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GNTX > SEC Filings for GNTX > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for GENTEX CORP


6-May-2013

Quarterly Report


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

RESULTS OF OPERATIONS:

FIRST QUARTER 2013 VERSUS FIRST QUARTER 2012

Net Sales. Net sales for the first quarter of 2013 decreased by approximately $21,208,000 or 7% when compared with the first quarter last year. Net sales of the Company's automotive mirrors (including features) decreased by approximately $22,717,000, or 8%, in the first quarter of 2013, when compared with the first quarter last year, primarily due to the impact of a higher mix of exterior and base interior auto-dimming mirrors, as well as the impact of annual customer price reductions. Auto-dimming mirror unit shipments increased 1% from approximately 6,259,000 in the first quarter of 2012 to approximately 6,304,000 in the most recently completed quarter. This unit increase was primarily due to increased penetration of auto-dimming mirrors, mostly offset by lower light vehicle production in Europe and Japan/Korea. Unit shipments to customers in North America for the most recently completed quarter increased by 8% compared with the first quarter of the prior year, primarily due to increased auto-dimming mirror unit shipments to certain domestic and Asian transplant automakers. Mirror unit shipments for the most recently completed quarter to automotive customers outside North America decreased by 4% compared with the first quarter in 2012, primarily due to decreased auto-dimming mirror unit shipments to certain Japanese and European automakers.
Other net sales increased by approximately $1,509,000, or 30%, for the most recently completed quarter versus the same quarter of last year, primarily due to an increase in dimmable aircraft window net sales. Fire protection net sales were flat quarter over quarter and 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 remained at 65.3% for the most recently completed quarter versus the same quarter of last year, with the impact of annual automotive customer price reductions being offset by purchasing cost reductions and product mix. Each positive offsetting factor is estimated to have impacted cost of goods sold as a percentage of net sales by approximately one percentage point.
Operating Expenses. Engineering, research and development (E, R & D) expenses for the most recently completed quarter decreased 20% and approximately $4,532,000 when compared with the same quarter last year, primarily due to planned reduced costs associated with outside contract engineering/development services.
Selling, general and administrative (S, G & A) expenses decreased 10% and approximately $1,184,000 for the most recently completed quarter, when compared with the same quarter last year, primarily due to reduced overseas office expenses. Selling, general and administrative expenses remained at 4% of net sales in the most recently completed quarter versus the same quarter last year. Total Other Income. Total other income for the most recently completed quarter decreased by approximately $1,386,000 when compared with the same quarter last year, primarily due to loss on disposal of assets.
Taxes. The provision for income taxes varied from the statutory rate for the most recently completed quarter, primarily due to the domestic manufacturing deduction.
Net Income. Net income for the first quarter of 2013 decreased by approximately $914,000 when compared with the same quarter last year, primarily due to the decrease in sales and operating margin.

FINANCIAL CONDITION:
The Company's cash and cash equivalents as of March 31, 2013 were $442,553,000, which was an increase of approximately $52,874,000 compared to December 31, 2012. The increase was primarily due


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to cash flow from operations, partially offset by fixed income investment purchases, dividends paid and capital expenditures.
Short-term investments as of March 31, 2013 increased approximately $15,149,000 compared to December 31, 2012, primarily due to fixed income investment purchases.
Accounts receivable as of March 31, 2013 increased approximately $12,347,000 compared to December 31, 2012, primarily due to the higher sequential sales level as well as monthly sales within each of those quarters. Inventories as of March 31, 2013 decreased approximately $29,861,000 when compared to December 31, 2012, primarily due to reductions in raw materials inventory.
Long-term investments as of March 31, 2013 increased approximately $16,377,000 compared to December 31, 2012, primarily due to an increase in unrealized gains in equity investments as a result of current market conditions.
Accrued liabilities as of March 31, 2013 increased approximately $31,896,000 compared to December 31, 2012, primarily due to increased accrued taxes and compensation, reflecting the timing of certain tax and compensation payments. Cash flow from operating activities for the three months ended March 31, 2013, increased approximately $36,291,000 to approximately $97,423,000, compared with approximately $61,132,000, during the same quarter last year, primarily due to changes in working capital. Capital expenditures for the three months ended March 31, 2013, were approximately $12,675,000, compared with approximately $39,825,000 for the same quarter last year, primarily due to production equipment and building related costs. Building related costs were approximately $5,000,000 in the first three months of 2013.
The Company previously announced the following facility expansion plans that are still in process. The projects include:

•            120,000 square-foot expansion project connecting two of its
             manufacturing facilities in Zeeland, Michigan, which is now expected
             to be completed in the second quarter of 2013, with a total
             estimated cost of approximately $21-$22 million. The Company is also
             expected to incur approximately $3 million in additional
             building-related costs to bring certain manufacturing and lab
             functions online within this facility, which is expected to be
             completed by December 31, 2013.


