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 December 30, 1995 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 [ ]
4,215,467 shares of Class A Common Stock and 3,582,198 shares of Class B
Common Stock were outstanding as of October 31, 1995.
<PAGE> 1
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets---
December 30, 1995 and July 1, 1995 3
Condensed Combined Consolidated Statements of Income---
Three and six months ended December 30, 1995 and
December 31, 1994 4
Condensed Combined Consolidated Statements of Cash Flows---
Six months ended December 30, 1995 and December 31, 1994 5
Notes to Condensed Combined Consolidated Financial
Statements---December 30, 1995 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8K 12
Signatures 13
<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements and supplementary data
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
December 30, July 1,
In thousands 1995 1995
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,637 $ 5,224
Accounts receivable, less allowance
of $570 and $575 59,552 50,866
Inventories 24,244 22,042
Prepaid expenses and other
current assets 30,694 21,674
Total current assets 117,127 99,806
Property, plant and equipment 161,521 150,578
Less accumulated depreciation 62,785 56,642
Net property, plant and equipment 98,736 93,936
Investments in and advances to affiliates 38,312 25,246
Other assets 4,804 4,800
Total assets $258,979 $223,788
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 42,710 $ 42,676
Other current liabilities 17,858 16,628
Total current liabilities 60,568 59,304
Long-term debt, less current maturities 103,301 66,374
Deferred income taxes and other
liabilities 13,889 12,926
Total liabilities 177,758 138,604
Minority interest 2,284
Preferred stock 531 531
Common stock 784 780
Other shareholders' equity 79,906 81,589
Total shareholders' equity 81,221 82,900
Total liabilities and shareholders'
equity $258,979 $223,788
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 30, December 31, December 30, December 31,
In thousands except
share data 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $ 106,823 $ 98,460 $ 197,346 $ 185,201
Cost and expenses:
Cost of sales 86,793 76,148 163,631 144,788
Selling, general and
administrative 9,880 11,099 20,023 22,749
Research and development 6,251 6,204 11,880 11,844
Gain on restructuring
of business (2,265) (2,265)
Operating income 3,899 7,274 1,812 8,085
Interest expense 2,002 1,267 3,737 2,417
Royalty income (1,175) (441) (2,503) (722)
Interest income (230) (604)
Other income
(31) (105) (130) (175)
Income before taxes
on income 3,333 6,553 1,312 6,565
Taxes on income 1,147 2,217 430 2,220
Income before minority
interest and equity
earnings 2,186 4,336 882 4,345
Minority interest in
net loss of subsidiary 79 405 202 218
Equity in earnings
(losses) of affiliated
companies 364 (42) (244) 51
Net income
$ 2,629 $ 4,699 $ 840 $ 4,614
Per share of common stock:
Net income $ 0.34 $ 0.61 $ 0.11 $ 0.59
Cash dividends
declared $ 0.10 $ 0.08 $ 0.20 $ 0.16
Average common
shares outstanding 7,797,808 7,739,650 7,785,620 7,735,018
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 30, December 31,
In thousands 1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 840 $ 4,614
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 6,534 5,220
Deferred pension cost and postretirement
benefits 968 971
Deferred income taxes 331 (119)
Minority interest (202) (218)
Equity in (earnings) losses of affiliated
companies 562 (60)
Restructuring gain (2,265)
Changes in operating assets and liabilities:
Accounts receivable (8,686) (1,018)
Inventories (2,202) (18)
Prepaid expenses and other current assets (9,443) 1,631
Accounts payable and other current
liabilities 1,378 (5,220)
Other (681) (196)
Net cash from (for) operating activities (10,601) 3,322
INVESTING ACTIVITIES
Capital expenditures (12,503) (10,802)
Proceeds from sale of businesses 14,200
Loan to affiliate (13,683) (500)
Purchase of minority interest (2,100)
Change in unexpended bond proceeds 292 68
Other (157)
Net cash from (for) investing activities (27,994) 2,809
FINANCING ACTIVITIES
Proceeds from long-term debt 37,213 15,000
Repayments on long term debt (18,517)
Resources provided by minority interest 491
Common stock issuance 411 221
Dividends paid (1,616) (1,258)
Net cash from (for) financing activities 36,008 (4,063)
Increase (decrease) in cash and cash
equivalents (2,587) 2,068
Cash and cash equivalents, beginning
of period 5,224 1,374
Cash and cash equivalents, end of period $ 2,637 $ 3,442
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 5
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
December 30, 1995
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited condensed combined consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-A 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 six months ended December 30, 1995, 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 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 December 30, 1995, and December 31,
1994, included 13 weeks.
