Gentex Corporation (GNTX) Q2 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Gentex Corporation Second Quarter 2013 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mark Newton, Senior Vice President. Please go ahead, sir.

Thank you. Good morning, and welcome to the Gentex 2013 Second Quarter Earnings Release Conference Call. Gentex participants in this conference call are myself, Mark Newton, Senior Vice President; Steve Downing, Vice President of Finance and Chief Financial Officer; and Kevin Nash, Director of Accounting and Chief Accounting Officer. In this call, we will provide an overview of the Gentex 2013 second quarter business, followed by questions and answers, and we will end the call promptly in 1 hour. This call is live on the Internet by way of an icon on the Gentex website at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call. Your participation in this conference call implies consent to these terms. This Gentex 2013 second quarter earnings release conference call is presented under the conditions of the Gentex Corporation's Safe Harbor statement included in the Gentex news release for 2013 second quarter earnings. In this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act as amended that are based on management's beliefs and information currently available to us, and they are also based on assumptions and analyses made by us in light of our experience and perceptions of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will confirm our current expectations, estimates and projections about the global automotive industry, the economy and the…

Thank you, Mark, good morning. Gentex is very pleased to report that in the second quarter of 2013, the company experienced increases in net sales, gross profit, as well as net income versus the second quarter of 2012 and the first quarter of 2013, with continuing positive efficiencies within our operating expenses. For the second quarter of 2013, net sales were $287 million, up 2.4% compared with net sales of $280.3 million in the second quarter of 2012, an increase sequentially from $269.5 million in the first quarter of 2013. Automotive net sales were $279.8 million, an increase of 1.8%, compared with automotive net sales of $274.8 million in the second quarter of 2012, an increase sequentially from $263 million in the first quarter of 2013. For the second quarter of 2013, automotive mirror unit shipments increased 10% compared with the second quarter of 2012 and were up 5% sequentially from the first quarter of 2013. North American automotive mirror unit shipments increased 4% compared with the second quarter of 2012 and were up 1% sequentially from the first quarter of 2013. North American light vehicle production increased by 5% compared with the same quarter last year and increased by 6% sequentially versus the first quarter of 2013. International automotive mirror unit shipments increased 13% in the second quarter of 2013, compared with the second quarter of 2012 and were up 8% sequentially from the first quarter of 2013, primarily due to increased mirror unit shipments to certain European and Asian automakers. European light vehicle production decreased by 1%, compared with the same quarter last year, an increase by 4% sequentially versus the first quarter of 2013. Japan and Korea light vehicle production decreased 9%, compared with the same quarter last year, and decreased by 4% sequentially versus the first…

Good morning, and thank you, Steve. I'll talk to you about operating expenses. ER&D expenses for the second quarter of 2013 decreased 17% to $18.9 million when compared to the second quarter of 2012. However, ER&D expenses were up approximately 1% sequentially versus the first quarter of 2013. The primary drivers for the reduced cost on a year-over-year basis are the planned reduced costs associated with outside contract, engineering and development services. ER&D expenses remained at approximately 7% of sales for the second quarter and year-to-date 2013. As has previously been disclosed, the company has worked diligently in late 2012 to replace its outside contract engineering workforce with permanent long-term hires, and as many of you may be aware, the typical cost for a contract engineer is 2 to 3x that of a permanent hire and the permanent hires tend to be more productive and focused on the overall goals of the company. SG&A expenses decreased 2% to $12.2 million, compared to the second quarter of 2012, primarily due to reduced overseas office expenses, which were partially offset by professional fees and due diligence costs associated with the pending acquisition of HomeLink, as previously announced. Selling, general and administrative expenses remained at 4% of net sales in the second quarter of 2013, as well as year-to-date 2013. Other income was $5.5 million, which was an increase from $3.2 million in the second quarter of 2012. The increase was primarily due to increases in realized gains on our equity investment portfolio. Now on to the balance sheet. Accounts receivable was $120.2 million, up from $109.6 million as of December 31, 2012. Due to the increases in sales and the timing of sales within each quarter, inventories were $116.0 million, down from $159.9 million as of December 31, primarily due to continued…

