Gentex Corp (GNTX) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Gentex Corporation third-quarter financial results. Today's conference is being recorded. I would now like turn the meeting over to Mr. Mark Newton, Senior Vice President. Please go ahead, Mr. Newton.

Thank you very much. Good morning and welcome to the Gentex 2013 third-quarter earnings release conference call. I thank all of you for the support and participation today. Again, I am Mark Newton, Senior Vice President. I am joined this morning by Steve Downing, Vice President of Finance and Chief Financial Officer and Kevin Nash, Director of Accounting and Chief Accounting Officer.

In this call we will provide an overview of the Gentex 2013 third-quarter business, followed by questions and answers. This call is live on the internet by way of an icon on the Gentex website, at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, re-transmitted, 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. Your participation in this conference call implies consent to these terms.

This conference call contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements contained in this communication, that are not purely historical, are forward-looking statements. Forward-looking statements give the Company 's current expectations or forecasts of future events. These forward-looking statements generally can be identified by the use of words such as anticipate, believe, could, estimate, expect, forecast, goal, hope, may, plan, project, will and variations of such words and similar expressions. Such statements are subject to risks and uncertainties that are often difficult to predict and beyond the Company's control and could cause the Company's results to differ materially from those described.

These risks and uncertainties include, without limitation, changes in general industry or regional market conditions, changes in consumer and customer preferences for our products, our ability to be awarded new business, continued uncertainty and pricing negotiations with customers, loss of business from increased competition, customer bankruptcies or divestiture of customer brands, fluctuation in vehicle production schedules, changes in product mix, raw material shortages, higher raw material price, fuel price, energy price and other costs, unfavorable fluctuations in currencies, or interest rates in the regions in which we operate, costs or difficulties related to the integration of any new or acquired technologies and businesses.

Changes in regulatory conditions, warranty and recall claims and other litigation and customer reactions thereto, possible adverse results of pending and future litigations including securities litigations relating to the conduct of our business, integration of the newly acquired HomeLink business operations, retention of the newly acquired customers of the HomeLink business and expansion of product offerings including those incorporating HomeLink technology. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise except as required by law or the rules of the NASDAQ global select market. Accordingly, any forward-looking statements should be read in conjunction with the additional information about risks and uncertainties identified under the heading Risk Factors in the Company's latest form 10-K and form 10-Q filed with the SEC.

Now, here's Steve Downing with the Q3 financial overview.

Good morning, everyone.

For the third quarter of 2013 Gentex reported net sales of $288.6 million, which was an 8% increase compared with net sales of $268.2 million in the third quarter of 2012. The gross profit margin in the third quarter of 2013 was 36.7%, up 3.1 percentage points compared with the gross profit margin of 33.6% in the third quarter of 2012, primarily due to the impact of purchasing cost reductions and product mix, which was partially offset by annual customer price reductions. The gross profit margin also increased sequentially from 35.8% in the second quarter of 2013, also primarily due to purchasing cost reductions and product mix. Net income for the third quarter of 2013 increased 33% to $55.5 million, compared with net income of $41.9 million in the third quarter of 2012, and also increased sequentially by 7% from $52.1 million in the second quarter of 2013. Earnings per diluted share were $0.38, which was an increase of $0.09 compared with earnings per diluted share of $0.29 in the third quarter of 2012 and were up sequentially from $0.36 in the second quarter of 2013.

Automotive mirror unit shipments increased 13% compared with the third quarter of 2012. Automotive net sales increased 7% to $280.9 million compared with automotive net sales of $261.9 million in the third quarter of 2012. North American automotive mirror unit shipments increased 6% compared with the third quarter of 2012, while North American light vehicle production increased 7% compared with the same quarter last year. International automotive mirror unit shipments increased 18% in the third quarter of 2013, compared with the third quarter of 2012, primarily due to increased mirror unit shipments to certain European and Asian automakers. European light vehicle production decreased by 1% compared with the same quarter last year, while Japan and Korea light vehicle production increased 3% compared with the same quarter last year. Other net sales which include fire protection products and dimmable aircraft windows were $7.7 million in the third quarter of 2013, up 21% compared with other net sales of $6.3 million in the third quarter of 2012.

On September 27, the Company completed the HomeLink acquisition, which was partially funded with new debt financing of $275 million at a variable rate of the one-month LIBOR plus 100 basis points. Additionally, as of September 30, the Company had approximately $1 million in debt related structuring and initiation costs. These costs will be amortized over the five-year life of the debt financing and will be included with interest expense. And now, Kevin Nash will provide additional Q3 financial details.

Thank you, Steve.

ER&D expenses for the third quarter of 2013 decreased 7% to $19.1 million, compared to the third quarter of 2012. ER&D expenses were up approximately 1% sequentially versus the second quarter of 2013. The primary driver for the reduced ER&D expense on a year-over-year basis is the plan to reduce costs associated with outside contract engineering and development services. ER& D expenses remained at approximately 7% of sales for the third quarter and year-to-date 2013. As has previously been disclosed, the Company has worked diligently in late 2012 to replace its outside contract engineering workforce with permanent long-term hires.

