Gentex Corp (GNTX) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gentex announces third-quarter 2012 financial results conference call. Today's call is being recorded. I'd now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations.

Thank you. Good morning, everyone. Thank you for participating in our third-quarter conference call. On the call with me today are Steve Dykman, our Chief Financial Officer, and Mark Newton, our Senior Vice President. First I'm going to go through a few routine matters and then I will turn the call over to Steve for his comments on the Company's financial results for the quarter.

This call is being broadcast live on the internet via an icon on our home page at www.gentex.com. 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 Corporation and may not 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, not withstanding 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 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 now if you do not agree to these terms.

Before we begin, I'd like to remind you of our forward-looking statements. Gentex Corporation will make forward-looking statements in this presentation related to its financial results for the third-quarter and calendar-year 2012 and beyond that are based on preliminary data and are subject to risk and uncertainties. These forward-looking statements are based on managements' belief, assumptions, current expectations, estimates and projections about the global automotive industries, the economy and the Company itself. Works like anticipate, believes, confident, estimates, expect, forecast, hope, likely, plan, project, optimistic and should, and variations of such words and similar expressions identify forward-looking statements.

These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occupancies. Actual results and outcomes may materially differ from what is expressed or forecasted. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the full Safe Harbor statement in our news release on our website.

At this point I will turn the call over to Steve Dykman.

Good morning and welcome to our third-quarter 2012 conference call. We are pleased to report that our gross profit margin sequentially improved in the third quarter of 2012, despite a sequential decline in net sales. We are also pleased to illustrate the positive efficiencies we are experiencing within our operating expenses. While we continue to be concerned about the flattening net sales, particularly as we operate in a challenging and changing market conditions, our primary long-term goal is to improve our top-line growth.

The Company reported third-quarter 2012 net sales of $268.2 million, which was slightly down compared with net sales of $269.5 million in the third quarter of 2011. Net sales of $839.2 million for the first nine months of 2012 was a 10% increase compared with net sales of $763.4 million in the first nine months of 2011. We reported third-quarter 2012 net income of $41.9 million, which was a 4% decrease compared with net income of $43.4 million in the third quarter of 2011. Net income of $129 million for the first nine months of 2012 was a 4% increase compared with net income of $124.2 million in the first nine months of 2011. We reported third-quarter 2012 earnings per diluted share of $0.29 compared with $0.30 per share in the third quarter of 2011. Earnings per diluted share was $0.89 for the first nine months of 2012 compared with earnings per diluted share of $0.86 for the first nine months of 2011.

Next we'll look at automotive net sales and automotive -- or auto-dimming mirror unit shipments for the third quarter ended September 30, 2012. Total auto-dimming mirror unit shipments increased by 5% in the third quarter of 2012 compared with the third quarter last year. Automotive net sales decreased by 1% from $264 million in the third quarter of 2011 to $261.9 million in the third quarter of 2012. In addition, we continue to experience increased volatility with customer orders in the near term. Auto-dimming mirror unit shipments increased by 22% in North America in the third quarter of 2012, primarily as a result of increased mirror unit shipments to certain domestic and transplant automakers.

North American light vehicle production increased by 14% in the third quarter of 2012 compared with the same prior-year quarter. However, we do continue to experience variability in vehicle production levels within the domestic automakers. Auto-dimming mirror unit shipments to offshore automakers decreased by 4% in the third quarter of 2012 compared with the same quarter last year, primarily due to decreased mirror unit shipments to certain European and Japanese automakers. Light vehicle production in Europe decreased by approximately 6% in the third quarter of 2012 and decreased by approximately 2% in Japan and Korea in the third quarter of 2012 compared with the same quarter last year.

For the nine months ended September 30, 2012, total auto-dimming mirror unit shipments increased by 13% compared with the same nine-month period last year. Automotive net sales increased by 10%, from $748.5 million in the first nine months of 2011 to $822.4 million in the first nine months of 2012. Auto-dimming mirror unit shipments increased by 24% in North America in the first nine months of 2012, primarily as a result of increased mirror unit shipments to certain transplant and domestic automakers. North American light vehicle production increased by 20% in the first nine months of 2012 compared with the same prior-year period. Again, we continue to experience variability in vehicle production levels within the domestic automakers.

