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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| | | | | |
ü | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018 or
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-10235
GENTEX CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Michigan | | 38-2030505 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
600 N. Centennial, Zeeland, Michigan | | 49464 |
(Address of principal executive offices) | | (Zip Code) |
(616) 772-1800
(Registrant’s telephone number, including area code)
________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: þ No: o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: þ No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ü | | Accelerated filer | |
| | | | |
Non-accelerated filer | | | Smaller reporting company | |
| | | | |
| | | Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial or accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes: o No: o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | | | | |
Class | | Shares Outstanding, October 19, 2018 |
Common Stock, $.06 Par Value | | 262,116,951 |
GENTEX CORPORATION AND SUBSIDIARIES
For the Three and Nine Months Ended September 30, 2018
FORM 10-Q
Index
| | | | | | | | |
Part I - Financial Information | | Page |
Item 1. | | |
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| | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Part II - Other Information | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
| | |
| | |
PART I —FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements.
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2018 and December 31, 2017
| | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 (Note) |
ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 194,017,041 | | $ | 569,734,496 |
| Short-term investments | 143,623,541 | | 152,538,054 |
| Accounts receivable, net | 247,322,101 | | 231,121,788 |
| Inventories | 213,394,037 | | 216,765,583 |
| Prepaid expenses and other | 29,201,873 | | 14,403,902 |
| Total current assets | 827,558,593 | | 1,184,563,823 |
| | | |
| PLANT AND EQUIPMENT—NET | 497,305,597 | | 492,479,330 |
| | | |
| OTHER ASSETS | | | |
| Goodwill | 307,365,845 | | 307,365,845 |
| Long-term investments | 141,631,510 | | 57,782,418 |
| Intangible assets, net | 274,500,000 | | 288,975,000 |
| Patents and other assets, net | 21,027,381 | | 20,887,496 |
| Total other assets | 744,524,736 | | 675,010,759 |
| | | |
| Total assets | $ | 2,069,388,926 | | $ | 2,352,053,912 |
| | | |
LIABILITIES AND SHAREHOLDERS’ INVESTMENT | | | |
| | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 90,041,982 | | $ | 89,898,467 |
| Current portion of long-term debt | — | | 78,000,000 |
| Accrued liabilities | 82,844,508 | | 75,748,540 |
| Total current liabilities | 172,886,490 | | 243,647,007 |
| | | |
| | | |
| | | |
| DEFERRED INCOME TAXES | 53,398,181 | | 58,888,644 |
| | | |
| TOTAL LIABILITIES | 226,284,671 | | 302,535,651 |
| | | |
| SHAREHOLDERS’ INVESTMENT | | | |
| Common stock | 15,727,030 | | 16,816,879 |
| Additional paid-in capital | 743,495,999 | | 723,510,672 |
| Retained earnings | 1,086,003,216 | | 1,301,997,327 |
| Accumulated other comprehensive (loss) income | (2,121,990) | | 7,193,383 |
| Total shareholders’ investment | 1,843,104,255 | | 2,049,518,261 |
| Total liabilities and shareholders’ investment | $ | 2,069,388,926 | | $ | 2,352,053,912 |
Note: The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
NET SALES | $ | 460,253,433 | | $ | 438,627,786 | | $ | 1,380,654,978 | | $ | 1,335,302,109 |
| | | | | | | |
COST OF GOODS SOLD | 287,263,147 | | 267,398,126 | | 862,231,819 | | 821,063,869 |
| Gross profit | 172,990,286 | | 171,229,660 | | 518,423,159 | | 514,238,240 |
| | | | | | | |
OPERATING EXPENSES: | | | | | | | |
| Engineering, research and development | 26,888,999 | | 24,770,279 | | 80,138,722 | | 75,165,946 |
| Selling, general & administrative | 18,673,376 | | 17,386,729 | | 55,658,189 | | 49,708,008 |
| Total operating expenses | 45,562,375 | | 42,157,008 | | 135,796,911 | | 124,873,954 |
| | | | | | | |
| Income from operations | 127,427,911 | | 129,072,652 | | 382,626,248 | | 389,364,286 |
| | | | | | | |
| OTHER INCOME (LOSS) | | | | | | | |
| Investment income | 3,180,683 | | 2,139,387 | | 8,062,421 | | 5,348,052 |
| Other income (loss), net | (73,979) | | (379,996) | | 578,655 | | (1,071,628) |
