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 JUNE 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
PRECEDING 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 ISSUERS:
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 July 23, 2007
----- ------------------
Common Stock, $0.06 Par Value 143,745,690
Exhibit Index located at page 18
Page 1 of 22
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2007 December 31, 2006
------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $287,509,408 $245,499,783
Short-term investments 77,174,631 82,727,927
Accounts receivable, net 74,358,590 58,337,396
Inventories 42,071,205 48,805,398
Prepaid expenses and other 14,610,616 11,507,590
------------ ------------
Total current assets 495,724,450 446,878,094
PLANT AND EQUIPMENT - NET 191,969,821 184,134,373
OTHER ASSETS
Long-term investments 156,608,554 146,215,929
Patents and other assets, net 8,215,552 7,800,004
------------ ------------
Total other assets 164,824,106 154,015,933
------------ ------------
Total assets $852,518,377 $785,028,400
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 29,849,329 $ 23,881,973
Accrued liabilities 35,417,341 33,481,005
------------ ------------
Total current liabilities 65,266,670 57,362,978
DEFERRED INCOME TAXES 26,079,464 24,971,133
SHAREHOLDERS' INVESTMENT
Common stock 8,624,741 8,548,571
Additional paid-in capital 225,217,630 196,901,488
Retained earnings 498,861,357 472,192,400
Other shareholders' investment 28,468,515 25,051,830
------------ ------------
Total shareholders' investment 761,172,243 702,694,289
------------ ------------
Total liabilities and
shareholders' investment $852,518,377 $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 Six Months Ended
June 30 June 30
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
NET SALES $163,479,812 $142,391,231 $320,685,794 $281,411,824
COST OF GOODS SOLD 105,782,966 91,494,753 208,410,186 182,282,638
------------ ------------ ------------ ------------
Gross profit 57,696,846 50,896,478 112,275,608 99,129,186
OPERATING EXPENSES:
Engineering, research and development 12,446,469 9,962,629 24,722,131 20,121,797
Selling, general & administrative 8,732,630 7,512,959 17,099,201 15,304,027
------------ ------------ ------------ ------------
Total operating expenses 21,179,099 17,475,588 41,821,332 35,425,824
------------ ------------ ------------ ------------
Income from operations 36,517,747 33,420,890 70,454,276 63,703,362
OTHER INCOME (EXPENSE)
Interest and dividend income 4,748,199 5,161,146 9,318,644 10,386,637
Other, net 3,699,084 1,517,113 8,662,662 4,280,033
------------ ------------ ------------ ------------
Total other income 8,447,283 6,678,259 17,981,306 14,666,670
------------ ------------ ------------ ------------
Income before provision for
income taxes 44,965,030 40,099,149 88,435,582 78,370,032
PROVISION FOR INCOME TAXES 14,008,923 12,863,099 27,981,766 24,762,925
------------ ------------ ------------ ------------
NET INCOME $ 30,956,107 $ 27,236,050 $ 60,453,816 $ 53,607,107
============ ============ ============ ============
EARNINGS PER SHARE:
Basic $ 0.22 $ 0.18 $ 0.42 $ 0.35
Diluted $ 0.22 $ 0.18 $ 0.42 $ 0.35
Cash Dividends Declared per Share $ 0.095 $ 0.090 $ 0.19 $ 0.18
See accompanying notes to condensed consolidated financial statements.
