Gentex Corp (GNTX) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Gentex announces fourth-quarter and year-end financial performance conference call. Today's call is being recorded. I would now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communications. Please go ahead, Ms. Hamblin.

Thank you. Good morning, everyone. Thank you for joining our conference call with respect to our fourth-quarter and year-end earnings. On the call today is Enoch Jen, our Senior Vice President and Steve Dykman, our Chief Financial Officer. I'll go through a few routine matters and then I will turn the call over to Enoch, who will go through the quarter and year's results.

This call is being broadcast live on the Internet via Gentex's website at www.gentex.com. The audio replay of the conference call is available on the website as well. 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 Corporation alone holds such rights. While we understand that there may be companies that can transcribe and redistribute our conference calls notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcript as Gentex Corporation will not be held liable for the content of any such transcript. Gentex Corporation will hold responsible 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.

I am going to read an abbreviated Safe Harbor statement, but we would request that you read the full statement that is contained in our news release that is on the website. 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 anticipates, believes, confident, estimates, expects, forecasts, likely, plans, projects, optimistic and should and variations of such words and similar expressions identify forward-looking statements, these and variations of such words and similar expressions.

These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence and actual results may differ materially from those in the forward-looking statements. The Company undertakes no obligation to update, amend or clarify forward-looking statements whether as a result of new information, future events or otherwise. We urge you to review the full Safe Harbor statement that is contained in the news release that is posted on our website.

At this time, I will turn the conference call over to Enoch Jen. He will make his remarks with respect to the quarter and year and then we will open it up to Q&A and we do ask that you ask one single-part question at a time to allow everybody to participate. Enoch?

Good morning, everyone. We are pleased to report a number of all-time record financial results both for the fourth quarter and for the year ended December 31, 2010. For the quarter, we reported record net sales of $222.1 million, a 25% increase compared with net sales of $177.6 million in the fourth quarter of 2009, record net sales of $815.3 million for calendar year 2010, a 50% increase compared with net sales of $544.5 million in calendar year 2009. Our operating income in the fourth quarter of 2010 was $50.6 million, a 17% increase compared with operating income of $43.2 million in the fourth quarter of 200; record operating income of $191 million for calendar year 2010, a 102% increase compared with operating income of $94.6 million in calendar year 2009; record net income of $36.9 million in the fourth quarter of 2010, a 23% increase compared with net income of $30 million in the fourth quarter of 2009; record net income of $137.7 million for calendar year 2010, a 113% increase compared with net income of $64.6 million in calendar year 2009. Our earnings per share were $0.26 in the fourth quarter of 2010 compared with $0.22 per share in the fourth quarter of 2009 and our earnings per diluted share were $0.98 for calendar year 2010 compared with $0.47 per share in calendar year 2009.

Looking next at our automotive net sales and auto dimming mirror unit shipments, for the fourth quarter, total auto dimming mirror unit shipments increased by 26% in the fourth quarter of 2010 compared with the fourth quarter last year. Automotive net sales increased by 26% from $173.3 million in the fourth quarter of 2009 to $217.7 million in the fourth quarter of 2010. Auto dimming mirror unit shipments increased by 27% in North America in the fourth 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 8% in the fourth quarter of 2010 compared with the same prior-year period. Auto dimming mirror unit shipments to offshore customers increased by 26% in the fourth quarter of 2010 compared with the same period last year primarily due to increased mirror unit shipments of certain European automakers.

Light vehicle production in Europe was flat in the fourth quarter of 2010 and decreased by 5% in Japan and Korea in the fourth quarter of 2010 compared with the same period last year. For the year ended December 31, 2010, total auto dimming mirror unit shipments increased by 46% in calendar year 2010 compared with calendar year 2009. Automotive net sales increased by 52% from $525.6 million in calendar year 2009 to $797.1 million in calendar year 2010.

Auto dimming mirror unit shipments increased by 56% in North America in calendar year 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 39% in calendar year 2010 compared with calendar year 2009. Auto dimming mirror unit shipments to offshore customers increased by 41% in calendar year 2010 compared with the same period last year primarily due to increased mirror unit shipments to certain European and Asian automakers. Light vehicle production in Europe increased by 13% in calendar year 2010 and increased by 20% in Japan and Korea in calendar year 2010 compared with calendar year 2009.

