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Gentex Corporation (NASDAQ:GNTX)

Q4 2011 Earnings Call

January 31, 2012 - 10:30 a.m. ET

Executives

Connie Hamblin – Vice President, Investor Relations and Corporate Communications

Steve Dykman – Vice President of Finance and Chief Financial Officer

Analysts

David Leiker – Robert W. Baird & Co, Inc.

Himanshu Patel – J.P. Morgan Securities, LLC

Richard Kwas – Wells Fargo Securities, LLC

John Murphy – Bank of America Merrill Lynch

Adam Brooks – Sidoti & Company, LLC

Steve Dyer – Craig-Hallum Capital Group, LLC

Brett D. Hoselton – KeyBanc Capital Markets, Inc.

Gregory W. Halter – LJR Great Lakes Review

H. Peter Nesvold – Jefferies & Company, Inc.

Operator

Please standby. We're about to begin. Good morning, ladies and gentlemen. Welcome to the Gentex announces fourth quarter and year-end financial results conference call. Today's call is being recorded.

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. Thanks for participating in our fourth quarter conference call and joining me and Steve Dykman, our Chief Financial Officer, for a review of Gentex's fourth quarter and calendar year 2011 results.

As you know from the 8-K filed in January of 2010, Enoch Jen retired from full-time employment at the end of 2011, and will continue on a limited part-time basis for 15 months. I'm going to go through a few routine matters and then I will turn the call over to Steve.

This call is being broadcast live on the Internet via an icon on the homepage of Gentex Corporation's website. The auto playback of the conference call is also available on the website. All contents of Gentex Corporation's conference calls are the property of Gentex and may not be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express or written consent of Gentex.

Gentex Corporation alone holds such rights. While we understand that there may be 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 transcript, 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 to these terms.

Before we begin, I'd like to remind you of our forward-looking statements. Gentex Corporation will make forward-looking statements in this presentation related to its financial results for the fourth quarter and calendar year 2011 and beyond that are based on preliminary data and are subject to risks and uncertainties.

These forward-looking statements are based on management's beliefs, assumptions, current expectations, estimates and projections of the global automotive industry, the economy, the ability to control and leverage fixed manufacturing overhead costs, unit shipment and net sales growth, product mix, the ability to control ER&D and SG&A expenses, gross margins, and the company itself.

All statements other than statements of historical facts are declarations that are or could be consider to be forward-looking statements and include terms such as anticipate, outlook, expectations, estimates, projects or forecast and variations of such words and similar expressions.

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.

The 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 Steve Dykman and he will make some comments about the quarter.

Steve Dykman

Good morning and thank you for joining us on the call.

We're pleased to report record fourth quarter in terms of revenues and earnings. The company reported record fourth quarter 2011 net sales of $260.3 million, a 17% increase compared with net sales of $222.1 million in the fourth quarter of 2010. Record net sales of $1 billion for calendar year 2011, a 25% increase compared with net sales of $816.3 million in calendar year 2010.

We also reported record fourth quarter 2011 operating income of $55.8 million, a 10% increase compared with operating income of $50.6 million in the fourth quarter of 2010. Record operating income of $231.4 million for calendar year 2011, a 21% increase compared with operating income of $191 million in calendar year 2010.

We reported record fourth quarter 2011 net income of $40.5 million, a 10% increase compared with net income of $36.9 million in the fourth quarter of 2010. Record net income of $164.7 million for calendar year 2011, a 20% increase compared with net income of $137.7 million in calendar year 2010.

We reported record fourth quarter 2011 earnings per diluted share of $0.28, compared with $0.26 per share in the fourth quarter of 2010. Record calendar year 2011 earnings per diluted share were $1.14, compared to $0.98 per share in calendar year 2010.

Next, we'll look at automotive net sales and auto-dimming mirror unit shipments. For the fourth quarter ended December 31, 2011, total auto-dimming mirror unit shipments increased by 16% in the fourth quarter of 2011 compared with the fourth quarter of last year. Automotive net sales increased by 17% from $217.7 million in the fourth quarter of 2010 to $254.7 million in the fourth quarter of 2011.

The lower-than-expected automotive net sales versus our guidance at the beginning of the quarter was primarily the result of lower-than-forecasted vehicle production volumes at certain customers, and inventory adjustments by certain Tier 1 exterior mirror suppliers.

Auto-dimming mirror unit shipments increased by 22% in North America in the fourth quarter of 2011, primarily the result of increased mirror unit shipments at certain domestic automakers. North American light vehicle production increased by 16% in the fourth quarter of 2011 compared with the same prior-year quarter.

Auto-dimming mirror unit shipments to offshore customers increased by 13% in the fourth quarter of 2011 compared with the same quarter last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European automakers. Light vehicle production in Europe decreased by approximately 1% in the fourth quarter of 2011, and increased by 12% in Japan and Korea in the fourth quarter of 2011 compared with the same quarter last year.

For calendar year ended December 31, 2011, total auto-dimming mirror unit shipments increased by 26% in calendar year 2011 compared with calendar year 2010. Automotive net sales also increased by 26% from $797.1 million in calendar year 2010 to $1 billion in calendar year 2011.

Auto-dimming mirror unit shipments increased by 26% in North America in calendar year 2011 compared with calendar year 2010, primarily as a result of increased mirror unit shipments to the domestic automakers. North American light vehicle production increased by 10% in calendar year 2011 compared with the same prior-year period.

