Ladies and gentlemen, thank you for standing by, and welcome to the Gentex Report First Quarter 2021 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Josh O’Berski, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to the Gentex Corporation first quarter 2021 earnings release conference call. I'm Josh O’Berski, Gentex's Director of Investor Relations, and I'm joined by Steve Downing, President and CEO; Neil Boehm, Vice President of Engineering and CTO; and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going to the Gentex website at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call. This conference call contains forward-looking information within the meaning of the Gentex's Safe Harbor statement included in the Gentex Reports First Quarter 2021 Financial Results press release from earlier this morning and, as always, shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now, I will turn the call over to Steve Downing, who will get us started today.

Thanks, Josh. For the first quarter of 2021, the company reported net sales of $483.7 million, which was an increase of 7% compared to net sales of $453.8 million in the first quarter of 2020. During the first quarter of 2021, vehicle production levels were negatively impacted by electronics and other part shortage issues. These shortages were the primary reason for the 12% reduction in North American light vehicle production compared to the beginning of the quarter forecast. The part shortages also impacted light vehicle production levels in Europe and the Japan and Korea markets, which were each down 3% versus the beginning of the quarter forecast. The part shortages and corresponding change to light vehicle production are estimated to have reduced our revenue in the first quarter by approximately $45 million. Despite these issues, the first quarter of 2021 was the second highest sales quarter in company history, behind only the fourth quarter of 2020. Our guidance for the year included a first quarter that was forecasted to be similar to the fourth quarter of 2020 from a revenue perspective, but first quarter revenues were clearly impacted by the difficulties created by part shortages. During the first quarter of 2021, our primary revenue generating markets of North America, Europe and Japan and Korea were down 2% on a combined basis, which means our revenue growth of 7% yielded a total outgrowth versus the underlying market of 9%. It is also important to remember that the first quarter of 2020 was negatively impacted by COVID-19 shutdowns, which means that vehicle production levels for the first quarter of 2021 were down 15% in comparison to the first quarter of 2019. However, our revenues grew by 3% when comparing those quarters, which calculates to an 18% outperformance versus the underlying market during that two-year period. For the first quarter of 2021, the gross margin was 37.9% compared to a gross margin of 34.5% for the first quarter of 2020. The gross margin improved significantly on a quarter-over-quarter basis, which was driven by the structural cost savings put in place in the second quarter of 2020, as well as product mix tailwinds related to exterior auto-dimming mirror growth and Full Display Mirror growth. Gross margins were negatively impacted during the quarter as a result of the part shortages that caused raw material price increases and increased freight costs. The company has once again performed very well in an incredibly difficult operating environment. The chaos created this quarter by component shortages, freight issues, as well as customer plant shutdowns and order changes made scheduling very difficult, but the team was able to not only keep up with customers’ orders, but also improve gross margins by 340 basis points versus the first quarter of last year. While the gross margin in the first quarter of 2021 was below our annual guidance range, the majority of that shortfall was driven by the $45 million in lost sales in the quarter. We expect to see further improvement in gross margins based on the higher sales levels that are forecasted for the remainder of the year. Operating expenses during the first quarter of 2021 decreased by 4% to $49.6 million compared to operating expenses of $51.6 million in the first quarter of 2020. The decrease was primarily driven by the continuation of the structural cost reductions made during the second quarter of 2020, but the lack of international travel and the cancellation of all industry-based trade shows because of the pandemic also contributed to lower operating expenses. Income from operations for the first quarter of 2021 was $133.7 million, which was an increase of 27% compared to income from operations of $105 million for the first quarter of 2020. During the first quarter of 2021, the company's effective tax rate was 16.1%, down from 16.6% during the first quarter of 2020. The decrease in the tax rate was driven by increased foreign-derived intangible income deductions, as well as increased discrete benefits from stock-based compensation. Net income increased 27% to $113.5 million for the first quarter of 2021 compared to net income of $89.5 million in the first quarter of 2020. The increase in net income was driven by the quarter-over-quarter increase in sales, improved product mix, higher gross margins and the continued operating leverage as a result of the structural cost savings that were put in place during the second quarter of 2020. Earnings per diluted share for the first quarter of 2021 were $0.46, an increase of 28% compared to earnings per diluted share of $0.36 for the first quarter of 2020. The increase in earnings per share is the result of the higher net income and a lower diluted share count when compared to the first quarter of 2020. During the first quarter of 2021, the company repurchased 2.8 million shares of its common stock at an average price of $35.46 per share. As of March 31, 2021, the company has approximately 6.7 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time and will take into account macroeconomic issues, including the impact of the COVID-19 pandemic, market trends, and other factors that the company deems appropriate. I will now hand the call over to Kevin for first quarter financial details.

