Gentex Corporation
Q4 2013 Earnings Call Transcript

Published: 29 Jan 2014

[Operator:]

Good morning. Welcome to the Gentex Fourth Quarter and Year End 2013 Financial Results Conference Call. I would now like to turn the meeting over to Mark Newton, Senior Vice President. Please go ahead, Mark.

[Mark Newton:]

Thank you. Again, good morning. Welcome to the Gentex 2013 fourth quarter and calendar year end earnings release conference call. I'm Mark Newton, Senior Vice President. In this call, we will provide an overview of the Gentex 2013 fourth quarter and 2013 calendar year business, followed by questions from you. 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. This conference call contains forward-looking information within the meaning of the Gentex Safe Harbor Statement included in the Gentex reports, fourth quarter financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms. Here's Steve Downing, Gentex's Chief Financial Officer, with the Q4 and calendar year 2013 summary.

[Steven R. Downing:]

Thank you, Mark. For the fourth quarter of 2013, the company's net sales were $326.8 million, up 26% compared with net sales of $260.3 million in the fourth quarter of 2012. For calendar year 2013, the company's net sales increased 7% to $1.17 billion compared to $1.1 billion for calendar year 2012. The gross profit margin in the fourth quarter of 2013 was 39.4% compared with a gross profit margin of 34.2% in the fourth quarter of 2012, due to improvements in product mix, the impact of the HomeLink acquisition, the company's ability to leverage fixed overhead costs and purchasing cost reductions, which were partially offset by annual consumer price reductions. The gross profit margin for calendar year 2013 was 36.8% compared with a gross profit margin of 33.9% for calendar year 2012, primarily due to improvements in product mix and purchasing cost reductions, which were partially offset by annual customer price reductions. Net income for the fourth quarter of 2013 was $69.9 million, up 76%, compared with net income of $39.6 million in the fourth quarter of 2012. Net income for calendar year 2013 was $222.9 million, up 32%, compared with net income of $168.6 million in calendar year 2012. Earnings per diluted share in the fourth quarter of 2013 were $0.48, an increase of $0.20, compared with earnings per diluted share of $0.28 in the fourth quarter of 2012. Earnings per diluted share were $1.55 for calendar year 2013 compared with $1.17 for calendar year 2012. Total automotive mirror unit shipments in the fourth quarter of 2013 increased 17% compared with the fourth quarter of 2012. Automotive net sales in the fourth quarter of 2013 were $320.3 million, up 26%, compared with automotive net sales of $254.6 million in the fourth quarter of 2012. Automotive mirror unit shipments for calendar year 2013 increased 10% compared to calendar year 2012. Automotive net sales for calendar year 2013 were $1.14 billion, up 6%, compared with automotive net sales of $1.07 billion in calendar year 2012. North American automotive mirror unit shipments increased 6% in the fourth quarter of 2013 and were up 6% for calendar year 2013. International automotive mirror unit shipments increased 25% in the fourth quarter of 2013 and were up 13% for calendar year 2013. Previously, the company gave annual SmartBeam and Driver Assist unit shipment guidance for calendar year 2013 of a 15% to 20% increase in units versus 2012. Actual unit shipments for calendar year 2013 increased 21% compared with calendar year 2012 shipments. In addition, the company also previously gave annual RCD unit shipment guidance for calendar year 2013 of a 25% to 35% decrease for calendar year 2013. Actual unit shipments for calendar year 2013 decreased 21% versus calendar year 2012 shipments. Other net sales for dimmable aircraft window and fire protection products in the fourth quarter of 2013 were $6.5 million, up 12%, compared with $5.8 million in the fourth quarter of 2012, and for calendar year 2013 were $27.9 million, up 23% compared to $22.6 million for calendar year 2012. Here's Kevin Nash, Gentex's Chief Accounting Officer, with the Q4 and calendar year 2013 details.

[Kevin Nash:]

