-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UsCdl2T5So57XeKJDntqfftVmUVq7X8Ao/LL4P6llHuzDvotU2rRqEbsKRx2KBA4 UNC8Ge8d0vtS/hLh9xgQ6Q== 0000950134-99-007653.txt : 19990819 0000950134-99-007653.hdr.sgml : 19990819 ACCESSION NUMBER: 0000950134-99-007653 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DII GROUP INC CENTRAL INDEX KEY: 0000899047 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 841224426 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21374 FILM NUMBER: 99695475 BUSINESS ADDRESS: STREET 1: 6273 MONARCH PARK PLACE STREET 2: STE 200 CITY: NIWOT STATE: CO ZIP: 80503 BUSINESS PHONE: 3036522221 FORMER COMPANY: FORMER CONFORMED NAME: DOVATRON INTERNATIONAL INC DATE OF NAME CHANGE: 19930319 10-Q 1 FORM 10-Q FOR QUARTER ENDED JULY 4, 1999 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 JULY 4, 1999 ( ) 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 Niwot, Colorado 80503 (Address and zip code of principal executive offices) (303) 652-2221 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT CLASS August 13, 1999 ----- --------------- Common Stock, Par Value $0.01 29,634,649 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THE DII GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share) (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- ----------------------------- JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998 ------------ ------------- ------------ ------------- Net sales: Systems assembly and distribution $ 181,405 142,712 332,318 293,131 Printed wiring boards 80,564 46,123 151,885 96,831 Other 18,124 33,103 43,358 67,350 --------- --------- --------- --------- Total net sales 280,093 221,938 527,561 457,312 Cost of sales: Cost of sales 237,781 188,796 447,320 390,728 Unusual charges -- -- -- 52,156 --------- --------- --------- --------- Total cost of sales 237,781 188,796 447,320 442,884 --------- --------- --------- --------- Gross profit 42,312 33,142 80,241 14,428 Selling, general and administrative expenses 20,686 19,384 40,796 38,560 Unusual charges -- -- -- 1,844 Interest expense 5,371 4,669 11,853 9,388 Interest income (356) (677) (750) (1,604) Amortization of intangibles 1,307 1,094 2,602 2,215 Other, net 814 169 800 1 --------- --------- --------- --------- Income (loss) before income taxes 14,490 8,503 24,940 (35,976) Income tax expense (benefit) 2,150 2,376 3,717 (10,056) --------- --------- --------- --------- Net income (loss) $ 12,340 6,127 21,223 (25,920) ========= ========= ========= ========= Earnings (loss) per common share: Basic $ 0.42 0.24 0.75 (1.03) Diluted $ 0.40 0.23 0.73 (1.03) Weighted average number of common shares and equivalents outstanding: Basic 29,463 25,044 28,408 25,110 Diluted 30,921 30,450 29,802 25,110
See accompanying notes to condensed consolidated financial statements 2 3 THE DII GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value data) (Unaudited)
JULY 4, JANUARY 3, 1999 1999 ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 35,734 55,972 Accounts receivable, net 157,828 153,861 Inventories 89,821 66,745 Prepaid expenses 13,442 11,570 Other 12,390 7,249 --------- --------- Total current assets 309,215 295,397 Property, plant and equipment, net 343,090 326,226 Goodwill, net 94,596 97,475 Debt issue costs, net 7,096 9,319 Investments in minority owned entities 20,507 -- Other 23,565 18,892 --------- --------- $ 798,069 747,309 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 162,820 122,536 Accrued expenses 39,619 44,134 Accrued interest payable 5,037 6,769 Current portion of capital lease obligations 1,121 5,617 Current portion of long-term debt 30,543 29,031 --------- --------- Total current liabilities 239,140 208,087 Capital lease obligations, net of current portion 831 1,820 Long-term debt, net of current portion 265,540 271,864 Convertible subordinated notes payable -- 86,235 Other 3,854 3,582 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; 90,000,000 shares authorized; 31,126,137 and 26,169,344 shares issued and 29,479,137 and 24,522,344 shares outstanding 311 262 Additional paid-in capital 214,222 124,410 Retained earnings 114,294 93,071 Treasury stock, at cost; 1,647,000 shares (28,544) (28,544) Accumulated other comprehensive loss (4,247) (4,139) Deferred compensation (7,332) (9,339) --------- --------- Total stockholders' equity 288,704 175,721 --------- --------- $ 798,069 747,309 ========= =========
See accompanying notes to condensed consolidated financial statements 3 4 THE D I I GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
FOR THE SIX MONTHS ENDED --------------------------- JULY 4, 1999 JUNE 28, 1998 ------------ ------------- Net cash provided by operating activities $ 29,687 42,183 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (48,291) (33,572) Proceeds from sales of property, plant and equipment 9,128 3,800 Proceeds from business divestitures 26,051 -- Investments in minority owned entities (20,507) -- -------- -------- Net cash used by investing activities (33,619) (29,772) -------- -------- Cash flows from financing activities: Payments to acquire treasury stock -- (16,158) Repayments of capital lease obligations (5,485) (2,479) Repayments of long-term debt (17,039) (2,164) Long-term debt borrowings 3,000 -- Proceeds from stock issued under stock plans 3,426 3,146 Other (101) -- -------- -------- Net cash used by financing activities (16,199) (17,655) -------- -------- Effect of exchange rate changes on cash (107) (40) -------- -------- Net decrease in cash and cash equivalents (20,238) (5,284) Cash and cash equivalents at beginning of period 55,972 85,067 -------- -------- Cash and cash equivalents at end of period $ 35,734 79,783 ======== ========
See accompanying notes to condensed consolidated financial statements 4 5 THE DII GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (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 January 3, 1999 has been derived from the audited consolidated financial statements of The DII Group, Inc. and subsidiaries (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 January 3, 1999 included in the annual report on Form 10-K previously filed with the Securities and Exchange Commission. 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 July 4, 1999 are not necessarily indicative of the results that may be expected for the year ending January 2, 2000. The Company's fiscal year consists of either a 52-week or 53-week period ending on the Sunday nearest to December 31. Fiscal 1998 comprised 53 weeks and ended on January 3, 1999 and fiscal 1999 will comprise 52 weeks and will end on January 2, 2000. The accompanying condensed consolidated financial statements are therefore presented as of and for the quarters ended July 4, 1999 and June 29, 1998, both of which are 13-week periods. (2) INVENTORIES Inventories consisted of the following:
JULY 4, JANUARY 3, 1999 1999 -------- ---------- Raw materials $ 50,666 44,669 Work in process 41,748 24,922 Finished goods 5,169 6,622 -------- ------ 97,583 76,213 Less allowance 7,762 9,468 -------- ------ $ 89,821 66,745 ======== ======
The Company made provisions to the allowance for inventory impairment (including unusual charges, see Note 7) of $336 and $7,280 during the six month periods ended July 4, 1999 and June 28, 1998, respectively. (3) BUSINESS COMBINATIONS, ASSET PURCHASES AND STRATEGIC INVESTMENTS In August 1998, the Company acquired Greatsino Electronic Technology, a printed wiring board fabricator and contract electronics manufacturer with operations in the People's Republic of China. The cash purchase price, net of cash acquired, amounted to $51,795. The initial purchase price is subject to adjustments for contingent consideration of no more than approximately $40,000 based upon the business achieving specified levels of earnings through August 31, 1999. This acquisition was accounted for as a purchase with the results of operations from the acquired business included in the Company's results of operations from the acquisition date forward. Pro forma results of operations would not be materially different from the historical results reported. The cost of this acquisition was allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. The fair value of the assets acquired, excluding cash acquired, amounted to $55,699 and liabilities assumed were $21,801, including estimated acquisition costs. The cost in excess of net assets acquired amounted to $17,897. 5 6 Goodwill associated with this acquisition, as well as previous acquisitions, is subject to future adjustments from contingent purchase price adjustments for varying periods, all of which end no later than June 2001. The Company increased goodwill and notes payable to sellers of businesses acquired in the amount of $9,500 for contingent purchase price adjustments during the six months ended July 4, 1999. There were no contingent purchase price adjustments during the six months ended June 28, 1998. In October 1998, the Company acquired Hewlett-Packard Company's ("HP") printed wiring board fabrication facility located in Boeblingen, Germany, and its related production equipment, inventory and other assets for a purchase price of approximately $89,900. The purchase price was allocated to the assets acquired based on the relative fair values of the assets at the date of acquisition. During the first quarter of fiscal 1999, the Company made two strategic minority investments amounting to $20,507. First, the Company entered into a joint venture with Virtual IP Group ("VIP"), a complex integrated circuit design company with locations in Hyderabad, India and Sunnyvale, California. The Company acquired a 49% interest in VIP for approximately $5,007. The Company accounts for its investment in VIP under the equity method. In March 1999, the Company acquired 15,000 non-voting preferred shares of DVB (Group) Limited ("DVB"), a wholly-owned subsidiary of Capetronic International Holdings Limited (Capetronic). The preferred stock accrues a 5% annual dividend and can be converted into common stock of Capetronic after 15 months and at a price of HK$4.80 per share. Additionally, at anytime after 15 months, Capetronic can force conversion if the market price is at least HK$10.00 per share. At a conversion price of HK$4.80 per share (based on an agreed exchange rate of US$1.00 equals HK$7.50) the Company would hold approximately 24,219 common shares of Capetronic, which currently would represent approximately 13% of the issued common stock of Capetronic after giving effect to the conversion, excluding the effect of other dilutive instruments which are currently in existence that, if converted, would reduce the Company's ultimate ownership percentage. However, under the terms of the agreement, the Company can not hold more than 10% of the outstanding common stock of Capetronic. If, upon conversion, the Company holds in excess of 10% of the outstanding common stock