Auto-dimming mirror unit shipments to offshore customers increased by 26% in calendar year 2011 compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European automakers. Light vehicle production in Europe increased by 7% in calendar year 2011 and decreased by 5% in Japan and Korea in calendar year 2011, compared with the same period last year.

Other net sales increased by 27% to $5.6 million for the fourth quarter of 2011 compared with the same quarter last year, primarily due to a 92% increase in dimmable aircraft window net sales. Other net sales increased by 7% to $20.6 million for calendar year 2011 compared with the same period last year, primarily due to a 29% increase in dimmable aircraft window net sales partially offset by relatively flat fire protection net sales.

The increases in dimmable aircraft window net sales for both the fourth quarter and calendar year 2011 were primarily due to the increased shipments of dimmable windows for the Boeing 787 Dreamliner series of aircraft. Fire protection net sales continue to be impacted by the relatively weak commercial construction market.

Next, we'll talk about the impact of natural disasters and supply chain constraints. As a result of the fast ramp-up in global automotive light vehicle production in the second half of 2010 and the continuation through 2011, the company experienced increased costs associated with supply chain constraints on certain automotive-grade electronic components.

Although availability of certain automotive-grade components remained tight throughout this period, the company did experience sequential improvements in this area. However, the March 12, 2011 earthquake and tsunami in Japan added significant stresses on the supply chain as many electronic components are supplied by Japanese manufacturers who were impacted by the natural disaster.

The company was successful in securing additional quantities of constrained parts to meet anticipated customer demand. In addition, the company did experience sequential reductions in supply chain related costs through the balance of calendar year 2011 as conditions improved following the earthquake and the tsunami in Japan.

Flooding in Thailand as a result of heavy rain and monsoon since late July 2011 resulted in additional supply chain disruption as production at certain component supplier plants was moved to their plants in other countries, putting those suppliers outside of Thailand in overcapacity situations.

Gaining access to those components resulted in additional cost to the company and negatively impacted the company's gross profit margins by approximately a quarter of a percentage point during the fourth quarter of 2011. The company currently estimates that costs associated with these supply chain constraints and disruptions will improve sequentially through the first half of calendar year 2012.

To-date, the supply chain related issues the company has experienced have not disrupted deliveries to customers, but the company continues to apply measures to ensure adequate supply of certain automotive-grade components that had been affected by recent economic and environmental conditions.

The current environment is constantly changing, and it is not known what the ultimate effect of the changing environment will have on supply chain, global light vehicle production, and the auto industry or the company.

Next, we'll look at average selling price per auto-dimming mirror unit, which is $46.39 in the fourth quarter of 2011. The ASP of auto-dimming rearview mirrors was down sequentially to $46.39 in the fourth quarter of 2011 compared with $46.79 in the third quarter of 2011, primarily due to a lower product mix of advanced feature mirrors and annual customer price reductions.

The ASP increased slightly on a year-over-year basis to $46.39 compared with $46.36 in the fourth quarter of 2010, primarily due to a higher mix of featured mirrors, mostly offset by annual customer price reductions.

Based on IHS' January 2011 light vehicle production forecast, we currently expect the first quarter 2012 ASP to be in approximately the same range as the fourth quarter of 2011 based on anticipated product mix of base and featured mirrors in that forecast. As usual, there are uncertainties with the IHS production and sales forecast, customer orders and new product introductions.

Next, we'll look at the gross profit margin. The gross profit margin decreased on a sequential basis from 35.4% in the third quarter of 2011 to 34.7% in the fourth quarter of 2011, primarily due to the company's inability to leverage fixed overhead costs due to the lower net sales.

Supply chain constraints related to the flooding in Thailand negatively impacted the gross margin in the fourth quarter of 2011 by approximately a quarter of a percentage point. The gross profit margin decreased on a year-over-year basis from 35.8% in the fourth quarter of 2010 to 34.7% in the fourth quarter of 2011, primarily due to annual customer price reductions.

The gross profit margin decreased to 35.3% for calendar year 2011 compared with 36.2% for calendar year 2010, primarily due to the impact of annual customer price reductions, partially offset by the company's ability to leverage fixed overhead costs.

The company currently expects that its gross profit margin for the first quarter of 2011 will be approximately in the same range as the gross profit margin reported in the fourth quarter of 2011.

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 and engineering costs reductions, supply chain constraints and manufacturing yields.

Engineering, research and development expense increased by 21% in the fourth quarter of 2011 compared with the same 2010 period, primarily due to additional hiring of employee in outside engineering and development services to support new product development projects and new program awards.

ER&D expenses increased by 27% for calendar year 2011 compared with the same 2010 period, primarily due to additional hiring of employee and outside contract engineering and development services to support new product development projects and new program awards.

ER&D expense is expected to increase by approximately 20% to 25% for the first quarter of 2011 compared with the first quarter of 2011, primarily due to additional hiring of employee and outside contract engineering and development services.

Selling, general and administrative expenses increased by 18% in the fourth quarter of 2011 compared with the same prior-year period, primarily due to continued overseas office hiring to support our overseas growth. SG&A expense increased by 20% for calendar year 2011 compared with calendar year 2010, primarily due to continued overseas office hiring to support our overseas growth.

