Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
The number of shares outstanding of the registrant’s common stock, as of the latest practicable date (October 31, 2017)(April 30, 2021) was 24,940,37325,254,445 shares of common stock.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LCI INDUSTRIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
(In thousands) | | | | | | | |
| | | | | | | |
Net income | $ | 74,120 | | | $ | 28,214 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Net foreign currency translation adjustment | (3,589) | | | (4,740) | | | | | |
| | | | | | | |
Unrealized gain on fair value of derivative instruments | 0 | | | 1,200 | | | | | |
Total comprehensive income | $ | 70,531 | | | $ | 24,674 | | | | | |
|
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 | | 2016 |
(In thousands, except per share amount) | | | | | |
| | | | | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | $ | 19,762 |
| | $ | 95,060 |
| | $ | 86,170 |
|
Accounts receivable, net | 139,144 |
| | 89,626 |
| | 57,374 |
|
Inventories, net | 229,763 |
| | 161,312 |
| | 188,743 |
|
Prepaid expenses and other current assets | 45,384 |
| | 28,572 |
| | 35,107 |
|
Total current assets | 434,053 |
| | 374,570 |
| | 367,394 |
|
Fixed assets, net | 210,304 |
| | 153,167 |
| | 172,748 |
|
Goodwill | 123,001 |
| | 93,925 |
| | 89,198 |
|
Other intangible assets, net | 134,761 |
| | 109,553 |
| | 112,943 |
|
Deferred taxes | 32,380 |
| | 29,208 |
| | 31,989 |
|
Other assets | 21,277 |
| | 14,095 |
| | 12,632 |
|
Total assets | $ | 955,776 |
| | $ | 774,518 |
| | $ | 786,904 |
|
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | |
Accounts payable, trade | $ | 88,148 |
| | $ | 55,681 |
| | $ | 50,616 |
|
Accrued expenses and other current liabilities | 109,849 |
| | 97,733 |
| | 98,735 |
|
Total current liabilities | 197,997 |
| | 153,414 |
| | 149,351 |
|
Long-term indebtedness | 49,918 |
| | 49,940 |
| | 49,949 |
|
Other long-term liabilities | 60,805 |
| | 39,796 |
| | 37,335 |
|
Total liabilities | 308,720 |
| | 243,150 |
| | 236,635 |
|
| | | | | |
Stockholders’ equity | | | | | |
Common stock, par value $.01 per share | 276 |
| | 273 |
| | 274 |
|
Paid-in capital | 201,814 |
| | 179,434 |
| | 185,981 |
|
Retained earnings | 472,154 |
| | 381,723 |
| | 395,279 |
|
Accumulated other comprehensive income (loss) | 2,279 |
| | (595 | ) | | (1,798 | ) |
Stockholders’ equity before treasury stock | 676,523 |
| | 560,835 |
| | 579,736 |
|
Treasury stock, at cost | (29,467 | ) | | (29,467 | ) | | (29,467 | ) |
Total stockholders’ equity | 647,056 |
| | 531,368 |
| | 550,269 |
|
Total liabilities and stockholders’ equity | $ | 955,776 |
| | $ | 774,518 |
| | $ | 786,904 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(In thousands) | | | |
Cash flows from operating activities: | | | |
Net income | $ | 115,420 |
| | $ | 103,372 |
|
Adjustments to reconcile net income to cash flows provided by operating activities: | | | |
Depreciation and amortization | 39,856 |
| | 33,720 |
|
Stock-based compensation expense | 15,042 |
| | 11,421 |
|
Deferred taxes | — |
| | 183 |
|
Other non-cash items | 3,655 |
| | 1,728 |
|
Changes in assets and liabilities, net of acquisitions of businesses: | | | |
Accounts receivable, net | (69,720 | ) | | (46,028 | ) |
Inventories, net | (33,780 | ) | | 13,451 |
|
Prepaid expenses and other assets | (18,662 | ) | | (7,659 | ) |
Accounts payable, trade | 29,856 |
| | 23,827 |
|
Accrued expenses and other liabilities | 27,192 |
| | 30,093 |
|
Net cash flows provided by operating activities | 108,859 |
| | 164,108 |
|
Cash flows from investing activities: | | | |
Capital expenditures | (60,342 | ) | | (21,927 | ) |
Acquisitions of businesses, net of cash acquired | (67,876 | ) | | (34,237 | ) |
Proceeds from sales of fixed assets | 348 |
| | 533 |
|
Other investing activities | (105 | ) | | (316 | ) |
Net cash flows used for investing activities | (127,975 | ) | | (55,947 | ) |
Cash flows from financing activities: | | | |
Exercise of stock-based awards, net of shares tendered for payment of taxes | (7,313 | ) | | 409 |
|
Proceeds from line of credit borrowings | 9,715 |
| | 81,458 |
|
Repayments under line of credit borrowings | (9,715 | ) | | (81,458 | ) |
Payment of dividends | (37,346 | ) | | (22,078 | ) |
Payment of contingent consideration related to acquisitions | (2,574 | ) | | (2,719 | ) |
Other financing activities | (59 | ) | | (1,018 | ) |
Net cash flows used for financing activities | (47,292 | ) | | (25,406 | ) |