Thanks, Steve. Automotive net sales in the first quarter of 2021 were $475.6 million compared with $439.9 million in the first quarter of 2020, which was an 8% increase quarter-over-quarter. Auto-dimming mirror unit shipment growth outpaced revenue growth during the first quarter of 2021, primarily as a result of a 15% growth in international shipments. The increase in international unit shipments were largely comprised of base interior and exterior auto-dimming mirror unit shipments and included significant growth in the China market. Other net sales in the first quarter of 2021, which includes dimmable aircraft windows and fire protection products, were $8.1 million, a decrease of 42% compared to other net sales of $13.9 million in the first quarter of 2020. Dimmable aircraft window sales decreased by 70% for the first quarter of 2021 when compared to the first quarter of 2020. The company continues to expect that dimmable aircraft window sales will be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels improve. In terms of the balance sheet. During the first quarter, the company continued with its capital allocation policy and maintained high levels of liquidity, so that we remain flexible and well positioned to handle these ongoing uncertainties in the industry. I'll now highlight some key balance sheet items as of March 31 as compared to December 31 of 2020. Cash and cash equivalents increased to $455.9 million, up from $423.4 million, primarily due to cash flow from operations, which were partially offset by share repurchases, dividend payments and CapEx. Short-term investments were $25.9 million, down from $27.2 million. Long-term investments were $172.9 million, up from $162 million. Accounts receivable decreased to $277.7 million from $284.9 million. Inventories were $233.1 million, up from $226.3 million. Accounts payable increased to $107.1 million, up from $84.8 million, primarily due to month-end payment timing. Accrued liabilities were $116.2 million, up from $92.9 million. Increases were due to higher accrued salaries and wages as well as accrued income taxes. For the first quarter, cash flow from operations was $190.8 million, up from $151.3 million in the first quarter of 2020. The increase in cash flow was driven by increases in net income for the quarter and changes in working capital. CapEx for the first quarter was $12.6 million compared with $15.6 million for the first quarter of 2020. And depreciation and amortization for the first quarter was $25.6 million compared with $26.3 million in the first quarter of 2020. I'll now hand the call over to Neil for a product update.

Thank you, Kevin. In the first quarter of 2021, there were 10 net new nameplate launches over interior, auto-dimming mirrors and electronic features, net of previously disclosed future headwinds. Despite the challenges our industry has been facing, the net launch rate for insight auto-dimming mirrors and advanced features was strong and one of the highest first quarter launch rates in the last three years. During the quarter, there was a good mix of both base auto-dimming and advanced feature mirrors. The inside auto-dimming mirror launches included new models in all of our major markets and the advanced feature launches were led by new models of HomeLink. Now for an update on Full Display Mirror. Since our last announcement of Full Display Mirror launches, we have had six new nameplates enter the market. Those nameplates are the Buick Envision, Buick Velite 7, Jaguar E-PACE, Toyota Mirai, Toyota Sienna and the Ram 2500/3500. Here's a comprehensive list of the OEMs and the number of nameplates where we are currently shipping FDM. General Motors, our initial launch customer, has 24 nameplates shipping. Subaru is currently shipping on three nameplates. At Nissan, we're shipping on two nameplates. Toyota is now shipping on 12 nameplates. Jaguar Land Rover, we're currently shipping on six nameplates. Aston Martin, one nameplate. Mitsubishi is shipping on two nameplates. And Ram is shipping FDM on three nameplates. As we look forward to the second quarter and the balance of the calendar year, we realize that many of our customers expected launches in new vehicles may be affected by the current market shortages. However, we're optimistic because we continue to see strong demand for our latest products and technologies. In the last quarterly call, we gave an update on an acquisition we did in 2020 of a company called Vaporsens, a Nanofiber Sensing company. This acquisition was focused on expanding our sensing capabilities for vehicles today and into the future, as well as grow in other market verticals. In late 2020, we completed another acquisition of a company called ARGIL. ARGIL is a small company in California working on conductive polymer electrochromic technology. As we've demonstrated at CES for the past few years, one of our technology strategies is to expand the use cases for dimming technology. So with the addition of the ARGIL team and technology to the Gentex product portfolio, we have a broader path in dimming technology that will allow us to achieve more of the use cases. This technology is still in development and a few years away from production viability, but we're excited about its potential to help us expand the dimming market. In summary, even with current challenges our industry is facing, our launches and product rollouts are strong. And with the addition of these new sensing and dimming technologies, we believe we're positioning the company to take advantage of the trends that are developing and the interest we have gathered over the last several years at CES. I'll now hand the call back over to Steve for guidance and closing remarks.

