Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS:
THIRD QUARTER 2018 VERSUS THIRD QUARTER 2017
Net Sales.
Net sales for the third quarter of 2018 increased by $21.6 million or 5% when compared with the third quarter of 2017.
Automotive net sales for the third quarter of 2018 increased 5% to $449.2 million, compared with automotive net sales of $428.2 million in the third quarter of 2017, driven primarily by a 6% quarter over quarter increase in automotive mirror unit shipments. The 6% increase in automotive mirror unit shipments in the third quarter of 2018 to 10.2 million units compared with the third quarter of 2017, was primarily due to increased international shipments of the Company's interior and exterior auto-dimming mirrors on a quarter over quarter basis, as opposed to North American mirror unit shipments, which were essentially flat on a quarter over quarter basis.
The below table represents the Company's auto-dimming mirror unit shipments for the three and nine months ended September 30, 2018, and 2017
(in thousands).
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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% Change
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2018
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2017
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% Change
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North American Interior Mirrors
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2,108
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2,102
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—
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%
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6,636
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6,693
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(1)
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%
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North American Exterior Mirrors
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1,103
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842
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31
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%
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2,871
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2,673
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|
7
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%
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Total North American Mirror Units
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3,211
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2,944
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9
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%
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9,507
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9,366
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2
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%
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International Interior Mirrors
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5,154
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4,794
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8
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%
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15,801
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14,438
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9
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%
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International Exterior Mirrors
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1,864
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1,875
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(1)
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%
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6,091
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5,517
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10
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%
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Total International Mirror Units
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7,018
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6,668
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5
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%
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21,892
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19,954
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10
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%
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Total Interior Mirrors
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7,262
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6,896
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5
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%
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22,437
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21,130
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6
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%
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Total Exterior Mirrors
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2,967
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2,717
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9
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%
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8,962
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8,189
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9
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%
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Total Auto-Dimming Mirror Units
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10,229
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9,613
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6
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%
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31,399
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29,320
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7
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%
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Note: Percent change and amounts may not total due to rounding.
Other net sales were $11.1 million in the third quarter of 2018, an increase of 6%, compared to $10.5 million in the third quarter of 2017. This was primarily a result of fire protection sales of $5.9 million in the third quarter of 2018, increasing by 13% compared to $5.2 million of fire protection sales in the third quarter of 2017. This was offset by a decrease of 3% in variable dimmable aircraft windows, which decreased from $5.3 million in the third quarter of 2017 to $5.2 million in the third quarter of 2018.
Cost of Goods Sold.
As a percentage of net sales, cost of goods sold increased to 62.4% in the third quarter of 2018 versus 61.0% in the third quarter of 2017. The quarter over quarter net decrease in the gross profit margin was primarily the result of annual customer price reductions, the inability to leverage fixed overhead costs, and newly enacted tariffs. This decrease was partially offset by purchasing cost reductions. On a quarter over quarter basis, annual customer price reductions had a negative impact of approximately 150 - 200 basis points and the inability to leverage fixed overhead and the newly enacted tariffs each had a negative impact of approximately 50 - 100 basis points. Purchasing cost reductions had a positive impact of approximately 50 -100 basis points on a quarter over quarter basis.
Operating Expenses.
Engineering, research and development ("E, R & D") expenses for the third quarter of 2018 increased by 9% or $2.1 million when compared with the third quarter of 2017, primarily due to
increased staffing levels and benefits, which continue to support growth and the development of new business and technology advances.
Selling, general and administrative ("S, G & A") expenses increased by 7% or $1.3 million for the third quarter of 2018 compared to the third quarter of 2017. S, G & A expenses, notwithstanding the quarter over quarter increase, were at approximately 4% of net sales in the third quarter of 2018 and in the third quarter of 2017. S, G, & A expenses increased on a dollar basis primarily due to increased staffing levels and benefits.
Total operating expenses were $45.6 million in the third quarter of 2018, which increased by 8% or $3.4 million, from $42.2 million in the third quarter of 2017.
Total Other Income.
Total other income for the third quarter of 2018 increased by $1.3 million when compared with the third quarter of 2017, primarily due to increased interest income, net of lower interest expense, each on a quarter over quarter basis, as the Company had an increased investment in fixed-income securities during the current quarter versus the third quarter of 2017, as well as additional paid down debt.