of Capetronic, the Company would be required to divest of shares to reduce its holdings to 10% or less. The Company currently accounts for its investment in Capetronic under the cost method. Once the criteria for conversion are reached, the Company will account for this investment as an available-for-sale marketable equity security in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Through this strategic investment and a related manufacturing agreement, the Company has obtained the rights to manufacture a majority of DVB's requirements for set-top boxes to be used for the delivery of video entertainment, data and educational materials in China. (4) DIVESTITURES The Company has undertaken an initiative to divest of its non-core business unit known as Process Technologies International ("PTI"). PTI is a group of manufacturing companies that produce equipment and tooling used in the printed circuit board assembly process. In April 1999, the Company completed the divestiture of IRI International and Chemtech (U.K.) Limited, manufacturers of surface mount printed circuit board solder cream stencils. In March 1999, the Company completed the divestiture of TTI Testron, Inc., its subsidiary that manufactures in-circuit and functional test hardware and software. The Company received cash proceeds from these sales amounting to $26,051, net of divestiture costs. The Company is divesting this non-core business unit in order to sharpen its focus on the Company's core businesses of design and semiconductor services, fabrication of printed wiring boards, and systems assembly and distribution. The Company does not believe that the sale of PTI will have any adverse impact on its consolidated financial position. However, the Company's consolidated revenues and operating results will be adversely impacted (by less than 10%) until such time as the proceeds are reinvested back into the Company's core businesses of design and semiconductor services, design and fabrication of printed wiring boards, and systems assembly and distribution. 6 7 (5) LONG-TERM DEBT Long-term debt was comprised of the following:
JULY 4, JANUARY 3, 1999 1999 --------- ---------- Senior subordinated notes $150,000 150,000 Bank term loan 92,000 100,000 Outstanding under line-of-credit 40,500 37,500 Notes payable to sellers of businesses acquired 9,500 11,550 Other 4,083 1,845 --------- ------- Total long-term debt 296,083 300,895 Less current portion 30,543 29,031 --------- ------- Long-term debt, net of current portion $ 265,540 271,864 ========= =======
(6) CONVERTIBLE SUBORDINATED DEBT As of February 18, 1999, substantially all of the Company's convertible subordinated notes were converted into approximately 4,600,000 shares of common stock and the unconverted portion was redeemed for $101. Stockholders' equity was increased by the full amount of the convertible subordinated notes less the unamortized issuance costs. The conversion was a non-cash addition to stockholders' equity during the first quarter of fiscal 1999. (7) UNUSUAL CHARGES During fiscal 1998, the Company recognized unusual pre-tax charges of $76,636, substantially all of which related to the operations of the Company's wholly owned subsidiary, Orbit Semiconductor. The Company decided to sell Orbit's 6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a fabless manufacturing strategy to complement Orbit's design and engineering services. The charges were primarily due to the impaired recoverability of inventory, intangible assets and fixed assets, and other costs associated with the exit of semiconductor manufacturing. The manufacturing facility was sold in January 1999 and the Company has successfully adopted a fabless manufacturing strategy. The Company recorded $54,000 and $22,636 of the charges in the first and fourth quarters of fiscal 1998, respectively. As discussed below, $52,156 of the unusual pre-tax charges had been classified as a component of cost of sales in the first quarter 1998. The components of the unusual charge recorded in fiscal 1998 are as follows:
FIRST FOURTH NATURE OF COMPONENTS OF CHARGE QUARTER QUARTER TOTAL CHARGE -------------------- -------- -------- -------- ---------- Severance.................................. $ 498 $ 900 $ 1,398 cash Long-lived asset impairment................ 38,257 15,083 53,340 non-cash Losses on sales contracts.................. 5,500 4,100 9,600 non-cash Incremental uncollectible accounts receivable............................... 900 -- 900 non-cash Incremental sales returns and allowances... 1,500 500 2,000 non-cash Inventory write-downs...................... 5,500 250 5,750 non-cash Other exit costs........................... 1,845 1,803 3,648 cash -------- ------- -------- Total............................ $ 54,000 $22,636 $ 76,636 ======== ======= ========
The following table summarizes the activity related to the charges taken in connection with the 1998 unusual charges:
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY ASSET ON SALES ACCOUNTS AND WRITE- OTHER SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL --------- ---------- --------- ------------- ------------- --------- ---------- -------- Balance at December 28, 1997 .......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Activities during the year: 1998 provision .... 1,398 53,340 9,600 900 2,000 5,750 3,648 76,636 Cash charges ...... (498) -- -- -- -- -- (465) (963) Non-cash charges .. -- (53,340) (8,500) (767) (1,500) (5,500) (643) (70,250) -------- -------- -------- -------- -------- -------- -------- -------- Balance at January 3, 1999 .............. 900 -- 1,100 133 500 250 2,540 5,423 Activities during the period: Cash charges ...... (900) -- -- -- -- -- (601) (1,501) Non-cash charges .. -- -- (1,100) (133) -- (250) -- (1,483) -------- -------- -------- -------- -------- -------- -------- -------- Balance at April 4, 1999 .............. -- -- -- -- 500 -- 1,939 2,439 Activities during the period: Cash charges ...... -- -- -- -- -- -- (584) (584) Non-cash charges .. -- -- -- -- (500) -- -- (500) -------- -------- -------- -------- -------- -------- -------- -------- Balance at July 4, 1999 .............. $ -- $ -- $ -- $ -- $ -- $ -- $ 1,355 $ 1,355 ======== ======== ======== ======== ======== ======== ======== ========
7 8 The unusual pre-tax charges include $53,340 for the write-down of long-lived assets to fair value. This amount has been classified as a component of cost of sales. Included in the long-lived asset impairment are charges of $50,739, which relate to the Fab which was written down to its net realizable value based on its sales price. The Company kept the Fab in service until the sale date in January 1999. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company discontinued depreciation expense on the Fab when it determined that it would be disposed of and its net realizable value was known. The impaired long-lived assets consisted primarily of machinery and equipment of $52,418, which were written down by $43,418 to a carrying value of $9,000 and building and improvements of $7,321, which were written down to a carrying value of zero. The long-lived asset impairment also includes the write-off of the remaining goodwill related to Orbit of $601. The remaining $2,000 of asset impairment relates to the write-down to net realizable value of a facility the Company exited during 1998. The Company purchased Orbit in August of 1996, and supported Orbit's previously made decision to replace its wafer fabrication facility ("fab") with a higher technology fab. The transition to the 6-inch fab was originally scheduled for completion during the summer of 1997, but the changeover took longer than expected and was finally completed in January 1998. The missed plan for the changeover and running both fabs simultaneously put pressure on the work force, with resulting quality problems. Compounding these problems, the semiconductor industry was characterized by excess capacity, which led larger competitors to invade Orbit's niche market. Further, many of Orbit's customers migrated faster than expected to a technology in excess of Orbit's fabrication capabilities, requiring Orbit to outsource more of its manufacturing requirements than originally expected. Based upon these continued conditions and the future outlook, the Company took this first quarter 1998 charge to correctly size Orbit's asset base to allow its recoverability based upon its then current business size. The first quarter 1998 unusual charge included $38,257 for the write-down of long-lived assets to fair value. The fair value of these assets was based on estimated market value at the date of the charge. Fair market value was determined in accordance with SFAS No. 121, and included the use of an independent valuation. The impairment charge consists of $37,656 related to property, plant and equipment and $601 related to goodwill. This amount was classified as a component of cost of sales. Additionally, the first quarter 1998 unusual charge included $7,900 for losses on sales contracts, incremental amounts of uncollectible accounts receivable, and estimated incremental sales returns and allowances, primarily resulting from the fab changeover quality issues. This amount was classified as a component of cost of sales. The first quarter 1998 unusual pre-tax charge also included $7,843 primarily associated with inventory write-downs. This write-down primarily resulted from excess inventory created by deciding to downsize operations. As previously stated, the Company subsequently decided to sell the manufacturing facility (which occurred in January 1999). This decision resulted in additional unusual pre-tax charges in the fourth quarter of 1998 of $22,636. The exit plan is expected to be completed in the third quarter of 1999. As of July 4, 1999, the total remaining cash expenditures expected to be incurred are $1,355 of other exit costs, including legal settlement costs, environmental clean-up costs and other exit costs. These expenditures will continue to be funded through operating cash flows of the Company which are expected to be sufficient to fund these expenditures. These amounts were recorded in accrued expenses at July 4, 1999. (8) COMPREHENSIVE INCOME The components of comprehensive income were as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED --------------------- ---------------------- JULY 4, JUNE 28, JULY 4, JUNE 28, 1999 1998 1999 1998 -------- -------- -------- -------- Net income (loss) $ 12,340 6,127 $ 21,223 (25,920) Other comprehensive loss- Foreign currency translation adjustments 7 (44) (108) (53) ======== ======== ======== ======== Comprehensive income (loss) $ 12,347 6,083 $ 21,115 (25,973) ======== ======== ======== ========
