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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 March 31, 2019 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 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
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.06 per share | GNTX | NASDAQ Global Select Market |
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, April 24, 2019 |
Common Stock, $.06 Par Value | | 255,581,668 |
GENTEX CORPORATION AND SUBSIDIARIES
For the Three Months Ended March 31, 2019
FORM 10-Q
Index
| | | | | | | | |
Part I - Financial Information | | Page |
Item 1. | | |
| | |
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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 March 31, 2019 and December 31, 2018
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 (Note) |
ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 221,688,575 | | $ | 217,025,278 |
| Short-term investments | 180,313,222 | | 169,412,999 |
| Accounts receivable, net | 244,266,296 | | 213,537,799 |
| Inventories | 225,303,042 | | 225,281,599 |
| Prepaid expenses and other | 14,824,876 | | 25,672,579 |
| Total current assets | 886,396,011 | | 850,930,254 |
| | | |
| PLANT AND EQUIPMENT—NET | 492,613,112 | | 498,473,766 |
| | | |
| OTHER ASSETS | | | |
| Goodwill | 307,365,845 | | 307,365,845 |
| Long-term investments | 126,528,508 | | 137,979,082 |
| Intangible assets, net | 264,850,000 | | 269,675,000 |
| Patents and other assets, net | 22,612,152 | | 21,010,121 |
| Total other assets | 721,356,505 | | 736,030,048 |
| | | |
| Total assets | $ | 2,100,365,628 | | $ | 2,085,434,068 |
| | | |
LIABILITIES AND SHAREHOLDERS’ INVESTMENT | | | |
| | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 90,117,496 | | $ | 92,810,316 |
| | | |
| Accrued liabilities | 94,376,376 | | 76,350,603 |
| Total current liabilities | 184,493,872 | | 169,160,919 |
| | | |
| OTHER NON-CURRENT LIABILITIES | 5,509,373 | | — |
| | | |
| | | |
| | | |
| DEFERRED INCOME TAXES | 53,287,636 | | 54,521,489 |
| | | |
| Total liabilities | 243,290,881 | | 223,682,408 |
| | | |
| SHAREHOLDERS’ INVESTMENT | | | |
| Common stock | 15,335,060 | | 15,559,717 |
| Additional paid-in capital | 748,641,461 | | 745,324,144 |
| Retained earnings | 1,093,373,960 | | 1,102,468,137 |
| Accumulated other comprehensive (loss) income | (275,734) | | (1,600,338) |
| Total shareholders’ investment | 1,857,074,747 | | 1,861,751,660 |
| Total liabilities and shareholders’ investment | $ | 2,100,365,628 | | $ | 2,085,434,068 |
Note: The condensed consolidated balance sheet at December 31, 2018 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 months ended March 31, 2019 and 2018
| | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, | | |
| | | | | 2019 | | 2018 |
NET SALES | | | | | $ | 468,588,997 | | $ | 465,420,105 |
| | | | | | | |
COST OF GOODS SOLD | | | | | 298,944,494 | | 292,791,704 |
| Gross profit | | | | | 169,644,503 | | 172,628,401 |
| | | | | | | |
OPERATING EXPENSES: | | | | | | | |
| Engineering, research and development | | | | | 28,089,181 | | 26,049,258 |
| Selling, general & administrative | | | | | 19,958,991 | | 18,063,810 |
| Total operating expenses | | | | | 48,048,172 | | 44,113,068 |
| | | | | | | |
| Income from operations | | | | | 121,596,331 | | 128,515,333 |
| | | | | | | |
| OTHER INCOME (LOSS) | | | | | | | |
| Investment income | | | | | 3,262,741 | | 2,037,605 |
| Other income (loss), net | | | | | 49,469 | | 1,206,993 |
| Total Other Income | | | | | 3,312,210 | | 3,244,598 |
| | | | | | | |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | | | | 124,908,541 | | 131,759,931 |
| | | | | | | |
| PROVISION FOR INCOME TAXES | | | | | 20,628,130 | | 20,511,188 |
| | | | | | | |
| NET INCOME | | | | | $ | 104,280,411 | | $ | 111,248,743 |
| | | | | | | |
| EARNINGS PER SHARE: | | | | | | | |
| Basic | | | | | $ | 0.40 | | $ | 0.40 |
| Diluted | | | | | $ | 0.40 | | $ | 0.40 |
| | | | | | | |
| Cash Dividends Declared per Share | | | | | $ | 0.115 | | $ | 0.110 |
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three months ended March 31, 2019 and 2018
| | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, | | |
| | | | | 2019 | | 2018 |
Net Income | | | | | $104,280,411 | | $111,248,743 |
| | | | | | | |
Other comprehensive income (loss) before tax: | | | | | | | |
| Foreign currency translation adjustments | | | | | 298,999 | | 1,626,178 |
| Unrealized gains on derivatives | | | | | — | | 67,047 |
| Unrealized gains (losses) on debt securities, net | | | | | 1,298,236 | | (21,280) |
| | | | | | | |
| Other comprehensive income, before tax | | | | | 1,597,235 | | 1,671,945 |
| | | | | | | |
| Expense for income taxes related to components of other comprehensive income | | | | | 272,631 | | 9,611 |
| | | | | | | |
| Other comprehensive income, net of tax | | | | | 1,324,604 | | 1,662,334 |
| | | | | | | |
Comprehensive Income | | | | | $ | 105,605,015 | | $ | 112,911,077 |
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Three months ended March 31, 2019 and 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock
Shares | | Common
Stock
Amount | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Shareholders’
Investment |
| BALANCE AS OF JANUARY 1, 2018 | 280,281,321 | | $ | 16,816,879 | | $ | 723,510,672 | | $ | 1,301,997,327 | | $ | 7,193,383 | | $ | 2,049,518,261 |
| Issuance of common stock and the tax benefit of stock plan transactions | 2,904,555 | | 174,274 | | 36,092,773 | | — | | — | | 36,267,047 |
| Repurchases of common stock | (9,331,499) | | (559,890) | | (21,089,188) | | (180,923,300) | | — | | (202,572,378) |
| Stock-based compensation expense related to stock options, employee stock purchases and restricted stock | — | | — | | 3,977,471 | | — | | — | | 3,977,471 |
| Impact of ASU 2016-01 Adoption | | | | | | | 6,642,727 | | (6,642,727) | | — |
| Dividends declared ($.110 per share) | — | | — | | — | | (30,123,981) | | — | | (30,123,981) |
| Net income | — | | — | | — | | 111,248,743 | | — | | 111,248,743 |
| Other comprehensive income | — | | — | | — | | — | | 1,662,333 | | 1,662,333 |
| BALANCE AS OF MARCH 31, 2018 | 273,854,377 | | $ | 16,431,263 | | $ | 742,491,728 | | $ | 1,208,841,516 | | $ | 2,212,989 | | $ | 1,969,977,496 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| BALANCE AS OF JANUARY 1, 2019 | 259,328,613 | | $ | 15,559,717 | | $ | 745,324,144 | | $ | 1,102,468,137 | | $ | (1,600,338) | | $ | 1,861,751,660 |
| Issuance of common stock and the tax benefit of stock plan transactions | 980,670 | | 58,840 | | 10,455,714 | | — | | — | | 10,514,554 |
| Repurchases of common stock | (4,724,938) | | (283,497) | | (12,001,344) | | (83,982,388) | | — | | (96,267,229) |
| Stock-based compensation expense related to stock options, employee stock purchases and restricted stock | — | | — | | 4,862,947 | | — | | — | | 4,862,947 |
| Dividends declared ($.115 per share) | — | | — | | — | | (29,392,200) | | — | | (29,392,200) |
| Net income | — | | — | | — | | 104,280,411 | | — | | 104,280,411 |
| Other comprehensive income | — | | — | | — | | — | | 1,324,604 | | 1,324,604 |
| BALANCE AS OF March 31, 2019 | 255,584,345 | | $ | 15,335,060 | | $ | 748,641,461 | | $ | 1,093,373,960 | | $ | (275,734) | | $ | 1,857,074,747 |
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three months ended March 31, 2019 and 2018
| | | | | | | | | | | |
| 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | $ | 104,280,411 | | $ | 111,248,743 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 28,098,804 | | 28,046,434 |
| (Gain) on disposal of assets | (43,338) | | (4,374) |
| Loss on disposal of assets | 122,296 | | 8,677 |
| (Gain) on sale of investments | (88,576) | | (1,245,075) |
| Loss on sale of investments | — | | 529,484 |
| Deferred income taxes | (1,233,853) | | (2,746,797) |
| Stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock | 4,862,947 | | 3,977,471 |
| | | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable, net | (30,728,497) | | (15,305,451) |
| Inventories | (21,443) | | 9,532,631 |
| Prepaid expenses and other | 10,847,705 | | 2,872,873 |
| Accounts payable | (2,692,820) | | (12,590,570) |
| Accrued liabilities, excluding dividends declared and short-term debt | 20,436,582 | | 23,125,002 |