| | | |
Net (decrease) increase in cash and cash equivalents | (66,408 | ) | | 82,755 |
|
| | | |
Cash and cash equivalents at beginning of period | 86,170 |
| | 12,305 |
|
Cash and cash equivalents at end of period | $ | 19,762 |
| | $ | 95,060 |
|
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for interest | $ | 1,291 |
| | $ | 1,525 |
|
Cash paid during the period for income taxes, net of refunds | $ | 48,181 |
| | $ | 51,524 |
|
Purchase of property and equipment in accrued expenses | $ | 1,205 |
| | $ | 279 |
|
| | | | | | | | | | | | | |
| March 31, | | December 31, |
| 2021 | | | | 2020 |
(In thousands, except per share amount) | | | | | |
| | | | | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | $ | 63,319 | | | | | $ | 51,821 | |
| | | | | |
Accounts receivable, net of allowances of $6,478 and $5,642 at March 31, 2021 and December 31, 2020, respectively | 405,395 | | | | | 268,625 | |
Inventories, net | 535,056 | | | | | 493,899 | |
| | | | | |
Prepaid expenses and other current assets | 64,410 | | | | | 55,456 | |
Total current assets | 1,068,180 | | | | | 869,801 | |
Fixed assets, net | 392,713 | | | | | 387,218 | |
Goodwill | 454,382 | | | | | 454,728 | |
Other intangible assets, net | 407,599 | | | | | 420,885 | |
Operating lease right-of-use assets | 121,789 | | | | | 104,179 | |
| | | | | |
Other assets | 55,810 | | | | | 61,220 | |
Total assets | $ | 2,500,473 | | | | | $ | 2,298,031 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | |
Current maturities of long-term indebtedness | $ | 67,154 | | | | | $ | 17,831 | |
Accounts payable, trade | 232,481 | | | | | 184,931 | |
| | | | | |
Current portion of operating lease obligations | 24,794 | | | | | 25,432 | |
Accrued expenses and other current liabilities | 210,559 | | | | | 188,200 | |
Total current liabilities | 534,988 | | | | | 416,394 | |
Long-term indebtedness | 726,608 | | | | | 720,418 | |
Operating lease obligations | 101,677 | | | | | 82,707 | |
Deferred taxes | 55,563 | | | | | 53,833 | |
Other long-term liabilities | 122,050 | | | | | 116,353 | |
Total liabilities | 1,540,886 | | | | | 1,389,705 | |
Stockholders’ equity | | | | | |
Common stock, par value $.01 per share | 283 | | | | | 282 | |
Paid-in capital | 227,400 | | | | | 227,407 | |
Retained earnings | 786,566 | | | | | 731,710 | |
Accumulated other comprehensive income | 3,500 | | | | | 7,089 | |
Stockholders’ equity before treasury stock | 1,017,749 | | | | | 966,488 | |
Treasury stock, at cost | (58,162) | | | | | (58,162) | |
Total stockholders’ equity | 959,587 | | | | | 908,326 | |
Total liabilities and stockholders’ equity | $ | 2,500,473 | | | | | $ | 2,298,031 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
(In thousands) | | | |
Cash flows from operating activities: | | | |
Net income | $ | 74,120 | | | $ | 28,214 | |
Adjustments to reconcile net income to cash flows provided by operating activities: | | | |
Depreciation and amortization | 24,516 | | | 24,614 | |
Stock-based compensation expense | 7,436 | | | 3,295 | |
| | | |
Other non-cash items | 1,318 | | | (2,231) | |
Changes in assets and liabilities, net of acquisitions of businesses: | | | |
Accounts receivable, net | (139,245) | | | (74,776) | |
Inventories, net | (41,170) | | | 40,883 | |
Prepaid expenses and other assets | (3,328) | | | 6,350 | |
Accounts payable, trade | 49,644 | | | 31,878 | |
Accrued expenses and other liabilities | 31,556 | | | (13,468) | |
Net cash flows provided by operating activities | 4,847 | | | 44,759 | |
Cash flows from investing activities: | | | |
Capital expenditures | (20,957) | | | (7,955) | |
Acquisitions of businesses, net of cash acquired | (2,779) | | | (95,766) | |
| | | |
| | | |
Other investing activities | (605) | | | 1,972 | |
Net cash flows used in investing activities | (24,341) | | | (101,749) | |
Cash flows from financing activities: | | | |
Vesting of stock-based awards, net of shares tendered for payment of taxes | (7,767) | | | (4,517) | |
Proceeds from revolving credit facility | 208,863 | | | 247,154 | |
Repayments under revolving credit facility | (141,489) | | | (102,330) | |
Repayments under term loan and other borrowings | (3,889) | | | (3,750) | |
| | | |
Payment of dividends | (18,939) | | | (16,321) | |
Payment of contingent consideration and holdbacks related to acquisitions | (2,792) | | | 0 | |
Other financing activities | 0 | | | (391) | |
Net cash flows provided by financing activities | 33,987 | | | 119,845 | |
Effect of exchange rate changes on cash and cash equivalents | (2,995) | | | (215) | |
