SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended March 29, 1997 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 _____
5,412,286 shares of Class A Common Stock and 4,463,243 shares of Class B Common
Stock were outstanding as of April 30, 1997.
<PAGE>
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
- March 29, 1997 and June 29, 1996 3
Condensed Combined Consolidated Statements of Income
- Three months and nine months ended
March 29, 1997 and March 30, 1996 4
Condensed Combined Consolidated Statements of Cash Flows
- Nine months ended March 29, 1997 and March 30, 1996 5
Notes to Condensed Combined Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17-18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED BALANCE
SHEETS
<TABLE>
March 29 June 30
In thousands 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 6,070 $ 1,303
Accounts receivable, less allowance of $939 and $571 ..................... 69,138 73,658
Inventories .............................................................. 45,310 24,228
Prepaid expenses and other current assets ................................ 33,715 27,506
-------- --------
Total current assets ... 154,233 126,695
Property, plant and equipment ............................................ 287,537 157,161
Less accumulated depreciation ............................................ 130,377 57,397
-------- --------
Net property, plant . 157,160 99,764
and equipment
Investments in and advances to affiliates ................................ 15,426 37,932
Other assets ............................................................. 20,699 7,101
-------- --------
Total assets ........ $347,518 $271,492
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable ............................................... $ 69,490 $ 44,349
Current maturities on long-term debt ..................................... 5,306 159
Other current liabilities ................................................ 35,446 18,705
-------- --------
Total current ....... 110,242 63,213
liabilities
Long-term debt, less current maturities .................................. 117,017 101,757
Deferred income taxes and other liabilities .............................. 24,516 17,670
-------- --------
Total liabilities ... 251,775 182,640
-------- --------
Minority interest ........................................................ 279 0
Preferred stock .......................................................... 531 531
Common stock ............................................................. 991 787
Other shareholders' equity ............................................... 93,942 87,534
-------- --------
Total shareholders' . 95,464 88,852
equity
-------- --------
Total liabilities and $347,518 $271,492
shareholders' equity
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Three Months Ended Nine Months Ended
March 29, March 30, March 29, March 30,
In thousands except share data 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales ......................... $ 181,681 $ 116,445 $ 483,118 $ 313,791
Costs and expenses:
Cost of sales ..................... 148,360 94,292 391,878 257,923
Selling, general and administrative 18,514 10,452 47,324 30,475
Research and development .......... 9,404 7,781 24,971 19,661
----------- ----------- ----------- -----------
Operating income .................. 5,403 3,920 18,945 5,732
Interest expense .................. 2,663 2,394 7,654 6,131
Royalty income .................... (135) (1,763) (1,216) (4,266)
Interest income ................... (135) (469) (549) (1,073)
Other income, net ................. (370) (418) (1,345) (548)
----------- ----------- ----------- -----------
Income before taxes on income ..... 3,380 4,176 14,401 5,488
Taxes on income ................... 1,226 1,419 5,369 1,849
----------- ----------- ----------- -----------
Income before minority interest
and equity earnings .......... 2,154 2,757 9,032 3,639
Minority interest in net (income)
loss of subsidiaries ........ 490 (16) (104) 186
Equity in earnings (losses)
of affiliated companies ...... 314 (238) (331) (482)
----------- ----------- ----------- -----------
Net income ........................ $ 2,958 $ 2,503 $ 8,597 $ 3,343
=========== =========== =========== ===========
Per share of common stock:
Net income ........................ $ 0.30 $ 0.26 $ 0.87 $ 0.34
Cash dividends declared ........... $ 0.10 $ 0.08 $ 0.26 $ 0.24