Thank you, Steve. First, I will give an update on a few additional income statement items. ER&D expenses for the fourth quarter of 2013 increased 7% to $19.8 million compared to the fourth quarter of 2012, primarily due to increased staffing levels that have occurred throughout the year, which continue to support growth and development of new business, as well as personnel additions that were part of the previously announced HomeLink acquisition. ER&D expenses for calendar year 2013 decreased by 10% compared to calendar year 2012, primarily due to planned reduced costs associated with the temporary outside contract engineering and development services, which were partially offset by the previously mentioned increased permanent staffing level. SG&A expenses for the fourth quarter of 2013 increased 13% to $13.2 million compared to the fourth quarter of 2012, primarily due to incremental employment costs and amortization expense related to the HomeLink acquisition. SG&A expenses for calendar year 2013 increased by 2% compared to calendar year 2012, again due to expenses related to the HomeLink acquisition. Other income for the fourth quarter was $8.5 million, which was an increase from $4.7 million in the fourth quarter of 2012, broken down into realized gains on sale of equity investments of $3.8 million, with the balance being primarily year-end mutual fund distributions, which were partially offset by the interest expense on the company's debt financing. For the calendar year, other income was $23.3 million versus $15.2 million in 2012, of which $18.1 million was related to realized gains on the sale of equity investments. The company expects other income for 2014 to be more in line with 2012 levels of other income given the current market conditions and the company's overall balance in its long-term investment portfolio. The effective tax rate for the fourth quarter of 2013 was 32.8%, which varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. For the full year, the effective tax rate was 32%, again, 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 calendar year 2014 to be approximately 32.75% based on the current tax laws specifically related to expired research and development tax credits. Quickly I'll talk about some items on the balance sheet. Cash and cash equivalents were $309.6 million, down $80.1 million from $389.7 million as of December 31, 2012, primarily due to the cash used in the acquisition of HomeLink, which was partially offset by the proceeds of the company's new debt financing of $275 million and cash flow from operations. Accounts receivable was $143 million, up from $109.6 million as of December 31, 2012, primarily due to the increased sales levels. Inventories were $120 million, down from $159.9 million as of December 31, 2012, primarily due to planned reductions in raw materials inventory. Goodwill declined to $307.4 million from $337.7 million as of September 30, 2013, due to adjustments made in the purchase price allocation related to the HomeLink acquisition, which were primarily due to adjustments in other intangible assets. Management, along with the company's auditors, continues to be in the final review stages of the purchase price allocation and would expect that this be completed by the end of the first quarter 2014. Patents and other assets were $391.5 million, up from $29.2 million as of December 31, 2012, due to the purchase price allocation of intangible assets related to the HomeLink acquisition. Again, management, along with the company's auditors, are in the final review stages of this purchase price allocation we expect to be done by the end of the first quarter of 2014. Long-term investments were $107 million, down from $141.8 million as of December 31, 2012, due to realized gains on equity investments, which were partially offset by increases in unrealized gains. Accrued liabilities were $56 million, up from $44.8 million as of December 31, 2012, primarily due to timing of certain tax payments and the current portion of the company's long-term debt financing. And lastly, we'll talk a little bit about some cash flow items. Cash flow from operations for the fourth quarter was $93.6 million compared with $81.4 million in the fourth quarter of 2012, driven by increases in net income and changes in working capital. And year-to-date cash flow from operations was $317.3 million compared to $257.8 million in 2012, also driven by increased net income and changes in working capital. Capital expenditures for the fourth quarter of 2013 were $17.4 million compared with $19.9 million in the fourth quarter of 2012. And for year-to-date, capital expenditures were $55.4 million compared with $117.5 million for calendar year 2012, primarily driven down by reduced expenditures on facility expansions. Depreciation and amortization for the fourth quarter was $20.5 million and for calendar year 2013 was $62.9 million. And lastly, on January 17, 2014, 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 January 6. Now I will turn the call back over to Mark, who will give an update on our first quarter guidance.

[Mark Newton:]

Thank you, Kevin. The company is in the development and launch of new technology in all product areas, which include inside and outside mirrors with frameless and curved glass applications; advanced mirror features including HomeLink, compass, interior lighting, microphones, telematics, displays, SmartBeam and Driver Assist camera systems and HomeLink electronic modules and other areas of the vehicle. As previously discussed, the company will no longer disclose the specifics of these technologies and business awards, including volume information, at the request of our customers to protect their investments and to prevent our competitors from knowledge of our inventions. The company has been awarded business contracts with various automotive OEMs for this new technology in all product areas extending to and beyond 2020. The company received in 2013 multiple performance awards from our customers

[Operator:]

[Operator Instructions] And we'll go to our first question. We'll take our first question from Rich Kwas with Wells Fargo.

[Richard Michael Kwas:]

Just a couple of questions. On the margin guide error for Q1, the 39% down from 39.4% in the fourth quarter, I know the price reductions can have an impact earlier in the year, but is there anything -- typically, you're flat to up slightly versus Q4 levels, at least looking back historically. Is it -- what are kind of the dynamics here we should be thinking about, and what's bringing it down a little bit? I know it's better than expected, but just trying to think through progression, potential progression as we move through the balance of the year and what's affecting Q1?

