Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SECOND QUARTER 2021 VERSUS SECOND QUARTER 2020
Net Sales. Net sales for the second quarter of 2021 increased by $198.1 million or 86% when compared with the second quarter of 2020.
Automotive net sales for the second quarter of 2021 were $420.6 million, compared with automotive net sales of $222.1 million in the second quarter of 2020. Auto-dimming mirror unit shipments grew 98% during the quarter, highlighted by 140% growth in exterior-mirror unit shipments, in each case compared to the second quarter of 2020.
The below table represents the Company's auto-dimming mirror unit shipments for the three and six months ended June 30, 2021, and 2020 (in thousands).
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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% Change
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2021
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2020
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% Change
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North American Interior Mirrors
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1,873
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787
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138%
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3,946
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2,806
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41%
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North American Exterior Mirrors
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1,497
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455
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229%
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2,990
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1,689
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77%
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Total North American Mirror Units
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3,370
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1,242
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171%
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6,936
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4,495
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54%
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International Interior Mirrors
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4,811
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2,916
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65%
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10,590
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7,948
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33%
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International Exterior Mirrors
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2,240
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1,102
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103%
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4,676
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3,211
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46%
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Total International Mirror Units
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7,052
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4,018
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76%
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15,266
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11,159
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37%
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Total Interior Mirrors
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6,684
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3,703
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81%
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14,535
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10,754
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35%
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Total Exterior Mirrors
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3,738
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1,557
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140%
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7,666
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4,900
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56%
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Total Auto-Dimming Mirror Units
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10,422
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5,260
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98%
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22,202
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15,654
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42%
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Note: Percent change and amounts may not total due to rounding.
Other net sales were $7.4 million in the second quarter of 2021, a decrease of 6%, compared to $7.9 million in the second quarter of 2020. This decrease is in large part attributable to a 65% quarter over quarter decline in variable dimmable aircraft windows sales, which decreased to $1.1 million in the second quarter of 2021 from $3.0 million in the second quarter of 2020. Fire protection sales increased by 31% in the second quarter of 2021 to $6.3 million, compared to $4.8 million in the second quarter of 2020.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased to 64.6% in the second quarter of 2021 versus 80.9% in the second quarter of 2020. Compared to the COVID-19 impacted second quarter of 2020, gross margins improved due to the higher sales levels, significantly better overhead leverage, the structural cost savings put in place during 2020, and positive product mix on a quarter over quarter basis. On a quarter over quarter basis, the fixed overhead leverage had a positive impact of approximately 1,000 basis points (10 percentage points) on the gross margin, and the savings as a result of structural cost reductions that took place in the second quarter of 2020 had a positive impact of approximately 200 - 300 basis points on gross margin. The above-referenced positive product mix had a positive impact of approximately 100 - 150 basis points on gross margin on a quarter over quarter basis. These positive impacts were partially offset by annual customer price reductions, which had a negative impact of approximately 150 basis points on gross margin on a quarter over quarter basis.
Operating Expenses. Engineering, research and development ("E, R & D") expenses for the second quarter of 2021 increased by $0.1 million when compared with the second quarter of 2020.
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Selling, general and administrative ("S, G & A") expenses increased by 4% or $0.9 million for the second quarter of 2021 compared to the second quarter of 2020. S, G & A expenses were 5% of net sales in the second quarter of 2021, compared to 9% of net sales in the second quarter of 2020. S, G, & A expenses increased on a quarter over quarter basis primarily due to increases in wages and selling expenses.
Total operating expenses were $51.7 million in the second quarter of 2021, which increased by 2% or $1.0 million, from $50.7 million in the second quarter of 2020.
Total Other Income. Total other income for the second quarter of 2021 decreased by $1.0 million when compared with the second quarter of 2020.
Provision for Income Taxes. The effective tax rate was 15.0% for, and an income tax expense of $15.3 million was recorded in, the second quarter of 2021 compared to an income tax benefit of $1.5 million for the same quarter of 2020. 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 Income. Net income for the second quarter of 2021 was $86.5 million, compared to a net loss of $2.4 million the second quarter of 2020. The increase in net income was driven by the quarter over quarter increase in sales, gross margins, and operating profits.
