Good morning, ladies and gentlemen, welcome to the Gentex reports Fourth Quarter 2016 and Year End Financial Results Conference Call. Today’s call is being recorded. And now, I would like to turn the meeting over to Mr. Josh O'Berski with Gentex, Investor Relations Manager. Please go ahead, sir.

Thank you. Good morning and welcome to the Gentex Corporation's fourth quarter 2016 earnings release conference call. I am Josh O'Berski, Gentex's Investor Relations Manager and I am joined by Steve Downing, Senior Vice President and Chief Financial Officer; Kevin Nash, Vice President and Chief Accounting Officer; and Neil Boehm, Vice President of Engineering. This call is live on the Internet by way of an icon on the Gentex Web site 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 Gentex Safe Harbor statement included in the Gentex Reports fourth quarter and year end 2016 financial results press release from earlier this morning and as always shown on the Gentex Web site. Your participation in this conference call implies consent to these terms. Now, I will turn the call over to Steve Downing who will give the fourth quarter 2016 financial summary.

Thank you, Josh. For the fourth quarter of 2016, the company reported net sales of $419.9 million, an increase of 4% compared to net sales of $405.6 million for the fourth quarter of 2015. The increase was primarily due to a 4% increase in auto-dimming interior and exterior rear view mirror shipments on a quarter-over-quarter basis. During the fourth quarter of 2016, our raw material shortage of a specific commodity which is used in the majority of the company's interior and exterior auto-dimming mirrors impacted the ability of the company to meet full customer demand for the fourth quarter and resulted in a negative impact to unit shipments and revenue for the quarter. Also during the most recently completed quarter incremental plant shutdowns at OEMs and inventory adjustments at certain Tier-1 customers negatively impacted quarterly unit shipments in revenue. The combined negative impact on revenue of these issues was approximately $15 million in the quarter. For calendar year 2016, the company's net sales increased 9% to $1.68 billion compared to $1.54 billion for calendar year 2015 primarily as a result of a 9% increase in auto-dimming interior and exterior mirror unit shipments. The gross profit margin in the fourth quarter of 2016 was 40.3% compared with a gross profit margin of 40.2% in the fourth quarter of 2015. The positive impact of strong advance feature shipments during the quarter as well as purchasing cost reductions more than offset the cost and inefficiencies associated with the aforementioned raw material shortage and sales shortfall as well as the customary impacts related to annual customer price reductions. For calendar year 2016, the gross profit margin was 39.8% compared with the gross profit margin of 39.1% for calendar year 2015. For the full year, favorable product mix as well as purchasing cost reductions more…

Thank you, Steve. Auto-dimming unit shipments in the fourth quarter of 2016 increased 4% compared with the fourth quarter of 2015. And for calendar year 2016 increased 9% comparing with calendar year 2015. As a result automotive net sales in the fourth quarter were $411.5 million up 4% compared with $395.9 million in the fourth quarter of 2015. And for calendar 2016 were $1.64 billion up 9% compared with $1.51 billion in calendar 2015. Other net sales were $8.4 million in the fourth quarter of 2016, down 13% compared with $9.7 million in the fourth quarter of 2015. But for calendar 2016, we were up 7% to $39.2 million when compared with $36.7 million in calendar year 2015 primarily due to a 15% year-over-year increase in fire protection sales. The effective tax rate during the fourth quarter of 2016 was 31.2% which varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction. Now for some balance sheet items which represent comparisons of December 31, 2016 versus December 31, 2015 unless otherwise noted. Cash and cash equivalents were $546.5 million down $5.1 million from $551.6 million due to share repurchases, capital expenditures, purchase of short-term investments, cash dividends and accelerated debt repayments but was mostly offset by cash flow from operations during the year. Accounts receivable was $211.6 million up from $196 million primarily due to the timing of sales within each of the periods. Inventories were $189.3 million up from $174.7 million, short-term investments were $177 million up from $4.5 million, long-term investments were $49.9 million down from $95.2 million both of which were driven by changes in investment mix. The accounts payable was $80 million up from $66.4 million primarily due to increased inventory purchases and capital expenditures and accrued liabilities were $69.9 million up from $64.7 million. Cash flow from operations for the fourth quarter of 2016 increased to $118.4 million from $68.4 million in the fourth quarter of 2015 and year-to-date cash flow from operations increased $471.5 million from $351.6 million in calendar year 2015 both primarily due to increases in net income and changes in working capital. Capital expenditures for the fourth quarter were $29.5 million compared with $35.7 million in the fourth quarter of 2015 and calendar year 2016 CapEx was $121 million compared with $97.9 million for calendar year 2015. And lastly depreciation and amortization expense for the fourth quarter was $19.7 million and for calendar year 2016 was $88.6 million. I will now hand the call back over Steve for a business development update.