The average selling price per auto dimming mirror unit was $46.36 in the fourth quarter of 2010 compared with $49.90 in the third quarter of 2010 primarily due to a higher mix of base auto dimming mirrors and annual customer price reductions. The ASP was down slightly on a year-over-year basis from $46.52 in the fourth quarter of 2009 primarily due to annual customer price reductions mostly offset by a higher product mix of mirrors with advanced electronic features.

Based on CSM's end of December light vehicle production forecast, we expect the first quarter 2011 ASP to be similar to the fourth quarter 2010 based on the anticipated product mix 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 5% to $4.4 million for the fourth quarter of 2010 compared with the same quarter last year as increased dimmable aircraft window net sales more than offset the 5% decrease in fire protection net sales. Other net sales increased by 2% to $19.2 million for calendar year 2010 compared with calendar year 2009, again, as increased dimmable aircraft window net sales more than offset the 16% decrease in fire protection net sales. The decrease in fire protection net sales was primarily due to the continued weak commercial construction market.

Next, I will look at our gross profit margin. The gross profit margin decreased on a year-over-year basis from 36.7% in the fourth quarter of 2009 to 35.8% in the fourth quarter of 2010 primarily due to annual customer price reductions and costs associated with supply chain constraints on certain automotive-grade electronic components, partially offset by purchasing VAVE cost reductions and the Company's ability to leverage its fixed overhead costs.

While the availability of certain automotive-grade electronic components remains tight, we have seen some improvement during the fourth quarter. The Company continues to believe that these increased supply chain costs will continue through the first half of 2011. The gross profit margin increased from 32.6% for calendar year 2009 to 36.2% for calendar year 2010 primarily due to the Company's ability to leverage its fixed overhead costs due to the 50% increase in net sales when comparing 2010 to 2009 partially offset by annual customer price reductions.

Based on the Company's expected net sales for the first quarter of 2011, which will be discussed later in these comments, we would expect the Company's first-quarter gross profit margin to be approximately in the same range as the fourth 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 costs, purchasing, VAVE cost reductions, supply chain constraints and manufacturing yields.

Next, we will look at our engineering, research and development expense. ER&D expense increased by 44% in the fourth quarter of 2010 compared with the same 2009 period primarily due to additional hiring of employees and outside contract engineering development services. ER&D expense increased by 36% for calendar year 2010 compared with calendar year 2009 primarily due to additional hiring of employee and outside contract engineering development services. ER&D expense is now expected to increase by approximately 30% to 35% for the first quarter of 2011 compared with the first quarter of 2010 primarily due to additional hiring of employee and outside contract engineering development services.

Looking at our selling, general and administrative expenses, SG&A expense increased by 16% in the fourth quarter of 2010 compared with the same prior year period primarily due to increased overseas office expenses. SG&A expense increased by 13% for calendar year 2010 compared with the same prior-year period primarily due to overseas office expenses. SG&A expense is currently expected to increase by approximately 10% to 15% for the first quarter of 2011 compared with the first quarter of 2010 primarily due to overseas office expenses.

Looking next at total other income, for the fourth quarter 2010, investment income was $1.213 million. Other was $3.424 million. For the calendar year 2010, investment income was $2.902 million and other was $9.566 million. Total other income increased in the fourth quarter of 2010 compared with the fourth quarter of 2009 primarily due to realized gains on the sale of equity investments. Total other income increased to $12.5 million in calendar year 2010 from $1.7 million in calendar year 2009 primarily due to realized gains on the sale of equity investments in calendar year 2010 compared with realized losses on the sale of equity investments in the same prior-year period.

Next, we will provide some balance sheet amounts at December 31, 2010. Accounts receivable were $95.7 million, inventories were $100.7 million, patents and other assets were $13.2 million, accounts payable were $40.3 million and accrued liabilities were $31.8 million. The effective tax rate of 33% varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for 2011 will be approximately 33% based on current tax laws primarily due to the domestic manufacturing deduction.

