<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 29, 1997
( ) 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 July 28, 1997
----- -------------
Common Stock, Par Value $0.01 12,439,853
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING FOR THE SIX MONTHS ENDING
------------------------------- ------------------------------
JUNE 29, 1997 JUNE 30, 1996 JUNE 29, 1997 JUNE 30, 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Contract electronics manufacturing $ 122,585 68,257 207,586 141,023
Other 61,512 46,807 113,591 87,017
---------- ---------- ---------- ----------
Total net sales 184,097 115,064 321,177 228,040
Cost of sales 151,418 90,945 262,318 183,351
---------- ---------- ---------- ----------
Gross profit 32,679 24,119 58,859 44,689
Selling, general and administrative expenses 18,189 11,451 34,326 23,242
Merger costs -- 1,104 -- 1,104
Interest income (156) (403) (398) (983)
Interest expense 1,720 1,533 3,420 3,072
Amortization of intangibles 929 783 1,729 1,523
Other, net 581 132 674 (152)
---------- ---------- ---------- ----------
Income before income taxes 11,416 9,519 19,108 16,883
Income tax expense 3,876 2,913 6,491 5,210
---------- ---------- ---------- ----------
Net income $ 7,540 6,606 12,617 11,673
========== ========== ========== ==========
Earnings per share:
Primary $ 0.59 0.54 0.99 0.95
Fully diluted $ 0.55 0.50 0.93 0.91
Weighted average number of common shares and
equivalents outstanding:
Primary 12,885 12,333 12,757 12,262
Fully diluted 15,338 14,836 15,303 14,767
</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 par value data)
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,445 25,010
Accounts receivable, net 103,881 79,851
Inventories 57,206 47,008
Other 10,496 8,829
------------ ------------
Total current assets 186,028 160,698
Property, plant and equipment, net 144,683 106,977
Intangible assets, net 73,869 66,207
Other 3,354 1,969
------------ ------------
$ 407,934 335,851
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 92,294 46,748
Accrued expenses 25,747 14,729
Accrued interest payable 1,158 1,116
Line-of-credit borrowings 5,660 --
Current installments of long-term financing obligations 7,387 10,572
Notes payable to sellers of businesses acquired -- 826
------------ ------------
Total current liabilities 132,246 73,991
Convertible subordinated notes payable 86,250 86,250
Long-term financing obligations, excluding current installments 9,955 12,938
Notes payable to sellers of businesses acquired 1,589 1,262
Other 1,998 2,373
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;
12,368,605 and 11,964,415 shares issued and outstanding 124 120
Additional paid-in capital 96,843 91,976
Retained earnings 87,400 74,783
Cumulative foreign currency translation adjustments (3,933) (3,849)
Deferred stock compensation (4,538) (3,993)
------------ ------------
Total stockholders' equity 175,896 159,037
------------ ------------
$ 407,934 335,851
============ ============
</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)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDING
----------------------------
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Net cash provided by operating activities $ 44,189 10,011
---------- ----------
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired (7,939) (2,056)
Additions to property, plant and equipment (46,156) (11,587)
Proceeds from sales of equipment 916 134
---------- ----------
Net cash used by investing activities (53,179) (13,509)
---------- ----------
Cash flows from financing activities:
Debt issuance costs -- (286)
Repayments of long-term financing obligations (8,368) (3,158)
Proceeds from issuance of long-term financing obligations -- 1,090
Proceeds from line-of-credit borrowings 5,660 --
Repayments of notes payable to sellers of businesses acquired (826) (15,868)
Proceeds from stock issued under stock plans 1,931 586
---------- ----------
Net cash used by financing activities (1,603) (17,636)
---------- ----------
Effect of exchange rate changes on cash 28 (9)
---------- ----------
Net decrease in cash and cash equivalents (10,565) (21,143)
Cash and cash equivalents at beginning of year 25,010 55,533
---------- ----------
Cash and cash equivalents at end of period $ 14,445 34,390
========== ==========
</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 29, 1996 has been
derived from the audited consolidated financial statements of The DII Group,
Inc. and subsidiaries (the "Company" or "DII").
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 29, 1996 included in
the annual report on Form 10-K previously filed with the Securities and
Exchange Commission (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 29,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 28, 1997.
