<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 SEPTEMBER 29, 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 November 1, 1996
----- ----------------
Common Stock, Par Value $0.01 11,937,289
<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 NINE MONTHS ENDED
SEPT. 29, 1996 SEPT. 30, 1995 SEPT. 29, 1996 SEPT. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 108,201 95,850 336,241 284,047
Cost of sales 87,753 76,655 271,104 228,736
-------------- -------------- -------------- --------------
Gross profit 20,448 19,195 65,137 55,311
Selling, general and administrative expenses 11,977 10,049 35,219 27,723
Merger costs 3,545 - 4,649 -
Interest income (379) (402) (1,362) (1,082)
Interest expense 1,547 730 4,619 2,304
Amortization of intangibles 832 597 2,355 1,825
Other, net (465) 103 (616) 82
-------------- ------------- -------------- --------------
Income before income taxes 3,391 8,118 20,273 24,459
Income tax expense 1,900 2,597 7,110 8,136
-------------- -------------- -------------- --------------
Net income $ 1,491 5,521 13,163 16,323
============== ============== ============== ==============
Earnings per share $ 0.12 0.45 1.05 1.36
============== ============== ============== ==============
Weighted average number of common shares
and equivalents outstanding 12,496 12,147 12,541 12,027
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1996 1995
------------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,830 55,533
Accounts receivable, net 70,627 63,340
Inventories,net 48,699 52,746
Other 6,930 6,454
------------------- -------------
Total current assets 160,086 178,073
Property, plant and equipment, net 91,718 83,281
Intangible assets, net 68,182 63,911
Other assets 2,689 2,046
------------------- -------------
$ 322,675 327,311
=================== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,303 46,904
Accrued expenses 16,411 15,480
Accrued interest payable 2,398 2,769
Current installments of long-term financing obligations 3,104 -
Notes payable to sellers of businesses acquired 2,382 16,588
------------------- -------------
Total current liabilities 62,598 81,741
Convertible subordinated notes payable 86,250 86,250
Long-term financing obligations, excluding current installments 9,646 11,536
Other 3,585 2,235
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; 11,920,857 and
11,400,906 issued 119 114
Additional paid-in capital 90,798 87,474
Retained earnings 77,911 64,748
Cumulative foreign currency translation adjustments (4,048) (3,443)
Deferred compensation (4,184) (3,344)
------------------- -------------
Total stockholders' equity 160,596 145,549
------------------- -------------
$ 322,675 327,311
=================== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 29, 1996 SEPT. 30, 1995
-------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 17,736 20,260
------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment (20,026) (14,375)
Proceeds from sales of property, plant
and equipment 181 2,288
Payments for business acquisitions, net of cash acquired (2,046) (4,559)
Grant proceeds received from the Ireland IDA
applied to property, plant and equipment - 131
------------- ------------
Net cash used by investing activities (21,891) (16,515)
------------- ------------
Cash flows from financing activities:
Repayments of long-term financing obligations (4,039) (5,226)
Repayments of notes payable to sellers of businesses acquired (16,836) (1,191)
Proceeds from long-term financing obligations 1,260 3,397
Debt issuance costs (314) (305)
Proceeds from stock issued under stock plans 1,384 1,113
Repayments of notes receivable 1,000 -
Restricted cash transferred to unrestricted cash - 3,750
------------- ------------
Net cash provided (used) by financing activities (17,545) 1,538
------------- ------------
Effect of exchange rate changes on cash (3) (245)
------------- ------------
Net increase (decrease) in cash and cash equivalents (21,703) 5,038
Cash and cash equivalents at beginning of period 55,533 15,161
------------- ------------
Cash and cash equivalents at end of period $ 33,830 20,199
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<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.
As more fully described in note 2 below, the DII Group, Inc. (the "DII Group")
merged with Orbit Semiconductor, Inc. ("Orbit") on August 22, 1996. This
transaction was accounted for as a pooling-of-interests and, accordingly, the
condensed consolidated financial statements for all periods presented have been
restated to reflect the combined operations of the two companies (collectively
referred to hereinafter as the "Company").
