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, 2006, 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
incorporation or organization) Identification No.)
600 N. CENTENNIAL, ZEELAND, MICHIGAN 49464
(Address of principal executive offices) (Zip Code)
(616) 772-1800
(Registrant's telephone number, including area code)
_______________________________________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes 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.
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 20, 2006
----- ------------------
Common Stock, $0.06 Par Value 153,758,286
Exhibit Index located at page 17
Page 1 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2006 December 31, 2005
-------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $431,919,985 $439,681,693
Short-term investments 47,434,718 67,331,928
Accounts receivable, net 70,415,718 60,924,437
Inventories 39,120,664 39,836,822
Prepaid expenses and other 11,279,779 11,212,647
------------ ------------
Total current assets 600,170,864 618,987,527
PLANT AND EQUIPMENT - NET 170,335,847 164,030,341
OTHER ASSETS
Long-term investments 137,045,303 132,524,966
Patents and other assets, net 7,457,078 7,102,968
------------ ------------
Total other assets 144,502,381 139,627,934
------------ ------------
Total assets $915,009,092 $922,645,802
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 22,340,036 $ 23,607,927
Accrued liabilities 50,648,278 34,480,332
------------ ------------
Total current liabilities 72,988,314 58,088,259
DEFERRED INCOME TAXES 23,855,817 22,962,168
SHAREHOLDERS' INVESTMENT
Common stock 9,225,497 9,362,639
Additional paid-in capital 194,704,417 194,476,306
Retained earnings 592,407,486 623,301,775
Other shareholders' investment 21,827,561 14,454,655
------------ ------------
Total shareholders' investment 818,164,961 841,595,375
------------ ------------
Total liabilities and shareholders' investment $915,009,092 $922,645,802
============ ============
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, 2006 AND 2005
2006 2005
------------ ------------
NET SALES $139,020,593 $127,641,720
COST OF GOODS SOLD 90,787,885 79,588,903
------------ ------------
Gross profit 48,232,708 48,052,817
OPERATING EXPENSES:
Engineering, research and development 10,159,168 7,977,385
Selling, general & administrative 7,791,068 6,839,831
------------ ------------
Total operating expenses 17,950,236 14,817,216
------------ ------------
Operating income 30,282,472 33,235,601
OTHER INCOME:
Interest and dividend income 5,225,491 3,084,095
Other, net 2,762,920 1,539,274
------------ ------------
Total other income 7,988,411 4,623,369
------------ ------------
Income before provision for income taxes 38,270,883 37,858,970
PROVISION FOR INCOME TAXES 11,899,826 11,926,000
------------ ------------
NET INCOME $ 26,371,057 $ 25,932,970
============ ============
EARNINGS PER SHARE:
Basic $ 0.17 $ 0.17
Diluted $ 0.17 $ 0.17
Cash Dividends Declared per Share 0.090 0.085
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,
--------------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,371,057 $ 25,932,970
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 6,689,711 5,894,059
(Gain) loss on disposal of assets (14,856) 140,683
(Gain) loss on sale of investments (2,563,508) (1,610,658)
Deferred income taxes (503,733) (709,339)
Amortization of deferred compensation 426,937 446,193
Stock based compensation expense related to employee
stock options and employee stock purchases 1,720,095 0
Tax benefit of stock plan transactions 0 167,671
Excess tax benefits from stock based compensation (76,044) 0
Change in operating assets and liabilities:
Accounts receivable, net (9,491,281) (7,286,099)
Inventories 716,158 (1,037,781)
Prepaid expenses and other 46,950 (153,647)
Accounts payable (1,267,891) 4,434,164
Accrued liabilities, excluding dividends declared 16,419,221 16,517,256
------------ ------------
Net cash provided by operating activities 38,472,816 42,735,472
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant and equipment additions (12,934,777) (11,128,956)
Proceeds from sale of plant and equipment 19,276 21,000
(Increase) decrease in investments 21,606,952 9,726,609
Increase in other assets (276,994) 92,645
------------ ------------
Net cash provided by (used for) investing activities 8,414,457 (1,288,702)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock from stock plan transactions 6,464,243 2,601,715
Cash dividends paid (14,043,958) (13,237,348)
Repurchases of common stock (47,145,310) 0
Excess tax benefits from stock based compensation 76,044 0
------------ ------------
Net cash provided by (used for) financing activities (54,648,981) (10,635,633)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (7,761,708) 30,811,137