SG&A expenses increased 10% to $13.2 million compared to the third quarter of 2012 primarily due to increased professional fees and due diligence costs associated with acquisition of HomeLink. Other income was $7.4 million, which was an increase from $4.1 million in the third quarter of 2012. The increase was primarily due to increases in realized gains on equity investments due to planned reductions of the Company's long-term investment portfolio in preparation for the HomeLink acquisition.

And now for some additional balance sheet information. Cash and cash equivalents were $226.7 million, which was down $163 million from $389.7 million as of December 31, 2012. Primarily due to the cash used in the acquisition of HomeLink, partially offset by proceeds from the Company's new debt financing of $275 million and cash flow from operations. Short-term investments decreased from $60.8 million as of December 31, 2012 to zero due to invest maturities and liquidations of the Company's short-term investment portfolio in preparation for the HomeLink acquisition. Accounts Receivable with $152.4 million, which was up from $109.6 million as of December 31, due to increases in sales in the quarter as well as acquired receivables as part of the HomeLink acquisition. Inventories were $117.4 million, down from $159.9 million as of December 31, primarily due to continued planned reductions in raw materials inventory.

Recorded goodwill was $337.7 million due to the recording of the purchase price allocation of the HomeLink acquisition. The recorded amount is based on the analysis of external valuation professionals relating to the acquired assets of the HomeLink business. However, they have not been audited and are therefore preliminary. The Company expects to complete the valuation reviewed and audit process by the end of the first quarter 2014. Patents and other assets were $370.3 million, which was up from $29.2 million as of December 31, 2012. The recorded amount is based on the analysis of external valuation professionals relating to the acquired intangible assets of the HomeLink business. However, again they have not been audited and are therefore preliminary. The Company expects to complete the valuation review and audit process by the end of the first quarter 2014.

Accounts Payable was $50.3 million, up from $43.2 million as of December 31, primarily due to the timing of certain payments. Other accrued liabilities were $69.2 million, up from $44.8 million as of December 31, primarily due to timing of certain tax and compensation payments as well as the current portion of the Company's new, long-term debt financing of $7.5 million. The effective tax rate for the third quarter of 2013 was 31.5%, which varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction as well as realized benefits of approximately $1 million from the filing of an amended federal tax return for 2009 specifically related to increased Research and Development tax credits. The Company expects the tax rate for the fourth quarter of 2013 to be approximately 32%. Cash flow from operations for the third quarter was $54.6 million, compared with $74.9 million in the third quarter of 2012, driven by increases in net income which was more than offset by changes in working capital. Year-to-date cash flow from operations was $226.6 million compared with $176.4 million through September 30, 2012. Again, driven by higher net income and changes in working capital, primarily inventory.

Capital expenditures for the third quarter of 2013 were $14 million compared with $28.2 million in the third quarter of 2012 and year-to-date, or approximately $38.1 million, compared with approximately $97.6 million for the same period last year primarily driven by reduced expenditures on facility expansions. Depreciation and amortization for the third quarter was $14.8 million and year-to-date was $42.3 million. And lastly on October 18 the Company paid a quarterly cash dividend of $0.14 per share to shareholders of record of the common stock at the close of business on October 4, 2013.

And now I turn it over back to Mark with the product update for the quarter.

Thank you, Kevin.

The Company continued, again in the third quarter of 2013, to develop and launch new awarded business in all product technology areas including HomeLink, Compass, microphones, telematics, displays, SmartBeam and driver assist camera systems, interior lighting, microphones, compass, telematics and all inside and outside auto dimming mirrors with frameless and various curved glass applications.

Gentex continued to receive performance awards from customers in the third quarter of 2013. Year-to-date we have received, from our customers, quality excellence awards from European, Asian and North American automakers. Delivery award from an Asian automaker, an excellence in business partnership award from an Asian automaker and excellence in value award from an Asian automaker. Technology awards for our SmartBeam Dynamic Forward Lighting camera system from an Asian automaker, a technology award for our driver-assist camera system from a North American automaker, a certificate of achievement for outstanding performance in sourcing to minority- and women-owned businesses from a North American automaker. This makes 10 customer, quality, delivery, product, value, business partnerships, supplier diversity and technology awards for our most complex products since the beginning of the year. We're working hard to improve all aspects of what we do and we are pleased that our customers are recognizing us for it.

Now, back to Steve Downing for our future estimates.

Thanks, Mark.

The Company estimates that net sales in the fourth quarter of 2013, including sales from the acquisition of HomeLink, will increase 20% to 25% compared with the fourth quarter of 2012 based on the October 2013 IHS production forecast and the current forecasted product mix. The Company also estimates gross profit margin for the fourth quarter of 2013 to be in the range of 38% to 38.5% based on the October 2013 IHS production forecast and the current forecast and product mix.

ER&D expense in the fourth quarter of 2013 is estimated to increase 5% to 10% compared with ER&D in the fourth quarter of 2012 primarily due to increased staffing levels that have occurred throughout 2013 which continued to support growth and the development of new business as well as personnel additions that were part of the HomeLink acquisition. SG&A expense in the fourth quarter of 2013 is estimated to increase 15% to 20%, compared with SG&A in the fourth quarter of 2012, primarily due to increased amortization of the HomeLink-acquired assets as well as personnel additions that were part of the HomeLink acquisition.

