Gentex's (GNTX) Q1 2017 Results - Earnings Call Transcript

| About: Gentex Corporation (GNTX)
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Gentex Corporation (NASDAQ:GNTX) Q1 2017 Earnings Conference Call April 21, 2017 9:30 AM ET

Executives

Jordan Diekema - Director of Finance

Steve Downing - SVP and CFO

Kevin Nash - CAO and VP of Accounting

Neil Boehm - Vice President of Engineering

Analysts

Chris Van Horn - FBR

Rich Kwas - Wells Fargo Securities

Brett Hoselton - KeyBanc

Adam Schmitz - Robert W. Baird

Jason Rodgers - Great Lakes Review

Matt Stover - SIG

David Whiston - Morningstar

John Murphy - Bank of America Merrill Lynch

Jason Rodgers - Great Lakes Review

Operator

Good day, ladies and gentlemen, and welcome to the Gentex Reports First Quarter 2017 Financial Results Conference Call. At this time all participants are in a listen-only. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to introduce your host Mr. Jordan Diekema, Director of Finance. Sir, you may begin.

Jordan Diekema

Good morning and welcome to the Gentex Corporation first quarter 2017 earnings release conference call. I am Jordan Diekema, Director of Finance filling in for Josh O'Berski, and I am joined by Steve Downing, Senior Vice President and Chief Financial Officer; Kevin Nash, Vice President and Chief Accounting Officer; and Neil Boehm, Vice President, Engineering. This call is live on the Internet by way of an icon on 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 Gentex Safe Harbor statement included in the Gentex Reports first quarter 2017 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 give the first quarter 2017 financial summary.

Steve Downing

Thank you, Jordan. For the first quarter of 2017, the company is pleased to report net sales of $453.5 million, which was an increase of 12% compared to net sales of $405.6 million in the first quarter of 2016. The sales growth was driven by a 12% quarter-over-quarter increase in auto-dimming mirror unit shipments while overall automotive like vehicle production in the company’s primary regions increased by approximately 3% for the first quarter of 2017 when compared with the same quarter in 2016.

The gross profit margin in the first quarter of 2017 was 38.8% compared with the gross profit margin of 39.1% in the first quarter of 2016. The quarter-over-quarter net decrease in the gross profit margin was the result of annual customer price reductions, which was partially offset by purchasing cost reductions and favorable product mix.

Operating income for the first quarter of 2017 increased 11% to $134.4 million when compared to operating income of $120.8 million for the first quarter of 2016. Other income increased to $0.4 million in the first quarter of 2017, compared with a loss of $1.3 million in the first quarter of 2016, primarily due to an increase in investment income and realized gains on the sale of equity investments during the most recently completed quarter as compared to the same quarter of last year.

Net income for the first quarter of 2017, increased 22% to $97.6 million compared with net income of $80.3 million in the first quarter of 2016. Driven by the 12% revenue growth, as well as favorable discrete items that impacted the company’s tax provision in the amount of $5.6 million. The favorable discrete tax items included $3.8 million related to a change in tax method and $1.8 million related to newly adopted accounting guidance, which impacted the treatment of share-based compensation.

Earnings per diluted share in the first quarter of 2017 increased 18% to $0.33 compared with earnings per diluted share of $0.28 in the first quarter of 2016. The increase was primarily driven by the increase in net income on a quarter-over-quarter basis. During the first quarter of 2017, the company repurchased 1.5 million shares of its common stock at an average price of $21.01 per share.

As of March 31, 2017, the company has approximately 5.3 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, depending on macroeconomic issues, market trends and other factors that the company deems appropriate.

During the first quarter of 2017, the company paid down $40 million on its revolver loan in addition to its normally scheduled principle repayment on the company’s term loan, which in combination was $41.9 million in debt repayment during the quarter.

The company intends to continue to pay additional principle towards its loans in the future, depending on macroeconomic trends, capital expenditure spending, cash and money market interest rates. The amount of available free cash and other factor that are deemed appropriate for timing and amounts of incremental debt repayments.

I will now turn the call over to Kevin Nash with the first quarter 2017 financial details.

Kevin Nash

Thank you, Steve. Automotive net sales in the first quarter of 2017 were $445.6 million, an increase of 13%, compared with automotive net sales of $394 million in the first quarter of 2016, driven by a 12% increase in auto-dimming mirror unit shipments on a quarter-over-quarter basis.

