Good day, ladies and gentlemen, and welcome to the Gentex Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to introduce your host for today's conference Mr. Josh O'Berski, Director of Investor Relations. Sir, please go ahead.

Thank you. Good morning, and welcome to the Gentex Corporation second quarter 2018 earnings release conference call. I'm Josh O'Berski, Gentex’s Director of Investor Relations, and I'm joined by Steve Downing, President and CEO; Kevin Nash, Vice President of Finance and CFO; and Neil Boehm, Vice President of Engineering and CTO. 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 content of this conference call. This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex Reports Second Quarter 2018 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'll turn the call over to Steve, who will give the second quarter financial -- 2018 financial summary.

Thank you, Josh. For the second quarter of 2018, the company reported net sales of $455 million, which was an increase of 3% compared to net sales of $443.1 million in the second quarter of 2017. When compared with the company's mid-April forecast for the second quarter of 2018, actual light vehicle production in North America declined approximately 3%, which resulted in lower than expected unit shipments and revenue during the quarter. Additionally, OEM shutdowns related to a supplier fire caused a revenue headwind of approximately 1% during the quarter. The second quarter of 2018 revenue growth rate fell just outside of our guidance range for the year, which although disappointing is explainable when viewed in the context of production levels by region and segment. The overall production levels in the North American market were down 3% quarter-over-quarter and the luxury segments defined as D and E segment vehicles were down over 3% quarter-over-quarter in our primary markets of North America, Europe and Japan and Korea. Our total net growth rate of 3% in a quarter where luxury segments were down 3% in our primary markets, represents an outgrowth to the underlying market of 6%. While we are happy with this level of growth, we remain optimistic about the second half of 2018 based in part on our product launch cadence of full-display mirror nameplates over the balance of the year. And while we continue to monitor the production levels in our primary markets, we still believe that the second half of the year will be closer to the top-end of the range of our annual guidance. For the second quarter of 2018, the gross margin improved to 38% when compared to a gross margin of 37.7% in the second quarter of 2017 and from 37.1% in the first quarter…

Thank you, Steve. For the next few minutes, we'd like to spend some time discussing additional details of the second quarter, key factors that drove the second quarter results, and points of consideration as we move through the remainder of 2018. Automotive net sales in the second quarter of 2018 were $444.2 million, an increase of 2% compared with automotive net sales of $433.9 million in the second quarter of 2017. Which was aided by an 8% increase in auto-dimming mirror unit shipments on a quarter over quarter basis, but partially offset by certain advanced feature headwinds, primarily related to Driver Assist sales. Other net sales in the second quarter of 2018, which includes dimmable aircraft windows and fire protection products were $10.7 million, an increase of 16% compared to other net sales of $9.2 million in the second quarter of 2017. One of the main focuses of our capital allocation strategy that was established earlier this year was a reduction in our target balances for cash and investments to $525 million by the end of calendar year 2018. As of June 30, 2018, the combination of cash, short-term and long-term investments were $609 million, down from $779.9 million as of December 31. The primary drivers for these overall reductions were also part of our capital allocation strategy, which included increased share repurchases and accelerated debt repayments. In addition to capital expenditures and an increase to the company's dividend rate earlier this year. The current mix between cash and investments may change on a quarterly basis. Related to changes in liquidity requirements, fluctuation in interest rates and fixed income investment maturities and reinvestments. Accounts receivable for the quarter was $239.4 million as of June 30, up from $231.1 million as of December 31, primarily due to higher sales levels on a period-over-period basis. Inventories were $212.4 million as of June 30, down from $216.8 million as of December 31. Accounts payable increased to $106.8 million as of June 30, from $89.9 million, due to timing of certain payments. And accrued liabilities were $107.6 million as of June 30, down from $153.8 million as of December 31, primarily driven by accelerated debt repayment. Now for a couple of cash flow highlights, for the second quarter of 2018, cash flow from operations was $144.9 million, compared with $132.3 million in the second quarter of 2017, driven by increased net income and fluctuations in working capital. CapEx for the second quarter of 2018 was $25.6 million, compared with $29.1 million for the second quarter of 2017. And lastly, depreciation and amortization for the second quarter of 2018 was $27.9 million compared with $25.2 million in the second quarter of 2017. I will now hand the call over to Neil for a product update.

