Gentex
Annual Report 2019

Plain-text annual report

2 0 1 9 A N N U A L R E P O R T E X P A N D I N G OUR VISION N E W P R O D U C T S . N E W T E C H N O L O G I E S . N E W M A R K E T S . gentex overview 4 Gentex Overview 6 8 Letter from the CEO Financial Performance 10 Market Performance 12 Digital Vision 14 Connectivity 16 Dimmable Devices 18 20 Sensing Sustainability 21 Diversity, Equity, and Inclusion 22 80 10-K 15-Year Summary 82 Corporate Data 83 Officers and Directors SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements contained in this communication that are not purely historical are forward-looking statements. Forward-looking statements give the Company’s current expectations or forecasts of future events. These forward-looking statements generally can be identified by the use of words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “goal”, “hope”, “may”, “plan”, “poised”, “project”, “will”, and variations of such words and similar expressions. Such statements are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control, and could cause the Company’s results to differ materially from those described. These risks and uncertainties include, without limitation: changes in general industry or regional market conditions; changes in consumer and customer preferences for our products (such as cameras replacing mirrors and/or autonomous driving); our ability to be awarded new business; continued uncertainty in pricing negotiations with customers; loss of business from increased competition; changes in strategic relationships; customer bankruptcies or divestiture of customer brands; fluctuation in vehicle production schedules (including the impact of customer employee strikes); changes in product mix; raw material shortages; higher raw material, fuel, energy and other costs; unfavorable fluctuations in currencies or interest rates in the regions in which we operate; costs or difficulties related to the integration and/or ability to maximize the value of any new or acquired technologies and businesses; changes in regulatory conditions; warranty and recall claims and other litigation and customer reactions thereto; possible adverse results of pending or future litigation or infringement claims; changes in tax laws; import and export duty and tariff rates in or with the countries with which we conduct business; negative impact of any governmental investigations and associated litigations including securities litigations relating to the conduct of our business; the length and severity of the recent COVID-19 (coronavirus) outbreak, including its impact across our business on demand, operations, and the global supply chain. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the NASDAQ Global Select Market. Accordingly, any forward-looking statement should be read in conjunction with the additional information about risks and uncertainties identified under the heading “Risk Factors” in the Company’s latest Form 10-K and Form 10-Q filed with the SEC. Includes content supplied by IHS Markit Light Vehicle Production Forecast (October 16, 2019 and January 16, 2020) (http://www.gentex.com/forecast-disclaimer). 2019 ANNUAL REPORT 2 3 G ENT EX CORPORAT ION 5,874 Full-time Employees 42.9M Auto-Dimming Mirror Units IPIN OUR PRIMARY MARKETS gentex overview 30+ OEM Customers Shipped To Gentex® is a leading supplier of dimmable devices, vision systems, sensors and advanced electronic products for the global automotive, aerospace, and fire protection industries. Our core competencies are enabling new innovations in each of these industries, while creating opportunities to develop market leading positions into new verticals. Within the automotive industry, we supply profitable, scalable features that optimize driver vision and enhance driver safety and convenience. We utilize our mirror locations, the surrounding windscreen, and other strategic locations in the vehicle to deliver our innovative features, including cameras, displays, alerts, communication modules, car-to-home automation systems, and security components. As vehicle electrification and autonomous driving trends progress, our core technologies are converging to yield products that continue to be integral components in connected SALES & SUPPORT OFFICES cars and future mobility systems. United States, Germany, France, United Kingdom, Sweden, Korea, Japan, China 1,537 PATENTS 583 US Patents 855 Foreign Patents 64 US Patents 11 Foreign Patents 13 US Patents 11 Foreign Patents 374 TRADEMARKS 31 US Trademarks 320 Foreign Trademarks 7 US Trademarks 16 Foreign Trademarks Gentex is focused on using technology to solve problems. Our expertise in physics, chemistry, software, electronics, glass processing, and sensing positions us to create new and unique products to serve our current markets and enter into new markets. When coupled with our strength in advanced, high-volume manufacturing, Gentex is able to bring new and unique products into these markets with an unmatched level of quality and performance. 500+ Nameplates our Content Appears On 2019 ANNUAL REPORT 4 5 G ENT EX CORPORAT ION CORE COMPETENCIES ◼ Electronics ◼ Microelectronics ◼ Design and Engineering ◼ Chemical Development ◼ Thin Film Coatings ◼ Automated Assembly ◼ Software Design ◼ Displays ◼ Glass Bending and Processing ◼ Vision Systems and Cameras 790 APPL ICATIONS IN PROCESS 256 Pending US Patent Applications 503 Pending Foreign Patent Applications 31 Trademark Applications LETTER FROM THE CEO philosophy, by creating logical paths for an automaker to create additional value, without adding un-needed complexity. Our latest digital vision systems have exceeded consumer expectations, improved safety through enhanced visibility, and meet all regulatory requirements for enhanced systems. In addition to our automotive product line up, we announced our first electronically dimmable window (EDW) program award with Airbus, which is expected to start production in early 2021. Unlike our first program award for the Boeing 787, Gentex will be a tier 1 supplier. This tier 1 designation is a testament to our quality systems and manufacturing expertise, as well as improvements in the technology itself. When looking at our current product designs, our latest EDWs darken twice as fast and become 100 times darker than our first iteration, effectively eliminating more than 99.999% of visible light. We are very excited to partner with Airbus, and look forward to the successful launch of this new program and to future developments in aerospace. Perhaps our biggest splash at CES came when we unveiled our new medical lighting technology, developed in partnership with Mayo Clinic. This adaptive task lighting technology, designed for the operating, surgical, and patient-care environments, leans heavily on our long-standing capabilities in machine vision, lighting control, material sciences, and software to dramatically reduce shadows and glare from the operating room. Controllable by voice, gesture, or a hand-held device, this lighting solution emerged as the product of 18 months of In 2019, global light vehicle production was impacted by trade disputes, macroeconomic uncertainty, a strike that impacted collaboration between Gentex engineers and Mayo Clinic one of our largest customers and continued changes within consumer demand. These factors combined to create a 6% surgeons, scientists, and operating room staff. Preliminary decrease in overall light vehicle production volumes. While most of the automotive market was down, one trend remained responses for this product have been incredibly positive, positive in 2019 which helped drive Gentex to a year of growth: consumer demand for our innovative technology remained and we are excited to continue working alongside Mayo very strong. Our focus on dimmable devices, connectivity, vision systems and sensors has helped position Gentex as a Clinic as we begin the next steps in engineering, testing, leading innovator within well-established industries. In fact, the strength of our core technologies and products like our Full Display Mirror® (FDM®, which shipped 739,000 units, a +93% increase year-over-year) as well as outside dimmable validation and clinical trials. We believe that this medical lighting solution is the first step in our efforts to continue mirrors (OEC, +11% globally) helped us outpace the automotive market to still grow net sales by 1% which represents an identifying and proactively solving problems in adjacent outperformance to the underlying market of 7% for 2019. We believe the strong demand for our technology and our new industries, and through our collaboration with Mayo product innovations will allow us to continue the trend of outperforming the market in 2020 and beyond. Currently, 2020 is not shaping up to be much easier. In a year that is projected to see continued slowdowns in emerging automotive markets, lethargic mature automotive markets, global trade disputes, elections, Brexit, and slowdowns due to COVID-19 (novel coronavirus), we remain committed to continuing our focus on delivering results for our employees, shareholders and the communities where we live and work. Today, we are more focused on research and development than any time in the Company’s history. This will supplement our already industry-leading product portfolio with new capabilities and additional products that will secure our future by driving growth into existing markets and provide opportunities for growth in new markets. None of this would be possible without the hard work that our teams have put forth to build the culture, foster innovation, create new products, and ultimately make Gentex successful. Clinic, we now have access to a world leader in healthcare, and also a technology leader in the medical industry. Since 2015, our capital allocation strategy has been focused on leveraging our industry leading cash flow profile to create additional value for our shareholders. In that time, we have returned nearly $2 billion dollars to shareholders through growing dividends and meaningful share repurchases, while continuing to invest in new technologies and partnerships. Building on the success of this strategy, we will continue to deploy our free cash flow toward dividends, share repurchases, capital expenditures and the research, development and acquisition of projects and technologies that will drive growth for our customers, shareholders and employees. For the sixth consecutive year, we have demonstrated new technologies and capabilities at the Consumer Electronics Show (CES). This show has become an important launchpad for the next generation of ideas, technologies, and Thank you for your continued support. We take your investment with us seriously, products. Our product and technologies focused on features and capabilities that we believe will play a pivotal role in and in the coming pages, we will outline the technology and strategy that we believe future mobility solutions. We demonstrated cockpit concepts including driver authentication and monitoring, in-vehicle will help us continue to outpace our markets in the coming years. payment processing, car-to-home connectivity, cabin sensing devices, as well as dimmable visors, side windows, and sunroofs for complete cabin lighting control. We also showcased technology enhancements to our Full Display Mirror, hybrid camera monitoring system (CMS), as well as our first-ever fully digital mirror replacement solution. Automotive manufacturers benefit dramatically by being able to offer multiple options for upgrading vehicle content. Our product strategy aligns perfectly with this Steve Downing President and CEO 2019 ANNUAL REPO RT 6 7 G ENT EX CORPORAT ION FINANCIAL PERFORMANCE s e u n e v e R ) s n o i l l i m n i ( A HISTORY OF GROWTH $2000 $1800 $1600 $1400 $1200 $1000 $800 $600 $400 $200 $0 $310 $544 $1,859 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year 2020 2021 RETURN TO SHAREHOLDERS GUIDANCE (As of January 31, 2020) SALES GROWTH $116.3 M Cash Dividends Paid $.46/share Dividend $331.5 M Share Repurchases 13.8 M Shares Repurchased $447.8 M Returned to Shareholders $1.91 – $2.0 b Revenue 36% – 37% Gross Margin $205 – $215 m Operating Expenses (E, R&D and S, G&A) 15% – 17% Estimated Annual Tax Rate $85 – $95 m Capital Expenditures $105 – $110 m Depreciation & Amortization 3 – 8% above 2020 sales growth estimates FUTURE ESTIMATES Our 2020 guidance is built from the IHS Markit’s Automotive mid-January 2020 forecast for global light vehicle production. Our ability to continue outperforming the automotive market will be driven by increased penetration rates of our core mirror products, continued growth of our Full Display Mirror product, and new launches of the Integrated Toll Module product. 2019 PERFORMANCE $1.859 B Revenue 37% Gross Margin $199.8 m Operating Expenses (E, R&D and S, G&A) 15.1% Annual Tax Rate $84.6 m Capital Expenditures $104.7 m Depreciation & Amortization $1.66 EPS 2019 ANNUAL REPO RT 8 9 GENT EX CO RPORATION MARKET PERFORMANCE LIGHT VEHICLE PRODUCTION (per IHS Markit January light vehicle production forecast) — in millions Region North America Europe Japan and Korea China Rest of World Calendar Year 2018 Calendar Year 2019 2018/2019 Variance 16,958,969 16,289,892 21,979,091 21,057,812 13,204,386 13,098,054 26,852,726 24,584,171 15,196,694 13,707,058 -3.95 -4.19 -0.81 -8.45 -9.80 -5.79 Total Light Vehicle Production 94,191,866 88,736,987 AUTO-DIMMING MIRROR SHIPMENTS (thousands) 29,594 IECs 29,651 in 2018 13,286 OECs (+11%) 11,954 in 2018 42,880 TOTAL MIRRORS (+3%) 41,605 in 2018 + = Calendar Year 2020 16,509,666 20,689,082 12,941,618 24,391,837 13,743,653 88,275,856 2019/2020 Variance 1.35% -1.75% -1.19% -0.78% 0.27% -0.52% HISTORICAL COMPARISON A look at the last decade. 2009 2019 Change Revenue $544.5 M $1.859 B Gross Margin EPS Employees 32.6% $0.47 2,371 37.0% $1.66 5,874 241% 13% 253% 148% Domestic Transplant North America Europe Asia-Pacific Total 2016 2017 2018 2019 23% 13% 36% 44% 20% 19% 12% 31% 46% 23% 19% 12% 31% 45% 24% 17% 15% 32% 46% 22% 100% 100% 100% 100% MARKET SHARE ELECTROCHROMIC (EC)/AUTO-DIMMING 93.5% 2019 ANNUAL REPORT 10 11 GENT EX CO RPORATION DIGITAL VISION FD M , CMS, AND FULL DIGITAL SO LU TI O N S Displays and digital technology have continued to become critical components within the automotive market. As camera and sensing technologies develop, advancements in vehicle safety and functionality have moved from high-end-only solutions into the mainstream marketplace. With our background in mirrors, chemistry, vision, sensing, and display technologies, Gentex is well positioned to continue leading this rapidly developing market. Continuing to grow in popularity and capabilities, Gentex’s Full Display Mirror (FDM) enables drivers to choose between a traditional auto-dimming mirror or, with the flip of a switch, choose a crisp, digital video view of their rearward surroundings. This dual-mode solution removes the common obstructions from rearward visibility, including passengers, headrests, and vehicle pillars, while still providing a fail-safe solution if the camera becomes blocked or is unable to function. Perhaps most importantly, FDM provides OEMs with optional, popular, profitable technology for their vehicle trim packages. Cameras Where and When You Want Them As more automakers focus on improving fuel economy to reduce fossil fuel consumption and improve battery-electric vehicle range, the shape and styling of vehicles has changed dramatically. While much of the fuel economy savings are achieved by changing the styling of the vehicle’s front end, Gentex has begun showing a reduced-size dimmable outside mirror that integrates cameras behind the dimmable glass to seamlessly blend advanced technology and traditional safety systems. The hybrid Camera Monitoring System or CMS embeds cameras behind the outside mirror glass, along with a high-mounted rear facing camera, to provide drivers with a customizable three-camera feed for an unmatched level of visibility in any condition. This hybrid solution is designed to maximize consumer adoption and improve the vehicle aerodynamics, while providing a fail-safe solution for all drivers. Fully Digital Gentex has continued to make strides toward fully digital mirror replacement solutions, which have been prototyped throughout the years in future-focused vehicles by nearly every major OEM. As with all optional content, pricing and performance remain absolutely critical, and Gentex was excited to demonstrate a production intent concept at CES in January of 2020. Improvements in camera and display performance, along with reduced electronic component costs, is bringing this exciting technology into the realm of possibility, and Gentex is well positioned to provide robust, profitable solutions for our customers. User-selected Viewing Options Our CMS platform enables the driver to choose between a variety of viewing modes, ranging from a wide angle stitched-view to independently segmented portions of the display. Some viewing modes can even be tied into the vehicle’s blind zone detection system to give drivers more awareness of their surroundings. Hybrid System Benefits Enhanced Vision Removes obstructions from sides and rear of vehicle Fails Safe Mirror views available if digital view is disrupted Smarter System adds additional clarity for side blind zone alerts Fuel Economy Smaller exterior mirrors improve weight, aerodynamic, and fuel savings Regulatory Compliance System designed to meet automaker, safety, and regulatory requirements Cost Effective Optional trim package upgrade path, doesn’t require retooling of vehicle interior Full Display Mirror Shipments 739k 20k 2016 20K 2017 180K 2018 382K 2019 739K List of nameplates with FDM (as of 1/2/2020) Cadillac Escalade Escalade ESV CTS CTS-V XT4 XT5 XT6 CT6 Chevrolet Traverse Silverado 1500 Silverado HD Camaro Bolt Blazer Buick Enclave GMC Sierra 1500 Sierra HD Nissan Armada Infiniti QX80 Subaru Ascent Levorg Forester Lexus LS ES Toyota Alphard Crown Hiace RAV4 Land Rover Range Rover Evoque Discovery Sport Jaguar XE Aston Martin DBS GT Zagato 2019 ANNUAL REPO RT 12 13 G ENT EX CORPO RAT ION connectivity H OMELINK AND INTEGRATED TO LL M OD ULE ( ITM) Built to optimize vehicle connectivity to both wifi-controllable devices and the more commonly installed radio frequency (RF) garage doors, HomeLink® and HomeLink Connect automotive experience of the future. With HomeLink’s RF functionality, OEMs can provide compatibility with nearly ™ seamlessly bridge the gap between today’s consumer and the every garage door manufacturer in North America, ensuring that consumers have reliable control of their garage doors, gates and lights. With HomeLink Connect, Gentex provides additional compatibility for wifi and networked devices, allowing users to control devices across multiple applications and providers with the press of a single button and through one app. HomeLink is on approximately 100M vehicles in the field, and available on nearly 300 nameplates worldwide. Combining Entry-Critical and Convenience Devices HomeLink and HomeLink Connect provide advanced in-vehicle control of entry-critical RF and wifi-enabled devices. Compatible devices include: garage doors, gates, hubs, lights, locks, outlets, switches, thermostats, shades, and an ever-increasing number of appliances. Enhancing In-Vehicle Payments Integrated Toll Module®, or ITM®, provides the critical connection point in the next generation of in-vehicle payment processing. Launched in 2019 with Audi , ITM has enabled drivers to transact tolls quickly, reliably and securely, while maintaining the immaculate design of their new vehicle interior and keeping the windscreen free from obstructions. Additionally, ITM allows OEMs to standardize hardware and software and enhance their compatibility across the majority of tolling locations in North America, significantly reducing cross-state tolling confusion for drivers. As more municipalities look to toll roads to provide funding for infrastructure, ITM is well positioned to provide OEMs with the in-vehicle solution to connect and transact safely and securely across multiple protocols. ITM’s opportunities stretch well beyond traditional tolling, and provides the backbone for vehicle to infrastructure (V2i) communication and payment. ITM offers secure, localized, payment solutions that can be tokenized to meet increased security protocols, and when paired with our biometric security platform, becomes an ideal solution for two-factor authenticated payments. Enabling future in-vehicle payments for: ◼ Tolls ◼ Gas ◼ Point of sale payments ◼ Charging stations ◼ Food and coffee 2019 ANNUAL REPO RT 14 15 GENT EX CO RPORATION dimmable devices COMPLETE LIGHTING CONTRO L Over the years, Gentex has continued to improve on our core electrochromic technology. Our capabilities and quality grew as we moved from interior mirrors to exterior, then into aerospace windows on the Boeing 787. While this was happening, our optical clarity, speed of darkening and clearing, and overall dynamic range have improved due to our relentless engineering and chemical development. These improvements in technology have enabled Gentex to begin prototyping and developing dimmable devices that will change the vehicle environment dramatically. In the car of the future, customizable cabin lighting will give OEMs the ability to enhance the comfort, visibility, and overall vehicle design in ways that have never been seen before. Dimmable sunroofs, moon roofs, side windows, mirrors, sensor shrouds, visors, heads-up displays and other innovative lighting controls will maximize our OEMs’ flexibility and enhance comfort for everyone in the vehicle. Dimmable HUDs and Visors Sensor Concealment Combining our dimmable glass technology with display areas inside As vehicles continue to adopt additional cameras, sensors, and displays of the vehicle ensures critical information doesn’t get washed out in various parts of the vehicle to inform ADAS, safety, and control in bright environments. systems, electrochromics can be utilized to seamlessly conceal or remove glare from these devices. Dimmable Sunroofs and Moonroofs Our electrochromic sunroofs and moonroofs enable occupants to customize the vehicle environment based off pre-established system settings or with manual controls. In addition to improved cabin lighting, a darkened vehicle cabin can keep the vehicle cooler, improving the interior’s life and lowering CO2 emissions through reduced air conditioning requirements. 2019 ANNUAL REPORT 16 17 GENT EX CO RPORATION sensing B I OMETRICS In the last decade, vehicle security has progressed from traditional lock-and-key technology to electronic key fobs and connected phones. Biometric authentication offers OEMs the next step in confirming a driver or passenger’s identity, enabling or disabling access, and customizing the vehicle’s features and functions accordingly. Each biometric system offers different strengths, but our dual iris authentication remains one of the most reliable and secure options, and can provide a robust secondary authentication option for vehicles and alternate mobility solutions. Leveraging our unique experience in cameras, displays, and sensing technology, Gentex has combined an iris-scanning camera, near-infrared emitters and displays to enable the next generation of advanced biometric authentication in consumer-owned, ride-sharing, ride hailing, and fleet-run vehicles. Touch-free, fast and accurate, dual iris authentication provides an additional layer of security and functionality for vehicle owners, operators, and the drivers and passengers of the future. Customized In-Vehicle Experiences Next Generation Security Protocols Biometrics enable vehicle personalization according to user- The biometric system could enable secure access to a variety of determined presets for items such as: cloud-based, connected-vehicle services, enabling or disabling access ◼ Seat position ◼ Mirror adjustments ◼ ◼ Secure payments Steering wheel position ◼ HVAC controls ◼ Music favorites ◼ GPS locations to functions and systems such as: ◼ HomeLink and ◼ Streaming and HomeLink Connect other entertainment Security, Access, and Operation Authorized users gain access to the vehicle, with customized controls and profiles for each different driver. In the case of an unauthorized driver, the vehicle could text its owner, limit functionality, or prevent operation altogether. car-to-home automation ◼ Integrated Toll Module and parking payments ◼ Gas, coffee, fast food and other payments Social media accounts ◼ ◼ Newsfeeds ◼ Online banking ◼ Work files and virtual meetings ◼ Health information ◼ Ride/vehicle sharing accounts 2019 ANNUAL REPO RT 18 19 G ENT EX CORPO RAT ION sustainability COMMIT TING TO SOCIAL AND E NV I RO N M EN TAL P RO GR ESS Committing to Social and Environmental Progress Gentex is committed to making intentional decisions that reflect our desire to be responsible with our resources. Internally, we call this core operational principle “Ownership Mentality.” To our team, it means taking the time to carefully consider the cost of a business decision, which not only encompasses the financial cost but also the cost to our environment, community, and planet. Social and environmental responsibility have been a core focus of our business since its inception. In alignment with our Board of Directors, Gentex incorporates environmental, social, and corporate governance issues into our decision-making processes and our business policies, operating in accordance with all applicable laws and seeking adherence with international human rights conventions. Our sustainability report, which we update and publish annually, provides information on the policies and practices that guide our environmental, social, and corporate governance requirements. It also highlights industry best practices and our continuous improvement initiatives and corresponding results. For the latest update of Gentex sustainability programs, visit: www.gentex.com/corporate/sustainability Scott Ryan Vice President, General Counsel, and Corporate Secretary, Sustainability Reporting Coordinator DIVERSITY , EQUITY AND INCLUSION COMMUNIT Y IN AC T ION Gentex is on a journey to be a world-class employer. One milestone Gentex also recently formed a DE&I Advisory Board, which in that journey started late in 2018, when Gentex installed our first provides advice and perspective from within and outside of Diversity Officer, Joe Matthews, to head up a cross-departmental our company to this council and the executive leadership team. council dedicated to ensuring that everyone at Gentex is treated The DE&I Advisory Board’s mission is to support and promote equitably and feels included in the workplace. Gentex’s Values in Action. One of the outputs of this group was the creation of Gentex’s three Values in Action, which serve as a mission for moving our diversity, equity and inclusion efforts forward. Our corporate leadership team signed this document to signify their support of: ◼ Cultivating a culture of inclusion where every team member belongs. ◼ Valuing differences and our team members’ unique contributions. ◼ Creating a positive environment where all team members have the opportunity to thrive. In addition to these steps, Gentex has created two new business resource groups, Women@Gentex and Gentex Veterans, which are integral components in our overall DE&I program. Both groups have been designed to help promote a dynamic workforce by developing a sense of inclusion and community while providing awareness, professional development and service opportunities. We believe that patient, intentional decisions can create change that is truly transformational, and are dedicated to ensuring this transformational change continues to drive Gentex forward. 