Earnings (Loss) Per Share. The Company had earnings per diluted share for the second quarter of 2021 of $0.36, compared to a loss per diluted share of $0.01 for the second quarter of 2020. The increase in earnings per diluted share was the result of higher net income compared to the second quarter of 2020.
SIX MONTHS ENDED JUNE 30, 2021 VERSUS SIX MONTHS ENDED JUNE 30, 2020
Net Sales. Net Sales for the six months ended June 30, 2021 increased by $228.0 million or 33% when compared with the same period in 2020.
Automotive net sales for the first six months of 2021 were $896.2 million, up 35% compared with automotive net sales of $661.9 million for the first six months of 2020, driven by a 42% period over period increase in automotive mirror unit shipments. North American automotive mirror shipments in the six months ended June 30, 2021 increased 54% to 6.9 million units compared with the same period in 2020.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased to 63.3% for the first six months of 2021, versus 70.7% in the same period last year. The period over period increase in the gross profit margin was primarily the result of the Company's better leverage of fixed overhead, positive structural cost savings put in place during the second quarter of 2020, and purchasing cost reductions. These improvements in gross margin were partially offset by annual customer price reductions. On a period over period basis, better fixed overhead leverage had a positive impact of approximately 400 - 450 basis points on gross margin, and the savings as a result of structural cost reductions that took place in the second quarter of 2020 had a positive impact of approximately 200 - 250 basis points on gross margin. Purchasing cost reductions had a positive impact of approximately 50 - 100 basis points on gross margin, each on a period over period basis. These positive impacts were partially offset by annual customer price reductions, which had a negative impact of approximately 150 - 200 basis points on gross margin on a period over period basis.
Operating Expenses. E, R & D for the six months ended June 30, 2021 decreased 3% or $1.9 million when compared with the same period last year. The decrease in E, R & D was primarily due reductions in wages and discretionary spending stemming from the structural cost reductions put in place in the second quarter of 2020.
S, G & A for the first six months of 2021 increased 2.0% or $0.9 million when compared with the same period last year. In the first six months of 2021, the Company recognized S, G & A savings from the structural cost savings put in place in the second quarter of 2020, but those savings were mostly offset by increases in professional fees and outbound freight costs. A lack of international travel and the cancellation of all industry-based trade shows due to the COVID-19 pandemic also impacted operating expenses.
Total Other Income. Total other income for the six months ended June 30, 2021 was $3.4 million compared with $5.1 million for the same period last year.
Provision for Income Taxes. The effective tax rate was 15.7% for the six months ended June 30, 2021 compared to 15.7% for the same period of 2020.
Net Income. Net income for the six months ended June 30, 2021 increased by $112.8 million or 129% to $200.0 million versus $87.1 million in the same period last year. The increase in net income was driven by the period over period increase in sales, improved product mix, higher gross margins and the continued operating leverage as a result of the structural cost savings that were put in place during the second quarter of 2020.
Earnings Per Share. The Company had earnings per diluted share for the six months ended June 30, 2021 of $0.82 which compared to earnings per diluted share of $0.35 for the six months ended June 30, 2020. The increase in earnings per share is the result of the higher net income and a lower diluted share count when compared to the second quarter of 2020.
FINANCIAL CONDITION:
The Company's cash and cash equivalents as of June 30, 2021 were $353.0 million, which decreased $70.3 million compared to $423.4 million as of December 31, 2020. The decrease was primarily due to share repurchases, dividend payments and capital expenditures, which were partially offset by cash flows from operations, during the six months ended June 30, 2021.
Short-term investments as of June 30, 2021 were $13.8 million, down from $27.2 million as of December 31, 2020, and long-term investments were $193.4 million as of June 30, 2021, compared to $162.0 million as of December 31, 2020. Changes in the investment balances were primarily driven by maturities of investments and additional investment purchases during the six months ended June 30, 2021.
Accounts receivable as of June 30, 2021 decreased approximately $50.8 million compared to December 31, 2020, primarily due to the timing of sales during the most recently completed six months. As of June 30, 2021, all of the Company's material tier one and OEM customers continue to be in good standing.