Other net sales in the first quarter, which includes dimmable aircraft windows and fire protection products were $7.9 million, compared to other sales of $11.6 million in the first quarter of 2016. Operating expenses increased by 9% during the first quarter of 2017 to $41.4 million due to staffing, increased travel and overseas office expenses. The company continues to estimate that its operating expenses will be between $165 million and $172 million for calendar year 2017.

As Steve mentioned, the tax rate during the first quarter of 2017 was 27.7%, which vary from the statutory rate of 35% due to domestic manufacturing deductions, as well as the favorable discrete items mentioned earlier.

Excluding future impacts of the standard mentioned, the company continues to expect its tax rate to be approximately 31.5% to 32.5% for calendar year 2017. However the new standard will cause variability in the company’s effective tax rate going forward, depending on employee stock option exercise activity and the common stock price.

Now for some balance sheet items. The following balance sheet items represent a comparison versus December 31, 2016, which is also included in today’s press release. Cash and cash equivalents were $559.6 million, an increase of $13.2 million from $546.5 million, primarily due to cash flow from operations, net of accelerated debt repayments, capital expenditures, dividends and share repurchases.

Accounts receivable was $249.5 million, up from $211.6 million, primarily due to higher sales level, as well as timing of sales within each of the periods. Inventories were $197.1 million up from $189.3 million, primarily due to increases in raw materials.

Short-term investments were $176.6 million, compared to $177 million and long-term investments were $61.5 million, up from $49.9 million. Accounts payable was $77.7 million a decrease of $80 million, primarily due to the timing of payments within each of the periods. Accrued liabilities were $196.6 million, up from $69.9 million primarily due to a reclassification of $100 million of long-term debt to short-term debt.

Cash flow highlights, cash flow from operations for the first quarter of 2017 decreased to $131.2 million from $151.9 million in the first quarter of 2016, due to increases in net income that were more than offset by changes in working capital.

Capital expenditures for the first quarter were $27.1 million compared with $20.3 million in the first quarter of 2016. And based on estimated completion dates for the company's current and planned capital expenditure project the company is maintaining its capital expenditure guidance range in the $115 million to $130 million range for the calendar year 2017.

Depreciation and amortization expense for the first quarter was $25.2 million compared to the first quarter of 2016 of $22.8 million. The company continues to estimate that depreciation and amortization expense for the calendar year will be between $95 million and $105 million.

And I will now hand over the call to Neil Boehm for a product and technology update.

Neil Boehm

Thank you, Kevin. To begin we would like to provide an update on our full display mirror launches. As we've discussed previously General Motors was our launch customer for this brand new technology, and through the fourth quarter of 2016 our full display mirror product was available on six different nameplates in the GM line item.

Recently GM began showing the all-new 2018 Chevy Traverse on its website, which includes our Full Display Mirror or as GM calls it the Rear Camera Mirror as one of the primary features identified on the vehicle. This will be the 7th vehicle in the GM line to include our Full Display Mirror.

Also during the first quarter of 2017, we began shipping production full display mirrors to our second OEM. As we discussed previously, Gentex will the system supplier for a second OEM launch, which means the Gentex's content for this program includes the reverse facing camera in addition to the Full Display Mirror.

The details of this customer should be available on late second quarter once the customer begins their announcements of public marketing of all new technology. The Gentex's Full Display Mirror continues to gain strong interest from our customers for this vision enhancing technology and we remain excited about the future opportunities.

On the launch side, the company has continue to demonstrate solid growth not only for our inside and outside electrochromic mirrors, but also for advanced technology products that are often house inside of those mirrors. For the first quarter 2017, the company experienced 11 net new nameplate launches of inside and outside mirrors. This first quarter launch rate is consistent with the launch rate in the first quarter of 2016, which was a record launch here for the company.

These new launches consist of approximately 50% advanced features. Although this is lower than the mixed experience most of last year it is consistent with the percentage of advanced features in prior years.

Gentex continues to see strong launch rates for featured and base products of both inside and outside mirrors, which continues to be a leading indicator of our overall interest from our customers in our product.

I'll now hand the call back over Steve for 2017 guidance and closing remarks.

Steve Downing

Thank you, Neil. Based on the April 2017 IHS light vehicle production forecast and our current forecasted product mix and expense growth estimates. The company is making no changes to its 2017 revenue estimates of $1.78 billion to $1.85 billion and gross margins between 39% and 40%.

However, based on weakening light vehicle product estimates in Europe for the second quarter and in North America in the third quarter. The company expects its revenue estimates for the second quarter and third quarter of 2017 to be at or around the lower end of its annual guidance range, but expects the fourth quarter to return to the higher end of its annual guidance range. Based on the current product data from HIS, our 2018 revenue estimates also remain unchanged from previous guidance.