Thanks, Neil. The company's current forecast for light vehicle production for 2021 and 2022 is based on the mid-April 2021 IHS market forecast for light vehicle production in North America, Europe, Japan, Korea and China. Based on this information, light vehicle production in the company's primary markets is expected to increase approximately 10% over the 2020 calendar year volumes. It's important to note that from our January earnings call until today, the IHS vehicle production forecast for our primary revenue producing regions of North America, Europe and Japan and Korea had decreased by about 3%. For calendar year 2022, light vehicle production in the company's primary markets is forecasted to increase over the 2021 estimated volumes by approximately 7%. Based on these light vehicle production forecasts, and despite the lower vehicle production volumes that are now forecasted for 2021, we are reaffirming our guidance estimates for calendar year 2021 for each of the following areas. Revenue for 2021 is expected to be between 1.94 billion and 2.02 billion. Gross margins for the year are expected to be between 39% and 40%. Operating expenses are forecasted to be approximately $210 million to $220 million. Our estimated annual tax rate, which assumes no changes to the statutory rate, is forecasted to be between 16% and 18%. Capital expenditures for 2021 are expected to be between $85 million and $95 million and depreciation and amortization is forecasted to be between $105 million and $110 million. Over the last several quarters, the company has been closely monitoring the tariff discussions between the U.S. and the EU. Currently, EU Regulation 2018/0886 is scheduled to go into effect on June 1, 2021. The company remains hopeful that a trade agreement can be reached before this date so that the increased tariffs do not take effect. If these tariffs do go into effect on June 1, the company estimates an impact in 2021 of approximately $7 million to $10 million in incremental expense that is not contemplated in the guidance. In addition, based on the mid-April 2021 light vehicle production estimates for calendar year 2022, the company is increasing our estimates for calendar year 2022 revenue to be approximately 8% to 13% higher than the estimated revenue for calendar year 2021. In conclusion, I'd like to reiterate a few key points regarding our performance. Our forecast for calendar year 2021 remains strong despite the supply chain issues that are continuing to impact the current vehicle production environment. While these issues create instability in the short term, the industry dynamics currently point to improved light vehicle production for the second half of 2021 and also the continued recovery of light vehicle production into calendar year 2022. More specific to Gentex, the combination of our launch cadence, product mix and overall program awards continue to provide us confidence about the future growth rate and health of our business in an otherwise hard to predict market. Over the last 12 months, our employees have been able to adapt to every situation we have encountered. First, it was never seen before shutdowns, followed by the busiest six months in company history. We are now battling to make sure we're able to provide products to our customers at the volume and timing they require without compromising our commitment to the quality standards that underlie our reputation in the industry. Accomplishing these objectives has become quite difficult. But we're not satisfied with those accomplishments alone. During this difficult time, we have continued our active pursuit of new technologies, maintained our focus on cost discipline that yielded margin improvement on our core business, and continued to invest capital in the company all while maintaining our rigorous approach to capital allocation and share repurchases. We trust that the hard work the team has done will help fortify the confidence you have placed in us and that this trust will be rewarded with above average market returns for years to come. That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

Your first question comes from the line of James Picariello of KeyBanc Capital.

Good morning, James.

