Gentex Corp (GNTX) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gentex announces fourth quarter and 2012 year-end financial results conference call. Today's call is being recorded. And now I would like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations. Please go ahead, Ms. Hamblin.

Thank you. Good morning, everyone. Thank you for participating in our fourth-quarter conference call. On the call with me today are Steve Dykman, our Chief Financial Officer; and Mark Newton, our Senior Vice President. I'm first going to go through a few routine matters, and then we'll turn the call over to Steve for his comments on the Company's financial results for the fourth quarter and calendar year, and Mark will also make some comments related to products and technology.

This call is being broadcast live on the internet via an icon on the home page of Gentex's website at www.gentex.com. Auto playback of the conference call is also available there.

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. Gentex alone holds first 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 [claims] 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 forgoing terms. Please drop off this line if you do not agree with these terms.

Before we begin, I'm going to give you a short forward-looking statement. You should go to our news release and look at the full statement.

Gentex Corporation will make forward-looking statements in this presentation related to its financial results for the fourth-quarter and calendar-year 2012 and beyond, that are based on preliminary 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, and the Company itself. Words like anticipate, believe, confident, estimates, expects, forecasts, hopes, likely, plans, projects, optimistic, and should, and variations of such words and similar expressions identify forward-looking statements.

These statements do not guarantee future performance, and involve certain risks and uncertainties, and assumptions that are difficult to predict with regard to timing, expense, likelihood, and degree of occurrence. Therefore, 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 news release for the full safe harbor statement.

At this time, Steve Dykman will make some remarks with respect to the quarter.

Good morning, and welcome to our fourth-quarter 2012 conference call. We are pleased to report that our gross profit margin sequentially improved in the fourth quarter of 2012, despite relatively flat net sales. We're also pleased to illustrate the continued positive efficiencies we are experiencing within our operating expenses. The Company reported fourth-quarter 2012 net sales of $260.3 million, which was flat compared with the fourth quarter of 2011. Net sales of $1.1 billion for calendar-year 2012 was a 7% increase compared with net sales of $1 billion in calendar-year 2011.

We reported fourth-quarter 2012 net income of $39.6 million, which was down 2% compared with net income of $40.5 million in the fourth quarter of 2011. Net income of $168.6 million for calendar-year 2012 was a 2% increase compared with net income of $164.7 million in calendar-year 2011. Net income for both periods above includes the $5 million pre-tax litigation settlement with American Vehicular Sciences, which will be discussed later in these comments.

We reported fourth-quarter 2012 earnings per diluted share of $0.28 compared with $0.28 per share in the fourth quarter of 2011. Earnings per diluted share was $1.17 for calendar-year 2012, compared with earnings per diluted share of $1.14 in calendar-year 2011. Earnings per share for both periods above also include the litigation settlement with AVS.

Next, we'll look at automotive net sales and auto-dimming mirror unit shipments for the fourth quarter ended December 31, 2012. Total auto-dimming mirror unit shipments increased by approximately 5% in the fourth quarter of 2012, compared with the fourth quarter last year. Automotive net sales declined slightly to $254.6 million in the fourth quarter of 2012 compared with $254.7 million in the fourth quarter of 2011. Auto-dimming mirror unit shipments increased by approximately 17% in North America in the fourth quarter of 2012, primarily as a result of increased mirror unit shipments to certain domestic and Japanese transplant auto makers.

North American light vehicle production increased by approximately 10% in the fourth quarter of 2012, compared with the same prior-year quarter. Auto-dimming mirror unit shipments to offshore auto makers decreased by approximately 2% in the fourth quarter of 2012, compared with the same quarter last year, primarily due to decreased mirror unit shipments to certain European and Japanese auto makers. Light vehicle production in Europe decreased by approximately 7% in the fourth quarter of 2012, and decreased by approximately 9% in Japan and Korea in the fourth quarter of 2012 compared with the same quarter last year.

