Gentex Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products generated about 98% of revenue. The filing is unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $438.6 million | $429.6 million | $1,335.3 million | $1,259.0 million |
| Gross profit | $171.2 million | $173.8 million | $514.2 million | $499.3 million |
| Gross margin | 39.0% | 40.5% | 38.5% | 39.7% |
| Operating income | $129.1 million | $134.2 million | $389.4 million | $383.8 million |
| Net income | $90.2 million | $92.1 million | $276.3 million | $258.8 million |
| Diluted EPS | $0.31 | $0.32 | $0.96 | $0.89 |
- Cash flow: Nine-month operating cash flow was $352.6 million, versus $356.4 million. Capital expenditures were $86.1 million, compared with $91.5 million.
- Liquidity: September 30 cash and cash equivalents were $562.0 million; short-term investments were $178.7 million and long-term investments $51.7 million. Working capital was $938.9 million, down from $1,005.1 million at year-end 2016, mainly because debt was reclassified as current.
- Debt: $106.9 million remained outstanding on the term loan; no revolver balance was outstanding. Debt was due September 27, 2018, and classified as current. Gentex reported compliance with credit covenants.
- Capital returns: Nine-month dividends paid were $80.4 million and share repurchases were $129.8 million. The quarterly dividend declared was $0.10 per share, up from $0.09.
Changes versus prior year
- Q3 sales grew 2%, while net income declined 2%. Automotive mirror units rose 5% overall: international shipments increased 12%, offset partly by a 7% decline in North America.
- For the first nine months, sales grew 6% and net income grew 6.8%. Auto-dimming mirror units increased 8%, led by 13% international growth; North American units declined 2%.
- Gross margin weakened in both periods. Management attributed the decline to customer price reductions and reduced fixed-cost leverage, partly offset by purchasing cost savings. Operating expenses increased 6% in Q3 and 8% for the nine months, primarily due to staffing and, for SG&A, travel.
- The nine-month effective tax rate fell to 29.8% from 32.2%, reflecting $6.3 million of favorable discrete tax items: $3.7 million from a tax-method change and $2.6 million from adoption of share-based-payment accounting guidance. These items boosted reported earnings; the filing says the EPS effect of the new guidance was less than $0.01 for each 2017 period.
Outlook, commentary and risks
- Management forecast 2017 revenue of $1.78–$1.80 billion and Q4 revenue growth of 5%–10% year over year. It maintained its 2018 revenue growth estimate of 6%–10% above its 2017 estimate.
- 2017 gross margin guidance remained 38.5%–39.0%; operating expenses were expected to be $165–$170 million. Capital expenditure guidance was increased to approximately $110–$120 million. Depreciation and amortization was estimated at $95–$100 million; the tax-rate outlook was 31%–32%, excluding discrete items.
- Management cited new product launches, increased international penetration and electronic content as growth drivers. Production Full Display Mirrors were shipping to three of five initial OEM customers. The company also described opportunities in HomeLink, camera-monitoring systems, integrated tolling and biometric features; some programs remain subject to customer, regulatory and launch timing.
- Risks include automotive pricing pressure, vehicle production and mix changes, customer or supplier disruptions, input-cost increases, competition (including cameras replacing mirrors), regulatory developments, foreign-market demand, and litigation or intellectual-property claims. Management reported no material pending legal proceeding expected to adversely affect results and no significant unrecorded off-balance-sheet arrangements.
- Revenue-recognition guidance was scheduled for adoption in Q1 2018; Gentex expected point-in-time recognition for most contracts but was still assessing the impact. It did not anticipate a material financial-statement impact from the lease standard scheduled for 2019.
Key facts for investors to verify
- Whether Q4 sales and full-year revenue meet management’s stated guidance, and how vehicle production, shipments and product mix compare with assumptions.
- Whether customer price reductions continue to outpace purchasing savings and productivity improvements, and whether gross margin stays within the 2017 outlook.
- Progress on debt repayment before the September 2018 maturity, alongside planned capital spending, dividends and share repurchases.
- How much of earnings growth reflects operating performance versus the $6.3 million in favorable nine-month discrete tax items.
- Commercial adoption, customer launches and regulatory progress for newer products, particularly Full Display Mirror and camera-monitoring systems.