The Company's previous guidance on capital expenditures remains unchanged and is expected to be in the range of $50 million to $60 million for the calendar year. However, the Company is increasing its estimate for depreciation and amortization expense for the full year 2013. Based on preliminary results of the asset values and the remaining useful lives of the assets of the HomeLink acquisition, the Company now expects the depreciation and amortization expense for the full year to be in the range of $60 million to $64 million. As stated previously, all asset valuations have been established by Management and the evaluation professionals working with the Company, but our preliminary, unaudited and are subject to change.

Thank you, Steve.

All right, in summary we are very pleased to report continued, strong revenue and earnings growth, despite year-to-date reduced light vehicle production in Europe and the Japan/Korea regions and we're excited by the momentum that the continued strong financial performance gives us as we now move beginning in the fourth quarter into a future that will include the growth that comes with our HomeLink acquisition.

Please join us in expressing thanks and congratulations to all of our Gentex Associates worldwide for their many contributions to this growth and improvement. Spectacular results come from unspectacular preparation and we worked hard to get here and we hope that you see that. We can now take questions. Thank you.

Thank you.

(Operator Instructions)

Matt Stover, Guggenheim Securities.

A couple questions here. First I want to just dig into the sequential improvement in margin that was a pretty significant improvement on what was a very modest improvement in revenue and shipments. I was wondering if you could kind of illuminate what the principal drivers were there?

Well, I think as we mentioned in the highlights, product mix and our ability to have purchasing cost reductions were the main drivers. There was some other small drivers, but I think this goes back to the similar message we talked about last quarter. Inside of some of the product mix in the shipment tables you can see some strength in certain product types and regions and that is the primary driver for the sequential increase.

How should we think about that, the reduce to purchase cost impacting base business this week as we flow-through to the fourth quarter would we consider that to continue to be a favorable factor?

Yes. It starts to -- you start to leverage it further as you get into the calendar year as most of these contracts are based on a calendar year, rolling calendar years. So you can expect that starting in 2014 you have annual customer price reductions again and then you start negotiating purchasing cost reductions again, which Mark's group is responsible for. So I think that's in the fourth quarter you start to see the heaviest leverage.

A couple of additional things, Matt this is Mark, thank you for the good question. I think your primary goal is trying to confirm our ability to sustain this and as we continue to grow in the sales or growing in production and growing in what we purchase, we are taking advantage of continuing stabilization in the supply chain as we continue to distance ourselves particularly for electronic components now further and further away from the natural disasters that hurt the industry a year and a half ago.

As we improve in this, as that stabilizes, we have been fortunate to take advantage of this and as we continue to grow in production as a business and purchase more raw material, we feel very positive as a management team that we can continue to get favorable results in this area.

Okay and if I think -- just one sort of technical question, as I think about sort of the incremental annual D&A associated, or the amortization rather, associated with the deal, should we think of that sort of in the $14 million range, $15 million range?

Well I think previous guidance was in the $56 million to $60 million for our calendar year and we left our CapEx guidance around the same so you can surmise that we're about $4 million increment for the quarter based on again on preliminary results. These things do tend to shift as they review and audit them, but I think you're in the ballpark.

Okay, thanks very much.

Rich Kwas, Wells Fargo Securities.

Hi, good morning. Just a follow-up on Matt's question regarding margin. So, last couple quarters exterior mirrors have grown nicely. That's been margin accretive. When you talk about product mix is that really what you're referring to? Is there something else in there particularly as you look on a regional basis that helped margins this quarter?

Well, like we've stated, I think in the last call, any time there's advanced features, obviously that's a help. But also, like you've mentioned here that when you look at the product mix between inside and outside that is also supportive of margin accretion as well. So the mix that you see occurring in the Q3 is one that has definitely positive impact to our overall margin performance.

And is this -- are you peaking in terms of the benefit from new program wins? Or, is this just more of a mixed trend-slash-favorability, if you will, that's kind of a more fluid? How do we think about that in terms of exterior mirror growth versus interior mirror growth going forward?

The answer is all of the above. Obviously, all the time we're working hard for new program awards. At the same time even inside of those programs that we have already increases in volumes of those existing platforms can help drive volume and then at the same time there's general additive programs that we've had in other regions that have continued to help as well.

So in other words, if you look at the two regions in particular, the inside mirrors grew -- were basically flat in North America but we had very strong outside mirror growth in the North American market. In Europe we had strength in both areas, both inside and outside mirrors. That helps us not only from the product mix side but also on the leverage side.

And that's one of the other things that we haven't talked about a whole lot, but in terms of our ability to leverage both fixed and variable overhead calculations that extra volume we've been able to drive that to the bottom line. And that's one of the things we've been focused on here over the last year and a half, especially is making sure that as we grow we do it in an efficient way so that the numbers flow from the top line all the way through gross margin but then ultimately through operating margin as well.

