Despite Slumping Margins Gentex Stays Optimistic

June 5, 2002
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ZEELAND — Soft auto sales brought on by the weakened economy, combined with the cost to develop new products and open a new production plant, pushed Gentex Corp’s. earnings down last quarter, even as the company posted quarterly record sales.

The Zeeland-based automotive supplier saw its net income decline 7 percent during the first quarter that ended March 31, from $18.5 million during the same period a year ago to $17.2 million. Earnings of 23 cents per share were just under Wall Street analysts’ expectations of 24 cents per share.

The earnings slide came despite a solid 7 percent quarterly sales gain, from $73.8 million in the first quarter of 2000 to $79.3 million this year. The sales growth was attributed to strong growth in offshore sales, which offset an industry downturn in North America and, after growing 37 percent over a year ago, now account for 40 percent of the company’s business.

Borrowing from the classic Dickens novel “A Tale of Two Cities,” Gentex Executive Vice president Ken La Grand called the first quarter “the best of times, and the worst of times.”

“That certainly applies to Gentex in the first quarter,” La Grand told brokerage analysts last week in a conference call to discuss the first quarter financial report.

The best news from the quarter came in sales volumes that grew even as the weakened U.S. economy resulted in reduced vehicle production from a year ago.

The worst of times were from a myriad of issues that cut into profits and produced lower gross margins.

Still, the period was “overall, a pretty reasonable quarter,” concluded analyst Brett Hoselton of McDonald Investments in Cleveland, Ohio.

Given the state of the economy and lower vehicle sales from a year earlier, “Gentex doesn’t look too bad,” Hoselton said.

Cutting into Gentex’s quarterly earnings was a gross margin that fell from 44 percent in the first quarter of 2000 to 40 percent in 2001. Gentex expects to maintain gross margins in the 40 percent range for the rest of the year — a margin that’s the envy of the automotive supply industry but is historically lower than what Gentex has produced.

La Grand attributed the lower gross margin to the cost associated with price cuts provided automakers as of Jan. 1, the opening of a new Zeeland production facility a year ago, and research and development costs that grew 27 percent from a year earlier due to additional staffing, engineering and testing for new product development.

La Grand told analysts that he expects research and development costs to grow by 20 percent to 25 percent annually for the foreseeable future. While the heavy spending to develop new products such as telematic mirrors, light-emitting diodes and new automotive technologies has yet to produce sales revenues that can offset costs, the investments will position the company well for the future, La Grand said.

Gentex’s goal is to double the size of the company over the next few years. Gentex, which employs more than 1,600 people at its three Zeeland facilities, posted sales in 2000 of $297.4 million.

“We’re very conscientious of every dollar that we do spend and that it’s something that’s going to give us a return,” La Grand said. “Sometimes we’d like to put the dollar in and get the return next week, and sometimes that doesn’t work in the business. It’s a year or two or three years out.”

“The future is extremely bright for us and it’s up to us to make it happen,” he said.

One of the new products ahead is a device that automatically adjusts a vehicle’s high- and low-beam headlights. Lincoln Mercury will use the SmartBeam system on its vehicles beginning with the 2004 model year, and a second unidentified automaker plans to install it in 2005, La Grand said.

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