Inventories as of June 30, 2021 were $263.9 million, compared to $226.3 million as of December 31, 2020, primarily due to increases in raw materials and finished goods.
Accounts payable as of June 30, 2021 increased approximately $16.5 million to $101.3 million when compared to December 31, 2020, primarily driven by month end payment timing.
Accrued liabilities as of June 30, 2021 increased approximately $2.2 million compared to December 31, 2020, primarily due to an increase in accrued salaries and wages.
Cash flow from operating activities for the six months ended June 30, 2021 increased $61.8 million to $252.2 million, compared with $190.5 million during the same six month period last year, primarily due to increased net income and changes in working capital.
Capital expenditures for the six months ended June 30, 2021 were approximately $31.4 million, compared with approximately $28.8 million for the same six month period last year.
The Company believes its existing and planned facilities are currently suitable, adequate, and have the capacity required for current and near-term planned business. Nevertheless, the Company continues to evaluate longer term facility needs.
The Company estimates that it currently has building capacity to manufacture approximately 33 - 36 million interior mirror units annually and approximately 14 - 17 million exterior mirror units annually, based on current product mix. The Company evaluates equipment capacity on an ongoing basis and adds equipment as needed.
Management considers the current working capital and long-term investments, in addition to internally generated cash flow, its Credit Agreement, and credit worthiness, to be sufficient to cover anticipated cash needs for the foreseeable future considering its contractual obligations and commitments.
The following is a summary of working capital and long-term investments:
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June 30, 2021
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December 31, 2020
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Working Capital
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$
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728,179,559
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$
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801,593,707
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Long Term Investments
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193,418,570
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162,028,068
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Total
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$
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921,598,129
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$
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963,621,775
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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. 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). At a recent meeting, the Company's Board of Directors authorized the repurchase of an additional 25,000,000 shares under the plan. During the six months ended June 30, 2021, the Company repurchased 6,166,196 shares. The Company has 28,253,070 shares remaining under the plan as of June 30, 2021, as is further detailed in Part II, Item 2 of this Form 10-Q.
BUSINESS UPDATE
For the second quarter of 2021, the Company reported net sales of $428.0 million, which was an increase of 86% compared to net sales of $229.9 million in the second quarter of 2020. On a quarter-over-quarter basis, global light vehicle production in the Company's primary regions of Europe, North America, Japan/Korea and China increased 36% when compared to the COVID-19 impacted second quarter of 2020. However, when compared to the mid-April 2021 IHS Markit light vehicle production forecast in the Company's primary regions, actual light vehicle production in the second quarter of 2021 declined approximately 1.1 million units, or 7% as a result of industry-wide part shortages and global supply chain constraints. The largest deviation from the forecasted production within the quarter came in North America, which saw an actual light vehicle production decline in excess of 15% compared to the mid-April 2021 forecast. The reduction in light vehicle production compared to forecast was led by certain OEM customers that deploy high levels of the Company's product content, including both interior and exterior auto-dimming mirrors and other electronic features such as Full Display Mirror® and HomeLink®. In total, the impact from the shortfall in vehicle production compared to forecast, led to an estimated mirror unit shipment reduction of approximately 2 million units versus the Company's beginning of the quarter expectations.
The Company's initial forecast for the second quarter was for sales to be one of the largest quarters in the Company's history, but the continual changes in releases and orders resulted in the push out of approximately 2 million units. The unit shipment changes were most severe in North America where the Company's dollar content per vehicle is above the corporate average. When looking forward into the second half of the year and into 2022, the Company believes that the overall demand for vehicles and its products should still provide opportunities for the Company to continue to outperform the underlying market.
In the second quarter of 2021, the Company had 29 total launches of interior and exterior auto-dimming mirrors and electronic features. Of these new launches, 45% contained advanced features with Full Display Mirror® being the primary driver.
PRODUCT UPDATE
Camera Systems
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 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.
