ADAPT & ACCELERATE 2 0 2 0 A N N U A L R E P O R T Driver Monitoring System Testing 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,” “future,” “goal,” “guidance,” “hope,” “intend,” “may,” “plan,” “poised,” “predict,” “project,” “should,” “strategy,” “target,” “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; supply chain disruptions; our dependence on key management; our dependence on information systems; 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 litigation including securities litigation relating to the conduct of our business; the length and severity of the COVID-19 (coronavirus) pandemic, 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, which risks and uncertainties now include the impacts of COVID-19 (coronavirus) pandemic that has affected, and will continue to affect, general economic and industry conditions, customers, suppliers, and the regulatory environment in which the Company operates. Includes content supplied by IHS Markit Light Vehicle Production Forecast of January 18, 2021 (gentex.com/forecast-disclaimer). CONTENTS Gentex Overview Letter from the CEO Financial Performance Market Performance Dimmable Devices Digital Vision Connectivity Sensing Sustainability Diversity, Equity, & Inclusion 10-K 15-Year Summary Corporate Data Officers and Directors 4 6 8 10 12 14 16 18 20 21 22 88 90 90 2 2 G ENTEX CORP ORATION 2020 A NNUAL REPORT 3 3 2020 ANNUAL REPORTGENTEX CORPORATION GENTEX OVERVIEW Gentex® is a leading supplier of dimmable devices, vision systems, sensors and in-vehicle connectivity products for the global automotive, aerospace, and fire protection industries. Our core competencies are enabling new innovations in these industries, while creating opportunities to develop market leading positions into new verticals. Within the automotive market, we supply Gentex is focused on using technology to solve profitable, scalable features that optimize driver problems. Our roots in physics, chemistry, vision and enhance driver safety and convenience. software, electronics, glass processing, sensing, We utilize vehicle mirrors, the windscreen, and manufacturing make us uniquely suited and other strategic locations in the vehicle to find new opportunities within new and to deliver our innovative features, including existing markets. We continue to deliver on cameras, displays, alerts, transactional modules, our history of outperformance to the market car-to-home automation systems, and safety through a combination of a wide variety of and security components. As vehicle electrification capabilities, innovative technology, and strong and autonomous driving trends progress, our product design and integration. core technologies are converging to yield products that stand to become integral components in connected cars and future mobility systems. 4 GE NTEX CORPORATION 5,303 Full-time Employees 38.2M Auto-Dimming Mirror Units 30+ OEM Customers Shipped To SALES & SUPPORT OFFICES United States, Germany, France, United Kingdom, Sweden, Korea, Japan, China 570+ Nameplates our Content Appears On 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 PRIMARY MARKETS IPIN OUR 1,739 PATENTS 647 US Patents 972 Foreign Patents 58 US Patents 38 Foreign Patents 14 US Patents 10 Foreign Patents 385 T RADEMARKS 30 US Trademarks 331 Foreign Trademarks 8 US Trademarks 16 Foreign Trademarks 668 A PPL ICATIONS IN PROCESS 230 Pending US Patent Applications 424 Pending Foreign Patent Applications 14 Trademark Applications 2020 A NNUAL REPORT 5 LETTER FROM THE CEO 2020 was a year of new challenges, and I am incredibly proud of the performance the team at Gentex delivered. In spite of a 16% decline in global light vehicle production for the year, our teams responded quickly and effectively, and delivered world-class operating results within months of encountering crippling shutdowns. The dedication of the team enabled us to close out the year with record-setting sales and profitability for the fourth quarter. Most importantly, the improvements we made in operational efficiency and cost control during the year will have a long-term positive impact on the overall profitability of the business. The Covid-19 pandemic upended many traditional business models, routines and strategies for companies all over the world, but Gentex remained adaptive and responsive in the midst of a constantly changing environment. Our teams pulled together to support one another and our community, working remotely when possible, and following enhanced safety protocols to help keep each other safe when on campus. We were also able to support our community, by supplying local police and healthcare teams with PPE that we had in stock, face shields that we designed and manufactured, and sanitizer and cleaning agents that we produced in our chemistry labs. Additionally, our research and engineering teams were able to help find and prove-out ways for hospitals to re-use PPE and then we supported the mobilization of this concept by lending industrial ovens to our local hospitals. Despite the difficult environment throughout the year, 2020 was a record setting year for donations to local charitable organizations that help support the communities where we live and work. FDM with Video Recording Gen 2 Full Display Mirror (FDM) In-Mirror Display Solutions When we speak with investors about the future of Gentex, I remain We continue to utilize our balance sheet to create shareholder value convinced that we are well positioned to continue leading the industry through our consistent dividend and share repurchase programs, which in innovation and growth. Our technology platforms provide substantial returned more than $400 million dollars to shareholders in 2020. We also value for our customers today, but are also enabling critical functionalities paid off the remaining short-term debt on the balance sheet, and are well for the automotive environment of tomorrow. In January of 2021, we positioned to identify and invest in new technologies that have a strategic showcased many of these new technologies and capabilities at the virtual fit with our core competencies. Consumer Electronics Show (CES), and you can see these new products and innovations at gentex.com/ces-2021. We know that the complexities we faced in 2020 have not completely gone away, and there will still be many challenges and risks ahead for the Among the technology enhancements shown at CES were new industries we support, our business, and the communities where we live capabilities for our Full Display Mirror and Camera Monitoring Systems, and work. Yet at the same time I remain optimistic about Gentex’s future. including trailer tow cameras and digital video recording. We also We believe that our financial discipline combined with our operational announced partnerships with Retispec, PayByCar and Simplenight, and efficiency, new product pipeline and common-sense approach to capital the acquisition of Vaporsens, a novel nanofiber sensing technology. The allocation provide the pathway to significant shareholder returns. expansion of our large-area dimmable device manufacturing line continues We appreciate your continued support and trust. to garner attention, and will support the launch of that product in the coming years. You can read more about these new technologies in the following pages. Steve Downing President and CEO Vaporsens Military Sensing Application 6 G ENTEX CORP ORATION 2020 A NNUAL REPORT 7 Kids’ Food Basket Retispec PaybyCar SimpleNight 2020 ANNUAL REPORT FINANCIAL PERFORMANCE history 2021: $1.94–$2.02 B $310 m 2021 GUIDANCE (As of January 31, 2021) $1.94–$2.02 b Revenue 39%–40% Gross Margin $210–$220 m GUIDANCE (As of January 31, 2020) $1.91–$2.0 B Revenue 36%–37% Gross Margin $205–$215 m ACTUAL PERFORMANCE $1.68 B Revenue 35.9% Gross Margin $205.9 m 29.3% (First Half ) 40.3% (Second Half ) Operating Expenses (E, R&D and S, G&A) Operating Expenses (E, R&D and S, G&A) Operating Expenses (E, R&D and S, G&A) 15%–17% Annual Tax Rate $85–$95 m Capital Expenditures $105–$110 m 15.6% Annual Tax Rate $51.7 m Capital Expenditures $104.7 m Depreciation & Amortization Depreciation & Amortization 16%–18% Estimated Annual Tax Rate $85–$95 m Capital Expenditures $105–$110 m Depreciation & Amortization 2020 RETURN TO SHAREHOLDERS $117.2 M Cash Dividends Paid $.48/share Dividend $288.5 M Share Repurchases 10.6 M Shares Repurchased $405.7 M Returned to Shareholders 2022 SALES GROWTH 4–8% Above 2021 sales growth estimates FUTURE ESTIMATES Our 2021 guidance is built from the IHS Markit’s mid-January 2021 forecast for light vehicle production in North America, Europe, Japan, Korea and China. 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. 8 G ENTEX CORP ORATION 2020 A NNUAL REPORT 9 $1800$2000$2200$1600$1400$1200$1000$800$600$400$200$0200120022003200420052006200720082009201020112012201320142015201620172018201920202021Revenues (in millions)Year MARKET PERFORMANCE LIGHT VEHICLE PRODUCTION (per IHS Markit January light vehicle production forecast) — in millions Region North America Europe Japan and Korea China Total Light Vehicle Production 2019 Actual 16.3 21.2 13.1 24.7 75.3 2020 Actual 2020/2019 Variance 13 16.5 11.2 23.4 64.1 -20% -22% -14% -5% -16% 2021 Forecast 16.3 19 12 25.1 72.4 2021/2020 Variance 2022 Forecast 2022/2021 Variance 25.4% 14.5% 7.1% 6.4% 12.4% 16.7 20.1 12.1 26 74.9 2% 6% 1% 4% 3% MARKET SHARE ELECTROCHROMIC (IEC) AUTO-DIMMING 93.8% AUTO-DIMMING MIRROR SHIPMENTS (thousands) 26,123 Interior Mirrors (IEC) 29,594 in 2019 12,098 Outside Mirrors (OEC) 13,286 in 2019 38,221 TOTAL MIRRORS (-11%*) 42,880 in 2019 Domestic Transplant North America Europe Asia-Pacific Total 2000 2010 2018 2019 2020 59% 5% 64% 27% 9% 22% 15% 37% 44% 19% 19% 12% 31% 45% 24% 20% 13% 32% 46% 22% 19% 12% 31% 44% 25% 100% 100% 100% 100%** 100% * Light Vehicle Production declined 16% in 2020, compared to 2019. ** Numbers may not add to 100% due to rounding. 10 G ENTEX CORP ORATION 2020 A NNUAL REPORT 11 DIMMABLE DEVICES MARKET LEADING POSITION IN ELECTROCHROMICS Throughout our history, Gentex has advanced the performance and potential use cases for electrochromic technology. Whether in a vehicle’s interior mirror or the larger outside mirrors, and even for the windows on a Boeing 787, we have continued to improve our optical clarity, time to darken and clear, and overall level of darkening capability. The quality of our dimmable products, along with our continued pursuit of additional features for our customers, has helped Gentex grow to provide more than 93% of the auto-dimming mirrors on today’s vehicles. As manufacturing came to a near standstill in the second quarter, the demand for dimmable mirrors and advanced features rebounded dramatically in the back half of 2020. We believe consumer demand for new technology remains strong, and tech adoption is continuing to accelerate across vehicle platforms as automakers seek to differentiate from their competition and across their vehicle lineup. In addition, consumers who have had electrochromics in their prior vehicles are likely to demand the feature as they look for their next vehicle, and Gentex continues to lead the industry by bringing dimming capability to even more areas of the vehicle cabin. Dynamically Controlled Ambient Lighting In the vehicle of the future, the ability to control the amount of ambient light in the cabin will give vehicle manufacturers the ability to improve their exterior and interior cabin aesthetics, passenger and driver comfort, display performance, and vehicle design. Dimmable sunroofs, moon roofs, side windows, mirrors, sensor shrouds, visors, heads-up displays, and other innovative lighting controls will maximize design flexibility and product performance. For transparent displays, electrochromics can be employed to add contrast to in-vehicle displays, ensuring that critical information is visible, even in bright environments. This same technology can be used to hide a vehicle’s cameras when not in use, or improve a camera or other sensor’s performance by limiting exposure or reducing glare. Dimmable Options 1. Windows 2. Auto Dimming Mirror 3. Heads-up Display: Concept 4. Exterior Display: Concept 5. Shroud: Concept 6. Sun Visor: Concept 1 3 4 12 G ENTEX CORP ORATION 2 2020 Interior Auto-Dimming 26,123 Exterior Auto-Dimming 12,098 Q1 7,051 3,343 Q2 3,703 1,557 Q3 7,174 3,385 Q4 8,162 3,814 Total 38,221 10,394 5,260 10,559 11,976 Large Area Dimmable Devices In addition to design and styling benefits, dimmable sunroofs and moonroofs can be used to manage sun load in the vehicle, keeping vehicles cooler and reducing HVAC load to help lower CO2 emissions and improve fuel efficiency. Electrochromics also provide the ability for occupants to customize their vehicle environment quickly and easily, which can be tied to consumer presets or in-cabin controls. 5 6 Dimmable Moon Roof 2020 A NNUAL REPORT 13 DIGITAL VISION A DIGITAL EVOLUTION Gentex continues to expand our capabilities in digital vision with our customers. As automakers redesign vehicles to optimize aerodynamics and reduce drag, they often must compromise the rearward visibility in the cabin. With the Full Display Mirror® (FDM®) and Camera Monitoring Systems (CMS), Gentex provides industry leading functionality that enables drivers to easily toggle between a mirror and a display to enhance comfort, convenience, and OEM profitability. In mirror mode, the Full Display Mirror functions as a traditional auto- In 2020, Gentex and Toyota launched this new digital video recording dimming mirror; removing glare and optimizing driver comfort. When (DVR) functionality in Japan, to capture both the rearward and forward toggling to display mode, it shows the video feed from a high mounted, facing camera feeds simultaneously, and then use the FDM’s interface rearward facing camera; removing any obstructions from the interior of to provide a seamless interaction point. This exciting development the vehicle. Users can switch between the two modes quickly and easily paves the way for continued proliferation of additional new features and based on preference or road conditions. upgrade opportunities for our customers. Additionally, these feature As in-vehicle displays continue to proliferate, FDM is poised to lead the charge. It represents a profitable, optional, in-demand function that consumers have reacted well to. Located ideally in the driver’s scanning sets are beginning to open the door to new market opportunities on delivery and transit vehicle platforms that historically have not utilized an in-cabin mirror. path, it opens up new opportunities for OEMs to show critical driver Gentex continues to advance our technology to enable camera monitoring information and alerts, and functions in this creative display location. systems. Building from our concepts at CES 2020, where we showcased At CES, Gentex showed additional FDM enhancements including digital hybrid and fully digital CMS platforms that use additional cameras and video recording (DVR) and trailer towing functionality, which utilize displays, Gentex continues push the boundaries of digital vision systems additional video feeds for optimal driver experiences and functionality. in the vehicle environment. Both hybrid and full CMS systems can be tied to the vehicle’s blind spot system, if available, and provide additional alerts and visibility for drivers. Forward Facing Hitch View Rearward Facing Interior Trailer View INTERIOR Facing Reverse View Full Display Mirror Shipments 23 new nameplates launched in 2020 1.05M 180k 2017 180K 2018 382K 2019 739K 2020 1.05M J.D. Power Tech Experience Index (TXI) Study SM Camera rear-view mirror earns the highest Execution Index score among luxury owners… Among advanced camera/vision technologies, camera rear-view mirror receives the highest overall execution in the mass market segment.* HYBRID CAMERA MONITORING SYSTEMS FULL CAMERA MONITORING SYSTEMS 1 2 3 4 5 6 7 Leverages the full display mirror as the display for two or more of the video feeds. Replaces exterior mirrors with cameras, which feed additional in-vehicle displays. • Can be engineered to meet global regulatory requirements • Enhances safety • Enables users to switch between mirror and display modes • Reduced size exterior mirrors enhance vehicle aerodynamics • Doesn’t require vehicle re-tooling 1. Hybrid Camera Monitoring System with Blind Spot Indicator 2. Exterior Mirror with camera behind the glass 3. Camera hidden in center high- mounted stop light (CHMSL) • Approved for use in Japan, EU, UK, and China • Further optimizes aerodynamics by replacing exterior mirrors with cameras • Increases fuel economy • Additional offering for OEMs 4. Full mirror replacement 5. Door-integrated display 6. Exterior mirror replacement 7. Shark-fin camera integration 14 G ENTEX CORP ORATION * jdpower.com/business/press-releases/2020-us-tech-experience-index-txi-study 2020 A NNUAL REPORT 15 15 CONNECTIVITY STAYING CONNECTED Connected mobility has been a buzz phrase at CES for the past several years, and HomeLink® and HomeLink Connect® continues to be the market leader in providing entry-critical access control. For the installed base of radio-frequency (RF) controlled garage doors and gates, HomeLink provides a profitable hardware upgrade in the vehicle for OEMs, and unmatched compatibility across nearly every device in North America. With HomeLink Connect, Gentex builds on this capability to provide a one-to-many compatibility platform for wifi and networked devices, by enabling users to control devices simultaneously, across multiple applications and providers, with the press of a single button. INTEGRATED TOLL MODULE Touch-free and contactless transactions are developing trends in the connected economy. Previously, this trend was being driven based on security and convenience, but Covid-19 has shown the potential impact these technologies could have in protecting the health and safety of each person. Our Integrated Toll Module® (ITM®) product is designed to take advantage of these trends by providing a single platform that is compatible with the majority of tolling systems in the US market. As ITM has rolled out with our lead customer, Gentex continues building relationships in different areas that will enhance the scope of the transactional vehicle environment. One example of this is our partnership with PayByCar, which utilizes toll tag systems and infrastructure at gas stations to enable contactless payment for refueling. We believe PayByCar is an early example of how our ITM hardware can create a unique value proposition for many industries and services seeking to move toward a more contactless payment environment. Adding to the convenience and functionality of our connectivity products, we were pleased to announce a partnership with the e-commerce aggregator, Simplenight. Gentex is working with Simplenight to broaden their in-vehicle offerings, which include the ability to make reservations at restaurants, buy movie tickets, make hotel accommodations, and more. We believe this will enhance our OEM customers’ ability to offer a one-stop shopping and connected-car experience. Enables the possibility of contact-free payments for: • Traditional Tolling • Demand-Based Tolling • Gasoline Purchases • Charging Stations and Lanes • Parking Garages • Fast Food • Coffee 16 G ENTEX CORP ORATION 2020 A NNUAL REPORT 17 SENSING With our extensive history in cameras, displays, and sensing technology, Gentex is well positioned to grow in the automotive realm, while also expanding our reach into new markets. This year, we announced a smoke and vape detection system in launch for autonomous taxis. This new product leverages our heritage in particulate smoke detection from our fire protection division, and expands it into a system designed for use in an HVAC system for automotive. Rinspeed Driverless Vehicle Concept While the future of mobility and the fully autonomous vehicle are still in development, we are working hard to continue to develop and create new technologies that can provide advanced authentication, enablement and sensing that will be required in user-owned, ride-sharing, ride hailing, and fleet-run vehicles of the future. Over the last few years we shared our expanding feature set that has included the development of camera and other sensing technologies that can provide biometric authentication, driver monitoring, and passenger monitoring. These functions can be paired with the vehicle’s security protocol for quick and reliable authentication, adding a layer of safety for managing access, control, and critical driver notifications. In-Cabin vehicle sensor Concept Advanced Sensory Lab Biometric authentication 1 2 3 4 Our sensing capabilities have continued to develop, from our founding in fire protection, to the unique light sensors in each of our interior auto-dimming mirrors, to the algorithms in our cameras that provide the feature set that makes digital vision possible, and into new machine vision features such as iris authentication, driver monitoring, and cabin monitoring. This year, we announced the acquisition of Vaporsens™, a nanofiber sensing company. The Vaporsens technology is capable of being deployed across multiple verticals to support sensing for hazardous chemicals, explosives, or to provide data regarding air quality. This exciting new technology leverages our core competencies to create sensing capabilities that surpass anything in the market today. 