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GNTX > SEC Filings for GNTX > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for GENTEX CORP

Form 10-Q for GENTEX CORP


2-Aug-2013

Quarterly Report


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

RESULTS OF OPERATIONS:

SECOND QUARTER 2013 VERSUS SECOND QUARTER 2012

Net Sales. Net sales for the second quarter of 2013 increased by approximately $6.7 million or 2% when compared with the second quarter of 2012.
Automotive net sales were $279.8 million, up 1.8% compared with automotive net sales of $274.8 million in the second quarter of 2012, driven by an 10% increase in automotive mirror unit shipments, which were partially offset by shifts in product mix and annual customer price reductions. North American automotive mirror unit shipments increased 4% to 2.6 million compared with the second quarter of 2012, primarily due to increased penetration of the Company's exterior auto-dimming mirrors, as well as a 5% increase in North American light vehicle production. International automotive mirror unit shipments increased 13% compared with the second quarter of 2012 primarily due to increased penetration of the Company's interior and exterior auto-dimming mirrors, despite a decline of 1% in European light vehicle production and a 9% decline in light vehicle production in the Japan and Korean region compared with the same quarter last year.

The below table represents the Company's auto dimming mirror unit shipments for the three and six months ended June 30, 2013 and 2012. (in thousands)

                                      Three Months Ended June 30,              Six Months ended June 30,
                                                               %                                       %
                                      2013        2012       Change          2013         2012       Change
North American Interior Mirrors        1,998     2,020        (1 )%           4,030      3,942          2 %
North American Exterior Mirrors          558       435        28  %           1,068        857         25 %
Total North American Mirror Units      2,556     2,455         4  %           5,098      4,799          6 %
Offshore Interior                      2,889     2,582        12  %           5,535      5,398          3 %
Offshore Exterior                      1,174     1,005        17  %           2,291      2,110          9 %
Total Offshore Mirror Units            4,063     3,587        13  %           7,826      7,508          4 %
Total Interior Mirrors                 4,887     4,602         6  %           9,565      9,340          2 %
Total Exterior Mirrors                 1,732     1,440        20  %           3,359      2,967         13 %
Total Auto-Dimming Mirror Units        6,619     6,042        10  %          12,924     12,307          5 %


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Other net sales for fire protection and dimmable aircraft windows were $7.2 million for the second quarter of 2013, up 32% compared with other net sales of $5.4 million in the second quarter of 2012, and up sequentially from $6.5 million in the first quarter of 2013, primarily due to increases in shipments of dimmable aircraft windows.

Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased to 64.2% for the second quarter of 2013 versus 66.9% in the same quarter of last year, primarily due to improvements in product mix and purchasing cost reductions, which accounted for approximately 75-80% of the improvement evenly split, with the balance of the improvement being a combination of factors including improved manufacturing efficiencies.

Operating Expenses. Engineering, research and development (E, R & D) expenses for the second quarter of 2013 decreased 17% or $3.9 million when compared with the second quarter of 2012, primarily due to reduced costs associated with outside contract engineering/development services. Selling, general and administrative (S, G & A) expenses decreased 2% or $0.3 million for the second quarter of 2013, when compared with the second quarter of 2012, primarily due to reduced overseas office expenses, which were partially offset by professional fees and due diligence costs associated with the pending acquisition of HomeLink which is discussed below. Selling, general and administrative expenses remained at 4% of net sales in the second quarter of 2013.
Total Other Income. Total other income for the second quarter of 2013 increased by $2.4 million when compared with the second quarter of 2012, 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 most recently completed quarter, primarily due to the domestic manufacturing deduction.
Net Income. Net income for the second quarter of 2013 increased by $11.3 million or 28% when compared with the second quarter of 2012, primarily due to increases in sales and operating margin.

