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 April 1, 2000 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)
49 West Third Street, Holland, Michigan 49423-2813
(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 ___
6,044,203 shares of Class A Common Stock and 4,117,889 shares of Class B Common
Stock were outstanding as of April 28, 2000.
<PAGE>
DONNELLY CORPORATION
INDEX
Page
Numbering
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
- April 3, 1999 and April 1, 2000 3
Condensed Combined Consolidated Statements of Income
- Three months ended April 3, 1999 and April 1, 2000 4
Condensed Combined Consolidated Statements of Cash Flows
- Three months ended April 3, 1999 and April 1, 2000 5
Notes to Condensed Combined Consolidated Financial
Statements 6-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
April 1, December 31,
In thousands 2000 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,713 $ 4,153
Accounts receivable, less allowance of $2,220 and $2,449 96,469 80,605
Inventories 47,275 50,392
Prepaid expenses and other current assets 28,355 28,784
---------- -----------
Total current assets 173,812 163,934
Property, plant and equipment 327,480 323,210
Less accumulated depreciation 127,179 124,824
---------- -----------
Net property, plant and equipment 200,301 198,386
Investments in and advances to affiliates 30,132 28,815
Other assets 37,477 37,728
---------- -----------
Total assets $ 441,722 $ 428,863
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108,940 $ 92,098
Other current liabilities 55,642 46,577
---------- -----------
Total current liabilities 164,582 138,675
Long-term debt, less current maturities 90,111 107,383
Deferred income taxes and other liabilities 59,355 58,059
---------- -----------
Total liabilities 314,048 304,117
---------- -----------
Minority interest 958 951
Preferred stock 531 531
Common stock 1,020 1,019
Other shareholders' equity 125,165 122,245
---------- -----------
Total shareholders' equity 126,716 123,795
---------- -----------
Total liabilities and shareholders' equity $ 441,722 $ 428,863
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Three Months Ended
------------------------------------
April 1, April 3,
In thousands except share data 2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 237,404 $ 233,154
Cost of sales 196,124 195,191
----------- ------------
Gross profit 41,280 37,963
Operating expenses:
Selling, general and administrative 20,569 20,560
Research and development 9,762 9,570
Restructuring and other charges - 8,777
----------- ------------
Total operating expenses 30,331 38,907
----------- ------------
Operating income (loss) 10,949 (944)
----------- ------------
Non-operating (income) expenses:
Interest expense 1,783 2,202
Interest income (459) (122)
Royalty income (247) (365)
Gain on sale of equity investment - (5,130)
Other expense, net 204 684
----------- ------------
Total non-operating (income) expenses 1,281 (2,731)
----------- ------------
Income before taxes on income 9,668 1,787
Taxes on income (credit) 2,653 (281)
----------- ------------
Income before minority interest and
equity earnings 7,015 2,068
Minority interest in net (income) loss of subsidiaries (285) 1,783
Equity in income (loss) of affiliated companies 44 (31)
----------- ------------
Net income $ 6,774 $ 3,820
=========== ============
Per share of common stock:
Basic net income per share $ 0.67 $ 0.38
Diluted net income per share $ 0.67 $ 0.38
Cash dividends declared $ 0.10 $ 0.10
Average common shares outstanding 10,153,601 10,093,510
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
-----------------------------
April 1, April 3,
In thousands 2000 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,774 $ 3,820
Adjustments to reconcile net income to net cash from
(for) operating activities:
Depreciation and amortization 7,404 6,350
Loss (gain) on sale of property and equipment (20) 85
Gain on sale of equity investment - (5,130)
Deferred pension cost and postretirement benefits 1,485 1,432
Change in deferred income taxes 9 (1,162)
Minority interest income (loss) 306 (2,882)
Equity in (earnings) losses of affiliated companies (44) 31
Restructuring and other charges - 8,777
Changes in operating assets and liabilities:
Sale of accounts receivable 2,901 408
Accounts receivable (21,220) (15,672)
Inventories 2,095 230
Prepaid expenses and other current assets (44) (6,516)
Accounts payable and other current liabilities 29,567 (979)
Other (144) (966)
--------- ---------
Net cash from (for) operating activities 29,069 (12,174)
========= =========
INVESTING ACTIVITIES
Capital expenditures (12,288) (14,404)
Proceeds from sale of property and equipment 44 143
Investments in and advances to affiliates (1,301) (1,711)
Proceeds from sale of equity investment - 7,567
Other (197) (283)
--------- ---------
Net cash for investing activities (13,742) (8,688)
========= =========
FINANCING ACTIVITIES
Net proceeds from long-term debt 1,002 13,517
Repayments on long-term debt (16,781) -
Redemption of minority interest in subsidiary (946) -
Common stock issuance 87 -
Dividends paid (1,025) (1,023)
--------- ---------
Net cash from (for) financing activities (17,663) 12,494
========= =========
Effect of foreign exchange rate changes on cash (104) (138)
--------- ---------
Decrease in cash and cash equivalents (2,440) (8,506)
Cash and cash equivalents, beginning of period 4,153 15,459
--------- ---------
Cash and cash equivalents, end of period $ 1,713 $ 6,953
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
April 1, 2000
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited condensed combined consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended April 1, 2000,
should not be considered indicative of the results that may be expected for the
year ending December 31, 2000. The combined consolidated balance sheet at
December 31, 1999, 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 report on Form 10-K for the six months ended
December 31, 1999.