We'd like to take a few minutes just to thank all of our employees of Gentex globally for their hard work and dedication that resulted in our first quarter results. Especially given the supplier issues we have been working through since the fourth quarter of 2016.

We appreciate everyone's time today and we can now proceed to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Chris Van Horn from FBR. Sir, your line is now open.

Chris Van Horn

Good morning, guys. Congrats on another great quarter.

Steve Downing

Good morning, Chris. Thank you.

Chris Van Horn

So, on the Chevy Traverse just could you walk us through kind of how that came about and then what the penetration is going to be for that program, is it going to be all platforms or just certain platforms to start?

Neil Boehm

Yes, so on the penetration side as it’s been pretty common with the FDM roll out at GM it’s going to be limited to some trim levels. Actually on the Traverse they haven’t disclosed what those trim levels are yet. And so we are still waiting for GM to take the lead there and kind of walk through and show on their website what the packaging will look like for the products on the vehicle.

In terms of I think the second part of your question was about how that came to be in terms of adding that vehicle and really this is kind of what we’ve been talking about for a little bit as relates to GM's product strategy when they went down this path with us to developing this technology. That was really focused on kind of a broader execution.

We’ve mentioned early on that we didn’t think it would be limited to just the Cadillac lineup obviously the Bolt was kind of the first indication of that, but then also now adding the Traverse. We believe is a positive sign of GM's dedication to the product and how they are using as one of their vehicle enhancements.

Chris Van Horn

Got it, great. And then on the margin side, obviously every first quarter price reductions come through. Did anything standout at you in terms of was it one program, one customer, was it generally just across the board and how did this kind of relate on a relative basis?

Steve Downing

So, you are right Chris. Typically the first is the toughest one because we have a January 1, price down. We don’t get full benefit from our supply side, cost downs there. But nothing outside of the normal other than we had really strong mix in the fourth quarter because of product mix. And then some of that shifted back to more base mirrors in the first quarter.

So you saw a little bit of a headwind from that, but it should normalized kind of going forward from that that supplier should we saw in the fourth quarter.

Neil Boehm

And we should put that supplier did cause some of mix issues, fourth quarter to be higher than normal and then first quarter to be slightly lower than normal.

Chris Van Horn

Got it. And then just last one from me, obviously really strong showing at CES this is first time we kind of talk to you since then. Could you update us on the pipeline for some of those new technologies you introduced because I think there is some interesting things there?

Steve Downing

Yes, so I think if you look at the -- thanks for bringing that up to it was a strong show for us at CES in terms of new product offering. The thing -- where we are busy right now is we would kind of put this in a time period of probably 18 to 24 months before we have anything probably to announce from those. Just because the products were pretty cutting edge and it does take a while to get the customer interest and their understanding of those products and then try to find a way to make them fit into their strategic lineup.

But we have had a lot of meetings since then with OEMs going into deeper dive and what the aspects are of the products and then doing customer drive let them experience those products specially we talked about the camera monitoring system. And that’s something that we worked hard on and put together some development vehicles that have been position in various parts of the world. So that OEMs can get behind the wheel and experience what that product does like to drive.

What I can tell you is that it’s exchanged some of our relationships with our customers. We’re getting higher level meetings and we are having a lot more interest around those products than what we’ve had historically.

Chris Van Horn

Great, thanks a lot guys.

Steve Downing

Thank you, Chris.

Operator

And our next question comes from the line of Rich Kwas from Wells Fargo Securities. Sir, your line is now open.

Rich Kwas

Hi, good morning everyone.

Steve Downing

Good morning.

Kevin Nash

Hey, Rich.

Rich Kwas

Hey, just want to follow-up on that last question regarding 18 to 24 months. Steve, is that 18 to 24 months before you think you’d sign a contract or 18 to 24 months before it would go in any of those technologies go into production?

Steve Downing

Contracts, yes. So, we would be focused on there the sales and then the decision by the OEM and then obviously going through the [indiscernible] phase.

Rich Kwas

So then from a production commercial standpoint, it would be another 12 to 24 months after that?

Steve Downing

Yes, that’s a fair timeline. Probably more on the 24 side, especially when you start talking about CMS and that’s probably even a hair longer, because of the complexity of that product offering.

Neil Boehm

Yes the impact of styling on the vehicle.

Rich Kwas

Right. Okay. And then the launch FDM with the second OE, is that confined to one or two platforms or is that more broad based?