Auto-dimming mirror unit shipments to offshore customers increased by 7% in the first nine months of 2012 compared with the same period last year, primarily due to increased mirror unit shipments to certain Japanese and European automakers. Light vehicle production in Europe decreased by approximately 4% in the first nine months of 2012, and increased by 21% in Japan and Korea in the first nine months of 2012 compared with the same prior period last year. Other net sales for the Company increased by 15% to $6.3 million for the third quarter of 2012, compared with the same quarter last year, primarily due to increased dimmable aircraft window net sales, partially offset by decreased fire protection net sales. Other net sales increased by 12% to $16.8 million for the first nine months of 2012 compared with the same period last year, primarily due to increased dimmable aircraft window net sales, partially offset by decreased fire protection net sales. Fire protection net sales continue to be impacted by the relatively-weak commercial construction market.

Next we'll look at the average selling price per auto-dimming mirror unit, which was $44.12 for the third quarter of 2012. The ASP of auto-dimming rear-view mirrors was down on a sequential basis to $44.12 in the third quarter of 2012 compared with $44.73 in the second quarter of 2012, primarily due to a higher mix of base auto-dimming mirrors and the impact of annual customer price reductions. The ASP decreased on a year-over-year basis to $44.12 in the third quarter of 2012 compared with $46.79 in the third quarter of 2011, primarily due to annual customer price reductions and a higher mix of base auto-dimming mirrors.

Based on IHS's mid-October 2012 light vehicle production forecast, we currently expect the fourth-quarter 2012 ASP to be in approximately the same range as the third quarter of 2012 based on anticipated product mix of base and featured mirrors in that forecast and annual customer price reductions. 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 margin increased on a sequential basis to 33.6% in the third quarter of 2012 compared with 33.1% in the second quarter of 2012, primarily due to purchasing cost reductions. The gross margin decreased on a year-over-year basis from 35.4% in the third quarter of 2011 to 33.6% in the third quarter of 2012, primarily due to the impact of annual customer price reductions and product mix, partially offset by purchasing cost reductions.

The Company currently expects that its gross profit margins for the fourth quarter of 2012 will be slightly down sequentially compared with a gross profit margin of 33.6% reported in the third quarter of 2012. The gross profit margin will continue to be impacted by annual customer price reductions, the uncertain global automotive reduction levels, product mix, our ability to leverage fixed overhead costs, purchasing and VAV cost reductions, supply chain constraints, as well as manufacturing yields.

Next we'll provide an update regarding the Company's operating expenses. The R&D expense decreased by approximately 1% in the third quarter of 2012 compared with the same 2011 quarter. The primary reason for the decrease in the third quarter of 2012 compared with the third quarter of 2011 was due to reduced costs related to outside contract engineering development services. E,R&D expense increased by 11% in the first nine months of 2012 compared with the same 2011 period. The primary reason for the increases in the first nine months of 2012 compared with the first nine months last year was due to increased hiring of employee and outside contract engineering development services to support new product development, projects, and new program awards. E,R&D expense is expected to be approximately flat for the fourth quarter of 2012 compared with the fourth quarter of 2011.

SG&A expense decreased by 3% in the third quarter of 2012 compared with the same prior-year period. The decrease in the third quarter was primarily due to the impact of favorable foreign exchange rates. SG&A expense increased by 2% in the first nine months of 2012 compared with the same prior-year period. The increase in the first nine months of 2012 was primarily due to increased overseas office expense, partially offset by the impact of favorable foreign exchange rates of approximately four percentage points. SG&A expense is currently expected to be approximately flat for the fourth quarter of 2012, compared with the fourth quarter of 2011. This estimate is based on stable foreign exchange rates.

Next, I'll provide additional details regarding other income for the third quarter of 2012. Investment income was $587,000 and other was $3.476 million for total other income of $4.063 million. Total other income increased in the third quarter of 2012 compared with the third quarter of 2011, primarily due to realized gains on the sale of equity investments. Other income for the first nine months of 2012; investment income was $1.816 million and other $8.7 million for total other income of $10.517 million. An update regarding a few balance sheet items. As of September 30, 2012-- accounts receivable $126.3 million; inventories $177.1 million; patents and other assets $28.2 million; accounts payable $52.2 million; and accrued liabilities $52 million.

An update regarding the effective tax rate for the Company. The third-quarter 2012 effective tax rate of 32% varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for calendar-year 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 $176.4 million, and capital expenditures for the third quarter of 2012 were $28.2 million, and depreciation expense for the third quarter of 2012 was $12.5 million. The Company continues to estimate that 2012 capital expenditures will be approximately $130 million to $140 million, depreciation and amortization expense for 2012 is currently estimated at approximately $48 million to $52 million.

