Gentex Corp (GNTX) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Gentex third-quarter 2009 earnings conference call. Today's call is being reported. I would now like to turn the meeting over to Miss Connie Hamblin, Vice President of Investor Relations and Corporate Communications. Please go ahead, Miss Hamblin.

Thank you. Good morning everyone. Welcome to Gentex Corporation's third-quarter conference call. On the call today with me are Enoch Jen, our Senior Vice President, and Steve Dykman, our Chief Financial Officer. I'll go through a few routine matters and then Enoch will go through the quarter and give his comments and then we will open it up to Q&A.

This call is being recorded by Gentex Corporation. All contents of Gentex Corporation's conference calls are the property of Gentex.

I should tell you first that this call is being broadcast live on the Internet on Gentex Corporation's website at www.Gentex.com, and that the auto playback of the conference is available on that site.

Gentex Corporation, all contents of our conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted, or otherwise redistributed without the expressed written consent of Gentex. Gentex alone hold 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 transcripts. Gentex Corporation will hold responsible and 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 with these terms.

Our Safe Harbor statement -- this presentation may include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about topline 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, confidence, 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. 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 Enoch Jen. After Enoch makes his remarks with respect to the quarter, we will open the call up for Q&A. And as usual, we ask that you ask one question at a time and one part questions, because we are not good at multiple part questions. Enoch?

Thank you Connie. Good morning everyone. Thanks for joining our conference call. We will start with some selected financial highlights.

Third-quarter revenues were $155.7 million, a 2% increase compared with revenues of $153.1 million in the third quarter of 2008. Revenues for the first nine months of 2009 were $366.9 million, a 27% decrease compared with revenues of $501.5 million for the first nine months of 2008.

Operating income in the third quarter of 2009 was $33.1 million, a 42% increase, compared with operating income of $23.3 million in the third quarter of 2008. Operating income for the first nine months of 2009 was $51.4 million, a 48% decrease compared with operating income of $99 million in the first nine months of 2008.

Net income increased by 58% to $23.9 million in the third quarter of 2009 compared with net income of $15.1 million in the third quarter of 2008. Net income decreased by 52% to $34.6 million in the first nine months of 2009 compared with net income of $72.5 million in the first nine months of 2008.

Earnings per diluted share were $0.17 in the third quarter of 2009 compared with earnings per diluted share of $0.11 in the third quarter of 2008. Earnings per diluted share were $0.25 in the first nine months of 2009 compared with earnings per diluted share of $0.51 in the first nine months of 2008.

Next we will look at automotive revenues and auto dimming mirror unit shipments for the third quarter and the nine months. Total auto dimming mirror unit shipments decreased by 7% in the third quarter of 2009 compared with the third quarter last year. Automotive revenues increased by 3% from $147.3 million in the third quarter of 2008 to $151.1 million in the third quarter of 2009.

Total auto dimming mirror unit shipments decreased by 31% for the first nine months of 2009 compared with the first nine months of 2008. Automotive revenues decreased by 27% from $484.2 million in the first nine months of 2008 to $352.2 million for the first nine months of 2009.

Auto dimming mirror unit shipments in North America decreased by 4% in the third quarter of 2009 compared with the same period of 2008, primarily as a result of lower light vehicle production. North American light vehicle production declined by 20% in the third quarter of 2009 compared with the same prior-year period.

Auto dimming mirror unit shipments in North America decreased by 39% for the first nine months of 2009 compared with the first nine months of 2008 primarily as a result of significantly lower light vehicle production. North American light vehicle production declined by 41% for the first nine months of 2009 compared with the same prior-year period.

Auto dimming mirror unit shipments to offshore customers decreased by 8% in the third 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 14% in the third quarter and decreased by 19% in Japan and Korea in the third quarter of 2009 compared with the same period last year.

Auto dimming mirror unit shipments to offshore customers decreased by 26% for the first nine months 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 29% in the first nine months of 2009 and decreased by 33% in Japan and Korea in the first nine months of 2009 compared with the same period last year.

Our average selling price per auto dimming mirror unit was $45.22 in the third quarter of 2009. The ASP of auto dimming rearview mirrors was up sequentially from $42.64 to $45.22 in the third quarter of 2009 primarily due to increased sales of our SmartBeam and RCD mirror. The ASP also was up on a year-over-year basis from $41.23 compared with the third quarter of (technical difficulty) from $41.23 in the third quarter of 2008, primarily due to increased sales of SmartBeam and RCD mirrors partially offset by annual customer price reductions. Based on CSM's end of September light vehicle production forecast, we expect ASP's to remain at about the same level in the fourth quarter of 2009.