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 DII Group's and Orbit's respective annual reports on Form 10-K previously
filed with the Securities and Exchange Commission (the "SEC"). The information
included in this report should also be read in conjunction with the DII Group's
Registration Statement on Form S-4 filed on July 22, 1996 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 nine-month period ended September 29, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 29, 1996.
The accompanying condensed consolidated financial statements include
reclassifications to conform financial statement presentations.
On August 22, 1996, the DII Group changed its fiscal year end from December 31
to the Sunday nearest to December 31, beginning with the fiscal year ended
December 29, 1996. The accompanying condensed consolidated financial statements
are therefore presented as of and for the three and nine month periods ended
September 29, 1996 and September 30, 1995.
(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.
5
<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 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.
On August 22, 1996, the DII Group merged (the "Merger") with Orbit, an
independent manufacturer and world marketer of quick-turn application specific
integrated circuits (ASICs), providing design and manufacturing services on a
worldwide basis. The DII Group issued 3,679,625 shares of Common Stock for all
outstanding shares of Orbit Common Stock, based upon one share of Orbit Common
Stock converted into 45/100ths (0.45) of a share of DII Group Common Stock (the
"Exchange Ratio"). In addition, outstanding options to purchase Orbit Common
Stock were converted into options to acquire an aggregate of 995,246 shares of
DII Group Common Stock, which is 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. The exercise price of the converted options is equal to the
quotient determined by dividing the original exercise price of such option by
the Exchange Ratio.
Results of operations for the separate companies prior to the Merger and for the
combined companies as restated are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED, NINE MONTHS ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Net sales:
DII Group $196,230 $82,334 $239,429
Orbit 31,810 13,516 44,618
---------- -------- ---------
Combined $228,040 $95,850 $284,047
========== ======== =========
Net income:
DII Group $ 9,499 $ 4,452 $ 11,689
Orbit 2,174 1,069 4,634
---------- -------- ---------
Combined $ 11,673 $ 5,521 $ 16,323
========== ======== =========
</TABLE>
6
<PAGE> 7
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) ACQUISITIONS, CONTINUED
In connection with the Merger, $4,649 of non-recurring pretax costs ($3,943
after-tax) were incurred and have been charged to expense in the nine months
ended September 29, 1996, of which $1,104 was incurred and charged to expense in
the second quarter of 1996 and the remaining $3,545 was incurred and charged to
expense in the third quarter of 1996. The Company's overall effective tax rate
for the three and nine month periods ending September 29, 1996 is higher than
the comparable 1995 periods due to certain merger costs not being deductible
for income tax purposes.
(3) GOODWILL
Goodwill, which is included in intangible assets in the accompanying condensed
consolidated balance sheets, 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 and $6,142 for contingent purchase
price adjustments during the nine-month periods ended September 29, 1996 and
September 30, 1995, respectively.
(4) INVENTORIES
Inventories, by components, are summarized as follows:
SEPTEMBER 29, DECEMBER 31,
1996 1995
---- ----
Raw materials $34,041 38,896
Work in process 15,440 15,545
Finished goods 2,884 2,838
------- -------
52,365 57,279
Allowance for inventory (3,666) (4,533)
------- -------
$48,699 52,746
======= =======
The Company made provisions to the allowance for inventory impairment of $653
and $150 during the nine months ended September 29, 1996 and September 30,
1995, respectively.
(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. Messrs. Gary L. Roubos and Lewis E. Burns, directors of The DII Group,
Inc., are Chairman and Vice President, respectively, of Dover Corporation.
7
<PAGE> 8
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) RELATED PARTY TRANSACTIONS, CONTINUED
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.
