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GNTX > SEC Filings for GNTX > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for GENTEX CORP

Form 10-Q for GENTEX CORP


12-Nov-2013

Quarterly Report


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

RESULTS OF OPERATIONS:

THIRD QUARTER 2013 VERSUS THIRD QUARTER 2012

Net Sales. Net sales for the third quarter of 2013 increased by $20.4 million or 8% when compared with the third quarter of 2012.
Automotive net sales increased 7% to $280.9 million, compared with automotive net sales of $261.9 million in the second quarter of 2012, driven by a 13% increase in automotive mirror unit shipments, which was partially offset by shifts in product mix and annual customer price reductions. North American automotive mirror unit shipments increased 6% to 2.4 million compared with the third quarter of 2012, primarily due to increased penetration of the Company's exterior auto-dimming mirrors, in conjunction with a 7% increase in North American light vehicle production. International automotive mirror unit shipments increased 18% compared with the third 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 only a 3% increase in light vehicle production in the Japan/Korea region compared with the same quarter last year.

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

                                   Three Months Ended September 30,          Nine Months ended September 30,
                                                               %                                         %
                                      2013        2012       Change           2013          2012       Change
North American Interior Mirrors        1,867     1,879        (1 )%             5,897      5,820          1 %
North American Exterior Mirrors          563       423        33  %             1,631      1,281         27 %
Total North American Mirror Units      2,430     2,302         6  %             7,528      7,101          6 %
International Interior Mirrors         2,972     2,537        17  %             8,507      7,935          7 %
International Exterior Mirrors         1,202       995        21  %             3,493      3,105         12 %
Total International Mirror Units       4,174     3,532        18  %            12,000     11,040          9 %
Total Interior Mirrors                 4,839     4,416        10  %            14,404     13,755          5 %
Total Exterior Mirrors                 1,765     1,418        24  %             5,124      4,386         17 %
Total Auto-Dimming Mirror Units        6,604     5,834        13  %            19,528     18,141          8 %

Other net sales, which include fire protection products and dimmable aircraft windows, were $7.7 million in the third quarter of 2013, up 21% compared with $6.3 million in the third quarter of 2012 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 63.3% for the third quarter of 2013 versus 66.4% in the same quarter of last year, primarily due to improvements in purchasing cost reductions and product
mix. Each of the positive factors is estimated to have impacted cost of goods sold as a percentage of net sales by approximately 125 basis points, with the balance of the improvement being a combination of smaller factors including improved manufacturing efficiencies.

Operating Expenses. Engineering, research and development (E, R & D) expenses for the third quarter of 2013 decreased 6% or $1.3 million when compared with the third quarter of 2012, primarily due to reduced costs associated with outside contract engineering/development services. Selling, general and administrative (S, G & A) expenses increased 9% or $1.1 million for the third quarter of 2013, primarily due


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to increased professional fees and due diligence costs associated with the previously announced acquisition of HomeLink. S, G&A expenses were 4.6% of net sales in the third quarter of 2013.
Total Other Income & Expense. Total other income for the third quarter of 2013 increased by $3.3 million when compared with the third quarter of 2012, primarily due to increased realized gains on the sale of equity investments. There was no interest expense recorded related to the Company's new borrowings, in the third quarter of 2013, as the Credit Agreement was signed at the end of the most recently completed quarter.
Taxes. The provision for income taxes varied from the statutory rate for the most recently completed quarter, primarily due to the domestic manufacturing deduction as well as realized benefits of approximately $1 million from the filing of an amended federal tax return for 2009, specifically related to increased Research & Development tax credits.
Net Income. Net income for the third quarter of 2013 increased by $13.6 million or 33% when compared with the third quarter of 2012, primarily due to increases in sales and operating margin.

