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GNTX > SEC Filings for GNTX > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for GENTEX CORP


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS:

THIRD QUARTER 2012 VERSUS THIRD QUARTER 2011

Net Sales. Net sales for the third quarter of 2012 were relatively flat when compared with the third quarter last year. Net sales of the Company's automotive mirrors (including features) decreased by approximately $2,054,000, or 1%, in the third quarter of 2012, when compared with the third quarter last year, primarily due to the impact of annual customer price reductions and a higher mix of base auto-dimming mirrors, mostly offset by a 5% increase in auto-dimming mirror unit shipments from approximately 5,556,000 in the third quarter of 2011 to approximately 5,834,000 in the current quarter. This increase in unit shipments was primarily due to increased penetration of auto-dimming mirrors and increased light vehicle production in North America. Unit shipments to customers in North America for the current quarter increased by 22% compared with the third quarter of the prior year, primarily due to increased auto-dimming mirror unit shipments to certain domestic and transplant automakers. Mirror unit shipments for the current quarter to automotive customers outside North America decreased by 4% compared with the third quarter in 2011, primarily due to decreased auto-dimming mirror unit shipments to certain European and Japanese automakers.

Other net sales increased by approximately $835,000, or 15% for the current quarter versus the same quarter of last year, primarily due to an increase in dimmable aircraft window net sales, partially offset by a 9% decline in fire protection net sales quarter over quarter. The quarter-over-quarter increase in dimmable window net sales was primarily due to increased unit shipments of dimmable aircraft windows. Fire protection net sales continue to be impacted by the relatively weak commercial construction market.

Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 64.6% in the third quarter of 2011 to 66.4% in the third quarter of 2012. This quarter-over-quarter percentage increase in cost of goods sold primarily reflected the impact of annual automotive customer price reductions and product mix, partially offset by purchasing cost reductions. Each negative factor is estimated to have impacted cost of goods sold as a percentage of net sales by approximately 1-2 percentage points.

Operating Expenses. Engineering, research and development (E, R & D) expenses for the current quarter decreased 1% and approximately $235,000 when compared with the same quarter last year, primarily due to reduced costs associated with outside contract engineering/development services.

Selling, general and administrative (S, G & A) expenses decreased 3% and approximately $311,000 for the current quarter, when compared with the same quarter last year, primarily due to the impact of favorable foreign exchange rates.

Total Other Income. Total other income for the current quarter increased by approximately $1,811,000 when compared with the same quarter last year, primarily due to increased realized gains on the sale of equity investments.

Taxes. The provision for income taxes varied from the statutory rate for the current quarter, primarily due to the domestic manufacturing deduction.

Net Income. Net income for the third quarter of 2012 decreased by approximately $1,520,000, when compared with the same quarter last year, primarily due to decreased gross profit.

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NINE MONTHS ENDED SEPTEMBER 30, 2012 VS. NINE MONTHS ENDED SEPTEMBER 30, 2011

Net Sales. Net sales for the nine months ended September 30, 2012 increased by approximately $75,795,000, or 10%, when compared with the same period last year. Net sales of the Company's automotive mirrors increased by approximately $73,968,000, or 10% period over period, as auto-dimming mirror unit shipments increased by 13% from approximately 16,068,000 in the first nine months of 2011 to approximately 18,141,000 in the first nine months of 2012. The increase was primarily due to increased light vehicle production in North America and Japan/Korea as well as increased penetration of auto-dimming mirrors on 2012 model year vehicles. Unit shipments to customers in North America increased by 24% during the first nine months of 2012 versus the same period in 2011, primarily due to increased auto-dimming mirror unit shipments to certain transplant and domestic automakers. Mirror unit shipments to automotive customers outside North America increased by 7% period over period, primarily due to increased auto-dimming mirror unit shipments to certain Japanese and European automakers.

Other net sales increased by approximately $1,827,000 or 12% period over period, due to an increase in dimmable window sales, partially offset by a 5% decrease in fire protection sales period over period. The period over period increase in dimmable window net sales was primarily due to increased unit shipments of dimmable aircraft windows. Fire protection net sales continue to be impacted by the relatively weak commercial construction market.

Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 64.5% in the nine months ended September 30, 2011, to 66.2% in the nine months ended September 30, 2012. This percentage increase primarily reflected the impact of annual automotive customer price reductions and product mix, partially offset by purchasing cost reductions. Each negative factor is estimated to have impacted cost of goods sold as a percentage of net sales by approximately 1-2 percentage points.

Operating Expenses. For the nine months ended September 30, 2012, engineering, research and development expenses increased 11% and approximately $6,613,000, when compared with the same period last year, primarily due to additional hiring of employee and outside contract engineering/development services to support new product development projects and program awards.

Selling, general and administrative expenses increased 2% and approximately $809,000 for the nine months ended September 30, 2012, when compared with the same period last year, primarily due to increased overseas office expense, partially offset by the impact of foreign exchange rates. Foreign exchange rates accounted for approximately a four percentage point reduction in selling, general and administrative expenses period over period.

Total Other Income. Total other income for the nine months ended September 30, 2012, increased by approximately $399,000, when compared with the same period last year.

Taxes. The provision for income taxes varied from the statutory rate during the nine months ended September 30, 2012, primarily due to the domestic manufacturing deduction.

Net Income. Net income increased by approximately $4,786,000 for the nine months ended September 30, 2012, when compared with the same period last year, primarily due to increased net sales and gross profit.

FINANCIAL CONDITION:

Cash and cash equivalents as of September 30, 2012, increased approximately $23,115,000 compared to December 31, 2011. The increase was primarily due to cash flow from operations and fixed income maturities, partially offset by capital expenditures, dividends paid and share repurchases.

Short-term investments as of September 30, 2012 decreased approximately $39,286,000 compared to December 31, 2011, primarily due to fixed income investment maturities.

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Accounts receivable as of September 30, 2012 increased approximately $15,883,000 compared to December 31, 2011, primarily due to the higher sales level as well as monthly sales within each of those quarters.

Long-term investments as of September 30, 2012 increased approximately $16,920,000 compared to December 31, 2011, primarily due to an increase in unrealized gains in equity investments as a result of current market conditions.

Patents and other assets, net as of September 30, 2012 increased approximately $15,197,000 compared to December 31, 2011, primarily due to obtaining certain intellectual property rights related to certain existing and potential future automotive mirror features and products in the ordinary course of business (additional details disclosed under "Trends and Developments").

Accrued liabilities as of September 30, 2012 increased approximately $16,799,000 compared to December 31, 2011, primarily due to increases in accrued taxes and compensation, reflecting the timing of certain payments.

Cash flow from operating activities for the nine months ended September 30, 2012, increased approximately $51,018,000 to approximately $176,449,000, compared with approximately $125,432,000, during the same period last year, primarily due to changes in working capital. Capital expenditures for the nine months ended September 30, 2012, were approximately $97,597,000, compared with approximately $84,995,000 for the same period last year, primarily due to building/improvement related costs and production equipment purchases. Building/improvement related costs were approximately $64,000,000 in the first nine months of 2012.

The Company's existing automotive interior mirror manufacturing facilities in Zeeland and Holland, Michigan, currently have estimated building capacity to manufacture approximately 16-18 million interior mirror units annually, based on current product mix. The Company's automotive exterior mirror manufacturing facility has an estimated building capacity to manufacture approximately 6 million units annually, based in each case on current product mix.

The Company previously announced the following expansion plans to increase plant capacity in the electronic assembly, final assembly and exterior mirror manufacturing areas:

• 60,000 square-foot chemistry lab expansion at the Company's Zeeland, Michigan campus, which was completed in the second quarter of 2012 with a total cost of approximately $11.5 million.

• 32,000 square-foot expansion project at the Company's exterior mirror manufacturing facility in Zeeland, Michigan, which was completed in the second quarter of 2012 with a cost of approximately $4 million.

• 125,000 square-foot expansion at the electronic assembly manufacturing facility in Holland, Michigan, which was completed in the third quarter of 2012 with a total cost of approximately $25 million. Production equipment moves/transfers began during the second quarter and were completed by the end of the third quarter of 2012.

• 120,000 square-foot expansion project connecting two manufacturing facilities in Zeeland, Michigan, which is expected to be completed by the end of calendar year 2012 with a total estimated cost of approximately $25 million.

