Steven Downing - President and Chief Executive Officer
"Thank you, Josh. For the second quarter of 2018, the company reported net sales of $455 million, which was an increase of 3% compared to net sales of $443.1 million in the second quarter of 2017. When compared with the companys mid-April forecast for the second quarter of 2018, actual light vehicle production in North America declined approximately 3%, which resulted in lower than expected unit shipments and revenue during the quarter.
Additionally, OEM shutdowns related to a supplier fire caused a revenue headwind of approximately 1% during the quarter. The second quarter of 2018 revenue growth rate fell just outside of our guidance range for the year, which although disappointing is explainable when viewed in the context of production levels by region and segment.
The overall production levels in the North American market were down 3% quarter-over-quarter and the luxury segments defined as D and E segment vehicles were down over 3% quarter-over-quarter in our primary markets of North America, Europe and Japan and Korea.
Our total net growth rate of 3% in a quarter where luxury segments were down 3% in our primary markets, represents an outgrowth to the underlying market of 6%. While we are happy with this level of growth, we remain optimistic about the second half of 2018 based in part on our product launch cadence of full-display mirror nameplates over the balance of the year. And while we continue to monitor the production levels in our primary markets, we still believe that the second half of the year will be closer to the top-end of the range of our annual guidance.
For the second quarter of 2018, the gross margin improved to 38% when compared to a gross margin of 37.7% in the second quarter of 2017 and from 37.1% in the first quarter of 2018, primarily as a result of improved product mix and purchasing cost reductions. The gross margin improvement from the first quarter of 2018 was impressive, given the lower than expected growth rate for the quarter and was primarily driven by product mix improvements and the team's hard work to manage costs.
As we move through the second half of 2018, there is still opportunity for us to show additional improvements in gross margin based on the forecasted revenue growth rates and product mix despite the negative headwinds expected from the tariffs that took effect on July 6th.
Operating expenses during the second quarter of 2018 were up 12% to $46.1 million, when compared to operating expenses of $41.3 million in the second quarter of 2017, primarily due to increased staffing levels. Income from operations for the second quarter of 2018 increased 1% to $126.7 million, when compared to income from operations of $125.9 million in the second quarter of 2017, primarily due to the increased quarter-over-quarter sales growth and gross profit margin percentage offset in part by increased operating expenses.
Other income increased to $2.3 million in the second quarter of 2018 compared to $2.1 million in the second quarter of 2017, primarily due to decreased interest expense. During the second quarter of 2018, the company's effective tax rate was 15.5%, down from 30.8% during the second quarter of 2017, primarily driven by the impacts of the Tax Cuts and Jobs Act of 2017 and the tax planning initiatives undertaken by the company.
Net income for the second quarter of 2018 increased 23% to $109 million, compared with net income of $88.5 million in the second quarter of 2017. Earnings per diluted share in the second quarter of 2018 increased 29% to $0.40, compared with earnings per diluted share of $0.31 in the second quarter of 2017 as a result of the lower effective tax rate and a reduction in diluted shares outstanding on a quarter-over-quarter basis.
During the second quarter of 2018, we repurchased 6.3 million shares of common stock at an average price of $23.33 per share for a total repurchase of $146.6 million. For calendar year 2018, we have repurchased a total of 15.6 million shares at an average price of $22.36 per share for a total of $349.2 million.
As of June 30, 2018, the company has approximately 19.7 million shares remaining available for repurchase as part of our previously announced share repurchase plan, which remains a part of our broader publicly disclosed capital allocation strategy. We intend to continue to repurchase additional shares of our common stock in the future in support of the capital allocation strategy, but share repurchases may vary from time-to-time and will take into account macroeconomic events, market trends and other factors that we deem appropriate.
During the second quarter of 2018, we paid down $26.9 million of principal on our term loan and we expect to pay all remaining principal on our credit facility during the third quarter of 2018."
Kevin Nash - CFO, VP of Finance and Treasurer
"Thank you, Steve. For the next few minutes, we'd like to spend some time discussing additional details of the second quarter, key factors that drove the second quarter results, and points of consideration as we move through the remainder of 2018.
Automotive net sales in the second quarter of 2018 were $444.2 million, an increase of 2% compared with automotive net sales of $433.9 million in the second quarter of 2017. Which was aided by an 8% increase in auto-dimming mirror unit shipments on a quarter over quarter basis, but partially offset by certain advanced feature headwinds, primarily related to Driver Assist sales.
Other net sales in the second quarter of 2018, which includes dimmable aircraft windows and fire protection products were $10.7 million, an increase of 16% compared to other net sales of $9.2 million in the second quarter of 2017.
One of the main focuses of our capital allocation strategy that was established earlier this year was a reduction in our target balances for cash and investments to $525 million by the end of calendar year 2018. As of June 30, 2018, the combination of cash, short-term and long-term investments were $609 million, down from $779.9 million as of December 31.