1. Military Application: Concept 3. Sensory Array 2. Nanofibers Under Magnification 4. Individual Nanofiber Cell MEDICAL Lighting Driver Monitoring Cabin Sensing On the medical front, we have continued to work with the Mayo Clinic to develop, test, and refine our surgical lighting solution. This ongoing development combines our camera and vision systems with advanced lighting components to optimize, control, and direct light within surgical and medical environments. In 2020, we also announced a partnership with Retispec, an artificial intelligence medical imaging company, to help develop and manufacture tools and systems for early detection of Alzheimer and other disease biomarkers in the human eye. Each of these opportunities capitalizes on the unique skill sets at Gentex, and is built on our heritage of being a leader in developing new sensor technologies. 18 G ENTEX CORP ORATION 2020 A NNUAL REPORT 19 SUSTAINABILITY OUR ONGOING COMMITMENT TO PROGRESS Gentex is committed to making intentional decisions that reflect our desire to be responsible with our resources. Each year, we update and publish our sustainability report to give a deeper look at the policies and practices we use to guide our environmental, social, and corporate governance decisions. We are working to improve the statistics, data sets, and goals in this report to ensure we are doing our part. Our most recent sustainability report can be found at gentex.com/sustainability. Within the investment community, sustainability has gained increasing recognition as an indicator that a company is focused on more than just short-term gains. At Gentex, continuous improvement is engrained in our teams’ daily activities. We focus on repeatable practices that are screened to consider their impact on the environment and in our communities. We also continue to work towards long-term goals in a meaningful and genuine manner, such as being carbon neutral by 2049. We expect our suppliers to join us in striving to align with the United Nations’ Global Compact Principles (unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html), including the defense of human rights, the implementation of protective labor policies, environmental responsibility, and anti-corruption practices. We also encourage our team and our suppliers to use recycled and/or sustainable materials whenever possible. To read more about these supplier requirements, visit gentex.com/supplier-information. Scott Ryan Vice President, General Counsel and Corporate Secretary, Sustainability Reporting Coordinator DIVERSITY, EQUITY, & INCLUSION DIVERSITY, EQUITY AND INCLUSION (DEI) Under the leadership of Gentex’s VP of Purchasing & Diversity Officer, Joe Matthews, the DEI Council has worked to focus our efforts around three core practices. These Values in Action, signed by our corporate leadership team, serve to guide our DEI efforts across the company: BUSINESS RESOURCE GROUPS (BRG) Business Resource Groups are an integral component of Gentex’s commitment to diversity, equity and inclusion. Each group is designed to create a sense of belonging within and across work groups at Gentex and provide an open forum for the exchange of ideas. • Cultivating a culture of inclusion where every team member belongs The groups also help identify gaps in Gentex’s professional development • Valuing differences and our team members’ unique contributions processes and propose opportunities for improvement. Lastly, each group • Creating a positive environment where all team members have the functions to create a liaison with a community organization that shares opportunity to thrive a similar focus or mission. Examples of Gentex BRGs include: In 2020, the DEI Council partnered with Community Action House’s food drive, and helped manufacture and distribute over 15,000 masks Women @ Gentex is a catalyst for women to achieve their personal to schools, staff and non-profits. In our offices, the council, our HR team, and professional purpose in career, community and marketplace. and management throughout different parts of the company took part in the Franklin Covey Unconscious Bias workshop. They found the training program to be incredibly valuable, and we will continue to roll it out across Gentex’s leadership. Gentex V.E.T.S. stands for Veterans. Empowerment. Teamwork. Service. It exists to equip Veterans with skills for success through coaching, mentorship, and development, and partners with military organizations to be an employer of choice for Veterans. We were honored to add Birgit Klohs and Robert Wilson, two exceptional community leaders, to our external DEI Advisory Board this year. Birgit was the President and CEO of The Right Place Inc. 2020 Events: where she led international business development strategy and economic development for the greater Grand Rapids area. Robert has worked in several leadership roles at Nissan North America and co-founded Culture Shift Team, where he is a senior partner. Both serve on a variety of boards and in nonprofit organizations, and provide outside experience implementing strategies to support our DEI Values. Women@Gentex • International Women’s Day Sponsor • Inforum ManufacturingNEXT sponsor • Inforum TechnologyNEXT sponsor • Work-life integration panel discussion Gentex V.E.T.S. • Veterans Day Ceremony at Gentex • Hiring West Michigan Recruiting Event • Received Bronze Level Status as Veteran friendly employer • Make a Veteran Smile Campaign • Vets & members of the BRG recorded messages to thank veterans for their service 20 G ENTEX CORP ORATION 2020 A NNUAL REPORT 21 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 also designs, develops and manufactures various electronics that are value added features to the interior and exterior automotive rearview mirrors 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 automotive producing regions worldwide, which it supports with numerous sales, engineering and distribution locations worldwide. At its inception, the Company manufactured smoke detectors, a product line that has since evolved to include a variety of fire protection products. In the early 1980’s, the Company introduced an interior electromechanical automatic-dimming rearview mirror as an alternative to the manual day/night rearview mirrors for automotive applications. In the late 1980’s, the Company introduced an interior electrochromic automatic-dimming rearview mirror for automotive applications. In the early 1990’s, the Company introduced an exterior electrochromic automatic-dimming rearview mirror for automotive applications. In the late 1990’s, the Company began making volume shipments of three new exterior mirror sub-assembly products: thin glass flat; convex; and aspheric. In 2005, the Company began making volume shipments of its bezel-free exterior automatic dimming mirror. In 2010 the Company began delivering, electrochromic dimmable aircraft windows for the aviation industry. In 2013, the Company acquired HomeLink®, a wireless vehicle/home communications product that enables drivers to remotely activate garage door openers, entry door locks, home lighting, security systems, entry gates and other radio frequency convenience products for automotive applications, wherein the Company had previously been a licensee of HomeLink® and had been, since 2003, integrating HomeLink® into its interior automatic-dimming rearview mirrors. 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 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 2021, the Company will be continuing to work on the intelligent medical lighting system in order to assess system performance and work toward obtaining any necessary approvals. In April 2020, the Company, in the ordinary course of business, acquired Vaporsens, Inc. (“Vaporsens”), which specializes in nanofiber chemical sensing research and development. This new nanofiber technology can detect a wide variety of chemicals, including explosives, drugs, volatile organic compounds (“VOCs”), toxic industrial chemicals, amines, and more. The core of Vaporsens’ chemical sensor technology is a net of nanofibers approximately one thousand times smaller in size than human hair. Their porous structure allows them to absorb targeted molecules from sampled gas and identify them via changes in their electrical resistance. The technology allows for the rapid detection of target chemicals with high sensitivity in the parts per billion and parts per trillion ranges. The Vaporsens technology has a wide variety of use cases in various markets and industries, with potential applications for automotive, aerospace, agriculture, chemical manufacturing, military and first responders, worker safety, food and beverage processing, and medical. Automotive revenues represent approximately 98% of the Company’s total revenue in 2020, mostly consisting of interior and exterior electrochromic automatic-dimming rearview mirrors and automotive electronics. 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, including the Full Display Mirror® product. The Company also ships interior non-automatic-dimming rearview mirrors with and without 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 can 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 available in its automatic-dimming applications. integrating biometric authentication with many of its other electronic features, including, HomeLink® and HomeLink Connect® or the The Company manufactures other automotive electronics products through HomeLink® applications in the vehicle including the rearview Integrated Toll Module®. The biometric system allows for added security and convenience for multiple drivers by adding an additional factor mirror, interior visor, overhead console, or center console. Certain of the Company’s newer features can be located either in the rearview mirror of authentication for increased security, when a driver (or passenger) enters a vehicle. The Company announced in January 2018 that it entered or other locations in the vehicle. Additionally, as the Company expands its Full Display Mirror® product and the Integrated Toll Module® into an exclusive licensing agreement, in the ordinary course of business, with Fingerprint Cards AB to deploy its ActiveIRIS® iris-scanning system, rearward facing video cameras and integrated toll transponders are being produced and sold. biometric technology in automotive applications. The Company produces rearview mirrors and electronics globally for automotive passenger cars, light trucks, pickup trucks, sport utility vehicles, In January 2019, the Company announced that it would be offering, as optional content, its latest generation of variable dimmable windows on and vans for OEMs, automotive suppliers, and various aftermarket and accessory customers. Automotive rearview mirrors and electronics accounted the Boeing 777X aircraft. During the third quarter of 2019, the first production shipments of variably dimmable windows were made to Boeing for 98% of the Company’s consolidated net sales in 2020. 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. 22 23 GENTEX CORPORATION2020 ANNUAL REPORT The Company is the leading manufacturer of electrochromic automatic-dimming rearview mirrors in the world, and is the dominant supplier also continues to sell automatic-dimming exterior mirror sub-assemblies to Magna Mirrors. In addition, a Japanese manufacturer (Tokai Rika) to the automotive industry. Competitors for automotive rearview mirrors include Magna International, Panasonic, YH America, Inc., BYD Auto is currently supplying a few vehicle models in Japan with solid-state electrochromic mirrors. There are also a small number of Chinese domestic Company, Murakami Kaimeido Company, Tokai Rika Company, Peak Power Automotive, SMR Automotive, ADAYO, Alpine Electronics, Inc., mirror suppliers that are marketing and selling automatic-dimming rearview mirrors, in low volume, within the domestic China automotive MEKRA Group, Ningbo Feng Mei, Chogqing Yimei, Guangdong, Xiamen Intretech, Licon, YanFeng, MirrorTech and the China automotive market. Moreover, other companies have demonstrated products that are competitive to the Company’s Full Display Mirror® system, and a aftermarket. The Company also supplies electrochromic automatic-dimming rearview mirrors to certain of these rearview mirror competitors. small number of Chinese domestic mirror suppliers have begun marketing and selling these products, in low volume, within the domestic China 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®, Market. Further, a Japanese manufacturer (Murakami) has begun selling and marketing competitive Full Display Mirror® products in Japan. The Company acknowledges that dimming device (e.g., electrochromic) technology is the subject of research and development efforts by numerous third parties. frameless mirror designs, LED map lamps, compass and temperature displays, telematics, ITM® systems, hands free communication, Rear In November 2020, the Company announced a partnership, in the ordinary course of business, with PayByCar™, to pursue compatibility Camera Display (“RCD”) interior mirrors, FDM® interior mirrors, digital video recording solutions, exterior turn signals, side blind zone between the Company’s Integrated Toll Module® and PayByCar’s innovative payment solution that allows drivers to use their smartphones indicators and various other exterior mirror features that improve safety and field of view. Advanced features currently in development include: and toll transponder to fuel up at certain gas stations without using cash or a credit card. Compatibility between these two technologies can biometric authentication systems, hybrid and fully digital camera monitoring systems (“CMS”), driver and cabin monitoring systems, cabin help to grow each company’s respective consumer base while introducing new users to the benefits of the transactional vehicle. sensing systems, touch screen displays for mirrors, and digital enhancements to displays to improve driver safety, among other things. Other automotive products currently in development include large area dimmable devices, which include sunroof and moonroof applications, driver and passenger windows and 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, In January 2021, the Company announced a partnership, in the ordinary course of business, with Simplenight to provide drivers and vehicle occupants with access to enhanced mobile capability for booking personalized entertainment and lifestyle experiences in addition to everyday purchases. Simplenight delivers a customizable and robust platform that enables brands to globally offer real-time book-ability across multiple categories such as dining, accommodations, attractions, events, gas, parking, shopping and more. The platform is unique in that it is designed to seamlessly integrate into automaker infotainment and navigation systems, as well as mobile applications and voice assistants. The Company Japan, South Korea and China, as well as its headquarters in Michigan. The Company generally supplies automatic-dimming mirrors and plans to integrate Simplenight into its current and future connected vehicle technologies, including HomeLink®, the automotive industry’s mirrors with advanced electronic features to its customers worldwide under annual blanket purchase orders with customers, as well as under leading car-to-home automation system. HomeLink® consists of vehicle-integrated buttons that can be programmed to operate a myriad of long-term agreements with certain customers, entered into in the ordinary course of the Company’s business. home automation devices. The Company is currently integrating Simplenight into its HomeLink Connect® app, which helps users program The Company is currently supplying mirrors and electronic modules for Aston Martin, BMW Group, Daimler Group, FCA Group, Ford Motor their HomeLink® buttons and control cloud-based devices from their vehicles. Co., Geely/Volvo, General Motors, Honda Motor Co., Hyundai/Kia, Jaguar/Land Rover, Mazda, Mahindra & Mahindra, McLaren, Polaris, PSA/ The Company believes its electrochromic automatic-dimming mirrors and mirrors with advanced electronic features offer significant Opel Group, Renault/Nissan/Mitsubishi Group, Rivian Automotive, Subaru, Suzuki, Tesla, Toyota Motor Company, Volkswagen Group, as well as, performance advantages over competing products and the Company makes significant research and development investments to continue shipments to domestic China manufacturers (Borgward, BYD, Chehejia, Chery, Great Wall Motors, Hongqi, NextEV, SAIC, and Skywell). to increase and improve the performance advantages of its products and to potentially add new products. Revenues by major geographic area are disclosed in Note 7 to the Consolidated Financial Statements. There are numerous other companies in the world conducting research on various technologies, including electrochromics, for controlling light Traditionally, new products and technologies have been restricted to high-end vehicles and premium trim/option packages. As consumer demand has continued to pursue the adoption of advanced technology, more OEMs have shifted to offer a variety of trim packages and option packages for each of their vehicles, creating a range of available pricing and technologies across their lineups. In some instances, Company products such as the FDM® appeal to consumers who are interested in new technology, while also resolving rearward vision limitations created by vehicle design changes that increase aerodynamics. The Company has contributed to this differentiation strategy, allowing OEMs to maximize profitability and optionality by providing a suite of profitable, mirror-based and in-vehicle technologies that consumers demand. As more consumers have become familiar with interior and exterior dimming mirrors, HomeLink®, SmartBeam®, FDM®, and other Company technologies, 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. The Company has also continued to invest in new technologies to improve the manufacturing processes. In the fourth quarter of 2020, the Company, in the ordinary course of business, completed the acquisition of Argil, Inc., which specializes in electrochromic technology and research and development, which the Company anticipates using to complement and expand its product offerings and leverage for manufacturing efficiencies. 