Gentex(GNTX) - 2019 Q4 - Annual Report

Part I Item 1. Business Gentex designs and manufactures digital vision, connected car, dimmable glass, and fire protection products, with automotive comprising 97% of 2019 revenue - Gentex Corporation was incorporated in Michigan in 1974, focusing on digital vision, connected car, dimmable glass, and fire protection products[6] - Automotive products, including automatic-dimming rearview mirrors and electronics, constituted approximately 97% of the Company's total revenue in 2019[13][18] - The Company began shipping Full Display Mirror® (FDM®) in 2015 and signed an exclusive agreement for Integrated Toll Module® (ITM®) technology integration[7] - In 2017, an agreement was made with VOXX International Corporation for exclusive aftermarket distribution of the Gentex Aftermarket Full Display Mirror® in North America[8] - The Company announced an embedded biometric solution for vehicles using iris scanning technology, with an exclusive licensing agreement with Fingerprint Cards AB in January 2018[8] - In January 2019, the Company began offering its latest generation of variable dimmable windows on the Boeing 777X aircraft, with production shipments starting in Q3 2019, and Airbus will also offer these windows starting late 2020[10][32] - In January 2020, an innovative lighting technology for medical applications, co-developed with Mayo Clinic, was unveiled, with clinical trials expected to take 18-24 months before commercial availability[11][12] Intellectual Property Portfolio | Category | U.S. Registered Trademarks | U.S. Patents | Foreign Registered Trademarks | Foreign Patents | | :------- | :------------------------- | :----------- | :---------------------------- | :-------------- | | Electrochromic/Automotive/HomeLink® | 31 | 583 | 320 | 855 | | Dimmable Windows | - | 64 | - | 11 | | Fire Protection Products | 7 | 13 | 16 | 11 | | Total Owned | 38 | 660 | 336 | 877 | | Applications in Process | 31 | 256 | - | 503 | - As of February 1, 2020, the Company had 5,874 full-time employees, none of whom are represented by a labor union[46] Item 1A. Risk Factors The Company faces significant risks from its reliance on the cyclical automotive industry, key customers, pricing pressures, tariffs, and intense competition - The automotive industry accounts for approximately 97% of the Company's net sales, making it highly susceptible to economic cycles and production volatility[50] - Three automotive customers (Volkswagen Group, Toyota Motor Company, and General Motors) each accounted for 10% or more of annual net sales in 2019, posing a significant concentration risk[52] - Ongoing pricing pressures from automotive customers and competitors, along with increased costs from tariffs (US-China), continue to impact profit margins[53][54] - Competition is formidable, particularly from Magna Mirrors, and emerging technologies like camera monitoring systems (CMS) pose a threat to traditional rearview mirrors, although the Company is developing its own CMS solutions[55][57][60] - The Company's financial performance is sensitive to product mix shifts and decreased consumer demand for vehicles where it provides higher-value content[61] - Risks associated with international operations include exposure to local economic/political conditions, currency fluctuations, tariffs, natural disasters (e.g., coronavirus), and reduced intellectual property protection in certain countries like China[78][80] Item 1B. Unresolved Staff Comments No unresolved staff comments from the SEC were reported as of the reporting date - No unresolved staff comments were reported[82] Item 2. Properties Gentex operates primary manufacturing and office facilities in Michigan, expanding its chemistry lab, and maintaining significant automatic-dimming mirror production capacity - The Company's primary operations are in Zeeland and Holland, Michigan, with additional leased sales and engineering offices in Europe and Asia[82][84] - A 36,000 square-foot addition to the main corporate office and manufacturing facility for chemistry lab expansion began in Q4 2019, with an estimated cost of $10 million and expected operation by Q4 2020[83] Manufacturing Capacity and 2019 Shipments | Product Type | Estimated Annual Building Capacity | 2019 Units Shipped | | :------------- | :--------------------------------- | :----------------- | | Interior Automatic-Dimming Mirrors | 33 - 36 million units | 29.6 million units | | Exterior Automatic-Dimming Mirrors | 14 - 17 million units | 13.3 million units | Item 3. Legal Proceedings The Company is involved in legal proceedings but does not anticipate any material adverse effects on its financial position or operations - The Company is involved in legal proceedings but does not believe any are material enough to adversely affect its financial position, results of operations, or cash flows[89] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the Company's operations - Mine Safety Disclosures are not applicable[90] Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Gentex common stock trades on Nasdaq (GNTX), with a $0.115 quarterly dividend and substantial share repurchases in 2019 - Gentex common stock trades on The Nasdaq Global Select Market® under the symbol GNTX[92] - As of February 1, 2020, there were 2,238 record-holders of the Company's common stock[92] - In March 2019, the Board of Directors approved an increased quarterly dividend rate of $0.115 per share[94] 2019 Share Repurchase Activity | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------- | :------------------------------- | :--------------------------- | | January 2019 | 75,001 | $21.42 | | February 2019 | 2,499,850 | $20.24 | | March 2019 | 2,150,087 | $20.49 | | April 2019 | 240,037 | $23.07 | | May 2019 | 1,858,307 | $22.20 | | June 2019 | 976,365 | $23.64 | | July 2019 | 380,220 | $27.22 | | August 2019 | 1,828,442 | $26.69 | | September 2019 | 1,360,915 | $27.54 | | October 2019 | 520,345 | $27.98 | | November 2019 | 900,765 | $28.75 | | December 2019 | 985,604 | $28.66 | | Total | 13,775,938 | - | Item 6. Selected Financial Data Selected financial data (2015-2019) shows consistent revenue growth, declining gross margin, increasing EPS and dividends, and no long-term debt by 2018 Selected Financial Data (2015-2019) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Net Sales (in thousands) | $1,858,897 | $1,834,064 | $1,794,873 | $1,678,925 | $1,543,618 | | Net Income (in thousands) | $424,684 | $437,883 | $406,792 | $347,591 | $318,470 | | Earnings Per Share (Fully Diluted) | $1.66 | $1.62 | $1.41 | $1.19 | $1.08 | | Gross Profit Margin | 37.0% | 37.6% | 38.7% | 39.8% | 39.1% | | Cash Dividends per Common Share | $0.460 | $0.440 | $0.390 | $0.355 | $0.335 | | Total Assets (in thousands) | $2,168,803 | $2,085,434 | $2,352,054 | $2,309,620 | $2,148,673 | | Long-Term Debt Outstanding at Year End (in thousands) | $— | $— | $— | $178,125 | $225,625 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, liquidity, and outlook, highlighting 2019 sales growth, decreased gross margin, increased operating expenses, and a slight net income decrease Results of Operations In 2019, net sales grew 1.4% to $1.859 billion, driven by mirror shipments, but gross profit decreased and operating expenses rose, resulting in a 3% net income decline Key Financial Performance Metrics (2017-2019) | Metric | 2019 (% of Net Sales) | 2018 (% of Net Sales) | 2017 (% of Net Sales) | 2019 vs 2018 (% Change) | 2018 vs 2017 (% Change) | | :---------------------------------- | :-------------------- | :-------------------- | :-------------------- | :---------------------- | :---------------------- | | Net Sales | 100.0% | 100.0% | 100.0% | 1.4% | 2.2% | | Cost of Goods Sold | 63.0% | 62.4% | 61.3% | 2.4% | 3.9% | | Gross Profit | 37.0% | 37.6% | 38.7% | (0.3)% | (0.6)% | | Engineering, Research and Development | 6.2% | 5.8% | 5.6% | 7.0% | 7.4% | | Selling, General and Administrative | 4.6% | 4.1% | 4.0% | 13.1% | 5.3% | | Total Operating Expenses | 10.7% | 9.9% | 9.5% | 9.6% | 6.5% | | Operating Income | 26.3% | 27.7% | 29.2% | (3.9)% | (2.9)% | | Income Before Provision for Income Taxes | 26.9% | 28.5% | 29.6% | (4.1)% | (1.8)% | | Provision for Income Taxes | 4.1% | 4.6% | 7.0% | (10.0)% | (32.7)% | | Net Income | 22.8% | 23.9% | 22.7% | (3.0)% | 7.6% | - In 2019, net sales increased by $24.8 million (1%) to $1.859 billion, despite a 6% decline in global vehicle production and a 1% negative impact from the General Motors strike[100] - Automotive net sales increased due to a 3% rise in automatic-dimming mirror shipments (42.9 