Gentex Corporation — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Gentex primarily develops and manufactures automotive mirrors and electronics; its smaller “Other” segment includes aerospace windows and fire-protection products.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Net sales | $429.6 million | $389.8 million | $1,259.0 million | $1,138.0 million |
| Gross profit | $173.8 million | $151.9 million | $499.3 million | $440.5 million |
| Gross margin | 40.5% | 39.0% | 39.7% | 38.7% |
| Operating income | $134.2 million | $116.3 million | $383.8 million | $332.1 million |
| Net income | $92.1 million | $78.3 million | $258.8 million | $230.1 million |
| Diluted EPS | $0.32 | $0.27 | $0.89 | $0.77 |
Q3 sales rose 10%, operating income 15%, and net income 18% year over year. For the first nine months, sales increased 10.6% and net income 12.5%. Automotive sales grew 11% in Q3, driven by a 9% increase in mirror shipments and favorable mix; “Other” sales were essentially flat. Purchasing savings and product mix improved gross margin, partly offsetting annual customer price reductions.
Cash flow and liquidity: Nine-month operating cash flow was $353.0 million, up from $283.2 million. Capital expenditures were $91.5 million, versus $62.3 million; operating cash flow less capital expenditures was approximately $261.5 million. Cash and cash equivalents were $534.5 million at September 30, 2016, with current assets of $1,108.8 million and current liabilities of $156.5 million. Working capital was $952.3 million. Cash plus short- and long-term investments totaled approximately $744.2 million.
Debt and shareholder returns: Long-term debt was $195.0 million, down $30.6 million from December 2015. The company had $75.7 million outstanding on its revolver, with $74.3 million available, and $127.5 million outstanding on its term loan. It repurchased 8.0 million shares for $122.7 million and paid $75.2 million in dividends during the first nine months. The quarterly dividend increased to $0.09 per share in Q2 2016.
Material changes and management commentary
- Auto-dimming mirror shipments increased 9% in Q3 and 11% for the first nine months. International shipments rose 14% in both periods; North American shipments rose 2% in Q3 and 7% year to date.
- Management attributed growth to new product launches, greater product penetration, and electronic content. Engineering and R&D spending increased to support staffing, testing, and new business development.
- Management reported ongoing customer pricing pressure, with annual reductions of approximately 2%–3%; purchasing savings, productivity, and volume growth are intended to offset it.
- A new 250,000-square-foot facility’s distribution portion was operational; manufacturing was expected to begin in early 2017. The company estimated the project would cost $55–$60 million and add capacity for 10–15 million mirrors annually, depending on product mix and facility use.
Outlook, risks, and contingencies
Updated 2016 guidance: revenue of $1.68–$1.71 billion; gross margin of 39.3%–39.7%; operating expenses of $152–$157 million; capital expenditures of $115–$130 million; depreciation and amortization of $90–$100 million; and an effective tax rate of 31.5%–32.5%. Gentex made no change to its previously announced 2017 revenue estimates.
Management cited forecasting uncertainties including vehicle production, supplier shortages, plant shutdowns, regional demand, customer inventory practices, OEM cost pressures, and potential customer or supplier work stoppages. Other risks include pricing pressure, competition, economic conditions, foreign exchange and interest-rate movements, investment-market volatility, regulatory changes, and litigation or intellectual-property claims. The filing reports no material change to previously disclosed risk factors, no material pending legal proceeding expected to adversely affect the company, and no significant unrecorded off-balance-sheet arrangements.
The company was in compliance with credit-agreement covenants. A $150 million interest-rate swap hedged floating-rate exposure; the swap liability was $3.3 million at quarter end. Management stated that available working capital, investments, debt financing, and internally generated cash flow were sufficient for anticipated needs for the foreseeable future.
Important facts for investors to verify
- Whether unit growth, product mix, and purchasing-cost savings continue to offset customer price reductions.
- Actual 2016 revenue, gross margin, operating expense, capital expenditure, and tax-rate results versus guidance.
- Facility manufacturing start-up timing, project spending, and the expected capacity contribution.
- Cash generation and liquidity after share repurchases, dividends, investment purchases, and scheduled debt repayments.
- Execution and customer adoption of newer products, including Full Display Mirror, SmartBeam, HomeLink, and the integrated toll module, as well as the competitive and regulatory risks described in the filing.