SIX MONTHS ENDED JUNE 30, 2013 VERSUS SIX MONTHS ENDED JUNE 30, 2012 Net Sales. Net sales for the six months ended June 30, 2013 decreased by $14.5 million or 2.5% when compared with the same period in 2012.
Automotive net sales were $542.8 million, down 3.2% compared with automotive net sales of $560.5 million for the first six months of 2012, which was driven down primarily by shifts in product mix and annual customer price reductions, partially offset by a 5% increase in automotive mirror unit shipments. North American automotive mirror unit shipments for the six months ended June 30, 2013 increased 6% compared with the same period last year, primarily due to increased penetration of the Company's exterior auto-dimming mirrors, as well as a 4% increase in North American light vehicle production. International automotive mirror unit shipments increased 4% compared with the same period last year, primarily due to increased penetration of both interior and exterior auto-dimming mirrors despite a decrease in European and Japan/Korea light vehicle production by 4% and 10%, respectively.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold for the first six months of 2013 declined to 64.8%, down from 66.1% in the same period last year primarily due to improvements in product mix and purchasing cost reductions, which accounted for approximately 75-80% of the improvement evenly split, with the balance of the improvement being a combination of factors including improved manufacturing efficiencies.
Operating Expenses. Engineering, research and development (E, R & D) expenses for the six months ended June 30, 2013 decreased 18% or $8.5 million when compared with the same period last year, primarily due to reduced costs associated with outside contract engineering/development services. Selling, general and administrative (S, G & A) expenses decreased 6% or $1.5 million when compared with the same period last year, primarily due to reduced expenses in the Company's overseas offices.


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Total Other Income. Total other income for for the six months ended June 30, 2013 increased by approximately $1.0 million when compared with the same period last year, primarily due to increased realized gains on sales of equity investments.
Taxes. The provision for income taxes varied from the statutory rate for the six months ended June 30, 2012, primarily due to the domestic manufacturing deduction.
Net Income. Net income for the six months ended June 30, 2013 increased by $10.4 million or 12% to $97.5 million vs. $87.1 million in the same period last year, primarily due to increased operating margins.
FINANCIAL CONDITION:
The Company's cash and cash equivalents as of June 30, 2013 were $502.7 million, which was an increase of approximately $113.0 million compared to December 31, 2012. The increase was primarily due to cash flow from operations, partially offset by fixed investment purchases, dividends paid and capital expenditures. Short-term investments as of June 30, 2013 increased approximately $31.7 million compared to December 31, 2012, primarily due to fixed income investment purchases.
Accounts receivable as of June 30, 2013 increased approximately $10.6 million 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 June 30, 2013 decreased approximately $43.9 million when compared to December 31, 2012, primarily due to reductions in raw materials inventory.
Long-term investments as of June 30, 2013 decreased approximately $4.9 million compared to December 31, 2012, primarily due to realized gains on sales of equity investments that were not re-invested, partially offset by an increase in unrealized gains in equity investments as a result of current market conditions. Accrued liabilities as of June 30, 2013 increased approximately $15.3 million 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 six months ended June 30, 2013, increased approximately $70.8 million to approximately $172.3 million, compared with approximately $101.5 million, during the same period last year, primarily due to changes in working capital. Capital expenditures for the six months ended June 30, 2013, were approximately $24.1 million, compared with approximately $69.4 million for the same period last year, primarily due to a reduction in production equipment and building related costs.
The Company previously announced a facility expansion plan for a 120,000 square-foot expansion project connecting two of its manufacturing facilities in Zeeland, Michigan, which has been substantially completed, with a total cost of approximately $22 million. The Company is 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.
The Company also previously announced a facility expansion plan for a 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 expansion has been completed and is in the early stages of production. Total costs for this facility were approximately $11 million. The Company incurred approximately $29 million in facility related costs pertaining to the above projects through June 30, 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.


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On July 18, 2013, the Company received a financing commitment from PNC Bank, NA, comprised of $300 million in senior unsecured credit facilities with the Company's option to increase the same in an amount not to exceed $75 million. Such debt financing will be subject to a definitive credit agreement and related documentation entered into simultaneously with closing of the purchase of HomeLink as referred to in the Business Update below. It is expected that this facility will expire 5 years after the closing.
Management considers the Company's current working capital and long-term investments, as well as the aforementioned credit facility, in addition to internally generated cash flow and an additional $5 million existing line of credit to be sufficient to cover anticipated cash needs for the foreseeable future considering it's contractual obligations, commitments and previously announced acquisition of HomeLink, discussed in footnote 12 as well as the Business Update below. The following is a summary of working capital and long-term investments:

                       June 30, 2013      December 31, 2012
Working Capital       $  751,587,886    $       656,705,598
Long Term Investments    136,977,928            141,834,034
Total                 $  888,565,814    $       798,539,632

The Company has a share repurchase plan under which it may purchase up to 4,000,000 shares of the Company's common stock based on market conditions, the market price of the stock, anti-dilutive effect on earnings, available cash and other factors that the Company deems appropriate. The Company did not repurchase any shares in the six months ended June 30, 2013.
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 June 30, 2013.