[Steven R. Downing:]

Sure. So the -- I'll take -- I'll answer a couple of those and I know Kevin's got a couple of other things he wants to add, too. First thing, like you mentioned, obviously, annual price reductions are stronger on the first part of the year than they tend to be on the back half. So that is one of the larger impact areas. Also, the other thing we're looking at and trying to predict out is product mix. One of the things we've been trying to be a little more formal about in communication is just the fact that product mix is a difficult thing to predict. But based on what we're seeing in the first quarter, it looks like product mix is a little weaker than what it was in Q4, not significantly, just a little. Additionally, the other thing that you have -- that you do have coming on is that Gentex is spending money on integrating the manufacturing of HomeLink into our facilities. So what you saw in Q4 was really the flow-through of the financials through our financial statements, but there is spending that needs to take place and some costs that are going to be encountered in the move of the HomeLink production to our facilities here in Zeeland. Kevin?

[Kevin Nash:]

Yes, and then just to add on to that, I think historically, if you look back at 2013, we did see sequential improvements in our margin, but that was a product mix story as well, right, from Q4 '11 to -- or Q4 '12 to first quarter '13. So we're continuing to see strong mix, as Steve already indicated, but we do have the price reductions that typically start in the first part of the year.

[Richard Michael Kwas:]

And just a follow-up on the mix, with some of the transition that's occurring with GM on the truck side, is that also factored into the mix here in the first quarter? And then just as a follow-up, does the spending with HomeLink, does that -- is that front-end loaded? Or is that pretty consistent, it's scheduled to be pretty consistent through the balance of '14?

[Steven R. Downing:]

Why -- and most of it's going to be front-loaded, obviously, especially because the efficiencies probably won't come on until the second half of the year or beyond. As you -- like I said, as you get the equipment in place and you get -- also get the resources in place in order to handle that workload, you experience those costs at the front end of that and then the efficiencies should pan out over time.

[Richard Michael Kwas:]

Okay. All right. And just a quick follow-up, on the North American interior shipments, they were up to -- production was a little bit better than that, if I recall last quarter, you were kind of in line with North American production versus -- on the mirrors, on the interior mirror side. Is there -- you talked about mix last quarter as being an impact. You just mentioned that mix was favorable in the fourth quarter on a broad basis. But in terms of North America, is there anything specific there that's keeping you back from outperforming overall production?

[Kevin Nash:]

Yes, this is Kevin. Thanks. I think what you're seeing is the continued play-out of our weakness in RCD, or what we previously announced in our RCD movement. But then, specifically within the quarter, we saw some weakness in our European and Asian transplant customers, as I think publicly in the market, they struggled a little bit in the North American market. So we saw some of that headwind as well.

[Mark Newton:]

And Rich, one more thing. This is Mark, back to another piece of your question a moment ago, on the General Motors K2XX launch timing. That, for us, is not something that we would consider material to the guidance that we've given in this. We do work, as all suppliers do, in supporting that program, but that was not one of the specific things that went into the materiality of our guidance.

[Operator:]

We'll go to our next question from Rich (sic) [Steven] Dyer from Craig-Hallum.

[Steven L. Dyer:]

It's Steve. Maybe I missed this, but could you detail maybe the contribution from HomeLink in the quarter and how you see that playing out in Q1? And then maybe, maybe anecdotally any seasonality you expect to see with that business?

[Steven R. Downing:]

Well, I think we previously talked about what our guidance was for HomeLink going in, $125 million to $150 million a year, and things were consistent with that going forward, so it was about a 50-50 split of increase in our revenue's growth, being organic growth, and then the HomeLink contribution and we see that playing out in the first quarter as well.

[Steven L. Dyer:]

Okay, great. And in general, would you expect that business to grow faster than sort of your existing -- the core business, or slower, or any commentary there?

[Steven R. Downing:]

Well I think -- well, like what we've kind of publicly disclosed previously is, our goal is to obviously grow that business at the same rate as our core business. Historically, that's always been somewhere in the kind of 8% to 10% range, and we're working very hard to try to find ways to make sure we grow that at near double digits. If you look at yet -- the second question is the seasonality part of HomeLink. We don't view HomeLink as having any more seasonality than what our core business does. So I mean, in essence, if you look at our core business, HomeLink itself should trend on the same type of path as the mirror business itself. So there shouldn't be any significant differences in the seasonality of HomeLink versus our core business.

[Steven L. Dyer:]

Okay, that's helpful. And then, just kind of a follow-up to the gross margin question. As you look forward, guidance for Q1 may be a little bit lower than Q4. Is there sort of a new kind of range we should think about, obviously, subject to mix and some of these other things? I mean, is it 39% to 41%? Or assuming 39% is kind of the watermark for this year, how much sort of upside should we expect throughout the year?

