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Gentex Corporation (NASDAQ:GNTX)

F3Q07 Earnings Call

October 22, 2007 10:00 am ET

Executives

Connie Hamblin - VP of IR, Corporate Communications & Corporate Secretary

Enoch Jen - Sr. VP

Steven Dykman - CFO, Principal Accounting Officer, VP of Finance and Treasurer

Analysts

John Murphy - Merrill Lynch

Brett Hoselton - Keybanc Capital Markets

Jairam Nathan - Banc of America

Richard Kwas - Wachovia Capital Markets

Robert Hinchliffe - UBS

David Leiker - Robert W. Baird

Presentation

Operator

(Operator Instructions) Please go ahead, Ms. Hamblin.

Connie Hamblin

Thank you. Good morning, everyone. Welcome to the Gentex Corporation third quarter conference call. On the call with me today is Enoch Jen, our Senior Vice President; and Steve Dykman, our Chief Financial Officer.

This call is being broadcast live on the Internet on Gentex’s website at www.gentex.com, and the icon is on the home page. The auto playback of the conference call will also be available on the website as well. I’m going to read through a couple of comments and then Enoch will go through the quarter and then we will go into Q&A.

I would like to let you know that this call is being recorded by Gentex. All contents of Gentex Corporation’s conference calls are the property of Gentex Corporation. No such content maybe copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the expressed written consent of Gentex Corporation. Gentex Corporation alone holds such rights.

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

As this point, I am going to read our Safe Harbor statement. This presentation may include forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the global automotive industry, the economy, the impact of stock option expenses on earnings, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the company itself.

Words like anticipates, believes, confident, estimates, expects, forecast, likely, plans, project 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 occurrence and actual results may differ materially from those in the forward-looking statements. The company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. We urge you to review the full Safe Harbor statement that is contained in the new release that is posted on our website.

At this point, I am going to turn the call over to Enoch Jen. He will make his remarks with respect to the quarter and then the call will be opened up for Q&A. As usual, we request that you to try to ask single-part questions and try to ask one question at a time to allow all parties to participate.

Enoch Jen

Good morning. It’s a beautiful day in West Michigan. We are pleased to report record financial results for the third quarter of 2007. For the third quarter, we reported revenues of $162.5 million, which represents a 15% increase over $141.3 million that was reported in the third quarter of 2006. For the first nine months, we reported revenues of $483.2 million, which represents a 14% increase over the $422.7 million for the first nine months of 2006.

We also reported record net income. For the third quarter, we reported net income of $29.8 million, a 23% increase over the $24.3 million reported in the third quarter of 2006. Excluding stock option expense, for the third quarter we would have reported net income of $30.7 million, a 20% increase over the $25.6 million reported a year ago.

For the first nine months, we reported net income of $90.3 million, which represented a 16% increase over the $77.9 million in the first nine months of 2006. Excluding stock options expense, we would have reported net income of $92.3 million, a 13% increase over the $81.5 million that would have been reported in the first nine months of 2006.

We also reported record earnings per share. For the third quarter, we reported earnings per share of $0.21, a 23% increase over the $0.17 reported in the third quarter of 2006. Excluding stock option expense, we would have reported earnings per share of $0.21 compared to $0.18 in the prior year third quarter. For the first nine months we reported earnings per share of $0.63, a 21% increase over the $0.52 reported in the first nine months of 2006. Excluding stock option expense, we would have reported $0.64 compared to $0.54 in the first nine months of 2006.

Looking at automotive revenues and unit shipments, automotive revenues increased by 15% from a $135.1 million in the third quarter of 2006 to a $156.5 million in the third quarter of 2007. Total mirror unit shipments were up by about 15% in the third quarter of 2007 compared with the third quarter last year. For the first nine months of 2007, automotive revenues increased by 15% to $464.8 million, compared with $404.4 million for the first nine months of 2006. Total mirror unit shipments increased by 13% in the first nine months of 2007 compared with the first nine months of 2006.

