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 SEPTEMBER 30, 2005, 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) <TABLE> <S> <C> MICHIGAN 38-2030505 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) </TABLE> <TABLE> <S> <C> 600 N. CENTENNIAL, ZEELAND, MICHIGAN 49464 (Address of principal executive offices) (Zip Code) </TABLE> (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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ----- ----- 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. <TABLE> <CAPTION> Shares Outstanding Class at October 21, 2005 ----- ------------------- <S> <C> Common Stock, $0.06 Par Value 155,376,711 </TABLE> Exhibit Index located at page 14 Page 1 of 21
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------ ----------------- (Unaudited) (Audited) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $399,172,878 $395,538,719 Short-term investments 82,069,959 99,341,541 Accounts receivable, net 76,451,242 56,092,330 Inventories 36,914,716 30,600,789 Prepaid expenses and other 11,870,001 11,035,715 ------------ ------------ Total current assets 606,478,796 592,609,094 PLANT AND EQUIPMENT - NET 158,926,604 135,649,119 OTHER ASSETS Long-term investments 132,867,231 122,174,030 Patents and other assets, net 6,735,352 6,427,185 ------------ ------------ Total other assets 139,602,583 128,601,215 ------------ ------------ Total assets $905,007,983 $856,859,428 ============ ============ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES Accounts payable $ 27,518,376 $ 19,849,569 Accrued liabilities 39,882,630 31,006,689 ------------ ------------ Total current liabilities 67,401,006 50,856,258 DEFERRED INCOME TAXES 22,298,802 22,723,198 SHAREHOLDERS' INVESTMENT Common stock 9,322,603 4,672,005 Additional paid-in capital 184,140,059 175,266,114 Retained earnings 607,682,037 591,546,326 Other shareholders' investment 14,163,476 11,795,527 ------------ ------------ Total shareholders' investment 815,308,175 783,279,972 ------------ ------------ Total liabilities and shareholders' investment $905,007,983 $856,859,428 ============ ============ </TABLE> See accompanying notes to condensed consolidated financial statements. -2-
GENTEX CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> NET SALES $138,114,897 $120,456,707 $398,141,062 $379,430,532 COST OF GOODS SOLD 86,918,447 72,754,752 249,326,226 222,388,833 ------------ ------------ ------------ ------------ Gross profit 51,196,450 47,701,955 148,814,836 157,041,699 OPERATING EXPENSES: Engineering, research and development 9,140,231 7,758,575 25,916,046 22,747,948 Selling, general & administrative 6,762,837 6,550,287 20,613,966 20,175,499 ------------ ------------ ------------ ------------ Total operating expenses 15,903,068 14,308,862 46,530,012 42,923,447 ------------ ------------ ------------ ------------ Income from operations 35,293,382 33,393,093 102,284,824 114,118,252 OTHER INCOME (EXPENSE) Interest and dividend income 4,456,050 2,263,373 11,578,709 6,507,213 Other, net 1,033,387 1,168,367 2,794,306 3,309,635 ------------ ------------ ------------ ------------ Total other income 5,489,437 3,431,740 14,373,015 9,816,848 ------------ ------------ ------------ ------------ Income before provision for income taxes 40,782,819 36,824,833 116,657,839 123,935,100 PROVISION FOR INCOME TAXES 12,847,000 11,600,000 36,748,000 39,910,000 ------------ ------------ ------------ ------------ NET INCOME $ 27,935,819 $ 25,224,833 $ 79,909,839 $ 84,025,100 ============ ============ ============ ============ EARNINGS PER SHARE: Basic $ 0.18 $ 0.16 $ 0.51 $ 0.55 Diluted $ 0.18 $ 0.16 $ 0.51 $ 0.54 Cash Dividends Declared per Share $ 0.09 $ 0.085 $ 0.26 $ 0.235 </TABLE> See accompanying notes to condensed consolidated financial statements. -3-
GENTEX CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For nine months ended September 30, ----------------------------------- 2005 2004 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 79,909,839 $ 84,025,100 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 18,123,855 16,976,090 (Gain) loss on disposal of assets 440,254 (863) (Gain) loss on sale of investments (3,012,538) (2,367,909) Deferred income taxes (1,856,619) 621,584 Amortization of deferred compensation 1,303,406 1,149,778 Tax benefit of stock plan transactions 1,777,169 2,693,941 Change in operating assets and liabilities: Accounts receivable, net (20,358,912) (4,653,136) Inventories (6,313,927) (7,112,650) Prepaid expenses and other (771,654) 411,208 Accounts payable 7,668,807 3,932,843 Accrued liabilities, excluding dividends declared 8,269,956 (983,396) ------------ ------------ Net cash provided by operating activities 85,179,636 94,692,590 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Plant and equipment additions (41,775,680) (20,705,920) Proceeds from sale of plant and equipment 40,753 44,500 (Increase) decrease in investments 13,504,039 34,461,644 Increase in other assets (1,102,532) (809,321) ------------ ------------ Net cash provided