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 MARCH 31, 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 April 23, 2007
----- ------------------
Common Stock, $0.06 Par Value 142,712,394
Exhibit Index located at page 16
Page 1 of 20
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2007 December 31, 2006
(Unaudited) (Audited)
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $282,343,771 $245,499,783
Short-term investments 72,368,429 82,727,927
Accounts receivable, net 71,434,594 58,337,396
Inventories 44,352,244 48,805,398
Prepaid expenses and other 13,363,538 11,507,590
------------ ------------
Total current assets 483,862,576 446,878,094
PLANT AND EQUIPMENT - NET 183,985,848 184,134,373
OTHER ASSETS
Long-term investments 149,242,440 146,215,929
Patents and other assets, net 7,901,135 7,800,004
------------ ------------
Total other assets 157,143,575 154,015,933
------------ ------------
Total assets $824,991,999 $785,028,400
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 27,649,660 $23,881,973
Accrued liabilities 51,497,876 33,481,005
------------ ------------
Total current liabilities 79,147,536 57,362,978
DEFERRED INCOME TAXES 24,042,096 24,971,133
SHAREHOLDERS' INVESTMENT
Common stock 8,562,744 8,548,571
Additional paid-in capital 207,675,732 196,901,488
Retained earnings 481,505,480 472,192,400
Other shareholders' investment 24,058,411 25,051,830
------------ ------------
Total shareholders' investment 721,802,367 702,694,289
------------ ------------
Total liabilities and
shareholders' investment $824,991,999 $785,028,400
============ ============
See accompanying notes to condensed consolidated financial statements.
-2-
GENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
2007 2006
------------ ------------
NET SALES $157,205,982 $139,020,593
COST OF GOODS SOLD 102,627,220 90,787,885
------------ ------------
Gross profit 54,578,762 48,232,708
OPERATING EXPENSES:
Engineering, research and development 12,275,662 10,159,168
Selling, general & administrative 8,366,571 7,791,068
------------ ------------
Total operating expenses 20,642,233 17,950,236
------------ ------------
Operating income 33,936,529 30,282,472
OTHER INCOME:
Interest and dividend income 4,570,445 5,225,491
Other, net 4,963,578 2,762,920
------------ ------------
Total other income 9,534,023 7,988,411
------------ ------------
Income before provision
for income taxes 43,470,552 38,270,883
PROVISION FOR INCOME TAXES 13,972,843 11,899,826
------------ ------------
NET INCOME $ 29,497,709 $ 26,371,057
============ ============
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.17
Diluted $ 0.21 $ 0.17
Cash Dividends Declared per Share $ 0.095 $ 0.090
See accompanying notes to condensed consolidated financial statements.
-3-
GENTEX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For three months ended
March 31,
---------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,497,709 $ 26,371,057
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 7,886,801 6,689,711
(Gain) loss on disposal of assets (69,859) (14,856)
(Gain) loss on sale of investments (4,421,296) (2,563,508)
Deferred income taxes (743,702) (503,733)
Stock based compensation expense related to employee
stock options, employee stock purchases and restricted stock 2,218,600 2,147,032
Excess tax benefits from stock based compensation (11,567) (76,044)
Change in operating assets and liabilities:
Accounts receivable, net (13,097,198) (9,491,281)
Inventories 4,453,154 716,158
Prepaid expenses and other (1,481,965) 46,950
Accounts payable 3,767,687 (1,267,891)
Accrued liabilities, excluding dividends declared 18,050,795 16,419,221
------------ ------------
Net cash provided by (used for)
operating activities 46,049,159 38,472,816
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant and equipment additions (7,927,054) (12,934,777)
Proceeds from sale of plant and equipment 342,500 19,276
(Increase) decrease in investments 10,156,234 21,606,952
Increase in other assets (139,682) (276,994)
------------ ------------
Net cash provided by (used for)
investing activities 2,431,998 8,414,457
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock from
stock plan transactions 9,214,518 6,464,243
Cash dividends paid (13,535,239) (14,043,958)
Repurchases of common stock (7,328,015) (47,145,310)
Excess tax benefits from stock based compensation 11,567 76,044
------------ ------------
Net cash provided by (used for)
financing activities (11,637,169) (54,648,981)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 36,843,988 (7,761,708)
CASH AND CASH EQUIVALENTS,
beginning of period 245,499,783 439,681,693
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $282,343,771 $431,919,985
============ ============
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 March 31, 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:
March 31, 2007 December 31, 2006
-------------- -----------------
Raw materials $29,335,777 $31,727,666
Work-in-process 4,601,380 4,681,714
Finished goods 10,415,087 12,396,018
----------- -----------
$44,352,244 $48,805,398
=========== ===========
(4) All earnings per share amounts, weighted daily average of shares of common
stock outstanding, common stock, and additional paid-in capital have been
restated, to reflect the Company's announcement on April 1, 2005, of a
two-for-one stock split effected in the form of a 100 percent common stock
dividend for each outstanding share, issued to shareholders on May 6, 2005.
