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GNTX > SEC Filings for GNTX > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for GENTEX CORP

Form 10-Q for GENTEX CORP


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS:

FIRST QUARTER 2014 VERSUS FIRST QUARTER 2013

Net Sales. Net sales for the first quarter of 2014 increased by $66.2 million or 25% when compared with the first quarter of 2013.
Automotive net sales for the first quarter of 2014 increased 24% to $326.3 million, compared with automotive net sales of $263 million in the first quarter of 2013, driven by a 13% increase in automotive mirror unit shipments and the addition of HomeLink. North American automotive mirror unit shipments in the first quarter of 2014 decreased 1% to 2.5 million units compared with the first quarter of 2013, primarily due to year-over-year declines in the Company's RCD mirror unit shipments. International automotive mirror unit shipments in the first quarter of 2014 increased 23% compared with the first quarter of 2013 primarily due to increased penetration of the Company's interior and exterior auto-dimming mirrors. Mirror unit shipments also grew due to light vehicle production increases of 5% in Europe and 9% 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 months ended March 31, 2014 and 2013. (in thousands)

                                         Three Months Ended March 31,
                                                                        %
                                           2014             2013      Change
North American Interior Mirrors       1,975                2,032      (3 )%
North American Exterior Mirrors         536                  510       5  %
Total North American Mirror Units     2,511                2,542      (1 )%
International Interior Mirrors        3,263                2,645      23  %
International Exterior Mirrors        1,350                1,117      21  %
Total International Mirror Units      4,613                3,762      23  %
Total Interior Mirrors                5,238                4,677      12  %
Total Exterior Mirrors                1,886                1,627      16  %
Total Auto-Dimming Mirror Units       7,124                6,304      13  %

Other net sales, which include fire protection products and dimmable aircraft windows, were $9.4 million in the first quarter of 2014, up 44% compared with $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 60.9% for the first quarter of 2014 versus 65.3% in the same quarter of last year, primarily due to the impact of the HomeLink acquisition, improvements in product mix, purchasing cost reductions and the Company's ability to leverage it's fixed overhead costs, which were partially offset by annual customer price reductions. Each of the positive factors is estimated to have impacted cost of goods sold as a percentage of net sales by approximately 100 - 150 basis points.

Operating Expenses. Engineering, research and development (E, R & D) expenses for the first quarter of 2014 increased 10% or $1.8 million when compared with the first quarter of 2013, primarily due to increased staffing levels. Selling, general and administrative (S, G & A) expenses increased 25% or $2.7 million for the first quarter of 2014 compared to the first quarter of 2013, primarily due to increased amortization expense related to the HomeLink® acquisition. S,G&A expenses were 4.1% of net sales in the first quarter of 2014.


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Total Other Income & Expense. Total other income for the first quarter of 2014 increased by $2.6 million when compared with the first quarter of 2013, primarily due to increased realized gains on the sale of equity investments, partially offset by interest expense of $0.9 million.
Taxes. The effective tax rate was 32.6% in the first quarter of 2014 compared to 30.9% for same period of 2013. Effective tax rates differ from statutory federal income tax rates, primarily due to the domestic manufacturing deduction, provisions for state and local income taxes and permanent tax differences. The increase in the effective tax rate is primarily due to a reduction in benefits associated with expired Research & Development tax credits.
Net Income. Net income for the first quarter of 2014 increased by $23.1 million or 51% when compared with the first quarter of 2013, primarily due to increases in sales and operating margin.

FINANCIAL CONDITION:
The Company's cash and cash equivalents as of March 31, 2014 was $374.7 million, which increased approximately $65.1 million compared to $309.6 million as of December 31, 2013. The increase was primarily due to cash flow from operations. Accounts receivable as of March 31, 2014 increased approximately $28.3 million compared to December 31, 2013, primarily due to the higher sequential sales level as well as timing of sales within the quarter.
Inventories as of March 31, 2014 increased approximately $8.3 million when compared to December 31, 2013, primarily due to increases in raw materials inventory.
Long-term investments as of March 31, 2014 increased approximately $2.0 million compared to December 31, 2013, due to increases in unrealized gains in equity investments, partially offset by realized gains on sales of equity investments that were not re-deployed.
Accrued liabilities as of March 31, 2014 increased approximately $39.3 million compared to December 31, 2013, primarily due to increased accrued taxes and compensation, reflecting the timing of certain tax and compensation payments. Long term debt as of March 31, 2014 decreased by $1.9 million compared to December 31, 2013, due to the Company's principal repayment on it's term loan, further explained in Note 10 to the Unaudited Condensed Financial Statements.
Cash flow from operating activities for the three months ended March 31, 2014, increased $0.3 million to $97.7 million, compared with $97.4 million, during the same quarter last year, primarily due to increases in net income, partially offset by changes in working capital.
Capital expenditures for the three months ended March 31, 2014, were approximately $16.4 million, compared with approximately $12.7 million for the same period last year, primarily due to production equipment purchases . The Company currently estimates that it has building capacity to manufacture approximately 21-23 million interior mirror units annually and approximately 10 million exterior mirror units annually, based 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 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 its contractual obligations and commitments. The following is a summary of working capital and long-term investments:


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                       March 31, 2014       December 31, 2013
Working Capital       $    536,479,951    $       481,205,828
Long Term Investments      108,967,579            107,005,522
Total                 $    645,447,530    $       588,211,350

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 three months ended March 31, 2014.
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, 2014.


