Gentex Corporation — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2012. Gentex makes automotive products, principally auto-dimming mirrors, as well as fire-protection products and dimmable aircraft windows. Automotive products accounted for about 97% of nine-month sales.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $268.2M | $269.5M | $839.2M | $763.4M |
| Gross profit | $90.1M | $95.3M | $283.7M | $271.2M |
| Income from operations | $57.6M | $62.2M | $180.6M | $175.6M |
| Net income | $41.9M | $43.4M | $129.0M | $124.2M |
| Diluted EPS | $0.29 | $0.30 | $0.89 | $0.86 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $176.4M | $125.4M |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $97.6M | $85.0M |
- Q3 gross margin was approximately 33.6% versus 35.4% a year earlier; operating margin was 21.5% versus 23.1%, and net margin was 15.6% versus 16.1%.
- Nine-month gross margin was approximately 33.8% versus 35.5%; operating margin was 21.5% versus 23.0%, and net margin was 15.4% versus 16.3%.
- Cash and cash equivalents were $381.1M at September 30, 2012, and short- and long-term investments totaled about $166.6M. Total assets were $1.255B; current liabilities were $104.3M. The balance sheet reports no debt. Management cited $780.6M of working capital and long-term investments and a $5M unsecured credit line as sufficient for anticipated needs.
Material changes and drivers
- Q3 sales were down about 0.5% year over year; nine-month sales rose about 9.9%. Nine-month automotive sales increased 10%, supported by a 13% rise in auto-dimming mirror shipments. North American mirror shipments rose 24% for the nine-month period.
- Q3 net income declined about 3.5%, mainly because of lower gross profit. For the first nine months, net income increased about 3.9%, reflecting higher sales and gross profit.
- Automotive customer price reductions and product mix increased cost of goods sold as a percentage of sales; purchasing cost reductions partly offset the pressure. Nine-month R&D expense rose 11% as the company added resources for development and program awards.
- Operating cash flow improved by about $51.0M year over year, primarily due to working-capital changes. Capital spending increased, including approximately $64M for building and improvement costs. Cash rose $23.1M from year-end, while short-term investments fell $39.3M, primarily due to maturities.
- Gentex repurchased 1.97M shares for $33.7M during the first nine months. It declared dividends of $0.13 per share in each quarter; the nine-month declared amount was $0.39 per share.
Outlook, risks and unusual items
- Management estimated Q4 2012 revenue would be approximately flat year over year, gross margin slightly lower than Q3, and R&D and SG&A expense approximately flat against Q4 2011, assuming stable foreign exchange rates.
- For calendar 2012, management expected RCD mirror shipments approximately flat year over year and SmartBeam and driver-assist shipments up 10–15%. The latter forecast was revised downward due primarily to lower SmartBeam take rates at certain European automakers.
- Four customers selected center-console displays as the primary rear-camera display location. Management expects this to reduce RCD mirror shipments for two customers beginning in 2013 and two in 2014. The timing and final requirements of the U.S. rear-camera rule remained uncertain.
- Automotive pricing pressure, volatile vehicle production and customer orders, possible customer or supplier financial distress, supply disruptions, foreign economic weakness, competition, and equity-market fluctuations are identified risks. Gentex said the Thailand-related supply constraints had improved and related costs were resolved, absent another natural disaster.
- AVS filed four patent-infringement complaints concerning SmartBeam and monitoring-system products. Gentex denied infringement and asserted defenses; it said the potential business impact was uncertain. Separately, acquired intellectual-property rights and related royalties are expected to reduce gross margin by about 35 basis points annually in the near term.
- Facility expansions were largely completed or underway, with remaining projects expected to be funded from existing cash. A VW/Audi agreement makes Gentex the exclusive supplier of sourced interior and exterior auto-dimming mirrors through December 31, 2018.
Important facts for investors to verify
- Whether auto-dimming mirror shipment growth can offset pricing and mix-related margin pressure.
- Actual Q4 results versus management’s flat-revenue and slightly lower-margin outlook.
- Customer decisions on rear-camera display location and the eventual U.S. regulatory timetable.
- Progress and financial effects of facility expansion, intellectual-property royalties, and the AVS litigation.
- Whether working-capital conversion, capital spending, and cash returns remain consistent with management’s liquidity assessment.