8 9 The foreign currency translation adjustments are not currently adjusted for income taxes since they relate to investments that are permanent in nature. (9) EARNINGS (LOSS) PER SHARE Earnings (loss) per common share ("EPS") data were computed as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED -------------------- -------------------- JULY 4, JUNE 28, JULY 4, JUNE 28, 1999 1998 1999 1998 ------- -------- ------- -------- BASIC EPS: Net income (loss) $12,340 6,127 $21,223 (25,920) ======= ======= ======= ======= Weighted-average common shares outstanding 29,463 25,044 28,408 25,110 ======= ======= ======= ======= Basic EPS $ 0.42 0.24 $ 0.75 (1.03) ======= ======= ======= ======= DILUTED EPS: Net income (loss) $12,340 6,127 $21,223 (25,920) Plus income impact of assumed conversions: Interest expense (net of tax) on convertible subordinated notes -- 776 400 -- Amortization (net of tax) of debt issuance cost on convertible subordinated notes -- 65 33 -- ======= ======= ======= ======= Net income (loss) available to common stockholders $12,340 6,968 $21,656 (25,920) ======= ======= ======= ======= Shares used in computation: Weighted-average common shares outstanding 29,463 25,044 28,408 25,110 Shares applicable to exercise of dilutive options 1,216 741 1,164 -- Shares applicable to deferred stock compensation 242 68 230 -- Shares applicable to convertible subordinated notes -- 4,597 -- -- ------- ------- ------- ------- Shares applicable to diluted earnings 30,921 30,450 29,802 25,110 ======= ======= ======= ======= Diluted EPS $ 0.40 0.23 $ 0.73 (1.03) ======= ======= ======= =======
The common equivalent shares from common stock options, deferred stock compensation and convertible subordinated notes were antidilutive for the six month period ended June 28, 1998, and therefore not assumed to be converted for diluted earnings per share computations. (10) COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS In 1997, two related complaints, as amended, were filed in the District Court of Boulder, Colorado and the U.S. District Court for the District of Colorado against the Company and certain of its officers. Both actions were brought by the same plaintiffs' law firm as the Orbit action discussed below. In July 1999 the federal court action was dismissed with prejudice. The state court action purports to be brought on behalf of a class of persons who purchased the Company's common stock during the period from April 1, 1996, through September 8, 1996, and claims violations of Colorado and federal laws based on allegedly false and misleading statements made in connection with the offer, sale or purchase of the Company's common stock at allegedly 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. The Company has filed an answer denying that it misled the securities market. A May 2000 trial date has been set and discovery has commenced. The Company believes that the claims asserted in the action are without merit and intends to defend vigorously against such claims. 9 10 A class action complaint (as amended in March 1996 and January 1997) for violations of federal securities law was filed against Orbit and three of its officers in 1995 in the U.S. District Court for the Northern District of California. The amended complaint alleged that Orbit and three of its officers were responsible for actions of securities analysts that allegedly misled the market for Orbit's then existing public common stock, and sought relief under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The amended complaint sought compensatory and other damages, as well as equitable relief. In September 1997, Orbit filed its answer to the second amended complaint denying responsibility for the actions of securities analysts and further denying that it misled the securities market. On May 24, 1999, the Court approved a class-wide settlement of the case, providing for a settlement fund of $1.7 million. Orbit's contribution to the settlement fund was $143,000, and the balance was paid by Orbit's insurance carriers. In addition, the Company is involved in certain litigation and environmental matters arising in the ordinary course of business. Although management is of the opinion that these matters and the matters discussed above will not have a material adverse effect on the consolidated financial position or results of operations of the Company, the ultimate outcome of the litigation and environmental 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 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. The Company has approximately $3,468 of capital commitments as of July 4, 1999. As of July 4, 1999, there were $40,500 in borrowings outstanding under the Company's $110,000 senior secured revolving line-of-credit facility. This credit facility requires compliance with certain financial covenants and is secured by substantially all of the Company's assets. As of July 4, 1999, the Company was in compliance with all loan covenants. On May 4, 1999, the Company announced that it has signed a memorandum of understanding with Ericsson Austria AG to purchase Ericsson's manufacturing facility and related assets located in Kindberg, Austria. Subject to concluding this transaction, the Company will enter into a long-term supply agreement with Ericsson to provide printed circuit board assembly, box build, and the associated logistics and distribution activities. The transaction is expected to be completed during the Company's third fiscal quarter of 1999. Completion of the transaction is subject to applicable government approvals and various conditions of closing. The transaction will be accounted for as a purchase of assets. Subject to final negotiations, due diligence and working capital levels at the time of closing, the estimated purchase price is approximately $15,000. (11) INCOME TAXES 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, the recognition of income tax loss and tax credit carryforwards, management's current assessment of the required valuation allowance and the implementation of several tax planning initiatives resulted in an estimated effective income tax rate of 15% for the three and six month periods ended July 4, 1999. 10 11 (12) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS The Company's businesses are organized, managed, and internally reported as three reportable segments. These segments, which are based on differences in products, technologies, and services are Systems Assembly and Distribution, Printed Wiring Boards, and Other (which includes Dii Semiconductor and PTI). These segments offer products and services across most sectors of the electronics industry in order to reduce exposure to downturn in any particular sector. Transactions between segments are recorded at cost. The Company's businesses are operated on an integrated basis and are characterized by substantial intersegment cooperation, cost allocations, and marketing efforts. Substantially all interest expense is incurred at Corporate. Therefore, management does not represent that these segments, if operated independently, would report the operating income and other financial information shown.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ---------------------------- ---------------------------- JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998 ------------ ------------- ------------ ------------- NET SALES: Systems assembly and distribution $ 181,405 $ 142,712 $ 332,318 $ 293,131 Printed wiring boards 80,564 46,123 151,885 96,831 Other 18,124 33,103 43,358 67,350 --------- --------- --------- --------- $ 280,093 $ 221,938 $ 527,561 $ 457,312 ========= ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES*: Systems assembly and distribution $ 8,706 $ 7,205 $ 16,337 $ 14,155 Printed wiring boards 8,556 5,066 17,553 13,468 Other 5,564 3,428 8,266 4,066 Unallocated general corporate (8,336) 9 (7,196) (17,216) 9 (13,665) --------- --------- --------- --------- $ 14,490 $ 8,503 $ 24,940 $ 18,024 ========= ========= ========= ========= DEPRECIATION AND AMORTIZATION: Systems assembly and distribution $ 3,425 $ 3,774 $ 6,774 $ 5,440 Printed wiring boards 5,410 2,667 10,456 5,315 Other 878 2,160 1,818 6,062 Unallocated general corporate 286 275 592 578 --------- --------- --------- --------- $ 9,999 $ 8,876 $ 19,640 $ 17,395 ========= ========= ========= ========= CAPITAL EXPENDITURES: Systems assembly and distribution $ 10,106 $ 8,269 $ 21,413 $ 14,400 Printed wiring boards 15,588 8,098 24,024 12,622 Other 1,030 2,022 1,929 6,468 Unallocated general corporate 225 30 925 82 --------- --------- --------- --------- $ 26,949 $ 18,419 $ 48,291 $ 33,572 ========= ========= ========= =========
11 12
IDENTIFIABLE ASSETS AT THE END JULY 4, JANUARY 3, OF EACH PERIOD: 1999 1999 - ------------------------------ -------- ---------- Systems assembly and distribution $266,761 $238,027 Printed wiring boards 432,741 390,194 Other 40,229 79,453 Unallocated general corporate 58,338 39,635 -------- -------- $798,069 $747,309 ======== ========
* Excludes unusual charges of $54,000 for the six months ended June 28, 1998, which related primarily to Other Services. See Note 7 for additional information regarding the unusual charges. The following summarizes financial information by geographic areas:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ---------------------------- --------------------------- JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998 ------------ ------------- ------------ ------------- NET SALES: North America $ 157,115 $ 162,262 $ 297,132 $ 331,765 Europe 53,623 40,407 109,992 81,823 Asia 69,355 19,269 120,437 43,724 --------- --------- --------- --------- $ 280,093 $ 221,938 $ 527,561 $ 457,312 ========= ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES*: North America $ 12,264 $ 9,984 $ 18,623 $ 19,821 Europe 2,388 4,710 9,028 9,537 Asia 8,174 1,005 14,505 2,331 Unallocated general corporate (8,336) (7,196) (17,216) (13,665) --------- --------- --------- --------- $ 14,490 $ 8,503 $ 24,940 $ 18,024 ========= ========= ========= =========
LONG-LIVED ASSETS AT THE END JULY 4, JANUARY 3, OF EACH PERIOD: 1999 1999 - ----------------------------- -------- ---------- North America $222,614 $232,134 Europe 106,438 110,296 Asia 106,526 80,635 Unallocated general corporate 9,204 9,955 -------- -------- $444,782 $433,020 ======== ========