Looking at Fire Protection revenues, Fire Protection revenues decreased by 19% to $4.5 million for the third quarter of 2009 compared with the same period last year, and declined by 16% for the first nine months of 2009 to $14.5 million compared with the same prior-year period. The decline of revenues in both periods was primarily due to the weak commercial construction market.

Looking next to our gross profit margin, the gross profit margin increased sequentially to 34.9% in the third quarter of 2009 compared with 30.5% in the second quarter of 2009. The increase in the sequential gross margin was due to the Company's increased ability to leverage its fixed overhead cost due to the 33% sequential increase in revenues. Gross profit margin also increased on a year-over-year basis from 30.5% in the third quarter of 2008 to 34.9% in the third quarter of 2009, primarily due to purchasing cost reductions, reduced fixed overhead costs, and improve product mix, partially offset by the impact of annual customer price reductions.

The gross profit margin was 30.7% for the first nine months of 2009 compared with 33.6% for the first nine months of 2008, primarily due to the Company's inability to leverage its fixed overhead costs. Annual customer price reductions were offset by purchasing cost reductions. Based on the Company's expected revenues for the fourth quarter of 2009, which will be discussed later in these comments, we would expect the Company's fourth-quarter gross profit margin to be approximately in the same range as the third quarter of 2009. 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, VAV initiatives, and manufacturing yields.

Our engineering research and development expense decreased by 9% in the third quarter of 2009, and decreased by 12% for the first nine months of 2009 compared with the same 2008 periods, primarily due to reduced employee compensation expense. ER&D expense is currently expected to be approximately flat for the fourth quarter of 2009 compared with the fourth quarter of 2008.

Selling, general, and administrative expense decreased by 10% in the third quarter of 2009 compared with the same prior-year period, primarily due to reduced overseas office expense, travel and foreign exchange rates. SG&A expense decreased by 12% for the first nine months of 2009 compared with the same period in 2008, primarily due to reduced employee compensation expense and foreign exchange rates. Excluding the increase and allowance for doubtful accounts in the fourth quarter of 2008, SG&A expense is currently expected to be up approximately 10% for the fourth quarter of 2009 compared with the fourth quarter of 2008, primarily due to foreign exchange rates and increased variable compensation expense.

In an ERP update, the Company implemented the first phase of a new enterprise resource planning system effective July 1, 2009, which covered core business areas at our Zeeland, Michigan locations. To date, we have not experienced any significant issues during the implementation process. However, there is no guarantee that all system components will function as intended in the future. In addition, the Company is planning to implement the second phase of its new ERP system by the end of calendar year 2009, which includes one overseas office location and additional lean manufacturing production line scheduling and business reporting capabilities.

Next we will look at some of the components of other income and expense. For the third quarter of 2009, investment income was $568,000, other net was $1.911 million for a total other income of $2.479 million. For the first nine months of 2009, we had investment income of $2.628 million and other than temporary impairment loss on equity securities of $1.291 million, and other expense on a net basis of $1.220 million, resulting in a total other income of $118,000. Other income increased in the third quarter of 2009 compared with the third quarter last year primarily due to realized gains on the sale of equity investments partially offset by lower investment income due to lower interest rates. Other income of $118,000 for the nine months ended September 30, 2009 decreased primarily due to lower investment income due to lower interest rates.

Next we will look at a few balance sheet items. As of September 30, 2009, Accounts Receivable was $74.3 million, inventories was $46.7 million, patents and other assets were $10.4 million, accounts payable were $32.2 million and accrued liabilities were $41.2 million.

Our effective tax rate of 32.7% 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 the domestic manufacturing deduction.

The year-to-date cash flow from operations was $83.6 million.

Our capital expenditures for the third quarter of 2009 was $5 million. Our depreciation expense for the third quarter of 2009 was $9.7 million. For calendar 2009, our estimate for capital expenditures is now approximately $20 million to $25 million. Our depreciation and amortization expense for 2009 is estimated at $36 million to $38 million.

Looking next at our share repurchase plan, the Company did not repurchase any shares during the third quarter of 2009. The Company has a share repurchase plan in place with authorization to repurchase up to 28 million shares of 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 us be opportunistic and is based on a number of factors, including market conditions, our 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, uncertain production of sales levels, potential customer bankruptcies and liquidity needs, you should expect that factor is playing a more important role in the decisions that are being made as to the number of shares being repurchased and at what prices they are repurchased.