Net increase in cash and cash equivalents | 11,498 | | | 62,640 | |
Cash and cash equivalents at beginning of period | 51,821 | | | 35,359 | |
Cash and cash equivalents cash at end of period | $ | 63,319 | | | $ | 97,999 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for interest | $ | 3,564 | | | $ | 5,536 | |
Cash received during the period for income taxes, net of payments | $ | (86) | | | $ | (73) | |
Purchase of property and equipment in accrued expenses | $ | 3,787 | | | $ | 2,459 | |
|
| | | | | | | | | | | | | | | | | | |
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Total Stockholders’ Equity |
(In thousands, except shares and per share amounts) | | | | | | |
Balance - December 31, 2016 | $ | 274 |
| $ | 185,981 |
| $ | 395,279 |
| $ | (1,798 | ) | $ | (29,467 | ) | $ | 550,269 |
|
Net income | — |
| — |
| 115,420 |
| — |
| — |
| 115,420 |
|
Issuance of 190,753 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | 2 |
| (7,315 | ) | — |
| — |
| — |
| (7,313 | ) |
Stock-based compensation expense | — |
| 15,042 |
| — |
| — |
| — |
| 15,042 |
|
Issuance of 63,677 deferred stock units relating to prior year compensation | — |
| 6,907 |
| — |
| — |
| — |
| 6,907 |
|
Other comprehensive income | — |
| — |
| — |
| 4,077 |
| — |
| 4,077 |
|
Cash dividends ($1.50 per share) | — |
| — |
| (37,346 | ) | — |
| — |
| (37,346 | ) |
Dividend equivalents on stock-based awards | — |
| 1,199 |
| (1,199 | ) | — |
| — |
| — |
|
Balance - September 30, 2017 | $ | 276 |
| $ | 201,814 |
| $ | 472,154 |
| $ | 2,279 |
| $ | (29,467 | ) | $ | 647,056 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except shares and per share amounts) | Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity |
Balance - December 31, 2019 | $ | 281 | | | $ | 212,485 | | | $ | 644,945 | | | $ | 1,123 | | | $ | (58,162) | | | $ | 800,672 | |
Net income | — | | | — | | | 28,214 | | | — | | | — | | | 28,214 | |
Issuance of 87,833 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | 1 | | | (4,518) | | | — | | | — | | | — | | | (4,517) | |
Stock-based compensation expense | — | | | 3,295 | | | — | | | — | | | — | | | 3,295 | |
Other comprehensive loss | — | | | — | | | — | | | (3,540) | | | — | | | (3,540) | |
Cash dividends ($0.65 per share) | — | | | — | | | (16,321) | | | — | | | — | | | (16,321) | |
Dividend equivalents on stock-based awards | — | | | 297 | | | (297) | | | — | | | — | | | 0 | |
Balance - March 31, 2020 | 282 | | | 211,559 | | | 656,541 | | | (2,417) | | | (58,162) | | | 807,803 | |
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Balance - December 31, 2020 | $ | 282 | | | $ | 227,407 | | | $ | 731,710 | | | $ | 7,089 | | | $ | (58,162) | | | $ | 908,326 | |
Net income | — | | | — | | | 74,120 | | | — | | | — | | | 74,120 | |
Issuance of 97,086 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | 1 | | | (7,768) | | | — | | | — | | | — | | | (7,767) | |
Stock-based compensation expense | — | | | 7,436 | | | — | | | — | | | — | | | 7,436 | |
Other comprehensive loss | — | | | — | | | — | | | (3,589) | | | — | | | (3,589) | |
Cash dividends ($0.75 per share) | — | | | — | | | (18,939) | | | — | | | — | | | (18,939) | |
Dividend equivalents on stock-based awards | — | | | 325 | | | (325) | | | — | | | — | | | 0 | |
Balance - March 31, 2021 | 283 | | | 227,400 | | | 786,566 | | | 3,500 | | | (58,162) | | | 959,587 | |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of LCI Industries and its wholly-owned subsidiaries (“LCII”("LCII" and collectively with its subsidiaries, the “Company”"Company," "we," "us," or "our"). LCII has no unconsolidated subsidiaries. LCII, through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components”"Lippert Components," "LCI," or “LCI”"Lippert"), supplies, domestically and internationally, a broad array of engineered components for the leading original equipment manufacturers (“OEMs”("OEMs") in the recreation and transportation product markets, consisting primarily of recreational vehicles (“RVs”("RVs") and adjacent industries including buses; trailers used to haul boats, livestock, equipment, and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing. The Company also supplies engineered components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors, and service centers. At September 30, 2017,March 31, 2021, the Company operated 52over 100 manufacturing and distribution facilities located throughout the United StatesNorth America and in Canada and Italy.Europe.
