Gentex Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products represented approximately 97%–98% of revenue. The filing is unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $474.6 million | $477.8 million | $1,158.3 million | $1,415.1 million |
| Gross profit | $188.2 million | $180.3 million | $388.8 million | $526.5 million |
| Gross margin | 39.7% | 37.7% | 33.6% | 37.2% |
| Operating income | $138.9 million | $128.1 million | $237.1 million | $377.6 million |
| Net income | $117.1 million | $111.9 million | $204.2 million | $325.1 million |
| Diluted EPS | $0.48 | $0.44 | $0.82 | $1.26 |
| Operating cash flow | Not separately presented | Not separately presented | $329.0 million | $383.9 million |
Q3 sales were down 1% year over year, while net income rose 5% and diluted EPS rose 9%. Nine-month sales fell 18%, net income fell 37%, and diluted EPS declined to $0.82. The nine-month effective tax rate was 17.1%, versus 15.9% in 2019; Q3 rates were 18.1% and 15.0%, respectively.
At September 30, cash and cash equivalents were $400.5 million, short-term investments $52.6 million, and long-term investments $159.0 million. Working capital was $738.8 million. The company had $25 million outstanding on its $150 million revolving facility, classified as current debt, and said it expected to repay the balance in Q4 2020. Total liabilities were $296.9 million. Nine-month capital expenditures were $37.0 million, compared with $58.3 million a year earlier.
Material changes and management commentary
- Q3 automotive revenue was essentially flat at $464.7 million. Gentex said Full Display Mirror growth helped it outperform declines in vehicle production in its principal markets. Auto-dimming mirror shipments fell 3% to 10.6 million units.
- Nine-month automotive revenue declined 18%, primarily reflecting a 17% reduction in mirror shipments amid COVID-19-related shutdowns and weaker demand. Other-segment revenue fell 17% for the period; Q3 aircraft-window revenue declined 52% year over year.
- Q3 gross margin improved to 39.7% from 37.7%. Management attributed the improvement to stronger orders, structural cost reductions announced in Q2, purchasing savings, and improved tariff costs, partly offset by annual customer price reductions. Nine-month margin remained lower because of under-absorbed fixed costs during Q2 shutdowns and customer price reductions.
- Management reported $35 million in annualized structural cost reductions, with lower wages and discretionary spending also reducing Q3 operating expenses. Supply-chain teams were managing supplier shutdowns, component run-outs, and rebounding demand.
- Gentex repurchased 8.2 million shares for $210.5 million in the first nine months and declared dividends of $0.36 per share. About 11.9 million shares remained authorized for repurchase at quarter-end; future repurchases were subject to market and business conditions.
Outlook, risks, and unusual items
- For the second half of 2020, the company estimated revenue of $940–$960 million, gross margin of 39%–40%, operating expenses of $95–$100 million, capital expenditures of $25–$30 million, and depreciation and amortization of $50–$55 million. It estimated a second-half effective tax rate of 16%–17%.
- Gentex forecast 2021 revenue approximately 15%–20% above estimated 2020 revenue. Its cited IHS Markit forecast projected 2020 light-vehicle production in its primary markets down 16% year over year and 2021 production up 12%. Management emphasized substantial uncertainty from the pandemic and other market factors.
- Key risks include further COVID-19 effects on demand, operations, and suppliers; volatile vehicle production; component shortages and shutdowns; customer pricing pressure; tariffs and regulation; competition, including camera systems and autonomous-driving trends; and customer or supplier financial distress. Management said COVID-19 had materially affected results and its full financial impact remained unknown.
- Acquisitions of Vaporsens and Air-Craftglass were completed in 2020. Purchase accounting remained preliminary; Air-Craftglass consideration included revenue-based contingent consideration. Neither acquisition contributed revenue through September 30. Acquisition-related costs of approximately $0.6 million had been expensed.
- The company reported no material pending legal proceedings believed likely to adversely affect its financial position or results, and no significant off-balance-sheet arrangements. It was in compliance with credit-facility covenants. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether vehicle production and customer demand recover in line with the forecasts underlying 2020 and 2021 guidance.
- Whether Q3 margin improvement and structural cost savings are sustainable despite customer price reductions and changes in product mix.
- Whether supply constraints, shutdowns, or renewed pandemic impacts disrupt production, shipments, or liquidity.
- Repayment of the $25 million revolver balance and the timing and scale of any remaining 2020 share repurchases.
- Final purchase-price accounting and contingent consideration for the Vaporsens and Air-Craftglass acquisitions.