2019 ANNUAL REPORT 20 21 GENT EX CO RPORATION I T R A P K - 0 1 Item 1. Business. G E N E R A L D E V E L O P M E N T O F B U S I N E S S Gentex Corporation (the “Company”) was incorporated as a Michigan corporation in 1974. The Company designs, develops, manufactures, markets, and supplies digital vision, connected car, dimmable glass, and fire protection products, including: automatic-dimming rearview and non-dimming mirrors and electronics for the automotive industry; dimmable aircraft windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry. The Company’s largest business segment involves designing, developing, manufacturing and marketing interior and exterior automatic-dimming automotive rearview mirrors that utilize proprietary electrochromic technology to dim in proportion to the amount of headlight glare from trailing vehicle headlamps. Within this business segment, the Company In January 2020 the Company unveiled an innovative lighting technology for medical applications that was co-developed with Mayo Clinic. This new lighting concept represents the collaboration of a global, high-technology electronics company with a world leader in health care. The Company’s new intelligent lighting system combines ambient room lighting with camera-controlled, adaptive task lighting to optimize illumination for surgical and patient-care environments. The system was developed over an 18 month period of collaboration between Company engineers and Mayo Clinic surgeons, scientists, and operating room staff. The teams researched, designed, and rapidly iterated multiple prototypes in order to develop unique features that address major gaps in current surgical lighting solutions. In 2020, the Company will be continuing to work on the intelligent medical lighting system in preparation for clinical trials in order to assess system performance and work toward obtaining any necessary approvals. The Company estimates that it could take 18 to 24 months to complete these trials, before a system could be available for commercial applications. also designs, develops and manufactures various electronics that are value added features to the interior and exterior automotive rearview mirrors Automotive revenues represent approximately 97% of the Company’s total revenue in 2019, mostly consisting of interior and exterior electrochromic as well as electronics for interior visors, overhead consoles, and other locations in the vehicle. The Company ships its products to all of the major automatic-dimming rearview mirrors and automotive electronics. automotive producing regions worldwide, which it supports with numerous sales, engineering and distribution locations worldwide. In 2015, the Company began making shipments of the Full Display Mirror (“FDM”), which is an on-demand, mirror-borne LCD display that streams live, panoramic video of the vehicle’s rearward view in order to improve driver rear vision. Also in 2015, the Company signed an exclusive agreement in the ordinary course of business with TransCore LLP to integrate TransCore’s toll module technology into the vehicle in a first-to-market application referred to as Integrated Toll Module or “ITM”. The interior mirror is an optimal location for a vehicle- integrated toll transponder and it eliminates the need to affix multiple toll tags to the windshield. In 2017, the Company announced an agreement entered into during the ordinary course of business with VOXX International Corporation to become the exclusive aftermarket distributor of the Gentex Aftermarket Full Display Mirror in North America. The Company has also displayed a new three-camera rear vision system that streams rear video – in multiple composite views – to a rearview-mirror-integrated display. Further, the Company has announced an embedded biometric solution for vehicles that leverages iris scanning technology to create a secure environment in the vehicle. There are many use cases for authentication, which range from vehicle security to start functionality to personalization of mirrors, music, seat location and temperature, to the ability to control transactions not only for the ITM system, but also the ride sharing car of the future. The Company believes iris recognition is among the most secure forms of biometric identification, with a false acceptance rate as low as one in 10 million, far superior to facial, voice, and other biometric systems. The Company’s future plans include integrating biometric authentication with N A R R A T I V E D E S C R I P T I O N O F B U S I N E S S The Company designs, develops, manufactures, markets, and supplies digital vision, connected car, dimmable glass, and fire protection products, including: automatic-dimming and non-automatic-dimming rearview mirrors and electronics for the automotive industry; dimmable aircraft windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry. Automotive Products AUTOMOTIVE REARVIEW MIRRORS AND ELECTRONICS. Automotive applications are the largest business segment for the Company, mostly consisting of interior and exterior electrochromic automatic-dimming rearview mirrors and automotive electronics. The Company manufactures interior electrochromic automatic-dimming rearview mirrors that darken to reduce glare and improve visibility for the driver. These electronic interior mirrors can also include additional electronic features such as compass, microphones, HomeLink, lighting assist and driver assist forward safety camera systems, various lighting systems, various telematics systems, ITM systems, and a wide variety of displays. The Company also ships interior non-automatic-dimming rearview mirrors with and without features. many of its other electronic features, including, HomeLink and HomeLink Connect or the Integrated Toll Module. The biometric system allows The Company’s interior electrochromic automatic-dimming rearview mirrors also power the application of the Company’s exterior electrochromic for added security and convenience for multiple drivers by adding an additional factor of authentication for increased security, when a driver automatic-dimming rearview mirrors that darken to reduce glare and improve visibility for the driver. These electronic exterior mirrors typically (or passenger) enters a vehicle. The Company announced in January 2018 that it entered into an exclusive licensing agreement, in the ordinary range in size and shape per automaker specification, but can also include additional features such as turn signal indicators, side blind zone course of business, with Fingerprint Cards AB to deploy its ActiveIRIS iris-scanning biometric technology in automotive applications. indicators, and courtesy lighting. The Company also ships exterior non-automatic-dimming rearview mirrors with similar electronic features In January 2018, the Company announced that an agreement had been signed, in the ordinary course of business, to participate in a round of available in its automatic-dimming applications. financing with Yonomi, Inc., the Company’s partner in home automation technology. The Company continues to work with Yonomi as a home The Company manufactures other automotive electronics products through HomeLink applications in the vehicle including the rearview mirror, automation aggregation partner and the Company has developed an app and cloud infrastructure called HomeLink Connect. HomeLink interior visor, overhead console, or center console. Certain of the Company’s newer features can be located either in the rearview mirror or other Connect is a home automation app that pairs with the vehicle and allows drivers to operate home automation devices from the vehicle’s center locations in the vehicle. Additionally, as the Company expands its Full Display Mirror product and the Integrated Toll Module system, rearward console display. Drivers of HomeLink Connect compatible vehicles will be able to download and configure the app to control many available facing video cameras and integrated toll transponders are being produced and sold. home automation devices and create entire home automation settings. In addition to the foregoing, the Company has addressed improvements to the HomeLink training process by adding functionality within the HomeLink Connect app to allow consumers to pair their garage door openers with their HomeLink buttons. In January 2019, the Company announced that it would be offering, as optional content, its latest generation of variable dimmable windows on the Boeing 777X aircraft. During the third quarter of 2019, the first production shipments of variably dimmable windows were made to Boeing for the 777X program. In January 2020, the Company announced that Airbus will also be offering the Company’s dimmable aircraft windows on its aircraft with production starting in late 2020. The Company produces rearview mirrors and electronics globally for automotive passenger cars, light trucks, pickup trucks, sport utility vehicles, and vans for OEMs, automotive suppliers, and various aftermarket and accessory customers. Automotive rearview mirrors and electronics accounted for 97% of the Company’s consolidated net sales in 2019. The Company is the leading manufacturer of electrochromic automatic-dimming rearview mirrors in the world, and is the dominant supplier to the automotive industry. Competitors for automotive rearview mirrors include Magna International, Panasonic, YH America, Inc., BYD Auto Company, Murakami Kaimeido Company, Tokai Rika Company, Peak Power Automotive, SMR Automotive, ADAYO, Alpine Electronics, Inc., MEKRA Group, Ningbo Feng Mei, Chogqing Yimei, Guangdong, Yuanfeng, Xiamen Intretech, TT Electronics, and the China automotive aftermarket. The Company also supplies electrochromic automatic-dimming rearview mirrors to certain of these rearview mirror competitors. 2019 ANNUAL REPO RT 22 23 G ENT EX CORPO RAT ION AUTOMOTIVE REARVIEW MIRRORS AND ELECTRONICS PRODUCT DEVELOPMENT. The Company continually seeks to develop new products and is currently working to introduce additional advanced-feature automatic-dimming mirrors. Advanced-feature automatic-dimming mirrors currently being offered by the Company include one or more of the following features: SmartBeam®, HomeLink, HomeLink Connect, frameless mirror designs, LED map lamps, compass and temperature displays, telematics, ITM systems, hands free communication, Rear Camera Display Through the Company’s HomeLink function, the Company is the leading supplier of integrated wireless in-vehicle communication devices to the automotive industry for communication with garages, gates, parking barriers, and certain home automation products. HomeLink business continues to be awarded to the Company either through its automatic-dimming rearview mirrors, or through HomeLink electronic modules which are integrated into other areas of the automobile (i.e. visors, overhead consoles, and center consoles). In 2014, the Company announced (“RCD”) interior mirrors, FDM interior mirrors, exterior turn signals, side blind zone indicators and various other exterior mirror features that HomeLink applications for alternative automobiles and vehicle types which include but are not limited to motorcycles, mopeds, snowmobiles, improve safety and field of view. Advanced features currently in development include: biometric authentication systems, hybrid and fully digital tractors, combines, lawn mowers, loaders, backhoes and golf carts. These product developments will utilize the market leading HomeLink camera monitoring systems (“CMS”), digital video recording solutions, driver and cabin monitoring systems, cabin sensing systems, touch screen V system of communication to the home, door locks, garage doors, gates, lights, security systems, and an increasing array of home automation displays for mirrors, and digital enhancements to displays to improve driver safety, among other things. Other automotive products currently in products. The Company believes it is being awarded virtually all business in this area and that while the Company believes it continues development include large area dimmable devices which include, such as sunroof and moonroof applications, driver and passenger windows and to maintain a competitive advantage in this area, the increased focus on vehicle and home connectivity through other devices represents a other window surfaces in vehicles, among others. AUTOMOTIVE REARVIEW MIRRORS AND ELECTRONICS MARKETS AND MARKETING. In North America, Europe and Asia, the Company markets its products primarily through a direct sales force utilizing its sales and engineering offices located in Germany, UK, Sweden, France, Japan, South Korea and China, as well as its headquarters in Michigan. The Company generally supplies automatic-dimming mirrors and mirrors with advanced electronic features to its customers worldwide under annual blanket purchase orders with customers, as well as under long-term agreements with certain customers, entered into in the ordinary course of the Company’s business. The Company is currently supplying mirrors and electronic modules for Aston Martin, BMW Group, Daimler Group, FCA Group, Ford Motor Co., Geely/Volvo, General Motors, Honda Motor Co., Hyundai/Kia, Jaguar/Land Rover, Karma Automotive, Mazda, Mahindra & Mahindra, McLaren, PSA/Opel Group, Renault/Nissan/Mitsubishi Group, Subaru, Suzuki, Tesla, Toyota Motor Company, Volkswagen Group, as well as, shipments to domestic China manufacturers (Borgward, BYD, Chery, Dongfeng, Great Wall, Jianghuai, NextEV, and SAIC). Revenues by major geographic area are disclosed in Note 7 to the Consolidated Financial Statements. Historically, new safety and comfort and convenience options have entered the original equipment automotive market on “top of the line” or luxury model automobiles. As the selection rates for the options on the luxury models increase, they generally become available on more models throughout the product line. The ongoing trend of domestic and foreign automakers is to offer several options as a package. The Company believes that its automatic-dimming mirrors with and without advanced features will continue to be offered in more option packages, and continue to be available on more small and mid-size vehicle models as consumer awareness of these safety and comfort and convenience features continue to grow, and as the Company continues its efforts to make automakers aware of the Company’s technology available on competitive vehicle platforms. With design trends currently reducing visibility in today’s passenger vehicles, the Company’s Full Display Mirror has gained popularity for its ability to leverage a custom camera and mirror-integrated video display to optimize a vehicle’s rearward view. The ability to optimize rearward visibility increases the use case of FDM for many different vehicles, from volume based nameplates to luxury models. Increasing demand for the FDM system appears to be based on the ability to capture video from a rearward-facing camera and streams it to a unique mirror-integrated LCD, which provides the driver with an unobstructed, panoramic view behind the vehicle, while at the same time offering the functionality of a standard rearview mirror with the flip of a switch. AUTOMOTIVE REARVIEW MIRRORS AND ELECTRONICS COMPETITION. The Company continues to be the leading producer of automatic- dimming rearview mirrors in the world and currently is the dominant supplier to the automotive industry with an approximate 94% market share worldwide in 2019 and an approximate 92% market share in 2018. While the Company believes it will retain a dominant position in automatic-dimming rearview mirrors for some time, another U.S. manufacturer, Magna Mirrors, a division of Magna International Inc. (“Magna”), continues to compete for sales to domestic and foreign vehicle manufacturers and is supplying a number of domestic and foreign vehicle models with its versions of auto-dimming mirrors and may have considerably more resources available to it. As such, Magna may present a formidable competitive threat. The Company also continues to sell automatic-dimming exterior mirror sub-assemblies to Magna Mirrors. In addition, a Japanese manufacturer (Tokai Rika) is currently supplying a few vehicle models in Japan with solid-state electrochromic mirrors. There are also a small number of Chinese domestic mirror suppliers that are marketing and selling automatic-dimming rearview mirrors, in low volume, within the domestic China automotive market. Additionally, other companies have demonstrated products that are competitive to the Company’s Full Display Mirror system, and the Company acknowledges that dimming device (e.g., electrochromic) technology is the subject of research and development efforts by numerous third parties. competitive threat to this business. The Company announced in January 2018 the launch of HomeLink Connect, an extension of the Company’s HomeLink feature and an all-new home automation app that pairs with the vehicle and allows drivers to operate home automation devices from the vehicle’s center console display and/or rearview mirror controls. Drivers of HomeLink Connect compatible vehicles will be able to download and configure the app to control a myriad of individual home automation devices, or create entire home automation settings. In August 2019, the Company announced its shipping of the latest version of its HomeLink Connect car-to-home automation system to VOXX Electronics Corporation for sale in the automotive aftermarket. The system consists of a Bluetooth-enabled automatic-dimming mirror with integrated buttons that can be programmed to operate a myriad of radio frequency and cloud-based home automation devices. The Company believes its electrochromic automatic-dimming mirrors and mirrors with advanced electronic features offer significant performance advantages over competing products and the Company makes significant research and development investments to continue to increase and improve the performance advantages of its products. There are numerous other companies in the world conducting research on various technologies, including electrochromics, for controlling light transmission and reflection. The Company currently believes that the electrochromic materials and manufacturing process it uses for automotive mirrors remains the most efficient and cost-effective way to produce such products. While automatic-dimming mirrors using other technologies may eliminate glare, the Company currently believes that each of these other technologies have inherent cost or performance limitations as compared to the Company’s technologies. As the Company continues to expand its automatic-dimming mirror products with additional advanced electronic features and expands the capabilities of its CMOS imager technology for additional features (i.e. SmartBeam, FDM, rear video camera, etc.), as well as continuing to expand the capabilities of the Company’s hybrid and fully digital CMS technology, the Company recognizes that it is competing with considerably larger and more geographically diverse electronics companies that could present a formidable competitive threat in the future as new products/features and technologies are brought to market. Dimmable Aircraft Windows The Company continues to manufacture and sell variable dimmable windows for the passenger compartment on the Boeing 787 Dreamliner series of aircraft. In January 2019, the Company announced that it would be offering, as optional content, its latest generation of variable dimmable windows on the Boeing 777X aircraft. During the third quarter of 2019, the first production shipments of variably dimmable windows were made to Boeing for the 777X program. In January 2020, the Company announced that Airbus will also be offering, as optional content, the Company’s dimmable aircraft windows on its aircraft with production starting in late 2020. MARKETS AND MARKETING. The Company markets its variable dimmable windows to aircraft manufacturers and airline operators globally. COMPETITION. The Company’s variable dimmable aircraft windows are the first commercialized product of its kind for original equipment installation in the aircraft industry. Other manufacturers are working to develop and sell competing products utilizing other technology in the aircraft industry for aftermarket or original equipment installation. The Company’s success with electrochromic technology provides potential opportunities and use cases for other commercial applications, which the Company continues to explore. 2019 ANNUAL REPO RT 24 25 G ENT EX CORPO RAT ION Fire Protection Products The Company manufactures photoelectric smoke detectors and alarms, visual signaling alarms, photoelectric smoke alarms and electrochemical carbon monoxide alarms, electrochemical carbon monoxide alarms and detectors, audible and visual signaling appliances, and bells and speakers for use in fire detection systems in office buildings, hotels, and other commercial and residential establishments. MARKETS AND MARKETING. The Company’s fire protection products are sold directly to fire protection and security product distributors under the Company’s brand name, to electrical wholesale houses, and to original equipment manufacturers of fire protection systems under both the Company’s brand name and private labels. The Company markets its fire protection products primarily in North America, but also globally through regional sales managers and manufacturer representative organizations. COMPETITION. The fire protection products industry is highly competitive in terms of both the smoke detectors and signaling appliance markets. The Company estimates that it competes principally with eight manufacturers of smoke detection products for commercial use and approximately four manufacturers within the residential market, three of which produce photoelectric smoke detectors. In the signaling appliance markets, the Company estimates it competes with approximately seven manufacturers. While the Company faces significant competition in the sale of smoke detectors and signaling appliances, it believes that the introduction of new products, improvements to its existing products, its diversified product line, and the availability of special features will permit the Company to maintain its competitive position. Trademarks and Patents The Company owns 38 U.S. Registered Trademarks and 660 U.S. Patents, of which 31 Registered Trademarks and 583 patents relate to electrochromic technology, automotive rearview mirrors, microphones, displays, cameras, sensor technology, and/or HomeLink products. These Patents expire at various times between 2020 and 2038. The Company believes that these patents provide the Company a competitive advantage in its markets, although no single patent is necessarily required for the success of the Company’s products. The Company also owns 336 foreign Registered Trademarks and 877 foreign patents, of which 320 Registered Trademarks and 855 patents relate to electrochromic technology, automotive rearview mirrors, microphones, displays, cameras, sensor technology, and/or HomeLink products. These patents expire at various times between 2020 and 2044. The Company believes that the competitive advantage derived in the relevant foreign markets for these patents is comparable to that applicable in the U.S. market. The Company owns 64 U.S. Patents and 11 foreign patents that relate specifically to the Company’s variable dimmable windows. The U.S. Patents expire at various times between 2020 and 2038, while the foreign patents expire at various times between 2021 and 2034. The Company owns 7 U.S. Registered Trademarks, 13 U.S. Patents, 16 foreign Registered Trademarks, and 11 foreign patents that relate to the Company’s fire protection products. The U.S. Patents expire at various times between 2021 and 2035, while the foreign patents expire at various times between 2020 and 2030. The Company believes that the competitive advantage provided by these patents is relatively small. The Company also has in process 256 U.S. Patent applications, 503 foreign patent applications, and 31 Registered Trademark applications. The Company continuously seeks to improve its core technologies and apply those technologies to new and existing products. As those efforts produce patentable inventions, the Company expects to file appropriate patent applications. In addition, the Company periodically obtains intellectual property rights, in the ordinary course of the Company’s business, to strengthen its intellectual property portfolio and minimize potential risks of infringement. Miscellaneous The Company considers itself to be engaged in the design, development, manufacturing, marketing, and supply of digital vision, connected car, dimmable glass, and fire protection products, including: automatic-dimming rearview mirrors, non-automatic-dimming rearview mirrors and electronics for the automotive industry; variable dimmable windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry. The Company has several important customers within the automotive industry, three of which each account for 10% or more of the Company’s net sales in 2019 (including direct sales to OEM customers and sales through their Tier 1 suppliers): Volkswagen Group, Toyota Motor Company, and General Motors. The loss of any of these customers (or certain other significant customers) could have a material adverse effect on the Company’s business, financial condition, and/or results of operations. As of February 1, 2020, the Company had 5,874 full-time employees. None of the Company’s employees are represented by a labor union or other collective bargaining representative. The Company believes that its relations with its employees are in good standing. See “Executive Officers of the Registrant” in Part III, Item 10. Available Information The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, will be made available, free of charge, through the Investor Information section of the Company’s website (http://ir.gentex.com) as soon as practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issues that a company files electronically with the SEC. Item 1A. Risk Factors. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements contained in this communication that are not purely historical are forward-looking statements. Forward-looking statements give the Company’s current expectations or forecasts of future events. These forward-looking statements generally can be identified by the use of words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “goal”, “hope”, “may”, “plan”, “poised”, “project”, “will”, and variations of such words and similar expressions. Such statements are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control, and could cause the Company’s results to differ materially from those described. These risks and uncertainties include, without limitation: changes in general industry or regional market conditions; changes in consumer and customer preferences for our products (such as cameras replacing mirrors and/ or autonomous driving); our ability to be awarded new business; continued uncertainty in pricing negotiations with customers; loss of business from increased competition; changes in strategic relationships; customer bankruptcies or divestiture of customer brands; fluctuation in vehicle production schedules (including the impact of customer employee strikes); changes in product mix; raw material and electronic component shortages; higher raw material, fuel, energy and other costs; unfavorable fluctuations in currencies or interest rates in the regions in which we operate; costs or difficulties related to the integration and/or ability to maximize the value of any new or acquired technologies and businesses; changes in regulatory conditions; warranty and recall claims and other litigation and customer reactions thereto; possible adverse results of pending or future litigation or infringement claims; changes in tax laws and interpretations; import and export duty and tariff rates in or with the countries with which we conduct business; and negative impact of any governmental investigations and associated litigations including securities litigations relating to the conduct of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise any forward- looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the NASDAQ Global Select Market. Forward-looking statements include content supplied by IHS Markit Light Vehicle Production Forecast ( January 16, 2020) (http://www.gentex.com/forecast-disclaimer). The following risk factors, together with all other information provided in this Annual Report on Form 10-K should be carefully considered. AUTOMOTIVE INDUSTRY. Customers within the auto industry comprise approximately 97% of our net sales. The automotive industry has always been cyclical and highly impacted by levels of economic activity. The current economic environment, while perhaps relatively stable domestically, continues to be uncertain when considering the global automotive market, and continues to cause increased financial and production stresses evidenced by volatile automotive production levels (including continued decreases in light vehicle production in China), volatility with customer orders, supplier part and material shortages, automotive and Tier 1 supplier plant shutdowns, customer and supplier financial issues, commodity material cost increases and/or supply constraints, tariffs, consumer vehicle preference shifts (where we may have a lower penetration rate and lower content per vehicle), and supply chain stresses, all of which have been exacerbated by the coronavirus. If automotive customers (including their Tier 1 suppliers) and suppliers experience plant shutdowns, work stoppages, strikes (such as the employee strike at General Motors in the fourth quarter of 2019, which negatively impacted revenue, gross margin, etc. in the fourth quarter and year ended December 31, 2019), part shortages, etc., it could disrupt our shipments to these customers, which could adversely affect our business, financial condition, and/or results of operations. Automakers continue to experience volatility and uncertainty in executing planned new programs on time, due in part to continued 2019 ANNUAL REPO RT 26 27 G ENT EX CORPO RAT ION vehicle complexity increases, which can result in delays or cancellations of new vehicle platforms, package configurations, and inaccurate volume In July 2016, a revision to UN-ECE Regulation 46 was published with an effective date of June 18, 2016, which allows for camera monitor forecasts. This makes it challenging for us to forecast future sales and manage costs, inventory, capital, engineering, research and development, systems to replace mirrors within Japan and European countries. Since January 2017, camera monitoring systems are also permitted as an and human resource investments, in addition to the aforementioned factors. KEY CUSTOMERS. We have a number of large customers, including three automotive customers which each account for 10% or more of our annual net sales in 2019 (including direct sales to OEM customers and sales through their Tier 1 suppliers): Volkswagen Group, Toyota Motor Company, and General Motors. The loss of all or a substantial portion of the sales to, or decreases in production by, any of these customers (or certain other significant customers) could have a material adverse effect on our business, financial condition, and/or results of operations. PRICING PRESSURES. We continue to experience on-going pricing pressures from our automotive customers and competitors, which have affected, and which will continue to affect our profit margins to the extent that we are unable to offset the price reductions with engineering and purchasing cost reductions, productivity improvements, increases in unit shipments of mirrors and electronics with advanced features, and/or new or advanced technologies, each of which pose an ongoing challenge, which could adversely impact our business, financial condition, and/or results of operations. TARIFFS. The geo-political environment between the Unites States and other jurisdictions, including China and the European Union, continues to cause uncertainty on tariffs and trade. Starting in 2018, and throughout calendar year 2019, the United States enacted new tariffs on numerous raw materials that the Company imports from China, and likewise China also enacted retaliatory tariffs on the finished goods that the Company imports into China for distribution and sale in the China market. Such tariffs increase the Company’s input costs, and potentially challenge the Company’s competitive position in the China market. Even though in January 2020, the United States and China came to agreement on the first phase of a trade deal to halt tariff increases, uncertainty remains. The continuance of these tariffs and/or escalation of disputes in the geopolitical environment will continue to interfere with automotive supply chains and may have a continued negative impact on the Company’s business, financial condition, and/or results of operations. COMPETITION. We recognize that Magna Mirrors, our main competitor, may have considerably more resources available to it, and may present a formidable competitive threat. Additionally, other companies have demonstrated products that are competitive to our Full Display Mirror alternative to replace mirrors in the Korean market. Notwithstanding the foregoing, the Company continues to believe rearview mirrors provide a robust, simple and cost effective means to view the surrounding areas of a vehicle and remain the primary safety function for rear vision today. Cameras, when used as the primary rear vision delivery mechanism, have some inherent limitations such as: electrical failure; cameras being blocked or obstructed; depth perception challenges; and viewing angle of the camera. Nonetheless, the Company continues designing and manufacturing not only rearview mirrors, but CMOS imagers and video displays as well. The Company believes that combining video displays with mirrors provides a more robust product by addressing all driving conditions in a single solution that can be controlled by the driver. The Company has been in production with the Company’s Full Display Mirror since 2015 and has been awarded programs with ten (10) OEM customers. The Company is currently shipping production Full Display Mirrors to five automaker customers, which are General Motors, Subaru, Toyota, Nissan, and Jaguar Land Rover. The Company’s CMS solution uses three cameras to provide a comprehensive view of the sides and rear of the vehicle while still providing the traditional safety of interior and exterior mirrors, that still function when cameras are obstructed, or not functioning. The Company recently announced the CMS development program with Aston Martin. The Company has also previously announced that the Company continues to develop in the areas of imager performance, camera dynamic range, lens design, image processing from the camera to the display, and camera lens cleaning. The Company acknowledges that as such technology evolves over time, such as cameras replacing mirrors and/or autonomous driving, there could be increased competition. PRODUCT MIX. We sell products that have varying profit margins. Our financial performance can be impacted depending on the mix of products we sell and to which customers, during a given period. The automotive industry is subject to rapid technological change, vigorous competition, short product life cycles and cyclical, ever-changing consumer demand patterns. When our customers are adversely affected by these factors, we may be similarly affected to the extent that our customers reduce the volume of orders for our products. As a result of such changes and circumstances impacting our customers, sales mix can shift which may have either favorable or unfavorable impact on revenue and would include shifts in regional growth, in OEM sales demand, as well as in consumer demand related to vehicle segment purchases and content penetration. A decrease in consumer demand for specific types of vehicles where we have traditionally provided higher value content could have a significant effect on our business, financial condition, and/or results of operations. Our forward guidance and estimates assume a certain geographic sales system and other products. We acknowledge that dimming device (e.g., electrochromic) technology is the subject of research and development mix as well as a product sales mix. If actual results vary from this projected geographic and product mix of sales, our business, financial condition, efforts by numerous third parties. and/or results of operations could be negatively impacted. For example, our SmartBeam product is a driver-assist feature for headlamp lighting control that competes with other multiple-function driver- assist features that include headlamp lighting control as one of the multiple functions. While we believe SmartBeam is a low cost solution for BUSINESS COMBINATIONS. We anticipate that acquisitions of businesses and assets may play a role in our future growth. We cannot be certain that we will be able to identify attractive acquisition targets, have resources available for or obtain financing for acquisitions on satisfactory terms, a safety feature that makes nighttime driving safer by maximizing a vehicle’s high-beam usage, competition from multiple-function driver-assist successfully acquire identified targets or manage timing of acquisitions with capital obligations across our businesses. Additionally, we may products has already and could continue to impact the success of SmartBeam. On March 31, 2014 the Alliance of Automobile Manufacturers petitioned the National Highway Traffic Safety Administration (“NHTSA”) to allow automakers to use camera monitoring systems (“CMS”) as an option to replace conventional rearview mirrors within North America, however, no final rule or legislation was made in response to this petition. At the annual SAE Government-Industry Meeting in January 2017, NHTSA requested that SAE develop Recommended Procedures for test protocols and performance criteria for CMS that would replace mirror systems on light vehicles in the U.S. market. SAE assigned the task to the Driver Vision Committee, and the SAE Driver Vision Committee created a CMS Task Force to draft the Recommended Procedures. NHTSA published a report dated October 2018 related to camera not be successful in integrating acquired businesses into our existing operations, achieving projected synergies, and/or maximizing the value of acquired technologies and businesses. Competition for acquisition opportunities in the various industries in which we operate already exists and may increase, thereby potentially increasing our costs of making acquisitions or causing us to refrain from making further acquisitions. We are also subject to applicable antitrust laws and must avoid anticompetitive behavior. These and other acquisition-related factors may negatively and adversely impact our business, financial condition, and/or results of operations. INTELLECTUAL PROPERTY. We believe that our patents and trade secrets provide us with a competitive advantage in automotive rearview mirrors, variable dimmable windows, certain electronics, and fire protection products, although no single patent is necessarily required for the monitoring systems for outside mirror replacements. On October 10, 2019, an Advanced Notice of Proposed Rulemaking (ANPRM) was success of our products. The loss of any significant combination of patents and trade secrets regarding our products could adversely affect our published seeking public comment on permitting camera-based rear visibility systems, as an alternative to inside and outside rearview mirrors business, financial condition, and/or results of operations. Lack of intellectual property protection in a number of countries, including China, required under Federal motor vehicle safety standard (FMVSS) No. 111, “Rear Visibility,” which currently requires that vehicles be equipped represents a current and on-going risk for the Company. with rearview mirrors to provide drivers with a view of objects that are to their side or to their side and rear. This ANPRM builds on NHTSA’s prior efforts to obtain supporting technical information, data, and analysis on CMS so that the agency can determine whether these systems can provide the same level of safety as the rearview mirrors currently required under FMVSS No. 111. The ANPRM states that one reason NHTSA is seeking additional information is because research conducted by NHTSA and others between 2006 and 2017 has consistently shown that prototype and preproduction camera-based rear visibility systems can exhibit safety-relevant performance issues. On October 18, 2019, a petition for temporary exemption from FMVSS No. 111 submitted by Audi of America was published requesting NHTSA to grant a two-year exemption to sell up to 2,500 vehicles for each twelve month period (up to 5,000 vehicles) that are equipped with camera monitoring systems and do not include FMVSS No. 111 compliant outside mirrors. NEW TECHNOLOGY AND PRODUCT DEVELOPMENT. We continue to invest significantly in engineering, research and development projects. Should these efforts ultimately prove unsuccessful, our business, financial condition, and/or results of operations could be adversely affected. INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS. A successful claim of patent or other intellectual property infringement and damages against us could affect business, financial condition, and/or results of operations. If a person or company claims that our products infringed their intellectual property rights, any resulting litigation could be costly, time consuming, and would divert the attention of management and key personnel from other business issues. The complexity of the technology involved in our business and the uncertainty of intellectual property litigation significantly increases these risks and makes such risk part of our on-going business. To that end, we periodically 2019 ANNUAL REPO RT 28 29 G ENT EX CORPO RAT ION obtain intellectual property rights, in the orbdinary course of business, to strengthen our intellectual property portfolio and minimize potential risks of infringement. The increasing tendency of patents granted to others on combinations of known technology is a potential threat to our GOVERNMENT REGULATIONS. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic Company. Any of these adverse consequences could potentially have an effect on our business, financial condition and/or results of operations. of Congo (“DRC”) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for CREDIT RISK. Certain automakers and Tier 1 customers from time to time may consider the sale of certain business segments or bankruptcy as a result of financial stress. Should one or more of our larger customers (including sales through their Tier 1 suppliers) declare bankruptcy or sell their business, it could adversely affect the collection of receivables, our business, financial condition, and/or results of operations. The current economic environment continues to cause increased financial pressures and production stresses on our customers, which could impact the timeliness of customer payments and ultimately the collectability of receivables. Our allowance for doubtful accounts primarily relates to financially distressed automotive mirror and electronics customers. We continue to work with these financially distressed customers in collecting past due balances. Refer to Note 1 of the Consolidated Financial Statements for additional details regarding our allowance for doubtful accounts. SUPPLY CHAIN DISRUPTIONS. Due to the just-in-time supply chains within our business and the automotive industry, a disruption in a supply chain caused by one or more of our suppliers and/or an unrelated Tier 1 supplier due to part shortages, natural disasters, coronavirus, work stoppages, strikes, bankruptcy, etc. could disrupt our shipments to one or more automakers or Tier 1 customers, which could adversely affect our business, financial condition, and/or results of operations. BUSINESS DISRUPTIONS. Manufacturing of our proprietary products employing electro-optic technology is performed at our manufacturing facilities in Zeeland and Holland, Michigan. One of our manufacturing facilities is located in Holland, Michigan, which is approximately three miles from our other manufacturing facilities in Zeeland, Michigan. Should a catastrophic event occur, our ability to manufacture product, complete existing orders and provide other services could be severely impacted for an undetermined period of time. We have purchased business interruption insurance to address some of these risks. Our inability to conduct normal business operations for a period of time may have an adverse impact on our business, financial condition, and/or results of operations. IT INFRASTRUCTURE. A failure of our information technology (“IT”) infrastructure could adversely impact our business, financial condition, and/or results of operations. We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. For example, we have implemented enterprise resource planning and other IT systems in certain aspects of our businesses over a period of several years and continue to update and further implement new systems going forward. These systems may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have an adverse effect on our business, financial condition, and/or results of operations. We, and certain of our third-party vendors, receive and store personal information in connection with our human resources operations and other aspects of our business. Despite our implementation of security measures, our IT systems, like all IT systems, are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. A material network breach in the security of our IT systems could include the theft of our intellectual property, trade secrets or customer information. To the extent that any disruptions or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential or customer information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against the Company and ultimately harm our business, financial condition, and/or results of operations. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. EMPLOYEES. Our business success depends on attracting and retaining qualified personnel. Throughout our Company, our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure that we have the leadership capacity with the necessary skill sets and experience and a skilled workforce could impede our ability to deliver our growth objectives and execute our strategic plan. Organizational and reporting changes within management could result in, and low unemployment generally has caused, increased turnover. In addition, any unplanned turnover or inability to attract and retain key employees, including managers, could have a negative effect on our business, financial condition and/or results of operations. those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements required due diligence efforts in 2013, 2014, 2015, 2016, 2017, 2018, and 2019, and the Company has disclosed its findings annually to the SEC on Form SD around May 30 each year. As there may be only a limited number of suppliers offering “conflict free” minerals, the Company cannot be certain that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, the Company may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if the Company is unable to sufficiently verify the origins for all conflict minerals used in the Company’s products through the procedures the Company may implement. The European New Car Assessment Program (“Euro NCAP”) provides an incentive for automobiles sold in Europe to apply safety technologies that include driver assist features such as lane detection, vehicle detection, and pedestrian detection as standard equipment. Euro NCAP compliant driver assist systems are also capable of including high beam assist as a function. The increased application of Euro NCAP on European vehicles has impacted and could continue to impact take rates for the Company’s SmartBeam application on these vehicles. On December 8, 2015, NHTSA proposed changes to the Administration’s 5-Star Safety Ratings for new vehicles (also known as the New Car Assessment Program or NCAP) and initiated a comment period. The proposed changes will, for the first time, encompass assessment of crash-avoidance technologies, which includes lower beam headlamp performance, semi-automatic headlamp switching, and blind spot detection. NHTSA originally intended to implement the enhancements in NCAP in 2018 beginning with model year 2019 vehicles. The NCAP implementation has been delayed. Under these proposed changes, the Company believes that its SmartBeam technology will qualify with the semi-automatic headlamp NCAP rating system, and that its SmartBeam technology and exterior mirrors with blind spot alert lighting can be included in a system that qualifies with the lower beam headlamp performance and blind spot detection NCAP rating system, respectively. On October 16, 2019, NHTSA issued a press release comparing NCAP to other regions’ version of NCAP, identified new technologies that are not currently included in NCAP, and suggested Congress legislatively direct actions to improve NCAP. On October 12, 2018, NHTSA published a Notice of Proposed Rulemaking (“NPRM”) for amendments to Federal Motor Vehicle Safety Standard (“FMVSS”) No. 108: Lamps, reflective devices, and associated equipment, and initiated a comment period. The NPRM proposes amendments that would permit the certification of adaptive driving beam head-lighting systems, if the manufacturer chooses to equip vehicles with these systems. NHTSA proposes to establish appropriate performance requirements to ensure the safe introduction of adaptive driving beam head-lighting systems if equipped on newly manufactured vehicles. The Company believes that its dynamic SmartBeam lighting control system (dynamic forward lighting or DFL), which has been sold in markets outside of North America for several years, will meet the requirements of the new FMVSS No. 108 standards, if amended. The Company’s SmartBeam application has and will continue to be affected by increased competition suppliers of multi-function driver assist camera products, which are able to achieve some of the same functionality as SmartBeam but at a lower cost, due to other suppliers leveraging similar hardware costs, but offering products with multiple software features. As noted, on October 10, 2019, an ANPRM was published seeking public comment on permitting camera-based rear visibility systems, as an alternative to inside and outside rearview mirrors required under FMVSS No. 111, “Rear Visibility,” which currently requires that vehicles be equipped with rearview mirrors to provide drivers with a view of objects that are to their side or to their side and rear. This ANPRM builds on NHTSA’s prior efforts to obtain supporting technical information, data, and analysis on CMS so that the agency can determine whether these systems can provide the same level of safety as the rearview mirrors currently required under FMVSS No. 111. The ANPRM states that one reason NHTSA is seeking additional information is because research conducted by NHTSA and others between 2006 and 2017 has consistently shown that prototype and preproduction camera-based rear visibility systems can exhibit safety-relevant performance issues. 