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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 ofFinance 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 GentexCorporation third quarter conference call. On the call with me today is EnochJen, our Senior Vice President; and Steve Dykman, our Chief Financial Officer.

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

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

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

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

Words like anticipates, believes, confident, estimates,expects, forecast, likely, plans, project and should, and variations of suchwords and similar expressions, identify forward-looking statements. Thesestatements do not guarantee future performance and involve certain risks,uncertainties and assumptions that are difficult to predict with regard totiming, expense, likelihood and degree of occurrence and actual results maydiffer materially from those in the forward-looking statements. The companyundertakes no obligation to update, amend, or clarify forward-lookingstatements, whether as a result of new information, future events, orotherwise. We urge you to review the full Safe Harbor statement that is containedin 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 beopened up for Q&A. As usual, we request that you to try to ask single-partquestions and try to ask one question at a time to allow all parties toparticipate.

Enoch Jen

Good morning. It’s a beautiful day in West Michigan. We are pleased to report record financial results forthe third quarter of 2007. For the third quarter, we reported revenues of $162.5million, which represents a 15% increase over $141.3 million that was reportedin the third quarter of 2006. For the first nine months, we reported revenuesof $483.2 million, which represents a 14% increase over the $422.7 million forthe 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 millionreported in the third quarter of 2006. Excluding stock option expense, for thethird 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 $90.3million, which represented a 16% increase over the $77.9 million in the firstnine months of 2006. Excluding stock options expense, we would have reportednet income of $92.3 million, a 13% increase over the $81.5 million that wouldhave been reported in the first nine months of 2006.

We also reported record earnings per share. For the thirdquarter, we reported earnings per share of $0.21, a 23% increase over the $0.17reported in the third quarter of 2006. Excluding stock option expense, we wouldhave reported earnings per share of $0.21 compared to $0.18 in the prior yearthird 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 $0.54in 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 quarterof 2006 to a $156.5 million in the third quarter of 2007. Total mirror unitshipments were up by about 15% in the third quarter of 2007 compared with thethird quarter last year. For the first nine months of 2007, automotive revenuesincreased by 15% to $464.8 million, compared with $404.4 million for the firstnine months of 2006. Total mirror unit shipments increased by 13% in the firstnine months of 2007 compared with the first nine months of 2006.

Unit shipments in North Americaincreased by 18% in the third quarter of 2007 compared with the same period in2006. The increase in unit shipments in North Americaduring the third quarter was primarily due to increased interior mirror unitshipments for certain domestic and Asian transplant automakers.

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

Unit shipments to offshore customers increased by 13% in thethird quarter of 2007 compared with the same period last year. The increase inunit shipments was primarily due to higher penetration at certain Asian andEuropean customers. Light vehicle production in Europeincreased by 6% in the third quarter and increased by 5% in Japanand Korea inthe third quarter of 2007 compared with the same period last year.

Unit shipments to offshore customers increased by 17% in thefirst nine months of 2007 compared with the same period last year. Lightvehicle production in Europe increased by 5% for thefirst nine months of 2007 compared with the same period last year. Lightvehicle production in Japanand Koreaincreased by 3% for the first nine months of 2007 compared with the same prior-yearperiod.

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

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

Looking at fire protection revenues, our fire protectionrevenues decreased by 3% to $6 million for the third quarter of 2007 comparedwith 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 periodlast year.

Looking next at our gross profit margin, the gross profitmargin of 35.1% in the third quarter of 2007 was slightly lower than the secondquarter gross margin of 35.3%,’ primarily due to annual customer pricereductions that were not fully offset by leveraging our fixed overhead costsand purchasing cost reductions. The gross profit margin increased on a year-over-yearbasis 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 marginin the fourth quarter will likely be in the range of the gross margin reportedin the second quarter of 2007 when we reported 35.3%. The gross profit marginwill continue to be impacted by annual customer price reductions, uncertainNorth American automotive production levels, our ability to leverage our fixedoverhead cost, purchasing price reductions and VAVE initiatives, andmanufacturing yields.

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

The litigation expense is related to the lawsuits betweenthe company and K.W. Muth and Muth Mirror Systems LLC -- collectively referredto as Muth -- that is related to exterior mirrors with turn signal indicators.Then turn signal feature in exterior mirrors currently represents about 1% ofour revenues and the litigation doesn’t not involve core Gentex electrochromictechnology. While confidentiality provisions preclude us from going into detailon this case, the complaint that we filed alleges that Muth breached anagreement.

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

Excluding the Muth litigation expense, ER&D expensewould have increased by approximately 14% in the third quarter of 2007 comparedto 2006. ER&D expense increased by 24% in the first nine months of 2007compared with the same 2006 period. Excluding Muth patent litigation expense ofapproximately $4.4 million, ER&D expense would have increased byapproximately 10% in the first nine months of 2007. Excluding stock optionexpensing and Muth litigation expense, we believe that ER&D expense willincrease 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 dueto continued expansion of the company’s overseas sales offices and foreignexchange rates. SG&A expense increased by 14% for the first nine months of2007 compared with the same prior-year period, primarily due to continuedexpansion of the company’s overseas sales offices and foreign exchange rates,partially offset by a reduction in non-income-based state taxes. Excludingstock option expensing, we currently believe that SG&A expense willincrease in the fourth quarter of 2007 by approximately 15%. This increase isprimarily due to continued expansion of overseas offices and foreign exchangerates.