Thank you, Kevin. In the second quarter of 2018, there were 17 new nameplate launches of our inside and outside electrochromic mirrors and electronic features net of previously disclosed feature headwinds. During the second quarter, approximately 60% of the net auto-dimming inside mirror launches contained advanced features. The second quarter was highlighted by increased launch levels in HomeLink and Full Display Mirror applications, as well as four new inside auto-dimming mirror applications for domestic China OEMs. Now for a quick update on our Full Display Mirrors product. In the first quarter of 2018 conference call, we discussed that our launch cadence would have us shipping Full Display Mirrors on at least six additional nameplates through the second half of the year. Having just crossed over the midpoint of the year, we remain confident in our product launch cadence for Full Display Mirrors in the second half of the year, and we're on pace to complete the launches necessary to achieve our target of 500,000 Full Display Mirror unit shipments in calendar year 2019. Also, we're pleased to announce that during the second quarter of 2018, we were able to secure Full Display Mirror business with our seventh OEM. The startup production for this OEM will be in the 2020-2021 timeframe. Full Display Mirror continues to be well received by our OEM customers and we’re optimistic that we will receive an additional award from an eighth OEM around the end of 2018. Now we’d like to provide an update on the sales and business development activities surrounding our Integrated Toll Module. We’re pleased to announce that during the second quarter the company has officially signed agreement with two additional OEMs to launch our ITM product. Both of these OEM launches are targeted to begin production shipments in the 2020-2021 time period. I will now hand the call back over to Steve for 2018 and 2019 guidance and closing remarks.

Thank you, Neil. Based on our mid-July vehicle production forecast as disclosed in our press release the company currently expects revenues in the second half of calendar year 2018 to increase between 7% and 10%, when compared with the second half of calendar year 2017 and as a result we have updated our revenue guidance to be between $1.88 billion and $1.91 billion for the year. Based on our year-to-date gross margin performance as well as taking into account recently enacted tariffs related to imports from China we are updating our gross margin guidance for the year. We are currently estimating the impact of tariffs to be between $5 million and $8 million for the second half of 2018. Based on the actual gross margins year-to-date and the impact of the tariffs, we are updating our gross margin guidance to be between 37.5% and 38.5% for calendar year 2018. We continue to monitor and evaluate the impact of these enacted tariffs along with other potential import and export tariffs that maybe implemented by other countries and affect our raw materials or finished goods. We’re adjusting our range of operating expenses down to be between $180 million and $185 million for calendar year 2018 as a result of our year-to-date operating expenses. Based on year-to-date capital expenditures and timing of new projects over the balance of the year the company is lowering its capital expenditure estimates to be between $110 million and $120 million for calendar year 2018. We are making no changes to our estimates for depreciation and amortization or estimated tax rate for calendar year 2018. Lastly based on 2019 light vehicle production forecast and current forecast at product mix, the company is making no changes to its previously announced revenue estimates for calendar year 2019, which continues to be estimated to be over and above our 2018 revenue estimates in the range of 5% to 10%. The first half of 2018 has been challenging, but the company continues to be focused on delivering higher growth rates and gross margin performance in the second half of this year, based on our technology roadmap and Full Display Mirror. Thank you for your time today, and we can now proceed to questions.

[Operator Instructions] Our first question comes from the line of Chris Van Horn with B. Riley. Your line is now open.

Good morning, guys. Thanks for taking the call and congrats on the Full Display awards.

Thanks, Chris.

Just first off could you give us some details on some of the gross margin headwind in the quarter, was it pricing related, was it product mix any additional details you could share on that?

Thanks, Chris. During the quarter actually we saw if you recall sequential improvement both sequentially and on a year-over-year basis. So really we saw a good performance out of the product mix, primarily due to some underperformance on some driver assist features that was buoyed by growth in our outside mirror product and some of our other advanced features. So we’re pretty pleased given the lower sales growth that were able to help offset our manufacturing cost inefficiencies with other costs and then getting a little bit better performance out of our purchase -- PPV or our purchasing cost reductions. So we’re pretty pleased given the 3% sales growth with that expansion in margin both on a year-over-year basis and sequentially.

Yes, Chris I would just say that that’s the single biggest headwind that you can’t offset or wasn’t offset in the quarter was the one Kevin mentioned at the end. In other words, if the growth rate were higher, we would have seen a little bit more margin expansion.

