Gentex Declines on North American Weakness

Gentex Corporation (GNTX 0.98%) announced mixed third-quarter 2017 results on Friday, highlighting the effects of an unexpected decline in North American light-vehicle production on its core business. But thanks to higher unit shipments in international markets, the auto-dimming mirror specialist still managed to deliver modest top-line growth to kick off the second half of the year.

Let's take a closer look at what Gentex achieved over the past few months, as well as what investors can expect for the rest of 2017.

IMAGE SOURCE: GENTEX

Gentex results: The raw numbers

Data source: Gentex Corporation.

What happened with Gentex this quarter?

• Gentex doesn't provide specific quarterly guidance. But by comparison, investors were looking for roughly the same earnings per share on higher revenue of $452 million.
• Revenue growth was driven primarily by international auto-dimming mirror-unit shipments, which more than offset a 7% decline in North American auto-dimming mirror-unit shipments. The latter was caused by an 8% decline in North American light-vehicle production during the quarter. Stateside light-vehicle production schedules decreased by roughly 3% as compared with Gentex's estimates last quarter.
• Automotive segment revenue climbed 2%, to $428.2 million, thanks to a 5% increase in total auto-dimming mirror-unit shipments.
• "Other" segment revenue climbed 6% year over year, to $10.5 million, driven by growth in dimmable aircraft windows and fire-protection products.
• Gentex saw 20 net nameplate launches of interior and exterior electrochromic mirrors and electronic features compared to 24 last quarter and 11 in Q1. Roughly 60% of this quarter's net auto-dimming mirror launches contained advanced features. 
• Gross margin declined 150 basis points year over year, to 39.0%, as annual customer price reductions were only partially offset by purchasing cost reductions. But it also improved 130 basis points sequentially from last quarter, driven by manufacturing efficiencies and favorable product mix. 
• Gentex repurchased 3.2 million shares at an average price of $17.41 per share, leaving 14.9 million shares remaining under its repurchase authorization.
• The company paid down $8.1 million of debt on its term loan, in addition to a $1.9 million scheduled principal repayment. 
• Gentex generated cash flow from operations of $89 million, and ended the quarter with cash and equivalents of $562 million.

What management had to say

During the subsequent conference call, Gentex CFO Steve Downing elaborated that light-vehicle production in Europe, Japan, and Korea -- which collectively represent nearly all of Gentex's international sales -- was up 7% year over year, more than offsetting the impact of intermittent plant shutdowns in North America that led to this quarter's domestic sales shortfall.

Meanwhile, Gentex VP of Engineering Neil Boehm stated that net launches of advanced features are greater than 50%, marking a particularly "bullish indicator of the strength of [Gentex's] product portfolio."

"We were also encouraged at the levels of launches in our base auto-dimming products as this growth provides evidence of the relevance of mirrors globally," Boehm added, "but more importantly helps us secure a geography in a car to deliver other technologies to our customers."

To that end, Gentex is still working on the development and launch of its Full Display Mirror product for initial launch customers. As it stands, Gentex has received program awards with five different OEMs for its Full Display Mirror, and is in advanced talks with other OEMs who will likely incorporate the product in their roadmap for future vehicles.

Looking forward

Based on the October 2017 IHS light-vehicle production forecast, which now predicts total light-vehicle production will increase 1.5% for all of 2017 (down from 2% last quarter), Gentex believes revenue in the fourth quarter will climb between 5% and 10% on a year-over-year basis. Analysts' consensus estimates predicted fourth-quarter revenue would arrive near the high end of that range.

Finally, Gentex made slight revisions to its full-year guidance, which now calls for 2017 revenue to be in the range of $1.78 billion to $1.80 billion -- narrowed from $1.79 billion to $1.83 billion previously. Gentex continues to expect gross margin for the year in the range of 38.5% to 39%.

Apart from temporary weakness in North America, which stems from light-vehicle production issues largely out of Gentex's control, this quarter held no significant surprises for Gentex shareholders. But shares were also up nearly 16% over the past year as of Thursday's close. Combined with its slight top-line shortfall and narrowed guidance coming mostly at the expense of the high end of Gentex's previous outlook, it's equally unsurprising to see Gentex stock falling today in response.