Effective July 4, 1999, the Company changed the date for the end of its fiscal
year from the Saturday nearest June 30 to December 31. The Company's fiscal
quarters end on the Saturdays nearest March 31, June 30 and September 30. All
year and quarter references relate to the Company's fiscal year and fiscal
quarters, unless otherwise stated.
Also in 1999, the Company changed the fiscal year ends of its German and Spanish
subsidiaries from May 31 to December 31. Prior to this change, these
subsidiaries reported their results of operations on a one-month lag. The
results of operations for the three-month period ended April 3, 1999, included
the results for these subsidiaries for the three months ended February 28, 1999,
while the first quarter of 2000 includes the results for the three months ended
April 1, 2000.
NOTE B --- INVENTORIES
Inventories consist of:
<TABLE>
April 1, December 31,
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Finished products and work in process $ 15,882 $ 18,529
Raw materials 31,393 31,863
--------------- ---------------
$ 47,275 $ 50,392
=============== ===============
</TABLE>
6
<PAGE>
NOTE C --- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for each period reported:
<TABLE>
Three Months Ended
---------------------------------------------
April 1, April 3,
In thousands, except per share data 2000 1999
- ----------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Net income $ 6,774 $ 3,820
Less: Preferred stock dividends (10) (10)
-------------------- -------------------
Income from continuing operations
available to common shareholders $ 6,764 $ 3,810
==================== ===================
Weighted-average shares 10,154 10,094
Plus: Effect of dilutive stock options 9 27
-------------------- -------------------
Adjusted weighted-average shares 10,163 10,121
==================== ===================
Basic earnings per share $ 0.67 $ 0.38
==================== ===================
Diluted earnings per share $ 0.67 $ 0.38
==================== ===================
</TABLE>
NOTE D---COMPREHENSIVE INCOME
Comprehensive income includes net income and all changes to shareholders'
equity, except those due to investments by owners and distributions to owners.
Comprehensive income consists of the following (in thousands):
<TABLE>
Three Months Ended
---------------------------------------------
April 1, April 3,
2000 1999
-------------------- -------------------
<S> <C> <C>
Net income $ 6,774 $ 3,820
Other comprehensive income:
Foreign currency translation and
transaction adjustments 2,043 2,466
-------------------- -------------------
Reclassification adjustment
for net gain on securities
available for sale included
in net income -- (3,216)
==================== ===================
Comprehensive income $ 8,817 $ 3,070
==================== ===================
</TABLE>
Translation and transaction adjustments are recorded directly in a component of
shareholder's equity in the accompanying Condensed Combined Consolidated Balance
Sheets. These result from changes in the foreign currency translation
adjustments of the Company's net investments in its foreign subsidiaries, as
well as foreign currency denominated long-term advances to affiliates caused by
7
<PAGE>
fluctuations in exchange rates. Prior to the first quarter of calendar 1999, the
Company's investment in VISION Group plc ("VISION Group") was accounted for at
fair value in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt
and Equity Securities," with unrealized gains and losses reported directly in a
component of shareholders' equity. In the first quarter of calendar 1999, the
Company sold its interest in VISION Group which caused the previously unrealized
gain to be realized (see also Note G). Total accumulated other comprehensive
income totaled $(13.2) million and $(11.2) million at April 1, 2000 and December
31, 1999, respectively.
NOTE E---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
Three Months Ended
--------------------------------------------
(In thousands) April 1, April 3,
2000 1999
------------------- -------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 338 $ 666
Income taxes 1,230 1,044
Non-cash financing and investing activities:
Transfer of non-cash net assets to
affiliates (See Note G) $ -- $ 2,617
Transfer of interest bearing note
from affiliate (See Note G) $ -- $ 5,000
</TABLE>
NOTE F---NATURE OF OPERATIONS
The Company is an international supplier of automotive parts and component
systems through manufacturing operations and various joint ventures in North and
South America, Europe and Asia. The Company primarily supplies automotive
customers around the world with rear view mirror systems, modular window systems
and handle products. The Company's non-automotive products represent less than
4% of total net sales for each of the last three years.
The Company is primarily managed based on geographic segments and the product
markets they serve. The Company has two reportable segments: North American
Automotive Operations ("NAAO") and European Automotive Operations ("EAO"). The
operating segments are managed separately as they each represent a strategic
operational component that offers the Company's product lines to customers in
different geographical markets. The accounting polices of the reportable
operating segments are the same as those described in the summary of significant
accounting policies described in Note 1 - Summary of Significant Accounting
Policies, in the Company's 1999 Annual Report. Revenues are attributed to
segments based on the location of where the sales originate. The Company
evaluates performance based on segment profit, which is defined as earnings
before interest, taxes, depreciation and amortization, excluding significant
special gains, losses and restructuring charges. Due to the Company's corporate
headquarter being located in the United States, certain estimates are made for
allocations to NAAO of centralized corporate costs incurred in support of NAAO.