Unit shipments in North America increased by 18% in the third quarter of 2007 compared with the same period in 2006. The increase in unit shipments in North America during the third quarter was primarily due to increased interior mirror unit shipments for certain domestic and Asian transplant automakers.

North American light vehicle production increased 4% in the third quarter of 2007 compared with the same prior-year period. GMT 800/900 light vehicle production was down 1% in the third quarter of 2007 compared to the same period in 2006. Unit shipments in North America increased by 9% in the first nine months of 2007 compared with the same period in 2006. North American Light vehicle production declined by 2% in the first nine months of 2007 compared with the same prior-year period.

Unit shipments to offshore customers increased by 13% in the third quarter of 2007 compared with the same period last year. The increase in unit shipments was primarily due to higher penetration at certain Asian and European customers. Light vehicle production in Europe increased by 6% in the third quarter and increased by 5% in Japan and Korea in the third quarter of 2007 compared with the same period last year.

Unit shipments to offshore customers increased by 17% in the first nine months of 2007 compared with the same period last year. Light vehicle production in Europe increased by 5% for the first nine months of 2007 compared with the same period last year. Light vehicle production in Japan and Korea increased by 3% for the first nine months of 2007 compared with the same prior-year period.

Our average selling price per mirror unit during the third quarter of 2007 was $42.24. The ASP increased from $40.57 in the second quarter of 2007 to $42.24 in the third quarter of 2007, primarily due to a higher percentage of featured versus base mirrors.

Based on our current forecast, we would expect the ASP to be in the range of a prior-year period depending upon product mix in the fourth quarter of 2007. The ASP increased on a year-over-year basis from the third quarter of 2006, when it was $42.09, to the $42.24 in the third quarter of 2007 primarily due to the Mercedes [con]tinted interior mirrors, mostly offset by annual customer price reduction.

Looking at fire protection revenues, our fire protection revenues decreased by 3% to $6 million for the third quarter of 2007 compared with same period last year. Fire protection revenues were approximately flat at $18.4 million for the first nine months of 2007 compared with the same period last year.

Looking next at our gross profit margin, the gross profit margin of 35.1% in the third quarter of 2007 was slightly lower than the second quarter gross margin of 35.3%,’ primarily due to annual customer price reductions that were not fully offset by leveraging our fixed overhead costs and purchasing cost reductions. The gross profit margin increased on a year-over-year basis from 33.9% to 35.1%, primarily due to leveraging our fixed overhead costs, purchasing cost reductions and improved manufacturing yields.

Excluding stock option expensing, we expect our gross margin in the fourth quarter will likely be in the range of the gross margin reported in the second quarter of 2007 when we reported 35.3%. The gross profit margin will continue to be impacted by annual customer price reductions, uncertain North American automotive production levels, our ability to leverage our fixed overhead cost, purchasing price reductions and VAVE initiatives, and manufacturing yields.

Looking next at our engineering, research and development expense, ER&D expense increased by 26% in the third quarter of 2007 compared with the same 2006 period. The increased expense is primarily due to litigation expense of $1.6 million and additional staffing and engineering for new product development and new vehicle programs.

The litigation expense is related to the lawsuits between the company and K.W. Muth and Muth Mirror Systems LLC -- collectively referred to as Muth -- that is related to exterior mirrors with turn signal indicators. Then turn signal feature in exterior mirrors currently represents about 1% of our revenues and the litigation doesn’t not involve core Gentex electrochromic technology. While confidentiality provisions preclude us from going into detail on this case, the complaint that we filed alleges that Muth breached an agreement.

There have been a number of other complaints filed by both parties, including allegations of patent infringement. All cases have been consolidated and the trial took place in Wisconsin in July. There was a hearing held this last Friday, October 19th. The judge plans to issue her written rulings by year end.