Our year-to-date cash flow from operations was $128.1 million. Our capital expenditures for the fourth quarter 2010 were $17.8 million. Our capital expenditures for the calendar year 2010 were $46.9 million. Our depreciation expense for the fourth quarter of 2010 was $9 million and our depreciation expense for the calendar year 2010 was $38.6 million.

In light of strong customer demand for our auto dimming mirrors and a more complex product mix, we have been increasing our production line capacity and also purchased the new James Street manufacturing facility. Production lines for auto dimming mirrors with advanced electronic features such as rear camera display and a SmartBeam are more complex and require additional equipment. For calendar year 2011, our estimate for capital expenditures is approximately $60 million to $70 million. Depreciation expense for 2011 is currently estimated at $39 million to $42 million.

Regarding cash dividends, on January 21, 2011, 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 January 6, 2011. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws, that it 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 productlines. SmartBeam is the intelligent high beam headlamp assist product that we introduced in the 2005 model year and it is currently offered on 55 vehicle models at 11 OEM customers, including Audi, BMW, Chrysler, General Motors, Opel Vauxhall, Peugeot Citroen, Saab, Tata Motors Land Rover, Toyota Lexus, Rolls-Royce and Volkswagen.

For the 2010 calendar year, we shipped approximately 630,000 SmartBeam units compared to the 2009 calendar year when we shipped approximately 437,000 SmartBeam units. Based on the CSM end of December forecast, we currently expect that SmartBeam units will increase by approximately 50% to 60% in calendar year 2011. We will no longer provide average take rates for SmartBeam or RCD as we don't feel they are meaningful given the large number of models offering this feature, the wide range of volumes that these vehicle models and the wide range of take rates across these models.

Next, we will provide an update on rear camera display. To date, our RCD mirrors are offered on 59 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 over 20 additional models.

A legislation update on December 3, 2010, the National Highway Traffic Safety Administration announced its preliminary interpretation of the Kids Transportation Safety Act of 2007, a law intended to increase a driver's visibility while backing up. NHTSA indicated that all new vehicles under 10,000 pounds in the United States are required to have backup camera-based systems by September 2014. The phase-in schedule is 10% of all vehicles sold in the US by September 2012, 40% by September 2013 and 100% by September 2014. This interpretation is subject to public comment and is intended to be finalized by the end of February 2011.

Our RCD mirror is an optimum, ergonomic, easily adaptable method to display the output of a rear camera for increased safety. 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 1.25 million RCD mirrors in calendar year 2010 compared with 573,000 RCD mirrors shipped in calendar year 2009. We have previously indicated that RCD mirrors will be implemented in three overlapping phases. The first phase is a market-driven phase covering the time period prior to any legislation through NHTSA's preliminary interpretation of the legislation on December 3, 2010. The second phase is a wait-and-see phase, which covers the period of time from when the legislation was signed into law on February 28, 2008 until the final interpretation, which is currently expected by the end of February 2011 and the third phase is an implementation phase covering the time period from the December 3 preliminary interpretation date until September 2014 when 100% of all vehicles sold in the US less than 10,000 pounds will be required to be equipped with rear cameras and displays.

Another factor affecting these three phases is that there are certain automakers that have made it clear that they want to be leaders in the safety area who either have already come forward and announced their strategies for how they will offer displays in their vehicles or will in the near future. We believe that it is important to understand the level of complexity involved in the customer decision-making process for determining how each different vehicle model will comply with this new regulation. Most automakers, the individuals who are responsible for displays, center consoles, mirrors and the rear backup cameras each come from different departments at the automaker. While it is relatively straightforward to implement a Gentex auto dimming RCD mirror in a vehicle, pulling together the rest of the camera-based system at the automaker may be more complicated.