Thank you, Kevin. In the second quarter of 2013, we are first pleased to report that we continue to receive new company performance awards from customers. Since the beginning of the year, we have been rewarded by our customers for quality excellence from a European automaker, quality and delivery from an Asian automaker, excellence in business partnership from an Asian automaker, excellence in the value from an Asian automaker, supplier excellence from an Asian automaker, technology award for our SmartBeam Dynamic Forward Lighting camera system from an Asian automaker, technology award for our driver assist camera system from a North American automaker, and certificate of achievement for outstanding performance in sourcing to minority and women-owned businesses from a North American automaker. This makes 8 customer quality delivery, product value, business partnerships, supplier diversity and technology awards for our most complex camera products since the beginning of the year. We are working hard to improve all aspects of what we do and we are pleased that our customers are recognizing us for it. In the second quarter of 2013, we are also pleased to report that the company launched auto-dimming mirror applications with automakers worldwide with various combinations of advanced technologies, including Rear Camera Display, Compass, Microphones, Telematics, HomeLink, SmartBeam and Driver Assist camera products and outside mirrors with advanced features. Those are SmartBeam with North American and European automakers, Driver Assist with a North American automaker. Rear Camera Display with European and Asian automakers; Compass with North American and European automakers; HomeLink with European automakers; Inside Mirrors with automakers worldwide; and Outside Mirrors also with automakers worldwide. And we are most pleased that on July 18, 2013, we announced the signing of a definitive agreement to acquire Johnson Control's HomeLink business. Under the terms of the agreement, Gentex will acquire…

Based on the IHS July 2013 forecast for the third quarter of 2013, the company estimates that net sales in the third quarter of 2013 will be flat to up 5%, compared with the third quarter of 2012. The company also estimates gross profit margin for the third quarter of 2013 to be in the same range as the 2013 year-to-date gross profit margin based on the July 2013 IHS production forecast. ER&D expense in the third quarter of 2013 is estimated to decrease by 5% to 10%, compared with ER&D in the third quarter of 2012, primarily due to reduced cost associated with the outside contract engineering. ER&D expense is expected to remain at approximately 7% of net sales, which is consistent with the company's recent historical trend. SG&A expense in the third quarter of 2013 is estimated to increase by 5% to 10%, compared with SG&A in the third quarter of 2012, primarily due to increased costs associated with professional fees and due diligence costs associated with the pending HomeLink acquisition. The company estimates that capital expenditures for 2013 will be approximately $50 million to $60 million, which is in line with our previous guidance. The company also estimates that depreciation and amortization expense for 2013 will be approximately $56 million to $60 million. The company continues in development and all product technology areas and in launch of new awarded business for that technology, including Rear Camera Display, information displays, signaling displays, SmartBeam and Driver Assist camera systems, interior lighting, Microphones, Compass, Telematics, HomeLink, as well as Inside and Outside auto-dimming mirrors with frameless and various curved glass applications. The HomeLink acquisition was done to secure the company's current customers and product offerings and HomeLink mirrors and to enable and expand our capabilities beyond the mirror. Our analysis indicates that the acquisition of the HomeLink business is a more efficient way to return shareholder value versus other alternative uses of cash, including share repurchases because it grows our business, provides new technology, leverages overhead costs and produces positive cash flow, as well as earnings per share. In our previous guidance from the HomeLink acquisition press release, we indicated that the acquisition of the HomeLink business will increase the company's consolidated gross profit margin by 1% to 1.5%. This guidance was given with the assumption that the improvement in gross margin was over and above the current quarter's gross margin performance, which we released prior to and have discussed during today's call. Gentex is planning to fund the acquisition with $400 million of cash and cash equivalents and $300 million in new debt financing. As described in our 8-K earlier this morning, Gentex has signed the commitment letter with PNC Bank in the amount of $300 million, with an accordion feature to increase the available funds in an amount not to exceed $75 million.

Thank you, Steve. This is Mark Newton, again. So in summary, we are very pleased with our second quarter results and we hope that you are, too. Please join us in expressing thanks and congratulations to all of our Gentex associates for their many contributions to our growth and improvement. We can now take questions. Thank you.

[Operator Instructions] And we'll first hear from John Murphy of Bank of America Merrill Lynch.

Just a first simple question on the revenue per year, it looks like we're down a little bit more than 7%, but it looks like mix was pretty negative in the quarter. I was just wondering if you could break down for us or even just roughly that pressure from pricing versus mix, which dominated that 7% decline? As much detail as you can give us there will be great.

