Gentex Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Gentex primarily develops and manufactures automotive mirrors and electronics; automotive products generated about 98% of revenue. Comparisons are with Q1 2016 unless noted.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $453.5 million | $405.6 million | +12% |
| Gross profit | $175.8 million | $158.7 million | +11% |
| Gross margin | 38.8% | 39.1% | Down 0.4 percentage points |
| Operating income | $134.4 million | $120.8 million | +11% |
| Net income | $97.6 million | $80.3 million | +22% |
| Diluted EPS | $0.33 | $0.28 | +18% |
| Operating cash flow | $131.2 million | $151.9 million | Down $20.7 million |
| Capital expenditures | $27.1 million | $20.3 million | Up $6.8 million |
Operating margin was approximately 29.6%, versus 29.8% a year earlier. Cash and cash equivalents were $559.6 million at quarter-end. Short-term and long-term investments were $176.6 million and $61.5 million, respectively. The company reported $144.6 million of borrowings: $20.8 million under its revolver and $123.8 million under its term loan. It repaid $41.9 million during the quarter and reclassified $100 million of debt to short-term liabilities as it plans accelerated repayments. The revolver had $129.2 million available; the company was in covenant compliance.
Cash dividends declared were $0.090 per share, compared with $0.085 a year earlier. Gentex repurchased 1.47 million shares for approximately $31.0 million in Q1, with 5.27 million shares remaining under its repurchase authorization.
Material changes and management commentary
- Automotive sales rose 13% to $445.7 million, driven by a 12% increase in mirror unit shipments and favorable product mix. North American units increased 5%; international units increased 16%. Other-segment sales declined to $7.9 million from $11.6 million.
- Cost of goods sold increased to 61.2% of sales from 60.9%. Management attributed margin pressure to annual customer price reductions (about 150–200 basis points), partly offset by purchasing cost reductions and favorable mix (each about 50–100 basis points).
- Research and development expense rose 9%, primarily from staffing to support growth and new business. SG&A increased 10%, mainly from staffing and benefits.
- Operating cash flow declined mainly because of working-capital changes. Receivables increased $37.9 million and inventories increased $7.8 million from year-end, largely reflecting higher sales and production needs.
- Management said unit growth continued to outpace vehicle production, supported by product launches and increased penetration. The company launched mirror and advanced-feature products on 11 new vehicle models in Q1. Full Display Mirror production shipments were underway to two of five initial OEM customers.
Guidance, risks and unusual items
- 2017 revenue guidance remained $1.78–$1.85 billion. Management expected Q2 and Q3 revenue around the lower end of the annual range and Q4 around the higher end, citing weaker production forecasts in Europe for Q2 and North America for Q3.
- 2017 guidance: gross margin of 39.0%–40.0%; operating expenses of $165–$172 million; capital expenditures of approximately $115–$130 million; depreciation and amortization of $95–$105 million; and an effective tax rate of 31.5%–32.5%, excluding discrete items. The company made no change to its previously announced 2018 revenue estimates; the filing does not state their value.
- The Q1 effective tax rate was 27.7%, versus 32.9%. A $5.6 million benefit from discrete tax items included $3.8 million from a change in tax method and $1.8 million from adopting new share-based compensation accounting. Management cautioned that the new accounting may create future tax-rate variability.
- Key business risks include automotive customer pricing pressure, vehicle-production and economic fluctuations, customer or supplier disruptions, competition and evolving camera-based systems, product mix, and raw-material or supplier shortages. Regulatory timing for advanced driver-assistance ratings and mirror-replacement camera systems remains uncertain.
- The company reported no material pending legal proceedings expected to materially affect its financial position or results, and no significant unrecorded off-balance-sheet arrangements. It said no interim goodwill impairment test was required in the quarter. Revenue recognition guidance was expected to be adopted in Q1 2018; its effects were still being assessed, including for certain long-term supply contracts and pre-production engineering, development and tooling costs.
Important facts for investors to verify
- Whether vehicle-production trends, product launches and customer option rates support the $1.78–$1.85 billion 2017 revenue outlook.
- Whether cost reductions and favorable product mix can offset annual pricing pressure and sustain the guided gross-margin range.
- How working-capital needs, planned capital spending, dividends and repurchases affect cash generation and the accelerated debt-repayment plan.
- The recurring earnings and tax-rate impact of the Q1 discrete tax benefits, including adoption of share-based compensation accounting.
- Potential effects of camera-based competition, regulatory changes, and adoption of the new revenue-recognition standard.