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. consumers have continued to select these technologies in their subsequent vehicles, driving further market and nameplate penetration as As the Company continues to expand its automatic-dimming mirror products with additional advanced electronic features and expands the OEMs launch new vehicles and expand into new markets. Where OEMs had historically used Company technologies only to differentiate from capabilities of its CMOS imager technology for additional features (i.e. SmartBeam®, FDM®, rear video camera, etc.), as well as continuing one another, they have now begun to also use Company technologies to differentiate trim lines across their own nameplates. In new markets, to expand the capabilities of the Company’s hybrid and fully digital CMS technology, the Company recognizes that it is competing with emerging OEMs have recognized the need to include Company products in their vehicles to compete with global OEMs and to maximize considerably larger and more geographically diverse electronics companies that could present a formidable competitive threat in the future per-vehicle profitability. as new products/features and technologies are brought to market. 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 Dimmable Aircraft Windows share worldwide in both 2020 and 2019. While the Company believes it will retain a dominant position in automatic-dimming rearview mirrors The Company continues to manufacture and sell variable dimmable windows for the passenger compartment on the Boeing 787 Dreamliner for some time, another U.S. manufacturer, Magna Mirrors, a division of Magna International Inc. (“Magna”), continues to compete for sales to series of aircraft. In January 2019, the Company announced that it would be offering, as optional content, its latest generation of variable domestic and foreign vehicle manufacturers and is supplying a number of domestic and foreign vehicle models with its versions of auto-dimming dimmable windows on the Boeing 777X aircraft. During the third quarter of 2019, the first production shipments of variably dimmable windows mirrors and may have considerably more resources available to it. As such, Magna may present a formidable competitive threat. The Company 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. 24 25 GENTEX CORPORATION2020 ANNUAL REPORT 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. Fire Protection Products The Company owns 8 U.S. Registered Trademarks, 14 U.S. Patents, 16 foreign Registered Trademarks, and 10 foreign patents that relate to the Company’s fire protection products. The U.S. Patents expire at various times between 2021 and 2037, while the foreign patents expire at various times between 2022 and 2030. The Company believes that the competitive advantage provided by these patents is relatively small. The Company also has in process 230 U.S. Patent applications, 424 foreign patent applications, and 14 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. 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 Human Capital Resources for use in fire detection systems in office buildings, hotels, and other commercial and residential establishments. As of February 1, 2021, the Company had 5,303 full-time employees. None of the Company’s employees are represented by a labor union 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 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. Company’s brand name and private labels. The Company markets its fire protection products primarily in North America, but also globally through The Company fosters a collaborative culture founded on devotion to quality and innovation. An inclusive environment is nurtured so that team regional sales managers and manufacturer representative organizations. members can perform, support each other, and continue to grow and learn, including on-the-job training. 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 primarily with eight manufacturers of smoke detection products for commercial use and approximately This culture is supported by a competitive compensation system that goes beyond base salary and includes for virtually all employees: quarterly profit-sharing bonuses; an extensive stock options program, an employee stock purchase plan; 401(k) plan (or other retirement plan for non-US four manufacturers within the residential market, three of which produce photoelectric smoke detectors. In the signaling appliance markets, the employees) with Company matching; and tuition reimbursement. Equity compensation is also paid to a significant number of employees. In Company estimates it competes with approximately seven manufacturers. While the Company faces significant competition in the sale of smoke keeping with the Company’s core principle of ownership mentality, compensation is structured throughout the organization so that employees detectors and signaling appliances, it believes that the introduction of new products, improvements to its existing products, its diversified product win when all of stakeholders win. The Company also provides a healthy and safe climate-controlled work environment that includes an on-site line, and the availability of special features will permit the Company to maintain its competitive position. wellness center and on-site health clinic at its headquarters. Nanofiber Products and Development Evidence of the Company’s commitment to inclusion is its cultivation of a world-class diversity, equity & inclusion (“DE&I”) ethos that allows team members to make a lasting impact in the communities in which the Company operates, all while attracting and retaining diverse talent that As noted, the Company completed the acquisition of Vaporsens in 2020. Again, Vaporsens specializes in nanofiber chemical sensing research can help propel the business forward. While the Company has an environment of equal employment opportunity related to recruitment, hiring, and development. promotion, discipline, and other terms of employment, the commitment to have a skilled and diverse world class workforce goes beyond that. MARKETS AND MARKETING. While no current commercialized product yet exists, this technology has the potential ability to sense explosives, toxic industrial chemicals, chemical warfare agents, drugs, consumer goods, and VOCs. This technology has a wide variety of use cases in various The Company’s DE&I initiatives are supported by the its Diversity Officer and DE&I Council, which helps implement specific diversity programs, supports internal training, and creates opportunities to spread awareness throughout the organization. The Company’s DE&I Council markets and industries, with potential applications for automotive, aerospace, agriculture, chemical manufacturing, military and first responders, is led by Mr. Joe Matthews, Diversity Officer and Vice President of Purchasing. Mr. Matthews has been honored as a Salute to Diversity Winner worker safety, food and beverage processing, and medical applications. by Corp! Magazine. Trademarks and Patents As a part of DE&I initiatives, the Company maintains a growing list of business resource groups (“BRGs”) comprised of individuals with similar interests or backgrounds that work internally to support one another, develop leadership skills, and enhance cultural awareness. Among current The Company owns 38 U.S. Registered Trademarks and 719 U.S. Patents, of which 30 Registered Trademarks and 647 patents relate to BRGs are Women at Gentex and Veterans at Gentex. electrochromic technology, automotive rearview mirrors, microphones, displays, cameras, sensor technology, smart lighting technology, and/ or HomeLink® products. These Patents expire at various times between 2021 and 2044. 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. DE&I efforts at the Company extend to the supply base as well, where Company been recognized for ongoing efforts to increase supplier relationships with minority- and women-owned enterprises. In fact, the Company mentors certain such suppliers to help them develop the business systems and technologies necessary to support future growth. The Company is a member of the Michigan Minority Supplier The Company also owns 347 foreign Registered Trademarks and 1020 foreign patents, of which 331 Registered Trademarks and 972 patents Development Counsel and the Women’s Business Enterprise Counsel – Great Lakes Region. relate to electrochromic technology, automotive rearview mirrors, microphones, displays, cameras, sensor technology, and/or HomeLink® products. These patents expire at various times between 2021 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. Hiring rates, voluntary and involuntary turnover rates, internal rates of hiring and promotion, and safety records are considered as measures of the Company’s success in human capital management. While hiring and diversity policies are in place as a means to remain on track in terms of appropriate human resources management, the DE&I efforts have furthered the process of creating a welcoming environment so The Company owns 58 U.S. Patents and 38 foreign patents that relate specifically to the Company’s variable dimmable windows. The U.S. the Company can hire and retain the best people. The Company produces a sustainability report providing more information regarding diversity Patents expire at various times between 2026 and 2038, while the foreign patents expire at various times between 2021 and 2037. and corporate responsibility. 26 27 GENTEX CORPORATION2020 ANNUAL REPORT Forbes has named the Company as one of the “200 Best Small Companies” numerous times. Forbes also recently acknowledged the Company as litigation relating to the conduct of our business; the length and severity of the COVID-19 (coronavirus) pandemic, including its impact across a “Best Employer for Diversity.” In addition, the Company is the recipient of an EPIC Diversity Visionary Award presented by a local Chamber our business on demand, operations, and the global supply chain. Readers are cautioned not to place undue reliance on these forward-looking of Commerce. Moreover, the Company’s DE&I efforts related to actively developing and using minority, women, and veteran-owned suppliers statements, which speak only as of the date they are made. have been acknowledged and recognized by multiple OEM customers. In fact, Toyota Motor Engineering & Manufacturing North America, Inc. has specifically recognized the Company’s efforts over the last 10 years to increase supplier relationships with minority business enterprises. 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 A charitable program run by Company employees has been established as a means to give back to the community. Employees are encouraged to statement should be read in conjunction with the additional information about risks and uncertainties identified under the heading “Risk organize on-site fundraisers and to spend time volunteering at worthy charitable organizations. Support is also provided to a number of minority Factors” in the Company’s latest Form 10-K and Form 10-Q filed with the SEC, which risks and uncertainties now include the impacts of organizations in keeping with the Company’s DE&I efforts and to continue to build an even more diverse and skilled workforce. COVID-19 (coronavirus) pandemic that has affected, and will continue to affect, general economic and industry conditions, customers, suppliers, and the regulatory environment in which the Company operates. Includes content supplied by IHS Markit Light Vehicle Production Forecast The Company’s Board of Directors has regular touchpoints with management regarding: employee engagement; workforce planning (including capabilities and skills development); safety; understanding workforce demographics and DE&I strategies; and corporate culture. The Board and of January 18, 2021 (gentex.com/forecast-disclaimer). management know the right talent is required to implement the Company’s strategies. As such, the Board works with management appropriately The following risk factors, together with all other information provided in this Annual Report on Form 10-K should be carefully considered. regarding the approach to, and investment in, human capital that includes recruitment, talent development, retention, and diversity. The Board has access to all levels of employees in the Company in its efforts to properly oversee human resources issues. AUTOMOTIVE INDUSTRY. Customers within the auto industry comprise approximately 98% of our net sales. The automotive industry has always been cyclical and highly impacted by levels of economic activity. The current economic environment continues to be uncertain, and The Board of the Company now has two women directors and the Nominating and Corporate Governance Committee has taken concrete continues to cause increased financial and production stresses evidenced by volatile automotive production levels (including continued decreases steps to improve Board diversity, including use of various resources and environments to identify qualified and diverse director candidates. Such in light vehicle production in China), volatility with customer orders, supplier part and material shortages, automotive and Tier 1 supplier candidates are contacted and interviewed in order to continue to build an even more diverse, qualified, and capable Board. plant shutdowns, customer and supplier financial issues, commodity material cost increases and/or supply constraints, tariffs, consumer vehicle The Board has also implemented a Complaint Submission and Handling Policy for concerns to be raised as needed. 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 (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 a website (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 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 COVID-19 pandemic. If automotive customers (including their Tier 1 suppliers) and suppliers experience plant shutdowns, work stoppages, strikes, 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 vehicle complexity increases, which can result in delays or cancellations of new vehicle platforms, package configurations, and inaccurate volume forecasts. This makes it challenging for us to forecast future sales and manage costs, inventory, capital, engineering, research and development, 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 2020 (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 that are not purely historical are forward-looking statements. Forward-looking statements give the Company’s current expectations or forecasts new or advanced technologies, each of which pose an ongoing challenge, which could adversely impact our business, financial condition, of future events. These forward-looking statements generally can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” and/or results of operations. “expect,” “forecast,” “future,” “goal,” “guidance,” “hope,” “intend,” “may,” “plan,” “poised,” “predict,” “project,” “should,” “strategy,” “target,” “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 other supply shortages; supply chain disruptions; our dependence on key management; our dependence on information systems; 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 litigation including securities 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 have increased the Company’s input costs, and have the potential to challenge the Company’s competitive position in foreign markets. The continuance of these tariffs and/or escalation of disputes in the geopolitical environment could 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, especially since the Company primarily manufactures and ships from one location. We cannot predict what further action may be taken with respect to tariffs or trade relations between the U.S. and other governments, and any further changes in U.S. or international trade policy could have an adverse impact on our business. 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® system and other products. We acknowledge that dimming device (e.g., electrochromic) technology is the subject of research and development efforts by numerous third parties. 28 29 GENTEX CORPORATION2020 ANNUAL REPORT 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 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, solution for a safety feature that makes nighttime driving safer by maximizing a vehicle’s high-beam usage, competition from multiple-function successfully acquire identified targets or manage timing of acquisitions with capital obligations across our businesses. Additionally, we may driver-assist products has already and could continue to impact the success of SmartBeam®. not be successful in integrating acquired businesses into our existing operations, achieving projected synergies, and/or maximizing the value of 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 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 devices, 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 obtain intellectual property rights, in the ordinary course of business, to strengthen our intellectual property portfolio and minimize potential risks of 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 infringement. The increasing tendency of patents granted to others on combinations of known technology is a potential threat to our Company. systems to replace mirrors within Japan and European countries. Since January 2017, camera monitoring systems are also permitted as an Any of these adverse consequences could potentially have an effect on our business, financial condition and/or results of operations. 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 eight automaker customers, which are General Motors, Subaru, Toyota, Nissan, Jaguar Land Rover, Mitsubishi, Aston Martin, and FCA. 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 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, 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. As a result of just-in-time supply chains within our business and the automotive industry, disruptions in our supply chain are occurring due to the COVID-19 pandemic and can also occur due to natural disasters, other pandemics, work stoppages, strikes, lens design, image processing from the camera to the display, and camera lens cleaning. The Company acknowledges that as such technology bankruptcy, etc. Such circumstances are disrupting, and may further disrupt, our shipments to one or more automakers or Tier 1 customers, evolves over time, such as cameras replacing mirrors and/or autonomous driving, there could be increased competition. which adversely affects our business, financial condition, and/or results of operations. 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, 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 short product life cycles and cyclical, ever-changing consumer demand patterns. When our customers are adversely affected by these factors, miles from our other manufacturing facilities in Zeeland, Michigan. Should a catastrophic event occur, our ability to manufacture product, 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 complete existing orders and provide other services could be severely impacted for an undetermined period of time. We have purchased business circumstances impacting our customers, sales mix can shift which may have either favorable or unfavorable impact on revenue and would include interruption insurance to address some of these risks. Our inability to conduct normal business operations for a period of time may have an adverse shifts in regional growth, in OEM sales demand, as well as in consumer demand related to vehicle segment purchases and content penetration. impact on our business, financial condition, and/or results of operations. 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 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, and/or results of operations could be negatively impacted. 