Gentex Corporation — Q3 2013 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2013, compared with the same 2012 periods. Gentex primarily develops and manufactures automotive mirrors and electronic features; its “Other” segment includes aerospace dimmable windows and fire-protection products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $288.6M | $268.2M | $845.1M | $839.2M |
| Gross profit | $106.0M | $90.1M | $302.0M | $283.7M |
| Operating income | $73.7M | $57.6M | $209.1M | $180.6M |
| Net income | $55.5M | $41.9M | $153.0M | $129.0M |
| Diluted EPS | $0.38 | $0.29 | $1.06 | $0.89 |
Q3 sales rose 8% and net income rose 33%; nine-month sales increased 0.7% and net income increased 19%. Gross margin was approximately 36.7% in Q3 and 35.7% year to date, versus 33.6% and 33.8%, respectively, in 2012. Operating margin was approximately 25.5% in Q3 and 24.7% year to date, versus 21.5% in both comparable 2012 periods.
Cash flow and liquidity: Nine-month operating cash flow was $223.7M, versus $176.4M. Investing cash outflow was $626.6M, primarily reflecting the HomeLink acquisition; capital expenditures were $38.0M versus $97.6M. Financing cash inflow was $240.0M. Cash and equivalents were $226.7M at September 30, down $163.0M from year-end 2012; working capital was $403.3M, and long-term investments were $114.3M.
Debt: Gentex reported $267.5M of long-term debt; total borrowings were $275M, including a $150M term loan and $125M drawn on a $150M revolving facility. The company reported $25M of remaining availability under the agreement and compliance with its covenants. The reported borrowing rate was 1.18%; the facilities mature in 2018.
Material developments and comparisons
- On September 27, Gentex completed its acquisition of Johnson Controls’ HomeLink business for approximately $700M. The preliminary allocation included $337.6M of goodwill and $343M of identifiable intangible assets. The valuation and purchase-price allocation remained preliminary; the business contributed no revenue or earnings to reported Q3 or year-to-date results because of the closing date.
- The acquisition was funded with approximately $423M of cash and debt financing. Gentex recorded $2.2M of acquisition-related costs in SG&A; approximately $0.95M of debt issuance costs was deferred.
- Automotive mirror unit shipments increased 13% in Q3 and 8% year to date. Q3 automotive sales increased 7%, while nine-month automotive sales were essentially flat, as higher shipments were offset by product mix and customer price reductions.
- Management attributed improved gross margin primarily to purchasing cost reductions and product mix, with additional benefit from manufacturing efficiencies. Q3 and nine-month other income also benefited from realized gains on equity-investment sales.
- The quarterly dividend declared was $0.14 per share, up from $0.13 a year earlier. No shares were repurchased during the first nine months of 2013.
Outlook, risks and contingencies
- For Q4 2013, Gentex estimated sales growth of 20%–25% versus Q4 2012 and gross margin of 38%–38.5%. It forecast Q4 R&D expense up 5%–10% and SG&A up 15%–20%, the latter primarily reflecting HomeLink amortization and added personnel.
- Full-year 2013 capital expenditures were estimated at $50M–$60M; depreciation and amortization was estimated at $60M–$64M. Management expected HomeLink integration to take 12–18 months and identified customer approvals, operational integration, supplier support, capacity, and customer retention as risks.
- Other cited risks include automotive production and economic volatility, customer pricing pressure, customer program delays or cancellations, competition and changing product preferences, supply disruptions, conflict-mineral sourcing requirements, and potential impairment of acquired goodwill or intangible assets if expected cash flows are not achieved.
- Management said existing facilities were adequate for current and near-term planned business. Ongoing facility projects were expected to bring total project costs to approximately $25M for a manufacturing expansion and approximately $11M for a chilled-water facility.
- The company reported no significant pending legal proceedings expected to materially affect its financial position or results, and no significant unrecorded off-balance-sheet arrangements. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and final valuation of the HomeLink acquisition, including integration costs, customer approvals, retention, synergies, amortization and any impairment indicators.
- Whether Q4 sales and gross-margin guidance was achieved, and how customer pricing and product mix affected subsequent margins.
- Cash generation, working-capital trends, debt repayment, revolving-credit availability and continued covenant compliance after the acquisition.
- Whether acquisition-related and other investment gains materially influenced earnings compared with recurring operating performance.
- Exposure to automotive production changes, customer program cancellations, competitive technologies and supply-chain or conflict-mineral constraints.