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 March 30, 1996 Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-0493110
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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 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 / /
4,243,947 shares of Class A Common Stock and 3,582,198 shares of Class B
Common Stock were outstanding as of April 30, 1996.
<PAGE> 2
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance
Sheets---March 30, 1996 and July 1, 1995........ 3
Condensed Combined Consolidated Statements of
Income---Three and nine months ended
March 30, 1996 and April 1 , 1995............... 4
Condensed Combined Consolidated Statements of
Cash Flows---Nine months ended March 30, 1996
and April 1, 1995............................... 5
Notes to Condensed Combined Consolidated
Financial Statements---March 30, 1996........... 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 12
Item 6. Exhibits and Reports on Form 8K..................... 12
Signatures...................................................... 13
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 30, July 1,
In thousands 1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,472 $ 5,224
Accounts receivable, less allowance
of $570 and $575 74,239 50,866
Inventories 24,938 22,042
Prepaid expenses and other current assets 32,007 21,674
-------- --------
Total current assets 133,656 99,806
Property, plant and equipment 166,890 150,578
Less accumulated depreciation 65,455 56,642
-------- --------
Net property, plant and equipment 101,435 93,936
Investments in and advances to affiliates 37,254 25,246
Other assets 5,932 4,800
-------- --------
Total assets $ 278,277 $ 223,788
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 50,573 $ 42,676
Other current liabilities 25,269 16,628
-------- --------
Total current liabilities 75,842 59,304
Long-term debt, less current maturities 105,753 66,374
Deferred income taxes and other liabilities 14,360 12,926
-------- --------
Total liabilities 195,955 138,604
-------- --------
Minority interest 2,284
Preferred stock 531 531
Common stock 785 780
Other shareholders' equity 81,006 81,589
-------- --------
Total shareholders' equity 82,322 82,900
-------- --------
Total liabilities and shareholders' equity $ 278,277 $ 223,788
-------- --------
-------- --------
</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 Nine Months Ended
-------------------- --------------------
March 30, April 1, March 30, April 1,
In thousands except share data 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $116,445 $ 96,708 $313,791 $281,909
Costs and expenses:
Cost of sales 94,292 75,689 257,923 220,477
Selling, general and administrative 10,452 10,903 30,475 33,652
Research and development 7,781 5,288 19,661 17,132
Gain on restructuring of business (2,265)
-------- -------- -------- --------
Operating income 3,920 4,828 5,732 12,913
Interest expense 2,394 1,106 6,131 3,523
Royalty income (1,763) (1,150) (4,266) (1,872)
Interest income (469) (109) (1,073) (245)
Other (income) expense, net (418) 125 (548) 86
-------- -------- -------- --------
Income before taxes on income 4,176 4,856 5,488 11,421
Taxes on income 1,419 1,615 1,849 3,835
-------- -------- -------- --------
Income before minority interest and
equity earnings 2,757 3,241 3,639 7,586
Minority interest in net (income)
loss of subsidiary (16) (227) 186 (9)
Equity in earnings (losses) of
affiliated companies (238) 62 (482) 113
-------- -------- -------- --------
Net income $ 2,503 $ 3,076 $ 3,343 $ 7,690
-------- -------- -------- --------
-------- -------- -------- --------
Per share of common stock:
Net income $ 0.32 $ 0.40 $ 0.43 $ 0.99
Cash dividends declared $ 0.10 $ 0.08 $ 0.30 $ 0.24
Average common shares outstanding 7,812,999 7,746,977 7,794,747 7,739,005
</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>
Nine Months Ended
-----------------------
March 30, April 1,
In thousands 1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,343 $ 7,690
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,355 8,530
Deferred pension cost and postretirement benefits 1,469 1,408
Deferred income taxes (23) (57)
Minority interest (202) 10
Equity in (earnings) losses of affiliated companies 1,057 (123)
Restructuring gain (2,265)
Changes in operating assets and liabilities:
Accounts receivable (23,373) (3,375)
Inventories (2,896) (1,885)
Prepaid expenses and other current assets (10,424) (2,449)
Accounts payable and other current liabilitie 16,854 4,318
Other 304 (441)
-------- --------
Net cash from (for) operating activities (4,536) 11,311
-------- --------
INVESTING ACTIVITIES
Capital expenditures (18,811) (21,685)
Proceeds from sale of businesses 14,200
Loan to affiliate (15,368) (500)
Purchase of minority interest (2,100)
Change in unexpended bond proceeds 392 (865)
Other (357)
-------- --------
Net cash for investing activities (35,887) (9,207)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt 39,463 15,000
Repayments on long term debt (11,734)
Resources provided by minority interest 491
Common stock issuance 586 367
Dividends paid (2,378) (1,887)
-------- --------
Net cash from financing activities 37,671 2,237
-------- --------
Increase (decrease) in cash and cash equivalents (2,752) 4,341
Cash and cash equivalents, beginning of period 5,224 1,374
-------- --------
Cash and cash equivalents, end of period $ 2,472 $ 5,715
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 30, 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 and nine months ended March 30, 1996, should not be considered
indicative of the results that may be expected for the year ended June 29,
1996. The combined consolidated balance sheet at July 1, 1995, 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 July 1, 1995.