Thanks Kevin. Despite the supplier issues, inventory adjustments that occurred recently, the fourth quarter and last few weeks have been a very exciting time for Gentex. The company presented at the SEMA automotive aftermarket show in November and debuted our new aftermarket version of the Full Display Mirror as well as a new HomeLink module designed for utility and ATV vehicles. This event was followed quickly by the CES show in January where the company debuted several new technologies. Our booth this year was anchored by new products that addressed two of the emerging trends in automotive, camera monitoring systems or CMS and the connected car. The Gentex product offering showed a fully functional three camera system in combination with our new Full Display Mirror. Two of the three cameras were housed a newly designed exterior mirrors behind our electrochromic glass, while the third camera was located in the short fin antenna on the roof of the vehicle. The exterior mirrors were designed as a much smaller package to reduce weight and drag, while improving fuel economy. This system offered the benefits of our full auto-dimming capability and functionality, while providing a protected and ideal location for the cameras. The third camera, which was uniquely packaged in the short fin antenna offers a high location on the car with optimal field of view and the best overall performance for bad weather environments. These three camera feeds were then combined into our new generation tool Full Display Mirror as a location of the video output and demonstrated several new display concepts that included software enhanced images dynamic warning indicators, split screen as well as imagery that displayed all three cameras together into a single panoramic view. We believe this combination of traditional electrochromic mirrors and the new digital camera and display…

Thank you, Steve. To being, we would like to provide an update on the full display mirror launches. As we have discussed previously General Motors was our launch customer for this brand new technology and through the fourth quarter of 2016, our full display mirror product is now available on six different name plates in the GM line up. At CES in 2016, we debuted FDM on the Cadillac CT6 and XT5 in our booth. This was quickly followed by the Cadillac CTS and late during the year by the Cadillac Escalade and the Escalade ESV. The latest launch for FDM product came in the fourth quarter on the Chevy Bolt. This vehicle represents the first non-Cadillac branded vehicle in GM's line-up to offer our full display mirror. Additional OEM launches for FDM are expected to occur this year, and will be announced once our customers make this information available. On the launch side, the company has continued to demonstrate solid growth not only for our inside and outside electrochromic mirrors but also for advanced technology products that are often housed inside of those mirrors. In 2016, the total number of launches for the company was approximately 10% higher versus the number of launches in 2015. The fourth quarter was extremely strong as it relates to net exterior auto-dimming mirror launches with the fourth quarter representing the strongest quarter of the year and one of the highest net launch grades in company history for our exterior auto-dimming mirrors. The company also continues to grow the number of applications with our advanced features. Over the last year, we have spent time further explaining interior and exterior auto-dimming mirror growth rate and the importance of advanced features in driving revenue growth. Currently, our advanced features account for approximately one-half of revenue growth which is primarily driven by the growth of frameless interior mirror executions and electronic content from SmartBeam, HomeLink, compass display, lighting technology and the full display mirror. For the fourth quarter and calendar year 2016, advanced feature launches represented about 60% of all interior, auto-dimming mirror launches for the company which is the head of our historic level and represents the strength and feature growth and complexity of our product offering. I will now hand the call back over to Steve for 2017 and 2018 guidance and closing remarks.

Thanks Neil. Our guidance for calendar year 2017 is based on the mid-January 2017 IHS production forecast for light vehicles produced in North America, Europe and Japan/Korea market. The current IHS production forecast for these markets is expected to increase 1% for calendar year 2017 and based on that the company estimates that net sales for calendar year 2017 will be between $1.78 billion and $1.85 billion. The company estimates that gross profit margin for calendar year 2017 will be between 39% and 40%. Annual customer price reductions continue to be a known headwind for the company. However, with the current projected 2017 sales forecast and our projected product mix for 2017, we believe that we can offset the majority of those annual customer price reductions with purchasing cost reductions and operational efficiency. From an operating expense standpoint, the company expects ER&D and SG&A expenses for calendar year 2017 to be between $165 million and $172 million. Based on current tax laws, the company estimates that tax rates to be between 31.5% and 32.5% for calendar year 2017. And to continue to support future growth and program launches, the company estimates the capital expenditures for 2017 will be between $115 million and $130 million. And lastly, depreciation and amortization is estimated to be between $95 million and $105 million for calendar year 2017. When looking at IHS' forecast for 2018, production in our primary market which is currently forecasted to increase by 1% over 2017 production, the company estimates that revenue for 2018 will increase approximately 6% to 10% over currently forecasted 2017 revenue. We can now proceed to questions. Thank you.

[Operator Instructions] And our first question is from the line of Chris Van Horn with FBR. Please go ahead.

Good morning, guys. Thanks for taking my call and congratulations on the continued margin performance.

Thanks Chris.