SG&A expense is currently expected to increase by approximately 15% to 20% for the first quarter of 2012 compared with the first quarter of 2011, primarily due to continued overseas office hiring to support our overseas growth.

Now, I'll provide some additional details regarding other income for the fourth quarter of 2011. Investment income was $2,524,000. Other net was $423,000 for total other income of $2,947,000. For calendar year 2011, investment income was $4,166,000, and other net was $8,898,000. Total other income for calendar year 2011 was $13,064,000.

Investment income increase in the fourth quarter of 2011 compared with the fourth quarter of 2010, primarily due to increased year-end mutual fund distribution income. Other income net decreased in the fourth quarter of 2011, primarily due to realized losses on the sale of equity investments in the fourth quarter of 2011 compared with realized gains on the sale of equity investments in the fourth quarter of 2010.

Investment income increased in calendar year 2011 compared with calendar year 2010, primarily due to increased year-end mutual fund distribution income. Other income net decreased in calendar year 2011 compared with calendar year 2010, primarily due to reduced realized gains on the sale of equity investments.

Now, I'll provide an update regarding certain balance sheet items as of December 31, 2011. Accounts receivable was $110.4 million, inventories $188.8 million, patents and other assets $13 million, accounts payable $65.5 million, and accrued liabilities at $35.2 million.

Now, I'll provide an update on the tax rate. The fourth quarter 2011 effective tax rate of 31% varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction and the conclusion of a routine audit examination during the quarter that was favorably impacted the effective tax rate by approximately two percentage points.

The effective tax rate at 33% for calendar year 2011 varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for 2012 will be approximately 33% based on current tax laws, primarily due to the domestic manufacturing deduction.

The company's year-to-date cash flow from operations was $141.7 million. An update regarding capital expenditures and depreciation; capital expenditures for the fourth quarter of 2011 were $35.2 million. Capital expenditures for the calendar year 2011 were $120.2 million. Depreciation expense for the fourth quarter was $9.3 million, and calendar year 2011 depreciation was $42.6 million.

The company currently estimates that 2012 capital expenditures will be approximately $130 million to $140 million, primarily due to the increased production equipment purchase of approximately $60 million to $65 million and new facility costs of approximately $70 million to $75 million to increase production plant capacity.

2012 capital expenditures will be financed from current cash and cash equivalents on hand. Depreciation and amortization expense for 2012 is currently estimated at approximately $48 million to $52 million. The company has previously announced the following expansion plans to increase its plant capacity in the electronic assembly, final assembly, RCD and exterior mirror manufacturing areas.

The projects include a 60,000 square foot chemistry lab expansion at the company's Zeeland, Michigan campus, which is expected to be completed in early 2012 with a total estimated cost of $9 million. 32,000 square foot expansion project on the company's exterior mirror manufacturing facility in Zeeland, Michigan, which is expected to be completed in early 20120 with a total estimated cost of approximately $4 million.

125,000 square foot expansion project to its electronic assembly facility in Holland, Michigan, which is expected to be completed in the second quarter of 2012 with a total estimated cost of approximately $17 million. 120,000 square foot expansion project connecting two of its manufacturing facilities in Zeeland, Michigan, which is expected to be completed in the second half of 2012 with a total estimated cost of approximately $25 million.

The company incurred approximately $13 million in facility costs pertaining to the above projects in 2011. The remaining $40 million to $45 million in facility costs pertaining to the above projects are expected to be incurred in 2012.

The company estimates that after the expansion projects are completed, plant capacity for its automotive mirror manufacturing facilities in Zeeland and Holland, Michigan will be approximately 21 million to 23 million interior mirror units annually, and approximately 10 million exterior mirror units annually.

The company has also evaluated additional manufacturing capacity needs to support the demand for its products. Due to the current volatile economic environment, as well as uncertainties related to timing of the ramp-up of certain products, the construction timing of a new manufacturing facility is uncertain.

However, the company is estimating that it will incur the cost of approximately $15 million pertaining to facility master-planning and land infrastructure improvements at 140-acre site that the company currently owns.

Now, an update on cash dividends. On January 20, 2012, the company paid a quarterly cash dividend of $0.12 per share to shareholders of record of the common stock at the close of business on January 6, 2012.

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

Connie will now provide an update on SmartBeam and Rear Camera Display.

Connie Hamblin

So, an update on SmartBeam. For the 2011 calendar year, we shipped approximately 1 million SmartBeam units, which was a 66% increase over the SmartBeam unit shipments of 630,000 in calendar year 2010. Based on the IHS January 2012 forecast, we currently expect that SmartBeam unit shipments will increase by approximately 40% to 45% in calendar year 2012.

Now, an update on Rear Camera Display product. On the legislation, the Kids Transportation Safety Act and the pending requirement that all new vehicles in the United States will be required to be equipped with cameras and Rear Camera Displays by September of 2014.

And this is based on the December 3rd, 2012 Notice of Proposed Rulemaking that was issued by the National Highway Traffic Safety Administration. That was moved from the Office of the Secretary of Transportation to the Office of Management and Budget on November 16th. At that time, the final rule was targeted to be completed by December 30th.

On January 10th of 2012, Secretary of Transportation, Ray LaHood, sent a letter to Congressman Fred Upton and other congressional leaders, indicating that due to the many public comments and the complexity of the rule that he now believes that the rule can be finalized by February 29th of 2010.

