Mark W. Newton - Senior Vice President, Secretary and Director Steven R. Downing - Chief Financial Officer, Vice President of Finance and Treasurer Kevin C. Nash - Chief Accounting Officer and Director of Accounting.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division Jason Rogers David Whiston - Morningstar Inc., Research Division Ryan J. Brinkman - JP Morgan Chase & Co, Research Division John Murphy - BofA Merrill Lynch, Research Division.

Good morning. Welcome to the Gentex First Quarter Financial Results Conference Call. Today's call is being recorded. I would now like to turn the call meeting over to Mark Newton, Senior Vice President and Corporate Secretary. Please, go ahead, Mark..

Thank you. Good morning, and welcome again to the 2014 first quarter earnings release conference call from Gentex. I'm Mark Newton, Senior Vice President, and I'm joined by Steve Downing, Chief Financial Officer, and Kevin Nash, Chief Accounting Officer. I thank all of you for calling in.

In this call, we will provide an overview of the Gentex 2014 first quarter business followed by questions. 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 first quarter 2014 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 items.

Here is Steve Downing, Gentex Chief Financial Officer, with the Q1 financial summary..

Thank you, Mark. For the first quarter of 2014, the company's net sales were $335.7 million, up 25% compared with net sales of $269.5 million in the first quarter of 2013.

This improvement over our initial guidance for the first quarter was assisted by strength in Europe, Japan and Korea and represents a very strong growth quarter for the company despite headwinds created by the previously announced RCD losses.

The gross profit margin in the first quarter of 2014 was 39.1% compared with a gross profit margin of 34.7% in the first quarter of 2013.

The improvement in the gross profit margin is due to the impact of the HomeLink acquisition, improvements in product mix, purchasing cost reductions and the company's ability to leverage fixed overhead costs, which were partially offset by annual customer price reductions.

Net income for the first quarter of 2014 was $68.6 million, up 51% compared with net income of $45.4 million in the first quarter of 2013. Earnings per diluted share in the first quarter of 2014 were $0.47, an increase of $0.15, or 47%, compared with earnings per diluted share of $0.32 in the first quarter of 2013.

Automotive mirror unit shipments in the first quarter of 2014 increased 13% compared with the first quarter of 2013, primarily due to increased unit shipments to certain European and Asian automakers.

As a result, automotive net sales in the first quarter of 2014 were $326.3 million, up 24% compared with automotive net sales of $263 million in the first quarter of 2013.

Other net sales, which includes dimmable aircraft windows and fire protection products, were $9.4 million in the first quarter of 2014, up 44% compared with $6.5 million in the first quarter of 2013. Here's Kevin Nash, our Chief Accounting Officer, with the Q1 2014 financial details..

Thanks, Steve. ER&D expense for the first quarter of 2014 increased 10% to $20.5 million compared to the first quarter of 2013, primarily due to increased staffing levels, 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 expenses for the first quarter of 2014 increased 25% to $13.6 million compared to the first quarter of 2013, primarily due to incremental employment costs and amortization expense related to the HomeLink acquisition.

Other income for the first quarter was $4.5 million, an increase from $1.9 million in the first quarter of 2013, which was driven primarily by increases in realized gains on sales of equity investments.

The effective tax rate for the first quarter of 32.6%, which varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. The company currently expects the tax rate for the calendar year 2014 to be approximately 32.5% based on current tax laws. Now I'll give an update on certain balance sheet items.

Cash and cash equivalents were $375 million, up from $309.6 million as of December 31, primarily due to cash flow from operations. Accounts receivable was $171.3 million, up from $143 million as of December 31, primarily due to increased sales and the timing of the sales within the quarter.

Inventories were $128.3 million, up from $120.1 million as of December 31, 2013, primarily due to increases in raw materials. Long-term investments were $109 million, up from $107 million, primarily due to gains -- unrealized gains -- gains on sales that were reinvested on the company's equity investment portfolio.

Accrued liabilities were $102.7 million, up from $63.5 million as of December 31, primarily due to the timing of certain tax and wage payments.

Cash flow from operations for the first quarter was $98.6 million compared with $97.4 million in the first quarter of 2013, driven by increases in net income but were partially offset by changes in working capital. And capital expenditures for the first quarter of 2014 were $16.4 million compared with $12.7 million in the first quarter of 2013.

And the company continues to estimate that capital expenditures for the calendar year will be in the $75 million to $85 million range.

Depreciation and amortization expense for the first quarter was $19.8 million compared with $13.8 million in the first quarter of 2013, primarily due to amortization expense related to the HomeLink acquisition, and the company continues to believe that depreciation and amortization for calendar year 2014 will be between $80 million and $85 million.