• 10,000 square-foot facility to centralize the production and distribution of chilled water that is used in production, chemical labs, as well as air conditioning. The facility is expected to be completed in the second quarter of 2013 with a total estimated cost of $11 million.

The above expansion projects are expected to be funded from current cash and/or cash equivalents on hand.

After the above expansion projects are completed, the Company estimates that it will have building capacity to manufacture approximately 21-23 million interior mirror units annually and approximately 10 million exterior mirror units annually, based in each case on current product mix.

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The Company believes its existing and planned facilities are suitable, adequate, and have the capacity necessary for current and near-term planned business. However, the Company continues to evaluate longer-term facility needs to support demand for its products. As a result, the Company is performing master planning and infrastructure improvements at a 140 acre site (near existing facilities) that the Company currently owns to prepare for its next facilities. The timing of new facility construction is still uncertain due to the volatile economic environment, uncertainty in the automotive industry, as well as uncertainties related to the timing of the ramp up of certain products.

Management considers the Company's working capital and long-term investments totaling approximately $780,572,000 as of September 30, 2012, together with internally generated cash flow and an unsecured $5,000,000 line of credit from a bank, to be sufficient to cover anticipated cash needs for the next year and for the foreseeable future.

On October 8, 2002, the Company announced a share repurchase plan, under which it may purchase up to 8,000,000 shares (post-split) based on a number of factors, including market conditions, the market price of the Company's common stock, anti-dilutive effect on earnings, available cash and other factors that the Company deems appropriate. On July 20, 2005, the Company announced that it had raised the price at which the Company may repurchase shares under the existing plan. On May 16, 2006, the Company announced that the Company's Board of Directors had authorized the repurchase of an additional 8,000,000 shares under the plan. On August 14, 2006, the Company announced that the Company's Board of Directors had authorized the repurchase of an additional 8,000,000 shares under the plan. On February 26, 2008, the Company announced that the Company's Board of Directors had authorized the repurchase of an additional 4,000,000 shares under the plan. The following is a summary of quarterly share repurchase activity under the plan to date:

Total Number of Shares Purchased

Quarter Ended                  (Post - Split)               Cost of Shares Purchased
March 31, 2003                                  830,000     $              10,246,810
September 30, 2005                            1,496,059                    25,214,573
March 31, 2006                                2,803,548                    47,145,310
June 30, 2006                                 7,201,081                   104,604,414
September 30, 2006                            3,968,171                    55,614,102
December 31, 2006                             1,232,884                    19,487,427
March 31, 2007                                  447,710                     7,328,015
March 31, 2008                                2,200,752                    34,619,490
June 30, 2008                                 1,203,560                    19,043,775
September 30, 2008                            2,519,153                    39,689,410
December 31, 2008                             2,125,253                    17,907,128
September 30, 2012                            1,971,829                    33,716,725

Totals                                       28,000,000     $             414,617,179

On October 23, 2012, the Company announced that the Company's Board of Directors had authorized the repurchase of an additional 4,000,000 shares under the Plan. The Company may purchase up to an additional four million shares of its common stock based on a number of factors including market, economic and industry conditions; the market price of the Company's common stock; anti-dilutive effect on earnings utilizing "normalized" interest rates; available cash; and other factors that the Company deems appropriate.

CRITICAL ACCOUNTING POLICIES:

The preparation of the Company's consolidated condensed financial statements contained in this report, which have been prepared in accordance with accounting principles generally accepted in the Unites States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions.

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The Company has identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in its Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Management believes there have been no significant changes in those critical accounting policies during the most recently completed quarter.

TRENDS AND DEVELOPMENTS:

All of the advanced automotive mirror technologies that the Company markets today continue to evolve at a rapid pace and are resulting in future new awarded business. Interior auto-dimming mirrors are in launch with new chrome ring frameless designs; lighting applications with new optoelectronics; digital microphones replacing analog microphones; wireless control systems; many different displays in new sizes with faster processing and increase graphics capabilities; SmartBeam® with advanced detection for tunnels, curves, and fog for use on halogen, xenon, and LED headlamp technologies; driver assist systems with lane departure warning, traffic sign recognition, and a variety of object detection capabilities; and combinations of these various features. Exterior auto-dimming mirrors are in launch with new chrome ring frameless designs, curved glass capabilities, and a variety of capabilities.