And just first question on the revenue headwinds in the quarter. Could you just give us a sense of the timing of these, are they short-term in nature, were they one-time in nature, do you see anything maybe reoccurring. And then, on the plant shutdowns, was that an idling or was that just programs kind of going away?

Sure. First on material shortage that was one-time in nature. By the end of the quarter we feel like we have secured enough material to get us back into solid position. Obviously, we talk about the operational and efficiencies of having supplier shortages that costs -- it costs money. We believe we have incurred most of those in the fourth quarter. There are some slight cost that will occur in Q1 but we don't think they are material in that they are not going to change the operational performance of the business significantly. When you look at the revenue shortfall on the Tier-1 side, we believe those are one-time in nature, we should make up those sales. Predominantly in Q1 but really throughout the rest of 2017, this has happened, about two years ago we had a similar issue. It's really typically based on our Tier-1 customers, the amount of inventory they are carrying and then them going through their end of year process and make an adjustments based off inventory levels. And then, you look at the OE shutdowns, these were really one-time in nature and that they were increased shutdowns versus what was already announced from the OEM side. So we don't believe those will have any residual effects. We don't think there is any out plans shutdowns beyond what's already publicly available, so we should see a recurring -- kind of recurrence to normal revenue levels with the beginning of Q1.

Okay, great. And then kind of looking forward and it's really on the heals of all the products and also the CES. Could you give us a sense of what -- you saw what attraction from your customers at the show. And then, you kind of exceeded this 50% of advance features number and that has couple of quarters. Do you have a goal in mind of what that number could wind up to be just going forward?

Sure. First on the CES side, I think Neil and I will probably kind of jump in. There was couple of comments around what the customer interest has been around those products. I guess I will start with kind of the connected car and let Neil handle the camera monitoring side. If you look at the connected car technology, we believe there is a lot of interest, not only for our HomeLink and home automation side, but the Integrated Tool Module system has a lot of interest on the OEM side. So we announced previously we have kind of one committed OEM now, we believe there will be a couple of more in the next six to 12 months that we believe we will be able to secure contracts with. Beyond that, the Iris demo Chris as you experienced when you were there, there was a lot of customer interest there. So we -- since the close of CES, we have had a lot of follow up conversations, lot of customers are asking us to get mobile demos to them, so that they can experience that in a vehicle environment or at least in a conference room and show it with their team. So there is a lot of work ahead of us, over the next year, so in terms of creating proof of concepts and demos that OEMs can experience.

Yes. In regards to the CMS property or the Camera Monitoring System, I think the biggest and largest feedback we had on that was the hybrid nature of the camera plus mirror. And as you walk through the logical path of why to have full systems, it resounded and stuck with lot of customers on the logic behind it and the need for it based on the consumers not everybody likes to drive with the display technology. So having the ability to have a mirror or switch between the two technologies, we have actually got a lot of customers kind of by surprise and we are very interested and excited about it.

Chris, what was the second half of your question?

The advance features have become a bigger part of your revenue mix.

Got it.

Just you have a target in mind of what that could look like?

We don't really have an arbitrary target in terms of, anything we are trying to get to obviously what we don't want to do is become over wait in anyone area whether that's mirrors by themselves or an advance features about mirrors. What we would love to do is, see those two -- move roughly in that 50% to 60% kind of range together. In other words, if we want mirrors to get the need to grow obviously we believe the last couple of years despite some of the concern around mirror growth and the longevity of mirrors, one of the things Neil talked about in his prepared comments was that outside mirror growth was really strong especially in Q4. Those are new launches that are occurring right now for programs that are probably going to run five or six years. And so really we are excited about the growth of the core interior and exterior mirrors and in combination seeing a little more strength in terms of those advanced features. Honestly, we figured about that between 50% and 60% of our launch is being advance features that would be probably the ideal breakout for us.

Okay, great. Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Rich Kwas with Wells Fargo Securities. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Rich.

Question for Neil, I heard the comment around 10% growth on launches. Do you have the Q4 numbers that you provided last quarter that was similar to what you provided in Q3 around net launches for Q4 that are available?

Thank you, Rich. For the quarter, we were -- 12 net launches for the quarter.

But that does include some losses on microphone that we talked about last quarter, so if you compare that back, it's more like 17.

Yes.

So, it is a growth on a year-over-year basis.

Correct.

Right. So, 17 in net new -- or new minus five where there was some content loss?

With the net of 12.

Net of 12, okay. All right. And then, just on your comment around previous question, what Chris was asking around recovery. So 6% to 10% growth, 2017 is consistent whether you said a year ago, the base arguably here little later versus what people are expecting, we are expecting for 2016. So, you talked about kind of recovery and pick ups, how do we think about that that doesn't seem to be embedded in the 6% to 10% growth. So, is that -- should we interpret that as -- those maybe some conservatism in there around that or would you see like if some of the stuff was pushed at, you get some recovery in 2017, but I just don’t know what's included in the 6% to 10%?