Centralized European overhead costs are included in EAO. The Company accounts
for intersegment sales and transfers at current market prices and intersegment
services at cost.
8
<PAGE>
A summary of the Company's operations by its business segments follows:
<TABLE>
Other Intersegment Total
In thousands NAAO EAO Segments* Eliminations Segments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Quarter ended April 1, 2000:
Revenues................................ $ 148,254 $ 75,954 $ 15,562 $ (2,366) $ 237,404
Segment profit.......................... 17,215 5,576 2,550 -- 25,341
Quarter ended April 3, 1999:
Revenues................................ $ 137,992 $ 68,530 $ 27,267 $ (636) $ 233,153
Segment profit.......................... 16,134 1,268 1,825 -- 19,227
</TABLE>
* Other segments category includes the Company's automotive joint ventures
and North American non-automotive businesses.
Reconciliations of the totals reported for the operating segments' profit to
consolidated income before income taxes in the combined consolidated financial
statements is shown below:
<TABLE>
April 1, April 3,
In thousands Quarter Ended 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Segment profit from reportable segments....................... $ 22,791 $ 17,402
Segment profit from other segments............................ 2,550 1,825
Interest, net................................................. (1,324) (2,080)
Restructuring and other charges............................... -- (8,777)
Depreciation and amortization................................. (7,404) (6,350)
Gain on sale of equity investments............................ -- 5,130
Corporate and other expenses*................................. (6,945) (5,363)
--------------------------------------------
Income before taxes on income $ 9,668 $ 1,787
============================================
</TABLE>
* Corporate and other expenses category includes centralized corporate
functions including those for advanced research, corporate administration
including information technology, human resources and finance and other
costs associated with corporate development and financing initiatives.
Additional disclosures regarding the Company's products and services, geographic
areas, major customers and total assets are included in Note 3 - Nature of
Operations, in the Company's Form 10-K for the six months ended December 31,
1999.
NOTE G---INVESTMENTS IN AND ADVANCES TO AFFILIATES
On September 14, 1999, the Company sold its 50% interest in Lear Donnelly
Overhead Systems, LLC ("Lear Donnelly") to Lear Corporation ("Lear"), its
partner in the joint venture. As a result of the transaction, the financial
results of Lear Donnelly are no longer included in the Company's financial
statements after September 1999.
Lear Donnelly operated by selling its products to Lear and the Company, which in
turn sold them to the final customers. Due to the transfer to Lear of the
Company's interior lighting and trim sales contracts included in the joint
venture, future annual net sales are expected to be reduced by approximately $60
to
9
<PAGE>
$65 million per year. The impact for the three-month period ended April 1, 2000,
was a reduction in net sales of approximately $15 million. Since the joint
venture operated at approximately break-even since its formation, the sale is
not expected to have a material impact on the Company's future results of
operations or financial position. However, gross profit and operating margins as
a percent of sales for future periods will be favorably impacted by the sale.
Effective January 4, 1999, the Company merged its wholly-owned subsidiary,
Donnelly Optics Corporation ("Optics") into Optics Acquisition, Inc., a
wholly-owned subsidiary of Applied Image Group, Inc. ("AIG"), a New York
Corporation. The surviving corporation in this merger was Optics and its name
was changed to Applied Optics, Inc. Optics designed and manufactured injection
molded optical lenses for the automotive, computer and medical industries. AIG
develops and manufactures opto-imaging products for the lighting, automotive,
optical and photonics industries. As a result of this transaction, the assets
and liabilities of Optics have been removed from the Company's financial
statements as of December 1, 1998. The financial results of Optics are no longer
included in the Company's financial statements after December 1, 1998. The
Company transferred the net assets of Optics for a 13% equity interest in AIG
and a $5 million convertible note.
In the first quarter of calendar 1999, the Company sold its remaining interest
in VISION Group. As a result of this sale, the Company received $7.6 million in
proceeds and recognized a pretax gain of approximately $5.1 million, or $0.33
per share after tax.
The Company has advanced $15.5 million at April 1, 2000 and $14.6 million at
December 31, 1999, to its venture, Donnelly Electronics, Inc. ("Donnelly
Electronics"), under a promissory note that bears interest at 7%. The Company
owns approximately 18.2% of Donnelly Electronics and accounts for it on the cost
method. Accordingly, the financial results of Donnelly Electronics are not
included in the Company's financial statements.
NOTE H---RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1997, the Company recorded a $10.0 million pretax
restructuring charge, or $4.0 million at net income, for a European
restructuring plan. A reduction of $1.1 million was recorded to the
restructuring reserve in 1998 associated with changes to the restructuring plan.
In the third quarter of fiscal 1999, an $8.8 million pretax restructuring
charge, or $3.5 million at net income, was recorded for the 1999 European
turnaround plan. The Company has combined the remaining actions of the 1997
restructuring, which primarily consisted of the elimination and outsourcing of
redundant operations in Germany, with the new European turnaround initiative. It
is expected that all actions associated with the plan will be substantially
completed by the end of 2000.
