Gentex Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. The statements are unaudited. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products generated about 98% of revenue.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $468.6 million | $465.4 million | +1% |
| Gross profit / margin | $169.6 million / 36.2% | $172.6 million / 37.1% | Margin down about 0.9 percentage points |
| Operating income / margin | $121.6 million / 26.0% | $128.5 million / 27.6% | Income down 5% |
| Net income | $104.3 million | $111.2 million | Down 6% |
| Diluted EPS | $0.40 | $0.40 | Unchanged as reported |
| Operating cash flow | $133.8 million | $147.4 million | Down $13.6 million |
| Capital expenditures | $16.8 million | $26.2 million | Down $9.4 million |
Revenue growth was modest: automotive sales rose 0.2% to $455.8 million, while Other segment sales increased 22% to $12.8 million, led by aircraft windows and fire protection products. Automotive mirror unit shipments increased 1% to 10.7 million. Operating expenses increased 9% to $48.0 million, primarily due to staffing, benefits, and related support for development and growth. The effective tax rate rose to 16.5% from 15.6%; management attributed the increase mainly to lower discrete stock-compensation tax benefits. Cash dividends declared were $0.115 per share, versus $0.110.
Cash, liquidity, and capital
At March 31, 2019, cash and cash equivalents were $221.7 million; short- and long-term investments were $180.3 million and $126.5 million, respectively. Working capital was $701.9 million. Current assets were $886.4 million and current liabilities $184.5 million. The company had no borrowings outstanding under its $150 million unsecured revolving credit facility, which expires in October 2023, and reported compliance with its covenants. Total liabilities were $243.3 million. Operating cash flow was partly offset by $96.3 million of share repurchases, $28.5 million of dividends paid, and capital expenditures. Gentex repurchased 4.7 million shares at a weighted average price of $20.37; 29.1 million shares remained authorized for repurchase.
Material changes and management commentary
- Gross margin pressure reflected annual customer price reductions, tariffs enacted in the second half of 2018, and limited fixed-overhead leverage. Management estimated price reductions reduced margin by 100–150 basis points and tariffs and fixed-overhead leverage each by 50–100 basis points; purchasing savings and product mix each offset about 50–100 basis points.
- North American mirror shipments increased 10%, including a 50% rise in exterior mirrors, while international mirror shipments declined 3%. Management said overall unit growth outpaced worldwide light-vehicle production growth by about 8%, citing product launches and demand for advanced features.
- Management described continued customer pricing pressure and cited tariffs, uncertain vehicle production, regulatory changes, plant shutdowns, supplier shortages, OEM cost pressures, and customer or supplier financial distress as factors that could disrupt results.
- Gentex reported no material pending legal proceedings expected to adversely affect its financial position or results. It identified no circumstances requiring interim goodwill impairment testing in the quarter. Adoption of the new lease standard had no material balance-sheet or income-statement impact.
Guidance and outlook
Management maintained its calendar 2019 outlook: revenue of $1.83–$1.93 billion; gross margin of 36%–37%; operating expenses of approximately $195–$200 million; capital expenditures of approximately $90–$100 million; depreciation and amortization of approximately $105–$115 million; and an effective tax rate of 16%–18%. The company expects 2020 revenue to be 3%–8% above its 2019 revenue estimate. These forecasts assume light-vehicle production estimates and anticipated product mix; management highlighted production levels, tariffs, regulation, customer and supplier disruptions, and regional sales as uncertainties. The company intends to continue share repurchases, subject to market conditions, share price, available cash, and other factors.
Business developments include production Full Display Mirror shipments to five OEMs and a ninth OEM customer secured in Q1. The first Integrated Toll Module production deliveries began in Q4 2018; two further OEM launches were targeted for 2020 or 2021. Gentex also reported that its latest dimmable aircraft windows would be offered as optional content on Boeing’s 777X. The filing notes potential competitive and regulatory risks as camera-monitor systems and driver-assistance technologies evolve.
Investor facts to verify
- Whether Q1 margin pressure from customer pricing, tariffs, and fixed costs persists, and whether cost savings and product mix offset it.
- Progress toward 2019 revenue and gross-margin guidance given forecast declines in light-vehicle production in key regions.
- Cash conversion and working-capital trends, particularly the increase in accounts receivable and lower operating cash flow.
- Execution, adoption, and profitability of Full Display Mirror, HomeLink, Integrated Toll Module, and other advanced-feature programs.
- Capital allocation: ongoing repurchases and dividends, and the effect on cash and share count. The filing also reports a deferred-compensation plan entered into on May 1, 2019, after quarter-end.