Gentex Corporation — FY 2017 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Gentex designs and manufactures automotive mirrors and electronics, dimmable aircraft windows, and fire-protection products. Automotive products generated approximately 98% of 2017 revenue. Gentex reported a roughly 93% worldwide share of automatic-dimming rearview mirrors.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,794.9 million | $1,678.9 million |
| Gross profit / margin | $694.5 million / 38.7% | $668.5 million / 39.8% |
| Operating income / margin | $523.4 million / 29.2% | $511.7 million / 30.5% |
| Net income | $406.8 million | $347.6 million |
| Diluted earnings per share | $1.41 | $1.19 |
| Cash flow from operations | $501.0 million | $477.0 million |
| Capital expenditures | $104.0 million | $121.0 million |
| Cash and cash equivalents, year-end | $569.7 million | $546.5 million |
| Debt, year-end | $78.0 million, classified current | $185.6 million total |
Sales rose 6.9% year over year; automatic-dimming mirror shipments increased 9% to 39.3 million units, led by international growth. Gross margin fell 1.1 percentage points, with customer price reductions and unfavorable product mix/overhead absorption outweighing purchasing savings. Operating expenses rose 9.2%, including $4.4 million in previously announced CEO-retirement-related costs. Net income increased 17.0%, aided by revenue growth and a lower effective tax rate of 23.5% versus 31.9%. Operating cash flow rose $24.0 million. The current ratio declined to 4.9 from 7.7, mainly because $78.0 million of debt due in September 2018 was reclassified as current. The company said cash, investments, working capital, and internally generated cash flow were adequate for foreseeable needs.
In Q4 2017, sales were $459.6 million versus $419.9 million; net income was $130.5 million versus $88.8 million; and diluted EPS was $0.46 versus $0.31. The quarter’s income tax expense reflected the 2017 Tax Cuts and Jobs Act, including provisional tax adjustments that reduced full-year tax expense by $37.2 million.
Outlook, risks, and unusual items
- 2018 guidance: revenue of $1.89–$1.97 billion; gross margin of 38.0%–39.0%; operating expenses of $180–$190 million; capital expenditures of $115–$130 million; depreciation and amortization of $105–$115 million; and tax rate of 18.0%–21.0%.
- 2019 revenue was forecast to increase approximately 5%–10% over the company’s 2018 revenue estimate. Forecasts depend on vehicle production, feature penetration, and product/geographic mix.
- Management expected to offset most annual customer price reductions through purchasing savings, operational efficiencies, and fixed-cost leverage. It also intended to continue share repurchases.
- Key risks include automotive cyclicality and production volatility; pricing pressure; concentration in four customers—Volkswagen, Toyota, Daimler, and Ford, each at least 10% of 2017 sales; supplier shortages; and competition or technology shifts, including camera-monitoring systems and autonomous driving. Other disclosed risks include customer financial distress, currency and commodity movements, intellectual-property claims, cybersecurity, and manufacturing disruption.
- The company repurchased 12.0 million shares for $231.4 million in 2017. Separately, it repurchased approximately 5.5 million shares from its former CEO in January 2018 for an average $20.98 per share; the related $115.5 million obligation was listed among year-end contractual commitments.
- The 2017 tax-rate benefit includes provisional Tax Act accounting that could be refined during the permitted measurement period. Gentex also expected a roughly $7 million retained-earnings adjustment in 2018 from adopting the new financial-instrument accounting standard, with greater earnings volatility thereafter from equity-investment fair-value changes.
Important facts for investors to verify
- Whether 2018 revenue and margin guidance is supported by actual vehicle production, customer awards, and product mix.
- Repayment or refinancing of the $78.0 million term-loan balance due September 2018, and the status of the $115.5 million former-CEO share repurchase commitment.
- The final tax effects of the 2017 Tax Act and the expected accounting effects of the 2018 financial-instrument standard adoption.
- Customer concentration, automotive production changes, supplier availability, and competitive effects from camera-based rear-vision technologies.
- Cash deployment among capital spending, dividends, debt repayment, and further repurchases; 2017 dividends declared were $0.39 per share.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.