Gentex(GNTX) - 2018 Q4 - Annual Report

PART I Business Overview The company leads in auto-dimming mirrors for the automotive sector, which generated 98% of 2018 revenue, alongside aerospace and fire protection products - The company's main businesses include automotive auto-dimming mirrors and electronic products, dimmable aircraft windows, and fire protection products[9][14] - Automotive products are the company's largest business segment, accounting for 98% of the company's total revenue in 2018[13][18] - The company is a global leader in electrochromic auto-dimming mirror manufacturing, with a global market share of approximately 92% in 2018 and 93% in 2017[19][26] - The company continuously develops new products, including advanced features such as SmartBeam®, HomeLink®, frameless mirror designs, LED map lights, compass and temperature displays, telematics, ITM® systems, hands-free communication, rear camera displays (RCD), and full display mirrors (FDM®); biometric authentication systems and camera monitoring systems (CMS) are currently under development[20] - The company announced in January 2019 that its latest generation of dimmable aircraft windows would be offered as an optional feature on the Boeing 777X[13][32] - The company holds 38 U.S. registered trademarks and 635 U.S. patents, with 31 trademarks and 514 patents related to electrochromic technology, automotive mirrors, microphones, displays, camera, sensor technology, and/or HomeLink® products[39] Net Sales Contribution from Major Automotive Customers in 2018 | Customer Name | 2018 Net Sales Contribution | | :--------------- | :-------------------------- | | Volkswagen Group | 15% | | Toyota Motor | 13% | | Daimler Group | 10% | Auto-Dimming Mirror Regional Shipment Contribution | Region | 2018 | 2017 | 2016 | 2008 | | :--------- | :--- | :--- | :--- | :--- | | Domestic | 19% | 19% | 23% | 24% | | (1) Multinational | 12% | 12% | 13% | 14% | | North America | 31% | 31% | 36% | 38% | | Europe | 45% | 46% | 44% | 45% | | Asia Pacific | 24% | 23% | 20% | 17% | | Total | 100% | 100% | 100% | 100% | Risk Factors The company faces risks from automotive industry cyclicality, customer concentration, pricing pressure, competition, global trade policies, technological shifts, supply chain disruptions, and regulatory complexities - Approximately 98% of the company's net sales are derived from the automotive industry, which is cyclical and susceptible to economic activity levels, facing risks such as production fluctuations, uncertain customer orders, component shortages, plant shutdowns, increased commodity costs, and shifts in consumer preferences[51] - Three automotive customers (Volkswagen Group, Toyota Motor, and Daimler Group) each accounted for 10% or more of the company's annual net sales in 2018; losing these customers or a decline in their production could significantly harm the company's business[53] - The company continuously faces pricing pressure from automotive customers and competitors; failure to offset price reductions through engineering and procurement cost reductions, productivity improvements, or increased shipments of high-value-added products will impact profit margins[54][55] - The geopolitical environment (e.g., US-China, US-Europe tariffs) continues to create uncertainty, potentially disrupting the automotive supply chain and negatively impacting the company's business[56] - Competitive risks include major competitor Magna Mirrors having more resources, full display mirror (FDM®) systems facing competition from other companies, and the long-term trend of camera monitoring systems (CMS) potentially replacing traditional mirrors[57][61] - Inadequate intellectual property protection (especially in China) poses an increasing risk to technology companies, and the loss of patents or trade secrets could adversely affect the company's business[64] - Supply chain disruptions (e.g., component shortages, natural disasters, shutdowns, bankruptcies) and IT infrastructure failures (e.g., cybersecurity attacks, data breaches) could severely impact the company's operations and financial condition[69][70][72] - Changes in government regulations, such as the Dodd-Frank Act's disclosure requirements for conflict minerals, and Euro NCAP and NHTSA evaluations of driver assistance systems and adaptive high-beam systems, could affect the company's product market and competitive position[74][78] Unresolved Staff Comments The company has no unresolved staff comments as of the end of the reporting period - The company has no unresolved staff comments[83] Properties The company operates manufacturing and office facilities in Michigan, with sales and engineering offices globally, and maintains sufficient production capacity - The company's primary operating facilities are located in Zeeland and Holland, Michigan, USA, including