[Steven R. Downing:]

Well, as we talked about, product mix is the biggest -- other than customer price reductions, product mix for us is the biggest unknown factor, right? So based on what we're seeing trending, we feel like, given our guidance, the approximation of 39%, we have some margin of error right, obviously, but we feel like that's probably the new bar where we would shoot for and what we see going out into the first quarter.

[Steven L. Dyer:]

Okay, last question for me. You had kind of talked about your other income being kind of right in that $15 million level, similar to 2012. Along with that commentary, should we expect that it's going to be bigger at the beginning of the year, tapering down as you unwind some of those long-term investments?

[Kevin Nash:]

Yes, that's correct. As we wind down that investment portfolio into a more normalized level for our balance sheet, what you would expect is that the front half of the year would be probably be a little stronger than the back half of the year.

[Operator:]

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

[David Leiker:]

Just want to follow up on the gross margin comment there. I mean historically, you've been able to drive a 40%-, 45%-type contribution margin, closer to 45% at this type of growth, and then obviously mix is part of that equation going forward. But is that the right number with HomeLink in there as you go forward that we should look at, at the gross profit line in terms of contribution?

[Steven R. Downing:]

Yes, that's in the range.

[David Leiker:]

Okay. And then, if we look at your organic growth, and this is mirror shipments relative to what vehicle production did globally, what we're seeing in Q1 is -- we've seen a nice acceleration through the course of 2013, and typically, that continues. It's weaker in Q1. You allude a bit to mix, but can you put some more color on in terms of what's going on there for you in terms of mix? Are there changes in take rates or penetration or anything like that?

[Steven R. Downing:]

Well, the one thing we had talked about before is that, in '14, there was going to be continued headwinds from the RCD losses that we had started to encounter in 2013. So that's just really more a continuation of this -- of the RCD story that we have been talking about for over a year now. Additionally to that, I mean, if you look at the markets for calendar year '14, the automotive markets, the first quarter is okay in some of the markets. But the second half of the year, especially from Q2 on, there's a lot of weakness in the production side of the automotive sector.

[David Leiker:]

Yes, I'm looking at mirror shipments, RCD rolling off isn't really going to affect your mirror shipments a whole lot, is it?

[Steven R. Downing:]

There has been some negative impact to that. As you lose RCD, there has been a tendency to lose some EC units as well.

[David Leiker:]

Okay. And then the last item here, if we look at the other features that you have in the mirror, leave HomeLink aside, because I think people have a pretty good understanding of that, but compass, temperature, map lamps, the telematics interface, microphones, displays, can you give us some color or talk about what's going on, on the trends there in terms of where those features are ending up, on the mirror or other parts of the vehicle or whether that's positive or negative for you in the next couple of years?

[Kevin Nash:]

What we're trying to communicate and have been working to do since the 3 of us took over this messaging in the middle of last year, what we presented as a product update in September, that we posted on our website, and what we're attempting to do when I continue with the statement that we are in research and development launch of new technology in each of our product areas. And now the additional comment that we've been awarded business contracts with automotive OEMs for this new technology in all those product areas extending to and beyond 2020. We're trying to communicate what the next steps in these technologies are. As we showed on our website in a section called The Future, of that presentation, that our electronic advanced features, HomeLink compass, interior lighting of all types, microphones, telematics displays, SmartBeam and Driver Assist camera systems, all are advancing new. Our intention with this communication is that it be positive to the extent we can describe it at this point. We're trying to communicate more broadly on all product areas as our hope, with the intention to indicate that we have positive customer reception of it. And for right now, with the second year of the 2 years that we've previously communicated on Rear Camera Display affecting us in '13 and in '14, we've also communicated that we see positive indication for media display applications in the mirror, improving as we get into 2015, and so that's what we're trying to communicate.

[Operator:]

We'll go to our next question from Matt Stover with Guggenheim.

[Matthew T. Stover:]

Many of the questions have been answered, but I have a couple here. You've mentioned that you're still assessing the goodwill allocations, and I'm just wondering if we think about how you accounted for that in the fourth quarter, would you expect for there to be a meaningful deviant or variance as we think of that Q4 to Q1 comp. Or do you not expect for there to be any meaningful change and...

[Steven R. Downing:]

Yes, we don't expect a meaningful change from where we are today.

[Matthew T. Stover:]

Okay. The other question is, in the fourth quarter, the CapEx was below D&A, and you folks are a hardy growth company. I'm wondering when you expect for the transition of CapEx over D&A, reflecting the growth prospects. Is it for the full year '14? Is it at some point during '14, or is it into '15?

