Gentex Q3
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Gentex Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Gentex Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GNTX)") else Response.Write("(NASDAQ: GNTX)") end if %> BACKGROUND Gentex Corporation is an international company that provides high quality products for the worldwide automotive industry and North American fire protection market. The company develops, manufactures, and markets proprietary electro-optic products: electrochromic, automatic-dimming Night Vision Safety (NVS) automotive rearview mirrors, and an extensive line of fire protection products for commercial applications.
Gentex was the first company to successfully develop and produce a commercial electrochromic mirror for the motor vehicle industry. The company is the leading supplier of these mirrors to the worldwide automotive industry with an approximate 90% share of the electrochromic mirror market.
Gentex customers include General Motors, Chrysler, Ford, BMW, Mercedes-Benz, Nissan/Infiniti, Toyota/Lexus, Honda, Hyundai, Daewoo, Kia Motors, Fiat, Open, and Rolls Royce/Bentley.
The company's fire protection products division makes more than 40 models of smoke detectors and 50 models of signaling devices.
UNION CITY, Ca., October 14, 1996/FOOLWIRE/ --- Gentex Corporation reported record third quarter revenues and earnings this morning. Net income increased 38% to $6.3 million or $0.18 per share. That was a penny above analyst expectations. Revenues were a record $36.8 million, up 37% from the year ago period.
Automotive revenues increased by 41% for the third quarter and by 47% for the first nine months. Fire protection revenues increased 18% for the third quarter and 14% for the first nine months of 1996.
PROFIT MARGINS
Gross profit margin in the third quarter was 35.5% compared to 38.9% in last year's third quarter. Gross profit margin was 37.6% for the first 6 months of 1996. The reduced gross profit margin in the third quarter is due primarily to greater than expected start up costs at the new automotive mirror manufacturing facility. Making the move to their new facility had a greater effect than what they anticipated both on the lines at the headquarters, because they disrupted everything there to move some of the equipment, as well as the start-ups on the new equipment at the new plant. And also they had a major start-up at the headquarters with the revamping they did on one of their Compass mirror assembly lines (one of the surface-mount technology lines) where they introduced the new Compass 2 product, but also introduced a lot of automation. They also rearranged the exterior mirror area to accommodate setting up the new aspheric mirror line. In addition to all those changes that were happening as far as their facilities and equipment moves, they also had an increase in mirror unit shipments where they were up 123% for the third quarter and 130% for the nine months compared with the same periods in prior years. So they also had a mix shift toward compasses again.
Their gross profit was also impacted by August 1st long-term contract price reductions at General Motors and at Chrysler. With everything else that was going on, the startup on the new redesigned version of the Compass mirror was more costly than what they expected. However, they think that is largely behind them now and they can expect to begin seeing the benefits of that new product in the fourth quarter. The redesign on that product is expected to more than offset the 1997 model year price reductions that they gave on the product. So they should have a net gain going forward on the gross margins of that product.
EXPENSES
R&D expense increased by 35% in the third quarter and was up by 28% for the first nine months of the year. R&D represented 5.3% and 5.0% of net sales for both of those periods compared with 5.3% and 5.5% respectively for the same periods last year. The increase in R&D expenses is attributable to additional staffing for new product development such as the aspheric mirrors, the 2nd generation Compass mirror, thin glass mirrors, and also work that they are doing on other electronic features that will be added to mirrors in the future. They currently expect that R&D expenses in the fourth quarter should show a year-over-year increase more in line with the 20% guidance they have given in the recent past.
SG&A for the third quarter represented 7.2% of sales versus 11.2% last year. Without the litigation, SG&A would only have represented 6.7% of sales for the first 9 months of 1996 versus 8.1% in the first nine months of 1995. If you exclude the litigation expense from the third quarter of 1995, SG&A expenses actually increased 28% in the third quarter of 1996 compared to 1995, primarily due to increased new program expenses in Europe which they are doing to support future growth there, and increased Michigan single business tax due to increased profitability.
The tax rate in Q3 was 32.5% compared to the statutory rate of 35% and that difference was due primarily to their foreign sales and also tax exempt investments. They expect that the tax rate will stay at the 32.5% rate for the remainder of 1996 and also anticipate that it will stay in that range for 1997. They currently expect SG&A expenses in the fourth quarter should show a year-over-year increase more in line with the 10% guidance they have given in the past.
Other income increased by 24% in the third quarter. Interest income was $856,000 in Q3 1996 compared to $743,000 in Q3 last year.
CAPITAL EQUIPMENT EXPENSES, DEPRECIATION AND AMORTIZATION
Capital expenditures in the third quarter were $3.6 million. Their estimate for 1996 for capital expenses plus tooling is that they will end up in the $15-17 million range. Their new automotive products manufacturing facility should account for about $8 million of that total for 1996. They began shipping product out of the new facility in late June 1996 and are currently running four lines on two shifts out of that facility. Looking to 1997, their current estimate for capital expenditures is in the $10-12 million range. This is an increase because they have made a decision to more vertically integrate some of their outside mirror manufacturing processes. They have made a commitment to buy some equipment that will allow them to do that and they think will give them lower costs and better yields once they get the equipment in and get it fully operational. There is a relatively long lead time on that equipment -- close to a year. Going forward, if good programs come along that have good paybacks either on quality or on costs, they are going to spend the money to make those things happen.
