Gentex Corporation

Good day and welcome to Gentex Report Second Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would like to turn the call over to Josh Roburski, Director of Investor Relations. You may begin.

Thank you. Good morning and welcome to the Gentex Corporation Second Quarter 2022 Earnings Release Conference Call. I'm Joshua Berski, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO, Neil Boehm, Vice President of Engineering and CTO, and Kevin Nash, Vice President of Finance and CFO. This call is live on the internet and can be reached by going to the Gentex website and at 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 Report Second Quarter 2022 Financial Results Press Release from earlier this morning and is 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.

Thank you, Josh. For the second quarter of 2022, the company reported net sales of $463.4 million compared to net sales of $428 million in the second quarter of 2021, which was an 8% increase quarter over quarter. For the second quarter of 2022, global light vehicle production in North America, Europe, Japan, Korea, and China decreased approximately 3% when compared to the second quarter of 2021. Light vehicle production in the company's primary markets of North America, Europe, and Japan, Korea was down 1% on a quarter-over-quarter basis, primarily driven by vehicle production increases in North America that were more than offset by reductions in Europe, Japan, and Korea. While we are pleased with our sales performance compared to the light vehicle production, which represents a 9% outperformance to our primary markets and 11% outperformance to the global market, It is important to note that sales for the quarter fell short of our beginning of quarter forecast by approximately $70 to $80 million. The sales shortfall was primarily driven by the fact that the light vehicle production in our primary markets was 4% lower than forecasted at the beginning of the quarter and then was further compounded by component issues that negatively impacted MIX on some of our advanced feature products. While there appears to be some improved stability in light vehicle production environment as compared to a year ago, the company is still experiencing significant customer order fluctuations on a week-to-week basis. The industry dynamics continue to create a difficult forecasting environment. However, we still believe that the continuing strong demand for light vehicles, combined with the historically low level of light vehicle inventories, should create a better sales environment as we move throughout the rest of this year and into 2023. For the second quarter of 2022, the gross margin was 32% compared to a gross margin of 35.4% for the second quarter of 2021. Gross margin was impacted on a quarter over quarter basis by raw material cost increases, labor cost increases, lower than expected sales levels and customer order volatility, logistics cost increases and product mix shifts. Inflationary pressures on our raw materials resulted in a margin impact of approximately 150 basis points. Higher labor costs impacted margins by approximately 60 basis points. The lower than forecasted sales levels and customer order volatility resulted in approximately 150 basis points of margin headwind. Logistics costs impacted margins by approximately 50 basis points. And product mix shifts resulted in approximately 60 basis points of headwind. The total of these issues mentioned created approximately 470 basis points of margin headwind, but we were able to offset some of these issues through lower than forecasted price downs to our customers and fixed and variable overhead efficiencies. While we currently expect that many of these challenges will continue throughout 2022 and into 2023, we are optimistic about our ability to stabilize and offset many of these headwinds due to the progress we are making with our customers regarding the inflationary aspects of our business by building collaborative relationships that provide opportunities to minimize the impact of these inflationary pressures on our respective business models. Operating expenses during the second quarter of 2022 increased by 21% to $62.6 million compared to operating expenses of $51.7 million in the second quarter of 2021. Operating expenses increased during the second quarter of 2022 due to staffing and professional fees outbound freight expenses, and travel-related expenses. Our operating expense growth rate for the second quarter of 2022 was significantly higher than our sales growth rate for the same quarter, but was necessary to support previously sourced new program launches, product redesigns in support of component issues, and our ongoing commitment to new technology areas. Additionally, the higher levels of operating expenses are more than justified based on our current forecasted growth rate throughout 2022 and into 2023. Income from operations for the second quarter of 2022 was $85.8 million compared to income from operations of $99.9 million for the second quarter of 2021. During the second quarter of 2022, the company had an effective tax rate of 14.6%, which is primarily driven by the benefit of the foreign-derived intangible income deduction and discrete benefits from stock-based compensation. Net income was $72.4 million for the second quarter of 2022 compared to net income of $86.5 million for the second quarter of 2021. The change in net income was primarily the result of the quarter-over-quarter changes in sales, gross margins, and operating profits. Earnings per diluted share for the second quarter of 2022 were 31 cents compared to earnings per diluted share of 36 cents for the second quarter of 2021. I will now hand the call over to Kevin for second quarter financial details. Thanks, Steve.