* Excludes unusual charges of $54,000 for the six months ended June 28, 1998, which related to businesses operated in North America. See Note 7 for additional information regarding the unusual charges. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands) FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 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. Words such as "expects," "anticipates," "forecasts," "intends," "plans," "believes," "projects," and "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include, but are not limited to, statements regarding prospective sales growth, new customers, integration of acquired businesses, contingencies, Year 2000 readiness, environmental matters and liquidity under "Part I, Financial Information - Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove to be wrong. Actual results and outcomes may vary materially from what is expressed or forecast in such statements. Among the factors that could cause actual results to differ materially are: general economic and business conditions; the Company's dependence on the electronics industry; changes in demand for the Company's products and services or the products of the Company's customers; the risk of delays or cancellations of customer orders; fixed asset utilization; the timing of orders and product mix; availability of components; competition; the risk of technological changes and of the Company's competitors developing more competitive technologies; the Company's dependence on certain important customers; the Company's ability to integrate acquired businesses; the Company's ability to manage growth; risks associated with international operations; the availability and terms of needed capital; risks of loss from environmental liabilities; and other risks detailed in this report. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A. OVERVIEW The Company is a leading provider of electronics design and manufacturing services, which operates through a global network of independent business units in North America, Europe, and Asia. These business units are uniquely linked to provide the following related core products and services to original equipment manufacturers ("OEMs"): custom semiconductor design; design and manufacture of printed wiring boards; assembly of printed circuit boards; final systems assembly ("box build"); and distribution. By offering comprehensive and integrated design and manufacturing services, the Company believes that it is better able to differentiate its product and service offerings from those of its competitors, develop long-term relationships with its customers and enhance its profitability. The Company provides the following related products and services to customers in the global electronics manufacturing industry: Design and Semiconductor Services-- Through Dii Technologies, the Company provides printed circuit board and backpanel design services, as well as design for manufacturability and test and total life cycle planning. Through Dii Semiconductor (formerly known as Orbit Semiconductor), the Company provides the following application specific integrated circuit ("ASIC") design services to its OEM customers: o Conversion services from field programmable gate arrays ("FPGAs") to ASICs. These services focus on designs that utilize primarily digital signals, with only a small amount of analog signals. o Design services for mixed-signal ASICs. These services focus on designs that utilize primarily analog signals, with only a small amount of digital signals. o Silicon integration design services. These services utilize silicon design modules that are used to accelerate complex ASIC designs, including system-on-a-chip. Dii Semiconductor utilizes external foundry suppliers for its customers' silicon manufacturing requirements, thereby using a "fabless" manufacturing approach. 13 14 By integrating the combined capabilities of design and semiconductor services, the Company can compress the time from product concept to market introduction and minimize product development costs. The Company believes that its semiconductor design expertise provides it with a competitive advantage by enabling the Company to offer its customers reduced costs through the consolidation of components onto silicon chips. Printed Wiring Boards-- The Company manufactures high density, complex multilayer printed wiring boards and back panels through Multek. Systems Assembly and Distribution-- The Company assembles complex electronic circuits and provides final system assembly and distribution services through Dovatron International ("Dovatron"). With the above core competencies, the Company has the ability to provide customers with total design and manufacturing outsourcing solutions. The Company's ability to offer fully integrated solutions with value-added front-and back-end product and process development capabilities, coupled with global volume assembly capabilities, provides customers with significant speed-to-market and product cost improvements. In addition, the Company manufactures machine tools and process automation equipment through its non-core business unit known as Process Technologies International ("PTI"). In March 1999, the Company sold TTI Testron, Inc., a manufacturer of functional and in-circuit test fixtures. In April 1999, the Company sold IRI International and Chemtech (U.K.) Limited, manufacturers of surface mount printed circuit board solder cream stencils. The Company is divesting this non-core business unit in order to sharpen its focus on the Company's core businesses of design and semiconductor services, fabrication of printed wiring boards, and systems assembly and distribution. The Company does not believe that the sale of PTI will have any adverse impact on its consolidated financial position. However, the Company's consolidated revenues and operating results will be adversely impacted (by less than 10%) until such time as the proceeds are reinvested back into the Company's core businesses of design and semiconductor services, design and fabrication of printed wiring boards, and systems assembly and distribution. 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 employed 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; the integration of acquired businesses; 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. Each of these factors has had in the past, and may have in the future, an adverse effect on the Company's operating results. 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 economic downturns at various times, which have been characterized by diminished product demand, accelerated erosion of average selling prices and overcapacity. The Company's customers also are subject to short product life cycles and pricing and margin pressures, which risks are borne by the Company. The Company seeks a well-balanced customer profile across most sectors of the electronics industry in order to reduce exposure to a downturn in any particular sector. The primary sectors within the electronics industry served by the Company are office automation, mainframes and mass storage, data communications, computer and peripherals, telecommunications, industrial, instrumentation, and medical. The Company offers manufacturing capabilities in three major electronics markets of the world (North America, Europe and Asia). The Company's European and Asian operations, combined, generated approximately 44% and 27% of total net sales for the six months ended July 4, 1999 and June 28, 1998, respectively. 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 and economic instability. Substantially all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions. Some transactions of the Company and its subsidiaries are made in currencies different from their functional currencies. 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 non-functional currency 14 15 monetary assets and liabilities. 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. Gains and losses on these foreign currency hedges are generally offset by corresponding losses and gains on the underlying transaction. To date, the Company's hedging activity has been immaterial, and there were no open foreign exchange contracts as of the balance sheet dates included in the accompanying Consolidated Financial Statements. As of July 4, 1999, the Company had the following unhedged net foreign currency monetary asset (liability) positions:
NET NET FOREIGN U.S. DOLLAR CURRENCY EQUIVALENT ASSETS ASSETS (LIABILITIES) (LIABILITIES) ------------- ------------- British Pound Sterling (887) $(1,399) Chinese Renminbi (4,863) (588) Czech Krown (190) (6) Euro 1,163 1,193 Hong Kong Dollar (1,662) (214) Malaysian Ringgit (1,637) (432) Mexican Peso (121) (13)
At any given time, certain customers may account for significant portions of the Company's business. Hewlett-Packard Company ("HP") accounted for approximately 17% of net sales during the six months ended July 4, 1999. HP and IBM accounted for 10% and 11% of net sales during the six months ended June 28, 1998, respectively. No other customer accounted for more than 10% of net sales during the six months ended July 4, 1999 or June 28, 1998. The Company's top ten customers accounted for approximately 56% and 50% of net sales for the six months ended July 4, 1999 and June 28, 1998, 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 would have a material adverse effect on the Company's operating results. Although management believes the Company has a broad diversification of customers and markets, the Company has few material firm long-term commitments or volume guarantees from its customers. In addition, customer orders can be canceled and volume levels can be changed or delayed. From time to time, some of the Company's customers have terminated their manufacturing arrangements with the Company, and other customers have reduced or delayed the volume of design and manufacturing services performed by the Company. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured, and termination of a manufacturing relationship or change, reduction or delay in orders could have a material adverse effect on the Company's operating results. In the past, changes in customer orders have had a significant impact on the Company's results of operations due to corresponding changes in the level of overhead absorption. The Company has actively pursued acquisitions in furtherance of its strategy to be the fastest and most comprehensive provider of custom electronics design and manufacturing services, ranging from microelectronics design through the fabrication, final assembly, and distribution of printed circuits and finished products for customers. The Company's acquisitions have enabled the Company to provide more integrated outsourcing technology solutions with time-to-market and lower cost advantages. OEM divestitures and acquisitions have also played an important part in expanding the Company's presence in the global electronics marketplace. OEM divestitures and acquisitions involve numerous risks including difficulties in assimilating 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 Company 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. There can be no assurance that the Company will be able to successfully integrate newly acquired businesses. Such failures could have a material adverse effect on the Company's business, financial condition and results of operations. 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. The Company also continues to experience rapid internal growth and expansion, and with continued expansion, it may become more difficult for the Company's management to manage geographically dispersed operations. The Company's failure to effectively manage growth could have a material adverse effect on the Company's results of operations. 