2019 ANNUAL REPO RT 30 31 G ENT EX CORPO RAT ION INTERNATIONAL OPERATIONS. We currently conduct operations in various countries and jurisdictions, including purchasing raw materials and other supplies from many different countries around the world, which subjects us to the legal, political, regulatory and social requirements FLUCTUATIONS IN MARKET PRICE. The market price for our common stock has fluctuated, ranging from a low closing price of $19.55 to a high closing price of $29.74 during calendar year 2019. The overall market and the price of our common stock may continue to fluctuate. There as well as various economic conditions in these jurisdictions. Some of these countries are considered growth markets. International sales and may be a significant impact on the market price for our common stock relating to the issues discussed above or due to any of the following: operations, especially in growth markets, subject us to certain risks inherent in doing business abroad, including: ◼ Exposure to local economic, political and labor conditions; ◼ Unexpected changes in laws, regulations, trade or monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the U.S. and other foreign countries; ◼ Tariffs (as discussed herein), quotas, customs and other import or export restrictions and other trade barriers; ◼ Natural disasters, political crises, and public health crises (such as the coronavirus in Wuhan, China), which have caused and will likely continue to cause downtime and closures at both supplier and customer facilities; ◼ Brexit, and its impact; ◼ Expropriation and nationalization; ◼ Difficulty of enforcing agreements, collecting receivables and protecting assets through non-U.S. legal systems; ◼ Reduced intellectual property protection; ◼ Withholding and other taxes on remittances and other payments by subsidiaries; ◼ Investment restrictions or requirements; ◼ Export and import restrictions; ◼ Violence and civil unrest in local countries; ◼ Compliance with the requirements of an increasing body of applicable anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws of various other countries; and ◼ Exposure related to buying, selling and financing in currencies other than the local currencies of the countries in which we operate. OTHER. Other issues and uncertainties which could adversely impact our business, financial condition, and/or results of operations include: ◼ Volatility in commodity prices may adversely affect our business, financial condition and/or results of operations. If commodity prices rise, and if we are unable to recover these cost increases from our customers, such increases could have an adverse effect on our business, financial condition and/or results of operations; ◼ Increasing interest rates impact our financial performance due to an increase in realized losses on the sale of fixed income investments and/or recognized losses due to an Other-Than-Temporary Impairment adjustment on held-to-maturity securities; ◼ General economic conditions continue to be of concern in many of the regions in which we do business, given that our primary industry is greatly impacted by overall general economic conditions. Any continued adverse worldwide economic conditions, currency exchange rates, trade war, war or significant terrorist acts, could each affect worldwide automotive sales and production levels; ◼ Manufacturing yield issues may negatively impact our business, financial condition and/or results of operations; and ◼ Obligations and costs associated with addressing quality issues or warranty claims may adversely affect our business, financial condition and/or results of operations. ANTITAKEOVER PROVISIONS. Our articles of incorporation, bylaws, and the laws of the state of Michigan include provisions that may provide our board of directors with adequate time to consider whether a hostile takeover offer is in our best interest and the best interests of our shareholders. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control. ◼ Variations in our anticipated or actual operating results or the results of our competitors; ◼ Changes in investors’ or analysts’ perceptions of the risks and conditions of our business and in particular our primary industry; ◼ Intellectual property litigation and infringement claims; ◼ The size of the public float of our common stock; ◼ Market conditions, including the industry in which we operate; and ◼ General macroeconomic conditions. Item 1B. Unresolved Staff Comments. None Item 2. Properties. As of December 31, 2019 the Company operates primarily out of facilities in Zeeland and Holland, Michigan, which consist of manufacturing, warehouse, and office space. The Company also operates a chemistry lab facility to support production in Zeeland, Michigan. In addition, the Company operates overseas offices in Europe and Asia as further discussed below. The location, square footage and use of the most significant facilities at December 31, 2019 were as follows: Owned Locations Square Footage Date of Acquisition/Build(1) Use Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Zeeland, MI Holland, MI Erlenbach, Germany Shanghai, China Shanghai, China 26,600 161,200 70,000 70,000 359,100 168,900 334,000 100,000 31,800 349,600 258,400 242,300 90,000 25,000 40,000 1970 1972 1989 1989 1996 2000 2006 2010 2011 2016 2018 2012 2003 2006 2017 Manufacturing, Office Manufacturing, Office Manufacturing Office Manufacturing Manufacturing Manufacturing, Office Manufacturing, Warehouse Office Manufacturing, Warehouse Warehouse Manufacturing, Warehouse Office Office, Warehouse Office, Warehouse (1) Date of Acquistion/Build refers to first year of operations, and does not refer to subsequent additions or expansions. 2019 ANNUAL REPO RT 32 33 G ENT EX CORPO RAT ION In the fourth quarter of 2019, the Company began construction of a 36,000 square-foot addition to its main corporate office and manufacturing facility to expand its chemistry lab facilities. The total cost of this addition is estimated to be $10 million and will be funded from cash and cash equivalents on hand. The facility is expected to be operational by the fourth quarter of 2020. The Company additionally has leased sales and engineering offices throughout Europe and Asia to support its sales and engineering efforts: Country Germany Japan United Kingdom France Sweden Korea Number of Leased Offices 3 3 1 1 1 1 The Company’s Automotive Products segment operates in virtually all of the foregoing facilities. The Company’s Other segment operates in certain Zeeland, Michigan facilities. CAPACITY. The Company believes its existing and planned facilities are currently suitable, adequate, and have the capacity required for current and near-term planned business. Nevertheless, the Company continues to evaluate longer term facilities needs. The Company estimates that it currently has building capacity to manufacture approximately 33 – 36 million interior automatic-dimming mirror units annually, based on current product mix. The Company evaluates equipment capacity on an ongoing basis and adds equipment as needed. In 2019, the Company shipped 29.6 million interior automatic-dimming mirrors. The Company’s automotive exterior mirror manufacturing facility has an estimated building capacity to manufacture approximately 14 – 17 million units annually, based on the current product mix. The Company evaluates equipment capacity on an ongoing basis and adds equipment as needed. In 2019, the Company shipped approximately 13.3 million exterior automatic-dimming mirrors. Item 3. Legal Proceedings. The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Such matters are subject to many uncertainties and outcomes are not predictable. The Company does not believe however, that at the current time, there are any matters that constitute material pending legal proceedings that will have a material adverse effect on the financial position, future results of operations, or cash flows of the Company. Item 4. Mine Safety Disclosures. Not applicable. Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. ( A ) The Company’s common stock trades on The Nasdaq Global Select Market under the symbol GNTX. As of February 1, 2020, there were 2,238 record-holders of the Company’s common stock and restricted stock. See Item 12 of Part III with respect to “Equity Compensation Plan Information”, which is incorporated herein by reference. Stock Performance Graph: The following graph depicts the cumulative total return on the Company’s common stock compared to the cumulative total return on the Nasdaq Composite Index (all U.S. companies) and the Dow Jones U.S. Auto Parts Index (excluding tire and rubber makers). The graph assumes an investment of $100 on the last trading day of 2014 and reinvestment of dividends in all cases. I I T R A P K - 0 1 l e u a V k c o t S $220 $200 $180 $160 $140 $120 $100 $80 $60 4 1 / 2 1 5 1 / 3 5 1 / 6 5 1 / 9 5 1 / 2 1 6 1 / 3 6 1 / 6 6 1 / 9 6 1 / 2 1 7 1 / 3 7 1 / 6 7 1 / 9 7 1 / 2 1 8 1 / 3 8 1 / 6 8 1 / 9 8 1 / 2 1 9 1 / 3 9 1 / 6 9 1 / 9 9 1 / 2 1 NASDAQ Composite Dow Jones US Auto Parts Gentex Corporation In March 2019, the Company’s Board of Directors approved a continuing resolution to pay a quarterly dividend at an increased rate of $0.115 per share until the board takes other action with respect to the payment of dividends. The Company intends to continue to pay a quarterly cash dividend and will consider future dividend rate adjustments based on the Company’s financial condition, profitability, cash flow, liquidity and other relevant business factors. ( B ) Not applicable. ( C ) The Company has in place and has announced a share repurchase plan. As previously disclosed, the Company may purchase authorized shares of its common stock under the plan based on a number of factors, including: market, economic, and industry 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. The plan does not have an expiration date, but the Board of Directors reviews such plan periodically. 2019 ANNUAL REPO RT 34 35 G ENT EX CORPO RAT ION The following is a summary of share repurchase activity during 2019: Period January 2019 February 2019 March 2019 April 2019 May 2019 June 2019 July 2019 August 2019 September 2019 October 2019 November 2019 December 2019 Total Issuer Purchase of Equity Securities Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased As Part of a Publicly Announced Plan* Maximum Number of Shares That May Yet Be Purchased Under the Plan* 75,001 $ 2,499,850 2,150,087 240,037 1,858,307 976,365 380,220 1,828,442 1,360,915 520,345 900,765 985,604 13,775,938 21.42 20.24 20.49 23.07 22.20 23.64 27.22 26.69 27.54 27.98 28.75 28.66 75,001 2,499,850 2,150,087 240,037 1,858,307 976,365 380,220 1,828,442 1,360,915 520,345 900,765 985,604 13,775,938 33,766,256 31,266,406 29,116,319 28,876,282 27,017,975 26,041,610 25,661,390 23,832,948 22,472,033 21,951,688 21,050,923 20,065,319 * See above paragraph with respect to the publicly announced share repurchase plan Item 6. Selected Financial Data. Percentage of Net Sales Year Ended December 31, Percentage Change 2019 2018 2017 2019 Vs 2018 2018 Vs 2017 100.0% 100.0% 100.0% 63.0 37.0 6.2 4.6 10.7 26.3 0.6 26.9 4.1 62.4 37.6 5.8 4.1 9.9 27.7 0.8 28.5 4.6 61.3 38.7 5.6 4.0 9.5 29.2 0.5 29.6 7.0 22.8% 23.9% 22.7% 1.4% 2.4 (0.3) 7.0 13.1 9.6 (3.9) (14.7) (4.1) (10.0) (3.0%) 2.2% 3.9 (0.6) 7.4 5.3 6.5 (2.9) 65.0 (1.8) (32.7) 7.6% Net Sales Cost of Goods Sold Gross Profit Operating Expenses: Engineering, Research and Development Selling, General and Administrative Total Operating Expenses: Operating Income Other Income/(Expense) Income Before Provision for Income Taxes Provision for Income Taxes Net Income Results of Operations: 2019 to 2018 NET SALES. In 2019, Company net sales increased by $24.8 million, or 1% compared to the prior year. Net sales for 2019 were negatively impacted by: lower than forecasted global vehicle production rates for calendar year 2019, which were down 6% on a a year over year basis; and by approximately 1% from the strike at General Motors which occurred in the fourth quarter of 2019. Despite these negative impacts, automotive net sales increased as a result of a 3% increase in automatic-dimming mirror shipments, from 41.6 million units in 2018 to 42.9 million units in 2019, due more so to growth within the Company’s domestic market than its international markets. North American automotive mirror shipments increased 8% in 2019 when compared with the prior year, primarily due to increased penetration of exterior automatic- (dollars in thousands, except per share data) dimming mirrors. Net Sales Net Income Earnings Per Share (Fully Diluted) Gross Profit Margin Cash Dividends per Common Share Total Assets Long-Term Debt Outstanding at Year End 2019 1,858,897 424,684 1.66 37.0% 0.460 2,168,803 $ $ $ $ $ 2018 1,834,064 437,883 1.62 37.6% 0.440 2,085,434 $ $ $ $ $ 2017 1,794,873 406,792 1.41 38.7% 0.390 2,352,054 $ $ $ $ $ 2016 1,678,925 347,591 1.19 39.8% 0.355 2,309,620 — $ — $ — $ 178,125 2015 1,543,618 318,470 1.08 39.1% 0.335 2,148,673 225,625 $ $ $ $ $ $ $ $ $ $ $ $ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations The following table sets forth for the periods indicated certain items from the Company’s Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the dollar amount of each such item from that in the indicated previous year. Other net sales increased 13% to $48.4 million compared to the prior year, as dimmable aircraft window sales increased 19% year over year and fire protection saw an increase in net sales of 7% year over year. COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold increased from 62.4% in 2018 to 63.0% in 2019, primarily due to annual customer price reductions that were not fully offset with purchasing cost reductions, as well as an increase in costs related to tariffs. Annual price reductions and tariffs independently impacted cost of goods sold as a percentage of net sales by approximately 75 - 200 basis points. These negative impacts were partially offset by the impact of purchasing cost reductions and product mix impacts that independently impacted cost of goods sold as a percentage of net sales by approximately 75 - 150 basis points. OPERATING EXPENSES. Engineering, research and development expenses increased by $7.6 million or 7% from 2018 to 2019, but remained at 6% of net sales. E, R & D increased, primarily due to increased staffing levels which continue to support growth and launch of new business, as well as development of new products. Selling, general and administrative expenses increased by $9.9 million or 13% from 2018 to 2019, representing 5% of net sales in 2019 versus 4% of net sales in 2018. The primary reason for the increase from 2018 to 2019 was due to increased staffing levels, travel expenses, and professional fees. TOTAL OTHER INCOME/(EXPENSE). Investment income remained at $11.2 million for 2019 compared to 2018. Other income – net decreased $2.0 million in 2019 versus 2018, primarily due to a decrease in gains on sales of debt investments on a year over year basis. 2019 ANNUAL REPO RT 36 37 G ENT EX CORPO RAT ION TAXES. The effective tax rate was 15.1% for year ended December 31, 2019 compared to 16.1% the prior year. The effective tax rates in 2019 nd 2018 differed from the statutory federal income tax rate, primarily due to the Foreign Derived Intangible Income Deduction. In 2019, The Company’s current ratio increased from 5.0 as of December 31, 2018 to 5.5 as of December 31, 2019, reflecting the increase in working capital. The Company’s current ratio increased from 4.9 as of December 31, 2017, to 5.0 as of December 31, 2018, reflecting the repayment the effective tax rate differed from the statutory federal income tax rate also primarily due to the Foreign Derived Intangible Income Deduction. of $78 million of the Company’s long term debt, that was offset by share repurchases discussed herein. The decrease in the effective tax rate year over year primarily relates to increase in the benefits derived from the Foreign Derived Intangible Income Deduction, Research & Development Credit and Stock Compensation Expense. NET INCOME. Net income decreased by $13.2 million, or 3% year over year, primarily due to the decrease in gross margin and increases in operating expenses primarily related to increased staffing levels. Results of Operations: 2018 to 2017 NET SALES. In 2018, Company net sales increased by $39.2 million, or 2% compared to the prior year. Automotive net sales increased due to a 6% increase in automatic-dimming mirror shipments, from 39.3 million units in 2017 to 41.6 million units in 2018, primarily reflecting Cash flow from operating activities was $506.0 million, $552.4 million and $501.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Cash flow from operating activities decreased $46.5 million for the year ended December 31, 2019 compared to the prior year, primarily due to decreased net income and changes in working capital. Cash flow from operating activities increased $51.4 million for the year ended December 31, 2018 compared to the same period in 2017, primarily due to increased net income which was partially offset by changes in working capital. Cash flow used for investing activities for the year ended December 31, 2019 decreased by $129.1 million to $56.7 million, compared with $185.8 million, for the year ended December 31, 2018, primarily due to decreased investment purchases, which was partially offset by a decrease in fixed income investment maturities during the year. Cash flow used for investing activities for the year ended December 31, 2018 increased by $108.1 increased overall penetration of automatic-dimming mirrors, primarily within the Company’s international markets. International automotive million to $185.8 million, compared to the year ended December 31, 2017, primarily due to increased investment purchases during the year. mirror unit shipments increased 7% in 2018 when compared with the prior year, primarily due to increased penetration of both interior and exterior automatic dimming mirrors to certain European and Japanese automakers. Capital expenditures were $84.6 million, $86.0 million, and $104.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. Capital expenditures for the year ended 2019 remained consistent with the year ended 2018, however, capital expenditures decreased by $18.0 Other net sales increase 17% to $42.9 million compared to the prior year, as dimmable aircraft window sales increased 16% year over year, and million for the year ended December 31, 2018 compared to the prior year primarily due to decreases in production equipment purchases and fire protection saw an increase in net sales of 8% year over year. building related costs. COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold increased from 61.3% in 2017 to 62.4% in 2018, primarily due to annual customer price reductions that were not fully offset with purchasing cost reductions, as well as the Company’s inability to leverage fixed Cash flow used for financing activities for the year ended December 31, 2019, decreased $349.3 million to $370.0 million, compared to the year ended December 31, 2018, primarily due to a reduction in the amount of shares of common stock repurchased which totaled $331.5 million overhead costs due to lower than expected sales levels. Annual price reductions and fixed overhead costs independently impacted cost of goods during the calendar year 2019 as compared to $719.3 million during the calendar year 2018. Cash flow used for financing activities for the sold as a percentage of net sales by approximately 75 - 150 basis points. These negative impacts were partially offset by the impact of purchasing year ended December 31, 2018, increased $319.3 million to $719.3 million compared to the year ended December 31, 2017, primarily due cost reductions of 50 - 75 basis points. to repurchases of common stock of $591.6 million during the calendar year 2018 compared to $231.4 million during the calendar year 2017. OPERATING EXPENSES. Engineering, research and development expenses increased by $7.4 million or 7% from 2017 to 2018, but remained at 6% of net sales. E, R & D increased, primarily due to increased staffing levels which continue to support growth and launch of new business Short-term investments as of December 31, 2019 were $140.4 million, down from $169.4 million as of December 31, 2018 and long-term investments were $139.9 million as of December 31, 2019, up from $138.0 million as of December 31, 2018, due to changes in the Company’s as well as development of new products. overall investment portfolio. Selling, general and administrative expenses increased by $3.8 million or 5% from 2017 to 2018, but remained at 4% of net sales. The primary Accounts receivable as of December 31, 2019 increased $21.9 million compared to December 31, 2018, primarily due to the timing of sales reason for the increase from 2017 to 2018 was due to increased staffing levels and travel expenses. within each of the comparable periods. TOTAL OTHER INCOME/(EXPENSE). Investment income increased $1.8 million in 2018 versus 2017, primarily due to higher interest rates available for the Company’s investable funds. Other income – net increased $3.7 million in 2018 versus 2017, primarily due to decreased interest expense associated with the Company’s debt financing, as discussed further in Note 2 of the Consolidated Financial Statements. TAXES. The effective tax rate was 16.1% for year ended December 31, 2018 compared to 23.5% the prior year. The effective tax rate in 2017 and 2018 differed from the statutory federal income tax rate, primarily due to the domestic manufacturing deduction as well as the re-measurement of net deferred tax liabilities as a result of the Tax Cuts and Jobs Act of 2017 (“Act”). In 2018, the effective tax rate differed from the new statutory federal income tax rate primarily due to the Foreign Derived Intangible Income Deduction. The decrease in the effective tax rate in 2018 from the prior year was due to the change in statutory tax rate as passed in the Act to 21% from 35%. NET INCOME. Net income increased by $31.1 million, or 8% year over year, primarily due to the lower effective tax rate on a year over year basis. Liquidity and Capital Resources The Company’s financial condition throughout the periods presented has remained very strong, in spite of a 6% decline in global light vehicle production from 2018 to 2019. The Company’s cash and cash equivalents were $296.3 million, $217.0 million and $569.7 million as of December 31, 2019, 2018 and 2017, respectively. The Company’s cash and cash equivalents include amounts held by foreign subsidiaries of $8.5 million, $8.3 million and $12.6 million as of December 31, 2019, 2018 and 2017, respectively. Inventories as of December 31, 2019, increased $23.7 million compared to December 31, 2018, primarily due to increased raw material inventory levels to support first quarter 2020 production and sales forecasts, as well as higher levels of component inventory with longer lead-times. Intangible Assets, net as of December 31, 2019 decreased $19.3 million compared to December 31, 2018, due to the amortization of definite lived intangible assets and patents, discussed further in in Note 10 to the Consolidated Financial Statements. Accounts payable as of December 31, 2019, increased $4.7 million compared to December 31, 2018, primarily due the timing of inventory and capital expenditure payments. Management considers the Company’s current working capital and long-term investments, as well as its existing credit financing arrangement (notwithstanding covenants prohibiting additional indebtedness), discussed further in Note 2 of the Consolidated Financial Statements, in addition to internally generated cash flow, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments. The following is a summary of working capital and long-term investments: 2019 ANNUAL REPO RT 38 39 G ENT EX CORPO RAT ION Working Capital Long Term Investments Total $ $ 2019 2018 2017 The Company also estimates that depreciation and amortization expense for calendar year 2020 will be between $105 and $110 million. 778,530,092 $ 681,769,335 $ 940,916,816 The Company is further estimating that its tax rate will be between 15.0% and 17.0% for calendar year 2020. 