Gentex Corp (GNTX) 2011 Q4 法說會逐字稿

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

I would now like to turn the meeting over to Miss Connie Hamblin, Vice President of Investor Relations and Corporate Communications. Please go ahead Miss Hamblin.

Thank you, good morning, everyone. Thanks for participating in our fourth-quarter conference call and joining me and Steve Dykman, our Chief Financial Officer, for a review of Gentex's fourth-quarter and calendar-year 2011 results. As you know from the 8-K filing in January 2010, Enoch Jen retired from full-time employment at the end of 2011 and will continue on a limited part-time basis for 15 months.

I'm going to go through a few routine matters and then I will turn the call over to Steve. This call is being broadcast live on the Internet via an icon on the homepage of Gentex Corporation's website. The audio playback of the conference call is also available on the website.

All contents of Gentex Corporation's conference calls are the property of Gentex and may not be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex. Gentex Corporation alone holds those rights.

While we understand that there may be companies that transcribe and redistribute our conference calls, notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcript.

Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree to these terms.

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

These forward-looking statements are based on management's beliefs, assumptions, current expectations, estimates and projections about the global automotive industry, the economy, the ability to control, leverage fixed manufacturing overhead costs, unit shipment and net sales growth, product mix, the ability to control E, R&D and SG&A expenses, gross margins and the Company itself. All statements other than statements of historical fact are declarations that are or could be considered to be forward-looking statements and include terms such as anticipates, outlook, expectations, estimates, projects, or forecast and variations of such words and similar expressions.

These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regards to timing, expense, likelihood and degree of occurrence. And actual results may differ materially from those in the forward-looking statements.

The Company undertakes no obligation to update, amend or clarify forward-looking statements whether as a result of new information, future events or otherwise. We urge you to review the full Safe Harbor statement that is contained in the news release that is posted on our website. At this point I will turn the call over to Steve Dykman and he will make some comments about the quarter.

Good morning, and thank you for joining us on the call. We are pleased to report record fourth quarter in terms of revenues and earnings.

The Company reported record fourth-quarter 2011 net sales of $260.3 million, a 17% increase compared with net sales of $222.1 million in the fourth quarter of 2010. Record net sales of $1 billion for calendar-year 2011, a 25% increase compared with net sales of $816.3 million in calendar-year 2010. We also reported record fourth-quarter 2011 operating income of $55.8 million, a 10% increase compared with operating income of $50.6 million in the fourth quarter of 2010.

Record operating income of $231.4 million for calendar-year 2011, a 21% increase compared with operating income of $191 million in calendar-year 2010. We reported record fourth-quarter 2011 net income of $40.5 million, a 10% increase compared with net income of $36.9 million in the fourth quarter of 2010.

Record net income of $164.7 million for calendar-year 2011, a 20% increase compared with net income of $137.7 million in calendar-year 2010. We reported record fourth-quarter 2011 earnings per diluted share of $0.28 compared with $0.26 per share in the fourth quarter of 2010. Record calendar-year 2011 earnings per diluted share were $1.14 compared to $0.98 per share in calendar-year 2010.

Next we will look at automotive net sales and auto-dimming mirror unit shipments. For the fourth quarter ended December 31, 2011, total auto-dimming mirror unit shipments increased by 16% in the fourth quarter of 2011 compared with the fourth quarter last year.

Automotive net sales increased by 17% from $217.7 million in the fourth quarter of 2010 to $254.7 million in the fourth quarter of 2011. The lower-than-expected automotive net sales versus our guidance at the beginning of the quarter was primarily the result of lower-than-forecasted vehicle production volumes at certain customers and inventory adjustments by certain Tier 1 exterior mirror suppliers.

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

Auto-dimming mirror units shipments to offshore customers increased by 13% in the fourth quarter of 2011 compared with the same quarter last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European automakers.

