Gentex Corp (GNTX) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Gentex announce the second-quarter 2010 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 Communication. Please go ahead, Ms. Hamblin.

Thank you. Good morning, everyone. Thanks for taking the time to listen to our second-quarter conference call. I am going to go through a few brief routine items and then I will turn the phone call over to Enoch Jen, our Senior Vice President, who is on the call with me as is Steve Dykman, our Chief Financial Officer.

This call is being broadcast live on the Internet via Gentex Corporation's website. There is an auto playback of the conference call that is available on the website as well. This call is being recorded by Gentex Corporation. All contents of Gentex Corporation conference calls are the property of Gentex. No such content may be copied, published, or reproduce, 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 morning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of content.

We advise that you should not rely on the contents 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 party for any damages that is 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.

Our Safe Harbor statement. This presentation may include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, projections about net sales and growth in the global automotive industry, the economy, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the Company itself.

Words like anticipate, believes, confident, estimates, expects, forecasts, likely, plans, projects, optimistic 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 time I will turn the phone call over to Enoch Jen. He will make his comments with respect to the second quarter and first six months and then we will open it up to Q&A. As usual we request that you keep it to one question, a single-part question, at a time. Enoch.

Good morning, everyone. Thank you for participating on the call. We are pleased to report an excellent quarter with all-time record net sales, operating income, and net income. For the second quarter, we had record net sales of $201.6 million, a 72% increase compared with net sales of $117.3 million in the second quarter of 2009.

We reported record net sales of $387.3 million for the first six months of 2010, an 83% increase compared with net sales of $211.2 million in the first six months of 2009. Record operating income in the second quarter of 2010 was $48.8 million, a 203% increase compared with operating income of $16.1 million in the second quarter of 2009. Record operating income of $93.4 million for the first six months of 2010, a 411% increase compared with operating income of $18.3 million in the first six months of 2009. Record net income of $34.1 million in the second quarter of 2010, a 179% increase compared with net income of $12.2 million in the second quarter of 2009. Record net income of $56.5 million for the first six months of 2010, a 524% increase compared with net income of $10.7 million in the first six months of 2009.

Our earnings per diluted share were $0.24 in the second quarter of 2010 compared with 9/10 per share in the second quarter of 2009. Earnings per share were $0.47 for the first six months of 2010 compared with $0.08 per share in the first six months of 2009.

Next, looking at our automotive net sales and auto-dimming mirror unit shipments. For the second quarter ended June 30, 2010, total auto-dimming mirror unit shipments increased by 50% compared with the second quarter last year. Automotive net sales increased by 75% from $112.2 million in the second quarter of 2009 to $196.4 million in the second quarter of 2010. Auto-dimming mirror unit shipments increased by 103% in North America in the second quarter of 2010, primarily as a result of increased mirror unit shipment to the domestic automakers as well as the Asian transplant automakers.

North American light vehicle production increased by 73% in the second quarter of 2010 compared with the same prior year period. Auto-dimming mirror unit shipments to offshore customers increased by 43% in the second quarter of 2010, compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments of certain European and Asian automakers. Light vehicle production in Europe increased by 13% in the second quarter of 2010 and increased by 32% in Japan and Korea in the second quarter of 2010 compared with the same periods last year.

For the first six months ended June 30, 2010, total auto-dimming mirror unit shipments increased by 75% in the first six months of 2010 compared with the first six months last year. Automotive net sales increased by 88% from $201.2 million in the first six months of 2009 to $377.9 million in the first six months of 2010. Auto-dimming mirror unit shipments increased by 97% in North America in the first six months of 2010 primarily as a result of increased mirror unit shipments of the domestic automakers as well as the Asian transplant automakers.

North American light vehicle production increased by 72% in the first six months of 2010 compared with the same prior year period. Auto-dimming mirror unit shipments to offshore customers increased by 64% in the first six months of 2010 compared with the same period last year. The increase to unit shipments was primarily due to increased mirror unit shipments to certain European and Asian automakers, light vehicle production in Europe increased by 24% in the first six months of 2010 and increased by 41% in Japan and Korea in the first six months of 2010, compared with the same period last year.

