Gentex Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; comparisons are with Q1 2017 unless otherwise noted. Gentex’s business is predominantly automotive mirrors and electronics.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $465.4 million | $453.5 million | +3% |
| Gross profit / margin | $172.6 million / 37.1% | $175.8 million / 38.8% | Margin down 1.7 percentage points |
| Operating income / margin | $128.5 million / 27.6% | $134.4 million / 29.6% | Income down 4% |
| Net income | $111.2 million | $97.6 million | +14% |
| Diluted EPS | $0.40 | $0.33 | +21% |
| Operating cash flow | $147.4 million | $131.2 million | +$16.3 million |
| Capital expenditures | $26.2 million | $27.1 million | Down $0.9 million |
Revenue growth reflected a 7% increase in auto-dimming mirror shipments to 10.6 million units. Automotive sales rose 2% to $455.0 million; other-segment sales increased 33% to $10.5 million. The lower gross margin and operating income reflected overhead under-absorption amid weaker-than-forecast industry growth, annual customer price reductions not fully offset by cost savings, and constrained Full Display Mirror shipments. Management estimated the supplier issue reduced quarterly revenue by about 2%; it said the issue was remediated after quarter-end and normal shipments resumed.
Financial position and capital allocation
- At March 31, cash and cash equivalents were $524.3 million, short-term investments $152.2 million, and long-term investments $3.2 million. Cash plus short-term investments totaled about $676.5 million.
- Total debt was $50.0 million, all under the term loan; the revolving facility had no outstanding balance. The term loan and revolver were due to mature September 27, 2018. Gentex repaid $28.0 million during the quarter, including an accelerated $26.1 million term-loan payment, and reported compliance with loan covenants.
- Operating cash flow was $147.4 million. Investing activities provided $29.5 million, including proceeds from investment sales; financing activities used $222.3 million, principally for $202.6 million of share repurchases, $28.0 million of debt repayment, and $28.0 million of dividends paid.
- Cash declined $45.4 million from year-end to $524.3 million. Working capital was $913.5 million, versus $940.9 million at December 31, 2017. The quarterly dividend declared was $0.11 per share, up from $0.09 a year earlier.
Significant changes and other items
- The effective tax rate fell to 15.6% from 27.7%, primarily reflecting the federal rate reduction under the Tax Cuts and Jobs Act, as well as R&D credits, equity-compensation tax benefits, and the foreign-derived intangible income deduction. Gentex recorded provisional tax-law effects subject to further analysis.
- Gentex repurchased 9.3 million shares for approximately $202.6 million, including 5.5 million shares bought from its former CEO under a retirement agreement. It reported 25.96 million shares remaining under its repurchase plan at quarter-end.
- Gentex adopted ASC 606 using the modified retrospective method; it said adoption had no material financial-statement impact. Adoption of ASU 2016-01 resulted in an approximately $6.6 million cumulative-effect reclassification from accumulated other comprehensive income to retained earnings.
- Automotive revenue was about 98% of total revenue. Management cited ongoing customer pricing pressure, global vehicle-production uncertainty, supplier shortages, and competition—including the longer-term possibility of cameras replacing mirrors—as business risks. The filing reported no material change in previously disclosed risk factors and no significant unrecorded off-balance-sheet arrangements.
Guidance and management outlook
- 2018 revenue: $1.89–$1.97 billion; gross margin: 38.0%–39.0%; operating expenses: approximately $180–$190 million.
- 2018 capital expenditures: approximately $115–$130 million; depreciation and amortization: approximately $105–$115 million.
- 2018 effective tax-rate guidance was lowered to 15.0%–18.0% from 18.0%–21.0%.
- Management maintained its 2019 revenue outlook of 5%–10% growth over its 2018 revenue estimate. It said the outlook depends on vehicle-production forecasts, product mix, option rates, and customer demand, and noted risks including production schedules, plant shutdowns, supplier shortages, customer inventory actions, and work stoppages.
Important facts for investors to verify
- Whether Full Display Mirror supply has remained normalized and the timing and extent of recovery from the reported shipment constraints.
- Whether pricing actions, purchasing savings, and production volumes support the 2018 gross-margin guidance, given Q1 margin contraction.
- The final impact of the Tax Cuts and Jobs Act and related tax items on the annual effective tax rate.
- Debt repayment and refinancing or maturity arrangements ahead of the September 2018 facility maturity.
- Reconcile apparent narrative inconsistencies: the MD&A describes cash as having “increased” by $45.4 million despite the balance-sheet decrease, and says inventories increased while reported inventory declined from $216.8 million to $207.2 million.