Well, I think just to start off to answer your question, I think the first thing, we need -- we view the -- we'll answer the question about ASPs but then separately, the concept that the mix was negative would not be an accurate depiction of what we experienced in this quarter. The mix was actually quite strong. I think it's evidenced by our gross margins. The significant improvement that you see in gross margin is obviously largely affected by product mix. As it relates to ASPs, it's one of the things that we wanted to discuss with you here today, very openly in, fact, is the fact that ASPs are not an accurate reflection of the health of our business, as evidenced by our performance over the last several quarters. In fact, ASP is not an internal decision-making tool and it's not even really considered when we're making business strategy decisions. And with our increase in complexity and the new products that we're offering and obviously, coming forward now, which will also include HomeLink outside the mirror, it's going to continue to be a statistic that's not relevant as it relates to predicting our performance. One of the things that you have seen, the ASP drop is not driven by -- it's not as driven by customer pricing pressure as what you're thinking. It's more a function of the product mix and which products are shipping. And as evidenced, obviously, over the last several quarters, the increased performance is actually moving in a favorable direction as it relates to product mix.

Okay, I understand that but can you help us understand, so you're saying pricing was the main driver of the decline and mix was actually positive in the quarter?

No. No, what I'm saying is that your assumption is that pricing drives ASP decline. There's other things that drive ASP decline and that includes product mix. So in other words, there are multiple products that we sell that are good products for the company that we target for success in growth that are below standard ASPs. And so one of the things that we want to be very upfront with you on is the fact that ASP is not an accurate indicator of future success. In fact, as evidenced by this quarter, we had a significant decline in ASP but we had a significant increase in gross profit margin. And that's why we make a statement that ASP is not an internal decision-making tool because it is just after the fact, after the quarter closed, calculation that is done, it's not something that we look at internally as indicative of whether or not we're going to be successful in the marketplace.

Okay, I'm sorry, maybe I'm confusing the question. I mean if your mirror shipments are up 10% and your revenue is only up 2%, there's a gap there. So what you're saying is you're selling more products at lower price points but higher margins. I get that, I was just trying to understand whether pricing or mix was the driver of that gap of revenue only being up 2% in the automotive segment versus mirror shipments.

I think on the year-over-year basis pricing is consistent but the big drivers on the positive side are, again, favorable product mix within our portfolio, and that's the main driver.

Correct. Okay, and if I can just ask about HomeLink quickly here. I mean as you look at that technology, there's a lot of competition out there in smartphones and in other systems that helped manage households in all different ways. Just curious what you think the real proprietary technology is in HomeLink versus those competition versus companies like Control4, and if there is potentially the opportunity to expand while beyond just the automotive application of HomeLink?

Well, one of the things we want to discuss, obviously is to talk about HomeLink as much as we can. However, like we've announced, we don't actually own HomeLink. We signed a definitive agreement to acquire it, but we're still covered under strict confidentiality and nondisclosure agreement until we actually become the owners of the technology and the product. So based off those requirements, we can't really comment today on the technology or much about the financial performance of HomeLink other than what we've given, due to the fact that we're not the owner of the technology.

Okay, I guess will have to follow-up on that. Just lastly, though, given the funding it looks like you're using a big chunk of cash. Could we assume that the investment portfolio that you've been managing for years will be liquidated and cash will just be cash on the balance sheet going forward? Or will you maintain the investment portfolio?

The company is going to begin the process of lowering our investment levels over the next several quarters. And the debt financing is going to allow us the flexibility to do this in a strategic way so that we maximize the shareholder return in the process.

But at some point down the line the portfolio will not be part of the equation?

As I just mentioned, we're going to continue to work our way out of the portfolio over the next several quarters.

Next question from Steve Dyer of Craig-Hallum.

Quick question on HomeLink and then 1 on the core business. You'd mentioned the accretion that you're expecting. I'm assuming you're talking about sort of non-GAAP accretion because I'm guessing there's going to be a pretty significant amount of amortization that takes place. Is that fair?

No, what we're saying -- there will be some amortization obviously but the accretion is net of the amortization. So what we're predicting is a significant improvement in our EPS performance, net of the increase in amortization.

Okay. And then as it relates to the core business, and I may have missed this, I think you've historically given RCD and SmartBeam shipment guidance as well as sort of an update for the quarter. Any update on those 2 lines of business?