(6) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation and environmental matters
described in the DII Group's and Orbit's respective Annual Reports on Form 10-K
for the fiscal year ended December 31, 1995 and the DII Group's Registration
Statement on Form S-4 filed on July 22, 1996 with the SEC. 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
September 29, 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 September 29, 1996, the Company employed
approximately 400 people. All grant proceeds received are accounted for as a
reduction of cost basis in the applicable fixed assets.
8
<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
The Company has approximately $11,778 of capital commitments as of September
29, 1996.
The DII Group is re-evaluating its plan to upgrade and expand Orbit's
manufacturing capabilities from its current 4-inch wafer fabrication line to a
6-inch fabrication line. These upgrading and expansion plans are estimated to
require capital funding of approximately $45,000 through the end of 1997. In
addition, Orbit is also re-evaluating 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 a facility in Israel would require capital funding of
approximately $217,000, of which it is anticipated that approximately $76,000
would be funded through grants from the Israeli government.
The Company has determined that there may be more attractive alternatives
available to Orbit than expanding its existing facility and these alternatives
could eliminate the need for a new facility in Israel. Further, the Company
believes that these alternatives could satisfy Orbit's capacity requirements
with substantially lower invested capital. In the event that the Company
pursues such alternatives, the Company would incur a one-time charge-off of its
investment in Orbit Israel as well as costs associated with shutting down its
present facility and moving to a new facility. Such one-time charges would
have a material adverse affect on the Company's financial condition and results
from operations.
As of September 29, 1996, the Company has a $60,000 senior secured revolving
line-of-credit which expires in June 1998. 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 September 29, 1996.
9
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands)
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, but are not limited
to, statements regarding backlog, new customers, contingencies, environmental
matters and capital expenditures under "Part I Financial Information - Item 1
Financial Statements and Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations". Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below under section "Overview".
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 semiconductor design and
manufacturing of customer specific integrated circuits; 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.
Orbit Semiconductor ("Orbit") designs and manufactures quick-turn
customer specific integrated circuits.
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.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands)
A. OVERVIEW, CONTINUED
Operating results may be affected by a number of factors including the economic
conditions in the markets the Company serves, price and product 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; start-up costs associated with adding new geographical
locations; expenditures required for research and development; and failure to
introduce, or lack of market acceptance of, new processes, services,
technologies and products on a timely basis. 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 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
will require the dedication of management resources that may distract attention
from the day-to-day business of the combined company.
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. The electronics 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 data communications,
computer and peripherals, 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 nine months ending September 29, 1996. Standard Microsystems Corporation
("SMC") and Seagate Technology, Inc. ("Seagate") accounted for 13% and 16% of
net sales for the nine months ending September 30, 1995, respectively. The
Company's top ten customers accounted for 43% and 60% of net sales for the nine
months ending September 29, 1996 and September 30, 1995, respectively.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands)
B. RESULTS OF OPERATIONS
The Company's backlog as of September 29, 1996 does not include any orders from
Seagate. Although the Company has obtained new customers orders to replace the
Seagate business, an unsuccessful or delayed launch of the new orders could
have a material adverse effect on the Company's operating results.
Effective August 22, 1996 the Company merged with Orbit Semiconductor, Inc.
("Orbit"), an independent manufacturer and world marketer of quick-turn
application specific integrated circuits (ASICs), providing design and
manufacturing services on a worldwide basis. This transaction ("the Merger") was
accounted for as a pooling-of-interests and, accordingly, the condensed
consolidated financial statements for all periods presented have been restated
to reflect the combined operations of the two companies (collectively referred
to hereinafter as the "Company"). See Note 2, to the accompanying condensed
consolidated financial statements for additional information regarding the
Merger.