<TABLE>
<CAPTION>
NOTE B---INVENTORIES
Inventories consist of:
(In thousands) December 30, July 1,
1995 1995
LIFO cost:
<S> <C> <C>
Finished products and work in process $ 6,888 $ 6,745
Raw materials 7,839 6,622
14,727 13,365
FIFO costs:
Finished products and work in process 2,436 3,397
Raw materials 7,081 5,280
9,517 8,677
$24,244 $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> 6
<TABLE>
<CAPTION>
NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months Ended
(In thousands) December 30, December 31,
1995 1994
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,427 $ 2,244
Income taxes $ 183 $ 3,150
</TABLE>
<PAGE> 7
Item 2.
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
2ND QUARTER REPORT
FOR THE SIX MONTHS ENDED DECEMBER 30, 1995
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 $106.8 million in the second quarter of 1996, an
increase of almost 8.5% over the same period last year and 18% over the first
quarter of 1996. The increase over the second quarter of 1995 is due to
new business programs in modular window systems (particularly for the newly
redesigned Chrysler minivan), door handles and interior trim and lighting
products. Net sales for the six month period were $197.3 million, an increase
of 6.5%, or $12.1 million, over the same period last year. Net sales for the
Company continued to grow despite a slightly lower carbuild in the second
quarter compared to the same period last year, the loss of the Saturn
business and significant price pressures from the Company's major automotive
customers. 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 sale in 1995. In the first quarter of
1995, 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.
Gross profit margin for the second quarter of 1996 was 18.8% compared to 15.1%
for the first quarter of 1996. This improvement was primarily due to higher
sales volumes, lower launch costs associated with new business programs and
cost containment measures taken on discretionary expenditures. Despite
these gains, margins continue to be substantially lower than the previous
year's second quarter gross profit margin of 22.7% due to excessive costs
associated with the start-up of new window and exterior door handle programs
combined with continued global price decreases. In addition, 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 significant effort required to launch new programs,
which will ultimately result in over $100 million in new business annually,
has hampered the Company's ability to perform the necessary continuous
improvement initiatives to offset price decreases. The gross profit
margin for the Company for the first six months of 1996 was 17.1% 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 for new programs and implementation of continuous improvement
programs, the Company does expect that 1996 margins will continue to fall
below the previous year's level.
Selling, administration and general expenses in the second quarter were 9.2%
of sales, down from 11.3% in the same period last year. These expenses were
lower due to the capitalization of legal costs associated with litigation
to defend certain electrochromic patents of the Company beginning in 1996
(see Item 1). This is in
<PAGE> 8
addition to the Company's commitment to leverage these expenses with continued
increases in automotive sales.
Research and development expenses for the second quarter were $6.3 million,
or 5.9% of sales, compared to 6.3% of sales in the same period 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 window systems.
Interest expense increased $0.3 million in the second quarter of 1996 to
$2.0 million. The increase 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. An increase in interest income was realized by the Company as
a result of the interest charged on the advances to Hohe.
Royalty income was $1.2 million in the second quarter of 1996 compared to
$0.4 million in 1995. The increase resulted from royalty income associated
with the appliance business sold to Gemtron Corporation in 1995. The
royalties under this agreement will continue through 1996 at which time the
royalty agreement will be satisfied.
Equity earnings of affiliated companies were $0.4 million in the second
quarter of 1996 compared to an insignificant loss last year. Additional
equity earnings from the acquisition of Hohe were offset by losses at
Donnelly 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 through the
remainder of the fiscal year.
The Company recognized net income of $2.6 million in the second quarter
compared to a first quarter loss of $1.8 million. The improvement in net
income was due to higher sales volumes, lower launch costs associated with
new business programs, the capitalization of patent litigation costs and
higher equity earnings. Net income of $0.8 million for the first six months
of 1996 compares to $4.6 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 1.9 and 1.7 at December 30, 1995, and
July 1, 1995, respectively. Working capital was $56.6 million at
December 30, 1995, compared to $40.5 million at July 1, 1995. This increase
included higher customer tooling and increased inventories to support new
business programs reaching full production later this year.
