GENTEX CORP (GNTX) FY 2024 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

The following table sets forth for the periods indicated certain items from the Company’s Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the dollar amount of each such item from that in the indicated previous year.

Results of Operations: 2024 to 2023

Net Sales. In 2024, the Company's net sales increased by $14.1 million, or 1% compared to the prior year, representing the highest annual sales in Company history, despite light vehicle production in 2024 that decreased year-over-year by more than 4% in the Company's primary markets. The Company's revenue outperformance in 2024 versus the underlying market was driven primarily by growth in FDM unit shipments.

Other net sales for calendar year 2024 were $48.6 million, compared to Other net sales of $44.6 million in calendar year 2023. Fire protection sales in 2024 increased 4% year over year, while dimmable aircraft windows increased by 9% in 2024, compared to calendar year 2023. Medical product sales were $1.4 million for calendar 2024.

Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased from 66.8% in 2023 to 66.7% in 2024. The year over year increase in the gross margin was primarily the result of supplier cost reductions and lower freight costs, though these benefits were largely offset by weaker than expected product mix, higher labor costs, and the inability to leverage fixed overhead costs due to the lower than forecasted revenue for the year. On a year over year basis, supplier cost reductions and lower freights costs had a positive impact of approximately 100 - 150 basis points and 50 - 100 basis points on gross margin, respectively. Product mix had a negative impact of approximately 100 - 150 basis points on gross margin on a year over year basis. Labor costs and inability to leverage fixed overhead costs, each had a negative impact of approximately 25 - 50 basis points on gross margin on a year over year basis.

Operating Expenses. Engineering, research and development expenses ("E, R & D") increased by $27.1 million or 18% from 2023 to 2024, which represents 8% of net sales in 2024, compared to 7% of net sales in 2023. E, R & D increased year over year primarily due to additional staffing and engineering related professional fees to assist with the execution of a high number of new product launches, product redesigns to optimize costs, and new product development.

Selling, general and administrative ("S, G & A") expenses increased by $8.5 million or 8% from 2023 to 2024, which remained at 5% of net sales. The primary reason for the year over year increase in S, G & A from 2023 to 2024 was increased staffing expenses.

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The Company also recorded impairment charges of $8.9 million for Goodwill and in-process research and development ("IPR&D") related to the Vaporsens technology acquired in 2020, as previously disclosed.

Total Other Income (Loss). Investment income decreased $0.1 million to $13.4 million for 2024 compared to $13.5 million for 2023. Other income – net increased $3.3 million in 2024 versus 2023, primarily due to increased interest income from fixed income investments.

Taxes. The effective tax rate was 14.3% for the year ended December 31, 2024, compared to 15.2% for the prior year. The effective tax rates in 2024 and 2023 differed from the statutory federal income tax rate, primarily due to the Foreign Derived Intangible Income Deduction, and R&D tax credits.

Net Income. Net income decreased by $23.9 million in 2024, or 6% compared to 2023, primarily due to the year over year changes in operating profits.

Results of Operations: 2023 to 2022

Net Sales. In 2023, the Company's net sales increased by $380.3 million, or 20% compared to the prior year. Overall light vehicle production in 2023 increased by 12% when compared to 2022 in the Company's primary markets, meaning net sales in 2023 outperformed the underlying market by 8%. The outperformance versus the underlying market was driven by growth from the continued adoption of FDM, exterior, auto-dimming mirrors, and continued penetration of the Company's base interior mirrors and electronic features. The Company's sales growth was driven by a 15% year over year increase in automatic-dimming mirror shipments, from 44.2 million units in 2022 to 50.6 million units in 2023, together with product mix.

Other net sales for calendar year 2023 were $44.6 million, compared to Other net sales of $44.2 million in calendar year 2022. Fire protection sales in 2023 decreased by 32% year over year, while dimmable aircraft windows increased by 211% in 2023 compared to calendar year 2022.

Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased from 68.2% in 2022 to 66.8% in 2023. The year over year increase in the gross margin was primarily the result of improved overhead leverage created by growth in revenue, lower freight costs, pricing increases and cost recoveries, and product mix. These positive impacts were partially offset by increased raw materials costs and annual customer price reductions. On a year over year basis, fixed overhead leverage and lower freights costs each had a positive impact of approximately 100 - 150 basis points on gross margin on a year over year basis. Price increases and cost recoveries, and product mix, each had a positive impact of approximately 50 - 100 basis points on gross margin on a year over year basis. Increased raw material costs and annual customer price reductions each had a negative impact of approximately 50 - 100 basis points on gross margin on a year over year basis.