manufacturing, office, and chemical laboratories[83] - The company has sales and engineering offices in Europe (Germany, UK, France, Sweden) and Asia (Japan, South Korea, China)[21][93][94][95][96] - In 2018, the company constructed a new 265,000 square foot distribution center in Zeeland at a cost of approximately $22 million, which became operational in the fourth quarter[91][92] - The company estimates its existing buildings can produce approximately 33 million to 36 million interior mirror units annually, with 29.7 million units shipped in 2018; exterior mirror manufacturing facilities can produce approximately 14 million to 17 million units annually, with approximately 12 million units shipped in 2018[98][99] Legal Proceedings The company is involved in routine legal proceedings but anticipates no material adverse impact on its financial condition or operations - The company does not believe there are currently any matters constituting significant pending legal proceedings that would have a material adverse effect on its financial condition, future operating results, or cash flows[100] Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[101] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with 3,086 shareholders, a quarterly dividend of $0.11 per share, and an active stock repurchase program - The company's common stock trades on the Nasdaq Global Select Market® under the ticker symbol GNTX[102] - As of February 1, 2019, there were 3,086 registered holders of the company's common stock and restricted stock[102] - The company's Board of Directors approved an increase in the quarterly dividend to $0.11 per share in March 2018 and plans to continue paying quarterly cash dividends[104] - The company implemented a stock repurchase program and authorized the repurchase of an additional 20,000,000 shares on March 9, 2018[105] Summary of Stock Repurchase Activity in 2018 | Period | Total Number of Shares Purchased | Average Price Paid Per Share ($) | Total Number of Shares Purchased As Part of a Publicly Announced Plan* | | :------------- | :------------------------------- | :------------------------------- | :--------------------------------------------------------------------- | | January 2018 | 6,649,731 | $21.33 | 6,649,731 | | February 2018 | 1,944,826 | $22.60 | 1,944,826 | | March 2018 | 736,942 | $22.81 | 736,942 | | April 2018 | 1,531,711 | $22.59 | 1,531,711 | | May 2018 | 2,121,554 | $23.18 | 2,121,554 | | June 2018 | 2,631,552 | $23.88 | 2,631,552 | | July 2018 | 2,079,020 | $22.47 | 2,079,020 | | August 2018 | 3,303,809 | $23.59 | 3,303,809 | | September 2018 | 2,125,420 | $22.53 | 2,125,420 | | October 2018 | 928,097 | $20.56 | 928,097 | | November 2018 | 1,050,870 | $22.16 | 1,050,870 | | December 2018 | 1,345,835 | $20.60 | 1,345,835 | | Total | 26,449,367 | | 26,449,367 | Selected Financial Data Selected financial data from 2014-2018 shows consistent growth in net sales and income, increasing EPS and dividends, and zero long-term debt post-2016 Selected Financial Data 2014-2018 | Metric | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | 2014 ($) | | :------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Net Sales | 1,834,064 | 1,794,873 | 1,678,925 | 1,543,618 | 1,375,501 | | Net Income | 437,883 | 406,792 | 347,591 | 318,470 | 288,605 | | Earnings Per Share (Diluted) | $1.62 | $1.41 | $1.19 | $1.08 | $0.98 | | Gross Margin | 37.6% | 38.7% | 39.8% | 39.1% | 39.2% | | Cash Dividends Per Share | $0.440 | $0.390 | $0.355 | $0.335 | $0.31 | | Total Assets | 2,085,434 | 2,352,054 | 2,309,620 | 2,148,673 | 2,022,540 | | Long-Term Debt at Year-End | $— | $— | 178,125 | 225,625 | 258,125 | Management's Discussion and Analysis of Financial Condition and Results of Operations 2018 net sales grew 2% driven by international mirror shipments, while net income rose 8% due to lower taxes, despite a slight gross margin decline from pricing pressure Comparison of Operating Results 2018 vs. 2017 | Metric | 2018 ($ Millions) | 2017 ($ Millions) | Change ($ Millions) | Change (%) | | :--------------------------- | :---------------- | :---------------- | :------------------ | :--------- | | Net Sales | $1,834.1 | $1,794.9 | $39.2 | 2.2% | | Cost of Sales as % of Net Sales | 62.4% | 61.3% | 1.1% | 1.8% | | Gross Profit | 37.6% | 38.7% | (0.6)% | (1.5)% | | Research and Development Expenses | 5.8% | 5.6% | $7.4 | 7.4% | | Selling, General and Administrative Expenses | 4.1% | 4.0% | $3.8 | 5.3% | | Operating Income | 27.7% | 29.2% | (2.9)% | (9.9)% | | Net Income | 23.9% | 22.7% | $31.1 | 7.6% | | Effective Tax Rate | 16.1% | 23.5% | (7.4)% | (31.5)% | - Automotive net sales grew in 2018, primarily due to a 6% increase in auto-dimming mirror shipments, from 39.3 million units in 2017 to 41.6 million units in 2018, mainly reflecting increased international market penetration[111] - Gross