For the calendar year ended December 31, 2012, total auto-dimming mirror unit shipments increased by 11% in calendar-year 2012, compared with calendar-year 2011. Automotive net sales increased by 7% to $1.1 billion in calendar-year 2012, compared with $1 billion in calendar-year 2011. Auto-dimming mirror unit shipments increased by approximately 22% in North America in calendar-year 2012, primarily as a result of increased mirror unit shipments to certain Japanese transplant and domestic auto makers.

North American light vehicle production increased by approximately 17% in calendar-year 2012, compared with the same prior-year period. Auto-dimming mirror unit shipments to offshore customers increased by approximately 5% in calendar-year 2012, compared with the same period last year, primarily due to increased mirror unit shipments to certain European and Japanese auto makers. Light vehicle production in Europe decreased by approximately 5% in calendar-year 2012, and increased by approximately 12% in Japan and Korea in calendar-year 2012, compared with the same prior period last year.

Other net sales for the Company increased by 3% to $5.8 million for the fourth quarter of 2012, compared with the same quarter last year, primarily due to increased dimmable aircraft window net sales, partially offset by a decreased fire protection net sales. Other net sales increased by 10% to $22.6 million for calendar-year 2012 compared with calendar-year 2011, primarily due to increased dimmable aircraft window net sales, partially offset by decreased fire protection net sales. The 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 $43.88 for the fourth quarter of 2012. The ASP of auto-dimming rear-view mirrors was slightly down on a sequential basis to the $43.88 in the fourth-quarter 2012, compared with $44.12 in the third quarter of 2012, primarily due to a higher mix of base auto-dimming mirrors. The average selling price decreased on a year-over-year basis to $43.88 in the fourth quarter of 2012, compared with $46.39 in the fourth quarter of 2011, primarily due to annual customer price reductions and higher mix of base auto-dimming mirrors.

Based on IHS's January 2013 light vehicle production forecast, we currently expect the first-quarter 2013 ASP to be down approximately 2% to 3% compared sequentially with the fourth quarter of 2012, based on annual customer price reductions, and the anticipated product mix of base and featured mirrors in this forecast. As usual, there are uncertainties with the IHS production and sales forecast, customer orders, and new product introductions.

Next, we'll look at the gross profit margin. The gross profit margin increased on a sequential basis to 34.2% in the fourth quarter of 2012, compared with 33.6% in the third quarter of 2012, primarily due to production efficiencies, partially offset by the Company's inability to leverage fixed overhead expenses on the lower sequential net sales. The gross margin decreased on a year-over-year basis from 34.7% in the fourth quarter of 2011, to 34.2% in the fourth quarter of 2012, primarily due to the impact of annual customer price reductions and product mix, partially offset by purchasing cost reductions. The gross margin declined from 35.3% in calendar-year 2011, to 33.9% in calendar-year 2012, primarily due to annual customer price reductions and product mix, partially offset by purchasing cost reductions.

The Company currently expects that its gross profit margin for the first quarter of 2013 will be slightly down sequentially, compared with the gross profit margin of 34.2% reported in the fourth quarter of 2012, primarily due to annual customer price reductions. The gross profit margin will continue to be impacted by annual customer price reductions on certain global automotive production levels, product mix, our ability to leverage our fixed overhead costs, purchasing and VAVE cost reductions, and manufacturing yields.

Next, I will provide an update regarding the Company's operating expenses. First, we'll look at ER&D expense. Our ER&D expense decreased by approximately 15% in the fourth quarter of 2012, compared with the same 2011 quarter, primarily due to reduced costs associated with outside contract engineering and development services. ER&D expense increased by 4% in calendar-year 2012 compared with calendar-year 2011, primarily due to additional employee hiring for new product development projects, and program awards, partially offset by reduced costs associated with outside contract engineering and development services. ER&D expense is expected to be down approximately 10% for the first quarter of 2013 compared with the first quarter of 2012, primarily due to reduced costs associated with outside contract engineering and development services.

