Glenn Wiener Patrick M. Lavelle - Chief Executive Officer, President and Director Charles Michael Stoehr - Chief Financial Officer, Senior Vice President and Director.

Robert W. Stone - Cowen and Company, LLC, Research Division Lee J. Giordano - Imperial Capital, LLC, Research Division Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division R. Scott Tilghman - B. Riley Caris, Research Division Sean P. McGowan - Needham & Company, LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the VOXX Fiscal 2014 Third Quarter Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Glenn Weiner. You may begin..

Thank you very much, and good morning, everyone. Welcome to VOXX International's Fiscal 2014 Third Quarter 9-Month Results Conference Call. Today's call is being webcast from our website, www.voxxintl.com, and can be accessed in the Investor Relations section. We also have a replay available for those who are unable to join us.

We're here at CES and, in my close to 20 years with the company, I have never seen such a strong reception to our new products and partnerships, but I will let Pat cover those details in his remarks.

Before turning the call over, I'd like to remind everyone that, except for historical information contained herein, statements made on today's call and webcast that would constitute forward-looking statements are based on currently available information, and the company assumes no responsibility to update any such forward-looking statements.

Risk factors associated with our business are detailed in our Form 10-K for the fiscal year ended February 28, 2013. At this time, I'd like to turn the call over to Pat Lavelle, our President and CEO of VOXX International.

Pat?.

We are out in Las Vegas at the Consumer Electronics Show, and it's been a great start to the year. So far, there's lots of excitement. We had another record attendance at our press conference and a positive reception to many of our new products and programs.

And based on this, I see no reason, barring any major downward swings in the economy, why we shouldn't be positioned for organic growth next year with good returns.

During my discussion of the third quarter and our year-to-date performance, I will be focusing on sales and market trends as Mike will go into the P&L and balance sheet details when I am done. Our third quarter sales were up $2.8 million versus last year, with growth in our automotive and premium audio business segments.

All of our OEM operations were up. International sales were up, despite consumer weakness in the Eurozone, and most of our domestic businesses were up as well. Sales for the first 9 months of the year are off $6.2 million or 1%.

Some of this decline was expected, and we made a strategic decision to protect certain price points in the premium audio category and transition to new UPP pricing, and by that, I mean, Universal Pricing Program, which caused us to pull back from some online retail sales that did not fit our brand and pricing objectives.

While these moves may curtail sales a bit in the near term, they should strengthen our gross margins and protect our valuable brands. Other factors impacting our top line continue to be the situation in Venezuela, the satellite radio and our exiting of lower-margin product lines.

Year-to-date, these 3 factors represent an excess of $30 million of sales. As for the holiday season, selling at retail in the U.S. was very strong. However, sell-through has been mixed and industry reports I've seen show a similar trend to last year.

CGA, however, is reporting that TVs are, in fact, growing again, which could lead to positive growth for our business as many of our premium audio and consumer accessory products are attachment products to TVs.

Within our automotive segment, which comprises more than 1/2 of our business, it is up 2.4% for both the third quarter and 9-months period, with growth across all of our OEM units. This helped offset declines in the domestic aftermarket, some softness in the Eurozone and the loss of Venezuelan sales.

Our total OEM business for the third quarter is up, and we've consistently grown our OEM business, and I feel confident this is a trend that should continue over the next several years, with bigger gains as some of our newly awarded programs kick off beginning in 2015 and running through 2020.

Our domestic aftermarket business is down both for the 3 and 9 month periods as expected and primarily due to satellite radio sales. To put this into context, this category is down a little over $11 million year-to-date. Some of our other aftermarket lines have been declining as well.

However, we have a number of new products coming to market and in new categories which should help reverse this trend. We've recently taken steps to realign our aftermarket business to focus on new technologies for both the aftermarket and for consumer markets. And I'll touch on that momentarily.

Within Premium Audio, our Premium Audio sales were up 3% for the 3 months and down less than 1% year-to-date. Newer products are selling well, and recent promotions have resulted in greater sales and increased brand awareness.

