Gentex Corporation (NASDAQ:GNTX) Q4 2023 Earnings Call Transcript
Gentex Corporation (NASDAQ:GNTX) Q4 2023 Earnings Call Transcript January 26, 2024
Gentex Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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. Our primary booth was in the West Hall and was focused on our automotive, aerospace and consumer-facing products and technologies. This booth contained multiple vehicles and simulators, which were designed to demonstrate new features and technologies to visitors, enabling them to experience the first-hand benefits of our products right on the show floor. One of the unique demonstrators showcased a scalable yet holistic approach to driver and in-cabin monitoring. The driver monitoring system tracked the driver's head pose, eye gaze and other relevant movements to determine distraction, drowsiness, sudden sickness and readiness for the return of manual control in semiautonomous vehicles.
The system is easily expandable to include 2D or 3D cabin monitoring for detecting passengers, behaviors, objects and even presence of life. Our goal with this system is to provide solutions for today's vehicles and the transition to autonomous vehicle, which means engineering a comprehensive and scalable monitoring platform based on our competency in digital vision and sensor fusion techniques. A second demonstrator was set up to demonstrate the value and use cases for thermal imaging using long-wave infrared technology. Gentex previously announced our partnership with ADASKY, whose focus is on thermal imaging. At CES, we showcased a simulator that we developed together that highlighted the value that thermal imaging can bring to both forward and rearward vision systems in a vehicle.
To demonstrate a forward-facing thermal imager, we showed how this information could be displayed in the center stack or any display in the dash of a vehicle to help a driver or passengers see under difficult conditions. For the rearward-facing thermal imager, we showcased how this information could be displayed in our Full Display Mirror in order to provide additional visibility benefits to the consumer in difficult driving conditions. Additionally, we demonstrated how a thermal imager can be utilized as an additional sensor input into ADAS systems for really difficult driving situations such as heavy fog, low light, very bright light, snow and rain. Also displayed at CES were our large-area dimmable devices, including sunroofs that darken on-demand or with system intelligence, and sun visors that fold down like a traditional visor but include a clear, dimmable panel that can darken in on-demand or based on sunload sensors.
With the dimmable visor we showed previously, the consumer would not have a vanity mirror on the visor due to the surface being all glass. So for CES this year, we had added an additional feature. With a press of a button, the see-through glass surface became a reflective surface and the lighting above visor turned on, so the person could utilize the device like a traditional vanity mirror. This new technology feature was really well received by everyone that sat in the vehicle. The last area of focus at CES was the launch of our new residential smoke detector product that we announced and displayed at the show. Gentex is celebrating our 50th anniversary this year. It's interesting to reflect on the fact that Gentex began as a smoke-detecting company.
And we are now using all of our background in detecting smoke for commercial applications to create an all-new product line of residential detectors called PLACE. PLACE has four different products that are designed for specific locations in the home. There's a product for the garage, the kitchen, the child's room and a general-use product. Each of these comes with some unique technology and capability to add value to the end consumer. For example, the child's room product has a nightlight feature, a white noise generator, audio and camera that will allow parents to check up on the child remotely. We're excited to launch this new product in 2024 and expect that this new product line will open many new opportunities as we expand into the consumer-facing market.
Overall, CES 2024 was an excellent opportunity for us to demonstrate to our current customers, and hopefully some future ones as well, where our product strategy and development focus is heading over the next few years. In terms of launches for the fourth quarter of 2023, there were 10 net new nameplate launches of our interior and exterior auto-dimming mirrors and electronic features. For calendar year 2023, we experienced our greatest net launch rate since 2015. And we continue to see a strong pipeline of launches through 2024. Now for an update on Full Display Mirror. The fourth quarter of 2023 was another strong quarter for Full Display Mirror shipments. And we're excited to announce that for the calendar year 2023, we were able to exceed our unit shipment goal of 500,000 units over 2022 volume by shipping approximately 750,000 units more than 2022.
This would bring our 2023 FDM unit shipments to approximately 2.44 million units. It's clear in looking at this growth that the product is being well received by our OEM customers and the end consumers. 2023 was a really strong year for Gentex products and technologies. The FDM growth was outstanding. We had an extremely heavy launch schedule. And late in the year, we had minimal component shortage issues to worry about. In 2024, while we continue to push the Gentex technology path that we showed at CES, we will also need to focus on the execution of our heavy launch backlog and the redesign work needed to achieve the cost-optimized designs necessary to recover from the increases we've seen over the past few years. I'll now hand the call back over to Steve for guidance and closing remarks.
Steven Downing: Thanks, Neil. The company's current forecast for light vehicle production for calendar year 2024 and 2025 are based on the S&P Global Mobility mid-January 2024 forecast for light vehicle production in North America, Europe, Japan, Korea and China. Light vehicle production in these markets is expected to decrease by 1% in 2024 compared to calendar year 2023. The forecasted vehicle production volumes for calendar years 2024 and 2025 from S&P Global Mobility are shown in our press release from today. Based on this light vehicle production forecast, the company is providing full year guidance estimates for calendar year 2024 as follows. Revenue for 2024 is expected to be between $2.45 billion and $2.55 billion. Gross margins for the year should be between 34% and 35%.
Operating expenses are expected to be between $295 million and $305 million. The estimated annual tax rate for the year is forecasted to be between 16% and 18%. Capital expenditures for calendar year 2024 are expected to be between $225 million and $250 million. Depreciation and amortization is expected to be between $95 million and $105 million. Additionally, based on the mid-January 2024 S&P Global Mobility light vehicle production forecast as well as the company's estimates for aerospace, medical and fire protection products, the company currently expects calendar year 2025 revenue to be between $2.65 billion and $2.75 billion. Calendar year 2023 turned out to be a remarkable year for the company and was the first time that Gentex has exceeded $2 billion in annual revenue.
It is important to note that the growth the company has achieved over the last few years has been driven by our new technologies and innovative product road maps. From 2018 through 2023, the company's revenue has grown by over 26% while light vehicle production in our primary markets of Europe, North America, Japan and Korea has shrunk by over 11% during the same period. We believe this revenue outperformance versus the underlying market is evidence that our product strategy is effective and is creating our targeted results. Our revenue guidance for 2024 and 2025 shows that we remain confident in our ability to outperform the underlying market and revenue growth while we continue to focus on gross margin improvement. Gentex is poised to execute on our forecasted revenue growth while maintaining focus on cost control and gross margin improvement, which are necessary to accomplish the goal of achieving a gross margin profile of 35% to 36% by the end of 2024.
These factors we believe will result in record revenue and profitability that should create the foundation for increased shareholder returns over the next several years. This completes our prepared comments for today, and we can now proceed to questions.
Operator: [Operator Instructions]. And our first question is going to come from the line of Luke Junk with Baird.
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