Gentex Corporation
Q3 2013 Earnings Call Transcript

Published: 22 Oct 2013

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Gentex Corporation Third Quarter Financial Results. Today's conference is being recorded. I would now like to turn the meeting over to Mr. Mark Newton, Senior Vice President. Please go ahead, Mr. Newton.

[Mark Newton:]

Thank you very much. Good morning, and welcome to the Gentex 2013 Third Quarter Earnings Release Conference Call. Thank all of you for the support and participation today. Again, I'm 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, 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. 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 in pricing negotiations with customers; loss of business from increased competition; customer bankruptcies or divestiture of customer brands; fluctuation and 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 statement 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.

[Steven R. Downing:]

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 a 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 1 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 5-year life of the debt financing and will be included with interest expense. And now Kevin Nash will provide additional Q3 financial details.

[Kevin Nash:]

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 planned reduced 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 the 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 the December 31, 2012 to 0, due to investment maturities and liquidations of the company's short-term investment portfolio in preparation for the HomeLink acquisition. Accounts receivable was $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 review 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 were approximately $38.1 million, compared with approximately $97.6 million for the same period last year, primarily driven by reduced expenditures on facility expansion. 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 a product update for the quarter.

[Mark Newton:]

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 of 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 and Excellence in Business Partnership Award from an Asian automaker; an 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 partnership, 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.

[Steven R. Downing:]

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 of 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 are preliminary, unaudited and are subject to change.

[Fred T. Bauer:]

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 and to 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.

[Operator:]

[Operator Instructions] And we'll take our first question from Matt Stover with Guggenheim Securities.

[Matthew T. Stover:]

A couple of questions here. First, I want to just dig in to the sequential improvement in margin. It 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.

[Steven R. Downing:]

Well, I think, as we mentioned in the highlights, product mix and our ability to have purchasing cost reductions were the main drivers. There were 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 a primary driver for the sequential increase.

[Matthew T. Stover:]

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

[Steven R. Downing:]

Yes. I mean, it could start 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, a rolling calendar year. 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.

[Mark Newton:]

A couple of additional things, Matt. This is Mark. I think your primary goal is trying to confirm our ability to sustain this. And as we continue to grow in sales, we're 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 1.5 years 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.

[Matthew T. Stover:]

Okay. And I think, just one -- just 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?

[Steven R. Downing:]

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, again, on preliminary results. These things do tend to shift as they review and audit them. But I think you're in the ballpark.

[Operator:]

And we'll take our next question from Rich Kwas with Wells Fargo Securities.

[Richard Michael Kwas:]

Just a follow-up on Matt's question regarding margin. So last couple of 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?

[Steven R. Downing:]

Well, like we've stated, I think, in the last call, any time there is advanced features, obviously, that's a help. But also, like you've mentioned here is 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.

[Richard Michael Kwas:]

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

[Steven R. Downing:]

Well, the answer is all of the above. I mean, obviously, all the time, we're working hard for new program awards. At the same time, even inside of these 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 2 regions in particular, the inside mirrors grew -- we're basically flat in North America, but we had very strong outside mirror growth in the North American market. And Europe, we had strengthened, both areas, both inside and outside mirrors. That helps us not only from the product mix, 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 that we've been focused on here over the last 1.5 years, especially as 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.

[Richard Michael Kwas:]

And then 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?

[Steven R. Downing:]

Well, like we mentioned before, I mean, 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 D&E segments combined, there's continues to be a weakness in that segment in the North American market. In the North American market, particularly, it tends to be where we have our heaviest content. So when those segments inside the North America markets 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 segments vehicles and then also the C segment vehicles. And so when you see market growth in North America, you have to look at it not only as of the market growing, but it's kind of going in areas that we don't have our heaviest participation in and it's one of the targets for us going forward is try to get our penetration rates up in those segments so that we can benefit from the growth in those areas.

[Richard Michael Kwas:]

Okay. And then anything that affected North America in the quarter, in terms of launches, that may have not hit -- stripped full stride? Did that have any impact on the North American piece in terms of growth?

[Steven R. Downing:]

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

[Operator:]

And we'll take our next question from Ryan Brinkman with JPMorgan.