For SmartBeam and Rear Camera Display, we don't believe there are any significant changes to the guidance that we previously provided. However, among the additional changes in the company that we look forward to in this, product specific guidance because of the wide variety of products that we're increasingly having and with more coming now with the HomeLink acquisition, we're not planning to provide product specific guidance going forward. These products are only a portion of what Gentex sells today and what we were hoping to emphasize to you in this call. And we've been working increasingly to do, over the last year, we believed as a company in response to wishes that you had, was to talk more about the total product line. I have been representing our engineering and program management sales community within Gentex for a number of years, and I came into this in the third quarter of last year and we brought more people from the product side end of this calls, we believed in response to the questions that you had. One year ago in this quarter, in response to changes that we had in Rear Camera Display, we came to the conclusion as a company that we needed to do a better job of explaining all of our products to our investors. Based on your response to the Rear Camera Display changes, we had significant changes in our investor opinion a year ago related to Rear Camera Display when in the years since that time, we hope we demonstrated that the business financially didn't suffer the large drop that was concerned or indicated. In the call today and the comments that I made regarding product and technology, I tried to talk about all the products that we do in addition to HomeLink. This is done in an effort we believed to better answer your questions. We have a wide variety of products that we were to sell in inside and outside mirrors with an increasing number of technology features in this. We work on acquisition whenever it's possible to try to add more technologies to it that have a value for this. HomeLink has had an important value for the company for over 10 years, and with that addition, we think we're adding more capability in this. And so, singling out RCD and SmartBeam, which the company has previously done, and which I'm confirming now, we don't have a significant change in the guidance that we previously provided for the year. Going forward, we want to do a better job of talking about all the technologies that we try to develop as a company.

Got you, I understand and appreciate all that. I just -- RCD in particular, it was a very big part of the story for a long time. And then guidance I think was a pretty significant drop off and then again -- but then again in the release today, you talked about new wins with European and Asian automakers there. So just trying to gauge the health of that business given the importance it was given, not that long ago.

We agree with you in that, and that's one of the things that the company leadership and the Board of Directors is trying to apply as we're trying to make changes as to how to we address our communication with you. We do need, as a company, do a better job of explaining that where we had changes a year ago with RCD we continue to market and sell RCD as a value opportunity for automakers. We continue to have new awards with OEMs, despite the losses disclosed previously. And in the 4 customers that we discussed in this call 1 year ago, those 4 customers continue also to buy the product and we're hoping by explaining the total business overall, and if you look at revenues for the company since that time, and the improvements we hope to demonstrate in gross profit and performance as a company, that we do have better balance in the business and we shouldn't single out and emphasize a product as much as perhaps, we did. We're trying to get better and we appreciate your instructions and guidance to us to try and do that. That's what we're hoping to do as a company.

And next we'll hear from Rich Kwas of Wells Fargo.

I just wanted to go back to John's question. I'm still not clear on the explanation because I think in 1 sentence, you said mix was a headwind or is implied to be a headwind year-over-year, but mix has also gotten better. And so, can you just clarify that again because it does seem that price was kind of the bigger driver on the year-over-year basis. And then, the other thing is, are you giving formal ASPs now for the quarter? Because, historically, you used to give the actual ASPs and I know they differ there's a little bit of a calculation difference and I was hoping to get that as well.

So Rich, the short answer is that no, our plan is not to provide ASPs anymore. And for obvious reasons in that, for several quarters and really over the last year, what you've seen is a decline in ASP but an increase in gross profit margin. And so the implication has always been from a company standpoint is that as ASP increases, the profitability should increase as well. And that is true at times, but it's also not true in other moments. So we have products today that we actively market and sell and we want to do in higher volume applications that are below average ASP, but are overall beneficial and healthy for the company. And so in our mind providing ASP as an indicator of success, is not an accurate portrayal of what we're trying to a, accomplish when we're selling to our customers and b, it's not an accurate portrayal of future performance. And so when you talk about the headwind of mix, we don't believe there was a headwind of mix. What we're saying is that mix, the product mix itself was very positive for the company. And the question was from John, I believe, was about, well, you shipped more than -- your units increased more than your sales dollars increase. And that is the case and there's a lot of factors that go into that, including product mix but then also mix between OEM and mix between regions and which products you're selling. So there's literally, hundreds of variables that go into answering why that happened. But the essence of it is and one of the things we want to be, like Mark mentioned, be very upfront with you about is the fact that we actively, as part of our strategy, pursue businesses that are below our standard ASP calculations. And as such, to continue to use that as a leading indicator, is not a good predictor of what we're actively trying to pursue as a business. What we're actively trying to pursue is growth but then also improvements in financial performance especially as it relates to gross profit margin. And what we believe today is that we've done a good job on this last quarter of moving mix in the right direction of hopefully finding a balance between starting to grow but then also delivering money to the bottom line.