Excluding the Muth litigation expense, ER&D expense would have increased by approximately 14% in the third quarter of 2007 compared to 2006. ER&D expense increased by 24% in the first nine months of 2007 compared with the same 2006 period. Excluding Muth patent litigation expense of approximately $4.4 million, ER&D expense would have increased by approximately 10% in the first nine months of 2007. Excluding stock option expensing and Muth litigation expense, we believe that ER&D expense will increase by approximately 10% to 15% in the fourth quarter of 2007.

Next looking at selling, general and administrative expense, SG&A expense increased by 18% in the third quarter of 2007, primarily due to continued expansion of the company’s overseas sales offices and foreign exchange rates. SG&A expense increased by 14% for the first nine months of 2007 compared with the same prior-year period, primarily due to continued expansion of the company’s overseas sales offices and foreign exchange rates, partially offset by a reduction in non-income-based state taxes. Excluding stock option expensing, we currently believe that SG&A expense will increase in the fourth quarter of 2007 by approximately 15%. This increase is primarily due to continued expansion of overseas offices and foreign exchange rates.

Looking at other income, total other income increased by 51% for the third quarter of 2007 compared with the same prior-year period. The increase in other income was primarily due to realized gains on the sale of equity investments. The breakdown of other income for the third quarter of 2007 was as follows: investment income of $5.140 million; other net of $4.76 million.

A few balance sheet items. As of September 30th, 2007, accounts receivable were $75.7 million, inventories were $47.4 million, patents and other assets were $8.7 million, accounts payable were $34.5 million, and accrued liabilities were $35.8 million.

Our tax rate in the third quarter of 2007 was 32.0% as compared with a statutory rate of 35%, primarily due to the domestic manufacturing deduction of stock option expensing. Tax benefits pertaining to stock option expense can vary from quarter to quarter due to incentive stock option disqualifying disposition activity. The tax benefit pertaining to stock option expense increased from 30% of the expense in the third quarter of 2006 to 56% of the expense in the third quarter of 2007. Excluding stock option expensing, for 2007 we expect that the tax rate will be approximately 33%, based on current tax laws.

Our year-to-date cash flow from operations was $101.2 million. Our capital expenditures for the third quarter of 2007 was $14.8 million. Our depreciation expense for the third quarter of 2007 was $8.5 million.

For calendar year 2007, our estimate for capital expenditures is now approximately $45 million to $50 million, including approximately $6 million in calendar year 2007 to add approximately 4 million units of capacity to our exterior mirror manufacturing facility. The increased estimate for capital expenditures is primarily due to an acceleration of progress payments being made on a new coater for exterior mirrors. Our depreciation and amortization expense for 2007 is currently estimated at $30 million to $33 million.

An update on our share repurchase plan. The company did not repurchase any shares during the third quarter of 2007. The company has a share repurchase plan in place with authorization to repurchase up to 24 million shares of the company’s common stock. To-date, including the prior share repurchases, the company has repurchased approximately 18 million shares, leaving approximately 6 million shares authorized to be repurchased under the plan.

Looking at cash dividends, on October 19 the company paid a quarterly cash dividend of $0.105 per share to shareholders of record of the common stock at the close of business on October 5. This new quarterly dividend rate represents an 11% increase over the prior rate of $0.095 per share previously paid. The ex-dividend date was October 3.

An update on SmartBeam, we continue to be pleased with the progress we’re making and the market acceptance for SmartBeam, the automatic high beam head lamp assist product that we introduced in the 2005 model year. We are currently shipping product in North America for the 2008 model year Cadillac STS, DTS, Escalade and Escalade EXT; the 2008 Jeep Grand Cherokee, Jeep Commander, Jeep Grand Cherokee SRT-8 and the Chrysler 300C Heritage, Chrysler 300C, as well as BMW 5 and 6 series in North America. We are also shipping SmartBeam for the BMW X5 and the 3, 5, 6, and 7 series for Europe and other selected regions.