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 March 30, 1996, and April 1, 1995,
included 13 weeks.
NOTE B---INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 30, July 1,
(In thousands) 1996 1995
-------- --------
<S> <C> <C>
LIFO cost:
Finished products and work in process $ 6,523 $ 6,745
Raw materials 8,248 6,622
-------- --------
14,771 13,365
FIFO costs:
Finished products and work in process 2,780 3,397
Raw materials 7,387 5,280
-------- --------
10,167 8,677
-------- --------
$ 24,938 $ 22,042
-------- --------
-------- --------
</TABLE>
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.
<PAGE> 7
NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
(In thousands) March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 2,227 $ 1,180
Income taxes $ 249 $ 6,600
</TABLE>
<PAGE> 8
ITEM 2.
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
3RD QUARTER REPORT
FOR THE NINE MONTHS ENDED MARCH 30, 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 year to year, as well as from quarter to quarter.
RESULTS OF OPERATIONS
The Company's net sales were $116.4 million in the third quarter of 1996, an
increase of 20.4% over the third quarter of fiscal 1995. Net sales for the
nine-month period were $313.8 million compared to $281.9 million in the same
period last year. Net sales for the Company continued to grow despite lower
North American carbuild, the loss of Saturn business and significant price
pressures from the Company's major automotive customers. In addition, sales
of both mirrors and windows systems were reduced due to the General Motors
("GM") strike in the Company's third quarter, as GM represents approximately
12% of the Company's total sales. During the Company's third quarter of 1996,
automotive production levels were down over 8% compared to the third quarter
of 1995. The Saturn business at D&A Technology, Inc., the Company's joint
venture with Asahi Glass Company, represented approximately 5% of the
Company's combined consolidated net sales in 1995. In the first quarter of
1996, the Company completed the purchase of Asahi's 40% interest in D&A.
The operation has been reduced in size and is being maintained as a
division of the Company in Tennessee. The Company's growth in net sales has
remained strong due to higher sales of Modular Window Systems (particularly
for the new Chrysler minivans), lighting and trim products, complete exterior
mirror products and slightly stronger sales for doorhandles.
Gross profit margin for the third quarter of 1996 was 19.0% compared to 21.8%
for the same period last year and 18.8% for the second quarter of 1996. The
gross profit margin for the Company remained relatively flat with the second
quarter of 1996 despite stronger sales, lower launch costs and cost containment
measures taken on discretionary expenditures. The flat margin performance was
due to an unexpected technical difficulty on a new business program which
resulted in significant additional engineering, production and other costs that
negatively impacted net earnings by $1.1 million, during the quarter. The
Company's position is that this problem was largely due to factors not directly
under the Company's control. It has been resolved in a timely and cooperative
way that ensures an uninterrupted source of supply to the customer
throughout this period and into the future. Donnelly continues to have
discussions with those involved regarding the additional financial burden that
was incurred by the Company as a result of these technical difficulties. The
Company's subsidiary in Naas, Ireland is experiencing lower gross profit
margins compared to last year due to pricing pressures from competition in
Eastern Europe and Asia. The gross profit margin for the Company for the first
nine months of 1996 was 17.8% compared to 21.8% for the same period last
year. While it is expected that improvements will be made in gross profit
margins with increased sales volumes, lower launch costs and implementation
of continuous improvement programs, the Company does expect that 1996
margins will continue to fall below the previous year's levels.