million units in 2019 vs. 41.6 million in 2018), primarily driven by an 8% increase in North American shipments[100] - Other net sales (dimmable aircraft windows and fire protection) increased by 13% to $48.4 million in 2019[101] - Cost of goods sold as a percentage of net sales increased from 62.4% in 2018 to 63.0% in 2019, mainly due to annual customer price reductions and increased tariff costs, partially offset by purchasing cost reductions[102] - Engineering, research and development expenses increased by $7.6 million (7%) in 2019, while selling, general and administrative expenses increased by $9.9 million (13%), both primarily due to increased staffing levels[103][104] - Net income decreased by $13.2 million (3%) in 2019, primarily due to the decrease in gross margin and increases in operating expenses[107] Liquidity and Capital Resources The Company maintains strong liquidity with increased cash to $296.3 million and an improved current ratio of 5.5 in 2019, despite decreased operating cash flow Cash and Cash Equivalents (2017-2019) | Year | Cash and Cash Equivalents | | :--- | :------------------------ | | 2019 | $296.3 million | | 2018 | $217.0 million | | 2017 | $569.7 million | - The Company's current ratio increased from 5.0 in 2018 to 5.5 in 2019, reflecting an increase in working capital[118] Cash Flow from Operating Activities (2017-2019) | Year | Cash Flow from Operating Activities | | :--- | :---------------------------------- | | 2019 | $506.0 million | | 2018 | $552.4 million | | 2017 | $501.0 million | - Cash flow used for investing activities decreased by $129.1 million to $56.7 million in 2019, primarily due to decreased investment purchases[120] - Cash flow used for financing activities decreased by $349.3 million to $370.0 million in 2019, mainly due to a reduction in common stock repurchases ($331.5 million in 2019 vs. $719.3 million in 2018)[122] - Management believes current working capital, long-term investments, and internally generated cash flow are sufficient to cover anticipated cash needs[126][127] Outlook For 2020, Gentex projects revenue between $1.91 billion and $2.0 billion, gross margin of 36-37%, and operating expenses of $205-215 million, with 2021 revenue growth of 3-8% Light Vehicle Production Forecasts (2020) | Region | Estimated Units (millions) | | :------- | :------------------------- | | North America | 16.5 | | Europe | 20.7 | | Japan and Korea | 12.9 | | China | 24.4 | - The Company estimates 2020 top-line revenue to be between $1.91 billion and $2.0 billion[130] - Gross profit margin is estimated to be between 36% and 37% for 2020[131] - Operating expenses (E, R&D and SG&A) are expected to be between $205 million and $215 million in 2020, driven by increased staffing and investment in new technologies[132] - Capital expenditures for 2020 are anticipated to be between $85 million and $95 million, mainly for production equipment[134] - Depreciation and amortization expense for 2020 is estimated between $105 million and $110 million, with a tax rate between 15.0% and 17.0%[135] - For 2021, revenue is estimated to increase approximately 3% to 8% over 2020 estimates[137] Market Risk Disclosure The Company is exposed to foreign exchange and interest rate risks, but considers them immaterial, with most non-U.S. sales in USD and no significant off-balance sheet arrangements - The Company is subject to foreign exchange rate risk and interest rate risk, but currently believes these risks are not material[138] - Approximately 7% of net sales in 2019 were invoiced and paid in foreign currencies, consistent with expectations for 2020, and the Company does not currently engage in foreign currency hedging[140] - The Company has no significant off-balance sheet arrangements or commitments not recorded in its financial statements[141] Contractual Obligations and Other Commitments As of December 31, 2019, total contractual obligations were $168.1 million, with $167.7 million due within one year, covering leases, purchase obligations, and dividends Contractual Obligations and Other Commitments (as of December 31, 2019) | Category | Total (millions) | Less than 1 Year (millions) | 1-3 Years (millions) | 3-5 Years (millions) | More than 5 Years (millions) | | :--------------- | :--------------- | :-------------------------- | :------------------- | :------------------- | :------------------- | | Operating leases | $1.1 | $0.7 | $0.4 | — | — | | Purchase obligations | $138.1 | $138.1 | — | — | — | | Dividends payable | $28.9 | $28.9 | — | — | — | | Total | $168.1 | $167.7 | $0.4 | — | — | Significant Accounting Policies and Critical Accounting Estimates Financial statements adhere to U.S. GAAP, requiring management estimates; critical areas like revenue recognition for variable consideration involve significant judgment - The preparation of financial statements requires management to make estimates and assumptions, which are inherently subject to uncertainty[147] - A critical accounting estimate is one that requires management to make assumptions about uncertain matters and where changes in the estimate could materially impact financial condition or results of operations[152] - Revenue recognition, especially for annual price reductions and retroactive price adjustments (variable consideration), is a critical accounting estimate requiring significant judgment based on historical results and expected negotiation outcomes[148][149] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section refers to Item 7 for detailed quantitative and qualitative disclosures about market risk exposures Item 8. Financial Statements and Supplementary Data This section presents consolidated financial statements, independent auditor reports, and selected unaudited quarterly financial data for 2018 and 2019 Selected Quarterly Results of Operations (2018-2019, in thousands) | Metric | 2019 Q1 | 2018 Q1 | 2019 Q2 | 2018 Q2 | 2019 Q3 | 2018 Q3 | 2019 Q4 | 2018 Q4 | | :--------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Net Sales | $468,589 | $465,420 | $468,711 | $454,981 | $477,761 | $460,253 | $443,836 | $453,409 | | Gross Profit | 169,645 | 172,628 | 176,538 | 172,804 | 180,321 | 172,990 | 161,805 | 172,044 | | Operating Income | 121,596 | 128,515 | 127,905 | 126,683 | 128,136 | 127,428 | 110,901 | 125,499 | | Net Income | 104,280 | 111,249 | 108,959 | 109,024 | 111,898 | 111,336 | 99,547 | 106,275 | | Basic EPS | $0.40 | $0.40 | $0.42 | $0.40 | $0.44 | $0.42 | $0.39 | $0.41 | | Diluted EPS | $0.40 | $0.40 | $0.42 | $0.40 | $0.44 | $0.42 | $0.39 | $0.41 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported for the 24-month period ended December 31, 2019 - No changes in or disagreements with accountants on accounting and financial disclosure were reported for the 24-month period ended December 31, 2019[155] Item 9A. Controls and Procedures Management affirmed effective disclosure controls and internal control over financial reporting as of December 31, 2019, with an unqualified audit opinion - The Company's disclosure controls and procedures were evaluated as adequate and effective as of December 31, 2019[156] - Management asserted the effectiveness of internal control over financial reporting as of December 31, 2019, based on the COSO 2013 Framework[157] - Ernst & Young LLP issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting[159][208][215] - No material changes to internal controls over financial reporting occurred during the period covered by the annual report[160] Item 9B. Other Information No other information is reported under this item - No other information was reported[161] Part III Item 10. Directors, Executive Officers and Corporate Governance This section details executive officers, their roles, and tenure, noting no family relationships and the adoption of a Code of Ethics Executive Officers as of Report Date | Name | Age | Position | Current Position Held Since | | :----------- | :-- | :--------------------------------------- | :-------------------------- | | Steve Downing | 42 | President and Chief Executive Officer | January 2018 | | Neil Boehm | 48 | Chief Technology Officer and Vice President, Engineering | February 2018 | | Kevin Nash | 45 | Vice President, Finance, Chief Financial Officer and Treasurer | February 2018 | | Matthew Chiodo | 55 | Vice President, Sales | February 2018 | | Scott Ryan | 39 | Vice President, General Counsel and Corporate Secretary | August 2018 | - There are no family relationships among the executive officers[165] - The Company has adopted a Code of Ethics for Certain Senior Officers, applicable to its principal