Gentex Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Comparisons are with the corresponding 2014 periods unless otherwise noted. The filing is unaudited.
Business context and results
Gentex primarily develops and manufactures automotive electro-optic mirrors and electronics. Its smaller “Other” segment includes aerospace dimmable windows and fire-protection products. Growth was driven mainly by higher auto-dimming mirror shipments and increased product penetration.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $389.8 million | $350.9 million | $1,138.0 million | $1,025.1 million |
| Gross profit | $151.9 million | $138.6 million | $440.5 million | $404.2 million |
| Operating income | $116.3 million | $103.2 million | $332.1 million | $300.2 million |
| Net income | $78.3 million | $72.3 million | $230.1 million | $217.6 million |
| Diluted EPS | $0.27 | $0.25 | $0.77 | $0.74 |
| Gross margin | 39.0% | 39.5% | 38.7% | 39.4% |
Q3 sales rose 11% and net income rose 8%; nine-month sales rose 11% and net income rose 6%. Automotive revenue was $379.9 million in Q3 and $1.111 billion for nine months. “Other” revenue was $9.9 million and $27.0 million, respectively. Automotive mirror unit shipments increased 15% in Q3 and 12% for the nine-month period.
Margins faced pressure from currency movements and customer price reductions. Nine-month cost of goods sold increased to 61.3% of sales from 60.6%; the company attributed the increase to annual price reductions, foreign exchange and higher manufacturing costs, partly offset by purchasing savings. Q3 operating income growth outpaced modestly higher operating expenses. Other income was lower year over year, mainly because of lower realized gains on investment sales and increased interest expense.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $283.2 million, up from $227.5 million. Capital expenditures were $62.3 million, versus $50.0 million.
- Cash and cash equivalents were $564.5 million at September 30, up from $497.4 million at December 31, 2014. Long-term investments were $94.4 million. Working capital was $797.6 million.
- Long-term debt on the balance sheet was $227.5 million. The credit-facility note reports $100.8 million outstanding on the revolver and $135.0 million on the term loan, with $49.2 million of revolver availability. The company reported compliance with debt covenants.
- The company repaid $30.6 million of debt during the first nine months, paid $72.2 million in dividends, and spent $82.9 million on share repurchases. It repurchased 4.9 million shares during the period. The quarterly dividend was $0.085 per share.
- A 250,000-square-foot Michigan manufacturing and distribution facility was under construction. Estimated project cost was $30–$35 million, with completion expected in 2016 and funding from cash on hand. The facility is expected to add capacity for 5–7 million mirrors annually.
Outlook, commentary and risks
- For calendar 2015, management estimated revenue of $1.52–$1.54 billion and gross margin of 38.5%–39%. It estimated operating expenses of $145–$147 million, capital expenditures of $95–$105 million, depreciation and amortization of $85–$90 million, and an effective tax rate of 31.5%–32%.
- Management cited new product launches, increased mirror and electronic-feature penetration, and product launches against flat light-vehicle production in its primary markets as growth drivers. Full Display Mirror production was expected to begin in Q4 2015, initially on the Cadillac CT6.
- Risks highlighted include automotive production and demand uncertainty, customer pricing pressure, foreign-exchange changes, customer inventory and business conditions, supply or labor disruptions, raw-material costs, competition, regulatory changes, and intellectual-property claims. Management noted that customer price pressure could continue to weigh on margins.
- The company said the 2018 U.S. rearview-camera mandate did not yet indicate an immediate material opportunity for additional rear-camera-display mirror applications. Management stated that it had no new material guidance on that opportunity.
- Management reported no material pending legal proceeding expected to adversely affect financial position or results, and no significant unrecorded off-balance-sheet arrangements. No material changes to previously disclosed risk factors were reported. The company was evaluating the impact and adoption method for the new revenue-recognition standard.
Key facts for investors to verify
- Whether revenue and shipment growth continues, particularly for exterior mirrors and advanced electronic features, and whether scheduled launches convert into sustained sales.
- Whether cost reductions and productivity improvements can offset customer pricing, currency and manufacturing-cost pressures and stabilize gross margins.
- Whether 2015 revenue, margin, expense, capital-spending and tax-rate estimates remain achievable given the stated production, currency and customer uncertainties.
- How the facility expansion, debt repayments, dividends and repurchases affect liquidity and future capital needs.
- Whether investment-market losses, interest-rate exposure and the interest-rate swap create material changes in earnings or accumulated other comprehensive income.