[Ryan J. Brinkman:]

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 are 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 grow going forward, et cetera?

[Steven R. Downing:]

Well, so, like we mentioned previously, our model that we're trying to promote here is one of the whole business as a -- the whole business and what it means to Gentex. As it relates to HomeLink, upon the acquisition we give 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.

[Fred T. Bauer:]

What we're hoping to indicate in this when we originally announced that we 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 of 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, but 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 that's going well. And the company's very pleased with how we're moving forward. And we will, as we began 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.

[Ryan J. Brinkman:]

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

[Steven R. Downing:]

Got to say, additionally, like Kevin mentioned previously, the next, say, 6 to 8 weeks, especially, are heavily influenced by auditors and our valuation 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 next several weeks.

[Ryan J. Brinkman:]

Okay, sure. And then my last question, I know that there have already been some gross margin questions, but I just want to be pretty clear about this. When you first announced HomeLink, it was just before your 2Q gross margin number was made public. And I think they almost mainly kind of looked at you, 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 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, and so maybe the -- because that would kind of take you to the 4Q margin number like the midpoint, like basically 38.2% or so, can we take that and say, "This is the new normal for Gentex going forward?"

[Steven R. Downing:]

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

[Mark Newton:]

And that's, again, based on current product mix and the forecast. So I mean, obviously, things change. But based on what we're seeing 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.

[Operator:]

We'll take our next question from Jason Rodgers with Great Lakes Review.

[Jason A. Rodgers:]

Wonder if you can break down the interest and dividend income in the Other Income line?

[Mark Newton:]

That's primarily gains on sale of equity investments as we talked about in the second quarter, making a strategic move 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.

[Jason A. Rodgers:]

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

[Mark Newton:]

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. So...

[Jason A. Rodgers:]

And then just looking at HomeLink, where are we now on the HomeLink 5 introduction? Has that been fully launched?

[Mark Newton:]

No. Actually, we're fighting over who answers this. This is Mark. No, actually we're in the initial stages of that launch as a 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.

[Operator:]

We'll take our next question from Steve Dyer with Craig-Hallum.

[Steven L. Dyer:]

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 a 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?

[Steven R. Downing:]

Well, 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 manufacture -- contract employees with permanent hires. And so that, once you start down that processes and start to execute that plan, you get basically your year-over-year comps for they're significantly improved. What we're seeing now is that now that those become the new baseline for year-over-year comps, what you're going to see more of them likely is the 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 an essence of step functions increase for us. And so what you can kind of expect would be that once we have a couple of quarters of this in place, you'd be able to see what kind of the HomeLink drills. And then also, hopefully, the plan will be to move those R&D and SG&A expenses in line with the business growth.

[Fred T. Bauer:]

Also in line with that, as we go into the fourth quarter on gross profit, making it 6 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 remain disciplined in this. We like the results 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're operating today.

[Operator:]

We'll take our next question from David Whiston with MorningStar.

[David Whiston:]

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 represent 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?

[Mark Newton:]

Well, 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 get worse.

[David Whiston:]

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?

[Kevin Nash:]

That's correct. I think primarily, 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 VA/VE and the product mix, all combined.

[Steven R. Downing:]

Right. In essence, like Nash was saying that 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 that 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.

[David Whiston:]

I was just going to move on to the next question. On the balance sheet, it sounded like at the Analyst Day that Fred, in particular, as we know, does not like the -- not a fan of debt. So are you going to keep this debt on the books for the full 5 years or pay it off sooner?

[Steven R. Downing:]

So our goal as we create the revenue and are able to leverage that through the bottom line, if we 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 for that question. That response is going to be situational, and our plan is, is that over the next year, 1.5 years, 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 pre-defined answer to when, if at all, we will plan to repay that debt above the current scheduled plan.

[David Whiston:]

So is it fair to say given you want to be flexible at any leverage outcome as possible?

[Steven R. Downing:]

Absolutely, yes.

[Operator:]

And we'll take our next question from John Murphy with Bank of America Merrill Lynch.

[John Murphy:]

Just a first question. A follow-up on Mitch and maybe to ask this maybe more specifically, the GM truck program is going through the changeover, as you guys well know. 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 just trying to understand, is that really benefiting mix here and is really that the case? And should we expect that to continue as the SUVs launch in the first half of next year?