executive, financial, and accounting officers[172] Item 11. Executive Compensation Executive compensation includes unchanged 2020 base salaries, an Annual Incentive Plan based on key financial metrics, and a Long-Term Incentive Plan with performance and restricted stock awards - Named executive officers' base salaries for 2020 remained unchanged from 2019, with additional upside provided under the Long-Term Plan[174][184] Executive Officer Base Salaries (2019-2020) | Executive Officer | Position | 2019 Base Salary | 2020 Base Salary | | :---------------- | :--------------------------------------- | :--------------- | :--------------- | | Steve Downing | President and CEO | $750,000 | $750,000 | | Neil Boehm | VP, Engineering and CTO | $407,000 | $407,000 | | Kevin Nash | VP, Finance, CFO and Treasurer | $400,000 | $400,000 | | Matt Chiodo | VP, Sales | $380,000 | $380,000 | | Scott Ryan | VP, General Counsel and Corporate Secretary | $350,000 | $350,000 | - The Annual Incentive Performance-Based Bonus Plan uses Revenue, Operating Income, and Earnings per Diluted Share, each weighted 33.33%, as key performance metrics[175][178] 2019 Annual Plan Performance Metrics and Actual Results | Performance Metric | Weight | Threshold* | Target* | Maximum* | Actual Performance* | | :----------------------- | :----- | :--------- | :--------- | :--------- | :------------------ | | Revenue | 33.33% | $1,504,000 | $1,880,000 | $2,256,000 | $1,858,897 | | Operating Income | 33.33% | $411,300 | $514,126 | $616,951 | $505,447 | | Earnings per Diluted Share | 33.33% | $1.384 | $1.730 | $2.076 | $1.733 | 2019 Annual Plan Performance Bonuses for Executive Officers | Executive Officer | 2019 Annual Plan Performance Bonus | | :---------------- | :--------------------------------- | | Steve Downing | $735,272 | | Neil Boehm | $299,256 | | Kevin Nash | $294,109 | | Matt Chiodo | $279,403 | | Scott Ryan | $257,345 | - The Long-Term Incentive Plan delivers 70% of the target award through Performance Share Awards (PSAs) tied to EBITDA and ROIC, and 30% through Restricted Stock (RS) awards[186][188][190] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference, with no known arrangements for a change in control - Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[191] - No arrangements are known that may result in a change in control[191] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[192] Item 14. Principal Accounting Fee and Services Information on principal accounting fees and services and the Audit Committee's pre-approval policy is incorporated by reference from the Proxy Statement - Information regarding principal accounting fees and services and the Audit Committee's pre-approval policy is incorporated by reference from the Proxy Statement[193] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules (none required), and exhibits filed as part of the 10-K report - This item refers to the financial statements, financial statement schedules (none required), and exhibits included in the report[199] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this report - No Form 10-K Summary is provided[197] Signatures The report is signed by the President and CEO, VP of Finance, CFO, and Treasurer, and the Company's Directors, affirming compliance - The report is signed by the President and CEO, Steven R. Downing, and the VP, Finance, CFO, and Treasurer, Kevin C. Nash, along with the Company's Directors[202][204][206] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting for 2017-2019 - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2019, 2018, and 2017[207] - The audit also included an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2019[208] - A critical audit matter identified was the 'Revenue - Estimate of Variable Consideration' due to the judgmental nature of annual price reductions and ongoing commercial negotiations with customers[213] Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Ernst & Young LLP issued an unqualified opinion on Gentex Corporation's effective internal control over financial reporting as of December 31, 2019 - Ernst & Young LLP expressed an unqualified opinion that Gentex Corporation maintained effective internal control over financial reporting as of December 31, 2019[215] Consolidated Financial Statements This section