GENTEX CORPORATION
RESULTS OF OPERATIONS:
NON-GAAP MEASURES
The following discussion includes adjusted gross profit ("Adjusted Gross
Profit"), adjusted gross margin ("Adjusted Gross Margin"), adjusted operating
expenses ("Adjusted Operating Expenses"), adjusted engineering, research and
development expenses ("Adjusted E, R & D Expenses"), adjusted selling, general
and administrative expenses ("Adjusted S, G & A Expenses"), adjusted operating
(loss) income ("Adjusted Operating Income"), adjusted net (loss) income
("Adjusted Net Income"), and adjusted earnings per diluted shares ("Adjusted
Earnings per Diluted Share"), which are non-GAAP measures. See section
Non-GAAP Financial Measure s for the GAAP measure, definitions of these
terms, and reconciliations between the non-GAAP measure and the GAAP measure, as
well as a discussion of why the Company believes this non-GAAP information is
useful to investors and how management uses such non-GAAP information.
SECOND QUARTER 2020 VERSUS SECOND QUARTER 2019
Net Sales . Net sales for the second quarter of 2020 decreased by $238.8 million
or 51% when compared with the second quarter of 2019.
Automotive net sales for the second quarter of 2020 decreased 51% to $222.1
million , compared with automotive net sales of $456.6 million in the second
quarter of 2019. This quarter over quarter decline in automotive net sales was
driven primarily by a 51% quarter over quarter decrease in automotive mirror
unit shipments. The 51% decrease in automotive mirror unit shipments in the
second quarter of 2020 to 5.3 million units compared with 10.8 million units in
the second quarter of 2019, was driven primarily by a 51% quarter over quarter
decrease in interior auto-dimming mirror unit shipments as a result of the
overall 45% quarter over quarter decrease in global light vehicle production,
and the more severe decreases in Europe (62% quarter over quarter decrease) and
North America (69% quarter over quarter decrease), stemming from the COVID-19
pandemic.
The below table represents the Company's auto-dimming mirror unit shipments for
the three and six months ended
Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
North American Interior Mirrors 787 2,206 (64)% 2,806 4,433 (37)%
North American Exterior Mirrors 455 1,320 (66)% 1,689 2,549 (34)%
Total North American Mirror Units 1,242 3,526 (65)% 4,495 6,981 (36)%
International Interior Mirrors 2,916 5,339 (45)% 7,948 10,596 (25)%
International Exterior Mirrors 1,102 1,953 (44)% 3,211 3,924 (18)%
Total International Mirror Units 4,018 7,293 (45)% 11,159 14,520 (23)%
Total Interior Mirrors 3,703 7,545 (51)% 10,754 15,028 (28)%
Total Exterior Mirrors 1,557 3,273 (52)% 4,900 6,473 (24)%
Total Auto-Dimming Mirror Units 5,260 10,819 (51)% 15,654 21,501 (27)%
Note: Percent change and amounts may not total due to rounding.
Other net sales were$7.9 million in the second quarter of 2020, a decrease of 35%, compared to$12.1 million in the second quarter of 2019. This decrease is in large part attributable to a 47% quarter over quarter decline in variable dimmable aircraft windows sales, which decreased to$3.0 million in the second
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quarter of 2020 from$5.7 million in the second quarter of 2019. Fire protection sales decreased by 24% in the second quarter of 2020 to$4.8 million , compared to$6.4 million in the second quarter of 2019. Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased to 80.9% in the second quarter of 2020 versus 62.3% in the second quarter of 2019. The quarter over quarter net decrease in the gross profit margin was primarily the result of lost sales and manufacturing inefficiencies due to the COVID-19 pandemic and the related shutdowns, severance related costs of$3.9 million , and annual customer price reductions. On a quarter over quarter basis, the lost sales and manufacturing inefficiencies due to the COVID-19 pandemic and the related shutdowns had a negative impact of approximately 14% - 15%, and the above-referenced severance related costs and annual price reductions each independently had a negative impact of approximately 150 - 200 basis points on gross profit margin. Purchasing cost reductions and product mix improvements independently had a positive impact of approximately 150 - 200 basis points on gross profit margin on a quarter over quarter basis. When adjusted for the expenses related to severance, the Adjusted Gross Margin for the quarter was 20.8%. (See Non-GAAP Financial M easures ). Operating Expenses. Engineering, research and development ("E, R & D") expenses for the second quarter of 2020 increased by 2% or$0.6 million when compared with the second quarter of 2019, primarily due to severance related costs of$3.3 million , which was partially offset by reductions in wages and discretionary spending. When excluding such severance related costs, Adjusted E, R & D Expenses for the second quarter of 2020 would have decreased by 9% when compared with the second quarter of 2019. (See Non-GAAP Financial Measures ). Selling, general and administrative ("S, G & A") expenses increased by 7% or$1.4 million for the second quarter of 2020 compared to the second quarter of 2019. S, G & A expenses were at 9% of net sales in the second quarter of 2020, up from 4% of net sales in the second quarter of 2019. S, G, & A expenses increased on a quarter over quarter basis primarily due to severance related costs of$1.6 million , which was partially offset by reductions in wages and discretionary spending. When excluding the severance related costs, Adjusted S, G & A Expenses for the second quarter of 2020 would have decreased by 1% when compared with the second quarter of 2019. (See Non-GAAP Financial Measures ). Total operating expenses were$50.7 million in the second quarter of 2020, which increased by 4% or$2.1 million , from$48.6 million in the second quarter of 2019. When excluding severance expenses, Adjusted Operating Expenses in the second quarter of 2020 were down 6% when compared with operating expenses in the second quarter of 2019. (See Non-GAAP Financial Measures ). The decrease in Adjusted Operating Expense was primarily driven by reductions in wages and discretionary spending. Total Other Income. Total other income for the second quarter of 2020 increased by$0.5 million when compared with the second quarter of 2019. Provision for Income Taxes. The Company recognized a tax benefit of$1.5 million in the second quarter of 2020 compared to tax expense of$16.3 million and a 16.4% effective tax rate for same quarter of 2019. Typically, effective tax rates for the Company differ from statutory federal income tax rates, due to provisions for state and local income taxes, permanent tax differences, research and development tax credits and the foreign-derived intangible income tax deduction. Net (Loss) Income. Net loss for the second quarter of 2020 was$2.4 million , down from a net income of$109.0 million the second quarter of 2019. Adjusted Net Income was$4.6 million during the second quarter of 2020, when adjusting for the impact of the severance related costs, net of tax. (See Non-GAAP Financial Measures ). Earnings (Loss) Per Share. The Company had a loss per diluted share for the second quarter of 2020 of$0.01 which compared to earnings per diluted share of$0.42 for the second quarter of 2019, primarily as a result of the COVID-19 pandemic and the related shutdowns. Adjusted Earnings per Diluted Share were$0.02 per share for the second quarter of 2020, when adjusting for the impact of the severance related costs. (See Non-GAAP Financial Measures ).