139,909,323 137,979,082 57,782,418 In accordance with its previously announced share repurchase plan and capital allocation strategy, the Company intends to continue to 918,439,415 $ 819,748,417 $ 998,699,234 repurchase additional shares of its common stock in 2020 and into the future depending on a number of factors, including: market, economic, The increase in working capital as of December 31, 2019 is primarily due to cash flow from operations, which was partially offset by share repurchases, dividend payments and capital expenditures. The decrease in working capital as of December 31, 2018 compared to December 31, 2017 is primarily due to increased share repurchases, dividend payments and capital expenditures, which in combination were more than provided by cash flow from operations. Please refer to Part II, Item 5, with regard to the Company’s previously announced share repurchase plan. and industry 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. The Company is also providing top line revenue guidance for calendar year 2021. IHS Markit current forecasts for light vehicle production for calendar year 2021 are approximately 16.5 million units for North America, 21.2 million units for Europe, 12.6 million units for Japan and Korea, and 25.3 million units for China. Based on these forecasts, the Company is estimating that revenue for calendar year 2021 will increase approximately 3% to 8% over current estimates provided for 2020 revenue. As noted above, continuing uncertainties make forecasting difficult. Outlook Market Risk Disclosure The Company utilizes the light vehicle production forecasting services of IHS Markit. IHS Markit current forecasts for light vehicle production for calendar year 2020 are approximately 16.5 million units for North America, 20.7 million units for Europe, 12.9 million units for Japan and Korea, and 24.4 million units for China. The Company currently estimates that top line revenue for calendar year 2020 will be between $1.91 and $2.0 billion. All estimates are based on light vehicle production forecasts in the primary regions to which the Company ships product, as well as the estimated option rates for its mirrors on prospective vehicle models and anticipated product mix. The Company continues to see order rates and booked business that allow for these estimates an expected vehicle production decrease in 2020 and only a modest increase in 2021 compared to 2020. Continuing uncertainties, including: light vehicle production levels; supplier part or material shortages; automotive plant shutdowns; sales rates in Europe, Asia and North America; challenging macroeconomic and geopolitical environments, including tariffs; OEM strategies and cost pressures; customer inventory management and the impact of potential automotive customer (including their Tier 1 suppliers) and supplier bankruptcies; work stoppages, coronavirus, strikes, etc., which could disrupt shipments to these customers, make forecasting difficult. The Company is estimating that the gross profit margin will be between 36% and 37% for calendar year 2020. Historically, annual customer price reductions have placed significant pressure on gross margin on an annual basis. Given the current revenue forecast and projected product mix for 2020, the Company hopes it may be able to offset certain annual customer price reductions with purchasing cost reductions and operational efficiencies, but there is no certainty of being able to do so. The Company also currently estimates that its operating expenses, which include engineering, research and development expenses and selling, general and administrative expenses, are expected to be between $205 and $215 million for calendar year 2020, due in part to increased staffing levels which continue to support growth and launch of new business as well as development of new products. The Company continues to invest heavily in technology directed at funding the development of its current product portfolio and create iterations of those products that help keep its products new and attractive to our customers. In addition, the Company has been investing heavily in the next wave of innovation, many of which were shown for the first time in 2020, and included new products for automotive, aerospace and developments in intelligent medical lighting. The Company is a technology leader in the automotive industry, with a focus on developing uniquely designed solutions that are highly proprietary. The Company continues to make investments intended to maintain a competitive advantage in its current market as well as to use its core competencies to develop products that are applicable in other markets. In light of on-going demand for our automatic-dimming mirrors and electronics, the Company currently anticipates that 2020 capital expenditures will be between $85 and $95 million, a majority of which will be production equipment purchases. Capital expenditures for calendar year 2020 are currently anticipated to be financed from current cash and cash equivalents on hand and cash flows from operating activities. The Company is subject to market risk exposures of varying correlations and volatilities, including foreign exchange rate risk, and interest rate risk. Fluctuating interest rates and securities prices could negatively impact the Company’s financial performance due to realized losses on the sale of fixed income investments. The Company does not currently believe such risks are material. The Company has some assets, liabilities and operations outside the United States, including multi-currency accounts, which currently are not significant overall to the Company as a whole. Because the Company sells its automotive mirrors throughout the world and automobile manufacturing is highly dependent on general economic conditions, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products. Most of the Company’s non-U.S. sales are invoiced and paid in U.S. dollars; during calendar year 2019, approximately 7% of the Company’s net sales were invoiced and paid in foreign currencies (compared to 8% for calendar year 2018 and 8% for calendar year 2017). The Company currently expects that approximately 7% of the Company’s net sales in calendar year 2020 will be invoiced and paid in foreign currencies. The Company does not currently engage in hedging activities of foreign currencies. The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its Consolidated Financial Statements. See the Contractual Obligations and Other Commitments below. Contractual Obligations and Other Commitments The Company had the following contractual obligations and other commitments (in millions) as of December 31, 2019. Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Operating leases Purchase obligations Dividends payable Total 1.1 138.1 28.9 168.1 0.7 138.1 28.9 167.7 0.4 — — 0.4 Purchase obligations are primarily for raw material inventory and capital equipment. Significant Accounting Policies and Critical Accounting Estimates — — — — The preparation of the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates, assumptions and apply judgments that affect its financial position and results of operations. On an ongoing basis, management evaluates these estimates and assumptions. Management also continually reviews its accounting policies and financial information disclosures. 2019 ANNUAL REPO RT 40 41 G ENT EX CORPO RAT ION The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The following financial statements and reports of independent registered public accounting firm are filed with this report following the signature page: These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, Selected quarterly financial data for the past two years appears in the following table: information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are inherently subject to a degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates, as is the case in any application of generally accepted accounting principles. The Company considers an accounting estimate to be critical if: ◼ It requires management to make assumptions about matters that were uncertain at the time of the estimate, and ◼ Changes in the estimate or different estimates that could have been selected would have had a material impact on our financial condition or results of operations. REVENUE RECOGNITION. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Accordingly, revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services when it transfers those goods or services to customers. Sales are shown net of returns, which have not historically been significant. The Company does not generate sales from arrangements with multiple deliverables. The Company generally receives purchase orders from customers on an annual basis. Typically, such purchase order provide the annual terms, including pricing, related to a particular vehicle model. Purchase orders generally do not specify quantities. The Company recognizes revenue based on the pricing terms included in our annual purchase orders. As part of certain agreements, entered into in the ordinary course of business, the Company is asked to provide customers with annual price reductions. Such amounts are estimated and accrued as a reduction of revenue as products are shipped to those customers. For any shipments of product that may be subject to retroactive price adjustments that are then being negotiated, the Company records revenue based on the Company’s best estimate of the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods to the customer. The Company’s best estimate requires significant judgment based on historical results and expected outcomes of ongoing negotiations with customers. The Company’s approach is to consider these adjustments to the contract price as variable consideration which is estimated based on the then most likely price amount. In addition, the Company has ongoing adjustments to our pricing arrangements with customers based on the related content, the cost of our products and other commercial factors. Such pricing accruals are adjusted as they are settled with our customers. See also Item 13 of Part III with respect to “Certain Transactions”, which is incorporated herein. Quarterly Results of Operations (in thousands, except per share data) First Second Third Fourth 2019 2018 2019 2018 2019 2018 2019 2018 Net Sales Gross Profit $ 468,589 $ 465,420 $ 468,711 $ 454,981 $ 477,761 $ 460,253 $ 443,836 $ 453,409 169,645 172,628 176,538 172,804 180,321 172,990 161,805 172,044 Operating Income 121,596 128,515 127,905 126,683 128,136 127,428 110,901 125,499 Net Income 104,280 111,249 108,959 109,024 111,898 111,336 99,547 106,275 Basic Earnings per share(1) Diluted Earnings per share(1) $ $ 0.40 0.40 $ $ 0.40 0.40 $ $ 0.42 0.42 $ $ 0.40 0.40 $ $ 0.44 0.44 $ $ 0.42 0.42 $ $ 0.39 0.39 $ $ 0.41 0.41 (1) Basic and diluted earnings per share are computed independently for each quarter presented. Therefore the sum of quarterly basic and diluted per share information may not equal annual basis and diluted earnings per share. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. As defined in Item 304 of Regulation S-K, there have been no changes in, or disagreements with, accountants during the 24-month period ended December 31, 2019. Item 9A. Controls and Procedures. Disclosure Controls and Procedures Under the supervision of and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have evaluated 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)]) as of December 31, 2019, and have concluded that the Company’s disclosure controls Item 7A. Quantitative and Qualitative Disclosures About Market Risk. and procedures are adequate and effective. See “Market Risk Disclosure” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7). Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a – 15(f ) and 15d – 15(f ). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework)(the COSO criteria). Based on this assessment, management asserts that the Company has maintained effective internal control over financial reporting as of December 31, 2019. 2019 ANNUAL REPO RT 42 43 G ENT EX CORPO RAT ION Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any Matthew Chiodo, the Company’s Vice President of Sales, was appointed an executive officer effective February 15, 2018. Mr. Chiodo has been evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that employed by the Company since 2001. Mr. Chiodo has been in his current role since January 2017 and previously served as Director of Sales the degree of compliance with the policies or procedures may deteriorate. for several years. Certain terms of Mr. Chiodo’s employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young LLP, Scott Ryan was appointed as the Company’s Vice President, General Counsel and Corporate Secretary on August 16, 2018. Mr. Ryan has been an independent registered public accounting firm, as stated in their report which is included in Part IV of this Form 10K. employed by the Company since 2010. Prior to his current position, he served as Assistant General Counsel and Corporate Secretary from June During the period covered by this annual report, there have been no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting. In addition, there 2015 to August 2018. Prior to that he served as Patent Counsel from November 2013 to June 2015. Certain terms of Mr. Ryan’s employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent Information relating to directors appearing under the caption “Election of Directors” in the definitive Proxy Statement for 2019 Annual to December 31, 2019. Item 9B. Other Information. None. I I I T R A P K - 0 1 Item 10. Directors, Executive Officers and Corporate Governance. Information about Our Executive Officers The following table lists the names, ages, and positions of all of the Company’s executive officers at the time of this report. Officers are generally elected at the meeting of the Board of Directors following the annual meeting of shareholders. Meeting of Shareholders and filed with the Commission within 120 days after the Company’s fiscal year end, December 31, 2019 (the “Proxy Statement”), is hereby incorporated herein by reference. No changes were made to the procedures by which shareholders may recommend nominees for the Board of Directors. Any information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934 that may appear under the caption “Delinquent Section 16 Reports” in the definitive Proxy Statement is hereby incorporated herein by reference. Information relating to the Company’s Audit Committee and concerning whether at least one member of the Audit Committee is an “audit committee financial expert” as that term is defined under Item 407(d)(5) of Regulation S-K appearing under the caption “Corporate Governance – Audit Committee” in the definitive Proxy Statement is hereby incorporated herein by reference. The Company has adopted a Code of Ethics for Certain Senior Officers that applies to its principal executive officer, principal financial officer, and principal accounting officer. A copy of the Code of Ethics for Certain Senior Officers is available without charge, upon written request, from the Corporate Secretary of the Company, 600 N. Centennial Street, Zeeland, Michigan 49464 and on the Company’s website. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethics by posting such information on its website. Information contained in the Company’s website, whether currently posted or posted in the future, is not part of this document or the documents incorporated by reference in this document. Name Age Position Current Position Held Since Item 11. Executive Compensation. Steve Downing Neil Boehm Kevin Nash Matthew Chiodo Scott Ryan 42 48 45 55 39 President and Chief Executive Officer Chief Technology Officer and Vice President, Engineering January 2018 February 2018 Vice President, Finance, Chief Financial Officer and Treasurer February 2018 Vice President, Sales Vice President, General Counsel and Corporate Secretary February 2018 August 2018 There are no family relationships among the officers listed in the preceding table. Steve Downing was elected Chief Executive Officer effective as of January 1, 2018. Mr. Downing has been employed by the Company since 2002. Prior to being elected Chief Executive Officer, he served as President and Chief Operating Officer from August 2017 to December 2017, as Senior Vice President and Chief Financial Officer from June 2015 to August 2017, and as Vice President of Finance and Chief Financial Officer from May 2013 to June 2015. He served in a variety of roles before that time. Certain terms of Mr. Downing’s employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. Neil Boehm was appointed as the Company’s Vice President, Engineering and Chief Technology Officer as of February 15, 2018 and was also appointed an executive officer. Mr. Boehm has been employed by the Company since 2001. Prior to his current position, he served as the Company’s Vice President of Engineering, beginning in 2015 and before that served as Senior Director of Engineering. Certain terms of Mr. Boehm’s The information contained under the caption “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation” contained in the definitive Proxy Statement is hereby incorporated herein by reference. The “Compensation Committee Report” shall not be deemed to be soliciting material or to be filed with the commission. As previously disclosed, the Compensation Committee intended to move base salaries for officers, including named executive officers, toward the market median of the Company’s established peer group over a three-year period. At the request of the CEO and named executive officers, the Compensation Committee and the Board of Directors have decided not to increase named executive officer base salaries at this time. In lieu thereof, the Board of Directors, based on a recommendation of the Compensation Committee, has provided the named executive officers additional upside under the Long-Term Plan as discussed below. As such, 2020 Base Salary as approved by the Board of Directors is set forth below: Executive Officer Position 2019 Base Salary 2020 Base Salary Steve Downing President and CEO Neil Boehm Kevin Nash VP, Engineering and CTO VP, Finance, CFO and Treasurer Matt Chiodo VP, Sales $ $ $ $ $ 750,000 407,000 400,000 380,000 350,000 $ $ $ $ $ 750,000 407,000 400,000 380,000 350,000 employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. Scott Ryan VP, General Counsel and Corporate Secretary Kevin Nash was appointed as the Company’s Vice President, Finance, Chief Financial Officer, and Treasurer, effective as of February 15, 2018. He is also the Company’s Chief Accounting Officer. Mr. Nash has been employed by the Company since 1999. Prior to his current position, he served as the Company’s Vice President of Accounting and Chief Accounting Officer, beginning in 2014 and before that served as Director of Accounting and Chief Accounting Officer. Certain terms of Mr. Nash’s employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. 2019 ANNUAL REPO RT 44 45 G ENT EX CORPO RAT ION Amended and Restated Annual Incentive Performance-Based Bonus Plan The Board of Directors previously approved the Amended and Restated Annual Incentive Performance-Based Bonus Plan (the “Annual Plan”) to further emphasize performance-based compensation. In lieu of participating in the profit-sharing bonus paid to all employees, the Annual Plan provides potential cash-based bonuses for officers based on the achievement of three key performance metrics: Revenue (33.33% weighting); Operating Income (33.33% weighting); and Earnings per Diluted Share (33.33% weighting). The Annual Plan covers all officers, including named executive officers. At the beginning of each year, the Compensation Committee reviews and approves a cash bonus target for each officer, as a percentage of base salary for the year. The CEO may earn from 0% - 200% of base salary. The non-CEO named executive officers may earn from 0% to 150% of their base salaries. All performance-related targets are set by, and achievement of targets are approved by, the Compensation Committee and/or the Board of Directors. For our executive officers, the 2019 Annual Plan payout opportunities as a percentage of base salary applicable to each performance metric are shown in the table below: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan Annual Plan Threshold Annual Plan Target Annual Plan Maximum 50% 37.5% 37.5% 37.5% 37.5% 100% 75% 75% 75% 75% 200% 150% 150% 150% 150% Performance Metric Revenue Operating Income Weight Threshold* Target* Maximum* Actual Performance* 33.33% $ 1,504,000 $ 1,880,000 $ 2,256,000 $ 1,858,897 33.33% $ 411,300 $ 514,126 $ 616,951 $ Earnings per Diluted Share 33.33% $ 1.384 $ 1.730 $ 2.076 $ 505,447 1.733 * Amounts in thousands (000) except for per share amounts. Amounts may be modified in the discretion of the Compensation Committee as appropriate to ensure the performance metrics are not unsuitable. Threshold, Target, and Maximum for Operating Income and Earnings per Diluted Share were adjusted to address the estimated impact of tariffs and the Actual Performance was similarly adjusted with respect to the actual impact of tariffs. Based on actual Revenue, Operating Income, and Earnings per Diluted Share results compared to the pre-established targets (adjusted for the impact of tariffs) and performance of the named executive officers, the payments for 2019 under the Annual Plan are shown in the table below: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan 2019 Annual Plan Performance Bonus 2019 Annual Plan Discretionary Bonus $ $ $ $ $ 735,272 299,256 294,109 279,403 257,345 $ $ $ $ $ 0 0 0 0 0 For 2020, the Compensation Committee has established thresholds, targets, and maximums for Revenue, Operating Income, and Earnings per Diluted Share (adjusted for the impact of tariffs) as the Annual Plan performance metrics. No changes were made to the Annual Plan target opportunities for executive officers in 2020, as the target and maximum opportunity levels were appropriate based on the competitive pay range for each position. The foregoing payout opportunities are multiplied by the weighting factor 2019 Omnibus Incentive Plan and Long-Term Incentive Program of a particular performance metric to determine the amounts of cash bonuses payable to officers to the extent the threshold, target, or maximum The Company’s 2019 Omnibus Incentive Plan (“OIP”) has been approved by shareholders. Pursuant to the OIP, the Company implemented for a performance metric is met or exceeded. To the extent performance exceeds the established threshold or target, as applicable, for any the Long-Term Incentive Plan (the”Long-Term Plan”). The Long-Term Plan provides officers, including our named executive officers, with performance metric, but does not meet or exceed the established target or maximum, as applicable, linear interpolation is used to determine the incentive awards that serve an important role by balancing other applicable short-term goals with longer term shareholder value creation, while pro rata portion of the performance bonus. The Compensation Committee also has discretion to increase (or decrease) such performance-based minimizing risk-taking behaviors that could negatively affect long-term results. bonuses using its judgment, provided that bonuses are not in any event to exceed 250% of the applicable base salary. The Long-Term Plan uses three-year performance periods and selected performance objectives to determine equity incentive awards so as to In 2019 and 2020, the Annual Plan uses the same three key performance metrics and weighting: Revenue (weighted 33.33%), Operating Income balance short-term goals under the Annual Plan, with performance objectives associated with longer-term shareholder value creation under (weighted 33.33%) and Earnings per Diluted Share (33.33%), since such metrics are not only appropriate measures of performance, but also the Long-Term Plan. Under the Long-Term Plan, the Board of Directors and/or the Compensation Committee determines the amount of the align with the Company’s overall business strategy. In determining whether annual cash bonuses are paid under the Annual Plan, actual performance for the year is measured against specified target levels for each performance metric. The target for the three performance metrics reflects a level of performance, which at the time set was anticipated to be challenging but achievable. The threshold level is set to be reflective of performance at which the Compensation Committee believed a portion of the award opportunity should be earned. The maximum level was set well above the target, requiring significant achievements and reflecting performance at which the Compensation Committee believed an additional 100% of the target award was warranted. For 2019, pre-established target performance (along with pre-established thresholds and maximums) and actual results for the performance metrics are as follows: long-term incentive awards. Each officer’s award opportunity is based on a target dollar value (determined toward the very beginning of the performance period) as a percentage of base salary assigned to his or her position based on market comparisons for similar positions, using both a peer group and general industry market data. The following target opportunities apply for the 2020-2022 performance period under the Long- Term Incentive Plan: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan Long-Term Plan Target Opportunity Percentage of Base Salary for 2020-2022 240% 150% 140% 130% 125% 2019 ANNUAL REPO RT 46 47 G ENT EX CORPO RAT ION These Long-Term Plan Target Opportunity Percentage of Base Salary for 2020 - 2022 have increased from those applicable for 2019 - 2021 (which were 200% for Mr. Downing and 100% for other named executive officers) in lieu of base salary increases as discussed above. Achievement at threshold performance yields 50% of the target award and achievement of the maximum performance yields another 100% of the target award. To the extent performance exceeds the established threshold or target, as applicable, for an applicable performance objective, but does not meet or exceed the established target or maximum, as applicable, linear interpolation is used to determine the pro rata portion of such award. Seventy percent (70%) of the total value of the target long-term incentive opportunity is delivered through performance share awards (“PSAs”) and the other thirty percent (30%) through restricted stock (“RS”). Both PSAs and RS are forms of performance-based incentive compensation because PSAs involve performance objectives that provide direct alignment with shareholder interests and the value of RS fluctuates based on stock price performance. In addition to requiring achievement of performance objectives in respect of PSAs, PSAs and RS require the executive officers to remain employed with the Company for three years from the grant date (unless the executive officer attains retirement age, departs for good reason, dies, or becomes disabled or a change in control occurs whereby an award may be paid or partially paid). Performance Shares The Long-Term Plan is designed to provide PSAs for officers, including our named executive officers. PSAs are tied to the achievement of two performance objectives, each weighted equally: earnings before interest, taxes, depreciation and amortization (EBITDA) and return on invested capital (ROIC), in each case adjusted as determined by the Compensation Committee. Each performance objective is based on a three-year performance period (2020-2022) with a performance range that can result in PSAs of 0% for failure to achieve threshold, 50% of target for achieving threshold, to 200% of the target opportunity for achieving maximum. EBITDA drives the ability to commit resources to continued growth, but is also a measure of ability to provide shareholder return. It also drives profitable sales growth and optimizes the Company’s cost structure. ROIC ensures management uses the Company’s capital in an effective manner that drives shareholder value. Since the value of PSAs is tied to the Company’s actual performance in financial objectives, it aligns the officers’ interests with those of shareholders. The target opportunities of PSAs for the named executive officers are shown in the table below: Restricted Stock Awards The other 30% of the total value of the long-term incentive opportunity consists of RS awards. RS incentivizes and rewards executives for improving long-term stock value and serves as a retention tool. Under the Long-Term Plan, RS will generally be granted in February to officers, including our named executive officers, and cliff vest on the third anniversary of the grant. The RS awarded in 2020, based on the target opportunities, for the executive officers are shown in the table below: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan Number of RS Awarded in 2020 for 2020-2022 17,792 6,035 5,535 4,883 4,325 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information contained under the captions “Common Stock Ownership of Management,” “Common Stock Ownership of Certain Beneficial Owners,” and “Equity Compensation Plan Information” contained in the definitive Proxy Statement is hereby incorporated herein by reference. There are no arrangements known to the registrant, the operation of which may at a subsequent date result in a change in control. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information contained under the caption “Certain Transactions” contained in the definitive Proxy Statement is hereby incorporated herein by reference. The information contained under the caption “Election of Directors” contained in the definitive Proxy Statement is hereby Executive Officer Number of PSAs Awarded in 2020 (Target) for 2020-2022 incorporated herein by reference. Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan 41,516 14,081 12,916 11,394 10,091 Item 14. Principal Accounting Fee and Services. Information regarding principal accounting fees and services set forth under the caption “Ratification of Appointment of Independent Auditors – Principal Accounting Fees and Services” in the definitive Proxy Statement is hereby incorporated herein by reference. Information concerning the policy adopted by the Audit Committee regarding the pre-approval of audit and non-audit services provided by the Company’s independent auditors set forth under the caption “Corporate Governance – Audit Committee” in the definitive Proxy Statement is hereby incorporated herein by reference. 2019 ANNUAL REPO RT 48 49 G ENT EX CORPO RAT ION Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Gentex Corporation Opinion on the Financial Statements To the Shareholders and the Board of Directors of Gentex Corporation Opinion on Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Gentex Corporation and subsidiaries (the Company) as of December 31, 2019 and We have audited Gentex Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2019 based on criteria established 2018, the related consolidated statements of income, comprehensive income, shareholders’ investment and cash flows for each of the three years in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the (the COSO criteria). In our opinion, Gentex Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the over financial reporting as of December 31, 2019, based on the COSO criteria. results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Gentex Corporation and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the income, shareholders’ investment and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2020 dated February 26, 2020 expressed an unqualified opinion thereon. Basis for Opinion expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures assurance about whether effective internal control over financial reporting was maintained in all material respects. to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue - Estimate of Variable Consideration Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. DESCRIPTION OF THE MATTER As discussed in Notes 1 and 11 to the Company’s consolidated financial statements, the Company occasionally enters into sales contracts with its customers that provide for annual price reductions over the production life of a particular part. Prices may also be adjusted Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance on an ongoing basis to reflect changes in product content, product cost and other commercial factors. with the policies or procedures may deteriorate. Auditing the accounting for and the completeness of the amount of revenue that the Company expects to be entitled to in exchange for its products (for arrangements containing annual price reductions) is judgmental due to the unique facts and circumstances involved with each revenue arrangement, as well as on-going commercial negotiations with customers. HOW WE ADDRESSED THE MATTER IN OUR AUDIT We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over annual price reductions. This included testing controls over the Company’s process to identify and evaluate customer contracts that contain matters that impact revenue recognition, as well as testing controls relating to the completeness and measurement of revenue related to those sales contracts. Our audit procedures included, among others, testing the completeness and valuation of the Company’s price reductions, including interviews of executive and commercial management personnel responsible for negotiations with customers, inspecting communications between the Company and its customers related to the price reductions, and testing manual price reduction entries recorded using lower materiality thresholds for our testing purposes. We have served as the Company’s auditor since 1999 Grand Rapids, Michigan FEBRUARY 26, 2020 We have served as the Company’s auditor since 1999 Grand Rapids, Michigan FEBRUARY 26, 2020 2019 ANNUAL REPO RT 50 51 G ENT EX CORPO RAT ION GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018 The accompanying notes are an integral part of these consolidated financial statements. V I T R A P K - 0 1 ASSETS CURRENT ASSETS: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories, net Prepaid expenses and other Total current assets PLANT AND EQUIPMENT: Land, buildings and improvements Machinery and equipment Construction-in-process Total Plant and Equipment Less- Accumulated depreciation Net Plant and Equipment OTHER ASSETS: Goodwill Long-term investments Intangible assets, net Patents and other assets, net Total Other Assets TOTAL ASSETS 2019 2018 LIABILITIES AND SHAREHOLDERS’ INVESTMENT 2019 2018 CURRENT LIABILITIES: $ 296,321,622 $ 217,025,278 Accounts payable $ 97,553,917 $ 92,810,316 140,384,053 235,410,326 248,941,855 29,319,036 950,376,892 344,231,180 843,439,691 39,456,490 169,412,999 213,537,799 225,281,599 25,672,579 850,930,254 340,910,332 838,887,032 18,156,423 1,227,127,361 1,197,953,787 (728,811,261) (699,480,021) 498,316,100 498,473,766 307,365,845 139,909,323 250,375,000 22,460,033 720,110,201 307,365,845 137,979,082 269,675,000 21,010,121 736,030,048 Accrued liabilities: Salaries, wages and vacation Income taxes Royalties Dividends payable Other Total current liabilities OTHER NON-CURRENT LIABILITIES DEFERRED INCOME TAXES TOTAL LIABILITIES SHAREHOLDERS’ INVESTMENT: 16,385,833 24,952 17,371,829 28,896,914 11,613,355 15,860,073 4,293,608 16,174,041 28,526,147 11,496,734 171,846,800 169,160,919 7,414,424 51,454,149 230,715,373 — 54,521,489 223,682,408 Common stock, par value $.06 per share; 400,000,000 shares authorized; 251,277,515 and 259,328,613 shares issued and outstanding in 2019 and 2018 respectively. 15,076,651 15,559,717 Additional paid-in capital Retained earnings Accumulated other comprehensive income: Unrealized gain on investments Cumulative translation adjustment 807,928,139 745,324,144 1,116,372,133 1,102,468,137 1,095,486 (2,384,589) 74,549 (1,674,887) 1,938,087,820 1,861,751,660 $ 2,168,803,193 $ 2,085,434,068 Total shareholders’ investment TOTAL LIABILITES AND SHAREHOLDERS’ INVESTMENT $ 2,168,803,193 $ 2,085,434,068 2019 ANNUAL REPO RT 52 53 G ENT EX CORPO RAT ION GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 The accompanying notes are an integral part of these consolidated financial statements. FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 The accompanying notes are an integral part of these consolidated financial statements. 0.2917 in 0.5417 in 0.8334 in NET SALES COST OF GOODS SOLD Gross profit OPERATING EXPENSES: 2019 2018 2017 2019 2018 2017 $ 1,858,897,406 $ 1,834,063,697 $ 1,794,872,578 CASH FLOWS FROM OPERATING ACTIVITIES: 1,170,589,437 1,143,597,005 1,100,344,312 Net income $ 424,683,939 $ 437,883,097 $ 406,791,922 688,307,969 690,466,692 694,528,266 Adjustments to reconcile net income to net cash provided by operating activities: Engineering, research and development 114,687,309 107,134,862 Depreciation and amortization 104,702,974 102,186,814 Selling, general and administrative Total operating expenses Income from operations OTHER INCOME: Investment income Other income (expense), net Total other income Income before provision for income taxes PROVISION FOR INCOME TAXES NET INCOME EARNINGS PER SHARE: Basic Diluted Cash Dividends Declared per Share 85,083,056 199,770,365 488,537,604 11,230,696 647,034 11,877,730 500,415,334 75,731,395 75,206,283 182,341,145 508,125,547 11,262,385 2,659,015 13,921,400 522,046,947 84,163,850 99,726,438 71,443,476 171,169,914 523,358,352 9,442,387 (1,004,035 8,438,352 531,796,704 125,004,782 $ $ $ $ 424,683,939 $ 437,883,097 $ 406,791,922 1.67 $ 1.66 $ 0.460 $ 1.64 $ 1.62 $ 0.440 $ 1.42 1.41 0.390 GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 The accompanying notes are an integral part of these consolidated financial statements. Gain on disposal of assets Loss on disposal of assets Gain on sale of investments Loss on sale of investments Deferred income taxes Stock based compensation expense related to employee stock options, employee stock purchases and restricted stock Change in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other Accounts payable Accrued liabilities Net cash flows from operating activities CASH FLOWS USED FOR INVESTING ACTIVITIES: Activity in available-for-sale securities: Sales proceeds Maturities and calls Purchases (155,150) 588,941 (660,643) 176,360 (3,358,537) (577,200) 108,927 (2,538,729) 532,494 (4,414,739) 99,570,908 (188,150) 299,174 (1,309,166) 375,388 (14,996,179) 21,671,192 18,305,981 18,376,965 (21,872,527) (23,660,256) (3,646,457) 4,743,601 2,753,427 17,583,989 (8,516,016) (11,268,677) 2,911,849 220,856 (19,530,043) (27,454,146) 16,183,673 9,934,837 12,947,597 505,966,864 552,418,646 501,002,780 57,139,135 125,013,589 55,248,551 181,892,136 30,207,523 23,100,000 (153,257,603) (332,106,362) (29,874,960) Net income $ 424,683,939 $ 437,883,097 $ 406,791,922 Proceeds from sale of plant and equipment OTHER COMPREHENSIVE INCOME (LOSS) BEFORE TAX: (Increase) Decrease in other assets 2,001,315 (3,027,263) 738,093 (5,603,042) 249,757 2,646,029 2019 2018 2017 Plant and equipment additions (84,580,255) (85,990,570) (104,040,919) Foreign currency translation adjustments (709,702) (2,319,917) Unrealized gains on derivatives Unrealized gains on available-for-sale securities, net Other comprehensive income (loss), before tax Expense for income taxes related to components of other comprehensive income (loss) Other comprehensive income (loss), net of tax — 1,292,325 582,623 271,388 311,235 (2,106,091) 11,133,661 44,903 2,668,973 Issuance of common stock from stock plan transactions Cash dividends paid Repurchases of common stock (2,150,994) 8,464,688 Net cash used for financing activities 98,767 115,059 3,508,029 1,721,933 5,903,699 Net cash used for investing activities (56,711,082) (185,821,194) (77,712,570) CASH FLOWS USED FOR FINANCING ACTIVITIES: Repayment of long-term debt — (78,000,000) (107,625,000) 77,821,151 (116,309,197) (331,471,392) (369,959,438) 79,296,344 217,025,278 66,837,820 (116,566,639) (591,577,851) (719,306,670) (352,709,218) 569,734,496 47,770,467 (108,815,040) (231,363,216) (400,032,789) 23,257,421 546,477,075 $ 296,321,622 $ 217,025,278 $ 569,734,496 Comprehensive income $ 424,995,174 $ 435,732,103 $ 415,256,610 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR 2019 ANNUAL REPO RT 54 55 G ENT EX CORPO RAT ION GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 The accompanying notes are an integral part of these consolidated financial statements. There may be some differences due to rounding. BALANCE AS OF JANUARY 1, 2017 Issuance of common stock Repurchases of common stock Stock-based compensation expense related to stock options, employee stock purchases and restricted stock Dividends declared ($.39 per share) Net income Other comprehensive income BALANCE AS OF DECEMBER 31, 2017 Issuance of common stock Repurchases of common stock Stock-based compensation expense related to stock options, employee stock purchases and restricted stock Impact of ASU 2016-01 adoption Dividends declared ($.44 per share) Net income Other comprehensive (loss) BALANCE AS OF DECEMBER 31, 2018 Issuance of common stock Repurchases of common stock Stock-based compensation expense related to stock options, employee stock purchases and restricted stock Dividends declared ($.46 per share) Net income Other comprehensive income BALANCE AS OF DECEMBER 31, 2019 Common Stock Shares 287,737,516 4,498,729 (11,954,924) — — — — 280,281,321 5,496,659 (26,449,367) — — — — — 259,328,613 5,724,840 (13,775,938) — — — — Common Stock Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Investment $ 17,264,251 $ 683,446,463 $ 1,210,984,825 $ (1,271,305) $ 1,910,424,234 269,923 (717,295) 47,500,544 — (25,813,300) (204,832,621) — — — — 18,376,965 — — — — (110,946,799) 406,791,922 — — — — — — 8,464,688 47,770,467 (231,363,216) 18,376,965 (110,946,799) 406,791,922 8,464,688 $ 16,816,879 $ 723,510,672 $ 1,301,997,327 $ 7,193,383 $ 2,049,518,261 329,801 66,508,019 — (1,586,963) (63,000,528) (526,990,360) — — — — — 18,305,981 — — — — — 6,642,727 (117,064,654) 437,883,097 — — — — 66,837,820 (591,577,851) 18,305,981 (6,642,727) — — — (2,150,994) (117,064,654) 437,883,097 (2,150,994) $ 15,559,717 $ 745,324,144 $ 1,102,468,137 $ (1,600,338) $ 1,861,751,660 343,490 (826,556) 77,477,661 — (36,544,858) (294,099,978) — — — — 21,671,192 — — — — (116,679,965) 424,683,939 — — — — — — 77,821,151 (331,471,392) 21,671,192 (116,679,965) 424,683,939 311,235 311,235 251,277,515 $ 15,076,651 $ 807,928,139 $ 1,116,372,133 $ (1,289,103) $ 1,938,087,820 2019 ANNUAL REPO RT 56 57 G ENT EX CORPO RAT ION ( 1 ) S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G A N D R E P O R T I N G P O L I C I E S Investments The Company Gentex Corporation including its wholly-owned subsidiaries (the “Company”) is a leading supplier of digital vision, connected car, dimmable glass, and fire protection products. The Company’s largest business segment involves designing, developing, manufacturing, marketing, and supplying automatic-dimming rearview and non-dimming mirrors and various electronic modules for the automotive industry. The Company ships its product to all of the major automotive producing regions worldwide, which it supports with numerous sales, engineering and distribution locations worldwide. A substantial portion of the Company’s net sales and accounts receivable result from transactions with domestic and foreign automotive manufacturers and Tier 1 suppliers. The Company also designs, develops, manufactures, markets, and supplies dimmable aircraft windows for the aviation industry and commercial smoke alarms and signaling devices for the fire protection products industry. The Company does not require collateral or other security for trade accounts receivable. Significant accounting policies of the Company not described elsewhere are as follows: Consolidation The consolidated financial statements include the accounts of Gentex Corporation and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Cash Equivalents Cash equivalents consist of funds invested in bank accounts and money market funds that have daily liquidity. Allowance For Doubtful Accounts The Company reviews a monthly aging report of all accounts receivable balances starting with invoices outstanding over sixty days. In addition, the Company monitors information about its customers through a variety of sources including the media, and information obtained through on- The Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures, for its financial assets and liabilities, and for its non-financial assets and liabilities subject to fair value measurements. ASC 820 provides a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases, require estimates of fair-market value. This standard also expanded financial statement disclosure requirements about a company’s use of fair-value measurements, including the effect of such measurement on earnings. The cost of securities sold is based on the specific identification method. The Company determines the fair value of its government securities, asset-backed securities, corporate bonds, and certain mutual funds by utilizing monthly valuation statements that are provided by its broker. The broker determines the investment valuation by utilizing the bid price in the market and also refers to third party sources to validate valuations, and as such are classified as Level 2 assets. The Company’s certificates of deposit are classified asavailable for sale, and are considered as Level 1 assets. These investments are carried at cost, which approximates fair value. The Company will also periodically make technology investments in certain non-consolidated third-parties. These equity investments are accounted for in accordance with ASC 321, Investments - Equity Securities. Equity investments that do not have readily determinable fair values, and where the Company has not identified any observable events that would cause adjustment of the valuation to date, are held at cost. These technology investments totaled $9.0 million and $3.9 million as of December 31, 2019 and December 31, 2018, respectively. These investments are classified within Long-Term Investments in the consolidated balance sheet and are not included within the tables below. Assets or liabilities that have recurring fair value measurements are shown below as of December 31, 2019 and December 31, 2018: Description December 31, 2019 (Level I) (Level 2) (Level 3) Fair Value Measurements at Reporting Date Using Quoted Prices in Actcive Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs going interaction between Company personnel and the customer. Based on the evaluation of the above information, the Company estimates its Cash & Cash Equivalents $ 296,321,622 $ 296,321,622 $ — $ allowances related to customer receivables on historical credit and collections experience, customers current financial condition and the specific identification of other potential problems, including the economic climate. Actual collections can differ, requiring adjustments to the allowances, but historically such adjustments have not been material. The following table presents the activity in the Company’s allowance for doubtful accounts: YEAR ENDED DECEMBER 31, 2019: Allowance for Doubtful Accounts YEAR ENDED DECEMBER 31, 2018: Allowance for Doubtful Accounts YEAR ENDED DECEMBER 31, 2017: Allowance for Doubtful Accounts $ $ $ Beginning Balance Net Additions/ (Reductions) to Costs and Expenses Deductions and Other Adjustments Ending Balance 2,746,647 $ — $ (295,354) $ 2,451,293 2,714,533 $ — $ 32,114 $ 2,746,647 2,917,424 $ — $ (202,891) $ 2,714,533 The Company’s allowance for doubtful accounts primarily relates to financially distressed automotive customers. The Company continues to work with these financially distressed customers in collecting past due balances. Short-Term Investments: Certificate of Deposit Corporate Bonds Government Securities Other Long-Term Investments: Asset-backed Securities Certificate of Deposit Corporate Bonds Government Securities Municipal Bonds 50,099,795 29,219,685 58,432,823 2,631,750 25,791,029 3,557,798 22,815,998 6,088,190 72,638,690 50,099,795 — — 2,631,750 — 29,219,685 58,432,823 — — 25,791,029 3,557,798 — — — — 22,815,998 6,088,190 72,638,690 Total $ 567,597,380 $ 352,610,965 $ 214,986,415 $ — — — — — — — — — — — 2019 ANNUAL REPO RT 58 59 G ENT EX CORPO RAT ION Description December 31, 2018 (Level I) (Level 2) (Level 3) Certificate of Deposit $ 150,299,384 $ — $ — $ 150,299,384 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2018 Short-Term Investments: Unrealized Cost Gains Losses Market Value Cash & Cash Equivalents Short-Term Investments: 217,025,278 $ 217,025,278 $ — $ Certificate of Deposit 150,299,384 150,299,384 Corporate Bonds Government Securities Other Long-Term Investments: Corporate Bonds Municipal Bonds Government Securities 6,967,700 9,176,227 2,219,688 60,369,930 18,025,432 56,483,720 — — 2,219,688 — — — — 6,967,700 9,176,227 — 60,369,930 18,025,432 56,483,720 Total $ 520,567,359 $ 369,544,350 $ 151,023,009 $ — — — — — — — — — The amortized cost, unrealized gains and losses, and market value of investment securities are shown as of December 31, 2019 and 2018: Government Securities Corporate Bonds Other Long-Term Investments: Corporate Bonds Common Stocks Municipal Bonds Government Securities 9,186,586 6,981,305 2,219,688 60,659,498 — 17,840,518 56,280,552 — — — 50,340 — 184,914 205,553 (10,359) (13,605) — 9,176,227 6,967,700 2,219,688 (339,908) 60,369,930 — — (2,385) — 18,025,432 56,483,720 Total $ 303,467,531 $ 440,807 $ (366,257) $ 303,542,081 Unrealized losses on investments as of December 31, 2019 are as follows: 2019 Short-Term Investments: Unrealized Less than one year Greater than one year Cost Gains Losses Market Value Total Aggregate Unrealized Losses Aggregate Fair Value $ $ 587,564 — 587,564 $ $ 90,721,081 — 90,721,081 Certificate of Deposit $ 50,099,795 $ — $ — $ 50,099,795 Unrealized losses on investments as of December 31, 2018 are as follows: Corporate Bonds Government Securities Other Long-Term Investments: Asset-backed Securities Certificate of Deposit Corporate Bonds Government Securities Municipal Bonds 29,025,624 58,343,911 2,631,750 25,971,156 3,500,000 22,306,130 6,012,705 71,997,996 194,061 99,917 — — 58,808 509,868 75,485 — (11,005) — (180,127) (1,010) — — 1,036,116 (395,422) 29,219,685 58,432,823 2,631,750 25,791,029 3,557,798 22,815,998 6,088,190 72,638,690 Total $ 269,889,067 $ 1,974,255 $ (587,564) $ 271,275,758 Less than one year Greater than one year Total $ $ 365,824 $ 433 366,257 $ 68,722,980 3,000,000 71,722,980 Aggregate Unrealized Losses Aggregate Fair Value ASC 320, Accounting for Certain Investments in Debt and Equity Securities, as amended and interpreted, provides guidance on determining when an investment is other-than-temporarily impaired. The Company reviews its fixed income investments for any unrealized losses that would be deemed other-than-temporary and require the recognition of an impairment loss in income. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and the Company’s intent and ability to hold the investments. Management also considers the type of security, related-industry and sector performance, as well as published investment ratings and analyst reports, to evaluate its portfolio. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments. No investments were considered to be other-than-temporarily impaired in 2019 and 2018. 2019 ANNUAL REPO RT 60 61 G ENT EX CORPO RAT ION Fixed income securities as of December 31, 2019, have contractual maturities as follows: Patents Due within one year Due between one and five years Due over five years Fair Value of Financial Instruments $ $ 137,752,302 43,125,222 87,766,483 268,644,007 The Company’s financial instruments consist of cash and cash equivalents, investments, accounts receivable, accounts payable, and short and long-term debt. The Company’s estimate of the fair values of these financial instruments approximates their carrying amounts at December 31, 2019 and 2018. Inventories The Company’s policy is to capitalize costs incurred to obtain patents. The cost of patents is amortized over their useful lives. The cost of patents in process is not amortized until issuance. The Company periodically obtains intellectual property rights, in the ordinary course of business, and the cost of the rights are amortized over their useful lives. Goodwill and Intangible Assets Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth quarter on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs an impairment review for its automotive reporting unit, which has been determined to be one of the Company’s reportable segments, using either a qualitative approach or quantitative approach which utilizes a fair value method that incorporates certain assumptions and judgments. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. The Company performs a qualitative assessment (step 0) to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, we determine the fair value of the reporting unit using step 1 and step 2 tests. If the fair value of the reporting unit Inventories include material, direct labor and manufacturing overhead and are valued at the lower of first-in, first-out (FIFO) cost or net is greater than its carrying amount, goodwill is not considered to be impaired. However, if the fair value of the reporting unit is less than realizable value. Inventories consisted of the following as of December 31, 2019 and 2018: its carrying amount, an impairment change is recorded as the excess of the reporting units carrying value over its fair value. Raw materials Work-in-process Finished goods Total Inventory $ $ 2019 164,974,553 $ 33,069,255 50,898,047 248,941,855 $ 2018 139,058,541 35,386,615 50,836,443 225,281,599 Estimated inventory allowances for slow-moving and obsolete inventories are based on current assessments of future demands, market conditions, evaluation of longer lead times for certain electronic components and related management initiatives. If market conditions The assumptions included in the impairment tests require judgment and changes to these inputs could impact the results of the calculations which could result in an impairment charge in future periods if the carrying amount of the reporting unit exceeds its calculated fair value. For the qualitative assessment performed, management considers factors such as macro-economic conditions, industry and market considerations, overall financial performance, and other company-specific events, amongst other factors, in making the determination as to whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Other than management’s internal projections of future cash flows, the primary assumptions used in the step 1 and step 2 impairment tests are the weighted-average cost of capital and long-term growth rates. Although the Company’s cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying business, there are significant judgments in determining the expected future cash flows attributable to a reporting unit. There have been no impairment charges recorded currently or in prior periods in which or customer requirements change and are less favorable than those projected by management, inventory allowances are adjusted accordingly. goodwill existed. Allowances for slow-moving and obsolete inventories (which are included, net, in the above inventory values) were $7.6 million and $7.8 million at December 31, 2019 and 2018, respectively. Plant and Equipment Plant and equipment is stated at cost. Depreciation and amortization are computed for financial reporting purposes using the straight- line method, with estimated useful lives of 7 to 30 years for buildings and improvements, and 3 to 10 years for machinery and equipment. Depreciation expense was approximately $82.3 million, $79.7 million and $77.0 million in 2019, 2018 and 2017, respectively. Indefinite lived intangible assets are also subject to annual impairment testing or more frequently if indicators of impairment are identified. Management judgment and assumptions are required in determining the underlying fair value of the indefinite lived intangible assets. While the Company believes the judgments and assumptions used in determining fair value are reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements. The indefinite lived intangible assets were not impaired as a result of the annual test prepared by management for either period presented. Refer to Note 10, “Goodwill and Intangible Assets” for information regarding the impairment testing performed in calendar year 2019. Impairment or Disposal of Long-Lived Assets Revenue Recognition The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long- lived asset impairment analysis in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Accordingly, revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services when it transfers those goods or services to customers. Sales are shown net of returns, which have not historically been significant. The Company does not generate sales from arrangements with multiple deliverables. The Company generally receives purchase orders from customers on an annual basis. Typically, such purchase order provide the annual terms, including pricing, related to a particular vehicle model. Purchase orders generally do not specify quantities. The Company recognizes revenue based on the pricing terms included in our annual purchase orders. 