[Kevin Nash:]

Yes, I think you're seeing the increase in D&A, primarily due to the HomeLink acquisition. That was about a $20 million increase in the -- in our previous guidance on amortization, and so the reason why they're in line is because of that. So we are obviously stepping up our -- yes, so we guided -- we had about an $8 million additional amortization in the fourth quarter due to the HomeLink assets. And 2014 -- in '14, we're estimating $80 million to $85 million in total D&A, of which, about $20 million of that is due to the asset, the intangible asset amortization from the acquisition. And so if you were to strip that out, it would -- our CapEx would be higher than our true depreciation.

[Steven R. Downing:]

Correct.

[Operator:]

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

[Ryan J. Brinkman:]

So if I assume that HomeLink in 4Q had the same revenue as it averaged in quarters 1 through 3, that was released in your 8-K, it would seem that revenue for the underlying business rose, what, maybe 10% to 11% year-over-year or so versus mirror shipments, up 17%. So can you help us kind of think about how much of the difference is due to an incremental mix towards lower ASP but higher-margin exterior mirrors, versus how much might be due to other factors such as customer price reductions?

[Steven R. Downing:]

Well, yes, probably the single biggest fact you have to look at there as it relates to that, that question would be the loss of RCD is one of the biggest. And then, yes, there is a tendency towards, like, if you look at the volume shipments that we disclosed in the press release, there was a significant growth in outside mirrors which do have a lower ASP. And customer price reductions, obviously, are always a factor as well.

[Ryan J. Brinkman:]

That's helpful, and I understand that exterior mirrors are increasing year-over-year. It does look like they decreased a little bit as a percentage of total domestic shipments just sequentially from 26.7% in 3Q to 25.9% in 4Q. How should we think about exterior versus interior split kind of going forward? And do you expect that to continue to be a tailwind to gross margin? How much of a tailwind relative to, I guess, the big tailwind you had this year?

[Kevin Nash:]

I think we're seeing continued strength into the first quarter with our outside mirror growth, but then, like we talked about earlier, you do see -- you have the pricing reductions that start to take effect. But we feel like given all the product mix and all the factors that we're probably at or near the peak of the efficiencies in the short term.

[Ryan J. Brinkman:]

Okay, and just last question, on the weaker yen. So a lot of your products are options. Are you seeing any benefit from Japanese automakers using the yen to add content, making optional products such as yours come standard with their vehicles or at least standard with different packages? Is that helping you?

[Steven R. Downing:]

No, I don't think we'd see any tailwind from that right now. In fact, one of the bigger issues has been, it's not just the yen to the dollar. You have to look at the yen versus the won and some of the other currencies where these guys compete internationally as well, and that's caused quite a bit of pressure in some regards, as our foreign-based automakers are competing in international markets. Actually, the currencies to other currencies has caused some headwind, even, that you would see as these guys are competing for global market shares.

[Operator:]

Our next question comes from Greg Halter with Great Lakes Review.

[Gregory W. Halter:]

All right, a couple of housekeeping items. The debt that you show on the balance sheet, is that total debt?

[Steven R. Downing:]

No, there's a component of it in short term that's about $7.5 million, so...

[Gregory W. Halter:]

And what were your accounts payable at the end of the year?

[Steven R. Downing:]

$55 million.

[Gregory W. Halter:]

All right. And any thoughts on where the share count will be going in 2014, and the reason for the increase this quarter was it just due to the stock price increase?

[Kevin Nash:]

Yes, you have -- as the stock price increases, you have the dilutionary effect of stock options and stock option activity of the employee compensation model. So if the stock continues to be high, you'll see that dilution continue given the current capital cost.

[Gregory W. Halter:]

At year end, what was the unrealized depreciation in your portfolio?

[Steven R. Downing:]

Net of tax, it was about $20 million.

[Gregory W. Halter:]

Net of tax, okay. And the 2015 Ford F-150, obviously, received a lot of press and has things like Smart Driver Assist, technologies in lane keeping and cross traffic alerts and so forth. Just wondered if you could elaborate on what kind of content Gentex may be providing there.

[Mark Newton:]

We're not allowed by the customer to detail that specifically at this time, but we do look forward to the release of the vehicle as it comes out and our ability to demonstrate what we're doing.

[Gregory W. Halter:]

But it's fair to say that you are working with them?

[Mark Newton:]

Absolutely.

[Gregory W. Halter:]

Okay. And any thoughts on further acquisition opportunities that may be out there that meet your very strict criteria, which I think you have established?

[Steven R. Downing:]

So there's -- like Mark mentioned before, I mean, we're constantly evaluating that as an opportunity. I would -- there's nothing imminent at this stage. We're still in the process of honestly digesting the one we've just completed, making sure we get that integrated into our system based on our -- like you said before, based on our criteria. Execution of that acquisition is very, very important to make sure we get the efficiencies out of it that we've expected and the market expects.

