Gentex Corp (GNTX) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gentex third-quarter 2010 financial results conference call. Today's call is being recorded and I would now like to turn the meeting over to Miss Connie Hamblin, Vice President of Investor Relations and Corporate Communication. Please go ahead Ms. Hamblin.

Thank you. Good morning, everyone, thank you for joining us on our third-quarter conference call. With me today is Enoch Jen, our Senior Vice President, and Steve Dykman, our Chief Financial Officer.

I would tell you that this call is being broadcast live on the Internet via Gentex's website at www.gentex.com. And there will be an audio playback of the conference call available on the website as well.

I will go through a couple of routine items. And then I will turn the call over to Enoch to go through our quarterly information and then we will open it up for Q&A.

This call is being recorded by Gentex Corporation. 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 express 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 transcripts as Gentex Corporation will not be held liable for the content of any such transcripts.

Gentex Corporation will hold responsible and liable any parties for any damages incurred by Gentex with respect to 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 and 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, forecast, 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 that is contained in the news release that is posted on our website.

At this point I will turn the call over to Enoch. After he makes his remarks with respect to the quarter, we will open it up to Q&A and as usual we ask that you ask one single-part question so that everyone has an opportunity to participate. Enoch?

Good morning, everyone. Despite a challenging operating environment we are pleased to report record financial results for the third quarter.

Record third-quarter net sales were $206.8 million, a 33% increase compared with net sales of $155.7 million in the third quarter of 2009. Record net sales of $594.2 million for the first nine months of 2010, a 62% increase compared with net sales of $366.9 million in the first nine months of 2009.

Operating income in the third quarter of 2010 was $47 million, a 42% increase compared with operating income of $33.1 million in the third quarter of 2009. Record operating income of $140.4 million for the first nine months of 2010, a 173% increase compared with operating income of $51.4 million in the first nine months of 2009.

Record net income of $34.3 million in the third quarter of 2010, a 43% increase compared with net income of $23.9 million in the third quarter of 2009. Record net income of $100.8 million for the first nine months of 2010, a 191% increase compared with net income of $34.6 in the first nine months of 2009.

Earnings per diluted share were $0.24 in the third quarter of 2010 compared with $0.17 per share in the third quarter of 2009. Earnings per diluted share were $0.72 for the first nine months of 2010 compared with $0.25 per share in the first nine months of 2009.

Looking next at automotive net sales and automatic-dimming mirror unit shipments, for the third quarter ended September 30, 2010, total auto-dimming mirror unit shipments increased by 28% compared with the third quarter last year. Automotive net sales increased by 33% from $151.1 million in the third quarter of 2009 to $201.5 million in the third quarter of 2010.

Auto-dimming mirror unit shipments increased by 36% in North America in the third quarter of 2010 primarily as a result of increased mirror unit shipments to the domestic automakers as well as the Asian transplant automakers. North American light vehicle production increased by 26% in the third quarter of 2010 compared with the same prior-year period.

Auto-dimming mirror unit shipments to offshore customers increased by 24% in the third quarter of 2010 compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Asian automakers. Light vehicle production in Europe decreased by 1% in the third quarter of 2010 and increased by 12% in Japan and Korean in the third quarter of 2010 compared with the same period last year.

For the first nine months ended September 30, 2010, total auto-dimming mirror unit shipments increased by 56% compared with the first nine months last year. Automotive net sales increased by 64% from $352.2 million in the first nine months of 2009 to $579.4 million in the first nine months of 2010.

Auto-dimming mirror unit shipments increased by 70% in North America in the first nine months of 2010 primarily as a result of increased mirror unit shipments to the domestic automakers as well as the Asian transplant automakers. North American light vehicle production increased by 54% in the first nine months of 2010 compared with the same prior-year period.

Auto-dimming mirror unit shipments to offshore customers increased by 48% in the first nine months of 2010 compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Asian automakers. Light vehicle production in Europe increased by 17% in the first nine months of 2010 and increased by 30% in Japan and Korea in the first nine months of 2010 compared with the same period last year.