Provision for Income Taxes.
The effective tax rate was 14.7% in the third quarter of 2018 compared to 31.0% for same quarter of 2017. Generally, effective tax rates for these periods differ from statutory federal income tax rates, due to provisions for state and local income taxes, permanent tax differences, and the foreign-derived intangible income tax deduction during the three month period ended September 30, 2018. The decrease in the effective tax rate for the third quarter of 2018 compared to the same period of 2017 was due to the reduction of the federal income tax rate from 35% to 21% as a result of the Act, as well as R&D tax credits, certain discrete tax benefits related to equity compensation, and the foreign derived intangibles income tax deduction.
Net Income.
Net income for the third quarter of 2018 increased by $21.1 million or 23% when compared with the third quarter of 2017, due to increases in sales, other income, and the decrease in the tax expense described above.
NINE MONTHS ENDED SEPTEMBER 30, 2018 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2017
Net Sales.
Net sales for the nine months ended September 30, 2018 increased by $45.4 million or 3% when compared with the same period in 2017.
Automotive net sales for the first nine months of 2018 were $1.35 billion, up 3% compared with automotive net sales of $1.31 billion for the first nine months of 2017, partially driven by a 7% period over period increase in automotive mirror unit shipments. North American automotive mirror unit shipments in the nine months ended September 30, 2018 increased 2% to 9.5 million units compared with same period in 2017, which results were impacted by North American light vehicle production. International automotive mirror unit shipments in the nine months ended September 30, 2018, increased 10% to 21.9 million units compared with the same period in 2017, primarily due to increased penetration of the Company's interior and exterior auto-dimming mirrors.
Cost of Goods Sold.
As a percentage of net sales, cost of goods sold increased to 62.5% for the first nine months of 2018 versus 61.5% in the same period last year. The period over period decrease in gross margin on a year to date basis was primarily due to annual customer price reductions that were not fully offset by purchasing cost reductions, and the Company's inability to leverage fixed overhead costs. Annual customer price reductions and inability to leverage fixed overhead each had a negative impact of approximately 100 - 150 basis points, while purchasing cost reductions had a positive impact of approximately 50 - 100 basis points.
Operating Expenses.
E, R & D expenses for the nine months ended September 30, 2018, increased 7% or $5.0 million when compared with the same period last year, primarily due to increased staffing levels related to development and launch of new business.
S, G & A expenses for the first nine months of 2018 increased 12% or $6.0 million when compared with the same period last year, primarily due to increases in staffing levels and benefits.
Total Other Income.
Total other income for the nine months ended September 30, 2018 increased by $4.4 million when compared with the same period last year, primarily due to an increase in investment income and realized gains on the sale of equity investments that primarily occurred during the first quarter of 2018, as well as increased interest income, net of lower period over period interest expense, compared to the first nine months of 2017 due to the pay down of debt.
Taxes.
The effective tax rate was 15.2% for the nine months ended September 30, 2018 compared to 29.8% for the same period of 2017. The decrease in the effective tax rate for the nine months ended September 30, 2018 compared to the same period of 2017 is primarily due to the reduction of the federal income tax rate from 35% to 21% as a result of the Act, as well as R&D tax credits, discrete tax benefits related to equity compensation, and the foreign-derived intangible income tax deduction.
Net Income.
Net income for the nine months ended September 30, 2018 increased by $55.3 million or 20% to $331.6 million versus $276.3 million in the same period last year, due to increases in sales, other income, and the decrease in tax expense described above.
FINANCIAL CONDITION:
The Company's cash and cash equivalents as of September 30, 2018 was $194.0 million, which decreased approximately $375.7 million compared to $569.7 million as of December 31, 2017. The decrease was primarily due to share repurchases, investment purchases, dividend payments, the repayment of debt, and capital expenditures, which was partially offset by the positive cash flows from operations and the proceeds from investment sales during the nine months ended September 30, 2018.
Short-term investments as of September 30, 2018 were $143.6 million, down from $152.5 million as of December 31, 2017. Long-term investments were $141.6 million as of September 30, 2018, compared to $57.8 million as of December 31, 2017, as a result of the Company increasing its holdings in fixed-income securities investments as part of its previously announced capital allocation strategy.