Now an update regarding cash dividends. On October 19, 2012 the Company paid a quarterly cash dividend of $0.13 per share to shareholders of record of the common stock at the close of business on October 5. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws, how to be meaningful and sustainable over time and that the dividend rate would increase generally in line with the Company's earnings and operating cash flow.

With respect to share repurchases, the Company repurchased approximately 2 million shares of the Company's stock during the third quarter of 2012, bringing the total shares repurchased to 28 million. The Company's Board of Directors had previously authorized a repurchase of a total of 28 million shares of the Company's stock. The Board of Directors has also authorized the repurchase of an additional 4 million shares of the Company's common stock. Under the plan, the Company may, from time to time, purchase up to an additional 4 million shares of its common stock based on a number of factors, including market, economic, and industry conditions; the market price of the Company's common stock, A&I dilutive effect on earnings utilizing normalized interest rates; available cash; and other factors the Company deems appropriate. The plan does not have an expiration date, but will be reviewed periodically by the Company's Board of Directors. Any share repurchases will be funded with available cash.

At this point, I'll turn the call over to Mark Newton, who will provide an update regarding Gentex products and technology.

Good morning. In an effort to provide more detail on our continuing investment in the business, all of the advanced automatic mirror technologies, the Gentex markets today, as shown on our website, are resulting in future new awarded business. Interior auto-dimming mirrors are in launch with new chrome ring frameless design; lighting applications with new optimal electronics; digital microphones replacing analog microphones; wireless control systems that send and receive signals from garage door, gates, lights, locks and security systems; many different displays in new sizes with faster processing and increased graphics capabilities; SmartBeam with advanced detection for tunnels, curves and fog for use on halogen, xenon and LED headlamp technologies; driver assistance systems with lane departure warning, traffic sign recognition and a variety of object detection capabilities and multiple combinations of these features.

Exterior auto-dimming mirrors are in launch with new chrome ring frameless designs, curved glass capabilities and a variety of indicators. The Company has previously disclosed that four customers for rear camera display mirrors had notified the Company of their plans to have the primary display for rear camera video and a radio display in the vehicle center console instead of in the rearview mirror. Two of the four customers are expected to begin that transition in the 2013 calendar year, with the other two customers in the 2014 calendar year and these transitions are expected to occur over multiple years. Each of these four customers continues to offer Gentex RCD mirrors for other vehicle applications.

In addition, they continue to offer Gentex auto-dimming mirrors, many with other advanced electronic features on the majority of their vehicle models. To date no additional RCD mirror customers have indicated a move of the rear video display application from the mirror to the center console. During the third quarter of 2012, the Company began shipping its RCD mirror product for seven additional vehicle models for General Motors, Honda, Hyundai, Mitsubishi, Nissan, and PSA.

The SmartBeam is the Company's high-beam headlamp assist product that optimizes for visibility by automating high-beam usage, which allows drivers to better identify and react to potential hazards and road ahead. Driver assist camera products utilize a multiple-function camera, combined with algorithmic decision making to perform certain tasks, such as automatic high-beam assist, lane keeping and driver alert. Based on the IHS mid-October 2012 forecast for light vehicle production, it is now expected the SmartBeam and driver assist unit shipments will increase by approximately 10% to 15% in calendar-year 2012 compared with calendar year 2011. This downward revision to the Company's previous 2012 guidance is primarily due to reduced option take rates of the SmartBeam option by certain European automakers.

During the third quarter of 2012, the Company began shipping its SmartBeam product for eight additional vehicle models for Chrysler, Honda, Opel and Toyota. Gentex's new driver assist multiple function camera applications performing automatic high-beam control, lane keeping and driver alert are now shipping on two additional vehicle models for Ford.

An update on AVS litigation. On June 25, 2012, American Vehicular Sciences has filed four patent infringement complaints naming the Company and one of two of its customers as co-defendants. In two of the complaints AVS alleges that the Company's SmartBeam product infringes one patent owned by AVS, and the other two complaints AVS alleges that the Company's monitoring system products infringe two other patents owned by AVS. The Company was served with the four complaints on July 27, 2012. On October 5, 2012 the Company submitted its answers to all four complaints. In its answer the Company denies infringement and contributing to and/or inducing others to infringe and further denies that AVS is entitled to any relief. In addition, the Company has provided affirmative defences, including but not limited to non-infringement and invalidity of the claims underlying the AVS allegation. The Company is uncertain of what impact, if any, the above claims may potentially have on its business.