30 31 GENTEX CORPORATION2020 ANNUAL REPORT 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 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 to expand and continually update this infrastructure in response to the changing needs of our business. For example, we have implemented by increased competition suppliers of multi-function driver assist camera products, which are able to achieve some of the same functionality as enterprise resource planning and other IT systems in certain aspects of our businesses over a period of several years and continue to update and SmartBeam® but at a lower cost, due to other suppliers leveraging similar hardware costs, but offering products with multiple software features. 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. 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 of Congo (“DRC”) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for 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, 2019, and 2020, 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 necessary for our products, 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. 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. 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. FLUCTUATIONS IN MARKET PRICE. The market price for our common stock has fluctuated, ranging from a low closing price of $20.09 to a high closing price of $34.06 during calendar year 2020. The overall market and the price of our common stock may continue to fluctuate. There 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: ◼ 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 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. ◼ General macroeconomic conditions. General Risk Factors 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 January 14, 2021, NHTSA issued a request for comment regarding NCAP with advanced driver assist features, including forward collision, lane keeping, blind spot detection and forward pedestrian impact avoidance technologies. 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 COVID-19 PANDEMIC. The COVID-19 pandemic has already significantly impacted worldwide economic and industry conditions and has had and may continue to have a material adverse effect on our business, financial condition, and/or results of operations. The COVID-19 pandemic began to materially impact the Company’s operations late in the first quarter of 2020 and continues to affect our business, financial condition, and/or results of operations, by virtue of governmental authorities imposing mandatory closures, work-from-home orders, and social distancing protocols, as well as voluntary closures and other restrictions. Even as restrictions have eased and production has resumed by our customers in large part, production volumes have been, and are expected to continue to be, volatile. The full extent of the effect of the COVID-19 pandemic on the Company, our customers, our supply chain, and our industries still depends on future developments, which remain highly uncertain, including the duration and severity of the current outbreak, subsequent outbreaks, and resulting actions taken by the Company or the various governments to contain or mitigate the spread of the coronavirus. These actions have already included, and could include more, work stoppages, quarantines, shutdowns, shelter-in-place orders or other limitations, which already have and could continue to: materially adversely affect the Company’s ability to adequately staff and maintain our operations; impair our ability to sustain existing levels of financial liquidity; and impact the Company’s business, financial condition, and/or results of operations. Additionally, if the negative global economic effects caused by the COVID-19 pandemic continue, overall customer demand may decrease, which could continue to have a material and adverse effect on the Company’s business, financial condition, and/or results of operations. While we cannot predict the duration and scope of the COVID-19 pandemic, the overall negative financial impact to the Company’s business, financial condition, and/or results of operations has been material, is not fully known, and is expected to last for an extended period of time. 32 33 GENTEX CORPORATION2020 ANNUAL REPORT INCOME TAXES. The Company is subject to income taxes in the U.S. and other foreign jurisdictions. Changes in tax rates, adoption of new tax laws or other additional tax policies, and other proposals to reform United States and foreign tax laws could adversely affect the Company’s ◼ 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 operating results, cash flows, and financial condition. The Company’s domestic and international tax liabilities are dependent upon the location exchange rates, trade war, war or significant terrorist acts, could each affect worldwide automotive sales and production levels; of earnings among these different jurisdictions. 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 can cause, increased turnover. In addition, any unplanned turnover, inability to attract and retain key employees, including managers, or government mandated remote work could have a negative effect on our business, financial condition and/or results of operations. 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 as well as various economic conditions in these jurisdictions. Some of these countries are considered growth markets. International sales and 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 COVID-19 pandemic), 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; ◼ 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. Item 1B. Unresolved Staff Comments. None Item 2. Properties. As of December 31, 2020 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 in Zeeland, Michigan to support production. 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, 2020 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 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 85,000 1970 1972 1989 1989 1996 2000 2006 2010 2011 2016 2018 2012 2003 2006 2017 Warehouse, Office Manufacturing, Office Manufacturing Office Manufacturing Manufacturing Manufacturing, Office Manufacturing, Warehouse Office Manufacturing, Warehouse Warehouse Manufacturing, Warehouse Office Office, Warehouse Office, Warehouse(2) ◼ 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. Erlenbach, Germany Shanghai, China Shanghai, China OTHER. Other issues and uncertainties which could adversely impact our business, financial condition, and/or results of operations include: (1) Date of Acquisition/Build refers to first year of operations, and does not refer to subsequent additions or expansions. (2) Light Assembly expected to begin at this location during 2022. ◼ 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 a corresponding impairment adjustment on investment securities; 34 35 GENTEX CORPORATION2020 ANNUAL REPORT 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 first quarter of 2021. The Company additionally has leased sales and engineering offices throughout the United States, Europe, and Asia to support its sales and 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, 2021, there were 2,095 record-holders of the Company’s common stock and restricted stock. I I T R A P K - 0 1 Number of Leased Offices See Item 12 of Part III with respect to “Equity Compensation Plan Information,” which is incorporated herein by reference. engineering efforts: Country Germany Japan United States United Kingdom France Sweden Korea 3 3 2 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, as well as a research and development offices in Salt Lake City, Utah and Santa Clara, CA. 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 2020, the Company shipped 26.1 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 2020, the Company shipped approximately 12.1 million exterior automatic-dimming mirrors. 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 2015 and reinvestment of dividends in all cases. NASDAQ Composite Dow Jones US Auto Parts Gentex Corporation $240 $220 $200 $180 $160 $140 $120 $100 $80 $60 l e u a V k c o t S 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 Item 3. Legal Proceedings. In March 2020, the Company’s Board of Directors approved a continuing resolution to pay a quarterly dividend at an increased rate of $0.120 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 The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including dividend and will consider future dividend rate adjustments based on the Company’s financial condition, profitability, cash flow, liquidity and 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, other relevant business factors. ( B ) Not applicable. or cash flows of the Company. Item 4. Mine Safety Disclosures. 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. 36 37 GENTEX CORPORATION2020 ANNUAL REPORT The following is a summary of share repurchase activity during 2020: Period January 2020 February 2020 March 2020 April 2020 May 2020 June 2020 July 2020 August 2020 September 2020 October 2020 November 2020 December 2020 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* — $ 1,945,036 5,073,996 — — — 125,110 525,295 525,351 400,230 1,000,477 1,050,558 10,646,053 — 29.40 23.97 — — — 27.07 27.38 26.44 28.04 31.52 33.55 — 1,945,036 5,073,996 — — — 125,110 525,295 525,351 400,230 1,000,477 1,050,558 10,646,053 20,065,319 18,120,283 13,046,287 13,046,287 13,046,287 13,046,287 12,921,177 12,395,882 11,870,531 11,470,301 10,469,824 9,419,266 * 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 2020 2019 2018 2020 Vs 2019 2019 Vs 2018 100.0% 100.0% 100.0% 64.1 35.9 6.9 5.3 12.2 23.7 0.7 24.4 3.8 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 (9.2)% (7.5) (12.0) 1.1 5.7 3.1 (18.2) 3.2 (17.7) (15.2) 20.6% 22.8% 23.9% (18.2)% 1.4% 2.4 (0.3) 7.0 13.1 9.6 (3.9) (14.7) (4.1) (10.0) (3.0)% 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: 2020 to 2019 NET SALES. In 2020, Company net sales decreased by $170.7 million, or 9% compared to the prior year. Net sales for 2020 were negatively impacted by lower than forecasted global vehicle production rates for calendar year 2020, which were down 16% on a year over year basis. The reduction in global light vehicle production and the Company’s sales was impacted primarily a result of the global shutdowns as a result of the COVID-19 pandemic, which primarily impacted the Company in the second quarter of 2020. Automotive net sales decreased as a result of an 11% decrease in automatic-dimming mirror shipments, from 42.9 million units in 2019 to 38.2 million units in 2020. 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 $ $ $ $ (dollars in thousands, except per share data) Other net sales decreased 17% to $40.0 million compared to the prior year, as dimmable aircraft window sales decreased 30% year over year 2020 2019 2018 2017 2016 and fire protection saw a decrease in net sales of 4% year over year. Dimmable aircraft window sales were impacted by production challenges the $ 1,688,189 $ 1,858,897 $ 1,834,064 $ 1,794,873 $ 1,678,925 Company’s customer faced. 347,564 424,684 437,883 406,792 347,591 1.41 $ 1.66 $ 1.62 $ 1.41 $ 35.9% 37.0% 37.6% 38.7% 0.480 $ 0.460 $ 0.440 $ 0.390 $ 1.19 39.8% 0.355 COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold increased from 63.0% in 2019 to 64.1% in 2020. The year over year decrease in the gross profit margin was primarily the result of the Company’s inability to leverage fixed overhead during the second quarter of 2020 as a result of COVID-19 related shutdowns and decreases in demand, as well as annual customer price reductions, which were partially offset by improvements in product mix related to Full Display Mirror® as well as purchasing cost reductions and structural cost reductions. On a year over year basis, the inability to leverage fixed overhead and annual customer price reductions each had a negative impact of 2,197,941 $ 2,168,803 $ 2,085,434 $ 2,352,054 $ 2,309,620 approximately 150 - 250 basis points on gross profit margin. Purchasing cost reductions, product mix improvements, and structural cost — $ — $ — $ — $ 178,125 reductions each independently had a positive impact on gross profit margin on a period over period basis of approximately 50 - 100 basis points. 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. OPERATING EXPENSES. Engineering, research and development expenses increased by $1.2 million or 1% from 2019 to 2020, representing 7% of net sales in 2020 versus 6% of net sales in 2019. E, R & D increased, primarily due to certain severance related costs incurred in the second quarter of 2020, which were partially offset by lower overall expense levels as a result of the COVID-19 pandemic. Selling, general and administrative expenses increased by $4.9 million or 6% from 2019 to 2020, but remained at 5% of net sales. The primary reason for the increase from 2019 to 2020 was due to severance related costs, wages and benefits, other resources associated with mitigation of the impacts of the global COVID-19 pandemic, and increased legal and professional fees associated with acquisitions of new technology described in Note 12 of the Consolidated Financial Statements. 38 39 GENTEX CORPORATION2020 ANNUAL REPORT TOTAL OTHER INCOME/(EXPENSE). Investment income decreased $4.2 million to $7.0 million for 2020 compared to $11.2 million for 2019 primarily due to decreases in interest income from fixed income investments. Other income – net increased $4.6 million in 2020 versus 2019, primarily due to an increase in gains on sales of debt investments on a year over year basis, as well as gains recognized on initial investments that were fully acquired during 2020, as further described in Note 12 of the Consolidated Financial Statements. TAXES. The effective tax rate was 15.6% for year ended December 31, 2020 compared to 15.1% the prior year. The effective tax rates in 2020 and 2019 differed from the statutory federal income tax rate, primarily due to the Foreign Derived Intangible Income Deduction. NET INCOME. Net income decreased by $77.1 million, or 18% year over year, primarily driven by the lower sales levels coming from the COVID-19 related shutdowns. 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 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-dimming mirrors. Other net sales increase 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 is 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. Liquidity and Capital Resources The Company’s financial condition throughout the periods presented has remained very strong, in spite of a 16% decline in global light vehicle production from 2019 to 2020 and a 6% decline from 2018 to 2019. The Company’s cash and cash equivalents were $423.4 million, $296.3 million and $217.0 million as of December 31, 2020, 2019 and 2018, respectively. The Company’s cash and cash equivalents include amounts held by foreign subsidiaries of $7.4 million, $8.5 million and $8.3 million as of December 31, 2020, 2019 and 2018, respectively. The Company’s current ratio remained consistent at 5.5 as of December 31, 2019 and December 31, 2020. 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. Cash flow from operating activities was $464.5 million, $506.0 million and $552.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Cash flow from operating activities decreased $41.5 million for the year ended December 31, 2020 compared to the prior year, primarily due to decreased net income driven from the impacts of the COVID-19 pandemic and related shutdowns. The reduction in net income was partially offset by changes in working capital. Cash flow from operating activities decreased $46.5 million for the year ended December 31, 2019 compared to the same period in 2018, primarily due to decreased net income and changes in working capital. Cash flow provided by investing activities for the year ended December 31, 2020 increased by $83.1 million to $26.4 million, compared with cash flow used for investing activities of $56.7 million, for the year ended December 31, 2019, primarily due to decreased investment purchases and additional maturities of fixed income investments during the year. Cash flow used for investing activities for the year ended December 31, 2019 decreased by $129.1 million to $56.7 million, compared to 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. Capital expenditures were $51.7 million, $84.6 million, and $86.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. Capital expenditures for the year ended 2020 decreased by $32.9 million compared with the year ended 2019 as a result of cost cutting initiatives and financial discipline in light of the COVID-19 pandemic. Capital expenditures for the year ended 2019 remained consistent with the year ended 2018. Cash flow used for financing activities for the year ended December 31, 2020, decreased $6.1 million to $363.9 million, compared to $370.0 million for the year ended December 31, 2019, primarily due to a reduction in the amount of shares of common stock repurchased which totaled $288.5 million during the calendar year 2020 as compared to $331.5 million during the calendar year 2019. 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 during the calendar year 2019 as compared to $591.6 million during the calendar year 2018. 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. Short-term investments as of December 31, 2020 were $27.2 million, down from $140.4 million as of December 31, 2019 and long-term investments were $162.0 million as of December 31, 2020, up from $139.9 million as of December 31, 2019, due to changes in the Company’s TAXES. The effective tax rate was 15.1% for year ended December 31, 2019 compared to 16.1% the prior year. The effective tax rate in 2019 and 2018 differed from the statutory federal income tax rate, primarily due to the Foreign Derived Intangible Income Deduction. The decrease in overall investment portfolio. Accounts receivable as of December 31, 2020 increased $49.5 million compared to December 31, 2019, primarily due to the timing of sales the effective tax rate year over year primarily relates to increase in the benefits derived from the Foreign Derived Intangible Income Deduction, within those years. 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. Inventories as of December 31, 2020, decreased $22.7 million compared to December 31, 2019, primarily due to decreased raw material inventory levels as a result of relatively high levels of production during the fourth quarter 2020. Intangible Assets, net as of December 31, 2020 decreased $0.6 million compared to December 31, 2019, due to the amortization of definite lived intangible assets and patents, which was offset by acquisitions of additional intangible assets during the year, which is discussed further in Note 10 and Note 12 to the Consolidated Financial Statements. Accounts payable as of December 31, 2020, decreased $12.8 million compared to December 31, 2019, primarily due the timing of inventory and capital expenditure payments. 