2019 ANNUAL REPO RT 62 63 G ENT EX CORPO RAT ION As part of certain agreements, entered into in the ordinary course of business, the Company is asked to provide customers with annual price reductions. Such amounts are subject to estimate and are accrued as a reduction of revenue as products are shipped to those customers. For any shipments of product that may be subject to retroactive price adjustments that are then being negotiated, the Company records revenue based on the Company’s best estimate of the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods to the customer. The Company’s best estimate requires significant judgment based on historical results and expected outcomes of ongoing negotiations with customers. The Company’s approach is to consider these adjustments to the contract price as variable consideration which is estimated based on the then most likely price amount. In addition, the Company has ongoing adjustments to our pricing arrangements with customers based on the related content, the cost of our products and other commercial factors. Such pricing accruals are adjusted as they are Year ending December 31, 2020 2021 2022 2023 Thereafter settled with our customers. Refer to Note 11, “Revenue”, for further information. Total future minimum lease payments Advertising and Promotional Materials All advertising and promotional costs are expensed as incurred and amounted to approximately $3.0 million, $2.5 million and $2.6 million, in 2019, 2018 and 2017, respectively. Repairs and Maintenance Major renewals and improvements of property and equipment are capitalized, and repairs and maintenance are expensed as incurred. The Company incurred expenses relating to the repair and maintenance of plant and equipment of approximately $28.9 million, $28.9 million and $24.6 million, in 2019, 2018 and 2017, respectively. Self-Insurance The Company is self-insured for a portion of its risk on workers’ compensation and employee medical costs. The arrangements provide for stop loss insurance to manage the Company’s risk. Such costs are accrued based on known claims and an estimate of incurred, but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation process is subjective, and to the extent that future results differ from original estimates, adjustments to recorded accruals may be necessary. Product Warranty The Company periodically incurs product warranty costs. Any liabilities associated with product warranty are estimated based on known facts and circumstances and are not significant at December 31, 2019, 2018 and 2017. The Company does not offer extended warranties on its products. Income Taxes Less imputed interest Total Earnings Per Share last three years: BASIC EARNINGS PER SHARE Net Income Less: Allocated to participating securities(1) Net Income available to common shareholders Basic weighted average shares outstanding Net Income per share - Basic DILUTED EARNINGS PER SHARE Allocation of Net Income used in basic computation The provision for income taxes is based on the earnings reported in the consolidated financial statements. Deferred income tax assets and Reallocation of undistributed earnings liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in deductible or taxable amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates. The Company applies the provisions of ASC 740, Income Taxes, as it relates to uncertainty in income taxes recognized in the Company’s consolidated financial statements. A threshold of more likely than not to be sustained upon examination is applied to uncertain tax positions. The Company deems Net Income available to common shareholders - Diluted Number of shares used in basic computation Additional weighted average dilutive common stock equivalents the estimates related to this provision to be reasonable, however, no assurance can be given that the final outcome of these matters will not vary Diluted weighted average shares outstanding from what is reflected in the historical income tax provisions and accruals. Net income per share - Diluted $ $ $ 786,807 297,316 145,154 19,296 15,105 1,263,678 (84,964) 1,178,714 2019 2018 2017 424,683,939 $ 437,883,097 $ 406,791,922 5,028,813 — — 419,655,126 $ 437,883,097 $ 406,791,922 251,766,382 267,794,786 285,864,997 1.67 $ 1.64 $ 1.42 419,655,126 $ 437,883,097 $ 406,791,922 21,104 21,007 19,398 419,676,230 $ 437,904,104 $ 406,811,320 251,766,382 267,794,786 285,864,997 1,506,608 2,082,563 2,361,092 253,272,990 269,877,349 288,226,089 1.66 $ 1.62 $ 1.41 $ $ $ $ $ $ The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends, which are considered participating securities under ASC 260, Earnings Per Share. The Company allocates earnings to participating securities and computes earnings per share using the two-class method. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. The following table sets forth the computation of basic and diluted net income per common share under the two-class method for each of the Leases The Company has operating leases for corporate offices, warehouses, vehicles, and other equipment, which are included within “Plant and Equipment” section of the Consolidated Balance Sheets. The leases have remaining lease terms of 1 year to 5 years. The weighted average remaining lease term for operating leases as of December 31, 2019 was 2 years, with a weighted average discount rate of 2.9%. Future minimum lease payments for operating leases as of December 31, 2019 were as follows: (1) While there were participating securities in 2018 and 2017, they did not have a material impact on the twoclass EPS calculation. Net income allocated to participating securities in 2018 and 2017 was $3,836,536 and $2,562,473, respectively. For the years ended December 31, 2019, 2018 and 2017, 247,855 shares, 698,019 shares, and 910,105 shares, respectively, related to stock option plans were not included in diluted average common shares outstanding because they were anti-dilutive. 2019 ANNUAL REPO RT 64 65 G ENT EX CORPO RAT ION Other Comprehensive Income (Loss) (2) DEBT AND FINANCING ARRANGEMENTS Comprehensive income (loss) 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 unrealized gains and losses on certain investments, derivatives, and foreign currency translation adjustments that are further detailed in Note 9 to the Consolidated Financial Statements. Foreign Currency Translation On October 15, 2018, the Company entered into a Credit Agreement (“Credit Agreement”) with PNC as the administrative agent and sole lender. Pursuant to this Credit Agreement, the Company has access to a $150 million senior revolving credit facility (“Revolver”). Under the terms of the Credit Agreement, the Company is entitled to further request an additional aggregate principal amount of up to $100 million, subject to the satisfaction of certain conditions. In addition, the Company is entitled to the benefit of Swing Loans from amounts otherwise available under the Revolver in the aggregate principal amount of up to $20 million and to request Letters of Credit from amounts otherwise available under the Revolver in the aggregate principle amount up to $20 million, both subject to certain conditions. The obligations of the Company under the The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional Credit Agreement are not secured, but are subject to certain covenants. As of December 31, 2019 and 2018, there were no outstanding balances currency. Assets and liabilities are translated at the exchange rate in effect at year-end. Income statement accounts are translated at the average rate on the Revolver. The Revolver expires on October 15, 2023. of exchange in effect during the year. The resulting translation adjustment is recorded as a separate component of shareholders’ investment. Gains and losses arising from re-measuring foreign currency transactions into the appropriate currency are included in the determination of net income. Stock-Based Compensation Plans The Credit Agreement contains customary representations and warranties and certain covenants that place certain limitations on the Company. As of December 31, 2019, the Company was in compliance with its covenants under the Credit Agreement. The Company accounts for stock-based compensation using the fair value recognition provisions of ASC 718, Compensation - Stock (3) INCOME TAXES Compensation. As described more fully in Note 5, the Company provides compensation benefits under an omnibus incentive plan, two other stock option plans, another restricted stock plan, and an employee stock purchase plan. The Company utilizes the Black-Scholes model, which The provision for income taxes is based on the earnings reported in the accompanying consolidated financial statements. The Company recognizes requires the input of subjective assumptions. These assumptions include estimating (a) the length of time employees will retain their vested stock deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial options before exercising them (“expected term”), (b) the volatility of the Company’s common stock price over the expected term, (c) the number statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the cumulative temporary of options that will ultimately not complete their vesting requirements (“forfeitures”) and (d) expected dividends. Changes in the subjective differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be applied to taxable income assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amounts recognized in years which those temporary differences are expected to be recovered or settled. Deferred income tax expense is measured by the net change on the consolidated condensed statements of operations. in deferred income tax assets and liabilities during the year. Estimates The Tax Cuts and Jobs Act (the “Act”), a tax reform bill signed into law in 2017, reduced the current federal income tax rate for corporations to 21% from 35%, among other things. The rate reduction was effective as of January 1, 2018, and as written is permanent. The Act caused the The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management Company’s deferred income taxes to be revalued during calendar year 2017, resulting in a reduction to income tax expense of $38.4 million in to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at that period. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. The one time the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ transition tax calculation, a separate provision of the Act, was also competed and was not material. from those estimates. Recent Accounting Standards The foreign components of income before the provision for income taxes were not material for the year ended December 31, 2019, 2018 and 2017. The components of the provision for income taxes are as follows: Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, which provides guidance for lease accounting. The new guidance contained in the ASU stipulates that lessees will need to recognize a right-of-use (“ROU”) asset and a lease Currently payable: liability for substantially all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. Treatment in the consolidated statements of income will be similar to the historical treatment of operating and capital leases. The adoption of this standard did not have a material impact on the Company’s consolidated balance sheet or consolidated income statement. Disclosures are now required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Federal State Foreign Total Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Deferred income tax (benefit) expense: 2019 2018 2017 $ 73,563,685 $ 83,010,387 $ 133,166,194 3,765,929 1,468,018 3,743,781 1,776,837 3,984,000 2,440,000 78,797,632 88,531,005 139,590,194 Losses on Financial Instruments. The standard requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. The standard requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. The adoption of this standard will not have a material impact on the Company’s consolidated balance sheet or consolidated income statement. Primarily federal Provision for income taxes (3,066,237) (4,367,155) (14,585,412) $ 75,731,395 $ 84,163,850 $ 125,004,782 2019 ANNUAL REPO RT 66 67 G ENT EX CORPO RAT ION The effective income tax rates are different from the statutory federal income tax rates for the following reasons: If recognized, unrecognized tax benefits would affect the effective tax rate. Statutory federal income tax rate State income taxes, net of federal income tax benefit Domestic production exclusion Research tax credit Increase in reserve for uncertain tax provisions Change in tax rate on deferred taxes Foreign tax credit Foreign derived intangible income deduction Stock compensation Other Effective income tax rate 2019 21.0% 0.6 — (1.1) 0.3 — (0.1) (4.8) (1.1) 0.3 2018 21.0% 0.6 — (0.8) 0.1 0.5 (0.1) (4.6) (1.0) 0.4 2017 35.0% 0.5 (2.8) (0.8) 0.1 (7.2) (0.8) — (1.0) 0.5 15.1% 16.1% 23.5% The tax effect of temporary differences which give rise to deferred income tax assets and liabilities at December 31, 2019 and 2018, are as follows: The Company recognizes interest and penalties related to unrecognized tax benefits through the provision for income taxes. The Company has accrued approximately $574,000, $315,000, and $433,000 for interest as of December 31, 2019, 2018, and 2017, respectively. Interest recorded during 2019, 2018 and 2017 was not considered significant. The Company is also subject to periodic and routine audits in both domestic and foreign tax jurisdictions, and it is reasonably possible that the amounts of unrecognized tax benefits could change as a result of an audit. Based on the current audits in process, the payment of taxes as a result of audit settlements, and the completion of tax examinations, the Company does not expect these to have a material impact on the Company’s financial position or results of operations. For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015. (4) EMPLOYEE BENEFIT PLAN The Company has a 401(k) retirement savings plan in which substantially all of its employees may participate. The plan includes a provision for the Company to match a percentage of the employee’s contributions at a rate determined by the Company’s Board of Directors. In 2019, 2018 and 2017 the Company’s contributions were approximately $8.7 million, $8.2 million and $7.7 million, respectively. The increase in each December 31, 2019 December 31, 2018 of the years was due to increased employee participation in the plan. The Company does not provide health care benefits to retired employees. ASSETS: Accruals not currently deductible Stock based compensation Other Total deferred income tax assets LIABILITIES: Excess tax over book depreciation Goodwill Intangible assets Other Total deferred income tax liability Net deferred income taxes $ $ $ $ 6,478,146 $ 9,100,745 66,830 5,111,242 9,586,372 356,039 15,645,721 $ 15,053,653 (30,725,471) (27,799,640) (6,171,628) (2,403,131) (39,835,025) (23,341,226) (5,089,042) (1,309,849) (67,099,870) $ (69,575,142) (51,454,149) $ (54,521,489) The Gentex Corporation Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) is intended to enhance retirement savings among a select group of management or highly compensated employees who contribute significantly to the success of the Company. It is also intended to constitute an unfunded non-qualified deferred compensation plan described in Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Only select management and highly compensated employees, including executive officers, are eligible to participate. The Deferred Compensation Plan is administered by a committee who shall approve designation of any participants and may also remove participants. Participants may elect, on a pre-tax basis, to defer receipt of compensation by making an election in accordance with the terms of the Deferred Compensation Plan. Participants are immediately vested in their own deferrals and related earnings. The Company may, but is not required, to match participant deferrals. Participants are generally vested in any such matching contributions 50% after two years but before three years of service and 100% after three years of service. A participant’s vested credit balance under the Deferred Compensation Plan will generally be paid on the earliest to occur of: a separation from service; a fixed date or event; a change of control; or a plan termination. A participant can elect whether to receive his or her vested credit balance in a lump sum on the relevant payment date or in installments thereafter. (5) STOCK-BASED COMPENSATION PLANS At December 31, 2019, the Company had two equity incentive plans under which awards are made, which include the Gentex Corporation 2019 Omnibus Incentive Plan (“2019 Omnibus Plan”), and an employee stock purchase plan. Those plans and any material amendments thereto have Income taxes paid in cash were approximately $74.9 million, $86.9 million and $126.0 million in 2019, 2018 and 2017, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2019 2018 2017 previously been approved by shareholders. Beginning of year $ 4,678,000 $ 4,435,000 $ 3,408,000 Additions based on tax positions related to the current year Additions for tax positions in prior years Reductions for tax positions in prior years 1,695,000 657,000 (38,000) 1,677,000 283,000 (163,000) Reductions as a result of completed audit examinations — (1,554,000) Reductions as a result of a lapse of the applicable statute of limitations (600,000) — End of year $ 6,392,000 $ 4,678,000 $ 941,000 289,000 (63,000) — (140,000) 4,435,000 The 2019 Omnibus Plan provides for the potential awards to: i) employees; and ii) non-employee directors of the Company or its subsidiaries, which potential awards may be stock options, both incentive stock options and non-qualified stock options, appreciation rights, restricted stock, restricted stock units, performance share awards and performance units, and other awards that are stock-based, cash-based or a combination of both. The 2019 Omnibus Plan replaced the Company’s Employee Stock Option Plan, Second Restricted Stock Plan, and Amended and Restated Non-Employee Director Stock Option Plan (the “Prior Plans”), which were also approved by shareholders. Any existing awards previously granted under the Prior Plans remain outstanding in accordance with their terms and are governed by the Prior Plans as applicable. 2019 ANNUAL REPO RT 68 69 G ENT EX CORPO RAT ION 2019 Omnibus Incentive Plan The 2019 Omnibus Plan covers 45,000,000 shares of common stock. The purpose of the 2019 Omnibus Plan is to attract and retain employees, officers, and directors of the Company and its subsidiaries and to motivate and provide such persons incentives and rewards for performance. Shares (000) Wtd. Avg. Ex. Price Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) 2018 As of December 31, 2019, 4,919,256 shares (net of shares from canceled/expired options) have been issued under the 2019 Omnibus Plan, which Outstanding at Beginning of Year 11,837 $ (1) Represents the Company’s estimated cash dividend yield over the expected term of option grant. are presented in the table below: (2) Amount is determined based on analysis of historical price volatility of the Company’s common stock. The expected volatility is based on the daily percentage change in the price includes stock options (at a set conversion rate), restricted shares, and performance share awards. EMPLOYEE STOCK OPTIONS The Employee Stock Option Plan allowed the Company to grant up to 24,000,000 shares of common stock under the plan, prior to its replacement by the 2019 Omnibus Plan. The Company has granted options on 796,635 shares (net of shares from canceled/expired options) under the 2019 Omnibus Plan and 12,903,592 shares (net of shares from canceled/expired options) under the prior plan through December 31, 2019. Under each of such 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 five to ten years. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the indicated periods: Dividend yield(1) Expected volatility(2) Risk-free interest rate(3) Expected term of options (in years)(4) 2019 2.0% 23.9% 1.8% 4.2 2018 2.1% 26.0% 2.7% 4.2 Weighted-average grant-date fair value $ 4 $ 5 $ 2017 2.1% 26.7% 2.0% 4.2 4 of the stock over a period equal to the expected term of the option grant. (3) Represents the U.S. Treasury yield over the expected term of the option grant. (4) Represents the period of time that options granted are expected to be outstanding. Based on analysis of historical option exercise activity, the Company has determined that all employee groups exhibit similar exercise and post-vesting termination behavior. As of December 31, 2019, there was $6,316,567 of unrecognized compensation cost related to stock option awards which is expected to be recognized over the remaining vesting periods, with a weighted-average period of 1.90 years. A summary of the status of the Company’s employee stock option plan at December 31, 2019, 2018 and 2017, and changes during the same periods are presented in the tables below. Shares (000) Wtd. Avg. Ex. Price Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) 2019 Outstanding at Beginning of Year 8,944 $ Granted Exercised Forfeited Outstanding at End of Year Exercisable at End of Year 1,049 (4,402) (156) 5,435 1,859 $ 18 25 16 20 20 18 $ $ $ 3.1 Yrs 2.2 Yrs 36,294 47,170 20,484 Granted Exercised Forfeited Outstanding at End of Year Exercisable at End of Year 1,613 (4,278) (228) 8,944 4,101 $ 16 22 15 18 18 16 2017 $ $ $ 2.8 Yrs 1.7 Yrs 38,097 24,881 16,162 Shares (000) Wtd. Avg. Ex. Price Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) Outstanding at Beginning of Year 14,252 $ Granted Exercised Forfeited Outstanding at End of Year Exercisable at End of Year 1,295 (3,476) (234) 11,837 5,297 $ 15 20 13 16 16 15 $ 25,156 2.7 Yrs $ 2 Yrs $ 58,202 32,152 A summary of the status of the Company’s non-vested employee stock option activity for the years ended December 31, 2019, 2018, and 2017, 2019 2018 Shares (000) 4,842 $ 1,049 (2,165) (151) 3,575 $ Wtd. Avg Grant Date Fair Value 4 4 4 4 4 Shares (000) 6,540 $ 1,613 (3,089) (222) 4,842 $ Wtd. Avg Grant Date Fair Value 4 5 4 4 4 2017 Shares (000) 9,397 $ 1,295 (3,941) (211) 6,540 $ Wtd. Avg Grant Date Fair Value 4 4 4 4 4 Nonvested Stock Options at Beginning of Year Granted Vested Forfeited Nonvested Stock Options at End of Year Restricted Shares The Company’s Second Restricted Stock Plan provided for a maximum number of shares that may be subject to awards of 9,000,000 shares, prior to its replacement by the 2019 Omnibus Plan. Restricted shares awarded under either that plan or the 2019 Omnibus 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 issued 854,633 shares under the 2019 Omnibus Plan and 5,762,672 shares under the prior plan as of December 31, 2019, and has 3,315,482 shares outstanding under such plans. 