Our average selling price per auto-dimming mirror unit was $46.90 in the third quarter of 2010. The ASP was up sequentially to $46.90 in the third quarter of 2010 compared with $46.40 for the second quarter of 2010 primarily due to a higher mix of featured mirrors including rear camera display and SmartBeam.

The ASP was up on a year-over-year basis from $45.22 in the third quarter of 2009 primarily due to increased sales of our RCD and SmartBeam partially offset by annual customer price reductions. Based on CSM's end-of-September light vehicle production forecast, we expect the fourth-quarter 2010 ASP to be similar to the third quarter of 2010 based on the anticipated product mix of based and featured mirrors in that forecast and annual customer price reductions. As usual there are uncertainties with the CSM production and sales forecast, customer orders and new product introductions.

Looking next at other net sales, other net sales increased by 15% to $5.4 million for the third quarter of 2010 compared with the same quarter last year as increased dimmable aircraft window net sales more than offset the 11% decrease in fire-protection net sales. The decrease in fire-protection net sales was primarily due to the weak commercial construction market.

Other net sales were flat at $14.7 million for the first nine months of 2010 compared with the same prior-year period as increased dimmable aircraft window net sales offset the 19% decrease in fire-protection net sales.

Looking next at our gross profit margin. The gross profit margin increased on a year-over-year basis from 34.9% in the third quarter of 2009 to 35.7% in the third quarter of 2010, primarily due to the Company's ability to leverage fixed overhead cost due to the 33% year-over-year increase in net sales, as a result of increased global light vehicle production levels and new program launches partially offset by annual customer price reductions and costs associated with supply chain constraints on certain electronic components.

The gross profit margin declined on a sequential basis from 36.7% to 35.7% due to increased costs associated with supply chain constraints on certain electronic components during the quarter. The Company currently expects that these increased costs will continue for the next several quarters.

While availability of certain consumer grade components has recently improved, availability of certain automotive grade components remains very tight. They include items like discrete semiconductor devices and larger case-size passive resisters and conductors.

The gross profit margin increased from 30.7% for the first nine months of 2009 to 36.4% for the first nine months of 2010 primarily due to the Company's ability to leverage fixed overhead cost due to 62% increase in net sales when comparing the first nine months to the first nine months of 2009. Based on the Company's expected net sales for the fourth quarter of 2010, 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 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, VAV initiatives, additional supply chain costs and manufacturing yields.

Next we will look at engineering, research and development expense. E, R&D expense increased by 38% in the third quarter of 2010 compared with the same 2009 period, primarily due to additional hiring of employee and outside contract engineering/development services. E, R&D expense increased by 33% for the first nine months of 2010 compared with the same 2009 period primarily due to additional hiring of employee and outside contract engineering/development services and increased variable employee compensation expense. E, R&D expense is now expected to increase by approximately 30% to 35% for the fourth quarter of 2010 compared with the fourth quarter of 2009 primarily due to additional hiring of employees and outside contract engineering/development services.

Next we look at selling, general and administrative expense. SG&A and expense increased by 11% in the third quarter of 2010 compared with the same prior-year period primarily due to the Company's overseas office expenses and increased variable employee compensation expense.

SG&A expense increased by 12% for the first nine months of 2010 compared with the same prior-year period primarily due to the Company's overseas office expenses and increased variable employee expense. SG&A expense is currently expected to increase by approximately 10% to 15% for the fourth quarter of 2010 compared with the fourth quarter of 2009 primarily due to increased overseas office expenses.

Next we will look at total other income. The breakdown for the third quarter of 2010 -- investment income, $620,000, no impairment loss; other, $2.579 million for a total of $3.199 million; for the first nine months of 2010 investment income of $1.689, no impairment loss; and other of $6.142 million for a total other income of $7.831 million.