Rich, another coming from Mark, sorry. This is another example of something the company is doing with the intention we believed after listening to you. Based on results of how we were being perceived in the market, as I just spoke about, determining that we need to do a better job of explaining all of our products. What we focused on is maintaining and improving gross profit and growth in the business. And within our current product line, this is before we bring in all of the non-mirror applications for HomeLink. We'll have outside mirrors that are very, very good business for the company with good gross profit. We have inside mirrors with SmartBeam HomeLink, Compass and a security indicator. Again, I'm coming from the engineering side, that are radically different in selling price. But both have a different benefit to the business. If we're using average selling price as a measurable with you, we're thinking based on your responses, that we're not explaining the business directly to you. And so, again, we're listening carefully to all of your comments today. We've been working the last year to make changes in pieces coming forward. And with the HomeLink acquisition, we were trying to do a better job of explaining product mix and profitability. We're hoping and what we've tried to explain today to the limit that we can with HomeLink, is that gross profit with HomeLink benefits the company and adds value to the company as well in an accretive way.

Right. Okay, and then, just on this mix issue regarding gross margins. So you had the increase here in the gross margin, you had also a nice bump year-over-year last quarter, if I recall. And exterior mirrors were a bigger percentage of the growth, and that my understanding is that's a higher gross margin product but a lower ASP product. So the question here is, that spread between exterior and interior mirrors, how long does that last? And hence, that would probably continue your gross margin performance in the near term? But any color on that on a go forward basis would be helpful.

Great question, Rich. And thank you for asking that. Mark first. I'll come from the sales side on this. It is not in our best interest to detail further profitability by product line, with our product for obvious competitive reasons and so what we're hoping to do is demonstrate to you generally that our gross profit from product to product, the company targets at and above the range where we're trying to perform right now. And you'd look at our historical performance in this and we worked hard over the last year from $33.1 million to what we've announced today to get to this point in all areas of the business. And so discussing further gross profitability by different product lines, we have market opportunity as we've previously disclosed for growth, for inside and outside mirrors that we hope is considerably available in the market. We're working those products for growth in this. Steve, I think you've got further comments you want to make as well.

No, I think you've pretty well covered it there, Mark.

Okay, so I guess -- I know you're hesitant on saying go forward, but should we expect this type, I mean, exterior sounds like it's more of a focus on your end so, is that reasonable?

No. That's actually not the case. Exterior is a focus. We have wide variety of products and exterior mirrors don't exist without an interior mirror. And so what we try to do is communicate and sell 3 mirror systems, 1 inside mirror, and 2 outside mirrors is our optimum success. And so we do these together and in parallel since we can't sell an outside mirror unless our inside mirror is there.

Okay, and then just a last question..

I think we need to limit the question, we need to move on, we have several on the queue.

Next, we'll hear from David Leiker of Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Two items here. Can you talk about the quarter books revenues in margin came in better than what you're talking about on your last earnings call. Can you talk about where that upside came from, both on the revenue side and on the gross margin side?

Well, the answer to the first is I think probably what you're seeing is pretty consistent in the market right now. As Europe came in stronger than was predicted at the beginning of the quarter. So obviously, we were all questioning what exactly was going to happen to our European shipments. That region actually did not perform quite as poorly as we had predicted or as IHS had predicted for that matter. From a margin standpoint, like we mentioned before, that was partially driven by the regions obviously. And any time the incremental contribution margin, obviously, increases, the sales increase at the end of the quarter. So if you can find -- as sales accelerate towards the end, that's what enables the increase in financial performance as well. But then additionally, like we mentioned and we're talking about fairly openly here is the fact that the product mix has been the biggest tailwind as it relates to gross margin performance. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then in the North America side, your shipments were actually 1% lower than what the North American production was. It's different than what we've seen in the past, what's behind that?

Well, I think if you look at the detail inside of the North American, where the growth came in the North American market, there was very little, if any, growth. I think it was in the range of about 1.5% increase in DNE segment vehicles, which is where we intend to participate with the highest penetration and take rates. If you look at the growth that was in that segment in North America -- in the North American by segment, most of it tended to be in smaller vehicles where we don't have the same level of penetration and take rates. So as these lower level vehicles increase that may make production volumes higher in the whole region but not have a correlating impact to our unit shipments. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then one other item here. As we've been talking, and Mark, you talked about a year ago with the RCD rolling off, my sense is that has started to happen here. And at one point, I think there is guidance that you'd thought 30% decline this year. Has that happened and is it falling at that pace here in the quarter?

Actually, the guidance that we gave annually for SmartBeam in that range is still the case. That hasn't changed. In RCD, yes. Yes, so there's been no change from what we previously guided for the year and that is occurring. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Have we seen that happen in the quarter, though.

It's consistent with our previous guidance.

It's been occurring.

And it has been occurring.

And this is what we guided previously. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then just one last item. On HomeLink, $700 million purchase price there some accretion to earnings. It seems like there's greater accretion buying back stock. Can you talk about the thought process of acquiring HomeLink versus acquiring your stock?