The average selling price per auto-dimming mirror unit was $46.40 in the second quarter of 2010. The ASP for auto-dimming mirrors was up sequentially to $46.40 in the second quarter of 2010 compared with $44.56 in the first quarter of 2010, primarily due to higher mix of featured mirrors including rear camera display and SmartBeam. The ASP was up on a year-over-year basis from $42.64 in the second quarter of 2009 primarily due to increased sales of RCD and SmartBeam, partially offset by annual customer price reductions.

Based on CSMs in mid-July, light vehicle production forecast, we expect the third-quarter 2010 ASP to be similar to the second quarter of 2010, based on the participated product mix of base and featured mirrors in that forecast and annual customer price reduction. As usual, there are uncertainties with the CSM production of sales forecast, customer orders, and new product introductions.

Fire protection net sales decreased by 21% to $4 million for the second quarter of 2010 compared with the same period last year. Fire protection net sales decreased by 22% to $7.8 million for the first six months of 2010 compared with the same prior year period. The decline in net sales during both periods was primarily due to continued weak commercial construction market.

The gross profit margin increased on a year-over-year basis from 30.5% in the second quarter of 2009 to 36.7% in the second quarter of 2010, primarily due to the Company's ability to leverage fixed overhead costs due to the 72% year-over-year increase in net sales. The gross profit margin increased from 27.5% for the first six months of 2009 to 36.8% for the first six months of 2010, primarily due to the Company's ability to leverage fixed overhead costs due to the 83% increase in net sales when comparing the first six months of 2010 to the first six months of 2009.

Based on the Company's expected net sales for the third quarter of 2010, which will be discussed later in these comments, we would expect the Company's third-quarter gross profit margin to be approximately in the same range as the first half of 2010. 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 cost, purchasing cost reductions, VAVE initiatives, and manufacturing yields.

Engineering research and development expense increased by 36% in the second quarter of 2010, compared with the same 2009 period, primarily due to increased hiring of employee and contract engineers and variable employee compensation expense. The R&D expense increased by 31% for the first six months of 2010, compared with the same 2009 period, primarily due to increased hiring of employee and contract engineers and variable employee compensation expense. The R&D expense is now expected to increase by approximately 30% to 35% for the third quarter of 2010, compared with the third quarter of 2009. Again, primarily due to increased hiring of employee and contract engineers and variable employee compensation expense.

Selling, general, and administrative expense increased by 16% in the second quarter of 2010, compared with the same prior year period, primarily due to increased variable employee compensation expense and overseas office expenses. SG&A expense increased by 13% from the first six months 2010 compared with the same prior year period again primarily due to increased variable employee compensation expense and overseas office expenses. SG&A expense is currently expected to increase by approximately 10% to 15% for the third quarter of 2010, compared with the third quarter of 2009, primarily due to increased variable employee compensation expense and overseas office expenses.

Next, looking at total other income. For the second quarter of 2010, our investment income was $556,000. Other net was $998,000 for a total of $1.554 million. For the first six months of 2010, our investment income was $1.059 million and other net was $3.563 million for a total other income of $4.632 million.

Investment income decreased and the second quarter and first six months of 2010, compared with the same prior year periods, primarily due to lower interest rates. Non-cash charges for other than temporary impairment losses on available for sale securities decreased from $1.3 million in 2009 to none in 2010. Other income was $1 million in the second quarter of 2010, compared with $1.4 million last year, primarily due to foreign exchange rates. Other income was $3.6 million for the first six months of 2010, compared with other expense of $3.1 million in the same period last year, primarily due to realized gains on the sale of equity investments in the first six months of 2010, compared with realized losses on the sales of equity investments in the same prior year period.

A few balance sheet items. At June 30, 2010, accounts receivable was $93.5 million. Inventories were semi-$79.3 million. Patents and other assets were $13.7 million. Accounts payable were $44.3 million and accrued liabilities were $39.2 million. The effective tax rate of 32% varied from the statutory rate of 35% during the second quarter of 2010, primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for 2010 will be approximately 32% to 33% based on current tax laws primarily due to the domestic manufacturing deduction.