New agreement. As we periodically disclosed, Gentex believes that its patents and trade secrets provide it with a competitive advantage. The Company has also previously discussed the fact that claims of infringement could be costly, time consuming and divert the attention of management and key personnel from other business issues. To that end, the Company has been able to, in the ordinary course of business, obtain certain intellectual property rights related to certain existing and potential future automotive mirror features and products that will decrease potential risks of infringement. These rights are included on the balance sheet under the category of patents and other assets net.

As part of obtaining the above-referenced intellectual property rights, the Company has also agreed to royalty payments based on shipments of automotive mirror products incorporating certain mirror features and to maintain confidentially with respect thereto. Amortization expense associated with these rights and the royalty payments are currently expected to negatively impact the gross profit margin by approximately 35-basis points going forward on an annualized basis, at least in the near term. The Company's business is not substantially or materially dependent upon the obtained intellectual property rights.

An update on dimmable aircraft window programs. We currently are 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 and Boeing has also expressed interest in using dimmable windows with other aircraft. Gentex is also shipping dimmable aircraft windows for use on passenger cabin windows of the 2010 Beechcraft King Aircraft 350i, the first aircraft in general and business aviation with dimmable windows. Each King Air 350i has 15 Windows. Other aircraft manufacturers continue to have interest in this technology and we are working on those potential programs.

Future sales estimates for Q4 2012, we currently estimate that net sales will be approximately flat compared with the same quarter in 2011, based on IHS's mid-October 2012 forecast for light vehicle production. We are concerned about the deteriorating macroeconomic environment, particularly in Europe, which is our largest up shipping destination. In the 2011 calendar year approximately 45% of our total mirror unit shipments were to Europe. And we also continue to experience volatility with customer orders within the 12-week customer release window with some of our customers, including the tier one window makers supply revising orders.

I'll turn this back over now to Connie Hamblin.

Okay, I'm going to give you a few production numbers, IHS production numbers that this forecast was based on. For the fourth quarter of 2012 IHS is predicting that North American light vehicle production will be 3.6 million vehicles, which is a 5% increase compared with 3.4 million in the fourth quarter of 2011. European light vehicle production of 4.5 million, which is down 10% compared with fourth-quarter 2011 at 5.0 million. And the Japan and Korea 3.4 million vehicles, which is down 10% compared with 3.7 million vehicles in the fourth quarter of 2011.

And then for calendar-year 2012, North American light vehicle production IHS has it at 15.2 million vehicles which is a 16% increase compared to 13.1 million last year. For Europe 19.0 million vehicles, which is down 6% compared with 20.1 million last year. And then Japan and Korea is 14.0 million vehicles, up 12% compared with 12.5 million vehicles last year. And again, these are based on IHS's mid-October forecast.

As a reminder, all listeners should note that this call is being recorded by Gentex Corporation. All contacts of Gentex Corporation's conference call is 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 there may be companies that still transcribe and redistribute our conference calls, not withstanding 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 party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping and the foregoing terms. Please drop off the line if you do not agree.

At this time, we will open the call up for Q&A and as usual, we respectfully request that you plan to ask one single-part question to allow others to get into the queue. Thank you. Operator, we can open this up for Q&A.

(Operator Instructions)

We'll go to our first question from David Leiker with R.W. Baird & Co.

Just a housekeeping item here to start with. Steve, can you put any color or comment at all on the impact Hyundai with the strike and Opel with their big September production cut, how big of an impact that was on your numbers?

Yes, with respect to the strike, it did not have a significant impact on the quarter. When you think of the revenue versus our guidance, a lot of that had to do with weakness in Europe.

And then your focus on Opel?

In part, yes.

Okay. And then my question is, if we look at margins, the gross margin, given where the revenue number came in, you still hit your gross margin target. Is that reflective that you're getting traction in some of these gains in terms of efficiencies on the manufacturing floor or purchasing initiatives or is there something else going on there?

Well, it's twofold. One, the primary driver is additional purchasing cost reduction benefits that we are experiencing and that is even on a sequential basis when you look at the 33.1% versus the 33.6%. And other factors that we talked about, in the second quarter we did have some production line moves, which we're beyond that. So there were some production efficiencies that occurred in the quarter, as well.