The following table presents selected consolidated financial information stated
as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 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 80.0 80.6 80.5
------ ------ ------ ------
Gross margin 18.9 20.0 19.4 19.5
Selling, general
and administrative 11.1 10.5 10.5 9.8
------ ------ ------ -------
7.8 9.5 8.9 9.7
======= ====== ====== =======
</TABLE>
Net sales for the three months ended September 29, 1996 increased $12,351 to
$108,201 from $95,850 for the three months ended September 30, 1995,
representing a 12.9% increase. Net sales for the nine months ended September 29,
1996 increased $52,194 to $336,241 from $284,047 for the nine months ended
September 30, 1995, representing a 18.4% increase. These increases are primarily
attributable to 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. More
specifically, the planned phase-out of DOVatron Malaysia's largest customer
(Seagate) had been accelerated and certain other customers had reduced their
orders for the second half of the year.
Gross profit for the three-month period ending September 29, 1996 increased
$1,253 to $20,448 from $19,195 for the comparable period of 1995. Gross profit
for the nine-month period ending September 29, 1996 increased $9,826 to $65,137
from $55,311 for the comparable period of 1995. The gross margin decreased to
18.9% for the three-month period ended September 29, 1996 from 20.0% for the
three-month period ended September 30, 1995. The gross margin decreased to 19.4%
for the nine-month period ended September 29, 1996 from 19.5% for the nine-month
period ended September 30, 1995. The decreases in gross margins are primarily
the result of under absorbed overhead resulting from the accelerated phase-out
of DOVatron Malaysia's largest customer and from certain other DOVatron
International CEM customer order reductions and reschedules for the second half
of the year.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
Selling, general and administrative (SG&A) expense increased $1,928 to $11,977
for the three months ended September 29, 1996 from $10,049 for the comparable
period in 1995. SG&A expense increased $7,496 to $35,219 for the nine months
ended September 29, 1996 from $27,723 for the comparable period in 1995. The
percentage of SG&A expense to net sales was 11.1% and 10.5% for the three months
ended September 29, 1996 and September 30, 1995, respectively and 10.5% and 9.8%
for the nine months ended September 29, 1996 and September 30, 1995,
respectively. These increases are mainly attributable to the start-up of the
Multilayer Technology facility located in Roseville, Minnesota and 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,
engineering and other general and administrative infrastructure necessary to
support the Company's current and prospective sales growth.
Interest income decreased $23 to $379 for the three months ended September 29,
1996 from $402 for the comparable period in 1995. Interest income increased $280
to $1,362 for the nine months ended September 29, 1996 from $1,082 for the
comparable period in 1995. These changes are attributable to the earnings
generated on cash and cash equivalents, the investable balances of which
fluctuates period to period. Interest expense increased $817 to $1,547 for the
three months ended September 29, 1996 from $730 for the comparable period in
1995. Interest expense increased $2,315 to $4,619 for the nine months ended
September 29, 1996 from $2,304 for the comparable period in 1995. These
increases are attributable to the incremental borrowings resulting primarily
from the issuance of the convertible subordinated notes in October 1995 as well
as the increase in long-term financing obligations in connection with equipment
additions related to the Orbit facility's development of a 6-inch wafer line
with 0.8 micron process capability.
Amortization of intangibles increased $235 to $832 for the three months ended
September 29, 1996 from $597 for the comparable period in 1995. Amortization of
intangibles increased $530 to $2,355 for the nine months ended September 29,
1996 from $1,825 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 $568
for the three months ended September 29, 1996 as compared to the three months
ended September 30, 1995. Other expenses, (net) decreased $698 for the nine
months ended September 29, 1996 when compared to the similar period in 1995.
These decreases are due mainly to higher gains realized on foreign exchange
transactions and lower provisions for bad debts.
In the three and nine month periods ended September 29, 1996, the Company
incurred $3,545 and $4,649, respectively of expenses associated with the
Company's merger with Orbit as discussed below in Section D, Acquisitions.
The Company's estimated effective income tax rate increased from 33.3% for the
nine months ended September 30, 1995 to 35.1% for the nine months ended
September 29, 1996 primarily as a result of certain Orbit merger costs not being
deductible for income tax purposes. 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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands)
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, 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.
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.