[Fred T. Bauer:]

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, revenues dependent on key platforms like the GM truck, Cadillac, Ford Expedition/Navigator, Chrysler Grand Cherokee, Chrysler 300, preference like that. Actually, today, and we published this, it's on our website. 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 a Japan/Korea market platform, followed by 3 Europe platforms; #5, Japan-Korea; 6 and 7 are Europe; 8, 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.

[John Murphy:]

Okay. So then what drove this spike in Exterior Mirrors versus Interior Mirrors? Because, I mean, at 33% up on Exterior Mirrors while Interiors are down 1% is intriguing.

[Fred T. Bauer:]

All right. 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, and the company's history, the way our product is applied, our Outside Mirrors cannot go on a vehicle unless our inside Mirror is on the vehicle. If you look at over the last 10 years, in 2001, we were -- our Inside Mirrors run 9% of vehicles produced, and our Outside Mirrors run 4%. Today, our Inside Mirrors run 24%, and our Outside Mirrors run 6%. We intentionally work on our Outside Mirrors in 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 had 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 a continued to.

[John Murphy:]

And that's obviously margin-accretive?

[Mark Newton:]

Correct.

[John Murphy:]

And 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. So I'm wondering what you think it's 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.

[Fred T. Bauer:]

That was another piece of information that we posted in our recent analyst Day, and it's among the things that we try 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%, 24% on Inside Mirrors, 4% to 6% of our revenues growing, we're hoping to indicate internationally about what you're saying, 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.

[John Murphy:]

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

[Steven R. Downing:]

I think just the same with the previous guidance. We're 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're continuing to evaluate that as we move forward and taking on the manufacturing activities of the HomeLink product.

[Fred T. Bauer:]

That's another piece of new information that since the 3 of us came into this in the last couple of months, we're trying to improve the communication of -- we have posted also in this presentation in our website, where we're stating right now that our existing plant facilities are suitable, adequate and have the capacity necessary for current and near-term planned business. But we also added in there overviews of our campus, where we show current facilities, latest construction 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.

[John Murphy:]

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

[Steven R. Downing:]

Yes. You're in the 75% range.

[John Murphy:]

75% range. Okay, so there's a lot of room to go.

[Operator:]

And we'll take our next question from David Leiker with Baird.

[David Leiker:]

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

[Steven R. Downing:]

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

[David Leiker:]

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

[Fred T. Bauer:]

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've basically published and currently on our website actually ER&D expenditures by quarter in the chart where it's easily understandable. And what we define for ER&D today, Kevin...

[Kevin Nash:]

That's about...

[Fred T. Bauer:]

Yes, you were at 19.1, where we've gone larger in each of the last few quarters, our ER&D continues to grow with this. We're finally now what you're seeing with this fourth quarter is we're finally on a quarter, where we're not comparing against the increased cost 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.

[David Leiker:]

No, I understand that. I guess what I'm getting at is if you take the midpoint of that 5% to 10%, That'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.

[Steven R. Downing:]

Well, I think you need to remember that most of the launch activity for HomeLink 5, a lot of the development was done by JCI, and we're taking over new launches. But that is carryover programs where some of that has been spent already. So there are some efficiencies there.

[David Leiker:]

Okay, great. And then just on HomeLink, just -- 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?

[Steven R. Downing:]

Yes, absolutely. One of the things -- the strategy from our perspective is not to set us up to run as its own independent business inside of Gentex, but it's to leverage, overhead and structure, everything all the way from sales force on the way through to program management and engineering. And so what we've worked hard to do for this 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 this to become one of the many things that we sale [ph]. 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 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 those 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 of the other projects that we're going to be working on going forward so that would end up with a silo and creating efficiencies trying to isolate HomeLink from the rest of the business.

[David Leiker:]

Okay, great. And then lastly, just a couple of a 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 2 line items?

[Mark Newton:]

Well, investment income is about $475,000, and the balance was gains.

[David Leiker:]

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

[Steven R. Downing:]

No. I don't think -- I think we had said a long time of that we're going to be strategically moving out of the portfolio. So we didn't disclose at what rate, but you can expect it's going to be probably similar to what we experienced in the third quarter.