Average common shares outstanding . 9,848,733 9,766,249 9,822,335 9,743,434
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
Six Months Ended
---------------------------
March 29, March 30
In thousands 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 8,597 $ 3,343
Adjustments to reconcile net income to net cash from (for)
operating activities:
Depreciation and amortization ....................................... 15,291 9,355
Gain on sale of property and equipment .............................. (596) 0
Gain on sale of affiliate stock ..................................... (872) 0
Deferred pension cost and postretirement benefits ................... 3,916 1,469
Deferred income taxes ............................................... (1,587) (23)
Minority interest income (loss) ..................................... 312 (202)
Equity in losses of affiliated companies ............................ 786 1,057
Changes in operating assets and liabilities:
Sale of accounts receivable ......................................... 38,777 0
Accounts receivable ................................................. (12,738) (23,373)
Inventories ......................................................... (4,289) (2,896)
Prepaid expenses and other current assets ........................... (2,457) (10,424)
Accounts payable and other current liabilities ...................... 9,008 16,854
Other ............................................................... (2,366) 304
-------- --------
Net cash from ...... 51,782 (4,536)
(for) operating
activities
======== ========
INVESTING ACTIVITIES
Capital expenditures ................................................ (20,194) (18,811)
Investments in and advances to equity affiliates .................... (4,589) (15,368)
Proceeds from sale property and equipment ........................... 3,248 0
Proceeds from sale of affiliate stock ............................... 974 0
Purchase of minority interest ....................................... 0 (2,100)
Change in unexpended bond proceeds .................................. 142 392
Cash increase due to consolidation of subsidiary .................... 9,963 0
Other ............................................................... (781) 0
-------- --------
Net cash for ....... (11,237) (35,887)
investing activities
======== ========
FINANCING ACTIVITIES
Proceeds from long-term debt ........................................ 0 39,463
Repayments on long-term debt ........................................ (33,369) 0
Common stock issuance ............................................... 863 586
Dividends paid ...................................................... (2,592) (2,378)
-------- --------
Net cash from ...... (35,098) 37,671
(for) financing
activities
======== ========
Effect of foreign exchange rate changes in cash ..................... (680) 0
Increase (decrease) in cash and cash equivalents .................... 5,447 (2,752)
Cash and cash equivalents, beginning of period ...................... 1,303 5,224
-------- --------
Cash and cash equivalents, end of period ............................ $ 6,070 $ 2,472
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 1997
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 nine months ended March 29, 1997,
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 March 29, 1997 and March 30, 1996, 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 is not expected
to be material for the year and was not material to the financial statements for
any previously reported periods. Accordingly, no retroactive restatement of the
prior year's financial statements was made.
<TABLE>
Inventories consist of:
(In thousands) March 29, June 29,
1997 1996
<S> <C> <C>
LIFO cost:
Finished products and work in process ............ $ -- $ 6,743
Raw materials .................................... -- 6,622
------- -------
-- 13,365
------- -------
FIFO costs:
Finished products and work in process ............ 19,605 3,397
Raw materials .................................... 25,705 7,466
------- -------
45,310 10,863
------- -------
$45,310 $24,228
======= =======
</TABLE>
<PAGE>
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.
On December 6, 1996, the Board of Directors declared a five for four stock split
in the form of a 25 percent stock dividend distributed on January 30, 1997. All
references to weighted average number of shares outstanding and per share
information have been adjusted to reflect the stock split.
NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
Nine Months Ended
(In thousands) March 29, March 30,
1997 1996
<S> <C> <C>
Cash paid during the period for:
Interest ......................................... $7,437 $2,227
Income taxes ..................................... $8,575 $ 249
</TABLE>
NOTE E---ACQUISITION AND INVESTMENTS IN AFFILIATES
In October 1996, the Company acquired a controlling interest in Donnelly Hohe
GmbH & Co KG ("Donnelly Hohe"). Accordingly, Donnelly Hohe's financial
statements were consolidated with those of the Company at the beginning of the
second quarter of 1997. The Company consolidates the Donnelly Hohe financial
statements from the one month prior to the Company's period end. For the
Company's period ending March 29, 1997, Donnelly Hohe's financial statements are
consolidated using the period ended February 28 1997. Pro-forma results of
operations, as though the Company had combined at the beginning of each period
presented, is as follows:
Pro-forma impact:
<TABLE>
Three Months Ended Nine Months Ended
March 29, March 30, March 29, March 30,
In thousands, except share data 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales .......................... $181,681 $172,830 $531,580 $477,150
Net income ......................... 2,958 2,503 8,597 3,343
Income per share of common stock ... 0.30 0.26 0.87 0.34
</TABLE>
<PAGE>
NOTE F--ASSET SECURITIZATION
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, $38.8 million
were sold at March 29, 1997, the proceeds of which were used to reduce
borrowings under the Company's revolving credit agreements. The sale is
reflected as a reduction of accounts receivable in the accompanying Condensed
Combined Consolidated Balance Sheet and as operating cash flows in the
accompanying Condensed Combined Consolidated Statement of Cash Flows. The sales
proceeds 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. Discount fees of $0.8 million are
included in selling, general and administrative expenses in the accompanying
Condensed Combined Consolidated Statement of Income for the period ended March
29, 1997. The Company, as agent for the purchaser, retains collection and
administrative responsibilities for the participating interests of the defined
pool.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," provides accounting and reporting standards for
sales, securitization, and servicing of receivables and other financial assets
and extinguishments of liabilities. The Company is required to adopt the
Statement for all transactions occurring after December 31, 1996, including
sales of receivables pursuant to securitization structures that were previously
entered into by the Company. The provisions of the Statement do not have a
material impact on the accounting for actual or future sales of trade accounts
receivable under the securitization agreement referred to above.
NOTE G--RESTRUCTURING
On February 18, 1997, the Company announced its intention to restructure the
Company's European operations to realign the Company's European manufacturing
capacity and to reduce future operating costs, primarily by reducing the number
of non-production employees in the Company's European operations. The
restructuring is intended to result in reductions in operating costs through
improved quality, better personnel training and management and outsourcing
certain production. The restructuring also involves reorganizing product lines
and production to realize efficiencies in the production process. The Company is
in the process of finalizing the details of the planned restructuring with the
Irish union and the workers' council in Germany specifically relating to the
employees to be terminated and the benefit arrangement for each employee.
Management believes that the Company will be in compliance with all the
necessary conditions of EITF 94-3 to recognize the restructuring expense
(primarily severance payments resulting from a reduction in the number of
employees) in the fourth quarter of 1997 resulting in a one-time charge to net
income of approximately $3.5 to $4.5 million.
NOTE H---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>
Item 2.
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER REPORT
FOR THE NINE MONTHS ENDED MARCH 29, 1997
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 controllin 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 March 29, 1997, Donnelly Hohe
represented approximately 33% of the 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 befor that date. The Company intends to
continue this practice. The Company's financial statements for the period ended
March 29, 1997, consolidate Donnelly Hohe's financial statements for the period
ended February 28, 1997.
On February 18, 1997, the Company announced its intention to restructure the
Company's European operations to realign the Company's European manufacturing
capacity and to reduce future operating costs, primarily by reducing the number
of non-production employees in the Company's European operations. The
restructuring is intended to result in reductions in operating costs through
improved quality, better personnel training and management and outsourcing
certain production. The restructuring also involves reorganizing product lines
and production to realize efficiencies in the production process. The Company is
in the process of finalizing the details of the planned restructuring with the
Irish union and the workers' council in Germany specifically relating to the
employees to be terminated and the benefit arrangement for each employee.
Management expects to finalize the details of the restructuring plan and to meet
all the necessary conditions of EITF 94-3 to recognize the restructuring expense
(primarily severance payments
<PAGE>
resulting from a reduction in the number of employees) in the fourth quarter of
1997, resulting in a one-time charge to net income of approximately $3.5 to $4.5
million.
On May 5, 1997, the Company filed a registration statement with the Securities
and Exchange Commission to register 1,725,000 shares of Class A Common Stock.
The net proceeds to the Company from the sale are estimated at $22.4 million
assuming the sale of 1.5 million shares at a public offering price of $16.00 per
share and after deducting underwriting discounts and commissions. The actual net
proceeds may vary depending on the price for which the shares are sold. The
Company intends to use the net proceeds to repay indebtedness, including amounts
incurred under its revolving credit agreements.