As I mentioned earlier, we could have posted stronger sales in this category, but we made a strategic decision to protect price and brand integrity and our customers' margins.Sound bars, sound decks and our new music centers have been well received, and we will -- and will be future growth drivers for us.

Our SB 1 and SB 3 soundbars are selling well, and we just introduced 2 new Klipsch music centers, the Klipsch GiG and the Klipsch KMC 3. And literally, just a few weeks ago launched The Stadium, an ultrahigh performance music center with incredible sound priced at $2,000. Magnat and Heco music centers are also -- were also recently launched in Europe.

We are also seeing increased activity in the commercial space. New movie theaters are being built, construction and homebuilding numbers are pointing upwards. We have identified this market segment as a potential growth driver for us as the worldwide economy improves, and we will focus our resources to expand in this area.

Within consumer accessories, sales were off 3.5% during our third quarter and are 7.9% off year-to-date. Softness in the German market, coupled with the fact that we did not anniversary approximately $7.7 million of sales of set-top boxes associated with conversion of analog to digital broadcasting in Germany, was one driver.

The other was the exiting of a little over $12 million in domestic lower margin products. Excluding this, our consumer accessory business is up, although we will always have to deal with end-of-life products and programs.

And while technology will always create an end-of-life challenge per category, we believe we are just about done exiting margin channel product, which should bolster our performance moving into next fiscal year. We also continue to expand our global retail distribution base and the products sold into these channels.

Power and charging products, antennas and our line of Bluetooth indoor and outdoor wireless speakers are driving our growth, and we have a number of exciting new products which makes me confident in our ability to grow organically.

Now let me transition my remarks to some of exciting developments within the company which were announced at our press conference on Monday. The first, the creation of VOXX Hirschmann. Given the opportunities we see in the global OEM market, we've realigned our operations by combining all of our OEM groups into one business unit.

The combination of our Hirschmann, Audiovox in-car, Code Alarm and Invision OE assets should significantly strengthen our status as a true Tier 1 global manufacturer and open up new sales channels for us in the future.

We have over 200 engineers within this group, with product development and engineering facilities located in Europe, Asia and the United States, and manufacturing facilities strategically located in Hungary, Germany and the U.S.

By combining everything into one unit, we'll be in a much stronger position to leverage shared R&D and bring to our customers not just products, but solutions for their end markets across the world.

Solutions that will include our new mobile multimedia tuner modules, systems that house a wide variety of wireless centers into one module, with one ethernet connection to the vehicle's center stack, which we believe eliminates weight, cost and expensive validation fees for our global OEM customers; our new eHub system that allows content sharing between rear seat screens in the vehicle and portable devices; and smart antenna technology for asset tracking in the automotive and transportation industries.

To lead this initiative, we have appointed Ludwig Geis as President and Chief Executive of VOXX Hirschmann. Ludwig is a 30-year veteran of the automotive industry and the former CEO of the infotainment solutions group with Siemens VDO Automotive.

Our team in Europe will concentrate its efforts on the European and China markets and our domestic team will focus on North and South America. As I mentioned previously, another important development is the creation of VOXX Electronics car.

We have folded our aftermarket automotive group into this newly formed operation, and Tom Malone will head up this subsidiary as president.

We will continue to drive mobile innovation by focusing on some of the newer technologies such as connectivity, Telematics, Android-based RSC and more, but VOXX Electronics will expand its focus and develop products within the biometrics and advanced imagery categories.

We believe entry into these markets will reverse the decline in our aftermarket business and set the tone for future growth. At the show, we debuted 2 of these products this week.

Our new 360Fly action camera captures full video in full 360 degrees, perfect for mounting on a skier's helmet, surfboard, skateboard, a bike -- it is the perfect action camera with features and tools that are not available in the market today. Reception to this point has been outstanding.

Myris, our new Iris scanning product allows you to bypass computer passwords and provide a level of security that is second only to DNA. Companies and consumers spend millions of dollars protecting themselves against fraud and protecting their identity. This product has enormous potential as well, both in the enterprise and the consumer marketplaces.

