Gentex Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited consolidated results. Gentex develops and manufactures automotive electro-optic products, including auto-dimming mirrors and HomeLink; its other products include aircraft windows and fire-protection products.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $350.9 million | $288.6 million | $1,025.1 million | $845.1 million |
| Gross profit | $138.6 million | $106.0 million | $404.2 million | $302.0 million |
| Income from operations | $103.2 million | $73.7 million | $300.2 million | $209.1 million |
| Net income | $72.3 million | $55.5 million | $217.6 million | $153.0 million |
| Diluted EPS | $0.49 | $0.38 | $1.49 | $1.06 |
| Gross margin | 39.5% | 36.7% | 39.4% | 35.7% |
| Operating margin | 29.4% | 25.5% | 29.3% | 24.7% |
Q3 sales rose 22% and net income 30% year over year; nine-month sales rose 21.3% and net income 42%. Automotive sales were $341.8 million in Q3 and $997.7 million for the nine months. Management attributed growth to HomeLink and higher mirror shipments: total auto-dimming mirror units increased 10% in Q3 and 11% year to date. Margin gains reflected HomeLink, product mix and purchasing-cost reductions, partly offset by customer price reductions.
Operating cash flow was $227.5 million for the nine months, versus $223.7 million a year earlier. Capital expenditures were $50.0 million, up from $38.0 million. Cash and cash equivalents rose to $433.5 million from $309.6 million at year-end 2013. Working capital was $656.9 million. Long-term investments were $104.1 million.
Long-term debt was $260.0 million, down $5.6 million from year-end 2013; current liabilities were $143.1 million. The company reported $25 million available under its revolving facility, excluding additional amounts it could request subject to conditions. It was in compliance with credit-agreement covenants. The quarterly dividend was $0.16 per share, versus $0.14 in Q3 2013.
Changes, outlook and management commentary
- HomeLink acquisition integration was described as essentially complete. The company highlighted HomeLink V, battery-powered HomeLink and potential non-automotive applications, as well as new camera, SmartBeam and Full Display Mirror products.
- Q3 cost of goods sold declined to 60.5% of sales from 63.3%; nine-month cost of goods sold declined to 60.6% from 64.3%. R&D and SG&A expenses increased, including costs related to staffing and HomeLink amortization.
- Other income fell to $0.8 million in Q3 from $7.4 million, primarily due to lower realized investment gains, interest expense and foreign-currency adjustments. Nine-month other income was $11.1 million, versus $14.8 million.
- Tax rates were 30.4% for Q3 and 30.1% for the nine months, compared with 31.5% and 31.7%, respectively. Lower rates included incremental R&D tax credits: approximately $1.8 million for 2013 filings and $5.5 million from amended 2010–2012 filings.
- For Q4 2014, management forecast sales growth of 10%–15% year over year, gross margin of 39.5%–40%, R&D expense growth of 5%–10%, SG&A expense growth of approximately 5%–10%, and an effective tax rate of approximately 32.5%. It forecast other income of $2–3 million, with investment gains and distributions subject to market conditions.
- Full-year capital expenditure guidance was reduced from $75–85 million to $70–80 million. The new Zeeland facility was estimated to cost $30–35 million, with $2–5 million expected in 2014; annual depreciation and amortization guidance remained $80–85 million.
Risks, contingencies and unusual items
Management cited ongoing automotive pricing pressure, vehicle-production and customer-program volatility, economic and currency uncertainty, raw-material and supplier risks, customer concentration and potential customer financial distress. RCD mirror shipments faced substitution by video displays integrated into vehicle radios; management expected a similar 2014 decline to the 21% decrease in 2013. Euro NCAP-driven camera systems could also replace some SmartBeam applications. The company noted potential conflict-minerals sourcing and verification challenges, and risks from intellectual-property claims. It reported no material pending legal proceeding expected to adversely affect its financial position or results, and no significant unrecorded off-balance-sheet arrangements.
After quarter-end, on October 1, Gentex entered an interest-rate swap covering $150 million of debt, effective July 31, 2015 through September 27, 2018, fixing the rate on that notional amount at 1.89% from the effective date. The company said the swap was intended to mitigate floating-rate exposure. Available-for-sale investments recorded a nine-month unrealized loss, net of tax, of $7.8 million; no investment losses were deemed other-than-temporary. No impairment indicators were identified for goodwill or intangible assets. The company is evaluating the effect and adoption method for the new revenue-recognition standard.
Important facts for investors to verify
- Whether forecast Q4 sales growth and gross margins were achieved, and how much depended on production forecasts and product mix.
- How much sales and margin growth came from HomeLink, unit volumes, mix and cost reductions, versus recurring underlying demand; monitor customer price reductions and RCD declines.
- Whether investment gains, tax credits and other non-operating items materially affected reported earnings and are repeatable.
- Debt balances, revolver availability, covenant compliance and the economics and accounting treatment of the post-quarter interest-rate swap.
- Execution and spending timing for the new facility, alongside inventory, receivables and capital expenditure trends.