Does that mean in a world of everything else equal, which it's not, that if we weren't looking for margin improvement until early 2013 that means that you might be ahead of track of that plan? Understanding that volumes are going to be weak with what's going on in your --?

A little bit to your point, yes. But when you look at our margin guidance going forward, we had indicated that it would be down slightly and one of the primary drivers for that is the new agreement. As Mark indicated in his comments, that would, at least in the near term, have an impact on the margins of just under 0.4%.

Great, thank you very much.

And we'll take our next question from Ryan Brinkman with JPMorgan.

I think a key questions investors may have is how long you can continue to exercise the type of expense control that you did in 3Q without impeding long-term sales growth. Can you comment on that? And if relevant, maybe the degree to which the ER&D and SG&A discipline in the quarter related to the trimming fat versus muscle, et cetera?

Okay. Well, if you think specifically within ER&D because that's really where the majority of the cost reductions occurred. We started to discuss that a little bit in our second-quarter conference call where we were starting to gain and see some efficiencies within that area and in part we were working off a higher base. We had talked about there were some resources devoted to the redesigning some products, specifically due to supply chain constraints, which that has subsided. And we also had, as we talked about, contract engineers for development services and some of those projects are nearing an end, as well.

A couple of additional comments. I'm from the engineering side of the business. We've not been doing this with muscle, this is the normal part of doing business. Contract engineers that were required to help and support of meeting near-term launch deliverables, we meet those requirements and we're always looking for opportunities to optimize our expenses in those areas. But we continue to invest strongly in the key areas of the ER&D going forward that lead to product development and support new awarded business.

Okay, that is great to hear, and then just lastly before I jump back in the queue. Can you comment on the appropriate net leverage for the firm? I think there is an overwhelming sense that the Company has a rather tremendous liquidity cushion currently. It might be helpful in sizing the amount of any capital that could be potentially deployed towards share repurchases or other core productivity. If you were to share whether there is a certain amount of cash, or percentage of sales held in cash, or net leverage that you are targeting or think is appropriate for the firm?

Well, I think if you look at our balance sheet and historically we've stated that we're very conservative from a financial standpoint and the actual cash needed to run the day to day operations would be significantly lower than current levels, probably in the $200 million to $250 million range. But we also know we're in a cyclical business and I think the economic downturn in '08 certainly is a demonstration of having that extra cash on the balance sheet certainly has allowed the business to run itself for the longer term and develop products. So, we can grow and return the highest rate of return to shareholders.

So I think when we look at deploying resources through cash dividends and share repurchases, we've talked about the cash dividend program that was initiated back in 2003. We've consistently have increased that dividend rate over that period of time and maintained it actually during the downturn. And with repurchases, to date we've repurchased 28 million shares and more recently about 2 million shares and as we just mentioned, the Board did authorize an additional 4 million shares, as well.

Great, I appreciate all the color on jump back in. Think so much.

And we'll take our next question from Rich Kwas with Wells Fargo.

On the SmartBeam guidance, I don't recall the Driver-Assist piece being included in the previous SmartBeam guidance, is that correct? And then if that is correct, does the SmartBeam revision, is that worse? Does that mean that SmartBeam growth is worse than the 10% to 15% because it is includes Driver-Assist, if you could just clarify that?

The guidance we had provided throughout this year did include the Driver-Assist, so that has not been a change.

Okay all right, thanks. And then just on the RCD outlook here, are you still looking for flat volume on a year-over-year basis for the full-year with the --?

For calendar year 2012, yes, that's correct.

Okay, great. I'll get back in the queue. Thanks.

And we'll take our next question from Steve Dyer with Craig-Hallum.

I'm wondering if you could give us an update, maybe refreshes us on the RCD legislation. Where -- what our -- I guess my understanding is maybe end of the year would be the next time we'd potentially hear something about that. Just what's your understanding?

That, too, is our understanding. We haven't been given any updates. What's publicly available is that it's still pending for the end of this year.

Okay, and then just with respect to gross margin, drilling down on the previous question. Assuming similar revenue levels next year, which, again, you're not endorsing that, but all else equal, should gross margin be in the same area, less the 35 basis point impact from the royalties?

All things being equal, yes, and we will provide more detail guidance in our fourth-quarter conference call. And obviously, the caveat there is there's a lot of uncertainty in the economy that can impact the overall business, as well.

Sure, and then last question. Operating expenses, would you expect them to remain in this level going forward assuming the outlook stays as it is?