Some of the other new products shown here at the show for the first time, from our consumer accessory group, we unveiled our Bluetooth outlet speakers, a speaker that plugs into your wall outlet and streams music from your smartphone via Bluetooth. You can play, power and charge a device all at the same time from a single source.

Under Acoustic Research, we introduced portable wireless speakers designed for both indoor and outdoor use, and they are our Berkeley and Lighthouse brands.

We're growing our 808 Audio product line with the launch of our new HEX line of portable Bluetooth wireless speakers, quick and easy wireless connections to your smartphone, tablets, computers and other wireless media players. New Duo and Studio over-the-ear headphones round out the 808 Audio headphone line.

We've entered the emergency preparedness market with our the Champ line of products designed for use during natural disasters, power shutdowns and other safety related events. The Champ line is designed around the need in emergencies for lighting, charging, communication and information.

Whether you need to charge a device, make that emergency phone call, have backup lighting and power or simply need to receive emergency updates, we have 3 new products that we've introduced that, we believe, will do very well.

And finally, under our TERK brand, we launched MyWayTV antennas, with streaming Roku service, the first product to give consumers HD over-the-air streaming and programming all-in-one package, with more than 1,000 channels of programming.

In our Automotive group, in addition to all of the products I touched upon earlier, we also announced at the show that we formally entered the ADAS market, that's Advanced Driver Assistance Systems, with a new Driving Video Recorder, a DVR in your car that continuously records your driving and automatically locks in 1 minute before and 3 minutes after an event so it can't be erased or recorded over -- a great tool for consumers, for fleets, for insurers and others.

Our Jensen line launched Jensen DUB Edition, a collaboration with our engineers and creators of DUB Magazine that features amps and speakers designed for the urban global [ph] market, and a line of rear seat entertainment systems with HDMI, MHL connectivity that allows direct connection to your smartphone, tablet or computer, allowing for direct playback of content through your in-vehicle screens.

And in premium audio, we showcased many of our current product lines that have been selling quite well at retail, as well as our new music systems, our soundbars and a complete line of headphones targeting the fast-growing gaming market. In music centers under Klipsch, we had on display our Stadium KMC 3 and KMC 1 systems.

All have been well received, and we are expecting strong growth from this category in fiscal '15. In soundbars, our SB 1 and SB 3 continue to be flagship products. This is another expected area of growth. And in headphones, a complete line of in-ear headphones with our S4, S3m, X7, and X11i models.

And in the on-air category, we had our new status headphones on display, as well as our Image 1 Bluetooth models. And lastly, our new KG200 and KG300 gaming models. I know that's a lot of information, but there are a lot of exciting new products that we've unveiled at the show.

To sum it up for the most part, we've been tracking to plan, and I remain bullish with our prospects over the next several years.

I think we're in a position now, with much of our transformational programs complete, to grow our core business, and while making the right tactical acquisitions that will extend our market penetration across any and all of our 3 business segments.

For fiscal year '14, we see sales being a bit lower than initially projected in the $825 million to $830 million range. Not a major shift. We believe we'll achieve the 28.8% growth profit margin that we previously guided to.

Our expenses are in line, and we have had an increase in other income that will positively impact net income, EBITDA and cash flow.

And as a result, we expect a roughly $3 million improvement in EBITDA versus forecast now guiding to $65 million, and roughly a $3 million improvement in our free cash flow forecast now guiding to approximately $40 million. We're not in a position today to provide firm guidance on next fiscal year. It's just a bit too early.

But with everything we know and have lined up, coming out of the show in terms of new products, customer placings, new programs that we have in development, I see no reason why we can't grow our core business by 3% to 4% in fiscal '15, and additional growth coming from some of the new categories that we're just introducing at the show.

If the global economies rebound any quicker or if any of the bigger programs or deals we're pursuing materialize, potentially, we will see a bit more. I'll refrain from that type of optimism until I see a stronger U.S. retail environment and more growth coming out of Germany and the Eurozone. But for now, I feel good about our prospects next year.