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, acquisitions, and substantial investment in new
product lines.
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.
RESULTS OF OPERATIONS
Net sales were $181.7 million in the third quarter of 1997 compared to $116.4
million for the third quarter of 1996 and $483.1 million and $313.8 million for
the first nine months of 1997 and 1996, respectively. The consolidation of
Donnelly Hohe contributed approximately $51.1 million and $111.6 million of net
sales for the third quarter and the first nine months of 1997, respectively.
Excluding Donnelly Hohe, consolidated net sales for the first nine months of
1997 were $371.6 million, an increase of 18% over the first nine months of 1996.
Net sales for the Company's operations were as follows (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
<S> <C> <C> <C> <C>
Domestic $114,874 $101,727 $324,898 $274,644
Foreign 66,807 14,718 158,220 39,147
Total $181,681 $116,445 $483,118 $313,791
</TABLE>
Net sales for the Company's domestic operations increased by approximately 13%
and 18% for the third quarter and first nine months of 1997, respectively,
compared to the same periods in 1996. Domestic net sales increased despite the
fact that automotive industry production remained stable. The increase was
primarily due to programs launched in 1996 running at full production volumes
and new product introductions in the modular
<PAGE>
window, door handle 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.
The Company's foreign sales increased by over $52.1 million and $119.1 million
for the third quarter and first nine months of 1997 compared to the same periods
in 1996, respectively, primarily due to the consolidation of Donnelly Hohe.
Excluding the consolidation of Donnelly Hohe, net sales for the Company's
foreign operations for the third quarter and first nine months of 1997 were
approximately 10% and 27% higher than the same period in 1996, respectively, due
to higher sales of interior and electrochromi mirrors and modular windows.
Gross profit margin for the third quarter of 1997 was 18.3% compared to 19.0%
for the third quarter of 1996 and 18.9% and 17.8% for the first nine months of
1997 and 1996, respectively.
The Company's domestic gross profit margins were stronger for the nine month
period due to higher volumes, significantly lower start-up expenses compared to
1996 and non recurring-costs incurred in the third quarter of 1996 due to
supplier technical difficulties on a new business program. In the first nine
months of 1996, the Company's domestic gross profit margin was negatively
impacted due to the simultaneous start-up of three major new business programs
which will result in annual net sales exceeding $100 million in 1997. Domestic
gross profit margin performance was also significantly impacted in the third
quarter of 1996 by supplier technical difficulties on a new business program.
The Company's foreign gross profit margins were stronger than the previous year
for the third quarter and nine month period ended March 29, 1997. The
improvement was primarily due to the Company's subsidiary in France operating at
normal volumes during the period as well as stronger performance at the
Company's subsidiary in Mexico. Partially offsetting these improvements were
lower gross profit margins at the Company's Irish operations 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.
Through the first nine months of 1997 the price decreases and paint supplier
performance has impacted gross profit by $0.9 million and $1.9 million,
respectively. The paint supplier performance problem is primarily due to process
related scrap expenses and the supplier's difficulty in meeting customer
schedules. The performance problem has resulted in excessive scrap, rework and
freight costs to the Company. The Company is working with the supplier to
resolve these issues as well as researching alternative sources of paint supply
for these products. The Irish operations also experienced new business start-up
costs primarily related to electrochromic mirrors. Partially offsetting the
reduced gross profit margin in Europe were strong gross profit margins at the
Company's operations in Spain and France.
Selling, general and administrative expenses increased from $10.5 million in the
third quarter of 1996 to $18.5 million for the same period of 1997 due to the
consolidation of Donnelly Hohe and to support higher sales for this period.
Selling, general and administrative expenses in the third quarter of fiscal 1997
were at 10.2% of net sales compared to 9.0% in the third quarter of 1996. The
increase in these expenses for the quarter is due to higher legal fees in North
America and consulting fees at Donnelly Hohe. These expenses are also higher in
the third quarter of 1997 for the company due to $0.8 million of discount fees
included from the asset securitization of accounts receivable. These expenses
were 9.8% of net sales for the first nine months of 1997 compared to 9.7% for
the same period in 1996.