Based on NHTSA's December 3, 2010 preliminary interpretation, our customers are obviously working to determine how they will meet NHTSA's phase-in schedule and there are many decisions yet to be made. We believe that this wait-and-see phase will cause a brief slowdown in the rampup of RCD mirror unit shipments until customers determine how they are going to meet the requirements of the new regulation across all of their vehicle lines and then implement those plans. Because we are in the early stages of the implementation phase and many automakers are revisiting any decisions that have been made prior to the December 3 NHTSA announcement, we believe that there are too many uncertainties to provide annual guidance for RCD mirror units at this time. And as a result, we currently plan to only provide guidance for the first six months of the year.

Based on IHS Automotive, which is formerly CSM, end of December forecast, we currently expect that RCD mirror unit shipments will increase by approximately 50% for the first six months of 2011 compared with the same period in 2010. By comparison, for the first six months of 2011, per IHS, light vehicle production in North America will be 6.7 million vehicle units, a 12% increase over the prior year, 9.7 million vehicle units in Europe, which will be flat with the first six months of 2010 and 6.5 million vehicle units in Japan and Korea, a 2% decrease from the first six months of 2010.

Since it is likely that camera-based systems will be required by September 2014, we now believe that the market for camera displays in vehicles will be divided into two primary market segments. The top 15% to 20% of the vehicle market will primarily offer the display or a rear camera in the navigation system with the option of purchasing an RCD mirror. The rest 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 and increasing competition.

Next, we will provide an update on dimmable aircraft window programs. We are currently shipping dimmable windows for the 787 Dreamliner and each passenger aircraft has approximately 100 windows. Boeing has also expressed interest in utilizing dimmable windows for other of their aircraft. On January 19, 2011, there was an announcement by Boeing that the anticipated first-quarter 2011 shipment of the Boeing 787 Dreamliner will now be delayed until the third quarter of 2011 primarily due to an in-flight issue experienced back in November on a test plane.

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

Next, we will provide some revenue estimates. The following projection for net sales in the first quarter of 2011 is based on CSM's end of December light vehicle production forecast. Our estimate for net sales for the first quarter of 2011 is an increase of approximately 30% to 35% compared with the same period in 2010. For comparison, the first-quarter 2011 light vehicle production per CSM is 3.3 million vehicle units in North America, a 15% increase compared to the first quarter of 2010; 4.8 million vehicle units in Europe, a 2% increase compared to the first quarter of 2010; and 3.3 million vehicle units for Japan and Korea, which is flat with the first quarter of 2010. For calendar year 2011, the CSM light vehicle production forecast is currently 12.9 million vehicle units in North America, a 9% increase compared with calendar year 2010; 18.6 million vehicles in Europe, a 1% increase compared with calendar year 2010; and 12.8 million vehicles for Japan and Korea, a 2% decrease compared with the prior year. At this time, I will turn the conference call back over to Connie.

As a reminder, alllisteners should note that this call is being recorded by Gentex Corporation. 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 express written consent of Gentex Corporation. Gentex Corporation alone holds such rights. While we understand that there may be companies that transcribe and redistribute our conference calls notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content.

We advise that you should not rely on the content of any unauthorized transcript as Gentex Corporation will not be held liable for the contents of any such transcript. 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 to these terms.

At this time, we are going to open it up to the Q&A and we again do request that you ask single-part questions and one at a time to allow everyone to participate. Thank you. Operator, you can open it up to Q&A.

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

Good morning. I don't think I have ever been first.

Good morning, David.

Lucky day. If we look at your growth estimates here for Q1, I'm talking 30% to 35% revenue growth, your production numbers, the CSM numbers are up 5%, so you have got a 25% or 30% gap. That's significantly higher than what you've seen historically. I was wondering if you could bucket it a little bit of how much of it might be a comparison issue with mix from last year versus shipments versus incremental content like RCD and SmartBeam. If you can characterize that in some fashion.

I don't think we have any detailed analysis to provide you with, David. I think the factors that you've listed are impacting our ability to grow our revenues faster than the increase in industry production levels. I think it's a combination, as we've said. First, we will be affected by global industry production levels; second, we continue to increase our penetration with auto-dimming mirrors. Though these new programs then allow us to grow faster than the industry. And then, finally, as we are looking at revenues compared to units, the increased number of new programs with added value, electronic features like SmartBeam and rear camera display enable the revenues to increase at a potentially greater rate. So it is all three factors, but we have not broken it down in any manner that we can communicate it.