Yes, bridging the first quarter’s performance to your reaffirmed full-year guidance. I know you utilized IHS as your base framework for industry production. It looks like second quarter volumes are expected to trend flat sequentially, right, based on IHS. So, the $45 million volume impact that was called out this quarter likely sustains. So just wondering how we should be thinking about the trajectory from here, second-half volumes better because the supply chain inflation, the freight, does that – do those headwinds go away? Yes, the bridge to the full-year would be great.

Yes. On the revenue side, I think you're exactly right. I mean, Q2 is going to be pretty similar to Q1 in terms of size. Really, the improvement and what we're seeing and hoping for is that the second-half strengthens, and that's what IHS is forecasting versus beginning of the year, the second-half has gotten better. Really what that's going to be dependent on is the supply chain side. If things – and right now, it's estimated that the constraints will slow down a little bit in the second-half of this year versus what we've seen in the first quarter. So we think Q2 is going to be a lot like Q1. It's going to be a lot of constraints, a lot of freight issues, definitely a tight supply. Hopefully by the back half of the year, that starts to settle down a little bit and supports the higher production volumes.

The mirror shipment volumes in the first quarter were quite strong, particularly for exterior mirrors, which resulted in a favorable mix. The growth rates were positive. However, it appears that the price mix, combining volume and price, has decreased compared to last year. I'm interested in understanding how we should consider price mix and its relationship to FDM shipments for this year. What does that trend look like?

Yes. I mean, really there were a couple factors happening there. Number one is the impact of annual price reductions. So, you're looking between 2% to 3% on most years that take effect on January 1, which was part of the reason for the decline. The other part was interesting was if you look, North America and Europe, Japan, Korea, we're really on a negative trend from a vehicle production standpoint. The China market actually increased significantly and we saw quite a bit of increase in sales in the China market. Those tend to come at lower average selling prices. So they're typically based on a dimming interior mirror. So, your average selling price on that is in the low 20 range. And so that was part of the – why you'd see average selling prices kind of trending down a little bit in the first quarter.

Got it. Thanks, guys.

No problem. Thank you.

Your next question comes from the line of Luke Junk with Baird.

Good morning. First question on the FDM, I’m just wondering if you could comment on how current production headwinds are impacting take rates insofar that we're seeing OEMs prioritizing their more profitable vehicles? Is this helping take rates incrementally and could there be any longer-term benefits to Gentex?

Yes, I believe that in the long term, you'll notice that late 2021 and 2022 were significant for OEMs, as they are currently focused on high-end vehicles, particularly regarding content and features. However, I want to note that the reasons behind the microchip shortages and other component issues are tied to this effort to produce higher value vehicles. We anticipate that production volumes will rise over the next 18 months, but this may also result in lower content and features for certain models. Some vehicles that aren't being produced tend to have lower take rates for us. We have observed a trend of increasing take rates for many of our advanced features, not only FDM. This situation has certainly increased the pressure from the microchip shortage. We hope that by the second half of this year, these constraints will begin to ease. The longer-term question is whether the content and take rates will remain at this elevated level or revert to more normal levels. Regarding FDM, we're not worried about a decline in take rates, but rather how to achieve those same take rates across various segments of vehicles. If we can do that, it would indicate significant success for us with FDM across multiple vehicle types.

Okay, that’s helpful. And then switching gears, wanted to drill down on some of the specific supply chain dynamics that you're seeing in terms of your own supply chain. And just wondering to the extent that your centralized production model and the amount of inventory that you hold on hand is helping you to mitigate these headwinds, if you could talk about those dynamics a little bit?

Yes, the dynamics have been quite challenging. It's not just about the availability of microchips; it's affecting all types of electronic components, from basic circuit boards to advanced microcontrollers. The industry faced a period of shutdowns globally due to the pandemic, and catching up has proven to be very difficult. Our specific market's response has exacerbated these issues, and we continually monitor supply problems and communicate daily with suppliers to ensure we have what we need to keep our production going. It will be interesting to see how the industry manages to catch up. We're optimistic that the summer, along with the typical shutdowns and retooling that OEMs undergo, might offer some relief for the supply chain. The situation with freight has also been problematic, especially with many components coming from Southeast Asia. We've encountered various issues, from the Suez Canal disruptions to ships being stuck off the West Coast, leading to significant freight challenges. This affects not only the availability of parts but also the costs associated with expedited shipping. We're hopeful that as constraints ease in the second half of the year, we can bring those freight costs under control. Regarding our inventory, it has certainly helped prevent shutdowns in our operations. However, if we can't replenish that stock, we'll face the same day-to-day challenges as everyone else, needing constant shipments to meet production demands.

