Gentex Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Gentex makes electro-optic products, principally automotive mirrors, with additional fire-protection and aircraft-window businesses.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $287.0 million | $280.3 million | $556.5 million | $571.0 million |
| Gross profit | $102.6 million | $92.8 million | $196.1 million | $193.6 million |
| Gross margin | 35.8% | 33.1% | 35.2% | 33.9% |
| Operating income | $71.6 million | $57.5 million | $135.4 million | $123.0 million |
| Net income | $52.1 million | $40.8 million | $97.5 million | $87.1 million |
| Diluted EPS | $0.36 | $0.28 | $0.68 | $0.60 |
Q2 sales rose 2% year over year, while first-half sales fell 2.5%. Q2 net income increased 28%; first-half net income increased 12%. Management attributed improved margins primarily to product mix and purchasing-cost reductions, with manufacturing efficiencies also contributing. Q2 automotive sales were $279.8 million, up 1.8%; other sales were $7.2 million, up 32%.
Operating cash flow for the first half was $172.3 million, compared with $101.5 million in 2012. Capital expenditures were $24.1 million versus $69.4 million. Cash and cash equivalents were $502.7 million at June 30, up from $389.7 million at year-end; short-term investments were $92.5 million and long-term investments $137.0 million. Working capital was $751.6 million. No borrowings are shown on the balance sheet; a new credit commitment is described below. Dividends declared were $0.14 per share in Q2, versus $0.13 a year earlier.
Material changes and management commentary
- Automotive mirror unit shipments rose 10% in Q2 and 5% in the first half, but product mix changes and annual customer price reductions weighed on sales. International Q2 mirror shipments increased 13%; North American shipments increased 4%.
- Engineering, research and development expense declined 17% in Q2 and 18% in the first half, mainly due to lower outside engineering and development costs. Selling, general and administrative expense also declined year over year in the first half.
- Inventory declined $43.9 million from December 31, primarily through lower raw-material inventory. The first-half increase in operating cash flow was attributed mainly to working-capital changes.
- The Zeeland facility expansion was substantially completed; management expected about $3 million of further building-related costs to bring certain functions online by year-end. A separate chilled-water facility was completed and entering production.
Outlook, transaction, and risks
- For Q3 2013, Gentex forecast sales flat to up 5% year over year and gross margin in the range of the 2013 year-to-date margin. It expected R&D expense down 5%–10% and SG&A expense up 5%–10%, with acquisition-related professional and due-diligence costs contributing to the latter.
- For 2013, the company estimated capital expenditures of $50–$60 million and depreciation and amortization of $56–$60 million, excluding HomeLink-related amounts.
- On July 18, 2013, Gentex agreed to acquire Johnson Controls’ HomeLink business for $700 million, subject to working-capital adjustments, customary conditions and regulatory approval; closing was targeted for about September 30, 2013. Gentex expected annual revenue of $125–$150 million after integration, a 1–1.5 percentage-point increase in consolidated gross margin, and accretion to profitability and EPS. These are forecasts, not reported results.
- On July 18, Gentex also received a commitment for $300 million of senior unsecured credit facilities, with an option to increase by up to $75 million. The definitive facility was expected to coincide with the acquisition closing and expire five years later.
- Key risks include automotive pricing pressure and cyclicality, uncertain production and customer forecasts, customer and supplier financial distress, supply disruptions, foreign-market demand, currency and investment-market exposure, and competition or regulatory changes affecting camera-based driver-assistance and rear-camera products. HomeLink closing depends on customary conditions, including antitrust clearance. Management reported no material pending legal proceeding expected to materially adversely affect the company.
Investor verification points
- Confirm HomeLink’s closing, final purchase price and working-capital adjustment, financing terms, integration costs, and realization of the projected revenue, margin, and EPS benefits.
- Track whether mirror shipment growth can offset customer price reductions and product-mix effects, and whether gross-margin improvements persist.
- Compare actual Q3 results and full-year capital spending with management’s forecasts.
- Assess cash generation and working-capital trends, particularly inventory, as production and customer demand change.
- Monitor marketable-investment valuation and the company’s exposure to equity-price, interest-rate, and foreign-exchange movements.