Gentex Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Gentex primarily develops and manufactures automotive mirrors and electronics, with smaller fire-protection and aerospace-window businesses.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $468.7 million | $455.0 million | $937.3 million | $920.4 million |
| Gross profit | $176.5 million | $172.8 million | $346.2 million | $345.4 million |
| Operating income | $127.9 million | $126.7 million | $249.5 million | $255.2 million |
| Net income | $109.0 million | $109.0 million | $213.2 million | $220.3 million |
| Diluted EPS | $0.42 | $0.40 | $0.82 | $0.80 |
- Q2 sales rose 3%; automotive revenue increased 3% to $456.6 million and Other-segment revenue increased 13% to $12.1 million. H1 sales rose 2%, with automotive revenue up 1% and Other-segment revenue up 17%.
- Gross margin was approximately 37.7% in Q2 versus 38.0% a year earlier, and 36.9% for H1 versus 37.5%. Operating margin was approximately 27.3% in Q2 versus 27.8%, and 26.6% for H1 versus 27.7%.
- H1 operating cash flow was $273.5 million, down from $292.4 million. Capital expenditures were $45.5 million, compared with $51.9 million. Cash and cash equivalents increased to $260.3 million at June 30 from $217.0 million at year-end.
- At June 30, short-term investments were $190.6 million and long-term investments $121.1 million. Current assets were $930.4 million against current liabilities of $177.6 million. No revolver borrowings were outstanding; the company reported compliance with credit covenants.
- H1 financing cash outflow included $166.1 million of share repurchases and $57.9 million of dividends paid. The company repurchased 7.8 million shares in H1, with 26.0 million authorized shares remaining. The quarterly dividend was raised to $0.115 per share.
Changes and management commentary
- Revenue growth was supported by a 2% increase in auto-dimming mirror shipments to 10.8 million units in Q2. North American mirror shipments rose 12%, while international shipments fell 2%; North American exterior mirror shipments increased 39%.
- Gross-margin pressure reflected annual customer price reductions and tariffs introduced in the second half of 2018. Management estimated their negative effects at approximately 150–200 basis points and 50–100 basis points, respectively; purchasing savings and product mix improvements partly offset these pressures.
- Q2 net income was essentially flat year over year. H1 net income declined 3%, primarily due to lower gross margin and higher operating expenses. H1 R&D rose 6% and SG&A rose 9%, largely due to staffing and benefits. The H1 effective tax rate increased to 16.4% from 15.5%, mainly because of fewer discrete stock-compensation tax benefits.
- Management cited product launches and demand for electrochromic technology, Full Display Mirror, HomeLink and other electronics as growth drivers. Full Display Mirror was shipping to five OEMs and 30 vehicle nameplates; initial volume shipments of the Integrated Toll Module to Audi began in Q1 2019.
Outlook, risks and other matters
- 2019 revenue guidance: $1.87–$1.90 billion; gross-margin guidance: 36.5%–37.5%; operating expenses: approximately $195–$200 million; capital expenditures: approximately $90–$100 million; depreciation and amortization: approximately $100–$110 million; effective tax rate: 16%–17%.
- Management maintained its 2020 revenue expectation of 3%–8% growth over its 2019 estimate. Guidance depends on vehicle production, product mix and tariffs, among other factors.
- Key risks include uncertain automotive demand and production schedules, customer pricing pressure, current and potential tariffs, supply interruptions, customer or supplier financial distress, competition, regulatory changes, and potential shifts toward camera-based or autonomous-driving systems. Management noted camera-monitoring systems could compete with traditional mirrors, while U.S. rules permitting camera replacement remained unresolved.
- The filing reports no material change to previously disclosed risk factors, no significant unrecorded off-balance-sheet arrangements, and no legal proceeding believed likely to materially harm financial position or results. Adoption of lease accounting had no material financial-statement impact; the company was evaluating a credit-loss accounting standard due for adoption in 2020.
Most important facts for investors to verify
- Whether tariffs and customer price reductions continue to weigh on gross margin, and whether cost savings and product mix can offset them.
- Whether the $1.87–$1.90 billion 2019 revenue outlook and 36.5%–37.5% gross-margin range remain achievable amid forecast declines in several major vehicle markets.
- Whether new product launches, including Full Display Mirror and Integrated Toll Module, convert into sustained shipments and revenue.
- How ongoing repurchases and dividends affect cash reserves and share count, alongside planned capital expenditures.