| Total Other Income | 3,106,704 | | 1,759,391 | | 8,641,076 | | 4,276,424 |
| | | | | | | |
| Income before provision for income taxes | 130,534,615 | | 130,832,043 | | 391,267,324 | | 393,640,710 |
| | | | | | | |
| PROVISION FOR INCOME TAXES | 19,198,798 | | 40,601,708 | | 59,658,782 | | 117,317,687 |
| | | | | | | |
| NET INCOME | $ | 111,335,817 | | $ | 90,230,335 | | $ | 331,608,542 | | $ | 276,323,023 |
| | | | | | | |
| EARNINGS PER SHARE: | | | | | | | |
| Basic | $ | 0.42 | | $ | 0.32 | | $ | 1.23 | | $ | 0.97 |
| Diluted | $ | 0.42 | | $ | 0.31 | | $ | 1.22 | | $ | 0.96 |
| | | | | | | |
| Cash Dividends Declared per Share | $ | 0.11 | | $ | 0.10 | | $ | 0.33 | | $ | 0.29 |
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Net Income | $ | 111,335,817 | | $ | 90,230,335 | | $331,608,542 | | $276,323,023 |
| | | | | | | |
Other comprehensive income (loss) before tax: | | | | | | | |
| Foreign currency translation adjustments | (1,174,213) | | 1,182,152 | | (2,013,638) | | 2,865,952 |
| Unrealized gains on derivatives | 16,165 | | 239,215 | | 98,769 | | 1,376,077 |
| Unrealized (losses) gains on debt securities, net | (609,422) | | 2,287,103 | | (932,953) | | 5,409,722 |
| | | | | | | |
| Other comprehensive (loss) income, before tax | (1,767,470) | | 3,708,470 | | (2,847,822) | | 9,651,751 |
| | | | | | | |
| (Benefit) Expense for income taxes related to components of other comprehensive income (loss) | (124,584) | | 884,211 | | (175,177) | | 2,375,031 |
| | | | | | | |
| Other comprehensive (loss) income, net of tax | (1,642,886) | | 2,824,259 | | (2,672,645) | | 7,276,720 |
| | | | | | | |
Comprehensive Income | $ | 109,692,931 | | $ | 93,054,594 | | $ | 328,935,897 | | $ | 283,599,743 |
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
| | | | | | | | | | | |
| 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | $ | 331,608,542 | | $ | 276,323,023 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 80,748,272 | | 74,858,551 |
| Gain on disposal of assets | (145,777) | | (163,984) |
| Loss on disposal of assets | 26,839 | | 288,323 |
| Gain on sale of investments | (1,508,411) | | (1,028,505) |
| Loss on sale of investments | 532,494 | | 113,091 |
| Deferred income taxes | (5,538,048) | | 6,855,507 |
| Stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock | 13,558,557 | | 13,090,804 |
| | | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable, net | (16,200,315) | | (28,914,071) |
| Inventories | 3,371,546 | | (17,346,380) |
| Prepaid expenses and other | (14,797,969) | | 14,540,408 |
| Accounts payable | 143,514 | | (60,096) |
| Accrued liabilities, excluding dividends declared and short-term debt | 6,408,044 | | 13,999,423 |
| Net cash provided by operating activities | 398,207,288 | | 352,556,094 |
| | | |
| CASH FLOWS USED FOR INVESTING ACTIVITIES: | | | |
| Activity in available-for-sale securities: | | | |
| Sales proceeds | 54,078,232 | | 2,888,493 |
| Maturities and calls | 51,892,136 | | 18,100,000 |
| Purchases | (180,657,259) | | (18,062,164) |
| Plant and equipment additions | (68,771,193) | | (86,111,836) |
| Proceeds from sale of plant and equipment | 194,200 | | 192,756 |
| | | |
| Decrease (increase) in other assets | (4,557,125) | | 2,432,320 |
| Net cash used for investing activities | (147,821,009) | | (80,560,431) |
| | | |
| CASH FLOWS USED FOR FINANCING ACTIVITIES: | | | |
| | | |
| Repayment of debt | (78,000,000) | | (78,125,000) |
| | | |
| Issuance of common stock from stock plan transactions | 61,379,666 | | 31,896,752 |
| Cash dividends paid | (87,733,776) | | (80,417,057) |
| Repurchases of common stock | (521,749,624) | | (129,827,666) |
| | | |
| Net cash used for financing activities | (626,103,734) | | (256,472,971) |
| | | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (375,717,455) | | 15,522,692 |
| | | |
| CASH AND CASH EQUIVALENTS, beginning of period | 569,734,496 | | 546,477,075 |
| | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | 194,017,041 | | $ | 561,999,767 |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 2017 annual report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only a normal and recurring nature, necessary to present fairly the financial position of the Company as of September 30, 2018, and the results of operations and cash flows for the interim periods presented.