Yes. If you look at that $15 million over next year, you are talking about slightly less than 1% total for annual revenue even if you recovered it all. Like we mentioned about a third of it, we don't think you probably will recover because it's OEM plant shutdowns. Our guess is, that's getting car inventory out of the marketplace to get those -- overall vehicle inventory levels back down. And so really you are talking about more than likely we're covering about 2/3rds of it. So when you start talking about $10 million over a 1.7 some billion, you are really talking about five to six tenths of a percent growth rate. So, it's -- yes, we tend to be a little conservative. But, you look at it, and we have to assume as we stand here this year we have to assume that four per quarter would typically be met with some of the more Tier-1 inventory adjustments next year as well. It does happen, it seems about every other year, some years, some more drastic than others. So in the Q4 especially next year, it's always tough to predict what those will look like. I think the other thing I will point out that we talk about 1% growth rate in 2017 and 2018 from a vehicle production standpoint. But, in reality in our primary markets, its actually seven tenths of a percent growth rate in production in 2017. And it's barely over half a percent in 2018. So, we are still talking in that 6% to 8% even at the mid-point out growth versus production rate.

All right. Okay. And just Steve on as we think that gross margins within the range typically what happens is, you have lower gross margins in the first half of the year and then it gets better because you get the price reductions out of the way and you get productivity benefits and what not. Should we think about the normal cadence as -- from sequential standpoint you had a nice number here this quarter? Should we think whether this is kind of pretty decent drop sequentially in Q1 that kind of builds off that?

Yes. Normally that would be the case. When you look at the impact of annual price reductions, you would see that drop-off really -- most of it affecting in January and in April giving the timing of our customers price reduction schedules. Now, the one thing that would I say that would change that next year potentially is, if you look at the production rates on a quarter-by-quarter basis, Q1 is quite a bit stronger from a production growth rate standpoint than the rest of the year. So, to the extent to which our margin will move roughly in line with growth rate, so that is the other factor that you have to consider. So, what we have talked about historically, as we are growing 6% to 10%, you typically will see margin tailwinds and obviously if you have hit the bottom end of that range, you will tend to see more flattish gross margins. And then, if you are growing that below 5, normally you see some margin headwind.

Okay, great. Thanks. I will pass it on.

Thank you.

And our next question is from the line of Brett Hoselton with KeyBanc. Please go ahead Brett.

Good morning, gentlemen.

Good morning, Brett.

Can you talk a little bit about M&A, I know that you've taken a greater interest in that in recent years and you obviously have a fair amount of cash in your balance sheet. So, can you kind of talk a little bit about what's your expectations are?

Sure. So, one thing, we didn't talk whole lot about so far today but the Iris scanning technology that we debuted at CES we actually took a minority position with the company that help create that technology. So, we have been active and the research side and looking, obviously, we are open to further positions in the space especially as it relates around technology. So, when you talk about Gentex's structure and we look at what our philosophy around merger and acquisitions is that typically not looking for an income statement. It doesn't mean we are opposed to it, but it's tough for us to find targets in automotive that meet our criteria for revenue growth, profitability. But also, strategic line up as it relates to IP and kind of a unique product. However, on the M&A side, there tend to be more targets that are available and so we continue to look obviously, we are not trying to be everything to everyone. We are looking for very strategic products that will fit into out product portfolio and help evolve our technology over time. When you look at the strategic partnership with TransCore on the Integrated Full Module system and then you look at the minority position we took in Delta ID for the Iris scanning. These are very good strategic fits that fit really well with our current product line up, they help take us to the next level as it relates to the car of the future.

As you think about the -- where you like to grow and so forth, is it primarily in the automotive space or there also interest elsewhere?

It's absolutely interest elsewhere. Obviously, we love products to have a relevant in automotive, we know the market really well, we feel like we can build a solid business case in that industry. What we are really looking for and hopeful of is that we can find a technology, it's an investment technology, is that a relevant automotive that have the potential to take us outside of automotive. That's not to say that if it was a peer play outside of automotive that we would say no to it. It's just has to be something that we have good fundamental skill set from an engineering standpoint and the ability to produce effectively.

Thank you, Steve.

Thank you.

And our next question comes from the line of David Leiker with Baird. Please go ahead, David.

Hi, this is Joe Vruwink for David.

Hi, Joe.

Few more questions on gross margins, so Q4 was a pretty large beat and that came despite all the disruptions you faced, it's a guidance for 2017 implies a year-over-year decline is likelier than that. But, nothing you released that on the call, when we think about advance features, offsetting pricing, high exterior mirror launch mix, moderating supplier cost. All that seems to be positive for gross margins, so what might we be missing?