We have equipped other European vehicles with the SmartBeam system and the feedback from customers continues to be very positive. In addition, we have equipped vehicles in the Asia Pacific region with the SmartBeam system and hope to have follow-on programs in that region in the 2008-2009 calendar year timeframe. For the 2007 calendar year, we expect to ship approximately 300,000 to 350,000 SmartBeam units.

An update on Rear Camera Display, or RCD. In late 2006 we announced that we had developed a new product that we call the Rear Camera Display, or RCD. The product currently is offered as original equipment on the Ford F150 and Expedition, and the Lincoln Navigator and Mark LT. We previously had announced that it is also available as a port or dealer-installed option on the Mazda CX-9.

We also recently announced that the RCD display is now available as a dealer or port-installed option on the Toyota Camry through Gulf States Toyota, one of two remaining independent Toyota distributorships that covers dealers in the States of Arkansas, Louisiana, Mississippi, Oklahoma and Texas.

Because the RCD mirror is offered as a standalone option on the Ford and Lincoln programs, Gentex has contracted with an outside marketing firm to visit the top 200 Ford and Lincoln dealerships which typically do 80% of Ford’s business, and educate dealers’ sales managers and sales people on the product, providing marketing materials, et cetera. We are in the process of evaluating the impact this type of activity may have on the take rates for those programs.

We also continue to work with several other customers on original equipment development programs for this product. This is not a long lead-time product, so upon receiving a production order from a customer, we could be in volume production for other programs within nine to 12 months.

Next, an update on the Boeing 787 DreamLiner window program. We begin shipping parts for test planes for the Boeing 787 DreamLiner series of aircraft at mid-year and volume production shipments are expected to begin at the end of 2007. Despite Boeing’s announced six-month delay in shipments to their customers, their instructions to suppliers have been that we are to continue to ship to the original schedule. Other aircraft manufacturers have also expressed interest in this technology.

Next, an update regarding the Daimler-Chrysler long-term agreement. The company has an existing long-term agreement with Daimler-Chrysler covering virtually all interior and exterior auto-dimming mirror business at Mercedes and Chrysler through 2009. During the third quarter of 2007, the company negotiated an extension to its global supply agreement with Chrysler. Under the extension, the company will be awarded virtually all Chrysler interior auto-dimming rearview mirror business through 2015.

Looking at unit shipment estimates, the following projections for mirror unit shipments are based on CSM’s preliminary mid-October light vehicle production forecast. For the fourth quarter of 2007, our estimate for mirror unit shipment growth and revenues for the fourth quarter of 2007 is approximately 10% to 15% compared with the same period in 2006, based on the current forecast for product mix.

CSM’s light vehicle production forecast for the fourth quarter 2007 is as follows: for North America, 3.6 million vehicle units, which is a decrease of 1% compared to the fourth quarter of 2006. For Europe, fourth quarter 2007 production of 5.5 million vehicle units, which is a 6% increase over the fourth quarter of 2006. For Japan and Korea, 3.9 million vehicle units, which is a 3% increase over the fourth quarter of 2006.

CSM’s forecast of light vehicle production for the 2007 calendar year is currently as follows: for North America, 15 million vehicle units, a decrease of 2% compared to 2006; for Europe 21.4 million vehicle units, a 5% increase over 2006; and for Japan and Korea 14.7 million vehicle units, a 3% increase over 2006.

At this time, I will turn the conference call back over to Connie.

Connie Hamblin

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

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

We advise that you should not rely on the content of any unauthorized transcript, as Gentex Corporation will not be held liable for the content of any such transcript. Gentex Corporation will hold responsible and liable any parties for any damages incurred by Gentex Corporation with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree to participate in these terms.

At this point, we are going to open up the conference call for Q&A. The operator will instruct you on how to get in the queue for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

Good morning. Just a question on pricing and margins here. Is there an opportunity as you win new business on new programs like the Accord, to potentially get better pricing and better margins? Or, is it going to take improved mix with products like SmartBeam and the rear camera display to get better pricing in margins as we go forward, along with the mirrors?