| Net cash provided by operating activities | 133,840,218 | | 147,449,048 |
| | | |
| CASH FLOWS (USED FOR) PROVIDED BY INVESTING ACTIVITIES: | | | |
| Activity in available-for-sale securities: | | | |
| Sales proceeds | 17,139,689 | | 53,822,052 |
| Maturities and calls | 3,000,000 | | 3,000,000 |
| Purchases | (18,475,158) | | (1,213,405) |
| Plant and equipment additions | (16,844,301) | | (26,247,890) |
| Proceeds from sale of plant and equipment | 117,455 | | 67,400 |
| | | |
| Decrease in other assets | 164,215 | | 45,322 |
| Net cash (used for) provided by investing activities | (14,898,100) | | 29,473,479 |
| | | |
| CASH FLOWS (USED FOR) FINANCING ACTIVITIES: | | | |
| | | |
| Repayment of debt | — | | (28,000,000) |
| | | |
| Issuance of common stock from stock plan transactions | 10,514,554 | | 36,267,047 |
| Cash dividends paid | (28,526,146) | | (28,028,132) |
| Repurchases of common stock | (96,267,229) | | (202,572,378) |
| | | |
| Net cash (used for) financing activities | (114,278,821) | | (222,333,463) |
| | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 4,663,297 | | (45,410,936) |
| | | |
| CASH AND CASH EQUIVALENTS, beginning of period | 217,025,278 | | 569,734,496 |
| | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | 221,688,575 | | $ | 524,323,560 |
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 2018 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 March 31, 2019, 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 2019
Effective January 1, 2019, the Company adopted Accounting Standards Update ("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 ("ROU") 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 historical treatment of operating and capital leases. The adoption of this standard did not have a material impact on the Company's consolidated balance sheet or consolidated income statement. Disclosures are now required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. The standard requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The Company will be required to adopt ASU 2016-13 as of January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-13 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, 2018 and March 31, 2019 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
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2019:
| | | | | | | | | | | | | | |
Other Intangible Assets | Gross | Accumulated Amortization | Net | Assumed Useful Life |
| Gentex Patents | $ | 36,767,886 | $ | (21,456,037) | $ | 15,311,849 | various |
| | | | |
| Other Intangible Assets | | | | |
HomeLink® Trade Names and Trademarks | $ | 52,000,000 | $ | — | $ | 52,000,000 | Indefinite |
HomeLink® Technology | 180,000,000 | (82,500,000) | 97,500,000 | 12 years |
| Existing Customer Platforms | 43,000,000 | (23,650,000) | 19,350,000 | 10 years |
| Exclusive Licensing Agreement | 96,000,000 | — | 96,000,000 | Indefinite |
| Total Other Intangible Assets | $ | 371,000,000 | $ | (106,150,000) | $ | 264,850,000 | |
| | | | |
| Total Patents & Other Intangible Assets | $ | 407,767,886 | $ | (127,606,037) | $ | 280,161,849 | |
As of December 31, 2018:
| | | | | | | | | | | | | | |
Other Intangible Assets | Gross | Accumulated Amortization | Net | Assumed Useful Life |
Gentex Patents | $ | 36,737,434 | $ | (21,014,168) | $ | 15,723,266 | various |
| | | | |
| Other Intangible Assets | | | | |
HomeLink® Trade Names and Trademarks | $ | 52,000,000 | $ | — | $ | 52,000,000 | Indefinite |
HomeLink® Technology | 180,000,000 | (78,750,000) | 101,250,000 | 12 years |
| Existing Customer Platforms | 43,000,000 | (22,575,000) | 20,425,000 | 10 years |
Exclusive Licensing Agreement | 96,000,000 | — | 96,000,000 | Indefinite |
| Total Other Intangible Assets | $ | 371,000,000 | $ | (101,325,000) | $ | 269,675,000 | |
| | | | |
| Total Patents & Other Intangible Assets | $ | 407,737,434 | $ | (122,339,168) | $ | 285,398,266 | |
Amortization expense on patents and intangible assets was approximately $5.6 million during the three ended March 31, 2019, compared to approximately $5.7 million for the same period ended March 31, 2018, .