The Company is also funding approximately $4.3 million for the construction of
shipping and warehousing facilities, relocation of employees and new material
handling and storage equipment associated with the turnaround plan. These costs
do not qualify as restructuring under EITF 94-3 and therefore are included in
the Company's capital expenditures and operating expenses. As of April 1, 2000,
approximately 50% of the cash flows required to complete these facilities were
funded, with the remaining expenditures expected to be substantively completed
by the end of May 2000, the majority of which will be capitalized.
10
<PAGE>
<TABLE>
Accrued
Restructuring
Original Fiscal 1999 Amounts Costs at April 1,
In thousands Accrual Accrual Utilitzed (1) 2000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee severance and termination benefits............ $ 9,965 $ 7,426 $ 9,309 $ 8,082
Write down of long-lived assets........................ -- 1,351 816 535
------------------------------------------------------------------
Restructuring Total............................... $ 9,965 $ 8,777 $10,125 $ 8,617
==================================================================
</TABLE>
(1) The Company has terminated 146 employees under the plan. In addition, the
Company has experienced a net reduction of approximately 40 employees in
Germany through natural attrition. Amounts utilized include an adjustment
of $1.1 million to the restructuring reserve in 1998 associated with
changes to the restructuring plan and the impact of foreign currency
changes.
11
<PAGE>
ITEM 2. DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION FIRST QUARTER REPORT FOR
THE THREE MONTHS ENDED APRIL 1, 2000
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The terms "believe,"
"anticipate," "intend," "goal," "expect," and similar expressions may identify
forward-looking statements. Investors are cautioned that any forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company or its management, are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in forward-looking statements as a result of
various factors including, but not limited to (i) general economic conditions in
the markets in which the Company operates, (ii) fluctuation in worldwide or
regional automobile and light truck production, (iii) changes in practices
and/or policies of the Company's significant customers, (iv) market development
of specific products of the Company, including electrochromic mirrors, (v)
whether the Company successfully implements its European restructuring, (vi)
fluctuations in foreign currencies and (vii) other risks and uncertainties. The
Company does not intend to update these forward-looking statements.
OVERVIEW
Effective July 4, 1999, the Company changed the date of its fiscal year end from
the Saturday nearest June 30 to December 31. Accordingly, comparisons of
operating results are analyzed utilizing the comparable calendar period. The
Company's fiscal quarters end on the Saturdays nearest March 31, June 30 and
September 30. Accordingly, the three-month periods ended April 1, 2000 and April
3, 1999, each included 13 weeks. All year and quarter references relate to the
Company's fiscal years and fiscal quarters, unless otherwise stated.
Also in 1999, the Company changed the fiscal year ends of its German and Spanish
subsidiaries from May 31 to December 31. Prior to this change, these
subsidiaries reported their results of operations on a one-month lag. The
results of operations for the three-month period ended April 3, 1999, included
the results for these subsidiaries for the three months ended February 28, 1999,
while the first quarter of 2000 includes the results for the three months ended
April 1, 2000.
The Company's net sales and net income are subject to significant fluctuations
attributable primarily to production schedules of the Company's major automotive
customers. These factors cause results to fluctuate from period to period and
year to year. The comparability of results on a period-to-period basis is also
affected by the formation and disposition of subsidiaries, joint ventures and
alliances, and acquisitions and investments in new product lines. In addition,
the Company has strong product content on light trucks, including sport utility
vehicles ("SUVs"), as compared to automobiles.
The Company has two reportable segments: North American Automotive Operations
("NAAO") and European Automotive Operations ("EAO"). The operating segments are
managed separately as they each represent a strategic operational component that
offers the Company's product lines to customers in different geographical
markets.
12
<PAGE>
Mergers, Joint Ventures and Sale of Investments
On September 14, 1999, the Company sold its 50% interest in Lear Donnelly
Overhead Systems, LLC ("Lear Donnelly") to Lear Corporation ("Lear"), its
partner in the joint venture. The Company's equity in the financial results of
Lear Donnelly is no longer included in the Company's financial statements after
September 1999. Lear Donnelly operated by selling its products to Lear and the
Company, which in turn sold them to their final customers. Due to the transfer
to Lear of the Company's interior lighting and trim sales contracts manufactured
by Lear Donnelly, annual net sales are expected to be reduced by approximately
$60 million to $65 million. The impact for the three-month period ended April 1,
2000 was a reduction in net sales of approximately $15 million. Since the joint
venture operated at approximately break-even from the time of its formation, the
sale is not expected to have a material impact on the Company's future results
of operations. However, gross profit and operating margins as a percent of sales
for future periods should be favorably impacted.
In April 1999, the Company formed Schott-Donnelly LLC Smart Glass Solutions
("Schott Donnelly"), a 50-50 joint venture with Schott North America
Manufacturing, Inc. ("Schott"), a wholly owned subsidiary of Schott Glas, which
is based in Germany and is one of the world's leading producers of specialty
glass products. The joint venture is developing electrochromic glass for
automotive and architectural applications.
In the second calendar quarter of 1999, the Company began consolidating the
financial statements of Varitronix EC (Malaysia) Sdn. Bhd. ("Varitronix EC").