Accounts receivable as of September 30, 2018 increased approximately $16.2 million compared to December 31, 2017, primarily due to the higher sales level, as well as timing of sales within the quarters.
Inventories as of September 30, 2018 decreased approximately $3.4 million when compared to December 31, 2017, primarily due to decreases in raw materials.
Accounts payable as of September 30, 2018 increased approximately $0.1 million when compared to December 31, 2017.
Accrued liabilities and the current portion of long-term debt as of September 30, 2018 decreased approximately $70.9 million compared to December 31, 2017, primarily due to the Company's debt repayment of $78.0 million during the first nine months of 2018, which was partially offset by an increase in accrued salaries and wages due to timing of certain wage payments.
Cash flow from operating activities for the nine months ended September 30, 2018 increased $45.7 million to $398.2 million, compared with $352.6 million during the same nine month period last year, primarily due to the increase in net income.
Capital expenditures for the nine months ended September 30, 2018 were approximately $68.8 million, compared with approximately $86.1 million for the same nine month period last year.
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 facilities needs. In the first quarter of 2018, as previously announced, the Company acquired a 25,000 square-foot, one-story building that was previously leased by the Company since 1978, as part of the former CEO's retirement agreement. Additionally, in the current year the Company began construction on a 250,000 square-foot distribution facility located at a 140 acre site in Zeeland, Michigan, where the Company previously performed master planning and completed land infrastructure improvements. The total cost of the building project is expected to be approximately $25 - $30 million and will be funded with cash and cash equivalents on hand. The facility is expected to be operational in the fourth quarter of 2018.
The Company estimates that it currently has building capacity to manufacture approximately 30 - 33 million interior mirror units annually and approximately 13 - 15 million exterior mirror units annually, based on current product mix (excluding the impact of the on-going construction of the aforementioned distribution center). The Company evaluates equipment capacity on an ongoing basis and adds equipment as needed.
Management considers the current working capital and long-term investments, in addition to internally generated cash flow, its new Credit Agreement, and credit worthiness, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments. The following is a summary of working capital and long-term investments:
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September 30, 2018
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December 31, 2017
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Working Capital
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$
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654,672,103
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$
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940,916,816
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Long Term Investments
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141,631,510
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|
57,782,418
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Total
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$
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796,303,613
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$
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998,699,234
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The decrease in working capital as of September 30, 2018 is primarily due to share repurchases made during the nine month period ended September 30, 2018, as well as capital expenditures.
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 intends to continue to repurchase additional shares of common stock in the future in support of the capital allocation strategy, but share repurchases may vary from time to time and will take into account macroeconomic events, 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 three and nine months ended September 30, 2018, the Company repurchased 7,508,249 and 23,124,565 shares, respectively. Of the 23,124,565 shares, 5,499,728 shares were repurchased from the former CEO in the first quarter of 2018, pursuant to the previously disclosed retirement agreement. The shares repurchased from the former CEO were separately approved by the Company's Board of Directors and were not a part of the Company's existing publicly announced share repurchase plan. The Company has 12,166,059 shares remaining under the plan as of September 30, 2018, as is further detailed in
Part II, Item 2
of this Form 10-Q.
BUSINESS UPDATE
The Company's overall unit growth continues to out-pace vehicle production growth in large part due to the many different product launches that have been executed in 2017 and year to date in 2018. The Company's unit and revenue growth continue to be driven by the Company's electrochromic technology, including a number of vehicles that are new launches, as well as certain other advanced features.
Interior and exterior auto-dimming mirrors and advanced electronic features were launched on a net new 10 vehicle models during the first quarter of 2018, on a net new 17 vehicle models during the second quarter of 2018, and on a net new 19 vehicle models during the third quarter of 2018. Of the 19 net new launches in the third quarter, 6 new nameplate launches were related to outside auto-dimming mirrors, 8 launches related to HomeLink, and 5 launches related to Full Display Mirror
®
applications. In addition, the Company had an additional 3 launches of inside and outside auto dimming mirrors with domestic Chinese OEMs.