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NON-GAAP FINANCIAL MEASURES: The financial information for the three months (above) and six months (below) endedJune 30, 2020 , is provided in accordance with Generally Accepted Accounting Principles ("GAAP"). Still, the Company believes that it is useful for the three months endedJune 30, 2020 to provide non-GAAP: Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Operating Expenses, Adjusted E, R & D Expenses, Adjusted S, G & A Expenses, Adjusted Operating Income, Adjusted Net Income; and Adjusted Earnings per Diluted Share with the adjustments set forth in the "Reconciliation of Non-GAAP Measures" table below. This non-GAAP financial information allows investors to evaluate current performance in the Company's core business in relation to historical performance by excluding the impact of certain COVID-19 related severance expenses. Management uses such non-GAAP information internally to help assess performance in the current period versus prior periods in the Company's core business. A reconciliation of the Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Operating Expenses, Adjusted E, R & D Expenses, Adjusted S, G & A Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Earnings per Diluted Share is provided in the attached "Reconciliation of non-GAAP Measures" table below. Like all non-GAAP financial measures, these non-GAAP measures are intended to supplement, not to replace, GAAP measures. All non-GAAP financial measures are subject to inherent limitations because not all of the expenses required by GAAP are included. The Company has presented Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Operating Expenses, Adjusted E, R & D Expenses, Adjusted S, G & A Expenses, and Adjusted Operating Income as supplemental measures of the Company's performance. Current quarter Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted E, R & D Expenses, Adjusted S, G & A Expenses, and Adjusted Operating Income exclude certain severance related costs set forth in the table below. Current quarter Adjusted Gross Margin is defined as Adjusted Gross Profit divided byNet Sales . 25
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Reconcilliation of Non-GAAP Measures
(Unaudited)
Three Months Ended June 30,
2020 2019
Gross Profit - GAAP $ 43,944,808 $ 176,537,604
Severance Related Costs 3,927,906 -
Adjusted Gross Profit - (Non-GAAP)
Gross Margin - GAAP 19.1 % 37.7
%
Adjusted Gross Margin - (Non-GAAP) 20.8 % 37.7
%
E, R & D Expenses - GAAP$ 28,992,968 $ 28,359,343 Less: Severance Related Costs (3,311,839) -
Adjusted E, R & D Expenses - (Non-GAAP)
S, G & A Expenses - GAAP$ 21,690,096 $ 20,273,295 Less: Severance Related Costs (1,593,610) -
Adjusted S, G & A Expenses - (Non-GAAP)
Operating Expenses - GAAP$ 50,683,064 $ 48,632,638 Less: Severance Related Costs (4,905,449) -
Adjusted Operating Expenses - (Non-GAAP)
Operating (Loss) Income - GAAP$ (6,738,256) $ 127,904,966 Severance Related Costs - Overhead 3,927,906 - Severance Related Costs - Operating 4,905,449 -
Adjusted Operating Income - (Non-GAAP)
Adjusted Net Income and Adjusted Earnings per Diluted Share: Adjusted Net Income
and Adjusted Earnings per Diluted Share are presented as supplemental measures
of the Company's performance for the reasons set forth above. Adjusted Net
Income is defined as Net (Loss) Income adjusted for severance related costs
during the second quarter of 2020. Adjusted Earnings per Diluted Share is
defined as Adjusted Net Income divided by weighted average diluted shares
outstanding.
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Reconcilliation of Non-GAAP Measures (continued)
(Unaudited)
Three Months Ended June 30,
2020 2019
Net (Loss) Income - GAAP $ (2,374,033) $108,958,625
Severance related costs 8,833,355 -
Tax Impact of Adjusting Items (at effective tax rate of 21% in each period)
(1,855,005) -
Adjusted Net Income (Loss) - (Non-GAAP) $4,604,317 $108,958,625
Earnings Per Share(1):
Basic $ (0.01) $ 0.42
Diluted (0.01) 0.42
Adjusted Earnings Per Share(1):
Basic $ 0.02 $ 0.42
Diluted 0.02 0.42
Weighted Average Shares
Basic 241,684,323 255,219,868
Diluted 242,545,795 256,579,622
(1) Earnings Per Share and Adjusted Earnings Per Share for the three months ended June 30, 2019 has been
adjusted to exclude the portion of net (loss) income allocated to participating securities as a result of
share-based payment awards.