Varitronix EC is based in Malaysia and is the Company's 50-50, controlled joint
venture with the Malaysian subsidiary of Varitronix International Ltd.
("Varitronix"). Varitronix, based in Hong Kong, is a global leader in the market
for liquid crystal displays and electronic systems. Varitronix EC provides
support for the Company's worldwide electrochromic mirror production.
In the first calendar quarter of 1999, the Company sold its remaining interest
in VISION Group plc ("VISION Group"). The Company received $7.6 million in
proceeds and recognized a combined pretax gain of approximately $5.1 million, or
$0.33 per share, after tax.
RESULTS OF OPERATIONS
Comparison of the three-month periods ended April 1, 2000, and April 3, 1999
North American Automotive Operations ("NAAO")
For the three-month period ended April 1, 2000, NAAO net sales increased by over
7%, or $10.3 million, compared to the same period in calendar 1999. North
American car and light truck build increased by approximately 7% for the same
comparable period.
NAAO gross profit margin was slightly lower for the three-month period ended
April 1, 2000, compared to the same period in the previous year. While margins
improved at the Company's North American complete outside mirror facilities,
these improvements were offset by an unfavorable product mix, primarily in
modular windows, and by the costs associated with the ramp-up of new
electrochromic and electronic mirror products. Gross profit margins were also
positively influenced by after-market sales for complete outside mirrors. The
success of the Company in maintaining gross profit margins is dependent upon its
ability to successfully launch new booked business and to offset continued
customer
13
<PAGE>
pricing pressures. In addition, the Company may experience changes in gross
profit margins based on its mix of lower-margin and higher-margin products. It
is expected that future changes in revenue will be balanced between higher- and
lower-margin products.
The Company's North American operating margins were flat for the quarter ended
April 1, 2000, compared to the comparable period in 1999. Higher sales were
offset by slightly lower gross profit margins and higher selling, general and
administrative expenses in the period. The higher selling, general and
administrative expenses were caused by increased investments in information
technology and the amortization costs for recently introduced software for
manufacturing, distribution and administration. The increased information
technology expenses were partially offset by reduced spending levels in other
NAAO functions.
European Automotive Operations ("EAO")
EAO net sales increased by approximately 11% for the quarter ended April 1,
2000, compared to the same period last year. The significant strengthening of
the dollar compared to the euro significantly reduced the reported sales level
for Europe. Stated in local currencies, EAO net sales increased by over 27%. The
increase in net sales is primarily due to products launched in calendar 1999
running at full production volumes and the elimination of the one-month lag in
consolidating the Company's subsidiaries in Germany and Spain. Western European
car production increased by approximately 6% in the first calendar quarter
compared to the same period last year.
EAO gross profit margins improved during the three-month period ending April 1,
2000 compared to the comparable period of calendar 1999, due to stronger sales
volumes and operating improvements in the Company's facilities in Germany.
Overall sales price pressures in Europe were offset by improvements in purchased
material costs, the impact of restructuring initiatives and general operational
productivity improvements.
In the first calendar quarter of 1999, an $8.8 million pretax restructuring
charge, or $3.5 million at net income, was recorded for an EAO turnaround plan
(see Note H).
EAO operating income, as adjusted for the restructuring charge, was improved for
the quarter ended April 1, 2000, compared to the same period in the previous
year. Stronger sales, improved gross profit margins and lower selling, general,
and administrative expenses all contributed to the improved operating margins
during the three-month period.
Company
Net sales were $237.4 million for the quarter ended April 1, 2000, compared to
$233.2 million in the same period last year, an increase of approximately 1.8%.
Adjusted for the impact of the reduction in net sales associated with Lear
Donnelly, the Company's net sales increased by slightly less than 9%. Suppliers
in the automotive industry continue to experience significant price pressure
from their customers. While this pressure continues to squeeze the Company's
gross profit and operating margins, it did not have a material impact on net
sales for the three-month periods reported. The impact of price pressures on
gross profit margins is dependant upon the ability of the Company to offset
these decreases by improvements in purchase material prices, product design
changes and overall operations productivity improvements.
14
<PAGE>
Gross profit margin for the three-month period ended April 1, 2000, was 17.4%
compared to 16.3% in the same period last year. The improved gross profit margin
is primarily due to the sale of Lear Donnelly and stronger gross profit margins
in Europe. The Company's Information Products subsidiary also contributed
favorably to the Company's gross profit for the quarter.
Selling, general and administrative expenses were $20.6 million, or 8.7% of net
sales, for the three-month period ended April 1, 2000, compared to $20.6
million, or 8.8% of net sales for the three-month period ended April 3, 1999.
These expenses remained flat with previous year levels due to management's focus
on cost management both in North America and Europe, despite the continued
investments in information technology.
Research and development expenses were $9.8 million, or 4.1% of net sales, for
the three-month period ended April 1, 2000, compared to $9.6 million, or 4.1% of
net sales, in the same period last year. The lower research and development
expenses were due to the formation of Schott Donnelly. Offsetting the reduction
in these expenses, were investments in new complete outside mirror products and
value-added technologies including electrochromic, electronics and lighting
applications launching in calendar 2000 and 2001.