Steve Downing

The initial launch for this one was a single platform, obviously with each of these OEMs we're announcing we're expecting additional platforms over the next 12 to 24 months as they start to rollout the products.

Rich Kwas

Okay. And then, are you done with the discontenting that occurred last year with one of your European based customers is that fully lapped at this point?

Steve Downing

Yes I would say the bulk of it was last year, I mean you have a little bit of a vehicle that are rolling off, but 60%, 70% of that impact was really last year.

Rich Kwas

Okay. And then last one, I know I asked this question or someone asked it every quarter, but cash building you've indicated a greater willingness to do M&A, how should we think about it? Are you more likely to do a larger transaction if you will around actually buying an entity for a few hundred million dollars, or you’re partnering with some other folks around some of these newer technologies. Is that maybe more the route you take around trying to diversify the business and sustain the growth rate?

Steve Downing

Well the simple answer is and we're obviously open to all of those. And so, we're not opposed to the concept of looking at an acquisition that includes an income statement and a product offering -- existing product offering. Really over the last two years what we've been focused on is more on the technology side and that's kind of what you saw at the CES booth as more about taking a cutting edge technology helping us incorporate that and develop come to market strategy with that new tech.

But neither of those preclude the other, so I would say we're open to both obviously it's a very active market on the M&A front. So we've been investigating a lot of things for better, for worse we haven’t been able to find the deal that was -- we were able to close or at a price point that we thought was acceptable.

Rich Kwas

Okay, great. Thank you.

Steve Downing

Thank you.

Operator

And our next question comes from the line of Brett Hoselton from KeyBanc. Sir, your line is now open.

Brett Hoselton

Good morning.

Steve Downing

Good morning.

Brett Hoselton

First just to follow on the Full Display Mirror product, can you talk about what your thoughts are as far as future contract wins? In other words, as you look out over the next year, do you think that you'd be able to get another one, two customers on that or do you think that's optimistic or you think you might be able to get more. I know I'm not asking you to name the customers of course, but what's your general sense there?

Steve Downing

Yeah, I think you used one year timeline is that correct Brett?

Brett Hoselton

Yes.

Steve Downing

Yeah, if you look out at a year, I think it's reasonable to expect we get at least one more during that time period. One additional contract in other words with an OEM. And so we would use that as a reasonable expectation, it could be better than that obviously, but I think that's a pretty safe and reasonable expectation.

Brett Hoselton

Okay. And then switching gears HomeLink, you've talked about potential growth in China, can you give us a sense as to where is that at?

Steve Downing

Yes. So like we mentioned before it's just getting legs under it now. I believe in the next probably by the end of calendar year '17 we'll probably shipping about six or seven different nameplates. Fairly low volume applications, but nonetheless it's beginning of that marketing process of introducing that products. And then walking the customer through the experience and making sure that the used case is met and that we execute flawlessly with the product launch.

Brett Hoselton

And then finally, on the SmartBeam side, have you -- do you continue to get contract wins let's say over the past six months or a year something along those lines?

Steve Downing

Yes we've continue to have contract wins on the SmartBeam product. The one thing that we have talked about is that there is wins and losses obviously, the losses are predicated primarily on competition with forward driver assist systems. And typically our wins are coming in different type vehicles either the lower end of that of vehicles or on lower segment vehicles or in emerging markets.

And that's kind of been the trend and we expect that trend to kind of continue. In other words, as forward driver assist systems take off and start to become higher volume it does create a bit of a headwind for the business and we're looking for new ways to try to offset those losses in those lower segments or in those emerging markets.

Brett Hoselton

So net-net, SmartBeam revenue is probably going to be flat to down in some amount is that a fair statement?

Steve Downing

Yes I would say over the next year that's probably an accurate trend.

Brett Hoselton

Okay. And then finally, did you quantify the -- you obviously had some commodity issues here in the fourth quarter, and did you quantify the revenue benefit from the reversal of those as you moved into the first quarter?

Steve Downing

It was about a $3 million. We were about $3 million short in the fourth quarter from what we had not shipped and we kind of filled up back with that $3 million to $4 million of revenue. So not a major impact on the growth in the quarter, but we did pick it back up.

Aileen Smith

Thank you very much gentlemen.

Steve Downing

Thanks, Brett.

Operator

And our next question comes from the line of David Leiker from Baird. Sir, your line is now open.

Adam Schmitz

Hi, guys this is Adam on the line for David.

Steve Downing

Hi, Adam.

Neil Boehm

Good morning.