SIX MONTHS ENDED JUNE 30, 2020 VERSUS SIX MONTHS ENDED JUNE 30, 2019
Net Sales . Net Sales for the six months ended June 30, 2020 decreased by
$253.6 million or 27% when compared with the same period in 2019.
Automotive net sales for the first six months of 2020 were $661.9 million , down
27% compared with automotive net sales of $912.4 million for the first six
months of 2019, driven by a 27% period over period decrease in automotive mirror
unit shipments. North American automotive mirror shipments in the six months
ended June 30, 2020 decreased 36% to 4.5 million units compared with the same
period in 2019, primarily due to a period over period decrease of 36% for North
American unit shipments of the Company's auto-dimming mirrors.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased
to 70.7% for the first six months of 2020, versus 63.1% in the same period last
year. The period over period decrease in the gross profit margin was primarily
the result of the Company's inability to leverage fixed overhead as a result of
COVID-19 related shutdowns and decreases in demand and annual customer price
reductions, which were partially offset by improvements in product mix related
to Full Display Mirror® as well as purchasing cost reductions. On a period over
period basis, the inability to leverage fixed overhead had a negative impact of
approximately 6% - 7%, and annual customer price reductions had a negative
impact of approximately 150 - 200 basis points, on gross margin. Purchasing cost
reductions and product mix improvements each independently had a positive impact
on gross margin on a period over period basis of approximately 50 - 100 basis
points.
Operating Expenses. E, R & D expenses for the six months ended June 30, 2020
increased 4% or $2.2 million when compared with the same period last year,
primarily due to severance related costs and increased staffing levels related
to development and launch of new business.
S, G & A expenses for the first six months of 2020 increased 8% or $3.4 million
when compared with the same period last year, primarily due to severance related
costs, increases in staffing levels and benefits,
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other resources associated with mitigation of the impacts of the global COVID-19 pandemic, and increased legal and professional fees associated with an acquisition of new technology described in Note 16 of the financial statements included in this Form 10-Q. Total Other Income. Total other income for the six months endedJune 30, 2020 decreased by$0.6 million when compared with the same period last year, primarily due to lower period over period investment income compared to the first six months of 2019. Provision for Income Taxes. The effective tax rate was 15.7% for the six months endedJune 30, 2020 compared to 16.4% for the same quarter of 2019. Net Income. Net income for the six months endedJune 30, 2020 decreased by$126.1 million or 59% to$87.1 million versus$213.2 million in the same period last year, due to the lower net sales and the corresponding decrease in gross margin, as well as the increases in operating expenses described above. Earnings Per Share. The Company had earnings per diluted share for the six months endedJune 30, 2020 of$0.35 which compared to earnings per diluted share of$0.82 for the six months endedJune 30, 2019 , primarily as a result of the COVID-19 pandemic and the related shutdowns as explained above.
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FINANCIAL CONDITION: The Company's cash and cash equivalents as ofJune 30, 2020 were$343.8 million , which increased$47.5 million compared to$296.3 million as ofDecember 31, 2019 . The increase was primarily due to cash flows from operations and the draw-down of$75 million on the Company's line of credit during the first quarter of 2020 (as described in Note 9 of the financial statements included in this Form 10-Q), which was partially offset by share repurchases, dividend payments and capital expenditures during the six months endedJune 30, 2020 . Short-term investments as ofJune 30, 2020 were$70.0 million , down from$140.4 million as ofDecember 31, 2019 , and Long-term investments were$171.1 million as ofJune 30, 2020 , compared to$139.9 million as ofDecember 31, 2019 . Changes in the investment balances were primarily driven by changes in fixed income investment maturities within the investment portfolio. Accounts receivable as ofJune 30, 2020 decreased approximately$64.8 million compared toDecember 31, 2019 , primarily due to the decrease in sales during the most recently completed quarter. As ofJune 30, 2020 , all of the Company's material tier one and OEM customers continue to be in good standing. Inventories as ofJune 30, 2020 were$259.7 million , compared to$248.9 million as ofDecember 31, 2019 , primarily due to increases in raw materials on hand to meet forecasted demand. Throughout 2020, the Company's purchasing and supply chain teams have had to manage through supply chain stresses, which have included managing rolling shutdowns in the Company's supplier base, managing run-out situations on certain components, working through the second quarter order reductions, and now preparing for a ramp up for the second half of 2020. Accounts payable as ofJune 30, 2020 decreased approximately$37.4 million to$60.2 million when compared toDecember 31, 2019 , primarily driven by lower purchases from suppliers in the quarter, lower levels of capital expenditures and less discretionary spending during the quarter. Accrued liabilities as ofJune 30, 2020 increased approximately$8.2 million compared toDecember 31, 2019 , primarily due to an increase in accrued salaries and wages, accrued severance liabilities, and tax liabilities due to timing of certain wage and tax payments. The current portion of long-term debt as ofJune 30, 2020 increased$75.0 million compared toDecember 31, 2019 as a result of the draw-down of$75.0 million on the Company's$150 million line of credit as is further detailed in Note 9 of the financial statements included in this Form 10-Q. Cash flow from operating activities for the six months endedJune 30, 2020 decreased$83.0 million to$190.5 million , compared with$273.5 million during the same six month period last year, primarily due to lower net income, which was partially offset by changes in working capital. Capital expenditures for the six months endedJune 30, 2020 were approximately$28.8 million , compared with approximately$45.5 million for the same six month period last year, as a result of spending containment strategies. The Company believes its existing and planned facilities are currently suitable, adequate, and have the capacity required for current and near-term planned business. Nevertheless, the Company continues to evaluate longer term facility needs. The Company estimates that it currently has building capacity to manufacture approximately 33 - 36 million interior mirror units annually and approximately 14 - 17 million exterior mirror units annually, based on current product mix. The Company evaluates equipment capacity on an ongoing basis and adds equipment as needed. Management considers the current working capital and long-term investments, in addition to internally generated cash flow, its Credit Agreement, and credit worthiness, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments. The following is a summary of working capital and long-term investments:
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June 30, 2020 December 31, 2019
Working Capital $ 641,695,591 $ 778,530,092
Long Term Investments 171,134,695 139,909,323
Total $ 812,830,286 $ 918,439,415
The decrease in working capital as of June 30, 2020 is primarily due to share
repurchases, dividend payments and capital expenditures. In order to continue to
maintain flexibility and liquidity during the COVID-19 pandemic, in the first
quarter of 2020 the Company drew-down $75 million on its line of credit, which
is classified as short-term debt as discussed in Note 9 of the financial
statements included in this Form 10-Q. The Company believes it has the ability
and has the intent to repay the full balance in the next twelve months.