That’s great. I'll leave it there. Thank you.

Your next question comes from the line of David Kelley with Jefferies.

Hi. Good morning, guys. Thanks for taking my questions and apologies for the background noise, in an airport here. But maybe to follow-up on the full-year guide, maintaining your outlook despite the headwinds, the disruption and then kind of the IHS numbers coming down a bit. Can you just talk about some of the incremental positives that have emerged over the past two to three months helping to kind of offset those incremental headwinds?

Yes. Thanks. This is Kevin. I think we've seen a bit of a resurgence in the China market, as Steve alluded to earlier, really good growth in some of the base level products and that volume has been applied throughout the year. And we've seen great strength in take rates in that market as well as the North American market. Some of the things that Neil talked about is some of the launches are taken off on time and with take rates that we were expecting. And so it's really bolstering that. But again, a lot of that is driven by what IHS is estimating to be easing of that supply chain issues in the back half.

I think some of the strength too has been on Full Display. Full Display Mirror continues that growth rate that we were on, really for the last couple of years. So that's been strong and the ITM launches have been going very well too. So that's been helping to add some positive revenue.

Okay. Thank you. And maybe a quick follow up kind of to your point on China. Can you give us a sense of kind of where the auto-dimming penetration is today and what that penetration has done over the past couple years or so?

Yes, I would say it has grown significantly over the past couple of years. Roughly 15% to 20% of the China market currently has an auto-dimming feature, with around 15% being the penetration rate in that market.

Okay, got it. Thank you. And then last one for me and I'll pass it along. Just curious, it sounds like the visibility to the back half of the year is pretty strong here assuming that the supply chain improves. But how should we think about kind of the normalized gross margins in the back half and again removing kind of supply chain impact that helps you get to that full-year 39% to 40%? We're just kind of trying to bridge the gap here to what appears to be kind of second quarter gross margins, it will probably be somewhere in the first quarter range to that second-half uptick that gets to the 39% to 40%, that'd be great. Thanks.

Yes, I would say that we expect the second half to generate slightly higher total sales dollars compared to the first half. The contribution margin from these additional sales will help us reach the midpoint or just above our annual guidance range for the year. This aligns with our full-year guidance. We have historically observed that the higher revenue in the second half generally benefits us, as Kevin often points out. The first quarter and typically the second quarter tend to be negatively affected by the inventory we carry from the previous year at that year's cost basis. As we progress through March, April, and May, we begin to see the positive effects of reduced purchasing costs for raw materials, which also tends to benefit the second half. Furthermore, when the growth rate exceeds the 5% to 10% range, we typically see a positive flow through the income statement associated with that increased growth rate.

Okay, great. Thanks so much. Really helpful, guys.

Thanks, David.

Your next question comes from the line of Josh Nichols with B. Riley.

Thanks for taking my question and good to see the company reaffirming the 2021 outlook. If you could provide a little bit more color. Nice to see the '22 outlook actually get raised here. What's really the areas of strength that give you enough confidence to raise despite some of the near-term shortages we're seeing? Is it Full Display Mirrors, ITM and what are the puts and takes for that '22 outlook?

Yes. First, we mentioned at the year-end conference call in January that we had some concerns about the IHS vehicle production forecast, which turned out to be justified. We saw a 3% drop in production in the quarter and for the full year, which we closely monitored. We are slightly cautious about the IHS numbers regarding portal growth. However, we are confident because of the actual take rates of our products, the launches that Neil discussed, and the continued interest in our Full Display Mirror and ITMs, along with new technologies we are introducing. Even though we may not meet the exact IHS total vehicle production growth rates, we believe our content is performing well in the market. These factors are the main reasons we feel we can raise our guidance for 2022.

Yes, thanks. And then just for a little bit of clarity looking at the back half of this year, how much of the supply chain shortage is expected to kind of alleviate? Is it expected to still be some lingering impact in the second-half or what are the thoughts regarding the second-half forecast?