presents the Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Shareholders' Investment, and Cash Flows for 2017-2019 Consolidated Balance Sheet Highlights (as of December 31, in thousands) | Metric | 2019 | 2018 | | :-------------------------- | :----------- | :----------- | | Total Assets | $2,168,803 | $2,085,434 | | Cash and cash equivalents | $296,322 | $217,025 | | Total current assets | $950,377 | $850,930 | | Total Liabilities | $230,715 | $223,682 | | Total Shareholders' Investment | $1,938,088 | $1,861,752 | Consolidated Statements of Income Highlights (for the years ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | | :-------------------------------- | :----------- | :----------- | :----------- | | NET SALES | $1,858,897 | $1,834,064 | $1,794,873 | | Gross profit | $688,308 | $690,467 | $694,528 | | Income from operations | $488,538 | $508,126 | $523,358 | | NET INCOME | $424,684 | $437,883 | $406,792 | | Diluted Earnings Per Share | $1.66 | $1.62 | $1.41 | | Cash Dividends Declared per Share | $0.460 | $0.440 | $0.390 | Consolidated Statements of Cash Flows Highlights (for the years ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | | :---------------------------------- | :----------- | :----------- | :----------- | | Net cash flows from operating activities | $505,967 | $552,419 | $501,003 | | Net cash used for investing activities | $(56,711) | $(185,821) | $(77,713) | | Net cash used for financing activities | $(369,959) | $(719,307) | $(400,033) | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | $79,296 | $(352,709) | $23,257 | | CASH AND CASH EQUIVALENTS, End of year | $296,322 | $217,025 | $569,734 | Notes to Consolidated Financial Statements These notes detail significant accounting policies, financial instruments, debt, income taxes, employee benefits, stock compensation, contingencies, segment reporting, and revenue recognition (1) Summary of Significant Accounting and Reporting Policies This section outlines Gentex's core accounting policies, including consolidation, investments, inventory, plant and equipment, intangible assets, revenue recognition, and recent accounting standard adoptions - The Company's significant accounting policies include consolidation, cash equivalents, allowance for doubtful accounts, investments, inventories, plant and equipment, impairment of long-lived assets, patents, goodwill and intangible assets, and revenue recognition[241] - Inventories are valued at the lower of first-in, first-out (FIFO) cost or net realizable value, with allowances for slow-moving and obsolete inventories of $7.6 million in 2019 and $7.8 million in 2018[259] - Revenue is recognized in accordance with ASC 606, when control of goods or services is transferred to customers, with estimates made for variable consideration such as annual price reductions[269][270] - The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, which did not have a material impact on its consolidated balance sheet or income statement[289] - ASU 2016-13 (Financial Instruments - Credit Losses) was adopted effective January 1, 2020, and is not expected to have a material impact[290][292] (2) Debt and Financing Arrangements As of December 31, 2019, Gentex had a $150 million senior revolving credit facility with no outstanding balances and was in compliance with all covenants - The Company has a $150 million senior revolving credit facility with PNC, expiring October 15, 2023[294] - There were no outstanding balances on the Revolver as of December 31, 2019, and 2018[294] - The Company was in compliance with all covenants under the Credit Agreement as of December 31, 2019[296] (3) Income Taxes The 2019 effective tax rate was 15.1%, down from 2018, due to increased deductions and credits, with $6.392 million in unrecognized tax benefits - The effective income tax rate for 2019 was 15.1%, compared to 16.1% in 2018 and 23.5% in 2017[106][114][300] - The decrease in the effective tax rate in 2019 was primarily due to increased benefits from the Foreign Derived Intangible Income Deduction, Research & Development Credit, and Stock Compensation Expense[106][300] - The Tax Cuts and Jobs Act of 2017 reduced the federal corporate income tax rate to 21% from 35%, leading to a $38.4 million reduction in income tax expense in 2017 due to revaluation of