<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended September 28, 1996 Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-0493110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
414 EAST FORTIETH STREET, HOLLAND, MICHIGAN 49423
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 786-7000
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
4,282,167 shares of Class A Common Stock and 3,575,959 shares of Class B Common
Stock were outstanding as of October 31, 1996.
<PAGE> 2
DONNELLY CORPORATION
INDEX
Page
Numbering
---------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
- September 28, 1996 and June 29, 1996...............................3
Condensed Combined Consolidated Statements of Income
- Three months ended September 28, 1996 and September 30, 1995.......4
Condensed Combined Consolidated Statements of Cash Flows
- Three months ended September 28, 1996 and September 30, 1995.......5
Notes to Condensed Combined Consolidated Financial
Statements - September 28, 1996......................................6-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition...............8-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders..............................................11
Item 6. Exhibits and Reports on Form 8-K.....................11
Signatures............................................................12
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, June 29,
In thousands 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,652 $ 1,303
Accounts receivable, less allowance
of $571 and $571 80,426 73,658
Inventories 27,040 24,228
Prepaid expenses and other current assets 26,848 27,506
--------- ---------
Total current assets 139,966 126,695
Property, plant and equipment 160,865 157,161
Less accumulated depreciation 60,902 57,397
--------- ---------
Net property, plant and equipment 99,963 99,764
Investments in and advances to affiliates 40,694 37,932
Other assets 8,247 7,101
--------- ---------
Total assets $ 288,870 $ 271,492
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 44,165 $ 44,349
Other current liabilities 23,148 18,864
--------- ---------
Total current liabilities 67,313 63,213
Long-term debt, less current maturities 113,366 101,757
Deferred income taxes and other liabilities 19,127 17,670
--------- ---------
Total liabilities 199,806 182,640
--------- ---------
Preferred stock 531 531
Common stock 789 787
Other shareholders' equity 87,744 87,534
--------- ---------
Total shareholders' equity 89,064 88,852
--------- ---------
Total liabilities and shareholders' equity $ 288,870 $ 271,492
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 28, September 30,
In thousands except share data 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 113,400 $ 90,523
Costs and expenses:
Cost of sales 90,252 76,838
Selling, general and
administrative 11,087 10,143
Research and development 7,119 5,629
---------- ---------
Operating income 4,942 (2,087)
Interest expense 1,957 1,735
Royalty income (409) (1,328)
Interest income (72) (374)
Other (income) expense, net 317 (99)
---------- ---------
Income (loss) before taxes on income 3,149 (2,021)
Taxes on income (credit) 1,171 (717)
---------- ---------
Income (loss) before minority 1,978 (1,304)
interest and equity earnings
Minority interest in net (income)
loss of subsidiaries --- 123
Equity in losses of affiliated
companies (256) (608)
---------- ---------
Net income (loss) $ 1,722 $ (1,789)
---------- ---------
---------- ---------
Per share of common stock:
Net income (loss) $ 0.22 $ (0.23)
Cash dividends declared $ 0.10 $ 0.10
Average common shares outstanding 7,836,615 7,773,432
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 28, September 30,
In thousands 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,722 $ (1,789)
Adjustments to reconcile net income
to net cash from (for)operating
activities:
Depreciation and amortization 3,759 3,683
Deferred pension cost and
postretirement benefits 1,340 479
Deferred income taxes (688) 1,233
Minority interest loss --- (123)
Equity in losses of affiliated
companies 1,318 1,097
Changes in operating assets and
liabilities:
Accounts receivable (6,768) (4,229)
Inventories (2,812) (3,005)
Prepaid expenses and other current
assets 658 (6,754)
Accounts payable and other current
liabilities 4,099 1,491
Other (459) (337)
----------- ----------
Net cash from (for) operating
activities 2,169 (8,254)
----------- ----------
----------- ----------
INVESTING ACTIVITIES
Capital expenditures (3,676) (6,064)
Investments in and advances to equity
affiliates (4,054) (13,680)
Purchase of minority interest --- (2,100)
Other (679) 174
----------- ----------
Net cash for investing activities (8,409) (21,670)
----------- ----------
----------- ----------
FINANCING ACTIVITIES
Proceeds from long-term debt 11,264 30,930
Common stock issuance 247 313
Dividends paid (922) (785)
----------- ----------
Net cash from financing
activities 10,589 30,458
----------- ----------
----------- ----------
Increase in cash and cash
equivalents 4,349 534
Cash and cash equivalents, beginning
of period 1,303 5,224
----------- ----------
Cash and cash equivalents, end of
period $ 5,652 $ 5,758
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited condensed combined consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended September 28, 1996, should not be considered
indicative of the results that may be expected for the year ended June 28,
1997. The combined consolidated balance sheet at June 29, 1996, has been
taken from the audited combined consolidated financial statements and
condensed. The accompanying condensed combined consolidated financial
statements and footnotes thereto should be read in conjunction with the
Company's annual report on Form 10-K for the year ended June 29, 1996.