And just a follow-up on the interior mirror performance in North America. So the relative underperformance, how much of that had to do with RCD programs falling off versus some other type of mix issue? How do we think about that for the quarter?

Well, like we mentioned before, obviously, there has been RCD drop-off that we're facing right now and so that's one of the hills that we're climbing. At the same time, we did talk quite a bit about this during the last call and that is that if you look at B&E segments combined there continues to be a weakness in that segment in the North American market. In the North American market particularly that tends to be where we have our heaviest content.

So, when those segments inside the North American market struggle, it does put negative pressure on our shipment volumes. The one thing that we've been talking about pretty openly is that the growth inside the North American market has been primarily around B segment vehicles and then also C segment vehicles. And so when you see market growth in North America you have to look at it not only as the market growing but it is kind of growing in areas that we don't have our heaviest participation in and it's one of the targets for us going forward is to try to get our penetration rates up in those segments so that we can benefit from the growth in those areas.

And anything that affected North America in the quarter in terms of launches that may have not just our full stride. Did that have any impact on the North American piece in terms of growth?

No, I wouldn't say there was anything out of the ordinary from a launch perspective that caused any issues in that quarter.

Okay, thanks, I'll pass it on.

Ryan Brinkman, JPMorgan.

Hi, congrats on the quarter. Thanks for taking my question.

Thank you.

It was mentioned earlier at your Analyst Day, and I think on the last call, that the investment community might be offered more information relative to HomeLink upon the closing of the transaction. So I'm curious now if there any incremental details related to say historical revenue growth or margins that you might now be willing and or able to share? Can you talk about like the number of HomeLink units that you think you might ship annually or even maybe just generally in terms of how it might growth going forward, et cetera?

Well, so, like we mentioned previously, our model that we're trying to promote here is one of the whole business as -- the whole business and what it means to Gentex. As it relates to HomeLink, the -- upon acquisition we gave the annual revenue guidance of what we were acquiring and what you'll see, what's reflected in Q4 guidance is in line with what we quoted during the initial acquisition announcement.

The key for us there is that we're trying to get away from giving too much detail about HomeLink, mainly for the obvious reason that we're just into our first few weeks of owning the Business and we're in the process of understanding that data and then working on our planning, going forward, both to grow the Business and then also how to make sure we handle the Business appropriately for the customer base.

So at this stage I wouldn't say that there's anything we're going to add about the overall business of HomeLink other than the fact that it's in line with what we had given previous guidance on.

What we're hoping to indicate in this, when we originally announced that we've said that once fully integrated the Company expects its annual revenue will increase in the range of $125 million to $150 million per year. We're hoping in this release today that when we provide the growth estimate for the fourth quarter, we're right now going into our third week effectively of this actual integration since the acquisition. We're hoping that is an indication of how this positively impacts the Business.

Now, in the quarter, there are other requirements that we have to provide from a regulatory standpoint on the Business itself. Those will be coming as recorded and defined by law. Going forward in the quarter. We're hoping with our fourth-quarter guidance that you can begin to see the positive impact that comes from this as a product. Now, we are, as I said in our third week of this integration and it's going well. And the Company is very pleased with how we're moving forward. And we will, as we begin to detail it, talk more as we go through meeting the legal responsibilities for reporting, provide I believe information that will satisfy you within the quarter.

Okay, great. And I'm sorry -- go ahead.

I would say additionally like Kevin mentioned previously, the next say six to eight weeks especially are heavily influenced by auditors and by our evaluation Company that we're using to try to determine the impact to the balance sheet of the acquisition itself. So, there's a lot of things there that haven't been completely solved yet that we're going to be working through over the several weeks.

Okay, sure, thanks. And then my last question, I know there've already been some gross margin questions, but I want to be pretty clear about this. When you first announced HomeLink to us just before your 2Q gross margin number was made public, and I think the analyst community kind of looked at the 34.7% that you did in 1Q and we added sort of 1 to 1.5 points to that and then it was stated on the 2Q call, no you can apply that to the 2Q call, no you can apply that to the 35.8%. Is what you're saying today that we can take the 36.7% you printed this morning and add 1 to 1.5 points to that? So maybe -- because that would kind of take you to the 4Q margin number, like basically 38.2% or so. Can we take that and say this is the new normal for Gentex going forward?

That is -- yes that would be a proper interpretation of what we're proposing.

And that's, again, based on current product mix and the forecast. So obviously things change, but based on what we're seen in our near term forecast --

That's what we're predicting for Q4 and the difference between the Q3 results and the Q4 forecast is primarily HomeLink related.

Okay, that's great. I would say that's way above investor expectations Thanks a lot, guys. Congrats on the quarter.

Thank you very much.

Jason Rogers, Great Lakes Review.

Hello. Wonder if you could break down the interest and dividend income in the other income line?

That's primarily gains on sale of equity investments as we talked about in the second quarter making a strategic moves out of our long-term investments and doing it in a manner that is responsible and strategic in nature as we pare down that long-term investment portfolio. So, again, primarily it's 90% driven by gains on sale of equities.

And what is left now in the amount of unrealized gains on the investments?

