Gentex(GNTX) - 2019 Q2 - Quarterly Report

FORM 10-Q Filing Information FORM 10-Q Filing Information - The report is a Quarterly Report (Form 10-Q) for the period ended June 30, 2019, filed by Gentex Corporation (Commission File Number: 0-10235)[2] Shares Outstanding | Class | Shares Outstanding, July 19, 2019 (shares) | | :--- | :--- | | Common Stock, $.06 Par Value | 254,775,618 | - The registrant is a large accelerated filer and is not a shell company[4] Table of Contents Table of Contents PART I – FINANCIAL INFORMATION PART I – FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, cash flow statements, and detailed notes, providing a snapshot of the company's financial position and performance for the periods ended June 30, 2019 Unaudited Condensed Consolidated Balance Sheets Consolidated Balance Sheet Summary | Metric | June 30, 2019 (USD) | December 31, 2018 (USD) | | :--- | :--- | :--- | | Total Assets | $2,142,802,873 | $2,085,434,068 | | Total Liabilities | $238,468,638 | $223,682,408 | | Total Shareholders' Investment | $1,904,334,235 | $1,861,751,660 | | Cash and cash equivalents | $260,332,892 | $217,025,278 | | Total current assets | $930,402,907 | $850,930,254 | Unaudited Condensed Consolidated Statements of Income Consolidated Income Statement Summary | Metric | Three Months Ended June 30, 2019 (USD) | Three Months Ended June 30, 2018 (USD) | Six Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2018 (USD) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $468,711,354 | $454,981,440 | $937,300,351 | $920,401,545 | | Gross profit | $176,537,604 | $172,804,472 | $346,182,108 | $345,432,873 | | Income from operations | $127,904,966 | $126,683,004 | $249,501,298 | $255,198,337 | | Net Income | $108,958,625 | $109,023,982 | $213,239,036 | $220,272,725 | | Basic EPS | $0.42 | $0.40 | $0.82 | $0.81 | | Diluted EPS | $0.42 | $0.40 | $0.82 | $0.80 | | Cash Dividends Declared per Share | $0.115 | $0.110 | $0.230 | $0.220 | Unaudited Condensed Consolidated Statements of Comprehensive Income Consolidated Comprehensive Income Summary | Metric | Three Months Ended June 30, 2019 (USD) | Three Months Ended June 30, 2018 (USD) | Six Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2018 (USD) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $108,958,625 | $109,023,982 | $213,239,036 | $220,272,725 | | Other comprehensive income (loss), net of tax | $774,955 | $(2,692,093) | $2,099,559 | $(1,029,759) | | Comprehensive Income | $109,733,580 | $106,331,889 | $215,338,595 | $219,242,966 | Unaudited Condensed Consolidated Statements of Shareholders' Investment Shareholders' Investment Summary | Metric | As of January 1, 2019 (USD) | As of June 30, 2019 (USD) | | :--- | :--- | :--- | | Common Stock Shares | 259,328,613 | 254,779,119 | | Common Stock Amount | $15,559,717 | $15,286,747 | | Additional Paid-In Capital | $745,324,144 | $777,238,253 | | Retained Earnings | $1,102,468,137 | $1,111,310,014 | | Accumulated Other Comprehensive Income (Loss) | $(1,600,338) | $499,221 | | Total Shareholders' Investment | $1,861,751,660 | $1,904,334,235 | - During the six months ended June 30, 2019, the company repurchased common stock totaling $166.14 million and declared cash dividends of $58.69 million[19] Unaudited Condensed Consolidated Statements of Cash Flows Cash Flow Summary | Cash Flow Activity (Six Months Ended June 30) | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $273,467,294 | $292,384,554 | | Net cash (used for) investing activities | $(48,037,964) | $(156,183,468) | | Net cash (used for) financing activities | $(182,121,716) | $(409,236,441) | | Net increase (decrease) in cash and cash equivalents | $43,307,614 | $(273,035,355) | | Cash and cash equivalents, end of period | $260,332,892 | $296,699,141 | Notes to Unaudited Condensed Consolidated Financial Statements (1) Basis of Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules and GAAP, including only normal and recurring adjustments[26] (2) Adoption of New Accounting Pronouncements - The company adopted ASU 2016-02, Leases, effective January 1, 2019, which did not have a material impact on its financial statements[27] - The company is evaluating ASU 2016-13, Financial Instruments - Credit Losses, for