by (used for) investing activities (29,333,420) 12,990,903 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock from stock plan transactions 12,796,239 12,332,859 Cash dividends paid (39,793,723) (34,760,901) Repurchases of common stock (25,214,573) 0 ------------ ------------ Net cash provided by (used for) financing activities (52,212,057) (22,428,042) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,634,159 85,255,451 CASH AND CASH EQUIVALENTS, beginning of period 395,538,719 322,662,971 ------------ ------------ AND CASH EQUIVALENTS, end of period $399,172,878 $407,918,422 ============ ============ </TABLE> 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 2004 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 September 30, 2005, 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: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------ ----------------- <S> <C> <C> Raw materials $22,647,131 $18,102,873 Work-in-process 4,465,383 3,894,864 Finished goods 9,802,202 8,603,052 ----------- ----------- $36,914,716 $30,600,789 =========== =========== </TABLE> (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): <TABLE> <CAPTION> Quarter Ended September 30, Nine Months Ended September 30, --------------------------- ------------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerators: Numerator for both basic and diluted EPS, net income $ 27,935,819 $ 25,224,833 $ 79,909,839 $ 84,025,100 Denominators: Denominator for basic EPS, weighted-average shares outstanding 155,817,978 154,487,100 155,545,871 154,118,332 Potentially dilutive shares resulting from stock plans 1,640,438 1,948,822 1,591,194 2,628,690 ------------ ------------ ------------ ------------ Denominator for diluted EPS 157,458,416 156,435,922 157,137,065 156,747,022 ============ ============ ============ ============ Shares related to stock plans not included in diluted average common shares outstanding because their effect would be antidilutive 3,104,212 2,973,662 4,430,072 1,366,922 </TABLE> (6) At September 30, 2005, the Company had two stock option plans and an employee stock purchase plan. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations. No stock-based employee compensation cost due to these plans is reflected in net income, since options granted under these plans have an exercise price equal to the market value of the underlying common stock on the date of grant. 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. -5-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.) <TABLE> <CAPTION> Quarter Ended September 30, Nine Months Ended September30, --------------------------- ------------------------------ 2005 2004 2005 2004 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> Net income, as reported $27,935,819 $25,224,833 $ 79,909,839 $ 84,025,100 Deduct: Total stock-based employee compensation expense determined under fair value-based method of all awards, net of tax effects (1,332,871) (4,058,943) (19,349,947) (10,676,152) ----------- ----------- ------------ ------------ Pro forma net income $26,602,948 $21,165,890 $ 60,559,892 $ 73,348,948 =========== =========== ============ ============ Earnings per share: Basic - as reported $ .18 $ .16 $ .51 $ .55 Basic - pro forma .17 .14 .39 .48 Diluted - as reported .18 16 .51 .54 Diluted - pro forma .17 .14 .39 .47 </TABLE> 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. (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: <TABLE> <CAPTION> September 30, 2005 September 30, 2004 ------------------ ------------------ <S> <C> <C> Quarter Ended $31,843,635 $23,098,757 Nine Months Ended $81,765,670 $82,850,918 </TABLE> (8) The increase in common stock during the nine months ended September 30, 2005, was primarily due to a two-for-one stock split effected in the form of a 100 percent common stock dividend, as disclosed in Note 4 of this quarterly statement. The other common stock activity during the quarter and nine months ended September 30, 2005, was attributable to the repurchase of 1,496,059 shares for approximately $25,215,000, partially offset by the issuance of 363,131 and 1,139,268 shares, respectively, of the Company's common stock under its stock-based compensation plans. The Company has also recorded a $0.085 per share cash dividend in the first and second quarters and a $0.09 per share cash dividend in the third quarter. The third quarter dividend of approximately $13,984,000, was declared on August 18, 2005, and was paid on October 21, 2005. -6-