Historically, the Company has been able to deliver higher than average margins when it has added electronic content faster than unit growth when combined with growth in unit penetration. These net additional vehicle models offering the Company's interior, exterior, and advanced feature products, as well as further penetration of its products on exiting models, helped drive a 5% quarter over quarter organic growth rate for interior mirror units and a 9% quarter over quarter organic growth rate for exterior mirror units compared to the third quarter of 2017, driven in part by an increase of 9% in domestic auto-dimming mirror unit shipments. The overall production levels in the in the North America, Europe, and Japan/Korea markets, which represent the Company's primary markets, was down 3% quarter over quarter.
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. 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 standard mirror, which is a long-standing safety requirement 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.
The Company continues to work on the development and launch of the Full Display Mirror
®
for seven customers. As of the third quarter of 2018, the Company is shipping production Full Display Mirrors
®
to four OEMs, which are General Motors, Subaru, Toyota, and Nissan. During the first quarter of 2018, the Company announced that Jaguar Land Rover would also launch the Company's Full Display Mirror
®
product and would be the first European customer to adopt the feature. During the third quarter of 2018, the Company announced 6 new vehicles in production with Full Display Mirror
®
technology, including three vehicles in the Japan market. The Company continues to see interest from other automotive OEMs as well and is negotiating with other OEMs on an on-going basis. The Company hopes on-going discussions with certain other OEMs may, in the future, cause such OEM's to consider adding the Full Display Mirror
®
into their product roadmap for future vehicles.
During the first quarter of 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 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 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 all while 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. 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.
On March 31, 2014, the Alliance of Automobile Manufacturers petitioned the National Highway Traffic Safety Administration ("NHTSA") to allow automakers to use cameras as an option to replace conventional rearview mirrors within the United States, however, no final rule or legislation has been made in response to this petition. At the annual SAE Government-Industry Meeting in January 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 a CMS Task Force to draft the Recommended Procedures. In the second half of 2018, the Office of Management and Budget published its regulatory and deregulatory agenda, which included a reference to a prerule stage for NHTSA related to amending the rear visibility standard to allow the option for camera-monitor systems to replace mirrors.
In July 2016, a revision to UN-ECE Regulation 46 was published with an effective date of June 18, 2016, which allows for CMS to replace mirrors in Japan and European countries. As of January 2017, CMS 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 has launched 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 to develop 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 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
®
, which uses both RF and wireless cloud-based connectivity to deliver complete vehicle-to-home automation. With the next-generation HomeLink
®
, a HomeLink
®
button press communicates with the HomeLink
®
app on the user’s smartphone via Bluetooth Low Energy. 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 server network and 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 the 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 new markets like China. The unique attributes of the China market allow for potential new 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 the China market.
In January 2016, the Company announced a partnership with TransCore to provide automobile manufacturers with a vehicle-integrated tolling solution that enables motorists to drive on all U.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 into the Company's rearview mirrors. In January 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 in Canada and Mexico. 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 helps automakers seamlessly integrate toll collection into the car. Since the Integrated Toll Module
®
or ITM
®
enables travel across almost all United States toll roads, and others in North 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 throughout the country. 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. Initial production deliveries are currently anticipated for the end of calendar year 2018, which may vary based on automaker vehicle launch timing. During the second quarter of 2018, the Company officially signed agreements, in the ordinary course of business, with two additional OEMs to launch the ITM
®
product. Both of these OEM launches are targeted to begin production shipments in the 2020 or 2021 time periods.
During the first quarter of 2017, the Company 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, which is far superior to facial, voice, and other biometric systems. The Company's future plans include integrating biometric authentication with HomeLink
®
and HomeLink Connect
TM
. 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 in January 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.
In January 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 called HomeLink Connect
TM
. HomeLink Connect
TM
is an all new home automation app that pairs with the vehicle and allows drivers to operate home automation devices from the vehicle's center console display. Drivers of HomeLink Connect
TM
compatible vehicles will be able to download and configure the app to control many available home automation devices and create entire home automation settings. The Company also announced that Jaguar Land Rover will be the first OEM to deploy this new technology in their vehicles.
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.
On December 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, and on August 5, 2018, NHTSA published a notice seeking public comment on NCAP with a deadline of October 1, 2018 for the submission of written comments. 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.
On October 12, 2018, NHTSA published a Notive 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 of North 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 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.