Light vehicle production in Europe decreased by approximately 1% in the fourth quarter of 2011 and increased by 12% in Japan and Korea in the fourth quarter of 2011 compared with the same quarter last year. For calendar year ended December 31, 2011, total auto-dimming mirror unit shipments increased by 26% in calendar-year 2011 compared with calendar-year 2010. Automotive net sales also increased by 26% from $797.1 million in calendar-year 2010 to $1 billion in calendar-year 2011.

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

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

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

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

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

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

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

Flooding in Thailand as a result of heavy rain and monsoons since late July 2011 resulted in additional supply chain disruptions as production at certain component supplier plants was moved to other plans in other countries putting those suppliers outside of Thailand in overcapacity situations. Gaining access to those components resulted in additional cost to the Company and negatively impacted the Company's gross profit margins by approximately a quarter of 1 percentage point during the fourth quarter of 2011.

The Company currently estimates that costs associated with these supply chain constraints and disruptions will improve sequentially through the first half of calendar-year 2012. To date the supply chain related issues the Company has experienced have not disrupted deliveries to customers but the Company continues to apply measures to ensure adequate supplies of certain automotive grade components that have been affected by recent economic and environmental conditions. The current environment is constantly changing and it is not known what the ultimate effect of the changing environment will have on the supply chain global wide vehicle production in the auto industry or the Company.

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

The ASP increased slightly on a year-over-year basis to $46.39 compared with $46.36 in the fourth quarter of 2010 primarily due to a higher mix of featured mirrors mostly offset by annual customer price reductions. Based on IHS's January 2012 light vehicle production forecast, we currently expect the first-quarter 2012 ASP to be in approximately the same range as the fourth quarter of 2011 based on anticipated product mix of base and featured mirrors in that forecast. As usual there are uncertainties with the IHS production and sales forecast, customer orders and new product introductions.

Next we will look at the gross profit margin. The gross profit margin decreased on a sequential basis from 35.4% in the third quarter of 2011 to 34.7% in the fourth quarter of 2011 primarily due to the Company's inability to leverage fixed overhead cost due to the lower net sales. Supply chain constraints related to the flooding in Thailand negatively impacted the gross margin in the fourth quarter of 2011 by approximately a quarter of 1 percentage point.

The gross profit margin decreased on a year-over-year basis from 35.8% in the fourth quarter of 2010 to 34.7% in the fourth quarter of 2011 primarily due to annual customer price reductions. The gross profit margin decreased to 35.3% for calendar-year 2011 compared with 36.2% for calendar-year 2010 primarily due to the impact of annual customer price reductions partially offset by the Company's ability to leverage fixed overhead costs.

The Company currently expects that its gross profit margin for the first quarter of 2012 will be approximately in the same range as the gross profit margin reported in the fourth quarter of 2011. The gross profit margin will continue to be conducted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage our fixed overhead costs, purchasing and engineering cost reductions, supply chain constraints and manufacturing yields.

Engineering, research and development expense increased by 21% in the fourth quarter of 2011 compared with the same 2010 period primarily due to additional hiring of employee and outside engineering and development services to support new product development projects and new program awards. E, R&D expenses increased by 27% for calendar-year 2011 compared with the same 2010 period primarily due to additional hiring of employee and outside contract engineering and development services to support new product development projects and new program awards.

E, R&D expense is expected to increase by approximately 20% to 25% for the first quarter of 2012 compared with the first quarter of 2011 primarily due to additional hiring of employee and outside contract engineering development services. Selling, general and administrative expense increased by 18% in the fourth quarter of 2011 compared with the same prior-year period primarily due to continued overseas office hiring to support our overseas growth.

SG&A expense increased by 20% for calendar-year 2011 compared with calendar-year 2010 primarily due to continued overseas office hiring to support our overseas growth. SG&A expense is currently expected to increase by approximately 15% to 20% for the first quarter of 2012 compared with the first quarter of 2011 primarily due to continued overseas office hiring to support our overseas growth.

I will now will provide some additional details regarding other income for the fourth quarter of 2011. Investment income was $2.524 million. Other net was $423,000 for total other income of $2.947 million.

For calendar-year 2011 investment income was $4.166 million and other net was $8.898 million. Total other income for calendar year 2011 with $13.064 million.