And lastly, on April 21, 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 April 4. And now I'll turn it back over to Mark, who will give a product and technology update..

Thank you, Kevin. On the company's website is a product and technology presentation that we provided in September of 2013 when we became responsible for investor communication. In that presentation, we talked about how our product applications to vehicle production had grown, from 9% on inside mirrors in 2001 to 24%.

And from 4% on outside mirrors in 2001 to 6% today. We explained that our revenues came from sales not to a few but to 22 automakers and that our top 20 platform applications included 16 international applications with an increasing presence in C-class vehicles, which is the fastest-growing vehicle segment today.

We detailed that our ER&D commitment to product development continues as an emphasis historically in the 6% to 7% range of sales.

Further, we included a section called The Future, where we gave a general overview of new products with a statement that 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 now HomeLink electronic modules and other areas of the vehicle outside the mirror.

We recently published our 2013 annual report that is titled Looking Out for You, a theme that was selected with that technology focus in mind with product photos included in it showing new frameless mirrors with new displays, new cameras and new HomeLink applications.

Please, understand that this information is a continuance of that Future section provided last September. The company has been awarded business contracts with various automotive OEMs for this new technology extending to and beyond 2020.

And we are excited that we will be giving further detail regarding new products at our Annual Shareholder's Meeting on May 15 of this year. On March 31, 2014, the National Highway Traffic Safety Administration issued a final rule requiring rearview video systems in the U.S.

light vehicle application space by May 1, 2018, with a phase-in schedule requirement of 10% of vehicles after May 2016, 40% of vehicles after May 2017 and 100% of vehicles after May 2018.

In this release, NHTSA estimated that 57% of model year 2014 vehicles already have a rear video system, and that even without a final rule, 73% of the vehicles sold in North America would have already included a rearview video system by 2018. This NHTSA ruling, as is clearly indicated from the percentage of U.S.

vehicles already having a solution, does not currently indicate an immediate opportunity for new Gentex RCD Mirror applications. Customer opportunities may exist by the time the 100% requirement is in place, but no new material guidance is available from us at this time.

The company's Rear Camera Display Mirror application meets all the technical requirements of the NHTSA ruling when installed in a vehicle and appropriately paired with an OEM-specified camera.

We have previously reported that in anticipation of the NHTSA ruling requiring rear video systems that 4 of our customers had implemented standard equipment rear video display in the radio in place of the Gentex RCD Mirror option and that the company would experience those lost U.S. applications on interior mirrors in 2013 and 2014.

Actual RCD unit shipments for calendar year 2013 decreased 21% as a result, and we expect similar unit shipment decline in 2014. But in spite of this headwind, the company is growing with new technology in mirrors, cameras and HomeLink, and this is the area we are hoping to emphasize with you in this earnings release and in further discussion.

Now I'll turn it back to Steve Downing for future guidance..

Thanks, Mark. Based on the April 2014 IHS production forecast and current forecasted product mix, the company estimates that net sales from the second quarter of 2014 will increase 15% to 20% compared to the second quarter of 2013 and estimates the gross profit margin to be 39% to 39.5%.

The company estimates that ER&D expense for the second quarter of 2014 will increase 10% to 15% compared with ER&D in the second quarter of 2013. SG&A expense is also estimated to increase 10% to 15% compared with the second quarter of 2013.

The integration of HomeLink is a major priority for the company in 2014, and it continues to run in line to slightly ahead of the company's original projections.

And we are pleased with our success in customer approvals, the manufacturing transition to Gentex production at our U.S.-based facilities, integration of suppliers and compatibility partners, order processing, logistics, the sourcing of new business awards, and most importantly, new product development.

HomeLink 5, which combines bidirectional communication capability for garage doors, gates, lights, locks and security systems with the ability to function across the globe, provides us with the technology platform for both integration into our rearview mirrors and expansion of our product line with electronic modules outside the mirror and other areas of the vehicle interior.

HomeLink is the market leader in the interface of vehicle to the home, and we look forward to new product announcements in the future. Continuing improvement in our core electrochromic mirror business together with the complement of HomeLink are driving the growth that we have seen in recent quarters.

The company continues to invest in the future, both in new product development and in continued penetration of existing products. Please, join us in expressing thanks and congratulations to all the Gentex associates worldwide for their contributions to our continued success in the first quarter of 2014. And with that, we can proceed to questions.

Thank you..

[Operator Instructions] And we'll go first to Rich Kwas with Wells Fargo Securities..