•            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.
The Company incurred approximately $27 million in facility related costs pertaining to the above projects through March 31, 2013.
After the above facility 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.
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 and has historically expanded facility capacity on a step-function basis to accommodate its needs for several years.
Management considers the Company's working capital and long-term investments, 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, considering its' contractual obligations and other commitments.


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The following is a summary of working capital and long-term investments:

                        March 31, 2013      December 31, 2012
Working Capital       $    685,602,000    $       656,706,000
Long Term Investments      158,211,000            141,834,000
Total                 $    843,813,000    $       798,540,000

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. 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 authorized shares of its common stock under the plan 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. 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

4,000,000 shares remain authorized to be repurchased under the plan as of March 31, 2013.
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 United 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, 2012. Management believes there have been no significant changes in those critical accounting policies during the most recently completed quarter.

TRENDS AND DEVELOPMENTS:
The Company continues in development and launch of new awarded business in all product technology areas, including interior auto-dimming mirrors with new bezel-free frameless designs; lighting applications with new optoelectronics; new digital microphones; many different displays in new sizes with faster processing and increased graphics capabilities; new wireless control systems that send and receive signals from garage doors, gates, lights, locks, and security systems; SmartBeam® with advanced detection for tunnels, curves, fog, and for use on halogen technologies, including halogen, Xenon, and LED; driver assist systems with object-detection capabilities; and exterior auto-dimming mirrors with new curved glass capabilities.
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 uses a custom, active-pixel, CMOS (complementary metal oxide semiconductor) sensor, and maximizes a driver's forward vision by significantly improving utilization of the vehicle's high-beam headlamps during nighttime driving. 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 SmartBeam® is expected to help provide growth over the next several years, competition from multiple-function driver-assist products could impact our expectations. As the Company continues to expand the capabilities of its CMOS 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®.
The Company previously announced that it is shipping auto-dimming mirrors with its 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. It works in conjunction with emerging headlamp technology to generate glare-free "block-out" zones that shield oncoming and preceding vehicles from headlamp glare.
The Company previously announced that it is supplying auto-dimming mirrors with a new, camera-based driver-assist system for a number of Ford and Lincoln vehicle models. 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 European New Car Assessment Program (Euro NCAP) provides an incentive to European automobile manufacturers to make safety technologies that include camera based driver assist features such as lane detection, vehicle detection, and pedestrian detection as standard equipment. Euro NCAP compliant camera based driver assist systems are also capable of including high beam assist as a function. The increased application of Euro NCAP on European vehicles can potentially have a negative impact on our SmartBeam® product by utilizing driver assist camera systems that include the high beam assist feature. While the Company does continue product development and launch of new SmartBeam® and new driver assist camera products on European vehicles, the potential for increased competition may exist in the future.


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The Company is currently shipping auto-dimming mirrors with SmartBeam® and/or Driver-Assist features for 84 vehicle models with 10 automakers.

Since 2007, the Company has been shipping auto-dimming mirrors with its Rear Camera Display (RCD) Mirror, which consists of a proprietary liquid crystal display (LCD) device that shows a panoramic video of objects behind the vehicle in real time. When the vehicle is put in reverse the display illuminates and automatically appears through the rearview mirror's reflective surface to give a high resolution, bright colored image. When the vehicle is put in drive, the display in the mirror automatically disappears. The Company is currently shipping auto-dimming mirrors with its RCD Mirror for 58 vehicle models with 10 automakers. The Company also ships auto-dimming mirrors with RCD for a number of aftermarket or dealer-installed programs.

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 now been delayed four times. Notwithstanding these delays, the final rule is still in the Office of Management and Budget, and the National Highway Traffic Safety Administration indicated that the final rule is currently expected in fiscal year 2013.