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 six month periods ended
June 29, 1997 and June 30, 1996.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 29,
1997 1996
-------- ------------
<S> <C> <C>
Raw materials $ 44,709 34,099
Work in process 16,222 15,721
Finished goods 2,906 2,580
-------- -------
63,837 52,400
Allowance for inventory (6,631) (5,392)
-------- -------
$ 57,206 47,008
======== =======
</TABLE>
The Company made provisions to the allowance for inventory impairment of $2,672
and $400 during the six months ended June 29, 1997 and June 30, 1996,
respectively.
(3) ACQUISITIONS
During the second quarter of 1997, the Company acquired Design Solutions, Inc.
("DSI") and Process Control Technologies, Inc. ("PCT"). DSI provides custom
design and engineering services for printed circuit assemblies to original
equipment manufacturers. PCT is a manufacturer of solutions to automate the
transfer of bare printed circuit boards and assembled circuits through the
entire manufacturing process
<PAGE> 6
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) ACQUISITIONS, CONTINUED
including final box-build assembly. The cash purchase price, net of cash
acquired for these acquisitions, was $7,939. The fair value of the assets
acquired and liabilities assumed from these acquisitions were immaterial. The
cost in excess of net assets acquired from these acquisitions amounted to
$6,812.
In April 1996, the Company acquired Chemtech Limited, 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 $2,056. The
fair value of the assets acquired and liabilities assumed were immaterial. The
cost in excess of net assets acquired amounted to $3,658.
The 1997 and 1996 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.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation and environmental matters
described in the Company's Annual Reports on Form 10-K for the fiscal year
ended December 29, 1996. 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 associated with these matters
in the accompanying condensed consolidated financial statements. The total
amounts accrued for these matters is immaterial.
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.
The Company has approximately $13,700 of capital commitments as of June 29,
1997.
The Company has a $60,000 senior secured revolving line-of-credit which expires
in June 1998. The Company had borrowings outstanding under this credit facility
in the amount of $5,660 as of June 29, 1997. This credit facility requires
compliance with certain financial covenants and is secured by substantially all
of the Company's assets. As of June 29, 1997, the Company was in compliance
with all financial covenants.
<PAGE> 7
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 contingencies, litigation, environmental matters and
capital expenditures herein under "Part I Financial Information - 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.
A. OVERVIEW
The Company is a value-added electronics design, engineering and manufacturing
service provider 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 and engineering services; manufacturing of
prototype printed circuit boards; assembly of printed circuit boards; process
tooling and assembly automation; machine tools; in-circuit and functional test
hardware and software; and final system configuration. By being the fastest and
most comprehensive provider of custom design, engineering and manufacturing
services for OEM customers, from microelectronics circuits through the final
assembly of finished products, 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 provides the following products and services to the global
electronics outsourcing industry:
Custom Semiconductors--The Company designs and manufactures customer
specific integrated circuits on a quick-turn basis through Orbit
Semiconductor ("Orbit").
Interconnect Technologies--The Company provides design and engineering
services for printed circuit assemblies through Design Solutions, Inc.
("DSI") and manufactures high density, complex multilayer printed
circuit boards on a quick-turn basis through Multilayer Technology
("Multek").
Systems Assembly and Distribution--The Company assembles complex
electronic circuits and final system configuration (contract
electronics manufacturing or "CEM") on a high and low volume contract
basis through Dovatron International ("Dovatron").
Process Technologies--The Company manufactures surface mount printed
circuit board solder cream stencils on a quick-turn basis through IRI
International ("IRI") and Chemtech Limited ("Chemtech"); designs and
manufactures in-circuit and functional test software and hardware on a
quick-turn basis through TTI Testron; manufactures depaneling systems
that route individual printed circuit boards from an assembled master
panel in the final step of the electronics assembly process through
Cencorp; and manufactures automation solutions for the transfer of
bare printed circuit boards and assembled circuits through the entire
manufacturing process including final box-build assembly through
Process Control Technologies, Inc. ("PCT").
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(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; product mix; 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 sales 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.