Yes, it's interesting how everyone has a different perspective on this issue. I believe it will last longer, even into the second half of this year. Considering the time it takes to establish capacity for these types of components, it won't be resolved in the short term. We're looking at at least 18 to 24 months before we could see any significant capital investment that enhances overall capacity in the supply chain. Initially, the focus will be on recovering from the downtime caused by the pandemic, which is starting to happen, but it will take several more months to fully achieve this. Additionally, there are shared resources with consumer electronics to consider. This raises questions about whether consumer electronics will see an upward or downward trend during this period, as well as the impact on automotive content. Personally, I believe it will take about 18 months before we start to see significant relief, although we anticipate some improvement compared to the tough supply situation in Q1. Q1 presented a very challenging environment on the supply side, and while we expect conditions to get somewhat better, they won't completely improve by the second half of the year.

Thanks, guys. I appreciate the color there.

Thank you.

Your next question comes from the line of John Murphy with Bank of America.

Good morning, guys. You've answered a lot of my questions, but I have just a couple left. On the raw material costs, I'm just curious if you think that's a headwind that may ease as we go through this year and into next year, or is that something that remains?

I think raw material, actually, it's probably going to get worse throughout the second-half of the year. And the reason why is a lot of the electronics suppliers are coming with price increases to customers, so very little of that actually hit in the first quarter. It was a little bit of it, but there'll be more in the second quarter and beyond. But we believe that the freight issues will start to drop in the second-half. And so we think the headwinds we experienced in Q1 will be very similar to what we see in Q2 through Q4. It's just going to be a different mix, right. There will be more raw material headwinds, but less on the freight side.

Got it. And then on the semis, you just gave some color on this, but if we think about next year and everybody maybe out of their homes and not buying as many computers and screens and PlayStations and the like, do you think that there is the potential that this could swing back in the other direction where capacity frees up that autos becomes the best game in town for the semi companies, and you have this ease dramatically and maybe actually become a tailwind for you at some point next year?

Yes, I'm not sure if it will happen next year, but I believe that it's possible within a two to three-year timeframe. Many semiconductor companies are currently increasing their production capacity and investing heavily in capital. If we consider a potential 10% to 15% rise in overall production capacity, that could provide the relief we're hoping for and start to align with your description. Historically, high-end electronics have seen an average annual decline of about 3% to 5% in selling prices during downturns, which we anticipate will occur again. However, we think it will take a few years before this trend returns to being the norm.

Okay. And then just lastly on China, I'm just curious what percent of your sales are going or being delivered to China? Who are the customers? And it sounds like it's mostly base interior and exterior mirrors for now. But what is that typical curve that's become more advanced mirrors over time?

Yes. In the quarter, it's right around 7%, 7.5% of total revenue was shipments to China because most of our revenue is through joint venture OEMs. We also have exposure to the Tesla plants in China, which is obviously taking off. And so it's a pretty broad spectrum. But we do have launches, as Neil has mentioned in the past, several quarters with some local Chinese OEMs. And it's really the play as far as expanding the ability to do things locally. The tariffs still remain a headwind going into China and thinking about how we manage the supply chain there for future growth with advanced features. The product, everybody loves it. This is just a matter of considering some of those things.

Your other question was about the development curve. We believe that after several years in the market, the growth we’re experiencing with base auto-dimming technology will pave the way for more advanced features. We have made some progress in China, but in the long term, we need to focus on developing market-specific features that are tailored to the China market. Historically, we have excelled in this area. The Full Display Mirror presents a significant opportunity as it transcends borders and regions. However, there are certain technologies specific to the market that we need to continue developing to enhance advanced feature content in China.

And I think I know the answer to this, but I'll ask it anyway. Is there any thought of building a production facility over there or is everything going to stay in Zeeland?

We purchased a new building a couple of years ago in China, which includes a distribution center. We're just starting to occupy that renovated building. It provides us with significantly more storage for finished goods coming from Zeeland to the China market. Additionally, it enables us to perform final assembly there, addressing customer demands and helping with the tariff situation. We currently have plans to expand our capability for local final assembly in that market.

And that final assembly skates or ducks below potential tariffs, is that.

What it does is it takes a lot of that dollar content, such as plastics, metal mounts, and even circuit boards, and identifies local suppliers for those. By sourcing domestically in Asia, we can avoid duties on those materials. However, the core auto-dimming elements will still be produced in Zeeland and shipped there, which reduces the overall tariff because the dollar content decreases.