15 16 B. RESULTS OF OPERATIONS Total net sales for the quarter ended July 4, 1999 increased $58,155 to $280,093 from $221,938 for the comparable period in 1998. This represents a 26% increase in total net sales, which is lower than the Company's five year compound annual growth rate of 41%. Total net sales for the six months ended July 4, 1999 increased $70,249 to $527,561 from $457,312 for the comparable period in 1998. This represents a 15% increase in total net sales, which is lower than the Company's five year compound annual growth rate of 41%. As further explained below, the Company believes these lower growth rates are attributable to reduced orders from certain product lines from some of the Company's major customers, as well as to divestitures of certain operations. Net sales from systems assembly and distribution, which represented 65% of net sales for the quarter ended July 4, 1999, increased $38,693 (27%) to $181,405, from $142,712 (64% of net sales) for the corresponding period in 1998. Net sales from systems assembly and distribution, which represented 63% of net sales for the six months ended July 4, 1999, increased $39,187 (13%) to $332,318, from $293,131 (64% of net sales) for the corresponding period in 1998. These increases are primarily the result of the Company's ability to continue to expand sales to new customers worldwide, and to a lesser extent, expanding sales to its existing customer base, which offset approximately $14,786 and $23,451 in reduced orders from some of the Company's major customers for the three and six month periods ended July 4, 1999, respectively. Net sales from printed wiring board manufacturing operations, which represented 29% of net sales for the quarter ended July 4, 1999, increased $34,441 (75%) to $80,564 from $46,123 (21% of net sales) for the comparable period in 1998. Net sales from printed wiring board manufacturing operations, which represented 29% of net sales for the six months ended July 4, 1999, increased $55,054 (57%) to $151,885 from $96,831 (21% of net sales) for the comparable period in 1998. These increases are attributable to the August 1998 Greatsino acquisition and the October 1998 purchase of the HP printed wiring board fabrication facility located in Boeblingen, Germany. Net sales for the Company's other products and services, which represented 6% of net sales for the quarter ended July 4, 1999, decreased $14,979 (45%) to $18,124 from $33,103 (15% of net sales) for the comparable period in 1998. Net sales for the Company's other products and services, which represented 8% of net sales for the six months ended July 4, 1999, decreased $23,992 (36%) to $43,358 from $67,350 (15% of net sales) for the comparable period in 1998. Approximately $10,518 of the decrease for the quarter and $17,515 of the decrease for the six month period is attributable to the previously described sale of the PTI business units and the sale of Orbit's 6-inch, 0.6 micron wafer fabrication facility ("Fab"). Gross profit for the quarter ended July 4, 1999 increased $9,170 to $42,312 from $33,142 in the comparable period in 1998. Gross profit for the six months ended July 4, 1999 increased $65,813 to $80,241 from $14,428 in the comparable period in 1998. Gross margin increased to 15.1% in the quarter ended July 4, 1999 from 14.9% in the comparable period in 1998. The slight improvement in gross margin is attributable to the increased concentration of sales from the Company's printed wiring board operations, which generate higher margins than the Company's other products and service offerings. Gross margin increased to 15.2% in the six months ended July 4, 1999 from 3.2% in the comparable period in 1998. The increase in gross margin is primarily attributable to $52,156 of unusual pre-tax charges during the first quarter of 1998 associated with the exit from wafer fabrication at Orbit. Excluding unusual charges, gross profit for the six months ended July 4, 1999 increased $13,657 to $80,241 from $66,584 for the comparable period in 1998. Excluding unusual charges, gross margin improved to 15.2% for the six months ended July 4, 1999 from 14.6% for the six months ended June 28,1998. The gross margin increase was primarily the result of (i) significantly improved margin performance from Dii Semiconductor resulting from a more focused and efficient business model since divesting of its Fab and (ii) the change in sales mix resulting from an increase in printed wiring board revenues, which generate higher margins than the Company's other products and service offerings. Selling, general and administrative (SG&A) expense increased $1,302 to $20,686 for the quarter ended July 4, 1999 from $19,384 for the comparable period in 1998. The percentage of SG&A expense to net sales decreased to 7.4% for the quarter ended July 4, 1999 from 8.7% in the comparable period in 1998. The increase in absolute dollars was primarily attributable to $2,371 of incremental SG&A expense associated with the addition of Multek's August 1998 Greatsino acquisition and October 1998 purchase of the HP printed wiring board fabrication facility located in Boeblingen, Germany, increased incentive-based stock compensation in the amount of $529, 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, combined with the continued investment in the Company's sales and marketing, finance, and other general and administrative infrastructure necessary to support the Company's business expansion offset by a reduction in expenses of approximately $2,755, which is attributable to the previously described sale of the PTI business units and the sale of Orbit's 6-inch, 0.6 micron wafer fabrication facility. 16 17 Selling, general and administrative (SG&A) expense increased $2,236 to $40,796 for the six months ended July 4, 1999 from $38,560 for the comparable period in 1998. The percentage of SG&A expense to net sales decreased to 7.7% for the six months ended July 4, 1999 from 8.4% in the comparable period in 1998. The increase in absolute dollars was primarily attributable to $4,220 of incremental SG&A expense associated with the addition of Multek's August 1998 Greatsino acquisition and October 1998 purchase of the HP printed wiring board fabrication facility located in Boeblingen, Germany, increased incentive-based stock compensation in the amount of $738, 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, combined with the continued investment in the Company's sales and marketing, finance, and other general and administrative infrastructure necessary to support the Company's business expansion offset by a reduction in expenses of approximately $4,598, which is attributable to the previously described sale of the PTI business units and the sale of Orbit's 6-inch, 0.6 micron wafer fabrication facility. During fiscal 1998, the Company recognized unusual pre-tax charges of $76,636, substantially all of which related to the operations of the Company's wholly owned subsidiary, Orbit Semiconductor. The Company decided to sell Orbit's 6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a fabless manufacturing strategy to complement Orbit's design and engineering services. The charges were primarily due to the impaired recoverability of inventory, intangible assets and fixed assets, and other costs associated with the exit of semiconductor manufacturing. The manufacturing facility was sold in January 1999 and the Company has successfully adopted a fabless manufacturing strategy. The Company recorded $54,000 and $22,636 of the charges in the first and fourth quarters of fiscal 1998, respectively. As discussed below, $52,156 of the unusual pre-tax charges had been classified as a component of costs of sales in the first quarter 1998. The components of the unusual charge recorded in fiscal 1998 are as follows:
FIRST FOURTH NATURE OF COMPONENTS OF CHARGE QUARTER QUARTER TOTAL CHARGE -------------------- ------- ------- ------- --------- Severance .............................. $ 498 $ 900 $ 1,398 cash Long-lived asset impairment ............ 38,257 15,083 53,340 non-cash Losses on sales contracts .............. 5,500 4,100 9,600 non-cash Incremental uncollectible accounts receivable ........................... 900 -- 900 non-cash Incremental sales returns and allowances 1,500 500 2,000 non-cash Inventory write-downs .................. 5,500 250 5,750 non-cash Other exit costs ....................... 1,845 1,803 3,648 cash ------- ------- ------- Total ........................ $54,000 $22,636 $76,636 ======= ======= =======
The following table summarizes the activity related to the charges taken in connection with the 1998 unusual charges:
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY ASSET ON SALES ACCOUNTS AND WRITE- OTHER SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL --------- ---------- --------- ------------- ------------ --------- ---------- -------- Balance at December 28, 1997 .......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Activities during the year: 1998 provision .... 1,398 53,340 9,600 900 2,000 5,750 3,648 76,636 Cash charges ...... (498) -- -- -- -- -- (465) (963) Non-cash charges .. -- (53,340) (8,500) (767) (1,500) (5,500) (643) (70,250) -------- -------- -------- -------- -------- -------- -------- -------- Balance at January 3, 1999 .............. 900 -- 1,100 133 500 250 2,540 5,423 Activities during the period: Cash charges ...... (900) -- -- -- -- -- (601) (1,501) Non-cash charges .. -- -- (1,100) (133) -- (250) -- (1,483) -------- -------- -------- -------- -------- -------- -------- -------- Balance at April 4, 1999 .............. -- -- -- -- 500 -- 1,939 2,439 Activities during the period: Cash charges ...... -- -- -- -- -- -- (584) (584) Non-cash charges .. -- -- -- -- (500) -- -- (500) -------- -------- -------- -------- -------- -------- -------- -------- Balance at July 4, 1999 .............. $ -- $ -- $ -- $ -- $ -- $ -- $ 1,355 $ 1,355 ======== ======== ======== ======== ======== ======== ======== ========