Capital expenditures for the first six months of 1996 were $12.5 million
compared to $10.8 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 facilities into a new facility in Holland, Michigan.
<PAGE> 9
In the second quarter 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
$33.2 million at December 30, 1995. 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 new products
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 undertook 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 experience
significant pressure due to general economic and industry conditions,
introduction of new technologies and programs to the Company, significant
global pricing pressures and the ability of the Company to move quickly on
the introduction of improved program management and lean manufacturing
systems.
It is anticipated that the Company's operating results in the foreseeable
future will continue to trail the increases in projected sales revenues due
to these influences. In addition, it is expected that the third quarter
of 1996 will continue to be significantly impacted by launch costs associated
with new window and mirror products being introduced in the Company.
<PAGE> 10
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 another lawsuit against the Company on June 7, 1993. In this
suit, Gentex alleged that the Company's solid polymer film electrochromic
mirror infringed one of the Gentex patents involved in the prior litigation
and that the Company has violated the injunction entered by the court in the
previous litigation. Gentex sought unspecified damages and an injunction
against further alleged infringement by the Company. 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's lawsuit against Gentex, filed on July 8, 1993, remains
outstanding. In this suit, the Company has alleged that Gentex's lighted
electrochromic mirrors infringe three of the Company's patents and that all
of Gentex's electrochromic mirrors infringe a fourth patent owned by the
Company. The Company is seeking unspecified damages and injunction against
further infringement by Gentex. A trial has been scheduled to begin in
April 1996. Gentex filed several motions for summary judgment, alleging
that the patents in question are invalid or not infringed, and that the
Company is not entitled to certain damages. 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.
On October 13, 1994, the Company filed a second lawsuit against Gentex,
alleging that Gentex's inside and outside electrochromic mirrors infringe
two additional patents owned by the Company which relate to the protection
of electrochromic mirrors from ultraviolet radiation. The Company
subsequently amended its complaint to allege that Gentex's inside and
outside electrochromic mirrors infringe a third patent owned by the Company
which also relates to the protection of electrochromic mirrors from
ultraviolet radiation. The Company is seeking unspecified damages and an
injunction against further infringement by Gentex. The Company has also
filed a motion seeking a preliminary injunction against further infringement
of two of these patents pending final resolution of the lawsuit. This
motion has not yet been decided by the court, and no trial date has been
set in the second lawsuit.
On June 23, 1995, Gentex filed a lawsuit against the Company seeking a
declaration that three patents owned by the Company are invalid and not
infringed by Gentex. The Company has responded by denying these allegations,
and charging that two of the patents in question are infringed by certain of
Gentex's electrochromic mirrors. The Company is seeking unspecified damages
and an injunction against further infringement by Gentex. Gentex has filed
motions for summary judgment alleging that the patents in-suit are invalid.
The Company has filed motions for summary judgment that the Court does not
have the authority to decide a portion of the case relating to one patent,
and to dismiss Gentex's allegation for failure to present proof relating to
a portion of another patent. The Court has not yet decided these motions
and no trial date has been set.
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.
<PAGE> 11
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 December 30, 1995.
<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: February 14, 1996 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: February 14, 1996 /s/ William R. Jellison
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
<PAGE> 13
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from
December 30, 1995 Donnelly Corporation financial statements and is
qualified in its entirety by reference to such financial statements
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] JUN-29-1995
[PERIOD-END] DEC-30-1995
[CASH] 2,637
[SECURITIES] 0
[RECEIVABLES] 59,552
[ALLOWANCES] 570
[INVENTORY] 24,244
[CURRENT-ASSETS] 117,127
[PP&E] 161,521
[DEPRECIATION] 62,785
[TOTAL-ASSETS] 258,979
[CURRENT-LIABILITIES] 60,568
[BONDS] 103,301
[PREFERRED-MANDATORY] 784
[PREFERRED] 0
[COMMON] 531
[OTHER-SE] 79,906
[TOTAL-LIABILITY-AND-EQUITY] 258,979
[SALES] 106,823
[TOTAL-REVENUES] 106,823
[CGS] 86,793
[TOTAL-COSTS] 86,793
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 2,002
[INCOME-PRETAX] 3,333
[INCOME-TAX] 1,147
[INCOME-CONTINUING] 2,186
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2,629
[EPS-PRIMARY] 0.34
[EPS-DILUTED] 0.34
</TABLE>
