UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended September 30, 2007,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to ____________
COMMISSION FILE NO. 0-10235
GENTEX CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2030505
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PROCEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSURERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at October 23, 2007
----- -------------------
Common Stock, $0.06 Par Value 144,508,379
Exhibit Index located at page 17
Page 1 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2007 December 31, 2006
(Unaudited) (Audited)
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $310,113,174 $245,499,783
Short-term investments 70,830,966 82,727,927
Accounts receivable, net 75,666,023 58,337,396
Inventories 47,403,471 48,805,398
Prepaid expenses and other 15,737,453 11,507,590
------------ ------------
Total current assets 519,751,087 446,878,094
PLANT AND EQUIPMENT - NET 198,135,164 184,134,373
OTHER ASSETS
Long-term investments 161,599,496 146,215,929
Patents and other assets, net 8,704,535 7,800,004
------------ ------------
Total other assets 170,304,031 154,015,933
------------ ------------
Total assets $888,190,282 $785,028,400
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 34,546,969 $ 23,881,973
Accrued liabilities 35,767,846 33,481,005
------------ ------------
Total current liabilities 70,314,815 57,362,978
DEFERRED INCOME TAXES 26,629,722 24,971,133
SHAREHOLDERS' INVESTMENT
Common stock 8,670,503 8,548,571
Additional paid-in capital 239,199,789 196,901,488
Retained earnings 513,577,734 472,192,400
Other shareholders' investment 29,797,719 25,051,830
------------ ------------
Total shareholders' investment 791,245,745 702,694,289
------------ ------------
Total liabilities and
shareholders' investment $888,190,282 $785,028,400
============ ============
See accompanying notes to condensed consolidated financial statements.
-2-
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
NET SALES $162,524,803 $141,265,647 $483,210,597 $422,677,471
COST OF GOODS SOLD 105,522,931 93,387,125 313,933,117 275,669,763
------------ ------------ ------------ ------------
Gross profit 57,001,872 47,878,522 169,277,480 147,007,708
OPERATING EXPENSES:
Engineering, research and development 13,251,945 10,536,334 37,974,076 30,658,131
Selling, general & administrative 9,112,808 7,737,384 26,212,009 23,041,411
------------ ------------ ------------ ------------
Total operating expenses 22,364,753 18,273,718 64,186,085 53,699,542
------------ ------------ ------------ ------------
Income from operations 34,637,119 29,604,804 105,091,395 93,308,166
OTHER INCOME (EXPENSE)
Interest and dividend income 5,139,536 4,794,928 14,458,180 15,181,565
Other, net 4,076,418 1,308,341 12,739,080 5,588,374
------------ ------------ ------------ ------------
Total other income 9,215,954 6,103,269 27,197,260 20,769,939
------------ ------------ ------------ ------------
Income before provision for income
taxes 43,853,073 35,708,073 132,288,655 114,078,105
PROVISION FOR INCOME TAXES 14,026,590 11,370,152 42,008,356 36,133,077
------------ ------------ ------------ ------------
NET INCOME $ 29,826,483 $ 24,337,921 $ 90,280,299 $ 77,945,028
============ ============ ============ ============
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.17 $ 0.63 $ 0.52
Diluted $ 0.21 $ 0.17 $ 0.63 $ 0.52
Cash Dividends Declared per Share $ 0.105 $ 0.095 $ 0.295 $ 0.275
See accompanying notes to condensed consolidated financial statements.
-3-
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For nine months
ended September 30,
----------------------------
2007 2006
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 90,280,299 $ 77,945,028
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 24,213,482 20,613,394
(Gain) loss on disposal of assets 302,960 74,784
(Gain) loss on sale of investments (10,681,432) (4,620,523)
Deferred income taxes (2,230,860) (1,664,489)
Stock-based compensation expense related to employee stock options,
employee stock purchases and restricted stock 6,785,909 6,554,701
Excess tax benefits from stock-based compensation (269,057) (214,212)
Change in operating assets and liabilities:
Accounts receivable, net (17,328,627) (10,173,906)
Inventories 1,401,927 (4,516,869)
Prepaid expenses and other (2,765,530) 576,552
Accounts payable 10,664,996 8,967,226
Accrued liabilities, excluding dividends declared 823,952 3,975,320
------------ -------------
Net cash provided by (used for) operating activities 101,198,019 97,517,006
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant and equipment additions (38,936,917) (40,406,163)
Proceeds from sale of plant and equipment 529,737 294,361
(Increase) decrease in investments 14,123,731 (10,707,990)
(Increase) decrease in other assets (772,484) 259,826
------------ -------------
Net cash provided by (used for) investing activities (25,055,933) (50,559,966)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock from stock plan transactions 36,279,027 12,832,072
Cash dividends paid (40,748,764) (41,096,783)
Repurchases of common stock (7,328,015) (207,363,826)
Excess tax benefits from stock-based compensation 269,057 214,212
------------ -------------
Net cash provided by (used for) financing activities (11,528,695) (235,414,325)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,613,391 (188,457,285)
CASH AND CASH EQUIVALENTS,
beginning of period 245,499,783 439,681,693
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $310,113,174 $ 251,224,408
============ =============
See accompanying notes to condensed consolidated financial statements.