CASH AND CASH EQUIVALENTS,
beginning of period 439,681,693 395,538,719
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $431,919,985 $426,349,856
============ ============
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 2005 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, 2006, 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, 2006 December 31, 2005
-------------- -----------------
Raw materials $24,409,609 $24,628,200
Work-in-process 3,761,321 3,739,394
Finished goods 10,949,734 11,469,228
----------- -----------
$39,120,664 $39,836,822
=========== ===========
(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,
---------------------------
2006 2005
------------ ------------
Numerators:
Numerator for both basic and
diluted EPS, net income $ 26,371,057 $ 25,932,970
Denominators:
Denominator for basic EPS,
weighted-average shares
outstanding 154,223,254 155,215,506
Potentially dilutive shares
resulting from stock plans 1,528,671 1,498,114
------------ ------------
Denominator for diluted EPS 155,751,925 156,713,620
============ ============
Shares related to stock plans not
included in diluted average common
shares outstanding because their
effect would be antidilutive 4,126,002 4,339,912
(6) Stock-Based Compensation Plans
At March 31, 2006, the Company had two stock option plans, a restricted
stock plan and an employee stock purchase plan, which are described more
fully below. Effective January 1, 2006, the Company adopted SFAS No. 123
(revised), "Share-Based Payment" [SFAS 123(R)] utilizing the modified
prospective approach. Prior to the adoption of SFAS 123(R) we accounted for
stock option grants under the recognition and measurement principles of APB
Opinion No. 25 (Accounting for Stock Issued to Employees) and related
interpretations, and accordingly, recognized
-5-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
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, 2005,
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 2006 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 three months ended March 31, 2006, were $1,720,095, $922,921, and
$.01 lower, respectively, than if we had continued to account for
stock-based compensation under APB Opinion No. 25 for our stock option
grants. Compensation cost capitalized as part of inventory for the three
months ended March 31, 2006 was $80,568. The cumulative effect of the
change in accounting for forfeitures was not material.
We receive a tax deduction for certain stock option exercises during the
period the options are exercised, generally for the excess of the price at
which the options are sold over the exercise price of the options. Prior to
the adoption of SFAS 123(R), we reported all tax benefits resulting from
the exercise of stock options as operating cash flows in our consolidated
statement of cash flows. In accordance with SFAS 123(R), for the three
months ended March 31, 2006, we revised our consolidated statement of cash
flows presentation to report the tax benefits from the exercise of stock
options as financing cash flows. For the three months ended March 31, 2006,
$76,044 of tax benefits from the exercise of stock options and vested
restricted stock were reported as financing cash flows rather than
operating cash flows.
Net cash proceeds from the exercise of stock options and employee stock
purchases were $6,340,969 for the three months ended March 31, 2006. The
actual income tax benefit realized from stock option exercises and vested
restricted stock are $695,311 for the same period.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation for the
three months ended March 31, 2005:
Three Months Ended
March 31, 2005
------------------
Net Income, as reported $ 25,932,970
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method of all
awards, net of tax effects (17,103,426)
------------
Pro forma net income $ 8,829,544
============
Earnings per share:
Basic - as reported $ .17
Basic - pro forma $ .06
Diluted - as reported $ .17
Diluted - pro forma $ .06
-6-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
On March 30, 2005, in response to the required implementation of SFAS No.
123(R), 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 2005, that otherwise would have been
recognized as follows: $6.1 million in 2005; $4.5 million in 2006; $2.2
million in 2007 and $0.8 million in 2008-2009. The objective of this
Company action was primarily to avoid recognizing compensation expense
associated with these options in future financial statements, upon the
Company's adoption of SFAS 123(R), effective January 1, 2006. In addition,
the Company also received shareholder approval of an amendment to its
Employee Stock Option Plan to allow the grant of non-qualified stock
options.