Next, we'll look at SG&A expenses. SG&A expense decreased by 8% in the fourth quarter of 2012 compared with the same prior-year period. The decrease in the fourth quarter was primarily due to decreased overseas office expense. SG&A expense were approximately flat in calendar-year 2012 compared with calendar-year 2011, primarily due to increased overseas office expense, offset by the impact of foreign exchange rates. The impact of foreign exchange rates was approximately 3 percentage points. SG&A expense is currently expected to be approximately flat for the first quarter of 2013 compared with the first quarter of 2012, and this estimate is based on stable foreign exchange rates.

Next, I will provide additional details regarding other income for the fourth quarter. Investment income was $3.491 million. Other -- $1.163 million, for total other income of $4.654 million. This compares to other income for the fourth quarter of 2011 of $2.947 million. For calendar-year 2012, investment income was $5.307 million. Other -- $9.863 million. For total other income of $15.170 million, and this compares to other income for calendar-year 2011 of $13.064 million.

Investment income increased in the fourth quarter of 2012 compared with the fourth quarter of 2011, and in calendar-year 2012 compared with calendar-year 2011, primarily due to increased year-end mutual fund distributions in each of those periods. The increases in other income in both periods was primarily due to increased realized gains on the sale of equity investments.

Now, I will provide an update regarding certain balance sheet items as of December 31, 2012. Accounts receivable was $109.6 million. Inventories, $160 million. Patents and other assets, $29.3 million. Accounts payable, $43.2 million. Accrued liabilities, $44.8 million.

The Company's rapid growth in 2010 and 2011 was compounded by electronics industry allocation of raw material and natural disasters with the Japan earthquake and the Thailand flood in critical areas of automotive electronic supply, and resulted in significantly longer lead time commitments. In the face of these challenges, the Company deliberately determined to increase its raw material commitment to ensure that we did not shut down our customers. To date, we have not shut down any of our customers. Inventory levels declined by 15% in calendar-year 2012 compared with calendar-year 2011, and the Company anticipates additional reductions in inventory levels in 2013, now that supply conditions have normalized.

Next, we'll look at the effective tax rate. The fourth-quarter 2012 effective tax rate of 32% varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. The calendar-year 2012 effective tax rate was 32.5%, and that varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. We currently expect that the effective tax rate will be approximately 31% in the first quarter of 2013, and approximately 32% for calendar-year 2013 based on current tax laws.

The reduced effective tax rate for the first-quarter and calendar-year 2013 is primarily due to the American Tax Payer Relief Act of 2012 that was signed into law by President Obama in January of 2013, which retroactively re-instated the research and development tax credit to January 1 of 2012. As a result, the 2012 tax credit benefit will be recognized in the first quarter of 2013 when the new legislation was enacted.

Next, we'll look at cash flow. The Company's year-to-date cash flow from operations was $257.8 million. Capital expenditures for the fourth quarter was $19.9 million. And capital expenditures for calendar-year 2012 were $117.5 million. Depreciation and amortization expense for the fourth quarter was $12.6 million, and for calendar-year 2012 was $50.2 million. The Company estimates that 2013 capital expenditures will be significantly reduced compared with 2012 capital expenditures, at approximately $50 million to $60 million. Depreciation and amortization expense for 2013 is estimated to be approximately $56 million to $60 million.

An update regarding cash dividends. On January 18, 2013, 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 January 7 of 2013. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws that would 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.

With respect to share repurchases, the Company did not repurchase any shares during the fourth quarter of 2012. The Board of Directors had previously authorized the repurchase of additional shares of the Company's common stock. Under the plan, the Company may, from time to time, purchase 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, and other factors the Company deems appropriate. The plan does not have an expiration date, but is reviewed periodically by the Company's Board of Directors, and repurchases will be funded with available cash.

