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GNTX > SEC Filings for GNTX > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for GENTEX CORP

Form 10-K for GENTEX CORP


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

Results of Operations.
The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the dollar amount of each such item from that in the indicated previous year.

                                        Percentage of Net Sales               Percentage Change
                                                                              2013          2012
                                        Year Ended December 31,                To            To
                                     2013         2012        2011            2012          2011
Net Sales                           100.0 %       100.0 %     100.0 %          6.6  %        7.4  %
Cost of Goods Sold                   63.2          66.1        64.7            2.0           9.7
Gross Profit                         36.8          33.9        35.3           15.5           3.1
Operating Expenses:
Engineering, Research and
Development                           6.5           7.7         8.0          (10.0 )         4.1
Selling, General and
Administrative                        4.2           4.4         4.7            2.3          (0.4 )
Litigation Settlement                   -           0.5           -         (100.0 )        N/A
Total Operating Expenses:            10.8          12.6        12.7           (8.9 )         6.3
Operating Income                     26.0          21.3        22.6           30.0           1.3
Other Income/(Expense)                2.0           1.4         1.3           53.7          16.1
Income Before Provision for
Income Taxes                         28.0          22.7        23.9           31.4           2.1
Provision for Income Taxes            9.0           7.4         7.8           29.7           1.6
Net Income                           19.0 %        15.3 %      16.1 %         32.2  %        2.4  %

Results of Operations: 2013 to 2012
Net Sales. Company net sales increased by $72.3 million, or 7% compared to the prior year. Automotive net sales increased by 6% on a 10% increase in auto-dimming mirror shipments, from 23.8 million units in 2012 to 26.2 million units, primarily reflecting increased overall penetration of auto-dimming mirrors. North American automotive mirror unit shipments increased 6% in 2013 compared with the prior year, primarily due to increased penetration of the Company's exterior auto-dimming mirrors, as well as a 5% year over year increase in North American light vehicle production. International automotive mirror unit shipments increased 13% in 2013 when compared with the prior year, primarily due to increased penetration of both interior and exterior auto-dimming mirrors to certain European and Japanese automakers, in spite of flat vehicle production in Europe and a 4% decline in vehicle production in the Japanese/Korean markets on a year over year basis.
Other net sales increased 23% to $27.9 million, as dimmable aircraft window sales increased 62% year over year and fire protection sales increased 3% year over year.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased from 66.1% in 2012 to 63.2% in 2013, primarily reflecting improvements in product mix and purchasing cost reductions, partially offset by annual automotive customer price reductions. Each positive 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 expenses decreased by $8.5 million from 2012 to 2013, and was 7% of net sales down from 8% of sales in the prior year. E, R & D expenses decreased 10% year over year, compared to calendar year 2012 primarily due to planned reduced costs associated with temporary outside contract engineering and development services, partially offset by increased permanent staffing levels.
Selling, general and administrative expenses increased by $1.1 million or 2% from 2012 to 2013, and remained at 4% of net sales due in part to expenses related to the HomeLink® acquisition.