Okay, that’s what I was getting at. Okay, that makes sense. And then what’s driving the International growth. You’ve seen really consistent double-digit growth there on the mirror shipment side, is it new customers, new launches, both, more content, what's kind of driving that?

Can you ask that again, Chris?

I'm sorry. So on the international side, the shipments continued to rise double-digits. And what's driving, is that new customers, new nameplates, both; is it additional content as well?

Yes, sorry. It's primarily penetration rates of existing customers. So I mean as it relates to the number of customers we have, we pretty much ship to all the major European OEMs. So there is not like a new customer per se. But what it does represent is the products being added to more vehicles and more nameplates and then of the nameplates that we are on at higher take rates. So it's really kind of that spread of the product across much more of the population of vehicles produced in the European and Asian markets.

Okay, got it. And then Full Display Mirror obviously tracking very well in terms of award activity. Probably can't give a lot more detail on the new awards, but is it -- these are obviously new OEMs to the platform? Is it a single program to start or is it multiple programs? And then how is the rollout going with the existing customers and what's kind of in the feedback so far on that?

Great question. So this is Neil. The question about the additional customers, the initial ones always start with a primary project or primary program to begin. And then there will be a rollout strategy that forms as we get closer to that timeframe. In regards to the existing customers, when we talked in Q1 about, I think we announced 15 nameplates, 14 or 15 in Q1 and we're talking about at least six additional. That was expansion on the existing customers that we already have. So that continues to go really, really well. You'll see those starting to come out here in the next quarter, you’ll see those publicly be visible and we're excited about that continuing to grow through the end of the year.

Okay, great. Thanks for all the color. I'll hop back in the queue.

Thanks, Chris.

Thanks, Chris.

Our next question comes from the line of David Leiker with Baird. Your line is now open.

Hi, good morning. This is Joe Vruwink for David.

Hi, Joe.

On the China tariffs, is qualifying secondary suppliers elsewhere in Asia a possibility? And if you do look to do that, is there a timeframe associated with that? I'm just wondering if the $5 million to $8 million is maybe the worst case scenario thinking about it, and things you can do over time you'd expect to actually mitigate that impact?

Well, I'd say the $5 million to $8 million is kind of the -- kind of worse case range, but that's only looking at the tariffs that are enacted currently. Obviously, every day you open a media report, there is more discussion. So I don't want to prognosticate on what the future holds as it relates to tariffs. As it relates to our ability to offset those, the first possibility is that many of our suppliers have locations in multiple countries in Asia. And so our preference would be to stick with our current supply base and hopefully find different sources of -- different countries that they can source those products out of produce those out of to hopefully avoid some of those. That does take time. The kind of the second plan would be obviously to find either new suppliers that could produce in different areas where that aren’t subject to the tariffs. That validation is quite longer. They're talking about a pretty significant -- remember every product that we build is every sub-supplier is approved and then that product gets validated as a final finished good. And so to change your sub supplier means you have to redo that validation process. So that would take a lot longer. You're looking at probably typically a 12 to 18 month process and quite a bit of expense to make that happen. It's not impossible, and if it makes sense we would look at it, but our preference is obviously to try to find other creative ways around those as much as possible.

And then the $5 million to $8 million, so that's really kind of a gross impact and thinking about your product, your option product that your customers markup make a lot of money on. So do you have the ability do you think overtime to reprice of your customers’ understanding there is inflation here. And so then that front just pricing could offset those?

Well, it would be interesting. The industry hasn't really addressed that question yet. So the tariffs just took effect so. It will be interesting to see how the supply base as a whole addresses this with OEMs as it relates to the cost increase to all the products. So it's difficult to say at this early stage how much tolerance OEMs will have towards price change is related to tariff structure.

Okay. And then on the industry dynamics and calling out DE segment underperformance. So this has been going on a while now in this quarter it actually looks you’ve gotten worse whereas globally production accelerated quarter-over-quarter. So is there anything on the horizon either industry wise customers in the DE segment just have more new product launching, so you’d expect some market share benefit or maybe Gentex’s own program launches are going to lower exposure to DE overtime, anything there you would call out to say that well it’s been a headwind the headwind should lessen. Or does the outlook into the second half essentially assume that DE segment performance isn’t getting any better?