Operating income was $10.9 million for the three-month period ended April 1,
2000, compared to a loss of $(0.9) million for the same period last year.
Adjusted for the impact of the 1999 restructuring, operating income improved by
$3.1 million, or from 3.4% of net sales for the quarter ended April 3, 1999, to
4.6% of net sales for the quarter ended April 1, 2000. Operating income was
improved primarily due to improved gross profit margins in Europe, the sale of
Lear Donnelly, the ability of the Company to leverage selling, general and
administrative expenses and positive performance from the Company's Information
Products subsidiary.
Interest expense was $1.8 million for the three-month period ended April 1,
2000, compared to $2.2 million for the same period last year. Interest expense
was lower primarily due to lower average borrowings during the period.
In the first calendar quarter of 1999, the Company sold its remaining interest
in VISION Group. The Company received $7.6 million in proceeds and recognized a
combined pretax gain of approximately $5.1 million, or $0.33 per share, after
tax.
Income tax expense for the three-month period ended April 1, 2000, was $2.7
million on pretax income of $9.7 million, for an effective tax rate of 27.4%. In
the three month period ended April 3, 1999, the Company recorded an income tax
credit of $0.3 million due to the tax benefit on German losses and the
restructuring charge taken in this period. The Company's effective tax rate will
vary based on the level and mix in pretax earnings in countries with varying
effective tax rates, availability of tax benefits and unusual pretax gains or
losses.
The Company has recorded $14.0 million and $14.6 million of deferred tax assets
on foreign non-expiring net operating loss carry-forwards at April 1, 2000 and
December 31, 1999, respectively. A significant portion of the loss
carry-forwards resulted from the European restructuring charges. These tax
assets are expected to be realized based on the improvements from the
restructuring initiative, which are expected to be substantially complete by the
end of calendar 2000, and continuous improvement in overall operational earnings
from the implementation of the Company's production system throughout Europe.
15
<PAGE>
Minority interest in net (income) loss of subsidiaries was $(0.3) million for
the three-month period ended April 1, 2000, compared to $1.8 million for the
same period last year. The $1.8 million benefit in 1999 was primarily due to the
restructuring charge and operating losses at the Company's Donnelly Hohe
subsidiary. In the first quarter of 2000, Donnelly Hohe operated at a positive
net income and the Company's Varitronix EC joint venture operated at a slight
loss.
Equity in earnings (losses) of affiliated companies improved slightly in the
first quarter of 2000 as compared to the first quarter of calendar 1999. For the
period ended April 1, 2000, equity earnings from the Company's Chinese joint
ventures were offset slightly by equity losses from the Company's joint venture
in Brazil. For the period ended April 3, 1999, equity earnings from the
Company's Chinese joint ventures were offset by equity losses from the Company's
Lear Donnelly joint venture. Due to the sale of the Company's interest in the
Lear Donnelly joint venture, the Company's equity in the financial results of
Lear Donnelly is no longer included in the Company's financial statements after
September 1999.
The Company is committed to improving shareholder value with a strategic plan
focussed on the following key areas: developing core automotive products,
primarily by increasing dollar content per vehicle through the expansion of
market share of existing products; introduction of new technologies and products
and increasing volume through penetration into new and emerging markets;
improving the overall operating performance of the Company's European
Operations; extending the Company's capabilities in value added electronics
technologies; and repositioning non-core businesses, as appropriate, through
merging or divesting these businesses.
The Company believes that these strategic initiatives have established the
foundation for the Company's ability to improve shareholder value. Excluding
unusual and non-recurring items, the unaudited net income from operations for
the twelve-month rolling period ending April 1, 2000, was $20.6 million, a
record for the Company. These financial developments combined with the strong
commercial developments for new orders booked (initially launching in late
calendar 2000) and the continued introduction of advanced technologies support
the Company's ability to grow shareholder value. Management remains committed to
the overall strategies of continued implementation of the Company's operational
systems, introducing new and innovative technologies, focusing on core
businesses and developing and enabling highly skilled people.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 1.1 and 1.2 on April 1, 2000, and December 31,
1999, respectively. Working capital was $9.2 million on April 1, 2000, compared
to $25.3 million at December 31, 1999. Increases in accounts receivable were
offset by continued benefits of an active working capital management program,
seasonal accrual increases and reduction of inventories due to the elimination
of year 2000 contingency stock and program transitions. Overall sales increases
in the quarter, particularly in Europe where credit terms are often longer than
those in North America, affected both accounts receivable and accounts payable
in the period. The increase in accounts receivable was partially offset by
increased cash receipts in North America due to timing of key customer payments.
The receipt of customer payments, combined with operating income in the quarter
and continued active working capital management, provided funds that were used
to reduce revolving lines of credit as of April 1, 2000.
16
<PAGE>
At April 1, 2000, and December 31, 1999, $41.8 million and $38.9 million,
respectively, had been sold under the Company's accounts receivable
securitization agreement. Proceeds received under this agreement are used to
reduce revolving lines of credit. The sales are reflected as a reduction of
accounts receivable and an increase to operating cash flows. The agreement
expires in December 2000, however it is renewable for one-year periods at the
option of the Company. The Company expects to extend the current agreement or
replace it on comparable terms.