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 (especially the
semiconductor sector) 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 (especially the semiconductor sector) 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 offers outsourcing capabilities in three major electronics
markets of the world (North America, Europe and Southeast Asia). 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 design, engineering and
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 material firm long-term commitments or volume guarantees from
its customers. In addition, customer contracts can be canceled and volume
levels can be changed or delayed. The timely replacement of canceled, delayed
or reduced contracts with new business cannot be assured.
At any given time, certain customers may account for significant portions of
the Company's business. Hewlett Packard Company accounted for 12% of net sales
during the six months ending June 29, 1997. No other customer accounted for
more than 10% of net sales during the six months ended June 29, 1997. No
customer accounted for more than 10% of net sales during the six months ended
June 30, 1996. The Company's top ten customers accounted for 47% and 46% of net
sales for the six months ending June 29, 1997 and June 30, 1996, respectively.
The percentage of the Company's sales to its major customers may fluctuate from
period to period. Significant reductions in sales to any of these customers
could have a material adverse effect on the Company's operating results.
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW, CONTINUED
The DII Group has actively pursued acquisitions in furtherance of its strategy
to be the fastest and most comprehensive provider of custom quick-turn design,
engineering and manufacturing services for OEM customers, from microelectronics
circuits through the final assembly of finished products. Moreover, the
Company's acquisitions enable the DII Group to provide more integrated
outsourcing technology solutions with time-to-market and lower cost advantages,
thereby enhancing its position as a leading provider of value-added design,
engineering and manufacturing solutions. These acquisitions have played an
important part in broadening the Company's presence in the global electronics
marketplace, thereby enhancing the DII Group's capability to provide a
comprehensive outsourcing technology solution and global electronics design,
engineering and manufacturing services to a market increasingly dependent on
outsourcing providers.
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 Company.
B. RESULTS OF OPERATIONS
Total net sales for the three months ended June 29, 1997 increased $69,033
(60%) to $184,097 from $115,064 for the comparable period in 1996. Total net
sales for the six months ended June 29, 1997 increased $93,137 (41%) to
$321,177 from $228,040 for the comparable period in 1996. The growth in net
sales is mainly attributed to the significant growth experienced by the
Company's contract electronics manufacturing services.
Contract electronics manufacturing net sales for the three months ended June
29, 1997 increased $54,328 (80%) to $122,585 from $68,257 for the corresponding
period in 1996. Contract electronics manufacturing net sales for the six months
ended June 29, 1997 increased $66,563 (47%) to $207,586 from $141,023 for the
comparable period in 1996. These increases are primarily attributable to the
high volume, multi-site production order for Hewlett-Packard combined with
increased orders to existing customers and an expanding customer base.
Net sales for the Company's other products and services for the three months
ended June 29, 1997 increased $14,705 (31%) to $61,512 from $46,807 for the
comparable period in 1996. Net sales for the Company's other products and
services for the six months ended June 29, 1997 increased $26,574 (31%) to
$113,591 from $87,017 for the comparable period in 1996. These increases are
attributable to (i) increased sales to existing customers, (ii) an expanding
customer base from the continued industry-wide acceptance of its service
offerings, and (iii) the 1997 acquisitions of DSI and PCT and the 1996
acquisition of Chemtech.
Gross profit for the three months ended June 29, 1997, increased $8,560 to
$32,679 from $24,119 for the comparable period in 1996. Gross profit for the
six-month period ending June 29, 1997, increased $14,170 to $58,859 from
$44,689 for the comparable period in 1996. The gross margin decreased to 17.8%
for the three months ended June 29, 1997 as compared to 21.0% for the three
months ended June 30, 1996. The
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
gross margin decreased to 18.3% for the six month period ended June 29, 1997
from 19.6% for the six month period ended June 30, 1996. These decreases were
the result of (i) the increase in the contract electronics manufacturing
revenues which generate lower margins than the Company's other products and
service offerings, (ii) pricing pressure as a result of a shift in Multek's
product mix to higher-volume (lower margin) production from its quick-turn,
low-volume (higher margin) production, and (iii) Orbit's underabsorbed overhead
associated with its transition into its new 6-inch, 0.6 micron wafer
fabrication facility.
