Gentex Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 2, 2012. Gentex manufactures automotive electro-optic products, including auto-dimming mirrors, and also sells fire-protection products and dimmable aircraft windows. All amounts below are U.S. dollars.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $280.3 million | $243.0 million | $571.0 million | $493.9 million |
| Gross profit | $92.8 million | $85.6 million | $193.6 million | $175.9 million |
| Gross margin | 33.1% | 35.2% | 33.9% | 35.6% |
| Operating income | $57.5 million | $53.2 million | $123.0 million | $113.3 million |
| Net income | $40.8 million | $38.5 million | $87.1 million | $80.8 million |
| Diluted EPS | $0.28 | $0.27 | $0.60 | $0.56 |
- Q2 sales rose 15% year over year; six-month sales rose 16%. Automotive products accounted for $274.8 million of Q2 revenue and $560.5 million for the six months.
- Operating cash flow was $101.5 million for the first half, versus $104.6 million a year earlier. Capital expenditures were $69.4 million versus $49.0 million, leaving approximately $32.1 million of operating cash flow after capital spending, compared with $55.6 million.
- At June 30, cash and cash equivalents were $375.7 million, short-term investments $45.9 million, and long-term investments $137.6 million. Current assets were $776.7 million and current liabilities $106.0 million. The filing reports no debt; it notes an unsecured $5 million bank line of credit.
- Cash dividends declared were $0.13 per share for Q2 and $0.26 per share for the first half. The quarterly rate increased by $0.01 per share in Q1 2012.
Changes and management discussion
- Automotive mirror sales increased 15% in Q2, primarily as auto-dimming mirror shipments rose 19%, from approximately 5.09 million to 6.04 million units. Management cited higher vehicle production in North America and Japan/Korea and greater mirror penetration. First-half mirror shipments increased 17%.
- Other revenue increased 13% in Q2, with higher aircraft-window sales—particularly for Boeing 787 programs—partly offset by a 7% decline in fire-protection sales. The commercial-construction market remained weak.
- Gross margin declined: cost of goods sold rose to 66.9% of sales in Q2 from 64.8%, and to 66.1% for the first half from 64.4%. Management attributed the pressure to annual automotive customer price reductions and product mix, partly offset by purchasing savings. Q2 R&D expense rose 13%; first-half R&D rose 17%, mainly to support product development and program awards.
- Cash and cash equivalents increased $17.7 million from year-end. Operating cash flow was lower year over year, primarily due to working-capital changes. Higher capital spending reflected building improvements and production equipment; approximately $45 million of first-half spending was building-related.
- Management reported working capital and long-term investments totaling approximately $808.3 million and said these resources, operating cash flow, and the credit line were sufficient for anticipated needs. No share repurchases occurred in the first half; 1,971,829 shares remained authorized under the repurchase plan.
Outlook, risks and notable items
- For Q3 2012, management estimated revenue would be flat to up 5% year over year, gross margin would improve approximately 50 basis points from Q2, R&D expense would rise about 10%, and SG&A expense would rise about 5%, assuming stable foreign exchange rates.
- Management expected 2012 RCD mirror shipments to be approximately flat year over year and revised SmartBeam shipment growth to approximately 20%–25%, citing lower take rates and packaging changes at some European customers and weaker European vehicle production.
- Four automotive customers have chosen center-console radio displays as their primary rear-camera display location instead of mirror displays. Gentex expected two changes to materially reduce RCD mirror shipments in 2013 and the other two beginning in 2014. The anticipated U.S. rear-camera rule remained pending; management cited an expected final rule by December 31, 2012.
- On June 25, 2012, American Vehicular Sciences filed four patent-infringement complaints naming Gentex and, in two complaints, a customer. Gentex was served July 27 and was evaluating the allegations; the potential business impact was uncertain.
- Automotive customer pricing pressure, vehicle-production volatility, customer order changes, supply-chain disruptions, customer or supplier financial distress, foreign-exchange and investment-market risks, and competition in driver-assistance products could affect results. Thailand-related supply constraints had improved and were reported resolved as of June 30, absent another natural disaster.
- Gentex completed a 60,000-square-foot chemistry-lab expansion (approximately $11.5 million) and a 32,000-square-foot exterior-mirror expansion (approximately $4 million). Two additional Michigan facility expansions were expected to finish by late 2012, at estimated costs of $17 million and $25 million, funded from existing cash or equivalents. A VW/Audi agreement made Gentex the exclusive supplier of sourced interior and exterior auto-dimming mirrors through December 31, 2018.
- Management stated there were no material changes in previously disclosed risk factors, no significant off-balance-sheet arrangements, and no material change in internal control over financial reporting. Newly adopted accounting standards had no material financial effect.
Important facts for investors to verify
- Whether automotive unit growth can offset customer price reductions and sustain or recover gross margins.
- The timing and shipment impact of the four customers’ RCD display-location changes and the final U.S. rear-camera rule.
- Whether the Q3 revenue, margin, expense, and 2012 SmartBeam shipment estimates are achieved.
- The status and potential exposure from the four patent complaints, and whether planned facility spending stays within estimates.
- Changes in automotive production, customer and supplier financial condition, working capital, and Gentex’s investment portfolio and related market risks.