Cash dividends -- on October 15, 2009, the Company paid a quarterly cash dividend of $0.11 per share to shareholders of record of the common stock at the close of business on October 7. The ex-dividend date was October 5.

The Company's cash dividend policy was established based on a number of criteria, including the favorable tax treatment under current US income tax laws that the dividend rate be meaningful, sustainable, and that the rate would increase generally in line with Company's earnings and operating cash flow over time. The cash dividend rate is an agenda item at every Board of Directors meeting.

Next, an update on SmartBeam. We continue to make progress with automakers as they more broadly offer SmartBeam across their product lines. SmartBeam is the intelligent highbeam headlamp assist product that we introduced in the 2005 model year, and it is currently offered on 32 vehicle models at eight OEM customers, including Audi, BMW, GM, Chrysler, Toyota, Opal, Land Rover, and Rolls-Royce. We expect to announce several additional new vehicle models yet for the 2009 calendar year.

For the 2008 calendar year, we shipped approximately 295,000 SmartBeam units. Based on our current forecast, we expect SmartBeam units to increase by approximately 50% in calendar year 2009 compared with calendar year 2008.

Next, an update on rear camera display. To date, our RCD mirrors are offered on 37 vehicle models with seven automakers as original equipment, including Acura-Honda, Buick-Chevrolet-GMC-Saturn, Daihatsu, Ford-Lincoln-Mercury, Hyundai-Kia, Lexus-Toyota and Mitsubishi. RCD mirrors are also currently offered as a dealer installed option, or an aftermarket product, on 18 additional vehicle models with six automakers, including Kia, Mazda, Mitsubishi, Nissan, Subaru, and Toyota.

Some of you will notice -- note that the Acura-Honda reference is new on our list. Honda Motor Company has adopted the same policy as General Motors, which does not allow suppliers to announce in a news release the vehicle programs for which we are shipping product. In those cases, we will update the information in our investor relation presentation on our website as we begin shipping and will reference it in these conference calls as required.

With respect to the RCD mirror, there continues to be significant interest in this line of products, and we expect to announce several additional vehicle models that will begin offering RCD in calendar year 2009. The Company shipped approximately 270,000 RCD mirror units in calendar year 2008. We still believe there is sufficient customer demand and that shipments of RCD mirrors could double in calendar year 2009.

Legislation regarding rear backup assist -- the automakers currently offering a rear camera display product are doing this absent any legislation and made the decision before any was pending. In 2008, the Transportation Safety Act of 2007 was signed into law and orders the Secretary of Transportation at the National Highway Traffic Safety Administration, NHTSA, to revise the federal standard to expand the field of view so that drivers can detect objects directly behind vehicles. The phase-in period during which automakers need to meet the requirements set forth by NHTSA is expected to be between now and 2015.

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

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

Looking next at revenue estimates, the following projection for revenues in the fourth quarter of 2009 is based on CSM's end of September light vehicle production forecast. Our estimate for revenues for the fourth quarter of 2009 is an increase of approximately 30% to 35% compared with the same period in 2008 based on CSM's end of September forecast for light vehicle production levels.

The global governmental vehicle stimulus programs such as the Cash for Clunkers program in the United States do not have a significant direct effect on our production levels in the third quarter of 2009, since the smaller vehicles that people are mostly purchasing were those that typically do not contain significant Gentex content. However, we believe there was some indirect effect due to the increased showroom traffic that those programs created.

While the governmental stimulus programs were in effect, automotive vehicle sales were temporarily higher than automotive production levels. Now that sales have decreased and the scenario has reversed, automakers at some point will need to adjust their production plans for the lower sales levels.

For the fourth quarter of 2009, light vehicle production per CSM for North America is 2.7 million vehicle units, a 1% increase compared to the fourth quarter of 2009; for Europe, 4.3 million vehicle units, a 9% increase compared to the fourth quarter of 2008; and for Japan and Korea, 2.9 million vehicle units, a 12% decrease compared to the fourth quarter of 2008. For calendar year 2009, light vehicle production per the CSM forecast for North America is currently 8.6 million vehicles, a 32% decrease compared to calendar year 2008; for Europe, 16.1 million vehicles, a 21% decrease compared to the prior year; and for Japan and Korea, 10.4 million vehicles, a 28% decrease compared to the prior year.

