SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
AMENDMENT TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended December 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 (IRS Employer Identification No.)
of 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 [ ]
5,359,967 shares of Class A Common Stock and 4,468,613 shares of Class B Common
Stock were outstanding as of January 31, 1997.
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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 28, 1996
GENERAL
Effective in April 1995, the Company acquired an interest in Hohe GmbH & Co. KG,
since renamed Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe"), a German limited
partnership with operations in Germany and Spain. Donnelly Hohe, based in
Collenberg, Germany, supplies many of the main automakers in Europe with
exterior automotive mirrors, interior mirrors, door handles, automotive tooling
and electronic components related to mirror systems. The Company initially
acquired for $3.6 million 48% of the controlling general partnership interest
and 662/3% of the limited partnership interest in Donnelly Hohe. The Company
also made a $28 million subordinated loan to Donnelly Hohe. In October 1996, the
Company acquired an additional 13% interest in the general partner of Donnelly
Hohe, resulting in the Company owning a controlling interest in Donnelly Hohe.
Accordingly, Donnelly Hohe's financial statements are consolidated with those of
the Company in the second quarter of 1997, and at December 28, 1996, Donnelly
Hohe represented approximately 33% of Company's combined consolidated total
assets.
The Company's fiscal year ends on the Saturday nearest June 30, and its fiscal
quarters end on the Saturdays nearest September 30, December 31, March 31 and
June 30. Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end
on August 31, November 30, February 28 and May 31. Accordingly, the Company's
Combined Consolidated Financial Statements as of or for a period ended on a
particular date include Donnelly Hohe's financial statements as of or for a
period ended approximately one month before that date. The Company intends to
continue this practice. The Company's period ended December 28, 1996,
consolidated Donnelly Hohe's financial statements for the three month period
ended November 30, 1996.
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. 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
Net sales were $301.4 million for the first six months of 1997 compared to
$197.3 million for the same period in 1996. The consolidation of Donnelly Hohe
contributed $60.5 million of net sales for the first six months of 1997, all in
the second quarter. Excluding Donnelly Hohe, consolidated net sales for the
first six months of 1997 were $240.9 million, an increase of 22% over the first
six months of 1996. Net sales for the Company's operations in North America
increased by 20% for the first six months of 1997 compared to the same period in
1996, despite the fact that automotive industry production remained stable.
North American net sales increased primarily due to programs launched in 1996
running at full production volumes and new product introductions in the modular
window and interior trim product lines. Net sales also increased as a result of
strong sales of vehicles containing Company products, such as the Chrysler
Caravan and the Ford Expedition. Excluding the consolidation of Donnelly Hohe,
net sales for the Company's European operations for the first six months of 1997
were 38% higher than the same period in 1996 due to higher sales of interior and
electrochromic mirrors and modular windows.
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Gross profit margin for the second quarter of 1997 was 18.5% compared to 18.8%
for the second quarter of 1996 and was 19.2% and 17.1% for the first six months
of 1997 and 1996, respectively. The Company's North American gross profit
margins were stronger due to higher volumes and significantly lower start-up
expenses compared to 1996. In the first six months of 1996, the Company's North
American gross profit margin was negatively impacted due to simultaneous
start-up of three major new business programs. Management believes that annual
net sales in 1997 for these products will exceed $100 million. The Company's
European gross profit margins were lower as a percent to sales than the previous
year due to the consolidation of Donnelly Hohe and lower gross profit margins at
the Company's Irish subsidiaries. Donnelly Hohe's gross profit margin, as a
percent of net sales, has been slightly lower than that of the Company.
Accordingly, the consolidation of Donnelly Hohe unfavorably impacted gross
profit performance as a percentage of net sales for the period. In addition, the
Company's Irish operations experienced lower gross profit for the first six
months of 1997 compared to the same period in 1996 due to a number of factors,
including price decreases resulting from currency fluctuations associated with
the strong Irish punt and a paint supplier performance problem. The Irish
operations also experienced new business start-up costs primarily related to
electrochromic mirrors. Partially offsetting the unfavorable variances in Europe
were strong gross profit margins at the Company's operations in Spain and
France.
Selling, administrative and general expenses increased form $9.9 million in the
second quarter of 1996 to $17.7 million in the same period of 1997 due to the
consolidation of Donnelly Hohe and to support higher sales for this period.
Selling, administrative and general expenses in the second quarter of fiscal
1997 were at 9.4% of sales compared to 9.2% in the second quarter. These
expenses were 9.6% of net sales for the first six months of 1997 compared to
10.1% for the same period in 1996 and continue to decline as a percentage of net
sales due to the Company's ability to achieve higher sales levels without a
proportionate increase in these expenses.
Research and development expenses for the second quarter were $8.4 million, or
4.5% of sales, compared to 5.9% of sales last year and were lower as a
percentage to sales due the consolidation of Donnelly Hohe in the second quarter
of 1997. As a percentage to sales, these expenses were at the same level as the
previous year for the second quarter without the consolidation of Donnelly Hohe.
Research and development expenses were 5.2% of net sales in the first six months
of 1997 compared to 6.0% for the first six months of 1996 and were comparable to
those in the same period in 1996 excluding the consolidation of Donnelly Hohe.
Management expects that these expenses will be approximately 4.5% to 5.0% of net
sales in future periods.
Interest expense was $3.0 million in the second quarter of 1997 compared to $2.0
million the previous year and $5.0 million and $3.7 million for the first six
months of 1997 and 1996, respectively. The higher interest expense was due to
the consolidation of Donnelly Hohe. Interest expense, excluding the
consolidation of Donnelly Hohe, was at the same level as the previous year.