Well, we'll provide detailed guidance in the fourth-quarter call. But I think as you look at the operating expenses and how they have trended as we've progressed through 2012. I think our expectation is that we'll continue to see efficiencies and that growth rate will slow down as you look at it on a year-over-year basis.

Okay, thank you.

And we'll take our next question from John Murphy with BofA Merrill Lynch.

I had a follow up on the ER&D cuts, or the more conservative outlook for the spend there, versus these patents that you're buying and putting on your balance sheet that are going to be expensed over time.

Just trying to understand where the proprietary technology that's incremental to your future growth really is owned and resides. Is that the kind of this stuff that is actually being purchased in, or is this the kind of patents and technology that you view as owning? You clearly have a core strength with these self-dimming mirror patents, but I'm just trying to understand the value of the patents and the intellectual property for these future products?

I will try to answer some of these key questions. This is actually a normal part of our business and something that we've always done throughout our history. Where to continue to develop products and technologies with the smallest risk of interference, we will from time to time look to obtain certain intellectual property rights like we have here. Which give us the capability to not only do our current products, but potentially do future new products and that's what we're referring to in this particular case. We consider this good for the Company and a normal part of doing business.

So it's like a seesaw in that you pull down the ER&D costs you are buying these patents to allow you to produce these -- or to generate the technology to produce these products. Is that the way to think about it, there's a bit of an offset here?

No, actually we're not taking away from ER&D and our product development efforts and intention continue very, very strong and it's at the highest rate I think we've experienced in many years. We continue to optimize and align those expenses with the business as our product development requires. In this particular case that we've just reported here we have been able to optimize outside contract engineering services, replace them with inside employees of our own in this case. That's a normal practice for, I think, any company in these areas is you look to optimize and grow your product development.

Okay, and then just to follow up on that. All of this is not resulting in a net increase in the revenue per mirror or the average selling price, depending on how you're measuring it. We're looking at a number that is really the lowest that we've seen since the second quarter of 2009. It seems like there's a lot of investment and more technology going into the mirror and the product you're delivering, yet you're really not getting any big payments for that. I'm just curious when you think that inflection point will occur that we actually see a real ramp-up in the average selling price or revenue per mirror, however it's measured going forward?

When you look at the ER&D efforts and developing products, as well as new program awards, that group is really working on things today that are not going to result in revenues for two to three years out. So when you look at additional development work, they tend to be on more advanced features, like we've talked, that tend to have higher Value-Add to the mirror. That is why we continue to believe over the long term that the average selling price will continue to trend up.

Now, when you look at five to seven years ago, the average selling price around $40 and today it's in the mid-$40's. Now more recently, when you look over the last 12 months or so, the average selling price has declined. That is, in part, due to the slowing growth with RCD, which is really the result of some of the legislation delays, as well as SmartBeam, which is a result of some of the European economic turmoil that is occurring that is affecting take rates. So those are more near-term headwinds that are affecting the ASPs, but in the long term we still feel directionally that it will increase over time.

Okay, great. Thank you very much.

And we'll take our next question from Brett Hoselton with KeyBanc.

I guess what I'm grappling with right now is the RCD. Last quarter you announced that four customers are going to de-content you to some extent here. Now you're providing maybe a little bit more detail on it -- two in 2013 and two in 2014. I guess my question is, how would you suggest that we consider quantifying this? It sounds like the four customers are very large customers, or not all of them, but it sounds like they do represent at least 50% of your current RCD shipments, is that a fair assessment?

We haven't specifically disclosed that and in part it is because 100% of that business with those four customers are not going away. So, like we had said in the second quarter that two of the customers start to impact our unit shipments in calendar year 2013 and will transition over a couple of years. The other two start in 2014 and transition over a couple of years.

However, we're still shipping mirrors to those customers, and we continue to have development programs with those customers for RCD, and we continue to start to ship for new programs for RCD with some of those customers. And so it's difficult to project looking forward the timing of the unit shift and to a certainty of what degree and what percentage that business is actually going to transition away.

As you think about now 2013, 2014 assuming a flat production environment, it appears as though your net RCD shipments are going to be declining over the next two years. First, am I correct in that? And secondly, if that's the case, at what point in time do you think that RCD shipments might actually turn positive again?

You're correct on that. As far as when RCD mirror unit shipments will turn positive that's going to be contingent upon a number of factors, including what happens with the legislation and what our customers decide to do. Because like Steve said, we continue to design RCD products that have different features in them, graphic overlays and other features beyond just the rear camera. So it's really hard to predict when it's really going to turn. Obviously, there's significant volume there that will transition over the next four or five years.