Today, we manufacture approximately 30% of our products, and we develop a good number of others through a profound and aggressive commitment to R&D. We are focused on developing unique solutions for our customers and end consumer that will enhance the delivery of content in both portable and mobile environments.

The capital investments we made this year will lower our fixed expenses next year and beyond, and we are continuously looking to lower costs where we can, while investing in future business opportunities.

I look forward to increased improvements in the domestic market and a gradual improvement in the Eurozone during 2014 which should bode well for us. We're executing on our strategy and hitting our milestones, and I remain confident in our market position and potential.

And with that, I'll turn the call over to Mike for a review of our financial performance, and then we'll open it up for questions..

we adjusted $4.3 million for the contract shortfall payment due as I've just discussed, offset by $63,000 in stock-based compensation and $32,000 in restructuring charges. In the comparable third quarter last year, we adjusted $215,000 for net settlements, offset by $63,000 for stock-based compensation and $56,000 related to acquisition cost.

For the 9-month comparison, we had $4.3 million for contract shortfall payment due; $4 million in net settlements; approximately $900,000 in Circuit City recovery; $200,000 restructuring charges associated with our Asia warehouse facility.

This was offset by $1.3 million in restructuring charges related to Klipsch and $552,000 for stock-based compensation. Note, the restructuring charges are a result of our ERP upgrade, which permitted the consolidation of administrative and operational groups at Klipsch onto our VOXX platform.

The fiscal '13 for the 9-month period, we adjusted $7.7 million for net settlements, $2.7 million related to the loss in foreign exchange contracts due to Hirschmann acquisition and $1.7 million in acquisition-related cost.

Approximately $800,000 in charges related to the change in our Klipsch warehouse in Asia and approximately $200,000 in stock-based compensation. We are now completing the last phase of the Klipsch integration. We anticipate there will be further restructuring charges in the fourth quarter of approximately $1 million related to severance for personnel.

As a result, our fixed expenses in the future year periods will be lower and, equally important, we will be able to operate more efficiently. Looking forward, we are raising our EBITDA guidance from $62 million to $65 million, and we're operating free cash flow from $37 million to $40 million. Now to our balance sheet.

Our AR turns were 4.6x in fiscal 2014 versus 4.5x in the comparable period fiscal 2013. This is due to the shift in our sales mix and customers. Our inventory turns were 3.3x compared to 3.2x for the same periods last year as our distribution programs continue to impact our inventory levels.

Our cash position was $16.3 million as of November 30 versus $19.8 million as of February 28. Our total debt as of November 30, 2013, which is inclusive of all mortgages and capital leases, stood at $140.9 million, compared to $199.5 million as of November 30, 2012. We reduced this by approximately $60 million.

Our bank debt as of 11/30 includes $48.8 million of borrowings under our term loan and $66.5 million under revolver for a total of $115.3 million versus $180.6 million last year. As of today, our bank debt is $107 million.

As I noted on last quarter's call, our borrowing needs increased in the third quarter and into the early parts of the fourth quarter to support the peak selling season over the holidays, and then it comes down. We are well on track to exit this year with total debt less than $100 million, with a leverage ratio under 2x.

Our leverage ratio as of the quarter end was 1.92%, and our borrowing spread in the fourth quarter will be 1.75% and will further be reduced in the first quarter to 1.5%. This is down from 2.25% last year. Additionally, CapEx for the third quarter was $3.9 million. And through the first 9 months of this year, CapEx is approximately $9.6 million.

We are still looking at CapEx for the year at slightly north of $12 million. We announced this morning a third amendment to our bank facility with Wells Fargo as the administrative agent. The new amendment sets up a $200 million revolving credit facility with LIBOR plus a range of 1% to 2%, subject to the company's total leverage ratio.

This amends the previous facility where we had a $110 million revolver plus a $75 million term loan, payable $15 million per annum, with a pricing range of LIBOR plus 1.25% to 2.25%. As a result, our availability under the old amendment as of 11/30/13 was $43.5 million, would have been $85 million under this new amendment.