40 41 GENTEX CORPORATION2020 ANNUAL REPORT Management considers the Company’s current working capital and long-term investments, as well as its existing credit financing arrangement Based on current light vehicle production forecasts, and the resultant forecast our automatic-dimming mirrors and electronics, the Company (notwithstanding covenants prohibiting additional indebtedness), discussed further in Note 2 of the Consolidated Financial Statements, in currently anticipates that 2021 capital expenditures will be between $85 and $95 million, a majority of which will be production equipment addition to internally generated cash flow, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual purchases. Capital expenditures for calendar year 2021 are currently anticipated to be financed from current cash and cash equivalents on hand obligations and commitments. and cash flows from operating activities. The following is a summary of working capital and long-term investments: The Company also estimates that depreciation and amortization expense for calendar year 2021 will be between $105 and $110 million. Working Capital Long Term Investments Total $ $ 2020 2019 2018 801,593,707 $ 778,530,092 $ 681,769,335 The Company is further estimating that its tax rate will be between 16.0% and 18.0% for calendar year 2021 based on the current statutory rates. In accordance with its previously announced share repurchase plan and capital allocation strategy, the Company intends to continue to repurchase 162,028,068 139,909,323 137,979,082 additional shares of its common stock in 2021 and into the future depending on a number of factors, including: market, economic, and industry 963,621,775 $ 918,439,415 $ 819,748,417 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 increase in working capital as of December 31, 2020 compared to 2019, as well as the increase as of December 31, 2019 compared to 2018, is primarily due to cash flow from operations, which was partially offset by share repurchases, dividend payments and capital expenditures. Please refer to Part II, Item 5, with regard to the Company’s previously announced share repurchase plan. Outlook The Company utilizes the light vehicle production forecasting services of IHS Markit. The IHS Markit mid-January 2021 forecast for light vehicle production for calendar year 2021 are approximately 16.3 million units for North America, 19.0 million units for Europe, 12.0 million units for Japan and Korea, and 25.1 million units for China. Based on the foregoing, the Company estimates that top line revenue for calendar year 2021 will be between $1.94 and $2.02 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 and electronics on prospective vehicle models and anticipated product mix. The Company continues to see order rates and booked business that allow for these estimates with an expected vehicle production increase in 2021 as well as a modest increase in 2022 compared to 2021. Continuing uncertainties, including: impacts of the COVID-19 pandemic on economic and industry conditions, including impacts on our customers and supply chain; 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 and potential tax law changes; 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, strikes, etc., which could disrupt shipments to these customers, make forecasting difficult. The Company is estimating that the gross profit margin will be between 39% and 40% for calendar year 2021. 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 2021, 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. During calendar year 2020, the Company made structural cost reductions of approximately $35 million on an annualized basis. Approximately 60% of these costs flow through cost of goods sold and have improved the The Company is also providing top line revenue guidance for calendar year 2022. IHS Markit current forecasts for light vehicle production for calendar year 2022 are approximately 16.7 million units for North America, 20.1 million units for Europe,12.1 million units for Japan and Korea, and 26.0 million units for China. Based on these forecasts, the Company is estimating that revenue for calendar year 2022 will increase approximately 4% to 8% over current estimates provided for 2021 revenue. As noted above, continuing uncertainties make forecasting difficult. Market Risk Disclosure 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 2020, approximately 7% of the Company’s net sales were invoiced and paid in foreign currencies (compared to 7% for calendar year 2019 and 8% for calendar year 2018). The Company currently expects that approximately 8% of the Company’s net sales in calendar year 2021 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 Company’s gross profit margin from recent historical levels. The Company had the following contractual obligations and other commitments (in millions) as of December 31, 2020. 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 $210 and $220 million for calendar year 2021, due in part to continued investments that support growth and launch of new business as well as development of new products, which are primarily staffing related. 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 2021, 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. Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Operating leases Purchase obligations Dividends payable Total 3.2 146.4 29.2 178.8 1.7 146.4 29.2 177.3 1.5 — — 1.5 Purchase obligations are primarily for raw material inventory and capital equipment. — — — — — — 42 43 GENTEX CORPORATION2020 ANNUAL REPORT Significant Accounting Policies and Critical Accounting Estimates Item 8. Financial Statements and Supplementary Data. 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. The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 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. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these The following financial statements and reports of independent registered public accounting firm are filed with this report following the signature page: Selected quarterly financial data for the past two years appears in the following table: Quarterly Results of Operations (in thousands, except per share data) First Second Third Fourth 2020 2019 2020 2019 2020 2019 2020 2019 Net Sales Gross Profit $ 453,762 $ 468,589 $ 229,926 $ 468,711 $ 474,639 $ 477,761 $ 529,864 $ 443,836 156,587 169,645 43,945 176,538 188,237 180,321 216,675 161,805 estimates and assumptions are inherently subject to a degree of uncertainty. As a result, actual results in these areas may differ significantly from Operating Income (Loss) 105,027 121,596 (6,738) 127,905 138,853 128,136 162,414 110,901 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 Net Income (Loss) 89,506 104,280 (2,374) 108,959 117,093 111,898 143,339 99,547 Basic Earnings (Loss) per share(1) $ 0.36 $ 0.40 $ (0.01) $ 0.42 $ 0.48 $ 0.44 $ 0.58 $ 0.39 Diluted Earnings (Loss) per share(1) (1) Basic and diluted earnings (loss) per share are computed independently for each quarter presented. Therefore the sum of quarterly basic and diluted per share information may not (0.01) $ 0.59 $ 0.36 $ 0.48 $ 0.44 0.40 0.42 $ $ $ $ 0.39 ◼ Changes in the estimate or different estimates that could have been selected would have had a material impact on our financial equal annual basis and diluted earnings per share. 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 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. be entitled in exchange for promised goods or services when it transfers those goods or services to customers. Sales are shown net of returns, As defined in Item 304 of Regulation S-K, there have been no changes in, or disagreements with, accountants during the 24-month period which have not historically been significant. The Company does not generate sales from arrangements with multiple deliverables. The Company ended December 31, 2020. 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See “Market Risk Disclosure” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7). 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, 2020, and have concluded that the Company’s disclosure controls and procedures are adequate and effective. 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, 2020. 44 45 GENTEX CORPORATION2020 ANNUAL REPORT Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any Kevin Nash was appointed as the Company’s Vice President, Finance, Chief Financial Officer, and Treasurer, effective as of February 15, 2018. He evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the 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 degree of compliance with the policies or procedures may deteriorate. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, has been audited by Ernst & Young LLP, 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. an independent registered public accounting firm, as stated in their report which is included in Part IV of this Form 10K. Matthew Chiodo, the Company’s Vice President of Sales, was appointed an executive officer effective February 15, 2018. Mr. Chiodo has been 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 employed by the Company since 2001. Mr. Chiodo has been in his current role since January 2017 and previously served as Director of Sales for several years. Certain terms of Mr. Chiodo’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 Scott Ryan was appointed as the Company’s Vice President, General Counsel and Corporate Secretary on August 16, 2018. Mr. Ryan has been to December 31, 2020. Item 9B. Other Information. None. 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. Name Age Position Current Position Held Since Steve Downing Neil Boehm Kevin Nash Matthew Chiodo Scott Ryan 43 49 46 56 40 President and Chief Executive Officer Chief Technology Officer and Vice President, Engineering Vice President, Finance, Chief Financial Officer and Treasurer Vice President, Sales Vice President, General Counsel and Corporate Secretary There are no family relationships among the officers listed in the preceding table. January 2018 February 2018 February 2018 February 2018 August 2018 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 employed by the Company since 2010. Prior to his current position, he served as Assistant General Counsel and Corporate Secretary from June 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. Information relating to directors appearing under the caption “Election of Directors” in the definitive Proxy Statement for 2021 Annual Meeting of Shareholders and filed with the Commission within 120 days after the Company’s fiscal year end, December 31, 2020 (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. Item 11. Executive Compensation. 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. Vice President and Chief Financial Officer from June 2015 to August 2017, and as Vice President of Finance and Chief Financial Officer from As previously disclosed, the Compensation Committee starting in 2018 intended to move base salaries for officers, including named executive 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 officers, toward the market median of the Company’s established peer group over a three-year period. Notwithstanding that intention, for the 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 employment arrangement are contained herein in Part III, Item 11 to this Form 10-K. second straight year, at the request of the CEO and named executive officers, the Compensation Committee and Board of Directors did not increase named executive officer base salaries. In February of 2020, the request and decision not to change executive officer base salaries was made based on market conditions (including declining light vehicle production) even prior to the material negative impacts of the COVID-19 pandemic and related shutdowns. In February of 2021, the request and decision not to change executive officer base salaries relates to the overall negative business environment caused by the COVID-19 pandemic. In light of the cost structure changes management made to deal with the same, the executive officers and the Board of Directors believe delaying base salary increases at this time is appropriate. In lieu thereof, the Board of Directors, based on a recommendation of the Compensation Committee, has provided the named executive officers additional potential upside under the Long-Term Plan as discussed below. As such, 2021 Base Salary for executive officers as approved by the Board of Directors is set forth below: 47 I I I T R A P K - 0 1 46 GENTEX CORPORATION2020 ANNUAL REPORT Executive Officer Position 2019 Base Salary 2020 Base Salary 2021 Base Salary Steve Downing President and CEO Neil Boehm Kevin Nash VP, Engineering and CTO VP, Finance, CFO and Treasurer Matt Chiodo VP, Sales Scott Ryan VP, General Counsel and Corporate Secretary $ $ $ $ $ 750,000 407,000 400,000 380,000 350,000 $ $ $ $ $ 750,000 407,000 400,000 380,000 350,000 $ $ $ $ $ 750,000 407,000 400,000 380,000 350,000 Amended and Restated Annual Incentive Performance-Based Bonus Plan 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. Generally, the target for the three performance metrics reflects a level of performance, which at the time set would be 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. The above goals for setting target levels for each performance metric were affected because such target levels were established prior to the COVID-19 pandemic, which has had a significant negative impact on the macroeconomic environment and, in particular, on the Company’s industries. The macroeconomic impact, including the impact on global light vehicle production, of the COVID-19 pandemic was entirely outside of the control of the officers of the Company. Had the very significant impact of the COVID-19 pandemic been known when targets for performance metrics were set under the Annual Plan, that knowledge would have directly informed such target setting. Revenue, Operating The Board of Directors previously approved the Amended and Restated Annual Incentive Performance-Based Bonus Plan (the “Annual Plan”) Income, and Earnings per Diluted Share are intended to measure performance and align with overall business strategy in normal times. 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 certain officers, including named executive officers. After performance targets had been set and then the impact of the COVID-19 pandemic became widespread, the Compensation Committee met later in 2020 and 2021 to consider not only the macroeconomic environment and industry conditions, (especially decreased global light vehicle production), but also management’s response thereto. That response included initiating and executing structural cost reductions of approximately $35 million on an annualized basis, all implemented in 2020 so the full impact of the same will be fully realized in 2021 and At the beginning of each year, the Compensation Committee reviews and approves a cash bonus target for each officer, as a percentage of base beyond. The benefits of those actions have already been seen through the Company’s entire income statement in the second half of 2021. Given 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 the changes that occurred in 2020 were outside of the control of officers, the performance metrics meant to incentivize operational performance their base salaries. All performance-related targets are set by, and achievement of targets are approved by, the Compensation Committee and/or did not necessarily appropriately reflect this performance as intended by the Compensation Committee and the Board of Directors. the Board of Directors. Since Annual Plan bonuses are based on a percentage of base salary, each executive officers’ potential for bonuses reflects the fact that there have been no base salary increases for three years. As such, in February of 2021, the Compensation Committee recommended to the Board of Directors, who subsequently approved (on February 18, 2021) a revision to pre-established targets under the Annual Plan for calendar year 2020, to ensure officers are properly acknowledged, For our executive officers, the 2021 Annual Plan payout opportunities as a percentage of base salary applicable to each performance metric are recognized, rewarded, and, incentivized for operational performance and aligning the business with current realities and strategies for the benefit 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 50.0% 37.5% 37.5% 37.5% 37.5% 100.0% 75% 75% 75% 75% 200.0% 150% 150% 150% 150% No changes were made to the Annual Plan target opportunities for executive officers in 2021, as it is believed the target and maximum opportunity levels remain appropriate. The foregoing payout opportunities are multiplied by the weighting factor of a particular performance metric to determine the amounts of cash bonuses payable to officers to the extent the threshold, target, or maximum for a performance metric is met or exceeded. To the extent performance exceeds the established threshold or target, as applicable, for any performance metric, but does not meet or exceed the established target or maximum, as applicable, linear interpolation is used to determine the pro rata portion of the performance bonus. The Compensation Committee also has discretion to increase (or decrease) such performance-based bonuses using its judgment, provided that bonuses are not in any event to exceed 250% of the applicable base salary. Since its inception in 2019, the Annual Plan uses the same three key performance metrics and weighting: Revenue (weighted 33.33%), Operating Income (weighted 33.33%) and Earnings per Diluted Share (33.33%), since such metrics are not only appropriate measures of performance, but also align with the Company’s overall business strategy. of all stakeholders. With that said, the Compensation Committee still desires performance-based compensation to be as objective as possible. As such, instead of using discretion with respect to adjusting targets for performance metrics under the Annual Plan, the Compensation Committee took into account the IHS Markit light vehicle production forecast estimates at the time the performance targets were set (which did not incorporate the full impact of the COVID-19 pandemic since that was unknown), versus the actual global light vehicle production for the same time period. This percentage of change was then applied against the original targets for performance metrics as disclosed below for the Annual Plan: IHS MARKIT LIGHT VEHICLE PRODUCTION FORECAST: Region North America Europe Japan/Korea China Other Total Actual 2020 13.0 16.6 11.2 23.6 10.1 74.5 Mid-January 2020 Forecast 16.7 20.7 12.9 24.5 13.8 88.6 Unit Change % Change (3.7) (4.1) (1.7) (0.9) (3.7) (14.1) (22.2)% (19.8)% (13.2)% (3.7)% (26.8)% (15.9)% The Compensation Committee, before making any adjustments to targets for performance metrics, confirmed that threshold performance was in fact achieved for all performance metrics under the Annual Plan, notwithstanding relevant factors outside of management’s control. Then, based on the 15.9% reduction from the IHS Markit mid-January 2020 global light vehicle production forecast for calendar year 2020 to actual global light vehicle production for calendar year 2020, the Compensation Committee and the Board adjusted the performance metrics for the Annual Plan as follows: 48 49 GENTEX CORPORATION2020 ANNUAL REPORT Annual Plan Performance Metrics: 2019 Omnibus Incentive Plan and Long-Term Incentive Program Revenue Original COVID-19 related adjustment As Adjusted Percentage Change Operating Income Original COVID-19 related adjustment As Adjusted Percentage Change Earnings per Diluted Share Original COVID-19 related adjustment As Adjusted Percentage Change $ $ $ $ $ $ $ $ $ Threshold 1,554,207 $ (247,176) $ 1,307,031 $ (15.9)% Threshold 409,970 $ (65,200) $ 344,770 $ (15.9)% Target 1,942,759 $ (308,970) $ 1,633,789 $ (15.9)% Target 512,463 $ (81,500) $ 430,963 $ (15.9)% Maximum 2,331,311 (370,765) 1,960,546 (15.9)% Maximum 614,956 (97,801) 517,155 (15.9)% Threshold Target Maximum 1.44 $ (0.23) $ 1.21 $ 1.80 $ (0.29) $ 1.51 $ (16.0)% (16.1)% 2.16 (0.35) 1.81 (16.2)% For 2020, target performance (along with thresholds, adjusted only for purposes of linear interpolation since all were exceeded in any event, and maximums) and actual results for the COVID-19 adjusted performance metrics are as follows: Weight Threshold* Target* Maximum* 33.33% $ 1,307,031 $ 1,633,789 $ 1,960,547 $ Actual Performance* 1,677,861 Performance Metric Revenue Operating Income The Company’s 2019 Omnibus Incentive Plan (“OIP”) has been approved by shareholders. Pursuant to the OIP, the Company implemented the Long-Term Incentive Plan (the “Long-Term Plan”). The Long-Term Plan provides officers, including our named executive officers, with incentive awards that serve an important role by balancing other applicable short-term goals with longer term shareholder value creation, while minimizing risk-taking behaviors that could negatively affect long-term results. The Long-Term Plan uses three-year performance periods and selected performance objectives to determine equity incentive awards so as to balance short-term goals under the Annual Plan, with performance objectives associated with longer-term shareholder value creation under the Long-Term Plan. Under the Long-Term Plan, the Board of Directors and/or the Compensation Committee determines the amount of the 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 2021-2023 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 2021-2023 285% 185% 185% 185% 185% These Long-Term Plan Target Opportunity Percentages of Base Salary for 2021 - 2023 have increased from those applicable for 2020 - 2022 (which were 240% for Mr. Downing, 150% for Mr. Boehm, 140% for Mr. Nash, 130% for Mr. Chiodo and 125% for Mr. Ryan) in lieu of base salary increases as discussed above. Such changes are also appropriate in light of there being no changes to outstanding Long-Term Plan awards, though the Compensation Committee believes adjustments could be justified as a result of the impact of the COVID-19 pandemic in order to achieve the aims of the Long-Term Plan. Achievement at threshold performance yields 50% of the target award and achievement of the maximum performance yields another 100% 33.33% $ 344,770 $ 430,963 $ 517,156 $ 411,995 of the target award. To the extent performance exceeds the established threshold or target, as applicable, for an applicable performance objective, Earnings per Diluted Share 33.33% $ 1.208 $ 1.510 $ 1.812 $ 1.460 but does not meet or exceed the established target or maximum, as applicable, linear interpolation is used to determine the pro rata portion * Amounts in thousands (000) except for per share amounts. 