-3-
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For six months ended June 30,
-----------------------------
2007 2006
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,453,816 $ 53,607,107
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 15,738,089 13,379,195
(Gain) loss on disposal of assets 220,514 (23,204)
(Gain) loss on sale of investments (7,112,255) (3,637,158)
Deferred income taxes (1,269,039) (1,439,236)
Stock-based compensation expense related to employee stock
options, employee stock purchases and restricted stock 4,362,765 4,310,318
Excess tax benefits from stock-based compensation (102,290) (176,803)
Change in operating assets and liabilities:
Accounts receivable, net (16,021,194) (9,583,588)
Inventories 6,734,193 (985,667)
Prepaid expenses and other (2,510,355) (9,102)
Accounts payable 5,967,356 5,801,881
Accrued liabilities, excluding dividends declared 1,927,709 9,845,897
------------ -------------
Net cash provided by (used for) operating activities 68,389,309 71,089,640
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant and equipment additions (24,127,055) (30,180,530)
Proceeds from sale of plant and equipment 353,000 294,361
(Increase) decrease in investments 7,372,068 15,465,915
(Increase) decrease in other assets (333,302) 553,133
------------ -------------
Net cash provided by (used for) investing activities (16,735,289) (13,867,121)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock from stock plan transactions 24,674,250 8,853,877
Cash dividends paid (27,092,920) (27,882,204)
Repurchases of common stock (7,328,015) (151,749,724)
Excess tax benefits from stock-based compensation 102,290 176,803
------------ -------------
Net cash provided by (used for) financing activities (9,644,395) (170,601,248)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 42,009,625 (113,378,729)
CASH AND CASH EQUIVALENTS, beginning of period 245,499,783 439,681,693
------------ -------------
CASH AND CASH EQUIVALENTS, end of period $287,509,408 $ 326,302,964
============ =============
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 June 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:
December 31,
June 30, 2007 2006
------------- ------------
Raw materials $25,200,198 $31,727,666
Work-in-process 4,588,819 4,681,714
Finished goods 12,282,188 12,396,018
----------- -----------
$42,071,205 $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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Numerators:
Numerator for both basic and
diluted EPS, net income $ 30,956,107 $ 27,236,050 $ 60,453,816 $ 53,607,107
Denominators:
Denominator for basic EPS,
weighted-average shares
outstanding 142,543,923 150,592,680 142,356,126 152,402,407
Potentially dilutive shares
resulting from stock plans 933,732 451,959 690,882 774,195
------------ ------------ ------------ ------------
Denominator for diluted EPS 143,477,655 151,044,639 143,047,008 153,176,602
============ ============ ============ ============
Shares related to stock plans not
included in diluted average common
shares outstanding because their
effect would be antidilutive 2,606,718 7,559,775 4,038,524 5,580,488
(5) Stock-Based Compensation Plans
At March 31, 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
-5-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(5) Stock-Based Compensation Plans (continued)
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.
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 second
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 second quarter and six months ended June 30, 2007, were $1,757,799,
$348,722, and $.00 per share lower and $3,551,766, $1,165,532, and $.01
lower, respectively. Compensation cost capitalized as part of inventory as
of June 30, 2007, was $103,407. 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 Six Months Ended
June 30, June 30,
------------------ ----------------
2007 2006 2007 2006
------ ------ ------ ------
Dividend yield 1.99% 1.88% 1.99% 2.00%
Expected volatility 29.50% 30.05% 29.20% 30.40%
Risk-free interest rate 4.92% 5.17% 4.71% 5.00%
Expected term of options (in years) 4.33 4.37 4.34 4.37
Weighted-average grant-date fair value $ 5.26 $ 3.90 $ 4.72 $ 4.27
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 June 30, 2007, there was $10,127,224 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 June 30, 2007, there was $216,918 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.
-6-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(5) Stock-Based Compensation Plans (continued)
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.
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 June 30,
2007, the Company had unearned stock-based compensation of $5,522,278
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 second quarter and six months ended June 30,
2007 were $386,366 and $810,999, 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 the beginning of fiscal year 2007, the Company had unrecognized tax
benefits of approximately $2,100,000 including accrued interest. There has
been no significant change in the unrecognized tax benefits during the
second quarter ending June 30, 2007. 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 $200,000 for interest as of June 30, 2007. Interest recorded
during the six months ended June 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 2003.
(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:
June 30, 2007 June 30, 2006
------------- -------------
Quarter Ended $35,366,211 $24,835,305
Six Months Ended $63,870,501 $53,731,609
-7-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(8) The increase in common stock during the six months ended June 30, 2007, was
primarily due to the issuance of 1,717,219 shares of the Company's common
stock under its stock-based compensation plans, partially offset by the
repurchase of 447,710 shares 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.
The second quarter dividend of approximately $13,656,000, was declared on
May 15, 2007, and was paid on July 20, 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.
While the ultimate results of litigation cannot be predicted with
certainty, management 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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue:
Automotive Products $157,183,786 $136,049,551 $308,299,621 $269,279,619
Fire Protection Products 6,296,026 6,341,680 12,386,173 12,132,205
------------ ------------ ------------ ------------
Total $163,479,812 $142,391,231 $320,685,794 $281,411,824
============ ============ ============ ============
Operating Income:
Automotive Products $ 35,215,160 $ 32,143,170 $ 67,994,280 $ 61,244,877
Fire Protection Products 1,302,587 1,277,720 2,459,996 2,458,485
------------ ------------ ------------ ------------
Total $ 36,517,747 $ 33,420,890 $ 70,454,276 $ 63,703,362
============ ============ ============ ============
(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:
SECOND QUARTER 2007 VERSUS SECOND QUARTER 2006
Net Sales. Net sales for the second quarter of 2007 increased by
approximately $21,089,000, or 15%, when compared with the second quarter
last year. Net sales of the Company's automotive auto-dimming mirrors
increased by approximately $21,134,000, or 16%, in the second quarter of
2007, when compared with the second quarter last year, primarily due to a
14% increase in auto-dimming mirror unit shipments from approximately
3,408,000 in the second quarter 2006 to 3,874,000 in the current quarter.