Royalty income was $1.1 million and $2.5 million for the first six months of
1997 and 1996, respectively. Royalty payments associated with the sale of the
refrigerator glass shelving business (the "Appliance Business") in 1995
concluded in the fourth quarter of 1996.
Other income was $1.0 million for the first six months of 1997. The Company sold
2.5% of its holding in Vision Group plc ("Vision Group"), resulting in a gain to
the Company of $0.9 million. The Company now owns 25.6% of the common stock of
Vision Group. The Company's cash investment in the net assets of Vision Group is
$0.7 million, which is reflected as an $8.4 million investment on the Company's
balance sheet at December 28, 1996. During 1997, 1996 and 1995, Vision Group
sold common shares in a private placement and through public offerings reducing
the Company's ownership interest from 40.0% to 25.6%. The Company's equity in
the net
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proceeds of these sales is reflected as an increase in additional paid-in
capital in the accompanying financial statements.
Minority interest in net (income) loss of subsidiaries was ($0.6) million in the
first six months of 1997 due to the consolidation of Donnelly Hohe, compared to
$0.2 million in the first six months of 1996. Beginning in the second quarter of
1997, the Company accounts for its investment in Donnelly Hohe under the
purchase method of accounting, thereby requiring the recognition of minority
interest in net (income) loss for 331/3% of this subsidiary. Prior to the second
quarter of 1997, the Company accounted for its investment in Donnelly Hohe under
the equity method of accounting. Equity in losses of affiliated companies were
($0.6) million in the first six months of 1997 compared to a loss of ($0.2)
million for the same period in 1996.
The Company's effective tax rate was 37.6% for the six month period ending
December 28, 1996, compared to 32.8% for the six month period ending December
30, 1995. The increase in the effective tax rate is due to higher net operating
losses at the Company's subsidiaries in Ireland that provide a lower tax benefit
due to lower tax rates in Ireland.
Net income for the six month period was $5.6 million in 1997 compared to $0.8
million in 1996. North American net income increased compared to the first six
months of 1996 due to higher sales, significantly lower start-up costs, improved
operational performance and lower selling, general and administrative expenses
as a percent of net sales. Net income for the Company's European operations was
lower in the first six months of 1997 as compared to the same period in 1996 due
to losses experienced at the Company's Irish operations. The Company's net
income was positively impacted for first six months of 1997 by the gain on sale
of Vision Group stock. The consolidation of Donnelly Hohe did not impact the
comparability of net income from 1996 to 1997 for the six month periods.
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.
The Company believes that future results of operations will 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. Operating variances, new business start-up costs, continued
development costs and pricing fluctuations from currency movements in foreign
markets are expected to continue placing pressure on the performance of the
Company's European operations into the second half of fiscal 1997. The Company
is working to restructure European operations to improve financial performance
to a level more in line with overall corporate financial goals. In addition
global pricing pressures are continuing to place pressure on the Company's
overall gross profit margin performance as pricing agreements are implemented
throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
In November 1996, the Company entered into an agreement to sell, on a revolving
basis, an interest in a defined pool of trade accounts receivable. The maximum
allowable amount of receivables to be sold is $50 million. The amount
outstanding at any measurement date varies based upon the level of eligible
receivables and management's discretion. Under this agreement, $32.0 million
were sold at December 28, 1996. The sale is reflected as a reduction of accounts
receivable in the accompanying Combined Consolidated Balance Sheet and as
operating cash flows in the accompanying Combined Consolidated Statement of Cash
Flows. The proceeds of sales are less than the face amount of accounts
receivable sold by an amount that approximates the purchaser's financing costs
of issuing its own commercial paper backed by these accounts receivable. The
discount fees were $0.2 million during the second quarter ended December 28,
1996, and has been included in selling, general and administrative expense in
the Company's Combined Consolidated Statement of Income. The Company, as agent
for the purchaser, retains collection and administrative responsibilities for
the participating interests of the defined pool.
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The Company's current ratio was 1.5 and 2.0 at December 28, 1996 and June 29,
1996, respectively. Working capital was $58.9 million at December 28, 1996,
compared to $63.5 million at June 29, 1996. The decrease in the current ratio
for the period was due to the sale of $32.0 million of accounts receivable at
December 28, 1996, offset slightly by the addition of Donnelly Hohe's working
capital and the increase in cash. The Company had a cash balance of $10.8
million at December 28, 1996, due to the timing of customer payments and cash
received on the sale of accounts receivable at Donnelly Hohe. The cash balance
was used to reduce bank debt by December 30, 1996. With respect to the timing of
customer payments, the Company's North American customers pay the Company on
pre-established payment dates ranging from the 25th to the 30th of each month.
Therefore, a number of customer payments were not received by the June 29, 1996
balance sheet date, accounting for the increase in accounts receivable compared
to July 1, 1995.
Capital expenditures for the first six months of 1997 and 1996 were $11.5 and
$12.5 million, respectively. Capital spending in 1997 is expected to be at
approximately the same level as the previous year. Capital expenditures are not
expected to be significantly higher with the consolidation of Donnelly Hohe.
The Company's $80 million bank revolving credit agreement had borrowings against
it of $24.7 million at December 28, 1996, compared to $42.2 million at June 29,
1996. The decrease is primarily due to the sale of $32.0 million of accounts
receivable at December 28, 1996, the proceeds of which were used to reduce
borrowings against the Company's revolving credit agreement. Donnelly Hohe has a
75 million German Mark (approximately $45-$50 million) revolving line of credit
agreement, which had borrowings against it of approximately $28.7 million as of
November 30, 1996.
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.
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SIGNATURE
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: April 15, 1997 /s/ William R. Jellison
-----------------------
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