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 COVID-19 adjustments to targets and performance of the named executive officers, the payments for 2020 under the Annual Plan are shown in the table below: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan 2020 Annual Plan Performance Bonus 2020 Annual Plan Discretionary Bonus $ $ $ $ $ 748,370 $ 304,587 $ 299,348 $ 284,381 $ 261,930 $ 0 0 0 0 0 These Annual Plan results appropriately reflect management’s excellent work in addressing the COVID-19 pandemic, yet still align with comparable year-over-year bonuses paid generally to employees under the Company’s profit-sharing plan. For 2021, 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. 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). 50 51 GENTEX CORPORATION2020 ANNUAL REPORT 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 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. capital (ROIC), in each case adjusted as determined by the Compensation Committee. Each performance objective is based on a three-year The information contained under the captions “Common Stock Ownership of Management,” “Common Stock Ownership of Certain Beneficial performance period (2021-2023) with a performance range that can result in PSAs of 0% for failure to achieve threshold, 50% of target for achieving Owners,” and “Equity Compensation Plan Information” contained in the definitive Proxy Statement is hereby incorporated herein by reference. threshold, to 200% of the target opportunity for achieving maximum. 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 incorporated herein by reference. 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. 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 awarded in 2021 for the named executive officers are shown in the table below: Executive Officer Steve Downing Neil Boehm Kevin Nash Matt Chiodo Scott Ryan Restricted Stock Awards Number of PSAs Awarded in 2021 (Target) for 2021-2023 42,762 15,063 14,804 14,064 12,954 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 2021, 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 2021 for 2021-2023 18,327 6,456 6,345 6,027 5,552 The Board of Directors approved and adopted the Israeli Appendix to the Company’s shareholder approved 2019 Omnibus Incentive Plan on February 18, 2021 and the same is included as an exhibit hereto. The Israeli Appendix allows for effective and efficient granting of Awards (as defined in the 2019 Omnibus Incentive Plan) to Participants (as also defined in the 2019 Omnibus Incentive Plan) who are subject to taxation by the state of Israel. The Israeli Appendix does not expand the group of individuals eligible for Awards, but rather is intended to make Awards to those employed with the Company’s wholly-owned subsidiary in Israel in a more tax efficient manner. 52 53 GENTEX CORPORATION2020 ANNUAL REPORT 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, 2020 We have audited Gentex Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2020 based on criteria established and 2019, the related consolidated statements of income, comprehensive income, shareholders’ investment and cash flows for each of the three in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our (the COSO criteria). In our opinion, Gentex Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 over financial reporting as of December 31, 2020, based on the COSO criteria. and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, 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 Company’s income, shareholders’ investment and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report internal control over financial reporting as of December 31, 2020, 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 22, 2021 expressed an unqualified dated February 22, 2021 expressed an unqualified opinion thereon. Basis for Opinion 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a 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 public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. federal securities laws and the applicable rules and regulations 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 assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures reasonable 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 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 on an ongoing basis to reflect changes in product content, product cost and other commercial factors. 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. 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. 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 with the policies or procedures may deteriorate. We have served as the Company’s auditor since 1999. Grand Rapids, Michigan FEBRUARY 22, 2021 We have served as the Company’s auditor since 1999. Grand Rapids, Michigan FEBRUARY 22, 2021 54 55 GENTEX CORPORATION2020 ANNUAL REPORT GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER31, 2020 AND 2019 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 2020 2019 LIABILITIES AND SHAREHOLDERS’ INVESTMENT 2020 2019 CURRENT LIABILITIES: $ 423,371,036 $ 296,321,622 Accounts payable $ 84,784,423 $ 97,553,917 27,164,369 284,925,335 226,291,843 17,577,981 979,330,564 350,574,243 857,583,647 49,048,555 140,384,053 235,410,326 248,941,855 29,319,036 950,376,892 344,231,180 843,439,691 39,456,490 1,257,206,445 1,227,127,361 (789,071,310) (728,811,261) 468,135,135 498,316,100 311,922,787 162,028,068 249,748,127 26,776,489 750,475,471 307,365,845 139,909,323 250,375,000 22,460,033 720,110,201 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: 18,557,799 3,790,219 21,056,412 29,243,144 20,304,860 16,385,833 24,952 17,371,829 28,896,914 11,613,355 177,736,857 171,846,800 17,300,442 38,960,743 7,414,424 51,454,149 233,998,042 230,715,373 Common stock, par value 0.06 per share; 400,000,000 shares authorized; 243,692,869 and 251,277,515 shares issued and outstanding in 2020 and 2019 respectively. 14,621,572 15,076,651 Additional paid-in capital Retained earnings Accumulated other comprehensive income: Unrealized gain on investments, net Cumulative translation adjustment 852,771,508 807,928,139 1,089,698,996 1,116,372,133 6,082,007 769,045 1,095,486 (2,384,589) 1,963,943,128 1,938,087,820 $ 2,197,941,170 $ 2,168,803,193 Total shareholders’ investment TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT $ 2,197,941,170 $ 2,168,803,193 56 57 GENTEX CORPORATION2020 ANNUAL REPORT GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 The accompanying notes are an integral part of these consolidated financial statements. FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 The accompanying notes are an integral part of these consolidated financial statements. 2020 2019 2018 $ 1,688,189,405 $ 1,858,897,406 $ 1,834,063,697 CASH FLOWS FROM OPERATING ACTIVITIES: 2020 2019 2018 1,082,745,885 1,170,589,437 1,143,597,005 Net income $ 347,563,621 $ 424,683,939 $ 437,883,097 605,443,520 688,307,969 690,466,692 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 104,739,900 104,702,974 102,186,814 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: (311,510) 162,553 (3,163,164) 1,064,508 (15,419,722) (155,150) 588,941 (660,643) 176,360 (3,358,537) (577,200) 108,927 (2,538,729) 532,494 (4,414,739) 30,797,327 21,671,192 18,305,981 NET SALES COST OF GOODS SOLD Gross profit OPERATING EXPENSES: Engineering, research and development Selling, general and administrative Total operating expenses Income from operations OTHER INCOME: Investment income Other income, net Total other income Income before provision for income taxes PROVISION FOR INCOME TAXES NET INCOME EARNINGS PER SHARE(1): Basic Diluted Cash Dividends Declared per Share 115,935,047 89,952,381 205,887,428 399,556,092 6,986,303 5,270,534 12,256,837 411,812,929 64,249,308 114,687,309 85,083,056 199,770,365 488,537,604 11,230,696 647,034 11,877,730 500,415,334 75,731,395 107,134,862 75,206,283 182,341,145 508,125,547 11,262,385 2,659,015 13,921,400 522,046,947 84,163,850 $ $ $ $ 347,563,621 $ 424,683,939 $ 437,883,097 1.41 1.41 0.480 $ $ $ 1.67 1.66 0.460 $ $ $ 1.64 1.62 0.440 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 (1) Earnings Per Share has been adjusted to exclude the portion of net income allocated to participating securities as a result of share-based payment awards GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 The accompanying notes are an integral part of these consolidated financial statements. Net income $ 347,563,621 $ 424,683,939 $ 437,883,097 Proceeds from sale of plant and equipment 2020 2019 2018 Plant and equipment additions Other comprehensive income (loss) before tax: Foreign currency translation adjustments 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 3,153,634 — 6,312,051 9,465,685 1,325,530 8,140,155 (709,702) — 1,292,325 582,623 271,388 311,235 (2,319,917) 98,767 115,059 (2,106,091) 44,903 (2,150,994) Comprehensive income $ 355,703,776 $ 424,995,174 $ 435,732,103 Acquisition of businesses, net of cash acquired Increase in other assets Net cash from (used for) investing activities CASH FLOWS USED FOR FINANCING ACTIVITIES: Proceeds from borrowings on Credit Agreement Repayment of borrowings on Credit Agreement Issuance of common stock from stock plan transactions Cash dividends paid Repurchases of common stock Net cash used for financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, Beginning of year CASH AND CASH EQUIVALENTS, End of year 58 (49,290,457) 22,725,798 10,493,993 (12,854,038) 27,982,962 464,491,771 24,455,695 142,547,368 (73,719,189) (51,706,541) 383,429 (11,216,927) (4,327,398) 26,416,437 75,000,000 (75,000,000) 41,803,640 (117,181,928) (288,480,506) (363,858,794) 127,049,414 296,321,622 (21,872,527) (23,660,256) (3,646,457) 4,743,601 2,753,427 17,583,989 (8,516,016) (11,268,677) 2,911,849 220,856 505,966,864 552,418,646 57,139,135 125,013,589 (153,257,603) (84,580,255) 2,001,315 — (3,027,263) (56,711,082) — — 77,821,151 (116,309,197) (331,471,392) (369,959,438) 79,296,344 217,025,278 55,248,551 181,892,136 (332,106,362) (85,990,570) 738,093 — (5,603,042) (185,821,194) — (78,000,000) 66,837,820 (116,566,639) (591,577,851) (719,306,670) (352,709,218) 569,734,496 $ 423,371,036 $ 296,321,622 $ 217,025,278 59 GENTEX CORPORATION2020 ANNUAL REPORT GENTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 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, 2018 Issuance of common stock from stock plan transactions 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 ($0.44 per share) Net income Other comprehensive income BALANCE AS OF DECEMBER 31, 2018 Issuance of common stock from stock plan transactions Repurchases of common stock Stock-based compensation expense related to stock options, employee stock purchases and restricted stock Dividends declared ($0.46 per share) Net income Other comprehensive (loss) BALANCE AS OF DECEMBER 31, 2019 Issuance of common stock from stock plan transactions Issuance of common stock related to acquisitions Repurchases of common stock Stock-based compensation expense related to stock options, employee stock purchases and restricted stock Dividends declared ($0.48 per share) Net income Other comprehensive income BALANCE AS OF DECEMBER 31, 2020 Common Stock Shares 280,281,321 5,496,659 (26,449,367) — — — — 259,328,613 5,724,840 (13,775,938) — — — — 251,277,515 2,897,689 163,718 (10,646,053) — — — — Common Stock Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Investment $ 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 $ 15,076,651 $ 807,928,139 $ 1,116,372,133 $ (1,289,103) $ 1,938,087,820 173,861 9,823 41,629,779 3,549,406 — — (638,763) (31,133,143) (256,708,600) — — — — 30,797,327 — — — — (117,528,158) 347,563,621 — — — — — — — 8,140,155 41,803,640 3,559,229 (288,480,506) 30,797,327 (117,528,158) 347,563,621 8,140,155 243,692,869 $ 14,621,572 $ 852,771,508 $ 1,089,698,996 $ 6,851,052 $ 1,963,943,128 60 61 GENTEX CORPORATION2020 ANNUAL REPORT ( 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 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 as available 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 $4.0 million and $9.0 million as of December 31, 2020 and December 31, 2019, respectively. These investments are classified within Long-Term Investments in the consolidated balance sheet and are not included within the tables below. The $5.0 million decrease in the balance of these technology investments are a result of the acquisitions of the remaining equity of Vaporsens and Argil during the year. Refer to Note 12, “Acquisitions,” for further information. Cash equivalents consist of funds invested in bank accounts and money market funds that have daily liquidity. Assets or liabilities that have recurring fair value measurements are shown below as of December 31, 2020 and December 31, 2019: 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-going interaction between Company personnel and the customer. Based on the evaluation of the above information, the Company estimates its 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 and impact the COVID-19 pandemic has had on specific Description December 31, 2020 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level I) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash & Cash Equivalents $ 423,371,036 $ 423,371,036 $ — $ customers. Actual collections can differ, requiring adjustments to the allowances, but historically such adjustments have not been material. Short-Term Investments: The following table presents the activity in the Company’s allowance for doubtful accounts: YEAR ENDED DECEMBER 31, 2020: Allowance for Doubtful Accounts YEAR ENDED DECEMBER 31, 2019: Allowance for Doubtful Accounts YEAR ENDED DECEMBER 31, 2018: Allowance for Doubtful Accounts $ $ $ Beginning Balance Net Additions/ (Reductions) to Costs and Expenses Net Additions/ Deductions and Other Adjustments Ending Balance 2,451,293 $ 1,000,000 $ 13,454 $ 3,464,747 2,746,647 $ — $ (295,354) $ 2,451,293 2,714,533 $ — $ 32,114 $ 2,746,647 Certificate of Deposit Corporate Bonds Government Securities Municipal Bonds Other Long-Term Investments: Asset-backed Securities Certificate of Deposit Corporate Bonds Municipal Bonds 1,516,693 7,155,600 6,678,450 10,284,765 1,528,861 37,924,537 3,645,520 9,024,035 107,407,831 1,516,693 — — — 1,528,861 — 7,155,600 6,678,450 10,284,765 — — 37,924,537 3,645,520 — — — 9,024,035 107,407,831 The Company’s allowance for doubtful accounts primarily relates to financially distressed automotive customers. The Company continues to work Total $ 608,537,328 $ 430,062,110 $ 178,475,218 $ with these financially distressed customers in collecting past due balances. 62 — — — — — — — — — — — 63 GENTEX CORPORATION2020 ANNUAL REPORT Fair Value Measurements at Reporting Date Using Unrealized Description December 31, 2019 Quoted Prices in Active Markets for Identical Assets (Level I) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash & Cash Equivalents $ 296,321,622 $ 296,321,622 $ — $ 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 $ The amortized cost, unrealized gains and losses, and market value of investment securities are shown as of December 31, 2020 and 2019: — — — — — — — — — — — 2020 Short-Term Investments: Unrealized Cost Gains Losses Market Value Certificate of Deposit $ 1,502,187 $ 14,506 $ — $ Corporate Bonds Government Securities Municipal Bonds Other Long-Term Investments: Asset-backed Securities Certificate of Deposit Corporate Bonds Municipal Bonds 7,084,638 6,635,132 10,160,376 1,528,861 37,681,113 3,503,898 8,595,020 70,962 43,318 124,389 — 800,802 141,622 429,015 — — — — (557,378) — — 1,516,693 7,155,600 6,678,450 10,284,765 1,528,861 37,924,537 3,645,520 9,024,035 2019 Short-Term Investments: Cost Gains Losses Market Value Certificate of Deposit $ 50,099,795 $ — $ Corporate Bonds Governmental Securities Other Long-Term Investments: Asset-backed Securities Certificate of Deposit Corporate Bonds Governmental 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) — — 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 1,036,116 (395,422) Total $ 269,889,067 $ 1,974,255 $ (587,564) $ 271,275,758 Unrealized losses on investments as of December 31, 2020 are as follows: Less than one year Greater than one year Total Aggregate Unrealized Losses Aggregate Fair Value $ $ 561,300 $ — 561,300 $ 12,317,187 — 12,317,187 Unrealized losses on investments as of December 31, 2019 are as follows: Less than one year Greater than one year Total Aggregate Unrealized Losses Aggregate Fair Value $ $ 587,564 $ — 587,564 $ 90,721,081 — 90,721,081 Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The guidance 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 Company utilized the guidance provided by ASC 326 to determine whether any of the available-for-sale debt securities held by the Company were impaired. No investments were considered to be impaired during the years presented. The Company has the intention and current ability 100,776,325 6,635,428 (3,922) 107,407,831 to hold its debt investments until the amortized cost basis has been recovered. If market, industry, and/or investee conditions deteriorate, the Total $ 177,467,550 $ 8,260,042 $ (561,300) $ 185,166,292 Company may incur future impairments. No investments were considered to be other-than-temporarily impaired in 2020 and 2019. Fixed income securities as of December 31, 2020, have contractual maturities as follows: 64 Due within one year Due between one and five years Due over five years $ $ 25,635,507 50,872,174 107,129,749 183,637,430 65 GENTEX CORPORATION2020 ANNUAL REPORT Fair Value of Financial Instruments 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, 2020 and 2019. Inventories Inventories include material, direct labor and manufacturing overhead and are valued at the lower of first-in, first-out (FIFO) cost or net realizable value. Inventories consisted of the following as of December 31, 2020 and 2019: Raw materials Work-in-process Finished goods Total Inventory $ $ 2020 151,688,455 $ 32,791,675 41,811,713 226,291,843 $ 2019 164,974,553 33,069,255 50,898,047 248,941,855 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 or customer requirements change and are less favorable than those projected by management, inventory allowances are adjusted accordingly. Allowances for slow-moving and obsolete inventories (which are included, net, in the above inventory values) were $10.4 million and $7.6 million at December 31, 2020 and 2019, 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 $82.4 million, $82.3 million and $79.7 million in 2020, 2019 and 2018, respectively. 