deferred tax liabilities[298] Unrecognized Tax Benefits (2017-2019, in thousands) | Year | Beginning of year | Additions (current year) | Additions (prior years) | Reductions (prior years) | Reductions (completed audits) | Reductions (statute of limitations) | End of year | | :--- | :---------------- | :----------------------- | :---------------------- | :----------------------- | :---------------------------- | :---------------------------------- | :---------- | | 2019 | $4,678 | $1,695 | $657 | $(38) | — | $(600) | $6,392 | | 2018 | $4,435 | $1,677 | $283 | $(163) | $(1,554) | — | $4,678 | | 2017 | $3,408 | $941 | $289 | $(63) | — | $(140) | $4,435 | - The Company has accrued approximately $574,000 for interest related to unrecognized tax benefits as of December 31, 2019[304] (4) Employee Benefit Plan The Company offers a 401(k) plan with $8.7 million in 2019 contributions and a Non-Qualified Deferred Compensation Plan for select employees - The Company's 401(k) contributions were approximately $8.7 million in 2019, $8.2 million in 2018, and $7.7 million in 2017, increasing due to higher employee participation[307] - The Company does not provide health care benefits to retired employees[308] - A Non-Qualified Deferred Compensation Plan is available for select management and highly compensated employees, allowing pre-tax deferrals and potential Company matching contributions[309][310] (5) Stock-Based Compensation Plans Gentex operates under the 2019 Omnibus Incentive Plan, covering 45 million shares for stock options, restricted stock, and performance share awards, with an Employee Stock Purchase Plan - The 2019 Omnibus Incentive Plan covers 45,000,000 shares for potential awards including stock options, restricted stock, and performance share awards[315] - As of December 31, 2019, there was $6.3 million of unrecognized compensation cost related to stock option awards, expected to be recognized over a weighted-average period of 1.90 years[320] - As of December 31, 2019, there was $47.1 million of unearned stock-based compensation associated with restricted stock grants[328] - Performance shares are tied to EBITDA and ROIC, with unearned stock-based compensation of $2.2 million as of December 31, 2019[329] - The Employee Stock Purchase Plan allows employees to purchase shares at 85% of the market price, with 173,013 shares sold in 2019[330] (6) Contingencies The Company is involved in legal proceedings but does not anticipate any material adverse effects on its financial position, operations, or cash flows - The Company is periodically involved in legal proceedings but does not believe any are material enough to adversely affect its financial position, future results of operations, or cash flows[332] (7) Segment Reporting Gentex operates in Automotive Products ($1.81 billion revenue in 2019) and Other Products ($48.4 million), with key automotive markets and significant customer concentration Revenue by Segment and Geographic Area (2017-2019, in thousands) | Segment/Region | 2019 | 2018 | 2017 | | :--------------- | :----------- | :----------- | :----------- | | Automotive Products | $1,810,536 | $1,791,198 | $1,758,127 | | United States | $569,940 | $583,673 | $567,493 | | Germany | $296,277 | $333,003 | $351,123 | | Japan | $225,577 | $209,312 | $185,261 | | Mexico | $160,968 | $106,112 | $93,604 | | Other Countries | $557,775 | $559,099 | $560,647 | | Other Products | $48,361 | $42,865 | $36,745 | | Total Revenue | $1,858,897 | $1,834,064 | $1,794,873 | Major Automotive Customers (% of Net Sales) | Customer | 2019 | 2018 | 2017 | | :--------------- | :--- | :--- | :--- | | Toyota Motor Company | 13% | 13% | 12% | | Volkswagen Group | 14% | 15% | 15% | | General Motors | 11% | <10% | <10% | | Daimler Group | <10% | 10% | 10% | | Ford Motor Company | <10% | <10% | 10% | - Approximately 7% of the Company's net sales in 2019 were invoiced and paid in foreign currencies, down from 8% in 2018 and 2017[338] (8) Quarterly Financial Information (Unaudited) This note provides unaudited selected quarterly financial data for 2018 and 2019, including net sales, gross profit, operating income, net income, and EPS Selected Quarterly Results of Operations (2018-2019, in thousands) | Metric | 2019 Q1 | 2018 Q1 | 2019 Q2 | 2018 Q2 | 2019 Q3 | 2018 Q3 | 2019 Q4 | 