The unusual pre-tax charges include $53,340 for the write-down of long-lived assets to fair value. This amount has been classified as a component of cost of sales. Included in the long-lived asset impairment are charges of $50,739, which relate to the Fab which was written down to its net realizable value based on its sales price. The Company kept the Fab in service until the sale date in January 1999. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company discontinued 17 18 depreciation expense on the Fab when it determined that it would be disposed of and its net realizable value was known. The impaired long-lived assets consisted primarily of machinery and equipment of $52,418, which were written down by $43,418 to a carrying value of $9,000 and building and improvements of $7,321, which were written down to a carrying value of zero. The long-lived asset impairment also includes the write-off of the remaining goodwill related to Orbit of $601. The remaining $2,000 of asset impairment relates to the write-down to net realizable value of a facility the Company exited during 1998. The Company purchased Orbit in August of 1996, and supported Orbit's previously made decision to replace its wafer fabrication facility ("fab") with a higher technology fab. The transition to the 6-inch fab was originally scheduled for completion during the summer of 1997, but the changeover took longer than expected and was finally completed in January 1998. The missed plan for the changeover and running both fabs simultaneously put pressure on the work force, with resulting quality problems. Compounding these problems, the semiconductor industry was characterized by excess capacity, which led larger competitors to invade Orbit's niche market. Further, many of Orbit's customers migrated faster than expected to a technology in excess of Orbit's fabrication capabilities, requiring Orbit to outsource more of its manufacturing requirements than originally expected. Based upon these continued conditions and the future outlook, the Company took this first quarter 1998 charge to correctly size Orbit's asset base to allow its recoverability based upon its then current business size. The first quarter 1998 unusual charge included $38,257 for the write-down of long-lived assets to fair value. The fair value of these assets was based on estimated market value at the date of the charge. Fair market value was determined in accordance with SFAS No. 121, and included the use of an independent valuation. The impairment charge consists of $37,656 related to property, plant and equipment and $601 related to goodwill. This amount was classified as a component of cost of sales. Additionally, the first quarter 1998 unusual charge included $7,900 for losses on sales contracts, incremental amounts of uncollectible accounts receivable, and estimated incremental sales returns and allowances, primarily resulting from the fab changeover quality issues. This amount was classified as a component of cost of sales. The first quarter 1998 unusual pre-tax charge also included $7,843 primarily associated with inventory write-downs. This write-down primarily resulted from excess inventory created by deciding to downsize operations. As previously stated, the Company subsequently decided to sell the manufacturing facility (which occurred in January 1999). This decision resulted in an additional unusual pre-tax charges in the fourth quarter of 1998 of $22,636. The exit plan is expected to be completed in the third quarter of 1999. As of July 4, 1999, the total remaining cash expenditures expected to be incurred are $1,355 of other exit costs, including legal settlement costs, environmental clean-up costs and other exit costs. These expenditures will continue to be funded through operating cash flows of the Company which are expected to be sufficient to fund these expenditures. These amounts were recorded in accrued expenses at July 4, 1999. Interest expense increased $702 to $5,371 for the quarter ended July 4, 1999 from $4,669 for the comparable period in 1998. Interest expense increased $2,465 to $11,853 for the six months ended July 4, 1999 from $9,388 for the comparable period in 1998. These increases are primarily associated with the increased borrowings used to fund the business acquisitions, purchases of manufacturing facilities and strategic investments as described in Note 3 of the condensed consolidated financial statements. In February 1999, substantially all of the Company's convertible subordinated notes were converted into approximately 4,600,000 shares of common stock and the unconverted portion was redeemed for $101. Interest income decreased $321 to $356 for the quarter ended July 4, 1999 from $677 for the comparable period in 1998. Interest income decreased $854 to $750 for the six months ended July 4, 1999 from $1,604 for the comparable period in 1998. These decreases are attributable to the decreased earnings generated on the lower average balances of invested cash and cash equivalents. Amortization expense increased $213 to $1,307 for the quarter ended July 4, 1999 from $1,094 for the comparable period in 1998. Amortization expense increased $387 to $2,602 for the six months ended July 4, 1999 from $2,215 for the comparable period in 1998. This increase is attributable to the amortization of debt issue costs associated with the increased borrowings as well as amortization of goodwill associated with acquisitions. 18 19 Other expense (net) increased $645 and $799 for the three and six month periods ended July 4, 1999, respectively. These increases are primarily the result of decreased net gains realized on foreign currency transactions combined with 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, the recognition of income tax loss and tax credit carryforwards, management's current assessment of the required valuation allowance and the implementation of several tax planning initiatives resulted in an estimated effective income tax rate of 15% for the three and six months ended July 4, 1999. The Company's effective income tax rate was 28% for the three and six months ended June 28, 1998 resulting from the mix of foreign and domestic earnings, income tax credits, and changes in previously established valuation allowances for deferred tax assets. C. BUSINESS COMBINATIONS, ASSET PURCHASES AND STRATEGIC INVESTMENTS In August 1998, the Company acquired Greatsino Electronic Technology, a printed wiring board fabricator and contract electronics manufacturer with operations in the People's Republic of China. The cash purchase price, net of cash acquired, amounted to $51,795. The initial purchase price is subject to adjustments for contingent consideration of no more than approximately $40,000 based upon the business achieving specified levels of earnings through August 31, 1999. This acquisition was accounted for as a purchase with the results of operations from the acquired business included in the Company's results of operations from the acquisition date forward. Pro forma results of operations would not be materially different from the historical results reported. The cost of this acquisition was allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. The fair value of the assets acquired, excluding cash acquired, amounted to $55,699 and liabilities assumed were $21,801, including estimated acquisition costs. The cost in excess of net assets acquired amounted to $17,897. Goodwill associated with this acquisition, as well as previous acquisitions, is subject to future adjustments from contingent purchase price adjustments for varying periods, all of which end no later than June 2001. The Company increased goodwill and notes payable to sellers of businesses acquired in the amount of $9,500 for contingent purchase price adjustments during the six months ended July 4, 1999. There were no contingent purchase price adjustments during the six months ended June 28, 1998. In October 1998, the Company acquired Hewlett-Packard Company's ("HP") printed wiring board fabrication facility located in Boeblingen, Germany, and its related production equipment, inventory and other assets for a purchase price of approximately $89,900. The purchase price was allocated to the assets acquired based on the relative fair values of the assets at the date of acquisition. During the first quarter of fiscal 1999, the Company made two strategic minority investments amounting to $20,507. First, the Company entered into a joint venture with Virtual IP Group ("VIP"), a complex integrated circuit design company with locations in Hyderabad, India and Sunnyvale, California. The Company acquired a 49% interest in VIP for approximately $5,007. The Company accounts for its investment in VIP under the equity method. In March 1999, the Company acquired 15,000 non-voting preferred shares of DVB (Group) Limited ("DVB"), a wholly-owned subsidiary of Capetronic International Holdings Limited (Capetronic). The preferred stock accrues a 5% annual dividend and can be converted into common stock of Capetronic after 15 months and at a price of HK$4.80 per share. Additionally, at anytime after 15 months, Capetronic can force conversion if the market price is at least HK$10.00 per share. At a conversion price of HK$4.80 per share (based on an agreed exchange rate of US$1.00 equals HK$7.50) the Company would hold approximately 24,219 common shares of Capetronic, which currently would represent approximately 13% of the issued common stock of Capetronic after giving effect to the conversion, excluding the effect of other dilutive instruments which are currently in existence that, if converted, would reduce the Company's ultimate ownership percentage. However, under the terms of the agreement, the Company can not hold more than 10% of the outstanding common stock of Capetronic. If, upon conversion, the Company holds in excess of 10% of the outstanding common stock of Capetronic, the Company would be required to divest of shares to reduce its holdings to 10% or less. The Company currently accounts for its investment in Capetronic under the cost method. Once the criteria for conversion are reached, the Company will account for this investment as an available-for-sale marketable equity security in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 19 20 Through this strategic investment and a related manufacturing agreement, the Company has obtained the rights to manufacture a majority of DVB's requirements for set-top boxes to be used for the delivery of video entertainment, data and educational materials in China. D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS At July 4, 1999, the Company had working capital of $70,075 and a current ratio of 1.3x compared with working capital of $87,310 and a current ratio of 1.4x at January 3, 1999. Cash and cash equivalents at July 4, 1999 were $35,734, a decrease of $20,238 from $55,972 at January 3, 1999. This decrease resulted primarily from cash used by investing and financing activities of $33,619 and $16,199, respectively, offset by cash provided by operating activities of $29,687. Cash provided by operating activities amounted to $29,687 and $42,183 for the six month periods ended July 4, 1999 and June 28, 1998, respectively. For the six months ended July 4, 1999, cash provided by operating activities reflects net income of $21,223 and depreciation and amortization of $19,640 versus a net loss of $25,920, non-cash unusual charges of $51,657 and depreciation and amortization of $17,395 in the six months ended June 28, 1998. The increase in depreciation and amortization of $2,225 is due mainly to the Company's