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

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

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

I will provide an update on the tax rate. The fourth-quarter 2011 effective tax rate of 31% varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction and the conclusion of a routine audit examination during the quarter that was favorably impacted the effective tax rate by approximately 2 percentage points.

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

The Company's year-to-date cash flow from operations was $141.7 million. An update regarding capital expenditures and appreciation, capital expenditures for the fourth quarter of 2011 were $35.2 million. Capital expenditures for the calendar-year 2011 were $120.2 million.

Depreciation expense for the fourth quarter was $9.3 million and calendar-year 2011 depreciation was $42.6 million. The Company currently estimates that 2012 capital expenditures will be approximately $130 million to $140 million primarily due to the increased production equipment purchases of approximately $60 million to $65 million and new facility costs of approximately $70 million to $75 million to increase production plant capacity. 2012 capital expenditures will be financed from current cash and cash equivalents on hand.

Depreciation and amortization expense for 2012 is currently estimated at approximately $48 million to $52 million. The Company has previously announced the following expansion plans to increase its plant capacity in the electronic assembly, final assembly, RCD and exterior mirror manufacturing areas. The projects include a 60,000 square foot chemistry lab expansion at the Company's Zeeland, Michigan campus, which is expected to be completed in early 2012 with a total estimated cost of $9 million; 32,000 square foot expansion project on the Company's exterior mirror manufacturing facility in Zealand, Michigan, which is expected to be completed in early 2012 with a total estimated cost of approximately $4 million; 125,000 square foot expansion project to its electronic assemblies facility in Holland, Michigan, which is expected to be completed in the second quarter of 2012 with a total estimated cost of approximately $17 million; a 120,000 square foot expansion project connecting two of its manufacturing facilities in Zeeland, Michigan, which is expected to be completed in the second half of 2012 with a total estimated cost of approximately $25 million.

The Company incurred approximately $13 million of facility costs pertaining to the above projects in 2011. The remaining $40 million to $45 million in facility costs pertaining to the above projects are expected to be incurred in 2012. The Company estimates that after the expansion projects are completed the plant capacity for its automotive mirror manufacturing facilities in Zeeland and Holland, Michigan will be approximately 21 million to 23 million interior mirror units annually and approximately 10 million exterior mirror units annually.

The Company is also evaluating additional manufacturing capacity needs to support the demand for its products. Due to the current volatile economic environment as well as uncertainties related to timing of the ramp-up of certain products, the construction timing of a new manufacturing facility is uncertain. However, the Company is estimating that it will incur costs of approximately $15 million pertaining to facility master planning and land infrastructure improvements at a 140 acre site that the Company currently owns.

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

The Company's cash dividend policy was established based on a number of criteria including current 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. Connie will now provide an update on SmartBeam and rear camera display.

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

Now an update on rear camera displays. On the legislation, the Kids Transportation Safety Act and the pending requirement that all new vehicles in the United States will be required to be equipped with cameras and rear camera displays by September 2014, and this is based on the December 3, 2010, notice of proposed rulemaking that was issued by the National Highway Traffic Safety Administration.

That was moved from the office of the Secretary of Transportation to the Office of Management and Budget on November 16. At that time the final rule was targeted to be completed by December 30. On January 10, 2012, Secretary of Transportation Ray LaHood sent a letter to Congressman Fred Upton and other congressional leaders indicating that due to the many public comments and the complexity of the rule that he now believes that the rule can be finalized by February 29, 2012.

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

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

And then third, the implementation phase, which is the time from the final rule when it is issued until full implementation when 100% of all new vehicles in the US under 10,000 pounds will be required to be equipped with rear cameras and displays. During this wait-and-see phase many customers have deferred any final sourcing decisions on programs until the final goal is published.

We continue to believe that the market for camera displays in vehicles will be divided into two primary market segments. Top 20% of the market will primarily offer the displays in a navigation system with the option of purchasing an RCD mirror. And then the rest of the market is the most likely market area to offer camera display in the mirror or in other 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 it also has the greatest and increasing competition. We continue to be in the wait-and-see phase as most automakers are waiting to find out what the final rule requirements will be.