-4-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements included herein
have been prepared by the Registrant, without audit, 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 Registrant 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 Registrant's 2006 annual report on Form 10-K.
(2) 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 Registrant as of September 30, 2007, and the
results of operations and cash flows for the interim periods presented.
(3) Inventories consisted of the following at the respective balance sheet
dates:
September 30, 2007 December 31, 2006
------------------ -----------------
Raw materials $30,151,960 $31,727,666
Work-in-process 4,542,473 4,681,714
Finished goods 12,709,038 12,396,018
----------- -----------
$47,403,471 $48,805,398
=========== ===========
(4) The following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share (EPS):
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
2007 2006 2007 2006
------------ ------------ -------------- --------------
Numerators:
Numerator for both basic and
diluted EPS, net income $ 29,826,483 $ 24,337,921 $ 90,280,299 $ 77,945,028
Denominators:
Denominator for basic EPS,
weighted-average shares
outstanding 143,496,082 144,879,673 142,740,287 149,871,596
Potentially dilutive shares
resulting from stock plans 1,346,546 212,411 958,975 569,929
------------ ------------ ------------ ------------
Denominator for diluted EPS 144,842,628 145,092,084 143,699,262 150,441,525
============ ============ ============ ============
Shares related to stock plans not
included in diluted average common
shares outstanding because their
effect would be antidilutive 1,209,289 9,045,847 2,224,594 6,770,393
(5) Stock-Based Compensation Plans
At September 30, 2007, the Company had two stock option plans, a restricted
stock plan and an employee stock purchase plan. Effective January 1, 2006,
the Company adopted Statement of Financial Accounting Standards No. 123
(revised), "Share-Based Payment" [SFAS 123(R)] utilizing the modified
prospective approach. Prior to the adoption of SFAS 123(R) we accounted for
stock option grants under the recognition and measurement principles of APB
Opinion No. 25 (Accounting for Stock Issued to Employees) and related
interpretations, and accordingly, recognized no compensation expense for
stock option grants in net income. Readers should refer to Note 6 of our
consolidated financial statements in our Annual Report on Form 10-K for the
calendar year ended December 31, 2006, for additional information related
to these stock-based compensation plans.
-5-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(5) Stock-Based Compensation Plans (continued)
Under the modified prospective approach, SFAS 123(R) applies to new awards
and to awards that were outstanding on December 31, 2005. Under the
modified prospective approach, compensation cost recognized in the third
quarter of 2007 includes compensation cost for all share-based payments
granted prior to, but not yet vested as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the original provisions
of SFAS 123, and compensation cost for all share-based payments granted
subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new standard.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income before taxes, net income and basic and diluted earnings per share
for the third quarter and nine months ended September 30, 2007, were
$1,930,835, $847,424, and $.01 per share lower and $5,482,600, $2,012,956,
and $.01 lower, respectively. Compensation cost capitalized as part of
inventory as of September 30, 2007, was $112,083. The cumulative effect of
the change in accounting for forfeitures was not material.
Employee Stock Option Plan
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
------ ------ ------ ------
Dividend yield 2.00% 1.94% 1.99% 1.97%
Expected volatility 29.80% 29.80% 29.40% 30.18%
Risk-free interest rate 4.26% 4.69% 4.57% 4.89%
Expected term of options (in years) 4.31 4.93 4.32 4.57
Weighted-average grant-date fair value $ 5.39 $ 3.97 $ 4.97 $ 4.15
The Company determined that all employee groups exhibit similar exercise
and post-vesting termination behavior to determine the expected term. Under
the plans, 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 seven years.
As of September 30, 2007, there was $11,243,554 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over the vesting period with a weighted-average period of 4.3
years.
Non-employee Director Stock Option Plan
As of September 30, 2007, there was $66,876 of unrecognized compensation
cost under this plan related to share-based payments which is expected to
be recognized over the balance of the 2007 calendar year. Under the plan,
the option exercise price equals the stock's market price on date of grant.
The options vest after six months, and expire after ten years.
Employee Stock Purchase Plan
In 2003, a new Employee Stock Purchase Plan covering 1,200,000 shares was
approved by the shareholders, replacing a prior plan. Under the plan, the
Company sells shares at 85% of the stock's market price at date of
purchase. Under SFAS 123(R), the 15% discounted value is recognized as
compensation expense.