As of today, our excess availability is $93 million as our debt has been reduced from $115.2 million as of 11/30, 2013, to $107.2 million. The terms and condition of this facility provide more flexibility and supports the company's future financial needs.

In summary, while we have guided sales slightly lower, a lot of it is due simply to business decisions and things we do have control over. Margins are tracking generally in line with where we thought they'd be as our expense levels.

We're investing now and aligning consolidating our operations to lower expenses in the future, and we'll continue to be opportunistic in this regard. Our inventory positions are clean, our balance sheet is in good shape and we're paying down debt and increasing our flexibility, which is important to us.

Our revised banking agreements provide us with more resources to support our growth, and I'll reiterate what Pat just said. We believe we're ending the downward sales trends and see opportunities for expansion as we move forward in the next fiscal year.

As a result, we are focused on making sure we're generating more cash, strengthening our balance sheet to support the projected increase in sales on our acquisition initiatives. That concludes my remarks. John, Pat and I will be happy to take any of your questions.

Pat?.

Thank you, Mike, and at this point, we'll open it up for questions..

[Operator Instructions] Our first question comes from Robert Stone..

The first thing I wanted to ask about was gross margin. I think you said you're still expecting to get to your target for the year, which looks like that would imply a sequential improvement in the fourth quarter.

Can you just confirm if I'm interpreting that correctly? And what would drive the rebound in margins in the last quarter?.

There are 2 things there. One is we had a little bit more promotional activity in the third quarter being the Christmas quarter than we will in the fourth quarter.

And then, traditionally, our margins will drift upwards in the fourth quarter because a number of the MDF programs, volume incentive rebates, that we maintain with our customers are accrued at 100%, meaning that we expect everyone to hit.

And then towards the end of the year after Christmas, we can determine who's not going to reach their numbers and we essentially release those reserves back into profits, which gives us a boost in our earnings, typically in every fourth quarter.

We're going into the fourth quarter in a better position than we were last year coming out of the third quarter, so I do believe that we'll be able to meet that 28.8% guidance that we gave earlier in the year..

Great. A follow-up question, if I may, on operating expenses. So you mentioned that there would be a charge in the fourth quarter related to severance, and I was thinking that with the reorganization and combining a number of things into the 2 new entities that there might also be some opportunity for synergies.

So can you say what the impact should be on the quarterly run rate of operating expenses taking those actions into account?.

Well, it changes a little bit from quarter-to-quarter.

But basically, what we'd looked at when I announced previously that the rules that we've made with the consolidation that we put in place this year should save us approximately $4 million in overhead, okay? But we're picking up in the -- what we've picked up so far this year and what we pick up in the fourth quarter is severance expenses and some realignment expenses, relocation expenses that should not and will not repeat next year.

So really, the work that we've done this year will be reflected in our overhead next year..

So $4 million on the year, it's about $1 million a quarter....

Approximately..

The last question I had is with respect to the classifications, there was a fairly significant drop in the amount of engineering and tech support expense in the quarter versus the prior quarter while SG&A went up.

Well, was there something special going on there in engineering?.

This is Mike Stoehr speaking. Inside the Q, by the way, is a much more detailed explanation on Page 14. But basically, the company operates on programs where we receive milestone payment for expenses related to projects. We did receive payments in the third quarter, as well as there were certain charges made, so the net was about $3 million..

Okay. So that probably rebounds to a more typical run rate and....

You will see, it's not sequential, but there are payments from time to time as we meet milestones that came in..

Our next question comes from Lee Giordano of Imperial Capital..

So it sounds like for your guidance next year of 3% to 4% growth in the core business that there might be some upside from new categories.

I was wondering if you'd talk about which categories you see as providing some upside to next year and the timing of the shipments when some of these launches might start hitting the P&L?.

We're anticipating that within the 2 new categories that we showed here at the show, the imaging and the biometric category, we'll start to see sales in the April, May, June time frame as we introduce those products.

The -- what I see is, as Mike had indicated, we have come pretty much to the end of the exiting of lower-margin products as the life cycles of those products end. So I don't think we're going to be fighting that as we go into 2015.