EMPLOYEE STOCK OPTION PLAN
In 2004, a new Employee Stock Option Plan was approved, replacing the prior
plan. The Company may grant options for up to 18,000,000 shares under its
new Employee Stock Option Plan. The Company has granted options on
4,628,133 shares (net of shares from canceled options) under the new plan
through March 31, 2006. 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 three to seven years.
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
------------------
2006 2005
------ ------
Dividend Yield 2.11% 2.13%
Expected Volatility 30.76% 43.20%
Risk-free interest rate 4.82% 4.06%
Expected term of options (in years) 4.37 4.37
Weighted-average grant-date fair value $ 4.64 $ 5.46
The Company determined that all employee groups exhibit similar exercise
and post-vesting termination behavior to determine the expected term.
As of March 31, 2006, there was $9,263,785 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.
A summary of the status of the Company's employee stock option plan at
March 31, 2006, and changes during the quarter is presented in the table
and narrative below:
Aggregate
Weighted Avg. Intrinsic
Shares Wtd. Avg. Remaining Value
(000) Ex. Price Contract Life (000)
------ --------- ------------- ---------
Outstanding at Beginning of Year 10,510 $17
Granted 404 17
Exercised (468) 12 $ 2,173
Forfeited (27) 18
------ --- -------
Outstanding at End of Period 10,419 17 3.1 Yrs $15,735
------ --- ------- -------
Exercisable at End of Period 7,391 $17 2.7 Yrs $11,714
-7-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A summary of the status of the Company's non-vested stock option activity
for the three months ended March 31, 2006 is presented in the table and
narrative below:
Wtd. Avg.
Shares Grant-Date
(000) Fair value
------ ----------
Non-vested stock options at beginning of quarter 3,069 $5.65
Granted 404 4.64
Vested (433) 7.05
Forfeited (12) 5.70
----- -----
Non-vested stock options at end of quarter 3,028 $5.47
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has a Non-employee Director Stock Option Plan covering
1,000,000 shares that was approved, replacing a prior plan. The Company has
granted options on 309,240 shares (net of shares from canceled options)
under the current plan through March 31, 2006. 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.
As of March 31, 2006, there was no unrecognized compensation cost related
to these share-based payments.
A summary of the status of the Company's Non-employee Director Stock Option
Plan at March 31, 2006, and changes during the quarter is presented in the
table and narrative below:
Aggregate
Wtd. Avg. Intrinsic
Shares Wtd. Avg. Remaining Value
(000) Ex. Price Contract Life (000)
------ --------- ------------- ---------
Outstanding at Beginning of Year 445 $14
Granted 0 --
Exercised 0 --
Expired (0) --
--- ---
Outstanding at End of Period 445 14 5.37 Yrs $1,782
--- --- -------- ------
Exercisable at End of Period 445 $14 5.37 Yrs $1,782
For the three months ended March 31, 2006, the Company did not have any
non-vested stock option activity.
EMPLOYEE STOCK PURCHASE PLAN
In 2003, a new Employee Stock Purchase Plan covering 1,200,000 shares was
approved, replacing a prior plan. The company has sold a total of 346,257
shares under the new plan through March 31, 2006. The Company sells shares
at 85% of the stock's market price at date of purchase. The weighted
average fair value of shares sold in 2006 was approximately $14.76.
RESTRICTED STOCK PLAN
The Company has a Restricted Stock Plan covering 1,000,000 shares of common
stock that was approved, 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
-8-
GENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
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 a committee, appointed by the Board of
Directors, but may not exceed ten years. The Company has 506,240 shares
outstanding as of March 31, 2006, and 22,860 shares were granted with a
restriction period of five years at a market price of $17.09 during the 1st
quarter 2006. As of March 31, 2006, the company has unearned stock-based
compensation of $4,811,399 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.