[Gregory W. Halter:]

Okay. And any change in the mirror pricing environment? I think the last time we discussed, it was like 1% to 2% on the downside, I believe?

[Steven R. Downing:]

Well, so historically, we've given guidance of 2% to 3%, and we tend to be at the bottom end of that range.

[Gregory W. Halter:]

Currently?

[Steven R. Downing:]

Yes, currently, yes.

[Gregory W. Halter:]

Okay. And one last one. As you, I'm sure, undoubtedly saw, Google is buying Nest for a large dollar amount.

[Steven R. Downing:]

Yes.

[Gregory W. Halter:]

And I just wanted to the probe that whole area with you guys and HomeLink and Gentex and how you may have a play into that area as well, if you do. In terms of technology being used through mirrors, smartphones, whatever the case may be.

[Mark Newton:]

High-end advanced technologies like that, and they're very, very impressive, we do continue to always evaluate as options for the various things we do. And what we're trying to do more of, in communicating to you on our product development technology is one, that we're extremely active in it, in these areas, for our mirrors, for our electronics, for our product development and for what we're trying to see for acquisitions. We're not in a position to detail much further today, but we are working very hard on it.

[Operator:]

We'll take our next question from Brett Hoselton with KeyBanc.

[Brett D. Hoselton:]

First of all, can you talk about the underlying drivers of your mirror shipment growth in 3 different segments? North America exteriors, certainly, has done quite well. And then the international, both on the interior and exterior side, have done quite well, all 3 outstripping or outperforming production by a fairly significant amount. So can you just kind of briefly talk about what are the underlying drivers there in your mind?

[Mark Newton:]

On outside mirrors worldwide, as we've tried to do a better job of explaining, we very, very intentionally always have worked and continue to situationally adapt now to aggressively apply outside mirrors everywhere we have an inside mirror. And so with our inside mirrors required for the performance of outside mirrors and because we have more applications and vehicle production in the market for inside mirrors, we always have growth opportunities there. We are, as the results should indicate for outside mirrors, continuing to succeed at that. We continue to focus heavily on that. On inside mirrors, that becomes a product mix situation, as we see things like some improvements occurring in production in Europe, which is our largest market for advanced feature inside mirrors. And overall, that's part of the improvement there, and with all of our other inside mirror technologies, we continue to compete as the market leader in electronic auto-dimming mirrors with advanced features. We're trying to communicate that we're succeeding with that.

[Steven R. Downing:]

I think one of the other things in the European market, in particular, in the European and Asian markets, is further penetration in the B- and C-segment vehicles and some of the plans that we've put together there are making progress, is very important for us. And Europe has been ahead of the pace in terms of the transition from D- and E-segment vehicles to B/C-segment vehicles. So that was one of our very first pushes in the marketplace for that, for our success in our mirrors in the B/C segment, has been in Europe.

[Brett D. Hoselton:]

And in thinking about your revenue growth expectations, your first quarter, looking at about 20% increase, 1/2 of that is HomeLink, kind of very roughly, it sounds like, so 10% underlying core business growth. It sounds like as we kind of comp out HomeLink, get into the fourth quarter, our goal is to kind of grow the business at around 8% to 10%. I assume that includes both new business and production. Is that how we should think about the company as we move into 2015 and 2016, in your mind? Or do you think that there's a potential that some of these new products you're talking about might cause that growth rate to improve or exceed that range?

[Mark Newton:]

What we can communicate today, that is how we would like it to be understood. We look forward, when we can give guidance in the future, to talking more about how we can grow this beyond that. But for right now, that's the message we're trying to communicate.

[Brett D. Hoselton:]

And then as you think about margins kind of into 2015, are there some additional margin drivers that might cause margins to continue to expand in 2015, possibly some synergies from your HomeLink acquisition or operating leverage or other factors?

[Steven R. Downing:]

Well, I think like we stated earlier on the call, the 39% guidance that we gave for Q1, we believe, is sustainable throughout the year if we can offset our customer price reductions and then some of the increased costs with finalizing the move from production, the acquisition, to our facilities here. And if you look and say, "Hey, beyond that, what are the margin drivers?" mix is the single biggest margin driver and -- on the positive side in the future. And as of right now, in terms of looking that far out, we're -- we feel very comfortable with where we're at on a margins perspective in that 39% range, and we're working really hard to try to maintain that. I wouldn't look at out years as having significant upside at all. I would look at it as saying, hey, that's -- historically, that's at the very top end of the ranges we've been in on the gross margin side, and we feel comfortable that if we're disciplined in the business approach, we should be able to maintain it.