Most industries where the Company sells products or where its products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, the Company’s sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the impact of international, national, and regional economic conditions, and consumer confidence on retail sales of RVs, and other products for which the Company sells its components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years.years, particularly as a result of the coronavirus ("COVID-19") pandemic and related impacts. Additionally, sales of certain engineered components to the aftermarket channels of these industries tend to be counter-seasonal.counter-seasonal, but may be different in 2021 and future years as a result of the COVID-19 pandemic and related impacts.
The Company is not aware of any significant events, except as disclosed in the Notes to Condensed Consolidated Financial Statements, which occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Condensed Consolidated Financial Statements.
In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations for the interim periods presented. The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2016 Annual Report oninstructions to Form 10-K10-Q, and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassifiedtherefore do not include some information necessary to conform to current year presentation.annual reporting requirements. Results for interim periods should not be considered indicative of results for the full year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, inventories, goodwill and other intangible assets, net assets of acquired businesses, income taxes, warranty and product recall obligations, self-insurance obligations, operating lease terminations,right-of-use assets and obligations, asset retirement obligations, long-lived assets, pension and post-retirement benefits, stock-based compensation, segment allocations, contingent consideration, environmental liabilities, contingencies, and litigation. The Company bases its estimates on historical experience, other available information, and various other assumptions 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 not readily apparent from other resources. Actual results and events could differ significantly from management estimates.
InCOVID-19 Update
The COVID-19 pandemic has caused significant uncertainty and disruption in the opinionglobal economy and financial markets. The COVID-19 pandemic had an adverse effect on the Company's financial results during the first half of management,2020 due to
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
government-mandated plant shutdowns. The Company took a variety of actions during 2020 to help mitigate the information furnishedadverse impacts, including temporary cost savings measures and delays and reductions in this Form 10-Q reflects all adjustments necessary for a fair statementcapital expenditures. Activity in most of the end markets the Company serves sequentially improved as 2020 progressed, and this trend has continued into the first quarter of 2021, especially in the RV and marine OEM markets and the Company's Aftermarket Segment. Management continues to closely monitor the impact of COVID-19 on all aspects of the business. The extent to which COVID-19 may impact the Company's liquidity, financial positioncondition, and results of operations forin the interim periods presented. future remains uncertain.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the instructionsaccounting policies described in its December 31, 2020 Annual Report on Form 10-K and should be read in conjunction with the Notes to Form 10-Q,Consolidated Financial Statements which appear in that report. All significant intercompany balances and therefore dotransactions have been eliminated.
There are no recent accounting pronouncements that have been issued and not include some information necessaryyet adopted that are expected to conform to annual reporting requirements.have a material impact on our Condensed Consolidated Financial Statements.
2.3. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Acquisitions During the Nine Months Ended September 30, 2017Subsequent Event
Metallarte S.r.l.Schaudt
In June 2017,April 2021, the Company acquired 100 percent of the equity interests of Metallarte S.r.l. (“Metallarte”Schaudt GmbH Elektrotechnik & Apparatebau ("Schaudt"), a leading supplier of electronic controls and energy management systems for the European caravan industry located in Markdorf, Germany. The purchase price was approximately $30.0 million. The purchase price is subject to customary adjustments for cash, working capital, and indebtedness. The results of the acquired business will be included in the Company's OEM Segment. The Company is in the process of determining the fair value of the assets acquired and liabilities assumed for the opening balance sheet, including net working capital, fixed assets, and the fair value of intangible assets.
Ranch Hand
In April 2021, the Company acquired 100 percent of the equity interests of Kaspar Ranch Hand Equipment, LLC ("Ranch Hand"), a manufacturer of entrycustom bumpers, grill guards, and compartment doorssteps for the European caravan market located near Siena, Italy, and its subsidiary, RV Doors, S.r.l., a manufacturer of driver-side doors located near Venice, Italy.automotive aftermarket headquartered in Shiner, Texas. The purchase price was $14.1approximately $57.4 million, plus contingent consideration up to $3.0 million. The purchase price is subject to customary adjustments for cash, working capital, and indebtedness. The results of the acquired business will be included in the Company's Aftermarket Segment. The Company is in the process of determining the fair value of the assets acquired and liabilities assumed for the opening balance sheet, including net working capital, fixed assets, and the fair value of intangible assets.