At this point, I will turn the call over to Mark Newton, who will provide some product and technology updates, as well as an update on the AVS litigation.

Thank you, Steve. Update on American Vehicular Science's litigation. As previously disclosed on June 25, 2012, American Vehicular Sciences filed four patent infringement complaints in the United States District Court in the Eastern District of Texas, which named the Company and one of two of its customers as co-defendants. On December 28, 2012, in the ordinary course of business, the Company entered into a settlement license agreement with AVS, settling all pending litigation. The cost associated with the agreement was accrued by the Company, and is reflected in its financial results as of December 31, 2012. As a result of the agreement, the United States District Court in the Eastern District of Texas has ordered that Gentex is dismissed with prejudice as a defendant in the complaints filed by AVS.

Product and Technology update. In the fourth quarter of 2012, the Company successfully began shipping a number of auto-dimming mirror production applications with several auto makers with advanced technologies, including SmartBeam, driver assist, Rear Camera Display, telematics, wireless control systems, compass, and various combinations of these features. Unit shipments of SmartBeam and driver-assist camera products increased by approximately 12% in calendar-year 2012 compared with calendar-year 2011, in the face of challenging European market conditions, which did have a negative impact on product mix and option take rates.

In calendar-year 2013, SmartBeam and driver-assist unit shipments are estimated to increase by approximately 10% to 15% compared with calendar-year 2012, based on the IHS January 2013 forecast for light vehicle production, which includes a 3% decline annually in European light vehicle production, with larger forecasted percentage decreases in the mid-size luxury class vehicle model market, which currently is one of the primary markets for these features.

RCD mirror unit shipments decreased by approximately 8% in calendar-year 2012 compared with calendar-year 2011. In calendar-year 2013, RCD mirror unit shipments are estimated to decrease by approximately 25% to 35% compared with 2012, which incorporates estimated reduced RCD mirror unit shipments to automotive customers who have previously notified the Company of their plans to have the display for the rear camera in the radio instead of the rear view mirror. While the Company continues production launches of RCD mirrors on new vehicle models in 2013, we continue to experience volatility in customer orders for this feature in the face of the Kids Transportation Safety Act, which did not meet the scheduled December 31, 2012 deadline for implementation, making this the fourth such delay for KTSA.

All other mirror products and technologies continue to result in new awarded business. In development and launch now are interior auto-dimming mirrors with new frameless designs; lighting applications with new opto-electronics; new digital microphones; many different displays in new sizes with faster processing and increased graphics capabilities; new wireless control systems that send and receive signals from garage doors, gates, lights, locks, and security systems; SmartBeam with advanced detection for tunnels, curbs, fog, and for use on all technologies for headlamps, including halogen, XENON and LED; driver-assist systems with new object detection capabilities; and exterior auto-dimming mirrors with new curved glass applications.

Next, I will summarize net sales estimates for the first quarter of 2013. We currently estimate that net sales for the first quarter of 2013 will decrease by approximately 5% to 10%, compared with the first quarter of 2012, based on the IHS January 2013 forecast for light vehicle production, including declines in Japanese and Korean, and European, and North American regions, as well as our 12-week customer release schedule. Forecasting with a degree of accuracy in this environment is very challenging.

Additionally, while European production is expected to decline by 10% in the first quarter of 2013, the forecast also includes higher percentage decreases in mid-sized luxury-class vehicle models, which currently are one of the primary markets for these features. We continue to be concerned about the deteriorating macroeconomic environment, particularly in Europe, which is our largest shipping destination. 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 mirror suppliers, revising orders.

Now I will turn this back over to Connie.