We're still north of $20 million in unrealized gains. The market was favorable in the quarter, as you guys probably are aware. We did pare it down considerably, but we still had additional unrealized gains during the quarter.

And then just looking at HomeLink, where are we now in the HomeLink five introduction? Has that been fully launched?

No, actually I think we're fighting over who answers this. This is Mark. No, actually we're in initial stages of that launch as new product. It's just beginning, very positive reception from automakers and customers worldwide, but the advantages and the opportunities that come with this product are one of the many things we're very excited about from a technology perspective. We're just beginning.

Thank you.

Steve Dyer, Craig-Hallum.

Thank you, good morning. Most of mine have been answered. Just wondering, as we think about operating expenses sort of beyond Q4 into next year. For a long time, I shouldn't say for long time, for a number of quarters you've been sort of decreasing them on a year-over-year basis, I'm assuming they will increase if nothing else by virtue of the HomeLink additions, but sort of beyond that how do we think about the growth trajectory of the OpEx next year?

I think the big reason for the reductions for the last year have been, like Kevin mentioned in his prepared comments, were the focus from management to reduce and exchange contract manufacturing -- or contract employees with permanent hires. And so that once you start down that processes and start to execute plan, you get basically year-over-year comp for their significantly improved.

What we're seeing now is that now that those become the new baseline for the year-over-year comps, what you're going to see more than likely is a consistent plan that's going to move those expenses in line with our business growth. And, like you mentioned, with the exception of the HomeLink acquisition which is going to be in essence a step function increase for us. And so what you can kind of expect would be that once we have a couple quarters of this in place you'll be able to see kind of what the HomeLink drove and then also hopefully the plan will be to move those R&D in SG&A expenses in line with the Business growth.

Also, in line with that as we go into the fourth quarter on gross profit, making it six consecutive quarters, I can probably say company-wide we worked really hard on a certain specific discipline for operating expenses that we are all, all Gentex Associates are very pleased with the results that we're achieving from quarter to quarter. And we feel positive about our ability to remained disciplined in this. We like the result very much. We're believing that you do as well and so, we're pretty disciplined right now as to how firmly we want to hold to the way we are operating today.

Okay, great, thank you.

David Whiston, Morningstar.

Good morning. I wanted to go back to gross margin in particular your answer to Ryan Brinkman's question on the midpoint of the 38%. I believe you said 38.2% guidance and he was asking about going forward and you said yes, that's the right way to interpret it. Were you talking about Q4 only or 2014, 2015 going forward?

So we don't provide guidance beyond next quarter. Obviously, there's a lot of things that have to be determined beyond this quarter as it relates to the amortization expense and some of the things associated with the Business. But obviously our goal is not to get worse.

Right. Given where you're guiding for Q4 margins, is it fair to say you're not seeing a lot of price pressure on your own input cost right now?

That's correct. I think primarily the annual customer price reductions happen in the first quarter, the first half of the year, if you will, and most of that stuff will start to hit in the first quarter. So you'd see, like I said earlier, additional leverage on purchasing cost reductions that help drive improvements and then the VAVE and then product mix all combined.

In essence like Nash was saying there you're going to have at the beginning of the year you're going to have most of the pressure from the customer price reduction side and only a portion of the benefit of the purchasing cost reductions to help on the material side. So by the end of the year you've equaled those out and you've kind of got the full benefit. You've taken the full expense of the customer side and you've got the full benefit of the purchasing side.

Okay. And on the bal --

Sorry, go ahead.

I was just going to move on to the next question unless you were done. Sorry.

Yes.

On the balance sheet, it sounded like at the Analyst Day that Fred in particular as we know does like to -- he's not a fan of debt. So are you looking to keep this debt on the books for the full five years or pay it off sooner?

So our goal is as we create the revenue and are able to leverage that through the bottom line, if it can maintain maximum flexibility to help us with that decision-making in the future. In other words, we don't have a preformatted response or plan to that question. That response is going to be situational and our plan is that over the next year, year and a half is to drive the value proposition through to the bottom line and allow us the flexibility to make that decision in the future. But as of right now we do not have a predefined answer to when, if at all, we will plan to repay that debt above the current scheduled plan.

So that there's a given you want to be flexible at any leverage outcome as possible?

Absolutely.

Okay, great. Thanks, guys.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. Just a first question follow-up on Mitch and maybe to ask this more specifically. The GM truck program is going through the changeover as you guys well know, and that's traditionally been a big deal for you guys on the positive side. And when we look at what's going on in North America with the interior and exterior mirrors, it looks like you probably had a big win on the pickup truck on the exterior mirrors and I'm trying to understand is that really benefiting mix here and is that the case? And should we expect that to continue as the SUVs launch in the first half of next year?

Good question. Actually this is one of the misconceptions that we've been working to correct. We recently at an Analyst Day where that particular question, revenue is dependent on key platforms like the GM truck, Cadillac, Ford Expedition, Navigator, Chrysler Grand Cherokee, Chrysler 300. Platforms like that actually today, and we publish this, it's on our website and we did it with an 8-K, our top platforms worldwide, our top 20 the GM truck, while a very important part of the Business we have other larger programs.