So if everything else is equal, which obviously it never is, that sounds like those drivers are sustainable to maintain that type of a gap.

I think if you look at it, that has been our long-term trend. I think from quarter to quarter we will be above and below that trend line, but it's been for 20 years that we've been able to generally increase our units and revenues faster than the overall global industry.

I guess what I'm trying to get at is whether this is something that is different that we have broken out to a different range of what that trend line has been or do you think this is just varying within what that historical trend line would have been? Then I will stop after that.

Okay, we think it is just a variation around the trend line. So we do not believe that there is any new factor.

Okay. Thank you.

Steve Dyer, Craig-Hallum.

Thank you, good morning. Just a quick question on the R&D expenses. Obviously, I think trending a little bit higher than maybe some of us had expected. Is the 30% to 35% year-over-year growth rate, is that a good number to use kind of each quarter going forward or would you expect that to flatten off at some point?

Well, I think if you look at it from a longer-term perspective, we feel the 10% to 15% historical increase on a year-over-year basis is a good number. However, in the near term, we do feel it is going to be trending higher on a year-over-year basis as far as expense increases go and that is in part due to the increased activity we are seeing with product development projects and new program launches. Now what we have said in the past is that the majority of our R&D spend related to new business awards and that is really tied to this 10% to 15% year-over-year increase. I think in the near term we are seeing a higher percentage of R&D spend that is going to be tied to product development projects and that is not necessarily always tied to new business awards. So that is really accounting for some of the acceleration in the year-over-year expense growth.

So how would you expect that to kind of look as the year goes on? Does it trend back to more of that normalized growth rate by the end of the year or is this year just going to be kind of inflated all around?

I think for the next year it is going to be above the 10% to 15%. I mean obviously we guided in the first quarter the 30% to 35% range on the tail end of 2011. Those expense growth rates may diminish slightly due to the fact that we have kind of ramped up the ER&D spend in the second half of 2010.

Okay. And then just one quick follow-up. You had mentioned kind of a little bit of the price differential between an LCD screen and putting the RCD in the mirror. Do you have any sort of hard numbers you could throw out there?

No, we don't, Steve. Our point is is that, in a number of vehicles, the automakers already have an LCD display either in a navigation system or in a radio display or some other place and in that situation, their natural tendency is to try to reuse that display for other functions, including possibly rear backup.

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

Jeff Rosenbaum, York Capital.

Hi, good morning. I appreciate the commentary on the uncertainty on rear camera. Just a couple of quick questions around that. One, in your conversation with the OEMs, how reliant are they on the data that the actual incidences of rear rollovers is lower when placed in the rearview display versus in other parts of the cockpit?

And then two, obviously, Ford came out right after the NPRM and announced that they would have some sort of rear display available on all vehicles, most vehicles in the US by the end of this year. Is that your expectation that other OEMs will be aggressive like that and is Ford -- can you take Ford as a template and look where in the vehicle they will be producing the rear camera, whether it is in the rearview mirror or in the infotainment stack, etc.?

Okay, I think you asked a three-part question, Jeff. So let me take the last section and then you are going to have to remind us what the first two parts were again. I think we expect certain automakers to be more aggressive in introducing camera-based rear backup systems into their vehicles not only to position themselves as safety leaders, but also their recognition that until the mandated date in September 2014, this could be a very profitable option for them to offer their customers. Now if you want to --.

And Ford said that they are going to make it available on all of their vehicles by 2011, which means again they are going to price for the option.

(multiple speakers)

Do you have any color as to what percent of their fleet would be in the rear camera versus other parts of the cockpit or in the rearview mirror versus other parts of the cockpit?

No, we don't at this time.

Okay. And in your conversations with OEMs, how reliant are they on the data that the rearview mirror location is the most effective in deciding?

I think the overriding factor is that there is regulation in place and they are going to have to meet that regulation. I think in terms of the location, some automakers are relying more on that on some of those studies. And certainly we are encouraging them to consider that recognizing that there are other potential locations and there are also cost constraints that the automakers need to operate under.