acquisitions. Cash provided by operating activities for the six month period ended July 4, 1999 also reflects an increase in accounts payable of $40,911, offset by increases of $9,331 and $28,195 in accounts receivable and inventory, respectively. For the six months ended June 28, 1998, cash provided by operating activities also reflected decreases in accounts receivable of $15,719 and inventory of $912, offset by a decrease of $13,928 in accrued expenses. The Company's net cash flows used by investing activities amounted to $33,619 and $29,772 for the six month periods ended July 4, 1999 and June 28, 1998, respectively. Capital expenditures amounted to $48,291 and $33,572 for the quarters ended July 4, 1999 and June 28, 1998, respectively. The capital expenditures represent the Company's continued investment in state-of-the-art, high-technology equipment, which enables the Company to accept increasingly complex and higher-volume orders and to meet current and expected production levels, as well as to replace or upgrade older equipment. The Company received proceeds of $9,128 and $3,800 from the sale of property, plant and equipment during the six month periods ended July 4, 1999 and June 28, 1998, respectively. A significant portion of the proceeds in the six months ended July 4, 1999 was related to the sale of Dii Semiconductor's wafer fabrication facility in January 1999. In April 1999, the Company completed the divestiture of IRI International and Chemtech (U.K.) Limited, manufacturers of surface mount printed circuit board solder cream stencils. In March 1999, the Company completed the divestiture of TTI Testron, Inc., its subsidiary that manufactures in-circuit and functional test hardware and software. The Company received cash proceeds from these sales amounting to $26,051, net of divestiture costs. As discussed in C above, during the six months ended July 4, 1999, the Company made two strategic minority investments amounting to $20,507. The Company's net cash flows used by financing activities amounted to $16,199 and $17,655 for the six month periods ended July 4, 1999 and June 28, 1998, respectively. The Company repaid $5,535 and $2,479 in capital lease obligations in the six months ended July 4, 1999 and June 28, 1998, respectively. The Company also repaid $16,989 and $2,164 in long-term debt in the six months ended July 4, 1999 and June 28, 1998, respectively. The Company received $3,426 and $3,146 in proceeds from stock issued under its stock plans in the six months ended July 4, 1999 and June 28, 1998, respectively. Additionally, during the six months ended June 28, 1998, the Company repurchased 850,000 shares of its common stock at a cost of $16,158. During the six months of 1999, the Company borrowed an additional $3,000 under its $110,000 senior secured revolving line-of-credit facility. As of July 4, 1999, there were $40,500 in borrowings outstanding under the Company's $110,000 senior secured revolving line-of-credit facility. This credit facility requires compliance with certain financial covenants and is secured by substantially all of the Company's assets. As of July 4, 1999, the Company was in compliance with all loan covenants. As of February 18, 1999, substantially all of the Company's convertible subordinated notes were converted into approximately 4,600,000 shares of common stock and the unconverted portion was redeemed for $101. On May 4, 1999, the Company announced that it has signed a memorandum of understanding with Ericsson Austria AG to purchase Ericsson's manufacturing facility and related assets located in Kindberg, Austria. Subject to concluding this transaction, the Company will enter into a long-term supply agreement with 20 21 Ericsson to provide printed circuit board assembly, box build, and the associated logistics and distribution activities. The transaction is expected to be completed during the Company's third fiscal quarter of 1999. Completion of the transaction is subject to applicable government approvals and various conditions of closing. The transaction will be accounted for as a purchase of assets. Subject to final negotiations, due diligence and working capital levels at the time of closing, the estimated purchase price is approximately $15,000. Management believes that its current level of working capital, together with cash generated from operations, existing cash reserves, leasing capabilities, and line-of-credit availability will be adequate to fund the Company's current capital expenditure plan for fiscal 1999. The Company intends to continue its acquisition strategy and it is possible that future acquisitions may be significant. If available resources are not sufficient to finance the Company's acquisitions, the Company would be required to seek additional equity or debt financing. There can be no assurance that such funds, if needed, will be available on terms acceptable to the Company or at all. 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, results from operations 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 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. See Note 10 of the condensed consolidated financial statements for a description of commitments, contingencies and environmental matters. E. YEAR 2000 ISSUE The Year 2000 date conversion issue is the result of computer programs being written using two digits rather than four to define the applicable year. This issue affects computer systems that have time-sensitive programs that may not properly recognize the Year 2000. This could result in major system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. Management has implemented a company-wide program to prepare its financial, manufacturing, and other critical systems and applications for the Year 2000. This comprehensive program was developed to ensure the Company's information technology assets, including embedded microprocessors ("IT assets") and non-IT assets are Year 2000 ready. The Company has formed a Year 2000 project team of approximately 75 employees, overseen by a corporate officer, which team is responsible for monitoring the progress of the program and ensuring timely completion. The team has a detailed project plan in place with tasks, milestones, critical paths, and dates identified. The Company's comprehensive program covers the following six phases: (i) inventory of all IT and non-IT assets; (ii) assessment of repair requirements; (iii) repair of IT and non-IT assets; (iv) testing of individual IT and non-IT assets to determine the correct manipulation of dates and date-related data; (v) communication with the Company's significant suppliers and customers to determine the extent to which the Company is vulnerable to any failures by them to address the Year 2000 issue; and (vi) creation of contingency plans in the event of Year 2000 failures. Implementation of the program is ongoing with all of the operating entities having completed the inventory and assessment phases. Each operating company has identified those software programs and related hardware that are non-compliant and is in the process of developing remediation or replacement plans and establishing benchmark dates for completion of each phase of those plans. The Company anticipates that mission-critical software and hardware will be compliant by the third quarter of 1999 for all but two sites, both of which will be compliant by November 1999. The Company has projected to have completed all system testing by the close of September 1999, except for one site, which will be completed in November 1999. Until system testing is completed, the Company cannot fully estimate the risks of its Year 2000 issue. To date, management has not identified any IT assets that present a material risk of not being Year 2000-ready, or for which a suitable alternative cannot be implemented. However, as the program proceeds into subsequent phases, it is possible that the Company may identify assets that do present a risk of a Year 2000-related disruption. It is also possible that such a disruption could have a material adverse effect on financial condition and results of operations. 21 22 The Company is continually contacting suppliers who provide both critical IT assets and non-information technology related goods and services (e.g. transportation, packaging, production materials, production supplies, etc.). The Company mailed surveys to its suppliers in order to (i) evaluate the suppliers' Year 2000 compliance plans and state of readiness and (ii) determine whether a Year 2000-related event will impede the ability of such suppliers to continue to provide such goods and services as the Year 2000 is approached and reached. For a vast majority of those suppliers of IT assets that have responded, the Company has received assurances that these assets will correctly manipulate dates and date-related data as the Year 2000 is approached and reached. The Company is in the process of reviewing responses for accuracy and adequacy, and sending follow-up surveys or contacting suppliers directly via phone for those non-responsive suppliers. The Company also relies, both domestically and internationally, upon government agencies, utility companies, telecommunications services, and other service providers outside of the Company's control. There is no assurance that such suppliers, governmental agencies, or other third parties will not suffer a Year 2000 business disruption. Such failures could have a material adverse affect on the Company's financial condition and results of operations. Further, the Company has initiated formal communications with its significant suppliers, customers and critical business partners to determine the extent to which the Company may be vulnerable in the event those parties fail to properly remediate their own Year 2000 issues. The Company has taken steps to monitor the progress made by those parties, and intends to test critical system interfaces as the Year 2000 approaches. The Company will develop appropriate contingency plans in the event that a significant exposure is identified relative to the dependencies on third-party systems. While the Company is not presently aware of any such significant exposure, there can be no guarantee that the systems of third parties on which the Company relies will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. The program calls for the development of contingency plans for the Company's at-risk business functions. The Company is finalizing its Year 2000 contingency plans for all of its business critical systems worldwide. These plans will address any business critical failure, both internal and external dependencies, including but not limited to transportation, banking, telecommunications, suppliers, manufacturing, accounting and payroll. Because the Company has not completed testing of mission critical systems, and, accordingly, has not fully assessed its risks from potential