I'll give you a few numbers. These are related to IHS's production forecast. This is for the first quarter of 2013. Light vehicle production in North America is expected to be 3.9 million, which is down 2% compared with 4.0 million last year. Europe is expected to decrease by 10%. It's from 4.7 million versus 5.2 million in the first quarter of 2012. The Japan and Korea markets are expected to decline by 13% at 3.3 million, and that compares with 3.8 million last year. For the calendar year, North American light vehicle production is expected to increase by 3% for North America at 15.9 million vehicles versus 15.4 million last year. European light vehicle production is expected to decline by 3% at 18.6 million versus 19.2 million last year. And Japan and Korea are also expected to decline by 9% to 12.7 million, compared with 14.0 million last year.

As a quick reminder, all the listeners should note that this call is being recorded by Gentex. All contents of Gentex's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted, or otherwise redistributed without the express written consent of Gentex. Gentex Corporation alone holds such rights.

While we understand that there may be companies that transcribe and redistribute our conference calls, notwithstanding this warning, Gentex corporation provides no authorization to do so, and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts, as Gentex Corporation will not be held liable for the content of any such transcript. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping, and to the foregoing terms. Please drop off the line if you do not agree to these terms.

At this time, we're going to open this call for questions and answers. We do respectfully request that you plan to ask one single-part question at a time, so that everyone has an opportunity to ask questions and participate. Thank you, we appreciate your cooperation.

Operator?

(Operator Instructions)

David Leiker, Robert W. Baird.

Good morning, everyone.

Good morning.

I wanted to start with some of the technology trends that we have been seeing in the industry at the consumer electronics show and then in Detroit. Particularly around the Safety Act, the safety driver information. Do you talk at all about the technology that you have in that space today? How much of your business might be coming from that today? And what the order book looks like in level of interest for that type of technology.

Thank you, David. This is Mark. The Company's products generally, for automotive, from our basis in auto-dimming mirrors, has an application based in safety. The advanced technology that we have in rear camera display and SmartBeam and drivers assist technology also comply in these areas. The mirror has been used heavily in Gentex's history as an information resource in the vehicle, in addition to the instrument panel and has been one of the keys to our growth. With technologies that are increasingly improving today, there has always been a general component of electronic safety applications in addition to our auto-dimming mirror applications and our side blind zone applications for outside mirrors. I would estimate that generally, we participate with all of our products in this area. Growth that we're experiencing now and for the future in the electronics arena continues to be in this area, that's part of SmartBeam, driver assist and these other technologies are.

I guess I'm trying to go one step further to lane departure warning, collision warning and those types of technologies that's using more of a finer image sensor going forward as well.

The driver assist systems that I referred to in my comments and that we have in our press release with new object detection capabilities are in the areas of lanes, lines, vehicles, pedestrians, consistent with what you're seeing in the industry generally.

And a closer loop on that, what is a bit of activity or business activity look like from your customers for those types of technologies?

As we have indicated from our growth numbers from '12 and 2013, we continue to grow an expansion of the SmartBeam capability, as we have spoken in the past year, adding capabilities for dynamic forward lighting; adding capabilities for all headlamp technology types and then additionally, doing driver assist systems which also include camera-based lane detection and traffic sign recognition; and the new object detection capabilities indicated further. This is a growth area for us.

Okay, thank you.

David, I think it's important to note that the lead times on these technologies are pretty long. It's not like you can just pop one of these on a vehicle in a year. They have a two- to three-year lead time.

Okay. Thank you.

With that, this is a lot of what you're seeing in our ER&D explanation. When we referred multiple times in the call and in the press release, about the improvements in ER&D primarily coming from replacement of contract and outside engineering resources, as we're able to hire our own resources. This is in response to awarded growth in technology areas that have longer lead times with the new technologies that I described earlier.

Okay. Thank you very much.

Thank you.

Matt Stover, Guggenheim.

Thank you for taking my call. I had a question regarding the KTSA legislation and rule making. There have been some reports out of Washington that have suggested that perhaps there may be some news on this front, and I am just wondering if you shared the opinions of those reports and if you can give any color as to the status of that rule making from your perspective.