We'll be -- it'll be the normal CE average selling price drop and things like that, and our new products normally offset that and give us growth. So with what the existing teams are doing of looking at 3% to 4% on our core business, and then when we factor in some of the new categories, they can potentially be explosive.

The new 360Fly that we're introducing is a 360-degree camera that will record everything around you as you ski or as you surf, and that is clearly a technology that surpasses what's out there in the market today. The response that we've received in that show, it has been very, very good.

So any sales that we pick up with that product will be added on to the core increases in sales that I expect. And then also our Iris product, again, very, very good reception here at the show and, certainly, sales that we will realize during the year, which will further increase sales in these new categories.

So depending on how quickly you get it to market and the reception that we get from retailers, as far as placement, a lot of times the big retailers, even though the product is ready, they are not ready for replacement so we may have to wait until a September launch or something like that.

Those will be the impediments to just growing the sales as soon as the product is ready. But all in all, we anticipate some good growth there. Now with that said, there is an investment in building the distribution, whether it be in displays, whether it be sliding charges or things like that, that we will incur as we get ready for this introduction.

But all in all, I expect some good sales in these categories, which will add to our organic growth..

Our next question comes from Mike Malouf of Craig-Hallum..

First question is on gross margins as we look out into fiscal 2015. I know that your target was always to try to get the overall company to 30%.

Is that still a good target for you guys? And maybe in the same realm of the question, when you look at 2015, do you still see any amount of product that you need to exit, maybe it's even $10 million to $20 million, or do you think that headwind is gone now?.

As far as the margins, we'll be consistent with, I think, what we're seeing right now, unless we do another acquisition with the criteria that I've laid out in the past, and that it'd be something north of 30% that will help drive our margins towards our target of 30%.

So with the current product mix that we have today, some of the categories that were introduced are a little bit lower as far as their margin structure as been some of our other products. So I think where we are right now is something that we can look at.

But as we do an acquisition or as any of these new categories come on, they, I fully expect, will favorably improve our overall GP percentage.

As far as the exit of product, there will always be an end-of-life category that we're going to have to deal with and we always have to deal with within the consumer space, especially at retail, dealing with average selling prices that drop. So a 10% drop means that we have to do 10% more in volume just to stay even.

But the issues that have faced us over the past 3 or 4 years where we had a number of categories that were going through their end of life cycle, that we do not see repeating. So it will not have the impact that we've seen in recent years..

Okay, great. And then, with regards to acquisitions, it looks like the balance sheet is in a much better place than it was a year ago, given you -- and then, obviously, with this new credit agreement, you have the flexibility to, I guess, get back out there and look at acquisitions a little bit more aggressively than you had.

Can you talk a little bit about the environment now, how's pricing? Are you seeing a lot of opportunities?.

When we went into fiscal 2014, we had indicated that because of the ERP upgrade and the consolidation that we were going to have on the back end of some of our operations, that we would focus on that and not the acquisitions.

However, we are fully back to looking at acquisitions, companies that will fit the criteria that we've laid out, and that will fit within the existing groups so we can leverage existing overhead. There is activity. We are talking to companies. As far as valuations, that remains really depending on the company or the category that we're talking about.

But with the economy improving and with generally margins improving and within companies, you can expect to see some multiples improving as well..

Our next question comes from Scott Tilghman of B. Riley..

I wanted to touch on a few of the items, first off with respect to fiscal '15 revenue guidance. Obviously, no Venezuela in there. It doesn't sound like any currency benefit, no growth from some of the new categories.

And Pat, you hinted at this a little bit, but I'm curious if you need to explore some new retail channels, new retail partners in rolling out some of these products?.

Yes, and that is part of the investment that we will make, whether we -- right now, our traditional distribution model does not go heavily into surf shops, board shops, ski shops and things like that. So that's -- those are some of the areas that we would have to build up.

And then, we are currently in a position of bringing on people with experience in those channels, contacts in those channels. So those are the types of investments that we will be making, along with the other investments needed to market the product and so forth.