At this point, our prepared comments are concluded, and I will turn the call back over to Connie.

As a quick reminder, all listeners should note that this call is being recorded by Gentex. All contents of Gentex Corporation's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the expressed 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 transcripts, as Gentex Corporation will not be held liable for the content of any such transcript. Gentex Corporation will hold responsible and liable any parties 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.

At this point, we are going to open it up to Q&A, and we would ask that you ask only one question at a time and single-part questions please. Operator?

(Operator Instructions). David Leiker, Robert W. Baird.

Hi, good morning. It's Keith Schicker calling in for David. Just one quick question on the average selling price. It's up pretty nicely quarter-over-quarter and year-over-year. Could we get a sense of how sustainable that level is going forward, or are there some mix issues that are maybe driving that number higher?

I think, per our guidance, we are expecting that the ASP for the fourth quarter to be similar to the third quarter. Looking out forward, we expect the overall direction to continue to move higher, but as we've discussed before, it is somewhat of a mix issue quarter-to-quarter. For example, we need to keep in mind that we are continuing to gain new base mirror and outside mirror business at the same time as we are increasing our RCD and SmartBeam mirror business.

Okay, thank you.

Brett Hoselton, KeyBanc Capital Markets.

Let's see here. We'll pick this one here. Gross margins, flat from the third quarter to the fourth quarter but it looks like you're expecting sales to be up, which would suggest that operating leverage would allow you to possibly push the gross margins up a little bit higher than they were in the third quarter. Is there some sort of an offset that is preventing the gross margins from going higher from the third quarter to the fourth quarter?

I think, if you look at it sequentially from the second to the third quarter, we had an incremental growth margin of about 48%, which was down sequentially from the first to the second quarter. And when you look at our revenue guidance on a sequential basis from Q3 to Q4, it's not going to be that great. And so we don't expect that the margin would have much improvement.

The other thing to keep in mind is we have spoken about the variable compensation component. And as financial performance improves, the Company-wide profit share bonus accruals will continue to increase. And we also have recently started hiring some employees, both temporary and permanent.

And let's see. As a very closely related question to that, the other income, how much of your other income -- and I think you might have said this before -- was due to the equity income?

For the quarter or for year-to-date?

For the quarter.

$1.911 million.

$1.911 million, okay. So basically $2 million in this quarter due to equity income. Is that right? What's your current mix of equity bonds and cash at this point?

As of September 30, we have about just under $336 million in cash and cash equivalents, $14.2 million in short-term investments and $92.8 million in long-term investments, which is primarily the equity investment portfolio.

Okay. And as I think about the return on equity, that $92 million portion, should I conceptually think about that as following the market? I mean you're essentially marking to market on a quarterly basis, or am I incorrect there?

That's correct. On the balance sheet, those are fair market values, and it should follow the overall performance in the market pretty much.

Great, thank you. Thank you very much, Steve.

John Murphy, Bank of America Merrill Lynch.

For once, I won't violate the rule. But I have fallen by the wayside already. First, you seem reluctant and have in the past to sort of endorse the possibility of returning to the 40% gross margin or slightly better that you have had historically. But obviously, with the operating leverage, you've seen some pretty good increases there in gross margin. Is there something structurally that has really changed in the business that's going to keep you from getting there if revenue ramps up significantly in the next year or two?

Okay, I think what we have said, John, over the past couple of years is that our short-term objective, which is out a year or two, was to stabilize our gross margins at the 35% level. And I think, given the third-quarter results, it looks like we are bouncing back a little quicker than what we may have expected. And then what we have said that, after we have shown the ability -- demonstrated the ability to stabilize our gross margins at 35%, we would look to see if we could continue to improve the margin further in the direction of 40%. So, there's nothing structurally that's preventing us. It's still the main ongoing factors, which are annual customer price reductions offset by our ability to leverage our fixed overhead costs and purchasing cost reductions.

Okay. The next half question here is on these ASP follow-ups. It looks like you had about almost a $2 bump sequentially from the second quarter to third quarter. I've got to imagine a lot of that is our new model year product that you're selling more content on. And that's sort of traditionally how things have happened in the past. Obviously, last year, we kind of skipped a beat on this.

As we think going forward, do you kind of foresee that step function increase continuing as this model year changeover happens and your ability to penetrate new models as well as higher content on existing models? Is that something we should kind of think about and last year was more of an aberration and this year is more the norm?

