Info on DII Group.
I talked to a knowledgeable source about DII Group and the recent news announcement. Here are some of the comments:
The recent press release was scheduled to coincide with DIIG' s presentation at the Alex Brown Tech conference. They needed to put out the release to be able to talk openly about forward looking information at the conference and address some of the rumors.
The new Jabil contract with Nortel Networks (Bay Networks) was announced at the Jabil conference call in mid June, although at that time they didn't name the customer (instead referring to a "networking customer"). The contract wasn't announced until the Jabil earnings report on October 6th.
My source believes DII began negotiating with Bay Networks in late June and early July, and first announced the existence of a "box-build" customer at their earnings report in July. DII then confirmed the info at meetings in August. This deal was apparently reached after the Jabil deal was reached and announced. Therefore, my source indicates that Bay Networks was not planning to include this product program in the Jabil contract.
After the completion of the Nortel / Bay Networks merger, the company began combining the networking business of Nortel with the Bay operations to form the Nortel Networks unit. Since the Bay networking operations were larger, much of the management in Nortel Networks came from Bay. But in the act of combining the operations, they decided to put some new contracts on hold, until they made some decisions on their preferred supplier list. The new program for DII was put on hold.
My source believes that is likely that eventually DII will make the short list of suppliers, and that the program will be retained by DII.
This program could eventually do approximately $200M annually and would be significant for Dovatron, which is expected to do just over $600M in revenues this year. Approximately $90M of this revenue was due to HP business, with the bulk of that dependent on one program. This HP product is the 4 in 1 printer/fax/copier/scanner. The revenues for this program fell off dramatically from over $90M in the last half of 97 to only $44M the first half of 98. The big surge in revenues in the second half of 97 was due to filling an empty product pipeline for a new product. Also the demand for this product was somewhat lower than expected, so overfilling the pipeline hurt doubly. This program should eventually provide about $25-30M per Q.
Without the HP revenues, Dovatron did about $384M in 97, and is expected to do about $518M (without HP) this year. Thus Dovatron's other assembly business will grow about 35% this year, a pretty decent internal growth rate. If this continues next year, with HP revenues level, then Dovatron should do about $790M. If they land the Nortel Networks program, then Dovatron could do closer to $950M.
This is compared to about $608M this year.
DII's bare board manufacturing division is Multek. The Irvine,CA and Roseville, Minnesota plants did about $97M last year, and should do about $100M this year. These plants are mostly quickturn and prototype work, and so Multek acquired the Austin, TX plant from IBM to get a volume production facility. They will do about $100M in Austin this year. They have been installing a new plating line that should be ready about the end of October, and this should increase the capacity of this plant to about $160M annually. In addition, there is some extra space in the Austin plant and Dovatron has begun a new backplanes/backplanels business in the Austin plant this year and will do about $15M in this business in 98, mostly for one defense electronics firm.
Multek's business carries a much higher gross margin normally than Dovatron's 9%, and even this year the margin will be 25% or better. This is in spite of a very poor marketplace for most board manufacturers. Multek has some very good businesses, and customers often like the quickturn / prototype work so much, they've been asking Multek to do volume production of the same products.
Multek made two acquisitions this year in China and Germany. The German plant was an HP plant, and is doing about $60M annually. The Chinese plant is doing about $40M annually and is expected to grow significantly.
The plants cost about $65M and $40M respectively, about one times revenues. The Chinese plant has a margin of 20%, and has an earn-out provision. In order for the current managers to max out on the earn-out, the plant has to do $65M in revenues next year (with operating earnings of $13M). I understand that these numbers are do-able. The prior owners of this plant were forced to sell the plant, after another business unit they owned (appliances?) ran into financial difficulty. The plant was purchased in a "fire sale".
These two plants should contribute at least $100M in 1999, and could easily do more than $130M.
Management is publicly forecasting $320M for Multek (in total) for 1999. This is consistent with Irvine+ Roseville at $100M, plus $120M from Austin, plus $100M from China + Germany. Essentially this is a low ball forecast. If Austin grows faster, and China hits the earn-out, then Multek could do $360M. The two new foreign plants will probably be accretive by about 38 cents per share, and if the earn-out is hit in China, they will accrete 51 cents a share to the bottom line.
Now to the weakest division, Orbit Semiconductor. Not much to say about Orbit. Its business has been lousy. And buying this unit in September 96 has been a huge mistake. This business eventually cost the company about 8M diluted shares, and they haven't got much in return. The company guidance in the latest release, is: "Regarding Orbit, without question the downturn of the semiconductor industry has had a severe impact on our financial results in 1998. Consequently, we have reduced our exposure to the industry and are taking other steps to optimize Orbit's direct contribution to profits. Although the utilization of Orbit's manufacturing facility continues to be a concern, our new management team there is making significant progress: Orbit's ENCORE! Conversion product had a book-to-bill ratio of greater than 1.0 for the third quarter; and the mixed-signal segment continues to be significantly profitable."
That about said it all, don't expect any profits from Orbit, and probably a continued drag on results.
In my next post, I will post my thoughts on the stock.
Paul
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