NINE MONTHS ENDED SEPTEMBER 30, 2013 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2012 Net Sales. Net sales for the nine months ended September 30, 2013 increased by $5.9 million or 0.7% when compared with the same period in 2012.
Automotive net sales for the nine months ended September 30 2013, were $823.7 million, which were essentially flat when compared with automotive net sales of $822.4 million for the first nine months of 2012, which was impacted primarily by shifts in product mix and annual customer price reductions, partially offset by an 8% increase in automotive mirror unit shipments. North American automotive mirror unit shipments for the nine months ended September 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 5% period over period increase in North American light vehicle production. International automotive mirror unit shipments increased 9% in the first nine months of 2013 compared with the same period last year, primarily due to increased penetration of both interior and exterior auto-dimming mirrors despite a period over period decrease in European and Japanese/Korean light vehicle production of 2% and 4%, respectively.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold for the first nine months of 2013 declined to 64.3%, from 66.2% in the same period last year, primarily due to improvements in purchasing cost reductions and product
mix. Each of the positive factors is estimated to have impacted cost of goods sold as a percentage of net sales by approximately 75 basis points, with the balance of the improvement being a combination of smaller factors including improved manufacturing efficiencies. Operating Expenses. E, R & D expenses for the nine months ended September 30, 2013 decreased 15% or $9.8 million when compared with the same period last year, primarily due to reduced costs associated with outside contract engineering/development services. S, G & A expenses decreased 1% or $0.3 million when compared with the same period last year, primarily due to reduced expenses in the Company's overseas offices, offset by increased professional fees and due diligence costs associated with the acquisition of HomeLink. Total Other Income. Total other income for for the nine months ended September 30, 2013 increased by $4.3 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 nine months ended September 30, 2013, primarily due to the domestic manufacturing deduction as well as realized benefits of approximately $1 million from the filing of an amended federal tax return for 2009, specifically related to increased Research & Development tax credits. Net Income. Net income for the nine months ended September 30, 2013 increased by $24.1 million or 19% to $153.0 million versus $129.0 million in the same period last year, primarily due to increased sales and operating margins.


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FINANCIAL CONDITION:
The Company's cash and cash equivalents as of September 30, 2013 were $226.7 million, which was a decrease of approximately $163.0 million compared to December 31, 2012. The decrease was primarily due to cash used for the previously announced Homelink acquisition, partially offset by proceeds from new debt financing as well as cash flow from operations.
Short-term investments as of September 30, 2013 decreased from $60.8 million as of December 31, 2012 to $0 due to maturities and liquidations of the company's short term investment portfolio in preparation for the HomeLink acquisition. Accounts receivable as of September 30, 2013 increased approximately $42.9 million compared to December 31, 2012, primarily due to the higher sequential sales level as well as acquired receivables in the HomeLink acquisition. Inventories as of September 30, 2013 decreased approximately $42.5 million when compared to December 31, 2012, primarily due to reductions in raw materials inventory.

Goodwill as of September 30, 2013 increased by approximately $337.7 million due to the goodwill acquired related to HomeLink acquisition, explained further in Notes 2 and 4 to the Unaudited Consolidated Condensed Financial Statements.

Patents and Other Assets increased approximately $341.0 million. This increase is due to the recording of intangible assets acquired during the Homelink acquisition explained further in Notes 2 and 4 to the Unaudited Consolidated Condensed Financial Statements.
Long-term investments as of September 30, 2013 decreased approximately $27.6 million compared to December 31, 2012, primarily due to realized gains on sales of equity investments that were not re-invested due to HomeLink acquisition, partially offset by an increase in unrealized gains in equity investments as a result of current market conditions.
Accrued liabilities as of September 30, 2013 increased approximately $25.5 million compared to December 31, 2012, primarily due to increased accrued taxes and compensation, reflecting the timing of certain tax and compensation payments, as well as the current portion of the Company's new debt financing of which the current portion is $7.5 million.
Long term debt as of September 30, 2013 increased by $267.5 million compared to December 31, 2012, due to the Company's new debt financing as a result of the HomeLink acquisition, explained further in Note 10 to the Unaudited Condensed Financial Statements.
Cash flow from operating activities for the nine months ended September 30, 2013, increased $47.2 million to $223.7 million, compared with $176.4 million, during the same period last year, primarily due to changes in working capital. Cash flow used for investing activities for the nine months ended September 30, 2013 increased $552.8 million to $626.6 million, compared with $73.8 million, during the same period last year, primarily due to the HomeLink acquisition. Capital expenditures for the nine months ended September 30, 2013, were approximately $38.0 million, compared with approximately $97.6 million for the same period last year, primarily due to a reduction in production equipment purchases and building related costs.
Cash flow from financing activities for the nine months ended September 30, 2013, increased $319.4 million to $240.0 million, primarily due to proceeds from borrowings on the Company's new debt financing, discussed further in Note 10 to the Unaudited Consolidated Condensed Financial Statements.
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 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, for a total expected cost of $25 million, 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


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as air conditioning. The facility expansion has been completed and is in production. Total costs for this facility were approximately $11 million. The Company incurred approximately $31 million in facility related costs pertaining to the above projects through September 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. Management considers the Company's current working capital and long-term investments, as well as the new debt financing arrangement (not withstanding its prohibitions on incurring additional indebtedness), discussed further in Note 10 to the Unaudited Condensed Financial Statements, in addition to internally generated cash flow to be sufficient to cover anticipated cash needs for the foreseeable future considering it's contractual obligations and commitments. The following is a summary of working capital and long-term investments:

                       September 30, 2013       December 31, 2012
Working Capital       $        403,261,218    $       656,705,598
Long Term Investments          114,270,623            141,834,034
Total                 $        517,531,841    $       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 nine months ended September 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 September 30, 2013.