The Company has a previously announced share repurchase plan under which the
Board of Directors has authorized the repurchase of shares of the Company's
common stock, which remains a part of the broader publicly disclosed capital
allocation strategy. The Company did not repurchase any common stock during the
most recently completed quarter as efforts were focused on preservation of
capital given the unknown impact of the COVID-19 pandemic on customers and the
resultant impact on the Company's operations and financial results. Provided
that business begins to return to more normalized levels, the Company will
consider the appropriateness of any share repurchases in the second half of
2020. Future share repurchases may vary from time to time and will take into
account macroeconomic events (including the COVID-19 pandemic), market trends,
and other factors the Company deems appropriate (including the market price of
the stock, anti-dilutive effect of repurchases, and available cash). During the
six months ended June 30, 2020 , the Company repurchased 7,019,032 shares. The
Company has 13,046,287 shares remaining under the plan as of June 30, 2020 , as
is further detailed in Part II, Item 2 of this Form 10-Q.
BUSINESS UPDATE
For the second quarter of 2020, the Company reported net sales of $229.9
million , which was a decrease of 51% compared to net sales of $468.7 million in
the second quarter of 2019. The Company's decrease of 51% in net sales was in
comparison to global light vehicle production levels that dropped 45% for the
second quarter of 2020 when compared to the second quarter of 2019. However, the
light vehicle production declines were even more severe in Europe , which
experienced a 62% quarter over quarter reduction, and in North America , which
experienced a 69% quarter over quarter reduction. The impact of COVID-19,
government enacted shutdowns of certain countries and states and the resultant
economic impact lead to the most severe change in demand in a very short period
of time that the Company has ever experienced. The Company's overall revenue
out-performance in comparison to production declines in the Company's primary
underlying markets was largely due to the relative success of the Full Display
Mirror®, as well as exterior electrochromic mirror units.
Interior and exterior auto-dimming mirrors and advanced electronic features were
launched on 33 new vehicles during the second quarter of 2020. Of these new
launches in the second quarter of 2020, over 60% contained advanced features,
which was primarily driven by HomeLink® and Full Display Mirror®
Despite challenging economic conditions created by the COVID-19 pandemic, the
base inside auto-dimming mirror launches included new models in all of major
markets, while advanced feature launches were led by new models for both
HomeLink® and Full Display Mirror®.
PRODUCT UPDATE
The Full Display Mirror® began production in the fourth quarter of 2015. Current
automotive design trends are yielding vehicles with small rear windows that are
often further obstructed by headrests, passengers, and roof support pillars
which can significantly hinder the mirror's rearward view. The Company's Full
Display Mirror® is an intelligent rear vision system that uses a custom,
internally or externally mounted video camera and mirror-integrated video
display to optimize a vehicle driver's rearward view. This rear vision system
consists of a hybrid Full Display Mirror® that offers bi-modal functionality. In
mirror mode, the product functions as an auto-dimming rearview mirror which
means that during nighttime driving, digital light sensors talk to one another
via a microprocessor to automatically darken the mirror when glare is detected.
