Gentex Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products accounted for about 98% of revenue. The filing is unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $460.3 million | $438.6 million | $1,380.7 million | $1,335.3 million |
| Gross profit | $173.0 million | $171.2 million | $518.4 million | $514.2 million |
| Operating income | $127.4 million | $129.1 million | $382.6 million | $389.4 million |
| Net income | $111.3 million | $90.2 million | $331.6 million | $276.3 million |
| Diluted EPS | $0.42 | $0.31 | $1.22 | $0.96 |
- Revenue rose 5% in Q3 and 3% year to date. Auto-dimming mirror shipments increased 6% in Q3 and 7% year to date; international shipments were the principal volume-growth driver.
- Gross margin was approximately 37.6% in Q3 versus 39.0% a year earlier, and approximately 37.5% year to date versus 38.5%. Operating margin was approximately 27.7% in Q3 versus 29.4%, and 27.7% year to date versus 29.2%.
- Net income growth outpaced revenue growth, mainly reflecting lower income tax expense. Effective tax rates were 14.7% in Q3 and 15.2% year to date, versus 31.0% and 29.8% in the prior-year periods.
- Operating cash flow was $398.2 million for nine months, up from $352.6 million. Capital expenditures were $68.8 million, compared with $86.1 million.
- Cash and cash equivalents were $194.0 million at September 30, down from $569.7 million at year-end 2017. Short- and long-term investments totaled $285.3 million. Working capital was $654.7 million, down from $940.9 million.
- The company repaid the remaining $78.0 million term-loan balance; no debt was outstanding at quarter-end. On October 15, 2018, it entered a new unsecured $150 million revolving credit agreement, with conditional capacity to request an additional $100 million. No revolver borrowings were outstanding at quarter-end.
- Financing cash outflows included $521.7 million of share repurchases and $87.7 million of dividends paid. The quarterly dividend declared was $0.11 per share.
Material changes and management commentary
- Q3 sales growth was supported by a 6% increase in auto-dimming mirror shipments to 10.2 million units, particularly international shipments. North American mirror shipments were essentially flat year over year in the quarter.
- Margin pressure came from annual customer price reductions, under-absorbed fixed overhead and newly enacted tariffs; purchasing-cost reductions partly offset those effects. Operating expenses increased as staffing and related costs rose.
- Tax expense benefited from the U.S. federal tax-rate reduction, R&D credits, equity-compensation tax benefits and the foreign-derived intangible income deduction. The company recorded a provisional $3.3 million tax expense in Q3 while continuing to refine its accounting for the Tax Cuts and Jobs Act.
- During the first nine months, Gentex repurchased 23.1 million shares for $521.7 million, including 5.5 million shares bought from its former CEO under a retirement agreement. 12.2 million shares remained authorized for repurchase under the public plan at September 30.
- Gentex reported new product launches across 36 vehicle models during the first three quarters of 2018. It was shipping Full Display Mirrors to four OEMs and continued development or launch work with additional customers. Three-camera camera-monitor systems, HomeLink, integrated tolling and driver-assistance features remain areas of development and commercial opportunity.
Outlook, risks and other items
- 2018 revenue guidance was $1.854–$1.872 billion; expected gross margin was 37.5%–38.0%, operating expenses $180–$185 million, capital expenditures $95–$105 million, depreciation and amortization $105–$110 million, and effective tax rate 15%–18%.
- Management maintained its 2019 revenue estimate of 5%–10% growth over its 2018 estimate. These forecasts depend on vehicle production, product mix, option rates and customer programs.
- Tariffs were expected to add $5.5–$6.0 million to Q4 2018 costs, including $2.5–$3.0 million from the latest U.S.-China measures.
- Key risks include customer pricing pressure, tariffs and trade restrictions, automotive production and shipment disruptions, economic and regional demand changes, customer or supplier financial distress, raw-material costs, competition, and evolving camera-based or autonomous-vehicle technologies. Gentex said there were no material changes to previously disclosed risk factors except as described in the filing.
- The company expected its $25–$30 million Zeeland distribution facility to be operational in Q4 2018. It reported no significant unrecorded off-balance-sheet arrangements and no legal matter it believed would materially affect its financial position or results. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether tariffs, customer price reductions and fixed-cost absorption continue to pressure margins, and whether cost savings offset them.
- Actual 2018 revenue, gross margin, tax rate and capital spending versus guidance; also whether the 2019 growth estimate is achieved.
- Cash and investment levels after substantial repurchases, dividends, debt repayment and facility spending, and the pace of future repurchases.
- Automotive production, mirror shipment trends, new-program launches and adoption of Full Display Mirror, HomeLink and other advanced products.
- Final tax accounting under the Tax Cuts and Jobs Act and any subsequent changes to provisional estimates.