-6-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(5) Stock-Based Compensation Plans (continued)
Restricted Stock Plan
The Company has a Restricted Stock Plan covering 1,000,000 shares of common
stock that was approved by the shareholders in 2001, the purpose of which
is to permit grants of shares, subject to restrictions, to key employees of
the Company as a means of retaining and rewarding them for long-term
performance and to increase their ownership in the Company. Shares awarded
under the 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. As of September
30, 2007, the Company had unearned stock-based compensation of $5,622,372
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 third quarter and nine months ended
September 30, 2007, were $492,309 and $1,303,308, respectively.
(6) Accounting for Uncertainty in Income Taxes
Effective January 1, 2007, the Company adopted the provisions of the
Financial Accounting Standards Board (FASB) Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes. The implementation of FIN
48 did not have a significant impact on the Company's financial position or
results of operations.
As of January 1, 2007, the Company had unrecognized tax benefits of
approximately $2,100,000 including accrued interest. Unrecognized tax
benefits including accrued interest decreased to approximately $1,800,000
during the third quarter ending September 30, 2007, primarily due to the
statute of limitations expiring for the 2003 tax year. If recognized, the
effective rate would be affected by the unrecognized tax benefits.
The Company recognizes interest and penalties related to unrecognized tax
benefits through the provision for income taxes. The Company had accrued
approximately $175,000 for interest as of September 30, 2007. Interest
recorded during the nine months ended September 30, 2007, was not
considered significant.
The Company is subject to periodic and routine audits in both domestic and
foreign tax jurisdictions. It is reasonably possible that the amounts of
unrecognized tax benefits could change as a result of an audit. Based on
the current audits in process, the payment of taxes as a result of audit
settlements are not expected to have a significant impact on the Company's
financial position or results of operations.
For the majority of tax jurisdictions, the Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2004.
(7) 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 items such as unrealized gains and losses on
investments and foreign currency translation adjustments. Comprehensive
income was as follows:
September 30, 2007 September 30, 2006
------------------ ------------------
Quarter Ended $31,155,687 $26,549,014
Nine Months Ended $95,026,188 $80,280,623
-7-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(8) The increase in common stock during the nine months ended September 30,
2007, was primarily due to the issuance of 2,479,908 shares of the
Company's common stock under its stock-based compensation plans, partially
offset by the repurchase of 447,710 shares in the first quarter of 2007
pursuant to the Company's previously announced share repurchase plan for
approximately $7,328,000. The Company has also recorded a $0.095 per share
cash dividend in the first and second quarters and a $0.105 per share cash
dividend in the third quarter. The third quarter dividend of approximately
$15,173,000, was declared on August 14, 2007, and was paid on October 19,
2007.
(9) Contingencies
The Company is involved in litigation with K.W. Muth and Muth Mirror
Systems LLC relating to exterior mirrors with turn signal indicators. The
turn signal feature in exterior mirrors currently represents approximately
one percent of our revenues, and the litigation does not involve core
Gentex electrochromic technology. The trial in Wisconsin related to this
case occurred during July 2007. There was a hearing held on October 19,
2007, and the judge's goal is to issue written rulings related to the case
by the end of the year.
While the ultimate results of litigation cannot be predicted with
certainty, management currently believes that it will not have a material
adverse effect on the Company's financial statements.
(10) The Company currently manufactures electro-optic products, including
automatic-dimming rearview mirrors for the automotive industry, and fire
protection products for the commercial building industry:
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue:
Automotive Products $156,528,289 $135,100,675 $464,827,910 $404,380,294
Fire Protection Products 5,996,514 6,164,972 18,382,687 18,297,177
------------ ------------ ------------ ------------
Total $162,524,803 $141,265,647 $483,210,597 $422,677,471
============ ============ ============ ============
Operating Income:
Automotive Products $ 33,544,456 $ 28,304,238 $101,538,736 $ 89,549,115
Fire Protection Products 1,092,663 1,300,566 3,552,659 3,759,051
------------ ------------ ------------ ------------
Total $ 34,637,119 $ 29,604,804 $105,091,395 $ 93,308,166
============ ============ ============ ============
(11) In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). This
statement provides a fair value option election that allows companies to
irrevocably elect fair value as the initial and subsequent measurement
attribute for certain financial assets and liabilities, with changes in
fair value recognized in earnings as they occur. SFAS No. 159 permits the
fair value option election on an instrument by instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a
new basis of accounting for that instrument. SFAS No. 159 is effective as
of the beginning of an entity's first fiscal year that begins on or after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided that the
entity makes that choice in the first 120 days of that fiscal year; has not
yet issued financial statements for any interim period of the fiscal year
of adoption; and also elects to apply the provisions of SFAS No. 157.
Currently, the Company is not planning to adopt the provisions of SFAS No.
159.
In June 2007, the FASB ratified the consensus on Emerging Issues Task Force
(EITF) Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards" ("EITF 06-11"). EITF 06-11 requires companies
to recognize the income tax benefit realized from dividends or dividend
equivalents that are charged to retained earnings and paid to employees for
non-vested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for fiscal
years beginning after September 15, 2007. While the Company is currently
evaluating the provisions of EITF 06-11, the adoption is not expected to
have any significant effect on the Company's consolidated financial
position or results of operations.