Operating Expenses. E, R & D increased by $21.1 million or 16% from 2022 to 2023, but remained at 7% of net sales. E, R & D increased year over year primarily due to additional staffing and engineering related professional fees to assist with the execution of high number of new product launches, product redesigns to optimize costs, and new product development.

S, G & A expenses increased by $6.0 million or 6% from 2022 to 2023, which represents 5% of net sales in 2023 compared to 6% of net sales in 2022. The primary reason for the year over year increase in S, G & A from 2022 to 2023 was increased staffing expenses, which were partially offset by lower freight expenses.

Total Other Income (Loss). Investment income increased $8.7 million to $13.5 million for 2023 compared to $4.8 million for 2022 primarily due to increases in interest income from fixed income investments and interest rates on other cash holdings. Other income – net increase $0.8 million in 2023 versus 2022, primarily due to increases in interest income from fixed income investments.

Taxes. The effective tax rate was 15.2% for the year ended December 31, 2023 compared to 13.8% for the prior year. The effective tax rates in 2023 and 2022 differed from the statutory federal income tax rate, primarily due to the Foreign Derived Intangible Income Deduction, as well as additional equity compensation deductions and various tax credits.

Net Income. Net income increased by $109.6 million in 2023, or 34% compared to 2022, primarily due to the year over year changes in gross margin and operating profits.

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Liquidity and Capital Resources

The Company’s financial condition throughout the periods presented has remained strong.

The Company's cash and cash equivalents were $233.3 million, $226.4 million, and $214.8 million as of December 31, 2024, 2023 and 2022, respectively. The Company's cash and cash equivalents include amounts held by foreign subsidiaries of $12.6 million, $14.8 million, and $12.5 million as of December 31, 2024, 2023 and 2022, respectively.

Cash flow from operating activities was $498.2 million, $537.2 million and $338.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. Cash flow from operating activities decreased $39.0 million for the year ended December 31, 2024 compared to the prior year, primarily due to decreases in net income and changes in working capital. Cash flow from operating activities increased $199.0 million for the year ended December 31, 2023 compared to the same period in 2022, primarily due to due to increases in net income and changes in working capital.

Cash flow used for investing activities for the year ended December 31, 2024 decreased by $97.3 million to $202.1 million, compared with cash flow used for investing activities of $299.4 million for the year ended December 31, 2023, primarily due to decreased capital expenditures in 2024 compared to 2023, as well as decreased expenditures on business acquisitions year over year. Cash flow used for investing activities for the year ended December 31, 2023 increased by $126.7 million to $299.4 million, compared to cash flow used for investment activities for the year ended December 31, 2022, primarily due to increased technology investment purchases during the year, as well as increased capital expenditures in 2023 compared to 2022.

Capital expenditures were $144.7 million, $183.7 million, and $146.4 million for the years ended December 31, 2024, 2023, and 2022, respectively. Capital expenditures for the year ended December 31, 2024 decreased by $39.0 million compared with the year ended December 31, 2023, primarily due to decreased in expenditures related to building and facility construction projects. Capital expenditures for the year ended December 31, 2023 increased by $37.2 million compared to the year ended December 31, 2022, primarily due to building and facility construction projects previously discussed.

Cash flow used for financing activities for the year ended December 31, 2024, increased $59.1 million to $289.3 million, compared to $230.2 million for the year ended December 31, 2023, primarily due to an increase in the amount of shares of common stock repurchased, which totaled $206.1 million during the calendar year 2024 as compared to $147.4 million during the calendar year 2023. Cash flow used for financing activities for the year ended December 31, 2023, increased $21.1 million to $230.2 million compared to the year ended December 31, 2022, primarily due to an increase in the amount of shares of common stock repurchased which totaled $147.4 million during the calendar year 2023 as compared to $112.5 million during the calendar year 2022.

Short-term investments as of December 31, 2024 were $22.3 million, up from $14.4 million as of December 31, 2023 and long-term investments were $339.6 million as of December 31, 2024, up from $299.1 million as of December 31, 2023, due to changes in the Company's overall investment portfolio.