The ex-dividend date was May 9, 2005.
(5) The following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share (EPS):
Quarter Ended March 31,
---------------------------
2007 2006
------------ ------------
Numerators:
Numerator for both basic and
diluted EPS, net income $ 29,497,709 $ 26,371,057
Denominators:
Denominator for basic EPS,
weighted-average shares
outstanding 142,166,241 154,223,254
Potentially dilutive shares
resulting from stock plans 557,376 1,528,671
------------ ------------
Denominator for diluted EPS 142,723,617 155,751,925
============ ============
Shares related to stock plans not
included in diluted average common
shares outstanding because their
effect would be antidilutive 5,249,844 4,126,002
(6) 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.)
(6) 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 first
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 first quarter ended March 31, 2007, were $1,793,967, $816,810, and
$.01 per share lower, respectively. Compensation cost capitalized as part
of inventory as of March 31, 2007, was $88,960. 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
March 31,
------------------
2007 2006
------ ------
Dividend yield 1.99% 2.11%
Expected volatility 28.90% 30.76%
Risk-free interest rate 4.54% 4.82%
Expected term of options (in years) 4.35 4.37
Weighted-average grant-date fair value $ 4.18 $ 4.64
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
two to seven years.
As of March 31, 2007, there was $9,518,098 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 4.4 years.
Non-employee Director Stock Option Plan
As of March 31, 2007, there was no unrecognized compensation cost under
this plan related to share-based payments. 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.)
(6) 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 March 31,
2007, the Company had unearned stock-based compensation of $5,699,893
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 first quarter of 2007 was $424,633.
(7) 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
first quarter ending March 31, 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 March 31, 2007. Interest recorded
during the quarter ended March 31, 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.
(8) 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:
March 31, 2007 March 31, 2006
-------------- --------------
Quarter Ended $28,504,290 $28,896,304
-7-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(9) The increase in common stock during the three months ended March 31, 2007,
was primarily due to the issuance of 683,923 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 quarter. The first
quarter dividend of approximately $13,558,000, was declared on March 6,
2007, and was paid on April 20, 2007.
(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 March 31,
---------------------------
2007 2006
------------ ------------
Revenue:
Automotive Products $151,115,835 $133,230,068
Fire Protection Products 6,090,147 5,790,525
------------ ------------
Total $157,205,982 $139,020,593
============ ============
Operating Income:
Automotive Products $ 32,779,120 $ 29,101,707
Fire Protection Products 1,157,409 1,180,765
------------ ------------
Total $ 33,936,529 $ 30,282,472
============ ============
(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. While
we are currently evaluating the provisions of SFAS No. 159, if adopted, the
statement 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:
FIRST QUARTER 2007 VERSUS FIRST QUARTER 2006
Net Sales. Net sales for the first quarter of 2007 increased by
approximately $18,185,000, or 13%, when compared with the first quarter
last year. Net sales of the Company's automotive auto-dimming mirrors
increased by approximately $17,886,000, or 13%, in the first quarter of
2007, when compared with the first quarter last year, primarily due to an
11% increase in auto-dimming mirror unit shipments from approximately
3,392,000 in the first quarter 2006 to 3,778,000 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 4% compared with the first quarter of the prior year, despite
a 4% decline in North American automotive industry production levels,
primarily due to increased interior auto-dimming mirror unit shipments for
GMT900 pickups and Ford vehicles. Mirror unit shipments for the current
quarter to automotive customers outside North America increased by 18%
compared with the first quarter in 2006, primarily due to increased
penetration at certain European automakers. Net sales of the Company's fire
protection products increased 5% for the current quarter versus the same
quarter of last year, primarily due to higher sales of certain signaling
devices.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
remained at 65.3% when comparing the current quarter to the same quarter
last year, primarily reflecting the impact of annual automotive customer
price reductions, offset by higher sales level leveraged over the fixed
overhead costs, positive product mix and purchasing cost reductions. Each
offsetting factor to customer price reductions impacted cost of goods sold
as a percentage of net sales by approximately 1-2%.