(2) Adoption of New Accounting Pronouncements
New Accounting Pronouncements Adopted in Fiscal Year 2018
Effective January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, using the modified retrospective method as applied to customer contracts that were not completed as January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606. This guidance supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, Accounting Standards Update ("ASU") 2014-09 requires certain additional disclosures around the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The Company has documented its accounting policy for the new standard based on a detailed review of its business and contracts. Based on the new guidance, the Company continues to recognize revenue at a particular point in time for the majority of its contracts with customers, which is generally when products are either shipped or delivered, as customer contracts did not meet the criteria in ASC 606 for over-time revenue recognition, specifically the over-time revenue recognition criteria of creating an asset with no alternative use and having an enforceable right to payment for progress towards completion. Therefore, the adoption of ASC 606 did not have a material impact on the consolidated financial statements. The Company has expanded its consolidated financial statement disclosures in order to comply with the disclosure requirements of the ASU. See Note 14 to the Unaudited Condensed Consolidated Financial Statements for additional disclosures regarding the Company’s revenue.
Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact to the Company's consolidated financial statements relates to the recognition and measurement of equity investments at fair value with changes recognized in net income. The amendment also updates certain presentation and disclosure requirements. The Company had a cumulative-effect adjustment in the first quarter of 2018 of approximately $6.6 million related to the reclassification of the net unrealized gain on available-for-sale securities as of January 1, 2018 from other comprehensive income to retained earnings due to the adoption of this guidance.
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for lease accounting. The new guidance contained in the ASU stipulates that lessees will need to recognize a right-of-use asset and a lease liability for substantially all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. Treatment in the consolidated statements of income will be similar to the current treatment of operating and capital leases. The new guidance is effective on a modified retrospective basis for the Company in the first quarter of its fiscal year ending December 31, 2019. The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements, including reviewing all of the available practical expedients for transition. Upon adoption, the Company does not anticipate a material impact on the Company's Consolidated Financial Statements.
(3) Goodwill and Other Intangible Assets
Goodwill represents the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company recorded Goodwill of $307.4 million as part of the HomeLink® acquisition. The carrying value of Goodwill as of December 31, 2017 and September 30, 2018 was $307.4 million.
In addition to annual impairment testing, which is performed as of the first day of the fourth quarter, the Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value thus resulting in the need for interim impairment testing, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company's market capitalization, and general industry, market and macroeconomic conditions. No such events or circumstances in the most recently completed quarter indicated the need for interim impairment testing.
The patents and intangible assets and related change in carrying values are set forth in the tables below:
As of September 30, 2018:
| | | | | | | | | | | | | | |
Other Intangible Assets | Gross | Accumulated Amortization | Net | Assumed Useful Life |
Gentex Patents | $ | 36,152,904 | $ | (20,336,961) | $ | 15,815,943 | various |
| | | | |
Other Intangible Assets | | | | |
HomeLink® Trade Names and Trademarks | $ | 52,000,000 | $ | — | $ | 52,000,000 | Indefinite |
HomeLink® Technology | 180,000,000 | (75,000,000) | 105,000,000 | 12 years |
| Existing Customer Platforms | 43,000,000 | (21,500,000) | 21,500,000 | 10 years |
| Exclusive Licensing Agreement | 96,000,000 | — | 96,000,000 | Indefinite |
Total Other Intangible Assets | $ | 371,000,000 | $ | (96,500,000) | $ | 274,500,000 | |
| | | | |
Total Patents & Other Intangible Assets | $ | 407,152,904 | $ | (116,836,961) | $ | 290,315,943 | |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2017:
| | | | | | | | | | | | | | |
Other Intangible Assets | Gross | Accumulated Amortization | Net | Assumed Useful Life |
Gentex Patents | $ | 34,847,029 | $ | (18,943,554) | $ | 15,903,475 | various |
| | | | |
HomeLink® Trade Names and Trademarks | $ | 52,000,000 | $ | — | $ | 52,000,000 | Indefinite |
HomeLink® Technology | 180,000,000 | (63,750,000) | 116,250,000 | 12 years |
Existing Customer Platforms | 43,000,000 | (18,275,000) | 24,725,000 | 10 years |
Exclusive Licensing Agreement | 96,000,000 | — | 96,000,000 | Indefinite |
Total other identifiable intangible assets | $ | 371,000,000 | $ | (82,025,000) | $ | 288,975,000 | |
| | | | |
Total Patents & Other Intangible Assets | $ | 405,847,029 | $ | (100,968,554) | $ | 304,878,475 | |
Amortization expense on patents and intangible assets was approximately $5.6 million and $16.9 million during the three and nine month periods ended September 30, 2018, respectively, compared to approximately $5.6 million and $16.9 million for the same periods ended September 30, 2017, respectively.