On August 22, 1996, the DII Group merged with Orbit, an independent manufacturer
and world marketer of quick-turn customer specific integrated circuits,
providing design and manufacturing services on a worldwide basis. The DII Group
issued 3,679,625 shares of Common Stock for all outstanding shares of Orbit
Common Stock, based upon one share of Orbit Common Stock converted into
45/100ths (0.45) of a share of DII Group Common Stock (the "Exchange Ratio"). In
addition, outstanding options to purchase Orbit Common Stock were converted into
options to acquire an aggregate of 995,246 shares of DII Group Common Stock,
which is 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. The
exercise price of the converted options is equal to the quotient determined by
dividing the original exercise price of such option by the Exchange Ratio.
In connection with the Merger, $4,649 of non-recurring pretax costs ($3,943
after-tax) were incurred and have been charged to expense in the nine months
ended September 29, 1996, of which $1,104 was incurred and charged to expense in
the second quarter of 1996 and the remaining $3,545 was incurred and charged to
expense in the third quarter of 1996.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(Dollars in thousands)
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
The Company's net cash provided by operating activities for the nine-month
period ended September 29, 1996 decreased $2,524 to $17,736 from $20,260 for
the comparable period in 1995. The decrease in net cash provided by operating
activities was primarily the result of lower net income of $3,160 for the
nine-month period ended September 29, 1996 as compared to the similar period in
1995. Net income was lower primarily as a result of Orbit Merger costs.
The Company's net cash flows used by investing activities amounted to $21,891
and $16,515 for the nine months ended September 29, 1996 and September 30, 1995,
respectively. Capital expenditures amounted to $20,026 and $14,375 for the nine
months ended September 29, 1996 and September 30, 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 $181
and $2,288 of equipment during the nine months ended September 29, 1996 and
September 30, 1995, respectively, 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 in 1996. The cash purchase price, net of cash acquired, was $2,046. The
Company purchased TTI Testron, a manufacturer of test fixturing equipment for
the electronics printed circuit assembly market, for a net cash payment of
$4,559 in 1995.
The Company's net cash flows used by financing activities amounted to $17,545 in
the nine months ended September 29, 1996. Financing activities provided net cash
of $1,538 for the nine months ended September 30, 1995. In the nine months
ended September 29, 1996 and 1995, the Company repaid notes payments of $16,836
and $1,191, respectively, to sellers of various businesses which were acquired
by the Company. The Company also repaid $4,039 and $5,226 in scheduled
long-term financing obligations in the nine months ended September 29, 1996 and
September 30, 1995, respectively.
The Company received $1,260 and $3,397 of proceeds from long-term financing
obligations in the nine months ended September 29, 1996 and September 30, 1995,
respectively. These borrowings relate primarily to equipment financing done by
Orbit in the nine months ended September 29, 1996 and September 30, 1995. In
addition, $3,000 represents a DII Group line-of-credit borrowing in the nine
months ended September 30, 1995, which was refinanced on a long-term basis in
October 1995 through the issuance of the convertible subordinated notes
payable.
As of December 31, 1994, the Company had restricted cash of $3,750, primarily
representing funds held by the Industrial Revenue Bond ("IRB") trustee for
unexpended bond proceeds. The IRB was repaid in 1995, and therefore this
amount was transferred to unrestricted cash in the September 30, 1995 condensed
consolidated balance sheet. This transfer represents a financing activity in
the accompanying September 30, 1995 condensed consolidated cash flow statement.
The Company received $1,000 from a scheduled note receivable payment in the
nine months ended September 30, 1996. In addition, the company also received
$1,384 and $1,113 in the nine months ended September 29, 1996 and September 30,
1995, respectively, from proceeds from stock issued under its stock plans.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands)
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS, CONTINUED
The DII Group is re-evaluating its plan to upgrade and expand Orbit's
manufacturing capabilities from its current 4-inch wafer fabrication line to a
6-inch fabrication line. These upgrading and expansion plans are estimated to
require capital funding of approximately $45,000 through the end of 1997. In
addition, Orbit is also re-evaluating 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 a facility in Israel would require capital funding of
approximately $217,000, of which it is anticipated that approximately $76,000
would be funded through grants from the Israeli government.