I think, first thing on the HomeLink acquisition itself in the numbers that we've seen on the analyst side being calculated, I think the one thing the statement that we made earlier on the HomeLink section would probably will change some of those calculations in one regard and that is our range of 1% to 1.5% improvement in gross profit margin consolidated for the company is based on what we've -- on the gross profit performance from the second quarter. So I think that will change, probably some of the calculations and expectations on what the total impact is to the company on profitability. Secondly, as it relates to the stock acquisition side, I think there's a couple of factors there. And the first one is there's, obviously, regulations that govern how much shares we can repurchase at any given point in time. And then, secondly, there's the consideration of the fact that it's virtually impossible to buy back that type of volume in the marketplace at today's price. So in other words, that type of demand in the marketplace, we try to -- would tend to drive the price which would not equate to the same type of number of shares that it would at today's price. And so when we look at it overall, the overall anti-dilutive effect of share repurchase is something that we generally agree with and we have done pretty significantly in the last 8, 10 years. However, an acquisition of this kind has other added benefits besides just the anti-dilutive effect of a share repurchase and that includes obviously the revenue growth, the efficiencies that we can achieve and incorporating that with the rest of our business and then obviously the technology and what that technology can provide for us going forward.

Next, we'll hear from Ryan Brinkman of JPMorgan. Keith R. Schicker - Robert W. Baird & Co. Incorporated, Research Division: A couple of questions on HomeLink. Firstly, do you expect that it would materially change your customer or geographic exposures? I'm guessing not. And then secondly, can you elaborate upon the comment that you made, a couple of points, during the prepared remarks about HomeLink allowing you to expand your offerings beyond the mirror? So could we expect that Gentex products might find their way into the center stack of other areas of the automotive cockpit. And how does HomeLink help you do that?

The HomeLink business that we're acquiring since we've been doing HomeLink for approximately 10 years, and thank you it's a good question. We've been doing it in the mirror, and that's what we have as a licensee had with Johnson Controls in a very positive relationship, what we're acquiring is the business outside the mirror in other areas of the vehicle. We're limited to specifically what we can state at this time due to the due diligence. I very, very much look forward to talking about it in the future and we're very excited by it. And if you see HomeLink and automobiles, we're the ones who do the mirror and what Johnson Controls has been doing is outside the mirror and we have as a company been looking for opportunities that are synergistic to the products that we've had success with historically to do that. We're pleased with the opportunities that this provides. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Okay, and then can you just help us to quantify some of the cost with HomeLink embedded in your 3Q SG&A increase guidance? So how much of the 5% to 10% increase is of a one-time nature? And also it looks like that you did cut SG&A in 2Q but maybe a little bit less than you'd guided, so I'm curious if maybe there was some bleeding of cost of one-time nature in 2Q as well as 3Q?

Well, I think if you look back at our first quarter results, there were -- we're looking at our ongoing costs similar to that. And then anything above and beyond that would be considered our due diligence or one-time costs, not expected to recur. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Okay, and then just last question. It looks like North America mirror shipments rose about 4%, which stood just a couple of points below the light vehicle production increase in that region, whereas we're used to typically seeing outperformance in North America shipments relative to production. So how should we interpret this? Is this just a onetime issue? Did your customer exposures help to contribute to that?

Well, I don't know if you heard the answer I gave to David Leiker, I don't want to waste too much time, if I'm boring people with redundancy, but the biggest growth in the market was actually in, I believe, in B segment in North America where we obviously have a presence but not nearly as significant as we have in the higher end vehicles. The D&E segments grew I think in combination somewhere around 1.5% or 2%. So if you look at that if you look at where we participate, we actually grew more than that market grew in the D&E segment vehicles. Most of the light vehicle production increases in North America were driven by smaller vehicles.

David Whiston, Morningstar.

First, on the acquisition, can you talk about if the JCI employees coming over are going -- will Gentex be responsible for any pension or [indiscernible] liabilities those employees have?

Let me go and grab this one Steve. Right now, where we are since we haven't completed the acquisition and since HomeLink is a part of JCI's business, we're in agreement, specifically on JCI, where we can say here Gentex has a successful history of working with JCI employees on the HomeLink. And for today, we look forward to moving to the next step in evaluating those resources needed to integrate the HomeLink business. It's the same on the facilities as well. Until we complete our due diligence and complete the acquisition, we'll have to in the future explain those detail.

I think David, the one key there is inside of our R&D and SG&A guidance, what we're predicting and what we're seeing in the future, there's nothing, as it relates to this acquisition, that would drive that to be out of line with our historical trend.

