Gentex Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; fourth-quarter figures are for the three months ended that date. Gentex designs and manufactures auto-dimming mirrors and automotive electronics, dimmable aircraft windows, and fire-protection products. Automotive products generated approximately 98% of 2013 sales.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $1,171.9 million | $1,099.6 million | +6.6% |
| Gross profit / margin | $430.7 million / 36.8% | $372.8 million / 33.9% | Margin +2.9 percentage points |
| Operating income / margin | $304.7 million / 26.0% | $234.5 million / 21.3% | +30.0% |
| Net income / margin | $222.9 million / 19.0% | $168.6 million / 15.3% | +32.2% |
| Diluted EPS | $1.55 | $1.17 | Up $0.38 |
| Operating cash flow | $317.3 million | $257.8 million | + $59.5 million |
Fourth-quarter sales were $326.8 million versus $260.3 million a year earlier; operating income was $95.6 million versus $53.8 million; net income was $69.9 million versus $39.6 million; and diluted EPS was $0.48 versus $0.28.
Auto-dimming mirror shipments rose 10% for the year, from 23.8 million to 26.2 million units. Management attributed improved gross margin mainly to product mix and purchasing-cost reductions, partly offset by customer price reductions. Other sales rose 23% to $27.9 million, including higher aircraft-window sales.
Liquidity, debt, and capital allocation
- Year-end cash and equivalents were $309.6 million, down from $389.7 million; short-term investments fell from $60.8 million to zero. The current ratio was 5.0, versus 8.5 in 2012; working capital was $481.2 million.
- Investing cash outflow was $633.3 million, primarily reflecting the HomeLink acquisition; financing cash inflow was $235.8 million. Capital expenditures were $55.4 million, compared with $117.5 million in 2012.
- Year-end debt was $273.1 million, including $7.5 million current and $265.6 million long-term. Gentex borrowed $275 million under a new credit agreement for the acquisition and reported $26.9 million of facility availability at year-end. It was in compliance with debt covenants.
- The company declared $0.56 per share in 2013 dividends, up from $0.52. No shares were repurchased in 2013; 4 million shares remained authorized under the repurchase plan.
Material changes and unusual items
- On September 27, 2013, Gentex acquired Johnson Controls’ HomeLink business for approximately $698.2 million, funded with about $423 million of cash and debt financing. The preliminary allocation included $307.4 million of goodwill and $366.2 million of identifiable intangible assets. HomeLink contributed $36.9 million of revenue and $20.2 million of gross profit from acquisition through year-end.
- The acquisition drove a substantial increase in reported assets and introduced debt. Purchase-price allocation remained preliminary at year-end, with completion expected in the first quarter of 2014.
- Other income increased, principally due to realized gains on equity investments; increased interest expense related to acquisition financing partly offset this. The 2012 comparison included a $5 million AVS litigation settlement expense; that litigation was settled and the company was dismissed with prejudice.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s and the auditor’s internal-control assessments excluded HomeLink, which represented 40% of consolidated assets and 3% of 2013 sales.
Outlook, risks, and contingencies
Management estimated first-quarter 2014 revenue growth of approximately 20% year over year. It expected first-quarter R&D expense to increase 10–15% and SG&A expense to increase 20–25%, with HomeLink-related staffing, benefits, and amortization contributing to the increases. 2014 capital expenditures were estimated at $75–85 million, mainly for production equipment. The company did not provide revenue estimates beyond the first quarter, citing difficulty forecasting vehicle production and customer orders.
Management expected HomeLink integration to continue over the following 12–18 months. Risks include customer approvals and retention, operational integration, automotive-industry cyclicality, customer pricing pressure, production and supply-chain disruptions, and dependence on major customers. Three automotive customers each represented at least 10% of 2013 sales: Volkswagen/Audi (14%), Toyota (13%), and Daimler (11%). Gentex reported an approximately 88% worldwide auto-dimming mirror market share in 2013.
The filing identifies potential exposure to intellectual-property claims, product quality or warranty matters, foreign-exchange, interest-rate and equity-market movements, and goodwill or intangible-asset impairment. The company reported no material pending legal proceeding expected to materially affect its financial position or future results. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Progress of HomeLink integration, customer approvals and retention, and final purchase-price allocation; assess the acquired assets’ future performance and impairment assumptions.
- Debt balance, covenant headroom, borrowing costs, and cash generation following the acquisition and planned capital spending.
- Whether forecast vehicle production, mirror penetration, product mix, and customer pricing support the stated near-term outlook and margin improvement.
- Exposure to major customers, automotive production volatility, supply disruptions, and competition in driver-assistance and camera-based systems.
- Internal-control coverage for HomeLink in subsequent reporting, since it was excluded from the 2013 control assessment despite its share of year-end assets.