-8-
GENTEX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS:
THIRD QUARTER 2007 VERSUS THIRD QUARTER 2006
Net Sales. Net sales for the third quarter of 2007 increased by
approximately $21,259,000, or 15%, when compared with the third quarter
last year. Net sales of the Company's automotive auto-dimming mirrors
increased by approximately $21,428,000, or 16%, in the third quarter of
2007, when compared with the third quarter last year, primarily due to a
15% increase in auto-dimming mirror unit shipments from approximately
3,210,000 in the third quarter 2006 to 3,706,000 in the current quarter.
This unit increase primarily reflected the increased penetration of
interior auto-dimming mirrors with additional electronic content. Unit
shipments to customers in North America for the current quarter increased
by 18% compared with the third quarter of the prior year, primarily due to
increased interior mirror unit shipments for certain traditional Big Three
automakers as well as Asian transplant automakers. Mirror unit shipments
for the current quarter to automotive customers outside North America
increased by 13% compared with the third quarter in 2006, primarily due to
increased penetration at certain Asian and European automakers. Net sales
of the Company's fire protection products decreased 3% for the current
quarter versus the same quarter of last year.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
decreased from 66% in the third quarter of 2006 to 65% in the third quarter
of 2007. This percentage decrease primarily reflected the higher sales
level leveraged over the fixed overhead costs, purchasing cost reductions
and improved manufacturing yields, partially offset by annual customer
price reductions. Each positive factor is estimated to have impacted cost
of goods sold as a percentage of net sales by up to approximately 1%.
Operating Expenses. Engineering, research and development expenses for the
current quarter increased 26% and approximately $2,716,000 when compared
with the same quarter last year. Excluding litigation expenses of
$1,579,000 (see discussion under "Trends and Developments"), E, R & D
expenses increased by 14% when comparing the current quarter to the same
quarter last year, primarily reflecting additional staffing, engineering
and testing for new product development, including mirrors with additional
features. Selling, general and administrative expenses increased 18% and
approximately $1,375,000, for the current quarter, when compared with the
third quarter of 2006, primarily reflecting the continued expansion of the
Company's overseas offices.
Total Other Income. Total other income for the current quarter increased by
approximately $3,113,000 when compared with the third quarter of 2007,
primarily due to realized gains on the sale of equity investments.
Taxes. The provision for income taxes varied from the statutory rate during
the current quarter, primarily due to the domestic manufacturing deduction
and stock option expense tax benefit.
Net Income. Net income increased by $5,489,000, or 23%, when compared with
the same quarter last year, primarily due to increased sales and gross
margin and an increase in other income.
NINE MONTHS ENDED SEPTEMBER 30, 2007, VERSUS NINE MONTHS ENDED SEPTEMBER
30, 2006
Net Sales. Net sales for the nine months ended September 30, 2007,
increased by approximately $60,533,000, or 14%, when compared with the same
nine month period last year. Net sales of the Company's automotive
auto-dimming mirrors increased by approximately $60,448,000, or 15%, as
auto-dimming mirror unit shipments increased by 13% from approximately
10,010,000 in the first nine months of 2006 to 11,358,000 units in the
first nine months of 2007. This increase primarily reflected the increased
penetration of interior and exterior auto-dimming mirrors on 2007 and 2008
model year vehicles. Unit shipments to customers in North America increased
by 9%, during the first nine months of 2007 versus the first nine months of
2006, primarily due to increased
-9-
interior mirror unit shipments for certain traditional Big Three automakers
as well as Asian transplant automakers. Mirror unit shipments to automotive
customers outside North America increased by 17%, primarily due to
increased penetration at certain European and Asian automakers. Net sales
of the Company's fire protection products were flat on a period over period
basis.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
decreased slightly from 65.2% in the nine months ended September 30, 2006,
to 65.0% in the nine months ended September 30, 2007. This slight
percentage decrease primarily reflected the higher sales level leveraged
over the fixed overhead costs, purchasing cost reductions and improved
manufacturing yields, mostly offset by annual customer price reductions.
Each positive factor is estimated to have impacted cost of goods sold as a
percentage of net sales by approximately 1%.
Operating Expenses. For the nine months ended September 30, 2007,
engineering, research and development expenses increased approximately
$7,316,000, and increased from 7% to 8% of net sales, when compared to the
same period last year, primarily due to Muth litigation expense and
additional staffing, engineering and testing for new product development,
including mirrors with additional features. Excluding Muth litigation
expense of $4,430,000 (see discussion under "Trends and Developments"), E,
R & D expenses increased by 10% for the current nine month period versus
the same nine month period last year. Selling, general and administrative
expenses increased approximately $3,171,000 for the nine months ended
September 30, 2007, but remained at 5% of net sales, when compared to the
same period last year, primarily reflecting the continued expansion of the
Company's overseas offices, partially offset by a reduction in non-income
based state taxes.