Adam Schmitz

Starting with the strength in international shipments, certainly Europe vehicle production was a positive in the quarter, but unit growth above market was stronger than it has been in recent quarters. Any launches or regions you can point to driving the outside?

Steve Downing

I mean if you look at it was especially in that European market, like we mentioned we had a pretty good years over the last five years, I mean really, if you take out last year and you look beyond that our growth rates there were pretty strong, last year kind of settled back a little, but then this year is kind of picking back up again.

If you look at it it’s really across the board, a lot of that’s driven by some of our frameless technology, there has been a lot of inside mirrors and obviously we have done fairly well enough on outside mirrors in that marketplace too over the last five years. So, I’d say it’s pretty well distributed across the board and across all OEMs.

Adam Schmitz

Great. And then turning to the camera monitoring system that you debut at CES. Now that you had some time to talk to customers, what has been the feedback on this product? And then for those customers what vehicle segments are they looking to launch this product in?

Steve Downing

Yes, so I’d say first what their reaction is and then we will kind of get into what their -- how OEMs make decision. So when you look at their reaction, I think especially when they drive it, so when we get vehicles in their local area where they can drive and experience the car. Their immediate reaction is kind of how -- what we expected it to be and why we came up with this product offering and that is they knew the limitations of camera and display only technologies and that’s what really had slowdown that evolution. Is that it doesn’t meet all the used cases.

So when we show this car, it’s kind of taking the best of both worlds combining them into a single product and they see the practical application and why that maybe a logical step. Now at it relates to how that influences their decision making that’s a long process I mean you talked about OEMs, very large organizations and a very critical part of the vehicle on safety of that vehicle are mirrors and displays.

So it takes time and that’s the big thing that we found is we have to distribute this product very widely inside of an OEM in order to get a positive decision or to get a sourcing commitment. So we think that still going to take quite a while, like we talked about that kind a year to two year decision making window before we will see any positive churns from that product offering.

Adam Schmitz

Great, thanks guys. I leave it there.

Steve Downing

Thank you.

Operator

And our next question comes from the line of Jason Rodgers with Great Lakes Review. Sir, your lines is now open.

Jason Rodgers

Good morning.

Steve Downing

Good morning.

Jason Rodgers

I wondered if you could expand a little bit more about the comments made on SmartBeam as far as revenues expected to be I think you said flat to slightly down was the comments over the next few years, why that’s the case? And that 6% to 10% revenue forecast for this year and next year I guess that would assume no growth from SmartBeam?

Steve Downing

Yes exactly. So when we gave the annual guidance for ‘17 and ‘18, those are net of those types of our trends inside of any one of the products. So that’s not -- that doesn’t take away from that growth rate projection. And really what’s driving that is just the acceptance and the wider penetration of forward driver assist systems in the vehicle space.

So in other words when there is already a camera on the car that’s doing line departure one in your forward crash obviously they don’t necessarily need to have a second camera to do lighting control. And so from an economic standpoint the OEMs are looking for the cheapest way to accomplish that feature set. And often times it’s going to be more advantages for them to add that type of content and software to an existing hardware module. And so that’s what’s causing most of the headwind.

Now what we have been successful at over the last few years and this has been the case for really the last five, six years since driver assist has started to rollout in higher volume, what we have been able to do is find lower segments like in other words in A, B, or C segment play or the lower trim levels on an existing vehicles. So in other words the entry level vehicle may have a lighting only and an upgrade to driver assist to higher trim levels.

And then the third area we have been able to find success is in emerging markets. So lower cost car markets where forward driver assist system hasn’t taken off or isn’t as widely accepted. And so that’s what’s caused kind of that flattish to slightly down play on the SmartBeam product, but we have been able to more than offset that with growth rates in our other product offerings.

Jason Rodgers

So long-term the high single-digit or so growth for the company can be achieved through HomeLink and the Full Display Mirror you don't necessarily need SmartBeam to grow, is that a fair statement?

Steve Downing

Yes exactly. I mean we're not one of the nice things and one of the things you see in the company kind of really work hard at over the last few years is expand that product offering. So we're not as dependent on any one product in order to get to above market growth rates.

Jason Rodgers

All right. And just looking at the updated guidance based on the forecast for automotive production. Would it be fair to say that second quarter will be more difficult than the third just given the drop in Europe that's anticipated? And is it possible that your revenue could drop below the 6% for the second quarter or do you still think it will fall in that range?

