Gentex Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Gentex makes automotive electro-optic products, including auto-dimming mirrors, and also sells fire-protection products and dimmable aircraft windows.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $206.8 million | $155.7 million | $594.2 million | $366.9 million |
| Gross profit | $73.8 million | $54.4 million | $216.2 million | $112.5 million |
| Gross margin | 35.7% | 34.9% | 36.4% | 30.7% |
| Operating income | $47.0 million | $33.1 million | $140.4 million | $51.4 million |
| Net income | $34.3 million | $23.9 million | $100.8 million | $34.6 million |
| Diluted EPS | $0.24 | $0.17 | $0.72 | $0.25 |
Cash flow and liquidity: Nine-month operating cash flow was $92.1 million, versus $83.6 million a year earlier. Investing activities used $110.9 million, including $29.1 million in capital expenditures and increased investment purchases; financing activities used $13.6 million, mainly for $46.0 million of dividends, partly offset by stock-plan proceeds. Cash and equivalents were $303.7 million at quarter-end; short- and long-term investments totaled $209.5 million. Current assets were $608.5 million and current liabilities $83.4 million. Management said working capital and long-term investments of approximately $649.0 million, internally generated cash flow, and an unsecured $5 million bank line were sufficient for anticipated needs. No borrowings are listed on the balance sheet.
Margins and debt: Q3 operating margin was 22.7%, compared with 21.3%; nine-month operating margin was 23.6%, compared with 14.0%. The filing lists no debt balance. Q3 and nine-month dividends declared were $0.11 and $0.33 per share, respectively.
Material changes and operating drivers
- Q3 sales rose 33% year over year; nine-month sales rose 62%. Automotive products generated $201.5 million of Q3 sales and $579.4 million for the nine months.
- Auto-dimming mirror shipments increased 28% in Q3 and 56% for the nine months, primarily reflecting higher global vehicle production and increased penetration on 2010-model-year vehicles.
- Gross margin improved as higher sales leveraged fixed overhead. In Q3, annual customer price reductions and electronic-component supply constraints each weighed on cost of goods sold by an estimated 1–1.5 percentage points.
- R&D expense increased 38% in Q3 and 33% for the nine months, largely due to additional employees and contract engineering. SG&A increased 11% and 12%, respectively, including overseas-office and variable compensation costs.
- Other revenue was up 15% in Q3, as dimmable-window sales offset an 11% decline in fire-protection sales. Nine-month other revenue was approximately flat; fire-protection sales fell 19%, reflecting weak commercial construction.
- Nine-month other income improved, principally due to realized gains from equity-investment sales compared with realized losses in the prior-year period. No additional investment losses were deemed other-than-temporary at September 30, 2010.
Outlook, commentary, and risks
- Management forecast Q4 2010 revenue approximately 20% above Q4 2009, based on vehicle-production forecasts and expected product mix. It expected Q4 R&D expense to rise 30–35% and SG&A 10–15% year over year.
- Management cited uncertain vehicle production, customer inventory actions, plant shutdowns, supplier shortages, and potential customer or supplier financial distress as factors that could disrupt shipments and make forecasts difficult.
- Other risks include automotive pricing pressure, customer requests for further cost reductions, product-feature removals, dual sourcing, warranty cost sharing, currency and equity-market exposure, and the cyclicality of the automotive industry. The company also noted possible lower content on smaller vehicles.
- Rear Camera Display Mirror and SmartBeam programs were expanding across automakers. Gentex had begun supplying dimmable windows for the Boeing 787 production line and continued low-volume shipments for the King Air 350i. A Ford sourcing agreement covering existing and certain new mirror programs runs through December 31, 2011.
- The filing reported no material change in previously disclosed risk factors, no significant unrecorded off-balance-sheet arrangements, and no material change in internal control over financial reporting. Management considered disclosure controls effective.
Investor verification points
- Check whether Q4 revenue growth and expense forecasts were achieved, and how actual vehicle production compared with the forecasts cited.
- Monitor whether automotive unit growth and fixed-cost leverage offset customer price reductions and electronic-component constraints.
- Assess receivables and inventory growth: both rose materially from December 2009, with inventory also reflecting longer component lead times.
- Review the performance and valuation risk of the investment portfolio, including the impact of realized gains and potential future impairment losses.
- Track adoption and economics of Rear Camera Display Mirror, SmartBeam, and dimmable windows, alongside risks from competing camera-display solutions and program timing.