(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:
March 31, 2006 March 31, 2005
-------------- --------------
Quarter Ended $28,896,304 $23,788,586
(8) The decrease in common stock during the three months ended March 31, 2006,
was primarily due to the repurchase of 2,803,548 shares for approximately
$47,145,000, partially offset by the issuance of 517,852 shares,
respectively, of the Company's common stock under its stock-based
compensation plans. The Company has also recorded a $0.09 per share cash
dividend in the first quarter. The first quarter dividend of approximately
$13,838,000, was declared on March 2, 2006, and was paid on April 21, 2006.
(9) 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,
---------------------------
2006 2005
------------ ------------
Revenue:
Automotive Products $133,230,068 $121,959,968
Fire Protection Products 5,790,525 5,681,752
------------ ------------
Total $139,020,593 $127,641,720
============ ============
Operating Income:
Automotive Products $ 29,101,707 $ 31,976,839
Fire Protection Products 1,180,765 1,258,762
------------ ------------
Total $ 30,282,472 $ 33,235,601
============ ============
-9-
GENTEX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
FIRST QUARTER 2006 VERSUS FIRST QUARTER 2005
Net Sales. Net sales for the first quarter of 2006 increased by
approximately $11,379,000, or 9%, when compared with the first quarter last
year. Net sales of the Company's automotive auto-dimming mirrors increased
by approximately $11,270,000, or 9%, in the first quarter of 2006, when
compared with the first quarter last year, primarily due to a 12% increase
in auto-dimming mirror unit shipments from approximately 3,030,000 in the
first quarter of 2005 to 3,392,000 in the current quarter. This unit
increase primarily reflected the increased penetration of interior and
exterior auto-dimming mirrors on 2006 model year vehicles. Unit shipments
to customers in North America for the current quarter increased by 7%
compared with the first quarter of the prior year, primarily due to
increased penetration at General Motors and Asian transplant automakers,
partially offset by reduced shipments to Chrysler and Ford. Mirror unit
shipments for the current quarter to automotive customers outside North
America increased by 16% compared with the first quarter in 2005, primarily
due to increased penetration at certain European and Asian automakers. Net
sales of the Company's fire protection products increased 2% for the
current quarter versus the same quarter of last year, primarily due to
stronger sales of certain fire alarm products.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
increased from 62% in the first quarter of 2005 to 65% in the first quarter
of 2006. This percentage increase primarily reflected the impact of
automotive customer price reductions, the inability to leverage the
Company's fixed overhead costs, and stock option expense. Each factor is
estimated to have impacted cost of goods sold by 1 - 2 percentage points.
Operating Expenses. Engineering, research and development expenses for the
current quarter increased 27% and approximately $2,182,000, when compared
with the same quarter last year, primarily reflecting additional staffing,
engineering and testing for new product development, including mirrors with
additional electronic features, and stock option expensing. Excluding stock
option expense, E, R & D expenses increased by 19%. Selling, general and
administrative expenses increased 14% and approximately $951,000, for the
current quarter, when compared with the first quarter of 2005. This
increased expense primarily reflected stock option expensing and the
continued expansion of the Company's overseas sales offices. Excluding
stock option expense, S, G & A expenses increased by 6%.
Total Other Income. Total other income for the current quarter increased by
approximately $3,365,000 when compared with the first quarter of 2005,
primarily due to increased interest income due to higher interest rates and
realized gains on the sale of equity investments.
Taxes. The provision for income taxes varied from the statutory rate during
the current quarter, primarily due to Extra Territorial Income Exclusion
Act exempted taxable income, domestic production exclusion, tax-exempt
investment income and stock option expense.
FINANCIAL CONDITION:
Cash flow from operating activities for the three months ended March 31,
2006, decreased to $38,473,000, compared to $42,735,000, for the same
period last year, primarily due to an increase in accounts receivable and a
decrease in accounts payable. Capital expenditures for the three months
ended March 31, 2006, increased to $12,935,000, compared to $11,129,000 for
the same period last year, including the new facility construction.
The Company currently expects that the construction of its fourth
automotive manufacturing facility and a new technical center will be
completed in the spring of 2006. The Company plans to invest approximately
$35-40 million for the new facilities during 2004-2006, which will be
funded from its cash and cash equivalents on hand.