Steve Downing

Well, I'd say first, I don't think there will be much of a difference in second and third in terms of the headwind from production. Because if you look at Europe basically going to be down about 5% year-over-year in the second and North America is going to be down about 5 in the third year-over-year. So we look at those and when we kind a extrapolate our take rates on those production volumes, we look at and say, it's about an equal amount of headwind for us between those two quarters.

It's theoretically possible always that you can drop below your guidance, I mean depending on what actually happens versus what's forecasted to happen, but right now when we look at the guidance for second and third quarters, I mean we're still inside of our annual guidance range and we feel comfortable with that.

We don't see or feel anything happening in the marketplace that would drive it to be below that. And so we feel pretty comfortable with how we're positioned, but obviously we never say that it's not possible to drop outside of our guidance range.

Jason Rodgers

And just two quick number questions, what percent of your current mirror shipments are frameless and what was the total debt balance at quarter end?

Steve Downing

So the frameless volumes, we'd have to get back with you, I don't want to just speculate exactly what that percentage of frameless was versus all inside mirrors. So if you would like we could talk about that a little later. But I would say it's probably in that 15% to 20% range I would guess of total inside mirror shipments. But that's just shooting from the head we’d want to check the data to get you a firm answer there.

Kevin Nash

Yes and the debt balance is $136 million as of quarter end.

Jason Rodgers

Thank you very much.

Steve Downing

Thank you.

Operator

And our next question comes from the line of Ryan Brinkman from JPMorgan. Sir, your line is now open.

Unidentified Analyst

Hi, this is Soumik [ph] on behalf of Ryan Brinkman. Firstly, I wanted to go back to the comment about gross margin and then within the first quarter there is always the annual purchase price reductions we could see the impact, but when we look at the year-over-year I wanted to clarify if there was any impact from raw material inflation on a year-over-year basis. Because we’ve seen commodities run up over these last few months. And also if you can remind us what's your biggest spend in terms of raw material and how you're -- how do you tackle changes in prices? And in terms of are you hedged with your suppliers or do you have been able to pass them on to the OEM customers?

Steve Downing

Sure if you start first, if you look at the change year-over-year, basically what the net decrease was caused by was our customer -- our reductions to our customers and us not being able to fully offset those with our supplier cost reduction. So yes, you're absolutely right, that's the single biggest impact to the quarter. And what that -- and that's caused by as just as you mentioned it is a tougher commodities market.

Now we still feel comfortable that in Q1 especially it's hard for us because with our inventory levels you're still shipping most of the product that you ship in Q1 at still at prior year purchases. So you have last year's economics on the cost side and this year's economics on the pricing side.

Now we believe that will improve throughout the year as we roll through that inventory and get into 2017 cost basis of our materials. But the important part there is that yes, it did fall behind as PPV or our purchase reductions did was behind our pricing reductions to our customer and that's what caused most of the margin pressure.

Now and as it relates to tightening in the supply side, it is a tougher market in certain commodities. Most of our purchases in electronics, which has shown a pretty good trend overall over the last several years and we continue to believe there is opportunities on the electronic side.

When you start talking plastics and metals and some of the others as primarily the commodities that are struggling and have a little more pressure on them. So we have to work through design elements, engineering tasks and obviously contracts with our customers or with our suppliers to try to find ways to gain the efficiencies that we need.

Unidentified Analyst

And just quick follow-up on that. Is there ability to pass on these changes in the commodity prices of raw materials easier on platforms where you are a standard versus where you are option?

Steve Downing

No it’s a very difficult for us in this product and how we position ourselves and our products to gain relief from the OEMs on cost pressures associated with the supply side. Like we mentioned before, this isn’t really about -- this isn’t abnormal for us, in other words that you see a little bit of pressure in Q1 on the margin, as it relates to commodities pricing, which is something that we tend to work through throughout the year and get better at as the year progresses.

Unidentified Analyst

Got it, that’s helpful. And just a final question, today you’ve sort of spend some time highlighting the vehicle production environment that you’re seeing in Europe and also in North America and seems like that’s somewhat softer environment that you are seeing from the date at the start of the year. So just curious how do you think about sort of adoption or even customer appetite for your advanced feature products and the higher ASP products given in same environment where production sort of weaker, how do you think about the adoption of those now tracking?

Steve Downing

Sure, well there is two elements and we like -- and that’s a good question, because we like to spend a little time talking about there is two distinct elements as it relates to auto production. One element is the number of cars produced and if you look across the segmentation there is a lot of different economics associated with purchase decisions by consumers, anywhere from $15,000 to $150,000 cars.