Okay. With the lane departure product with Mobileye, is that still mostly on more expensive Explorer, Lincoln type vehicles or have you gotten any success moving that into volume seconds [ph] like Camry and Malibu?

Unfortunately, Driver Assist continues for us and generally in the marketplace from what we can see on higher end vehicles, it is a lower take rate feature because of its cost and we absolutely hope that it expands into higher volume applications with higher take rates.

Do you think the bundling on something like that, $6,000 package is a hindrance? Could you get more success if you could break it out or put it into a lower tier cheaper package for consumers?

Actually, from what we compete with in the market and technically, the product by definition is expensive, regardless of whether it's packaged in the mirror and with the success that we've had with drivers, we had to compete with those areas outside the mirror. It's an expensive product.

I think David, if I'm interpreting your question correctly, you're saying if the OEM packages that they sell to customers weren't so expensive could it sell better. Is that what you're asking?

Yes.

Yes, well, in general I mean I think if you ask that question on all of our features, what we would say is yes. We like to sell, obviously, features that OEMs can sell the consumers and they view as a value, too, that being said when we get package there's always times where we believe that we could do better on our own. But that being said, yes, I mean, pricing from the OEM and how they structure the pricing strategy does tend to be a hindrance to volume at times on all of our features.

Okay. Just one more product one and I'm done. With GM and others looking to bring 4G into vehicles is there, down the road, is there any application that Gentex could get in on that trend?

For applications like that, we're always looking and we have capability in our setting those opportunities. Nothing that can be discussed for a future product today. But we're always looking in those types of areas as well.

Mark Johnson, Principal Global Investments.

Just a couple of things on HomeLink. I'm wondering, could you talk about what the revenue growth there has been like the last 3 years? And what I'm interested in is this business has been basically going up-and-down with vehicle production levels. Is it growing faster? Or is it growing less those levels? Could you give some indication of that?

So Mark, unfortunately, what we disclosed already is what we have approved with JCI on what we can disclose as it relates to the history of HomeLink and sales levels. Once we're the owners of HomeLink, we'll, obviously, be free to discuss in a little more detail about the history and then projections of what we think it could become. But as of today, we're limited by the confidentiality agreement and nondisclosure agreement that we have in place.

We were hoping in our comments and we did our best in the call to indicate how valuable we believe the future is.

Okay, second thing, I mean, how many -- what's the property plant and equipment look like that your acquiring from HomeLink? How many facilities is it? Where are they located? Can you say that?

As we'd hope to indicate earlier, at this point, we are in agreement with Johnson Controls that we look forward to moving to the next step in evaluating all the operational and production requirements for HomeLink business. We cannot disclose anything today. We've been manufacturing HomeLink ourselves integrated in our rear view mirror product as a licensee for a long time. At this point right now, because HomeLink is part of an offering that JCI has provided for their electronics business and because it's not complete, we're not allowed to disclose further, and we do look forward to doing that in the future.

Matt Stover with Guggenheim.

I have a couple of questions. I want to talk through some of the gross margin improvement and if you could kind of illuminate how much of that is the result of lower purchase cost. Some other electronic commodity categories, companies are seeing variable variances there. I assume that would be the case for you folks.

I think for our favorable product mix and purchasing cost reductions, we feel that those are equally split as a positive factor on our gross margins. And with that being said, our purchasing cost reductions are in line with our historical average as well. So I think between the 2.

So if I look at the variants year-to-year, I should equally split it between the favorable mix on gross profit basis and purchase cost activities.

Yes, there are some smaller factors not mentioned. We are -- as, again, manufacturing efficiencies are a part of it that they're less of an impact. But so very favorable overall. So I think, between the 2, the primary drivers between first cost reduction and product mix. You could split the difference.

Okay, second question's on HomeLink. There's some fees that are going to burden the third quarter, I guess, presumably those aren't going to be there in the future. Can you just give us a sense of the value of that? And then I guess more generally, if you look at the HomeLink business, my impression is that this is a really high return business. It's fairly well penetrated in North America, where it has its strongest market position and as a result kind of gotten to not necessarily high growth. You mentioned that it gets you outside the mirror, but, in general, if you look at the HomeLink products outside the mirror, their buttons and modules and visors, center stack and overhead modules. How does this actually get you outside of the mirror? And why would getting into visors, center stack and overhead modules be an attractive investment of your capital?

You want to answer the financial one first, Steve, and then I'll address the market.

Go ahead and go with the market.

