Gentex Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same periods in 2021. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products accounted for most revenue.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $493.6 million | $399.6 million | $1,425.3 million | $1,311.3 million |
| Gross profit | $147.2 million | $140.9 million | $456.0 million | $475.8 million |
| Gross margin | 29.8% | 35.3% | 32.0% | 36.3% |
| Operating income | $86.8 million | $88.2 million | $275.9 million | $321.8 million |
| Net income | $72.7 million | $76.7 million | $232.6 million | $276.6 million |
| Diluted EPS | $0.31 | $0.32 | $0.99 | $1.15 |
Q3 sales increased 24%, while net income declined 5%. For the first nine months, sales rose 9%, but net income fell 16%. Management attributed margin and profit pressure chiefly to higher raw-material and labor costs, unfavorable product mix, and previously agreed annual customer price reductions. Q3 operating expenses increased 15% year over year; nine-month R&D rose 14% and SG&A rose 21%.
Cash flow and liquidity: Nine-month operating cash flow was $236.4 million, down from $299.4 million. Capital expenditures were $108.5 million, versus $44.4 million a year earlier. Cash and equivalents were $222.9 million at September 30, down from $262.3 million at year-end 2021. Working capital was $724.2 million. Current assets were $989.3 million and current liabilities $265.2 million. Total liabilities were $277.3 million. The company had no revolver borrowings against its $150 million facility, which expires October 2023, and reported covenant compliance.
Inventory increased to $418.3 million from $316.3 million at year-end, mainly in raw materials and finished goods. The company reported $16.1 million of short-term and $154.4 million of long-term investments. Nine-month financing cash outflows included $84.9 million of dividends paid and $83.8 million of share repurchases. The declared quarterly dividend was $0.12 per share.
Business changes and management commentary
- Q3 automotive mirror shipments rose 17% to 11.5 million units, with exterior mirror shipments up 23%. Automotive revenue rose to $480.9 million from $391.3 million.
- Other-segment revenue increased to $12.7 million from $8.3 million, mainly due to higher fire-protection sales; aerospace revenue declined. Nine-month fire-protection sales rose 59%.
- Management said customer order adjustments, supply constraints, and labor availability left shipments about 750,000 units below the beginning-of-quarter forecast. Order fluctuations and difficulty sourcing advanced electronics continued.
- The company began construction on a new 350,000-square-foot manufacturing facility, expected to be operational in Q4 2023, and two facility expansions. Stated project estimates were $80–$90 million, $40–$45 million, and $20–$30 million, respectively, funded with cash on hand.
- Gentex invested in GreenMarbles, including $20 million cash and $5 million in Gentex shares. Equity-method investments totaled $39.7 million at September 30.
Outlook, risks, and unusual items
- Updated 2022 guidance: revenue of $1.90–$1.95 billion; gross margin of 32%–33%; operating expenses of approximately $235–$240 million; annual tax rate of 14%–15%; capital expenditures of $140–$150 million; and depreciation and amortization of $100–$105 million.
- For 2023, management estimated revenue growth of approximately 15%–20% over its updated 2022 revenue estimate. The filing emphasized substantial forecasting uncertainty.
- Risks include volatile vehicle production and customer orders, electronics and supply-chain constraints, inflation, labor shortages, pricing pressure, tariffs, macroeconomic uncertainty, and potential changes in customer demand or technology. Management said negotiations with customers on inflation-related pricing could continue into 2023.
- The company is responding to an SEC Enforcement staff subpoena concerning records from approximately 2015–2019 and accounting determinations the staff believes may have affected reported EPS. Gentex maintains its historical filings were fairly presented, says it remains open to resolving the matter, and recorded an estimated liability it considers immaterial.
- Available-for-sale debt investments had $14.6 million of unrealized losses at September 30, versus $1.8 million at December 31, 2021; the company said no investments were considered impaired and it intended and was able to hold them until cost recovery.
Important facts for investors to verify
- Whether 2022 revenue, gross-margin, and capital-expenditure guidance was achieved, and how 2023 growth expectations changed.
- Whether customer pricing negotiations offset inflation and supply-chain costs, and whether margins recovered.
- Whether inventory growth converted to sales and cash, given the year-over-year decline in operating cash flow.
- Developments in the SEC inquiry, including any resolution or change to the recorded estimate.
- Actual spending, timing, and expected returns for the manufacturing facility and expansions.
- Investment valuation and recovery assumptions for debt securities with unrealized losses.