Acquisitions Completed During the Three Months Ended March 31, 2021
Wolfpack
In March 2021, the Company acquired the business and certain assets of Wolfpack Chassis, LLC ("Wolfpack"), a chassis manufacturer in Kendallville, Indiana to add production capacity. The purchase price was $2.8 million paid at closing, plus contingent considerationclosing. The preliminary purchase price allocation resulted in goodwill of $2.0 million. The accounting for this acquisition is incomplete at March 31, 2021. The purchase price allocation is subject to adjustment for net working capital, fixed asset valuation, and the fair value of intangible assets as additional information is obtained within the measurement period (not to exceed 12 months from the acquisition date). As this acquisition is not considered to have a material impact on the Company's financial statements, pro forma results of operations and other disclosures are not presented.
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisitions with Measurement Period Adjustments During the Three Months Ended March 31, 2021
Veada
In December 2020, the Company acquired 100 percent of the outstanding capital stock of Veada Industries, Inc. ("Veada"), a manufacturer and distributor of boat seating and marine accessories based on future sales by this operation.in New Paris, Indiana. The purchase price was $69.0 million, net of cash acquired, which included holdback payments of $12.2 million to be paid over the next two years. Holdback payments of $2.3 million were paid during the three months ended March 31, 2021. The remaining holdback payments are recorded in the Condensed Consolidated Balance Sheet in accrued expenses and other current liabilities ($8.2 million) and other long-term liabilities ($1.8 million) at March 31, 2021. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. Thedate, primarily in the Company's OEM Segment. As the acquisition of Veada is not considered to have a material impact on the Company's financial statements, pro forma results of operations and other disclosures are not presented.
During the three months ended March 31, 2021, the Company is validatingadjusted the preliminary purchase price allocation reported at December 31, 2020 to account for updates to net working capital balances and finalizing the valuation for the acquisition.
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):
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Cash consideration, net of cash acquired | $ | 13,501 |
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Contingent consideration | 2,366 |
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Total fair value of consideration given | $ | 15,867 |
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Customer relationships | $ | 7,000 |
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Other identifiable intangible assets | 2,150 |
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Net tangible assets | 167 |
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Total fair value of net assets acquired | $ | 9,317 |
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Goodwill (not tax deductible) | $ | 6,550 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater thanassumptions and estimates related to the fair value of fixed assets. These measurement period adjustments would not have resulted in a material impact on the prior period results if the adjustments had been recognized as of the acquisition date. The purchase price allocation is subject to adjustment for net working capital and the fair value of intangible assets acquired, resulting in goodwill, becauseas additional information is obtained within the Company anticipatesmeasurement period (not to exceed 12 months from the attainment of synergies and an increase in the markets for the acquired products.acquisition date).
LexingtonChallenger
In May 2017,November 2020, the Company acquired substantially all of the business and certain assets of LexingtonChallenger Door, LLC (“Lexington”("Challenger"), a leading manufacturer and distributor of high quality seating solutionsbranded doors for the marine, RV transportation, medicalindustry and office furniture industries locatedproducts for specialty and cargo trailers, based in Elkhart,Nappanee, Indiana. The purchase price was $40.1$35.0 million, which included holdback payments of $4.5 million to be paid over the next two years. The holdback payments are recorded in the Condensed Consolidated Balance Sheet in accrued expenses and other current liabilities ($3.5 million) and other long-term liabilities ($1.0 million) at closing.March 31, 2021. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date, as follows (in thousands):
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Cash consideration | $ | 40,062 |
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Customer relationships | $ | 16,900 |
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Other identifiable intangible assets | 1,820 |
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Net tangible assets | 4,928 |
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Total fair value of net assets acquired | $ | 23,648 |
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Goodwill (tax deductible) | $ | 16,414 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Sessa Klein S.p.A.
In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“Sessa Klein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $8.5 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM SegmentSegment. As the acquisition of Challenger is not considered to have a material impact on the Company’s financial statements, pro forma results of operations and other disclosures are not presented.
During the three months ended March 31, 2021, the Company adjusted the preliminary purchase price allocation reported at December 31, 2020 to account for updates to net working capital balances and assumptions and estimates related to the fair value of fixed assets. These measurement period adjustments would not have resulted in a material impact on the Condensed Consolidated Statementsprior period results if the adjustments had been recognized as of Income since the acquisition date. The Companypurchase price allocation is validating account balancessubject to adjustment for net working capital and finalizing the valuation for the acquisition.