Well, I think if you look at the forecast, I mean the Q3 in particular I mean in North America strengthened is quite a bit and even in the segment. So as we look forward, we don’t see this necessarily being a trend that continues where D and E continues to underperform the market we think it will stabilize at some point. The other part about this is, is that as a lot of OEM start to focus on more cross-over type vehicles versus traditional sedans, historically that’s represented a positive kind of vehicle lineup for us in our products. So we’re still optimistic that if you look at where production is heading, if you look at the macro-trends it doesn’t seem to show that production itself is declining significantly. And we think that our product mix including our Full Display Mirror launches will help position us very well to continue to grow in this production environment.

And then my last question on Q3 and really the second half with WLTP going into effect in Europe some of your European customers have called out just needing more time to produce the same number of vehicles. And so you’d expect some inefficiencies and Q3 impacts on production have you factored that in so I just obviously as a forecast that you’re getting customer call-offs is that anticipated in the second half views you’re providing?

Yes, between the incoming forecast that we use from our forecasting suppliers and then our own analysis and then also the call-offs from OEMs for the next quarter. So we look at all those inputs to drive our forecast and right now we don’t see that being a significant impact to our forecast in Q3.

Great, thank you.

Thank you.

Our next question comes from Rich Kwas of Wells Fargo Securities. Your line is now open.

Hi, good morning everyone.

Good morning, Rich.

Just following up on the last point, so we shouldn’t think of the balance of the year meaning Q3, Q4 it should reflect normal seasonality largely speaking revenue wise?

Yes.

All right. So these impacts in Europe is such not enough to move the needle against normal seasonality in your view at this point?

Correct and really what you’d see is there is a -- there maybe a modest impact to that from more of the normal seasonality, but that’s more than offset by our production launches Full Display Mirror launches and other product launches. And so that growth rate accelerating in the second half is what we’re seeing.

And you probably gain some lift from post Meridian fire right in Q3 stuff…

Yes, that was like a about a 1% headwind in Q2 though and honestly like at these production levels it’s tougher them to catch up if they catch up that loss production time, but you would expect the modest tailwind in Q3 from that.

Okay. And then on the tariff, the $200 billion that’s being contemplated where they put 10% on the…

Or the 500 from this morning.

Yeah, you know it's pretty fluid topic these days. But I mean with the 200 though, let's just -- since that's -- we can't really put any numbers around, I mean, figure out what obviously they presented some [ph] this morning. But I mean the 200 billion been out there for a few weeks now. What -- how should we think about that potential incremental impact? I mean I imagine it's probably fairly limited for '18 but what would be your exposure on a gross basis? Any kind of estimate we can think about particularly as we think about '19?

Yeah, our supply chain team does not like Steve or I, right now. So -- perfectly okay [ph] with that because they've been crunching the numbers over the last couple weeks as these -- I think, it covers about 6,000 HCS codes, which we are inside of those. And right now our estimate is pretty broad, and we don't have all the numbers, but it's probably on an annual basis, call it $5 million to $10 million depending on, again where we source, if we can resource stuff out of a different country other than China, but it's somewhere in that range, potentially higher once we quantify all that. But again that's not enacted yet and like Steve said at this moment, they want to have tariffs on all $500 billion coming in. So I think that's what we've done at first log on [ph] but it may change.

Yes, sure.

…but it's not -- definitely not too impactful. But it's certainly something we're working on and looking at it and trying to figure out a way through.

Alright. So it's five to eight for the balance of this year. Then you get -- with related to the first 34, would you get another five day right for the first half of next year? Because it's half year right?

Yes, exactly. You’d have to analyze that five to eight for 2019.

And then on top of that, if this goes into effect, it would be 5 to 10 on the annual basis?

Correct.

Okay. Alright, good.

Additionally.

And then, just in terms of Europe the proposed section being NXB [ph] of European tariffs. So that would go into effect in 2021. I mean, does that have -- obviously it doesn't have any impact in the near-term. But how do we think about the ability to from a quoting standpoint, where you go to market, you're bidding, you got your cost structure in place, everything's done here. How do we think about potential being at a disadvantage versus some of your key competition that would have manufacturing capacity in Europe?