Since 2007, the Company has been shipping auto-dimming mirrors with its Rear Camera Display (RCD) Mirror, which consists of a liquid crystal display (LCD) that shows a panoramic video of objects behind the vehicle in real time, for a number of vehicle models with automakers. The Company also ships auto-dimming mirrors with RCD for a number of aftermarket or dealer-installed programs. During the current quarter, the Company began shipping its RCD Mirror product for seven additional vehicle models for General Motors, Honda, Hyundai, Mitsubishi, Nissan and PSA.

The "Cameron Gulbransen Kids Transportation Safety Act of 2007" (KTSA) and the pending requirement that all new vehicles in the United States will be required to be equipped with cameras and rear camera displays by September 2014 has been delayed three times. Notwithstanding these delays, the final rule is still in the Office of Management and Budget (OMB), and the Secretary of Transportation Ray LaHood indicated that the final rule is currently expected by December 31, 2012.

The Company's RCD mirrors have always been sold to automakers that have multiple options for where the Rear Camera Display is located. While there continues to be a lot of uncertainty among the Company's current RCD mirror automotive customers as a result of the rulemaking delays, four of its customers notified the Company during the second quarter of 2012 that they have selected a radio display in the center console as the primary location for the Rear Video Display application. Two of those customer location changes are expected to impact the Company's RCD mirror unit shipments negatively beginning in calendar year 2013, with the other two customers negatively impacting RCD mirror unit shipments beginning in calendar year 2014. Each of these customer transitions occurs over multiple years. These four customers continue to purchase the Company's RCD Mirrors for other vehicle applications. In addition, these customers continue to offer the Company's auto-dimming mirrors, many with other advanced electronic features. To date, no additional RCD mirror customers have indicated a move of the rear video display application from the mirror to the center console.

The Company continues to believe that most automakers will continue to have a multi-pronged location approach for rear camera displays, with the market divided into two primary market segments:

1. The top 20% of the vehicle market will primarily offer the display for a rear camera in the navigation system, with the option of purchasing an RCD mirror, and

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2. The remaining portion of the market will offer the camera display in a number of different locations, including the radio, instrument panel, console, and rearview mirror. This is the segment of the market with the greatest and increasing competition.

The Company still believes that its cost-competitive RCD Mirror product is an optimum, ergonomic, easily adaptable method to display the image produced by the rear camera for increased safety, and automakers could utilize rear cameras with the display in a RCD Mirror to satisfy the requirements of the legislation. The Company also continues to believe that this will be a very competitive market, as automotive customers consider different options for the location where that image from the camera can be displayed in the vehicle (i.e. the navigation system, and other radio or multi-purpose displays).

In addition, the Company continues to believe that its RCD Mirror product will be implemented in three overlapping phases by automakers:

1. Market-Driven Phase: was the time period prior to any legislation through NHTSA's Notice of Proposed Rulemaking on December 7, 2010.

2. "Wait and See" Phase: the period of time from when the legislation was signed into law on February 28, 2008, until the currently expected final interpretation date of December 31, 2012.

3. Implementation Phase: from the time the final rule is issued and will run until full implementation, when 100 percent of all new vehicles in the U.S. under 10,000 lbs. will be required to be equipped with rear cameras and displays (based on the December 7, 2010, NPRM issued by NHTSA). We believe that automaker production cycles currently are being used by OEM's to set their implementation schedules, absent any final schedule being published by NHTSA.

The Company previously announced it is shipping auto-dimming mirrors with SmartBeam®, its proprietary intelligent high-beam headlamp assist feature to a number of automakers. The SmartBeam® product is a single-function driver-assist feature for headlamp lighting control that competes with multiple-function drivers-assist features that include headlamp lighting control as one of the multiple functions. While we expect SmartBeam® to help provide growth over the next several years, competition from multiple-function drivers-assist products could impact our expectations. As the Company continues to expand the capabilities of its CMOS (complementary metal oxide semiconductor) imager technology for additional features, the Company recognizes that it is competing against multiple-function driver-assist technologies that could present a competitive threat for SmartBeam®. During the current quarter, the Company began shipping its SmartBeam ® product for eight additional vehicle models for Chrysler, Honda, Opel and Toyota.