Great. Thank you.

Brett Hoselton, KeyBanc.

Good morning, Connie, Enoch, Steve. Let's see, I know you are hesitant to talk about RCD growth in the back half of the year. My question is --.

Well, it's easier if you ask the questions.

My question is you have got contracts in hand right now and so is there any sense -- do you have any sense what your growth rate might be in the back half of the year given your current contracts? And then are you thinking that it could be higher than that or lower than that or you just don't know?

We just don't know. And that is why we feel that it is best not to provide any guidance for the second half of 2011 until we have better information from our customers. Again, I think for over the past year plus, we have been talking about the fact that this wait-and-see phase that where once the legislation was passed, a number of automakers have been very diligent and looking at alternatives in terms of camera or sensor-based systems, different locations within their vehicles and a lot of decisions were pending the final interpretation by NHTSA.

Asking that question a little different way, is there any contracts that you have had in hand prior to the announcement that have been canceled post the announcement? In other words, they have chosen -- the automaker has chosen to choose another alternative?

No.

Good. Thank you very much.

Himanshu Patel, JPMorgan.

Hi, good morning, guys. First, I wanted to talk just about -- you mentioned in your comment on ASPs that there was a little bit of a sequential slippage because of a higher mix of base auto-dimming mirrors in the quarter. Can you just elaborate on that?

Well, what we have said is that, over the next three to five years, we expect ASPs to gradually trend upward as some of the positive factors will outweigh some of the downward pressure. However, we have always said from quarter to quarter the ASPs can fluctuate a little bit and in the fourth quarter, we had more shipments of base-featured mirrors, which, from our standpoint, is a good thing, but it does tend to pull the ASPs down a little bit based on the mix during the quarter.

Okay. And then just two quick questions on RCD. Are you guys getting any better visibility on the kind of magnitude of price deflation the OEMs may ask on this product longer term, not during this phase-in period, but sort of after that when everyone kind of has to have it on?

No. We are not -- I think, right now, the automakers are all struggling with how best to implement it for their vehicles and then once they determine the different ways that they are going to do it, then I think they are going to focus on pricing as it relates to volumes.

And the requirement for meeting the 10% is not so difficult for them because everything is pretty much there. It is just getting to the 40%, getting to that jump. That is what is really going to be somewhat difficult for some of the automakers.

And then, Connie or Enoch, just I thought it was interesting, it was actually helpful; you guys discussed all of the areas where the camera image could be displayed. In addition to the in-dash navigation system and the mirror, you also highlighted radios and IPs. Just two questions on that. How much movement is there in those kind of subsegments? Are you seeing some serious competition from those areas of -- are the products already available that other auto suppliers are offering in the IP space or radios such that you think it could be a credible share of the total backup camera display image? And then do you also have a sense of how much incremental cost is involved for OEMs to pipe the image into those two channels, like to go from a standard IP to an IP that can display a rear camera display image?

To the first part of your question, yes, there are credible other locations that are being seriously considered by the automakers. Regarding the second part of the question, we don't have accurate information that we are able to provide at this time.

One potential problem with some of the other locations is there is a requirement in NHTSA's interpretation on the brightness of the display and it's somewhat difficult and sometimes difficult for them to have a radio display or even a nav display meet that 500 candela requirement. That is going to be a challenge for some OEMs.

And then I think obviously there is still this public comment period and there is certainly some potential for some tweaks in the final interpretation by NHTSA, which may affect the viability of some locations versus the others. But as we've said, obviously, with the preliminary interpretation, if it holds, sensor-based systems no longer will meet the law and so it increases the potential addressable market, but there are a number of other serious and credible alternative locations.

And I would just make the point that our mirrors -- we do not have any issues in terms of meeting that 500 candela because when we were developing these products, our customers were pushing us so hard to get to 500 and then get to 1,000 that we just kind of leapfrogged everything, so now we are really bright. So we don't have any problems with that.

And Connie, is there an image size requirement?

