Gentex Corporation — Q2 2010 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. Gentex makes automotive electro-optic products, including auto-dimming mirrors, as well as fire-protection products and dimmable aircraft windows. Automotive products generated approximately 97% of Q2 sales.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $201.6 million | $117.3 million | $387.3 million | $211.2 million |
| Gross profit | $73.9 million | $35.8 million | $142.5 million | $58.1 million |
| Gross margin | 36.7% | 30.5% | 36.8% | 27.5% |
| Operating income | $48.8 million | $16.1 million | $93.4 million | $18.3 million |
| Net income | $34.1 million | $12.2 million | $66.5 million | $10.7 million |
| Diluted EPS | $0.24 | $0.09 | $0.47 | $0.08 |
- Q2 sales rose 72%; first-half sales rose 83%. Automotive mirror shipments increased 60% in Q2 and 75% in the first half, driven by higher global vehicle production and greater auto-dimming mirror penetration.
- Operating margin was 24.2% in Q2 versus 13.7% a year earlier. Management attributed improved cost of goods sold as a share of sales to better absorption of fixed overhead as volume recovered.
- Operating cash flow was $67.1 million for the first half, up from $49.5 million. Capital expenditures were $19.1 million versus $11.5 million; cash dividends paid were $30.6 million.
- At June 30, cash and cash equivalents were $295.2 million; short- and long-term investments totaled $198.2 million. Current assets were $577.4 million and current liabilities $83.5 million. No debt balance is reported; the company cited an unsecured $5 million bank line of credit.
- Cash declined $40.9 million from year-end to $295.2 million, principally alongside investment purchases, capital spending and dividends. Inventory increased to $79.3 million from $53.6 million, and receivables rose to $93.5 million from $71.2 million.
Material changes and management commentary
- Automotive sales increased 75% in Q2; shipments rose 103% in North America and 43% outside North America. Fire-protection sales fell 21% in Q2 and 22% in the first half, reflecting weak commercial construction.
- Engineering, research and development expense increased 36% in Q2 and 31% in the first half, mainly from engineering hires and higher variable compensation. Selling, general and administrative expense increased 16% and 13%, respectively.
- Investment income declined because of lower interest rates. First-half other income included realized investment-sale gains; there were no investment impairment charges in the first half of 2010, compared with a $1.3 million impairment charge in the first half of 2009.
- Gentex began delivering dimmable windows for the Boeing 787 production line and continued low-volume shipments for the Beechcraft King Air 350i. It reported RCD mirrors shipping for 47 vehicle models across eight automakers and SmartBeam for 34 models. A Ford sourcing agreement covers existing and certain new interior auto-dimming mirror programs through December 31, 2011.
Outlook, risks and other items
- Management estimated Q3 2010 revenue would increase approximately 30–35% year over year, based on mid-July vehicle-production forecasts and expected product mix. It forecast Q3 R&D expense growth of 30–35% and SG&A growth of 10–15%. It provided no revenue estimate beyond Q3 because of forecasting uncertainty.
- Management said working capital, long-term investments, internally generated cash flow and the credit line should cover anticipated needs for the next year and foreseeable future.
- Risks highlighted include volatile global auto production, customer and supplier financial distress or bankruptcies, disruptions and shortages, customer pricing demands, raw-material cost increases, program delays or cancellations, foreign exchange and investment-market fluctuations, and competition for rear-camera display technology. Automotive customers’ pricing pressure may constrain margins.
- The company reported no material change in previously disclosed risk factors, no significant unrecorded off-balance-sheet arrangements, and no subsequent event requiring recognition or disclosure. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether vehicle production, mirror penetration and shipments support the Q3 revenue-growth estimate, and how actual results compare with the forecasts used.
- Whether volume growth and fixed-cost absorption can offset customer price reductions, higher engineering spending and input-cost pressures.
- Inventory and receivables growth relative to sales, including whether component lead times or customer payment conditions change.
- Investment portfolio valuation and exposure to equity-market losses; management reported no additional other-than-temporary impairments at June 30, 2010.
- Commercial progress and economics of RCD mirrors, SmartBeam and aircraft windows, including competitive alternatives and adoption rates.