Excluding the impact of any future acquisitions, the Company continues to estimate amortization expense for each of the years ended December 31, 2019, 2020, and 2021 to be approximately $22 million annually, approximately $21 million for 2022, and approximately $19 million for the year ended December 31, 2023.
(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.
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 determines the fair value of its government securities, municipal bonds, 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.
The Company will also periodically make 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 were held at cost at a total of $4.1 million and $3.85 million as of March 31, 2019 and December 31, 2018, respectively. 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 March 31, 2019 and December 31, 2018:
As of March 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | March 31, 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
Cash & Cash Equivalents | $ | 221,688,575 | | $ | 221,688,575 | | $ | — | | $ | — |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | 150,299,384 | | 150,299,384 | | — | | — |
| Government Securities | 21,109,868 | | — | | 21,109,868 | | — |
| Corporate Bonds | 5,982,688 | | — | | 5,982,688 | | — |
| | | | | | | |
| Other | 2,921,282 | | 2,921,282 | | — | | — |
| Long-Term Investments: | | | | | | | |
| Corporate Bonds | 66,610,295 | | — | | 66,610,295 | | — |
| Municipal Bonds | 21,283,707 | | — | | 21,283,707 | | — |
| Government Securities | 34,534,506 | | — | | 34,534,506 | | — |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | 524,430,305 | | $ | 374,909,241 | | $ | 149,521,064 | | $ | — |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2018
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, 2018 | | (Level 1) | | (Level 2) | | (Level 3) |
Cash & Cash Equivalents | $ | 217,025,278 | | $ | 217,025,278 | | $ | — | | $ | — |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | 150,299,384 | | 150,299,384 | | — | | — |
| Government Securities | 9,176,227 | | — | | 9,176,227 | | — |
| | | | | | | |
| Corporate Bonds | 6,967,700 | | — | | 6,967,700 | | — |
| Other | 2,219,688 | | 2,219,688 | | — | | — |
| Long-Term Investments: | | | | | | | |
| Corporate Bonds | 60,369,930 | | — | | 60,369,930 | | — |
| | | | | | | |
| | | | | | | |
| Municipal Bonds | 18,025,432 | | — | | 18,025,432 | | — |
| Government Securities | 56,483,720 | | — | | 56,483,720 | | — |
| Total | $ | 520,567,359 | | $ | 369,544,350 | | $ | 151,023,009 | | $ | — |
The amortized cost, unrealized gains and losses, and market value of investment securities are shown as of March 31, 2019 and December 31, 2018:
As of March 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized | | | | |
| Cost | | Gains | | Losses | | Market Value |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | $ | 150,299,384 | | $ | — | | $ | — | | $ | 150,299,384 |
| Government Securities | 21,101,631 | | 9,901 | | (1,664) | | 21,109,868 |
| | | | | | | |
| Corporate Bonds | 5,979,056 | | 4,095 | | (463) | | 5,982,688 |
| Other | 2,921,282 | | — | | — | | 2,921,282 |
| Long-Term Investments: | | | | | | | |
| Corporate Bonds | 66,172,642 | | 504,809 | | (67,156) | | 66,610,295 |
| | | | | | | |
| | | | | | | |
| Municipal Bonds | 20,851,133 | | 432,574 | | — | | 21,283,707 |
| Government Securities | 34,316,447 | | 218,059 | | $ | — | | 34,534,506 |
| Total | $ | 301,641,575 | | $ | 1,169,438 | | $ | (69,283) | | $ | 302,741,730 |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2018
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized | | | | |
| Cost | | Gains | | Losses | | Market Value |
Short-Term Investments: | | | | | | | |
| Certificate of Deposit | $ | 150,299,384 | | $ | — | | $ | — | | $ | 150,299,384 |
| Government Securities | 9,186,586 | | — | | (10,359) | | 9,176,227 |
| | | | | | | |
| Corporate Bonds | 6,981,305 | | — | | (13,605) | | 6,967,700 |
