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Gentex Corporation (GNTX) Q4 2023 Earnings Call Transcript

Gentex Corporation (GNTX)

Q4 2023 Earnings Conference Call

Company Participants

Josh O'Berski - Director, IR

Steven Downing - President, CEO & Director

Kevin Nash - VP, Finance, CFO, Treasurer & CAO

Neil Boehm - CTO & VP, Engineering

Conference Call Participants

Luke Junk - Robert W. Baird & Co.

Thomas Scholl - BNP Paribas Exane

Michael Nichols - B. Riley Securities

Mark Delaney - Goldman Sachs Group

John Murphy - Bank of America Merrill Lynch

Ryan Brinkman - JPMorgan Chase & Co.

Ronald Jewsikow - Guggenheim Securities

David Whiston - Morningstar

Presentation

Operator

Good day, and thank you for standing by. Welcome to Gentex' Fourth Quarter and Year-End 2023 Financial Results Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Josh O'Berski, Director of Investor Relations. Please go ahead.

Josh O'Berski

Thank you. Good morning, and welcome to the Gentex Corporation Fourth Quarter and Year-End 2023 Earnings Release Conference Call. I'm Josh O'Berski, Gentex' Director of Investor Relations. And I'm joined by Steve Downing, President and CEO; Neil Boehm, CTO; and Kevin Nash, Vice President of Finance and CFO.

This call is live on the Internet and can be reached by going through the Gentex website and to ir.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call.

This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex Reports Fourth Quarter and Year-End 2023 Financial Results press release from earlier this morning and, as always, shown on the Gentex website. Your participation in this conference call implies consent to these terms.

Now I'll turn the call over to Steve Downing, who will get us started today. Steve?

Steven Downing

Thank you, Josh. For the fourth quarter of 2023, the company reported net sales of $589.1 million, an increase of 19% compared to net sales of $493.6 million for the fourth quarter of last year. The fourth quarter of 2023 revenue included one-time cost recoveries of approximately $5 million. Light vehicle production increased by 6% quarter-over-quarter in the company's primary markets of North America, Europe, Japan and Korea, which equates to a 13% revenue outperformance versus the company's underlying markets.

The gross margin in the fourth quarter of 2023 was 34.5% compared with a gross margin of 31.2% in the fourth quarter of last year. The increase in gross margin in the fourth quarter of 2023 was positively impacted by recurring price increases to customers and one-time cost recoveries, which together positively impacted the gross margins by approximately 100 basis points on a quarter-over-quarter basis.

The additional improvements in gross margin came from the higher sales levels, improved leverage on overhead expenses, purchasing cost reductions, lower inbound freight expenses and improvements in overtime-related costs. The fourth quarter of 2023 produced significant year-over-year gross margin improvements as well as a sequential improvement in gross margin compared to the third quarter of this year.

Our team has done an excellent job of working with our customers to execute both temporary and permanent price increases to help offset the inflationary cost environment that has negatively impacted Gentex over the last 2 years. I'm very pleased with the progress we have made in our gross margin recovery plan during 2023.

And as we head into 2024, the next phase of our gross margin recovery plan will focus on bill of material reductions, throughput improvements and overtime and scrap cost reductions. The improvements we have made in 2023, combined with our targeted improvements for 2024, provide the road map of how we plan to achieve our target of a 35% to 36% gross margin by the end of the year.

Operating expenses during the fourth quarter of 2023 were up 18% to $70.6 million compared to operating expenses of $59.7 million in the fourth quarter of 2022. Operating expenses increased quarter-over-quarter, primarily due to staffing and engineering-related professional fees.

As we ramp up our development and launch capabilities, our planned R&D expenses are trending higher but remain in line with our expectations and continue to increase in line with our overall sales growth rates. We are focused on adding technical bandwidth across many different disciplines to help execute the significantly higher number of launches needed to accomplish our recent and forecasted growth.

While launch activity has been driving an increase in R&D, we also continue to invest heavily in research activity focused on new products and technical capabilities while also ensuring that the technical team is in place to help drive product redesign that will optimize the cost structure of existing bills of material. We expect our R&D levels to be elevated throughout 2024 as the pace of innovation and launch of new products remains at the highest rate in company history.

Income from operations for the fourth quarter of 2023 was $132.8 million compared to income from operations of $94.1 million for the fourth quarter of last year. During the fourth quarter of 2023, the company had an effective tax rate of 13.9%, which was driven by benefits from the foreign-derived intangible income deduction, discrete benefits from stock-based compensation as well as provision-to-return adjustments.

In the fourth quarter of 2023, net income was $116.9 million compared to net income $86.2 million in the fourth quarter of last year. Earnings per diluted share in the fourth quarter of 2023 were $0.50 compared with earnings per diluted share of $0.37 in the fourth quarter of last year.