Well, it's something that's just starting to play out. Obviously, the European side has a longer horizon. So we believe there's a lot a lot more changes that could come over the next 18 months to two years that could impact that. But it is something that we're going to be looking at and talking with our OEM customers about as we move forward, that if this becomes very prohibitive to doing business, we're going to have to get creative with solutions around how we can make sure our costs get to those customers on a cost effective way. That doesn't change our take rates.

Right. Okay. I mean, it's just something to think about as we -- you go and start to bid stuff out for 2021.

Right. Absolutely.

Lastly, just buyback, it was elevated versus what you were kind of targeting. I think, at least publicly around $100 million a quarter. So just how should we thinking about the second half of the year?

Well, remember the first half -- the first quarter was actually a little lower. If you take out the one-time repurchase at the beginning of the quarter from Fred shares, then you look at Q1 was actually below the 100 I would think it’s in the mid-80s. And so, we were playing a little bit of catch up from Q1. And then the other part of it, which has been situational, some of the numbers we believe were very favorable, has a repurchase price. So we picked up that pace a little bit at the end of the quarter.

Okay. But the $425 million still a target for the year?

Roughly. Remember the primary target is the net cash position at the end of the year. And so that's what we're focused on is as on December 31 being around that $525 million in cash and short and long-term investments. And so, the difference there and what the gas pedal get pressed if cash generation accelerates we will be a little bit more aggressive on the repurchase side.

Okay, great. Thank you.

Thank you.

Our next question comes from Anthony Deem with Longbow Research. Your line is now open.

Hi, good morning, gentlemen.

Good morning, Anthony.

Good morning.

I just wanted to dig into a near-term issue then long-term stuff. So, on the second quarter revenue I miss is that -- so Driver Assist seems to be the culprit. Was that related to the Mobileye rolling off or just greater than expected smart weakness in SmartBeam in general. Can you just expand on that comment?

Yes, it was really both. If you look at a couple factors, one of them was the Mobileye, the beginning of the Mobileye roll off. The other factor was the Meridian fire impacted forward pretty significantly. And so all of our Driver Assist businesses with Ford currently. And so that did impact the Driver Assist orders, the Mobileye Driver Assist orders in the quarter. And then the SmartBeam -- some of the SmartBeam headwinds that we discussed in the last few quarters were part of that as well.

Got it. And then weaker than expected shipments, they're still up 8%, which is pretty strong. So I would assume the plant fire was around 100 basis points. So was the expectation around 9%, or it was a weaker production maybe another 200 basis points on top of that? So maybe the expectation going into the quarter was low double-digits? Or something along those lines?

Yes, absolutely. We are looking at low double-digits kind of on a unit growth basis going in and we are also on the top-line side in terms of dollars, we were expecting that to be more on the 5% to 6% range. So the fire was about 100 basis points, and then we believe there was another 200 points of like we mentioned the customer orders changes in the quarter for the quarter and primarily driven by D&E segment production in the North American market being a little below what everyone was predicting for the quarter.

Got it. And I have two questions on the product wins on ITM and FDM. So on ITM it's great so up to three OEMs I believe. You had one win before if I'm not mistaken. I'm just wondering within the two announced today. Are those mass market or more German OEMs. Can you help expand on who the customers might be?

So yes, you're right. We do have three now one goes production late this year. And the other two are more luxury side vehicles, luxury brand vehicles.

Okay. And then on FDM. So you're optimistic you can win another OEM by late this year. Is that going to be on the gen 2 FDM or are you still bidding the gen 1 there?

That would be on the gen 2.

Okay. So then just lastly, so thinking about Gentex's long-term, is it a fair statement if I said the potential level five offerings today are focused exclusively on connected car and maybe dimmable cabin features as oppose to vision solutions. Is that going to be the case longer term, or is your team plan to compete to be a provider of like vision technologies that might actually decontent the exterior interior mirrors of the backup safety device. I mean you see the new Mitsubishi product being talked about this year in Japan that's available next year that seem so. I know Gentex has an in-house developed imager today I think with FDM. So is this technology applicable to future innovations and continues to expand on any additional level 5 vision offerings?