The Company's fiscal year is the 52 or 53 week period ending the Saturday
closest to June 30. Accordingly, each quarter ends on the Saturday closest
to quarter end. Both the quarters ended September 28, 1996, and September
30, 1995, included 13 weeks.
NOTE B---INVENTORIES
At the beginning of fiscal 1997, the Company changed to the FIFO (first-in,
first-out) method for determining the cost of all inventories. Until fiscal
1997, the Company used the LIFO (last-in, first-out) method for determining
inventory cost, except for the inventories of consolidated subsidiaries
which used the FIFO method. The change in accounting principle was made to
provide a better matching of revenue and expenses. This accounting change
was not material to the financial statements for the quarter and is not
expected to be material for the year, and accordingly, no retroactive
restatement of the prior year's financial statements was made.
<TABLE>
<CAPTION>
Inventories consist of:
(In thousands) September 28, June 29,
1996 1996
------------- --------
<S> <C> <C>
LIFO cost:
Finished products and work in process $ --- $ 6,745
Raw materials --- 6,622
--------- ---------
--- 13,365
--------- ---------
FIFO costs:
Finished products and work in process 10,890 3,397
Raw materials 16,150 5,280
--------- ---------
27,040 8,677
--------- ---------
$ 27,040 $ 22,042
--------- ---------
--------- ---------
</TABLE>
<PAGE> 7
NOTE C---INCOME PER SHARE
Income per share is computed by dividing net income, adjusted for preferred
stock dividends of approximately $10,000 in each respective quarter, by the
weighted average number of shares of Donnelly Corporation common stock
outstanding, as adjusted for stock splits.
NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) September 28, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,144 $ 819
Income taxes 2,698 101
</TABLE>
NOTE E---IMPAIRMENT OF ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," requires long-lived assets, including the excess
of cost over the fair value of assets of businesses acquired, to be reviewed
for impairment losses whenever events or changes in circumstances indicate
the carrying amount may not be recoverable through future net cash flows
generated by the assets. The Company adopted SFAS No. 121 in the first
quarter of 1997. The effect of adoption is not material to the accompanying
financial statements.
NOTE F---FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements which involve risks
and uncertainties. When used in this report, the words "believe,"
"anticipate," "think," "intend," "goal" and similar expressions identify
forward-looking statements. Such statements are subject to certain risks
and uncertainties which could cause actual results to differ materially from
those anticipated. Readers are cautioned not be place undue reliance on
those forward-looking statements which speak only as of the date of this
report.
<PAGE> 8
ITEM 2.
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1ST QUARTER REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 1996
GENERAL
The Company's net sales and net income are subject to significant quarterly
fluctuations attributable primarily to production schedules of the Company's
major automotive customers. These same factors cause quarterly results to
fluctuate from year to year, as well as from quarter to quarter. The
comparability of the Company's results on a period to period basis may also
be affected by the Company's implementation of new joint ventures, alliances
and acquisitions.
RESULTS OF OPERATIONS
Consolidated net sales were $113.4 million in the first quarter of 1997, an
increase of more than 25% over the first quarter of 1996. The increase was
primarily due to new business launched in fiscal 1996 running at full
production volumes and the introduction of new modular window business in
the first quarter of 1997. North American car and light truck build was
approximately 5% above the same period last year.