For calendar year 2023, the company's net sales were $2.3 billion, an increase of 20% compared to net sales of $1.92 billion in calendar year 2022, representing the highest annual sales in company history. Light vehicle production in 2023 increased by 12% compared to last year in the company's primary markets. The company's revenue outperformance in 2023 versus the underlying market was driven by growth in FDM and exterior auto-dimming mirror unit shipments as well as continued penetration of base interior auto-dimming mirrors.

For calendar year 2023, the gross margin was 33.2% compared to a gross margin of 31.8% for calendar year 2022. Gross margin improved for the year by 140 basis points primarily due to price increases and cost recoveries, lower freight costs, product mix and improved overhead leverage created by the growth in revenue.

For calendar year 2023, operating expenses increased 11% to $266.9 million compared to operating expenses of $239.8 million last year. For calendar year 2023, the company's effective tax rate was 15.2% compared to an effective tax rate of 13.8% for calendar year 2022. The increase in the tax rate in 2023 was primarily driven by a reduced benefit from the foreign-derived intangible income deduction compared to last year.

Net income for calendar year 2023 was $428.4 million, up 34% compared to net income of $318.8 million last year. Earnings per diluted share for calendar year 2023 were $1.84 compared to earnings per diluted share of $1.36 last year.

I'll now hand the call over to Kevin for some financial details.

Kevin Nash

Thanks, Steve. Automotive net sales during the fourth quarter of '23 were $578.7 million compared to $482 million in the fourth quarter of 2022. For calendar year '23, automotive net sales were $2.25 billion, which represents a 20% increase over '22. The increase in automotive net sales was driven primarily by a 45% increase in FDM unit shipments as well as a 21% year-over-year increase in exterior auto-dimming mirror unit shipments.

Other net sales in the fourth quarter, which includes dimmable aircraft windows and fire protection products, were $10.5 million, a decrease of 2% compared to other net sales of $10.7 million in the fourth quarter of '22. Fire protection sales decreased by 44% and dimmable aircraft window increased by 362% for the fourth quarter of '23 when compared to the fourth quarter of '22. Other net sales for calendar year '23 were $44.6 million compared with other net sales of $44.2 million in calendar year '22. Fire protection sales in '23 were down 32% year-over-year while dimmable aircraft window sales increased by 211% in '23 compared to last year.

Share repurchases. The company repurchased 2.2 million shares of its common stock during the fourth quarter at an average price of $30.76 per share. For the year ended December 31 of '23, the company repurchased 4.93 million shares of its common stock at an average price of $29.61 per share for a total of $144.7 million.

As of December 31 of '23, the company has 15.9 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy. But share repurchases may vary from time-to-time and will take into account macroeconomic issues, market trends and other factors the company deems appropriate.

Shifting over to the balance sheet. The balance sheet comparisons mentioned today are as of December 31 of '23 as compared to December 31 of '22. Cash and cash equivalents were $226.4 million compared to $214.8 million. Short-term and long-term investments combined were $313.4 million, up from $225.3 million, which includes fixed income investments as well as the company's equity and cost method investments. Accounts receivable was $321.8 million, up from $276.5 million due to the increase in sales levels. Inventories were $402.4 million, down from $404.4 million, and accounts payable increased to $184.4 million, up from $151.7 million.

Let's take a look at preliminary cash flow items for the quarter and year. Fourth quarter 2023 cash flow from operations was $169.6 million, which was an increase from $101.8 million in the fourth quarter of '22. The increase was due to increases in net income, shifts in working capital and deferred taxes. Year-to-date, cash flow from operations was $537.2 million, an increase from $338.2 million in 2022 due to increased net income and changes in working capital.

CapEx for the fourth quarter was $62.3 million compared with $37.9 million for the fourth quarter of last year. And calendar year 2023 capital expenditures were $183.7 million compared with $146.4 million last year. And depreciation and amortization for the fourth quarter was $22.3 million compared with $23.3 million for the fourth quarter of last year. And calendar year '23 depreciation and amortization was $93.3 million compared with $96.6 million last year.

I'll now hand the call over to Neil for a product update.

Neil Boehm

Thank you, Kevin. Earlier in January, Gentex participated in the 2024 Consumer Electronics Show. CES is one of the many tools we use to showcase our current and potential future product portfolio to customers and consumers. Our booth was designed to help automakers envision a path toward the autonomous age with scalable products and features ready for implementation on today's vehicles.

This year, we had two different booths where we demonstrated Gentex technology. One of the booths, which was located in the North Hall, showcased our newly announced acquisition of eSight, the medical wearable for people with vision loss. This booth was set up to allow partners and consumers the ability to experience this great technology. And it showed Gentex' capability and experience in displays and cameras applied in a new market segment. ...

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