Excluding the impact of any future acquisitions, the Company continues to estimate amortization expense for each of the years ended December 31, 2018, 2019, 2020, 2021, and 2022 to be approximately $22 million annually.
(4) Investments
The Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures” for its financial assets and liabilities, and for its non-financial assets and liabilities subject to fair value measurements. ASC 820 provides a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases, require estimates of fair-market value. This standard also expanded financial statement disclosure requirements about a company’s use of fair-value measurements, including the effect of such measurement on earnings. The cost of securities sold is based on the specific identification method.
The Company’s investments in common stock are stated at fair value based on quoted market prices, and as such are classified as Level 1 assets. The Company determines the fair value of its government securities and corporate bonds by utilizing monthly valuation statements that are provided by its broker. The broker determines the investment valuation by utilizing the bid price in the market and also refers to third party sources to validate valuations, and as such are classified as Level 2 assets.
The Company's certificates of deposit have remaining maturities of less than one year and are considered as Level 1 assets. These investments are carried at cost, which approximates fair value.
During the year ended December 31, 2017, the Company made technology investments in certain non-consolidated third- parties for ownership interests of less than 20%. These investments do not have readily determinable fair values, and the Company has not identified any observable events that would cause adjustment of the valuation to date, and therefore these investments are held at cost at a total of $3.2 million as of September 30, 2018. These investments are classified within Long-Term Investments in the consolidated balance sheet.
Assets or liabilities that have recurring fair value measurements are shown below as of September 30, 2018 and December 31, 2017:
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2018
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using | | | | |
| Total as of | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable | | Significant Unobservable Inputs |
Description | September 30, 2018 | | (Level 1) | | (Level 2) | | (Level 3) |
Cash & Cash Equivalents | $ | 194,017,041 | | $ | 194,017,041 | | $ | — | | $ | — |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | 130,000,000 | | 130,000,000 | | — | | — |
| Corporate Bonds | 4,994,018 | | — | | 4,994,018 | | — |
| Government Securities | 6,691,949 | | — | | 6,691,949 | | — |
| | | | | | | |
| Other | 1,937,574 | | 1,937,574 | | — | | — |
| Long-Term Investments: | | | | | | | |
| Corporate Bonds | 62,393,073 | | — | | 62,393,073 | | — |
| Government Securities | 58,331,619 | | — | | 58,331,619 | | — |
| Common Stocks | 40,000 | | 40,000 | | — | | — |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Municipal Bonds | $ | 17,666,818 | | $ | 17,666,818 | | $ | — | | $ | — |
| Total | $ | 476,072,092 | | $ | 343,661,433 | | $ | 132,410,659 | | $ | — |
As of December 31, 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using | | | | |
| Total as of | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Description | December 31, 2017 | | (Level 1) | | (Level 2) | | (Level 3) |
Cash & Cash Equivalents | $ | 569,734,496 | | $ | 569,734,496 | | $ | — | | $ | — |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | 130,000,000 | | 130,000,000 | | — | | — |