The Company shipped approximately 1.7 million RCD mirrors in calendar-year 2011 compared with calendar-year 2010. And based on IHS automotive January 2012 forecast we currently expect that RCD mirror unit shipments will increase by approximately 10% to 15% for the first quarter of 2012 compared with the first quarter of 2011 reflecting the extended wait-and-see period due to the delay in the final rule and lack of visibility with respect to final customers' sourcing decisions.

I'll give an update on the dimmable aircraft window program. We are currently shipping dimmable windows for the 787 Dreamliner and each passenger aircraft has approximately 100 windows.

The first Boeing 787 was purchased by All Nippon Airways. Boeing has also expressed interest in utilizing these dimmable windows for other aircraft.

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

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

The strong outperformance of Gentex unit shipment growth be the compared to light vehicle production growth in our major markets continued but began narrowing in the fourth quarter of 2011 reflecting a slowdown in the growth rate of light vehicle production in China and at the major German automakers. European light vehicle production is currently expected to decline by 11% in the first quarter of 2012 compared with the same period last year and light vehicle production is expected to decline by 4% in China for that same period.

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

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

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

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

Gentex Corporation alone hold such rights. While we understand that there may be companies that transcribe and redistribute our conference calls notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content.

We advise that you should not rely on the content of any unauthorized 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 incurred by Gentex with respect to any such unauthorized use.

Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree to these terms.

Now we are going to open the call up for questions and answers. And as usual we respectfully request that you plan to ask one single-part question because we really aren't good at multiple part questions.

So at this point we will open it up for Q&A. Operator?

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

Good morning, everyone. The production number here in the fourth quarter, it sounds like from what you're talking about that you saw a decline in production rates during (technical difficulties) relative to what you expected, am I understanding that correctly?

Yes, certain customers and within the customers with certain vehicle models that were on, and that is primarily with some of the Asian customers.

The Asian customers in Europe?

Yes. And then the second item that really affected the fourth quarter compared to the beginning of the quarter forecast was, as you are aware, we are a Tier 2 for our exterior mirrors. And some of the Tier 1 customers had some inventory adjustments as they approached yearend and evaluate their inventory levels, so that affected us in the fourth quarter as well.

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

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

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

Strictly exterior mirrors only.

All of your exterior mirrors are Tier 2?

Yes.

Okay. I will stop there with my one question. Thank you.

Himanshu Patel, JPMorgan.

Hi, good morning, guys. I think on the third-quarter call you indicated that the Thailand flood was expected to be a 25 to 50 basis point margin hit.

First of all, can you just do a postmortem on that? Is that where that impact shook out? Was it worse or better?

And then just around a bridge from that magnitude versus the 90 basis points year-over-year gross margin decline that you saw, what was all of the difference between the two annual customer price downs? Or was there something else going on there as well?

Okay, so the guidance and on a sequential basis, yes, we estimated that the flooding impact to be 25 to 50 basis points. And it was about 25 basis points in the quarter effect related to that.

So it was a little bit on the low end of our guidance range. And on a year-over-year basis the other impact was the effect of annual customer price reductions.

Okay, thank you.

Rich Kwas, Wells Fargo.

Hi, Steve and Connie, how are you? Steve, I know you talked about guidance for E, R&D and SG&A here for the first quarter. As we think about the year should there be some better leverage on the E, R&D side as we move through the year given the amount of money you spent the last couple of years?

If you look at the trend line we are working off a larger base. So on a percentage basis naturally you would think that would come down a bit.

But we continue to devote resources to the E,R&D line item as we develop new products. So I think here for the near term it will likely be running ahead of the long-term historical trend of that 10% to 15% range.

Okay, and is that for both?

On SG&A expenses for -- and again, you do have the potential effect of any foreign currency fluctuation that could affect that line item. But in the first quarter we have guided 15% to 20% and we do think here in the near term that the expense growth on a percentage basis on that line item will be a little higher than the historical trend of around 10%.