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):
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Cash consideration, net of cash acquired | $ | 6,502 |
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Contingent consideration | 4,922 |
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Total fair value of consideration given | $ | 11,424 |
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Customer relationships | $ | 3,189 |
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Other identifiable intangible assets | 1,329 |
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Net tangible assets | 585 |
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Total fair value of net assets acquired | $ | 5,103 |
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Goodwill (not tax deductible) | $ | 6,321 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of intangible assets as additional information is obtained within the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Acquisitions During the Nine Months Ended September 30, 2016
Project 2000 S.r.l.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income sincemeasurement period (not to exceed 12 months from the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):date).
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Cash consideration, net of cash acquired | $ | 16,618 |
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Contingent consideration | 1,322 |
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Total fair value of consideration given | $ | 17,940 |
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Customer relationships | $ | 9,696 |
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Other identifiable intangible assets | 6,141 |
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Net other liabilities | (3,482 | ) |
Total fair value of net assets acquired | $ | 12,355 |
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Goodwill (not tax deductible) | $ | 5,585 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Flair Interiors
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a manufacturer of RV furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date.
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The acquisition of this business was recorded on the acquisition date as follows (in thousands):
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Cash consideration | $ | 8,100 |
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Customer relationships | $ | 3,700 |
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Net other assets | 2,378 |
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Total fair value of net assets acquired | $ | 6,078 |
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Goodwill (tax deductible) | $ | 2,022 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Highwater Marine Furniture
In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. The purchase price was $10.0 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
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Cash consideration | $ | 10,000 |
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Customer relationships | $ | 8,100 |
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Net tangible assets | 1,307 |
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Total fair value of net assets acquired | $ | 9,407 |
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Goodwill (tax deductible) | $ | 593 |
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The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines.
Goodwill
Goodwill by reportable segment was as follows:
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(In thousands) | OEM Segment | | Aftermarket Segment | | Total |
Net balance – December 31, 2020 | $ | 305,953 | | | $ | 148,775 | | | $ | 454,728 | |
Acquisitions – 2021 | 2,000 | | | — | | | 2,000 | |
Measurement period adjustments | 1,250 | | | 45 | | | 1,295 | |
Foreign currency translation | (3,670) | | | 29 | | | (3,641) | |
Net balance – March 31, 2021 | $ | 305,533 | | | $ | 148,849 | | | $ | 454,382 | |
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(In thousands) | OEM Segment | | Aftermarket Segment | | Total |
Net balance – December 31, 2016 | $ | 74,663 |
| | $ | 14,535 |
| | $ | 89,198 |
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Acquisitions – 2017 | 29,277 |
| | — |
| | 29,277 |
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Other | 4,519 |
| | 7 |
| | 4,526 |
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Net balance – September 30, 2017 | $ | 108,459 |
| | $ | 14,542 |
| | $ | 123,001 |
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Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist.
Changes in goodwill resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table.
Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various factors, including the Company’s (i) historical warranty costs, (ii) current trends, (iii) product mix, and (iv) sales. The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current and long-term portions, for the ninethree months ended September 30:March 31:
From time to time, the Company cooperates with and assists its customers on their product recalls and inquiries, and occasionally receives inquiries directly from the National Highway Traffic Safety Administration (“NHTSA”) regarding reported incidents
involving the Company’s products. As a result, the Company has incurred expenses associated with product recalls from time to time, and may incur expenditures for future investigations or product recalls.
The Company’s operations are subject to certain Federal, state, and local regulatory requirements relating to the use, storage, discharge, and disposal of hazardous materials used during the manufacturing processes. Although the Company believes its operations have been consistent with prevailing industry standards and are in substantial compliance with applicable environmental laws and regulations, one or more of the Company’s current or former operating sites, or adjacent sites owned by third parties,third-parties, have been affected, and may in the future be affected, by releases of hazardous materials. As a result, the Company may incur expenditures for future investigation and remediation of these sites, including in conjunction with voluntary remediation programs or third-party claims.
In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries, and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinionmanagement believes that, after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2017,March 31, 2021, would not be material to the Company’s financial position or annual results of operations.
The following table summarizes information about shares of the Company’s common stock at:
The following reconciliation details the denominator used in the computation of basic and diluted earnings per share:
Changes in either of the inputs in isolation would result in a change in the fair value measurement. A change in the assumptions used for sales forecasts would result in a directionally similar change in the fair value liability, while a change in the weighted average cost of capital would result in a directionally opposite change in the fair value liability. If there is an increase in the fair value liability, the Company would record a charge to selling, general and administrative expenses, and if there is a decrease in the fair value liability, the Company would record a benefit in selling, general and administrative expenses.
Decisions concerning the allocation of the Company’s resources are made by the Company’s chief operating decision maker (“CODM”), with oversight by the Board of Directors. The CODM evaluates the performance of each segment based upon segment operating profit or loss, generally defined as income or loss before interest and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of assets. Management of debt is a corporate function. The accounting policies of the OEM and Aftermarket Segments are the same as those described in Note 12 of the Notes to Consolidated Financial Statements ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2020.