Incredibly helpful. Thank you, guys.

No problem. Thank you.

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Great. Thanks for taking my question. You discussed in the release about the parts shortages that resulted in raw material price increases. Can you talk about what your biggest raw material buys are and which are the ones that contribute the increase? Is it primarily the electronics components you've been talking about or is it more base materials? I'm not sure to the extent which you might be exposed to like polypropylene or thermoplastics, maybe using housings, we're seeing a lot of increase there. And then also could you talk about any kind of customer pass-throughs that you might have in place? Thanks.

Yes. So the largest purchase that the company undertakes is obviously microelectronics, the components. The biggest negative impact, however, this quarter we saw was in some of the precious metal markets what we saw in the quarter. But going forward, it's really the price increases that Steve alluded to really starting to take hold in the back half of the year on the electronics side. But we do have exposure to the plastics issues that are also impacting the market and price increase is potentially in that realm as well. What was the last part of the question?

Customer pass-throughs.

The customer pass-throughs, with our products being market-based pricing, we work as hard as we can to push on the average price recovery side. But we take that risk every day when you look at our margin buildup already and try to push on average price recovery, either through volume or those types of things. But for the most part, that's for us to figure out on either getting more efficient in the manufacturing process and minimizing the impact of these cost increases.

Great, thank you. And just lastly, is there an update that you could provide on the Integrated Toll Module product? You've been announcing a lot of awards there with Audi, but I think there has been some expectation you might snag some new ones with other automakers perhaps this year. I'm curious what discussions with automakers look like on that product. And I'm not sure you've disclosed ASP or profitability metrics for that product, but any color you might want to provide there would be helpful also.

Sure, I'll talk a little bit about the products side. So the Audi rollout continues to go extremely well. The volumes have continued to increase over the last year. It's now consumer awareness and getting some of the functionality in place that the consumer is looking for as we continue to improve the product. Second, a customer that we've talked about expects something in the last part of Q2, early Q3 for that.

On the average selling price side, average selling price is around $50 to $60 for that product.

Okay, very helpful. Thank you.

No problem. Thank you.

Your next question comes from the line of David Whiston of Morningstar.

Good morning. I know in the past you've talked about how your rock-solid cash-rich balance sheet tends to give you a higher priority on scarce raw materials when there are supply problems. Is that happening this time around?

Yes, it definitely helped us. There is no doubt about it. When facing situations like this, one of the biggest worries is the possibility of shutting down an OEM, which can happen. Fortunately, we haven't experienced that, and our inventory allowed us to manage the situation better than others. Every day, automotive publications report on different OEMs facing shutdowns due to supply shortages, and we have been fortunate that we haven't been affected by that. However, as we struggle to receive shipments, we are depleting our inventory. We are getting creative in working with our suppliers to ensure they have enough visibility and lead time from us, which is essential for accessing the parts quickly. There is no doubt that our actions helped. The team has excelled in managing the supply side to ensure we have what we need to deliver shipments on time. Unfortunately, one impact has been a trend of higher freight costs, especially for inbound shipments, as we aim to get materials from the port to us as quickly as possible.

And somewhat related, I believe that with the annual price reduction mitigation we experience throughout the year, Q1 is typically the most challenging time because the process hasn't really started or is only just beginning. However, this year, we are also contending with much higher raw material prices. How does that price reduction mitigation effort appear this year? Will it be particularly difficult?

Yes, it's going to be much more challenging, there is no doubt. From a timing perspective, the basic timing won't change. What you'll see is the extent of improvement from Q1 through the latter half of the year won't be as significant as in a normal year. You'll burn through prior year inventory in the first quarter, and as you progress through the second quarter and beyond, you'll start to see the positive effects of the annual price reductions from our suppliers. This year, due to some material increases in certain areas, the level of improvement on the purchasing side may not be the same. We're modeling less benefit there. However, as the year progresses, we expect some improvement in freight costs since we are not anticipating the same levels of premium freight charges in the latter half of the year compared to what we've been paying so far.

You previously mentioned the offset between lower freight and higher electronics prices. How significant is that offset from lower freight? Is it 30%, 50%, or 90%?