The Company's RCD mirrors have always been sold to automakers that have multiple options for where the Rear Camera Display is located (i.e. rearview mirror, the navigation system, and other radio or multi-purpose displays in the vehicle). There continues to be a lot of uncertainty among the Company's current RCD mirror automotive customers as a result of the rulemaking delays and, as previously announced, four of its customers have notified the Company 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 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. The Company also continues to believe that this has become an ever increasingly competitive market, as there are a number of different locations that the image from the camera can be displayed in the vehicle.
The Company previously announced that it was providing variably dimmable windows for the passenger compartment on the new Boeing 787 Dreamliner series of aircraft. The Company has been shipping variably dimmable windows for the Boeing 787 Dreamliner Series of Aircraft since the second quarter of 2010. During 2008, the Company announced that it was supplying dimmable windows to Hawker Beechcraft Corporation for the passenger-cabin windows of the 2010 Beechcraft King Air 350i airplane. The Company continued to ship parts for the Boeing 787 Dreamliner Series of Aircraft and the King Air 350i airplane in low volume in the first quarter of 2013. The Company continues to work with aircraft manufacturers that have an interest in this technology regarding potential additional programs.
The Company continues to experience significant pricing pressures from its automotive customers and competitors, which have affected, and which will continue to affect, its margins to the extent that the Company is unable to offset the price reductions with engineering and purchasing cost reductions, productivity improvements, and increases in unit sales volume, each of which pose a challenge. In addition, financial pressures and volatile production volumes within certain regions at certain automakers are resulting in additional cost reduction efforts by them, including requests for additional price reductions, decontenting certain features from vehicles, customer market testing of business, dual sourcing initiatives and warranty cost-sharing programs, which could adversely impact the Company's business, financial condition, and/or results of operations.
As periodically disclosed, the Company believes that its patents and trade secrets provide it with a competitive advantage in automotive rearview mirrors. 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 periodically obtains intellectual property rights, in the ordinary course of business, to strengthen its intellectual property portfolio and minimize potential risks of infringement.
The automotive industry has always been cyclical and highly impacted by levels of economic activity. The current economic environment continues to be uncertain (especially in Europe, which remains the


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Company's largest shipping destination) and continues to cause increased financial and production stresses evidenced by volatile production levels, volatility with customer orders, supplier part shortages, automotive plant shutdowns, customer and supplier financial issues/bankruptcies, commodity material cost increases, and consumer preference shift to smaller vehicles
(where the Company has a lower penetration rate and lower content per vehicle)
due to fuel costs and environmental concerns, and supply chain stresses. If additional automotive customers (including their Tier 1 suppliers) and suppliers experience bankruptcies, work stoppages, strikes, part shortages, etc., it could disrupt the Company's shipments to these customers, which could adversely affect the Company's business, financial condition, and/or results of operations. Automakers continue to experience increased volatility and uncertainty in executing planned new programs which have, in some cases, resulted in delays or cancellations of new vehicle platforms, package reconfigurations and inaccurate volume forecasts. This volatility and uncertainty continues to make it difficult for the Company to forecast future sales and effectively manage costs, inventory, and utilize capital, engineering, research and development, and human resource investments.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements will require due diligence efforts in fiscal 2013, with initial disclosure requirements beginning in May 2014. There will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering "conflict free" minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be "conflict free" or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
The Company currently estimates that its top line revenue will be approximately flat to down 5% in the second quarter of 2013 compared with the second quarter of 2012, based on the IHS Worldwide April forecast for second quarter current light vehicle production forecasts in the regions to which the Company ships product, as well as the estimated option rates for the Company's mirrors on vehicle models, anticipated product mix, as well as the Company's 12-week customer release schedule. Continuing uncertainties, including the light vehicle production levels; supplier part shortages; automotive plant shutdowns; sales rates in Europe, Asia and North America; uncertain macroeconomic environment (especially in Europe); customer inventory management and the impact of potential Tier 1 suppliers and other supplier potential bankruptcies; work stoppages; strikes, etc., which could disrupt Company shipments to customers, make forecasting difficult. The Company also continues to experience increasing volatility with customer orders within its 12-week customer release window with some customers (including tier 1 mirror suppliers) revising orders at the last minute. Due to uncertainties with global vehicle production volumes and volatility with customer orders, it is a difficult environment in which to forecast, and as a result, the Company is not providing revenue estimates beyond the second quarter of 2013 at this time.
The Company currently expects that its gross margin in the second quarter of 2013 will be in the same range as the gross margin reported in the first quarter of 2013.
The Company also estimates that engineering, research and development expenses are currently expected to decrease approximately 15% in the second quarter of 2013 compared with the same period in 2012, primarily due to reduced costs related to outside contract engineering/development services. In addition, the Company estimates that selling, general and administrative expenses are currently expected to decrease approximately 5-10% in the second quarter of 2013 compared with the same quarter in 2012, primarily due to reduced overseas office expenses (this estimate is based on stable foreign exchange rates). Based on the April IHS forecast for light vehicle production levels for the entire 2013 year, the Company continues to estimate that SmartBeam® and driver-assist unit shipments will increase approximately


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10-15% in calendar year 2013 compared with calendar year 2012, based on anticipated product mix and estimated take rates.
Also based on the April IHS forecast for light vehicle production levels for the entire 2013 year, the Company continues to estimate that RCD Mirror unit shipments will decrease approximately 25-35% in calendar year 2013 compared with calendar year 2012, based on anticipated product mix and estimated take rates. The Company utilizes the light vehicle production forecasting services of IHS Worldwide. The IHS April forecast for light vehicle production for the second quarter of 2013 are approximately 4.2 million units for North America, . . .

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