| Other | 2,219,688 | | — | | — | | 2,219,688 |
Long-Term Investments: | | | | | | | |
| Corporate Bonds | 60,659,498 | | 50,340 | | (339,908) | | 60,369,930 |
| | | | | | | |
| | | | | | | |
| Municipal Bonds | 17,840,518 | | 184,914 | | — | | 18,025,432 |
| Government Securities | 56,280,552 | | 205,553 | | (2,385) | | 56,483,720 |
| Total | $ | 303,467,531 | | $ | 440,807 | | $ | (366,257) | | $ | 303,542,081 |
Unrealized losses on investments as of March 31, 2019, are as follows:
| | | | | | | | | | | |
| Aggregate Unrealized Losses | | Aggregate Fair Value |
Less than one year | $ | 69,283 | | $ | 20,786,455 |
Greater than one year | — | | — |
Total | $ | 69,283 | | $ | 20,786,455 |
Unrealized losses on investments as of December 31, 2018, are as follows:
| | | | | | | | | | | |
| Aggregate Unrealized Losses | | Aggregate Fair Value |
Less than one year | $ | 365,824 | | $ | 68,722,980 |
Greater than one year | 433 | | 3,000,000 |
Total | $ | 366,257 | | $ | 71,722,980 |
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 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 March 31, 2019 have contractual maturities as follows:
| | | | | |
Due within one year | $ | 177,391,940 |
Due between one and five years | 111,377,100 |
Due over five years | 11,051,408 |
| $ | 299,820,448 |
(5) Inventories
Inventories consisted of the following at the respective balance sheet dates:
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Raw materials | $ | 143,533,414 | | $ | 139,058,541 |
Work-in-process | 35,811,334 | | 35,386,615 |
Finished goods | 45,958,294 | | 50,836,443 |
Total Inventory | $ | 225,303,042 | | $ | 225,281,599 |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Earnings Per Share
The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends, which are considered participating securities under ASC Topic 260, Earnings Per Share. The Company allocates earnings to participating securities and computes earnings per share using the two-class method. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. The following table sets forth the computation of basic and diluted net income per common share under the two-class method for the three months ended March 31, 2019 and March 31, 2018, respectively:
| | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, | | |
| | | | | 2019 | | 2018 |
| Basic Earnings Per Share | | | | | | | |
| Net Income | | | | | $ | 104,280,411 | | $ | 111,248,743 |
| Less: Allocated to participating securities | | | | | 1,081,933 | | 833,316 |
| Net Income available to common shareholders | | | | | $ | 103,198,478 | | $ | 110,415,427 |
| | | | | | | |
| Basic weighted average shares outstanding | | | | | 257,822,836 | | 274,759,516 |
| Net Income per share - Basic | | | | | $ | 0.40 | | $ | 0.40 |
| | | | | | | |
| Diluted Earnings Per Share | | | | | | | |
| Allocation of Net Income used in basic computation | | | | | $ | 103,198,478 | | $ | 110,415,427 |
| Reallocation of undistributed earnings | | | | | 3,813 | | 6,011 |
| Net Income per share - Diluted | | | | | $ | 103,202,291 | | $ | 110,421,438 |
| | | | | | | |
| Number of shares used in basic computation | | | | | 257,822,836 | | 274,759,516 |
| Additional dilutive common stock equivalents | | | | | 1,282,396 | | 2,749,912 |
| Diluted weighted average shares outstanding | | | | | 259,105,232 | | 277,509,428 |
| | | | | | | |
| Net income per share - Diluted | | | | | $ | 0.40 | | $ | 0.40 |
| | | | | | | |
| Shares related to stock plans not included in diluted average common shares outstanding because their effect would be anti-dilutive | | | | | 1,799,477 | | 156,467 |
(7) Stock-Based Compensation Plans
As of March 31, 2019, the Company had four equity incentive plans, which include two stock option plans, a restricted stock plan and an employee stock purchase plan. Those plans and any prior material amendments thereto have previously been approved by shareholders.