This unit increase primarily reflected the increased penetration of
interior and exterior auto-dimming mirrors on 2007 model year vehicles.
Unit shipments to customers in North America for the current quarter
increased by 6% compared with the second quarter of the prior year, despite
a 2% decline in North American automotive industry production levels,
primarily due to increased interior auto-dimming mirror unit shipments for
certain domestic and Asian transplant automakers. Mirror unit shipments for
the current quarter to automotive customers outside North America increased
by 21% compared with the second quarter in 2006, primarily due to increased
penetration at certain European and Asian automakers. Net sales of the
Company's fire protection products decreased 1% 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
increased from 64.3% in the second quarter of 2006 to 64.7% in the second
quarter of 2007. This percentage increase primarily reflected the impact of
annual automotive customer price reductions, partially offset by higher
sales level leveraged over the fixed overhead costs, purchasing cost
reductions and improved manufacturing yields. Each offsetting factor to
customer price reductions impacted cost of goods sold as a percentage of
net sales by approximately 1%.
Operating Expenses. Engineering, research and development expenses for the
current quarter increased 25% and approximately $2,484,000 when compared
with the same quarter last year. Excluding litigation expenses of
$1,427,000 (see discussion under "Trends and Developments"), E, R & D
expenses increased by 11% 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 16% and
approximately $1,220,000, for the current quarter, when compared with the
second quarter of 2006, 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 current quarter increased by
approximately $1,769,000 when compared with the second quarter of 2006,
primarily due to realized gains on the sale of equity investments,
partially offset by lower interest income due to lower investable funds.
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 benefits.
Net Income. Net income increased by $3,720,000, or 14% for the current
quarter, when compared with the same quarter last year, primarily due to
increased sales and gross margin and an increase in other income.
SIX MONTHS ENDED JUNE 30, 2007, VERSUS SIX MONTHS ENDED JUNE 30, 2006
Net Sales. Net sales for the six months ended June 30, 2007 increased by
approximately $39,274,000, or 14%, when compared with the same period last
year. Net sales of the Company's automotive auto-dimming mirrors increased
by approximately $39,020,000, or 14% period over period, as auto-dimming
mirror unit shipments increased by 13% from approximately 6,800,000 in the
first six months of 2006 to 7,653,000 units in the first six months of
2007. This increase primarily reflected the increased penetration of
interior and exterior auto-dimming mirrors on 2007 model year vehicles.
Unit shipments to customers in North America increased by 5% during the
-9-
first six months of 2007 versus the same period in 2006, primarily due to
increased auto-dimming mirror unit shipments for certain domestic and Asian
transplant automakers. Mirror unit shipments to automotive customers
outside North America increased by 20% period over period, primarily due to
increased penetration at certain European and Asian automakers. Net sales
of the Company's fire protection products increased 2% period over period,
primarily due to higher sales of certain signaling devices.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
increased from 64.8% in the six months ended June 30, 2006, to 65.0% in the
six months ended June 30, 2007, primarily reflecting the impact of annual
automotive customer price reductions, partially offset by higher sales
level leveraged over fixed overhead costs, purchasing cost reductions and
improved manufacturing yields. Each offsetting factor to customer price
reductions impacted cost of goods sold as a percentage of net sales by
approximately 1%.
Operating Expenses. For the six months ended June 30, 2007, engineering,
research and development expenses increased approximately $4,600,000, and
increased from 7% to 8% of net sales, when compared to the same period last
year, primarily due to litigation expense and additional staffing,
engineering and testing for new product development, including mirrors with
additional features. Excluding litigation expense of $2,851,000 (see
discussion under "Trends and Developments"), E, R & D expenses increased by
9% for the current period versus the same period last year. Selling,
general and administrative expenses increased approximately $1,795,000 for
the six months ended June 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 six months ended June 30,
2007, increased $3,315,000 when compared to the same period last year,
primarily due to realized gains on the sale of equity investments,
partially offset by lower interest income due to lower investable funds.