I think you hit the nail on the head. It's just you got to make sure you are quantifying correctly. I mean annual customer price reductions average 2.5% to 3% down. So, I mean that is a big hurdle to over come. We continue to work towards it and our goal is to offset those with purchasing cost reductions, but it doesn't always happen. And then, mix is the one that's the variable rate. So, we do have a strong launch activity but sometimes it moves in your favor; sometimes it doesn’t. I think the fourth quarter represented, while we did have some shortages in the certain customers that were impacted for more base mirror type customers. So we actually had favorable product mix as a result of the shortage, but in addition to the offsets from the inefficiencies. But, I don't think you are wrong, as far as all your inputs.

Yes. I think it's important to look at, if you look at the full year 2016 gross margin performance, it's inside of the range and the guidance that we are providing. So that's not -- if you take the midpoint of our guidance, it's slightly below, by that you are talking 20, 30 bps below the full year performance of 2016.

Yes. Okay. And then, any change you might foresee in competitive dynamics with some of the proposed quarter taxes, the fact that your U.S. manufacturing period, does that -- you already have a lot of market share, but do you see any maybe benefit for you headwinds that you might have to counter things like that with what's been proposed so far?

I think we are sitting in a pretty good position if you look at our entire business model. We are a net exporter. We do imports from the raw materials for inputs. But, few thirds of our business leaves the country. We manufacture everything in the United States, as we talked about it a little bit earlier. We are paying 32% of tax rate, so we feel like we are going to benefit from that as well potentially if changes happen. But, the bigger question is, if border taxes happen to that change demand for vehicles, if they become more expensive and that’s not really in our control. But, we feel like from all other perspective being the United States company with all of our presence here, will benefit us if there is changes.

Okay, great. And then, my last question, are the change in the investment portfolio, how might that impact the investment income in the 2017?

Yes. If you look at, the change is really last year were very low levels of investment income that affected the income statement. So, we really should see very little impact to our ability to produce net income based off of the smaller investment portfolio. So I wouldn't expect or any type of changes really. If you look at what we are moving into, so shorter duration type fixed income assets, I mean, they are not great percentage returns, but they should more than offset what we are able to make on the portfolio previous.

And so that line items can unlock more just like your debt payments?

Yeah, it will be…

Yes.

We should be able to offset some of those debt payments with some of the lower returns on fixed income.

Okay. Okay, I see. Thanks guys.

Thanks, Joe.

Thank you.

And our next question is from the line of Jason Rodgers with Great Lakes Review. Please go ahead.

Good morning.

Good morning.

Good morning, Jason.

Just wanted to follow-up on the raw material shortage, I don’t know if you could quantify the revenue and cost related specifically to the shortage, if you lost any customers and how you can avoid it in the future?

Yes. So, well, first, it was about $5 million in terms of the revenue impact, and you are really only talking about 25 basis points to 50 basis points of margin impact due to the inefficiencies around that. Fortunately, we are able to manage this, so we didn’t have any plant shutdowns, we didn’t cause any OEM issues. Obviously, the biggest cost we incurred in that process was expedited free. So in other words, we’re having to air ship parts to get them to the OEMs on time to make sure we are not affecting them. So it did not caused us any customers issues, it didn’t caused us any type of contract issues. In fact, most of our OEM customers were very pleased with how we respond and how we met that challenge. The issue is always, one-off, trying to make sure now you go back and look at how do you make sure this never happens again. So it’s part of process we’ve been going through as a team and making sure that we have other sources available if we need them and making sure we understand the constraints around our suppliers better than we did coming into this quarter.

All right. And just as a follow-up, wanted to ask about the CMS product. When might that be available? Will it be sold as a replacement to the full display mirror or a standalone product and how does the ASP compared to FDM?

So, I will cover the product side, I will let Steve cover the ASP side. So the CMS the first we debuted was at CES this year, so only about three weeks ago. So we are actually working with customers on how that product could be implemented and brought to market. The response we got as we showed, the concept of the camera integrated with the mirror was overwhelming from an interest level because many customers are struggling with how to provide a camera system with the display without having redundancy. So the actual mirror provides the redundancy. So there is no SOP target date, but if you take a normal automotive launch cycle, you are four to five years out. And then from a…