As of the second quarter of 2021, the Company is shipping production Full Display Mirrors® to nine different automaker customers, which are General Motors, Subaru, Toyota, Nissan, Jaguar Land Rover, Mitsubishi, Aston Martin, Stellantis, and Maserati. As of the end of the second quarter of 2021, the Company is shipping Full Display Mirror® on 56 nameplates, and is forecasting at least 10 new vehicle nameplate launches for the second half of 2021. The second quarter 2020 launch of the Full Display Mirror® for the Toyota Harrier was the first Full Display Mirror® to launch with Digital Video Recording ("DVR") capability. This mirror and system launched in the Japan 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. 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. As of the end of the second quarter of 2021 the Company has been awarded Full Display Mirror® programs with 14 OEMs.
To enhance capability and usability of the Company's Full Display Mirror®, the Company previously introduced its 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.
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. 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. NHTSA published a report dated October 2018 related to camera monitoring systems for outside mirror replacements. On October 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 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.
On October 18, 2019, a petition for temporary exemption from FMVSS 111 submitted by Audi 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.
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. Since January 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.
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 in Europe 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 European vehicles has had the effect of replacing, and could potentially continue replacing, the Company's SmartBeam® application on these vehicles.
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. 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. On October 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 suggested Congress legislatively direct actions to improve NCAP. In March 2020, HR 6256 was introduced, which would require NHTSA to update NCAP. There are multiple bills being discussed in both the U.S. House of Representatives and the U.S. Senate that relate to NCAP.
On October 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 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 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.
Connected Car
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 third 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. In May 2021, the Company announced the Volkswagen as the first automaker to offer Bluetooth® enabled mirror for home automation that works in conjunction with HomeLink Connect®. The Company further continues to work with compatibility partners for HomeLink® applications in newer markets like China. The unique attributes of the China market allow for potential different use cases of these products and offer the potential for additional growth opportunities for 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 nearly 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. 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. In September 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 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 North 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. Currently, the Company is shipping ITM® on 9 platforms, which are: the A4, A5, A6, A7, Q5, Q7, Q8, e-tron, and the e-tron Sportback. The Company expects further ITM® nameplate launches with Audi throughout 2022 and 2023, as well as the initial launch of ITM® at its second OEM. The launch is targeted to begin production shipments in the second half of calendar year 2021. In April 2020, the Company was honored with an Automotive News PACE Award for its ITM® product, 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 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 with Yonomi Inc., in the ordinary course of business, to access 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.
In November 2020, the Company announced a partnership, in the ordinary course of business, with PayByCar™, to pursue compatibility between the Company's Integrated Toll Module and PayByCar's innovative payment solution that allows drivers to use their smartphones and toll transponder to fuel up at certain gas stations without using cash or a credit card. Compatibility between these two technologies can help to grow each company's respective consumer base while introducing new users to the benefits of the transactional vehicle.
In January 2021, the Company announced a partnership, in the ordinary course of business, with Simplenight to provide drivers and vehicle occupants with access to enhanced mobile capability for booking personalized entertainment and lifestyle experiences in addition to everyday purchases. Simplenight delivers a customizable and robust platform that enables brands to globally offer real-time book-ability across multiple categories such as dining, accommodations, attractions, events, gas, parking, shopping and more. The platform is unique in that it is designed to seamlessly integrate into automaker infotainment and navigation systems, as well as mobile applications and voice assistants. Simplenight can be integrated into the Company's current and future connected vehicle technologies, including HomeLink®, the automotive industry’s leading car-to-home automation system. HomeLink® consists of vehicle-integrated buttons that can be programmed to operate a myriad of home automation devices. Integration of Simplenight into the Company's HomeLink Connect® app is underway and will allow users to program their HomeLink® buttons and control cloud-based devices from their vehicles.
Dimmable Devices
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. In January 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. In January 2020, the Company announced that Airbus will also be offering the Company's dimmable aircraft windows on an aircraft with production starting in 2021.
Medical
In January 2020 the Company unveiled an innovative lighting technology for medical applications that was co-developed with Mayo 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 and Mayo 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 2021, the Company continues to further develop and work on the intelligent medical lighting system in order to assess system performance and work toward obtaining any necessary approvals.
OTHER
Automotive revenues represent approximately 98% - 99% of the Company's total revenue, consisting of interior and exterior electrochromic automatic-dimming rearview mirrors and automotive electronics.