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Information relating to segments follows for the: | | | | | | |
| Nine Months Ended September 30, | | Three Months Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net sales: | | | | | | | |
OEM Segment: | | | | | | | |
RV OEMs: | | | | | | | |
Travel trailers and fifth-wheels | $ | 1,045,465 |
| | $ | 836,634 |
| | $ | 357,940 |
| | $ | 263,579 |
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Motorhomes | 114,887 |
| | 85,762 |
| | 41,595 |
| | 29,373 |
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Adjacent industries OEMs | 310,373 |
| | 253,088 |
| | 106,386 |
| | 82,963 |
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Total OEM Segment net sales | 1,470,725 |
| | 1,175,484 |
| | 505,921 |
| | 375,915 |
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Aftermarket Segment: | | | | | | | |
Total Aftermarket Segment net sales | 129,908 |
| | 100,515 |
| | 48,893 |
| | 36,455 |
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Total net sales | $ | 1,600,633 |
| | $ | 1,275,999 |
| | $ | 554,814 |
| | $ | 412,370 |
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Operating profit: | | | | | | | |
OEM Segment | $ | 151,867 |
| | $ | 144,102 |
| | $ | 41,025 |
| | $ | 39,049 |
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Aftermarket Segment | 18,229 |
| | 16,152 |
| | 6,902 |
| | 6,089 |
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Total operating profit | $ | 170,096 |
| | $ | 160,254 |
| | $ | 47,927 |
| | $ | 45,138 |
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11. NEW ACCOUNTING PRONOUNCEMENTS
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815, Derivatives and Hedging. This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company does not believe the updated requirements will materially impact the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which amends ASC 350, Intangibles - Goodwill and Other. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This ASU is effective for interim and annual reporting periods, beginning after December 15, 2019 with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which amends ASC 805, Business Combinations. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating
LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
whether transactions should be accounted for as acquisition (or disposals) of assets or businesses. This ASU is effective for interimThe following tables present the Company’s revenues disaggregated by segment and annual reporting periods beginning after December 15, 2017. The adoption of this ASU 2017-01 is not expected to have a material impactgeography based on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classificationbilling address of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. This ASU is effective for annual and interim periods beginning after December 15, 2017, and should be applied retrospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s consolidated financial statements.customers:
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| Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 |
(In thousands) | U.S. (a) | | Int’l (b) | | Total | | U.S. (a) | | Int’l (b) | | Total |
OEM Segment: | | | | | | | | | | | |
RV OEMs: | | | | | | | | | | | |
Travel trailers and fifth-wheels | $ | 486,542 | | | $ | 16,474 | | | $ | 503,016 | | | $ | 303,682 | | | $ | 3,426 | | | $ | 307,108 | |
Motorhomes | 39,417 | | | 23,176 | | | 62,593 | | | 26,914 | | | 11,173 | | | 38,087 | |
Adjacent Industries OEMs | 211,682 | | | 38,959 | | | 250,641 | | | 146,601 | | | 40,561 | | | 187,162 | |
Total OEM Segment net sales | 737,641 | | | 78,609 | | | 816,250 | | | 477,197 | | | 55,160 | | | 532,357 | |
Aftermarket Segment: | | | | | | | | | | | |
Total Aftermarket Segment net sales | 171,410 | | | 12,598 | | | 184,008 | | | 121,618 | | | 5,695 | | | 127,313 | |
Total net sales | $ | 909,051 | | | $ | 91,207 | | | $ | 1,000,258 | | | $ | 598,815 | | | $ | 60,855 | | | $ | 659,670 | |
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In March 2016,(a) Net sales to customers in the FASB issued ASU 2016-09, ImprovementsUnited States of America
(b) Net sales to Employee Share-Based Payment Accounting, which amended ASC 718, Compensation - Stock Compensation. This ASU simplifies several aspectscustomers in countries domiciled outside of the accounting for share-based payment transactions, including income tax consequences, the classificationUnited States of awards as either equity or liabilities, and the classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the Company present excess tax benefits on the consolidated statement of cash flows as an operating activity. The adoption of the ASU resulted in the recognition of excess tax benefits in the provision for income taxes within the Condensed Consolidated Financial Statements of $5.2 million for the nine months ended September 30, 2017. Additionally, the Condensed Consolidated Statement of Cash Flows now present excess tax benefits as an operating activity, adjusted prospectively. Finally, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award. The Company adopted ASU 2016-09 in the first quarter of 2017 and elected to apply this adoption prospectively. Prior periods have not been adjusted.America
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires, in most instances, a lessee to recognize on its balance sheet a liability to make lease payments (the lease liability) and also a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a modified retrospective approach with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU 2014-09 provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts with customers to provide goods and services. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. ASU 2014-09 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017. The new standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. ASU 2014-09 also requires entities to disclose both quantitative and qualitative information to enable users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company does not anticipatefollowing table presents the adoption of this standard will have a material impact on its reported current net sales; however, given its acquisition strategy, there may be additionalCompany’s operating profit by segment:
