Gentex Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Gentex develops and manufactures automotive mirrors and electronics, with smaller aerospace-window and fire-protection businesses. Automotive products accounted for approximately 97%–98% of revenue.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $477.8m | $460.3m | $1,415.1m | $1,380.7m |
| Gross profit / margin | $180.3m / 37.7% | $173.0m / 37.6% | $526.5m / 37.2% | $518.4m / 37.5% |
| Operating income / margin | $128.1m / 26.8% | $127.4m / 27.7% | $377.6m / 26.7% | $382.6m / 27.7% |
| Net income | $111.9m | $111.3m | $325.1m | $331.6m |
| Diluted EPS | $0.44 | $0.42 | $1.26 | $1.22 |
| Operating cash flow | Not separately presented for the quarter | $383.9m | $398.2m |
- Q3 revenue grew 4%; automotive revenue rose 3%, supported by 6% higher auto-dimming mirror shipments to 10.8 million units. Other-segment revenue increased 22%, including 46% growth in dimmable aircraft windows.
- For the first nine months, revenue increased 2%, while net income declined 2%. Higher operating expenses and lower gross margin contributed to the earnings decline.
- Cash and cash equivalents were $260.2m at September 30, versus $217.0m at year-end 2018. Short-term investments were $207.2m and long-term investments $103.0m. Working capital was $805.2m.
- Current assets were $987.5m and current liabilities $182.3m. No balance was outstanding on the $150m revolving credit facility; Gentex reported compliance with its covenants.
- Nine-month investing cash outflow was $59.1m, including $58.3m of capital expenditures. Financing cash outflow was $281.8m, including $262.8m of share repurchases and $87.2m of dividends paid.
Material changes and management commentary
- Q3 cost of goods sold was 62.3% of sales, slightly below 62.4% a year earlier. For the nine-month period it rose to 62.8% from 62.5%. Customer price reductions and tariffs pressured margins; purchasing savings and product mix improvements partly offset those effects.
- Q3 sales growth was offset by company-specific product headwinds of about 350 basis points and the GM strike, which began September 15 and reduced Q3 revenue by an estimated 200 basis points. Management estimated lost sales of $7m–$8m per strike week.
- Operating expenses increased 15% in Q3. Management cited staffing and product-development needs, travel and tariff-mitigation resources, professional fees related to a minor technology acquisition, and tax-planning costs.
- Gentex repurchased 11.4m shares for $262.8m during the first nine months, with 22.5m shares remaining authorized under the plan. The quarterly dividend rose to $0.115 per share from $0.110.
- Product developments included Full Display Mirror shipments to five automakers, production across 31 vehicle nameplates, and a tenth OEM award. First production shipments of dimmable windows for Boeing’s 777X began in Q3. The company also described planned ITM launches and continued HomeLink and camera-monitoring-system development.
Outlook, risks and unusual items
- Q4 2019 revenue guidance: $430m–$455m, reflecting the estimated GM strike impact and updated vehicle-production forecasts. Full-year 2019 revenue guidance: $1.84bn–$1.87bn.
- Full-year 2019 gross-margin guidance: 36.6%–37.0%; Q4 margin: 35%–36%. Operating expenses: approximately $198m–$200m; capital expenditures: approximately $90m–$100m; depreciation and amortization: $104m–$107m; effective tax rate: 16.0%–16.5%.
- Management maintained its 2020 revenue-growth estimate of 3%–8% above its 2019 estimate. Its forecast relied on IHS Markit estimates that 2019 global light-vehicle production would decline 5% year over year.
- Principal uncertainties include the GM strike and other production disruptions, vehicle demand, customer pricing, tariffs, regulation, supply constraints, product mix, competition, customer financial condition, and foreign-market economic and currency conditions. Management noted potential competition from camera-based systems and multi-function driver-assistance products.
- The filing reports no material pending legal proceeding expected to materially affect the company, no significant unrecorded off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Adoption of lease accounting in 2019 had no material financial-statement impact.
Key investor verification points
- Check the duration and final shipment impact of the GM strike against Q4 revenue and margin guidance.
- Track whether customer price reductions and tariffs continue to outweigh purchasing savings and favorable product mix.
- Compare actual full-year results and 2020 growth with management’s stated ranges and vehicle-production assumptions.
- Monitor working-capital movements, capital spending, and the pace of share repurchases relative to operating cash generation.
- Assess whether Full Display Mirror, HomeLink, ITM, and aircraft-window launches translate into sustained growth, while considering regulatory and competitive developments for camera-monitoring systems.