| Government Securities | 9,011,130 | | — | | 9,011,130 | | — |
| Mutual Funds | 393,581 | | — | | 393,581 | | — |
| Corporate Bonds | 12,944,999 | | — | | 12,944,999 | | — |
| Other | 188,344 | | 188,344 | | — | | — |
Long-Term Investments: | | | | | | | |
| Corporate Bonds | 3,018,720 | | — | | 3,018,720 | | — |
| Common Stocks | 15,703,371 | | 15,703,371 | | — | | — |
| Mutual Funds | 34,681,337 | | 34,681,337 | | — | | — |
| Preferred Stock | 1,178,991 | | 1,178,991 | | — | | — |
| | | | | | | |
Total | $ | 776,854,969 | | $ | 751,486,539 | | $ | 25,368,430 | | $ | — |
The amortized cost, unrealized gains and losses, and market value of investment securities are shown as of September 30, 2018, and December 31, 2017
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized | | | | |
| Cost | | Gains | | Losses | | Market Value |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | $ | 130,000,000 | | $ | — | | $ | — | | $ | 130,000,000 |
| Government Securities | 6,699,555 | | — | | (7,606) | | 6,691,949 |
| | | | | | | |
| Corporate Bonds | 4,998,499 | | — | | (4,481) | | 4,994,018 |
| Other | 1,937,574 | | — | | — | | 1,937,574 |
| Long-Term Investments: | | | | | | | |
| Corporate Bonds | 62,619,934 | | 56 | | (226,917) | | 62,393,073 |
| Government Securities | 58,671,384 | | — | | (339,765) | | 58,331,619 |
| Common Stocks | 40,000 | | — | | — | | 40,000 |
| | | | | | | |
| Municipal Bonds | 17,841,486 | | — | | (174,668) | | 17,666,818 |
| Total | $ | 282,808,432 | | $ | 56 | | $ | (753,437) | | $ | 282,055,051 |
As of December 31, 2017:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized | | | | |
| Cost | | Gains | | Losses | | Market Value |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | $ | 130,000,000 | | $ | — | | $ | — | | $ | 130,000,000 |
| Government Securities | 9,024,777 | | — | | (13,647) | | 9,011,130 |
| Mutual Funds | 392,482 | | 1,575 | | (476) | | 393,581 |
| Corporate Bonds | 12,952,229 | | — | | (7,230) | | 12,944,999 |
| Other | 188,344 | | — | | — | | 188,344 |
Long-Term Investments: | | | | | | | |
| Corporate Bonds | 3,022,994 | | — | | (4,274) | | 3,018,720 |
| Common Stocks | 10,897,219 | | 5,079,815 | | (273,663) | | 15,703,371 |
| Mutual Funds | 29,306,540 | | 5,440,344 | | (65,547) | | 34,681,337 |
| Preferred Stock | 1,141,458 | | 40,533 | | (3,000) | | 1,178,991 |
| | | | | | | |
| Total | $ | 196,926,043 | | $ | 10,562,267 | | $ | (367,837) | | $ | 207,120,473 |
Unrealized losses on investments as of September 30, 2018, are as follows:
| | | | | | | | | | | |
| Aggregate Unrealized Losses | | Aggregate Fair Value |
Less than one year | $ | 753,437 | | $ | 148,084,928 |
Greater than one year | — | | — |
Total | $ | 753,437 | | $ | 148,084,928 |
Unrealized losses on investments as of December 31, 2017, are as follows:
| | | | | | | | | | | |
| Aggregate Unrealized Losses | | Aggregate Fair Value |
Less than one year | $ | 263,655 | | $ | 31,223,557 |
Greater than one year | 104,182 | | 285,077 |
Total | $ | 367,837 | | $ | 31,508,634 |
ASC 320, “Accounting for Certain Investments in Debt and Equity Securities”, as amended, provides guidance on determining when an investment is other than temporarily impaired. No investment losses
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
were considered to be other than temporary during the periods presented. The Company has the intention and current ability to hold its debt investments until the amortized cost basis has been recovered.