The primary drivers for these overall reductions were also part of our capital allocation strategy, which included increased share repurchases and accelerated debt repayments. In addition to capital expenditures and an increase to the company's dividend rate earlier this year.
The current mix between cash and investments may change on a quarterly basis. Related to changes in liquidity requirements, fluctuation in interest rates and fixed income investment maturities and reinvestments.
Accounts receivable for the quarter was $239.4 million as of June 30, up from $231.1 million as of December 31, primarily due to higher sales levels on a period-over-period basis. Inventories were $212.4 million as of June 30, down from $216.8 million as of December 31. Accounts payable increased to $106.8 million as of June 30, from $89.9 million, due to timing of certain payments. And accrued liabilities were $107.6 million as of June 30, down from $153.8 million as of December 31, primarily driven by accelerated debt repayment.
Now for a couple of cash flow highlights, for the second quarter of 2018, cash flow from operations was $144.9 million, compared with $132.3 million in the second quarter of 2017, driven by increased net income and fluctuations in working capital. CapEx for the second quarter of 2018 was $25.6 million, compared with $29.1 million for the second quarter of 2017. And lastly, depreciation and amortization for the second quarter of 2018 was $27.9 million compared with $25.2 million in the second quarter of 2017."
Neil Boehm - CTO and VP of Engineering
"Thank you, Kevin. In the second quarter of 2018, there were 17 new nameplate launches of our inside and outside electrochromic mirrors and electronic features net of previously disclosed feature headwinds.
During the second quarter, approximately 60% of the net auto-dimming inside mirror launches contained advanced features. The second quarter was highlighted by increased launch levels in HomeLink and Full Display Mirror applications, as well as four new inside auto-dimming mirror applications for domestic China OEMs.
Now for a quick update on our Full Display Mirrors product. In the first quarter of 2018 conference call, we discussed that our launch cadence would have us shipping Full Display Mirrors on at least six additional nameplates through the second half of the year. Having just crossed over the midpoint of the year, we remain confident in our product launch cadence for Full Display Mirrors in the second half of the year, and we're on pace to complete the launches necessary to achieve our target of 500,000 Full Display Mirror unit shipments in calendar year 2019.
Also, we're pleased to announce that during the second quarter of 2018, we were able to secure Full Display Mirror business with our seventh OEM. The startup production for this OEM will be in the 2020-2021 timeframe. Full Display Mirror continues to be well received by our OEM customers and we’re optimistic that we will receive an additional award from an eighth OEM around the end of 2018.
Now we’d like to provide an update on the sales and business development activities surrounding our Integrated Toll Module.
We’re pleased to announce that during the second quarter the company has officially signed agreement with two additional OEMs to launch our ITM product. Both of these OEM launches are targeted to begin production shipments in the 2020-2021 time period.
I will now hand the call back over to Steve for 2018 and 2019 guidance and closing remarks."
Steven Downing
"Thank you, Neil. Based on our mid-July vehicle production forecast as disclosed in our press release the company currently expects revenues in the second half of calendar year 2018 to increase between 7% and 10%, when compared with the second half of calendar year 2017 and as a result we have updated our revenue guidance to be between $1.88 billion and $1.91 billion for the year.
Based on our year-to-date gross margin performance as well as taking into account recently enacted tariffs related to imports from China we are updating our gross margin guidance for the year. We are currently estimating the impact of tariffs to be between $5 million and $8 million for the second half of 2018.
Based on the actual gross margins year-to-date and the impact of the tariffs, we are updating our gross margin guidance to be between 37.5% and 38.5% for calendar year 2018. We continue to monitor and evaluate the impact of these enacted tariffs along with other potential import and export tariffs that maybe implemented by other countries and affect our raw materials or finished goods.
We’re adjusting our range of operating expenses down to be between $180 million and $185 million for calendar year 2018 as a result of our year-to-date operating expenses. Based on year-to-date capital expenditures and timing of new projects over the balance of the year the company is lowering its capital expenditure estimates to be between $110 million and $120 million for calendar year 2018. We are making no changes to our estimates for depreciation and amortization or estimated tax rate for calendar year 2018.
Lastly based on 2019 light vehicle production forecast and current forecast at product mix, the company is making no changes to its previously announced revenue estimates for calendar year 2019, which continues to be estimated to be over and above our 2018 revenue estimates in the range of 5% to 10%.
The first half of 2018 has been challenging, but the company continues to be focused on delivering higher growth rates and gross margin performance in the second half of this year, based on our technology roadmap and Full Display Mirror."
Gentex Corporation (GNTX) Steven Downing on Q2 2018 Results - Earnings Call Transcript | Seeking Alpha