<PAGE>
Research and development expenses for the third quarter of 1997 were $9.4
million, or 5.2% of net sales, compared to 6.7% of net sales for the third
quarter of 1996 and were lower as a percentage to sales due the consolidation of
Donnelly Hohe. As a percentage to net sales, these expenses compared to the
previous year for the third quarter without the consolidation of Donnelly Hohe.
Research and development expenses were 5.2% of net sales in the first nine
months of 1997 compared to 6.3% for the first nine months of 1996, and were
comparable excluding the consolidation of Donnelly Hohe. Management expects that
these expenses will be approximately 5.0% of net sales in future periods.
Operating income for the Company's operations was as follows (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
<S> <C> <C> <C> <C>
Domestic $5,331 $4,545 $16,287 $6,851
Foreign 72 (625) 2,658 (1,119)
Total $5,403 $3,920 $18,945 $5,732
</TABLE>
The Company's operating margins increased from 1.8% of net sales in the first
nine months of 1996 to 3.9% of net sales in the same period of 1997. The
Company's operating margins decreased slightly in the third quarter from 3.4% of
net sales in 1996 to 3.0% of net sales in 1997. The decrease in the third
quarter was due to the consolidation of Donnelly Hohe which included planned
customer shutdowns for the Christmas holiday.
The Company's domestic operating income increased from 2.5% of net sales in the
first nine months of 1996 to 5.0% of net sales in the same period of 1997.
Operating margins were flat in the third quarter of 1997 compared to 1996.
Domestic operating margins were higher in the nine month period due to higher
volumes, significantly lower start-up expenses compared to 1996 and
non-recurring costs incurred in the third quarter of 1996. Improvements made in
domestic gross profit margins were mostly offset by higher selling, general and
administrative expenses and research and development expenses as a percent to
sales.
Foreign operating income improved from an operating loss of 4.2% of net sales
and 2.9% of net sales for the third quarter and the first nine months of 1996,
respectively, to operating income of 0.1% of net sales and 1.7% of net sales in
the same periods of 1997, respectively. The improvement in the third quarter was
primarily due to the consolidation of Donnelly Hohe, which has stronger
operating margins than that of the Company's other European operations, and
lower research and development expenses a Donnelly Mirrors Limited in Ireland.
The nine month period also benefited from the consolidation of Donnelly Hohe as
well as higher sales and stronger operating performance at the Company's
subsidiary in France. Partially offsetting these improvements in operating
margin for each period were lower gross profit margins at the Company's Irish
operations due to price decreases resulting from currency fluctuations and a
paint supplier performance problem.
Interest expense was $2.7 million in the third quarter of 1997 compared to $2.4
million for the third quarter of the previous year and $7.7 million and $6.1
million for the first nine 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. Interest expense was positively
<PAGE>
impacted in the third quarter due to the asset securization of accounts
receivable. The discount expense associated with this transaction is included in
selling, general and administrative expenses.
Royalty income was $1.2 million and $4.3 million for the first nine 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 $0.4 million for both the third quarter of 1997 and 1996 and
$1.3 million and $0.5 million for the first nine months of 1997 and 1996,
respectively. In the second quarter of 1997, the Company sold 2.5% of its
holding in Vision Group plc ("Vision Group"), resulting in a $0.9 million gain.
Minority interest in net (income) loss of subsidiaries was ($0.1) million in the
first nine months of 1997 compared to ($0.2) million in the first nine 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 the net (income) or 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 was $0.3 million in the
first nine months of 1997 compared to $0.5 million for the same period in 1996.
The Company's effective tax rate was 37.2% for the nine month period ended March
29, 1997, compared to 33.7% for the nine month period ended March 29, 1997. The
increase in the effective tax rate is due to a higher marginal tax rate due to
improved pretax income of the Company and lower tax credits as a percentage of
pretax income.