Total Other Income/(Expense). Investment income increased $1.4 million in 2013 versus 2012, primarily due to increased year-end mutual fund distribution income. Other income - net increased $6.7 million in 2013 versus 2012, primarily due to increased realized gains on the sale of equity investments, partially offset by increased interest expense associated with the Company's debt financing.
Taxes. The provision for federal income taxes varied from the statutory rate in 2013 primarily due to the domestic manufacturing deduction.
Net Income. Net income increased by $54.3 million, or 32% year over year, primarily due to increased sales and gross profit. Results of Operations: 2012 to 2011
Net Sales. Company net sales increased by $75.8 million, or 7% compared to the prior year. Automotive net sales increased by 7% on a 11% increase in auto-dimming mirror shipments, from 21.5 million (in 2011) to 23.8 million (in 2012) units, primarily reflecting increased light vehicle production in North America as well as increased penetration of auto-dimming mirrors on 2012 and 2013 model year vehicles. North American auto-dimming mirror unit shipments in 2012 increased by 22% compared to 2011, primarily as a result of increased auto-dimming mirror unit shipments to certain Japanese transplant automakers and to the traditional Big Three automakers. Overseas mirror unit shipments increased by 5% during 2012 compared to 2011, primarily due to increased auto-dimming mirror unit shipments to certain European and Japanese automakers. Other net sales increased 10% compared to the prior year, as dimmable aircraft window sales increased 56% year over year and fire protection sales decreased 5% year over year.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 64.7% in 2011 to 66.1% in 2012, primarily reflecting 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 expenses increased approximately $3.4 million from 2011 to 2012, but remained at approximately 8% of net sales. E, R & D expenses increased 4% year over year, primarily due to additional employee hiring for new product development projects and program awards, partially offset by reduced costs associated with outside contract/engineering/development services.
Selling, general and administrative expenses were approximately flat from 2011 to 2012, and declined to 4% of net sales from 5% year-over-year, primarily due to increased overseas office expense, offset by the impact of foreign exchange rates. The impact of foreign exchange rates was approximately three percentage points in 2012 vs. 2011.
During the fourth quarter of 2012, the Company in the ordinary course of business incurred litigation settlement expense of $5 million related to the Company's litigation with American Vehicular Sciences LLC ("AVS"). On June 25, 2012, AVS filed four patent infringement complaints in the United States District Court in the Eastern District of Texas, which named 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 alleged that the Company's SmartBeam® product infringed one patent owned by AVS. In the other two complaints (#6:12-cv-00410 and #6:12-cv-00415), AVS alleged 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. On December 28, 2012, in the ordinary course of business, the Company entered into a settlement/license agreement ("agreement") with AVS, settling all pending litigation. As a result of the agreement, the United States District Court in the Eastern District of Texas has ordered that the Company is dismissed with prejudice as a defendant in the complaints filed by AVS.
Total Other Income/(Expense). Investment income increased $1.1 million in 2012 vs. 2011, primarily due to increased year-end mutual fund distribution income. Other income - net increased $1.0 million in 2012 vs. 2011, primarily due to increased realized gains on the sale of equity investments.
Taxes. The provision for federal income taxes varied from the statutory rate in 2012 primarily due to the domestic manufacturing deduction. Net Income. Net income increased by $3.9 million, or 2% year over year, primarily due to increased sales and gross profit.


Liquidity and Capital Resources
The Company's financial condition throughout the periods presented has remained very strong, in spite of the general economic environment and conditions in our primary industry of automotive which, even though improving in certain regions, has not necessarily fully recovered.
The Company's cash and cash equivalents were $309.6 million, $389.7 million and $358.0 million as of December 31, 2013, 2012 and 2011, respectively. The Company's cash and cash equivalents include amounts held by foreign subsidiaries of $8.1 million, $6.6 million and $6.0 million as of December 31, 2013, 2012 and 2011, respectively. The funds held by foreign subsidiaries are considered indefinitely reinvested to be used to support operations outside the United States. The Company does not intend to repatriate any foreign cash or cash equivalents in the foreseeable future. These amounts would be subject to possible U.S. taxation only if remitted as dividends.
The Company's current ratio decreased from 8.5 as of December 31, 2012, to 5.0 as of December 31, 2013, due primarily due to a reduction in cash and cash equivalents as a result of the HomeLink® acquisition. The Company's current ratio increased from 7.5 as of December 31, 2011, to 8.5 as of December 31, 2012, primarily as a result of an increase in cash and cash equivalents and a decrease in accounts payable, partially offset by a decrease in inventory. Cash flow from operating activities was $317.3 million, $257.8 million and $141.7 million for the years ended December 31, 2013, 2012, and 2011, respectively. Cash flow from operating activities increased $59.5 million for the year ended December 31, 2013 compared to the prior year, primarily due to increased net income. Cash flow from operating activities increased $116.2 million for the year ended December 31, 2012, compared the same period in 2011, primarily due to reductions in inventory.
Cash flow used for investing activities for the year ended December 31, 2013 increased $501.2 million to $633.3 million, compared with $132.1 million, during 2012, primarily due to the HomeLink® acquisition. Cash flow used for investing activities for the year ended December 31, 2012 increased $28.6 million to $132.1 million, compared to the year ended December 31, 2011, primarily as a result of changes in the Company's available for sale securities and other assets. Capital expenditures for the year ended December 31, 2013, were $55.4 million, compared with $117.5 million for the same period last year, primarily due to a reduction in production equipment purchases and building related costs. During 2013, capital expenditures were related primarily to production equipment purchases.
Cash flow from financing activities for the year ended December 31, 2013, increased $329.9 million to $235.8 million, compared to the prior year, primarily due to proceeds from borrowings on the Company's long-term debt financing, discussed further in Note 2 to the Consolidated Financial Statements. Cash flow used for financing activities for the year ended December 31, 2012, increased $65.5 million to $94.1 million compared to the prior year, primarily due to increases in repurchases of common stock.
Cash and cash equivalents as of December 31, 2013 decreased $80.1 million compared to December 31, 2012, primarily due to cash used for the previously announced HomeLink® acquisition, which was partially offset by proceeds from new debt financing as well as cash flow from operations.
Short-term investments as of December 31, 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 December 31, 2013 increased $33.5 million compared to December 31, 2012, primarily due to the higher sequential sales level. Inventories as of December 31, 2013, decreased $39.9 million compared to December 31, 2012, primarily due to a decrease in raw materials inventory.