Total other income increased in the third quarter of 2010 compared with the third quarter of 2009 primarily due to changes in the foreign currency exchange rates related to the Company's euro denominated account. Total other income increased to $7.8 million in the first nine months of 2010 from $118,000 in the first nine months of 2009 primarily due to realized gains on the sale of equity investments in the first nine months of 2010 compared with realized losses on the sale of equity investments in the same prior-year period.

Next we will look at a few balance sheet items. At September 30, 2010, accounts receivable were $106.7 million. Inventories were $92.1 million.

Patents and other assets were $13.4 million. Accounts payable were $50.1 million and accrued liabilities were $33.3 million.

The effective tax rate of 32% for the third quarter of 2010 varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for the 2010 year will be approximately 32% to 33% based on current tax laws primarily due to the domestic manufacturing deduction.

The year-to-date cash flow from operations was $92.1 million. Our capital expenditures for the third quarter of 2010 was $10 million. Our depreciation expense for the third quarter of 2010 was also $10 million.

For calendar-year 2010, our estimate for capital expenditures is approximately $40 million. Depreciation expense for 2010 is estimated at $38 million to $40 million.

On October 15, 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 October 6. 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 an update on our SmartBeam feature. We continue to make progress with automakers as they more broadly offer SmartBeam across their product lines.

SmartBeam is the intelligent, high beam headlamp assist product that we introduced in the 2005 model year and it is currently offered on 52 vehicle models at 10 OEM customers including Audi, BMW, Chrysler, General Motors, Opel/Vauxhall, Peugeot, Tata Motors' Land Rover, Toyota Lexus, Rolls-Royce and Volkswagen. We expect to announce several additional vehicle models during the balance of the 2010 calendar year.

For the 2009 calendar year we shipped approximately 437,000 SmartBeam units. Based on the CSM end-of-September forecast we now expect that SmartBeam units will increase by approximately 40% to 45% in calendar-year 2010.

Next update on it rear camera display. To date our RCD mirrors are offered on 51 vehicle models with eight automakers as original equipment including Daihatsu, Ford, General Motors, Hyundai 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 several additional vehicle models during the balance of the 2010 calendar year.

Regarding legislation, in 2008 the Kids Transportation Safety Act of 2007 was signed into law and ordered 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 vehicles. The phase-in period during which automakers will need to meet the requirements set by NTSA is expected to be between now and 2015.

The automakers currently offering a rear camera display product are doing so absent of any legislation and made the decision before any legislation was pending. NHTSA is expected to publish its preliminary interpretation, which will again be subject to public content in mid-November with the final interpretation expected in February 2011.

Our RCD mirrors have 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. Based on CSM's end-of-September forecast we now expect that RCD mirror units will approximately double in calendar-year 2010 compared with calendar-year 2009.

We currently believe that the market for camera displays in mirrors 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 60% to 70% of the market is the most likely market area 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, etc. This is the segment of the market with the greatest volume potential but also has the greatest an increasing competition. Provided that NHTSA allows sensor-based technologies to be used, the bottom 15% to 20% of the market will primarily offer a radar or sonar display possibly with a camera display as the upgrade option.

Next an update on dimmable aircraft window programs. We are currently 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 will have 15 windows.

On October 17, PPG Aerospace announced that it was showing a dual panel electrochromic window system that they would most likely sell to aircraft manufacturers where weight is not the most important factor and who want their aircraft darker than dark. They have not yet announced any orders for this particular window system at this time. Other aircraft manufacturers continue to have interest in this technology and we are working on these potential programs with PPG Aerospace.

Next we will look at revenue estimates. The following projections for net sales in the fourth quarter of 2010 is based on CSM's end-of-September light vehicle production forecast.