Okay.

And I don't know that answered your question, but --

It sounds like it's about as close as we're going to get at this point. The amortization, my understanding that the fourth quarter does not necessarily reflect the amortization. So therefore, the step function change is likely to take place as we move into 2013?

It'll start to affect in Q4 so the agreement was a Q3 event. So there was not much of an impact in Q3 of that new agreement but there would be a full affect in Q4 start.

And we'll take our next question from Peter Nesvold with Jefferies.

Hi, this is Elaine Kwei for Peter and thanks for taking the question. Just a quick follow up on the licensing. Is that -- it's not with AVS considering they're already filing suits against you. Is it -- it's with someone else, we should assume?

This is not with -- (multiple speakers).

I'm not sure if you had -- (multiple speakers).

This is not with AVS. No, sorry if we confused you in the proximity of the statements. No, this is not related to AVS.

Okay, great. So this -- is it related to the Driver-Assist technology?

We cannot state specifically any details on the technologies because of legal agreement that's involved. This is across multiple different technologies that we do, as we spoke earlier, as a normal part of doing business to help us potentially develop new products and technologies, but it's across multiple different ones.

Okay, great, thanks. Just one quick one on CapEx. It looks like you're definitely doing what you can to optimize OpEx there and sounds like the CapEx plans haven't changed. Do you think the backlog and current outlook can still support the kind of growth that you had originally planned for? Or is there any potential for adjusting CapEx to different market conditions, especially if volumes continue to deteriorate?

Yes, one thing to keep in mind, too, with respect to CapEx for the calendar year 2012 is, there is a sizable amount of the CapEx that is related to facilities, building expansions. Which we've often discussed that facility-related plant capacity is more of a step function process for the Company and equipment capacity is added as needed and has a shorter lead time. So, the building expansions, two of the four are complete. The third one is pretty much done and with the fourth one being completed by the end of this calendar year. So, because that's a step function basis if you think of backlog in the business. We have said that this would -- capacity would last us for about three years. And so, depending on the backlog as things adjust we may have plant capacity for a little bit longer than three years, but we truly do view facility-related expansions as a step function basically.

Okay understood, that's helpful. Just one also on -- I think you had mentioned earlier there was some negative mix affects from take rates on the feature mirrors, or we also have the lower growth out -- lower outlook for SmartBeam. What's the growth rate looking like [answer] relatively between these different product lines at this point? Are they starting to converge, or are certain ones still on a much faster trajectory?

We haven't disclosed specifics by product lines. Obviously there's certain products that continue to do well. Overall we're continuing to increase our overall core auto-dimming mirror unit shipments. Two of the products that we talked about is with respect to Rear Camera Display and that 2012 the unit shipments would be approximately flat. So that has had a trend of slowing growth and that's really been primarily driven due to the delays in the legislation. And I think specifically with SmartBeam that product continues to grow, although the growth rate has slowed and that's really been driven by the European economic situation.

Okay, thank you so much.

And we'll take our next question from Jason Rogers with Great Lakes Review.

Can you remind us or just give us an update for the number of vehicle programs and OEMs that have RCD as well as SmartBeam?

We basically talked in this -- we talked about the number of programs that we've added this quarter in the press release. We have seven additional RCD programs and then we have -- in terms of marketing we have an additional eight and then, additional two Driver-Assist programs.

But do you have the total there as far as the --?

Not right off the top of my head, but basically you can take the totals that you had from last time and add these onto them.

Okay. And then the share repurchase, the 2 million shares rebought. Do you have the total spend for that, or the average price per share that you paid?

The details of the average repurchase prices will be disclosed in our 10-Q filing, but as a matter of practice the Company repurchases shares not during our blackout periods, which start at the end of the calendar quarter and extend 48 hours after we release our earnings. So it'd basically be from the end of July up until the end of September. And so if you just look at our share price history it's been roughly between $15 and $18.

Okay. And then finally, looking at the radio display competition for RCD, that competing product. I wondered if you've got any more information about that as far as the response time of that product, or how bright it is, et cetera?

We haven't yet seen the production unit in these areas so we're still looking for that information, as well.

Thank you.

And we'll take our next question from Efraim Levy with Standard & Poor's.

I just wondering, you're in the middle of an expansion program and I was wondering where you stood in the capacity utilization on the actual capacity that you have for interior mirrors and exterior mirrors? You're trying to get to 21 million to 23 million and 10 million respectively so where do you stand now? Thank you.