Gross profit margin for the first quarter of 1997 was 20.4% compared to
15.1% for the first quarter of 1996. 1996 gross profit margin was negatively
affected by the simultaneous start-up of three major new business programs
which have annual sales for the Company over $100 million annually. These
start-up problems were resolved in 1996. 1997 gross profit margin was
positive compared to the previous year primarily due to higher sales and
significantly lower start-up costs during the period. Favorable
performances in the Company's North American operations were offset slightly
by to continued pricing pressures at the Company's subsidiary in Naas,
Ireland and operating variances at the Company's subsidiary in
Manorhamilton, Ireland. Although global pricing pressures are expected to
continue, the Company is focused on reducing process and product related
costs through improved design as well as strong commitment to continuous
improvement throughout the Company.
Selling, administrative and general expenses in the first quarter were at
9.8% of sales, down from 11.2% in the same period last year. The first
quarter of 1996 included legal expenses associated with patent litigation
between the Company and Gentex Corporation. The two companies reached a
settlement in the fourth quarter of 1996 to resolve the patent litigation.
Selling, general and administrative expenses were lower as a percent of
sales from the previous year due to the lower legal costs and the Company's
commitment to leverage these expenses with continued increases in sales.
Research and development expenses for the first quarter were $7.1 million,
or 6.3% of sales, compared to 6.2% of sales last year. The Company
continues to be committed to develop new and innovative technologies that
improve the function, quality and safety of automotive products and support
new business for complete exterior mirrors, electrochromic mirror systems,
door handles, interior systems and modular windows.
<PAGE> 9
Interest expense was $2.0 million in the first quarter of 1997 compared to
$1.7 million the previous year. The higher interest expense was primarily
due to higher working capital to support new business programs and increased
sales, in addition to additional investments in affiliates.
Royalty income was $0.4 million in the first quarter of 1997 compared to
$1.3 million in 1996. Royalty income associated with the sale of the
appliance business in 1995 was satisfied in the fourth quarter of 1996.
Equity losses of affiliated companies were $0.3 million in the first quarter
of 1997 compared to losses of $0.4 million last year. The loss in the first
quarter of 1997 is due to operating losses at Donnelly Hohe for the three
month period ending August 31, 1996, and start-up expenses at the Company's
joint venture in China, Donnelly Fu Hua Window Systems Company Ltd.
("Donnelly Fu Hua"). The operating losses at Donnelly Hohe were primarily
due to scheduled customer shut downs during the period. Donnelly Hohe net
sales and net income are subject to significant quarterly fluctuations
attributable primarily due to production schedules of major automotive
customers. The Company expects the start-up losses at Donnelly Fu Hua to
continue into the third quarter of 1997, at which time current business is
at full production.
The Company had net income of $1.7 million in the first quarter of 1997,
compared to a net loss of $1.8 million in the same period last year.
Earnings increased in this period due to higher sales volumes, significantly
lower start-up costs and lower selling, general and administrative expenses
as a percent to sales, which more than offset the decrease in royalty
income.
The Company is committed to improving shareholder value through focused
development of core automotive businesses primarily by increasing the
Company's dollar content per vehicle through introduction of new
technologies, increasing volume through penetration into new and emerging
markets and improving the efficiency of current operations and the
effectiveness of new product launches. Net sales for the Company have
increased at a compounded rate of approximately 15% over a 10 year period.
The Company expects that 1997 net sales will increase below this level,
excluding Donnelly Hohe sales, due to lower volumes for domestic modular
window business and continued price pressures. Earnings growth from
operations have trailed the increase that the Company has experienced in
sales revenues. The Company believes that future results of operations will
continue to be influenced by the Company's introduction of improved program
management and lean manufacturing systems, introduction of new technologies
and programs to the Company, significant global pricing pressures and
general economic and industry conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 2.1 and 2.0 at September 28, 1996, and June
29, 1996, respectively. Working capital was $72.7 million at September 28,
1996, compared to $63.5 million at June 29, 1996. This increase is
primarily due to higher accounts receivable related to the timing of
customer payments received in relation to the period ending on September 28.
Capital expenditures for the first quarter of 1997 and 1996 were $3.7 and
$6.1 million, respectively. Capital spending in 1997 is expected to be at
approximately the same level as the previous year.