Sure. If you look at our Full Display Mirror, we believe that's the leverage point to introduce a full camera monitoring system into vehicles. That's what we're showing at CES the last two years' models that vehicles that we prototype that show how smaller mirrors in combination with cameras and displays can be used as a supplemental vision system. What we tend to take a strong point on though is that in order to guarantee safety that redundancy is incredibly important. We believe most OEMs have reached a very similar conclusion that in theory of completely digital solution if possible and practice, it's very hard to pull off and it's very difficult to convince consumers the 100% of people will like that type of technology. Our experience says that many people enjoyed digital displays some do not. And so what we're offering is a combination our hybrid solution that does all of the above, we continue to believe it's best-in-class from a safety and reliability and dependability standpoint. So yes, we absolutely intend to continue to be a supplier of cameras and vision systems and displays to help bring about that kind of autonomous car of the future.

Okay. If I can say one more in here and I appreciate the time. Can you give us an update on maybe the digital rear and side vision systems. And your products roll in level 3, level 4 autonomous. At CES when I visit you guys, I was under the impression that the CMS technology was production ready no longer proof of concept. So just wondering here if we're still under development phase or if you're in RFQs with the CMS. And thank you.

Yes, Anthony, it's still in the development stage proof of concept stage with customers. So because of the change in the combination of mirrors with cameras as Steve was just talking about. We're still in that kind of business development process of selling the product and working with customers on how it can fit into the strategy going forward. So there is no RFQs at this stage yet. And we are working through that process with a couple of different customers. And hopefully we'll have a better update in the future on the progress of that.

And it's important to remember. Most OEMs haven't made clear decisions yet on what direction they're going take as it relates to this type of technology. So this is still very early in the decision making phase for most OEMs. The vehicles that you referenced typically are low volume applications and unique applications by an OEM to kind of beta test this in a very unique market. And so we keep an eye on that, we participated in some of those in the past, but what we're really focused on now is actual volume production program trying to find one that make sense for an OEM.

Okay, thanks for taking my questions.

Yes, thank you.

Our next question comes from John Murphy with Bank of America Merrill Lynch. Your line is now open.

Good morning, guys. First question on the trade stuff, I mean this is sort of a new world order for a lot of us. I mean, I've been looking at this for 20 years and this is all kind of new it's tough for us to all figure out. When you look at what's going on with the proposed tariffs in Europe. I mean is the timeline really 2021 or is there the risk it gets pulled forward or change, I mean, what have you heard on that and it’s kind of where did they kind of shooting at rear view mirrors it’s a rare product for them to pick out just curious why you think that happened?

It’s always -- it’s fascinating to watch how things develop. There is a lot of items covered in those categories. So I think it’s probably more looking at generic kind of big picture areas. And looking at probably industries and then trying to find ways to put a tariff or a duty in place that makes sense. In terms of prognosticating about pull ahead, I wouldn’t go so far as to try to guess how that’s going to happen what we do know is right now the EU has been pretty good about when they give a timeline probably holding to it, it doesn’t mean it couldn’t amp up and change. But right now our plans are around what we know to be true and that is that’s a timeline we’re working with. So we’re hoping obviously that this just settles out and become some type of a negotiated settlement that makes sense. If not we’re going to be prepared to do what we need to keep the business moving forward.

And I guess there’s two responses, I mean, working with your -- I mean, presuming this goes through working with your customers to try to get pass this through and make yourselves hold or potentially open up a facility over in Europe. I mean, I know you guys have been very tightened here in Michigan, which seems to have made a lot of sense so far the world has normally worked, but it’s changing, I mean, is that something you would consider three, five years down the line if it made sense?

Well, like I mentioned before, I mean we’re going to do what we need to, to keep the business moving forward. So we’re not -- every day we will come into work obviously we have to assume that there are no sacred cows and you have to be willing to look at every situation differently. And if this were to negatively impact our ability to grow or to actually start hurting sales, of course we would have to consider alternatives. We’re still hopeful that this shakes out in a more reasonable fashion and that our current business model can work because that’s the one we feel most comfortable with and most confident in we believe has produced the most return for shareholders. But that being said, if something changes of course we’ll be willing to do what we need to.

Okay. And then just a last question on coating activity and kind of following up on where costs has gone before, have you seen any change in coating activity in response to this. But then also sort of all the other uncertainties that are kind of popping up in the world right now where you see maybe some of your customers hit pause on your incremental capital investments and maybe things have slowed down a little bit. Or is it really just business as usual and you’re not seeing any change in sort of any marked change in sort of RFPs and all that kind of stuff?

