Gentex Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results; comparisons are with Q1 2010 unless noted.
Business context and results
Gentex manufactures automotive electro-optic products, including automatic-dimming mirrors, as well as fire-protection products and dimmable aircraft windows. Automotive products generated $246.3 million of Q1 sales, about 98% of total revenue.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $250.9 million | $185.8 million | +35% |
| Gross profit / margin | $90.3 million / 36.0% | $68.6 million / 36.9% | Margin down about 0.9 percentage points |
| Operating income | $60.1 million | $44.6 million | +35% |
| Net income | $42.3 million | $32.5 million | +30% |
| Diluted EPS | $0.29 | $0.23 | +26% |
| Operating cash flow | $77.4 million | $61.3 million | +$16.1 million |
| Capital expenditures | $19.4 million | $10.8 million | Higher, mainly production equipment |
Automotive mirror sales rose 36%; auto-dimming mirror shipments increased 34%, from approximately 4.03 million to 5.42 million units. Management attributed growth primarily to higher global vehicle production and increased mirror penetration on 2011 models. Other-segment sales increased 10% to $4.7 million. Gross margin pressure reflected annual customer price reductions, partly offset by fixed-overhead leverage. R&D expense increased 32% and SG&A increased 18% year over year.
Financial position and liquidity
- At March 31, cash and cash equivalents were $440.3 million; short-term investments were $41.6 million and long-term investments $142.3 million. Cash increased $92.0 million from year-end, while short-term investments declined $44.8 million.
- Total assets were $1.092 billion and shareholders’ investment $935.0 million. Current liabilities were $115.3 million, up from $72.1 million at December 31, 2010; current assets were $722.8 million.
- No debt balance is presented in the balance sheet. The company reported an unsecured $5 million bank line of credit and said liquidity, internally generated cash flow and investments were sufficient for anticipated needs for the next year and foreseeable future.
- Cash from operations was partly offset by capital spending and dividends. The company declared a $0.12-per-share quarterly dividend, up $0.01; the approximately $17.1 million Q1 dividend was paid April 21, 2011.
Outlook, developments and risks
- For Q2 2011, management estimated revenue growth of 20–25% year over year, including an estimated $15–$20 million negative sales impact from the Japan earthquake and tsunami. It expected gross margin to decline 0.5–0.75 percentage points from Q1, with roughly two-thirds of the expected decline attributed to those lost sales.
- Q2 R&D expense was expected to increase 30–35% year over year and SG&A 10–15%. Management provided no revenue estimate beyond Q2, citing uncertainty in vehicle production and supply conditions.
- The company said Q1 sales were not materially affected by Japan-related shutdowns or shortages and that it believed it had adequate parts for Q2 based on then-current forecasts. However, the ultimate impact on supply chains, production and Gentex remained uncertain; some replacement sourcing involved higher costs. Automotive-grade electronic component constraints had shown sequential improvement but remained tight.
- Automotive customer pricing pressure, potential customer requests for further price cuts, production volatility, supplier shortages, customer financial stress or bankruptcy, and changing vehicle programs could adversely affect sales, margins and profitability.
- NHTSA’s proposed backup-camera rule was delayed; the final rule was then expected by December 31, 2011, with full implementation proposed by September 2014. Gentex cited its Rear Camera Display mirror as a potential solution but noted competition among display locations and uncertainty about adoption.
- Boeing 787 delivery delays affected the timing outlook for dimmable aircraft windows; first delivery was then expected in Q3 2011. Gentex reported no equity-investment losses considered other-than-temporary at quarter-end, while noting that market declines could lead to future losses or impairments.
- Management reported disclosure controls were adequate and effective, no material change in internal control over financial reporting, and no material change to previously disclosed risk factors apart from matters discussed in the filing.
Investor facts to verify
- Whether Q2 revenue and gross-margin estimates were achieved, especially against the estimated $15–$20 million Japan-related sales impact.
- Automotive production, mirror shipment growth, and whether customer price reductions and component costs continued to pressure margins.
- Cash conversion and working-capital movements, including rising receivables and current liabilities, alongside planned capital spending.
- Progress and adoption of Rear Camera Display and SmartBeam products, and the final timing and requirements of the NHTSA backup-camera rule.
- Timing and commercial contribution of 787 dimmable-window deliveries, and any changes in investment valuations or impairment assessments.