BUSINESS UPDATE

On July 18, 2013 announced the signing of an asset purchase agreement (the "Purchase Agreement") to acquire Johnson Controls' HomeLink business. HomeLink, a vehicle-based control system that enables drivers to remotely activate garage door openers, entry door locks, home lighting, security systems, entry gates, and other radio frequency convenience products, has been integrated into the Company's automatic-dimming mirrors for more than 10 years. It is compatible with a wide variety of home safety and convenience products, and is currently offered in all automotive brands. HomeLink is compatible with more than 99 percent of garage door opening systems, and is sold in North America, Europe, Africa, Asia/Pacific and the Middle East. Under the terms of the Purchase Agreement, the Company will acquire all of Johnson Controls' HomeLink assets, intellectual property, testing facilities, and the talented employees who manage


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and support the business, for a purchase price of $700 million subject to working capital adjustments. The transaction is subject to customary closing conditions, including certain regulatory approval, and is targeted to close on or about September 30, 2013. Once fully integrated the Company expects that its' annual revenue will increase in the range of $125 million to $150 million per year. The Company also estimates that the Company's gross profit margin will be positively impacted in the range of 1% - 1.5% on a consolidated basis. The Company further expects that once the integration is completed, operating expenses for the Company will be in the range of the company's historical operating expenses as a percent of sales. Based on these estimates and expectations, the Company forecasts the addition of HomeLink to be accretive to profitability and earnings per share, and a growth driver for the business overall.

The Purchase Agreement contains representations, warranties, covenants, and agreements that are customary for a transaction of this nature. The obligations of the parties to complete the acquisition are subject to certain customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the performance in all material respects of the parties' covenants and agreements. The Purchase Agreement may be terminated by the Company or the Seller under certain circumstances specified therein, including mutual written consent, the uncured failure of the other party's representations and warranties to be true and correct that individually or in aggregate cause a material adverse effect, the uncured material breach of the other party's covenants or other agreements, the failure to close the Acquisition by April 18, 2014 (subject to certain extension options) or the failure to obtain approval under the HSR Act.

Separate from the Purchase Agreement, the Seller and the Company have entered into a Supply Agreement whereby the Company, subsequent to the closing of the Acquisition, agrees to supply HomeLink product to the Seller for incorporation into the Seller's vehicular products.

The Purchase Agreement has been filed as Exhibit 2.1 and is incorporated herein by reference. The foregoing description of the Purchase Agreement is summary and does not purport to be complete and is qualified in its entirely by reference to the full text of the Purchase Agreement. In addition, the description of the Purchase Agreement set forth in the Form 8-K filed on July 24, 2013, applies hereto as well.

In connection with the above-described acquisition, see the description of the financing commitment received from PNC Bank described above. There are uncertainties and risks associated with this potential transaction, including the occurrence of certain events, changes, or other circumstances that could give rise to termination of the Purchase Agreement, the inability to complete the transaction due to failure to satisfy the conditions of the transaction, including expiration of the waiting period under the HSR Act, and failure to obtain, delays in obtaining, or adverse conditions contained in any required regulatory or other approvals.

The Company continues in development in all product technology areas, and in launch of new awarded business for that technology, including: rear camera display; information displays; signaling displays; SmartBeam and driver assist camera systems; interior lighting; microphones; compass; telematics; and HomeLink, as well as inside and outside auto-dimming mirrors with frameless and various curved glass applications.

The Company continues to experience significant pricing pressure from its automotive customers and competitors which will continue to affect its profit margins. This challenge requires the Company to work to offset these price reductions with engineering and purchasing cost reductions, productivity improvements, and increases in unit sales volume.

Automakers continue to experience volatility and uncertainty in executing planned new programs which result in delays or cancellations of new vehicle platforms, package configurations, and inaccurate volume forecasts. This challenge makes it difficult for the Company to forecast future sales and manage costs inventory, capital, engineering, research and development, and human resource investments.