Goodwill as of December 31, 2013 was $307.4 million due to the Goodwill recorded as a result of the HomeLink® acquisition, explained further in Notes 10 and 11 to the Consolidated Financial Statements.
Long-term investments as of December 31, 2013, decreased $34.8 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 on equity investments as a result of current market conditions. Intangible Assets, net as of December 31, 2013 was $366.2 million due to the recording of intangible assets as a result of the HomeLink® acquisition, explained further in Notes 10 and 11 to the Consolidated Financial Statements.


Accounts payable as of December 31, 2013, increased $13.3 million compared to December 31, 2012, primarily due the timing of certain payments.
Long term debt as of December 31, 2013 was $265.6 million, due to the Company's new debt financing incurred in connection with the HomeLink® acquisition, explained further in Note 2 to the Consolidated Financial Statements. Management considers the Company's current working capital and long-term investments, as well as its existing debt financing arrangement (notwithstanding covenants prohibiting additional indebtedness), discussed further in Note 2 of the Consolidated Financial Statements, in addition to internally generated cash flow to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments. The following is a summary of working capital and long-term investments:
The following is a summary of the Company's working capital and long-term investments as of December 31, 2013, 2012, 2011:

                           2013           2012           2011
Working Capital       $ 481,205,828  $ 656,705,598  $ 583,180,645
Long Term Investments   107,005,522    141,834,034    129,091,167
Total                 $ 588,211,350  $ 798,539,632  $ 712,271,812

Outlook

The Company utilizes the light vehicle production forecasting services of IHS Worldwide, and IHS current forecasts for light vehicle production for the first quarter of 2014 are approximately 4.27 million units for North America, 5.03 million for Europe and 3.60 million for Japan and Korea. Current forecasts for light vehicle production for calendar 2014 are approximately 16.8 million units for North America, 19.6 million for Europe and 12.7 million for Japan and Korea.
The Company currently estimates that top line revenue will increase approximately 20% in the first quarter of 2014 compared with the same period in 2013 based on the current IHS worldwide forecast for current light vehicle production levels and our anticipated product mix. These estimates are based on light vehicle production forecasts in the regions to which the Company ships product, as well as the estimated option rates for its mirrors on prospective vehicle models and anticipated product mix. Continuing uncertainties, including light vehicle production levels; supplier part shortages; automotive plant shutdowns; sales rates in Europe, Asia and North America; challenging macroeconomic environments; OEM strategies and cost pressures; customer inventory management and the impact of potential automotive customer (including their Tier 1 suppliers) and supplier bankruptcies; work stoppages, strikes, etc., which could disrupt shipments to these customers, make forecasting difficult.
The integration of the HomeLink® business will continue to 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 on the Company and 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, we will face risks in regard to our ability to own and operate all facets of the HomeLink® 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 may negatively and adversely impact our business, financial condition and/or results of operations.
The Company also continues to experience volatility with customer orders within its twelve-week customer release window with some customers (including Tier 1 mirror suppliers) revising orders at the last minute. Due to significant uncertainties with global vehicle production volumes, it is an extremely difficult environment to forecast, and as a result, the Company is not providing revenue estimates beyond the first quarter of 2014 at this time.
The Company also estimates that engineering, research and development expenses are currently expected to increase approximately 10 - 15% in the first quarter of 2014 compared with the same period in 2013, primarily due to staffing and benefit costs which continue to support growth and the development of new business, as well as personnel additions that were part of the HomeLink® acquisition. In addition, the Company estimates that selling, general and


administrative expenses are currently expected to increase approximately 20 - 25% in the first quarter of 2014 compared with the same period in 2013 primarily due to incremental employment costs and amortization expense related to the HomeLink® acquisition (this estimate is based on stable foreign exchange rates). In light of on-going demand for our auto-dimming mirrors and electronics, the Company currently anticipates that 2014 capital expenditures will be approximately $75 - $85 million, a majority of which will be production equipment purchases. 2014 capital expenditures are currently anticipated to be financed from current cash and cash equivalents on hand.

