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Gentex Falls Just Short of Expectations

Gentex Corporation (NASDAQ: GNTX) announced second-quarter 2016 results on Friday morning, once again demonstrating its ability to outgrow relevant light vehicle production that drives its business. But that wasn't enough to appease the market, leaving shares of the auto-dimming mirror specialist to fall more than 7% on the day.

Let's reflect more closely, then, on how Gentex capped the first half of the year, and what investors should expect from the company in the coming quarters.

IMAGE SOURCE: GENTEX.

Gentex results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Growth

Revenue

$443.1 million

$423.8 million

4.6%

Net income

$88.5 million

$86.5 million

2.3%

Earnings per share

$0.31

$0.30

3.3%

Data source: Gentex Corporation. 

What happened with Gentex this quarter?

  • Though we don't usually pay close attention to Wall Street's demands, these results were slightly below consensus estimates for revenue of $446.2 million and earnings of $0.32 per share.
  • Automotive segment revenue grew 5% year over year, to $433.9 million, thanks primarily to a 6% increase in auto-dimming mirror unit shipments.
  • Other segment revenue -- including dimmable aircraft windows and fire-protection products -- fell 2% to $9.2 million.
  • Gentex saw 24 net new nameplate launches of inside and outside electromagnetic mirrors and electronic features -- up from 11 last quarter -- with two-thirds of net inside mirror launches including advanced features.
  • Gross margin declined to 37.7% (from 39.4% in the same year-ago period), as annual customer price reductions and unfavorable product mix weren't completely offset by purchasing cost reductions.
  • Repurchased 2.2 million shares during the quarter, leaving roughly 3.1 million shares remaining under Gentex's current repurchase authorization.
  • Generated cash flow from operations of $132.3 million during the quarter, up from $103.3 million in last year's Q2.
  • Paid down $25 million of debt on the company's term loan in addition to a $1.9 million scheduled principal repayment.
  • Gentex ended the quarter with cash and equivalents of $580.6 million.

What management had to say

During the subsequent conference call, Gentex CFO Steve Downing noted that there was a higher percentage of base auto-dimming mirror shipments this quarter compared to the same year-ago period, which put a crimp on gross margin. 

At the same time, Gentex VP of engineering Neil Boehm noted the percentage of advanced feature nameplate launches was encouragingly higher than Gentex's historical average. Gentex also initiated shipments of its full-display mirror product to its second major OEM customer during the quarter, marking a significant step toward global acceptance of the promising line.

Looking forward

Based on the July 2017 IHS light vehicle production forecast -- which calls for total light vehicle production to increase 2% for the year -- Gentex expects revenue in the second half of the year to increase between 6% and 10% on a year-over-year basis. As such, Gentex narrowed its full-year guidance for revenue to be in the range of $1.79 billion to $1.83 billion (compared to $1.78 billion to $1.85 billion previously), with gross margin of 38.5% to 39% (down from 39% to 40% previously).

Gentex's revenue guidance update isn't of big concern, as its long-term thesis and ability to continue permeating its industry both appear to remain intact. But combined with its slight relative underperformance in the second quarter, while certainly not a deal-breaker, it's unsurprising to see the market bidding shares down on signs of continued margin compression in the near term.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gentex. The Motley Fool has the following options: short December 2017 $17 puts on Gentex. The Motley Fool has a disclosure policy.