Selling, general and administrative (SG&A) expense increased $6,738 to $18,189
for the three months ended June 29, 1997 from $11,451 for the comparable period
in 1996. The percentage of SG&A expense to net sales decreased to 9.9% for the
three months ended June 29, 1997 from 10.0% for the three months ended June 30,
1996. The increase in absolute dollars was primarily attributable to (i)
additional costs associated with the start-up of Orbit's newly acquired wafer
fabrication facility while winding down its old wafer fabrication facility,
(ii) the continued expansion of the Company's sales and marketing, finance, and
other general and administrative infrastructure necessary to support the
Company's sales growth, (iii) increased incentive-based stock plan
compensation, the recognition of which is based upon expected achievement of
certain earnings per share targets established by the Compensation Committee of
the Board of Directors, and (iv) increased SG&A expenses associated with the
60% increase in net sales in the three months ended June 29, 1997 versus the
comparable period in 1996. The percentage of SG&A expense to net sales did not
increase during the three months ended June 29, 1997 versus June 30, 1996 due
to the significant increase in the contract electronics manufacturing revenues.
SG&A expense increased $11,084 to $34,326 for the six month period ended June
29, 1997 from $23,242 for the comparable period in 1996. The percentage of SG&A
expense to net sales also increased to 10.7% for the six months ended June 29,
1997 from 10.2% for the six months ended June 30, 1996. These increases are
primarily attributable to (i) additional costs associated with the start-up of
Orbit's newly acquired wafer fabrication facility while winding down its old
wafer fabrication facility, (ii) the continued expansion of the Company's sales
and marketing, finance, and other general and administrative infrastructure
necessary to support the Company's sales growth, (iii) increased
incentive-based stock plan compensation, and (iv) increased SG&A expenses
associated with the 41% increase in net sales in the six months ended June 29,
1997 versus the comparable period in 1996.
Interest income decreased $247 to $156 for the three months ended June 29, 1997
from $403 for the comparable period in 1996. Interest income decreased $585 to
$398 for the six months ended June 29, 1997 from $983 for the comparable period
in 1996. This decrease is attributable to the earnings generated on the
invested cash and cash equivalents. Interest expense increased $187 to $1,720
for the three months ended June 29, 1997 from $1,533 for the comparable period
in 1996. Interest expense increased $348 to $3,420 for the six months ended
June 29, 1997 from $3,072 for the comparable period in 1996. This increase is
primarily associated with the increase in long-term financing obligations in
connection with equipment additions related to Orbit's transition to its new
6-inch, 0.6 micron process facility coupled with borrowings from the Company's
line-of-credit.
Amortization of intangibles increased $146 to $929 for the three months ended
June 29, 1997 from $783 for the comparable period in 1996. Amortization of
intangibles increased $206 to $1,729 for the six
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
months ended June 29, 1997 from $1,523 for the comparable period in 1996. This
increase is attributable to the amortization of goodwill associated with the
Chemtech, DSI and PCT acquisitions. Other expenses (net) increased $449 for the
three months ended June 29, 1997 from the comparable period of 1996 and $826
for the six months ended June 29, 1997 from the corresponding period in 1996.
These increases were primarily the result of increased provisions for doubtful
accounts.
The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic income tax credits and lower effective income
tax rates on foreign earnings considered permanently invested abroad. The
effective tax rate for a particular year will vary depending on the mix of
foreign and domestic earnings, income tax credits and changes in previously
established valuation allowances for deferred tax assets based upon
management's current analysis of the realizability of these deferred tax
assets. As foreign earnings considered permanently invested abroad increase as
a percentage of consolidated earnings, the overall consolidated effective
income tax rate will usually decrease because the foreign earnings are
generally taxed at a lower rate than domestic earnings. The mix of foreign and
domestic income from operations before income taxes, income tax credits and
management's current assessment of the required valuation allowance resulted in
an estimated effective income tax rate of 34% and 31% for the six months ended
June 29, 1997 and June 30, 1996, respectively.
C. ACQUISITIONS
During the second quarter of 1997, the Company acquired DSI and PCT. DSI
provides custom design and engineering services for printed circuit assemblies
to original equipment manufacturers. PCT is a manufacturer of solutions to
automate the transfer of bare printed circuit boards and assembled circuits
through the entire manufacturing process including final box-build assembly.