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BUSINESS UPDATE

As previously announced, the Company completed the acquisition of HomeLink on September 27th 2013. The integration of the HomeLink business will occur over the next 12 to 18 months. Many factors, though not currently expected, could introduce additional risks to the business including customer approvals and support that, if not received, could have a negative impact to the Company and its future performance. Examples of risk associated with customer support and approvals are in the areas of manufacturing changes, purchase order changes, freight and logistics changes, sourcing awards for new and replacement programs and quality approvals and sign-offs. In addition, the Company will face risks in regards to its ability to own and operate all facets of the business, including support from suppliers and compatibility partners, manufacturing skills, equipment and know-how, capacity constraints, electronic ordering systems, inventory levels, shipping and logistics systems, and invoicing/payment systems. Moreover, there are inherent business risks associated with disruptive technologies, consumer preference changes, macro-economic impacts and customer business relationships that could have a negative impact on the previously provided financial guidance associated with the HomeLink acquisition.

The Company continues in development and launch of new awarded business in all product technology areas, including HomeLink, compass, microphones, telematics, displays, SmartBeam and driver assist camera systems, interior lighting, and inside and outside 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 continues to be 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. Because the Company sells its automotive mirrors throughout 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


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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 for the 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. 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 and in other parts of the vehicle with it's newly acquired HomeLink portfolio. 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 October forecast for light vehicle production for the fourth quarter of 2013 are 4.05 million units for North America, 4.69 million units for Europe, and 3.46 million units for Japan and Korea. The IHS October forecast for light vehicle production for calendar year 2013 are 16.2 million units for North America, 19.0 million units for Europe, and 13.4 million units for Japan and Korea.

Based on the IHS October 2013 forecast for the fourth quarter of 2013, as well as the estimated option rates for the Company's mirrors on vehicle models, anticipated product mix including HomeLink products, and the Company's 12-week customer release schedule, the Company estimates that net sales in the fourth quarter of 2013 will increase 20 to 25% compared with the fourth quarter of 2012.

The Company also estimates gross profit margin for the fourth quarter of 2013 to be in the range of 38% - 38.5%, based on the October 2013 IHS production forecast and current forecasted product mix.

E,R&D expense in the fourth quarter of 2013 is estimated to increase 5% - 10% compared with E, R&D in the fourth quarter of 2012, primarily due to the increased staffing levels that have occurred throughout 2013, which continue to support growth and development of existing business as well as personnel additions that were part of the HomeLink acquisition.

S, G&A expense in the fourth quarter of 2013 is estimated to increase 15% - 20% compared with S, G&A in the fourth quarter of 2012, primarily due to increased amortization of the HomeLink acquired assets as well as personnel additions that were part of the HomeLink acquisition. This estimate is based on stable foreign exchange rates.

The Company continues to estimate that capital expenditures for 2013 will be approximately $50 - $60 million.

The Company currently estimates that depreciation and amortization expense for the full year to be in the range of $60 - $64 million.


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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 (see in particular Goodwill and Intangible assets below).
The Company has identified 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 existing critical accounting policies during the most recently completed quarter, however since the completion of the HomeLink acquisition, management believes there are additional critical accounting policies which have been and will be considered by the Company currently and on a prospective basis.

Goodwill and Intangible Assets

Goodwill represents the excess of fair value of assets acquired and liabilities assumed as of the acquisition date. In accordance with accounting guidance related to goodwill and other intangible assets, the Company tests for impairment of goodwill and indefinite-lived intangible assets annually in the fourth quarter and in certain situations between those annual dates, if interim indicators of impairment arise. Indefinite-lived intangible assets will be tested for impairment annually in the fourth quarter, by comparing the estimated fair value of the indefinite-lived intangible asset to the carrying value using a discounted cash flow approach. Intangible assets with a definite life are amortized over their useful life, which is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Management will periodically assess the amortization period of intangible assets with definite lives based upon estimated future cash flows from related operations and tests for impairment when indicators arise.

Given the timing of the acquisition, no impairment indicators arose during the nine months ended September 30, 2013 which would give reason for an interim test to be performed on goodwill or intangible assets. Inherent in the calculation of the fair value of goodwill and indefinite-lived intangible assets are various estimates. Future cash flow estimates are, by their nature, subjective, and . . .

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