Total Other Income. Total other income for the nine months ended September
30, 2007, increased $6,427,000 when compared to the same period last year,
primarily due to realized gains on the sale of equity investments.
Taxes. The provision for income taxes varied from the statutory rate during
the nine months ended September 30, 2007, primarily due to the domestic
manufacturing deduction and stock option expense tax benefit.
Net Income. Net income increased by $12,335,000, or 16%, when compared with
the same nine month period last year, primarily due to increased sales and
gross margin and an increase in other income.
FINANCIAL CONDITION:
Cash flow from operating activities for the nine months ended September 30,
2007, increased $3,681,000 to $101,198,000, compared to $97,517,000, for
the same period last year, primarily due to increased net income, partially
offset by changes in working capital. Capital expenditures for the nine
months ended September 30, 2007, were $38,937,000, compared to $40,406,000
for the same period last year; the reduction was primarily due to the
construction of a new facility in 2006.
The Company also started construction of a 60,000-square-foot building
addition to its exterior mirror manufacturing facility in Zeeland,
Michigan, during the first quarter of 2007. The building addition is
expected to be completed in the first quarter of 2008 with an approximate
cost of $6 million, which will be funded from cash and/or cash equivalents.
Cash and cash equivalents as of September 30, 2007, increased approximately
$64,613,000 compared to December 31, 2006. The increase was primarily due
to cash flow from operations, less dividends paid.
Accounts receivable as of September 30, 2007, increased approximately
$17,329,000 compared to December 31, 2006. The increase was primarily due
to the higher sales level, as well as monthly sales within each quarter.
Accounts payable as of September 30, 2007, increased $10,665,000 compared
to December 31, 2006. The increase was primarily due to increased capital
spending and increased production levels.
Management considers the Company's working capital and long-term
investments totaling approximately $611,036,000 as of September 30, 2007,
together with internally generated cash flow and an unsecured $5,000,000
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line of credit from a bank, to be sufficient to cover anticipated cash
needs for the next year and for the foreseeable future.
On October 8, 2002, the Company announced a share repurchase plan, under
which it may purchase up to 8,000,000 shares (post-split) based on a number
of factors, including market conditions, the market price of the Company's
common stock, anti-dilutive effect on earnings, available cash and other
factors that the Company deems appropriate. On July 20, 2005, the Company
announced that it had raised the price at which the Company may repurchase
shares under the existing plan. On May 16, 2006, the Company announced that
the Company's Board of Directors had authorized the repurchase of an
additional 8,000,000 shares under the plan. And, on August 14, 2006, the
Company announced that the Company's Board of Directors had authorized the
repurchase of an additional 8,000,000 shares under the plan.
The following is a summary of quarterly share repurchase activity under the
plan to date:
Total Number of Shares Cost of
Quarter Ended Purchased (Post-Split) 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
---------- ------------
Total 17,979,453 $269,640,651
6,020,547 shares remain authorized to be repurchased under the plan.
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 Unites States,
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. On an
ongoing basis, management evaluates these estimates. Estimates are based on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not 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.
The Company has identified the 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, 2006. Management believes there have been no changes in those
critical accounting policies.
TRENDS AND DEVELOPMENTS:
During the first quarter of 2005, the Company negotiated an extension to
its long-term agreement with General Motors (GM) in the ordinary course of
the Company's business. Under the extension, the Company was sourced
virtually all the interior auto-dimming rearview mirrors programs for GM
and its worldwide affiliates through August 2009, and includes all but two
low-volume models that had previously been awarded to a competitor under a
lifetime contract. The new business also included the GMT360 program, which
is the mid-size truck/SUV platform that previously did not offer
auto-dimming mirrors. The new GM programs were transferred to the Company
by the 2007 model year. The Company also negotiated a price reduction for
the GM OnStar(R) feature in
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its auto-dimming mirrors, effective January 1, 2005, in connection with
GM's stated plan to make their OnStar system standard across their vehicle
models over the next several years.
The Company has a long-term agreement with DaimlerChrysler in the ordinary
course of the Company's business. Under the agreement, the Company will be
sourced virtually all Mercedes and Chrysler interior and exterior
auto-dimming rearview mirrors through December 2009. During the quarter
ended September 30, 2007, the Company negotiated an extension to its global
supply agreement with Chrysler in the ordinary course of the Company's
business. Under the extension, the Company will be sourced virtually all
Chrysler interior auto-dimming rearview mirrors through 2015. From publicly
available information, the Company currently does not believe that the
Daimler sale of the Chrysler unit will significantly impact the Company's
current business with Chrysler or Mercedes in the near term, but there may
be other information of which the Company is not aware.
During the first quarter of 2007, the Company negotiated a multi-year
sourcing agreement with Ford Motor Company in the ordinary course of the
Company's business. Under the agreement, the Company was sourced all
existing interior auto-dimming rearview mirror programs as well as a number
of new interior auto-dimming rearview mirror programs during the agreement
term which ends December 31, 2008.