Fixed income securities as of September 30, 2018 have contractual maturities as follows:
| | | | | |
Due within one year | $ | 141,685,968 |
Due between one and five years | 129,595,580 |
Due over five years | 8,795,930 |
| $ | 280,077,478 |
(5) Inventories
Inventories consisted of the following at the respective balance sheet dates:
| | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 134,039,095 | | $ | 139,272,129 |
Work-in-process | 33,336,971 | | 30,481,192 |
Finished goods | 46,017,971 | | 47,012,262 |
Total Inventory | $ | 213,394,037 | | $ | 216,765,583 |
(6) Earnings Per Share
The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share (EPS):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerators: | | | | | | | |
Numerator for both basic and diluted EPS, net income | $ | 111,335,817 | | $ | 90,230,335 | | $ | 331,608,542 | | $ | 276,323,023 |
Denominators: | | | | | | | |
| Denominator for basic EPS, weighted-average shares outstanding | 265,607,128 | | 284,661,920 | | 270,366,996 | | 285,915,565 |
| Potentially dilutive shares resulting from stock plans | 1,988,014 | | 2,359,030 | | 2,366,506 | | 3,145,936 |
| Denominator for diluted EPS | 267,595,142 | | 287,020,950 | | 272,733,502 | | 289,061,501 |
| | | | | | | |
Shares related to stock plans not included in diluted average common shares outstanding because their effect would be anti-dilutive | 462,631 | | 807,013 | | 24,590 | | 2,847,247 |
(7) Stock-Based Compensation Plans
As of September 30, 2018, the Company had four equity incentive plans which include two stock option plans, a restricted stock plan and an employee stock purchase plan. All plans and any prior material amendments thereto have previously been approved by shareholders. Readers should refer to Note 5 of our consolidated financial statements in our Annual Report on Form 10-K for the calendar year ended December 31, 2017, for additional information related to these stock-based compensation plans.
The Company recognized compensation expense for share-based payments of $4,829,463 and $13,196,413 for the three and nine months ended September 30, 2018, respectively, and $3,067,076 and
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$9,957,687 for the three and nine months ended September 30, 2017, respectively. Compensation cost for share based payment awards capitalized as part of inventory as of September 30, 2018 and December 31, 2017 was $224,025 and $279,102, respectively.
Employee Stock Option Plan
The Company has an employee stock option plan covering 24,000,000 shares of common stock. The purpose of the plan is to provide an opportunity to use stock options as a means of recruiting new managerial and technical personnel and as a means for retaining certain employees of the Company by allowing them to purchase shares of common stock of the Corporation and thereby having an additional incentive to contribute to the prosperity of the Company.
The fair value of each option grant in the employee stock option plan was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the indicated periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Dividend Yield (1) | 1.99 | % | | 2.10 | % | | 2.09 | % | | 2.15 | % |
Expected volatility (2) | 23.32 | % | | 23.09 | % | | 26.65 | % | | 27.68 | % |
Risk-free interest rate (3) | 2.94 | % | | 1.92 | % | | 2.78 | % | | 2.00 | % |
Expected term of options (years) (4) | 4.19 | | 4.25 | | 4.21 | | 4.17 |
Weighted-avg. grant date fair value | $4.05 | | $3.35 | | $4.70 | | $4.05 |
1. Represents the Company’s estimated cash dividend yield over the expected term of option grant.
2. Amount is determined based on analysis of historical price volatility of the Company’s common stock. The expected volatility is based on the daily percentage change in the price of the stock over a period equal to the expected term of the option grant.
3. Represents the U.S. Treasury yield over the expected term of the option grant.
4. Represents the period of time that options granted are expected to be outstanding. Based on analysis of historical option exercise activity, the Company has determined that all employee groups exhibit similar exercise and post-vesting termination behavior.
Under the employee stock option plan, the option exercise price equals the stock’s market price on date of grant. The options vest after one to five years, and expire after five to ten years. As of September 30, 2018, there was $9,600,422 of unrecognized compensation cost related to share-based payments which is expected to be recognized over the remaining vesting periods.
Non-employee Director Stock Option Plan
The Company has a non-employee director stock option plan covering 1,000,000 shares of common stock. As of September 30, 2018, there was $87,458 of unrecognized compensation cost under the non-employee director plan related to share-based payments. The Company has granted options on 480,430 shares under the non-employee director plan through September 30, 2018. Under the non-employee director plan, the option exercise price equals the stock’s market price on the date of grant. The options vest after six months, and expire after ten years.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan covering 2,000,000 shares of common stock. Under the plan, the Company sells shares at 85% of the stock’s market price at date of purchase. Under ASC 718, the 15% discounted value is recognized as compensation expense. As of September 30, 2018, the Company has granted 924,878 shares under this plan.