Accounts receivable as of December 31, 2024 decreased $26.5 million compared to December 31, 2023, primarily due to a decrease in sales in the fourth quarter of 2024 compared to the fourth quarter of 2023.

Inventories as of December 31, 2024, increased $34.0 million compared to December 31, 2023, primarily due to increases in raw materials and finished goods.

Intangible Assets, net as of December 31, 2024, decreased $18.8 million compared to December 31, 2023, due to the amortization of definite lived intangible assets and patents, which is discussed further in Note 10 of the Consolidated Financial Statements, in addition to a $5.2 million impairment charge on the Vaporsens IPR&D in the fourth quarter of 2024.

Accounts payable as of December 31, 2024, decreased $16.1 million compared to December 31, 2023, primarily due to decreases in capital expenditure payments and timing of payments.

Management considers the Company’s current working capital and long-term investments, as well as its existing credit financing arrangement (notwithstanding covenants prohibiting additional indebtedness), discussed further in Note 2 of the Consolidated Financial Statements, in addition to internally generated cash flow, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments.

The following is a summary of working capital and fixed income long-term investments:

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The increase in working capital as of December 31, 2024, compared to December 31, 2023, is primarily due to an increase in prepaid expenses, increases in inventory, and a decrease in accounts payable. The increase in working capital as of December 31, 2023, compared to 2022, is primarily due to increases in cash and accounts receivable, which were partially offset by increases in accounts payable.

Please refer to Part II, Item 5, with regard to the Company's previously announced share repurchase plan.

Outlook

The Company utilizes the light vehicle production forecasting services of S&P Global Mobility. The S&P Global Mobility mid-January 2025 forecast for light vehicle production for calendar year 2025 are approximately 15.1 million units for North America, 16.6 million units for Europe, 11.9 million units for Japan and Korea, and 30.2 million units for China.

Based on the foregoing, and excluding any impact of the Company's pending acquisition of VOXX (which remains subject to certain regulatory and VOXX stockholder approvals), the Company estimates that top line revenue for calendar year 2025 will be between $2.40 and $2.45 billion. All estimates are based on light vehicle production forecasts in the primary regions to which the Company ships product, as well as the estimated option rates for its mirrors and electronics on prospective vehicle models and anticipated product mix. Continuing uncertainties, such as: light vehicle production volumes; tariffs; the Ukraine-Russia war; the Israel-Hamas war; labor shortages; automotive plant shutdowns; sales rates in Europe, Asia, and North America; challenging macroeconomic and geopolitical environments, including inflation, and potential tax law changes; OEM strategies and cost pressures; customer inventory management and the impact of potential automotive customer (including their Tier 1 suppliers) and supplier bankruptcies; work stoppages, strikes, etc.; could disrupt shipments to customers and make forecasting difficult.

The Company is estimating that the gross margin will be between 33.5% and 34.5% for calendar year 2025. Historically, annual customer price reductions have placed pressure on gross margin on an annual basis. Given the current revenue forecast and projected product mix for 2025, the Company hopes it may be able to offset certain annual customer price reductions with raw material cost decreases, improved operational efficiencies, and leverage on the Company's fixed costs, but there is no certainty of being able to do so.

The Company is also estimating that its operating expenses, which include E, R & D and S, G & A, are expected to be between $310 and $320 million for calendar year 2025, due in part to continued investments that support growth and launch of new business as well as development of new products, which are primarily staffing related. The Company continues to invest heavily in technology directed at funding the development of its current product portfolio and creating iterations of those products that help keep its products new and attractive to our customers, as well as new products, though these expense estimates for 2025 represent a lower growth rate in operating expenses as the Company believes the new baseline established for engineering spend is sufficient to support current initiatives.

The Company is a technology leader in the automotive industry, with a focus on developing uniquely designed solutions that are proprietary. The Company continues to make investments intended to maintain a competitive advantage in its current markets, as well as to use its core competencies to develop products that are applicable in other markets.

Based on current light vehicle production forecasts, and the Company's resultant forecast its automatic-dimming mirrors and electronics, the Company currently anticipates that 2025 capital expenditures will be between $125 and $150 million, a majority of which will be related to production equipment purchases. Capital expenditures for calendar year 2025 are currently anticipated to be financed from current cash and cash equivalents on hand and cash flows from operating activities.