And because this is a complex product, the development with it is going to take probably at least a year longer for them to see the concept, buy into it, work with their teams on how they want to kind of developed this and integrate this into their vehicle. So this is probably a product that you won't even if it's picked up fairly quickly, but I won't see on the road for five years. And that's what's exciting about the product really for us as we talk about the future of the car and there’s been a lot of speculation about what that means for Gentex. When we show this product, our customers’ response was pretty uniform and that is the solution makes sense, combination of both known technologies from today plus technology of the future. When you look at it, your question around, is it additive to the full display mirror and the answer is, absolutely. Obviously, you need a good display location. We believe the full display mirror has been very sticky with our customers in terms of the right location for that type of information and the redundancy that Neil mentioned. So when you're really talking about ASPs, it’s really tough to predict and the reason why is how you go about pulling off this system, it can go a lot of different directions. Obviously, you have increased number of cameras on the car, so those are going to run anywhere from $40 to $60 a piece depending on what kind of camera and how high of pixilation that they want in that device. You start talking about the processing blocking and where that's going to happen, are you going to do image stitching, or are you just going to have dedicated displays for each one. Those can go all kinds of different directions. And is it focused on the U.S. market or the European market given the different regulations in those marketplaces, some of them drive additional displays beyond just our FDM, so – in order to have a full camera monitoring solution. So we – you look at it, I mean, obviously, it's a pretty expensive system to add to a car, more importantly though we think that having that in combination with our easy mirrors in that location makes a lot of sense. So, it's a little early to start predicting what revenue can look like from this side of system.

Okay. Thank you for that. And just if I can squeeze in one more, wanted to ask if the new plant was completed and if any of the CapEx budget for 2017 has – any amount in there for that plant?

Yes. The plant itself is completed. We're – about half of the manufacturing space is currently being utilized for both distribution and final assembly. We do have some increased capital in 2017. Part of that CapEx is related to finishing the rest of that manufacturing space. We expect that to be operational probably mid this year now, so mid-2017, and beyond that you'll see some of that increase in capital is designed around equipment to fill that space. So you continue to see us be deliberate in our growth strategy. Obviously, for us, we're trying to do a better job of master planning our facilities and making sure that we're giving the shareholders a smoother bridge of understanding what CapEx needs to look like. This helps support these double-digit or near-double-digit growth rates over the next couple years.

Thank you.

Thanks Jason.

And our next question comes from the line of Ryan Brinkman with JPMorgan. Please go ahead Ryan.

Great. Thanks for taking my question. I'd like to follow up on the earlier discussion about tax code changes. So you referenced to obvious benefit in terms of your exports receiving favorable treat under our border adjusted tax. You interestingly mentioned a potential offset in terms of higher prices of vehicles potentially reducing demand, which could be a little under the radar screen. But there's a bunch of other factors too, like, the corporate tax rate going from 35% to 15% under the Trump proposal and then two, the immediate deduction of capital expenditures, which I have to image would help you a lot. So have you tried to do any scenario analyses around what your effective tax rate could go to potentially, where a combination of these changes to come into effect, there is some speculation that perhaps it could even fall, for example, by half, is that reasonably possible?

Yes. I think, the primary drivers for our tax rate are federal taxes and state taxes and 35% nominal tax rate for federal taxes, the deduction there is that – the domestic manufacturing deduction of which we’re a big beneficiary of. So, yes, if the federal tax rate drops in half, we would expect some of the deductions to go away such as the manufacturing deduction. That’s one of the things being tossed around. But moving that nominal rate down to 15% or 20% would be a big benefit for us.

And even some of the potential offsets that are being discussed to help bring about that lower tax rate wouldn't – probably eat up more than, say, 5% or so of that improvement.

Yes.

So you'd still see a significant improvement in our overall tax rate.

Yes. And so the general comment I made about vehicle demand is really more a macro issue of – if there's a 35% border tax, it’s left to be seen and what that does for overall consumer demand and that’s what I was disappointed, but we would move generally ahead of the market like we do today. So we have modeled that internally. We feel like we're in the driver spot like I said, but we're not speculating as to what that means until it's legislated.

Great. That sounds very encouraging. And then one of the reasons why the border adjusted tax proponents claim, you know, it wouldn't be just a tremendous windfall for exporters or tremendous headwind for importers is because the dollar is theorized to rally significantly under that scenario. But can you just kind of remind us of how you are contracts are priced in dollars relative to local currency, I think, it’s like almost entirely in dollars, and then would you expect that automakers would look to renegotiate that over time or would this be a potential big benefit for you over the – you wouldn’t see that offset that many other companies would see?

Sure. If you look at it, and about 95% of our sales are denominated in U.S. dollars. So, obviously, with all these conversations come the possibility for customers and the expense of dollar causing problems, but that's regardless of tax rates, honestly, I mean that would be tied more to the value of the currency. If you look over the last 15 years, we've fluctuated anywhere from say 85% to 95% of our sales denominated in dollars and we've gone through significant currency changes during those periods. We've always been able to find a way to renegotiate deals with our customers that give them, obviously, the positive business case for buying our products and still leave us with our fundamental financial performance in tax. So it’s really difficult as we stand here today to predict all the different ways this can go. What we do know is we continue to stay focused on new technology and that helps us grow our business with our customers. Beyond that the tax situation and some of the potential issues that can cause with the expense of our products from a dollar standpoint are all problems that we have to address. Now if those are likely correlated to some degree, obviously, any type of tax improvement would probably more than offset any type of pricing issues that we struggled with due to the cost of the price of the dollar.

Interesting, thanks. And then just on the different topic, if you sort of look at the midpoint of your operating expense guide for 2017 implies about an increase of 8% versus 2016 and that’s sort of similar to the midpoint of your revenue growth guidance too. So, at least, using the midpoint, it would seem that you wouldn't expect to lever expenses in 2017 versus ordinarily I think probably you could. So is that because of some sort of lingering premium freight issue or due to development cost in new products or some other factor that we should be thinking about?

No, I mean that's absolutely our strategy. So our goal is to move our expenses roughly in line with sales growth and that is designed around the products and the advanced technologies that we’re working on five years from now. On the product that we showed at CES, we're going to require an increase in engineering effort, so when you look at those products, we talk about iris and authentication in the car and home automation and then also the CMS products, those are going to require increased engineering effort and demand from the business. So our intention is to be deliberate about that and continue to invest in the core engineering process internally [indiscernible].

Yes. And if you were to look at the break out of those two operating lines, you would see that R&D is going to be probably at the higher end of the range and SG&A is going to be somewhere in the mid-single-digit growth rate.

Okay, got it. Investing for future revenue growth.

Yes.

Okay. Thank you so much guys.

Thank you.

Thanks, Ryan.

And our next question is from Matt Stover with SIG. Please go ahead, Matt.

Thank you very much. Two questions, most of them have been address. The first one is just the detail. If I’m looking at the S&A as a percent of sales in the fourth quarter, it looks like it was up about 50 bps versus last year. And I'm just wondering if there was something unusual in that that we should think about?

Yes. So part of it, if you look at that press release, a little over $1.2 million in the quarter was related to the issue. So, about $1 million of it was related to premium freight of – that was about $800,000 had some increased travel costs associated with the raw material shortage and the balance of it was actually strengthening Japanese yen in our foreign office in Japan. So, unfavorable exchange rates there when against us for about $200,000. The rest of it is – go ahead.

The premium freight showed up in SG&A?

It does.

Okay.

Yes, and so that shows up there, which, like Steve said, there may be a little bit lingering in Q1, but not nearly – not to that extent.

We talk about premium freight that Kevin's referring to that’s premium freight out.

Yes.

So that’s getting our parts to our customers.

Yes.

Second question is if we're looking at the bracketing of growth over the next two years between 5%, 9%, I recognize this is an imperfect process forecasting, but how would you recommend that we think about what would guide towards the low-end of that range and toward the high-end of that range? Is that more variability on the end market is that more variability at a particular customer or is that tied to any particular product?

I think the bigger – the single biggest issue that will affect that is overall production levels, but also the macroeconomic environment. So one of the things we talk about, not only in the number of vehicles that are produced, but what segment of vehicles are produced and then beyond that what price point are those vehicles selling at. So, one of the early indicators of a recession for us that we look for is what is the average content, what is the average sell price of the car itself not necessarily how many are produced and as content play in automotive that's one of things we have to focus on. So those would be the single biggest drivers for the business. We’re not overly exposed to any one OEM. If you look at it, our largest customer tends to be around 14% of revenue. And so, we don't have any type of exposure issues to any one OEM or to one region. About two-thirds of our sales are overseas or into foreign production markets, so we feel like we're pretty well diversified geographically as well.

One last question to follow-on is, are you folks seeing any evidence of trim package changes that your customer would – that would then have a negative mix impact to you in terms of mirror content and that sort of thing?

I think last year we talked about the BMW de-contenting of some passenger side outside mirrors…

Yes.

…where they have taken auto-dimming off, other than that – that’s the only real packaging concern that we've dealt within the last 18 months where something you know strategically changed at an OEM.

Okay. Thanks very much.

Thank you.

Thanks, Matt.

And our next question is from the line of David Whiston with Morningstar. Please go ahead, David.

Thanks. Good morning.

Hi, David. Good morning.

Hi, David.

I wanted to go back to first the possible tax changes. Obviously, you would have a lot more money coming in and can you talk at all about what you would want to do with that money from holding it to buybacks perhaps hiring more engineers and kind of related to that is can you talk about hiring more engineers, is it really tough to compete with Silicon Valley for the talents, are you having to offer a lot of stock option awards anything like that to get people to come to Michigan?