I think it is -- historically you are correct, that typically with the new model year, we have had more featured mirrors. Having said that, on a quarter-to-quarter basis, it's still a function of the exact mix because our new program wins consist both of featured mirrors, including SmartBeam and RCD as well as base mirror business and outside mirror business. So, it's always going to be some -- hopefully some type of an increase, but I don't think it's going to be at the magnitude of the third quarter of 2008 compared to the third quarter of 2009. As you indicated, last year was a little bit of an aberration to our historical pattern.

And I'll sneak one last one in here just on R&D. R&D as a percent sales ramped up pretty significantly as a percent over time. Is there some point where that kind of just starts flatlining or do you need to keep that at this 8% to 9% of sales to keep the product engine moving forward?

I think what we have said, John, is that we don't manage our ER&D or SG&A expenses as a percentage of sales. Rather we manage our ER&D expenses from a bottoms-up project by project basis, and that in a perfect world, the increase over time in our annual ER&D expenses should be a leading indicator of the number of new programs that we have and that will go into production in the following two to three years.

So it sounds like to ramp up has been more of a function of RCD and SmartBeam really gaining some traction here. Is that fair?

That is correct, over the past few years, yes.

Great. Thank you very much.

Himanshu Patel, JPMorgan.

Hi. This is Brian Brinkman for Himanshu. Could you please just comment on the sequential increase in mirror shipments that we saw in North America? It clearly outpaced the sequential rise in North America light vehicle assembly. Maybe you can talk about some of the drivers of this outperformance for example. Is it more a function of just what platforms that you do sell into such as the GMT 900, etc., or is it more a result of backlog in new business wins or RCD's, etc.?

Okay. In terms of the positive variance between our unit year-over-year production levels compared to the industry, as we look at the details of the CSM forecast, it looks like to us that the most significant declines during the third quarter in North America were concentrated in the small vehicle and some of the midsize vehicle segments where we have less content. And so when you look at the particular vehicles that we do offer our mirrors on, it's more in line with the change year-over-year in North America.

Okay, thank you.

So the short answer, Ryan, is that it's the specific vehicle model that we are on.

All right, thanks.

Rich Kwas, Wells Fargo Securities.

Hi. Good morning everyone. A follow-up on one of the earlier questions regarding margin. I think, in the past, Enoch, you just mentioned that you want to stabilize gross margin at 35%. But I think that the prior commentary kind of -- that worked around a 14 million unit number in terms of production in North America. You got to 35% or thereabouts here with much lower production levels. That seems to imply that you could get to the high 30s% or 40% in a production environment that may not be 14 million production units here in North America. And I just want to get some more color as you look at the next couple of years with the recovery in the market, how should we think about that?

I think we've use the 14 million rate in North America kind of as a proxy for the global production rate. So, because two-thirds of our shipments are actually to overseas now, it's really more closely tied to the global rate, but most people here are more familiar with the North American production levels. And I would say that, based on the results of the third quarter, that it looks like we have a little more upside potential than what we had previously thought. I think it has to do with our efforts over the past year to reduce our fixed manufacturing overhead costs. We continue to have a large number of continuous improvement projects to take cost out of the product design and manufacture processes. And so I would say our probability of being able to improve our margins a little faster than what we had expected a few quarters ago.

Okay. That's helpful. When you look back five, six years ago when you were doing low 40s%, 43%, 42%, 43%, do you still view that as an achievable objective at this point, given what you've done?

I think, like we said, we still said we need to demonstrate to you and our investors that we can hold gross margins at the 35% level, and then gradually work over time towards the 40% internal objective.

Okay. And then as we look out into 2010, are there any kind of one-time cost reductions or temporary cost reductions that occurred this year that are helping you this year that won't be duplicated next year? Anything? I know you talked about variable comp, and that's understandable. Anything else we should be thinking about that won't be duplicated next year?

I think the variable comps is the most significant component, so that's the main item. (multiple speakers)

Okay, so how about like 401(k) contributions and salary reductions and that kind of stuff?

No.

No? Okay, great. Thank you.

Jason Rodgers, Great Lakes Review.

Good morning. It was good see the nice boost in the SmartBeam programs that you're offering now, which seem to be having a nice impact on the ASPs. I was wondering if you are seeing any additional competition for Magna in the space, and how your offering compares to theirs, what you think the differentiating characteristics are?