A question just on domestic interior mirrors down 3% in the quarter. In the last few quarters, you've been either down slightly or up slightly, but the growth has been pretty muted.

Just curious, what are you seeing there? I know RCD may have -- the declines in RCD have probably had some level of impact in there, but I've kind of looked at that as more of content issue than anything else.

Any real explanation there on what's going on? Because I know you talked about mix of vehicles, mix of production in the past but just wanted to get some further clarity on that..

Sure. Rich, this is Steve. I think you touched on it, and I think last quarter, we discussed it a little bit that we believe that, well, not only the RCD losses in certain situations do drive loss of mirrors at times, so we don't view that to be the case 100% of the time, obviously, because the declines are fairly small.

However, we do believe that when we do lose RCD content in certain applications, we are also losing the mirror sale itself..

Okay, so that, as we cycle through the balance of '14 and get into '15, that should decline in terms of the impact from moving to next year?.

That's our -- yes, that's our belief and our goal, obviously, is to hope to see that level off and start to change once we get through the remaining of these declines..

Right. And I know like we're a ways out from '15, but I mean, RCD, I recall in past conversations, you think that could see some increase next year.

Is that still the case as you see things today?.

That is still the case, Rich, from what we're seeing right now. And since the NHTSA ruling in the Kids Transportation Safety Act, this for the United States specifically, we do continue to see opportunities, as we've said, outside of the U.S. with the product, and we look forward to growth in that after we get past this impact in '14 at this time..

The one thing to point out there, though, is when we talk about the growth of RCD in '15 and beyond, or that potential growth, those are not North American market. Like we've said before, that's a focus on RCD in alternative markets or in expansion markets for us.

So you wouldn't expect to see those sales necessarily in and of themselves RCD sales drive North American units at all because that's not what where we're expecting that growth..

Okay, that's helpful, Steve. And then just with the stock behavior over the last several weeks, stocks coming in a bit [ph].

What is the appetite for leveraging your share repurchase plan as you move forward here given the underperformance in the stock here year-to-date?.

Like we talked about previously, our position on the balance sheet side of things right now is to wait until the second half of this year to make those final decisions on what our positions are going to be as it relates to debt repayment versus share repurchases versus other alternative uses of cash.

So as of right now, we don't -- we're trying to get through this first half of the year and focus on HomeLink and the capital requirements that are associated with it before we engage in the other alternative uses of cash in the second half..

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

Wonder if you could talk about HomeLink, the HomeLink 5 product, how that's tracking as well as any early progress in using HomeLink to penetrate the smaller type vehicles for other Gentex products?.

As we've been working to indicate -- good question -- all of our anticipated goals for HomeLink product development and application are proceeding positively as we indicated when we were approaching the acquisition, and we do look forward to product development releases in the future coming related to this as well since we've been taking over the product.

So new applications and new developments in the product we'll be talking about soon..

I think the other thing to -- associated with HomeLink is our first year in terms of incorporating that into the business, our first and primary focus is to try to stabilize the business, make sure customers are taken care of, and then it's at least 1 year out before we expect to be able to make any change in terms of where HomeLink is located.

Our first responsibility is to take care of the business as it stands today and try to grow it. Longer-term strategies are where the HomeLink location is going to play in.

So I would expect that to be a conversation probably in -- 1 year or more out before any OEMs start to engage a discussion about where HomeLink should reside or what the right location is..

And I guess along the same lines, looking at RCD as a display in the mirror, what type of reception are you getting from the automakers in that regard?.

Video, we'll call it video displays in the mirror, do continue as a product development as we've generally indicated and applications for that, and it is an area of product development for us.

And as we indicated, in 2015, when we included RCD, those applications that are for rear video and additional applications for that, those are all part of the development.

And so as we've stated, we have new displays and new technology coming in this area and probably generally we're seeing, based on similar commentary in the market that we see that larger displays and their potential application in the rearview mirror space. You should always expect that we'll participate in these areas..

And finally, just looking at the other income, the $4.5 million, could you break out what part of that was interest and dividend income?.

Yes, that was approximately $300,000, gains on sale were about $5 million and then the rest of it was offset by interest expense on our debt..

We'll now move to David Whiston with Morningstar..

One item that came out on that April 2 NHTSA ruling was the Alliance for Automobile Manufacturers lobbying NHTSA to -- for the purpose of design flexibility to use cameras as an option to replace mirrors at times. Now I don't think they're necessarily upset with mirrors.

They're looking to get perhaps an aerodynamic angle, but obviously, this would be very bad for your business.