The automotive industry has always been cyclical and highly impacted by levels of economic activity, and the current economic environment continues to be uncertain. This challenge stresses the Company with volatile customer orders, automaker plant shutdowns, supplier material cost fluctuation, supplier part shortages, and consumer vehicle feature preference changes (in certain circumstances to vehicles where the Company has a lower penetration rate). Because the Company sells its automotive mirrors throughout


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the world, and automotive manufacturing is highly dependent on economic conditions, the Company can be affected by uncertain economic conditions that can reduce demand for its' products.

The uncertain economic environment can also affect the automotive industry in the sale or bankruptcy of customer businesses. Should any of the Company's customers, including Tier 1 suppliers, sell their business or declare bankruptcy, it could adversely affect the collection of receivables, product planning and business with that customer.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring transparency and accountability concerning the use of conflict minerals originating from the Democratic Republic Of Congo and adjoining countries, affects the Company with due diligence efforts in 2013 and with disclosure requirements beginning May, 2014. The implementation of the applicable rules could affect the sourcing, supply and pricing of materials used in the Company's products. As there may be only a limited number of suppliers offering "conflict free" minerals, the Company cannot be sure that it will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, the Company may face reputational challenges if it is determined that certain of the Company's products contain minerals not determined to be "conflict free" or if the Company is unable to sufficiently verify the origins for all conflict minerals used in its products through the procedures that may be implemented.

The Cameron Gulbransen Kids Transportation Safety Act of 2007 (KTSA), indicating a requirement that new vehicles be equipped with a rear video camera and a rear video display, has had implementation delays multiple times. The KTSA indication that rear video would be required along with implementation delays has increased competition for systems capable of rear video in a variety of locations in the vehicle. The Company's Rear Camera Display mirror application has been affected by this increased competition and may continue to be in the future.

The European New Car Assessment Program (Euro NCAP) provides an incentive for automobiles sold in Europe to apply 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 could potentially replace the Company's SmartBeam application on these vehicles. The Company previously announced that it was providing variably dimmable windows Boeing 787 Dreamliner series of aircraft as well as the Beechcraft King Air 350i aircraft. 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 second quarter of 2013. The Company continues to work with aircraft manufacturers that have an interest in this technology regarding potential additional programs.

The Company believes that its patents and trade secrets provide it with a competitive advantage in automotive rearview mirrors. Claims of patent infringement can be costly and time-consuming to address. To that end, the Company obtains intellectual property rights in the ordinary course of business to strengthen its intellectual property portfolio to minimize the risk of infringement.

The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its consolidated financial statements.

OUTLOOK:

The Company utilizes the light vehicle production forecasting services of IHS Worldwide. The IHS July forecast for light vehicle production for the third quarter of 2013 are 4.0 million units for North America, 4.2 million units for Europe, and 3.4 million units for Japan and Korea. The IHS July forecast for light vehicle production for calendar year 2013 are 16.2 million units for North America, 18.8 million units for Europe, and 13.3 million units for Japan and Korea.

Based on the IHS July 2013 forecast for the third quarter of 2013, as well as the estimated option rates for the Company's mirrors on vehicle models, anticipated product mix, and the Company's 12-week customer


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release schedule, the Company estimates that net sales in the third quarter of 2013 will be flat to up 5% compared with the third quarter of 2012.

The Company also estimates the gross profit margin for the third quarter of 2013 to be in the same range as the 2013 year-to-date gross profit margin, based on the July 2013 IHS production forecast.

E,R&D expense in the third quarter of 2013 is estimated to decrease 5-10% compared with E,R&D in the third quarter of 2012, primarily due to reduced costs associated with outside contract engineering. E,R&D expense in the third quarter of 2013 is expected to remain at approximately 7% of net sales, consistent with the Company's recent historical trend.

S,G&A expense in the third quarter of 2013 is estimated to increase 5-10% compared with S,G&A in the third quarter of 2012, primarily due to increased costs associated with professional fees and due diligence costs associated with the pending HomeLink acquisition, which was previously disclosed and is discussed above. This estimate is based on stable foreign exchange rates.

The Company estimates that capital expenditures for 2013 will be approximately $50 - $60 million excluding any capital expenditures associated with the pending acquisition of HomeLink.

The Company estimates that depreciation and amortization expense for 2013 will be approximately $56 - $60 million, excluding any additional depreciation and amortization associated with the pending acquisition of HomeLink.

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.
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.


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