Net income was $3.0 million in the third quarter of 1997 compared to $2.5
million the previous year and $8.6 million and $3.3 million for the first nine
months of 1997 and 1996, respectively. Domestic net income increased compared to
the first nine months of 1996 due to higher sales, significantly lower start-up
costs and improved operational performance. Domestic net income was also
significantly impacted in the third quarter of 1996 by supplier technical
difficulties on a new business program that resulted in significant additional
costs that negatively impacted net income. Net income for the Company's foreign
operations was lower in the first nine 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 in 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 nine 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 progra management and lean manufacturing
systems, introduction of new technologies and programs to the Company,
significant global pricing pressures and general economic and industry
conditions. The Company is working to restructure European operations to improve
financial performance to a level consistent with the Company's overall corporate
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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, $38.8 million
were sold at March 29, 1997 the proceeds of which are used to reduce debt under
the Company's revolving credit agreements. The sale is reflected as a reduction
of accounts receivable in the accompanying Condensed Combined Consolidated
Balance Sheet and as operating cash flows in the accompanying Condensed Combined
Consolidated Statement of Cash Flows. The sales proceeds 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. Discount fees of $0.8 million are included in selling,
general an administrative expense in the accompanying Condensed Combined
Consolidated Statement of Income for the period ended March 29, 1997. The
Company, as agent for the purchaser, retains collection and administrative
responsibilities for the participating interests of the defined pool.
The Company's current ratio was 1.4 and 2.0 at March 29, 1997 and June 29, 1996,
respectively. Working capital was $44.0 million at March 29, 1997, compared to
$63.5 million at June 29, 1996. The decrease in the current ratio for the period
was due to the sale of $38.8 million of accounts receivable at March 29, 1997,
offset slightly by the addition of Donnelly Hohe's working capital.
Capital expenditures for the first nine months of 1997 and 1996 were $20.2 and
$18.8 million, respectively. Capital spending in 1997 is expected to be slightly
higher compared to the previous year due to the consolidation of Donnelly Hohe.
The company expects that company spending will increase in 1998 by approximately
45%-55% of the 1997 spending level primarily due to new business in interior
lighting and trim, diffractive optics and electrochromic mirrors.
The Company's $80 million bank revolving credit agreement had borrowings against
it of $1.5 million at March 29, 1997, compared to $42.2 million at June 29,
1996. The decrease is primarily due to the sale of $38.8 million of accounts
receivable at March 29, 1997, 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 $33 million as of
February 28, 1997.
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.
Recently Issued Accounting Standards
<PAGE>
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 indicated 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 was not material to the accompanying financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies to
continue to account for their stock-based compensation plans in accordance with
APB Opinion No. 25, but encourages the adoption of a new accounting method to
record compensation expense based on the estimated fair value of employee
stock-based compensation. Companies electing not to follow the new fair value
based method are required to provide expanded footnote disclosures, including
pro forma net income and earnings per share, determined as if the Company had
adopted the new method. The Statement is effective for the Company's fiscal year
ending in 1997. Management intends to continue to account for its stock-based
compensation plans in accordance with APB Opinion No. 25 and provide the
supplemental disclosures as required by SFAS No. 123.
SFAS No. 125, " Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," provides accounting and reporting standards for
sales, securitization, and servicing of receivables and other financial assets
and extinguishments of liabilities . The Company is required to adopt the
Statement for all transactions occurring after December 31, 1996, including
sales of receivables pursuant to securization structures that were previously
entered into by the Company. The provisions of the Statement do not have a
material impact on the accounting for actual or future sales of trade accounts
receivable under the securitization agreement referred to above.
SFAS No. 128, "Earnings Per Share," establishes standards for computing and
presenting earnings per share ("EPS") and simplifies that standards previously
found in APB Opinion No. 15, which has been superseded. It replaces the
presentation of primarily EPS with a presentation of basic EPS, which excludes
dilution and is computed by dividing net income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15.
This Statement is effective for the Company in 1998, and requires restatement of
all prior-period EPS data presented. It is not expected to have a material
effect on the accompanying financial statements.