Restricted Stock Plan
The Company has a restricted stock plan covering 9,000,000 shares of common stock. The purpose of the restricted stock plan is to permit grants of shares, subject to restrictions, to employees of the Company as a means of retaining and rewarding them for performance and to increase their ownership in the Company. Shares awarded under the restricted stock plan entitle the shareholder to all rights of common stock
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction period is determined by the Compensation Committee, appointed by the Board of Directors, but may not exceed ten years under the terms of the plan. As of September 30, 2018, the Company had unearned stock-based compensation of $33,559,239 associated with these restricted stock grants. The unearned stock-based compensation related to these grants is being amortized to compensation expense over the applicable restriction periods. Amortization expense from restricted stock grants in the three and nine months ended September 30, 2018 was $2,480,911 and $6,314,544, respectively, and for the three and nine months ended September 30, 2017 was $1,788,162 and $4,014,820, respectively.
(8) Comprehensive Income
Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income represents net income adjusted for unrealized gains and losses on certain debt investments, foreign currency translation adjustments, and derivatives.
The following table presents the net changes in the Company's accumulated other comprehensive income (loss) by component: (All amounts shown are net of tax).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency translation adjustments: | | | | | | | |
| Balance at beginning of period | $ | (194,395) | | $ | (1,179,199) | | $ | 645,030 | | $ | (2,862,999) |
Other Comprehensive (loss) income before reclassifications | (1,174,213) | | 1,182,152 | | (2,013,638) | | 2,865,952 |
| | | | | | | |
| Net current-period change | (1,174,213) | | 1,182,152 | | (2,013,638) | | 2,865,952 |
Balance at end of period | (1,368,608) | | 2,953 | | (1,368,608) | | 2,953 |
| | | | | | | |
| Unrealized gains (losses) on available-for-sale debt securities: | | | | | | | |
Balance at beginning of period | (271,939) | | 4,818,677 | | (16,349) | | 2,788,975 |
Other Comprehensive (loss) income before reclassifications | (276,010) | | 1,371,712 | | 33,941 | | 4,111,338 |
Amounts reclassified from accumulated other comprehensive income | (205,433) | | 114,905 | | (770,974) | | (595,019) |
Net current-period change | (481,443) | | 1,486,617 | | (737,033) | | 3,516,319 |
Balance at end of period | (753,382) | | 6,305,294 | | (753,382) | | 6,305,294 |
| Unrealized gains (losses) on derivatives: | | | | | | | |
| Balance at beginning of period | (12,770) | | (458,322) | | (78,026) | | (1,197,281) |
| Other comprehensive income (loss) before reclassifications | 114,889 | | 424 | | 175,308 | | 124,124 |
| Amounts reclassified from accumulated other comprehensive income | (102,119) | | 155,066 | | (97,282) | | 770,325 |
| Net current-period change | 12,770 | | 155,490 | | 78,026 | | 894,449 |
| Balance at end of period | — | | (302,832) | | — | | (302,832) |
| | | | | | | |
Accumulated other comprehensive (loss) income, end of period | $ | (2,121,990) | | $ | 6,005,415 | | $ | (2,121,990) | | $ | 6,005,415 |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents details of reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income Components | | Amounts Reclassified from Other Comprehensive Income | | | | | | | | Affected Line item in the Statement of Consolidated Income |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | |
| | 2018 | | 2017 | | 2018 | | 2017 | | |
Unrealized gains (losses) on available-for-sale debt securities | | | | | | | | | | |
| Realized gain on sale of securities | | $ | 260,042 | | $ | (176,777) | | $ | 975,917 | | $ | 915,414 | | Other income (loss), net |
| Provision for income taxes | | (54,609) | | 61,872 | | (204,943) | | (320,395) | | Provision for income taxes |
| | $ | 205,433 | | $ | (114,905) | | $ | 770,974 | | $ | 595,019 | | Net of tax |
| | | | | | | | | | |
Unrealized gains (losses) on derivatives | | | | | | | | | | |
| Realized gain (loss) on interest rate swap | | $ | 129,265 | | $ | (238,564) | | $ | 123,142 | | $ | (1,185,116) | | Other income (loss), net |
| Provision for income taxes | | (27,146) | | 83,498 |