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With the flip of a switch, the mirror enters display mode, and a clear, bright display appears through the mirror's reflective surface, providing a wide, unobstructed rearward view. The bi-modality of the Full Display Mirror® is essential, because in the event of any failure of the camera or display, the product is able to function as a mirror, which meets long-standing safety requirements in the automotive industry. In addition, the driver has the ability to switch between modes to accommodate usage preferences for various weather conditions, lighting conditions, and driving tasks. In the first quarter of 2020, the Company announced Aston Martin at CES, and began shipping to Mitsubishi, as OEMs for Full Display Mirror®. As of the first quarter of 2020, the Company is shipping production Full Display Mirrors® to six automaker customers, which are General Motors, Subaru,Toyota , Nissan, Jaguar Land Rover, and Mitsubishi, and expects to begin shipping for Aston Martin around mid-year in 2020. As of the end of the second quarter of 2020, the Company is shipping Full Display Mirror® on 46 nameplates. The second quarter launch of the Full Display Mirror® for the Toyota Harrier is the first Full Display Mirror® to launch with Digital Video Recording ("DVR") capability. This mirror and system have launched in theJapan market and combine the superior functionality of the Full Display Mirror® with the added capability to record video from the rearward facing and forward-facing cameras simultaneously. Per OEM request, the data is stored to an SD storage card. This integrated solution provides consumers with the features they want, while allowing the OEM to control the integration and execution in the vehicle. For the second half of 2020, the Company anticipates an additional 8 new vehicle nameplate launches for the Full Display Mirror®. The Company remains confident that on-going discussions with certain other customers, in the future, may cause such customers to consider adding the Full Display Mirror® into their product road-map for future vehicles. In 2017, the Company introduced a new three-camera rear vision system that streams rear video in multiple composite views to its Full Display Mirror®. The Company believes it is the industry's first practical and comprehensive rear vision solution designed to meet automaker, driver, safety and regulatory requirements. The Company's rear vision system, known generally as a camera monitoring system ("CMS"), uses three cameras to provide a comprehensive view of the sides and rear of the vehicle. The side-view cameras are discretely housed in downsized, automatic-dimming exterior mirrors. Their video feeds are combined with that of a roof-mounted or rear window based camera and stitched together into multiple composite views, which are streamed to the driver using the Full Display Mirror®. The system's modular nature lets the automaker customize functionality while offering it as an affordable, optional feature thereby enhancing safety by allowing the system to fail safe. During any failures due to weather conditions or otherwise that disrupt the digital view, drivers can still safely use the interior and exterior mirrors. The system also supports user preference by permitting drivers to use standard mirror views, camera views, or both. The system can also be tuned to meet the various regulatory field-of-view requirements around the world by using different types of flat and curved glass, combined with simple alterations to the video viewing modes. Downsized exterior mirrors provide automakers with significant weight savings and fuel efficiency improvements. To further enhance safety, the Company's CMS solution can also work in conjunction with a vehicle's side blind zone warning system. When a trailing vehicle enters a side blind zone, a warning indicator illuminates in both the interior and exterior mirrors while the corresponding side-view video feed appears in the display until the vehicle passes. InJanuary 2020 , the Company announced a collaboration with Aston Martin to bring CMS to future Aston Martin vehicles. OnMarch 31, 2014 , theAlliance of Automobile Manufacturers petitioned theNational Highway Traffic Safety Administration ("NHTSA") to allow automakers to use cameras as an option to replace conventional rearview mirrors withinthe United States . At the annual SAE Government-Industry Meeting inJanuary 2017 , NHTSA requested that SAE develop Recommended Procedures for test protocols and performance criteria for CMS that would replace mirror systems on light vehicles in the U.S. market. SAE assigned the task to the Driver Vision Committee, and the SAE Driver Vision Committee created aCMS Task Force to draft the Recommended Procedures. NHTSA published a report datedOctober 2018 related to camera monitoring systems for outside mirror replacements. OnOctober 10, 2019 , an Advanced Notice of Proposed Rulemaking (ANPRM) was published seeking public comment on permitting camera-based rear visibility systems, as an alternative to inside and outside rearview mirrors required under Federal motor vehicle safety standard (FMVSS) No. 111, "Rear Visibility," which currently requires that vehicles be equipped with rearview mirrors to provide drivers with a view of objects that are to their side or to their side and rear. This ANPRM builds on NHTSA's prior efforts to obtain supporting technical information, data, and analysis on CMS so that the agency can determine whether these systems can provide the same level of safety as the rearview mirrors currently required under FMVSS No. 111. The ANPRM states that one reason
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NHTSA is seeking additional information is because research conducted by NHTSA and others between 2006 and 2017 has consistently shown that prototype and preproduction camera-based rear visibility systems can exhibit safety-relevant performance issues. OnOctober 18, 2019 , a petition for temporary exemption from FMVSS 111 submitted byAudi of America was published requesting NHTSA to grant a two-year exemption to sell up to 2,500 vehicles for each twelve month period (up to 5,000 vehicles) that are equipped with camera monitoring systems and do not include FMVSS 111 compliant outside mirrors. InJuly 2016 , a revision to UN-ECE Regulation 46 was published with an effective date ofJune 18, 2016 , which allows for CMS to replace mirrors inJapan and European countries. SinceJanuary 2017 , camera monitoring systems are also permitted as an alternative to replace mirrors in the Korean market. Notwithstanding the foregoing, the Company continues to believe rearview mirrors provide a robust, simple and cost effective means to view the surrounding areas of a vehicle and remain the primary safety function for rear vision today. Cameras when used as the primary rear vision delivery mechanism have some inherent limitations such as: electrical failure; cameras being blocked or obstructed; depth perception challenges; and viewing angles of the camera. Nonetheless, the Company continues designing and manufacturing not only rearview mirrors, but CMOS imagers and video displays as well. The Company believes that combining video displays with mirrors may well provide a more robust product by addressing all driving conditions in a single solution that can be controlled by the driver. As noted, the Company is currently in production with a rear vision camera system that streams rear video to a rearview-mirror-integrated display using the Company's Full Display Mirror®. The Company's CMS solution uses three cameras to provide a comprehensive view of the sides and rear of the vehicle. The Company also continues development in the areas of imager performance, camera dynamic range, lens design, image processing from the camera to the display, and camera lens cleaning. The Company acknowledges that as such technology evolves over time, such as cameras replacing mirrors and/or autonomous driving, there could be increased competition. The Company's HomeLink® products are the auto industry's most widely used and trusted car-to-home communication system, with an estimated 50 million units on the road. The system consists of two or three in-vehicle buttons that can be programmed to operate garage doors, security gates, home lighting, and other radio-frequency-controlled devices. During the first