Market Risk Disclosure
The Company is subject to market risk exposures of varying correlations and volatilities, including foreign exchange rate risk, interest rate risk and equity price risk. Volatile equity markets could negatively impact the Company's financial performance due to realized losses on the sale of equity investments and/or recognized losses due to other-than-temporary impairment adjustments on available-for-sale securities (mark-to-market adjustments). Interest rate fluctuations on the Company's long term debt financing could negatively impact our financial performance due to increased borrowing costs.
The Company has some assets, liabilities and operations outside the United States, including a Euro denominated account, which currently are not significant overall to the Company as a whole. Because the Company sells its automotive mirrors throughout the world and automobile manufacturing is highly dependent on general economic conditions, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products.
Most of the Company's non-U.S. sales are invoiced and paid in U.S. dollars; during 2013, approximately 7% of the Company's net sales were invoiced and paid in foreign currencies (compared to 8% for 2012 and 9% for 2011). The Company currently expects that approximately 7% of the Company's net sales in 2014 will be invoiced and paid in foreign currencies. The Company does not currently engage in hedging activities.
In 2013, the Company sold all holdings in its' fixed-income investment portfolio in preparation for the HomeLink® acquisition. In 2012 and prior years, the Company managed its' interest rate risk and default risk in its fixed-income investment portfolio by investing in shorter-term maturities and investment grade issues. The Company's fixed-income investments' maturities at fair value (000,000) and average interest rates are as follows:

                           Total Balance as of
                              December 31,
                          2013          2012
U.S. Government
Amount                  $   -       $      15.0
Average Interest Rate       - %             0.2 %
Government Agency
Amount                  $   -       $      38.5
Average Interest Rate       - %             0.2 %
Certificates of Deposit
Amount                  $   -       $       0.5
Average Interest Rate       - %             2.6 %
Corporate Bonds
Amount                  $   -               8.7
Average Interest Rate       - %             1.6 %
Other
Amount                  $   -       $       0.2
Average Interest Rate       - %             0.1 %

Most of the Company's equity investments are managed by a number of outside equity fund managers who invest primarily in large capitalization companies on the U.S. stock markets:
The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its Consolidated Financial Statements. See the Contractual Obligations and Other Commitments below.


Contractual Obligations and Other Commitments The Company had the following contractual obligations and other commitments (000,000) as of December 31, 2013 .

                                         Total       Less than 1 Year             1-3 Years          After 3 Years
Short-term debt                              7.5                    7.5         $          -   -   $             -
Long-term debt                             265.6                      -         $       15.0                 250.6
Interest on short and long-term debt        47.6                    3.2                  6.2                  38.2
Operating leases                             2.1                    1.1                  0.6                   0.4
Purchase obligations                       124.8                  124.8                    -                     -
Dividends payable                           20.4                   20.4                    -                     -
Total                                $     468.0     $            157.0   $ -   $       21.8       $         289.2

Purchase obligations are primarily for raw material inventory and capital equipment.
Critical Accounting Policies.
The preparation of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates, assumptions and apply judgments that affect its financial position and results of operations. On an ongoing basis, management evaluates these estimates and assumptions. Management also continually reviews its' accounting policies and financial information disclosures.
The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The policies described below represent those that are broadly applicable to its operations and involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related amounts.
Revenue Recognition. The Company recognizes revenue in accordance with ASC 820, Revenue Recognition in Financial Statements. Accordingly, revenue is recognized based on the terms of the customer purchase order that indicates title to the product and risk of ownership passes to the customer upon shipment. Sales are shown net of returns, which have not historically been significant. The Company does not generate sales from sale arrangements with multiple deliverables. Accounts Receivable. The Company reviews a monthly aging report of all accounts receivable balances starting with invoices outstanding over sixty days. In addition, the Company monitors information about its customers through a variety of sources including the media, and information obtained through on-going interaction between Company personnel and the customer. Based on the evaluation of the above information, the Company estimates its allowances related to customer receivables on historical credit and collections experience, customers current financial condition and the specific identification of other potential problems, including the economic climate. Actual collections can differ, requiring adjustments to the allowances, but such adjustments have not, historically, been material.
Inventories. Estimated inventory allowances for slow-moving and obsolete inventories are based on current assessments of future demands, market conditions, evaluation of longer lead times for certain electronic components and related management initiatives. If market conditions or customer requirements change and are less favorable than those projected by management, inventory allowances are adjusted accordingly.

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 will test 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 HomeLink® acquisition, no impairment indicators arose during the year ended December 31, 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 actual results may differ materially from the Company's estimates. If the Company's ongoing estimates of future cash flows are not met, the Company may have to record impairment charges in future accounting periods.

Investments. The Company's internal investment committee regularly reviews its fixed income and equity investment portfolio for any unrealized losses that . . .

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