Gentex Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparison is with Q1 2012. Gentex manufactures automotive electro-optic products, principally auto-dimming mirrors, as well as fire-protection products and dimmable aircraft windows.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $269.5 million | $290.7 million | Down 7% |
| Gross profit | $93.5 million | $100.8 million | Down 7% |
| Gross margin | 34.7% | 34.7% | Flat |
| Operating income | $63.9 million | $65.5 million | Down 3% |
| Net income | $45.4 million | $46.3 million | Down 2% |
| Diluted EPS | $0.32 | $0.32 | Flat |
| Operating cash flow | $97.4 million | $61.1 million | Up $36.3 million |
Operating expenses fell 16% to $29.6 million, including a 20% decrease in engineering and development and a 10% decrease in selling, general and administrative expense. The effective tax provision was approximately $20.3 million. Automotive products generated $263.0 million of revenue, down from $285.7 million; Other-segment revenue was $6.5 million, up from $5.0 million.
Liquidity, cash flow and capital
- At March 31, cash and cash equivalents were $442.6 million, short-term investments $76.0 million, and long-term investments $158.2 million. Working capital was $685.6 million.
- Total assets were $1.33 billion and shareholders’ equity was $1.16 billion. The balance sheet reports no debt; management also cited an unsecured $5 million bank line of credit.
- Operating cash flow was $97.4 million; investing cash outflow was $32.9 million, including $12.7 million of capital expenditures; financing cash outflow was $11.7 million, including $18.6 million of dividends paid. Cash increased $52.9 million during the quarter.
- Capital spending was lower than the prior-year quarter’s $39.8 million. Facility projects were expected to cost about $21–22 million for a manufacturing expansion, plus about $3 million to bring functions online, and $11 million for a chilled-water facility. Approximately $27 million in related facility costs had been incurred through March 31.
- The quarterly dividend was raised by $0.01 to $0.14 per share; the Q1 dividend was declared in February and paid April 19. No shares were repurchased during the quarter; 4 million remained authorized under the repurchase plan.
Material changes and management commentary
Automotive mirror sales fell about 8%, chiefly because of mix shifts toward exterior and base interior mirrors and annual customer price reductions. Auto-dimming mirror shipments rose 1% to approximately 6.304 million units: North American shipments increased 8%, while shipments outside North America declined 4%, primarily reflecting lower shipments to certain Japanese and European automakers. Management said annual price reductions were offset in cost of goods sold by purchasing savings and product mix.
Management expects Q2 2013 revenue to be approximately flat to down 5% year over year and gross margin to remain in the Q1 range. It estimated Q2 engineering and development expense would decrease about 15% and SG&A expense about 5–10% year over year. For calendar 2013, it continued to estimate SmartBeam and driver-assist shipments would rise 10–15%, while Rear Camera Display mirror shipments would decline 25–35%. It provided no revenue estimate beyond Q2 because of market and order uncertainty.
Risks, contingencies and other items
- Risks cited include automotive production and order volatility, pricing pressure, regional economic uncertainty, customer and supplier financial stress, parts shortages, and difficulty forecasting demand and managing costs.
- Four customers selected center-console radio displays rather than Gentex’s rearview mirror for rear-camera images; two transitions were expected to affect shipments beginning in 2013 and two beginning in 2014. The company also cited delays and uncertainty around the U.S. rear-camera-display rulemaking.
- Management warned that camera-based, multi-function driver-assistance systems could compete with SmartBeam. It also noted that automotive pricing pressure may continue to challenge margins.
- The company said pending legal matters were not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no significant unrecorded off-balance-sheet arrangements.
- Available-for-sale investment values rose during the quarter, contributing to other comprehensive income; no equity investment losses were considered other-than-temporary. Management noted exposure to equity-price, interest-rate and foreign-exchange risks.
- Management stated that disclosure controls were adequate and effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether auto-dimming unit growth, product mix and customer price reductions translate into revenue and margin performance in subsequent quarters.
- Actual Q2 results versus the company’s revenue, gross-margin and operating-expense expectations, and the assumptions behind those estimates.
- The pace and financial effect of the four customers’ rear-camera-display location changes, alongside the timing of the U.S. rulemaking.
- Progress, total costs and completion of the disclosed facility projects, and whether planned capacity aligns with demand.
- Customer, supplier and regional automotive-market developments, including the competitive outlook for SmartBeam and driver-assist products.