SFAS No. 129, "Disclosure of Information about Capital Structure, " establishes
standards for disclosing information about an entity's capital structure. This
statement is effective for the Company in 1998 and will not have a material
effect on the accompanying financial statements.
No other recently issued accounting standards are expected to have a material
impact on the Company.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. ("Midwest") filed a
lawsuit against the Company in Cook County, Illinois Circuit Court with respect
to terminated discussions regarding the possibility of Midwest's acquisition of
the Company's Information Products business. The litigation has been removed to
the Federal District Court for the Northern District of Illinois. Midwest
alleges that a verbal agreement to purchase the Information Products business
had been reached, and has filed its lawsuit in an attempt to compel the Company
to proceed with the sale and to pay damages including Midwest's claimed damages
of out of pocket costs and the difference between the alleged value of the
Information Products business and the price that Midwest alleges was verbally
agreed upon. The Company has denied liability and intends to vigorously defend
its interests.
In April 1996, the Company reached a patent and licensing settlement with Gentex
Corporation that resolved patent litigation between the two companies relating
to automotive electrochromic rearview mirrors. In the settlement, the Company
and Gentex Corporation agreed to cross-license certain patents, which each
company may practice within its own core technology. The Company's core
electrochromic technology achieves dimming by electrochromic coloration of a
solid film, and the Company manufactures and markets electrochromic mirrors
using the Company's solid film electrochromic technology. In the settlement, the
parties also agreed not to pursue patent litigation against each other on
certain other patents for a period of four years. In addition, Gentex
Corporation agreed to pay the Company a settlement of $6.0 million in patent
settlement fees plus a $0.2 million contingent payment if the Company prevails
in its appeal involving the Company's lighted mirror patent. The Company used
the settlement proceeds primarily to offset related patent litigation costs that
has previously been capitalized and recognized a gain of $2.3 million net of
those costs. Management believes that the settlement with Gentex Corporation is
a positive development for the Company that will allow the Company to compete
more vigorously in the market for electrochromic mirrors.
In June, 1994, the Company entered into a joint venture with Happich
Fahrzeug-InnausstrHung GmbH of Germany ("Happich") to purchase sun visors, grab
handles and other interior parts in North America. In July, 1995, when the joint
venture was at an early stage of its development, Happich expressed its desire
to terminate the joint venture. The parties have been engaged in arbitration
over the terms of the joint venture termination since July 29, 1996. The Company
has made several claims against Happich, including for damages, as has Happich
against the Company. Management believes that the arbitration will be concluded
without a material adverse effect on the Company's financial condition or
results of operations and liquidity.
In May, 1997, Quantech, Ltd. ("Quantech") filed a lawsuit against the Company in
the United Sates District Court for the District of Minnesota concerning
components supplied by the Company's Donnelly Optics division to Quantech, which
Quantech alleges failed to meet specifications. Quantech seeks unspecified
damages, including damages resulting from Quantech's alleged delay in obtaining
regulatory approval of the medical instrument being developed by Quantech of
which the component is a part. Management believes that the claim by Quantech
will be resolved without a material adverse effect on the Company's financial
condition or results of operations and liquidity.
<PAGE>
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 that such litigation and claims will be resolved
without a material adverse effect on the Company's financial condition, results
of operations and liquidity, individually and in the aggregate.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 18 - Preferability Letter for Change in Accounting Method
The preferability letter for change in accounting method was filed as part of
Form 10-Q for the quarter ended September 28, 1996, as Exhibit 18 and is hereby
incorporated herein by reference.
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 a controlling interest in Donnelly Hohe GmbH & Co. KG ("Donnelly
Hohe.") Therefore, Donnelly Hohe's financial statements are 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 Registrant also filed a Form 8-K/A,
dated November 27, 1996, which was an amendment to the above Form 8-K. The
originally filed Form 8-K did not include audited financial statements for Hohe
(the business acquired) or pro forma financial statements which were both filed
under cover of the amended Form 8-KA.
<PAGE>
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: September 23, 1997 /s/ William R. Jellison
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
