Gentex Corp., a Zeeland, Michigan-based manufacturer of automotive automatic-dimming rearview mirrors, automotive electronics, dimmable aircraft windows and fire protection products, has reported financial results for the three months ended March 31.
For the first quarter of 2018, the company reported net sales of $465.4 million, which was an increase of 3 percent compared to net sales of $453.5 million in the first quarter of 2017. When compared with the company’s mid-January forecast for the first quarter of 2018, light vehicle production in the company’s primary regions declined in excess of 3 percent, which resulted in lower than expected unit shipments and revenue during the quarter for the company. On a quarter-over-quarter basis, automotive light vehicle production in the company’s primary markets decreased by approximately 3 percent versus the previous reported production numbers from IHS for the first quarter of 2017.
In addition, a supplier production issue for certain electronic components affected the company’s ability to meet demand for full display mirrors, which resulted in a negative impact of approximately 2 percent on the company’s revenue during the quarter. Since the end of the first quarter of 2018, the supplier production issue has been remediated and the company has resumed normal shipments of the impacted products.
“While we were disappointed with the overall revenue performance during the first quarter of 2018, we were able to outperform our underlying markets by approximately 6 percent, taking into consideration the lower automotive production levels during the quarter,” said President and CEO Steve Downing. “Despite the first quarter headwinds, we have a strong product launch cadence of full display mirror nameplates over the balance of 2018. Additionally, light vehicle production for the remainder of 2018 is currently forecasted to improve, especially in the second half of the year. When you combine these factors, we are pleased to be able to maintain our revenue and margin guidance for calendar year 2018, despite the difficulties in the first quarter.”
When compared with the first quarter of 2017, the gross margin declined from 38.8 percent in the first quarter of 2017 to 37.1 percent in the first quarter of 2018, primarily as a result of an inability to leverage fixed overhead costs, resulting from the lower than forecasted sales growth and the full display mirror shipments that were lower than demand during the quarter due to the supplier production issue. In addition, annual customer price reductions negatively impacted the gross margin because they were not fully offset by purchasing cost reductions.
“As is customary for the company, most annual price reductions become effective in the first quarter, but purchasing cost reductions don’t materially start to help offset that margin pressure until sometime in the second quarter. We are currently expecting positive leverage on gross margin based on the timing of purchasing cost reductions and forecasted revenue growth rates for the remainder of calendar year 2018, allowing us to maintain annual guidance provided,” said Downing.
Operating expenses during the first quarter of 2018 were up 7 percent to $44.1 million when compared to operating expenses of $41.4 million in the first quarter of 2017, primarily due to increased staffing levels.
Income from operations for the first quarter of 2018 decreased 4 percent to $128.5 million when compared to income from operations of $134.4 million for the first quarter of 2017, primarily due to the lower quarter-over-quarter gross profit margin percentage.
Other income increased to $3.2 million in the first quarter of 2018 compared to $0.4 million in the first quarter of 2017, primarily due to an increased interest net of expense, foreign exchange gains and realized gains on sales of equity investments.
During the first quarter of 2018, the company’s effective tax rate was 15.6 percent, down from 27.7 percent during the first quarter of 2017, primarily driven by the impacts of the Tax Cuts and Jobs Act of 2017.
Net income for the first quarter of 2018 increased 14 percent to $111.2 million compared with net income of $97.6 million in the first quarter of 2017.
Earnings per diluted share in the first quarter of 2018 increased 21 percent to 40 cents, compared with earnings per diluted share of 33 cents in the first quarter of 2017, as a result of the lower effective tax rate and a reduction in diluted shares outstanding on a quarter over quarter basis.
Automotive net sales in the first quarter of 2018 were $455 million, an increase of 2 percent compared with automotive net sales of $445.6 million in the first quarter of 2017, driven by a 7 percent increase in auto-dimming mirror unit shipments on a quarter-over-quarter basis.
Other net sales in the first quarter of 2018, which includes dimmable aircraft windows and fire protection products, were $10.4 million, an increase of 33 percent, compared to other net sales of $7.9 million in the first quarter of 2017.
Share Repurchases
During the first quarter of 2018, the company repurchased 9.3 million shares of its common stock at an average price of $21.71 per share. Of these share repurchases, 5.5 million shares were repurchased from the former CEO, pursuant to the previously disclosed retirement agreement, at a price of $20.98 per share. As previously announced, these share repurchases were separately approved by the company’s board of directors and were not a part of the company’s existing publicly announced share repurchase plan. As of March 31, the company has approximately 26 million shares remaining available for repurchase pursuant to the previously announced share repurchase plan, which is now a part of the broader publicly disclosed capital allocation strategy. The company intends to continue to repurchase additional shares of its common stock in the future in support of such capital allocation strategy, but share repurchases may vary from time to time and will take into account macroeconomic issues, market trends and other factors that the company has deemed appropriate.
Debt Repayment
During the first quarter of 2018, the company paid down $26.1 million of debt on the company’s term loan, which in combination with its normally scheduled principal repayment of $1.9 million resulted in a total repayment of $28 million during the quarter. The company expects to continue, based on previously disclosed factors, to pay additional principal during the second and third quarters of 2018, in anticipation of such debt maturing on Sept. 27, 2018.
