Gentex Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; comparisons are with the corresponding 2016 periods. Gentex’s business is predominantly automotive: automotive products generated about 98% of revenue.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $443.1 million | $423.8 million | $896.7 million | $829.4 million |
| Gross profit | $167.2 million | $166.8 million | $343.0 million | $325.5 million |
| Gross margin | 37.7% | 39.4% | 38.3% | 39.2% |
| Operating income | $125.9 million | $128.7 million | $260.3 million | $249.6 million |
| Net income | $88.5 million | $86.5 million | $186.1 million | $166.8 million |
| Diluted EPS | $0.31 | $0.30 | $0.64 | $0.57 |
Q2 sales rose 5%, while net income increased about 2%; for the first half, sales increased 8.1% and net income 11.6%. Q2 margin pressure reflected annual customer price reductions and unfavorable product mix/fixed-cost absorption, partly offset by purchasing cost reductions. Operating expenses rose 9% in Q2, primarily with staffing and benefit costs supporting development and new business.
Cash flow and balance sheet: First-half operating cash flow was $263.6 million, compared with $255.1 million a year earlier. Capital expenditures were $56.2 million. Cash and cash equivalents were $580.6 million at June 30, up $34.1 million from year-end; short-term investments were $184.6 million and long-term investments $49.3 million. Working capital was $933.6 million. The company reported total debt of $116.9 million under its term loan and no revolver balance; it made $68.8 million of principal repayments in the first half and said it intended to accelerate repayments. The company was in compliance with credit covenants. First-half financing cash uses included $51.8 million of dividends and $73.6 million of share repurchases.
Material changes and management commentary
- Automotive revenue rose 5% in Q2 and 9% in the first half. Auto-dimming mirror shipments increased 6% in Q2 and 9% year to date, with international shipments up 10% and 13%, respectively; North American shipments declined 3% in Q2 and increased 1% year to date.
- Gross margin fell year over year in both periods. Management cited customer price reductions not fully offset by purchasing savings and unfavorable product mix limiting fixed-cost leverage.
- First-half effective tax rate was 29.2%, versus 32.5% in 2016. The decrease included $5.8 million of favorable discrete tax items: $3.8 million from a tax-method change and $2.0 million from adopting share-based payment accounting guidance. The company cautioned that the new guidance may make future tax rates variable.
- The quarterly dividend was increased by $0.01 to $0.10 per share. During the first half, Gentex repurchased 3.66 million shares; 3.09 million shares remained authorized under the plan at June 30.
- Product activity included new vehicle launches and ongoing development of Full Display Mirror, camera monitoring, HomeLink, tolling, biometric, and SmartBeam products. Gentex was shipping Full Display Mirrors to two of five initial OEM customers. Management noted camera-based mirror replacement remains subject to regulatory developments, including no final U.S. ruling on replacing conventional mirrors with cameras.
Outlook, risks, and contingencies
Updated 2017 guidance: revenue of $1.79–$1.83 billion; second-half revenue growth of 6%–10% versus the second half of 2016, with Q3 expected near the low end and Q4 near the high end; gross margin of 38.5%–39.0%; operating expenses of $165–$170 million; capital expenditures of approximately $115–$130 million; depreciation and amortization of $95–$105 million; and a 31.5%–32.5% tax rate excluding discrete items. Management maintained its 2018 revenue-growth estimate of 6%–10% above its 2017 estimate.
Guidance depends on vehicle production, product mix, option rates, and customer demand. Cited risks include production changes or plant shutdowns, supplier shortages, customer cost pressure and bankruptcies, pricing pressure, competition and customer preferences (including cameras replacing mirrors), raw-material costs, economic conditions, regulation, foreign exchange, and litigation or intellectual-property claims. Management said existing resources and operating cash flow were sufficient for foreseeable cash needs and that it believed it could make accelerated debt payments. It reported no material pending legal proceeding expected to materially adversely affect financial position or results, and no significant off-balance-sheet arrangements.
Investor verification points
- Whether sales growth and international shipment gains continue, and how regional vehicle production and product mix develop.
- Whether purchasing savings, productivity, and volume can offset customer price reductions and support the guided gross margin.
- Execution against 2017 revenue, expense, capital-spending, and tax guidance, including the impact of discrete tax items.
- Debt repayment pace, cash deployment, and the continued level of dividends and share repurchases.
- OEM adoption and commercial timing for newer products, and regulatory progress on camera monitoring systems and mirror replacement.