2018 Q4 | | :--------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Net Sales | $468,589 | $465,420 | $468,711 | $454,981 | $477,761 | $460,253 | $443,836 | $453,409 | | Gross Profit | 169,645 | 172,628 | 176,538 | 172,804 | 180,321 | 172,990 | 161,805 | 172,044 | | Operating Income | 121,596 | 128,515 | 127,905 | 126,683 | 128,136 | 127,428 | 110,901 | 125,499 | | Net Income | 104,280 | 111,249 | 108,959 | 109,024 | 111,898 | 111,336 | 99,547 | 106,275 | | Basic EPS | $0.40 | $0.40 | $0.42 | $0.40 | $0.44 | $0.42 | $0.39 | $0.41 | | Diluted EPS | $0.40 | $0.40 | $0.42 | $0.40 | $0.44 | $0.42 | $0.39 | $0.41 | (9) Comprehensive Income Comprehensive income for 2019 was $424.995 million, slightly exceeding net income due to positive other comprehensive income - Comprehensive income for 2019 was $424,995,174, compared to net income of $424,683,939[230] - Other comprehensive income (loss) components include foreign currency translation adjustments, unrealized gains/losses on available-for-sale securities, and unrealized gains/losses on derivatives[341] Accumulated Other Comprehensive Income (Loss) (as of December 31) | Component | 2019 | 2018 | 2017 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Foreign currency translation adjustments | $(2,384,589) | $(1,674,887) | $645,030 | | Unrealized gains (losses) on available-for-sale securities | $1,095,486 | $74,549 | $6,626,379 | | Unrealized gains (losses) on derivatives | — | — | $(78,026) | | Total Accumulated Other Comprehensive Income (Loss) | $(1,289,103) | $(1,600,338) | $7,193,383 | (10) Goodwill and Intangible Assets Goodwill remained at $307.4 million with no impairment, while net identifiable intangible assets decreased to $250.4 million in 2019 due to amortization - Goodwill, primarily from the HomeLink® acquisition in 2013, was $307.4 million as of December 31, 2019 and 2018, with no impairment recognized[347][348] Intangible Assets (as of December 31, 2019) | Other Intangible Assets | Gross | Accumulated Amortization | Net | Assumed Useful Life | | :-------------------------------- | :---------- | :----------------------- | :---------- | :---------------- | | HomeLink® Trade Names and Trademarks | $52,000,000 | — | $52,000,000 | Indefinite | | HomeLink® Technology | $180,000,000 | $(93,750,000) | $86,250,000 | 12 years | | Existing Customer Platforms | $43,000,000 | $(26,875,000) | $16,125,000 | 10 years | | Exclusive Licensing Agreement | $96,000,000 | — | $96,000,000 | Indefinite | | Total other identifiable intangible assets | $371,000,000 | $(120,625,000) | $250,375,000 | - | - Amortization expense on patents and other intangible assets was approximately $22.4 million in 2019, and is anticipated to be around $22 million annually for 2020 and 2021[353][354] (11) Revenue This note disaggregates revenue by segment and geography, detailing recognition policies, variable consideration estimates, and payment terms Revenue by Major Source (2018-2019, in thousands) | Revenue Source | 2019 | 2018 | | :-------------------------- | :----------- | :----------- | | Automotive Segment | $1,810,537 | $1,791,198 | | Automotive Mirrors & Electronics | $1,638,600 | $1,598,590 | | HomeLink Modules* | $171,937 | $192,609 | | Other Segment | $48,361 | $42,865 | | Fire Protection Products | $23,740 | $22,110 | | Windows Products | $24,620 | $20,756 | | Total Revenue | $1,858,897 | $1,834,064 | - Revenue recognition occurs when control of products is transferred to the customer, generally upon shipment from the manufacturing facility[359][363][364][365][366] - The Company estimates variable consideration for annual price reductions and retroactive price adjustments based on historical results and expected outcomes of ongoing negotiations[363] Exhibit Index This section lists exhibits filed with the Form 10-K, including corporate governance documents, security descriptions, and compensatory plans, many incorporated by reference - The Exhibit Index lists various documents filed with the 10-K, including corporate governance documents, security descriptions, and compensatory plans[369] - Many exhibits, such as the Second Restricted Stock Plan, 2012 Amended and Restated Non-Employee Director Stock Option Plan, and the 2019 Omnibus Incentive Plan, are incorporated by reference from prior filings[369][371]