Depreciation and amortization in the third quarter was $1.1 million. Their estimate is $4-4.5 million for all of 1996. They expect that depreciation and amortization for 1997 will be about $5.0-5.5 million.
OUTLOOK FOR THE REST OF 1996 AND 1997
Discounting any effects of the CAW strike against General Motors, which looks like it is continuing and they are still hopeful it will have a relatively speedy settlement, they feel that their unit shipments for the fourth quarter will potentially be about 20% higher than the fourth quarter last year. If that happens and the CAW strike doesn't hurt the fourth quarter too much, they will end up for calendar 1996 with unit shipments in the 35-40% range over 1995 unit shipments. Looking ahead to calendar 1997, their current preliminary forecast indicates that unit shipments probably will grow on the order of 20-25% in 1997 over 1996.
They will begin instigating a quiet period at the end of the quarter. The last 10 business days of every quarter through the day of the earnings release will represent a quiet period at Gentex.
UPDATE ON THE NEW ASPHERIC MIRROR PRODUCT
They expect to make some starting shipments of production parts late this fourth quarter on their new aspheric mirrors. They will be ramping up over the first half of 1997. During the second half of 1997, they will be shipping aspheric mirrors at fairly large volume, approaching numbers like 18,000-20,000 units per month. This program is very large and its impact on 1997 is probably on the order of $12 million plus or minus a little bit. That includes 6 months of ramp up and 6 months of volume production. It is probably one of the largest single pieces of new business they have for 1997, so it is important to them. It is also not without some risk because no one has really done successfully, with good yields, aspheric electrochromic mirrors -- so they are the pioneer and are doing something unique. It does have risks, but also has tremendous rewards if they are successful with it. If something would happen and they flop the program where the customer decided they couldn't produce it in volume, he has a couple of choices -- put it on selected car lines rather than on many car lines, introduce it in lower volume, or can decide to push it out a model year, or decide that it's never going to happen and take it off of the car. They hope those things don't happen. They hope to ramp up together and that they can be successful on it.
The analysts asked if the customer for the aspheric mirrors is Mercedes-Benz. The company would not verify who the customer is other than to say that Mercedez-Benz is a fairly decent guess. They were asked if there have been any changes in legislation in the US to make aspheric mirrors legal in the US. The company responded that there is talk about it but it is down in the Vision Subcommittee level and they think probably, based on some similar things that happened to make convex mirrors legal for the passenger side a number of years ago, that they are probably looking at a 4-5 year program. They did recently get a request for a quote just for budgetary purposes from one of the Big 3 for one of their premium lines. So, there is some thinking about it going on and the actual work is down in the subcommittee level of SAE (Society of Automotive Engineers). They think, especially as people that travel to Europe get some experience driving those cars, that it is a good thing and will come to the United States. They don't know how long it will take, but they do think it will come here.
NEW LARGER ELECTROCHROMIC MIRRORS
They also have a program that will start kind of in the middle of 1997 that involves some much larger sport utility mirrors than what they have done previously. In order to make those mirrors perform on the vehicle, they have to make them with what they call thin glass. The two sheets of glass used are about half the thickness of the normal glass that they use in their other exterior electrochromic mirrors. Therefore, even though they are much bigger, the weight of the mirrors are significantly reduced and therefore they have better drive characteristics, less vibration. Again, in that program they are doing something very unique. It has tremendous rewards and a lot of potential beyond this first program, which is a fairly good size program by itself. But it also has some risk.
IMPACT OF THE GM STRIKE
So far the effect of the GM strike on Gentex has been minimal. Last week they were affected by the one truck plant in Ontario that they ship mirrors to and they lost about 1000 compass mirrors last week. Their schedule going forward looks like it averages about 1800 mirrors per week. It looks like the next plant that is going to affect Gentex is, due to trim parts that are made in Windsor, the Detroit area plant is expected to go down probably totally by Tuesday or Wednesday of this week. They laid off their second shift on Saturday and are running first shift today and Tuesday, possibly part of Wednesday until they run out of parts. But, that plant produces all of the front-wheel-drive Cadillacs. Gentex's base electrochromic mirror is standard equipment and the compass mirror is a 50% option on those vehicles.
On the outside of the vehicles, Gentex has an outside mirror that they sell a subassembly to a tier one manufacturer, a division of Magna, that is probably on approximately 80-90% of the vehicles produced there. So that plant is a major plant for Gentex. If it continues to be shut down for very long it will affect Gentex.
They are not going to speculate on the potential impact of the GM strike because there are too many variables. They think they are better off to see how it progresses and at some point if it continues or when it ends, they will be able to measure what it has done to them along with what they are going to be able to make up through some overtime. Even though they don't have the strike factored into their shipment numbers, they are being a little more conservative than usual because they recognize the potential for an impact is there and they don't want to go out on too big a limb. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |