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Gentex Corp. (NASDAQ:GNTX)

Q1 2009 Earnings Call

April 22, 2009 10:30 AM ET

Executives

Connie Hamblin - Vice President of Investor Relations and Corporate Communications

Enoch Jen - Senior Vice President

Steve Dykman - Vice President of Finance & Chief Financial Officer

Analysts

John Murphy - Banc of America - Merrill Lynch

Richard Kwas - Wachovia Capital Markets

Himanshu Patel - JPMorgan

Brett Hoselton - KeyBanc Capital Markets

David Leiker - Robert W. Baird

Jason Rogers - Great Lakes Review

Operator

Good morning, ladies and gentlemen. Welcome to the Gentex First Quarter 2009 Earnings Conference Call.

I would now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communications. Please go ahead, Ms. Hamblin.

Connie Hamblin

Thank you. Good morning, everyone. This is Gentex Corporation's first quarter conference call.

On the call with me today is Enoch Jen, our Senior Vice President; and Steve Dykman, our Chief Financial Officer. This call has been broadcast live on the internet on Gentex's website at www.gentex.com. There will be an auto playback of the conference call available at website as well. I'm going to go through a few routine remarks. And then I will turn it over to Enoch Jen who will go through the quarter.

This call is being recorded by Gentex Corporation. All contents of Gentex's corporation's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the expense written consent of Gentex Corporation. Gentex Corporation alone holds such rights.

While we understand that there maybe companies that transcribe and redistribute our conference calls, notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcripts.

Gentex Corporation will hold responsible or liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop-off the line if you do not agree of these terms.

This presentation may include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about top-line growth and the global automotive industry, the economy, the impact of stock option expenses on earnings, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the company itself.

Words like anticipate, believes, confident, estimates, expects, forecasts, likely, plans, projects and should and variations of such words and similar expressions identify forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence, and actual results may differ materially from those in the forward-looking statements.

Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review the full Safe Harbor statement that is contained in the news release that is posted on our website.

At this point, I will turn the call over to Enoch Jen. He will make his remarks with respect to the quarter. And then we will open the call up to Q&A. We would ask that you ask one question at a time, so that everyone has the opportunity to participate. Thank you.

Enoch Jen

Good morning, everyone. Thank you for joining our conference call. Our revenues for the first quarter were $93.8 million, down 47% compared to $178 million in the first quarter of 2008.

Our operating income for the first quarter, 2009 was $2.2 million, down 95%, compared to $40 million in the first quarter of 2008.

For the first quarter of 2009, we reported a net loss of $1.6 million. This compares to net income of $30.5 million in the first quarter of 2008. In the first quarter of 2009, we reported a loss of $0.01 per share, compared to earnings of $0.21 per share in the first quarter of 2008.

Excluding realized losses of $3.9 million and the impairment loss on available for sales securities of $1.3 million, earnings per share in the first quarter of 2009 would have been approximately $0.01.

Next, we'll look at automotive revenues and auto-dimming mirror unit shipments. In the first quarter of 2009, total auto-dimming mirror unit shipments decreased by 50%, compared with the first quarter of last year. Automotive revenues decreased by 48% from a $172.1 million in the first quarter of 2008 to $89 million in the first quarter of 2009.

Auto-dimming mirror unit shipments in North America decreased by 56% in the first quarter of 2009, compared with the same period in 2008, primarily as a result of significant lower light vehicle production.

North American light vehicle production declined by 52% in the first quarter of 2009, compared with the same prior year period. GMT 900 light vehicle production was down 31% in the first quarter of 2009, compared with the same period in 2008. And those vehicles utilize an interior and exterior mirror on each vehicle.

In addition, other automakers announced extended pick-up and SUV plant closings during the quarter, resulting in total truck SUV production in North America being down by 52% in the first quarter of 2009, compared with the first quarter of 2008.

Auto-dimming mirror unit shipments offshore customers decreased by 46% in the first quarter of 2009, compared with the same period last year. The decrease in unit shipments was primarily due to lower light vehicle production in Asia and Europe.

Light vehicle production in Europe decreased by 42% in the first quarter and decreased by 43% in Japan and Korea in the first quarter of 2009, compared with the same period last year.

Looking at our average selling price per auto-dimming mirror unit, the ASP was $41.82 in the first quarter of 2009. This ASP was down sequentially per our prior guidance at 41.82 in the first quarter of 2009, primarily due to mix.

The ASP was up on a year-over-year basis, compared with the first quarter of 2008, primarily due to a mix of higher featured mirrors, partially offset by annual customer price reductions.

Based on CSMs, end of March light vehicle production forecasts, we continued to expect ASPs to increase over the balance of calendar year 2009, as we begin shipping for additional RCD and SmartBeam programs.

First quarter of 2009 and calendar year 2009, ASPs exclude non auto-dimming mirrors as well as microphone units. This is how we will be reporting ASPs going forward.

Fire protection revenues decreased by 17% to $4.9 million for the first quarter of 2009, compared with the same period last year, primarily due to the weak commercial construction market.

Looking at our gross profit margins, the gross profit margin of 23.8% in the first quarter of 2009 declined sequentially from 28.4% in the fourth quarter of 2008. Approximately three quarters of the decline was due to the company's inability to leverage fixed overhead costs due to the 23% sequential decline in revenues. The balance of the decline was due to annual customer price reductions.

The gross profit margin declined on a year-over-year basis from 35.2% in the first quarter of 2008, to 23.8% in the first quarter of 2009. Approximately, three quarters of the decline was due to the 47% year-over-year decline in revenues resulting in the company's inability to leverage the fixed overhead costs. The balance of the decline was due to annual customer price reductions and foreign exchange rates, partially offset by purchasing cost reductions.

Based on the company's expected revenues for the second quarter of 2009 which we will discuss later in our comments, we would expect the company's gross margin to improve on a sequential basis. The gross profit margin will continue to be impacted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage our fixed overhead costs, purchasing cost reductions, VAVE initiatives and manufacturing yields.

Looking at engineering, research and development expense, our ER&D expense decreased by 11% in the first quarter of 2009, compared with the same 2008 period primarily due to reduced employee compensation expense.

ER&D expense is currently expected to be down approximately 10% for the second quarter of 2009, compared with the second quarter of 2008, primarily due to reduced employee compensation expense.

Next, selling, general and administrative expense, SG&A expense decreased by 12% in the first quarter of 2009, compared with the same prior year period. Approximately, two-thirds of the decline was due to reduced employee compensation expense and the balance was due to foreign exchange rates.

SG&A expense is currently expected to be down approximately 10% for the second quarter of 2009, compared with the second quarter of 2008, primarily due to reduced employee compensation expense and foreign exchange rates.

Looking at our allowance or doubtful accounts and our customer credit exposure, the company increased its allowance for doubtful accounts by $3.8 million in the fourth quarter of 2008, related to financially distressed Tier 1 automotive customers.

While the company is making progress and collecting a portion of the significantly passed to account balances from certain Tier 1 customers, the overall allowance for doubtful accounts related to all financially discussed Tier 1 automotive customers remains unchanged.

The company's total credit exposure for the Detroit 3 automakers was approximately $13 million as of March 31, 2009. Each automaker's credit exposure approximately represented their respective percentage of total company revenues during the quarter. The company does not have any specific allowance for doubtful accounts established for the Detroit 3 automakers as of March 31, 2009.

The company is currently evaluating the government support program terms and effective dates, which currently appear to be after March 31, 2009, for General Motors and Chrysler. To-date, the company have now entered into the government supplier support programs.

Expense management activities, the company continues to work to reduce expenses in a number of different areas. The primary items that we are working on include continued purchasing cost reductions and VAVE efforts, continued slowdown in hiring, reduced incentive employee compensation, reduced travel supplies, healthcare and freight expenses, and a significant reduction in capital expenditures resulting in slower growth of deprecation expense.

Looking at our other income expense line item, the breakdown for the first quarter of 2009 was as follows: investment income of $1.193 million, and impairment loss of $1.291 million, and other net expense of $4.487 million, for a total other expense of $4.585 million. The decline in investment income was primarily due to lower interest rates on a year-over-year basis.

Under the current mark-to-market accounting rules, the company reported a non-cash other than temporary impairment charge of $1.3 million for unrealized losses on the company's equity investments in the first quarter of 2009.

In addition, the company reported realized losses of approximately $3.9 million on the sale of equity investments during the first quarter.

Next, we'll look at several balance sheet items. As of march 31, 2009, our accounts receivable were $47.2 million, our inventories were $54.1 million, our patents and other assets were $10 million, our accounts payable were $19.3 million, and our accrued liabilities were $30.9 million.

Our tax rate, the refundable effective tax rate of 34.75% during the first quarter of 2009 varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. Excluding stock option expensing, we currently expect that the tax rate for 2009 will be approximately 33% based on current tax laws, primarily due to tax exempt interest and the domestic manufacturing deduction.

Our year-to-date cash flow from operations was $16.1 million for the first quarter of 2009. Our capital expenditures for the first quarter of 2009 was $6 million. Our depreciation expense for the first quarter 2009 was $9.6 million. For calendar year 2009, our estimates for capital expenditures is approximately 30 to $35 million. Our estimated depreciation expense for 2009 is 36 to $38 million.

Next, we'll look at our share repurchase plans. The company did not repurchase any shares during the first quarter of 2009. The company has a share repurchase plan in place with authorization of repurchase up to 28 million shares of the company stock. To-date, the company has repurchased approximately 26 million shares, leaving approximately 2 million shares authorized to be repurchased under the plan.

The company's current share repurchase plan was originally announced in 2002. The objective of the plan was to have it be opportunistic. And it's based on a number of factors, including market conditions, the market price of the company's common stock, the anti-dilutive effect on earnings, available cash and other factors that the company deems appropriate.

Given the current market conditions, including market volatility, the uncertain production of sales levels, potential customer bankruptcies and liquidity needs, you should expect that that factor's playing a more important role in the decisions that are being made as the number of shares being repurchased and at what prices they are repurchased at.

Cash dividends on April 17, 2009, the company paid a quarterly cash dividend of $0.11 per share to shareholders of record of the common stock after close of business on April 7th. The ex-dividend date was April 3.

The company's cash dividend policy was established based on a number of criteria, including current U.S. income tax, laws which dictate a favorable tax treatment that the dividend be meaningful, sustainable and that the dividend rate would increase generally inline with the company's earnings and operating cash flow over time.

The cash dividend rate is an agenda item at every Board of Directors meeting. Investors have asked if the company will continue to pay a cash dividend at the current level given the current economic environment, or if the company does not earn the dividend.

On a balance sheet basis, the company could continue to pay a dividend within the criteria above for a long period of time. The decision on any change to the dividend policy is the Board decision. And the Board would take into consideration the existing economic climate and would base any changes on their expectations as of the duration and magnitude of this global recession.

Next, an update on the SmartBeam. We continued to make progress with automakers as they more broadly offers SmartBeam across their product lines. SmartBeam is the high beam headlamp assist product that we introduced in the 2005 model year. And we are currently shipping for 22, 2009 vehicle programs to six OEM customers, including General Motors, Chrysler, BMW, Audi, Opel/Vauxhall and Toyota. There continued to be a number of follow-on programs for existing and new customer schedules for the 2009 calendar year.

For the 2008 calendar year, we shipped approximately 295,000 SmartBeam units. Based on our current forecast, volumes and incremental sales dollars for SmartBeam will become more meaningful in the 2009 calendar year. However, due to the continued uncertainties with vehicle production volumes, we do not plan to provide an estimate for SmartBeam unit shipments for 2009 at this time.

Next, an update on Rear Camera Display. We currently have announced 22 OEM Rear Camera Display programs with four automakers including Ford, Hyundai, Kia General Motors and Toyota, and four aftermarket accessory programs with Mazda, Gulf States Toyota and Suzuki. There continues to be significant interest in Gentex's RCD Mirrors, and we are working with a number of additional customers on original equipment programs that will be announced during 2009.

The company shipped approximately 270,000 RCD Mirror in calendar year 2008. If light vehicle productions starts to stabilize and does not significantly decline from currently forecasted levels by CSM Worldwide, we still believe that there is sufficient customer demand and their shipments of RCD Mirrors could nearly double in calendar year, 2009.

Regarding legislation, the automaker is currently offering a Rear Camera Display product or doing this absent any legislation and made the decision before any was pending. The legislation that was signed into law on February, 2008 called the Kids Transportation Safety Act of 2007 orders the Secretary of Transportation at the National Highway Traffic Safety Administration to revise the federal standard, to expand the field-of-view so the drivers can detect objects directly behind vehicles. The phase and period during which automakers will need to meet their requirements set by NHTSA is expected to be between now and 2016.

Next, an update on dimmable aircraft windows. Boeing currently expects the first 787 Dreamliner aircraft to go into service in late 2009 or early 2010. Due to the Boeing production delays, we currently anticipate that we will begin to deliver our windows to the aircraft production line in 2009. Boeing has also expressed interest in utilizing dimmable windows for other of their aircrafts.

In October 2008, Gentex and PPG Aerospace announced that we also will be shipping dimmable aircraft windows for use on the passenger cabin windows of the 2010, Beechcraft King Air 350i aircraft. This will be the first aircraft in the general and business aviation market with dimmable windows. Each King Air 350i will have 15 windows and we expect to begin shipments sometime during calendar year, 2009.

Other aircraft manufacturers continue to have interest in this technology, and we are working on these potential programs with PPG Aerospace.

Next, looking at revenue estimates. The following projection for revenues in the second quarter of 2009 is based on CSMs end of March light vehicle production forecasts. Due to the significant uncertainties with global vehicle production volumes, we do not plan to provide an estimate for revenues for calendar year 2009 at this time.

Over the second quarter of 2009, our estimate for revenues is a decline of approximately 30%, compared with the same period in 2008, again based on CSMs end of March forecast for light vehicle production levels. However, due to the many uncertainties in the marketplace, we believe that there is potentially more downside than upside to global light vehicle production levels.

For the second quarter of 2009, light vehicle production per CSM for North America is at 2.1 million vehicle units. This represents a 40% decline, compared to the second quarter of 2008. The second quarter 2009 light vehicle production for Europe is at 4.2 million vehicle units, a 29% decline compared to the second quarter of 2008. And for Japan and Korea, the second quarter of 2009 light vehicle production is at 2.5 million vehicle units, a 33% decline compared to the prior year period.

For the calendar year 2009, light vehicle production for North America is forecasted to be 8.2 million vehicles, a 36% decrease, compared to 2008. For Europe, calendar year 2009, light vehicle production is forecasted at 15.9 million vehicles, a 23% decline, compared to the prior year.

And for Japan and Korea, the calendar year 2009 light vehicle production is at 10.7 million vehicles, a 26% decline, compared to the prior year.

At this time, I'll turn the call back over to Connie.

Connie Hamblin

As a quick reminder, all listeners should note that this call is being recorded by Gentex Corporations. All contents of Gentex's conference call is a property of Gentex Corporation. No such content maybe copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the expressed written consent of Gentex Corporation. Gentex Corporation alone holds such right.

While we understand that there maybe companies that transcribe and redistribute our conference calls, notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcript.

Gentex Corporation will hold responsible or liable any party for any damages incurred by Gentex Corporation with respect to any such unauthorized use.

Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree of these terms.

At this point, we will open it up for Q&A. Again, we would ask that you try to ask one question at a time to allow others to participate. Operator?

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from John Murphy with Merrill Lynch.

John Murphy - Banc of America - Merrill Lynch

Good morning. I'll try to keep this to one. It copies a lot of questions out there. But, I guess just focusing on gross margin, I mean it was significantly weaker than we were expecting in the first quarter. And I'm just trying to understand that as volumes potentially stabilize and recover in the future, hopefully they will.

It will see a real recovery in the gross margin. And if you can kind of explain the components of the pressure on gross margins, really I mean in certain major buckets in sort of negative operating leverage pricing pressure, maybe negative mixed-shift, and just kind of give us an idea of what major leverage were there, and if it was 90%, operating the leverage and that will just comeback over time. It's surely trying to understand what's going on with the gross margin.

Steve Dykman

Okay. If you look at our margin, both on a sequential basis and on a year-over-year basis, the primary driver is our inability to leverage our fixed overhead costs. And with the significant declines, we're experiencing in revenues that obviously has put some downward pressure on our margins. So, as that stabilizes, we anticipate that the margin will improve over time and obviously our objective is to get back to historical average of the 35%. And that we were at prior to the third and fourth quarter drop-in vehicle production levels.

John Murphy - Banc of America - Merrill Lynch

So there is nothing exchanged that would make you believe that that 35% is not achievable if files recover?

Steve Dykman

No. So, if you think about it sequentially and year-over-year about three quarters of the margin drop was solely due to our inability to leverage fixed overhead costs.

John Murphy - Banc of America - Merrill Lynch

And there is nothing that you would do to cause in the interim to... would you do anything with cutting cost in the interim to get closer to that margin or are you're kind of comfortable with the restructuring actions you've taken to-date and maybe some variable costs around the fringes over the next couple of quarters and it's kind of a waiting game for this volume to stabilize and recover?

Steve Dykman

Yeah, I think we're making progress on the cost side of things. And we continue to look at cost reductions. However, from the fixed overhead cost standpoint that takes a little bit more time and you can't react quite as quickly. And with the significant revenue declines, it's real difficult.

John Murphy - Banc of America - Merrill Lynch

Okay. Thank you very much.

Operator

And Rich Kwas with Wachovia has our next question.

Richard Kwas - Wachovia Capital Markets

Hi, everyone.

Enoch Jen

Good morning.

Richard Kwas - Wachovia Capital Markets

Following up on John's question on the margin, if... you mentioned the sequential decline in revenue. It looks like North American production is going to be up somewhere in the neighborhood 4, 500,000 units sequentially. Should we think about the margin improvement in Q2 kind of corresponding to that increase in production here North America? Is that the way to think about in terms of the magnitude of potential improvement?

Steve Dykman

Yeah. It's one way to look at that if you're going to calculate an estimate for margin in Q2 is if you look at our guidance for revenue declines of approximately 30%, and what we said in the past is that our fixed overhead costs run about 10 to 15 percentage points of revenues. So, you can do the math and see that there is going to... we're anticipating some sequential improvement in our margins in the second quarter.

Richard Kwas - Wachovia Capital Markets

Okay. So the contribution margin should get a little bit better or detrimental margin should get a little bit better sequentially?

Steve Dykman

Yes.

Richard Kwas - Wachovia Capital Markets

Okay, perfect. Okay. And then, for the other expense line at 8 million negative, how do we think about that? Is that kind of a run rate to use or is that going to come down over the next few quarters?

Steve Dykman

Well, I think when you look at the investment income, that's dropping significantly on a year-over-year basis primarily due to lower interest rates. So that's were inline should be similar going forward with the exception of the fourth quarter, where we historically had some year-end mutual fund distributions. And as Enoch mentioned, $1.3 million related to an impairment loss due to the accounting rules, so that's going to be largely dependant on the future performance of the equity markets.

And then, I think as far as realized gains or losses in Q2 that also will be largely dependant on the general equity market performance. So we're not anticipating any significant shifts to the recent trend lines.

Richard Kwas - Wachovia Capital Markets

Okay. Last question. I know this is a third one. But just the... just going back to the margin longer term, is there kind of a... to get that back to 35% level, is there a production level that you're benchmarking for North America and Europe to get to that level? Some other suppliers have talked about getting to a certain production level to achieve breakeven and some have gotten to levels that are going to probably be realized this year in terms of getting to a breakeven point. So, I mean just trying to think about getting back that 35% level, I assume that production that would be much higher than it has than it is right now. But I just wanted to get your thoughts on where that would be?

Steve Dykman

Well, I think Rich first off; I think we tend to look at global production levels just because our customer base is more diversified and more concentrated overseas. And I think in the past what we said is in order for us to achieve the 35% gross margin that we would need a flat global production environment. And obviously we've had a significant decline over the past six to nine months. So we are going to have to get back to significantly higher global production levels, which we think could take a few years. And I think CSM is thus beginning to agree with that outlook.

Richard Kwas - Wachovia Capital Markets

Okay. Okay, that's helpful. Thank you.

Operator

And we'll take our next question from Himanshu Patel with JPMorgan.

Himanshu Patel - JPMorgan

Hi. Enoch, you had mentioned earlier that Gentex was assessing whether or not it was going to participate in the supplier receivable backstopping program from U.S. Treasury. Can you just tell us what considerations are going into your assessment there?

Enoch Jen

Okay. Well, like many other suppliers, I think we're trying to make sure that we understand all of the terms and conditions of the program. And I think there is a certain group of suppliers that have such a large percentage of their business with Kia and or Chrysler, and also their financial fortunes are very closely tied to those two automakers that regardless of the terms and conditions, those suppliers needed to sign up for the program regardless.

And I think what's our situation where GM and Chrysler represents a smaller percentage of our total business and that's our current understating that only a percentage of our business with GM and Chrysler would be covered under the program. We want to make sure that we understand what we're signing up for on a financial condition or balance sheet basis, obviously we could absorb the loss. As business people with the increasing likelihood that one or both automakers will need to declare bankruptcy. Obviously, we are looking to minimize any potential of bad debt losses.

Himanshu Patel - JPMorgan

Is this a discussion that involves some sort of situation where you may order to participate, you're being asked to get back more on pricing?

Enoch Jen

Well, I think to-date, GM has not indicated that there are many additional terms and conditions. Chrysler has verbally indicated that there are some additional terms and conditions. And we just want to make sure that we understand what we would be signing up for before we commit ourselves. And certainly, I think Chrysler is for those who will follow the industry in this situation, there are some indications that Chrysler is talking about price reductions as well as extended payment terms.

Himanshu Patel - JPMorgan

Okay. The European scrappage program, that's been launched and clearly volumes are being helped but there has been an adverse shift on mix. I'm just wondering, what do you guys seeing in your forward production schedules for April, May and June? Are the platforms that Gentex is exposed to in Europe or are they actually seeing any improvement in productions schedules or is that not the case?

Enoch Jen

Well, like you indicated the short-term results of the government scrappage programs in Europe have primarily resulted in significantly increased sales of very small vehicles. And so, as we look out there has not been much noticeable impact on our European customer base, which is primarily focused on luxury... near luxury and mid-size vehicle segments. So, we are not seeing any change in production levels for the vast majority of the vehicles that we shift to based on the scrappage program.

Himanshu Patel - JPMorgan

Okay. And then, just one last question on the gross margins. I haven't got a chance to go through the maths. But just... you guided the 30% dime on revenue. That's about a 120 million of revenue for Q2. That's basically what your Q4 revenues were. Is it a reason to think your gross margins would be that much different than what you just posted in Q4?

Steve Dykman

No.

Himanshu Patel - JPMorgan

Okay. Thank you.

Steve Dykman

Yeah.

Operator

And our next question comes from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

Good morning.

Enoch Jen

Good morning Brett.

Steve Dykman

Good morning.

Brett Hoselton - KeyBanc Capital Markets

Looking at your mirror shipments, just comparing them to production. It looks like your mirror shipments were a little bit worse than production in the first quarter. And you're expecting them to be a little bit better than production in the second quarter. And my question is, is that simply a mix issue?

Enoch Jen

Yes. It's primarily a mix issue. I mean we were impacted in the first quarter by a number of the vehicles that we ship to which would include the light truck segment in North America and the Luxury Passenger Car segment in Europe that on average tended to offer two or three mirror systems.

Brett Hoselton - KeyBanc Capital Markets

And, as you think about that 25% of the gross margin decline that you attribute to price reductions versus, and FX versus cost reductions. If I would have strip out the FX portion, are you able to reduce your costs as quickly as you're able, or as quickly as your price reductions are occurring?

Steve Dykman

That has been our objectives. And that is close to offsetting the annual customer price reduction.

Brett Hoselton - KeyBanc Capital Markets

Okay. Very good. Thank you.

Operator

And David Leiker with Robert W. Baird has our next question.

David Leiker - Robert W. Baird

Hi. Good morning.

Enoch Jen

Good morning David.

Steve Dykman

Hi.

David Leiker - Robert W. Baird

I missed a bit of your initial call, has done something else. But if you look at second quarter production, and I'm sure you talked about this. But, we're hearing from a couple of different places that there are some scheduled productions, plant closings here in May and June that some folks are saying could end up in Q2 building flat but Q1 build. I was curious if you're seeing that in any of your releases as you look out over the next several weeks?

Steve Dykman

We are starting to see some of the final assembly plans and noun shutdowns longer than the historical two week shutdowns around the 4th of July. And, our expectation is that we'll see an increased number of these extended plant shutdowns. We're... at this time we're not expecting the shutdowns to be so great as to bring second quarter production levels down to first quarter production levels.

From our standpoint, quite a few customer assembly plans extended their Christmas shutdowns into January and even into February. And certainly, there is some downside risk in June as we approach the end of the model year and excess vehicle inventories if they continue to remain high. And then, I think a number of the extended plant shutdowns more likely will occur in the third quarter into second half of July and possibly into August.

David Leiker - Robert W. Baird

Do you think what you have seeing out in that June time period is captured in the CSM numbers already or not?

Steve Dykman

We're not thinking it's fully captured in the CSM numbers.

David Leiker - Robert W. Baird

Okay. And then just one other item here on a different topic, just kind of take rates or penetration rates on particular vehicles. And, yeah I know it's difficult to cross the entire universe to do it. But if you look at particular plans, you'll take a Camry plan, you know how many mirrors you shipped them and you know how many Camries they make. Have you seen any change in the penetration rates when you look, but not necessary Camry, but when you look at specifically plants and your shipments relative to that?

Steve Dykman

We have not seen any significant changes in any take rates across the vehicles that we shipped to.

David Leiker - Robert W. Baird

Okay, great. Thank you very much.

Steve Dykman

Welcome.

Operator

(Operators Instructions). And our next question comes from Jason Rogers with Great Lakes Review.

Jason Rogers - Great Lakes Review

Hi. Can you give the figure for the ASP in the quarter? I missed the year ago figure though.

Enoch Jen

Okay. I think probably we didn't give it Jason. So you didn't miss anything.

Jason Rogers - Great Lakes Review

Okay.

Enoch Jen

The year ago figure, so this would be for the first quarter of 2008 was $40.94.

Jason Rogers - Great Lakes Review

Okay. And looking at your balance sheet, could you break out the dollar figure as far as cash and investments, what's in equities, what's in money markets and what's in short-term governments and CDs?

Enoch Jen

Sure. As of March 31, we had cash and cash equivalents of just under 309 million. Short-term investments were just under 25 million, that's primarily in government securities, and long-term investments were just over 59 million. And the primary drivers of the drop and the value from December 31 were there were some equity investments that were sold during the quarter and that reinvested back into the market as of March 31.

Jason Rogers - Great Lakes Review

Okay. And just finally, looking at your guidance based on the CSM numbers, you're looking for roughly 25 or 30% sequential improvement in sales. And that... is that based just totally on the CSM forecast? It just seems fairly aggressive given what's happened with the economy and talking about extended plant shutdowns. I'm just trying to get a better feel for maybe this sequential optimism you are looking for?

Enoch Jen

That is based on the CSM and the March forecast. As the taker option rates have not changed significantly. So, I think as a couple of things, one is that we said that I think there is some downside to the CSM forecast as we approach the end of the another year.

Jason Rogers - Great Lakes Review

Okay. Thanks.

Operator

And we have a follow-up question from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

Hello again.

Connie Hamblin

Hello.

Brett Hoselton - KeyBanc Capital Markets

The mixed investments that you just mentioned the long-term 59 million, does that include equity?

Steve Dykman

That is primarily all equities.

Brett Hoselton - KeyBanc Capital Markets

Okay. And then as you think about the percentage of euro denominated contracts as a percentage of revenue, where that stand at this point in time?

Steve Dykman

For calendar year 2009, it's approximately 12%.

Brett Hoselton - KeyBanc Capital Markets

Okay. And as we think about maybe let's say the mismatch between the cost, your cost and the revenue side of that very, very roughly the percentage of your cost that are euro denominated?

Steve Dykman

Well, what we've said is that we're about 50% naturally hedged. And if you think as in the first quarter, just under one percentage point of our revenue decline related to foreign exchange rates, and then there would be roughly half of that offset through material and SG&A costs, so it's not that significant.

Enoch Jen

And probably with the greater decline in revenues, our natural cost hedges probably a higher percentage than it has been historically.

Brett Hoselton - KeyBanc Capital Markets

Okay. And then while I was typing as fast I could, you went to the other expense and income lines. So, I may have gotten this wrong, but the $1.2 million in investment income, that's basically your interest rate yielding items, correct?

Steve Dykman

Correct.

Brett Hoselton - KeyBanc Capital Markets

Okay. The 1.2 million impairment change reduced basically mark-to-market your equity portfolio?

Steve Dykman

Correct.

Brett Hoselton - KeyBanc Capital Markets

Okay. 3.9 million realized losses is entirely just your realized equity losses, right?

Steve Dykman

Correct.

Brett Hoselton - KeyBanc Capital Markets

Okay. Now, I've got a... now the 4.5 million other?

Steve Dykman

Yeah.

Brett Hoselton - KeyBanc Capital Markets

And what is that?

Steve Dykman

Well, 3.9 of that, 4.5 million relates to the realized losses on the sale of equity investments, that's the majority of it.

Brett Hoselton - KeyBanc Capital Markets

Okay. So basically, the remainder of it is just miscellaneous stuff?

Steve Dykman

Correct.

Brett Hoselton - KeyBanc Capital Markets

Okay, perfect. Thank you very, very much.

Operator

And we have a follow-up question from John Murphy with Merrill Lynch.

John Murphy - Banc of America - Merrill Lynch

Well, the one question that has been busted wide open. I'll fall for sort of a two part here. There is two areas where you guys appeared to be drifting cash. First, in share repurchase and second, sort of in the combination of R&D and CapEx pullback. I was just wondering, with the shares where they are and your cap is somewhere it is, why you haven't been more aggressive on shared buybacks because you certainly, you don't have any debt, you have a lot of cash, that sort of a first part of the question.

Steve Dykman

Well, I think John in today's environment, we are more concerned about the potential downside. And with not being sure during the first quarter of exactly where production levels were going to bottom out or in fact whether they are going to. And with the increasing risk of customer bankruptcies, which could disrupt the entire automotive supply chain because many suppliers supply most of the OEM globally. We felt it was important to be more cautious.

And in looking at the cash dividend versus share repurchases, the Board at our most recent meeting felt that until they had a better handle on the magnitude and duration of the recession, that's they preferred to elect to maintain the cash dividend and be more cautious on share repurchases.

John Murphy - Banc of America - Merrill Lynch

Okay. And then if you think about the R&D and CapEx, I mean clearly I guess the same thought process goes, this is far as conserving cash. But what kind of an impact might that have on the business going forward. Is this all real variable stuff that you are able to just sort of knock-out of the cost and CapEx equations?

Or is there anything in the future as far as product launched delays or anything like that that are working into the equation here and will have any impact in the business in the next couple of years?

Steve Dykman

Yeah. I think on the R&D and CapEx, the focus is not so much at conserving cash. But on the capital expenditures, we've always said that it's been a combination of increasing our capacity and maintenance, or improving our processes, replacing other equipment.

And so, with the decline in global production levels and therefore a decline in our production, we have not needed most of the capital expenditures that historically has been dedicated to increasing our production capacity.

And ER&D, and we talked about a couple of things. One is we've just... we said that we are taking a closer look at all of our ER&D programs and making sure that there is a tangible payoff in a shorter time period than maybe we will willing to accept previously on all new programs. So this is business that we have been awarded to begin production and shipments in the next two to three years. We are funding all of those programs and ensuring that they do meet the customer milestones. There have been a few customer programs that have been delayed or cancelled, so that to have some impact on the historical increase in the ER&D expenses also.

John Murphy - Banc of America - Merrill Lynch

Okay. And then just lastly is, the exposure of the Chrysler that you are at right now, what's the level... I think it's been 13 to 14% at the end of last year, what's... what was the level on the first quarter?

Steve Dykman

What we have said is that as a percentage of revenues, they account for mid-single digits.

John Murphy - Banc of America - Merrill Lynch

Okay, great. Thank you very much.

Operator

And there are no further questions at this time. Ms. Hamblin, I'd like to turn the conference back over to for any additional or closing remarks.

Connie Hamblin

I'd like to thank everybody for participating in the conference call. And we will be here if you have additional questions. Thank you. Have a good day.

Operator

Thank you for joining this Gentex conference call. That does conclude our presentation. Have a nice day.

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Source: Gentex Q1 2009 Earnings Call Transcript
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