Enoch Jen

Our pricing around the world for base mirrors and featured mirrors is pretty consistent. We are not looking at -- expecting that we will be able to improve our pricing as we gain new business. We should be able to improve our margins to the extent that we are able to leverage our fixed overhead costs and reduce our product costs due to greater volumes.

ASPs, certainly as you can see, may start to increase as our mix of featured versus base mirrors continues to improve.

John Murphy - Merrill Lynch

Okay, but a like mirror that you’ve been selling for three years on an old product that you start selling on a new product, you are saying the pricing would be almost exactly the same even though you’ve gotten the price downs from a customer for three years in a row?

Enoch Jen

We do not price by vehicle model, we really price by type of mirror based on overall volume to a specific automaker.

Operator

Your next question comes from Brett Hoselton - Keybanc Capital Markets.

Can you give the SmartBeam volume shift in the third quarter?

Enoch Jen

Connie won’t let us. We are still, as you probably can tell from your notes; we are still sticking with our estimates for the full year of 300,000 to 350,000 units, so the third quarter shipments were pretty much on plan.

Brett Hoselton - Keybanc Capital Markets

Looking at the mirror shipments, you had very strong mirror shipments domestically -- the interior mirror shipments. What I’m wondering is as you move forward, as you look into next year as you think about that mix -- domestic interior, foreign exterior, foreign interior, that’s sort of thing -- what do you think the outlook looks like for your mirror shipments overall and then which segments of your mirror shipment should be the driver, in your opinion?

Enoch Jen

I think we have said that our expectation is over the next three to five years that we have the potential of growing our unit shipments by 10% to 15%, I think when you look at any specific quarter, and sometimes even a specific model year, the growth rate may fluctuate between the different regions of the world. We had also talked about that even with a lot of the negative press about the declining market share of the Detroit three automakers, that we were actually gaining some significant new business with the Detroit three automakers, both on new vehicle platforms that they are launching as well as adding features.

Brett Hoselton - Keybanc Capital Markets

In the quarter, was there a particular automaker that drove the increase in interior mirror shipments domestically?

Steve Dykman

That was across the board.

Operator

Your next question comes from Jairam Nathan - Banc of America.

Jairam Nathan - Banc of America

On the litigation, can you explain to us, is it all done here or to what extent do you have a liability left remaining?

Enoch Jen

The litigation won’t be officially concluded until the judge issues her written ruling, which she hopes to by the end of this year. Certainly the level of activity should decline; we will certainly have some litigation expense for the month of October because of the hearing and then hopefully lower levels of activity and expense for the balance of the fourth quarter.

Jairam Nathan - Banc of America

Did the Accord help you in the third quarter or does it really kick in only in the fourth quarter?

Connie Hamblin

I’m sorry, I didn’t understand that.

Jairam Nathan - Banc of America

The Honda Accord win, was that a factor in the third quarter or is it primarily in fourth quarter?

Enoch Jen

Yes, it did help us in the third quarter

Jairam Nathan - Banc of America

Lastly on Europe, given the 6% increase in the Europe introduction, we did not see the same level of improvement in your shipments as in North America where the production was lower. Are you seeing penetration not growing as much, or is there anything specific going on there?

Enoch Jen

I don’t think there is anything specific. I think as we have stated previously, our growth rates are clearly tied to the specific vehicle models that our mirrors are offered on. If my memory is correct, I do think the stronger growth in Europe primarily was focused in the lower vehicle segments.

Connie Hamblin

One thing you need to remember as you are looking at these unit shipments going forward, as more and more of the foreign automakers build transplant vehicles in North America, those unit shipments will be classified under North America so it’s going to skew those numbers a little bit. It’s going to be little tough to follow.

Operator

Your next question comes from Richard Kwas - Wachovia.