Taxes. The provision for income taxes varied from the statutory rate during
the six months ended June 30, 2007, primarily due to the domestic
manufacturing deduction and stock option expense benefits.
Net Income. Net income increased by $6,847,000, or 13% for the six months
ended June 30, 2007, when compared with the same 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 six months ended June 30, 2007,
decreased to $68,389,000, compared to $71,090,000, for the same period last
year, primarily due to an increase in accounts receivable and a decrease in
other accrued liabilities. Capital expenditures for the six months ended
June 30, 2007, were $24,127,000, compared to $30,181,000 for the same
period last year; the reduction was primarily due to new facility
construction in 2006.
The Company 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.
Accounts receivable as of June 30, 2007, increased approximately
$16,021,000 compared to December 31, 2006. The increase was primarily due
to the higher sales level, as well as monthly sales within each quarter.
Inventories as of June 30, 2007, decreased approximately $6,734,000
compared to December 31, 2006. The decrease was primarily a result of
working down inventory levels built up at the end of calendar year 2006 in
anticipation of manufacturing line moves and smoothing out of holiday
production schedules.
Management considers the Company's working capital and long-term
investments totaling approximately $587,066,000 as of June 30, 2007,
together with internally generated cash flow and an unsecured $5,000,000
line of credit from a bank, to be sufficient to cover anticipated cash
needs for the next year and for the foreseeable future.
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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. 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 Purchased Cost of
Quarter Ended (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 includes 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 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.
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During the quarter ended September 30, 2005, the Company negotiated an
extension to its long-term agreement with DaimlerChrysler in the ordinary
course of the Company's business. Under the extension, the Company will be
sourced virtually all Mercedes and Chrysler interior and exterior
auto-dimming rearview mirrors through December 2009. 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 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 sourcing
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. 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 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
one 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 currently expects that auto-dimming mirror unit shipments and
revenues for the third quarter and the balance of 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. The third quarter is always a
difficult quarter to forecast, due to customer plant summer shutdowns and
model year product changeover. In addition, in the third quarter of 2007,
there are additional uncertainties, including vehicle production and sales
rates at the traditional Big Three automakers in North America and the
upcoming UAW contract negotiations.
The Company utilizes the light vehicle production forecasting services of
CSM Worldwide, and CSM's current forecasts for light vehicle production for
calendar 2007 are approximately 15.2 million units for North America, 21.3
million for Europe and 14.6 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 June 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.
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, our 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 our automotive customers (including their Tier 1 suppliers)
experience work stoppages, strikes, etc. due to their UAW contracts or
other negotiations, it could disrupt our
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shipments to these customers, which could adversely affect our sales,
margins, profitability and, as a result, our share price.
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 our 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, our 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 and continued through the second
quarter resulting in litigation expenses of $2,851,000 for the six months
ended June 30, 2007. The trial in Wisconsin related to this case occurred
during July 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.
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 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 June 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 June 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
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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
June 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 form on Form 10-K.
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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders of the Company was held on
May 10, 2007.
(b) Nominees Frederick Sotok, John Mulder and Wallace Tsuha were
elected to serve three-year terms and James Wallace was elected
to serve a two-year term (filling the vacancy that was created
when J. Terry Moran unexpectedly passed away) on the Company's
Board of Directors by the following votes.
Frederick Sotok John Mulder Wallace Tsuha James Wallace
--------------- ----------- ------------- -------------
For 124,370,952 129,799,067 133,501,633 133,409,714
Against -- -- -- --
Withheld 9,837,441 4,409,326 706,760 798,680
The terms of office for incumbent Directors Fred Bauer, Gary Goode, Ken La
Grand, Arlyn Lanting and Rande Somma continued after the meeting.
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(c) A proposal to ratify the appointment of Ernst & Young LLP as the
Company's auditors for the fiscal year ended December 31, 2007,
was approved by the following vote:
For 132,466,843
Against 1,655,594
Abstain / Broker-Non-Votes 85,956
See Part II, Item 4(b), with respect to the election of the
Directors.
ITEM 6. EXHIBITS
(a) See Exhibit Index on Page 18.
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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: August 3, 2007 /s/ Fred T. Bauer
----------------------------------------
Fred T. Bauer
Chairman and Chief Executive Officer
Date: August 3, 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). 20
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). 21
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) 22
----------
* Indicates a compensatory plan or arrangement.
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