Okay, thank you.

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

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. One real question and then one housekeeping question. I apologize for the addition here.

The first question is on the average selling price for the mirror for the full year of 2011. Looks like it's about flat but you are talking about the RCDs and SmartBeam sales, or unit sales increasing quite dramatically.

I am just curious, why the average selling price if we load those in is not increasing? It just seems like you are actually not getting paid too much for the RCDs and the SmartBeam incrementally.

And then just a housekeeping issue, is your sales are up 25% but your inventory is up 90%. So it looks like to me that your inventory turns are about 3.5 times versus the long-term average of 10 times and I just fear I am actually doing something wrong with my math there.

It just seems like inventory has gone up a lot faster than sales. Just trying to understand what I am missing there.

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

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

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

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

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

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

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

Adam Brooks, Sidoti & Company.

Good morning, guys. Maybe if you can just give an update on your thoughts on the margin impact on the expansion plans this year and maybe anything beyond?

It seems like at the rate you are growing probably another year or so, like you said, maybe in a completely new facility. Maybe what you are thinking initially the margin impact would be?

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

And with the expansions to existing facilities we are not anticipating as significant of an impact on margins due to the fact that it is not like we have to duplicate and add the support functions like you do with a new facility. So I think when we opened our 2006 facility we had talked about a 0.5 percentage point decline or impact on margins in the first year as a result of that new facility and we are not expecting that these expansion plans will be to that degree.

Okay, and maybe if I could speak in one quick more. Do you have a rough number as far as percentage of sales for China at this point?

It varies in material. It's low low single digits.

Thank you.

Steve Dyer, Craig-Hallum.

Thank you, good morning Connie and Steve. Was there any currency impact either to revenue or margins in any material way in the quarter?

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

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

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

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

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

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

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

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

Okay. Thanks.

Brett Hoselton, KeyBanc.

Good morning, Steve. Good morning, Connie.

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

We have not heard anything in terms of what the final bill is going to be good. In terms of having it slip, we have said for a while that because of the delays in the final rule that we would expect that this September 2014 date probably will be pushed out a year for full implementation just because of the way that the actual law is written.

This isn't based on any information we're getting from the market or anything. But the way the law is written it says they are supposed to be given four years from the date of the final rule.

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

But yet at the same time I'm not sure you really experienced anything that has ramped-up at a 40% or 50% rate in the 2 million to 3 million, to 4 million to 5 million units range in terms of shipments range. So my question here is as you look at over the next two to three years, do you think that you are going to be able to ramp-up at a very very significant rate, high volume and be able to absorb that and leverage off of that, get the operating leverage that you might expect off of that?

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

Okay. Thank you very much, Steve. Connie.

Greg Halter, Great Lakes Review.

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

Still in the 2% to 4% range.

Okay, and one other quick one on the contract that you had with PPG, I think it was signed December 2005. Given all the delays with the Boeing 787, has that been extended, or renewed, or are there any number of planes that were under that contract? How does that work?

No, it's basically talked about $50 million over the first five years of production. And given that there were production delays, so basically it's just kind of moved out as the production has been delayed.

Okay. Thank you.

(Operator Instructions). Peter Nesvold, Jefferies.

Good morning. I had a question on the growth rate of E, R&D versus the growth rate in revenue. So if I take E, R&D grew faster than revenue in the fourth quarter and if I take the midpoint of the range for the guidance in 1Q it happens again in 1Q.

When do we see that inflection point to the positive? When do we start to see revenue growing faster than E, R&D again?

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

And with the historical trend of the 10% to 15% growth rate in E, R&D, that was primarily driven by new program awards and work surrounding actual new programs that were coming online within two years. And the last 12, 18 months the higher growth rate was really driven by increased activity regarding product development projects. And those necessarily aren't generating revenues here in the near term.

Because that really would be two to three years out. So we feel that here in the near term the growth rate will continue above the historical 10% to 15% trend line but should moderate over time on a percentage growth basis. And hopefully then you will start to see revenues growing at similar or greater paste in the E, R&D growth rate but that will likely be beyond the 2012 calendar year.