Richard Kwas - Wachovia Capital Markets

Enoch, could you give us a feel for the early take rates on the RCDs with the Ford product? I know it’s a bit early and that you are starting this marketing program with the top 200 dealers, but any feel for what the early take rate is right now?

Enoch Jen

It really is too early to tell, Rich. Like you indicated the vehicles are just launching and so it’s difficult to figure out how much is pipeline fill, how much is initial orders from the dealers? Especially because it’s offered as a standalone option on the Ford and Lincoln vehicles. It’s hard for us because we can’t tie it to a specific package. Like we mentioned, we have engaged this marketing firm and we are hopeful that their efforts will result in higher ordering reach from dealerships going forward.

Richard Kwas - Wachovia Capital Markets

When you report in next quarter, I guess you’ll have a much better understanding and I guess you will have some feel with the instruction given by this outside firm in terms of the impact? Would you say first quarter or would it take longer than that?

Connie Hamblin

It’s probably going to take longer than that. I mean, virtually every program that we’re on whether it’s the Ford program, the Mazda or even the Camry, we are standalone options or dealer or port-installed options so it’s very difficult to predict with any certainty what these take rates are going to be. Until we see some consistency in the numbers and any reasonable ability to predict these numbers, we’re not likely to give these numbers because one quarter they might be 50,000 units, the next quarter they might be 25,000 units and everybody is going to think the sky is falling, but that’s not necessarily going to be indicative of what’s going on. So we need to get a little history and I think it needs to become somewhat material before you’re going to see us disclosing units on those things. Once we start getting into some option packages where it’s a little more predictable, that will probably make it a lot easier for us.

Richard Kwas - Wachovia Capital Markets

Thanks, Connie. The other question is on the new Chrysler agreement. Am I to read this as the incremental is just new products that would be launched by Chrysler Mercedes; that you didn’t pick up any vehicles, you have all the vehicles that it was an umbrella contract before?

Steven Dykman

Well I think the primary take away from the new agreement is an extension out beyond 2009 and because we currently have virtually all of the business at Chrysler, that we will continue to have that business going forward.

Richard Kwas - Wachovia Capital Markets

Okay. That’s helpful. Thanks. Thanks, Steven.

Operator

The following question is from Rob Hinchliffe - UBS.

Rob Hinchliffe - UBS

Sticking on the Chrysler extension, is pricing pretty consistent with how it’s been or is there any change there?

Enoch Jen

No, the pricing is consistent with what we have discussed historically.

Robert Hinchliffe - UBS

There was a question earlier about ASPs and with some of this new content, I think Enoch you said we could see ASPs starting to grow. Could you put a timeline on that? When will some of these new features really help to get that ASP number growing?

Enoch Jen

Well, obviously they are currently helping but it won’t be significant until we ramp up to some higher volumes. I think you are probably looking out a year or two on the RCD feature, the SmartBeam feature is starting to have some impact as that volume continues to grow; and then we have also talked about some additional features that we will be offering on mirrors shipped to Ford and Chrysler, for example.

So it really comes down to product mix and features versus the annual price reductions that take place.

Robert Hinchliffe - UBS

Yes, that makes sense.

Connie Hamblin

And the rate at which customers actually adopt the features. RCD could be a little faster.

Robert Hinchliffe - UBS

Yes, that makes sense. On the other line, can you help point us in a right direction for Q4, even into next year given the market is obviously real choppy, and you are getting a pretty good number there the last few quarters.

Enoch Jen

While I think there are a couple of things that you may want to consider. The first is in the fourth quarter of each year, because we hold a certain amount, most of our international equity investments in the form of mutual funds that typically, with a good year -- which to date it certainly has been a very good year internationally -- that there are year end mutual fund distributions that tend to make the fourth quarter results in the other income line higher than the other three quarters.

The second thing that will help guide you on the other income line is to understand our unrealized gain or loss position on our equity investments; and again, that has been steadily building over the past few years. I would say there is an increasing likelihood that the higher level of realized gains could continue although that is largely up to our outside equity fund managers.