With the fourth delay December 31, we know all the information, we believe that generally the rest of the public does in this. We, right now, don't see any definitive indication of when this might be applied. Connie, do you have any further comments?

I haven't seen anything. Matt, you have recently seen stuff that they're talking about?

It was an interview with Ray LaHood.

Recently?

Yes. I will dig it up and pass it on to you.

Okay, yes. I know they were talking a lot at the end of the year, and they actually said that they had intended to meet the requirements by the end of the year, and, obviously, that deadline was not met. So --.

Okay, thank you very much.

We want to know what you know.

Okay. Thank you very much.

Thanks.

John Murphy, Bank of America, Merrill Lynch.

Good morning, guys. I missed it at the beginning of the call, so I apologize if you covered this. But I'm just curious. As you look at the efficiencies that you gained from manufacturing in the fourth quarter that helped out the gross margin. I wonder if you can expand on some of the specifics there, and sort of help us understand if that is a lot of manufacturing efficiencies or are you maybe getting better margins on your core mirrors than you were on the RCDs, so as the RCDs fade, you actually get a margin left. I am trying to understand the specifics around the efficiencies versus the mix impact that we might have seen in the fourth quarter and going forward.

Yes, specifically with respect to the production efficiencies, they're really surrounding manufacturing cost reduction process improvements, as well as some direct labor efficiencies and some improvements with respect to overtime related costs. I think as we look forward, our guidance for Q1 was a slight decline, as we previously discussed, that the first quarter is one of the larger quarters for annual customer price reduction activities. And the other thing to keep in mind, as we look forward to calendar year 2013, we have the facilities, the new facility-related cost coming online, so that will be a little bit of a headwind as we look forward to the coming year.

Okay, so you think these are repeatable, but they're going to be a little bit dwarfed by price-downs in the first quarter. Is that a correct characterization?

Yes.

Okay. To follow up on that on the ER&D, the savings or the declines that you're talking about there, are pretty extreme and are very unusual. They really are all a function of bringing these engineers, or these engineering resources in-house and really getting this net savings.

Yes. That is the most significant component of it as Mark had indicated. To some degree there has been a lot of launch activity and then certain milestones have been met. Some of the contract engineers are needed, but the biggest component is, as we replace them with permanent hires, that is at a much lower cost. So we are gaining efficiencies. I think when you look at the guidance for Q1, Q1 of last year was really kind of a peak level of the ER&D spend as well. Just keep that in mind.

Related to that, the large sales growth that we were fortunate to experience in 2011 also had a component of strong growth in awards, and with that increased development and launch, much of it in new technologies with long lead times. These resources for electrical design and software development is two of the typical areas that companies like Gentex have to go get. These are two to three times, and more, expensive versus standard staffing. As we're able to recruit permanent resources to replace those, which we were able to transition to in 2012, as you watch that improvement begin in Q3, we're pleased now that we're operating without those resources, the outside contract engineers. So you will hopefully continue to see the improvements we've indicated in the ER&D. With that, our product and technology development commitment, is as strong as it ever was. This improvement is, as Steve indicates, in the area of replacing temporary resources with permanent employ.

And most of those engineers are in Zeeland, Michigan or are they around the world?

The overall majority are in Michigan.

Right. Thank you very much.

And an interesting note. I just got an email saying that Secretary of Transportation Ray LaHood is leaving the administration. So. I don't know if that is good news or bad news.

Ryan Brinkman With J.P. Morgan.

Hi. Good morning. Firstly congratulations on the quarter. It's great to see a bit of gross margin traction now in addition to the excellent cost control.

Thank you.