quarter of 2017, the Company demonstrated the next generation of HomeLink®, commonly referred to as HomeLink Connect® which uses both RF and wireless cloud-based connectivity to deliver complete vehicle-to-home automation. With HomeLink Connect®, a HomeLink® button press communicates with the HomeLink Connect® app on the user's smartphone. The app contains predefined, user-programmed actions, from single device operations to entire home automation scenes. The app, in turn, communicates to the home's smart hub over the cloud activates the appropriate devices, including security systems, door locks, thermostats, lighting, and other home automation devices, providing comprehensive vehicle-to-home automation. The ability to prepare the home for arrival or departure can occur with one button press. For the automaker, it allows them to offer a customizable, yet proven solution without the engineering effort or security concerns associated with integrating 3rd party software into the vehicle's computer network. The Company also continues to work on providing HomeLink® applications for alternative automobile and vehicle types which include but are not limited to motorcycles, mopeds, snowmobiles, tractors, combines, lawn mowers, loaders, bulldozers, road-graders, backhoes and golf carts. The Company further continues to work with compatibility partners for HomeLink® applications in newer markets likeChina . The unique attributes of theChina market allow for potential different use cases of these products and offer what the Company believes to be a real opportunity for growth of the HomeLink® brand and products. In 2017, the Company began its first volume production shipments of HomeLink® units on vehicles for theChina market. InJanuary 2016 , the Company announced a partnership with TransCore to provide automobile manufacturers with a vehicle-integrated tolling solution that enables motorists to drive on nearly allU.S. toll roads without a traditional toll tag on the windshield. Currently more than 75 percent of new car registrations are in states with toll roads with over 50 million drivers accessing these roads each year. The Company signed an exclusive agreement, in the ordinary course of business, to integrate TransCore's toll module technology. InJanuary 2017 , the Company signed an extension of its agreement in the ordinary course of business, which enables the Company to offer the Integrated Toll Module system inCanada andMexico . InSeptember 2019 , the Company signed a new agreement with TransCore, in the ordinary course of business, which extended the term of the partnership. The interior mirror is the optimal location for a vehicle-integrated toll transponder and it eliminates the need to affix multiple toll tags to the windshield and
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helps automakers seamlessly integrate toll collection into the car. Since the Integrated Toll Module® or ITM® enables travel across almost allUnited States toll roads, and others inNorth America , motorists would no longer need multiple toll tags for different regions of the country or to manage multiple toll accounts. The Company's vehicle-integrated solution simplifies and expedites local, regional, and national travel. ITM® provides transportation agencies with an interoperability solution without costly infrastructure changes to the thousands of miles of toll lanes throughoutNorth America . The Company believes that this product could potentially represent another growth opportunity over the next several years. The Company has its first OEM award of ITM® with Audi. In the first quarter of 2019, the Company began its first volume shipments of the ITM® product to Audi. During the second quarter of 2019, the first consumers began registering their ITM® systems online to activate the device and began using the system for normal tolling use. The Company continues to monitor and assess feedback from consumers, dealers, and the OEM in order to help others understand the use case and acceptance of this product. Currently, the Company is shipping ITM® on 3 nameplates in the Audi brand of vehicles. In late June of 2020, Audi published a press release on the 2021 Audi Q5, in which they announced it will implement the ITM® product as well. Over the next 18 months, the Company expects further ITM® nameplate launches with Audi, as well as the initial launch of ITM® at its second OEM. The launch is targeted to begin production shipments toward the end of calendar year 2020. InApril 2020 , the Company was honored with an Automotive News PACE Award for its ITM® system, which recognizes automotive suppliers for superior innovation, technological advancement, and business performance. Further, the Company has previously announced an embedded biometric solution for vehicles that leverages iris scanning technology to create a secure environment in the vehicle. There are many use cases for authentication, which range from vehicle security to start functionality to personalization of mirrors, music, seat location and temperature, to the ability to control transactions not only for the ITM® system, but also the ride sharing car of the future. The Company believes iris recognition is among the most secure forms of biometric identification, with a false acceptance rate as low as one in 10 million, far superior to facial, voice, and other biometric systems. The Company's future plans include integrating biometric authentication with HomeLink® and HomeLink Connect®. The biometric system will allow HomeLink® to provide added security and convenience for multiple drivers by activating the unique home automation presets of different authorized users. The Company announced inJanuary 2018 that it completed an exclusive licensing agreement, in the ordinary course of business, with Fingerprint Cards AB to deploy its ActiveIRIS® iris-scanning biometric technology in automotive applications. InJanuary 2018 , the Company also announced that an agreement had been signed, in the ordinary course of business, to participate in a round of financing with Yonomi, the Company's partner in home automation technology. The Company is working with Yonomi as a home automation aggregation partner and the Company has developed an app and cloud infrastructure known as HomeLink Connect®. As discussed above, HomeLink Connect® is the home automation app that pairs with the vehicle and allows drivers to operate home automation devices from the vehicle. Drivers of HomeLink Connect® compatible vehicles will be able to download and configure the app to control many available home automation devices and create entire home automation settings. SmartBeam® is the Company's proprietary high beam control system integrated into its auto-dimming mirror. SmartBeam® Generation 4, which was developed using the fourth generation of the Company's custom designed CMOS imager, has an advanced feature set made possible by the high dynamic range of the imager including: high beam assist; dynamic forward lighting with high beams constantly on; LED matrix beam; and a variety of specific detection applications including tunnel, fog and road type as well as certain lane tracking features to assist with lighting control. The Company has the ability to package the control electronics inside of its interior rearview mirrors with a self-calibrating camera attached to the mirror mount with optimal mechanical packaging which also provides for ease of service. In addition, the Company has long been integrating its camera products to optimize performance by fusing with other systems on the vehicle, including radar, navigation, steering and related modules provided by other suppliers. This enables the Company to provide its customers with a highly customizable solution that meets their unique needs and specifications. The European New Car Assessment Program ("Euro NCAP") provides an incentive for automobiles sold inEurope to apply safety technologies that include driver assist features such as lane detection, vehicle detection, and pedestrian detection as standard equipment. Euro NCAP compliant driver assist systems are also capable of including high beam assist as a function. The increased application of Euro NCAP on
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European vehicles has had the effect of replacing, and could potentially continue replacing, the Company's SmartBeam® application on these vehicles.
