Gentex Corporation — Q2 2015 Form 10-Q
Business context and period: This unaudited report covers the three and six months ended June 30, 2015, compared with the same 2014 periods. Gentex primarily develops and manufactures automotive electro-optic products, including auto-dimming mirrors and electronic features; its smaller “Other” segment includes aerospace windows and fire-protection products.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $379.3 million | $338.4 million | $748.2 million | $674.2 million |
| Gross profit | $145.5 million | $134.3 million | $288.6 million | $265.6 million |
| Gross margin | 38.4% | 39.7% | 38.6% | 39.4% |
| Operating income | $108.1 million | $99.8 million | $215.8 million | $197.0 million |
| Net income | $74.6 million | $76.7 million | $151.7 million | $145.3 million |
| Diluted EPS | $0.25 | $0.26 | $0.51 | $0.50 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $191.9 million | $142.1 million |
Q2 sales increased 12%, while net income declined 3%. For the first six months, sales grew 11% and net income rose 4.4%. Automotive sales drove growth: Q2 automotive revenue was $370.5 million, up 12%; “Other” revenue was $8.8 million, down 1%. Total auto-dimming mirror shipments increased 11% in both the quarter and first half. Calculated operating margins were approximately 28.5% in Q2 2015 and 28.9% for the first half.
Q2 cost of goods sold rose to 61.6% of sales from 60.3%; first-half cost of goods sold rose to 61.4% from 60.6%. Management cited customer price reductions, unfavorable mix, currency effects and, for the first half, higher manufacturing costs; purchasing savings partly offset these pressures. Q2 operating expenses increased 8.6%, including higher engineering and development spending and approximately $2 million of severance-related costs in SG&A.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $569.9 million, up $72.5 million from year-end; long-term investments were $114.7 million. Working capital was $799.9 million.
- First-half operating cash flow was $191.9 million; investing cash outflow was $33.8 million, including $33.6 million of capital expenditures. Financing cash outflow was $85.6 million, including $47.2 million of dividends and $50.1 million of share repurchases.
- The balance sheet reports $254.4 million of long-term debt, versus $258.1 million at December 31, 2014. The debt note reports $125 million outstanding on the revolver and $136.9 million on the term loan at June 30; the filing text does not clearly reconcile these principal amounts with the balance-sheet figure. The company reported covenant compliance and $25 million of revolver availability.
- A $150 million interest-rate swap was scheduled to take effect July 31, 2015, fixing the rate on that notional amount at 1.89% through September 2018. The stated borrowing rate at June 30 was 1.19%.
- Gentex repurchased 2.8 million shares in the first half for $50.1 million and had 3.4 million shares remaining under the plan. The quarterly dividend increased to $0.085 per share.
Outlook, commentary and risks
For calendar 2015, management forecast revenue of $1.52–$1.55 billion, gross margin of 38.5%–39%, operating expenses of $148–$151 million, capital expenditures of $95–$105 million, depreciation and amortization of $85–$90 million, and a tax rate of 31.5%–32%. These estimates relied on vehicle-production forecasts, product option rates and mix. Management expected the new 250,000-square-foot Zeeland facility to be completed in 2016 at a project cost of approximately $30–$35 million, funded with cash; it is expected to add capacity for 5–7 million mirrors annually.
Management attributed growth to new vehicle launches, increased penetration of interior and exterior auto-dimming mirrors, and higher electronic-feature content. Full Display Mirror production was expected to begin in Q4 2015, with the first launch on the Cadillac CT6. Management also discussed SmartBeam and HomeLink opportunities. It cautioned that customer pricing pressure would continue to weigh on margins and said the 2018 U.S. rearview-camera requirement did not yet indicate an immediate material opportunity for Gentex’s rear-camera-display mirrors.
Key risks include vehicle-production and economic weakness, customer pricing and cost pressure, currency and interest-rate movements, product mix, customer or supplier disruptions and bankruptcies, competition, raw-material costs, and litigation or intellectual-property claims. The filing reported no material pending legal proceedings expected to materially adversely affect the company and no significant unrecorded off-balance-sheet arrangements. No material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Other notable items: Q2 effective tax rate increased to 32.5% from 27.4%, partly because Q2 2014 included approximately $5.5 million of amended-return R&D tax credits. Q2 other income also fell, mainly due to lower realized gains on equity-investment sales. The company adopted no revenue-recognition standard during the period; it was evaluating the then-upcoming customer-contract standard and possible adoption method.
Investor verification points
- Reconcile reported balance-sheet debt with the credit-facility principal balances and confirm the impact of the July 2015 swap becoming effective.
- Track whether revenue and margin guidance is achieved, particularly given customer price reductions, mix, currency and manufacturing-cost pressures.
- Assess whether new launches and electronic-feature adoption sustain mirror shipment growth and support the planned capacity expansion.
- Monitor capital spending, cash generation, share repurchases and dividends against the company’s liquidity and debt commitments.
- Check the timing and commercial contribution of Full Display Mirror and other advanced products, noting management’s caution about near-term rear-camera-display opportunity.