We continue to believe that RCD mirrors will likely be implemented in three overlapping phases. First phase was market-driven phase, and that was the time period prior to any legislation through the date of the National Highway Traffic Safety Administration's Notice of Proposed Rulemaking last December.

Then secondly, there is a wait-and-see phase, which we currently are in. And that's the period of time for when the legislation was signed into law on February 28th of 2008 until a final rule was issued, which currently is indicated by February 29th of 2012.

And then third, the implementation phase, which is the time from the final rule when it's issued until full implementation when 100% of all new vehicles in the U.S. under 10,000 pounds will be required to be equipped with rear cameras and displays.

During this wait-and-see phase, many customers have deferred any final sourcing decisions and programs until the final rule is published. We continue to believe that the market for camera displays in vehicles will be divided into two primary market segments.

Top 20% of the market will primarily offer the display in their navigation systems with the option of purchasing a RCD mirror. And then, the rest of the market is the most likely market area to offer camera display in the mirror or in other multi-purpose displays in the vehicle in a number of different locations, including the radio, instrument panel, console, et cetera.

This is the segment of the market with the greatest volume potential, but it also has the greatest and increasing competition. We continue to be in the wait-and-see phase as most automakers are waiting to find out what the final rule requirements will be. The company shipped approximately 1.7 million RCD mirrors in calendar year 2011, compared with calendar year 2010.

And then, based on IHS automotive January 2012 forecast, we currently expect that RCD mirror unit shipments will increase by approximately 10% to 15% for the first quarter of 2012, compared with the first quarter of 2011, reflecting the extended wait-and-see period due to the delay in the final rule and lack of visibility with respect to final customer sourcing decisions.

I'll give an update on the dimmable aircraft window program. We're currently shipping dimmable windows for the 787 Dreamliner, and each passenger aircraft has approximately 100 windows. The first Boeing 787 was purchased by All Nippon Airways. Boeing has also expressed interest in utilizing these dimmable windows for other aircrafts.

Gentex is also shipping dimmable aircraft windows for use on the passenger cabin windows of the 2010 Beechcraft King Air 350i, which is the first aircraft in general and business aviation with dimmable windows. Each King Air has approximately 15 windows. Other aircraft manufacturers continue to have interest in this technology, and we are working on those potential programs with PPG Aerospace.

Now, I will provide our future projections with respect to net sales in the first quarter. Our estimate for net sales for the first quarter of 2012 is an increase of approximately 15% to 20%, compared to the same quarter in 2011 based on IHS's January 2012 forecast for light vehicle production levels.

The strong outperformance of Gentex's unit shipment growth compared to light vehicle production growth in our markets continued but began narrowing in the fourth of 2011, reflecting a slowdown in the growth rate of light vehicle production in China and at the major German automakers.

European light vehicle production is currently expected to decline by 11% in the first quarter of 2012, compared with the same period last year. And light vehicle production is expected to climb by 4% in China for that same period.

I'll give you the production numbers that we're basing our estimates on. This is based on IHS's January 2012 forecast. For North America, 3.6 million light vehicle units, which is a 7% increase over 3.4 million units in the first quarter of last year.

In Europe, 4.7 million vehicle units, which is a decrease of 11% compared with 5.4 million units for last year's first quarter. And then Japan and Korea, 3.9 million vehicle units, which is a 37% increase over the 2.9 million units in the first quarter of 2011.

And then the calendar year numbers that we are basing our projections on. North America, 13.9 million vehicles, which is a 6% increase over 13.1 million last year. Europe, 18.5 million vehicles in the 2012 calendar year, which is a decline of 8% compared with 20.1 million in calendar year 2011. And then Japan and Korea, 13.9 million, and that's a 12% increase compared with 12.5 million vehicles in calendar year 2011.

And then, just as a reminder, all listeners should note that this call is being recorded by Gentex. All contents of the call are the property of Gentex Corporation. No such content may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex Corporation alone holds such rights.

While we understand that there may be 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 transcript, 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 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 to these terms.

Now, we are going to open the call up for questions and answers. And as usual, we respectfully request that you try and ask one single-part question because we really aren't good at multiple-part questions. So at this point, we will open it up for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from David Leiker with Robert W. Baird.

David Leiker – Robert W. Baird & Co, Inc.

Good morning, everyone.

Connie Hamblin

Good morning.

Steve Dykman

Good morning, David.

David Leiker – Robert W. Baird & Co, Inc.

The production number here in the fourth quarter, it sounds like from what you're talking about that you saw a decline in production rate relative to what you expected. Am I understanding that correctly?

Steve Dykman

Yeah, so certain customers and within the customers, with certain vehicle models that we're on. And that is primarily with some of the Asian customers.

David Leiker – Robert W. Baird & Co, Inc.

So the Asian customers in Europe?

Steve Dykman

Yeah. And then, the second item that really affected the fourth quarter compared to the beginning of the quarter forecast was, as you're aware, we're a Tier 2 for our exterior mirrors, and some of the Tier 1 customers had some inventory adjustments as they approached year-end and evaluated their inventory levels. So that affected us in the fourth quarter as well.

David Leiker – Robert W. Baird & Co, Inc.

Yeah, on that second item, if you look at your foreign exterior mirror shipments, it's really the source of most of the shortfall, at least from what we are looking for. A couple hundred thousand units in the quarter, do you think all of that would be attributed to inventory correction or most of it?