The Company has determined that there may be more attractive alternatives
available to Orbit than expanding its existing facility and these alternatives
could eliminate the need for a new facility in Israel. Further, the Company
believes that these alternatives could satisfy Orbit's capacity requirements
with substantially lower invested capital. In the event that the Company
pursues such alternatives, the Company would incur a one-time charge-off of its
investment in Orbit Israel as well as costs associated with shutting down its
present facility and moving to a new facility. Such one-time charges would
have a material adverse affect on the Company's financial condition and results
from operations.
In the view of Orbit's management, the expansion and upgrading of Orbit's
manufacturing capabilities is an important part of Orbit's strategy. The
inability of Orbit to complete successfully its expansion plans or its inability
to do so in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations.
As of September 29, 1996, the Company has a $60,000 senior secured revolving
line-of-credit which expires in June 1998. 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 September 29, 1996.
Management believes that cash generated from operations, existing cash reserves,
leasing capabilities, and the line-of-credit availability will be adequate to
fund the Company's current capital commitments.
See Note 6 to the Condensed Consolidated Financial Statements included elsewhere
herein, for a description of commitments and contingencies.
Backlog was $420 and $310 as of September 29, 1996 and September 30, 1995,
respectively. Backlog consists of firm purchase orders and commitments which
typically are to be filled within the next twelve months. Management estimates
that 25% of the backlog will be filled during the current fiscal year, however,
since orders may be rescheduled or canceled and many of the Company's
subsidiaries provide their products and services on a quick-turn basis and
therefore have a backlog of only 4 to 6 weeks, backlog is not necessarily
indicative of future sales levels.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary course of
business. In addition, as a result of the Merger, the Company is now party to
certain litigation matters involving Orbit. 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 DII Group's 1995
Consolidated Financial Statements included in Part II, Item 8 of Form 10-K for
the DII Group's contingencies and environmental matters and note 13 of Orbit's
1995 Consolidated Financial Statements included in Part II, Item 8 of Form 10-K
for Orbit's contingencies and environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held a Special Meeting of the Stockholders on August 22, 1996. A
proposal to approve and adopt an Agreement and Plan of Merger, dated as of June
9, 1996, among the DII Group, DII Merger Corp., a wholly-owned subsidiary of the
DII Group, and Orbit Semiconductor, Inc. was voted on. Voting in favor were
4,866,414, opposed were 349,310, abstaining were 40,201, and broker non-votes
were 24,256.
The shareholders approved the proposal to approve an amendment to the 1994 Stock
Incentive Plan to increase the number of shares issuable thereunder from 925,000
to 2,000,000. Voting in favor were 4,650,596, opposed were 521,773, abstaining
were 83,196, and broker non-votes were 24,616.
The shareholders approved the proposal to approve an amendment to the 1994
Employee Stock Purchase Plan to increase the number of shares issuable
thereunder from 200,000 to 500,000. Voting in favor were 4,818,889, opposed were
408,471, abstaining were 52,461, and broker non-votes were 360.
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 September 29, 1996. The following items were
reported in the Form 8-K dated August 22, 1996:
Item 2. Acquisition or Disposition of Assets - The Company completed its
acquisition of Orbit Semiconductor, Inc. pursuant to an Agreement and
Plan of Merger, dated June 9, 1996, as approved by the stockholders of
the Company and Orbit at the respective special meeting of stockholders
at each company held on August 22, 1996.