So it will be an expense, you'll see it within our upcoming quarters and some of those expenses will impact the quarter because we won't have some revenue. But I would think that, with a April, May rollout of most of the products, that any introduction of these products will be very accretive to the company during the full fiscal year..

So second, I wanted to touch on operating expenses and make sure I'm hearing you correctly. It sounded like there are 2 $4 million discrete benefits heading into fiscal '15, one from the restructuring activity and second, from the overlap of the ERP implementation.

Is that correct, or are you talking about the same $4 million?.

Well, it's definitely no. That's pretty much the same. Because basically, what we're looking at, the ERP implementation allowed us to take down certain back-end overhead. So we couldn't get that done until we had the ERP system in. There are some expenses that are associated with the ERP system.

But really, it is the overhead that we've been able to eliminate -- the duplicated overhead, that we've been able to eliminate because of the ERP implementation..

Next thing I wanted to touch on is just the EBITDA guidance. Obviously, you offered the GAAP and the adjusted. Are we looking at the $65 million as being an adjusted figure or a GAAP figure? And then, separately, I wanted to verify that you're not including the debt discount amortization in that figure..

So this is Mike speaking. It's the GAAP EBITDA, and the debt discount is not -- is out of it, dated back..

Great. And then last thing, and I'll turn it over to someone else.

The guidance for debt levels below $100 million, are you talking the bank debt only or the total, including the capitalized leases?.

It will be the bank debt..

[Operator Instructions] Our next question comes from Sean McGowan of Needham..

I have a couple -- I wanted to follow up on an earlier question regarding the engineering and technology services expense because I didn't quite get the full answer.

Is the -- should we expect it in the fourth quarter to kind of go back to the rate that it was at in the second and first quarter? I mean, it's been kind of an extended streak of growing, not only in dollars, but as a percentage of sales, so should we see a rebound back up to much higher level in fourth quarter?.

Well, basically, what we look at, we've brought on a number of engineers to work on -- actually, in the third quarter, we brought on approximately 26 new engineers within our European operation to work on the many different programs and products that we're set to deliver over the next 2 or 3 years. So that will be constant within our R&D spend..

Well, I figured that, but you're not going to see any offsets like you did in the third quarter?.

As far as the offsets, as we hit milestones -- within some of the contracts that we have with our OEM customers, as we hit milestones, we are paid nonrecurring, engineering, and those expenses, yes, do offset overhead -- the overhead expense.

And that -- we have many programs where we will be receiving income as we deliver a particular sample or as we get closer to launch date and meet the milestones that are built into our contracts..

So the timing is not really that certain? Okay. And then....

I mean, it's based on -- again, there is certain timing where we do have to meet, we have to deliver a sample -- a working sample of this or that by this particular date. That's what the teams work on, making sure they maintain the launch dates, maintain the milestones.

Because that -- within the OEM space is very, very disciplined because of the production of the vehicle, you have to stay online with the production of whatever part it is that you're manufacturing for that car. Otherwise, you throw the whole schedule off.

So it's very disciplined, and those milestones are worked at and we work very, very hard to maintain them. One of the reasons why we brought in additional engineering is to make sure that we were maintaining the different milestones and the launch dates for our partners..

Okay. And my other question was for Mike on -- talk a little bit about factors that made the tax rate so low in this quarter and what should we expect for the balance of this year.

And should we just be assuming kind of a 37% rate going forward?.

Yes. What happened, we've got tax credits from Venezuela on a hyperinflationary accounting which offset the reduced tax rate for the quarter to 29%. You can continue to use 37%. We are very aggressive in our tax positions. But for GAAP purposes, you can use 37%..

I'm showing no further questions. Please proceed with any further remarks..

If there are no further questions, I would like to thank you for your interest in joining us this morning. We're very excited about what's coming out of the show, and we're looking forward to really getting into some of these new products and seeing all the different things that all the different groups are working on.

We're moving in and we're starting 2014 on the right note. So with that, I wish you a good afternoon. And once again, happy new year..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day..