[Operator:]

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

[David Whiston:]

First, a balance sheet question. I just wanted to get a little bit more rationale on the shifting launch of investments. Is that just going to go into cash and sit there beyond funding normal reinvestment in the business and the dividend?

[Steven R. Downing:]

For now, that's correct.

[David Whiston:]

Okay. And so can you just clarify a bit what -- why do you want to -- I think the term used was rebalance the balance sheet or reallocate those assets. Is it just, you just felt like you had too much in long-term investments?

[Steven R. Downing:]

Yes, given our current cash levels and the rest of the balance sheet, it was -- seemed and appears to be much more prudent to have a little less in the investment portfolio and more liquid to help us a, with the business requirements, the capital expenses that we're going to be seeing throughout the year and also preparing in the event that we did find an opportunity on the acquisition side. We want to make sure that we're not tied up in investments and unable to move quickly.

[David Whiston:]

Okay. Moving on to HomeLink, your guidance there originally on gross margin expansion was as much 150 bps, and sequentially, you're up to 70. So is the 150 guidance still on the table and the other roughly 120 bps was the internal efficiencies and mix you talked about before?

[Steven R. Downing:]

For the most part, there's a little bit -- there is a little bit of positive pressure on -- from the HomeLink side, and that's primarily related to the operations and the acquisition coming on board a little more quickly than we had anticipated and a little more efficiently than we had initially anticipated.

[David Whiston:]

Okay. And has -- the HomeLink deal, now that's closed, are you finding that you're having a different tone of conversation at all with your OEM customers?

[Steven R. Downing:]

No. I'd say OEMs have been very supportive of the transition and helping us with their requirements to make sure we can get the product transitioned to Gentex quickly. Most of our customers are very familiar with us from an electronic standpoint and they've been very helpful and supportive in making sure that transition happens efficiently.

[David Whiston:]

And last question. For 2014, any concerns on the supply chain front, raw materials, electronics, anything like that?

[Mark Newton:]

Nothing material that we feel needs to be communicated in this, no.

[Operator:]

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

[John Murphy:]

Believe it or not, I have another HomeLink question here. If we look at the revenue increase of just about $66 million you had year-over-year, you mentioned that about 1/2 of that was coming from HomeLink. And presuming that, that's getting the 60% gross margins it has more recently, you'd sort of back that out of the gross margin. It looks like the core business did a gross margin of about 37.1%. Is that sound about right?

[Steven R. Downing:]

Yes, in the ballpark. Yes.

[John Murphy:]

Okay. I just wanted to make sure I get my numbers straight there. Then a second question, just to get into the balance sheet, given the debt levels you guys have taken on that are sort of unusual relative to your history, it sounds like you're not looking to pay those down and that you're going to build up cash in anticipation of a potential acquisition. I know you kind of have been alluding to that. But is there any reason that you might not get more aggressive in paying down debt going forward, given you have a pretty healthy level of cash right now? You're going to be generating a bunch of cash this year. And it just seems like you're taking down your portfolio of investments that you might focus on paying down debt. I'm just trying to understand sort of what the thought process is there. It seems like you're almost going to have too much cash and carrying this level of debt might not be prudent.

[Steven R. Downing:]

Well, I think the answer to the question, what we've been being pretty open about is everyone's familiar with Fred's position on debt, his disdain for it, would been putting it mildly. Given the favorable terms, under which we've borrowed at, my preference would be to continue to stock away the retained earnings into cash. I think we would differ with you on that you can never have too much cash. But that being said, what we've agreed as of now is to work through the first half and through '14 to actually deliver the results and to drive the value through the income statement. And then if we're blessed with the situation where we'll have, as you would phrase it, too much cash, then we'll be able to make the decision of what's the appropriate use for that cash, whether to pay down debt or to look at acquisitions or to do other investments in the business.

[John Murphy:]

So it's really mid-'14 before you kind of make a hard and fast decision, is that kind of what you're alluding to?

[Steven R. Downing:]

Yes, at least, yes.

[John Murphy:]

Then on inventory. Was the inventory on the books at the end of 2013 including HomeLink? Is it $120 million? You've been working down inventory or turning your inventory much faster. It just -- it seems like almost -- like there's almost no inventory that came on from HomeLink.

[Kevin Nash:]

Well, most components are similar. We've been manufacturing HomeLink for 10 years, so we have similar components, and it's a slight -- it's not a major increase in what we consider for our components. It's just incremental, so we're continuing to work our finished good levels and balancing that with our lead times, and so it's not a significant change.

[Steven R. Downing:]

And like Kevin mentioned, there is a balancing act there of continued improvements in our existing inventory levels on the core business which were obviously then partially offset by the increases from the HomeLink acquisition.