Our year-to-date cash flow from operations was $67.1 million. Our capital expenditures for the second quarter of 2010 were $8.3 million and our depreciation expense for the second quarter of 2010 was $9.9 million. For calendar year 2010, our estimate for capital expenditures is now approximately $40 million. Depreciation and amortization expense for 2010 is estimated at $38 million to $40 million.

On July 16, 2010, 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 July 6. The ex dividend date was July 2. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws, that the dividend rate 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. The cash dividend rate is an agenda item at every Board of Directors meeting.

Next we will provide 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 high beam headlamp of this product that we introduced in the 2005 model year and it is currently offered on 34 vehicle models at eight OEM customers, including Audi, BMW, Chrysler, General Motors, Opel Vauxhall, Tata Motors Land Rover, Toyota Lexus, and Rolls-Royce.

We expect to announce a number of vehicle models for existing and new customers during the balance of the 2010 calendar year.

For the 2009 calendar year, we shipped approximately 437,000 SmartBeam units compared with approximately 295,000 SmartBeam units in 2008. Based on the CSM mid-July forecast, we now expect that SmartBeam units will increase by approximately 40% in calendar year 2010.

Next, an update on Rear Camera Display. To date our RCD mirrors are offered on 47 vehicle models with eight automakers as original equipment including Daihatsu, Ford, General Motors, Honda Acura, Hyundai Kia, Mitsubishi, Subaru, and Toyota Lexus. RCD mirrors are also currently offered as a dealer installed option or an aftermarket product on nearly 20 additional vehicle models. We expect to announce a number of additional vehicle models for existing and new customers during the balance of the 2010 calendar year.

Regarding legislation, in 2008, the Kids Transportation Safety Act of 2007 was signed into law and orders the Secretary of Transportation at the National Highway Traffic Safety Administration to revise the federal standard to expand the field of view so that drivers can detect objects directly behind their vehicle. The phase in period during which automakers will need to meet the requirements set by NHTSA is expected to be between now and 2015. The automakers currently offering a Rear Camera Display product are doing so absent any legislation and made the decision before any legislation was pending.

Our RCD mirror is an optimum, ergonomic, easily adaptable method to display the output of a rear camera for increased safety. Ultrasonic sensors cost less, but may be less effective. Any color display in a vehicle is relatively costly. When a color display is required for other features such as navigation, radio, or other vehicle functions then it may be less costly on a per feature basis to display the output of the backup camera in that in dash display.

The Company shipped approximately 573,000 RCD mirror units in calendar year 2009, compared with approximately 270,000 units in calendar year 2008. Based on CSM's mid-July forecast we expect that RCD mirror units will nearly double in calendar year 2010 compared with calendar year 2009. The increase in the forecast is primarily due to increased take rates on certain domestic vehicle models.

We currently believe that the market for camera displays in vehicles will be divided into three primary market segments. The top 15% to 20% of the vehicle market will primarily offer the display for a rear camera in the navigation system with the option of purchasing an RCD mirror. The middle 50% to 70% of the market is the most likely market segment to offer the camera display in the mirror, or in other multipurpose 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 also has the greatest and increasing competition.

Provided that NHTSA allows sensor-based technologies to be used, we currently expect that the bottom 15% to 20% of the market will primarily offer a radar or sonar display possibly with a camera display as an upgrade option.

Next, an update on dimmable aircraft window programs. We currently are shipping dimmable windows for the Boeing 787 Dreamliner. Each passenger aircraft has approximately 100 windows. Boeing has also expressed interest in utilizing dimmable windows for other aircraft.

Gentex is 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 has 15 windows.

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

During the second quarter of 2010, the Company negotiated a multi-year sourcing agreement with Ford Motor Company in the ordinary course of the Company's business. Under the agreement, the Company has sourced all existing interior auto-dimming rearview mirror programs as well as a number of new interior auto-dimming rearview mirror programs during the sourcing agreement term, which ends December 31, 2011.