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 perform a step 1 test to determine the fair value of the reporting unit using an income approach to estimate the fair value of each of its reporting units and a market valuation approach to further support this analysis. If the fair value of the reporting unit 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 its carrying amount, an impairment change is recorded as the excess of the reporting units carrying value over its fair value. 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 impairment test is 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 goodwill existed. 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. During the current year, the Company acquired Indefinite lived in-process research and development (“IPR&D”) intangible assets. These IPR&D assets are not amortized, but are tested for impairment annually, or more frequently when indicators of potential impairment exist, until the completion or abandonment of the associated research and development efforts. Upon completion of the projects, the assets will be amortized over the expected economic life of the asset, which will be determined on that date. Should the project be determined to be abandoned, and if the asset developed has no alternative use, the full value of the asset will be charged to expense. Refer to Note 10, “Goodwill and Intangible Assets” for information regarding the impairment testing performed in calendar year 2020. Impairment or Disposal of Long-Lived Assets The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment Revenue Recognition whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long- The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. lived asset impairment analysis in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. ASC 360-10-15 requires Accordingly, revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for 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 promised goods or services when it transfers those goods or services to customers. Sales are shown net of returns, which have not historically assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not been significant. The Company does not generate sales from arrangements with multiple deliverables. The Company generally receives purchase indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the orders from customers on an annual basis. Typically, such purchase order provide the annual terms, including pricing, related to a particular asset group exceeds its fair value based on discounted cash flow analysis or appraisals. vehicle model. Purchase orders generally do not specify quantities. The Company recognizes revenue based on the pricing terms included in our Patents 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 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 reductions. Such amounts are subject to estimate and are accrued as a reduction of revenue as products are shipped to those customers. For any in process is not amortized until issuance. The Company periodically obtains intellectual property rights, in the ordinary course of business, and shipments of product that may be subject to retroactive price adjustments that are then being negotiated, the Company records revenue based 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 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. Refer to Note 11, “Revenue,” for further information. 66 67 GENTEX CORPORATION2020 ANNUAL REPORT Advertising and Promotional Materials Earnings Per Share All advertising and promotional costs are expensed as incurred and amounted to approximately $2.0 million, $3.0 million and $2.5 million, The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends, which are considered participating in 2020, 2019 and 2018, respectively. Repairs and Maintenance 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. 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 $22.6 million, $28.9 million and 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 $28.9 million, in 2020, 2019 and 2018, 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 last three years: BASIC EARNINGS PER SHARE Net Income Less: Allocated to participating securities(1) (IBNR) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation Net Income available to common shareholders 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, 2020, 2019 and 2018. The Company does not offer extended warranties on its products. Basic weighted average shares outstanding Net Income per share - Basic DILUTED EARNINGS PER SHARE Allocation of Net Income used in basic computation 2020 2019 2018 347,563,621 $ 424,683,939 $ 437,883,097 4,964,928 5,028,813 — 342,598,693 $ 419,655,126 $ 437,883,097 242,599,923 251,766,382 267,794,786 1.41 $ 1.67 $ 1.64 342,598,693 $ 419,655,126 $ 437,883,097 $ $ $ $ Income Taxes The provision for income taxes is based on the earnings reported in the consolidated financial statements. Deferred income tax assets and 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 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 from what is reflected in the historical income tax provisions and accruals. 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, 2020 was 2 years, with a weighted average discount rate of 1.2%. Future minimum lease payments for operating leases as of December 31, 2020 were as follows: Year ending December 31, 2021 2022 2023 2024 Thereafter Total future minimum lease payments Less imputed interest Total 68 $ $ $ 1,666,680 1,086,084 447,583 39,246 6,173 3,245,766 (25,303) 3,220,463 Reallocation of undistributed earnings 14,232 21,104 21,007 Net Income available to common shareholders - Diluted $ 342,612,925 $ 419,676,230 $ 437,904,104 Number of shares used in basic computation 242,599,923 251,766,382 267,794,786 Additional weighted average dilutive common stock equivalents 1,082,069 1,506,608 2,082,563 Diluted weighted average shares outstanding 243,681,992 253,272,990 269,877,349 Net income per share - Diluted $ 1.41 $ 1.66 $ 1.62 (1) While there were participating securities in 2018, they did not have a material impact on the two-class EPS calculation. Net income allocated to participating securities in 2018 was $3,836,536. For the years ended December 31, 2020, 2019 and 2018, 403,071 shares, 247,855 shares, and 698,019 shares, respectively, related to stock option plans were not included in diluted average common shares outstanding because they were anti-dilutive. Other Comprehensive Income (Loss) 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 The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at year-end. Income statement accounts are translated at the average rate 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. 69 GENTEX CORPORATION2020 ANNUAL REPORT Stock-Based Compensation Plans (3) INCOME TAXES The Company accounts for stock-based compensation using the fair value recognition provisions of ASC 718, Compensation - Stock Compensation. As described more fully in Note 5 to the Consolidated Financial Statements, 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 to estimate the value of the stock options, which requires the input of assumptions. These assumptions include estimating (a) the length of time employees will retain their vested stock options before exercising them (“expected term”), (b) the volatility of the The provision for income taxes is based on the earnings reported in the accompanying consolidated financial statements. The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the cumulative temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be applied to taxable income in years which those temporary differences are expected to be recovered or settled. Deferred income tax expense is measured by the net change Company’s common stock price over the expected term, (c) the number of options that will ultimately not complete their vesting requirements in deferred income tax assets and liabilities during the year. (“forfeitures”) and (d) expected dividends. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amounts recognized on the consolidated condensed statements of operations. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Standards Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption. Based on the insignificant impact of this ASU on the Company’s financial statements, a cumulative-effect adjustment to retained earnings was not deemed necessary. 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 did not have a material impact on the The foreign components of income before the provision for income taxes were not material for the years ended December 31, 2020, 2019 and 2018. The components of the provision for income taxes are as follows: Currently payable: Federal State Foreign Total Deferred income tax benefit: Primarily federal Provision for income taxes 2020 2019 2018 $ 67,606,617 $ 73,563,685 $ 83,010,387 10,180,218 1,882,195 79,669,030 3,765,929 1,468,018 3,743,781 1,776,837 78,797,632 88,531,005 (15,419,722) (3,066,237) (4,367,155) $ 64,249,308 $ 75,731,395 $ 84,163,850 The effective income tax rates are different from the statutory federal income tax rates for the following reasons: Statutory federal income tax rate State income taxes, net of federal income tax benefit Company’s consolidated balance sheet, consolidated income statement, or consolidated statement of cash flows. Research tax credit (2) DEBT AND FINANCING ARRANGEMENTS 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 (Decrease) 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 the Revolver in the aggregate principal amount of up to $20 million and to request Letters of Credit from amounts otherwise available under the Effective income tax rate Revolver in the aggregate principle amount up to $20 million, both subject to certain conditions. During the first quarter of 2020, the Company had a draw-down of $75 million on the Company’s Revolver, of which $50 million was paid off during the third quarter and the remaining $25 million was paid off during the fourth quarter. During the year ended December 31, 2020, interest expense was $0.6 million, which was recorded with the “Other income, net” section of the Consolidated Statements of Income. The obligations of the Company under the Credit Agreement are not secured, but are subject to certain covenants. As of December 31, 2020 and 2019, there were no outstanding balances on the Revolver. The Revolver expires on October 15, 2023. The Credit Agreement contains customary representations and warranties and certain covenants that place certain limitations on the Company. As of December 31, 2020, the Company was in compliance with its covenants under the Credit Agreement. 70 2020 21.0% 2.1 (1.4) (0.1) — (0.1) (5.2) (1.0) 0.3 15.6% 2019 21.0% 0.6 (1.1) 0.3 — (0.1) (4.8) (1.1) 0.3 15.1% 2018 21.0% 0.6 (0.8) 0.1 0.5 (0.1) (4.6) (1.0) 0.4 16.1% 71 GENTEX CORPORATION2020 ANNUAL REPORT The tax effect of temporary differences which give rise to deferred income tax assets and liabilities at December 31, 2020 and 2019, are as follows: (4) EMPLOYEE BENEFIT PLANS December 31, 2020 December 31, 2019 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 2020, 2019 and 2018 the Company’s contributions were approximately $8.9 million, $8.7 million and $8.2 million, respectively. The increase in each of the 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 $ $ $ $ $ 13,135,048 $ 11,983,900 1,163,204 26,282,152 $ (16,606,068) $ (33,427,901) (11,237,588) (3,971,338) (65,242,895) (38,960,743) $ $ Income taxes paid in cash were approximately $61.9 million, $74.9 million and $86.9 million in 2020, 2019 and 2018, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Beginning of year $ 6,392,000 $ 4,678,000 $ 2020 2019 Additions based on tax positions related to the current year Additions for tax positions in prior years Reductions for tax positions in prior years Reductions as a result of completed audit examinations Reductions as a result of a lapse of the applicable statute of limitations 918,000 770,000 (2,907,000) — 1,695,000 657,000 (38,000) — (1,554,000) 6,478,146 9,100,745 66,830 15,645,721 (30,725,471) (27,799,640) (6,171,628) (2,403,131) (67,099,870) (51,454,149) 2018 4,435,000 1,677,000 283,000 (163,000) years was due to increased employee participation in the plan. The Company does not provide health care benefits to retired employees. 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, 2020, 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 previously been approved by shareholders. 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 (309,000) (600,000) — 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 End of year $ 4,864,000 $ 6,392,000 $ 4,678,000 previously granted under the Prior Plans remain outstanding in accordance with their terms and are governed by the Prior Plans as applicable. If recognized, unrecognized tax benefits would affect the effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits through the provision for income taxes. The Company has accrued approximately $577,000, $574,000, and $315,000 for interest as of December 31, 2020, 2019, and 2018, respectively. Interest expensed during 2020, 2019 and 2018 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 2016. 72 73 GENTEX CORPORATION2020 ANNUAL REPORT 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. As of December 31, 2020, 9,868,580 shares (net of shares from canceled/expired options) have been issued under the 2019 Omnibus Plan, which 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 2,212,301 shares (net of shares from canceled/expired options) under the 2019 Omnibus Plan and 12,778,967 shares (net of shares from canceled/expired options) under the prior plan (prior to its replacement) through December 31, 2020. 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. 2020 Shares (000) Wtd. Avg. Ex. Price Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) Outstanding at Beginning of Year 5,435 $ Granted Exercised Forfeited Outstanding at End of Year 1,571 (2,077) (396) 4,533 Exercisable at End of Year 1,358 $ 20 26 18 22 23 20 2019 $ $ $ 3.4 years 2.3 years 23,861 48,501 18,334 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following Outstanding at Beginning of Year 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) 2020 2.0% 27.5% 0.3% 4.2 2019 2.0% 23.9% 1.8% 4.2 Weighted-average grant-date fair value $ 5 $ 4 $ 2018 2.1% 26.0% 2.7% 4.2 5 Granted Exercised Forfeited Outstanding at End of Year Exercisable at End of Year Shares (000) Wtd. Avg. Ex. Price 18 8,944 $ Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) 1,049 (4,402) (156) 5,435 1,859 $ 25 16 20 20 18 2018 $ $ $ 3.1 years 2.2 years 36,294 47,170 20,484 Wtd. Avg. Remaining Contract Life Aggregate Intrinsic Value (000) (1) Represents the Company’s estimated cash dividend yield over the expected term of option grant. (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 of Outstanding at Beginning of Year Shares (000) Wtd. Avg. Ex. Price 16 11,837 $ 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, 2020, there was $7,220,109 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 2.05 years. Stock option expense for the years ended December 31, 2020, 2019 and 2018 was $4,935,527, $6,345,147, and $8,582,489 respectively. Granted Exercised Forfeited Outstanding at End of Year Exercisable at End of Year 1,613 (4,278) (228) 8,944 4,101 $ 22 15 18 18 16 $ $ $ 2.8 years 1.7 years 38,097 24,881 16,162 A summary of the status of the Company’s non-vested employee stock option activity for the years ended December 31, 2020, 2019, and 2018, A summary of the status of the Company’s stock option plans at December 31, 2020, 2019 and 2018, and changes during the same periods are are presented in the table below: presented in the tables below. 2020 2019 2018 Wtd. Avg Grant Date Fair Value 4 5 4 4 5 Shares (000) 3,575 $ 1,571 (1,585) (386) 3,175 $ Wtd. Avg Grant Date Fair Value 4 4 4 4 4 Shares (000) 4,842 $ 1,049 (2,165) (151) 3,575 $ Shares (000) 6,540 $ 1,613 (3,089) (222) 4,842 $ Nonvested Stock Options at Beginning of Year Granted Vested Forfeited Nonvested Stock Options at End of Year Wtd. Avg Grant Date Fair Value 4 5 4 4 4 75 74 GENTEX CORPORATION2020 ANNUAL REPORT Restricted Shares Performance 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, Performance shares awarded under the 2019 Omnibus Plan are considered performance condition awards as attainment is based on the Company’s 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 1,603,118 shares under the 2019 Omnibus Plan and 5,688,309 shares under the prior plan (prior to its replacement) as of December 31, 2020, and has 3,598,778 shares outstanding under such plans. 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, 2020, the Company had unearned stock-based compensation of $6,062,139 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 years ended December 31, 2020 and 2019 was $4,424,678, and $897,136, respectively. No amortization expense for performance share grants 2020 2019 2018 was incurred in 2018, as no such awards were issued or outstanding. Vesting Period(1) Shares Granted Market Price at Grant Date Shares Granted Market Price at Grant Date Shares Granted Market Price at Grant Date Employee Stock Purchase Plan 1 Year 2 Year 3 Years 4 Years 5 Years 42,074 22.16 - 26.94 39,627 $ 21,669 23.88 - 26.94 119,504 23.88 - 31.08 — 64,718 22.19 — 20.40 — $ — — — — — 479,346 20.68 - 28.98 773,698 20.68 - 28.98 762,749 20.21 - 23.14 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, 2020, 2019 and 2018: 170,355 20.68 - 28.98 254,988 20.68 - 28.98 279,420 20.21 - 23.14 Plan 2020 2019 2018 Cumulative Shares Issued 2020 Weighted Average Fair Value 2020 (1) Each of these awards cliff vest after the restriction period with no additional restrictions. 832,948 $20.68 - 31.08 1,133,031 $ 20.40 - 28.98 1,042,169 $ 20.21 - 23.14 2013 Employee Stock Purchase Plan 208,273 173,013 177,846 1,354,129 $ 21.38 A summary of restricted share award activity, including award grants, vesting, and forfeitures for the years ended December 31, 2020, 2019, and ( 6 ) C O N T I N G E N C I E S 2018, are presented in the table below: Nonvested, Beginning of Year Granted Vested Forfeited Nonvested, End of Year 2020 2019 2018 Shares (000) Shares (000) Shares (000) 3,315 833 (303) (246) 3,599 2,638 1,133 (361) (95) 3,315 2,019 1,042 (321) (102) 2,638 As of December 31, 2020, there was unearned stock-based compensation of $39,291,347 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, 2020, 2019 and 2018 was $20,675,447, $13,770,917, and $8,841,985 respectively. 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. 76 77 GENTEX CORPORATION2020 ANNUAL REPORT ( 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. 2020 2019 2018 $ 519,337,271 $ 569,939,756 $ 583,672,971 228,652,827 216,100,530 127,157,684 556,949,831 39,991,262 296,276,971 225,577,146 160,967,900 557,775,114 48,360,519 333,002,878 209,311,790 106,111,515 559,099,142 42,865,401 1,688,189,405 $ 1,858,897,406 $ 1,834,063,697 Other includes Dimmable Aircraft Windows, Fire Protection Products, and Nanofiber. Major product line revenues included within the Automotive Products segment are as follows: Automotive Products Automotive Mirrors HomeLink® Modules* Total Automotive Products Other Products Revenue Total Revenue 2020 2019 2018 $ $ $ $ 1,520,628,604 $ 1,638,600,272 $ 1,598,589,777 127,569,539 171,936,615 192,608,519 1,648,198,143 $ 1,810,536,887 $ 1,791,198,296 39,991,262 $ 48,360,519 $ 42,865,401 1,688,189,405 $ 1,858,897,406 $ 1,834,063,697 * 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, 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, 2020, 2019 and 2018, approximately 7%, 7% and 8% of the Company’s net sales $ $ $ $ $ $ $ $ $ 393,979,860 $ 473,546,112 $ 495,471,799 were invoiced and paid in foreign currencies, respectively. 