Capital expenditures for the three months ended April 1, 2000, and April 3,
1999, were $12.3 million and $14.4 million, respectively. Capital spending was
primarily to support new business orders, the ramp up of new electrochromic and
electronic mirror products, the 1999 European turnaround plan and continuous
improvement activities of the Company. Capital spending the next twelve to
eighteen months is expected to remain near current spending levels to support
these programs, in addition to the implementation of new manufacturing,
distribution and administrative information systems globally.
The Company announced significant restructuring plans in fiscal 1997 and 1999 to
improve the overall profitability of EAO (see Note H). The remaining reserve
balance for these plans was $8.6 million at April 1, 2000. It is expected that
all actions associated with the plan will be substantially completed by the end
of 2000. In addition, the Company will also require approximately $2.2 million
for the remaining construction of shipping and warehousing facilities,
relocation of employees and new material handling and storage equipment
associated with the 1999 European turnaround plan, the majority of which will be
capitalized.
The Company believes that its long-term liquidity and capital resource needs
will continue to be provided principally by funds from operating activities,
supplemented by borrowings under existing credit facilities. The Company also
considers equity offerings to properly manage the Company's total capitalization
position. The Company considers, from time to time, new joint ventures,
alliances and acquisitions, the implementation of which could impact the
liquidity and capital resource requirements of the Company. In the first quarter
of 2000, the Company made $2.2 million of investments in and advances to
affiliates, including the redemption of a minority interest in a subsidiary.
The Company's $160 million multi-currency global revolving credit agreement had
borrowings against it of $24.1 million and $42.5 million as of April 1, 2000,
and December 31, 1999, respectively. Total long-term borrowing decreased by
$17.3 million at April 1, 2000, compared to December 31, 1999, primarily due to
operating income in the quarter and continued active working capital management.
The Company's primary foreign investments are in Germany, Ireland, Spain,
France, Mexico, China, Brazil and Malaysia. Except for the Company's subsidiary
in Mexico, whose functional currency is the United States dollar, financial
statements of international companies are translated into United States dollar
equivalents at exchange rates as follows: (1) balance sheet accounts at year-end
rates and (2) income statement accounts at weighted average monthly exchange
rates prevailing during the year. Translation gains and losses are reported as a
separate component of shareholders' equity and are included in accumulated other
comprehensive income. For the subsidiary in Mexico, transaction and translation
gains or losses are reflected in net income for all accounts other than
intercompany balances of a long-term investment nature for which the translation
gains or losses are reported as a separate component of shareholders' equity.
Foreign currency transaction gains and losses included in other incom are not
material.
17
<PAGE>
The Company utilizes interest rate swaps and foreign exchange contracts, from
time to time, to manage exposure to fluctuations in interest and foreign
currency exchange rates. The risk of loss in the event of nonperformance by any
party under these agreements is not material.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives in the balance sheet at fair
value. It also requires that unrealized gains and losses resulting from changes
in fair value be included in income or comprehensive income, depending on
whether the instrument qualifies as a hedge. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect the implementation of this new standard to have a material impact on
its results of operations or financial position.
No other recently issued accounting standards are expected to have a material
impact on the Company.
Euro Conversion
Effective January 1, 1999, eleven of fifteen member countries of the European
Union established permanent rates of exchange between the members' national
currency and a new common currency, the "euro." In this first phase, the euro is
available for non-cash transactions in the monetary, capital, foreign exchange
and interbank markets. National currencies will continue to exist as legal
tender and may continue to be used in commercial transactions until the euro
currency is issued in January 2002 and the participating members' national
currency is withdrawn by July 2002. The Company's significant European
operations are all located in member countries participating in this monetary
union.
The Company created an internal, pan-European, cross-functional team, as well as
internal teams at each operation affected by the change, to address operational
implementation issues and investigate strategic opportunities due to the
introduction of the euro. The Company has established action plans that are
currently being implemented to address the euro's impact on information systems,
currency exchange risk, taxation, contracts, competition and pricing. The
Company anticipates benefiting from the introduction of the euro through a
reduction of foreign currency exposure and administration costs on transactions
within Europe and increased efficiency in centralized European cash management.
The Company has commenced conversion of its European operations from national
currency to the euro. The change in functional currency is proceeding as planned
and is expected to be completed in the middle of calendar 2001.
The Company does not presently expect that the introduction and use of the euro
will materially affect the Company's foreign exchange hedging activities or the
Company's use of derivative instruments. Any costs associated with the
introduction of the euro will be expensed as incurred. The Company does not
believe that the introduction of the euro will have a material impact on its
results of operations or financial position.
ITEM 7 (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign currency
exchange primarily in its cash, debt and foreign currency transactions. The
Company holds derivative instruments, including
18
<PAGE>
interest rate swaps and forward foreign currency contracts. Derivative
instruments used by the Company in its hedging activities are viewed as risk
management tools and are not used for trading or speculative purposes.