The cash purchase price, net of cash acquired for these acquisitions, was
$7,939. The fair value of the assets acquired and liabilities assumed from
these acquisitions were immaterial. The cost in excess of net assets acquired
from these acquisitions amounted to $6,812.
In April 1996, the Company acquired Chemtech, 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 $2,056. The fair
value of the assets acquired and liabilities assumed were immaterial. The cost
in excess of net assets acquired amounted to $3,658.
The 1997 and 1996 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> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At June 29, 1997 the Company had working capital of $53,782 and a current ratio
of 1.4x compared to working capital of $96,332 and a current ratio of 2.2x at
December 29, 1996. Cash and cash equivalents at June 29, 1997 were $14,445, a
decrease of $10,565 from $25,010 at December 29, 1996. This decrease resulted
from cash used by investing and financing activities of $53,179 and $1,603,
respectively, offset by cash provided by operating activities of $44,189.
The Company's net cash flows used by investing activities amounted to $53,179
and $13,509 for the six months ended June 29, 1997 and June 30, 1996,
respectively. Capital expenditures amounted to $46,156 and $11,587 for the six
months ended June 29, 1997 and June 30, 1996, respectively. This increase is
mainly attributable to the Company's continued investment in state-of-the-art,
high-technology equipment for its Multek and Dovatron operating companies which
enables the Company to accept increasingly complex and higher-volume orders.
Additionally, Orbit acquired capital equipment of $25,258 necessary for its new
6-inch, 0.6 micron process facility. The Company sold $916 and $134 of
equipment during the six months ended June 29, 1997 and June 30, 1996,
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, during the second quarter of
1997, the Company acquired DSI and PCT. DSI provides custom design and
engineering services for printed circuit assemblies to original equipment
manufacturers. PCT is a manufacturer of solutions to automate the transfer of
bare printed circuit boards and assembled circuits through the entire
manufacturing process including final box-build assembly. The cash purchase
price, net of cash acquired for these acquisitions, was $7,939. The Company
purchased Chemtech, a manufacturer of surface mount printed circuit board
solder cream stencils in 1996. The cash purchase price, net of cash acquired,
was $2,056.
The Company's net cash flows used by financing activities amounted to $1,603
and $17,636 for the six months ended June 29, 1997 and June 30, 1996,
respectively. The Company repaid $8,368 and $3,158 in long-term financing
obligations in the six months ended June 29, 1997 and June 30, 1996,
respectively. For the six months ended June 29, 1997 and June 30, 1996, the
Company repaid $826 and $15,868, respectively, of notes payable to sellers of
various businesses acquired. The Company received $1,931 and $586 in proceeds
from stock issued under its stock plans in the six months ended June 29, 1997
and June 30, 1996, respectively. In addition, the Company borrowed $5,660 from
its line-of-credit during the six months ended June 29, 1997.
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.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing processes. The Company
believes that it is currently operating in compliance with applicable
regulations and does not believe that costs of compliance with these laws and
regulations will have a material effect upon its capital expenditures, earnings
or competitive position.
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 is operating facilities, or a
determination that the Company is
<PAGE> 13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS, CONTINUED
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.
See Note 4 to the condensed consolidated financial statements for a description
of commitments, contingencies and environmental matters.
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1997, a complaint was filed in the District Court of Boulder, Colorado
against the Company and three of its officers and directors. The lawsuit
purports to be brought on behalf of a class of persons who purchased Company
stock during the period April 1, 1996 through September 8, 1996 and claims
violations of Colorado law based on allegedly false and misleading statements
made in connection with the offer, sale or purchase of Company stock at
artificially inflated prices, including statements made prior to the Company's
acquisition of Orbit. The complaint seeks compensatory and other damages as
well as equitable relief.
A class action complaint for violations of federal securities law was filed
against Orbit and three of its officers in 1995. The current amended complaint
alleges that Orbit and the named officers misled the market for Orbit's then
existing public common stock, by issuing a number of allegedly false or
misleading statements. The amended complaint alleges claims under Section 10(b)
and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated
thereunder. The court has dismissed all claims based upon the public statements
of Orbit and its officers and directors. The only remaining claims assert that
Orbit is responsible for the statements of securities analysts. Third party
discovery is ongoing and the court has not yet set a trial date.