So, I think we look at competition for our SmartBeam feature from two directions. One is head-to-head, like you indicated with Magna. Magna is demonstrating a similar feature to automakers, and we continue to try to improve our product's performance and value to the customer.

The second area of competition, which is probably greater over the next several years, is with these multifunction sensor-based systems. That includes SmartBeam as well as certain other features like lane departure warning. And so there's really two types of competition for the SmartBeam feature.

Okay. In your recent conversations with customers, are you seeing any uptick in interest from smaller vehicles, or is it still mainly in the mid to luxury class?

Our volume, looking out over the next few years, is still going to be concentrated in the full-size and midsize vehicle segments. We are seeing more interest in adding features, not only ours, but other features, to smaller vehicles as automakers are looking at consumer interest and demand for more -- for smaller vehicles that have better gas economy. So we are definitely seeing some interest there. Typically, that takes a few years to work its way through the design and development process at the customer.

Thank you.

Adam Brooks, Sidoti and Company LLC.

Good morning. Just kind of staying on the whole run rate as far as maintaining margin at 35%, clearly next year there is going to be a disparity between Europe and North America, and things will depend on what happens with graphics programs over there. Do you have a global run rate that you say as far as stabilizing that 35% or a European run rate?

No, I think what we said is that we need a stable industry production level, and whether -- I mean we tend to look at it from a global standpoint -- in order that the top line will not have a positive or negative impact on our gross margin. And then we would need to offset annual customer price reductions with purchasing and other cost reductions.

Okay. And I guess one more quick thing. You guys have talked about kind of entering other applications, whether it be lane departure warning or whatnot. Is there any update? Is there any R&D going towards there at this point, and really is there anything that is going to come online in the next few years?

We are looking at other center based features that our customers are interested in. And as with all of our development programs, we look at the business case for those additional features and the value add to the customer in deciding whether to proceed with those to production.

All right. Thank you.

Frank Martin, Martin Capital Management.

I'm fine and here to heap plaudits on a remarkable company, as you might expect. Just a curious question about employee incentives and rewards and the state of employee morale. With the stock being essentially flatlined for a number of years now despite today's rather impressive performance, are you having to consider adjusting or rightsizing your incentives and rewards systems to reflect the overall stagnation in the stock price?

I think we continue to review our various employee incentive compensation programs, and as we have discussed previously, these include the quarterly employee profit sharing bonus, performance bonuses, our stock option plan, restricted stock plan, and other incentives. And to date, we have not significantly changed any of those plans, but certainly we continue reviewing them to make sure that we are getting the best value for the expense. And like you said, with the stagnation in the share price, obviously most of the focus has been on the stock option plan.

Understand. Beyond saying once again how understandably pleased I am with the people that run Gentex, would you give my best to Fred?

Certainly.

Thank you guys.

Brett Hoselton, KeyBanc Capital Markets.

Let's see. Acura-Honda, you said you just added it to the list. Was there any disclosure as to the model and so forth?

We are just checking to see if you were listening.

Thank you.

I believe it is the RDX? The Acura RDX?

Okay, RDX. And in talking with your customer, Acura-Honda, do you have any sense of what their intent is, meaning that as you talked about Toyota or possibly Ford, there seems to be a sense that they're very interested in the product, that they are thinking about taking it across a large portion of their product lineup over a period of time, that sort of thing. Is this program kind of a one-off or is this program -- is there an intent here in your mind that they may go beyond this one program over time?

I think there is definitely interest at Honda in the feature. And I think, when you look at Honda, they are more similar to Toyota in the sense that they tend to make corporate decisions rather than vehicle-by-vehicle decisions. So, I think you can expect that there may be some future programs there.

And then on the R&D front, you said up 10% year-over-year from the fourth quarter to the fourth quarter, excluding some unusual items in the fourth quarter of 2008. What was that, and how much was that? I just don't recall.

The guidance of up 10% related to SG&A for the fourth quarter (multiple speakers).

Excuse me, I apologize.

And that would exclude the increase in the allowance for doubtful accounts we had in Q4 of 2008 which was about $3.8 million.

Okay, great. Thank you very much. Have a great day.

It appears there are no further questions at this time. Ms. Hamblin, I would like to turn the call back over to you for any additional or closing remarks.

Thank you, everyone, for participating in this conference call, and we will be around if you have additional questions. Thank you. Bye bye.

This concludes today's conference. Thank you for your participation.