OnDecember 8, 2015 NHTSA proposed changes to the NHTSA's 5-Star Safety Ratings for new vehicles (also known as the New Car Assessment Program or NCAP) and initiated a comment period. The proposed changes will, for the first time, encompass assessment of crash-avoidance technologies, which includes lower beam headlamp performance, semi-automatic headlamp switching, and blind spot detection. NHTSA initially intended to implement the enhancements in NCAP in 2018 beginning with model year 2019 vehicles. The NCAP implementation has been delayed. Under these proposed changes, the Company believes that its SmartBeam® technology will qualify with the semi-automatic headlamp NCAP rating system, and that its SmartBeam® technology and exterior mirrors with blind spot alert lighting can be included in a system that qualifies with the lower beam headlamp performance and blind spot detection NCAP rating system, respectively. OnOctober 16, 2019 , NHTSA issued a press release comparing NCAP to other regions' version of NCAP, identified new technologies that are not currently included in NCAP, and suggestedCongress legislatively direct actions to improve NCAP. InMarch 2020 , HR 6256 was introduced, which would require NHTSA to update NCAP. OnOctober 12, 2018 , NHTSA published a Notice of Proposed Rulemaking ("NPRM") for amendments to Federal Motor Vehicle Safety Standard ("FMVSS") No. 108: Lamps, reflective devices, and associated equipment, and initiated a comment period. The NPRM proposes amendments that would permit the certification of adaptive driving beam headlighting systems, if the manufacturer chooses to equip vehicles with these systems. NHTSA proposes to establish appropriate performance requirements to ensure the safe introduction of adaptive driving beam headlighting systems if equipped on newly manufactured vehicles. The Company believes that its dynamic SmartBeam® lighting control system (dynamic forward lighting or DFL), which has been sold in markets outside ofNorth America for several years, will meet the requirements of the new FMVSS 108 standards, if amended. The Company's SmartBeam® application has and will continue to be affected by increased competition by suppliers of multi-function driver assist camera products, which are able to achieve some of the same functionality as SmartBeam® but at a lower cost, due to other suppliers leveraging similar hardware costs, but offering products with multiple software features. The Company previously announced that it is providing variably dimmable windows for the Boeing 787 Dreamliner series of aircraft. The Company continues to work with other aircraft manufacturers that have an interest in this technology regarding potential additional programs. InJanuary 2019 , the Company announced that its latest generation of dimmable aircraft windows will be offered as optional content on the new Boeing 777X. During the third quarter of 2019, the first production shipments of variably dimmable windows were made to Boeing for the 777X program. InJanuary 2020 , the Company announced that Airbus will also be offering the Company's dimmable aircraft windows on its aircraft with production starting in late 2020. InJanuary 2020 the Company unveiled an innovative lighting technology for medical applications that was co-developed withMayo Clinic . This new lighting concept represents the collaboration of a global, high-technology electronics company with a world leader in health care. The Company's new intelligent lighting system combines ambient room lighting with camera-controlled, adaptive task lighting to optimize illumination for surgical and patient-care environments. The system was developed over an 18 month period of collaboration between Company engineers andMayo Clinic surgeons, scientists, and operating room staff. The teams researched, designed, and rapidly iterated multiple prototypes in order to develop unique features intended to address major gaps in current surgical lighting solutions. In 2020, the Company will be continuing to work on the intelligent medical lighting system in preparation for clinical trials in order to assess system performance and work toward obtaining any necessary approvals. The Company estimates that it could take 18 to 24 months to complete these trials, before a system could be available for commercial applications.
OTHER
Automotive revenues represent approximately 97% - 98% of the Company's total
revenue, consisting of interior and exterior electrochromic automatic-dimming
rearview mirrors and automotive electronics.
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The Company does continue to experience pricing pressure from its automotive customers and competitors, which will continue to cause downward pressure on its sales and profit margins. The Company works continuously to offset these price reductions with engineering and purchasing cost reductions, productivity improvements, and increases in unit sales volume, but there is no assurance the Company will be able to do so in the future.