Looking at other income, total other income increased by 51%for the third quarter of 2007 compared with the same prior-year period. Theincrease in other income was primarily due to realized gains on the sale ofequity investments. The breakdown of other income for the third quarter of 2007was 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, patentsand other assets were $8.7 million, accounts payable were $34.5 million, and accruedliabilities were $35.8 million.

Our tax rate in the third quarter of 2007 was 32.0% ascompared with a statutory rate of 35%, primarily due to the domesticmanufacturing deduction of stock option expensing. Tax benefits pertaining tostock option expense can vary from quarter to quarter due to incentive stockoption disqualifying disposition activity. The tax benefit pertaining to stockoption expense increased from 30% of the expense in the third quarter of 2006to 56% of the expense in the third quarter of 2007. Excluding stock optionexpensing, 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 $101.2million. Our capital expenditures for the third quarter of 2007 was $14.8million. Our depreciation expense for the third quarter of 2007 was $8.5million.

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

An update on our share repurchase plan. The company did notrepurchase any shares during the third quarter of 2007. The company has a sharerepurchase plan in place with authorization to repurchase up to 24 millionshares of the company’s common stock. To-date,including the prior share repurchases, the company has repurchased approximately18 million shares, leaving approximately 6 million shares authorized to berepurchased under the plan.

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

An update on SmartBeam, we continue to be pleased with theprogress we’re making and the market acceptance for SmartBeam, the automatichigh 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 yearCadillac 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 asBMW 5 and 6 series in North America. We are also shipping SmartBeam for the BMWX5 and the 3, 5, 6, and 7 series for Europe and otherselected regions.

We have equipped other European vehicles with the SmartBeamsystem and the feedback from customers continues to be very positive. Inaddition, we have equipped vehicles in the Asia Pacific region with theSmartBeam system and hope to have follow-on programs in that region in the2008-2009 calendar year timeframe. For the 2007 calendar year, we expect toship approximately 300,000 to 350,000 SmartBeam units.

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

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

Because the RCD mirror is offered as a standalone option onthe Ford and Lincoln programs, Gentex has contracted with an outside marketingfirm 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 theproduct, providing marketing materials, et cetera. We are in the process ofevaluating the impact this type of activity may have on the take rates forthose programs.

We also continue to work with several other customers onoriginal equipment development programs for this product. This is not a longlead-time product, so upon receiving a production order from a customer, wecould 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 ofaircraft at mid-year and volume production shipments are expected to begin atthe end of 2007. Despite Boeing’s announced six-month delay in shipments totheir customers, their instructions to suppliers have been that we are tocontinue to ship to the original schedule. Other aircraft manufacturers havealso expressed interest in this technology.

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

Looking at unit shipment estimates, the followingprojections for mirror unit shipments are based on CSM’s preliminarymid-October light vehicle production forecast. For the fourth quarter of 2007,our estimate for mirror unit shipment growth and revenues for the fourthquarter of 2007 is approximately 10% to 15% compared with the same period in2006, based on the current forecast for product mix.

CSM’s light vehicle production forecast for the fourthquarter 2007 is as follows: for North America, 3.6million vehicle units, which is a decrease of 1% compared to the fourth quarterof 2006. For Europe, fourth quarter 2007 production of5.5 million vehicle units, which is a 6% increase over the fourth quarter of2006. For Japanand Korea, 3.9million vehicle units, which is a 3% increase over the fourth quarter of 2006.

CSM’s forecast of light vehicle production for the 2007calendar year is currently as follows: for North America,15 million vehicle units, a decrease of 2% compared to 2006; for Europe21.4 million vehicle units, a 5% increase over 2006; and for Japanand Korea 14.7million vehicle units, a 3% increase over 2006.

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

Connie Hamblin

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

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

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from JohnMurphy - 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 takeimproved mix with products like SmartBeam and the rear camera display to getbetter pricing in margins as we go forward, along with the mirrors?

Enoch Jen

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

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

John Murphy - Merrill Lynch

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

Enoch Jen

We do not price by vehicle model, we really price by type ofmirror 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 thirdquarter?

Enoch Jen

Connie won’t let us. We are still, as you probably can tellfrom your notes; we are still sticking with our estimates for the full year of300,000 to 350,000 units, so the third quarter shipments were pretty much onplan.

Brett Hoselton - Keybanc Capital Markets

Looking at the mirror shipments, you had very strong mirrorshipments domestically -- the interior mirror shipments. What I’m wondering isas 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 andthen which segments of your mirror shipment should be the driver, in youropinion?

Enoch Jen

I think we have said that our expectation is over the next threeto 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 aspecific model year, the growth rate may fluctuate between the differentregions of the world. We had also talked about that even with a lot of thenegative press about the declining market share of the Detroitthree automakers, that we were actually gaining some significant new businesswith the Detroit three automakers,both on new vehicle platforms that they are launching as well as addingfeatures.