In February 2019, the Company's Compensation Committee and Board of Directors approved the Gentex Corporation 2019 Omnibus Incentive Plan or 2019 Omnibus Plan, subject to shareholder approval. The 2019 Omnibus Plan provides for the potential awards to: i) employees; and ii) nonemployee directors of the Company or its subsidiaries, which awards may be stock options, both incentive stock options and non-qualified stock options, appreciation rights, restricted stock, restricted stock units, performance shares awards and performance units, and other awards that are stock-based, cash-based or a combination of
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
both. The 2019 Omnibus Plan is intended to replace the Company's shareholder approved Employee Stock Option Plan, Second Restricted Stock Plan, and Amended and Restated Non-Employee Director Stock Option Plan (the "Prior Plans"), upon shareholder approval, though first quarter 2019 grants to non-officer employees were made under the Prior Plans since the 2019 Omnibus Plan has not yet been approved by Shareholders. Any existing awards previously granted under the Prior Plans, including those made to non-officers in the first quarter of 2019, will continue to remain outstanding in accordance with their terms and be governed thereby. If, however, the 2019 Omnibus Plan is approved by the shareholders, all future awards thereafter will be made under the 2019 Omnibus Plan, including those made to officers in the first quarter of 2019. If the 2019 Omnibus Plan is not approved by shareholders, it will not be adopted and the Company will continue to operate under the Prior Plans until their expiration.
Readers should refer to Note 5 of the consolidated financial statements in the Company's Annual Report on Form 10-K for the calendar year ended December 31, 2018, for additional information related to the Prior Plans.
The Company recognized compensation expense for share-based payments of $4,786,794 for the three months ended March 31, 2019, and $3,901,316 for the three months ended March 31, 2018. Compensation cost for share based payment awards capitalized as part of inventory as of March 31, 2019 and March 31, 2018 was $295,973 and $258,651, 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 March 31, | | |
| | | | | 2019 | | 2018 |
Dividend Yield (1) | | | | | 2.03 | % | | 2.02 | % |
Expected volatility (2) | | | | | 23.56 | % | | 23.26 | % |
Risk-free interest rate (3) | | | | | 2.23 | % | | 2.56 | % |
Expected term of options (years) (4) | | | | | 4.19 | | 4.19 |
Weighted-avg. grant date fair value | | | | | $3.69 | | $4.18 |
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 the date of grant. The options vest after one to five years, and expire after five to ten years. As of March 31, 2019, there was $7,650,472 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 March 31, 2019, there was $4,302 of unrecognized compensation cost under the non-employee director plan related to share-based payments. The Company has granted options on 483,940 shares under the non-employee director plan through March 31, 2019. Under the non-employee director plan, the option
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2019, the Company has granted 1,026,404 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 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 March 31, 2019, the Company had unearned stock-based compensation of $36,944,099 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 months ended March 31, 2019 was $2,723,579, and for the three months ended March 31, 2018 was $1,643,060.
2019 Omnibus Incentive Plan
The Omnibus Incentive Plan will cover 45,000,000 shares of common stock, if approved by the shareholders (thereby replacing the Prior Plans). The purpose of the 2019 Omnibus Incentive Plan is to attract and retain directors, officers, and other employees of the Company and its subsidiaries and to motivate and provide such persons incentives and rewards for performance.
(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.