margin decreased in 2018, primarily due to annual customer price reductions not being fully offset by lower procurement costs, and lower-than-expected sales preventing full absorption of fixed overhead[113] - Net income increased by 8% in 2018, primarily due to a lower effective tax rate, largely attributable to the Tax Cuts and Jobs Act of 2017 reducing the statutory federal income tax rate from 35% to 21%[117][118] Cash and Cash Equivalents and Current Ratio | Metric | 2018 ($ Millions) | 2017 ($ Millions) | 2016 ($ Millions) | | :----------------------- | :---------------- | :---------------- | :---------------- | | Cash and Cash Equivalents | $217.0 | $569.7 | $546.5 | | Current Ratio | 5.0 | 4.9 | 7.7 | Summary of Cash Flows | Cash Flow Source/Use | 2018 ($ Millions) | 2017 ($ Millions) | 2016 ($ Millions) | | :------------------------ | :---------------- | :---------------- | :---------------- | | Cash Flow from Operating Activities | $552.4 | $501.0 | $477.0 | | Cash Flow from Investing Activities | ($185.8) | ($77.7) | ($251.4) | | Cash Flow from Financing Activities | ($719.3) | ($400.0) | ($230.7) | - Cash outflow from financing activities significantly increased in 2018, primarily due to common stock repurchases rising from $231.4 million in 2017 to $591.6 million in 2018[130] - The company expects 2019 revenue to be between $1.83 billion and $1.93 billion, with a gross margin between 36% and 37%, including approximately $20 million in tariff costs[138][139] - The company anticipates 2019 capital expenditures of approximately $90 million to $100 million, primarily for production equipment purchases, to be financed through existing cash and operating cash flows[141] - The company expects 2020 revenue to grow by approximately 3% to 8% compared to 2019[144] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign exchange and interest rate risks, though most non-U.S. sales are USD-denominated, and no hedging activities are currently undertaken - The company faces foreign currency exchange rate risk and interest rate risk, where interest rate fluctuations could negatively impact the financial performance of fixed-income investments[145] - Most of the company's non-U.S. sales are denominated in U.S. dollars, with approximately 8% in 2018, 8% in 2017, and 7% in 2016 of net sales denominated in non-U.S. currencies; the company currently does not engage in foreign currency hedging activities[147] Financial Statements and Supplementary Data This section presents consolidated financial statements for 2016-2018, including balance sheets, income statements, and cash flow statements, along with quarterly data - This report includes consolidated balance sheets as of December 31, 2018, and 2017, and consolidated statements of income, comprehensive income, shareholders' investment, and cash flows for the years ended December 31, 2018, 2017, and 2016[158] Quarterly Financial Data 2018 and 2017 (Unaudited) | Metric | 2018 Q1 ($ Thousands) | 2017 Q1 ($ Thousands) | 2018 Q2 ($ Thousands) | 2017 Q2 ($ Thousands) | 2018 Q3 ($ Thousands) | 2017 Q3 ($ Thousands) | 2018 Q4 ($ Thousands) | 2017 Q4 ($ Thousands) | | :------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net Sales | $465,420 | $453,535 | $454,981 | $443,139 | $460,253 | $438,628 | $453,409 | $459,570 | | Gross Profit | $172,628 | $175,801 | $172,804 | $167,208 | $172,990 | $171,230 | $172,044 | $180,290 | | Operating Income | $128,515 | $134,427 | $126,683 | $125,865 | $127,428 | $129,073 | $125,499 | $133,994 | | Net Income | $111,249 | $97,557 | $109,024 | $88,536 | $111,336 | $90,230 | $106,275 | $130,469 | | Basic Earnings Per Share ($) | $0.40 | $0.34 | $0.40 | $0.31 | $0.42 | $0.32 | $0.41 | $0.46 | | Diluted Earnings Per Share ($) | $0.40 | $0.33 | $0.40 | $0.31 | $0.42 | $0.31 | $0.41 | $0.46 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in accountants or disagreements on accounting and financial disclosure occurred during the 24 months ended December 31, 2018 - During the 24-month period ended December 31, 2018, there were no changes in accountants, nor any disagreements with accountants on accounting and financial disclosure[160] Controls and Procedures Management and independent auditors confirmed the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2018 - The company's Chief Executive Officer and Chief Financial Officer assessed the effectiveness of disclosure controls and procedures as of December 31, 2018, and concluded they were adequate and effective[161] - Management assessed the effectiveness of internal control over financial reporting based on the COSO (2013) framework and concluded that the company maintained effective internal control over financial reporting as of December 31, 2018[162] - Independent registered public accounting firm Ernst & Young LLP audited the effectiveness of the company's