Yes, it has to be 2.8, but it is -- even the way that it is measured, it is measured diagonally and 2.8 inches is not necessarily -- sometimes even a 2.4 inch display, depending on the way that it is measured and the size of the mirror, could work and would meet the requirements. So none of the existing technology really was ruled out as a result of it.

Great. Thank you very much. Very helpful.

David Lim, Wells Fargo Securities.

Great, good morning. Can you hear me?

Sure.

Yes.

Good, good. Just to follow up on RCD, I guess the question that we have is obviously the upper tier segments within the auto space will have the navigation equipment. Among the 80% or 85% or so where you guys are going to compete, I mean how much of that can really feasibly be from an infotainment system or similar to like My Ford Touch? I mean can you sort of size that for us?

We can't size it because we don't know where info -- one, the potential practical size of the infotainment market. In terms of performance/cost characteristics, infotainment systems will be very similar to nav systems in our opinion. So we think the system itself will be relatively costly once you have the system. Then the incremental cost to include rear backup assist will be less.

Got you.

So it will be that trade-off.

So essentially I mean if I think of this right, the more upper-end vehicles, whether it be mid-segment, so the upper-end vehicles in the mid-segment might have the infotainment and could possibly have the display piped in through the actual LCD screen, but given if they have thatm normally the OEMs will probably go through the LCD screen over another rear camera display? I mean would that be a fair assessment?

Yes, for the most part, with the exception that there are automakers who are recognizing that they can only put so much information in one display and they are looking at multiple displays.

Got it, got it. And my final question is annual pricedowns. Are you guys seeing more pressure than normal than what you've seen in the last year or so?

No, I think for 2009 and 2010 calendar year, we had said that it has improved slightly from the historical trend and they have been in the range of the 2% to 4% range overall.

Got it. Thank you very much. I appreciate it.

Greg Halter, Great Lakes Review.

Yes, good morning, thanks for taking the question. Relative to SmartBeam, wondered if you have reached the volume limits whereby there may be price reductions requested by some of the OEMs?

Well, what we had talked about, Greg, was that when we introduced the SmartBeam feature back in the 2005 model year, that with those initial automakers, there was an agreement that until volume ramped up past the first few years there would be no pricedowns. So over the past several years, there have been normal annual pricedowns on the SmartBeam feature along with our mirrors and other features.

Okay. And can you give us a status update on the -- I think it is the James Street facility, how that is progressing, which appears to be a great addition on your part.

Yes, well, I think like one analyst that follows Gentex pointed out, sometimes greenfield development can be overrated and can be much more costly. So we do feel that we are going to have the James Street facility ready for production at probably close to a third of the cost that a new facility would have required. We did the renovations at an extremely fast pace within about a month, from the second week in December to the second week in January. We are in the process of moving over production lines each week and we expect to have the existing electronic assembly production lines moved over to the James Street facility within the next month or two.

Okay, great. That's awesome.

So it has moved very fast and the renovation and the move have gone well.

Thank you.

David Leiker.

Hello again. I have a question for you on Ford because I think -- I don't know if you recall offhand how many Ford vehicles you are on with RCD. Do you have that number handy?

I don't think I have it exactly, no.

Okay. Well, I think Ford has made the comment that they have taken 80% -- that they have an 80% take rate on SYNC, which obviously puts a screen in the display. You obviously have a lot of vehicles where you have RCD mirrors in Ford vehicles presumably with SYNC. Can you talk a little bit about Ford's decision to put it in the mirror versus in the screen that operates the SYNC? Do you have any insights there?

No, we really don't. We have eight Ford vehicles that we are offered on currently. I really can't answer that. I don't know how to --.

I think like most of the domestic OEMs, they tend to make their decisions on a vehicle platform level. Certainly we would hope that some of those decisions were influenced by some of the studies that have come out saying that the mirror is a more user-friendly, ergonomic location. But, no, there is no official Ford strategy at this point.

Do you have any sense how much economics might play a role there? And obviously, by putting it in the mirror, they can sell an option and generate more revenue than just embedding it in the stream for SYNC. Do you have any sense on that?