Our largest program is Japan/Korea market platform followed by three Europe platforms number five Japan/Korea, six and seven are Europe, eight, North America, while we absolutely compete for and do participate on the GM truck, it's not the significant platform driver that is driving the results that you're seeing here.

Okay so then what drove the spike in exterior mirrors versus interior mirrors? Because I mean at 33% up on exterior mirrors, well interiors are down 1% is intriguing.

This is another area that we've worked to address. On our global average application rates today, John, we're on approximately 24% for interior mirrors of all vehicles produced today and 6% on outside mirrors. Now, the Company's history, the way our product is supplied our outside mirrors cannot go on a vehicle unless our inside mirror is on the vehicle.

If you look out over the last ten years in 2001, our inside mirrors were on 9% of vehicles produced and our outside mirrors were on 4%. Today our inside mirrors were on 24% and our outside mirrors run 6%. We intentionally work on our outside mirrors and what we call take rate initiatives to market the benefits and the improvement in the product.

What's occurring in the market is not specifically platform related, it's generally related to an overall worldwide effort that we consciously do continuously to sell outside mirrors where we have inside mirrors. We're succeeding with it and that's the message that we're hoping can be interpreted here. We're succeeding with it and we anticipate to continue to.

And that's obviously margin accretive?

Correct.

Then just one more on the international shipments. I mean in markets where the volume and the economy is not really that great, you're proving to have a great growth. I mean with this 18% of international mirror unit shipments, I was wondering what you think is really driving that massive penetration in the face of what is some not so great market dynamics? Relative -- I mean this is a big increase.

That was another piece of information that we posted in a recent Analyst Day and it's among the things we're trying to do a better job of more generally providing product information. In this call, when we state that all of our product technology is in development of new technology and has been awarded for that new technology, and when we indicate that we grow from 9% to 24% on inside mirrors, 4% to 6% if our revenue's growing we're hoping to indicate internationally by what you're seeing that we're increasing nameplates, we're getting on more cars, we're penetrating.

And that's done more as a general effort on our part as we increase the application of our products generally. The same [take rate] initiatives that we have for outside mirrors we apply those internationally as well. And actually we're as pleased as I hope you are with those results. We work hard at it.

Okay. And then just lastly on your newest facility, what are the capacity utilization rates? Because usually you have a good margin progression as the Caput ramps up in a new facility. So just curious where you're at?

I think it's consistent with our previous guidance. We were thinking $21 million to $23 million on inside mirrors and up to $10 million on outside mirrors.

And now some of that is going to be affected by, as we take on capacity with the HomeLink. So we'll continue evaluating that as we move forward and taking on the manufacturing activities of the HomeLink product.

That's another piece of new information that, since the three of us came into this in the last couple months we're trying to improve the communication of -- we have posted also in this presentation on our website where we're standing right now that our existing and planned facilities are suitable, adequate and have the capacity necessary for current and near-term to plan business.

But we also added in there overviews of our campus where we show current facilities, latest construction and where they are and additional properties that we have around on this campus. Our intention with this is to try to better assure you and our investors that we do have good planning in this area with our current capacities for growth as well as for the future.

Okay. But I mean capacity utilization has a lot of room to run, which traditionally would be good for margins. So I'm just trying to understand -- you're saying that you have up to 31 million, you're probably going to be in the ballpark of 26 million mirrors this year. So there's a lot of room to run here. I mean in that new facility where are you in the context of Caput, is it 60%, 70%?

Yes, you're in the 75% range.

75% range. Okay. So there's a lot of room to go. Okay, thank you very much.

Thank you.

David Leiker, Baird.

Good morning, everyone.

Good morning.

A couple of things here. The ER&D 5% to 10% growth which you're talking about going forward is similar to what you had before implying that there is no real incremental cost there with HomeLink coming in. Is that the right way to look at that?

Well, what it's implying is that our current projections for Q4 only includes both the HomeLink -- the people that come with the HomeLink acquisition as well as planned spending or increases in that area for Q4.

So excluding HomeLink you would expect that number to probably be down in Q4, is that right?

No, not at all, actually. I grabbed some numbers, David. This is one of the things, and one of the misconceptions that we've been working to try to correct. A common comment we're learning is that ER&D as a percentage of sales is lower than expected apparently driven by reduced investment in the business.

That was why we basically published and currently on our website actually or in the expenditures by quarter in a chart where it was maybe more easily understandable. And what we define for ER&D today, Kevin --

It was about 19.1%.

Yes, you were at 19.1%. Where we've gone larger in each of the last few quarters our ER or continues to grow. We're finally now, what you're seeing with this fourth quarter, is we're finally in a quarter where we're not comparing against the increased costs of the consultant. In the fourth quarter a year ago is when we basically finished replacing those with permanent hires. So we've actually been growing in ER&D consistent with our historical trend and finally in the fourth quarter you can begin to see it.

No, I understand that. I guess what I'm getting at is if you take the midpoint of that 5% to 10% it's implying a Q4 ER&D number of just under $20 million or $1 million higher than in Q3? I would expect HomeLink to take that number up by more than $1 million.