adoption on January 1, 2020[28] (3) Goodwill and Other Intangible Assets - Goodwill remained constant at $307.4 million as of June 30, 2019, and December 31, 2018, with no interim impairment testing needed[29][31] Intangible Asset Carrying Values | Intangible Asset | Net Carrying Value (June 30, 2019) (USD) | Net Carrying Value (December 31, 2018) (USD) | | :--- | :--- | :--- | | Gentex Patents | $15,304,338 | $15,723,266 | | HomeLink® Trade Names and Trademarks | $52,000,000 | $52,000,000 | | HomeLink® Technology | $93,750,000 | $101,250,000 | | Existing Customer Platforms | $18,275,000 | $20,425,000 | | Exclusive Licensing Agreement | $96,000,000 | $96,000,000 | | Total Patents & Other Intangible Assets | $275,329,338 | $285,398,266 | - Amortization expense for patents and intangible assets was approximately $11.2 million for the six months ended June 30, 2019, and is estimated to be around $22 million annually for 2019-2021[32][33] (4) Investments - The company classifies its government, municipal, and corporate bonds as Level 2 assets, while certificates of deposit are Level 1 assets[37][38] Investment Fair Value Summary | Investment Category | Total Fair Value (June 30, 2019) (USD) | Total Fair Value (December 31, 2018) (USD) | | :--- | :--- | :--- | | Cash & Cash Equivalents | $260,332,892 | $217,025,278 | | Short-Term Investments | $190,565,065 | $169,412,999 | | Long-Term Investments | $121,061,221 | $137,979,082 | | Total Fair Value | $564,359,178 | $520,567,359 | - Unrealized losses on investments totaled $40,879 as of June 30, 2019, with no investment losses considered other than temporary[44] Fixed Income Securities Maturity | Fixed Income Securities Maturity (June 30, 2019) | Amount (USD) | | :--- | :--- | | Due within one year | $189,280,485 | | Due between one and five years | $91,584,216 | | Due over five years | $21,877,006 | | Total | $302,741,707 | (5) Inventories Inventory Composition | Inventory Component | June 30, 2019 (USD) | December 31, 2018 (USD) | | :--- | :--- | :--- | | Raw materials | $146,975,452 | $139,058,541 | | Work-in-process | $31,237,909 | $35,386,615 | | Finished goods | $46,881,102 | $50,836,443 | | Total Inventory | $225,094,463 | $225,281,599 | (6) Earnings Per Share - The company uses the two-class method for EPS computation due to unvested share-based payment awards with non-forfeitable dividends[48] Earnings Per Share Metrics | EPS Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Basic Earnings Per Share ($/share) | $0.42 | $0.82 | | Diluted Earnings Per Share ($/share) | $0.42 | $0.82 | | Basic weighted average shares outstanding (shares) | 255,219,868 | 256,350,600 | | Diluted weighted average shares outstanding (shares) | 256,579,621 | 257,694,885 | (7) Stock-Based Compensation Plans - The 2019 Omnibus Incentive Plan, approved by shareholders in May 2019, replaced prior plans and covers 45,000,000 shares of common stock for various awards[52][55] Share-Based Compensation Expense and Unrecognized Costs | Compensation Expense (Share-Based Payments) | Three Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2019 (USD) | | :--- | :--- | :--- | | Total Compensation Expense | $5,200,045 | $9,986,839 | | Amortization expense from restricted stock grants | $3,274,411 | $6,046,175 | | Amortization expense from performance share grants | $257,756 | $257,756 | | Unrecognized compensation cost (stock options, Jun 30, 2019) | - | $7,397,810 | | Unearned stock-based compensation (restricted stock, Jun 30, 2019) | - | $43,851,893 | | Unearned stock-based compensation (performance shares, Jun 30, 2019) | - | $2,726,924 | - The company's Employee Stock Purchase Plan allows employees to purchase shares at 85% of market price, with 1,063,052 shares issued under the plan as of June 30, 2019[66] (8) Comprehensive Income - Comprehensive income includes net income adjusted for unrealized gains/losses on debt investments, foreign currency translation adjustments, and derivatives[68] Accumulated Other Comprehensive Income (Loss) Components | Component (Net of Tax) | Balance at End of Period (June 30, 2019) (USD) | | :--- | :--- | | Foreign currency translation adjustments | $(1,851,574) | | Unrealized gains (losses) on available-for-sale