Year 2000 failures, the Company has not yet developed specific Year 2000 contingency plans. The Company will develop such plans if the results of testing mission-critical systems identify a business function risk. In addition, as a normal course of business, the Company maintains and deploys contingency plans to address various other potential business interruptions. These plans may be applicable to address the interruption of support provided by third parties resulting from their failure to be Year 2000-ready. To date, the Company estimates that it has spent approximately $5,900 on implementation of the program, with the majority of the work being performed by Company employees. Less than $7,000 has been allocated to address the Year 2000 issue. The Company's aggregate cost estimate includes certain internal recurring costs, but does not include time and costs that may be incurred by the Company as a result of the failure of any third parties, including suppliers, to become Year 2000-compliant or costs to implement any contingency plans. The Company is expensing as incurred all costs related to the assessment and remediation of the Year 2000 issue. These costs are being funded through operating cash flows. Certain inventory and manufacturing software-related projects were accelerated to ensure Year 2000 compliance. However, such acceleration did not increase the anticipated costs of the projects. The Company has not deferred any specific information technology project as a result of the implementation of the program. The Company is committed to achieving Year 2000 compliance; however, because a significant portion of the problem is external to the Company and therefore outside its direct control, there can be no assurances that the Company will be fully Year 2000 compliant. If the modifications and conversions required to make the Company Year 2000-ready are not made, or are not completed on a timely basis, the resulting problems could have a material impact on the operations of the Company. This impact could, in turn, have a material adverse effect on the Company's results of operations and financial condition. F. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) are recognized in earnings or in other comprehensive income each reporting period, depending on the intended use of the 22 23 derivative and the resulting designation. Generally, changes in the fair value of derivatives not designated as a hedge, as well as changes in fair value of fair-value designated hedges (and the item being hedged), are required to be reported in earnings. Changes in fair value of other types of designated hedges are generally reported in other comprehensive income. The ineffective portion of a designated hedge, as defined, is reported in earnings immediately. The Company will be required to adopt SFAS 133 as of January 2, 2001. The Company has not completed the process of evaluating the impact, if any, that will result from adopting SFAS 133. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposures are in the areas of interest-rate risk and foreign currency exchange rate risk. To manage the volatility relating to these exposures, the Company may enter into various derivative transactions to hedge the exposures. The Company does not hold or issue any derivative financial instruments for trading or speculative purposes. The Company incurs interest expense on loans made under its Credit Agreement at interest rates that are fixed for a maximum of six months. Borrowings under the Credit Agreement bear interest, at the Company's option, at either: (i) the Applicable Base Rate ("ABR") (as defined in the Credit Agreement) plus the Applicable Margin for ABR Loans ranging between 0.00% and 0.75%, based on certain financial ratios of the Company, or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus the Applicable Margin for Eurodollar Loans ranging between 1.00% and 2.25%, based on certain financial ratios of the Company. The Eurodollar Rate is subject to market risks and will fluctuate. There has been no material change in the Eurodollar Rate and the fair value of the Company's fixed rate debt since January 3, 1999. The Company had no open interest rate hedge positions to reduce its exposure to changes in interest rates at July 4, 1999. The Company conducts a significant amount of its business and has a number of operating facilities in countries outside of the United States. Substantially all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions. Some transactions of the Company and its subsidiaries are made in currencies different from their functional currencies. 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 non-functional currency monetary assets and liabilities. 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. Gains and losses on these foreign currency hedges are generally offset by corresponding losses and gains on the underlying transaction. To date, the Company's hedging activity has been immaterial, and there were no open foreign exchange contracts as of the balance sheet dates included in the accompanying Consolidated Financial Statements. As of July 4, 1999, the Company had the following unhedged net foreign currency monetary asset (liability) positions:
NET NET FOREIGN U.S. DOLLAR CURRENCY EQUIVALENT ASSETS ASSETS (LIABILITIES) (LIABILITIES) ------------- ------------- British Pound Sterling (887) $(1,399) Chinese Renminbi (4,863) (588) Czech Krown (190) (6) Euro 1,163 1,193 Hong Kong Dollar (1,662) (214) Malaysian Ringgit (1,637) (432) Mexican Peso (121) (13)
The Company believes that its revenues and operating expenses currently incurred in foreign currencies are immaterial, and therefore any associated market risk is unlikely to have a material adverse affect on the Company's business, results of operations or financial condition. 23 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In 1997 two related complaints, as amended, were filed in the District Court of Boulder, Colorado and the U.S. District Court for the District of Colorado against the Company and certain of its officers. Both actions were brought by the same plaintiffs' law firm as the Orbit action discussed below. In July 1999 the federal court action was dismissed with prejudice. The state court action purports to be brought on behalf of a class of persons who purchased the Company's common stock during the period from April 1, 1996, through September 8, 1996, and claims violations of Colorado and federal laws based on allegedly false and misleading statements made in connection with the offer, sale or purchase of the Company's common stock at allegedly 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. The Company has filed an answer denying that it misled the securities market. A May 2000 trial date has been set and discovery has commenced. The Company believes that the claims asserted in the action are without merit and intends to defend vigorously against such claims. A class action complaint (as amended in March 1996 and January 1997) for violations of federal securities law was filed against Orbit and three of its officers in 1995 in the U.S. District Court for the Northern District of California. The amended complaint alleged that Orbit and three of its officers were responsible for actions of securities analysts that allegedly misled the market for Orbit's then existing public common stock, and sought relief under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The amended complaint sought compensatory and other damages, as well as equitable relief. In September 1997, Orbit filed its answer to the second amended complaint denying responsibility for the actions of securities analysts and further denying that it misled the securities market. On May 24, 1999, the Court approved a class-wide settlement of the case, providing for a settlement fund of $1.7 million. Orbit's contribution to the settlement fund was $143,000, and the balance was paid by Orbit's insurance carriers. 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 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 9 of the 1998 Consolidated Financial Statements included in Part II, Item 8 of the Company's Form 10-K Annual Report for the fiscal year ended January 3, 1999 for contingencies and environmental matters. ITEM 6(a). EXHIBITS EXHIBIT NUMBER DESCRIPTION 15 Letter re: Unaudited Interim Financial Information. 23.1 Report of Independent Accountants - Deloitte & Touche LLP. 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. 24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE DII GROUP, INC. Date: August 18, 1999 By: /s/ Carl R. Vertuca, Jr. -------------------------------------- Carl R. Vertuca, Jr. Executive Vice President--Finance, Administration and Corporate Development Date: August 18, 1999 By: /s/ Thomas J. Smach -------------------------------------- Thomas J. Smach Chief Financial Officer 25 26 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 15 Letter re: Unaudited Interim Financial Information. 23.1 Report of Independent Accountants - Deloitte & Touche LLP. 27 Financial Data Schedule.
26 EX-15 2 LETTER RE: UNAUDITED INTERIM FINANCIAL INFO. 1 EXHIBIT 15 August 13, 1999 The DII Group, Inc. 6273 Monarch Park Place Niwot, Colorado We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The DII Group, Inc. and subsidiaries for the periods ended July 4, 1999 and June 28, 1998, as indicated in our report dated August 13, 1999; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended July 4, 1999, is incorporated by reference in Registration Statement Nos. 33-73556, 33-90572, 33-79940, 333-10999, 333-11001, 333-11005, and 333-11007 on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. Very truly yours, DELOITTE & TOUCHE LLP EX-23.1 3 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors The DII Group, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of The DII Group, Inc. and subsidiaries (the Company) as of July 4, 1999, and the related condensed consolidated statements of income and cash flows for the thirteen weeks and twenty six weeks ended July 4, 1999 and June 28, 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The DII Group, Inc. and subsidiaries as of January 3, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the 53 weeks then ended (not presented herein); and in our report dated January 28, 1999, (February 18, 1999 as to the redemption of convertible subordinate notes described in Note 6), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 3, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Denver, Colorado August 13, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JAN-02-2000 JAN-04-1999 JUL-04-1999 35,734 0 165,120 7,292 89,821 309,215 433,166 90,076 798,069 239,140 0 0 0 311 288,393 798,069 527,561 527,561 447,320 488,116 (1,111) 3,763 11,853 24,940 3,717 21,223 0 0 0 21,223 0.75 0.73
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