In 2000, the Company signed an agreement with Murakami Corporation, a major
Japanese mirror manufacturer, to cooperate in expanding sales of
auto-dimming mirrors using the Gentex electrochromic technology. During
2006, the agreement with Murakami Corporation was terminated and replaced
with a memorandum of understanding, negotiated in the ordinary course of
the Company's business. During the quarter ended June 30, 2007, the Company
signed a new supplier agreement with Murakami Corporation in the ordinary
course of the Company's business.
The Company previously announced development programs with several
automakers for its Rear Camera Display (RCD) Mirror that consists of a
proprietary liquid display (LCD) device that shows a panoramic video of
objects behind the vehicle in real time. During the second quarter of 2007,
the Company announced a number of OEM programs with Ford Motor Company and
a dealer or port-installed program with Mazda to supply its Rear Camera
Display Mirror, each in the ordinary course of the Company's business. The
Company recently announced that the Rear Camera Display is available as a
dealer or port-installed option on the Toyota Camry through Gulf States
Toyota, one of two remaining independent Toyota distributorships that
covers dealers in the states of Arkansas, Louisiana, Mississippi, Oklahoma
and Texas.
The Company currently expects that auto-dimming mirror unit shipments and
revenues for the fourth quarter of calendar year 2007 will be approximately
10-15% higher, compared with the same period in 2006. These estimates are
based on light vehicle production forecasts in the regions to which the
Company ships product, as well as the estimated option rates for its
mirrors on prospective vehicle models. Uncertainties, including vehicle
production and sales rates at the traditional Big Three automakers in North
America and the ongoing UAW contract negotiations, make it difficult to
forecast in the short-term.
The Company utilizes the light vehicle production forecasting services of
CSM Worldwide, and CSM's current forecasts for light vehicle production for
the fourth quarter of 2007 are approximately 3.6 million units for North
America, 5.5 million for Europe and 3.9 million for Japan and Korea. CSM's
current forecasts for light vehicle production for the calendar 2007 are
approximately 15.0 million units for North America, 21.5 million for Europe
and 14.7 million for Japan and Korea.
The Company is subject to market risk exposures of varying correlations and
volatilities, including foreign exchange rate risk, interest rate risk and
equity price risk. During the quarter ended September 30, 2007, there were
no material changes in the risk factors previously disclosed in the
Company's report on Form 10-K for the fiscal year ended December 31, 2006.
The Company has some assets, liabilities and operations outside the United
States, which currently are not significant. Because the Company sells its
automotive mirrors throughout the world, the Company could be significantly
affected by weak economic conditions in worldwide markets that could reduce
demand for its products.
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The Company continues to experience pricing pressures from its automotive
customers, which have affected, and which will continue to affect, its
margins to the extent that the Company is unable to offset the price
reductions with productivity or yield improvements, engineering and
purchasing cost reductions, and increases in unit sales volume, which
continues to be a challenge. In addition, profit pressures at certain
automakers are resulting in increased cost reduction efforts by them,
including requests for additional price reductions, decontenting certain
features from vehicles, and warranty cost-sharing programs, which could
adversely impact the Company's sales growth, margins, profitability and, as
a result, its share price. The Company also continues to experience some
manufacturing yield issues and pressure for select raw material cost
increases. The automotive industry is experiencing increasing financial and
production stresses due to continuing pricing pressures, lower domestic
production levels, supplier bankruptcies, and commodity material cost
increases. If the Company's automotive customers (including their Tier 1
suppliers) experience work stoppages, strikes, etc. due to their UAW
contracts or other negotiations, it could disrupt our shipments to these
customers, which could adversely affect the Company's sales, margins,
profitability and, as a result, its share price. The Company's largest
customer, General Motors, shut down virtually all of its assembly plants in
the United States due to a nationwide UAW strike at the end of September.
The General Motors shut down impacted one day of shipments during the third
quarter of 2007.
Automakers have been experiencing increased volatility and uncertainty in
executing planned new programs which have, in some cases, resulted in
cancellations or delays of new vehicle platforms, package reconfigurations
and inaccurate volume forecasts. This increased volatility and uncertainty
has made it more difficult for the Company to forecast future sales and
effectively utilize capital, engineering, research and development, and
human resource investments.
In light of the financial stresses within the worldwide automotive
industry, certain automakers and tier one mirror customers are considering
the sale of business segments or may be considering bankruptcy. Should one
or more of the Company's larger customers (including their tier 1
suppliers) sell their business or declare bankruptcy, it could adversely
affect our sales, margins, profitability and, as a result, the Company's
share price.
The Company does not have any significant off-balance sheet arrangements or
commitments that have not been recorded in its consolidated financial
statements.