Next, we will provide some revenue estimates and a CSM unit forecast. The following projection for net sales in the third quarter of 2010 is based on CSM's mid-July light vehicle production forecast. Due to continued automotive market uncertainties, we do not plan to provide full year revenue guidance at this time.

Our estimates for net sales for the third quarter of 2010 has an increase of approximately 30% to 35% compared with the same period in 2009 based on CSM's mid-July forecast for light vehicle production levels.

Where in the third quarter of 2010, North American light vehicle production for CSM is 2.9 million vehicle units, a 23% increase compared to the third quarter of 2009. Light vehicle production for Europe is 3.8 million vehicle units, an 8% decrease compared to the third quarter of 2009; and Japan and Korea is at 3.2 million vehicle units, a 10% increase compared to the third quarter of 2009.

For the calendar year 2010, the CSM forecast for light vehicle production for North America is 11.6 million vehicles, a 36% increase compared to the 2009 calendar year. The Europe light vehicle production forecast is 17.5 million vehicles, a 7% increase compared to the 2009 calendar year and the light vehicle production forecast for Japan and Korea is 12.8 million vehicles, a 17% increase compared to the 2009 calendar year.

At this time I will turn the conference call back over to Connie.

Thank you. 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 Corporation. 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 call's notwithstanding this morning, 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 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 with these terms.

At this point in time we are going to open it up to Q&A. Please ask one single-part question at a time because it helps us out a lot. We are all getting older. Thank you. Operator.

(Operator Instructions). David Leiker, Robert Baird.

Good morning. I think this is a single-part question, but your SG&A and the ER&D numbers for the quarter came in higher than what you had guided to a quarter ago and the go-ahead numbers are again higher there as well. And in your release you talk about going out looking for new hires for new technical people and workers.

Does that --? Is that a function of you getting back to where you were before? Are you seeing better growth opportunities and more investment opportunities going forward?

Well, I think for the ER&D it is a -- and SG&A it is a partial function of catching back up, that we had cut back and we had also had a higher increase in place during the downturn. And then I think the second one is because of the number of complex new programs that are scheduled to go in production over the next two or three years. We are aggressively looking for software and electrical engineers specifically to make sure that we can meet our milestones.

Does that mean that we should get to a situation where it looks -- where you see your revenues coming in better than you thought? That you are going to flex your SG&A and ER&D numbers more than what you have in the past?

No. I think what we've done with ER&D and SG&A specifically with our overseas offices is more tied to new programs coming onstream and when we come across the right people to hire. So we don't high our hiring to our topline growth. But rather than to the new program that we have been awarded over the next few years.

But we have a couple of quarters in a row here where your revenue is better than what you guided to and your SG&A and ER&D were also higher than what you had guided to. It seems -- it just seems like they are flexing up as your revenue numbers seem to be coming in better. (multiple speakers).

We are just saying that there's not a -- necessarily a correlation between those line items. That, in theory, that our hiring could have been less if we didn't find the right people regardless of what the topline was. And conversely, if our topline had not come in as strong as what it did, we still would have hired if we had found the right people.

Okay, thank you.

John Murphy, Bank of America Merrill Lynch.

Good morning. I have a question maybe in a similar vein more just focused on the gross margin level. You are posting pretty good gross margin as your sales are increasing. I am trying to understand how much leverage there is as we go forward and sales improve in the coming quarters or next year. If there is anything structurally that has shifted in the business mix of your product that would keep those margins from expanding and there being some pretty good operating leverage over time, really, just trying to understand what is going on there.

Well, when you look at incremental margins on a year-over-year basis they have been running in this historical 40% to 45% range. And over the last couple of quarters it has actually been a little bit higher than that. So we continue to look to ways to improve our margins. We are running a net positive favorable PPV. We do have the ongoing impacts of annual customer price reductions that will continue to impact margins going forward.