Our estimate for net sales for the fourth quarter of 2010 is an increase of approximately 20% compared with the same period in 2009 based on CSM's end-of-September forecast for light vehicle production models. For the fourth quarter of 2010 light vehicle production per CSM for North America is 2.8 million vehicle units, a 4% increase over the fourth quarter of 2009. They are forecasting 4.3 million vehicle units for Europe, a 5% decrease compared to the fourth quarter of 2009 and CSM is currently forecasting 3.1 million vehicle units for Japan and Korea, a 7% decrease compared to the fourth quarter of 2009.

For the 2010 calendar year, the end-of-September CSM forecast is 11.8 million vehicles for North America, a 38% increase compared to the 2009 calendar year. CSM is currently forecasting 18 million vehicles for Europe, a 10% increase compared to calendar-year 2009.

And CSM is currently forecasting 12.9 million vehicles for Japan and Korea, an 18% increase compared to calendar-year 2009. At this time I will turn the conference call back over to Connie.

As a reminder all listeners should note that this call is being recorded by Gentex Corporation. 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 express written consent of Gentex Corporation.

Gentex alone hold 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 the content.

We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcripts. Gentex Corporation will hold responsible 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 will open it up to Q&A. And we would again request that you ask single-part one question at a time, as we are getting old. Operator you can open it up for questions now.

Okay. (Operator Instructions). John Murphy, Bank of America Merrill Lynch.

Good morning, guys. A question on the margins and this increase in electronic content. I'm really just trying to get my hands around what the isolated impact here is.

It seems like volume was positive and mix was positive in the quarter. So the higher electronic content really hit gross margin by more than 100 basis points. Is that a correct characterization and is this electronic content something that is going to become a bigger issue over time as you sell more SmartBeam and RCDs and are demanding more semiconductors and other electronic components where you might be running into this competition outside the auto industry more and more for demand?

Okay, John, we probably ought to clarify it. It's not higher electronic content. It is continued tight availability of certain automotive grade electronic components.

And while our purchasing group expects that the situation will gradually improve going into next year we do expect that these supply chain stresses will continue for at least the next several quarters. And these increased costs were the primary reason for the decline in the sequential gross margin percentage.

Okay, so that was the 100 basis point -- that alone accounts for the 100 basis points and that in isolation would be 100 basis points?

That was the primary cause behind the 100 basis point decline, yes.

Okay. And there is no chance of passing that pricing through to the automakers in any way, shape or form? There's no escalators for those kinds of costs or any sort of a discussion or negotiation that could go on there as far as passing that through to the automakers?

No, there is currently no expectation for pass-through. Our focus has been on keeping all of our automaker customers supplied with product, delivering our products on time and ensuring that they have an uninterrupted supply. And so while we expect this to be temporary, we also expect we felt it was very important to fully support our automakers as they ramped up their production.

Okay. Thank you very much.

Steve Dyer, Craig-Hallum.

With respect to E, R&D that has grown I think a little bit faster, maybe at least than I had expected, certainly growing, projected to grow faster than revenue in Q4. How should we think about that going into next year?

I think as we have stated over the last year or so a pretty big component of the year-over-year increases in E, R&D were due to variable employee comp expense. And as we head the into the tail end of this year that is a diminishing factor. And so the primary drivers for the fourth quarter, and was the case in the third quarter, has been increased hiring and contract engineer/development support services for a lot of new product development and new program launches.

So we do expect that will continue into the first part of 2011 but should in the long term more normalize into the 10% to 15% increase on a year-over-year basis. Now if you look at the guidance we provided for E, R&D for the fourth quarter, that is pretty level from a dollar standpoint to the third quarter. So the growth is on a sequential basis is flattening a little bit.

Okay. Great, thanks.

Brett Hoselton, KeyBanc.

Good morning. Okay, I'm going to sneak in here, too. I apologize but here it comes.

The semiconductor electronic shortages, do you expect it to worsen going forward? And then secondly, when you say several, is several kind of first half of 2011, or second half of 2011 or does it potentially continue out into 2012?