Analytical techniques are used to manage and monitor foreign exchange and
interest rate ris and include market valuation. The Company believes it is, to a
lesser degree, subject to commodity risk for price changes that relate to
certain manufacturing operations that utilize raw commodities. The Company
manages its exposure to changes in those prices primarily through its
procurement and sales practices. This exposure is not considered material to the
Company.
A discussion of the Company's accounting policies for derivative financial
instruments is included in Note 1 - Summary of Significant Accounting Policies,
in the Notes to the Combined Consolidated Financial Statements, which is
included in Item 8 of the Form 10-K report for the six months ended December 31,
1999. Additional information relating to financial instruments and debt is
included in Note 8 - Financial Instruments and Note 6 - Debt and Other Financing
Arrangements, which are also included in Ite 8 of the Form 10-K report for the
six months ended December 31, 1999.
International operations are primarily based in Europe and, excluding U.S.
export sales which are principally denominated in U.S. dollars, constitute a
significant portion of the revenues and identifiable assets of the Company. A
predominant portion of these international revenues and identifiable assets are
based in German marks. The Company has significant loans to foreign affiliates,
which are denominated in foreign currencies. Foreign currency changes against
the U.S. dollar affect the foreign currency transaction adjustments on these
long-term advances to affiliates and the foreign currency translation adjustment
of the Company's net investment in these affiliates, which impact consolidated
equity of the Company. International operations result in a large volume of
foreign currency commitment and transaction exposures and significant foreign
currency net asset exposures. Since the Company manufactures its products in a
number of locations around the world, it has a cost base that is diversified
over a number of different currencies, as well as the U.S. dollar, which serves
to counterbalance partially its foreign currency transaction risk.
Selective foreign currency commitments and transaction exposures are partially
hedged. The Company does not hedge its exposure to translation gains and losses
relating to foreign currency net asset exposures; however, when possible, it
borrows in local currencies to reduce such exposure. The Company is also exposed
to fluctuations in other currencies including: British pounds, French francs,
Irish punts, Japanese yen, Mexican pesos, Spanish pesetas, Malaysian ringgit and
Brazilian reals. The fair valu of the foreign currency contracts outstanding has
been immaterial each of the last two years and the transition period.
The Company's cash position includes amounts denominated in foreign currencies.
The Company manages its worldwide cash requirements considering available funds
among its subsidiaries and the cost effectiveness with which these funds can be
accessed. The repatriation of cash balances from certain of the Company's
affiliates could have adverse tax consequences.
However, those balances are generally available without legal restrictions to
fund ordinary business operations. The Company has and will continue to transfer
cash from those affiliates to the parent and to other international affiliates
when it is cost effective to do so.
The Company manages its interest rate risk in order to balance its exposure
between fixed and variable rates while attempting to minimize interest costs.
Nearly half of the Company's long-term debt is fixed and an additional $30
million is effectively fixed through interest rate swaps.
19
<PAGE>
See the Company's Form 10-K for the six months ending December 31, 1999, Item 7
(a), for quantitative disclosures about market risk as of December 31, 1999.
There have been no material changes in the nature of the market risk exposures
facing the Company since December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 2000, Sekurit Saint-Gobain U.S.A., Inc. filed a complaint against
the Company in the U.S. District Court for the Eastern District of Michigan. The
complaint alleges that the Company has induced infringement and contributorily
infringed a patent relating to window assemblies for use in vehicles. The
Company has not yet responded to this complaint. The Company believes that this
litigation will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
The Company and its subsidiaries are involved in certain other legal actions and
claims incidental to its business, including those arising out of alleged
defects, breach of contracts, product warranties, employment-related matters and
environmental matters. An estimated loss from a legal action or claim is accrued
when events exist that make the loss probable and the loss can be reasonably
estimated. Although the Company maintains accruals for such claims when
warranted, there can be no assurance that such accruals will continue to be
adequate. The Company believes that accruals related to such litigation and
claims are sufficient and that these items will be resolved without material
effect on the Company's financial position, results of operations or liquidity,
individually and in the aggregate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedules
20
<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: May 16, 2000 /s/ J. Dwane Baumgardner
------------------------
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: May 16, 2000 /s/ Scott E. Reed
-----------------
Scott E. Reed
(Senior Vice President, Chief
Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from April 1,
2000 Donnelly Corporation financial statements and is qualified in its entirey
by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<CASH> 1,713
<SECURITIES> 0
<RECEIVABLES> 96,469
<ALLOWANCES> 0
<INVENTORY> 47,275
<CURRENT-ASSETS> 173,812
<PP&E> 327,480
<DEPRECIATION> 127,179
<TOTAL-ASSETS> 441,722
<CURRENT-LIABILITIES> 164,582
<BONDS> 90,111
0
531
<COMMON> 1,020
<OTHER-SE> 125,165
<TOTAL-LIABILITY-AND-EQUITY> 441,722
<SALES> 237,404
<TOTAL-REVENUES> 237,404
<CGS> 196,124
<TOTAL-COSTS> 196,124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,783
<INCOME-PRETAX> 9,668
<INCOME-TAX> 2,653
<INCOME-CONTINUING> 7,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,774
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.67
</TABLE>