Well, I think some automakers that are looking at that I guess product and pricing strategy and so rather than focusing strictly on cost or location, they are also looking at how they can best meet consumer demand and make it a profitable option until the September 2014 mandated date.

Okay, and --.

And given the amount of profitability that is associated with putting these in their vehicles, it makes the most sense for them to offer it optionally as long as they possibly can, again, trying to work within all the vehicle cycles. It's a very complex system that everybody has to work into now.

Right. And then on Ford here still again, is there anyway you can give us some sense whether you see the take rates at Ford for the RCD are higher or lower than what you would see on average?

No. I don't think that there is that much difference.

Okay, great. Thank you.

Brett Hoselton.

Good morning again. I don't know if you mentioned this earlier, and I might have just missed it, but did you talk about sequential gross margins as you move from the fourth quarter to the first quarter, whether or not you thought they would be down, flat, up?

We had said gross margins would be in the range of the fourth quarter in the first quarter of 2011.

Perfect. Thank you very much, Steve.

Jeff Rosenbaum.

Any comments or commentary you can provide on the European Commission or euro end cap and their response or their thoughts on what NHTSA has mandated and/or any conversations you've had with them?

I don't know that we have had any conversations with them. Certainly this is something that any automaker who is shipping product back here has to consider and that's one of the places where we think that our mirror could be a very good opportunity for them because a lot of those vehicles, particularly the higher-end vehicles, if they don't have a nav screen in them, then there is probably maybe 10%, 15% of maybe BMWs that don't have a nav screen, but those would be good opportunities for an RCD mirror.

But in regards to it potentially being mandated in Europe or the safety rating standards being changed in Europe to include something like this?

No.

No, I think we have said that we don't expect any mandated safety requirement in Europe for a number of reasons, including the fact that there is a lot fewer driveways in Europe. They tend to look at a feature like this more as a parking assist feature rather than a rear backup feature. And we have also said the legislation in the US, I mean it is emotional, as well as a safety feature here and it is certainly going to make backing up safer, but some people have questioned the overall cost of the legislation.

Got it. Thanks.

Greg Halter.

Yes, thank you again for allowing me on. I wanted to get an update on your hiring plans, both on the hourly folks, as well as the engineers and also whether or not you are looking to replace some of the outside folks with your own hiring?

Okay. Well, we have been continuing to hire. On the hourly front, we are fairly close to meeting our near-term levels. What we have historically done and are continuing to do with contract or temporary hourly workers is that they are initially hired as contract and then generally over a 60 to 90 day time period, they generally tend to be converted over to permanent employees based on their performance. On the salaried employees, we still have a significant number of salaried positions that we are looking to fill. They tend to be pretty specialized in terms of electrical engineering, embedded software, international and those positions are posted on our Gentex website.

Okay. And with the stock price slightly above $15 a share, I wonder what your cash plans are seemingly that the share repurchase would be out of the picture?

With respect to share repurchases, our criteria has not changed and as you noticed on the history over the past 12 plus months, we have not repurchased shares at these levels. We do have the ongoing quarterly cash dividend program and the criteria with respect to that program has not changed and historically the payout ratio has been roughly about half of earnings and 40% to 45% of operating cash flow and that was the case for the 2010 calendar year.

Okay. That's excellent. And one last one relative to the supply constraints. Enoch, I think you mentioned that you have seen some improvement there. Any way to characterize how much that may have hurt your gross profit in dollars in the quarter?

Well, we haven't specifically talked about dollars, but what we've said in the third quarter that it negatively impacted our gross margin by roughly 1 percentage point and in the fourth quarter, it was slightly improved. So it was a little bit under a percentage point.

And you expect that for the first half of 2011, but at a lower rate?

Well, we expect the challenges for the first half of 2011. We expect and believe there could be some slight improvements as we proceed through the year.

Okay, thanks.

We have time for one more question. operator.

And actually we have no questions remaining at this time, so I'd like to turn the call back over to you for closing remarks.

Okay, I want to thank everyone for taking the time to participate in this call and we will be here if you have any additional follow-up questions. Thank you.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.