Operating Expenses. Engineering, research and development expenses for the
current quarter increased 21% and approximately $2,116,000, when compared
with the same quarter last year. Excluding litigation expenses of
$1,424,000 (see discussion under "Trends and Developments"), E, R & D
expenses increased by 7% 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 7% and
approximately $576,000, for the current quarter, when compared with the
first 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 $1,546,000 when compared with the first quarter of 2006,
primarily due to realized gains on the sale of equity investments,
partially offset by reduced interest income due to lower investable funds,
primarily due to share repurchases.
Taxes. The provision for income taxes varied from the statutory rate during
the current quarter, primarily due to domestic manufacturing deduction,
tax-exempt investment income and stock option expense.
Net Income. Net income increased by $3,127,000, or 12%, when compared with
the same quarter last year, primarily due to increased net sales and gross
margin and an increase in other income.
FINANCIAL CONDITION:
Cash flow from operating activities for the three months ended March 31,
2007, increased to $46,049,000, compared to $38,473,000, for the same
period last year, primarily due to an increase in accounts payable and a
decrease in inventories. Capital expenditures for the three months ended
March 31, 2007, were $7,927,000, compared to $12,935,000 for the same
period last year, 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
-9-
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 March 31, 2007, increased approximately
$13,097,000 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 March 31, 2007, decreased approximately $4,453,000
compared to December 31, 2006. The decrease was 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 $553,957,000 as of March 31, 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.
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 7,328,033
---------- ------------
Total 17,979,453 269,640,669
========== ============
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.
-10-
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.
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.
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.
The Company currently expects that auto-dimming mirror unit shipments for
the second quarter and the balance of 2007 will be approximately 10%
higher, and revenue growth will be slightly higher on a percentage basis
than unit shipment growth, compared with the same periods 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 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, 21.1
million for Europe and 14.4 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 March 31, 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, it 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 shipments to these customers,
which could adversely affect our sales, margins, profitability and, as a
result, our share price.
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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. Activity related to the Company's ongoing
litigation increased significantly during the current quarter and resulted
in litigation expenses of $1,424,000. The Company currently estimates that
its additional litigation expenses related to this case will continue to
increase through the scheduled trial in July 2007.
On March 30, 2005, in response to the required implementation of SFAS No.
123(R) as disclosed in Note 6, 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 April 1, 2005, the Company announced a two-for-one stock split effected
in the form of a 100 percent common stock dividend for each outstanding
share, issued to shareholders on May 6, 2005. The ex-dividend date was May
9, 2005.
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. Magna
International recently announced that they are reviewing alternatives
regarding its role in a potential transaction pertaining to the purchase of
the Chrysler Group. The Company is uncertain what affect this potential
transaction may have on our business with Chrysler.
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 Results of Operations and Financial Condition.
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 March 31, 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 March 31, 2007, were
effective such that the information required to be disclosed by the
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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
March 31, 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 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
The following is a summary of share repurchase activity during
the first quarter ended March 31, 2007:
Total Number of Maximum Number
Total Number Average Price Shares Purchased As of Shares That May Yet
Of Shares Paid Per Part of a Publicly Be Purchased Under
Period Purchased Share Announced Plan the Plan
------ ------------ ------------- ------------------- ----------------------
January 2007 -- $ -- -- 6,468,257
February 2007 -- $ -- -- 6,468,257
March 2007 447,710 $16.37 447,710 6,020,547
------- -------
Total 447,710 447,710
======= =======
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. The Company
repurchased 17,979,453 shares at a cost of $269,640,669 under the
plan to date (see below). 6,020,547 shares remain authorized to
be repurchased under the plan.
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 7,328,033
---------- ------------
Total 17,979,453 269,640,669
========== ============
ITEM 6. EXHIBITS
(a) See Exhibit Index on Page 16.
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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: May 3, 2007 /s/ Fred T. Bauer
----------------------------------------
Fred T. Bauer
Chairman and Chief
Executive Officer
Date: May 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). 18
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). 19
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) 20
----------
* Indicates a compensatory plan or arrangement.
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