The Company is involved in litigation with K. W. Muth and Muth Mirror
Systems LLC relating to exterior mirrors with turn signal indicators. The
turn signal feature in exterior mirrors currently represents approximately
one percent of our revenues, and the litigation does not involve core
Gentex electrochromic technology. The Company is uncertain of the outcome
of the trial and the impact that it may have on its exterior mirror
business. Activity related to the Company's ongoing litigation increased
significantly during the first quarter of 2007 and continued through the
July 2007 trial in Wisconsin. There was a hearing held on October 19, 2007
and the judge's goal is to issue written rulings related to the case by the
end of the year. The litigation expenses totaled $4,430,000 for the nine
months ended September 30, 2007.
On March 30, 2005, in response to the required implementation of SFAS No.
123(R) as disclosed in Note 5, the Company accelerated the vesting of
current "under water" stock options. As a result of the vesting
acceleration, approximately 2.3 million shares became immediately
exercisable and an additional approximate $13.6 million of proforma
stock-based employee compensation expense was recognized in the first
quarter of 2005. The objective of this Company action is primarily to avoid
recognizing compensation expense associated with these options in future
financial statements, upon the Company's adoption of SFAS No. 123(R). In
addition, the Company has also received shareholder approval of an
amendment to its Employee Stock Option Plan to allow the grant of
non-qualified stock options.
In July 2007, the State of Michigan enacted a new business tax that will be
effective January 1, 2008. The Company completed its evaluation of the new
business tax provisions and it is not expected to have a significant impact
on the Company's consolidated financial position or results of operations.
On October 1, 2002, Magna International acquired Donnelly Corporation, the
Company's major competitor for sales of automatic-dimming rearview mirrors
to domestic and foreign vehicle manufacturers and their mirror
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suppliers. The Company sells certain automatic-dimming rearview mirror
sub-assemblies to Magna Donnelly. To date, the Company is not aware of any
significant impact of Magna's acquisition of Donnelly upon the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Trends and Developments" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of its principal executive
officer and principal financial officer, has evaluated the effectiveness,
as of September 30, 2007, of the Company's "disclosure controls and
procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based
upon that evaluation, the Company's management, including the principal
executive officer and principal financial officer, concluded that the
Company's disclosure controls and procedures, as of September 30, 2007,
were effective such that the information required to be disclosed by the
Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
In the ordinary course of business, the Company may routinely modify,
upgrade, and enhance its internal controls and procedures over financial
reporting. However, there was no change in the Company's "internal control
over financial reporting" (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the quarter ended
September 30, 2007, that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
SAFE HARBOR STATEMENT:
Statements in this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act, as amended,
that are based on management's belief, assumptions, current expectations,
estimates and projections about the global automotive industry, the
economy, the impact of stock option expenses on earnings, the ability to
leverage fixed manufacturing overhead costs, unit shipment and revenue
growth rates and the Company itself. Words like "anticipates," "believes,"
"confident," "estimates," "expects," "forecast," "likely," "plans,"
"projects," and "should," and variations of such words and similar
expressions identify forward-looking statements. These statements do not
guarantee future performance and involve certain risks, uncertainties, and
assumptions that are difficult to predict with regard to timing, expense,
likelihood and degree of occurrence. These risks include, without
limitation, employment and general economic conditions, the pace of
automotive production worldwide, the maintenance of the Company's relative
market share, competitive pricing pressures, currency fluctuations, the
financial strength of the Company's customers, supply chain disruptions,
potential sale of OEM business segments or suppliers, the mix of products
purchased by customers, the ability to continue to make product
innovations, the success of certain newer products (e.g. SmartBeam(R),
Z-Nav(R) and Rear Camera Display Mirror), and other risks identified in the
Company's filings with the Securities and Exchange Commission. Therefore
actual results and outcomes may materially differ from what is expressed or
forecasted. Furthermore, the Company undertakes no obligation to update,
amend, or clarify forward-looking statements, whether as a result of new
information, future events, or otherwise.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Part I - Item 2 of
this Form 10-Q and in Part I - Item 1A - Risk Factors of the Company's report on
Form 10-K for the fiscal year ended December 31, 2006. There have been no
material changes from the risk factors previously disclosed in the Company's
report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
On October 8, 2002, the Company announced a share repurchase plan,
under which it may purchase up to 8,000,000 shares (post-split) based
on a number of factors, including market conditions, the market price
of the Company's common stock, anti-dilutive effect on earnings,
available cash and other factors that the Company deems appropriate.
This share repurchase plan does not have an expiration date. On July
20, 2005, the Company announced that it had raised the price at which
the Company may repurchase shares under the existing plan. On May 16,
2006, the Company announced that the Company's Board of Directors had
authorized the repurchase of an additional 8,000,000 shares under the
plan. And, on August 14, 2006, the Company announced that the
Company's Board of Directors had authorized the repurchase of an
additional 8,000,000 shares under the plan. Cumulatively, the Company
has repurchased 17,979,453 shares at a cost of $269,640,651 under the
plan to date (see below). 6,020,547 shares remain authorized to be
repurchased under the plan.