Steve Dykman

No, no, because the 200,000 is both interior and exterior. And so, the exterior mirror units is what's been affected by the inventory adjustments.

David Leiker – Robert W. Baird & Co, Inc.

And how much of your -- I don't recall right now how much of your business in Europe is Tier 2 driven.

Steve Dykman

Strictly exterior mirrors only.

David Leiker – Robert W. Baird & Co, Inc.

All of your exterior mirrors are Tier 2?

Steve Dykman

Yes.

David Leiker – Robert W. Baird & Co, Inc.

Okay, I'll stop there with my one question. Thank you.

Operator

And we'll take the next question from Himanshu Patel from J.P. Morgan.

Himanshu Patel – J.P. Morgan Securities, LLC

Hi, good morning, guys.

Steve Dykman

Good morning, Himanshu.

Connie Hamblin

Good morning.

Himanshu Patel – J.P. Morgan Securities, LLC

I think on the third quarter call you indicated that the Thailand flood was expected to be a 25 to 50 basis point margin hit. First of all, can you just kind of do a post-mortem on that? Is that where that impact shook out? Was it worse or better?

And then, I'm just trying to bridge from sort of that magnitude versus the 90 basis point year-over-year gross margin decline that you saw. Was all of the difference between the two annual customer price-downs or was there something else going on there as well?

Steve Dykman

Okay. So the guidance and on a sequential basis, yeah, we estimated that the flooding impact to be 25 to 50 basis points, and it was about 25 basis points in the quarter effect related to that. So it's a little bit on the low-end of our guidance range. And on a year-over-year basis, the other impact was the effect of annual customer price reductions.

Himanshu Patel – J.P. Morgan Securities, LLC

Okay, thank you.

Steve Dykman

Yep.

Operator

And we'll take the next question from Rich Kwas with Wells Fargo.

Richard Kwas – Wells Fargo Securities, LLC

Hi, Steve and Connie, how are you?

Steve Dykman

Good, how are you?

Connie Hamblin

Good, how are you?

Richard Kwas – Wells Fargo Securities, LLC

Good. Steve, I know you talked about guidance for ER&D and SG&A over the first quarter. As we think about the year, should there be some better leverage on the ER&D side as we move through the year, given the amount of money you've spent the last couple of years?

Steve Dykman

If you look at the trend line, we're working off a larger base, a lot of percentage basis, naturally we think that would come down a little bit. But we continue to devote resources to the ER&D line item as we develop new products. So I think, here for the near-term, it will likely be running ahead of the long-term historical trend of that 10% to 15% range.

Richard Kwas – Wells Fargo Securities, LLC

Okay, and is that for both --

Steve Dykman

Oh, no. On SG&A expenses, for -- and again, you do have the potential effect of any foreign currency fluctuation that could affect that line item. But in the first quarter, we've guided 15% to 20%. And we do think, here in the near-term, that the expense growth on a percentage basis on that line item will be a little higher than the historical trend of around 10%.

Richard Kwas – Wells Fargo Securities, LLC

Okay, thank you.

Connie Hamblin

And the ER&D is also vehicle-specific implementation in the engineering area on programs that we already have. Because our product mix has become more complex, it requires more engineering resources to implement these products on the vehicles.

Operator

And we'll take the next question from John Murphy with Bank of America Merrill Lynch.

John Murphy – Bank of America Merrill Lynch

Good morning, guys.

Steve Dykman

Good morning.

John Murphy – Bank of America Merrill Lynch

I have one real question and then one housekeeping question, and I apologize for sort of the addition there. But the first question is on the average selling price for the mirror for the full-year of 2011. It looks like it's about flat, but you're talking about the RCD's and SmartBeam sales or unit sales increasing quite dramatically.

I'm just curious why the average selling price, if we load those in, is not increasing. It just seems like you're actually not getting paid too much for the RCD's and the SmartBeam sort of incrementally. And then, sort of just a housekeeping issue. Is the sales -- your sales are up 25% but your inventory is up 90%.

So it looks like to me that your inventory turns are about 3.5 times versus kind of the long-term average of 10 times. And I just fear I'm actually something with my math there, but it just seems like inventory has gone up a lot faster than sales. Just trying to understand what I'm missing there.

Steve Dykman

So first, on the ASPs on a year-over-year basis, as you mentioned, it's just up slightly and so, part of that on the positive side, we have the higher mix of featured mirrors. And then, the other impact is the effect of annual customer price reductions on the overall book of business that would have partially offset that.

And then on the housekeeping question on inventories, you are correct, inventory has increased from a little over 100 million to a little over 180 million year-over-year. And so, that's a combination of increased production levels, and then the other factor really relates to the longer lead times, certain electronic components related to supply chain constraints.

So we have carried additional inventory levels in the raw material area as a result of all the supply chain disruptions and constraints. And so at this point, as we work through those, we hope to bring those levels down a little bit.

Most of the increase within the inventory is in the raw materials area. And as we talked about on the third quarter call, we are expected to have our finished goods inventory decreased a little bit sequentially as we head into year-end, and our finished goods inventory levels did decline during the fourth quarter a little bit.

John Murphy – Bank of America Merrill Lynch

But you think that this is -- you can work that working capital or the inventory back down, and this may be just really a short-term issue or is this kind of the new level that we should expect inventory to run at? I'm just curious --

Steve Dykman

Yeah, I think part of it is we're working off a larger base. But the component that relates to the longer lead time and the supply chain disruptions and constraints, as that component of the increase improves through the first half of next year, that should come down a bit.

John Murphy – Bank of America Merrill Lynch

Great. Thanks, Steve and Connie. I appreciate it.

Operator

And we'll take the next question from Adam Brooks with Sidoti & Company, LLC.

Adam Brooks – Sidoti & Company, LLC

Good morning, guys. Maybe you should just give an update on your thoughts on the margin impact from the expansion plans this year, and maybe anything beyond. It seems like at the rate you're growing, probably in another year or so, like you said, maybe a completely new facility, maybe what you're thinking initially the margin impact could be.

Steve Dykman

Okay. So as we've said previously, the four expansion plans that we have ongoing here, their expansions to existing facilities. And that is a little different than our historical trend where if we add a new facility.

And with the expansions to existing facilities, we're not anticipating as significant of an impact on margins due to the fact that it's not like we have to duplicate and add the support functions like you do with a new facility.

So there will have -- I think when we opened our 2006 facility, we had talked about half a percentage point decline or impact on margins in the first year as a result of that new facility. And we're not expecting that these expansion plans will be to that degree.

Adam Brooks – Sidoti & Company, LLC

Okay. And maybe if I could sneak in one quick more, do you have a rough number as far as percentage of sales to China at this point?

Steve Dykman

It's very immaterial, low, low single-digit.

Adam Brooks – Sidoti & Company, LLC

Thank you.

Operator

And we'll take the next question from Steve Dyer with Craig-Hallum.

Steve Dyer – Craig-Hallum Capital Group, LLC

Thank you. Good morning, Connie and Steve.

Steve Dykman

Good morning.

Connie Hamblin

Good morning.

Steve Dyer – Craig-Hallum Capital Group, LLC

Was there any currency impact, either to revenue or margins, in any material way in the quarter?

Steve Dykman

No. On revenues, it was maybe like a tenth of 1%. It was very insignificant. And within the SG&A line, it was pretty much flat with no effect. For calendar year SG&A expenses, foreign currency accounted for about 4 percentage points of the overall increase in the expenses.

Steve Dyer – Craig-Hallum Capital Group, LLC

Okay. I'm wondering if you can help me kind of reconcile your gross margin guidance for Q1 of essentially flat quarter-over-quarter. I think the midpoint of your revenue guidance would imply $30 million, $35 million of additional revenue sequentially.

You've kind of said that you think the majority of the supply chain flooding impact is behind you, so why would we not see a little bit of a bump there on the gross margin line?

Steve Dykman

That's a good question. As you mentioned, sequentially, revenues are going to be up about 13% and really the offset is going to be the impact of annual customer price reductions in the first quarter. And that impact will be offset by our ability to leverage fixed overhead costs.

I think one thing to keep in mind, 10 years ago when we talked about the effect of annual customer price reductions, the majority of those reductions occurred in the third quarter, and that has shifted overtime throughout the year. But as we look at the customer base and the mix, the first quarter is the largest quarter in which we have customers that have their annual customer price reductions effective.

Steve Dyer – Craig-Hallum Capital Group, LLC

Okay, and then one more. How should we think about gross margin trending throughout the balance of 2012 directionally, and maybe any help with magnitude would be great?

Steve Dykman

Okay. Well, I think first, we have to demonstrate that we can stabilize margins as we work through the supply chain issues that we are hopeful and expect to improve in the first and second quarter. And then, improve on those from the current levels.

So we do continue to work and we have an aggressive purchasing cost reduction program, and engineering VAVE program that continue to generate cost savings. So as we progress through the year, we continue to work to improve on the margin. It will likely be smaller, incremental improvements as we move forward.

Steve Dyer – Craig-Hallum Capital Group, LLC

Okay, thanks.

Operator

And we'll take the next question from Brett Hoselton with KeyBanc.

Brett D. Hoselton – KeyBanc Capital Markets, Inc.

Good morning, Steve. Good morning, Connie.

Steve Dykman

Good morning, Brett.

Connie Hamblin

Good morning, Brett.

Brett D. Hoselton – KeyBanc Capital Markets, Inc.

The Kids and Cars Safety Act, first question I had was, have you heard anything that suggest that the final rule will be materially different than the current proposed rule, whether in terms of implementation standard themselves, like what cars are covered? And/or the timing which is currently 2014, is that possible that that could on to 2015? Have you heard anything along those lines or not at all?

Connie Hamblin

We have not heard anything in terms of what the final bill is going to be. In terms of having a slip, we've said for a while that because of the delays in the final rule, that we would expect that the September 2014 date probably will be pushed out a year for full implementation just because of the way that the rule -- the actual law is written. This isn't based on any information we're getting from the market or anything, but the way the law is written. So they're supposed to be given four years from the date of the final rule.

Brett D. Hoselton – KeyBanc Capital Markets, Inc.

And then, the slowdown in shipments near-term, you've attributed that to just customers waiting and seeing. Even if we assume that we get pushed back to 2015, you're looking at a very or potentially a very substantial ramp-up in RCD shipments, which sound really good.

But at the same time, I'm not sure you've really experienced anything that has ramped up at a 40% or 50% rate in the 2 million to 3 million, to 4 million to 5 million units range in terms of shipments range.