OTHER
Automotive revenues represent approximately 98% of the Company's total revenue, consisting of interior and exterior electrochromic automatic-dimming rearview mirrors and automotive electronics.
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 previously announced that it is providing variably dimmable windows for the Boeing 787 Dreamliner series of aircraft. The Company continues to work with aircraft manufacturers that have an interest in this technology regarding potential additional programs.
The Company believes that its patents and trade secrets provide it with a competitive advantage in adimmable devices and other electronic features that it offers in vehicles and the aerospace 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.
OUTLOOK
The Company’s forecasts for light vehicle production for the fourth quarter and full year of 2018 are based on IHS Markit's mid-October 2018 forecasts for light vehicle production in North America, Europe, Japan and Korea. Using the mid-October 2018 light vehicle production forecasts indicated in the table below, the Company has provided certain guidance for calendar year 2018.
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Light Vehicle Production (per IHS Markit Automotive mid-October light vehicle production forecast)
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(in Millions)
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Region
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4Q 2018
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4Q 2017
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% Change
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Calendar Year 2018
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Calendar Year 2017
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% Change
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North America
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4.23
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4.11
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3
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%
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17.02
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17.06
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—
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%
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Europe
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5.67
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5.69
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—
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%
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22.22
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22.22
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—
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%
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Japan and Korea
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3.47
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3.29
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5
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%
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13.15
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13.26
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(1)
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%
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Total Light Vehicle Production
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13.37
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13.09
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2
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%
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52.39
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52.54
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—
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%
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Based on the aforementioned light vehicle product forecasts, the Company now estimates that top line revenue for calendar year 2018 will be between $1.854 and $1.872 billion. All estimates are based on light vehicle production forecasts in the regions to which the Company ships product, as well as the estimated option rates for its products on prospective vehicle models and anticipated product mix.
The Company continues to see order rates and booked business that allow for these estimates despite relatively modest vehicle production increases (and in some measures even decreases) in its primary markets. Nevertheless, ongoing uncertainties remain including: light vehicle production levels; impacts of tariffs; impacts of regulation changes; automotive plant shutdowns; supplier part shortages; sales rates in Europe, Asia and North 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, strikes, etc., all of which could disrupt shipments to these customers and make forecasting difficult.
As a result of the most recently enacted tariffs by the Office of the United States Trade Representative related to imports from China and tariffs enacted by China on imports from the United States, the Company currently expects additional cost increases of between $2.5 million and $3 million for the fourth quarter of 2018. Total cost increases related to all recently enacted tariffs are expected to be approximately $5.5 million to $6 million for the fourth quarter of 2018. Based on actual results for the first nine months of 2018, currently forecasted sales and anticipated product mix, and the aforementioned increased tariff costs, the Company now estimates that the gross profit margin will be between 37.5% and 38.0% for calendar year 2018, as previously announced.
The Company continues to estimate that its operating expenses, which include E, R & D expenses and S, G & A expenses are expected to be approximately $180 - $185 million for calendar year 2018, primarily to staffing costs, professional fees and travel expenses, which continue to support growth and the development of new business, technology advances or, in the case of professional fees, provides support with respect to the new income tax legislation passed in 2017.
In light of on-going demand for the Company's auto-dimming mirrors and electronics, and based on actual spending levels through the first nine months of 2018, the Company now anticipates that 2018 capital expenditures will be approximately $95 - $105 million, as previously announced. Capital expenditures in the calendar year 2018 are currently anticipated to be financed from current cash and cash equivalents on hand and cash flows from operating activities.
Based on actual results for the first nine months of 2018, as well as expected projects in the fourth quarter, the Company now estimates that depreciation and amortization expense for calendar year 2018 will be approximately $105 - $110 million.
The Company continues to estimate its effective annual tax rate for calendar year 2018 to be in the range of 15.0% to 18.0%, as previously announced.
The Company intends to continue to repurchase additional shares of its common stock in 2018 and into the future depending on a number of factors, including: market, economic, and industry conditions; the market price of the Company's common stock; anti-dilutive effect on earnings; available cash; and other factors that the Company deems appropriate, commensurate with its previously announced capital allocation strategy.
Finally, based on available light vehicle production forecasts and current forecasted 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 the foregoing 2018 revenue estimates in the range of 5% to 10%.
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 in the 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 ended December 31, 2017.