internal control over financial reporting as of December 31, 2018, and issued an unqualified opinion[164][216][221][222] - No material changes occurred in the company's internal control over financial reporting during the reporting period[165] Other Information This section contains no other information - There is no other information in this section[166] PART III Directors, Executive Officers and Corporate Governance This section lists executive officers, details their tenure, and notes the adoption of a Code of Ethics, with further governance details in the proxy statement Company Executive Officers | Name | Age | Position | Tenure in Current Position | | :------------ | :-- | :----------------------------------------- | :------------------------- | | Steve Downing | 41 | President and Chief Executive Officer | January 2018 | | Kevin Nash | 44 | Vice President of Finance, CFO and Treasurer | February 2018 | | Scott Ryan | 38 | Vice President, General Counsel and Corporate Secretary | August 2018 | | Neil Boehm | 47 | Chief Technology Officer and VP of Engineering | February 2018 | | Matthew Chiodo | 54 | Vice President of Sales | February 2018 | - The company has adopted a Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and all other executive officers, which is available on the company's website[177] Executive Compensation Executive compensation was adjusted in 2019, with annual incentives tied to revenue, operating income, and EPS, and long-term incentives using PSAs and RS to align with shareholder value Executive Officer Base Salaries 2018 vs. 2019 | Executive Officer Name | Position | 2018 Base Salary (USD) | 2019 Base Salary (USD) | | :--------------------- | :----------------------------------------- | :--------------------- | :--------------------- | | Steve Downing | President and Chief Executive Officer | $650,000 | $750,000 | | Kevin Nash | Vice President of Finance, CFO and Treasurer | $340,000 | $400,000 | | Neil Boehm | Vice President of Engineering and CTO | $333,000 | $407,000 | | Matt Chiodo | Vice President of Sales | $336,000 | $380,000 | | Scott Ryan | Vice President, General Counsel and Corporate Secretary | $315,000 | $350,000 | - The Annual Incentive Plan provides cash awards to executive officers based on three key performance indicators: revenue (33.33%), operating income (33.33%), and diluted earnings per share (33.33%)[181][185] - In 2018, the CEO's annual plan bonus target ranged from 0%-200% of base salary, while other executive officers' targets were 0%-150%; in 2019, the CEO's threshold increased to 50%, and other executive officers' thresholds increased to 37.5%[182][183] 2018 Annual Incentive Plan Performance vs. Actual Results | Performance Metric | Weight | Threshold ($ Thousands) | Target ($ Thousands) | Maximum ($ Thousands) | Actual Performance ($ Thousands) | | :----------------------- | :------ | :---------------------- | :------------------- | :-------------------- | :------------------------------- | | Revenue | 33.33% | $1,794,873 | $1,930,000 | $2,065,000 | $1,834,064 | | Operating Income | 33.33% | $523,359 | $554,000 | $597,000 | $515,001 | | Diluted Earnings Per Share | 33.33% | $1.410 | $1.640 | $1.780 | $1.644 | - The company implemented the 2019 Omnibus Incentive Plan (OIP) and Long-Term Incentive Plan, designed to balance short-term goals with long-term shareholder value creation through Performance Share Awards (PSAs) and Restricted Stock (RS)[189][192] - In the Long-Term Incentive Plan, 70% of awards are granted through PSAs, linked to EBITDA and ROIC; 30% are granted through RS, serving as an incentive and retention tool[192][194][196] - Equity compensation for non-employee directors has been adjusted, replacing previous stock options with $100,000 worth of restricted stock awards, which will vest one year after the grant date[198] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details for management and beneficial owners are incorporated by reference, with no identified change of control arrangements - Information regarding security ownership of management, certain beneficial owners, and equity compensation plan summaries is incorporated by reference into the proxy statement[199] Certain Relationships and Related Transactions, and Director Independence Information on certain transactions and director independence is incorporated by reference into the proxy statement - Information regarding certain transactions and director independence is incorporated by reference into the proxy statement[200] Principal Accounting Fee and Services Details on principal accounting fees, services, and the audit committee's pre-approval policy are incorporated by reference into the proxy statement - Detailed information regarding principal accounting fees and services, along with the audit committee's policy on pre-approval of audit and