Operator

Your next question comes from Brett Hoselton - KeyBanc Capital Markets.

Brett Hoselton - KeyBanc Capital Markets

The margins, typically you see a nice improvement, maybe a 50 basis point improvement from the third quarter to the fourth quarter. It sounds like you are expecting maybe a modest improvement. My question would be, why would you not see a more substantial improvement going from the third quarter to the fourth quarter in terms of your margins?

Enoch Jen

I think it’s probably a couple of things, one is I think our third quarter margin was probably year over year significantly better than what it has been for the past several years. I think the other thing is as we continue ramping up our fixed overhead costs in anticipation of continued growth, we may not get as much leverage going from the third to fourth quarter of this year.

Brett Hoselton - KeyBanc Capital Markets

Switching gears, the Gulf States Toyota deal with the Camry, how do you think about that relative to the adoption of the new product, the Rear Camera Display, at Toyota? Do you think there is any relationship there or would you say that there really is no relationship between the two?

Enoch Jen

No, there is definitely a relationship. I think back when we first announced the RCD feature it was demonstrated on a Toyota Tacoma vehicle at the SEMA Show and if you look at our history with Toyota for EC mirrors, we initially started with the three Toyota distributors in North America -- South East Toyota, Gulf States Toyota and Toyota Motor Sales. So, there is definitely is a correlation with Toyota between their distributors and their OEM offering.

Operator

Your next question comes from David Leiker - Robert W. Baird.

David Leiker - Robert W. Baird

Where are you right now in terms of installed capacity? Not the footprint but in terms of manufacturing lines? What do you have in the new facility today?

Connie Hamblin

In the brand new facility?

David Leiker - Robert W. Baird and Company

Yes.

Connie Hamblin

Primarily electronic assembly.

David Leiker - Robert W. Baird and Company

How much of that floor space have you used?

Connie Hamblin

There are only a couple of lines in there.

Enoch Jen

Did we add a third line?

Steven Dykman

There are two lines currently.

David Leiker - Robert W. Baird and Company

Originally there was just one, so you --

Connie Hamblin

Pardon?

David Leiker - Robert W. Baird and Company

You moved existing capacity into that, right?

Connie Hamblin

Right.

Enoch Jen

Yes.

David Leiker - Robert W. Baird and Company

Have you added capacity to that or are you still working off of your old capacity?

Enoch Jen

We are in the process of adding additional capacity.

David Leiker - Robert W. Baird and Company

So your utilization right now is close to what you would call normal?

Enoch Jen

We have a lot of excess capacity from a plant capacity standpoint. I think from an equipment capacity utilization, we’re at fairly normal levels.

Connie Hamblin

It varies by what equipment it is. Certain equipment it is much higher on than it is others.

Operator

Your next question comes from Brett Hoselton - KeyBanc Capital Markets.

Brett Hoselton - KeyBanc Capital Markets

The additional CapEx that you’re spending, the $6 million, as I understood it that was the accelerated payments on an exterior mirror coating line? Is there any reason to believe that would be tied to any sort of acceleration in terms of your exterior mirror shipments?

Enoch Jen

I think our increase and our estimate was about $5 million.

Steven Dykman

$5 million, yes.

Enoch Jen

It just means that the coater is being completed at a faster rate during this year than what was originally expected, but it should not significantly affect the point at which the coater will be placed into service.

Brett Hoselton - KeyBanc Capital Markets

So you don’t see that as having any materially impact on your revenues or your margins in terms of your expectations?

Enoch Jen

No. Correct. We don’t expected to have any significant impact.

Operator

There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Jen.

Enoch Jen

Thank you very much for taking the time to join us on our third quarter conference call. If you should have any further follow-up questions, Connie will be available to answer those questions and we look forward to continuing to talk with you about the progress being made at our company. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation and have great day.

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Source: Gentex Q3 2007 Earnings Call Transcript
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