The Company previously announced that it has begun shipping its new vision-based, glare-free high-beam system (known as SmartBeam® DFL (Dynamic Forward Lighting)). The new DFL vision-based system consists of a custom CMOS image sensor combined with algorithmic decision-making to offer constant "on" glare-free high beams.

The Company previously announced that it is supplying auto-dimming mirrors with a new, camera-based driver-assist system for the 2013 Ford Explorer. The Company's new driver-assist system uses a multi-function camera combined with algorithmic decision-making to perform Automatic High-Beam Control, Lane Keeping and Driver Alert. The system was developed in conjunction with Mobileye®, the global pioneer in the development of vision-based driver-assistance systems. The Automatic-High-Beam Control turns a vehicle's high beams on and off automatically according to surrounding traffic conditions. In Lane Keeping mode, the driver is warned by vibration in the steering wheel, while the Lane Keeping function warns the driver by applying torque at the steering wheel to direct the vehicle back into the lane. Driver Alert monitors the vehicle's lane position and can notify a driver of signs of inattentiveness with a coffee cup warning light that appears on the dashboard instrument cluster. Certain components, including the camera and microprocessor, are integrated into a Gentex interior auto-dimming mirror. The Company also previously announced that it is supplying auto-dimming mirrors with the Company's own SmartBeam® lighting assist system, as well as auto-dimming mirrors with a camera-based driver-assist system (Automatic-High-Beam Control, Lane Keeping and Driver Alert) for the new 2013 Lincoln MKS and the 2013 Lincoln MKT. During the current quarter, the Company began shipping its new driver assist multiple-function camera applications performing automatic High Beam Control, Lane Keeping, and Driver Alert for two additional vehicle models for Ford.

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On June 25, 2012, American Vehicular Sciences LLC ("AVS") filed 4 patent infringement complaints in the United States District Court in the Eastern District of Texas, which names the Company and one of two of its customers as co-defendants. In two of the complaints (#6:12-cv-00413 and #6:12-cv-00406), AVS alleges that the Company's SmartBeam product infringes one patent owned by AVS. In the other two complaints (#6:12-cv-00410 and #6:12-cv-00415), AVS alleges that the Company's monitoring system products infringe two other patents owned by AVS. The Company was served with the four complaints on July 27, 2012. On October 5, 2012, the Company submitted its answers to all four complaints. In its answers the Company denies infringement and contributing to and/or including others to infringe, and further denies that AVS is entitled to any relief. In addition, the Company has provided affirmative defenses, including but not limited to non-infringement and invalidity, of the claims underlying the AVS allegations. The Company is uncertain of what impact, if any, the above claims may potentially have on its business.

The Company previously announced that it was working with PPG Aerospace to provide the variably dimmable windows for the passenger compartment on the new Boeing 787 Dreamliner series of aircraft. As previously announced, Boeing delivered the first 787 Dreamliner Series of Aircraft to All Nippon Airways (ANA) on September 27, 2011. There previously was a news report that ANA was not satisfied with the darkness level of the aircraft windows that the Company supplies with PPG Aerospace. That story was refuted the next day in a blog posted by airlinereporter.com.

The Company and PPG Aerospace previously announced that they would work together to supply dimmable windows to Hawker Beechcraft Corporation for the passenger-cabin windows of the 2010 Beechcraft King Air 350i airplane.

As periodically disclosed, the Company believes that its patents and trade secrets provide it with a competitive advantage. The Company has also previously discussed the fact that claims of infringement could be costly, time-consuming, and divert the attention of management and key personnel from other business issues. To that end, the Company has been able to, in the ordinary course of business, obtain certain intellectual property rights related to certain existing and potential future automotive mirror features and products that will decrease potential risks of infringement. These rights are included on the Balance Sheet under the category of "Patents and other assets-net". As part of obtaining the above-referenced intellectual property rights, the Company has also agreed to royalty payments based on shipments of automotive mirror products incorporating certain mirror features. Amortization expense associated with . . .

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