debt securities | $2,350,795 | | Unrealized gains (losses) on derivatives | $0 | | Accumulated other comprehensive income (loss), end of period | $499,221 | Reclassification from AOCI | Reclassification from AOCI (Six Months Ended June 30) | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Realized gain on sale of securities (net of tax) | $172,995 | $565,541 | | Realized gain (loss) on interest rate swap (net of tax) | $0 | $(4,837) | | Total net reclassifications for the period | $172,995 | $560,704 | (9) Debt and Financing Arrangements - The company has a $150 million senior revolving credit facility, with no outstanding balance as of June 30, 2019, and was in compliance with all covenants[73][75] (10) Equity - Common stock decreased by 4.5 million shares during the six months ended June 30, 2019, primarily due to repurchases of 7.8 million shares, partially offset by 3.3 million shares issued under stock plans[77] - The quarterly cash dividend rate increased by $0.005 per share in Q1 2019, resulting in a $0.115 per share dividend declared in Q2 2019[78] (11) Contingencies - The company is involved in various legal proceedings but does not anticipate any material adverse effects on its financial position or results[79] (12) Segment Reporting - The company operates in two segments: Automotive Products (digital vision, connected car products, electronics) and Other (variably dimming windows for aerospace, fire protection products)[80] Segment Performance | Segment | Revenue (Six Months Ended June 30, 2019) (USD) | Income from Operations (Six Months Ended June 30, 2019) (USD) | | :--- | :--- | :--- | | Automotive Products | $912,423,707 | $241,247,925 | | Other | $24,876,644 | $8,253,373 | | Total | $937,300,351 | $249,501,298 | (13) Income Taxes - The effective tax rate for the six months ended June 30, 2019, was 16.4%, up from 15.5% in the prior year, primarily due to a decrease in discrete tax benefits related to stock-based compensation[82] (14) Revenue Automotive Products Revenue by Geography | Automotive Products Revenue by Geography (Six Months Ended June 30, 2019) | Amount (USD) | | :--- | :--- | | U.S. | $285,931,010 | | Germany | $151,601,619 | | Japan | $112,055,986 | | Mexico | $86,589,093 | | Other | $276,245,999 | | Total Automotive Products | $912,423,707 | Revenue by Major Source | Revenue by Major Source (Six Months Ended June 30, 2019) | Amount (USD) | | :--- | :--- | | Automotive Mirrors & Electronics | $822,400,934 | | HomeLink Modules | $90,022,773 | | Fire Protection Products | $12,211,499 | | Windows Products | $12,665,145 | | Total Revenue | $937,300,351 | (15) Leases - As of June 30, 2019, the weighted average remaining lease term for operating leases was 2 years, with a weighted average discount rate of 2.9%[85] Future Minimum Lease Payments | Year Ending December 31 | Future Minimum Lease Payments (USD) | | :--- | :--- | | 2019 (excluding six months ended June 30, 2019) | $745,751 | | 2020 | $576,623 | | 2021 | $138,888 | | 2022 | $54,656 | | 2023 | $11,083 | | Thereafter | $12,725 | | Total future minimum lease payments | $1,539,726 | | Less imputed interest | $(26,933) | | Total | $1,512,793 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis covers financial performance, condition, key drivers, trends, and future outlook Results of Operations: Second Quarter 2019 vs. Second Quarter 2018 - Net sales for Q2 2019 increased by 3% to $468.7 million, primarily driven by a 3% increase in automotive net sales and a 13% increase in other net sales[88][89][92] Auto-Dimming Mirror Unit Shipments | Metric | Q2 2019 (thousands of units) | Q2 2018 (thousands of units) | % Change | | :--- | :--- | :--- | :--- | | Total Auto-Dimming Mirror Units | 10,819 | 10,567 | 2% | | North American Exterior Mirrors | 1,320 | 950 | 39% | | International Exterior Mirrors | 1,953 | 2,115 | (8)% | - Gross profit margin decreased due to annual customer price reductions (150-200 basis points negative impact) and tariffs (50-100 basis points negative impact), partially offset by product mix improvements (50-100 basis points positive impact) and purchasing cost reductions (100-150 basis points positive impact)[93] - Net income for Q2 2019 was relatively flat at $109.0 million compared to Q2 2018[98] Results of Operations: Six Months Ended June 30, 2019 vs. Six Months Ended June 30, 2018 - Net sales for the six months ended June 30, 2019, increased by 2% to $937.3 million, with automotive net sales up 1% driven by a 2% increase in automotive mirror unit shipments[99][100] - Cost of goods sold as a percentage of net sales increased to 63.1% for the first six months of 2019, up from 62.5% in the same period last year, primarily due to customer price reductions and tariffs[101] - Engineering, research and development (E, R & D) expenses increased 6% to $56.4 million, and selling, general & administrative (S, G & A) expenses increased 9% to $40.2 million, both primarily due to increased staffing levels[13][94][95][101][102] - Net income for the six months ended June 30, 2019, decreased by 3% to $213.2 million, compared to $220.3 million in the prior year, attributed to decreased gross margin and increased operating expenses[105] Financial Condition - Cash and cash equivalents increased by $43.3 million to $260.3 million as of June 30, 2019, driven by positive cash flows from operations[105] Working Capital and Long-Term Investments | Metric | June 30, 2019 (USD) | December 31, 2018 (USD) | | :--- | :--- | :--- | | Working Capital | $752,842,110 | $681,769,335 | | Long Term Investments | $121,061,221 | $137,979,082 | | Total | $873,903,331 | $819,748,417 | - The company repurchased 7,799,647 shares during the six months ended June 30, 2019, with 26,041,610 shares remaining under the authorized plan[114][158] - Capital expenditures for the six months ended June 30, 2019, were approximately $45.5 million[109] Business Update - The company's Q2 2019 revenue growth outpaced worldwide light vehicle production growth by approximately 11%, driven by product launches in 2018 and 2019[115] - Growth is attributed to electrochromic technology, the Full Display Mirror®, and other electronic features like the Integrated Toll Module and HomeLink®[115] - Interior and exterior auto-dimming mirrors and advanced electronic features were launched on 33 new vehicle models in Q2 2019, with increased launches for HomeLink® and Full Display Mirror®[116] Product Update - The Full Display Mirror® (FDM) is shipping to five OEMs (General Motors, Subaru, Toyota, Nissan, and Jaguar Land Rover) and is currently on 30 vehicle nameplates, with ongoing negotiations for future OEM adoptions[118] - The company's Camera Monitoring System (CMS) uses three cameras for a comprehensive view, streaming to the FDM, and is designed to meet automaker, driver, safety, and regulatory requirements, including UN-ECE Regulation 46[119][121] - Next-generation HomeLink Connect™ uses RF and wireless cloud-based connectivity for vehicle-to-home automation, with expansion efforts in new markets like China[122][123] - The Integrated Toll Module (ITM®) began volume shipments to Audi in Q1 2019, with further nameplate launches expected with Audi and two additional OEMs in 2020 or 2021[124] - The company has an exclusive licensing agreement with Fingerprint Cards AB for ActiveIRIS® iris-scanning biometric technology for automotive applications, aiming to integrate it with HomeLink® for enhanced security and personalization[125] - SmartBeam® Generation 4, the proprietary high beam control system, offers advanced features like dynamic forward lighting and is expected to meet new FMVSS 108 standards, though it faces increased competition from multi-function driver assist camera products[127][130] - The latest generation of dimmable aircraft windows will be offered as optional content on the new Boeing 777X, building on its existing supply for the Boeing 787 Dreamliner[131] Other Business Considerations - Automotive revenues constitute approximately 97-98% of the company's total revenue[132] - The company faces ongoing pricing pressure from automotive customers and competitors, which it attempts to offset through engineering and purchasing cost reductions, productivity improvements, and increased unit sales volume[132][133] - The company relies on patents and trade secrets for competitive advantage and actively manages intellectual property rights to minimize infringement risks[134] Outlook