Accounts receivable as of March 31, 2006, increased approximately
$9,491,000 compared to December 31, 2005. The increase was primarily due to
the higher sales level, as well as monthly sales within each quarter.
-10-
Management considers the Company's working capital and long-term
investments totaling approximately $664,228,000 as of March 31, 2006,
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. During the quarter ended March 31, 2003,
the Company repurchased 830,000 shares (post-split) at a cost of
approximately $10,247,000. During the quarter ended September 30, 2005, the
Company repurchased approximately 1,496,000 shares at a cost of
approximately $25,215,000. During the quarter ended March 31, 2006, the
Company repurchased approximately 2,804,000 shares at a cost of
approximately $47,145,000. Approximately 2,870,000 shares remain authorized
to be repurchased under the plan.
CRITICAL ACCOUNTING POLICIES:
The preparation of the Company's consolidated condensed financial
statements, 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 on-going 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, 2005. Management believes there have been no changes in those
critical accounting policies, except as noted below.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with the
fair value recognition provisions of SFAS No. 123(R). The Company utilizes
the Black-Scholes model, which requires the input of subjective
assumptions. These assumptions include estimating (a) the length of time
employees will retain their vested stock options before exercising them
("expected term"), (b) the volatility of the Company's common stock price
over the expected term, (c) the number of options that will ultimately not
complete their vesting requirements ("forfeitures") and (d) expected
dividends. Changes in the subjective assumptions can materially affect the
estimate of fair value of stock-based compensation and consequently, the
related amounts recognized on the consolidated condensed statements of
operations.
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 will be sourced
all of 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 will be transferred to the
Company by no later than the 2007 model year. We currently estimate that
this new business represents incremental auto-dimming mirror units in the
range of 500,000 on an annualized basis. 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.
-11-
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.
The Company currently expects that auto-dimming mirror unit shipments will
be approximately 10% higher in the second quarter and calendar year of 2006
compared with 2005. 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 2006 are approximately 15.8 million units for North America, 20.2
million for Europe and 14.2 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, 2006, 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, 2005.
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. 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 and margins. 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 due to loss of market share, supplier bankruptcies, and
commodity material cost increases.
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.
The Company does not have any significant off-balance sheet arrangements or
commitments that have not been recorded in its consolidated financial
statements.
On March 30, 2005, in response to the required implementation of SFAS No.
123(R) as disclosed in Note 10, 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. 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.
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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.
NON-GAAP FINANCIAL MEASURE:
The financial information provided, including earnings, is in accordance
with GAAP (generally accepted accounting principles). Still, the Company
believes it is useful to provide non-GAAP earnings to exclude the effect of
SFAS 123(R). This non-GAAP financial measure allows investors to evaluate
current performance in relation to historic performance without considering
this non-cash charge.
The Company's management uses this non-GAAP information internally to help
assess performance in the current period versus prior periods. Disclosure
of non-GAAP earnings to exclude the effect of SFAS 123(R) has economic
substance because the excluded expenses do not represent current or future
cash expenditures.
A reconciliation of non-GAAP earnings, to exclude the effect of SFAS
123(R), to GAAP earnings can be found in the following financial table. The
use of non-GAAP earnings is intended to supplement, not to replace,
presentation of GAAP earnings. Like all non-GAAP financial measures,
non-GAAP earnings are subject to inherent limitations because all of the
expenses required by GAAP are not included. The limitations are compensated
by the fact that non-GAAP earnings are not relied on exclusively, but are
used to simply supplement GAAP earnings.
STATEMENTS OF INCOME RECONCILIATION
NON-GAAP MEASUREMENT TO GAAP:
(unaudited)
Non-
GAAP GAAP
Three Months Ended March 31, 2006 2006 2006
--------------------------------------------- vs. vs.