Okay, your two-part question, I think first, overall we don't see the situation significantly worsening but we don't also see the situation significantly improving in the short term. And as we talk about the next several quarters I think our visibility right now is probably through the mid -- the first half of 2011.

Okay, perfect. Thank you very much.

David Leiker, Robert W Baird

Good morning, everyone. I want to focus on the revenue line and just try to get a handle on it. Some of these programs you have been on for a generation or two.

Where are you seeing increased -- whether the next generation the penetration rate is increasing and content is increasing. And the one thing that jumped out to me that was notable, the Explorer you've got on before, the new Explorer you are on but the Escape you weren't and the new Escape you are and there is more content.

I just want to try and get an understanding of that dynamic of whether penetration and content is in a position to accelerate going forward as some of these midsize vehicle start using your product more? Just a general discussion on that, if you can.

Okay. What I think if you look at vehicles where we have been on for some time, I think we have said that we don't see decreases in penetration rates on existing vehicles and certainly as the vehicles are refreshened we work at improving the packages on which they are on.

As you pointed out, we are announcing new vehicle models with Ford and other automakers like the Escape. We are starting to see some improved take rates at certain customers including Ford. And we are also starting to see increased feature and dollar content with RCD and SmartBeam with Ford and other automakers.

And just one follow-up on that specifically on the Explorer and Escape. Given the price points on that, what is the thought process that Ford does to put more content on the Escape than what they are putting on the Explorer with your product?

Well, I think we have talked for many years that regarding the approach of the North American automakers that the feature content decisions are primarily made by individual vehicle platform teams. And so therefore you don't always see the consistency across their models like you do in Europe and in Asia.

And I think what we have said about Ford over the past several years is that even in the downturn our business with Ford grew for a number of reasons. One is they moved away from their 50/50 sourcing policy between Gentex and Magna; secondly, they have started to add more features to their mirrors whereas in the past it has been virtually all base mirrors; and I think third, they are moving auto-dimming mirrors and features down further into their midsize vehicle models.

Okay. Thank you.

(Operator Instructions) Richard Kwas, Wells Fargo Securities.

Hey, good morning. How are you? Question -- so for margin, understand the supply chain issue but you usually get the price downs in the third quarter with some of the Detroit-based manufacturers.

Were those worse than expected? Did that have any impact on the gross margin relative to your initial expectation?

No, as you pointed out, Rich, the majority of the domestic automakers' annual price reductions do take place in the third quarter. I think what you are seeing as our business becomes more globally diversified that the annual price reductions are spread out more throughout the year.

So the annual price reductions for the domestic automakers were as expected. And as they become a smaller percentage of our total business their impact on our overall Company's revenues and margins becomes less also.

Okay. Just a quick follow-up on Europe for the quarter, it looks like production and mix is more favorable industry-wide relative to initial expectations. I think you sell a little bit less expensive mirror over there because you have more exterior mirror penetration. How did mix play out in Europe for you relative to initial expectations for the third quarter?

So I think compared to initial expectations they were very consistent. Now what we said in Europe and I mean CSM and other sources say the same thing, is that production in Europe has outpaced new vehicle registrations primarily due to exports to the emerging markets, specifically China, as well as to the US.

And historically our inside mirror business into Europe was primarily base mirrors and element subassemblies. And that is changing over time as we are introducing higher featured and dollar contented mirrors like SmartBeam and eventually RCD.

So we are starting to shift more featured mirrors into Europe. And with outside mirrors overall we have said that the ASP is a little lower but in Europe they make much greater use of aspheric and convex curved glass mirrors and those have a higher ASP than the flat exterior mirrors.

Okay. That's helpful, thanks.

Himanshu Patel, JPMorgan.

Hi, good morning, guys. Just actually dovetailing on the last question a little bit, we had heard over the course of the quarter that European auto production was running considerably stronger than CSM's start-of-quarter expectations.

And just kind of looking at your revenues in the quarter it didn't really seem like that came through. And maybe just the anecdotal color we were getting was misguided.