non-audit services, is incorporated by reference into the proxy statement[201] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, the independent auditor's report, and an exhibit index, noting that financial statement schedules are not applicable - This section lists the financial statements and the report of the independent registered public accounting firm submitted with the report[206] - Financial statement schedules are not required or applicable[206] - The exhibit index can be found on page 67[206] Form 10-K Summary This report does not include a Form 10-K summary - This report does not contain a Form 10-K summary[204] Financial Statements and Supplementary Data This section presents detailed consolidated financial statements for 2016-2018, including balance sheets, income statements, and cash flow statements, along with comprehensive notes on accounting policies and specific financial items - The company's financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles and audited by Ernst & Young LLP, which issued an unqualified audit opinion[215][217] Consolidated Balance Sheet Summary (As of December 31) | Metric | 2018 (USD) | 2017 (USD) | | :------------------------- | :------------ | :------------ | | Cash and Cash Equivalents | 217,025,278 | 569,734,496 | | Short-Term Investments | 169,412,999 | 152,538,054 | | Accounts Receivable, Net | 213,537,799 | 231,121,788 | | Inventories, Net | 225,281,599 | 216,765,583 | | Property, Plant and Equipment, Net | 498,473,766 | 492,479,330 | | Goodwill | 307,365,845 | 307,365,845 | | Intangible Assets, Net | 269,675,000 | 288,975,000 | | Total Assets | 2,085,434,068 | 2,352,053,912 | | Accounts Payable | 92,810,316 | 89,898,467 | | Deferred Income Taxes | 54,521,489 | 58,888,644 | | Total Stockholders' Equity | 1,861,751,660 | 2,049,518,261 | Consolidated Statements of Income Summary (For the Years Ended December 31) | Metric | 2018 (USD) | 2017 (USD) | 2016 (USD) | | :------------------------- | :------------ | :------------ | :------------ | | Net Sales | 1,834,063,697 | 1,794,872,578 | 1,678,924,756 | | Cost of Sales | 1,143,597,005 | 1,100,344,312 | 1,010,472,512 | | Gross Profit | 690,466,692 | 694,528,266 | 668,452,244 | | Total Operating Expenses | 182,341,145 | 171,169,914 | 156,709,309 | | Operating Income | 508,125,547 | 523,358,352 | 511,742,935 | | Provision for Income Taxes | 84,163,850 | 125,004,782 | 162,969,497 | | Net Income | 437,883,097 | 406,791,922 | 347,591,276 | | Diluted Earnings Per Share ($) | $1.62 | $1.41 | $1.19 | Consolidated Statements of Cash Flows Summary (For the Years Ended December 31) | Cash Flow Source/Use | 2018 (USD) | 2017 (USD) | 2016 (USD) | | :------------------------------- | :------------ | :------------ | :------------ | | Net Cash Provided by Operating Activities | 552,418,646 | 501,002,780 | 477,048,185 | | Net Cash Used in Investing Activities | (185,821,194) | (77,712,570) | (251,446,108) | | Net Cash Used in Financing Activities | (719,306,670) | (400,032,789) | (230,682,529) | | Net Increase (Decrease) in Cash and Cash Equivalents | (352,709,218) | 23,257,421 | (5,080,452) | | Cash and Cash Equivalents at Year-End | 217,025,278 | 569,734,496 | 546,477,075 | - The company entered into a new $150 million senior revolving credit facility on October 15, 2018, with an option for an additional $100 million; as of December 31, 2018, there was no outstanding balance under this facility, and the company was in compliance with all covenant terms[292][294] - The Tax Cuts and Jobs Act of 2017 reduced the federal income tax rate to 21%, resulting in a provisional $38.4 million reduction in the company's 2017 income tax expense; related accounting treatments were completed in 2018 with no significant adjustments[297][298] - The company contributed approximately $8.2 million in 2018, $7.7 million in 2017, and $6.5 million in 2016 to its 401(k) retirement savings plan, with the increase primarily due to higher employee participation[308] - The company's goodwill is $307.4 million, related to the HomeLink® acquisition, with no impairment recorded in 2018 and 2017; intangible assets include the HomeLink® trademark (indefinite life), HomeLink® technology (12-year life), and an exclusive license agreement (indefinite life)[346][347][348][349] Revenue by Geographic Location and Major Product Source (For the Years Ended December 31) | Revenue Category | 2018 (USD) | 2017 (USD) | | :------------------- | :------------ | :------------ | | Automotive Products | | | | United States | 583,672,971 | 567,492,812 | | Germany | 333,002,878 | 351,123,204 | | Japan | 209,311,790 | 185,261,067 | | Other Countries | 665,210,657 | 654,250,385 | | Other Products | | | | Fire Protection Products | 22,109,784 | 18,790,474 | | Window Products | 20,755,617 | 17,954,636 | | Total Revenue | 1,834,063,697 | 1,794,872,578 |