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BUSINESS UPDATE

As previously announced, the Company completed the acquisition of HomeLink on September 27th 2013. The integration of HomeLink remains a major priority for the Company in 2014. The integrations continues to run in line with, to slightly ahead of, the Company's original projections. The Company is encouraged by customer approvals received, the manufacturing transition to production at the Company's U.S. based facilities, integration of suppliers and compatibility partners, order processing, logistics, the sourcing of new business awards, and perhaps most importantly, new product development. HomeLink V, which combines bi-directional communication capability for garage doors, gates, lights, locks, and security systems with the ability to function across the globe, provides us with a technology platform for both integration into our rearview mirrors and expansion of our product line with electronic modules outside the mirror in other areas of the vehicle interior. HomeLink is the market leader in the interface of vehicle to the home, and the Company looks forward to new product announcements in the future.

The Company is in the development and launch of new technology in all product areas which include: inside and outside mirrors with frameless and curved glass applications, advanced mirror features including HomeLink, compass, interior lighting, microphones, telematics, SmartBeam and driver assist camera systems, and HomeLink electronic modules in other areas of the vehicle. The Company has been awarded business contracts with various automotive OEM's for this new technology extending to and beyond 2020.

The Company does continue 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 while improving, 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 (to vehicles where the Company has lower penetration). 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 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 required due diligence efforts in 2013, with initial disclosure requirements beginning in May 2014. There will be costs associated with complying with these disclosure requirements, including costs 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 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 determines that certain of its 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 the Company's products through the procedures the Company may implement.


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On March 31, 2014, the National Highway Traffic Safety Administration issued a final rule requiring rearview video systems in U.S. light vehicles by May 1, 2018, with a phase-in schedule requirement of 10% of vehicles after May 2016, 40% of vehicles after May 2017, and 100% of vehicles after May 2018. In this release, NHTSA estimated that 57% of model year 2014 vehicles already have a rear video system, and that even without a final rule, 73% of the vehicles sold into North America would have already included a rearview video system by 2018. This NHTSA ruling, as is indicated from the percentage of U.S. vehicles already having a solution, does not currently indicate an immediate opportunity for new RCD mirror applications for the Company. Customer opportunities may exist by the time the 100% requirement is in place, but no new material guidance is available from the Company at this time. The Company's rear camera display mirror application meets all the technical requirements of the NHTSA ruling when installed in a vehicle and appropriately paired with an OEM specified camera. The Company has previously reported that in anticipation of the NHTSA ruling requiring rearview video systems, four of its customers had implemented standard equipment rear video display in the radio in place of the Company's RCD mirror option, and that the Company would experience those lost U.S. applications beginning in 2013 and continuing throughout calendar 2014. Actual RCD unit shipments for calendar year 2013 decreased 21% as a result, and the Company currently expects a similar decline in unit shipments in 2014.

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.

Requests to NHTSA for cameras and video displays to replace automotive rearview mirrors has for many years been a consideration in regulatory discussion and specification development. Mirrors are the primary safety function for rear vision in automotive today. Challenges to replacing rearview mirrors with cameras include viewing area, depth perception, cleanliness of the camera lens in all weather conditions, and the fundamental issue of what does the driver do if the camera fails due to electrical or interference issues.
The Company designs and manufactures both rearview mirrors and CMOS imager cameras and video displays and has been shipping these products for many years. The Company has recognized the future potential for these technologies, and continues to be an active participant in the development of products that would continue to put the Company in a position to become a market leader in this area.

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 relatively 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 its 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.


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OUTLOOK:

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 2014 are 4.32 million units for North America, 5.12 million units for Europe, and 3.14 million units for Japan and Korea. The IHS April forecast for light vehicle production for calendar year 2014 are 16.8 million units for North America, 19.6 million units for Europe, and 12.9 million units for Japan and Korea.

Based on the IHS April 2014 forecast for the second quarter of 2014, 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 second quarter of 2014 will increase 15 - 20% compared with the second quarter of 2013.

The Company also estimates gross profit margin for the second quarter of 2014 to be in the range of 39% - 39.5%, based on the April 2014 IHS production forecast and current forecasted product mix.

E,R&D expense in the second quarter of 2014 is estimated to increase 10% - 15% compared with E, R&D in the second quarter of 2013, primarily due to the increased staffing levels that have occurred throughout calendar 2013 and into 2014, 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 second quarter of 2014 is estimated to increase 10% - 15% compared with S, G&A in the second quarter of 2013, 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 2014 will be approximately $75 - $85 million.

The Company continues to estimate that depreciation and amortization expense for the full year to be in the range of $80 - $85 million.

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/or 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, 2013.


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