Yes, I think the incrementals are helpful in the short run and in thinking about modeling, but I am trying to understand if there's any -- if there is a possibility of getting back to that closer to 40% gross margin level a year or two or three out and if there is any real reason that you can't get there structurally.

As we have previously stated, when we develop new products, it is our internal objective to obtain a 40% gross margin. But when you look at all of the leading factors that are impacting margins then everything would have to align perfectly for us to get back to a 40% margin. And whether that would be sustainable over a period of time will remain to be seen. So we feel that over the next three to five years we continue to work to improve on the margin that we feel will be more slower in incremental improvements.

Great. Thank you.

Rick Kwas, Wells Fargo Securities.

Good morning. I guess when we look at third-quarter guidance here with the CSM numbers, how should we think about mix? And specifically I am talking about Europe here. Production expected to be down year-over-year. How is mix playing out relative to what you have seen the first half of the year? Is it going to be better than what you have seen, about what you have seen or maybe a little worse than what you have seen?

From -- when we look at Europe, overall it is down, but the segments that are bearing the brunt of the declines are on the low end. So as you all may recall, a year or two ago we had mentioned that we would not see any significant benefit from the government stimulus programs in Europe because they focused primarily on the low end vehicles. And as we look at the overall decline that CSM is forecasting for the second half of the year, it is really separating into two segments. The low end is declining the most significantly. The higher end segments are either declining less or actually gaining. You will have seen some of the reports especially by the German luxury automakers including BMW, Mercedes, and Audi. And they are all expecting increases year over year primarily due to strong demand in China as well as in the United States.

So we will not be affected as negatively as what the overall European market is forecasted to decline.

But, Enoch, I guess the way you portrayed it sounds like actually the second half mix should be better for you than first half. Is that fair? In Europe?

I would agree with that. And I think when you look at the first half of the year you will see that our topline growth in North America, Europe, and Japan and Korea were higher than what the overall production levels were in those markets.

Right. And then how do we think -- I know you have guided to flattish ASPs here, but last year you had a big stair step up from Q2 to Q3 on ASP. I would imagine that you have had some big launches occurring on the RCD front here in the second half, SmartBeam, et cetera. Why shouldn't we believe the DSP should not go higher in the second half?

Well, certainly there is some potential for it to increase in the second half, but when we look at it we all have to keep in mind that it is a mix issue. And so while we expect that RCD and SmartBeam mirror units will continue to increase, we are also growing our base mirror and outside mirror business and both of those tend to have lower than average ASPs. So, again, we need to keep in mind that the ASP is an average.

And then what is --? Last question. When we think about the launches for the programs, RCD, SmartBeam, when you think back to the middle of last year is the launch activity this year going to be greater for those programs than last year at this time when you look at second-half expectations?

We don't really analyze it that way. Because, internally, we know which programs -- specific programs -- are going into production. And so it doesn't -- it isn't that meaningful to us comparing it from year to year. I think you can tell from our overall forecast for the full calendar year that the growth in RCD mirrors and sparking continue to be very strong as the percentage growth rate remains relatively high on a larger base.

Okay. And then finally, I know this is like my fourth question, but what is your --

Well, at least you are counting.

We are cutting you off now.

What is the mix of the investment portfolio again?

As of the end of June, our cash and cash equivalents was $295 million. Short-term investments just under $86 million, and long-term investments a little over $112 million.

What is the split on equity and fixed income of that long-term investment?

A long-term investment virtually all of it is equities.

Okay. Great. Thanks a lot.

Himanshu Patel, JPMorgan.

Good morning. Are you hearing any additional -- hearing of any additional unanticipated weeks of shutdowns being added to the typical summer shutdowns either in Europe or North America?

What we are hearing, Himanshu, is basically the opposite. I think GM has said they won't be shutting down a number of their assembly plants for the than normal two-week summer shutdowns. And we have also heard from primarily some of the German luxury automakers that they will not be shutting down for the full three weeks that they historically do in August.

Okay. And then --

So really when you look at the third quarter one of the reasons why the forecast for third quarter may be stronger than anticipated is we don't have nearly as many assembly plant shutdowns as we historically have.