I think you need to remember that most of the launch activity for your HomeLink Five a lot of the development was done by JCI and we're taking over new launches, but that is carryover programs where some of the has been spent already. So there are some efficiencies there.

Okay, great. And then on HomeLink, what are your plans there in terms of integrating the people, the manufacturing, the management? Is there anything you can share in terms of what that structure looks like and what that process is going to be?

Yes, absolutely. One of the things -- the strategy from our perspective is not to set this up to run as its own independent business inside of Gentex, but it's to leverage overhead and structure, everything all the way from a sales force all the way through program management and engineering. And so what we've worked hard to do for the first few weeks is actually take the engineering resources, program management resources and sales resources and integrate them into the proper teams inside of the Company.

What that allows us to do is just to become one of the many things that we sell. What we're trying to avoid is becoming any type of a conglomerate where we have redundant resources doing similar tasks. And so what we're trying to do is, the way we view it at least, is the best way to leverage this into an efficient manner would be to incorporate it into its core functionality, the area where the people have a similar mindset, similar skill set and similar work that they're accustomed to doing. That way we can have a team that's focused on not only doing just HomeLink but also the skills could transcend into other areas of our business.

Similarly any place where we have from testing to ER& D, we'll be able to work on projects whether those are mirror related or HomeLink related or any other projects that we're going to be working on going forward so that we don't end up with a silo and create inefficiencies through trying to isolate HomeLink from the rest the business.

Okay, great. And then lastly just a couple of number questions. If we look at -- I know you talked earlier about investment income and other income. But can you give us the exact numbers for those two line items?

Investment income was about $475,000 and balance was gains.

Gains. And it sounds like there's no intention to sell any of your investments here Q4? Is that correct?

No. I think we stated a long time ago that we were going to be strategically moving out of the portfolio so. We didn't disclose at what rate, but you can expect that it's going to be probably similar to what we experienced in third quarter.

Right. What you'll see is there was actually a significant increase in investment gains and year-over-year performance. Our goal is to try to consistently move out of that investment portfolio down into a more acceptable range and that transition is going to happen each quarter consistently over the next few quarters.

In which case the modeling has to start to reflect the fact that investment income is going to be waning down by the end of next year. And so what our plan is is [ohs] to do this in an orderly fashion and maximize shareholder value and not to do anything in a rushed fashion, but to do it where it makes sense based off where we have unrealized gains and where we can replicate the behavior, at the same time not walking away from potential future gains prematurely.

Okay. So it sounds like the intent is a year from now or so that all of those investments will be converted to short-term investments?

I wouldn't go that far. The goal is to get it down into a more consistent or balanced balance sheet. In other words what we don't want to do is be overweighted in securities, given what we have going on with the business right now and the debt and all the things that we've taken on for the first time. Our goal is that our investment portfolio would make sense in combination with the rest of the business and all the things we have going on.

So in the past sort of 25% long-term investments, 75% short-term. Is that the proper mix that we should expect that to move towards?

I would say is closer to, it's closer to in line. That makes more sense than where we sit, where we sat six months ago. I wouldn't go so far as to say that there's any type of fixed percentages. In other words the market's going to somewhat dictate to us what that ratio needs to look like and part of it's going to be predicated on obviously if there strengths in the market like there have been, we liquidated holdings but at the same time our overall and long-term investment portfolio did not change due to those improvements in the market conditions. So, we're not trying to hit an arbitrary target, what we're trying to do is make an orderly exit into a position that makes more sense given where we're at today.

Okay, great. Thank you very much.

Brett Hoselton, KeyBanc Capital Markets.

Good morning, gentlemen. I'm wondering -- kind of taking a long step back, as you think about revenue growth for the Company, and we kind of just exiled the HomeLink acquisition because I know that you've already provided some out there. But excluding HomeLink, over the next two to three years how are you thinking about your revenue growth rate trending relative to production?

So, for example if production were flat over the next two to three years, which I certainly don't expect, but let's say hypothetically it was flat over the next two to three years, do you have any specific guidance that you could share with us as to how you thought or think your revenue might trend? And again, kind of excluding the one-time impact of HomeLink or the near-term impact of HomeLink here, is 100, 200, 300 basis points above, 500 basis points above the production growth rate? What are your thoughts there?

Specific guidance we're not allowed to provide. However, what we try to do in this, and we work hard on this language and we're still trying to find a way to get information to you that we think you'd like is when I say that the Company continues to develop and launch new awarded business in all product technology areas, that's intended to indicate that we're selling successfully in these areas with all of our products and that growth can be anticipated.

When ever we work to correct misconceptions like the one that the Company's end of market appears to be penetrated by pointing out that we're on 24% of vehicles for inside mirrors and 6% for outside mirrors and that's up since 2001 from 9% on inside and 4%, our hope in doing it generally that way instead of specifically, further out into the future, the area where we can't really give that specific guidance, is to give you an indication that we believe we're growing and we expect to grow. That's about as far as probably take it beyond the next quarter.