and Guidance Calendar Year 2019 Light Vehicle Production Forecast | Region | Calendar Year 2019 Light Vehicle Production Forecast (Millions of units) | % Change YoY | | :--- | :--- | :--- | | North America | 16.65 | (2)% | | Europe | 21.44 | (3)% | | Japan and Korea | 13.28 | 1% | | China | 25.04 | (7)% | | Total Light Vehicle Production | 76.41 | (3)% | Guidance for Calendar Year 2019 | Guidance for Calendar Year 2019 | Range | | :--- | :--- | | Revenue | $1.87 - $1.90 billion | | Gross Profit Margin (%) | 36.5% - 37.5% | | Operating Expenses (USD) | $195 - $200 million | | Capital Expenditures (USD) | $90 - $100 million | | Effective Annual Tax Rate (%) | 16.0% - 17.0% | - The company maintains its 2020 revenue growth estimate of 3% to 8% over 2019, despite ongoing uncertainties in light vehicle production, tariffs, and market conditions[140][146] Critical Accounting Policies - The preparation of financial statements requires management to make estimates and assumptions, which are continuously evaluated and have historically not differed materially from actual results[147] - Detailed critical accounting policies are referenced in the company's 2018 Annual Report on Form 10-K[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces foreign exchange and interest rate risks, with no material changes from the 2018 Form 10-K - The company is subject to foreign exchange rate risk and interest rate risk, which could lead to realized losses on fixed income investments or other-than-temporary impairment adjustments[149] - There were no material changes in market risk factors from the previously disclosed 2018 Form 10-K[149] - Uncertain economic conditions in foreign markets could reduce demand for the company's automotive products[150] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2019, with no material changes in internal control - The company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of June 30, 2019[151] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2019[152] Safe Harbor Statement Safe Harbor Statement - This report contains forward-looking statements subject to various risks and uncertainties, including market conditions, customer preferences, competition, and regulatory changes[153][155] - Readers are cautioned not to place undue reliance on these statements, and the company undertakes no obligation to publicly update or revise them[155] PART II – OTHER INFORMATION PART II – OTHER INFORMATION Item 1A. Risk Factors This section refers to risk factors detailed in Item 2 of this 10-Q and the 2018 Form 10-K, with no material changes - Risk factors are discussed in Item 2 of this Form 10-Q and in Part I – Item 1A of the company's 2018 Form 10-K[157] - No material changes to risk factors were reported, except as described in Item 2 and Item 3 of this Form 10-Q[157] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase plan, including shares repurchased and remaining authorization - The company has an ongoing share repurchase plan authorized by the Board of Directors as part of its capital allocation strategy[158] Share Repurchase Activity | Period | Total Number of Shares Purchased (shares) | Weighted Average Price Paid Per Share ($/share) | Maximum Number of Shares That May Yet Be Purchased Under the Plan or Program (shares) | | :--- | :--- | :--- | :--- | | 1st Quarter 2019 Total | 4,724,938 | $20.37 | - | | 2nd Quarter 2019 Total | 3,074,709 | $22.72 | - | | 2019 Total (Six Months) | 7,799,647 | $21.30 | 26,041,610 | - As of June 30, 2019, the company had repurchased a total of 120,958,118 shares at a cost of $1.71 billion under its share repurchase plan[159] Item 6. Exhibits This section refers to the Exhibit Index for a list of documents filed as exhibits to the Form 10-Q - The Exhibit Index is located on page 36 (actual page 47) of the report[160] Signatures Signatures - The report was signed on August 2, 2019, by Steven R. Downing, President and Chief Executive Officer, and Kevin C. Nash, Vice President, Finance, Chief Financial Officer and Treasurer[162] Exhibit Index Exhibit Index - The Exhibit Index lists various documents, including CEO and CFO certifications under the Sarbanes-Oxley Act (Sections 302 and 906) and Inline XBRL documents[164]