Okay. So as you mentioned, prior to the four expansion projects that the Company announced some time ago, interior mirror capacity was in the16 million to 18 million range and exterior mirrors at 6 million. After those four expansion projects were completed, interior mirror capacity would increased to 21 million to 23 million units and exterior mirrors 10 million units annually. The exterior mirror facility expansion is now complete so that capacity is at the revised rate.

We have -- one of the four expansion projects still under construction that's expected to be completed near the end of calendar year 2012 and that is one of the larger expansion projects of the four of around 120,000 square feet. So you might say that we're maybe halfway there on the inside mirror side of things.

All right, thank you.

And we'll take our next question from Ryan Brinkman with JPMorgan.

In the past I think you have pointed to normalize gross margins in the neighborhood or the vicinity around 35%. I was wondering if today's announcement related to the purchased intellectual property rights would cause you to reassess that target range? Thanks.

Well, we've talked about that we feel that we can work towards overtime and stabilize and maintain margins of around 35%. I think with the new agreement, as we've indicated, that at least in the near term this has -- it's estimated to have an impact of just under 0.4% on the margin. So it is not significant in our view that we would permanently adjust our objective of around 35% margins.

Okay, that is very helpful. And then I guess just lastly. Can you talk about any new product introductions coming up that could improve your top-line growth? Last quarter I think you were talking about the rollout of the Driver-Assist product maybe on the Ford Explorer. Is there anything you can update in terms of take rates, penetration rates, how things are tracking in that respect?

I'll answer little bit of this. In the additional information under our update in products and technology, by detailing an overview of all the technologies that I listed when I read that, that was an indication to try to give you some indication that we are in launch and growing with advances in all of our existing technology right now. So that's probably, I think, our best indication right now of information we can provide today and we did add this information in an effort to try and provide you more detail on this.

Okay, thanks so much.

And we'll take our next question from Steve Bowen with Kalmar Investment.

Steve, perhaps you've already answered this the best you can, but I do have a follow-up questions as it relates to share repurchases and the formula the Board uses to make decisions because I am surprised that the authorization isn't more aggressive. Unless I'm mistaken what I'm seeing is $4 a share in net cash, 3% dividend yield where the shares are currently trading, little return on the $570 million in cash on the balance sheet much less what the Company might be able to borrow. It seems to me that there's just room to be more aggressive and so it leaves me wondering what in this formula -- if you agree with what I've outlined here -- that is factored such that the Board is as conservative as they are? Thank you.

That's a good question, Steve, and I think when you look over the years and the Company's history with respect to the share repurchase program, the Board has authorized additional shares incrementally as the plan has progressed. Still, as we have discussed to date, the anti-dilutive effect using normalized interest rates is one of the factors as a starting point for consideration for repurchases, and the Board and the Company also looks at other economic and market considerations.

So I think the fact when you look back in 2006, I believe, is the last time the Board authorized additional shares, they authorized 4 million additional shares. So in the event that the new 4 million shares that have been authorized are exhausted, the Board certainly will evaluate the potential for additional authorizations. And so our criteria really hasn't changed to date, so we continue to progress under those -- the criteria the Board and the Company has established.

Just as a follow up -- yes, go ahead, Connie.

As you know, it's intended to be an opportunistic plan and with the macroeconomic conditions the way that they are, particularly in Europe, our Board is watching that very carefully.

Okay, thank you very much.

We have time for one more question.

And we'll take our last question from Rich Kwas with Wells Fargo Securities.

CapEx. Steve, for next year, is it -- this year was a big ramp, would you envision next year should be down?

Well, if you go under the assumption that the majority of the CapEx this year, or a significant portion of the CapEx per share was facility-related costs and they will be completed near the end of this year. So, that would not be an ongoing re-occurring event, so CapEx to come should come down.

Okay, all right. And then just a follow up on -- just pricing. With the European manufacturers struggling and some of that seeping over onto the premium side and at least Daimler has got a pretty -- now going to announce a pretty aggressive cost reduction cost program, are you seeing any incremental pricing pressure from the European manufacturers that you work with closely -- most closely?

Nothing beyond what we normally have had, no.

Okay. All right, thanks so much.

Thank you. At this time we're going to wrap the call up. We thank you for participating and if you have follow-up questions we will be around this afternoon. Thank you.

That concludes today's conference call and we appreciate your participation.