[John Murphy:]

Got you. It's impressive. Then just lastly, in the first quarter, you're talking about sales being up about 20%, but mix being somewhat negative, which would imply that your mirror shipments would grow at a rate faster than 20%. Is that sort of a correct assumption there or sort of line of reasoning?

[Steven R. Downing:]

Well, the mix that we're talking about there is predominantly related around which types of mirrors that we're shipping, not necessarily that we're shipping less mirrors in comparison to production. That was not the intent of that statement. It was more about what type of mirrors that we're shipping.

[John Murphy:]

But what do you think, shipments -- will shipments will be up greater than the 20% increase in sales or less? Because it seems, based on what you're saying, they might increase a little bit faster than that.

[Steven R. Downing:]

You have to remember, a portion of that 20%, what we said is roughly about 1/2 of that is HomeLink related, which doesn't count into the mirror shipments. So in that sense, if you look at Q4, the mirror -- the growth on the core business was about 1/2 of the 26%. And so if you're taking a 20% growth rate, we're not suggesting that mirrors are growing at 20%, it's growing at -- it would be growing at something less, around 1/2 of that.

[Operator:]

And we'll go to David Leiker with Baird.

[David Leiker:]

Just one follow-up on Brett's question for you, asking about the revenue -- longer-term revenue growth opportunities. If we look historically, you have grown, most of the time, your mirror shipments, about 10% to 12% faster than the end market. Brett's question about growing revenues 8% to 10% would include end market growth. I just want to try and reconcile those 2 numbers, if you could.

[Steven R. Downing:]

I think in different markets, at various times, you've seen changes to that, and I think it's been quite a while since you'd see double-digit out-performance versus market conditions in North America. We have had that type of success in international markets for the last few quarters. When you look at it, you look -- especially, like we've mentioned before, some of the downside pressure in the North American market is RCD-related, and it is a more mature market in terms of our history here and our time here. So performing at those type of double-digit increases over market conditions in say, a North American market is difficult to achieve, not impossible, but it is difficult. So we take a little more balanced approach when we look at the automotive market as a whole versus regionally specific. We're pleasantly surprised and working hard to make sure we maintain the performance on the overall market growth, whether it's in a specific region or over the market in general.

[David Leiker:]

Yes. But that 8% to 10% comment, I think, that Brett was talking about was total revenue growth, not just North America. And if we look at 2013, your mirror shipments -- well, Q4, your mirror shipments grew 14% faster than what the end market grew, that's total end market and total mirror shipments.

[Steven R. Downing:]

Yes, that's what I'm saying, though. That's the weighted average over the entire automotive segment, though, not -- inside of any one region, there may be winners and losers in those.

[David Leiker:]

Yes, I understand that. So now if we take it across the whole business on a weighted average basis, you've grown 10% to 12% faster than the end markets historically in terms of mirror shipments. Is that a pace that you would expect to continue to do going forward across the whole company globally?

[Steven R. Downing:]

I mean, we hope so, but that's a -- and like I said, that's in line. That 8% to 10% is in line with our targeted growth rates annually.

[David Leiker:]

Yes, I guess what I'm getting at is the 8% to 10% revenue guidance is lower than the 10% to 12% shipment growth, and I'm trying to reconcile those 2 numbers, whether you think it will grow...

[Kevin Nash:]

I think that plays into your OEC versus RCD mix issue. It's really about the different pricing stuff.

[David Leiker:]

I think the question is beyond -- once we get beyond the noise of HomeLink and RCD rolling off, what's the underlying growth of this business?

[Mark Newton:]

Well, for right now, just a little bit in closing on this, it is management's intention and a corporate goal to sustain the growth that we're having. But we want to also emphasize that the performance numbers that we just announced today are all basically records for the company, and we were stronger at the end of 2013 and in previous quarters. Earlier in 2013, given the choice, we prefer the bigger quarters. And it's our hope to do that. But in our current situation where we're approximately in the high 80s to 90% of the supply for the products that we make for electrochromic mirrors, we want to be careful as to how we explain it. But intentionally, is it the company's intention to try and do this? Absolutely. And part of the reason why, again, as we've said before, we're communicating this information. We're actually also responsible in the management for these areas of the business, as well as this communication. So we should probably confirm that yes, it's our intention to try and do this. The numbers we're giving apply the caution that we have in this as we try to analyze a slowly growing production environment that we hope continues to improve as it has in the fourth quarter.

[Operator:]

And there are no other questions at this time.

[Mark Newton:]

All right, very good. If there are no further questions, I thank everyone for talking with us today and participating in this call. We look forward to any individual calls that we have going forward. Thank you.

[Operator:]

And that concludes today's conference call. Thank you for your participation.