<PAGE> 9
Selling, administration and general expenses in the third quarter were 9.0% of
sales, down from 11.3% in the same period last year. These expenses were
lower primarily due to the capitalization of legal costs associated
with litigation to defend certain electrochromic patents of the Company
beginning in 1996 (see Part II, Item 1). In addition, the Company has
committed to leverage these expenses with continued increases in automotive
sales.
Research and development expenses for the third quarter were $7.8 million, or
6.7% of sales, compared to 5.5% of sales in the same period last year. The
increase in research and development costs are due to technical difficulties on
a new business program and costs for the design and development of new
window, door handle and interior trim programs. 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 window systems.
Interest expense increased $0.4 million in the third quarter of 1996 to $2.4
million. The increase over last year resulted from higher borrowing levels to
support the Company's investment in and advances to Hohe, the Company's
equity affiliate in Germany, higher working capital and capital expenditures.
The Company advanced an additional $13.7 million to Hohe in the first quarter
of 1996. The advance was financed through the Company's existing borrowing
agreements. The increase in interest income realized by the Company is a
result of the interest charged on the advances to Hohe.
Royalty income was $1.8 million in the third quarter of 1996 compared to $1.2
million in 1995. This increase and the year to date increase resulted from
royalty income associated with the appliance business sold to Gemtron
Corporation in 1995. The royalty obligations under this agreement will be
satisfied during the fourth quarter of 1996.
Equity in losses of affiliated companies were $0.2 million in the third
quarter of 1996 compared to an insignificant gain last year. Equity earnings
from Hohe were offset by losses at Applied Films Corporation, the Company's
joint venture in Boulder Colorado, and VLSI Limited, the Company's joint
venture in Scotland. The Company expects the start-up costs at VLSI Limited
to continue into the first half of 1997.
The Company recognized net income of $2.5 million in the third quarter of 1996
compared to $3.1 million for the same period last year and $2.6 million in the
second quarter of 1995. Higher sales volumes, higher royalty income lower
launch costs associated with new business programs, lower selling and
administrative costs as a percent of sales and the capitalization of patent
litigation costs positively impacted earnings in the third quarter. These
improvements were offset by an unexpected technical difficulty during the third
quarter on a new business program, loss of sales due to the GM strike, lower
profitability at the Company's Irish subsidiary due to pricing pressures,
higher Research and Development costs as a percent of sales and equity in
losses of affiliated companies. Net income of $3.3 million for the first nine
months of 1996 compares to $7.7 million for the same period last year, which
included $2.0 million of net income associated with the gain on the
restructuring of non-automotive businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 1.8 and 1.7 at March 30, 1996, and July 1,
1995, respectively. Working capital was $57.8 million at March 30, 1996,
compared to $40.5 million at July 1, 1995. This increase included
<PAGE> 10
an increase in accounts receivables to support higher sales and higher customer
tooling and increased inventories to support new business programs reaching
full production later this year. Also, due to the timing of the quarter end a
customer payment was not fully received by the end of the quarter, increasing
receivable levels for the period.
Capital expenditures for the first nine months of 1996 were $18.8 million
compared to $21.7 million for the same period last year. Capital spending will
be slightly lower in 1996 due to the completion of the building
additions required the last two years in Langres, France and Newaygo, Michigan
to support new business programs; the transfer of the Outside Mirror Glass
product line to Mexico and the consolidation of two older interior mirror
operations into a new facility in Holland, Michigan.
In the second quarter of 1996 the Company amended its revolving credit loan
agreement by increasing the amount to $80 million, and extending the maturity
date to November 2002. The revolving credit agreement had borrowings against
it of $35.2 million at March 30, 1996. In November 1995, the Company issued
a senior note of $20.0 million with an insurance company. Principal payments
commence in fiscal 2001 until maturity in fiscal 2006. The Company believes
that the borrowing availability under the current revolving line of credit,
together with funds generated by operations will meet the Company's current
business needs.
OUTLOOK
The Company is committed to improving shareholder value through focused
development of core automotive businesses primarily by increasing dollar
content per vehicle through introduction of new technologies, increasing volume
through penetration into new and emerging markets, improving the efficiency
of current operations and the effectiveness by which the Company launches new
products.
