Gentex Corporation — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2016, compared with the same 2015 periods. Gentex primarily develops and manufactures automotive electro-optic products and electronics; its smaller “Other” segment includes aerospace dimmable windows and fire-protection products.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $423.8 million | $379.3 million | $829.4 million | $748.2 million |
| Gross profit | $166.8 million | $145.5 million | $325.5 million | $288.6 million |
| Gross margin | 39.4% | 38.4% | 39.2% | 38.6% |
| Operating income | $128.7 million | $108.1 million | $249.6 million | $215.8 million |
| Net income | $86.5 million | $74.6 million | $166.8 million | $151.7 million |
| Diluted EPS | $0.30 | $0.25 | $0.57 | $0.51 |
Q2 sales increased 12% and net income increased 16% year over year. First-half sales rose 10.8% and net income rose 9.9%. Automotive sales were $414.4 million in Q2 and $808.4 million in the first half; the segment accounted for most revenue. Other segment sales were $9.4 million and $21.0 million, respectively.
Auto-dimming mirror shipments increased 13% in Q2 and 12% in the first half. Management attributed growth primarily to higher product penetration, new launches, and increased electronic content. In Q2, North American shipments rose 7% and international shipments rose 17%.
Cash flow and investment: First-half operating cash flow was $253.5 million, up from $191.9 million. Capital expenditures were $54.8 million, versus $33.6 million. Investing activities used $176.1 million, including $165.5 million of investment purchases; financing activities used $129.4 million, including $92.3 million of share repurchases, $49.3 million of dividends paid, and $18.8 million of debt repayment.
Liquidity and debt at June 30, 2016: Cash and cash equivalents were $499.5 million; short-term investments were $145.3 million and long-term investments were $73.5 million. Working capital was $886.5 million. Long-term debt was $206.9 million, comprising $85.8 million drawn on a $150 million revolving facility and $129.4 million under a term loan. The company reported covenant compliance and $64.2 million of remaining revolver availability. The facilities mature in September 2018. A $150 million interest-rate swap fixes the rate on that notional amount at 1.89%; the reported borrowing rate was 1.47% based on the leverage ratio. Management said available resources and internally generated cash flow were sufficient for anticipated needs for the foreseeable future.
Material changes and management commentary
- Gross margin improved year over year: Q2 cost of goods sold fell to 60.6% of sales from 61.6%; first-half cost of goods sold fell to 60.8% from 61.4%. Management cited purchasing savings and favorable mix, which more than offset annual customer price reductions. It estimated annual price reductions of approximately 2%–3%.
- Operating expenses rose 2% in Q2 and approximately 4% in the first half, principally reflecting staffing and development costs. First-half other income declined by $5.4 million year over year, mainly because of lower realized gains on equity-investment sales; Q2 included realized investment losses.
- The first-half effective tax rate was 32.5%, versus 30.7% in 2015. Management linked the increase primarily to a $3.9 million uncertain-tax-position reversal recorded in Q1 2015 following completion of IRS audits.
- Cash and cash equivalents declined $52.1 million from year-end, mainly due to investment purchases, capital expenditures, accelerated debt repayment, and share repurchases. Gentex repurchased 6.2 million shares for $92.3 million in the first half; 3.35 million shares remained authorized at June 30. The quarterly dividend increased to $0.090 per share from $0.085 in Q1.
- A new 250,000-square-foot Michigan facility was expected to begin product distribution in mid-2016 and production in early 2017. The project was estimated to cost $50–$55 million and add capacity for 10–15 million mirrors annually, depending on mix and utilization.
Outlook, risks, and contingencies
For calendar 2016, Gentex raised its revenue estimate to $1.68–$1.72 billion and forecast gross margin of 39.0%–39.5%, operating expenses of $150–$158 million, capital expenditures of $115–$130 million, depreciation and amortization of $90–$100 million, and a tax rate of 31.5%–32.5%. Management made no change to its previously announced 2017 revenue estimate; the filing does not provide that estimate’s value here.
Management cited continued customer pricing pressure, economic and vehicle-production uncertainty, supplier shortages, production shutdowns, customer inventory management, and potential work stoppages as factors that could affect results and forecasting. Other stated risks include competition, product mix, raw-material costs, foreign exchange and interest rates, regulatory changes, litigation, and intellectual-property claims. The company also noted that camera-based mirror replacement may increase competition, while its advanced mirror and electronics launches, HomeLink, SmartBeam, and Full Display Mirror are potential growth drivers. No material pending legal proceeding was identified as likely to materially affect financial position or future results; no material changes to previously disclosed risk factors were reported.
The company reported no impairment trigger for HomeLink goodwill in the quarter and no equity investment losses deemed other-than-temporary. Market volatility could nevertheless lead to realized investment losses or future impairment charges. Gentex disclosed no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether 2016 revenue, gross-margin, expense, tax, and capital-spending guidance is achieved, and the assumptions for vehicle production, option rates, and product mix.
- Whether unit and electronic-content growth continues to offset customer price reductions and competitive pressure on margins.
- Facility spending, timing of production ramp-up, and the expected capacity and utilization of the new plant.
- Investment-portfolio performance and potential realized losses or impairment, alongside the company’s share repurchases and dividend commitments.
- Debt repayment and liquidity developments before the September 2018 credit-facility maturity, including compliance with covenants.