(Non-GAAP (unaudited) 2005 2005
Stock Option Excluding Stock Quarter Ended % %
GAAP Expense Option Expense) 3/31/2005 Change Change
------------ ------------ --------------- ------------- ------ ------
Net sales $139,020,593 $ 0 $139,020,593 $127,641,720 8.9% 8.9%
Costs and Expenses
Costs of Goods Sold 90,787,885 (542,254) 90,245,631 79,588,903 14.1% 13.4%
Engineering, Research & Development 10,159,168 (657,710) 9,501,458 7,977,385 27.3% 19.1%
Selling, General & Administrative 7,791,068 (520,131) 7,270,937 6,839,831 13.9% 6.3%
Other Expense (Income) (7,988,411) 0 (7,988,411) (4,623,369) 72.8% 72.8%
------------ ------------ ------------ ------------
Total Costs and Expenses 100,749,710 (1,720,095) 99,029,615 89,782,750 12.2% 10.3%
------------ ------------ ------------ ------------
Income Before Provision for Income Taxes 38,270,883 1,720,095 39,990,978 37,858,970 1.1% 5.6%
Provision for Income Taxes 11,899,826 797,174 12,697,000 11,926,000 -0.2% 6.5%
------------ ------------ ------------ ------------
Net Income $ 26,371,057 $ 922,921 $ 27,293,978 $ 25,932,970 1.7% 5.2%
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.17 $ 0.01 $ 0.18 $ 0.17
Diluted $ 0.17 $ 0.01 $ 0.18 $ 0.17
Weighted Average Shares:
Basic 154,223,254 154,223,254 154,223,254 155,215,506
Diluted 155,751,925 155,751,925 155,751,925 156,713,620
-13-
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
As of March 31, 2006, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures [(as defined in Exchange Act Rules 13a -
15(e) and 15d - 15(e)]. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls
and procedures were adequate and effective as of March 31, 2006, to ensure
that material information relating to the Company would be made known to
them by others within the Company, particularly during the period in which
this Form 10-Q was being prepared. During the period covered by this
quarterly report, there have been no changes in the Company's internal
controls over financial reporting that have materially affected or are
likely to materially affect the Company's internal controls 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 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 economic recovery in the U.S.
and in international markets, the pace of automotive production worldwide,
the types of products purchased by customers, competitive pricing
pressures, currency fluctuations, the financial strength of the Company's
customers, the mix of products purchased by customers, the ability to
continue to make product innovations, the success of newly introduced
products (e.g. SmartBeam), 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, 2005. 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, 2006:
Maximum Number
Total Average Total Number of of Shares That
Number Price Shares Purchased As May Yet Be
Of Shares Paid Per Part of a Publicly Purchased Under
Period Purchased Share Announced Plan the Plan
------ --------- -------- ------------------- ---------------
January 2006 475,952 $16.85 475,952 5,197,989
February 2006 1,630,596 $16.88 1,630,596 3,567,393
March 2006 697,000 $16.64 697,000 2,870,393
--------- ---------
Total 2,803,548 2,803,548
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. During the quarter ended March 31, 2003,
the Company repurchased 830,000 shares (post-split) at a cost of
approximately $10,247,000. During the quarter ended September 30, 2005, the
Company repurchased approximately 1,496,000 shares at a cost of
approximately $25,215,000.
ITEM 6. EXHIBITS
(a) See Exhibit Index on Page 17.
-15-
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 2, 2006 /s/ Fred T. Bauer
----------------------------------------
Fred T. Bauer
Chairman and Chief Executive Officer
Date: May 2, 2006 /s/ Enoch C. Jen
----------------------------------------
Enoch C. Jen
Senior Vice President and Chief
Financial Officer Principal Financial
and Accounting Officer
-16-
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.
-17-
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(e) The form of Indemnity Agreement between Registrant and each of the
Registrant's directors and certain officers was filed as Exhibit
10 (e) to Registrant's Report on Form 10-Q dated October 31, 2002,
and the same is incorporated herein by reference.
31.1 Certificate of the Chief Executive Officer of Gentex Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). 19
31.2 Certificate of the Chief Financial Officer of Gentex Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). 20
32 Certificate of the Chief Executive Officer and Chief Financial
Officer of Gentex Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 21
- ----------
* Indicates a compensatory plan or arrangement.
-18-