So, I think you have done a good job at addressing margins, which were part of my multi-part question. So, really, I will just ask one single question in keeping with your policy. Just on share repurchases, last quarter I think we saw what most investors interpreted as a modest, but symbolically significant step in the right direction on this front. Of course, you didn't repurchase shares this quarter, and I know your sighting uncertainty regarding fiscal cliff and industry and macro-environment in Europe and that is well-understood. I think it's still worth pointing out that your cash and short- and long-term investments are something on the order of magnitude of 50% of 2012 annual sales, which compares to an average of 8% for th 14 other US auto-parts suppliers stocks that we cover at JPMorgan. I like what you're doing from an operating perspective within the context of the headwinds you face, but, can you understand why it's hard for investors to understand, that if you are so conservative, why couldn't you just go out there and get a sizeable revolver for backup liquidity purposes, which would almost certainly remain undrawn, even as you repurchase potentially hundreds of millions of dollars of stock?

That is a good question. As you're aware, the Company has been conservative from a financial perspective and that has been a fundamental view of the Company's Board as well as our CEO. And that enabled us to run the business from a longer-term perspective, especially given the financial crisis and economic downturn back in 2008, 2009. We acknowledge that we have additional cash and investments on our balance sheet. I think the Board has focused a little bit more recently on the uncertainty and the overall economy and industry in some of those decisions. The other thing to keep in mind is, we do not repurchase shares during the Company's overall blackout periods. And that, during that blackout period were the lowest points of share prices in the fourth quarter. But, it is a good question and it is something our Board continues to monitor in determining decisions for repurchases going forward.

Okay. I think that is very well stated. I would additionally point out that I believe that you're free cash flow positive in 2008 and 2009, which was a good accomplishment. Again, congratulations on the quarter.

Thank you.

Steve Dyer, Craig-Hallum.

Thanks, Good morning.

Good morning.

With respect to RCD, what quarter this year or quarters, are the two customers who are rolling off going to roll off?

It's spread throughout the year. It's not significantly impacting one quarter over another.

Is it starting Q1 and go throughout? Or does it start later in the year?

Q1.

It starts in Q1 and covers through the year of the four previously announced customers who notified us of intention to change from the mirror to the radio. The two largest occur in 2013.

In '13, okay. And then with respect to this IP settlement, I think it was last quarter you indicated that you were going to be paying basically a 50-basis point licensing agreement. I think this is the same agreement. Does that then mean that the settlement of this would then be a 50-basis point tailwind going forward?

No. The other agreement that was discussed in our prior quarter conference call is a separate agreement, and at that time we indicated that that license agreement was estimated to have a negative impact on margins going forward of about 35 basis points. The AVS litigation is a settlement and there is not a margin impact in the fourth quarter or going forward.

Okay, so I got those two mixed up. Did you realize the 35-basis-point improvement in that in Q4? Or, I'm sorry, not improvement --

Headwind, yes.

Okay. I'll hop back in the queue. Thank you.

Rich Klaas, Wells Fargo.

Hi, Good morning, everyone.

Good morning.

Question on the ER&D. Steve, the comp a year ago, there was a big growth in spending, obviously for the guidance for Q1 '13, you got a pretty big decline. Should we think of the decline in ER&D being the most significant Q1 when we think in terms of the full year?

Yes, if you look at the trend line in 2010 and 2011, sequentially, we were experiencing increases in ER&D spend and it really kind of peaked in Q1, Q2 of 2012. So in recent quarters, you will notice the sequential change in ER&D spend hasn't been as significant. As you look at the trend going forward on a percentage basis, the beginning of 2013 is going to experience larger declines year over year than as we progress through the year.

Okay, how far along are you in terms of bringing these engineers in-house versus outsourcing? Is it mostly complete? Does this quarter run-rate on ER&D represent the bulk of that is gone?

We have completed this. We're operating now all with in-house resources. We completed the last of that in the fourth quarter, so what you will see, as we forecasted for the first quarter of 2013, you will see those improvements reflected in 2013. We now have removed all of the outside consulting services.

Okay. And then --.

We still continue to look for engineers in different disciplines, with good histories and --.