And so it’s not just about how many cars are produced, it’s about what is the average content or price of those cars when they are consumed. And what you tend to see is that in this environment from since we are not seeing as much pressure on the technology side or on the pricing other vehicles as much as about the total volume.

And so one of the things we are focused on our OEMs are still interested in technology because they are differentiators for them and it is what the consumer is interested in seeing that technology advancement and deployment in the vehicle environment.

So we continue to work really hard to show them alternatives and unique products that we hope will help separate their vehicles and create a technology package that the consumer values.

Unidentified Analyst

Thanks for the color. Thank you.

Steve Downing

Thank you.

Operator

And our next question comes from the line of Matt Stover from SIG. Sir, your line is now open.

Matt Stover

Thanks very much for taking the question. Two things, one, just to clarify if you could just comment on your expectations for production, is that a reflection of the IHS numbers you are seeing, or are you making additional subjective decisions or judgments about productions schedules in particular regions?

Steve Downing

No, when we talk about that that is the pure IHS number. So when we look at the downside in Europe and downside in North America that was the end of March based IHS forecast.

Matt Stover

Yes. Okay. And the second question is if we look at the full display mirrors, how should we think about the margin impact to those products over the course of the next couple of years as their volume builds? Is that more favorable relative to the average at the average or below?

Steve Downing

In terms of revenue or gross margin?

Matt Stover

I am thinking gross margin.

Steve Downing

So, well look, we talked about the revenue aspect, so higher ASP obviously with those products and we believe the trend will be towards the corporate average.

Matt Stover

Towards the corporate average, okay. Thank you very much.

Steve Downing

Thank you.

Operator

Our next question comes from the line of David Whiston from Morningstar. Sir, your line is now open.

David Whiston

Thanks, good morning. I wanted to first start with biometrics. Just thinking long-term here, I mean what areas of that could you do more beyond iris scan, I mean could you do something like a fingerprint in a mirror or voice recognition, things like that?

Steve Downing

Yes, I mean, if you look at the possibilities, there is a lot of things that we have a skill set in that we could bring to the market. Historically we have shied away from anything that touches kind of the glass surface and the reason why it’s cosmetically not a great solution, when it comes to fingerprints and leaving fingerprints on a reflective surface it tends to look bad. It’s not to say that you can’t do it I mean, technologically it’s feasible, the issue is trying to find what do our customers want.

So what we are really focused on is how do we offer that kind of -- that security solution in a biometrics form with a very high level of security that fits the customers used case and what they want their customer experience to be. And so what’s interesting about this with the iris offering is it’s kind of taken us into different discussions with our customers that we haven’t had historically to trying to understand just that. What is their desire, what are they looking for, for their customer experience and is there a way for Gentex to play a part of that.

David Whiston

Okay. And international unit volume is growing much better than domestic or North American just particular for this quarter on the variance where is most of this international growth coming from?

Neil Boehm

Yes you typically you are going to see that David because of our higher penetration in North America. And so we did see like Steve talked about earlier Europe was pretty strong in the quarter but Japan and Korea actually performed very well for us. So the Korean customers have been kind of in a low lately, but this quarter was the strong performance and then Japan saw good growth there.

So it was really again a function of I think we’ve been talking about for a long time, Japan and Korea have been depressed, but they saw a little bit of a turnaround in the quarter.

David Whiston

Okay. And my last question is on the comments earlier on the production forecast and I believe in Q4 it’s going to be pick back up versus Q2, Q3 softness. What gives you confidence of that forecast by IHS will prove correct is it just the expectation on new model rollovers, product cadence?

Steve Downing

Well really when you look at it you're looking at year-over-year comps. And so the headwind from Europe and North America in Q2 and Q3 have a portion to do with this year and the product level but also the prior year's production level and how does that look. And so when we look at that forecast we feel fairly comfortable, we feel fairly comfortable with what those are going to be.

And typically you have the seasonality of the calendar year as it relates to OEMs and their product levels when we look at Q4 we don't see any of those numbers that look too far out of the norm versus what the OEMs are planning on. Now as it relates to Q2, we still have better color, I mean you're typically dealing and 4 to 12 week release when those from your customers.

And so where you start to get actual orders versus just IHS data, and that's what gives us the confidence around Q2 and starting to move into Q3. Q4 is really just a pure forecast at that point. But the point is as what we study as a regression analysis around IHS and how they do from a forecast standpoint three, six and nine months out, and we don't see anything that to us appears like it's a challenge beyond the numbers they're forecasting.

David Whiston

Okay, thanks so much.

Steve Downing

Thank you.