Are you guys lobbying Washington to remind the regulators that snow can block these cameras and that mirrors are still the best option?.

Actually, excellent point, and I'm glad you asked this question. Requests to NHTSA for cameras and video displays to replace automotive rearview mirrors is not new.

This has been, for many years, a consideration and regulatory discussion and specification development, and Gentex has always participated in this regulatory consideration and in the spec review.

In that, primary issues as you've indicated that are most commonly in debate are these mirrors are long-established as the primary safety function for rear vision in automotive today.

If a camera is to replace the rearview mirror, what does the driver do if there is an electrical failure? What happens if the camera lens is blocked? What happens if the camera lens is wet, is covered with ice, snow, dirt, et cetera, depth perception, viewing angle, 2 dimension, 3 dimension and more.

These are all reasons that cameras and displays are currently used as a secondary assist to the mirror primarily in the market today. However, this is also the reason Gentex designs and manufactures both rearview mirrors and CMOS imager cameras and video displays, specifically.

That's why we do both and why we've been shipping these products in production for many years.

We have been and continue new product development in the areas of camera image and performance; camera dynamic range, which is the ability to see in both bright light and darkness; lens optic designs; image processing from the camera to the display; and camera lens cleaning, to name just a few technologies.

We were a market leader in designing and supplying the video camera for the Audi e-tron digital rearview mirror development in 2012. And we look forward to further product announcements in this area.

So for us, overall, it's our intention, and has long been, to participate in both sides of this as market leader, and hopefully that gives you some better information on what we've been doing..

That's very helpful color. Switching to R&D.

You're guiding it up to be double digits, but you've had a lot of in-sourcing there, so is the increase purely just a function of a lot more dollar spend?.

Yes, I think it's continued program development and then on a year-over-year basis, we had the additional employees that came with the acquisition. So it's purely a function of that..

Plus we'd already ran a full year of the lower costs associated with in-sourcing. So now it's comping against a prior period that already included the lower cost..

So once you have HomeLink, would the Delta decline year-over-year?.

Say that again, I'm sorry?.

It probably would've been flat to slightly up..

Oh, okay. Got you..

And then just one last question on with -- you had some really good results overseas.

Do you think Europe is in recovery mode? Are you still uncertain? And is it more strength in luxury channel or in volume channels, too?.

Well, for sure the -- I mean if you look at -- the data was definitely better than anticipated in terms of strength, and then the luxury brands did perform pretty well in terms of sales there. So for us, the auto markets changed in different geographic markets a lot.

So we're cautious before assuming that anything is a trend, but we're definitely pleased with the first quarter results and with the sales support we saw out of Europe..

Our next question comes from Ryan Brinkman with JPMorgan..

Maybe just one on gross margin. I think last year, your margin benefited as the year progressed from favorable product mix.

Can you kind of update us on where you think that you are in that process? Do you view it as like there's already been a step change in the mix toward more lower ASP but higher-margin exterior mirror shipments, and we can now expect comparatively less tailwind? And then also maybe how long do you expect this tailwind to persist as the multiyear trend?.

Well, I think we're through most of that kind of step function up in the margin increases. What you'd see in that guidance, I mean, obviously, the 39.1% and then the guidance that we gave for second quarter is fairly consistent.

So we don't view that trend in OEC strength to diminish any in the near future, but we don't -- also don't see any significant improvements in that either from a product mix standpoint..

Okay. And then just last question, obviously your foreign shipments are growing much more quickly than international light vehicle production.

Can you update us a bit on the relative importance of your different overseas markets and maybe comment on which are the markets that are driving the outperformance? So for example, is the growth more coming from rebounding take rates as the economy stabilizes over in Europe? Or is it about growing quickly off of a small base in China, et cetera?.

It's a little bit of both of those things as you've said. We're happy that it's starting to become visible that we're penetrating, and we're achieving new applications in addition to increasing take rates, so we are adding vehicles and application space, and we're seeing some favorable product mix.

Europe has for some time been -- our European automakers have been our largest application base. When that continues, we're encouraged that production with them is strengthening. We continue to have increasing success in our applications in China as another area for us in this.

And so it's partly our efforts in increasing take rates, increasing applications for outside mirrors, which is a concerted effort as we publicly try to describe, and penetration into new vehicle platforms, particularly, we have, as we've spoken a little bit previously of focused effort on the fastest-growing segments in B and C class vehicles.

We are having some increasing success in that area as well..