And then secondly as we think about HomeLink specifically, as we think about the guidance that you provided to us in terms of the revenue and margin impact going forward, have you -- should we expect that there are -- or how should we think about the potential synergies, whether it be revenue or cost synergies associated with that business? In other words as we kind of go into 2015 or 2016, is there an expectation on your part that there is the potential for some sort of a step function improvement, whether it be in terms of revenue or cost synergies? Or, is it just going to look similar to your core business and just kind of be melded in with your core business?

I think to answer that question there's a couple different ways of looking at it. The first is that we believe the first step function occurs in Q4 with that increase from Q3 gross margin to what we're giving guidance on Q4 gross margin guidance to be. So, that's the first step function and like we mentioned on one of the previous questions, our goal is to incorporate this into the business in order to get those efficiencies.

I would not expect to be on this quarter that there's any kind of step function increase. What's going to drive any type of efficiencies in the merger of this business into ours is going to be brute force. And it's blocking and tackling, it's not tremendous strategy. The strategy we've already put in place and it's reflected in the Q4 guidance. The rest of it's going to become peer performance in making sure that we're hitting our targets and integrating this business appropriately.

In terms of guiding out a couple years what type of efficiencies? We obviously have things that we're working on at the same time to try to give those into you in terms of guidance would just be foolish on our part because they are so far out and they do require -- there's so many moving parts and variables that they're impossible to predict at this stage. That doesn't mean that there isn't a strategy in place, it just means that the results of those strategies aren't easily predicted at this point.

And then finally in terms of thinking about the other income line over the next year to two years, it sounds like you're going to be booking some unrealized equity gains, but obviously you're going to be incurring some interest costs and you're potentially going to lose some interest income and so on and so forth. So as we kind of think out beyond the unrealized gains, the $20 million that you're potentially going to realize over whatever period of time, as we think out into 2015 should that number be zero as opposed to be an income as it has been for the past -- well -- umpteen years?

How far out are you asking that question?

Well I guess what I'm wondering is you got $20 million in gains and let's say you just fold it all off in the fourth quarter, which understand that you're not going to do, so is 2014 then going to be zero? Or, whatever period of time you want to characterize it. But apart from the unrealized gains, does that number go effectively to zero once the unrealized gains are incurred?

Well, so, in theory, yes but that implies a stagnant market where we're not continuing to grow our asset or retain earnings through the course of time. Our plan obviously, and I think some of you have heard Fred's position on this as there's a couple reference to it, but Fred prefers a pristine balance sheet. So our goal over the next couple years is obviously to replenish the cash and offer us the flexibility to choose whether we invest in long-term investments at that point or pay down debt or reinvest in our core business.

Our goal, though, in the next year let's say is to get the long-term investment portfolio in line with the balance sheet that we now have after the acquisition. I would tell you that the long-term investment portfolio made sense to us, given the fact that we had no debt and what our balance sheet looked like a year ago. Now, given the fact that we do have long-term debt post acquisition, we're working on getting that balance sheet to be in line with what current conditions are.

Longer term our goal is to get back to the conditions we were in a year ago with a preferred cash position, a strong balance sheet, not obligated under too much of a debt load and that's our goal. So, I don't want to make any assumptions as to how long we're going to have gains on investments. Our goal is to continue -- if the market continues to grow at the rate it has for the last three to four months, then I would tell you we're going to struggle to be able to pare down that investment portfolio in a reasonable way.

At the same time it's hard to imagine the market continuing to be quite as bullish as it has been for the last couple of years now. So, our goal is just to put these things in order to make sense out of them, to whittle that portfolio down to an appropriate level. My guess is that's going to take at least six months to a year for that to occur. We're not implying that after a year that it's zero. That's not what we're saying. What we're saying is we're just trying to get it to an appropriate level for our business and our balance sheet.

Fair enough, thank you very much, gentlemen.

Jason Rogers, Great Lakes Review.

Thanks for taking the follow-up. Just another question on the gross margin. Would it be possible to estimate the benefit of purchasing cost reductions on the gross margin in the fourth quarter?

We typically don't provide that kind of detail. Obviously, what we're saying is that the purchasing cost reductions and product mix of the two largest contributors. So, from there kind of point you in the general direction, but we've always shied away from providing exact details, not only because of our business model, but because of our supplier partners and then also because of our customer base.

Okay. Let me just ask something for the first half of next year. If we look at the benefit of purchasing cost reductions and we compare that to the negative impact of customer price reductions, would you expect the benefits to outweigh the cost there?

This is the standard challenge that we face normally in the business. And like all manufacturers in the automotive industry or in other industries where you do face annual price reduction requirements from your customers, you try to coordinate your own purchasing cost reductions to cover as much of that as possible. We do that as a standard practice. We always have and it's probably one of the hardest things that we do in the business.

I'm responsible for sales and purchasing both and I work with Kevin and Steve on a daily basis in this area. We're, for obvious reasons with our suppliers and with our customers, this is not a subject we'd like to detail specifically because it hurts our ability to succeed in either area. But it is an area that we work hard in.

Thank you.

It appears there are no further questions at this time. Mr. Newton, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you everyone for their participation in this. We look forward now to any and all individual calls from investors and analysts, those who want to schedule. And thank everyone for their participation today.

This concludes today's conference. We thank you for your participation.