<PAGE> 10
The Company's $80 million bank revolving credit agreement had borrowings
against it of $42.2 million at September 28, 1996. The Company anticipates
completing a $50 million asset securitization transaction by the end of the
second quarter of 1997. This will be utilized by the Company and Donnelly
Hohe to provide additional financing availability and reduce interest and
other costs.
The Company utilizes interest rate swaps and foreign exchange contracts to
manage exposure to fluctuations in interest and foreign currency exchange
rates. The risk of loss to the Company in the event of nonperformance by
any party under these agreements is not material.
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Donnelly Corporation's 1996 Annual Meeting of Shareholders was held on
October 18, 1996.
(b) Proxies were distributed pursuant to Regulation 14A under the
Securities Exchange Act of 1934. There was no opposition to the
Board's nominees as listed in the proxy statement and shareholders
elected the nominees as listed in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 18 - Preferability Letter for Change in Accounting Method
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed a Form 8-K, dated October 28, 1996, relating to the
acquisition of an additional interest in the general partner in Donnelly
Hohe GmbH & Co. KG ("Hohe"), by the end of October 1996. The Registrant,
therefore, now directly controls Hohe and Hohe's financial statements will
be consolidated with those of the Registrant beginning in the second
quarter. The initial filing included a description of the acquisition and
additional options to increase the Registrant's ownership in the future.
The filing did not include audited financial statements for Hohe (the
business acquired) or pro forma financial statements which will both be
filed under cover of Form 8 as soon as practicable but not later than
November 30, 1996.
<PAGE> 12
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 thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: November 12, 1996 /s/ J. Dwane Baumgardner
------------------------
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: November 12, 1996 /s/ William R. Jellison
-----------------------
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
Exhibit 18
<PAGE> 1
September 28, 1996
Mr. William R. Jellison
Vice President, Corporate Controller and Treasurer
Donnelly Corporation
414 East 40th Street
Holland, Michigan 49423
Dear Mr. Jellison:
As stated in Note B to the combined consolidated financial
statements of Donnelly Corporation for the three months ended
September 28, 1996, the Company changed its method of determining
inventory cost from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method because such a method provides a
better matching of revenue and expenses. The Company believes
that the impact of this change is not material to the financial
statements and therefore has not restated its financial statements
as otherwise called for by paragraph 27 of Accounting Principles
Board Opinion No. 20. At your request, we have reviewed and
discussed with you the circumstances and the business judgment and
planning which formulated your basis to make this change in
accounting principle.
It should be understood that criteria have not been established by
the Financial Accounting Standards Board for selecting from among
the alternative accounting principles that exist in this area.
Further, the American Institute of Certified Public Accountants
has not established the standards by which an auditor can evaluate
the preferability of one accounting principle among a series of
alternatives. However, for purposes of the Company's compliance
with the requirements of the Securities and Exchange Commission,
we are furnishing this letter.
Based on our review and discussion, we concur in management's
judgment that the newly adopted accounting principle described in
Note B is preferable in the circumstances. In formulating this
position, we are relying on management's business planning and
judgment, which we do not find to be unreasonable. Because we
have not audited any financial statements of Donnelly Corporation
as of any date or for any period subsequent to June 29, 1996, we
express no opinion on the financial statements for the three
months ended September 28, 1996.
Very truly yours,
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
September 28, 1996 Donnelly Corporation financial statements and is
qualified in its entirety by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> SEP-28-1996
<CASH> 5,652
<SECURITIES> 0
<RECEIVABLES> 80,426
<ALLOWANCES> 571
<INVENTORY> 27,040
<CURRENT-ASSETS> 139,966
<PP&E> 160,865
<DEPRECIATION> 60,902
<TOTAL-ASSETS> 288,870
<CURRENT-LIABILITIES> 67,313
<BONDS> 113,366
0
531
<COMMON> 789
<OTHER-SE> 87,744
<TOTAL-LIABILITY-AND-EQUITY> 288,870
<SALES> 113,400
<TOTAL-REVENUES> 113,400
<CGS> 90,252
<TOTAL-COSTS> 90,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,957
<INCOME-PRETAX> 3,149
<INCOME-TAX> 1,171
<INCOME-CONTINUING> 1,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,722
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