But was there any issue with the pace of new product launches or something inside of the quarter that tracked differently than what you would've expected that could have pressured revenues this quarter? Or are we just kind of reading that incorrectly?

There was really nothing different from our expectations going into the quarter. If you recall, in the second-quarter conference call we had used the updated CSM forecast from the middle of July because that did show a significant increase from the end of June forecast.

And so from our standpoint the European production was as forecasted. We had talked about that a number of the German luxury automakers were not shutting down for their typical three weeks in August.

That also happened, and I think the final benefit we did get from Europe is that the luxury vehicle segment has been holding up better than the entry-level. So we didn't see any significant differences from our standpoint.

Again, somewhat along the same lines on Europe, it seems like there is sort of a bit of a divergence in Europe right now where the traditional Western European past car market has sort of softened a little bit post-scrappage. At least on the registration data we can see.

But things that are working in Europe are things like light commercial vehicles, Russia, exports to China for premium vehicles. I'm just kind of wondering when you, at a high level, look at what is growing in Europe right now and what is not growing, any generalized comments you can provide about your respective exposure to those markets?

Yes, I think right now our mix of business in Europe is favorable. One, we've talked about the luxury car segment in terms of exports to China and the US.

And secondly with the high-volume European automakers, we are seeing a lot of growth with VW as well as Ford of Europe. And I think among the high-volume automakers they are doing better than most of their competitors.

Okay, thank you.

Jason Rodgers, Great Lakes Review.

Hello. Looking at the SmartBeam and looks like you had a very nice quarter with the ramp-up in new programs. Just wondering if there was anything unusual that happened in the quarter or should we start to expect more of a ramp-up in that product?

I think the SmartBeam shipments were pretty much as forecasted and expected. We have always said that there is strong interest in SmartBeam. It is being led primarily by the European automakers and the ramp-up has been strong and steady as compared to RCD, for example.

And we have also talked about with SmartBeam that there is a two- to three-year lead time for program development integration into the vehicles' electrical system and the mechanical engineering changes required of the automakers. And so we continue to be optimistic about the growth of SmartBeam and it will -- we are expecting it to continue to grow at an above-average rate.

And looking at some of the new products that you had talked about, the dynamic variable lighting and dynamic forward lighting, are those products that can be incorporated into SmartBeam, or is that just a completely separate product?

They are versions of SmartBeam. They are just different levels of SmartBeam that have enhanced capabilities. So it's basically a CMOS imager that has more pixels.

Is that something that could (multiple speakers) is that something that could come out potentially next year, or is that a few years ahead?

We would expect that the first step-up would be within a year or two. And then the next one, the dynamic would be within a year or two after that. And we are working with customers on them.

Okay, thank you.

Steve Dyer, Craig-Hallum.

Good morning, again. Just to drill down on the component shortage once again. Is that putting a bottleneck on sales at all, or is it just a matter of you can get the prices if you are willing to pay a little bit more, have them rushed, etc.?

It's not putting a bottleneck on sales. What it is doing is that our purchasing and material and planning groups are spending a lot of time looking for additional sources, looking for different purchasing channels. In some cases we are also looking at engineering redesigns of our products and all of this has resulted in increased costs but we have continued to supply our production lines, which then in turn have kept our customers fully supplied.

Okay. Thanks.

David Leiker, Robert W. Baird.

Good morning, again. I have two now since this is the second round. If you look at -- I know you talked about E, R&D a little bit as it goes, as you look to next year, I wanted to try and get a handle on it from a different perspective.

You go back 10, 12 years your E, R&D ran at 5% or 6% of revenue. Then for the last five or six years at 6% or 7% of revenue. Today we are running at 8% of revenue.

Where do you get to the point that the revenue line is growing faster than E, R&D and you can bring that down as a percent of revenue? Is that in 2011, or 2015, or is just something we shouldn't expect?