So my question here is as you look out the next two to three years, do you think that you're going to be able to ramp-up at a very, very significant rate, high-volume, and be able to absorb that and leverage off of that, get the operating leverage that you might expect off of that?

Steve Dykman

Well, and that's why we're looking at longer-term facility expansion needs for our overall product base. I think when you look at the ramp of RCD, it's going to be somewhat dependent on customers' final decisions, as well as they look at their vehicle platforms and when they have a mid-cycle refresh or a model change. That might be spread out a little bit through the implementation phase.

Brett D. Hoselton – KeyBanc Capital Markets, Inc.

Okay. Thank you very much, Steve, Connie.

Operator

And we'll take the next question from Greg Halter with Great Lakes Review.

Gregory W. Halter – LJR Great Lakes Review

Yes. Looking at the price reductions that you have been discussing, I know in the past you had talked about, I think, a 3% to 5% and then that had dropped to about 2% to 4% area. And I'm just wondering what kind of range you're looking at these days.

Steve Dykman

Still in the 2% to 4% range.

Gregory W. Halter – LJR Great Lakes Review

Okay. And one other quick one on the contract that you have with PPG, I think it was signed December of '05. Given all the delays, it was the Boeing 787. Has that been extended or renewed or are there any number of planes that were under that contract? How does that work?

Connie Hamblin

No. It basically talks about $50 million of the first five years of production, and given that there were production delays. So basically, it's just kind of moved out as the production has been delayed.

Gregory W. Halter – LJR Great Lakes Review

Okay, thank you.

Connie Hamblin

Yep.

Operator

(Operator Instructions) We'll take the next question from Peter Nesvold with Jefferies.

H. Peter Nesvold – Jefferies & Company, Inc.

Good morning.

Connie Hamblin

Good morning.

Steve Dykman

Good morning.

H. Peter Nesvold – Jefferies & Company, Inc.

I had a question on the growth rate of ER&D versus the growth rate in revenue. So if I take -- ER&D grew faster than revenue in fourth quarter, and if I take the midpoint of the range to the guidance in 1Q, it happens again in 1Q. When do we see that inflection point to the positive? When do we start to see revenue growing faster than ER&D again?

Steve Dykman

Okay. We've talked about that for probably the last 12 to 18 months as ER&D expenses have grown at a higher pace than historical trends, and in some quarters, greater than the revenue growth. And within the ER&D line, they are working on projects and programs that really are currently generating revenues.

And with the historical trend of the 10% to 16% growth rate in ER&D, that was primarily driven by new program awards and work surrounding actual new programs that were coming online, but then two years. And the last 12 to 18 months, the higher growth rate was really driven by increased activity regarding product development projects.

And those necessarily aren't generating revenues here in the near-term because that really will be two to three years out. So we feel that here in the near-term the growth rate will continue above the historical 10% to 15% trend line but should moderate overtime on a percentage growth basis.

And hopefully, then you'll start to see revenues growing at similar or greater pace than the ER&D growth rate. But that will likely be beyond the 2012 calendar year.

H. Peter Nesvold – Jefferies & Company, Inc.

I just sort of had the sense from the past two earnings calls or so, because the CapEx guidance was going higher. But it sounded like there were some near-term programs that were approaching, and that we would -- I think the investment -- the markets would start anticipating an acceleration in the top line growth.

But I don't really get that sense from the communication this morning. Has anything changed or is this sort of the growth rate in terms of top line that maybe we could anticipate for 2012

Connie Hamblin

Well, the expansions that we talked about, the near-term expansions that we're doing, and the dollars that we're investing there are basically to get us through the next year or so. They were -- we looked at our business as a whole and there were bottlenecks in capacity in certain areas where we needed to expand.

And when where the law of large numbers if impacting us, where we can't just, if we need to add capacity, we can't just add a shift anymore. When we have to flex, we have to literally like build a new plant or expand a plant considerably. So that's kind of where the expansion is coming from, and that's just based on our basically current book of business.

H. Peter Nesvold – Jefferies & Company, Inc.

Okay.

Steve Dykman

And I think, one thing we've talked about for several quarters is when you look at the vehicle production trend versus our unit growth, it has been very strong for the past 12 months. And what you really saw, starting in the fourth quarter and continuing into the first quarter, is a slowing or a narrowing of the delta between vehicle production and our unit growth.

And that really is driven by some of the slowing growth that you read about in China, as well as Europe, and specifically some of the German automakers. And so, we've had that tailwind from really the fourth quarter of 2010 through the first three quarters of 2011, and that is part of the contributing factor as well.

H. Peter Nesvold – Jefferies & Company, Inc.

Okay, thank you.

Steve Dykman

Nothing really has changed with respect to new program awards or anything like that. It's just that that tailwind with the vehicle production mix isn't as significant as what it has been previously.

Operator

And we'll take the next question as a follow-up from David Leiker with Robert W. Baird.

David Leiker – Robert W. Baird & Co, Inc.

Hello?

Steve Dykman

Hello.

David Leiker – Robert W. Baird & Co, Inc.

The first, a follow-up on the question earlier about Europe. And Steve, your comment on that was primarily Asian OEMs in Europe. But my thought was that the majority of your European business is with essentially BMW, Volkswagen, Mercedes and Opel. How large are the Asian OEMs for you in Europe?