Well, as you can imagine – well, first of all, yes, I mean, if the tax laws were to change, we would be looking at focused on investing in the business itself as our primary use of that cash, but that's no different than our strategy today, it would just be amplified slightly. So we will be focused on trying to find new ways and creative ways at engineering talent. As it relates to today, we have a pretty good success rate finding engineering talents, that's not too big of a concern. However, as we start to emerge into some of these new products, what we found is partnering or looking at targets from an M&A standpoint in those areas is very attractive at times. So when you talk about the iris scanning technology – the company there that we invested in was actually a Silicon Valley-based company, if you look at our camera monitoring system, we partnered with a Silicon Valley-based company to help us with the graphics processing side in Ambarella. So you continue to look for and find new ways to partner. Even those engineering costs don’t necessarily need to be just employees; they can be contracts that you set up in place for help on the underlying technology. So we'll continue to look and be creative at how we acquire engineering resources. Obviously, convincing someone from Palo Alto to move to West Michigan is a bit of a challenge. But beyond that beside to the weather it’s not an over concern in any stretch that there is somehow a lack of engineering talent available to us.

It's good to hear. Can you remind me to on – with HomeLink, have you – are you exploring or do you already have any kind of relationship with Nest or Amazon, the Alexa, is that something you're interested in if you don't have it?

I mean we continue to do some background into those areas and we are doing work with Alexa product and demonstrating the capability of how HomeLink can function with that technology. So we are looking at what’s in the – from a mainstream, from a technology and then making sure that our efforts are tying into those products to be more seamless from a consumer side.

Okay. And just one more question. Can you say specifically what commodity was in short supply?

Sure. It was actually the plastic, the primary plastic that we use for making the cases for the inside and outside mirrors.

Do you say if we get that from oversees?

No, it’s actually a domestic product.

Okay, thank you.

Thank you.

And our next question is from John Murphy with Bank of America/Merrill Lynch. Please go ahead, John.

Good morning, guys. This is Aileen Smith on for John. Not to beat a dead horse here, but going back to the raw material shortages, can you talk about the potential impact on that specific commodity price if there was one? You had mentioned that you secured enough of it by the end of the quarter, but did it come at a significantly higher cost and do you anticipate any material change to the input cost to that commodity should the shortages persist?

No, there were no material – there were no material price changes per se. So there won’t be a build material impact to this on a go-forward basis.

Okay. And switching gears to capital allocation, it looks like you’ve placed an increasing focus in recent quarters on paying down debt and also repurchasing shares, and in the past you’ve commented about repurchasing shares at fairly consistent phase, is the refocus on debt pay down driven in anyway by your current view of the industry and where it’s going and your desire to kind of fortify the balance sheet before the cycle turns?

No, it’s – I mean, those are always the side benefits, but the real focus is in – has been on our ability to outperform our cash generation estimates and as we outperform and generate more cash than anticipated, we look at creative ways of how to deploy that. One of the things that is important to keep in mind is our debt structure is designed to end in the fall of 2018 at which point we will either have to refinance that debt or pay it off completely. So it’s a good time to start kind of working towards that point for the innovate team to be prepared for whatever and offer up the most flexibility for Gentex as it relates to our debt structure.

Okay, great. Thanks. And just a quick housekeeping one. Looking at your interior versus exterior mirrors, there’s been some variation in the growth trajectory of each of them over the past couple of years and I understand that you had faced some de-contenting by the BMW on the exterior mirror side, but how should we think about interior versus exterior mirror shipment growth going forward especially since that has some impact on your pricing and your margins?

Sure. So before we get to the projections of what this will look like, we will talk about the last couple of years that you referenced. Really over the last couple of years exterior mirrors – especially two years ago and throughout 2015, exterior mirrors posted almost a 20% growth rate for a lot of our major markets. And so after a solid couple of years of growth rates that we are above – we are in the double-digit growth range. Those are going to moderate a little bit back in line closer to what our inside mirror growth rates would be. So we would expect us to be both kind of in that mid-to-high single-digit range for both inside and outside mirrors over the coming years.

Okay, great. Thanks. That's it for me.

Thank you.

Thanks, Aileen.

And our last question is from the line of [indiscernible] with HighTower. Please go ahead.

Good morning. Thanks for the call.

Good morning.

All right. So just going back on expanding outside of autos, I was hoping you could comment on the partnership with Boeing for the 787 platform and if you are exploring any more opportunities in the aerospace industry?

Yes, absolutely, yes. So, the 787 was a great program launch for us. Obviously, it is our first foray into aerospace, so there is a lot of lifeless info during that process as you can imagine. There is continued interest from different manufactures. We continue to be active at business jets for the NBAA show and some other business jet environments. We continue to believe that there will be additional commercial applications available to us over the coming years as well. The hardest part for us to get used to is the pace with which aerospace does move, it is a little slower than automotive. Now the design cycles are longer and the approval process is tougher. So we understand the why, but we continue to be very excited about the potentials for growth in the aerospace market.

Great. Thank you.

Thank you.

And this concludes our Q&A session. I would like to turn the call back to Josh O'Berski for final remarks.

Thank you everyone for joining in the call. Great questions. And if you have any follow-ups please don't hesitate to reach out.