One other thing to point out is that last year, for instance, D and E segment vehicles struggled, especially in the European market, and if you look at E especially on the European market and this last quarter, it was up significantly, over 20% increase in E-segment vehicles in Europe.

And if you look at the Japan and Korea regions, D and E, together, were up over 12%. So like we've talked about before, that's historically been where a majority of our business has been focused is in on the D and E segment and for the first time in a while, we saw some real strength in those segments in foreign markets..

We'll now take John Murphy with Bank of America Merrill Lynch..

Just a first question on HomeLink, and I'm not sure if you guys can disclose this now or you might disclose it in the Q, but did you talk about the incremental sales and gross margin that you got from HomeLink specifically in the quarter? Can you disclose that?.

No, Sir..

I think it's consistent with what we guided initially, where you saw our step function in margin from Q3 to Q4 last year, which was 2 to 2.5 basis points, and our actual results flowed with that. And then the annual guidance that we gave was $125 million to $150 million.

And I would say that we're probably at the higher end of that range if you were to extrapolate for the quarter, but beyond that, that's as comfortable as we are in giving HomeLink specific sales..

Is there anything that would seasonally be different with HomeLink than there would be with the mirror business or the auto business in general? Or it's pretty close tagalong on a seasonal basis?.

It's pretty close tagalong in that. Actually, as we tried to communicate as we were working on the acquisition for a close, very, very similar since we've been doing HomeLink in the mirror for almost a decade, part of the acquisition.

Since we do both now, in the mirror and outside the mirror and other parts of the car, the seasonality, the vehicle application space, all consistent with what we're used to..

Okay. And then just a follow-up on HomeLink or 2 follow-ups.

Are there are a lot of synergies that are left to go? I mean if you're in the very early days of pulling this into your facilities, I mean, is there a tremendous amount more opportunity on the margin side for HomeLink specifically?.

No.

I mean, like we talked about, I think when we first -- in the first quarter, we were able to negotiate pretty favorable contracts with JCI during the transition, which helped us get a lot of that benefit almost immediately as they were producing for us on our behalf and now as we begin to produce on our -- for ourselves, that step function increase that you'd expect in terms of efficiencies was reduced, but it was, like I said, it was offset by the fact that we saw a lot of those benefits almost immediately upon the acquisition.

So we're expecting fairly modest increases, and there'd be -- you'd expect to see those probably 1 year or so out because that immediate benefit has been reduced based off the preferential contracts, but -- and it's going to take probably 1 year or so before we get a chance to really work on the full efficiencies of production inside of our facilities..

Got you.

And what percent of HomeLink is being sold without your mirrors at this point on a standalone basis, if you will?.

Yes, we've not disclosed like what the marketing data is related to the percentage of mirror business versus percentage of HomeLink business outside of the mirror. And we're probably not going to disclose that in the future other than to say some of the indications that we gave in the previous announcements as it related to the HomeLink acquisition..

Okay. And then just on the RCDs.

Are there any opportunities where you're selling RCD -- your RCD technology without your mirrors, or is it always coupled with an interior mirror currently or forward?.

Currently today and going forward, our application will be with the interior mirror. That's a good question because LCD mirror technology also is not new.

If you search that on a search engine on the Internet, you will see it's long been a product, but we're going to continue to focus on what we do, selling basically an electronic system with auto dimming, which aids in the performance and visibility of the video display, and the incorporation of additional features, which typically go with a video mirror on our part.

So that's how we're intending to continue to compete and go forward. As we've said before, Gentex competing for vehicle applications that have many, many, many competitors like 1,000 LCD suppliers on the interior of the vehicle doesn't match our model or what we try to target.

So we're going after the engineered side, continuing as our plan today, but good question..

One last longer to your [ph] question, is there any time where you think the EC mirrors could actually be less than 50% of your total revenue?.

Anything is possible, I guess..

Actually, yes, let's talk about that a little bit. We've been very vocal about our intentionality to grow either through development or acquisition. We've said publicly that we are actively continuing to look at opportunities for acquisition and new technology outside the mirror and outside of automotive as well.

So that's not new information for us, and so if we can continue to grow at an above the historic goals from what you and our investors like to see, if it includes growth outside of EC mirrors, that's fantastic..

That does conclude the question-and-answer session. At this time, I'd like to turn the conference back to our speakers for any additional or closing remarks..

I thank you very much. Hopefully, we've added additional information today that we now can go into individual communication with investors and analysts and answer further questions. Thank everyone very much for participating, and maybe we'll get to see you at our Shareholders' Meeting on May 15. Thanks a lot. Bye..

Once again, that does conclude today's conference. Thank you for your participation..