Steve Dykman

It's not as significant. But when you look at the vehicle production forecast from the beginning of the fourth quarter to the end of the fourth quarter, many of those variations and weakness in vehicle production were with some of the Asian automakers.

David Leiker – Robert W. Baird & Co, Inc.

Okay. And then on a different note, as we look at the capacity of plants that you laid out here, essentially getting interior, exterior mirrors combined to something in the low 30 million range. It seems to me, by my math, that that's probably sufficient to get you through demand levels through 2014. Is that reasonable?

Steve Dykman

That is close, yes. And obviously, what we experienced coming out of the downturn is we experienced certain capacity constraints in specific areas. So as for some of the expansion, but generally overall, we feel that once the four expansion projects are complete, that we should be set for a couple of years.

However, we also realize that if we're going to build a new facility, it takes a year and a half to two years to construct.

David Leiker – Robert W. Baird & Co, Inc.

And what's the timing for those different expansion plans to be completed?

Steve Dykman

The current four that we talked about?

David Leiker – Robert W. Baird & Co, Inc.

Right.

Steve Dykman

One of -- most of them in the first half of 2012, and then one of them in the second half of 2012.

David Leiker – Robert W. Baird & Co, Inc.

We usually get some relief from the overtime and there's a bottleneck in the second half of '12 from these expansions.

Steve Dykman

We're hopeful for that, yes.

David Leiker – Robert W. Baird & Co, Inc.

Okay, thank you.

Steve Dykman

Yep.

Operator

And we'll take the next question from as a follow-up from John Murphy with Bank of America Merrill Lynch.

John Murphy – Bank of America Merrill Lynch

Thanks for squeezing me back in. Just two questions on RCD. Steve, you had given capacity numbers for mirrors. I don't know if you've given capacity numbers for RCD's. I'm just curious if you have that or is that sort of encompassed?

Steve Dykman

We have not provided that because RCD is just some additional equipment at existing lines, so it is difficult to segregate out.

John Murphy – Bank of America Merrill Lynch

Okay. And then, sort of just as a second question on that, it looks like your penetration rate, if we were just to use your RCDs, it looks like your RCDs are already 13% of the U.S. market. I'm just curious if that sounds like that's about right. And what you think sort of the total RCD penetration rate is currently in the market for sort of all deliveries or all screens, including the mirrors and NAV systems?

Steve Dykman

Well, the 13% probably pretty close. What we've said is the NAV systems probably are 10% to 15%. And if we're at 10 plus percent, that kind of gives you an overall total. And Magna has a couple RCD mirror programs, but they're not that significant at this time.

John Murphy – Bank of America Merrill Lynch

So you think RCDs have probably already penetrated 25% to 30% of just the U.S. market, roughly?

Connie Hamblin

Between our products and the NAV --

Steve Dykman

In total, between the various --

John Murphy – Bank of America Merrill Lynch

Yes, not Gentex alone but sort of in the aggregate?

Connie Hamblin

Yep.

John Murphy – Bank of America Merrill Lynch

Okay, great. That's very helpful. Thank you.

Connie Hamblin

We have time for one more question.

Operator

We'll take the last question from Rich Kwas with Wells Fargo.

Richard Kwas – Wells Fargo Securities, LLC

Hi, just a couple of follow-ups here. The 15 million that, Steve, you talked about for the construction or getting set for constructing a new facility, is that -- that's year-over-year increase? And there was -- I guess there was nothing spent in 2011, is that right or --?

Steve Dykman

Yeah, the 15 million really relates to a parcel of property that we have. And the 15 million relates to master-planning an infrastructure that would need to be done to kind of get ready for when we construct and have a need for a new facility.

Richard Kwas – Wells Fargo Securities, LLC

Okay, but this is first expenditures on those sort of thing.

Steve Dykman

Yeah.

Richard Kwas – Wells Fargo Securities, LLC

Okay. And that hits SG&A, I assume?

Steve Dykman

No.

Richard Kwas – Wells Fargo Securities, LLC

No?

Steve Dykman

Well, that would be for production.

Richard Kwas – Wells Fargo Securities, LLC

Okay, so it's in the gross margin line.

Steve Dykman

Yeah.

Richard Kwas – Wells Fargo Securities, LLC

Okay. And then, just a quick follow-up on the RCD. So the 10% to 15% for first quarter, if I recall, first half of last year, you were growing something like 50%, then it kind of came down in the second half closer to 30%, somewhere in that neighborhood. So is it reasonable to think that as you move through the year, the RCD comparisons on a quarterly basis, they get easier?

Steve Dykman

It's like one way to look at it, as you mentioned that a growth rate percentage slowed in the second half of the year to roughly 30%, but when you run the numbers of our first quarter guidance of the 10% to 15% growth rate, that really is the units are pretty much in line with the latter part of 2011 unit levels.

Richard Kwas – Wells Fargo Securities, LLC

Okay.

Steve Dykman

And so, we are in the wait-and-see type phase.

Richard Kwas – Wells Fargo Securities, LLC

Okay, okay, got it. Thank you.

Operator

And that was the last question for today.

Connie Hamblin

Thank you. I'd like to take this opportunity to thank everybody for joining us. If you have additional follow-up questions, we'll be here. Thank you. Have a good day.

Operator

That does conclude today's conference. Thank you for your participation.

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