Gentex Corporation

Good day and thank you for standing by. Welcome to the Gen Techs Report's third quarter 2022 financial results conference 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. To ask a question during the session, you will need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Josh Oberski. Please go ahead.

Thank you. Good morning and welcome to the Gentex Corporation third quarter 2022 earnings release conference call. I'm Josh Oberski, 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's Third 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 third quarter of 2022, the company reported net sales of $493.6 million compared to net sales of $399.6 million in the third quarter of last year, which was a 24% increase quarter over quarter. For the third quarter, global light vehicle production in North America, Europe, Japan, Korea, and China increased approximately 26% when compared to the third quarter of last year. Light vehicle production in the company's primary markets of North America, Europe, and Japan, Korea was up 22% on a quarter over quarter basis. Some of the supply chain issues that plagued the industry in the third quarter of last year have improved and overall light vehicle production growth contributed to the company's quarter-over-quarter revenue growth. However, product mix for the third quarter and overall sales levels were still impacted by customer order adjustments, supply chain challenges, and labor availability issues. Together, these headwinds resulted in unit shipments being approximately 750,000 units lower than our original forecast at the beginning of the quarter which resulted in a revenue shortfall of about $35 to $40 million. While there appears to be some improved stability in the light vehicle production environment and the overall supply chain, the company continues to experience significant customer order fluctuations on a week-to-week basis and difficulty in sourcing advanced electronic components for our most complex products. For the third quarter, the gross margin was 29.8% compared to a gross margin of 35.3% for the third quarter of last year. Gross margin was impacted on a quarter-over-quarter basis by raw material cost increases, unfavorable product mix and labor cost increases, and prior commitments to annual customer price reductions. The continuation of cost increases in raw materials, as well as unfavorable product mix, had the most significant impact on our margin profile during the third quarter. Additionally, while the overall improvement in sales levels helped offset fixed overhead costs during the third quarter, the increase in labor costs more than offset the gains in overhead absorption to create additional margin pressure. During the third quarter, product mix issues driven by component shortages in our advanced feature mirrors and lower sales to our Tier 2 customers contributed about 150 basis points of margin headwind that we believe will improve during the fourth quarter. The company is also making progress on cost escalation conversations with our customers, and we expect relief to begin during the fourth quarter, which should provide improvement in our margin profile as we move through 2023 and into 2024. Operating expenses during the third quarter increased by 15% to $60.4 million, compared to operating expenses of $52.7 million in the third quarter of last year. Operating expenses increased during the third quarter primarily due to staffing, professional fees, increased outbound freight expenses, and travel-related expenses. Our operating expense growth for the third quarter continues to support our product development strategy, as well as previously sourced new program launches, product redesigns, and supportive component supply issues and our ongoing commitment to new technology areas. The increase in operating expenses was in line with our plan and represents the level of development needed to achieve the forecasted growth rate for the rest of this year and into 2023. Income from operations for the third quarter was $86.8 million compared to income from operations of $88.2 million for the third quarter of last year. During the third quarter, the company had an effective tax rate of 15.7%, which was primarily driven by the benefit of the foreign-derived intangible income deduction. Net income was $72.7 million for the third quarter, compared to net income of $76.7 million for the third quarter of last year. The change in net income was primarily the result of the quarter-over-quarter changes in gross margins and operating profits. Earnings per diluted share for the third quarter were $0.31 compared to earnings per diluted share of $0.32 for the third quarter of 2021. I will now hand the call over to Kevin for third quarter financial details. Thanks, Steve.