Total Number of Shares Cost of
Quarter Ended Purchased (Post-Split) 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
---------- ------------
Total 17,979,453 $269,640,651
ITEM 6. EXHIBITS
(a) See Exhibit Index on Page 17.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTEX CORPORATION
Date: November 2, 2007 /s/ Fred T. Bauer
----------------------------------------
Fred T. Bauer
Chairman and Chief Executive Officer
Date: November 2, 2007 /s/ Steven A. Dykman
----------------------------------------
Steven A. Dykman
Vice President - Finance, Principal
Financial and Accounting Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
3(a) Registrant's Restated Articles of Incorporation, adopted on August
20, 2004, were filed as Exhibit 3(a) to Registrant's Report on
Form 10-Q dated November 2, 2004, and the same is hereby
incorporated herein by reference.
3(b) Registrant's Bylaws as amended and restated February 27, 2003,
were filed as Exhibit 3(b)(1) to Registrant's Report on Form 10-Q
dated May 5, 2003, and the same are hereby incorporated herein by
reference.
4(a) A specimen form of certificate for the Registrant's common stock,
par value $.06 per share, was filed as part of a Registration
Statement on Form S-8 (Registration No. 2-74226C) as Exhibit 3(a),
as amended by Amendment No. 3 to such Registration Statement, and
the same is hereby incorporated herein by reference.
4(b) Amended and Restated Shareholder Protection Rights Agreement,
dated as of March 29, 2001, including as Exhibit A the form of
Certificate of Adoption of Resolution Establishing Series of
Shares of Junior Participating Preferred Stock of the Company, and
as Exhibit B the form of Rights Certificate and of Election to
Exercise, was filed as Exhibit 4(b) to Registrant's Report on Form
10-Q dated April 27, 2001, and the same is hereby incorporated
herein by reference.
10(a)(1) A Lease dated August 15, 1981, was filed as part of a Registration
Statement on Form S-1 (Registration Number 2-74226C) as Exhibit
9(a)(1), and the same is hereby incorporated herein by reference.
10(a)(2) First Amendment to Lease dated June 28, 1985, was filed as Exhibit
10(m) to Registrant's Report on Form 10-K dated March 18, 1986,
and the same is hereby incorporated herein by reference.
*10(b)(1) Gentex Corporation Qualified Stock Option Plan (as amended and
restated, effective February 26, 2004) was included in
Registrant's Proxy Statement dated April 6, 2004, filed with the
Commission on April 6, 2004, which is hereby incorporated herein
by reference.
*10(b)(2) First Amendment to Gentex Corporation Stock Option Plan (as
amended and restated February 26, 2004) was filed as Exhibit
10(b)(2) to Registrant's Report on Form 10-Q dated August 2, 2005,
and the same is hereby incorporated herein by reference.
*10(b)(3) Specimen form of Grant Agreement for the Gentex Corporation
Qualified Stock Option Plan (as amended and restated, effective
February 26, 2004) was filed as Exhibit 10(b)(3) to Registrant's
Report on Form 10-Q dated November 1, 2005, and the same is hereby
incorporated herein by reference.
*10(b)(4) Gentex Corporation Second Restricted Stock Plan was filed as
Exhibit 10(b)(2) to Registrant's Report on Form 10-Q dated April
27, 2001, and the same is hereby incorporated herein by reference.
*10(b)(5) Specimen form of Grant Agreement for the Gentex Corporation
Restricted Stock Plan, was filed as Exhibit 10(b)(4) to
Registrant's Report on Form 10-Q dated November 2, 2004, and the
same is hereby incorporated herein by reference.
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EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
*10(b)(6) Gentex Corporation 2002 Non-Employee Director Stock Option Plan
(adopted March 6, 2002), was filed as Exhibit 10(b)(4) to
Registrant's Report on Form 10-Q dated April 30, 2002, and the
same is incorporated herein by reference.
*10(b)(7) Specimen form of Grant Agreement for the Gentex Corporation 2002
Non-Employee Director Stock Option Plan, was filed as Exhibit
10(b)(6) to Registrant's Report on Form 10-Q dated November 2,
2004, and the same is hereby incorporated herein by reference.
*10(b)(8) Confidential Severance Agreement and Release between Gentex
Corporation and Garth Deur was filed as Exhibit 10(b)(8) to
Registrant's Report on Form 10-Q dated August 1, 2006, and the
same is incorporated herein by reference.
10(e) The form of Indemnity Agreement between Registrant and each of the
Registrant's directors and certain officers was filed as Exhibit
10 (e) to Registrant's Report on Form 10-Q dated October 31, 2002,
and the same is incorporated herein by reference.
31.1 Certificate of the Chief Executive Officer of Gentex Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). 19
31.2 Certificate of the Chief Financial Officer of Gentex Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). 20
32 Certificate of the Chief Executive Officer and Chief Financial
Officer of Gentex Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 21
----------
* Indicates a compensatory plan or arrangement.
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