[Kevin Nash:]

Right. What'll you see is there is actually -- there was 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 accessible range, and that transition is going to happen at 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 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 on where we have an unrealized gains and where we can replicate the behavior, at the same time, not walking away from potential future gains prematurely.

[David Leiker:]

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?

[Kevin Nash:]

I wouldn't go that far. The goal is just 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 in with the business right now and all the things debt and 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 that we have going on.

[David Leiker:]

So in the past, sort of 25% long-term investment, 75% short-term, is that the proper mix that we should expect that to move toward?

[Kevin Nash:]

I would say it's closer to in line that makes more sense than where we sit -- where we sat 6 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 is going to be predicated on obviously recover their strength in the market like there has been. We liquidated holdings, but at the same time, our overall 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.

[Operator:]

And we'll take our next question from Brett Hoselton with KeyBanc Capital Markets.

[Brett D. Hoselton:]

I'm wondering kind of taking a long step back. As you think about revenue growth for the company, and we kind of just x out this -- the HomeLink acquisition, because I know that you've already provided some thoughts there. But, excluding HomeLink, over the next 2 to 3 years, how are you thinking about your revenue growth rate trending relative to production? So for example, if production were flat over the next 2 to 3 years, which I certainly don't expect, but let's say hypothetically, it was flat over the next 2 to 3 years, do you have any specific guidance that you can share with us as to how you thought or think your revenue might trend? And again, kind of excluding the onetime impact of HomeLink, or the near-term impact of HomeLink, is it 100, 200, 300, basis points above? 500 basis points above the production growth rate? What are your thoughts there?

[Fred T. Bauer:]

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 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. Whenever we work to correct misconceptions like the one that the companies and the 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 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.

[Brett D. Hoselton:]

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 of 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?

[Steven R. Downing:]

Well, I think, to answer that question, there's a couple of 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 beyond 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 is going to become pure performance and making sure that we're hitting our targets and integrating this business appropriately. In terms of guiding out a couple of years what the types of efficiencies. We obviously have things that we're working on, at the same time, to try to give those in to you in terms of guidance would be foolish on our part, because they are so far out and they do require -- there are so many moving parts and variables that they're impossible to predict at this stage. It 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.

[Brett D. Hoselton:]

And then just finally, in terms of thinking about the Other Income line over the next year to 2 years, it sounds like you're going to be booking some unrealized equity gains. But obviously, you're going to have to -- be incurring some interest costs, and you're potentially going to lose some interest income and so on and so forth. So we kind of think of 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 0, as opposed to being an income as it has been for the past, well...

[Fred T. Bauer:]

How far out did you -- how far out are you asking that question?

[Brett D. Hoselton:]

Well, I guess, what I'm wondering is, you got $20 million in gains, and let's say, you just sold it all off in the fourth quarter, which I understand that you're not going to do, so is 2014 then going to be 0? Or whatever period of time you want to characterize it. But apart from the unrealized gains, does that number go effectively to 0 once the unrealized gains are incurred?

[Steven R. Downing:]

In theory, yes, but that implies a stagnant market, where we're not continuing to grow our asset, our retained earnings, through the course of time. Our plan, obviously, and I think some of you have heard Fred’s position on this if there's a couple of reference to it, but Fred prefers a pristine balance sheet. So our goal over the next couple of 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 that 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. And 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're 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 4 -- 3 to 4 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 it's going to take at least 6 months to 1 year for that to occur. We're not implying that after a year, that it's 0. 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.

[Operator:]

And we'll take our next question from Jason Rodgers with Great Lakes Review.

[Jason A. Rodgers:]

Just another question on the gross margin. Would it be possible to estimate the benefit of purchasing cost reductions on a gross margin in the fourth quarter?

[Steven R. Downing:]

We typically don't provide that kind of detail. Obviously, what we're saying is that purchasing cost reductions and product mix are the 2 largest contributors. So from there, it kind of points 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.

[Jason A. Rodgers:]

Okay. Well, 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?

[Fred T. Bauer:]

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.

[Operator:]

And 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.

[Mark Newton:]

Thank you, everyone, for the participation. And as 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.

[Operator:]

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