The Company continues 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 and industry-wide parts shortages and global supply constraints.
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.
OUTLOOK
The Company’s most recent forecasts for light vehicle production for the second half of 2021, and full years 2021 and 2022 are based on the mid-July 2021 IHS Markit light vehicle production forecast for light vehicle production in North America, Europe, Japan/Korea and China. Second half of 2021, and calendar years 2021 and 2022 forecasted light vehicle production volumes are shown below:
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Light Vehicle Production (per IHS Markit Automotive mid-July light vehicle production forecast)
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(in Millions)
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Region
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2h 2021
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2h 2020
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% Change
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Calendar Year 2022
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Calendar Year 2021
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Calendar Year 2020
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2022 vs 2021
% Change
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2021 vs 2020
% Change
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North America
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7.83
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7.87
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(1)
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%
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17.03
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14.63
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13.02
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16
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%
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12
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%
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Europe
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9.11
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9.61
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(5)
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%
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20.29
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18.05
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16.57
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12
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%
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9
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%
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Japan and Korea
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6.04
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6.15
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(2)
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%
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12.40
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11.81
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11.21
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5
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%
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5
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%
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China
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13.26
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14.24
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(7)
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%
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26.60
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24.98
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23.59
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6
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%
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6
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%
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Total Light Vehicle Production
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36.24
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37.87
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(4)
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%
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76.32
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69.47
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64.39
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10
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%
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8
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%
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Based on the aforementioned light vehicle production forecast,and the results for the first six months of 2021, the Company has provided guidance for the second half of 2021 as shown below. This guidance includes manual adjustments to the Company's forecasts as a result of customer order changes due to part shortages that have impacted the second quarter and will likely continue to impact demand in the second half of this year and perhaps even into 2022. The Company has also updated the cost and profitability model to include impacts due to elevated raw material prices, freight expenses and labor costs. In addition, over the last several quarters, the Company has been closely monitoring the tariff discussions between the US and the EU with respect to EU Regulation 2018/0886, which was scheduled to go into effect on June 1, 2021. The EU, however, suspended the implementation until November 30, 2021 as part of on-going discussions. The Company remains hopeful that a trade agreement can be reached before this date so that the increased tariffs do not take effect. The guidance for the second half of 2021 is a follows, which does NOT take into account the aforementioned potential increased tariff costs:
•Revenue is expected to be between $970 million and $1.07 billion
•Gross Margin is expected to be between 37.5% and 38.5%
•Operating Expenses are expected to be approximately $105 to $110 million
•Estimated Annual Tax Rate, which assumes no changes to the statutory rate, is expected to be between 16% and 18%
•Capital Expenditures are expected to be between $50 and $60 million
•Depreciation and Amortization is expected to be between $54 and $59 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 that occurred in a very short time period. Beyond the impact of the COVID-19 pandemic, other ongoing uncertainties remain including: light vehicle production levels; industry-wide parts shortages and global supply chain constraints; impacts of already in place and potential additional future tariffs; impacts of regulation changes; automotive plant shutdowns; vehicle 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; etc., all of which could disrupt shipments to these customers and make forecasting difficult.
In accordance with the previously announced share repurchase plan, the Company continue to will consider the appropriateness of any share repurchases for the remainder of 2021. This determination will take into account macroeconomic issues (including the impact of the COVID-19 pandemic and industry-wide parts shortages and global supply chain constraints), market trends, and other factors that the Company deems appropriate (including the market price of the stock, anti-dilutive effect of repurchases, tax rates, and available cash). At a recent meeting, the Company's Board of Directors authorized the repurchase of an
additional 25,000,000 shares under the plan. As of June 30, 2021, the Company has 28.3 million shares remaining available for repurchase under the previously announced share repurchase plan.
Additionally, based on the mid-July 2021 light vehicle production estimates for 2022, the Company is providing revenue guidance for 2022, despite the fact that there continues to be significant uncertainty regarding macroeconomic conditions, underlying overall consumer demand for light vehicles worldwide, and the continued impact from the COVID-19 pandemic. The Company estimates that revenue for calendar year 2022 will be approximately 10% - 15% higher than estimated revenue in calendar year 2021.
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, 2020.