Gentex Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Gentex designs and manufactures automotive mirrors and electronics, including HomeLink and Full Display Mirror products; it also sells fire-protection products and dimmable windows. Automotive products represent approximately 97%–98% of revenue. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $453.8 million | $468.6 million; down 3% |
| Gross profit / margin | $156.6 million / 34.5% | $169.6 million / 36.2% |
| Operating income / margin | $105.0 million / 23.1% | $121.6 million / 26.0% |
| Net income / diluted EPS | $89.5 million / $0.36 | $104.3 million / $0.40 |
| Operating cash flow | $151.3 million | $133.8 million |
| Capital expenditures | $15.6 million | $16.8 million |
| Cash and cash equivalents | $278.5 million at March 31 | $296.3 million at December 31, 2019 |
| Short- and long-term investments | $131.1 million and $177.8 million at March 31 | $140.4 million and $139.9 million at December 31, 2019 |
| Debt | $75.0 million drawn on revolving credit facility; classified as current | No balance at December 31, 2019 |
| Working capital | $646.8 million at March 31 | $778.5 million at December 31, 2019 |
| Dividend declared per share | $0.120 | $0.115 |
Gross margin declined about 1.7 percentage points year over year. The effective tax rate was 16.6%, versus 16.5% a year earlier. Cash declined by $17.8 million during the quarter, principally reflecting share repurchases, dividends and capital expenditures, partly offset by operating cash flow and the credit-facility draw. The company reported $178.8 million of share repurchases, buying 7.0 million shares at an average $25.48 per share. It had 13.0 million shares remaining under its repurchase authorization at quarter-end.
Material changes and operating drivers
- Revenue fell $14.8 million year over year. Automotive sales decreased 3%, with automotive mirror unit shipments down 3%; HomeLink module revenue decreased to $38.8 million from $46.8 million. Other-segment revenue increased to $13.9 million from $12.8 million.
- Management estimated COVID-19 reduced Q1 sales by approximately $40 million. Global light-vehicle production fell 24% year over year in the quarter, while Gentex sales declined 3%; management attributed outperformance in part to Full Display Mirror and growth in exterior electrochromic mirrors.
- Gross-margin pressure reflected annual customer price reductions and reduced fixed-cost absorption associated with COVID-related shutdowns and lower demand. Management estimated these effects at negative 150–200 and 50–100 basis points, respectively; purchasing-cost reductions and product-mix improvement each contributed positive 50–100 basis points.
- R&D expense rose 5% to $29.6 million, primarily due to staffing for development and launches. SG&A rose 10% to $21.9 million, citing staffing and benefits, COVID response resources, acquisition-related professional fees and tax planning.
Outlook, risks and unusual items
- Updated 2020 guidance: revenue of $1.58–$1.67 billion; gross margin of 34%–35%; operating expenses of approximately $195–$205 million; capital expenditures of approximately $60–$70 million; depreciation and amortization of approximately $102–$107 million; and an effective tax rate of 16%–17%.
- Management’s cited IHS Markit mid-April forecast anticipated a 20% decline in 2020 light-vehicle production across Gentex’s primary regions. Q2 production was forecast down 42% year over year. Customer shutdowns, uncertain restart timing, and the pandemic make sales and cost forecasts highly uncertain. Gentex withdrew 2021 revenue guidance, citing limited reliable production data, while stating it remained confident in its ability to outperform the market.
- Management described liquidity as good and said existing resources and planned cash generation were sufficient for anticipated needs. Gentex said it intended and was able to repay the $75 million revolver balance within 12 months; the facility expires in October 2023, and the company was in covenant compliance. It was reducing costs and spending, including hiring, headcount, pay programs, travel, discretionary spending and capital projects.
- Key risks include prolonged COVID-19 disruption to customers, suppliers, operations and vehicle demand; lower sales of higher-margin advanced-feature products; automotive customer pricing pressure; production changes and supply shortages; tariffs and regulatory changes; and competition or technology shifts, including cameras replacing mirrors. The filing says ongoing legal matters were not believed to be material to the company’s financial position or future results.
- On April 8, 2020, Gentex acquired Vaporsens for $10.5 million, in addition to a prior $3.0 million equity investment. Consideration included $7.1 million cash and $3.4 million in restricted Gentex shares. Purchase accounting was incomplete at filing; further details were expected in the Q2 2020 report.
Important facts for investors to verify
- Whether customer operations and vehicle production resumed as assumed, and how actual 2020 sales compared with the $1.58–$1.67 billion guidance range.
- Whether product mix, pricing and factory utilization kept gross margin within the 34%–35% outlook, particularly as advanced-feature demand and shutdowns changed.
- Cash generation, investment liquidity and repayment of the $75 million revolver borrowing, alongside continued dividends and share repurchases.
- The completed Vaporsens purchase accounting and whether the acquisition contributes to the expected product expansion.
- Developments in camera-monitoring-system regulation, customer adoption and competition that could affect Gentex’s mirror and electronics businesses.