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, | | |
| | | | | 2019 | | 2018 |
Foreign currency translation adjustments: | | | | | | | |
| Balance at beginning of period | | | | | $ | (1,674,887) | | $ | 645,030 |
Other Comprehensive income before reclassifications | | | | | 298,999 | | 1,626,178 |
| | | | | | | |
| Net current-period change | | | | | 298,999 | | 1,626,178 |
Balance at end of period | | | | | (1,375,888) | | 2,271,208 |
| | | | | | | |
| Unrealized gains (losses) on available-for-sale debt securities: | | | | | | | |
Balance at beginning of period | | | | | 74,549 | | (16,349) |
Other Comprehensive income before reclassifications | | | | | 1,095,581 | | 548,506 |
Amounts reclassified from accumulated other comprehensive income | | | | | (69,976) | | (565,317) |
Net current-period change | | | | | 1,025,605 | | (16,811) |
Balance at end of period | | | | | 1,100,154 | | (33,160) |
| Unrealized gains (losses) on derivatives: | | | | | | | |
| Balance at beginning of period | | | | | — | | (78,026) |
| Other comprehensive income before reclassifications | | | | | — | | 43,173 |
| Amounts reclassified from accumulated other comprehensive income | | | | | — | | 9,794 |
| Net current-period change | | | | | — | | 52,967 |
| Balance at end of period | | | | | — | | (25,059) |
| | | | | | | |
Accumulated other comprehensive (loss) income, end of period | | | | | $ | (275,734) | | $ | 2,212,989 |
The following table presents details of reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details about Accumulated Other Comprehensive Income Components | | | | | | | | | | Affected Line item in the Statement of Consolidated Income |
| | | | | | Three Months Ended March 31, | | | | |
| | | | | | 2019 | | 2018 | | |
| Unrealized gains on available-for-sale debt securities | | | | | | | | | | |
| Realized gain on sale of securities | | | | | | $ | 88,576 | | $ | 715,591 | | Other income (loss), net |
| Provision for income taxes | | | | | | (18,600) | | (150,274) | | Provision for income taxes |
| | | | | | $ | 69,976 | | $ | 565,317 | | Net of tax |
| | | | | | | | | | |
| Unrealized losses on derivatives | | | | | | | | | | |
| Realized loss on interest rate swap | | | | | | $ | — | | $ | (12,398) | | Other income (loss), net |
| Provision for income taxes | | | | | | — | | 2,604 | | Provision for income taxes |
| | | | | | $ | — | | $ | (9,794) | | Net of tax |
| | | | | | | | | | |
| Total net reclassifications for the period | | | | | | $ | 69,976 | | $ | 555,523 | | Net of tax |
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Debt and Financing Arrangements
On October 15, 2018, as previously disclosed, the Company entered into a new Credit Agreement (“Credit Agreement”) with PNC as the administrative agent and sole lender.
Pursuant to this new Credit Agreement, the Company has access to a $150 million senior revolving credit facility (“Revolver”). Under the terms of the Credit Agreement, the Company is entitled to further request an additional aggregate principal amount of up to $100 million, subject to the satisfaction of certain conditions. In addition, the Company is entitled to the benefit of swing loans from amounts otherwise available under the Revolver in the aggregate principal amount of up to $20 million and to request Letters of Credit from amounts otherwise available under the Revolver in the aggregate principle amount up to $20 million, both subject to certain conditions. The obligations of the Company under the Credit Agreement are not secured, but are subject to certain covenants. As of March 31, 2019, there was no outstanding balance on the Revolver. The Revolver expires on October 15, 2023.
The Credit Agreement contains customary representations and warranties and certain covenants that place certain limitations on the Company.
As of March 31, 2019, the Company was in compliance with its covenants under the Credit Agreement.
(10) Equity
The decrease in common stock during the three months ended March 31, 2019, was primarily due to the repurchases of 4.7 million shares, partially offset by the issuance of 1.0 million shares of the Company’s common stock under the Company’s stock-based compensation plans. The total net decrease was 3.7 million shares.
The Company announced a $0.005 (1/2 cent) per share increase in its quarterly cash dividend rate during the first quarter of 2019. As such, the Company recorded a cash dividend of $0.115 during the first quarter of 2019 as compared to a cash dividend of $0.110 per share during the first quarter of 2018. The first quarter 2019 dividend of $29.4 million was declared on March 8, 2019, and was paid on April 24, 2019.
(11) Contingencies
The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Such matters are subject to many uncertainties and outcomes are not predictable. The Company does not believe, however, that at the current time any of these matters constitute material pending legal proceedings that will have a material adverse effect on the financial position or future results of operations or cash flows of the Company.
(12) Segment Reporting
The Company's automotive segment develops and manufactures digital vision and connected