In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business. Although management is
of the opinion that none of these matters will 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 10 of the 1996
Consolidated Financial Statements included in Part II, Item 8 of the Company's
Form 10-K Annual Report for the fiscal year ended December 29, 1996 for
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 13, 1997,
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, Gary P. Kennedy, Constantine S. Macricostas, Gerard T. Wrixon,
Alexander W. Young. Not less than 9,253,098 shares were cast for each of the
Directors.
The shareholders approved the proposal to amend the 1994 Stock Incentive Plan
to increase the maximum number of shares of the Company's common stock covered
by awards that may be granted to any single individual in any fiscal year from
50,000 to 150,000 shares. Voting in favor were 8,338,957, opposed were
2,159,654, abstaining were 94,629, and broker non-votes were zero.
The shareholders ratified the selection of KPMG Peat Marwick LLP as the
Company's independent auditors. Voting in favor were 10,035,650, opposed were
20,798, abstaining were 536,792, and broker non-votes were zero.
<PAGE> 15
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
No reports on Form 8-K were filed during the quarter for which this report is
filed.
<PAGE> 16
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: July 31, 1997 By: /s/Ronald R. Budacz
--------------------- ------------------------------
Ronald R. Budacz
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: July 31, 1997 By: /s/Carl R. Vertuca, Jr.
--------------------- ------------------------------
Carl R. Vertuca, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: July 31, 1997 By: /s/Thomas J. Smach
--------------------- ------------------------------
Thomas J. Smach
Vice President and Corporate
Controller
(Principal Accounting Officer)
<PAGE> 17
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 PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING FOR THE SIX MONTHS ENDING
----------------------------- -----------------------------
JUNE 29, 1997 JUNE 30, 1996 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Earnings Available for Primary Earnings Per Share:
Net income $ 7,540 6,606 12,617 11,673
========== ========== ========== ==========
Shares Used in Computation:
Weighted average common shares outstanding 12,241 11,819 12,135 11,793
Common share equivalents outstanding:
Stock options 559 514 537 469
Deferred stock compensation 85 -- 85 --
---------- ---------- ---------- ----------
12,885 12,333 12,757 12,262
========== ========== ========== ==========
Primary Earnings Per Share $ 0.59 0.54 0.99 0.95
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Earnings Available for Fully Diluted Earnings Per Share:
Net income $ 7,540 6,606 12,617 11,673
Interest expense (net of tax) on 6% convertible
subordinated notes 776 776 1,552 1,552
Amortization (net of tax) of debt issuance cost on
convertible subordinated notes 65 85 65 147
---------- ---------- ---------- ----------
Earnings available for fully diluted earnings per share $ 8,381 7,467 14,234 13,372
========== ========== ========== ==========
Shares Used in Computation:
Weighted average common shares outstanding 12,241 11,819 12,135 11,793
Additional potentially dilutive securities (equivalent in
common stock):
Stock options 712 672 752 629
Deferred stock compensation 85 45 116 45
Convertible subordinated notes 2,300 2,300 2,300 2,300
---------- ---------- ---------- ----------
15,338 14,836 15,303 14,767
========== ========== ========== ==========
Fully Diluted Earnings Per Share $ 0.55 0.50 0.93 0.91
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 14,445
<SECURITIES> 0
<RECEIVABLES> 106,487
<ALLOWANCES> 2,606
<INVENTORY> 57,206
<CURRENT-ASSETS> 186,028
<PP&E> 197,743
<DEPRECIATION> 53,060
<TOTAL-ASSETS> 407,934
<CURRENT-LIABILITIES> 0
<BONDS> 0
124
0
<COMMON> 0
<OTHER-SE> 175,772
<TOTAL-LIABILITY-AND-EQUITY> 407,934
<SALES> 321,177
<TOTAL-REVENUES> 321,177
<CGS> 262,318
<TOTAL-COSTS> 262,318
<OTHER-EXPENSES> 35,497
<LOSS-PROVISION> 834
<INTEREST-EXPENSE> 3,420
<INCOME-PRETAX> 19,108
<INCOME-TAX> 6,491
<INCOME-CONTINUING> 12,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,617
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.93
</TABLE>
