Gentex Reflects on a Light Quarter

By Steve Symington Markets Fool.com

Gentex Corporation(NASDAQ: GNTX)released fourth-quarter 2016 results Friday morning, and shares of the auto-dimming mirror company are down around 2.6% as of this writing. Despite not being able to meet customer demand in the quarter, Gentex continues to advance its technology and further penetrate its core markets.Let's take a closer look at how Gentex finished the year.

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Gentex's new biometric mirror system can authenticate drivers through iris identification. IMAGE SOURCE: GENTEX.

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Gentex results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Growth

Revenue

$419.9 million

$405.6 million

3.5%

Net income

$88.8 million

$88.4 million

0.5%

Earnings per share

$0.31

$0.30

3.3%

Data source: Gentex Corporation.

What happened with Gentex this quarter?

  • Revenue growth was driven by a 4% year-over-year increase in auto-dimming mirror shipments.
    • Revenue and unit shipments were negatively affected by a raw-material shortage of a specific commodity used in the majority of Gentex's auto-dimming mirrors, which impacted its ability to meet full customer demand during the quarter.
    • To a lesser extent, growth was also held back by incremental plant shutdowns at OEMs, as well as inventory adjustments at "certain Tier 1 customers."
    • These collectively had a negative impact to revenue of roughly $15 million in the quarter.
  • Therefore, revenue for the full calendar-year 2016 increased 9.1%, to $1.68 billion -- near the low end of of Gentex's previous guidance, which called for 2016 sales of $1.68 billion to $1.71 billion.
  • Automotive segment revenue grew 3.9% year over year in the fourth quarter, to $411.5 million.
  • "Other" segment revenue -- including fire protection products and dimmable aircraft windows -- declined 13.4% year over year, to $8.4 million.
  • Roughly 60% of all interior, auto-dimming mirror launches contained advanced features and added electronic content.
  • The total number of launches in 2016 grew roughly 10% over 2015.
  • Gross margin expanded 10 basis points year over year during the quarter, to 40.3%.
  • Full-year gross margin improved 70 basis points year over year, to 39.8%, above the high end of guidance that called for 2016 gross margin of 39.3% to 39.7%.
  • Repurchased 2.3 million shares of common stock during the quarter at an average price of $17.94 per share,leaving 6.7 million shares remaining under Gentex's current repurchase authorization.
  • Cash flow from operations grew 73.1% year over year in Q4, to $118.4 million, bringing full-year cash flow from operations to $471.5 million.
  • Made additional debt payments of $15 million on its revolver loan on top of the normally scheduled principal repayment on its term loan.
  • Ended the quarter with cash and equivalents of $546.5 million and long-term debt of $178.1 million.

What management had to say

During the subsequent conference call, Gentex CFO Steve Downing added:

Despite the supplier issues and inventory adjustments that occurred recently, the fourth quarter and last few weeks have been a very exciting time for Gentex. The company presented at the SEMA automotive aftermarket show in November, and debuted our new aftermarket version of the Full Display Mirror, as well as a new HomeLink module designed for utility and ATV vehicles. This event was followed quickly by the CES show in January, where the company debuted several new technologies.Our booth this year was anchored by new products that addressed two of the emerging trends in automotive, camera monitoring systems or CMS and the connected car.

In particular at CES, Downing called attention to the company's new three-camera system that works in combination with its new full-display mirror, including two cameras housed behind new exterior mirrors with electrochromic glass, and a third camera located in the short fin antenna on the roof of the vehicle. Gentex also demonstrated a "functional proof of concept" for its new embedded biometric mirror solution for vehicles, which can recognize individual people through iris scanning technology. Possible applications for this novel, secure biometric concept include vehicle security, start functionality, and personalization from mirror adjustments to seat locations, music, and preferred temperatures.

Looking forward

Based on the mid-January 2017 IHS Automotive forecast for light-vehicle production in North America, Europe, Japan, and South Korea -- which predicts total light-vehicle production will increase 1% in 2017 over 2016 -- Gentex currently anticipates full-year 2017 revenue to be in the range of $1.78 billion to $1.85 billion. Gentex also anticipates gross margin in 2017 will be between 39% and 40%, assuming the majority of expected annual customer price reductions will be offset by purchasing cost reductions and operational efficiency initiatives.

Finally, over the longer-term, looking at IHS' production forecast for 2018 (which assumes 1% growth, as well), Gentex believes revenue will climb another 6% to 10% over currently forecasted 2017 revenue.

All things considered, this was another admirable performance from Gentex in light of the multiple near-term growth headwinds the company faced in the fourth quarter. As the company continues to invest in compelling new product offerings while its existing technology becomes more indispensable to automakers, I think today's small pullback will prove to be nothing more than a blip in Gentex's long-term radar.

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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 a disclosure policy.