Because the Company sells its products throughout the world, and automotive manufacturing is highly dependent on economic conditions, the Company can be affected by uncertain economic conditions that can reduce demand for its products. The Company has been likewise affected by the COVID-19 pandemic.
The Company believes that its patents and trade secrets provide it with a competitive advantage in dimmable devices, electronics and other features that it offers for the automotive, aerospace and medical industry. Claims of patent infringement can be costly and time-consuming to address. To that end, the Company obtains intellectual property rights in the ordinary course of business to strengthen its intellectual property portfolio and to minimize the risk of infringement.
The Company does not have any significant off-balance sheet arrangements or commitments that have not been recorded in its consolidated financial statements.
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OUTLOOK
The Company's forecasts for light vehicle production for the second half of 2020 are based on IHS Markit'smid-July 2020 forecasts for light vehicle production inNorth America ,Europe ,China , andJapan andKorea . The Company's forecast also takes into account the fact that many of our OEM customers continue to be impacted by the COVID-19 pandemic. Based on this information, global light vehicle production in the Company's primary regions is expected to decline 7% for the second half of 2020 and 20% for calendar year 2020 compared to 2019 as detailed below: Light Vehicle Production (perIHS Markit Automotive mid-July light vehicle production forecast) (in Millions) Calendar Year Calendar Year Region 2H 2020 2H 2019 % Change 2020 2019 % Change North America 7.53 7.83 (4) % 12.62 16.31 (23) % Europe 9.05 9.83 (8) % 15.85 21.11 (25) % Japan and Korea 5.45 6.38 (15) % 10.53 13.11 (20) % China 12.26 13.15 (7) % 21.52 24.67 (13) % Total Light Vehicle Production 34.29 37.19 (8) % 60.52 75.20 (20) % Based on this light vehicle production forecast and the structural changes that the Company has made over the last several months, the Company is providing guidance estimates for the second half of 2020, as opposed to only updating full year guidance. Given the magnitude of changes made in 2020, the Company believes this guidance is a more accurate representation of the new cost structure and financial performance not only for the remainder of 2020, but should also provide better visibility heading into 2021. Such guidance for the second half of 2020 reflects the Company's best estimate of the impact of the ongoing COVID-19 pandemic, as well as changes to the IHS Markit's estimates for light vehicle production for the remainder of 2020. Based on the aforementioned, the Company currently estimates that top line revenue for the second half of calendar year 2020 will be between$865 and$915 million . Ongoing uncertainties remain around the impact of the COVID-19 pandemic on customer demand and restrictions on operations. COVID-19 has created unprecedented circumstances for the Company's industries, which included massive changes to production levels at its customers, which occurred in a very short time period. Beyond the impact of the COVID-19 pandemic, other ongoing uncertainties remain including: light vehicle production levels; impacts of already in place and potential additional future tariffs; impacts of regulation changes; automotive plant shutdowns; supplier part shortages; vehicle sales rates inEurope ,Asia andNorth America ; OEM strategies and cost pressures; customer inventory management and the impact of potential automotive customer (including their Tier 1 suppliers) and supplier bankruptcies; work stoppages; etc., all of which could disrupt shipments to these customers and make forecasting difficult. Based on updated net sales guidance for the second half of calendar year 2020, as well as actual results for the first six months of 2020 and anticipated product mix, the Company has estimated that the gross margin will be between 36% and 37% for the second half of calendar year 2020. As a result of efforts to manage the cost structure of the Company in light of the impacts of the COVID-19 pandemic, the Company is also lowering the guidance range for operating expenses, which include E, R & D expenses and S, G & A expenses. The Company has estimated that its operating expenses are now expected to be approximately$88 -$93 million for the second half of calendar year 2020. As part of the Company's renewed focus on optimizing its cost structure over the remainder of the year, the Company now anticipates that capital expenditures for the second half of calendar year 2020 will be approximately$30 -$40 million , the majority of which will be equipment purchases. Capital expenditures in calendar year 2020 are currently anticipated to be financed from current cash and cash equivalents on hand and cash flows from operating activities.
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Based on actual results for the first six months of 2020, and expected projects in the remainder of the year, the Company now estimates that depreciation and amortization expense for the second half of calendar year 2020 will be approximately$52 -$55 million . The Company estimates its effective annual tax rate for the second half of calendar year 2020 to be in the range of 17% to 19%, which reflects the anticipated lower discrete benefits from stock option exercises of the Company's employees and reduced foreign-derived intangible income tax benefits due to geographical mix changes within its customer base. In accordance with the previously announced share repurchase plan, and provided that business begins to return to more normalized levels, the Company will consider the appropriateness of any share repurchases in the second half of 2020. This determination will take into account macroeconomic issues (including the impact of the COVID-19 pandemic), market trends, and other factors that the Company deems appropriate (including the market price of the stock, anti-dilutive effect of repurchases, and available cash). As ofJune 30, 2020 , the Company has 13.0 million shares remaining available for repurchase under the previously announced share repurchase plan. Additionally, based on the difficulties forecasting and the uncertainty of global light vehicle production data for 2021, the Company has withdrawn revenue guidance for 2021, until better data becomes available. Despite the fact that we are withdrawing guidance for 2021, the Company remains confident in its ability to continue to outperform its primary underlying markets.
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CRITICAL ACCOUNTING POLICIES: The preparation of the Company's consolidated condensed financial statements contained in this report, which have been prepared in accordance with accounting principles generally accepted inthe United States , requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and/or on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions. The Company has identified critical accounting policies used in determining estimates and assumptions in the amounts reported in its Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
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