17
<PAGE> 18
ITEM 6(B). REPORTS ON FORM 8-K, CONTINUED
Item 7. Financial Statements and Exhibits - The following pro forma
financial information was included in said report:
(i) Pro Forma Combined Condensed Consolidated Balance Sheet as of
June 30, 1996 (unaudited);
(ii) Pro Forma Combined Condensed Consolidated Statement of
Income for the three months ended June 30, 1996 (unaudited);
(iii) Pro Forma Combined Condensed Consolidated Statement of
Income for the six months ended June 30, 1996 (unaudited);
(iv) Pro Forma Combined Condensed Consolidated Statement of Income
for the three months ended June 30, 1995 (unaudited);
(v) Pro Forma Combined Condensed Consolidated Statement of Income
for the six months ended June 30, 1995 (unaudited);
Item 8. Change in Fiscal Year - The Company changed its fiscal year end from
December 31 to the Sunday nearest to December 31, beginning with the
period ended December 29, 1996.
18
<PAGE> 19
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: November 12, 1996 By: /s/Ronald R. Budacz
--------------------- -------------------
Ronald R. Budacz
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 By: /s/Carl R. Vertuca, Jr.
--------------------- -----------------------
Carl R. Vertuca, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1996 By: /s/Thomas J. Smach
--------------------- ------------------
Thomas J. Smach
Vice President and
Corporate Controller
(Principal Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
<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 NINE MONTHS ENDED
SEP. 29, 1996 SEP. 30, 1995 SEP. 29, 1996 SEP. 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Earnings Available for Primary Earnings Per Share:
Net income $ 1,491 5,521 13,163 16,323
======== ======== ======== ========
Shares Used in Computation:
Weighted average common shares outstanding 11,869 11,615 11,806 11,466
Additional potentially dilutive securities (equivalent in
common stock):
Stock options 571 532 679 561
Performance stock awards 56 - 56 -
-------- -------- -------- --------
12,496 12,147 12,541 12,027
======== ======== ======== ========
Primary Earnings Per Share $ 0.12 0.45 1.05 1.36
======== ======== ======== ========
FULLY DILUTED EARNINGS PER SHARE:
Earnings Available for Fully Diluted Earnings Per Share:
Net income $ 1,491 5,521 13,163 16,323
Interest expense (net of tax) on 6% convertible
subordinated notes issued in October 1995 - (1) - - (1) -
Amortization of debt issuance cost (net of tax) on 6%
convertible subordinated notes issued in October 1995 - (1) - - (1) -
-------- -------- -------- --------
Earnings Available for Fully Diluted Earnings Per Share $ 1,491 5,521 13,163 16,323
======== ======== ======== ========
Shares Used in Computation:
Weighted average common shares outstanding 11,869 11,615 11,806 11,466
Additional potentially dilutive securities (equivalent in
common stock):
Stock options 571 532 678 561
Performance stock awards 56 - 56 -
6% convertible subordinated notes - (1) - - (1) -
-------- -------- -------- --------
12,496 12,147 12,540 12,027
======== ======== ======== ========
Fully Diluted Earnings Per Share $ 0.12 0.45 1.05 1.36
======== ======== ======== ========
</TABLE>
(1) The 6% convertible subordinated notes were antidilutive for the three and
nine months ended September 29, 1996, and therefore not assumed to be
converted for fully diluted earnings per share computations.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 33,830
<SECURITIES> 0
<RECEIVABLES> 70,627
<ALLOWANCES> 0
<INVENTORY> 48,699
<CURRENT-ASSETS> 160,086
<PP&E> 139,935
<DEPRECIATION> 48,217
<TOTAL-ASSETS> 322,675
<CURRENT-LIABILITIES> 62,598
<BONDS> 86,250
119
0
<COMMON> 0
<OTHER-SE> 160,477
<TOTAL-LIABILITY-AND-EQUITY> 322,675
<SALES> 336,241
<TOTAL-REVENUES> 336,241
<CGS> 271,104
<TOTAL-COSTS> 271,104
<OTHER-EXPENSES> 40,028
<LOSS-PROVISION> 217
<INTEREST-EXPENSE> 4,619
<INCOME-PRETAX> 20,273
<INCOME-TAX> 7,110
<INCOME-CONTINUING> 13,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,163
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