No, I don’t think you would ever see a change in RFPs or core process because of this. What you would tend to see the most logical reaction would be the OEMs are going to drive the product strategy that they believe in. However it would typically impact you is in once you get to that time period it would probably be more likely to impact take rates than it would sourcing of a product, in other words instead of if this were to happen and it was a worst case scenario instead of a 30% or 40% take rate on a product you might be looking at a 10% take rate. Because obviously their business case changes and then it’s only -- they’re only going to get paid X from their customers so they would be looking to find that maximum profitability for themselves. So I don’t think you would ever see an OEMs say hey we’re going to stop looking at new technology and focus on a three year out product launch. There’d be more about how good of a take rate can you get, what are the packaging options look like and what’s the total maximum upside business for us if this plays out in a worst case.

Okay. And so just one last question on raws, I mean, given we’re seeing inflation in raw material cost and then you’re having this increase in some of the stuff you’re purchasing from China, I'm just curious how your contracts work with either pass throughs or indexing and are they different for just market dynamics versus what might happen sort of with a tariff, I mean is there any kind of line of demarcation in these contracts or would it just be a general inflation number that you can pass through index?

Yes, I mean, on the tariff side it’s going to be interesting to see how the industry as a whole and our customers react to many suppliers who are going to struggle with this and see how -- what the response is from OEMs to this cost increase that a lot of suppliers are going to experience. So that one is still yet to play out. I assume that that will be playing out fairly quickly here in the next several months and quarters. In terms of indexing there’s really not a whole lot you can do, now in theory what the tariff is designed to do is obviously create additional supply base in other alternative markets. So in theory over the long run if this worked, that you would see suppliers put plans up in different geographies that would it be able to avoid the tariff that does take time however. And so we're kind of working with our suppliers right now and completely understanding where their footprint is and their geography to see if there is better ways to accomplish the receipt of those products at a favorable price.

Any chance those can get reach over to the U.S. because that's kind of the purpose here, right?

Yes, I think a lot of the products that's possible on anything silicon based. I mean that's where the difficulty comes. Right electronics and specially these foundries and plants are incredibly large very complex. Even if someone made that commitment to want to do them, you're talking about regulation issues. And then also tremendous amount of capital investment and physical side. So you’re probably looking at three to five years before something like that would be a foundry basically would be able to exist in the U.S. and producing parts. Because I mean not only you have to get that foundry up and running you then have to go through a whole validation of the process, the plant and then obviously all the suppliers have to go through a full OEM approval of that new product.

Great, thank you very much.

Thank you.

Our next question comes from David Stratton with Great Lakes Review. Your line is now open.

Good morning. Thanks for taking the question. I think you touched on it fairly well before, I just want to make sure I got my head wrapped around it correctly. And that's regarding the issue with the supplier, it was a 1% ahead of it now, but you expect a tailwind going forward, but then you kind of hedged with but they're going to have trouble catching up in general. So looking into the second half of the year, do you see that being a continued headwind or is that just kind of melt away here. How should I think about that?

Sure, so that wasn't our supplier, that was actually the Meridian fire that kind down the several OEMs for a couple of weeks based off some line downs. So the problem with the OEMs catching up to that is they were running near full capacity already. So once you lose a couple of weeks out of a production schedule it’s hard to add back to that couple of weeks into it when you're already running at near capacity levels. So that's the issue. So we would expect a little bit of a tailwind, but probably not the full 100 basis points tailwind all in Q3, just because of capacity constraints by those OEMs.

Alright. And then in the prepared remarks, you mentioned lot of the sequential margin improvement was from cost management. And I was just wondering if there was anything that you'd like to highlight there, or is that just overall everybody doing a little bit or is there a single cost initiative that is taking shape and helping out?

No, I think, we have quarterly updates with our team and everybody knows kind of the goal. There is a big focus on manufacturing costs all the time, but we did see some improvements in our variable manufacturing costs, which helped to offset our inefficiencies on the fixed side. So our fixed capital investment was offset by call it improved scrap rates and a little bit better efficiency in the labor side. So it's really just everybody doing what we already do, but a little bit better.

Alright, thank you.

[Operator Instructions] Our next question comes from the line of David Whiston with Morningstar. Your line is now open.