Well, let's put it this way. Right now, what we saw in Q1 is about 100 to 150 basis points in headwind from raw material and freight combined. And so we don't think that that number changes drastically in the back half. But we think there is the opportunity for that to obviously go down, but we think there's going to be the majority of those that headwind is going to last throughout the year.

Okay. Thanks.

No problem. Thank you.

Thanks, David.

Your next question comes from the line of Charlie Sloan of Oak Family Advisors.

From the Midwest. Just calling. Hi, guys. I have a couple of questions. In previous cycles, you've seen greater delays as the automakers resumed production compared to your output due to inventory depletion, but it doesn't seem like that's the case this time, as you're struggling to keep up.

Yes, that's correct. Timing is always intriguing. If you consider the downturns during the first and second quarters of the pandemic, while OEMs were reducing output, we continued to ship our products. Typically, we are about 4 to 12 weeks ahead of our customers in production. However, given the current constraints, with OEMs having lower inventory and fewer products in transit, we believe you are right in observing that there will be less of a lag than usual. Frankly, we would prefer things to return to normal because the current situation feels a bit precarious. I think over the next 6 to 12 months, you will see a much stronger correlation in timing than we have experienced in the past.

Okay. And then on the FDM, which if you go back a year to your optimism about FDMs, has anything changed or is it more optimistic or less optimistic? How do you perceive it from a year ago? And then my next question that would be as a follow-up, are you giving guidance as to the total shipments of FDMs this year and next?

So I'll start with the optimism. I would say that from a year ago until today, I'd say it's about the same. We felt really good about where the growth rate was and what it was going. Now what I would say is it's been a roller-coaster between a year ago to today. Given everything that's happened, you kind of go through, man, is this product going to continue to grow despite the issues that are happening in the industry. And so we sit here today having watched Q1 develop at about the same growth rate we were expecting. And so despite the issues and the problems and everything that's gone on, we're right on track with our growth rate. What we kind of talked about to second part of your question there is on the growth rate, we're really talking about adding 200,000 units each year for the next couple of years. And we're right on pace with that. Last year was a huge growth year for FDM, but we continue to expect that thing to increase by 200,000, 250,000 units a year.

Okay. And then finally, given that you guys have managed through the cycle so powerfully and you have some cash on the balance sheet, about 640 million, right, between cash and long-term investments. Is that right?

Yes, sir.

Okay. And so the 525 million target, have we – what are we going to do about that?

We have slightly increased our focus on cash retention throughout this cycle, particularly since the pandemic began. This decision was motivated by two main factors. First, we were uncertain about the long-term economic effects of recent events and wanted to ensure we were prepared for any potential business challenges. Second, we found it somewhat surprising that more acquisition targets have become available at reasonable prices. The valuation multiples for available businesses have not changed significantly. Therefore, we are getting ready for what we expect might be a downturn and a decrease in market values of available assets, which has not yet occurred. Our aim is to prepare for both unexpected challenges and potential acquisition opportunities if prices fall.

Okay. So I think we – because we are shareholders, we're not just the sell side, we're the buy side. And so if there is any excess capital that you have sitting on the balance sheet, I'm sure shareholders would appreciate that as always.

Yes.

You guys are doing a great job.

And we appreciate it and we love the confidence that you've shown on us in a long time and I think one thing we are absolutely adamant about is our goal is not to stockpile cash beyond what's necessary and that's why that share repurchase plan is kind of our fallback position in saying, hey, we're confident in our long-term growth and what that future will look like over a 5 to 10-year period. And so whenever we have an opportunity, we're going to be buying stock. And whenever we see market retrench too much, we'll get more aggressive on that side as well.

Okay. Because it does look like as you describe it, you're describing a wonderful 2021 where your new feature sets are coming into play with higher average selling prices. You have a slowdown in some of the freight cost stuff that you've run into and probably a pickup in production at the car companies. I look at this and say, wow. Okay.

Yes. Neil's team has done a remarkable job on the technologies piece of delivering new features, new content. And we believe that sets us up for a long-term growth.

Okay, all right. Keep up the great work.

I appreciate it. Thank you so much.

This concludes the Q&A portion of our call. Thank you everyone for the great questions and hope you have a great rest of your week and good weekend.

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