Gentex Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. Gentex manufactures automotive electro-optic products, including auto-dimming mirrors and rear-camera display mirrors, as well as fire-protection products and dimmable aircraft windows.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $269.5 million | $206.8 million | $763.4 million | $594.2 million |
| Gross profit | $95.3 million | $73.8 million | $271.2 million | $216.2 million |
| Gross margin | 35.4% | 35.7% | 35.5% | 36.4% |
| Operating income | $62.2 million | $47.0 million | $175.6 million | $140.4 million |
| Net income | $43.4 million | $34.3 million | $124.2 million | $100.8 million |
| Diluted EPS | $0.30 | $0.24 | $0.86 | $0.72 |
- Q3 sales grew 30% year over year; net income rose about 27%. Nine-month sales grew 28%, and net income rose about 23%.
- Automotive products generated $264.0 million of Q3 sales and $748.4 million for the nine-month period. Q3 auto-dimming mirror shipments rose 31% year over year, to approximately 5.56 million units; nine-month shipments rose 29%, to approximately 16.07 million.
- Cost of goods sold increased to 64.6% of sales in Q3 from 64.3%, and to 64.5% for the nine months from 63.6%. Annual customer price reductions pressured margins; fixed-cost leverage and purchasing savings provided partial offsets.
- Research and development expense increased 26% in Q3 and 30% for the nine months. Selling, general and administrative expense increased 20% in both periods, reflecting hiring to support product development and overseas growth.
Cash, liquidity and capital
- Cash and cash equivalents were $397.1 million at September 30, 2011, up from $348.3 million at year-end 2010. Short-term investments were $59.1 million and long-term investments were $106.9 million.
- Current assets were $758.2 million versus current liabilities of $116.7 million. The balance sheet reports no debt; the company also had an unsecured $5 million bank line of credit.
- Nine-month operating cash flow was $125.4 million, compared with $92.1 million in 2010. Capital expenditures were $85.0 million, versus $29.1 million. Cash dividends paid were $50.0 million.
- Management said working capital and long-term investments, totaling approximately $748.4 million, together with internally generated cash flow and the credit line, should cover anticipated needs for the next year and foreseeable future.
- Inventory rose to $151.1 million from $100.7 million at year-end, partly because of higher activity and longer lead times for certain electronic components. Receivables rose to $130.0 million from $95.6 million, primarily reflecting higher sales.
- 2011 capital spending was estimated at $100–$115 million, including production equipment and facility expansion; depreciation and amortization was estimated at $41–$44 million. Expansion projects were expected to be funded from cash on hand.
Outlook, developments and risks
- Management forecast Q4 2011 revenue growth of approximately 20–25% year over year. It expected gross margin to decline slightly sequentially, including an estimated 0.25–0.5 percentage-point Q4 margin impact from supply-chain disruption costs.
- Q4 R&D expense was expected to rise approximately 20–25% year over year; SG&A was expected to rise approximately 15–20%.
- The March 2011 Japan earthquake and tsunami reduced nine-month sales by an estimated $20 million. Component constraints had eased sequentially, but flooding in Thailand could disrupt supply. Management said it believed it had secured adequate parts for the remainder of 2011, while warning the situation remained uncertain.
- Automotive customer price pressure, volatile vehicle production and forecasts, supplier shortages, customer or supplier financial distress, and possible bankruptcies could affect shipments, margins and receivable collection. Management estimated current plant capacity at 16–18 million interior mirrors and 6 million exterior mirrors annually and announced facility expansions in Michigan.
- Rear Camera Display mirrors were shipping on 63 vehicle models with nine automakers. The proposed U.S. backup-camera rule was then expected to be finalized by December 30, 2011, with full implementation proposed for September 2014. Gentex noted uncertainty about the final rule and competition from other in-vehicle display locations.
- Other developments included SmartBeam offerings on additional European models and a mirror interface developed with Hyundai for Blue Link services. Boeing delivered its first 787 on September 27, 2011; Gentex supplies dimmable aircraft windows for the program.
- Investment market risk is relevant: available-for-sale investments had $6.5 million of unrealized losses at quarter-end, all reported as less than one year in duration. Management said no equity investment losses were considered other-than-temporary.
Most important facts to verify
- Whether Q4 revenue and expense forecasts were achieved, and how margins developed as supply-chain costs and customer price reductions changed.
- Whether Thailand-related or other component disruptions affected production, shipments, or customer demand after the filing date.
- Actual capital spending, completion and funding of the announced expansions, and resulting production capacity.
- Final backup-camera regulation, automaker adoption of rear-camera displays, and Gentex’s resulting program wins and market share.
- Subsequent inventory and receivables trends, customer credit conditions, and the valuation and impairment status of equity investments.