GENTEX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (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: <TABLE> <CAPTION> Quarter Ended September 30, Nine Months Ended September 30, --------------------------- ------------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenue: Automotive Products $131,696,221 $114,546,283 $379,781,156 $362,111,159 Fire Protection Products 6,418,676 5,910,424 18,359,906 17,319,373 ------------ ------------ ------------ ------------ Total $138,114,897 $120,456,707 $398,141,062 $379,430,532 ============ ============ ============ ============ Operating Income: Automotive Products $ 33,810,716 $ 32,160,066 $ 98,146,950 $110,651,518 Fire Protection Products 1,482,666 1,233,027 4,137,874 3,466,734 ------------ ------------ ------------ ------------ Total $ 35,293,382 $ 33,393,093 $102,284,824 $114,118,252 ============ ============ ============ ============ </TABLE> (10) On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 123(R), "Share-Based Payment," which required all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, and was effective for public companies for interim or annual periods beginning after June 15, 2005. On April 14, 2005, the U.S. Securities and Exchange Commission announced that companies will be allowed to implement SFAS No. 123(R) at the beginning of their next fiscal year after June 15, 2005. The Company does not intend to adopt a fair-value based method of accounting for stock-based employee compensation until required (January 1, 2006). Proforma quarterly earnings and certain Company actions taken in response to SFAS No. 123(R) are disclosed in Note 6 of this quarterly statement. -7-
GENTEX CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: THIRD QUARTER 2005 VERSUS THIRD QUARTER 2004 Net Sales. Net sales for the third quarter of 2005 increased by approximately $17,658,000, or 15%, when compared with the third quarter last year. Net sales of the Company's automotive auto-dimming mirrors increased by approximately $17,150,000, or 15%, in the third quarter of 2005, when compared with the third quarter last year, primarily due to a 16% increase in auto-dimming mirror unit shipments from approximately 2,756,000 in the third quarter of 2004 to 3,198,000 in the current quarter. This unit increase primarily reflected the increased penetration of interior and exterior auto-dimming mirrors on 2006 model year vehicles during the third quarter of 2005. Unit shipments to customers in North America for the current quarter increased by 14% compared with the third quarter of the prior year, primarily due to higher unit shipments to transplants. Mirror unit shipments for the current quarter to automotive customers outside North America increased by 18% compared with the third quarter in 2004, primarily due to higher unit shipments to certain European automakers. Net sales of the Company's fire protection products increased 9% 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 60% in the third quarter of 2004 to 63% in the third quarter of 2005. This percentage increase primarily reflected the impact of automotive customer price reductions, as well as yield issues on certain new exterior mirror production lines and in the microelectronics manufacturing area. 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 approximately $1,382,000, from 6% to 7% of net sales, 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. Selling, general and administrative expenses increased approximately $213,000, for the current quarter, but remained at 5% of net sales, when compared with the third quarter of 2004. This increased expense primarily reflected the continued expansion of the Company's overseas sales offices, partially offset by a reduction in state taxes. Total Other Income. Total other income for the current quarter increased by approximately $2,058,000 when compared with the third quarter of 2004, primarily due to increased interest income due to higher interest rates. NINE MONTHS ENDED SEPTEMBER 30, 2005, VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2004 Net Sales. Net sales for the nine months ended September 30, 2005, increased by $18,711,000, or 5%, when compared with the same period last year. Net sales of the Company's automotive auto-dimming mirrors increased by $17,670,000, or 5%, as auto-dimming mirror unit shipments increased by 7% from approximately 8,739,000 in the first nine months of 2004 to 9,327,000 units in the first nine months of 2005. This increase primarily reflected the increased penetration of interior and exterior auto-dimming mirrors on 2005 and 2006 model year vehicles. Unit shipments to customers in North America increased by 3%, as a result of increased unit shipments to transplants, partially offset by reduced shipments to domestic automakers due to their lower production levels. Mirror shipments to automotive customers outside North America increased by 10%, primarily due to increased penetration of auto-dimming mirrors. Net sales of the Company's fire protection products increased 6% in the first nine months of 2005 versus the first nine months of 2004, primarily due to stronger sales of certain fire alarm and signal products. Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 59% in the nine months ended September 30, 2004, to 63% in the nine months ended September 30, 2005, primarily reflecting the impact of automotive customer price reductions, higher fixed overhead expenses and lower mirror shipment growth resulting -8-
