Gentex Corporation — Q2 2011 Form 10-Q
Business context and period: The unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Gentex primarily manufactures automatic-dimming automotive mirrors; other products include fire-protection systems and dimmable aircraft windows.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $243.0 million | $201.6 million | $493.9 million | $387.3 million |
| Gross profit | $85.6 million | $73.9 million | $175.9 million | $142.5 million |
| Operating income | $53.2 million | $48.8 million | $113.3 million | $93.4 million |
| Net income | $38.5 million | $34.1 million | $80.8 million | $66.5 million |
| Diluted EPS | $0.27 | $0.24 | $0.56 | $0.47 |
- Year-over-year sales grew 21% in Q2 and 28% for the first half; net income rose approximately 13% and 21%, respectively.
- Gross margin was approximately 35.2% in Q2 (36.7% prior year) and 35.6% for the first half (36.8% prior year). Operating margin was approximately 21.9% and 22.9%, respectively, versus 24.2% and 24.1% a year earlier.
- Automotive products generated $238.2 million of Q2 sales and $484.5 million for the first half. Auto-dimming mirror shipments increased 22% in Q2 and 28% year to date. “Other” sales declined 7% in Q2 and rose 1% for the first half.
- First-half operating cash flow was $104.6 million, versus $67.1 million. Capital expenditures were $49.0 million, versus $19.1 million. Cash and equivalents increased to $444.6 million from $348.3 million at year-end.
- At June 30, cash, short-term investments and long-term investments totaled approximately $611.4 million. Working capital was approximately $621.8 million. No debt balance is shown; the company reported an unsecured $5 million bank line of credit.
- Cash dividends declared were $0.12 per share in Q2 and $0.24 per share for the first half, compared with $0.11 and $0.22, respectively, in 2010.
Changes, outlook and risks
- Growth reflected higher vehicle production and increased penetration of auto-dimming mirrors. Japan earthquake and tsunami-related customer shutdowns and parts shortages reduced sales by approximately $17 million in Q2 and $20 million in the first half.
- Margins were pressured by annual customer price reductions and higher costs for constrained automotive-grade electronic components. Q2 cost of goods sold rose to 64.8% of sales from 63.3%; management attributed the increase approximately equally to pricing and supply-chain costs.
- R&D expense increased 33% in Q2 and 32% for the first half, principally to support product development and program awards. SG&A rose 23% and 20%, respectively, partly reflecting overseas costs and foreign exchange.
- Other income increased, primarily due to realized gains on equity investments and foreign-currency effects in Q2; first-half growth was primarily attributed to euro-account currency movements. The filing reports no equity investment losses considered other-than-temporary at June 30.
- Management forecast Q3 2011 revenue growth of approximately 25–30% year over year, slight sequential gross-margin improvement, R&D expense growth of 25–30% and SG&A growth of 15–20%. It did not provide revenue estimates beyond Q3. 2011 capital spending was estimated at $100–$115 million; depreciation and amortization at $41–$44 million.
- Management estimated 2011 SmartBeam shipments would rise 60–70% and Rear Camera Display (RCD) Mirror shipments approximately 40%. Potential U.S. backup-camera requirements could support RCD demand, but the final rule was pending and competing in-vehicle display locations pose uncertainty.
- Key risks include automotive cyclicality and production forecasts, customer pricing pressure, component shortages and supply disruption, customer financial distress or bankruptcy, currency and equity-market movements, and delays to Boeing 787 deliveries that have weighed on dimmable-window sales. Management said the operating environment remained difficult to forecast.
Investor verification priorities
- Track whether Q3 sales guidance and the expected sequential margin improvement materialized, including actual supply-chain costs and customer price reductions.
- Verify automotive production, mirror shipment and customer penetration trends, and assess how much growth depends on the automotive segment.
- Monitor Japan-related supply impacts, customer concentration and financial health, and any resulting receivable or shipment disruptions.
- Check capital spending against the $100–$115 million estimate and assess returns from added manufacturing capacity.
- Follow the final U.S. backup-camera rule, RCD adoption and competition, as well as Boeing 787 production timing and aircraft-window demand.
- Review the investment portfolio’s equity exposure, realized gains and foreign-exchange effects, which contributed to other income.