Gentex Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparisons are with Q1 2011 unless otherwise noted. Gentex manufactures automotive electro-optic products, including auto-dimming mirrors, as well as fire-protection products and dimmable aircraft windows.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $290.7 million | $250.9 million | +16% |
| Gross profit / gross margin | $100.8 million / 34.7% | $90.3 million / 36.0% | Margin down 1.3 percentage points |
| Operating income / operating margin | $65.5 million / 22.5% | $60.1 million / 24.0% | Income +9% |
| Net income | $46.3 million | $42.3 million | +9% |
| Diluted EPS | $0.32 | $0.29 | +10% |
| Operating cash flow | $61.1 million | $77.4 million | Down $16.2 million |
| Capital expenditures | $39.8 million | $19.4 million | More than doubled |
- Automotive product sales were $285.7 million, up 16%; other sales were $5.0 million, up 8%. Automotive mirror unit shipments rose 16%, from approximately 5.42 million to 6.26 million.
- Cash and cash equivalents were $370.8 million at March 31, versus $358.0 million at year-end. Short- and long-term investments totaled $198.1 million at quarter-end; management cited working capital and long-term investments of approximately $802.3 million.
- Total assets were $1.255 billion and shareholders’ equity was $1.070 billion. The balance sheet reports no debt; the company also disclosed an unsecured $5 million bank line of credit.
- Current assets were $786.3 million against current liabilities of $130.1 million. Accounts receivable rose $28.9 million and inventory rose $12.0 million from December 31.
- Quarterly dividend declared was $0.13 per share, up $0.01; the approximately $18.7 million Q1 dividend was paid April 20, 2012. Cash dividends paid during Q1 were $17.3 million.
Changes and management commentary
- Sales growth reflected higher auto-dimming mirror shipments, attributed to increased mirror penetration and higher light-vehicle production in North America and Japan/Korea. North American mirror shipments rose 18%; shipments outside North America rose 14%.
- Cost of goods sold increased to 65.3% of sales from 64.0%, primarily due to annual automotive customer price reductions, partly offset by purchasing and manufacturing savings. R&D expense rose 23% to $23.2 million, mainly to support product development and program awards; SG&A rose 7% to $12.1 million.
- Operating cash flow declined, primarily due to working-capital changes. Capital spending increased mainly for building improvements and production equipment; building/improvement spending was approximately $25.7 million.
- Management said Thailand-related supply-chain constraints improved sequentially and expected associated costs to be resolved by the end of Q2 2012, barring another natural disaster. The company continued to carry additional inventory to protect component supply.
Outlook, risks and contingencies
- Management estimated Q2 2012 revenue growth of approximately 15% year over year and gross margin in approximately the Q1 2012 range. It expected Q2 R&D expense to increase approximately 15% and SG&A to increase approximately 10%–15% year over year, assuming stable foreign exchange rates.
- Based on the IHS March forecast, management estimated RCD Mirror unit shipments would be approximately flat for calendar 2012 versus 2011. It cited ongoing uncertainty over the delayed U.S. backup-camera rule; the final rule remained pending, with a December 31, 2012 date then indicated by the Department of Transportation.
- Four Michigan facility expansion projects were underway or planned, with stated estimated costs totaling approximately $55 million and completion targets during 2012. Management expected to fund them from existing cash and cash equivalents. Longer-term construction timing at a company-owned site remained uncertain.
- Key risks include automotive pricing pressure, industry cyclicality, customer and supplier financial distress, production volatility, supply interruptions and shortages, foreign-market demand, and competition in camera displays and driver-assistance systems. Equity-market declines could also lead to investment losses or impairment charges. No material change to previously disclosed risk factors was reported.
- Management reported no significant off-balance-sheet arrangements or commitments not recorded in the financial statements. Newly adopted accounting standards had no material effect; disclosure controls were assessed as adequate and effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and mirror shipment gains continue, and whether annual customer price cuts can be offset by cost savings and volume.
- Whether gross margins stabilize near Q1 levels and whether increased R&D and SG&A spending translates into product/program growth.
- Whether working capital, particularly receivables and inventory, improves and operating cash flow supports the planned capital program and dividends.
- Actual costs, completion dates, and capacity benefits from the facility expansions; management’s near-term funding estimate relies on available cash.
- Progress and final timing of the backup-camera regulation, RCD Mirror adoption, and competition for display locations and driver-assistance features.
- Exposure to equity-market changes: the investment portfolio included $29.9 million of unrealized gains and $0.4 million of unrealized losses at March 31, 2012; management reported no equity investment losses as other-than-temporary.