Thanks, good morning. Wanted to follow-up on one of John's questions on tariffs. Are you -- it sounds like you're not hearing any kind of difference in the level of concern from say the German OEMs versus the Japanese Korean or American OEMs. Is that fair?

On the tariff side?

Right.

Yes, I'd say everyone is kind of equally concerned as it relates to how -- especially us and how we manufacture as primarily based in Mitsubishi and importing parts from all over the world to produce our products. So I think it's probably different for each supplier in terms of where they're getting pressure based off their geographical bias.

Okay. And if there is more tariff headwinds or unless there is any recession, your various capital spending and your expansion project if it was right in the middle of a project, will you keep going or would you freeze those temporarily?

Well it depends on what kind of project it is. So if you're halfway done building a building you probably have to finish. If it's something else than there is different ways you can hit pause. It's hard to imagine something right now, like catching us mid-cycle where you'd have to make a decision like that. We're pretty careful about how we do things and we have deep processes for all of our capital expenditures. So if something were to happen it wouldn't be abnormal for us to hit pause at a gate and push out or wait until the timing was right. So that wouldn't be the first time in the company's history that happened. I mean, we do that on a regular basis. And that’s part of our normal CapEx processes, the discipline necessary to make sure the right things are happening. And everything is executing to plan before we finish.

And in the press release, you called out increased staffing levels, is that mostly on the line? Is it in engineering, sales?

It's a combination of engineering. So contract engineering for a lot of the launches that we're working on. A little bit of -- in the SG&A area, we talked about increased levels there to help with our business development process and some new markets that we're working into. So it’s a combination staffing levels across it’s kind of that engineering and selling organization.

Okay, thanks very much.

Thank you.

Thank you.

Our next question comes from Richard Carlson with BMO Capital Markets. Your line is now open.

Good morning, guys.

Good morning, Richard.

So, pretty much all the questions have been answered so far. But I just want to get maybe clarify on the $525 million in net cash target and the $425 million of planned share buybacks this year. So you're already below that net cash target now mid-year. So obviously implying of course for a typical cadence, expected some pretty good cash flow in the back year. But, I guess how rigid are you with that $525 million? And what does that tell us about any kind of M&A plans? I mean, if something came along, is that why the $525 million is being kind of -- being protected, so that you can do that and what's a comfort debt level with the leverage in case something did come up?

Yes, exactly. So one other things we're doing as part of that capital allocation strategy, we're working through some loan documents right now, we're going to be open up and as we pay off the debt from the HomeLink acquisition. We're going to be open up a new LOC through the remainder of this year, to help us prepare for a potential M&A. Technically, we're at above -- we're actually above that target, we're about $609 million right now cash, short-term and long-term investments. Those are all liquid investments. So, we can turn those into cash anytime we want basically. One of the things that we're focused on there is kind of getting from that $609 million point now down to about the $525 million. The $525 million isn't like a rigid number. And in essence if an M&A opportunity came up, obviously, to put the capital allocation strategy on hold to execute the acquisition or the merger, whatever became appropriate. So it's not -- that's not the hard and fast rule, we're saying is in the absence of an M&A play or something more strategic. That's the capital allocation strategy that we're going to work towards.

Got it, thank you. And then on the FDM, I think IHS is now kind of projecting some long-term targets for that. How is the competitive landscape and how do you guys forecasting kind of longer term your market share?

So far we have -- we've been quoting against others, typical competitors, Magna's [ph] in this space. IHS did do their forecast some time ago and they solicited input from many suppliers. And we feel pretty good about our 500,000 unit forecast for calendar '19, and like Neil said, we've got 7 OEMs in the hopper, we've got -- we're working on to close on number 8, and we're actively working on some others. So we are -- we feel really good about the growth prospects, both what we've already announced and then in that 2020 and 2021 and beyond timeframe and continuing to work to further that technology from Gen 1 to now Gen 2 and then beyond. So that's how we always stay ahead of our competition, or try to is with technology evolution.

Thanks, guys.

Thank you.

Awesome. Thanks, Richard.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. O'Berski, for closing remarks.

Thank you everyone for your time and attendance. Just as a reminder, we'll be in New York at the NASDAQ market site building on August 22nd for our Analysts and Investor Day. So if anyone is interested in attending, please reach out and let me know. This concludes our call. Thank you everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.