Well, I think what we have said is we don't manage our E, R&D line as a percentage of revenues. It's really tied to new product development and new program wins that are scheduled to go into production in the next two to three years.

So Steve has talked about how a significant portion of the large year-over-year increases in the past year is due to variable compensation. That should go away, so it should be more in line with additional staffing, both employee and outside contractors, as we ramp-up to hit the milestones necessary to bring these two programs into production.

So, in some ways -- at some point it is going to -- the year-over-year increase will be more closely in line with our top-line revenue growth. Right now because it is tied to new program launches as long as we manage it properly it actually should be good news for our shareholders that we continue to increase the spending on that line. Because that means that we are developing new products and it means that we are getting ready to launch new programs.

I guess one way to look at that is that that is some sort of indicator of your backlog of future revenue that we should see somewhere down the road. And that number is larger today than what would've been 5 years ago or 10 years ago. Is that fair?

Yes, I think that's exactly the way we look at it, David. That it should be a leading indicator. And I do think as we move into more complex products and that involves more electronic technology as well as software, that that requires more resources to bring those products to market.

Okay. Then the other piece of it is, I know you look at pricing your product and return on a gross margin level, but if you look at all the capital that you have invested in it including the development costs in software engineering before you ship, on a higher development cost you should generate a higher margin otherwise your return on capital goes down. Do you look at return on capital from that perspective as you go after new business?

What we do is as we look at the target margin, we take into account development cost into the computation. So, yes, indirectly we are expecting a similar return on invested capital. And therefore as we have products that require more initial development either there is an expectation that customers will share some of those costs, or -- I lost my train of thought -- that we need higher volume programs to justify the initial development costs and effort.

Still, we've got two ways to look at that. One is it is costing you more to get business that generates the same type of return, or there is an influx of new business opportunity that we should see accelerate in the coming years. What I'm hearing you say it is more of the second one than the first one?

Correct.

Okay, and then another item is, this investment dividend other income combination line is starting to become meaningful here again and create some variances relative to what people are looking for. And I know historically in Q4 you have had a pretty big dividend income number from mutual fund distributions. Given do you think we are more back into a normal environment that we should see that here in the fourth quarter again?

I think when you look at things sequentially and year over year there will likely be an increase. Now the extent of the increase, the mutual fund distributions in the fourth quarter are going to be largely dependent on those mutual funds to the extent they have embedded losses in there that will offset what they normally would've paid out. So it's hard to tell at this point.

But in a normal environment your fourth quarter, those two lines combined are about 50% of what you did in the nine-month period. Do you think we are back to a normal environment on this yet, or are we another year away?

I think we are another year away. I think it will increase but not to nearly that extent.

And then one last quick one. If we look at the lane departure warning and traffic signs, do those use your rear camera display in the mirror to operate?

The lane departure warning? Say that again, sorry.

Due to [LT's] driver assist functions, as that information is presented to the driver are you using the rear camera display to deliver that information to the driver?

That is a possibility, yes.

Of the programs you are working on, is that the path that you think the automakers might go down?

Yes, that's where they are talking about doing it and that's certainly what we are pushing. (multiple speakers)

So it's conceivable that the rear camera display -- what I'm trying to go at is that rear camera display isn't attached specifically to the rear camera. It is actually functions a different way and that it's not necessarily going to be tied just to displaying that rear camera image, correct?

Correct. It functions beyond that. Its other warnings and they are looking at -- right now there is research going on where they are looking at how much time it takes a driver to recognize a warning when it is put in a mirror as opposed to the instrument panel and how much time it takes their eyes off of the road and those types of things.

Great. Thank you for letting me follow-up on those last items.

And it appears we have no further questions at this time. I would like to turn the call back over to our speakers for any closing remarks.

I would like to thank everyone for participating in this call. If you have additional follow-up questions we will be here to answer your questions.

Thank you. Have a good day.

And once again ladies and gentlemen that concludes today's conference. We appreciate your participation.