Operator

Our next question comes from the line of John Murphy with Bank of America. Sir, your line is now open.

John Murphy

Good morning guys. Maybe if I could just kind a follow-up on the question, is there anything outside of the production schedule specifically around your business on product launches that's creating some sort of pressure in the second and third quarter that might bounce back in the fourth quarter. So you wouldn't be as reliant on these schedules bouncing back.

Steve Downing

No, if you look at -- I mean, if you look at our launch cadence and what's happened with the business, we don't see anything on our side that would be changing in Q2 or Q3 that would then come back in Q4. You have normal roll off of old programs and restart some of them you have the normal cadence inside the automotive cycle.

Obviously IHS tends to be aberration [ph] in Q3 especially on shutdowns. And so part of that maybe driving the cut in production especially in the North American market in Q3. But aside from that, we don't see anything on our side that would be changing that growth rate story inside the year.

John Murphy

Got it, okay. And then just a second question and I apologize I don't think I’ve heard anything on HomeLink and sort of an update on take rates in industry through that business. I think you've talked about SmartBeam, is there any update on HomeLink and take rates and how that business is going?

Steve Downing

Yes, I mean if you look at since I'll kind of just back up really since the acquisition, we've posted pretty solid numbers on the growth story as it relates to HomeLink. So typically at about 10% really over that kind of three and three and half year period it's been running right around there 10% slightly above at times. We continue to believe that that kind of 6% and 10% growth rate that we've talked about corporately is right in line with what we expect HomeLink and what we’ve seen out of the HomeLink product in terms of penetration.

John Murphy

Okay. And then just lastly the $100 million doing from long-term debt to short term debt. I mean as I look at as far as I can tell a lot of maturities or all the maturities you have are September of 2018 so that's outside of 12 months. So just curious why that got reclassified to short-term debt.

Steve Downing

Yeah it’s just more of being a word our intent and what's going to become based on our payment schedules and what we planned to pay down over the next 12. And then obviously like you said once it becomes current, the rest of it will fold over into current at that time. So September that you should expect the full balance to become current after the third quarter.

John Murphy

So it’s a clear signal that a big $100 million chunk and this is going to get paid almost six months early right is a simple way to put it?

Steve Downing

Yes I mean if you look we've been averaging between $20 million and kind of $40 million a quarter depending on cash flow from operations and how it’s looking and in preparation honestly for that October ‘18 maturity of the debt.

John Murphy

So I guess there is no rash -- I mean there is no thought process of potentially trying to roll this debt in the market, it seems like you guys are just heading towards the pay down path.

Steve Downing

Yes exactly, and the reason why primarily it’s a variable rate debt today obviously there are speculation or what those rates are going to look like. We feel like we are in a better position to go ahead and pay that down and then if an acquisition presents itself, obviously we can always kind of reschedule or re-up a new borrowing to cover that new target. But based off of the operations of the business our cash generation model and where we are headed, it’s a definitely a sign that we’re intending to pay that all off by the fall of ‘18.

John Murphy

And I’m sorry to put a final point right it means that you guys will let out those facilities expire won’t re-up them unless you see some other kind of opportunity emerge over the next 12 months or in couple years whatever?

Steve Downing

I mean that one is just a function of those instruments and if they’re very effective inexpensive to have them available, we will. Obviously we’re not going to carry cost that we don’t need. If we don’t see a target on the horizon it looks like we need the availability of cash.

John Murphy

Great, make sense. Thank you very much.

Steve Downing

Thank you.

Operator

Our next question comes from the line of Jason Rodgers from Great Lakes Review. Sir, your line is now open.

Q – Jason Rodgers

Thanks for taking the follow-up. Do you have the growth rate of SmartBeam revenue was in 2016?

Steve Downing

I’m sorry, can you say that again?

Jason Rodgers

The SmartBeam, the revenue growth rate for SmartBeam in 2016?

Steve Downing

In ‘16 it was -- I think it was mid-single-digits.

Jason Rodgers

Okay. So just to be clear you are expecting that to be flattish or so going forward?

Steve Downing

Yes, flat to down.

Jason Rodgers

Okay. And as far as HomeLink, what is the current penetration rate of HomeLink in U.S.?

Steve Downing

Yes right around 50% right now.

Jason Rodgers

Alright. Thank you.

Steve Downing

Thank you.

Operator

I’m showing no further questions. And I now like to turn the call back to Mr. Jordan Diekema for final remarks.

Jordan Diekema

That's all from us guys. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program and you may all disconnect. Everyone have a great day.

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