2019 ANNUAL REPO RT 70 71 G ENT EX CORPO RAT ION 773,698 20.68 - 28.98 762,749 20.21 - 23.14 628,015 18.97 - 21.33 REVENUE: 2019 2018 2017 1 Year 3 Years 4 Years 5 Years Vesting Period(1) Shares Granted Market Price at Vesting Date Shares Granted Market Price at Vesting Date Shares Granted Market Price at Vesting Date 2019 2018 2017 39,627 $ 64,718 22.19 20.40 — $ — — — — $ — — — 254,988 20.68 - 28.98 279,420 20.21 - 23.14 228,630 18.97 - 21.33 1,133,031 $20.40 - 28.98 1,042,169 $20.21 - 23.14 856,645 $18.97 - 21.33 (1) Each of these awards cliff vest after the restriction period with no additional restrictions. As of December 31, 2019, there was unearned stock-based compensation of $47,139,370 associated with these restricted stock grants. The unearned stock-based compensation related to these grants is being amortized to compensation expense over the applicable restriction periods. Amortization expense of restricted stock for the years ended December 31, 2019, 2018 and 2017 was $13,770,917, $8,841,985, and $5,353,339 respectively. Performance Shares Performance shares awarded under the 2019 Omnibus Plan are considered performance condition awards as attainment is based on the Company’s performance relative to pre-established metrics. The fair value of such performance share awards was determined using the Company’s closing stock price on the date of grant. The expected attainment of the metrics for these awards is then analyzed each reporting period, and the related expense is adjusted based on expected attainment, if the then expected attainment differs from previous expectations. The cumulative effect on current and prior periods of a change in expected attainment is recognized in the period of change. As of December 31, 2019, the Company had unearned stock-based compensation of $2,224,328 associated with these performance share grants. The unearned stock-based compensation related to these grants is being amortized to compensation expense over the applicable performance periods. Amortization expense from performance share grants for the year ended December 31, 2019 was $897,136. No amortization expense for performance share grants was incurred in 2018 or 2017, as no such awards were issued or outstanding. Employee Stock Purchase Plan In 2013, the Gentex Corporation Employee Stock Purchase Plan covering 2,000,000 shares of common stock was approved by the shareholders, replacing a prior plan. Under such plan, the Company sells shares at 85% of the stock’s market price at the date of purchase. Under ASC 718, the 15% discounted value is recognized as compensation expense. The following table summarizes shares sold to employees under the 2013 Plan in the years ended December 31, 2019, 2018 and 2017: Plan 2013 Employee Stock Purchase Plan 2019 173,013 2018 177,846 2017 175,479 Cumulative Shares Issued in 2019 Weighted Average Fair Value 2019 1,145,856 $ 21.40 ( 6 ) C O N T I N G E N C I E S The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Such matters are subject to many uncertainties and outcomes are not predictable. The Company does not believe, however, that at the current time there are matters that constitute material pending legal proceedings that will have a material adverse effect on the financial position, future results of operations, or cash flows of the Company. ( 7 ) S E G M E N T R E P O R T I N G ASC 280, Segment Reporting, requires that a public enterprise report financial and descriptive information about its reportable operating segments subject to certain aggregation criteria and quantitative thresholds. Operating segments are defined by ASC 280 as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-makers in deciding how to allocate resources and in assessing performance. Automotive Products United States Germany Japan Mexico Other Countries Other Total INCOME (LOSS) FROM OPERATIONS: Automotive Products Other Total ASSETS: Automotive Products Other Corporate Total DEPRECIATION & AMORTIZATION: Automotive Products Other Corporate Total CAPITAL EXPENDITURES: Automotive Products Other Corporate Total $ 569,939,756 $ 583,672,971 $ 567,492,812 296,276,971 225,577,146 160,967,900 557,775,114 48,360,519 333,002,878 209,311,790 106,111,515 559,099,142 42,865,401 351,123,204 185,261,067 93,603,796 560,646,589 36,745,110 1,858,897,406 $ 1,834,063,697 $ 1,794,872,578 473,546,112 $ 495,471,799 $ 512,895,699 14,991,492 12,653,748 10,462,653 488,537,604 $ 508,125,547 $ 523,358,352 1,463,030,286 $ 1,449,910,935 $ 1,472,061,650 16,000,669 14,333,098 9,576,514 689,772,238 621,190,035 870,415,748 2,168,803,193 $ 2,085,434,068 $ 2,352,053,912 97,520,972 $ 97,279,052 $ 95,378,100 481,861 6,700,141 422,844 4,484,918 300,935 3,891,873 104,702,974 $ 102,186,814 $ 99,570,908 63,537,512 $ 84,337,455 $ 82,703,576 1,704,045 19,338,698 1,447,494 205,621 170,357 21,166,986 84,580,255 $ 85,990,570 $ 104,040,919 $ $ $ $ $ $ $ $ $ 2019 ANNUAL REPO RT 72 73 G ENT EX CORPO RAT ION Other includes Dimmable Aircraft Windows and Fire Protection Products. Major product line revenues included within these segments are as follows: ( 9 ) C O M P R E H E N S I V E I N C O M E Automotive Products Automotive Mirrors HomeLink Modules* Total Automotive Products Other Products Revenue Total Revenue 2019 2018 2017 $ $ $ $ 1,638,600,272 $ 1,598,589,777 $ 1,573,222,820 171,936,615 192,608,519 184,904,648 1,810,536,887 $ 1,791,198,296 48,360,519 $ 42,865,401 1,858,897,406 $ 1,834,063,697 $ $ $ 1,758,127,468 36,745,110 1,794,872,578 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 unrealized gains and losses on certain investments, foreign currency translation adjustments, and unrealized movement in derivative financial instruments designated as hedges. Foreign currency translation adjustments: Balance at beginning of period $ (1,674,887) $ 645,030 $ (2,862,999) For the Twelve Months ended December 31, 2019 2018 2017 * Excludes HomeLink revenue integrated into automotive mirrors. Corporate assets are principally cash and cash equivalents, investments, deferred income taxes and corporate fixed assets. Depreciation & Amortization on corporate fixed assets are allocated as appropriate to the Automotive and Other segments when reviewing operating results. Substantially all long-lived assets are located in the U.S. Automotive Products revenues in the “Other countries” category are sales to customer automotive manufacturing plants in Korea, Mexico, Canada, Hungary, China, and the United Kingdom as well as other foreign automotive customers. Most of the Company’s non-U.S. sales are invoiced and paid in U.S. dollars. During the years ended December 31, 2019, 2018 and 2017, approximately 7%, 8% and 8% of the Company’s net sales were invoiced and paid in foreign currencies, respectively. In 2019, the Company had three automotive customers (including direct sales to OEM customers and sales through their Tier 1 suppliers), which individually accounted for 10% or more of net sales as follows: Toyota Motor Company Volkswagen Group General Motors Daimler Group Ford Motor Company 2019 2018 2017 # Less than 10 percent. 13% 13% 12% 14% 15% 15% 11% # # # 10% 10% # # 10% Other comprehensive (loss) income before reclassifications Net current-period change Balance at end of period Unrealized gains (losses) on available-for-sale securities: Balance at beginning of period ASU 2016-01 adoption impact Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current-period change Balance at end of period Unrealized gains (losses) on derivatives: Balance at beginning of period Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current-period change Balance at end of period (709,702) (709,702) (2,384,589) 74,549 — 1,403,521 (2,319,917) (2,319,917) (1,674,887) 6,626,379 (6,642,727) 1,675,823 (382,584) (1,584,926) 1,020,937 1,095,486 (6,551,830) 74,549 — — — — — (78,026) 175,308 (97,282) 78,026 — ( 8 ) Q U A R T E R LY F I N A N C I A L I N F O R M A T I O N ( U N A U D I T E D ) Accumulated other comprehensive (loss) income, end of period $ (1,289,103) $ (1,600,338) $ The following table sets forth selected financial information for all of the quarters during the years ended December 31, 2019 and 2018 (in thousands, except per share data): All amounts are shown net of tax. Amounts in parentheses indicate debits. 3,508,029 3,508,029 645,030 2,788,975 — 4,444,360 (606,956) 3,837,404 6,626,379 (1,197,281) 248,042 871,213 1,119,255 (78,026) 7,193,383 First Second Third Fourth 2019 2018 2019 2018 2019 2018 2019 2018 Net Sales Gross Profit $ 468,589 $ 465,420 $ 468,711 $ 454,981 $ 477,761 $ 460,253 $ 443,836 $ 453,409 169,645 172,628 176,538 172,804 180,321 172,990 161,805 172,044 Operating Income 121,596 128,515 127,905 126,683 128,136 127,428 110,901 125,499 Net Income 104,280 111,249 108,959 109,024 111,898 111,336 99,547 106,275 Earnings Per Share (Basic)(1) Earnings Per Share (Diluted)(1) $ $ 0.40 $ 0.40 $ 0.42 $ 0.40 $ 0.44 $ 0.42 $ 0.39 $ 0.41 0.40 $ 0.40 $ 0.42 $ 0.40 $ 0.44 $ 0.42 $ 0.39 $ 0.41 (1) Basic and diluted earnings per share are computed independently for each quarter presented. Therefore the sum of quarterly basic and diluted per share information may not equal annual basis and diluted earnings per share. 2019 ANNUAL REPO RT 74 75 G ENT EX CORPO RAT ION The following table presents details of reclassifications out of other comprehensive income for the twelve months ended December 31, 2019, As of December 31, 2018: 2018 and 2017. Details about Accumulated Other Comprehensive Income Components Unrealized gains on available-for-sale debt securities Realized gain on sale of securities Provision for income taxes Total reclassifications for the period Unrealized gains (losses) on derivatives Realized loss on interest rate swap Provision for income taxes Total reclassifications for the period $ $ $ $ $ For the Twelve Months ended December 31, 2019 2018 2017 Affected Line item in the Statement of Consolidated Income 484,283 $ 2,006,235 $ 933,778 Other income (expense), net (101,699) (421,309) (326,822) Provision for Income Taxes 382,584 $ 1,584,926 $ 606,956 Net of tax — $ 123,142 $ (1,340,329) Other income (expense), net — (25,860) 469,116 Provision for Income Taxes — $ 97,282 382,584 $ 1,682,208 $ $ (871,213) Net of tax (264,257) Net of tax ( 1 0 ) G O O D W I L L A N D I N T A N G I B L E A S S E T S Other Intangible Assets Gross Accumulated Amortization Net HomeLink Trade Names and Trademarks $ 52,000,000 $ — $ 52,000,000 HomeLink Technology 180,000,000 (78,750,000) Existing Customer Platforms Exclusive Licensing Agreement 43,000,000 96,000,000 (22,575,000) $ $ 101,250,000 20,425,000 — $ 96,000,000 Assumed Useful Life Indefinite 12 years 10 years Indefinite Total other identifiable intangible assets 371,000,000 (101,325,000) 269,675,000 Accumulated amortization on patents and intangible assets was approximately $143.1 million and $122.3 million at December 31, 2019 and 2018, respectively. Amortization expense on patents and other intangible assets was approximately $22.4 million, $22.5 million, and $22.5 million in calendar years 2019, 2018 and 2017, respectively. At December 31, 2019, patents had a weighted average amortized life of 10 years. Excluding the impact of any future acquisitions, the Company anticipates amortization expense including patents and other intangible assets for each of the years ended December 31, 2020 and 2021 to be approximately $22 million annually, approximately $21 million for the year ended December 31, 2022, approximately $19 million for the year ended December 31, 2023, and approximately $16 million for the year ended December 31, 2024. ( 1 1 ) R E V E N U E The Company recorded Goodwill of $307.4 million related to the HomeLink acquisition, which occurred in September 2013. The carrying value The following table shows the Company’s Automotive and Other Products revenue disaggregated by geographical location for Automotive of Goodwill as of both December 31, 2019 and December 31, 2018 was $307.4 million as set forth in the table below. Products for the twelve month periods ended December 31, 2019, 2018, and 2017: Balance as of December 31, 2018 Acquisitions Divestitures Impairments Other Carrying Amount $ 307,365,845 — — — — Balance as of December 31, 2019 $ 307,365,845 The Company reviews goodwill for impairment during the fourth quarter on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company has not recognized any impairment of goodwill in the current or prior periods. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value thus resulting in the need for interim testing, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization, and general industry, market Revenue Automotive Products U.S. Germany Japan Mexico Other Total Automotive Products Other Products (U.S.) Total Revenue For the Twelve Months ended December 31, 2019 2018 2017 $ 569,939,756 $ 583,672,971 $ 567,492,812 296,276,971 225,577,146 160,967,900 557,775,114 333,002,878 209,311,790 106,111,515 559,099,142 351,123,204 185,261,067 93,603,796 560,646,589 $ $ 1,810,536,887 $ 1,791,198,296 $ 1,758,127,468 48,360,519 42,865,401 36,745,110 1,858,897,406 $ 1,834,063,697 $ 1,794,872,578 and macro-economic conditions. No such events or circumstances that negatively impacted the key assumptions were noted in 2019. Revenue by geographic area may fluctuate based on many factors, including: exposure to local economic, political and labor conditions; unexpected The Intangible Assets and related change in carrying values are set forth in the table below as of December 31, 2019 and December 31, 2018. As of December 31, 2019: Other Intangible Assets Gross Accumulated Amortization Net HomeLink Trade Names and Trademarks $ 52,000,000 $ — $ 52,000,000 HomeLink Technology 180,000,000 (93,750,000) $ 86,250,000 Existing Customer Platforms Exclusive Licensing Agreement 43,000,000 96,000,000 (26,875,000) $ 16,125,000 — $ 96,000,000 Total other identifiable intangible assets 371,000,000 (120,625,000) 250,375,000 Assumed Useful Life Indefinite 12 years 10 years Indefinite changes in laws, regulations, trade or monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the U.S. and other foreign countries; and tariffs, quotas, customs and other import or export restrictions and other trade barriers. The following table disaggregates the Company’s Automotive and Other revenue by major source for the twelve month periods ended December 31, 2019 and 2018: 2019 ANNUAL REPO RT 76 77 G ENT EX CORPO RAT ION Revenue Automotive Segment Automotive Mirrors & Electronics HomeLink Modules* Total Automotive Products Other Segment Fire Protection Products Windows Products Total Other For the Twelve Months Ended December 31, 2019 2018 HOMELINK MODULES. The Company manufactures and sells HomeLink Modules individually, as well as in combination with the automotive mirrors and other advanced features, as described above. For the majority of automotive products, transfer of control and revenue recognition occurs when the Company ships the product from the manufacturing facility to the customer. $ $ $ $ 1,638,600,272 171,936,615 1,810,536,887 23,740,261 24,620,258 48,360,519 $ $ $ $ 1,598,589,777 192,608,519 1,791,198,296 22,109,784 20,755,617 42,865,401 Other Segment DIMMABLE AIRCRAFT WINDOWS. The Company supplies variable dimmable windows for the passenger compartment on the Boeing 787 Dreamliner Series of Aircraft. For dimmable aircraft windows, transfer of control and revenue recognition occurs when the Company ships the product from the manufacturing facility to the customer. Payment terms on dimmable aircraft window sales range from 30 days to 45 days. FIRE PROTECTION PRODUCTS. The Company manufactures photoelectric smoke detectors and alarms, visual signaling alarms, electrochemical carbon monoxide detectors and alarms, audible and visual signaling alarms, and bells and speakers for use in fire detection systems in office buildings, hotels, and other commercial and residential buildings. For fire protection parts, transfer of control and revenue recognition occurs when the Company ships the product from the manufacturing facility to the customer. Payment terms on fire protection part sales to customers * Excludes HomeLink revenue related to HomeLink modules integrated into automotive mirrors. range from 30 days to 75 days. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied. Such recognition generally occurs with the transfer of control of the products at a point in time. The Company’s automotive OEM contracts generally include Long Term Supply Agreements (“LTSA”) entered into in the ordinary course of business and Purchase Orders (“PO”) whereby the LTSA sometimes stipulates the pricing and delivery terms and is evaluated together with a PO, which identifies the quantity, timing, and the type of product to be transferred. Certain customer contracts do not always have an LTSA, in which case, the contracts are governed by the PO from the customer in conjunction with other mutually agreed upon terms and conditions. The Company does not generate revenue from arrangements with multiple deliverables. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods excluding revenue amounts that are transferred to third parties, such as sales, value add, and other taxes the Company collects concurrently with revenue-producing activities. The Company does not incur any incremental cost to obtain contracts. Costs are incurred to fulfill contracts with the OEM. However, such costs are accounted for under ASC 340-10, and are not treated as fulfillment costs under ASC 340-40. Automotive Products Segment AUTOMOTIVE REARVIEW MIRRORS AND ELECTRONICS. The Company manufactures interior electrochromic automatic-dimming rearview mirrors that darken to reduce glare and improve visibility for the driver. These electronic interior mirrors can also include additional electronic features such as compass, microphones, HomeLink, lighting assist and driver assist forward safety camera systems, various lighting systems, various telematics systems, ITM systems, and a wide variety of displays. The Company also ships interior non-automatic-dimming rearview mirrors with features. The Company’s interior electrochromic automatic-dimming rearview mirrors also power the application of the Company’s exterior electrochromic automatic-dimming rearview mirrors that darken to reduce glare and improve visibility for the driver. These electronic exterior mirrors typically range in size and shape per automaker specification, but also include additional features such as turn signal indicators, side blind zone indicators, and courtesy lighting. The Company also ships exterior non-automatic-dimming rearview mirrors with similar electronic features as what is available in its automatic-dimming applications. The Company manufactures other automotive electronics products both inside and outside of the rearview mirror through HomeLink applications in the vehicle including the rearview mirror, interior visor, overhead console, or center console. For the majority of automotive products, transfer of control and revenue recognition occurs when the Company ships the product from the manufacturing facility to the customer. The Company generally receives payment equal to the price that applies at the time of invoice for most automotive product sales. For any shipments of product that may be subject to retroactive price adjustments that are then being negotiated, the Company records revenue based on the Company’s best estimate of the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods to the customer. The Company’s best estimate requires significant judgment based on historical results and expected outcomes of ongoing negotiations with customers. The Company’s approach is to consider these adjustments to the contract price as variable consideration which is estimated based on the then most likely price amount. Payment terms on automotive part sales to customers range from 15 days to 90 days. Estimated revenue is adjusted at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. 2019 ANNUAL REPO RT 78 79 G ENT EX CORPO RAT ION 15-year summary of financial data SUMMARY OF OPERATIONS FOR THE YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 $ 1,858,897 $ 1,834,064 $ 1,794,873 $ 1,678,925 $ 1,543,618 $ 1,375,501 $ 1,171,864 $ 1,099,560 $ 1,023,762 $ 816,263 $ 544,523 $ 623,800 $ 653,933 $ 572,267 $ 536,484 Research and development expenses 114,687 107,135 Selling, general & administrative expenses 85,083 75,206 Net Sales Cost of goods sold Gross profit Gross profit margin Operating income Percent of net sales Interest expense Other income (expense) Income before taxes Percent of net sales Income taxes Tax rate Net income Percent of net sales Return on average equity Earnings per share - diluted Price/earnings ratio range Weighted average common shares outstanding - diluted Capital expenditures FINANCIAL POSITION AT YEAR-END 1,170,589 1,143,597 1,100,344 1,010,473 688,308 690,467 694,528 668,452 37.0% 37.6% 38.7% 99,726 71,443 39.8% 94,238 62,471 939,842 603,776 39.1% 88,393 56,617 836,611 538,890 39.2% 84,176 55,880 741,131 430,733 36.8% 76,495 49,496 726,741 372,819 33.9% 85,004 53,360(4) 35.3% 81,634 48,578 36.2% 64,100 40,618 488,538 508,126 523,358 511,743 458,766 398,834 304,742 234,455(4) 231,368 190,972 26.3% 296 12,174 27.7% 927 14,849 29.2% 4,371 12,809 30.5% 5,684 4,501 29.7% 4,439 9,264 29.0% 3,501 19,993 26.0% 937 24,259 21.3% 22.6% 23.4% - - - 662,182 520,573 366,968 420,673 426,236 373,163 337,844 361,580 295,690 177,555 203,127 227,697 199,104 198,640 32.6% 47,128 35,808 94,619 17.4% - 32.6% 51,889 34.8% 50,715 42,425(3) 38,166(1) 34.8% 41,774 30,883 37.0% 35,059 27,286 108,813 138,816 126,447 136,295 17.4% 21.2% 22.1% 25.4% - - - - 15,170 13,064 12,468 1,733 (16,618) 40,923 32,527 23,600 500,415 522,047 531,797 510,561 463,591 415,326 328,064 249,626 244,432 203,440 26.9% 75,731 15.1% 28.5% 29.6% 30.4% 30.0% 30.2% 84,164 125,005 162,969 145,122 126,722 16.1% 23.5% 31.9% 31.3% 30.5% 28.0% 105,134 32.0% 22.7% 81,039 32.5% 23.9% 79,764 32.6% 24.9% 65,706 32.3% 424,684 437,883 406,792 347,591 318,470 288,605 222,930 168,587 164,668 137,734 22.8% 22.4% $ 1.66 18-12 23.9% 22.4% $ 1.62 15-11 22.7% 20.5% $ 1.41 16-12 20.7% 19.1% $ 1.19 17-11 20.6% 19.3% $ 1.08 18-12 21.0% 19.9% $ 0.98 19-14 19.0% 18.2% $ 0.77 22-12 15.3% 15.7% $ 0.59 27-12 16.1% 17.1% $ 0.57 31-19 16.9% 16.9% $ 0.49 31-17 96,352 17.7% 31,715 32.9% 64,637 11.9% 9.0% $ 0.24 39-15 92,195 179,739 158,974 159,895 14.8% 30,107 32.7% 62,088 10.0% 8.2% $ 0.22 44-15 27.5% 57,609 32.1% 27.8% 50,213 31.6% 29.8% 50,367 31.5% 122,130(2) 108,761 109,528 18.7% 16.2% $0.43(2) 27-17 19.0% 14.1% $ 0.37 29-17 20.4% 13.5% $ 0.35 29-22 253,273 269,877 288,226 291,072 296,238 293,400 288,548 287,936 288,554 281,472 275,291 282,010 288,140 296,988 314,062 84,580 85,991 104,041 120,956 97,942 72,519 55,380 117,474 120,178 46,862 21,131 45,524 54,524 48,193 53,533 Cash and short-term investments $ 436,706 $ 386,438 $ 722,273 $ 723,498 $ 556,105 $ 497,431 $ 309,592 $ 450,482 $ 418,795 $ 434,797 $ 353,232 $ 323,484 $ 397,989 $ 328,228 $ 507,014 Long-term investments Total current assets Total current liabilities Working capital Plant and equipment - net Total assets 139,909 950,377 171,847 778,530 498,316 137,979 57,782,418 49,894 850,930 1,184,564 1,154,989 169,161 681,769 498,474 243,647 149,858 940,917 1,005,131 492,479 465,822 95,157 984,009 131,007 853,002 412,720 114,643 856,638 133,431 723,207 373,391 107,006 601,186 119,980 481,206 357,021 141,834 744,663 128,168 129,091 109,155 81,349 155,384 146,216 132,525 752,293 655,269 505,414 457,152 528,494 446,878 618,988 87,957 100,695 72,089 58,638 49,472 68,363 57,363 58,088 656,706 349,938 651,598 583,181 446,776 407,680 460,131 389,515 560,900 282,542 205,108 197,530 214,952 205,610 184,134 164,030 2,168,803 2,085,434 2,352,054 2,309,620 2,148,673 2,022,540 1,764,088 1,265,691 1,163,772 1,002,691 822,603 763,103 898,023 785,028 922,646 Long-term debt, including current maturities - - 78,000 185,625 225,625 258,125 265,625 - - - - - - - - Shareholders’ investment Debt/equity ratio (including current maturities) Common shares outstanding Book value per share 1,938,088 1,861,752 2,049,518 1,910,424 1,722,517 1,571,412 1,327,604 1,120,961 1,027,119 893,531 735,929 698,596 806,812 702,694 841,595 - - 0.04 0.10 0.15 0.20 0.23 - - - - - - - - 251,278 259,329 280,281 287,738 291,338 295,248 291,156 286,152 288,140 284,584 276,678 275,268 289,508 284,952 312,088 $ 8 $ 7 $ 7 $ 7 $ 6 $ 5 $ 5 $ 4 $ 4 $ 3 $ 3 $ 3 $ 3 $ 2 $ 3 Cash Dividend declared per share $ 0.460 $ 0.440 $ 0.390 $ 0.355 $ 0.335 $ 0.310 $ 0.280 $ 0.260 $ 0.240 $ 0.220 $ 0.220 $ 0.215 $ 0.200 $ 0.185 $ 0.175 (1) Includes litigation judgment of $2,885,000 in 2007. (2) Litigation judgment negatively impacted net income by $1,900,000 (after tax) and earnings per share by $0.01. (3) Includes an increase in allowance for doubtful accounts of $3,800,000 (4) Includes litigation settlement of $5,000,000 (pre tax) in 2012. In thousands, except Gross profit margin, Percent of net sales on Income and Net Income, Tax rate, Return on average equity, Per share data, Price/earnings ratio and Debt/Equity ratio. All per share data has been adjusted to reflect the two-for-one stock splits effected in the form of 100 percent common stock dividends issued to shareholders in June 1993, June 1996, June 1998, May 2005 and December 2014. 2019 ANNUAL REPO RT 80 81 G ENT EX CORPO RAT ION DIRECTORS Mr. James Wallace, Board Chair Ms. Leslie Brown Mr. Gary Goode Mr. James Hollars Mr. John Mulder Mr. Richard Schaum Mr. Frederick Sotok Ms. Kathleen Starkoff Mr. Brian Walker COMMITTEES COMPENSATION COMMITTEE Mr. Richard Schaum, Committee Chair Mr. Gary Goode Mr. James Wallace NOMINATING AND GOVERNANCE COMMITTEE Mr. James Wallace, Committee Chair Ms. Leslie Brown Mr. Gary Goode AUDIT COMMITTEE Mr. Gary Goode, Committee Chair Mr. Richard Schaum Mr. Frederick Sotok Ms. Kathleen Starkoff CORPORATE DATA CORPORATE HEADQUARTERS GENTEX COMMON STOCK OFFICERS GENTEX CORPORATION The Company’s stock trades on The NASDAQ Global Select Market Steve Downing, President & Chief Executive Officer 600 N. Centennial Street Zeeland, Michigan 49464 www.gentex.com under the symbol GNTX. The Company does not have a direct Kevin Nash, Chief Financial Officer, Treasurer, & Vice President of Finance stock purchase plan or dividend reinvestment policy. Shares of the Neil Boehm, Chief Technology Officer & Vice President of Engineering Company’s stock may be purchased through a stock broker or other Scott Ryan, Vice President, General Counsel and Corporate Secretary registered securities representative. Matt Chiodo, Vice President of Sales Brad Bosma, Vice President of Vision Systems and Dimmable Glass Paul Flynn, Vice President of Operations Matt Fox, Vice President of Mechanical Engineering Sue Franz, Vice President of Chemical Technologies Ken Horner, Vice President of Quality Joe Matthews, Diversity Officer and Vice President of Purchasing Angela Nadeau, Vice President of Commercial Management Robert Vance, Vice President of New Markets INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM INVESTOR RELATIONS CONTACT Josh O’Berski Director of Investor Relations 616.772.1590 x5814 ERNST & YOUNG LLP 171 Monroe Avenue, NW, Suite 600 Grand Rapids, Michigan 49503 www.ey.com TRANSFER AGENT AST 6201 15th Avenue Brooklyn, New York 11219 www.amstock.com ANNUAL MEETING OF SHAREHOLDERS THURSDAY, MAY 21, 2020 @ 4:30 PM The Pinnacle Center 3330 Highland Drive, Hudsonville, Michigan VOTE YOUR SHARES ONLINE https://proxyvote.com 2019 ANNUAL REPO RT 82 83 G ENT EX CORPO RAT ION OFFICERS, DIRECTORS, AND COMMITTEES 600 N. Centennial Street Zeeland, Michigan 49464 616.772.1800 gentex.com | gentextech.com © 2020 Gentex Corporation Gentex®, A Smarter Vision®, Full Display Mirror®, FDM®, ITM®, Integrated Toll Module®, ITM (design)™, HomeLink®, HomeLink (house design)®, HomeLink Connect™, and SmartBeam® are all trademarks of Gentex Corporation. The products referenced in this report may not be approved in all jurisdictions. 

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