Okay. And then the last one, in terms of the manufacturing with the new facility, if I recall from back five, six, seven years ago at this point, with the other facility that you last launched, I think that was, I want to say 25 to 50 basis point headwind to gross margin in the first year or so when that was up and running. I might be wrong on the exact number, but what is the assumption here for '13 in terms of the headwind to gross margin from the ramping up of the new facility?

Yes, back in 2006, when we added that new facility, the headwind on margin in the first year was approximately 50 basis points. So we have talked about the more recent facility expansion plans, and we're anticipating an impact on margins in the initial year, slightly less than the 50 basis points, And part of the reason for that is our primarily additions to existing facilities. So we're not in a position where we have to duplicate a lot of resources like you would with a typical new facility.

Okay. In terms of the Q1 guidance, that's at least partly incorporated?

Yes.

Yes. Okay. All right. Thank you.

Thanks.

Greg Halter, Great Lakes Review.

Yes, thank you and good morning.

Morning.

That was a good segue into my question on the plants. I wonder what your capacity is now for interior and exterior mirrors?

Okay. So we have talked about the various expansion projects and they've, for the most part, been completed as 2012 calendar year progressed. The connector or bridge facility that we have talked about is running into the first quarter of 2013 a little bit, here. But, upon completion of that, for interior auto-dimming mirrors, capacity will be 21 to 23 million mirror units annually. And exterior mirrors, the capacity is approximately 10 million mirror units annually.

All right. Thank you.

Yes.

Adam Brooks, Sidoti and Company.

Good morning, guys. A lot has been asked. A question as far as an update maybe on conversations with customers regarding where sensors are placed for active safety. Just you being in the mirror versus on the windshield. Are you getting any headway as far as the European OEM's?

Our application for all of our camera-based products is incorporated with the mirror. We compete against others who do cameras outside of the mirror, and we have had strong success with that in our history as our advantage with it. Our gross, as indicated in the SmartBeam and driver assist, that is all with the camera incorporated with the mirror and the electronics controlling it inside the mirror. We continue to grow with this with our European customers and other customers worldwide.

And maybe a follow up on that, as far as just strictly driver assist, outside of SmartBeam, lane departure warning, whatnot, can you give us a sense as far as price, how you are compared to your competitors that are not in the mirror?

We believe, as we continue to compete in this market and as we're growing, that we're competitive in this. There are still many, many suppliers in this area. Because we have such a large application base as a camera supplier to the automotive industry based on SmartBeam. And our long history being among the first to do this in automotive, we're competing with all auto makers worldwide on this, with a good reputation. We do do this in a mirror-based application and as our continued forecasted growth, in case we continue to grow, so we believe we're competitive.

All right. Thank you.

Thanks. We have time for one more question.

Brett Hoselton, Keybanc.

You made it.

Yes, just barely. How are you? [ Laughter ] You know, I think I'm going to ask you a couple of questions since I'm at the tail end here. The first question I have is, your RCD guidance is down 25% to 35% in 2013. Last year you basically said, look, we're going to have a material decline in RCD in 2013 and an additional material decline in 2014. My question is simply, 25% to 35% is clearly material. Does 2014 look like that?

Our largest decline that we see currently, based on the current forecast is in 2013.

All right. And then my second question is, what would need to change from where we're currently at today for you to actually repurchase shares?

Well, I think, as we have indicated, the Board has, at least in the fourth quarter, taken a look at more on the industry and overall economic uncertainty that is out there, the fiscal cliff situations. Obviously that uncertainty is beyond us. However, there is a lot of volatility and uncertainty in Europe that is on the minds of the Board. And as the discussions with respect to repurchases, the curve. So, there is a number of factors that the Company takes into account in making those decisions, but some of the uncertainty in Europe certainly is on the forefront of their minds.

Thank you very much.

Yes.

Thank you. This wraps up our conference call. We will be around if you have questions. Thank you for participating. Have a good day.

That concludes today's conference call. We appreciate your participation.