And do you think, Enoch, that those shorter shutdown periods are reflected in [CSN's] current third-quarter forecast?

Yes. They definitely are.

Okay. I wanted to go back to the contribution or incremental margin question. I know year over year those numbers are pretty impressive, but if you look sequentially, your incremental margins at the gross profit line appear to be about 17% in Q1 and about 31% in Q2. And both of those figures are below the gross margin percentage for both of those quarters.

So I am trying to understand has the business hit a level on cost and capacity such that to service additional future revenue growth, there is going to be a decent amount of cost addback going forward and basically we really shouldn't think about a whole lot of operating leverage at the gross profit level from here onwards?

I think if you look sequentially we certainly with the rapid rebound have been adding cost back in the catch-up. And when you look at the lower sequential incremental margins from Q1 to Q2 we have been continuing our hiring efforts to align our workforce with the current demand. So that is a little bit of it.

Okay, great. Thank you.

Steve Dyer, Craig-Hallum.

Good morning. I guess I will start with capacity putting up record quarters despite being well off historical SAR records both here and in Europe. Are you running any -- running into any capacity issues either from a square footage standpoint, a capital equipment standpoint, or a manufacturing personnel standpoint?

From a facility standpoint we are not running into any capacity issues. From a production line standpoint, there are some selected areas where we are adding capacity. Currently we are meeting it through overtime and adding shifts. In terms of people, our hourly associates we added back several hundred hourly associates since the trough at the end of 2008. We are currently recruiting for 100 more hourly associates. And we are hiring some salaried manufacturing positions, also including technical team leaders, which are typically engineering college graduates and some other manufacturing support positions.

Okay. That's helpful. Then, quickly on the legislation, it sounds like next February or March was supposed to be sort of a key -- potentially anyway -- decision point based on if there would be a mandate of a particular technology.

It sounds like, Enoch, that maybe the thought is that there will be several options opened up -- or at least this is your expectation -- several options opened up to the OEMs that they can address this in a variety of ways. Is that the thought? Or do you still think that there is a potential that the mirrors are mandated in some form?

I don't know that our thinking has changed at all. We have always thought that there would be a number of different options available and the mirror being one of them. But I don't know that our thinking has changed on that.

The timeline as it stands -- I mean, they are supposed to make a decision and publish the requirements for automakers in February of 2011. However, they seem to be probably four to six months behind in publishing this latest set of information that they were going to put out for public comment. So I don't know if that pushes the February -- if that February date is flexible or not. We don't have a lot of experience in having products mandated. So, I would guess though that they are going to have the flexibility to do what they need to do in order to try to get this right.

Okay. I will hop back in the queue. Thanks.

David Leiker, Robert Baird.

A follow-up on this sequential contribution margin and how it is lagging at your normal would be as the costs come in faster than the revenue sequentially, how long do you think that is going to be an issue before that return -- gets back to the more normal relationship that we see in the year-over-year numbers?

I would say part of it is going to depend on our production schedules. But I think for the next couple of quarters probably.

Next -- okay. And then, from -- on a different item if we look at your revenue guidance, it is implying a number of that is at or above the revenue that you just reported for this quarter. Are there any particular items we should look at when we look down at the EBIT line operating income line that would cause anything in Q2 -- Q3 to be different than Q2 given a comparable revenue number?

Nothing of any significance. No.

Okay. All right. Thank you.

(Operator Instructions).

It seems that there are no questions.

Actually we did just have a question queue up from Jason Rodgers, Great Lakes Review.

Saw the cash flow from operations was down pretty significantly from a year ago and was wondering if that was due to the inventory and receivables going up?

Cash flow from operating activities actually were up on a year-over-year basis if you look at it through the first six months of 2009 it was a little over $49 million. And for the first six months of 2010 it was $67.1 million.

Okay. Thank you.

And with that there are no further questions.

Okay, thank you for participating in this conference call. If you have questions we will be here. Thank you. Have a good day.

And once again, ladies and gentlemen, this does conclude today's call. Thank you for your participation and have a wonderful day.