In line with this strategy, the Company has continued in the last few years to
build volume growth in all its existing businesses; introduce products new to
the Company including exterior and interior door handles, modular window
systems and encapsulated sunroofs, electrochromic mirrors and interior trim and
lighting; completed the largest acquisition in the Company's history through
the purchase of an equity share of Hohe GmbH & Co. K.G.; expanded and built
production equipment and facilities; and undertaken a major restructuring
program.
These actions continue to result in solid increases in sales revenues for the
Company. Earnings growth from operations, however, has 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.
SUBSEQUENT EVENT
On April 1, 1996, the Company and Gentex Corporation of Zeeland, Michigan
announced that they have reached a settlement agreement to resolve patent
litigation between the two companies relating to automotive electrochromic
(automatic-dimming) rearview mirrors. The parties have signed a definitive
agreement. The specific details of the agreement will remain confidential,
the agreement does not include any licenses on either Companies' current core
electrochromic technology, but, the agreement does include the following
provisions:
<PAGE> 11
- - - Cross licensing of certain patents (for the life of the patents) that each
company may practice within its own core electrochromic technology area.
- - - Gentex will pay Donnelly $6.2 million ($6.0 million in settlement fees plus
a $200,000 contingent payment if Donnelly prevails in its lighted mirror
patent appeal) as full and complete satisfaction of all Donnelly's patent
infringement claims. The $6.0 million was paid in the beginning of the 4th
quarter. This gain will be recognized net of patent litigation costs
previously capitalized.
- - - The two companies agreed not to pursue litigation against each other on
certain other patents for a period of four years.
Both companies emphasized the importance of ending the substantial legal costs
and loss of management time.
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Litigation. Certain electrochromic mirror technology of the Company has
been the subject of patent litigation between the Company and Gentex
Corporation ("Gentex"). Following the settlement of prior litigation, Gentex
filed a lawsuit against the Company on June 7, 1993, alleging that the
Company's solid polymer film electrochromic mirror infringed a patent owned
by Gentex. On March 21, 1994, the Company's motion for summary judgment
of non-infringement was granted and the lawsuit was dismissed. Gentex filed
an appeal of this ruling. On November 3, 1995, the Court of Appeals for the
Federal Circuit affirmed the summary judgment decision and dismissed
Gentex's appeal. On December 18, 1995, the Court of Appeals for the Federal
Circuit denied Gentex's request for a rehearing.
The Company was also a party to three subsequent lawsuits involving ten patents
owned by the Company. In one of these suits, the Court granted Gentex's
motion for summary judgment that two of the Company's patents relating to
lighted mirrors are invalid. The Company believes that its lighted mirror
patents are not invalid and has filed on appeal on this issue. The appeal is
currently pending.
On April 1, 1996, the Company entered into a settlement agreement with Gentex
which resolved all aspects of these three lawsuits except for the pending
appeal referred to above. Under the agreement, Gentex paid the Company $6.0
million in settlement fees and will pay an additional $200,000 if the Company
prevails in its appeal. In addition, the settlement includes cross-licensing
of certain patents which each party may practice within its own core
technology area, and an agreement that the parties will not pursue litigation
against each other on certain other patents for a period of four years.
Other Litigation. The Company and its subsidiaries are involved in certain
other legal actions and claims, including environmental claims, arising in the
ordinary course of business. Management believes (based on advice of legal
counsel) that such litigation and claims will be resolved without material
effect on the Company's financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - 27 FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 30, 1996.
<PAGE> 13
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: May 15, 1996 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive Officer,
and President)
Date: May 15, 1996 /s/ William R. Jellison
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from March 30,
1996 Donnelly Corporation financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> MAR-30-1996
<CASH> 2,472
<SECURITIES> 0
<RECEIVABLES> 74,239
<ALLOWANCES> 570
<INVENTORY> 24,938
<CURRENT-ASSETS> 133,656
<PP&E> 166,890
<DEPRECIATION> 65,455
<TOTAL-ASSETS> 278,277
<CURRENT-LIABILITIES> 75,842
<BONDS> 105,753
0
531
<COMMON> 785
<OTHER-SE> 81,006
<TOTAL-LIABILITY-AND-EQUITY> 278,277
<SALES> 116,445
<TOTAL-REVENUES> 116,445
<CGS> 94,292
<TOTAL-COSTS> 94,292
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,394
<INCOME-PRETAX> 4,176
<INCOME-TAX> 1,419
<INCOME-CONTINUING> 2,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,503
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