I swear I had the sense from the past two earnings calls or so because the CapEx guidance was going higher but it sounded like there was some near-term programs that were approaching. And that we would -- I think the investment markets were starting to anticipate an acceleration in the top-line growth but I don't really get that sense from the communication this morning. Has anything changed, or is this sort of the growth rate in terms of top line that maybe we can anticipate for 2012?

The expansions that we've talked about, the near-term expansions that we are doing and the dollars that we are investing there are basically to get us through the next year or so. We looked at our business as a whole and there were bottlenecks in capacity in certain areas where we needed to expand. And the law of large numbers is impacting us where we can't just, if we need to add capacity, we can't just add a shift anymore.

We have to literally build a new plant or expand a plant considerably. So that's kind of where the expansion is coming from and that is just based on our basically current book of business.

And I think one thing we have talked about for several quarters is when you look at the vehicle production trend versus our unit growth, it has been very strong for the past 12 months. And what you really saw starting in the fourth quarter and continuing into the first quarter is a slowing or a narrowing of the delta between vehicle production and our unit growth. And that really is driven by some of the slowing growth that you read about in China as well as in Europe and specifically some of the German automakers.

And so we have had that tailwind from really the fourth quarter of 2010 through the first three quarters of 2011 and that is part of the contributing factor as well. Nothing really has changed with respect to new program awards or anything like that. It's just that the tailwind with the vehicle production mix isn't as significant as what it has been previously.

Okay. Thanks.

David Leiker, Robert W. Baird.

Hello again. First a follow-up on the question earlier about Europe and Steve your comment that was primarily Asian OEMs in Europe.

My thought was that the majority of your European business was with essentially BMW, Volkswagen, Mercedes and Volvo. How large are the Asian OEMs for you in Europe?

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

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

That is close, yes. And obviously what we experienced coming out of the downturn is we experienced certain capacity constraints in specific areas.

So that forced some of the expansion plans but generally overall we feel that once the four expansion projects are complete that we should be set for a couple of years. However, we also realized that if we are going to build a new facility it takes a year and a half to two years to construct.

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

The current four that we talked about?

Right.

Most of them in the first half of 2012 and then one of them in the second half of 2012.

So you should get some relief from the overtime and the bottlenecks in the second half of 2012 some of these expansion (multiple speakers)

We're hopeful for that, yes.

Thank you.

John Murphy, Bank of America Merrill Lynch.

Thanks for squeezing me back in. Just two questions on RCD's.

You have given capacity numbers for mirrors. I don't know if you have given capacity numbers for RCDs. Just curious if you have that, or is that (multiple speakers)

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

Okay, and then a second question on that. It looks like your penetration rate if we were to see use your RCDs, it looks like you are RCDs are already 13% of the US market.

I'm just curious if that sounds like that is about right? And what you think is the total RCD penetration rate is currently in the market for all deliveries, or all screens including the mirrors and nav systems?

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

So you say RCDs are probably already penetrated 25% to 30% of the US market, roughly?

Between our product and the Magna (multiple speakers)

Between the various --

Not Gentex alone but sort of in the aggregate?

Yes.

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

We have time for one more question.

Rich Kwas, Wells Fargo.

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

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

Okay. These are the first expenditures on this sort of thing?

Yes.

Okay. And that hits SG&A I assume?

No. That would be for production.

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

Yes.

Okay. And then just a quick follow-up on the RCD. So the 10% to 15% for first quarter.

As I recall first half of last year you were going something like 50% and then it kind of came down in the second half closer to 30%, somewhere in the neighborhood. So is it reasonable to think that as you move through the year the RCD comparisons on a quarterly basis they get easier?

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

Okay.

So we are in the wait-and-see type phase.

Okay, okay. Thank you.

And that was the last question for today.

Thank you. I would like to take this opportunity to thank everybody for joining us. If you have additional follow-up questions we will be here.

Thank you. Have a good day.

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