I'll go with the market. There was a lot in that question. We have, as a company, because we've had have such a strong success in history in electronics growth. Gentex has always had opportunities to do things outside of mirror, in other areas of the vehicle, like the instrument panel and other places. We haven't done so up to this point but we always look for them because we'd like to do it from an area where we're already successful, but we can bridge it. What we're acquiring is HomeLink outside the mirror. And it provides us with opportunities, not to start from 0 outside the mirror. As for example, last year, when the Kids Transportation Safety Act indicated it was going to be approved, which will never occur, and that invited competition outside the mirror. We received a lot of request, often times from our investors, of why don't you make radios. And we didn't think entering a highly competitive market for radios with many, many competitors was a good growth area for the business. And so what we intended to look for are areas where we're already succeeding, which already have a business base outside the mirror, which can take us to other areas in the car, give us a platform for -- they are the same customers but they're different areas of the businesses and this helps us expand with our current customers and we're excited by the opportunity that brings.

But if you look at that, I'd like to follow onto that. It's an important question. I mean, what you have is a transmission module and it's located in an overhead module. It's located sometimes on a dash, it's located sometimes on a visor. But I'm presuming you're not saying you want to get into the plastic formation business of overhead modules, dashes, or visors, or are you?

We're not at a point where we can talk about this yet. We do look forward to it, but if you consider, and I'll try to put it this way, if you consider that this has been a successful business for us in -- as one of our many electronic applications. We sell in combination of many things with the mirror. Our primary competitor for it are those areas outside the mirror. We now have the opportunity, if we can close this acquisition, to have those as well, that it might strengthen our ability in the vehicle with this product. This has, and I think this ties to the earlier part of your question. This has been a successful and growing product for us. We believe, as we tried to indicate in general comments to the extent that we can, on the call, that we see this as a successful and growing product line forward.

So Matt you also asked the question about SG&A guidance, I believe. It was your first..."

Yes.

And you'd mention there was going be fees and we need to take that out because that's not going to be in the future.

Right. So if you look at -- what we were trying to give an indication of before was if you look at Q1 and kind of use that as the chalk line, what we're saying is the Q3 guidance that's above about what the Q level -- Q1 levels are, you can assume that to be cost associated with the acquisition and probably -- it may not be necessarily one-time. I mean one thing we have talked about is that this could delineate a little longer even than Q3. And so what we're trying to do is to make sure we give you guidance that we believe covers us and protects you and all of us honestly for what we believe to be the SG&A costs are associated with going through the final due diligence phase -- and then obviously through the government regulation approval process as well.

All right, thank you. If we could, Steve Downing has to catch flight, we take 1 more question and thank you for allowance in this.

And we'll hear from Brett Hoselton of KeyBanc.

Yes, I just want to follow-up with HomeLink. I guess, 2 kind of bottom line questions. One, outside of the additional $125 million to $150 million in incremental revenue that you're potentially gaining as a result of the acquisition, is your expectation that your new business revenue growth rate for Gentex, as an overall company, will accelerate as a result of purchasing HomeLink? Are you going to grow faster?

Well, 2 things. One of the things we need to make sure that we're very clear about. We cannot give any indication as to what HomeLink has already -- what JCI's projections are for HomeLink or what any of that information is because we are limited by the confidentiality and nondisclosure agreement. That being said, the other limitation here is that we give quarter-by-quarter guidance and we're going to stick to that. But in the context of what Mark's been sharing, and hopefully you pick up on the tone here, is that we are excited about the opportunities this represents for us.

All right, and then you commented that efficiencies are also an important element of the rationale for the purchase. My question there is you cited some margin expansion targets for the acquisition. Are you saying that there is potentially some efficiencies, which could drive some margin expansion opportunities over and above that, or do those already anticipate those efficiencies taking place?

Well, I think, as you indicated, we indicated the efficiencies, but what we're looking at is that we don't disclose it on a quarterly basis. But if you look back at our 10-Q in the balance sheet, you'll notice that as a licensee, there are certain costs that are associated being a licensee. And so some of those efficiencies will come with the business. And then as we work to integrate the manufacturing, the operations, we feel that beyond -- potential beyond the initial integration, we feel like there could be some efficiencies there.

Yes. So to answer your question there's the short term, there's the shorter-term efficiencies that we've given indication of in our previous press release and then also, again, today. Beyond that, there's always opportunity for increased efficiencies as it relates to incorporating this into our existing book of business.

With that, unless there's any other pressing ones, I think we're good for this call and we want to thank everyone very, very much, excellent questions and discussion, and supporting us in this call.

And that does conclude today's conference. Thank you, all, for your participation.