The Company is also estimating that depreciation and amortization expense for calendar year 2025 will be between $85 and $90 million.

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The Company is further estimating that its tax rate will be between 15% and 17% for calendar year 2025 based on the current statutory rates.

In accordance with its previously announced share repurchase plan and capital allocation strategy, the Company intends to continue to repurchase additional shares of its common stock in 2025 and into the future depending on a number of factors, including: market, economic, and industry conditions; the market price of the Company's common stock; anti-dilutive effect on earnings; available cash; and other factors that the Company deems appropriate.

The Company is also providing top line revenue guidance for calendar year 2026, taking into account anticipated increases in light vehicle production in 2026 compared to 2025, but excluding any impact of the Company's pending acquisition of VOXX. S&P Global Mobility forecast (as of mid-January 2025) for light vehicle production for calendar year 2026 are approximately 15.4 million units for North America, 17.0 million units for Europe, 11.6 million units for Japan and Korea, and 31.0 million units for China. Based on these forecasts, as well as the Company's estimates for fire protection, aerospace, medical, and biometrics sales for calendar year 2026, the Company is estimating that revenue for calendar year 2026 will be between $2.55 and $2.65 billion. As noted above, continuing uncertainties make forecasting difficult.

Market Risk Disclosure

The Company is subject to market risk exposures of varying correlations and volatilities, including foreign exchange rate risk, and interest rate risk. Fluctuating interest rates and securities prices could negatively impact the Company's financial performance due to realized losses on the sale of fixed income investments and/or realized losses due to an impairment adjustment on investment securities. The Company does not currently believe such risks are necessarily material.

The Company has some assets, liabilities and operations outside the United States, including multi-currency accounts, which currently are not significant overall to the Company as a whole. Because the Company sells its automotive mirrors throughout the world and automobile manufacturing is highly dependent on general economic conditions, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products.

Most of the Company’s non-U.S. sales are invoiced and paid in U.S. dollars. During calendar year 2024, approximately 7% of the Company’s net sales were invoiced and paid in foreign currencies (compared to 8% for calendar year 2023 and 7% for calendar year 2022). The Company currently expects that approximately 7-8% of the Company’s net sales in calendar year 2025 will be invoiced and paid in foreign currencies. The Company does not currently engage in hedging activities of foreign currencies.

The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its Consolidated Financial Statements.

Significant Accounting Policies and Critical Accounting Estimates

The preparation of the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates, assumptions and apply judgments that affect its financial position and results of operations. On an ongoing basis, management evaluates these estimates and assumptions. Management also continually reviews its accounting policies and financial information disclosures.

The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements.

Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are inherently subject to a degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates, as is the case in any application of generally accepted accounting principles.

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The Company considers an accounting estimate to be critical if:

• It requires management to make assumptions about matters that were uncertain at the time of the estimate, and

• Changes in the estimate or different estimates that could have been selected would have had a material impact on our financial condition or results of operations.

Revenue Recognition. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Accordingly, revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services when it transfers those goods or services to customers. Sales are shown net of returns, which have not historically been significant. The Company does not generate sales from arrangements with multiple deliverables. The Company generally receives purchase orders from customers on an annual basis in the ordinary course of business. Typically, such purchase orders provide the annual terms, including pricing, related to a particular vehicle model. Purchase orders generally do not specify quantities. The Company recognizes revenue based on the pricing terms included in such annual purchase orders.

As part of certain agreements, entered into in the ordinary course of business, the Company is asked to provide customers with annual price reductions. Such amounts are estimated and accrued as a reduction of revenue as products are shipped to those customers. For any shipments of product that may be subject to retroactive price adjustments that are then being negotiated, the Company records revenue based on the Company’s best estimate of the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods to the customer. The Company's best estimate requires significant judgment based on historical results and expected outcomes of ongoing negotiations with customers. The Company's approach is to consider these adjustments to the contract price as variable consideration which is estimated based on the then most likely price amount. In addition, the Company has ongoing adjustments to our pricing arrangements with customers based on the related content, the cost of our products and other commercial factors. Such pricing accruals are adjusted as they are settled with our customers.

See also Item 13 of Part III with respect to "Certain Transactions", which is incorporated herein.