in lower capacity utilization, as well as yield issues on certain new exterior mirror production lines and in the microelectronics manufacturing area. Each factor is estimated to have impacted cost of goods sold by 1 - 2 percentage points. Operating Expenses. For the nine months ended September 30, 2005, engineering, research and development expenses increased approximately $3,168,000, from 6% to 7% of net sales, when compared to the same period last year, primarily due to additional staffing, engineering and testing for new product development, including mirrors with additional electronic features. Selling, general and administrative expenses increased approximately $438,000 for the nine months ended September 30, 2005, but remained at 5% of net sales, when compared to the same period last year, primarily reflecting the continued expansion of the Company's overseas sales offices, partially offset by a reduction in state taxes. Total Other Income. Total other income for the nine months ended September 30, 2005, increased $4,556,000 when compared to the same period last year, primarily due to increased interest income, partially offset by lower miscellaneous other income. Taxes. The Company's effective income tax rate decreased from 32.2% in the nine months ended September 30, 2004, to 31.5% in the nine months ended September 30, 2005, primarily due to increased tax-exempt investment income. FINANCIAL CONDITION: Cash flow from operating activities for the nine months ended September 30, 2005, decreased to $85,180,000, compared to $94,693,000, for the same period last year, primarily due to an increase in accounts receivable. Capital expenditures for the nine months ended September 30, 2005, increased to $41,776,000, compared to $20,706,000 for the same period last year, primarily due to 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 September 30, 2005, increased approximately $20,359,000 compared to December 31, 2004. The increase was primarily due to the higher sales level, as well as monthly sales within each quarter. Management considers the Company's working capital and long-term investments totaling approximately $671,945,000 as of September 30, 2005, 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. Approximately 5,674,000 shares remain authorized to be repurchased under the plan. 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 -9-
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. 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 10-15% higher in the fourth quarter of 2005 compared with the fourth quarter of 2004. 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 2005 are approximately 15.7 million units for North America, 20.1 million for Europe and 13.7 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 September 30, 2005, there were no significant changes in the market risks reported in the Company's 2004 Form 10-K report. 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, 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. -10-
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. 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 September 30, 2005, 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 September 30, 2005, 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. Statements in this Quarterly Report on Form 10-Q contain forward-looking statements (e.g. unit shipment growth estimates) within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, about the global automotive industry, the economy and the Company itself, and involve risks and uncertainties described under the headings "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Trends and Developments." 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, automotive production levels 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. -11-
PART II. OTHER INFORMATION 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 third quarter ended September 30, 2005: <TABLE> <CAPTION> 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 ------ ------------ ------------- ------------------- --------------------- <S> <C> <C> <C> <C> July 2005 -- -- -- 7,170,000 August 2005 123,768 $17.02 123,768 7,046,232 September 2005 1,372,291 $16.84 1,372,291 5,673,941 --------- --------- Total 1,496,059 1,496,059 </TABLE> 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. ITEM 6. EXHIBITS (a) See Exhibit Index on Page 14. -12-
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: November 1, 2005 /s/ Fred T. Bauer ---------------------------------------- Fred T. Bauer Chairman and Chief Executive Officer Date: November 1, 2005 /s/ Enoch C. Jen ---------------------------------------- Enoch C. Jen Vice President - Finance, Principal Financial and Accounting Officer -13-
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- <S> <C> <C> 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). 16 *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. </TABLE> -14-
<TABLE> <S> <C> <C> *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 </TABLE> - ---------- * Indicates a compensatory plan or arrangement.