5,576,232 14,991,492 12,653,748 In 2020, the Company had three automotive customers (including direct sales to OEM customers and sales through their Tier 1 suppliers), 399,556,092 $ 488,537,604 $ 508,125,547 which individually accounted for 10% or more of net sales as follows: 1,436,374,596 $ 1,463,030,286 $ 1,449,910,935 33,317,668 728,248,906 16,000,669 689,772,238 14,333,098 621,190,035 2,197,941,170 $ 2,168,803,193 $ 2,085,434,068 97,530,191 $ 97,520,972 $ 97,279,052 689,894 6,519,815 481,861 6,700,141 422,844 4,484,918 104,739,900 $ 104,702,974 $ 102,186,814 34,926,686 $ 63,537,512 $ 84,337,455 1,470,705 15,309,150 1,704,045 19,338,698 1,447,494 205,621 51,706,541 $ 84,580,255 $ 85,990,570 Toyota Motor Company Volkswagen Group General Motors Daimler Group 14% 13% 13% 14% 14% 15% 12% 11% # # # 10% 2020 2019 2018 # Less than 10 percent. ( 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 ) The following table sets forth selected financial information for all of the quarters during the years ended December 31, 2020 and 2019 (in thousands, except per share data): First Second Third Fourth 2020 2019 2020 2019 2020 2019 2020 2019 Net Sales Gross Profit $ 453,762 $ 468,589 $ 229,926 $ 468,711 $ 474,639 $ 477,761 $ 529,864 $ 443,836 156,587 169,645 43,945 176,538 188,237 180,321 216,675 161,805 Operating Income (Loss) 105,027 121,596 (6,738) 127,905 138,853 128,136 162,414 110,901 Net Income (Loss) 89,506 104,280 (2,374) 108,959 117,093 111,898 143,339 99,547 Earnings (Loss) Per Share (Basic)(1) Earnings (Loss) Per Share (Diluted)(1) $ $ 0.36 $ 0.40 $ (0.01) $ 0.42 $ 0.48 $ 0.44 $ 0.59 $ 0.39 0.36 $ 0.40 $ (0.01) $ 0.42 $ 0.48 $ 0.44 $ 0.58 $ 0.39 (1) Basic and diluted earnings (loss) 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. Revenue: 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 78 79 GENTEX CORPORATION2020 ANNUAL REPORT ( 9 ) C O M P R E H E N S I V E I N C O M E 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. Details about Accumulated Other Comprehensive Income Components Unrealized gains on available-for-sale debt securities For the Twelve Months ended December 31, 2020 2019 2018 Affected Line item in the Statement of Consolidated Income Foreign currency translation adjustments: Total reclassifications for the period $ 1,657,938 $ 382,584 $ 1,584,926 Net of tax For the Twelve Months ended December 31, Realized gain on sale of securities $ 2,098,656 $ 484,283 $ 2,006,235 Other income, net 2020 2019 2018 Provision for income taxes (440,718) (101,699) (421,309) Provision for Income Taxes Balance at beginning of period $ (2,384,589) $ (1,674,887) $ 645,030 Other comprehensive income (loss) 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 3,153,634 3,153,634 769,045 1,095,486 — (709,702) (709,702) (2,384,589) 74,549 — Other comprehensive income before reclassifications 6,644,459 1,403,521 (2,319,917) (2,319,917) (1,674,887) 6,626,379 (6,642,727) 1,675,823 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 (1,657,938) (382,584) (1,584,926) 4,986,521 6,082,007 1,020,937 1,095,486 (6,551,830) 74,549 — — — — — — — — — — (78,026) 175,308 (97,282) 78,026 — Accumulated other comprehensive (loss) income, end of period $ 6,851,052 $ (1,289,103) $ (1,600,338) All amounts are shown net of tax. Amounts in parentheses indicate debits. The following table presents details of reclassifications out of accumulated other comprehensive income for the twelve months ended December 31, 2020, 2019 and 2018: Unrealized gains (losses) on derivatives Realized loss on interest rate swap Provision for income taxes Total reclassifications for the period $ $ $ — $ — — $ — $ 123,142 Other income, net — (25,860) Provision for Income Taxes — $ 97,282 Net of tax 1,657,938 $ 382,584 $ 1,682,208 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 The Company recorded Goodwill of $307.4 million related to the HomeLink® acquisition, which occurred in September 2013. The Company also recorded an additional $3.7 million in Goodwill as part of the acquisition of Vaporsens, Inc. (“Vaporsens”) in the second quarter of 2020, and an additional $0.9 million in Goodwill as part of the acquisition of Argil, Inc. (“Argil”) during the fourth quarter of 2020. Refer to Note 12, “Acquisitions,” for further information on these acquisitions. The carrying value of Goodwill as of December 31, 2020 and December 31, 2019 was $311.9 million and $307.4 million, respectively, as set forth in the table below. Balance as of December 31, 2019 Acquisitions Divestitures Impairments Other Balance as of December 31, 2020 $ $ Carrying Amount 307,365,845 4,556,942 — — — 311,922,787 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 and macro-economic conditions. No such events or circumstances, including the COVID-19 pandemic, that might negatively impact the key assumptions were observed in 2020 and, as such, nothing indicated the need for interim impairment testing. The Intangible Assets and related change in carrying values are set forth in the table below as of December 31, 2020 and December 31, 2019. 80 81 GENTEX CORPORATION2020 ANNUAL REPORT As of December 31, 2020: Other Intangible Assets Gross Accumulated Amortization Net Assumed Useful Life Revenue Automotive Products HomeLink® Trade Names and Trademarks $ 52,000,000 $ — $ 52,000,000 Indefinite HomeLink® Technology 180,000,000 (108,750,000) $ 71,250,000 Existing Customer Platforms 43,000,000 (31,175,000) $ 11,825,000 Exclusive Licensing Agreement Vaporsens In-Process R&D Argil In-Process R&D Air-Craftglass In-Process R&D 96,000,000 11,000,000 6,278,132 1,394,995 — $ — $ — $ — $ 96,000,000 11,000,000 6,278,132 1,394,995 Total other identifiable intangible assets $ 389,673,127 $ (139,925,000) $ 249,748,127 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 43,000,000 (26,875,000) $ 16,125,000 12 years 10 years Indefinite Indefinite Indefinite Indefinite Assumed Useful Life Indefinite 12 years 10 years Exclusive Licensing Agreement 96,000,000 — $ 96,000,000 Indefinite Total other identifiable intangible assets 371,000,000 (120,625,000) 250,375,000 Accumulated amortization on patents and intangible assets was approximately $164.5 million and $143.1 million at December 31, 2020 and 2019, respectively. Amortization expense on patents and other intangible assets was approximately $22.4 million, $22.4 million, and $22.5 million in calendar years 2020, 2019 and 2018, respectively. At December 31, 2020, 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, 2021 and 2022 to be approximately $22 million annually, approximately $19 million for the year ended December 31, 2023, approximately $16 million for the year ended December 31, 2024, and approximately $12 million for the year ended December 31, 2025. ( 1 1 ) R E V E N U E The following table shows the Company’s Automotive and Other Products revenue disaggregated by geographical location for Automotive Products for the twelve month periods ended December 31, 2020, 2019, and 2018: U.S. Germany Japan Mexico Other Total Automotive Products Other Products (U.S.) Total Revenue For the Twelve Months ended December 31, 2020 2019 2018 $ 519,337,271 $ 569,939,756 $ 583,672,971 228,652,827 216,100,530 127,157,684 556,949,831 296,276,971 225,577,146 160,967,900 557,775,114 333,002,878 209,311,790 106,111,515 559,099,142 $ $ 1,648,198,143 $ 1,810,536,887 $ 1,791,198,296 39,991,262 48,360,519 42,865,401 1,688,189,405 $ 1,858,897,406 $ 1,834,063,697 Revenue by geographic area may fluctuate based on many factors, 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; 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, 2020 and 2019: 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, 2020 2019 $ $ $ $ 1,520,628,604 $ 1,638,600,272 127,569,539 171,936,615 1,648,198,143 $ 1,810,536,887 22,716,985 $ 17,274,277 39,991,262 $ 23,740,261 24,620,258 48,360,519 * Excludes HomeLink revenue related to HomeLink modules integrated into automotive mirrors. 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. 82 83 GENTEX CORPORATION2020 ANNUAL REPORT Automotive Products Segment ( 1 2 ) A C Q U I S I T I O N S 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. 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. 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 range from 30 days to 75 days. NANOFIBER The Company acquired Vaporsens in early 2020, which specializes in nanofiber chemical sensing research and development. Vaporsens is primarily involved with research and development of technology related to nanofibers sensing a variety of chemicals and/or compounds. No revenue was recognized related to Nanofiber during 2020. Refer to Note 12, “Acquisitions,” for further information. On April 3, 2020, the Company acquired Vaporsens for $10.6 million in a stock purchase deal, which was in addition to the previous $3.0 million equity investment by the Company in Vaporsens. The Company funded the acquisition with $7.1 million in cash payments, with the remaining $3.5 million of consideration paid with common stock of the Company. Vaporsens specializes in nanofiber chemical sensing research and development, which the Company anticipates using to complement and expand its product offerings. Vaporsens is now a 100% owned subsidiary of the Company, and has been classified within the “Other” segment. The assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The Company accounted for the acquisition under the provisions of FASB ASC Topic 805, Business Combinations. There were no revenues of the business of Vaporsens which were included in the Company’s consolidated statement of income and comprehensive income for the year ended December 31, 2020. The valuation process was completed during the fourth quarter of 2020. The following table summarizes the fair values of the assets acquired, and the liabilities assumed, as of the acquisition date of April 3, 2020: Current Assets Personal Property Technology Licenses In-Process R&D Goodwill Total Assets Acquired Current Liabilities Deferred Tax Liability Total Liabilities Assumed Net Assets Acquired $ $ Fair Value 435,722 562,840 245,335 11,000,000 3,664,704 15,908,601 255,522 2,034,079 2,289,601 13,619,000 On September 18, 2020, the Company acquired Air-Craftglass, a Belgian company specializing in research and development for aircraft windows, for an initial payment of $1.1 million in a stock purchase deal. The Company funded the acquisition with a cash payment from cash on hand. The transaction also included contingent consideration based on future revenues. The Company is still in the process of verifying data and finalizing information related to the valuation and recording of identifiable intangible assets, deferred taxes, net working capital, contingent consideration liability, and the resulting effects on the amount of recorded goodwill. The Company expects to finalize these matters within the measurement period, which is currently expected to remain open through the second quarter of 2021. Air-Craftglass is now a 100% owned subsidiary of the Company, and will be classified within the “Other” segment. The assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The Company accounted for the acquisition under the provisions of FASB ASC Topic 805, Business Combinations. There were no revenues of the business of Air-Craftglass which were included in the Company’s consolidated statement of income and comprehensive income for the year ended December 31, 2020. 84 85 GENTEX CORPORATION2020 ANNUAL REPORT On December 14, 2020, the Company acquired Argil for $3.7 million in a stock purchase deal, which was in addition to the previous $4.2 million equity investment by the Company in Argil. The Company funded the acquisition with a cash payment from cash on hand. Argil specializes in electrochromic technology and research and development, which the Company anticipates using to complement and expand its product offerings and leverage for manufacturing efficiencies. The Company is still in the process of verifying data and finalizing information related to the valuation and recording of identifiable intangible assets, deferred taxes, net working capital, and the resulting effects on the amount of recorded goodwill. The Company expects to finalize these matters within the measurement period, which is currently expected to remain open through the third quarter of 2021. Argil is now a 100% owned subsidiary of the Company, and has been classified within the “Automotive” segment. The assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The Company accounted for the acquisition under the provisions of FASB ASC Topic 805, Business Combinations. There were no revenues of the business of Argil which were included in the Company’s consolidated statement of income and comprehensive income for the year ended December 31, 2020. Through December 31, 2020, the Company has incurred acquisition-related costs of approximately $650,000, which has been expensed as incurred in the “Selling, general & administrative” section of its Condensed Consolidated Income Statement. ( 1 3 ) S U B S E Q U E N T E V E N T On January 6, 2021, the Company entered into an agreement and plan of merger to acquire Guardian Optical Technologies (“Guardian”) for approximately $12.0 million. Guardian is an Israeli research and development company that specializes in in-cabin sensing technologies for the automotive industry. The proposed transaction is expected to close in the first quarter of 2021, subject to customary closing conditions, including regulatory approval of the Israeli government. The Company is in the process of gathering relevant information needed to complete the initial accounting of the acquisition and is currently evaluating the financial statement impacts of the transaction. this page Intentionally left mostly blank 86 87 GENTEX CORPORATION2020 ANNUAL REPORT 15-year summary of financial data SUMMARY OF OPERATIONS FOR THE YEAR 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 $ 1,688,189 $ 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 1,082,746 1,170,589 1,143,597 1,100,344 1,010,473 939,842 836,611 741,131 726,741 662,182 520,573 366,968 420,673 426,236 373,163 605,444 688,308 690,467 694,528 668,452 603,776 538,890 430,733 372,819 361,580 295,690 177,555 203,127 227,697 199,104 Research and development expenses 115,935 114,687 107,135 Selling, general & administrative expenses 89,952 85,083 75,206 35.9% 37.0% 37.6% 38.7% 99,726 71,443 39.8% 94,238 62,471 39.1% 88,393 56,617 399,556 488,538 508,126 523,358 511,743 458,766 23.7% 641 26.3% 296 27.7% 927 29.2% 4,371 12,898 12,174 14,849 12,809 30.5% 5,684 4,501 29.7% 4,439 9,264 39.2% 84,176 55,880 36.8% 76,495 49,496 398,834 304,742 29.0% 3,501 26.0% 937 33.9% 85,004 53,360(4) 234,455(4) 35.3% 81,634 48,578 36.2% 64,100 40,618 32.6% 47,128 35,808 32.6% 34.8% 51,889 50,715 42,425(3) 38,166(1) 34.8% 41,774 30,883 231,368 190,972 94,619 108,813 138,816 126,447 21.3% 22.6% 23.4% 17.4% 17.4% 21.2% 22.1% - - - - - - - 19,993 24,259 15,170 13,064 12,468 1,733 (16,618) 40,923 32,527 411,813 500,415 522,047 531,797 510,561 463,591 415,326 328,064 249,626 244,432 203,440 96,352 92,195 179,739 158,974 24.4% 26.9% 28.5% 29.6% 30.4% 30.0% 30.2% 28.0% 22.7% 23.9% 24.9% 17.7% 14.8% 27.5% 27.8% 64,249 75,731 84,164 125,005 162,969 145,122 126,722 105,134 81,039 79,764 65,706 31,715 30,107 57,609 50,213 15.6% 15.1% 16.1% 23.5% 31.9% 31.3% 30.5% 32.0% 32.5% 32.6% 32.3% 32.9% 32.7% 32.1% 31.6% 347,564 424,684 437,883 406,792 347,591 318,470 288,605 222,930 168,587 164,668 137,734 64,637 62,088 122,130(2) 108,761 20.6% 17.8% $ 1.41 24-14 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 11.9% 9.0% $ 0.24 39-15 10.0% 8.2% $ 0.22 44-15 18.7% 16.2% $0.43(2) 27-17 19.0% 14.1% $ 0.37 29-17 243,682 253,273 269,877 288,226 291,072 296,238 293,400 288,548 287,936 288,554 281,472 275,291 282,010 288,140 296,988 51,707 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 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 Cash and short-term investments $ 450,535 $ 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 Long-term investments Total current assets Total current liabilities Working capital 162,028 139,909 137,979 57,782,418 49,894 95,157 114,643 107,006 141,834 128,168 129,091 109,155 81,349 155,384 146,216 979,331 950,377 850,930 1,184,564 1,154,989 984,009 856,638 601,186 744,663 752,293 655,269 505,414 457,152 528,494 446,878 177,737 171,847 169,161 243,647 149,858 131,007 133,431 119,980 87,957 100,695 72,089 58,638 49,472 68,363 57,363 801,594 778,530 681,769 940,917 1,005,131 853,002 723,207 481,206 656,706 651,598 583,181 446,776 407,680 460,131 389,515 Plant and equipment - net 468,135 498,316 498,474 492,479 465,822 412,720 373,391 357,021 349,938 282,542 205,108 197,530 214,952 205,610 184,134 Total assets 2,197,941 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 Long-term debt, including current maturities - - - 78,000 185,625 225,625 258,125 265,625 - - - - - - - Shareholders’ investment 1,963,943 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 Debt/equity ratio (including current maturities) Common shares outstanding Book value per share - - - 0.04 0.10 0.15 0.20 0.23 - - - - - - - 243,693 251,278 259,329 280,281 287,738 291,338 295,248 291,156 286,152 288,140 284,584 276,678 275,268 289,508 284,952 $ 8 $ 8 $ 7 $ 7 $ 7 $ 6 $ 5 $ 5 $ 4 $ 4 $ 3 $ 3 $ 3 $ 3 $ 2 Cash Dividend declared per share $ 0.480 $ 0.460 $ 0.44 $ 0.390 $ 0.355 $ 0.335 $ 0.310 $ 0.280 $ 0.260 $ 0.240 $ 0.220 $ 0.220 $ 0.215 $ 0.200 $ 0.185 (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. 88 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. 89 GENTEX CORPORATION2020 ANNUAL REPORT CORPORATE DATA CORPORATE HEADQUARTERS OFFICERS GENTEX CORPORATION Steve Downing, President & Chief Executive Officer 600 N. Centennial Street Zeeland, Michigan 49464 gentex.com TRANSFER AGENT Neil Boehm, Chief Technology Officer & Vice President of Engineering Kevin Nash, Chief Financial Officer, Vice President of Finance, & Treasurer Scott Ryan, Vice President, General Counsel & Corporate Secretary Matt Chiodo, Vice President of Sales Brad Bosma, Vice President of Vision Systems & Dimmable Glass Paul Flynn, Vice President of Operations Matt Fox, Vice President of Mechanical Engineering BROADRIDGE SHAREHOLDER SERVICES Sue Franz, Vice President of Chemical Technologies c/o Broadridge Corporate Issuer Solutions Attn: IWS 1155 Long Island Avenue Edgewood, NY 11717-8309 shareholder.broadridge.com Ken Horner, Vice President of Program Management & Quality Joe Matthews, Diversity Officer and Vice President of Purchasing Angela Nadeau, Vice President of Commercial Management Robert Vance, Vice President of New Markets DIRECTORS Mr. James Wallace, Board Chair GENTEX COMMON STOCK The Company’s stock trades on The NASDAQ Global Select Market under the symbol GNTX. The Company does not have a direct stock purchase plan or dividend reinvestment policy. Ms. Leslie Brown Mr. Steve Downing Mr. Gary Goode Mr. James Hollars Mr. John Mulder Shares of the Company’s stock may be purchased through a stock Mr. Richard Schaum broker or other registered securities representative. IR AND MEDIA CONTACT Josh O’Berski Director of Investor Relations 616.772.1590 x5814 ir.gentex.com Ms. Kathleen Starkoff Mr. Brian Walker Dr. Ling Zang, Board Nominee 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 Ms. Kathleen Starkoff ANNUAL MEETING OF SHAREHOLDERS THURSDAY, MAY 20, 2021@ 4:30 PM The Pinnacle Center 3330 Highland Drive, Hudsonville, Michigan The meeting may be held virtually (virtualshareholdermeeting.com/GNTX2021), depending on government guidelines for gatherings. Please refer to the Gentex IR site for updated event information at ir.gentex.com VOTE YOUR SHARES ONLINE @ PROXYVOTE.COM 90 G ENTEX COR PORATION 2020 A NNUAL REPORT 91 91 2020 ANNUAL REPORT 600 N. Centennial Street, Zeeland, Michigan 49464 | 616.772.1800 | gentex.com | gentextech.com © 2021 Gentex Corporation Gentex®, A Smarter Vision®, Full Display Mirror®, FDM®, ITM®, Integrated Toll Module®, ITM (design)™, HomeLink®, HomeLink (house design)®, HomeLink Connect™, SmartBeam®, and Vaporsens™ are all trademarks of Gentex Corporation. The products referenced in this report may not be approved in all jurisdictions.