Brett Hoselton - Keybanc Capital Markets

In thequarter, was there a particular automaker that drove the increase in interiormirror shipments domestically?

Steve Dykman

That was across the board.

Operator

Your next question comes from Jairam Nathan - Banc ofAmerica.

Jairam Nathan - Banc of America

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

Enoch Jen

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

Jairam Nathan - Banc of America

Did the Accord help you in the third quarter or does it reallykick 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 quarteror 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 thesame level of improvement in your shipments as in North Americawhere 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 havestated previously, our growth rates are clearly tied to the specific vehiclemodels that our mirrors are offered on. If my memory is correct, I do think thestronger growth in Europe primarily was focused in thelower vehicle segments.

Connie Hamblin

One thing you need to remember as you are looking at theseunit shipments going forward, as more and more of the foreign automakers build transplantvehicles in North America, those unit shipments will be classified under NorthAmerica so it’s going to skew those numbers a little bit. It’s going to belittle 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 onthe RCDs with the Ford product? I know it’s a bit early and that you are startingthis marketing program with the top 200 dealers, but any feel for what theearly take rate is right now?

Enoch Jen

It really is too early to tell, Rich. Like you indicated thevehicles are just launching and so it’s difficult to figure out how much ispipeline fill, how much is initial orders from the dealers? Especially becauseit’s offered as a standalone option on the Ford and Lincoln vehicles. It’s hardfor us because we can’t tie it to a specific package. Like we mentioned, wehave engaged this marketing firm and we are hopeful that their efforts willresult 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 muchbetter understanding and I guess you will have some feel with the instructiongiven by this outside firm in terms of the impact? Would you say first quarteror would it take longer than that?

ConnieHamblin

It’sprobably going to take longer than that. I mean, virtually every programthat we’re on whether it’s the Ford program, the Mazda or even the Camry, weare standalone options or dealer or port-installed options so it’s verydifficult to predict with any certainty what these take rates are going to be. Untilwe see some consistency in the numbers and any reasonable ability to predictthese numbers, we’re not likely to give these numbers because one quarter theymight be 50,000 units, the next quarter they might be 25,000 units andeverybody is going to think the sky is falling, but that’s not necessarilygoing to be indicative of what’s going on. So we need to get a little historyand I think it needs to become somewhat material before you’re going to see us disclosingunits on those things. Once we start getting into some option packages whereit’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 belaunched by Chrysler Mercedes; that you didn’t pick up any vehicles, you haveall the vehicles that it was an umbrella contract before?

Steven Dykman

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

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 prettyconsistent with how it’s been or is there any change there?

Enoch Jen

No, the pricing is consistent with what we have discussedhistorically.

Robert Hinchliffe - UBS

There was a question earlier about ASPs and with some ofthis 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 reallyhelp to get that ASP number growing?

Enoch Jen

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

So it really comes down to product mix and features versusthe 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 pointus in a right direction for Q4, even into next year given the market isobviously real choppy, and you are getting a pretty good number there the lastfew quarters.

Enoch Jen

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

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

Operator

Your next question comes from Brett Hoselton - KeyBancCapital Markets.

Brett Hoselton - KeyBanc Capital Markets

The margins, typically you see a nice improvement, maybe a50 basis point improvement from the third quarter to the fourth quarter. Itsounds like you are expecting maybe a modest improvement. My question would be,why would you not see a more substantial improvement going from the thirdquarter to the fourth quarter in terms of your margins?

Enoch Jen

I think it’s probably a couple of things, one is I think ourthird quarter margin was probably year over year significantly better than whatit has been for the past several years. Ithink the other thing is as we continue ramping up our fixed overhead costs inanticipation of continued growth, we may not get as much leverage going fromthe 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, theRear Camera Display, at Toyota? Doyou think there is any relationship there or would you say that there really isno relationship between the two?

Enoch Jen

No, there is definitely a relationship. I think back when wefirst announced the RCD feature it was demonstrated on a Toyota Tacoma vehicleat the SEMA Show and if you look at our history with Toyotafor EC mirrors, we initially started with the three Toyotadistributors in North America -- South East Toyota, GulfStates Toyota and Toyota MotorSales. So, there is definitely is a correlation with Toyotabetween 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? Notthe footprint but in terms of manufacturing lines? What do you have in the newfacility 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 offof 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 wouldcall normal?

Enoch Jen

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

Connie Hamblin

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

Operator

Your next question comes from Brett Hoselton - KeyBancCapital Markets.

Brett Hoselton - KeyBanc Capital Markets

The additional CapEx that you’re spending, the $6 million, asI understood it that was the accelerated payments on an exterior mirror coatingline? Is there any reason to believe that would be tied to any sort ofacceleration 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 fasterrate during this year than what was originally expected, but it should notsignificantly 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 onyour revenues or your margins in terms of your expectations?

Enoch Jen

No. Correct. We don’t expected to have any significantimpact.

Operator

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

Enoch Jen

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

Operator

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

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