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| Three Months Ended March 31, | | |
(In thousands) | 2021 | | 2020 | | | | |
Operating profit: | | | | | | | |
OEM Segment | $ | 79,287 | | | $ | 43,189 | | | | | |
Aftermarket Segment | 22,144 | | | 1,077 | | | | | |
Total operating profit | $ | 101,431 | | | $ | 44,266 | | | | | |
The following table presents the Company’s revenue streams acquired prior to the adoption date. The Company’s technical analysis is on-going with respect to variable consideration, whether certain contracts’ revenues will be recognized over time or at a point in time, and whether costs to obtain a contract will be capitalized. Further, the Company is continuing to assess what disaggregated revenue disclosures, in addition to current disclosures in Note 10 - Segment Reporting, will be required in its consolidated financial statements. The Company plans to adopt ASU 2014-09 using the modified retrospective approach on January 1, 2018.by product:
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| Three Months Ended March 31, | | |
(In thousands) | 2021 | | 2020 | | | | |
OEM Segment: | | | | | | | |
Chassis, chassis parts, and slide-out mechanisms | $ | 287,061 | | | $ | 202,263 | | | | | |
Windows and doors | 249,920 | | | 156,031 | | | | | |
Furniture and mattresses | 155,244 | | | 87,180 | | | | | |
Axles and suspension solutions | 55,122 | | | 35,136 | | | | | |
Other | 68,903 | | | 51,747 | | | | | |
Total OEM Segment net sales | 816,250 | | | 532,357 | | | | | |
Total Aftermarket Segment net sales | 184,008 | | | 127,313 | | | | | |
Total net sales | $ | 1,000,258 | | | $ | 659,670 | | | | | |
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of Part 1 of this Report,report, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2020.
LCI Industries (“LCII”,("LCII" and collectively with its subsidiaries, the “Company”"Company," "we," "us," or "our"), through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components”"Lippert Components," "LCI," or “LCI”"Lippert"), supplies, domestically and internationally, a broad array of engineered components for the leading original equipment manufacturers (“OEMs”("OEMs") in the recreation and transportation product markets, consisting primarily of recreational vehicles (“RVs”("RVs") and adjacent industries, including buses; trailers used to haul boats, livestock, equipment, and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing. The CompanyWe also suppliessupply engineered components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors, and service centers.
The Company hasWe have two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. At September 30, 2017, the CompanyMarch 31, 2021, we operated 52over 100 manufacturing and distribution facilities located throughout the United States and in Canada, Ireland, Italy, the Netherlands, and Italy.the United Kingdom. See Note 1013 of the Notes to the Condensed Consolidated Financial Statements.Statements for further information regarding our segments.
The Company’sOur OEM Segment manufactures or distributes a broad array of engineered components for the leading OEMs of RVsleisure and adjacentmobile transportation industries. Approximately 7162 percent of the Company’sour OEM Segment net sales for the twelve months ended September 30, 2017March 31, 2021 were of components for travel trailer and fifth-wheel RVs, including:
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● Steel chassis and related components | ● FurnitureEntry, luggage, patio, and mattressesramp doors |
● Axles and suspension solutions | ● Furniture and mattresses |
● Slide-out mechanisms and solutions | ● Electric and manual entry steps |
● Slide-out mechanisms and solutions | ● Awnings and awning accessories |
● Thermoformed bath, kitchen, and other products | ● Electronic componentsAwnings and awning accessories |
● Vinyl, aluminum, and frameless windows | ● AppliancesElectronic components |
● Manual, electric, and hydraulic stabilizer and
leveling systems | ● Televisions, sound systems, navigation
systems and backup cameras |
● Entry, luggage, patio and ramp doors | ● Other accessories |
The Aftermarket Segment supplies many of these engineered components to the related aftermarket channels of the RVrecreation and adjacent industries,transportation product markets, primarily to retail dealers, wholesale distributors, and service centers. The Aftermarket Segment also includes biminis, covers, buoys, fenders to the marine industry, towing products, truck accessories, and the sale of replacement glass and awnings to fulfill insurance claims.
Most industries where the Company sellswe sell products or where itsour products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, the Company’sour sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the impact of international, national and regional economic conditions, and consumer confidence on retail sales of RVs and other products for which the Company sells itswe sell our components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years.years, particularly as a result of the COVID-19 pandemic and related impacts. Additionally, many of the optional upgrades and non-critical replacement parts for RVs are purchased outside the normal product selling season, thereby causing these Aftermarket Segment sales to be counter-seasonal, but this may be different in 2021 and future years as a result of the COVID-19 pandemic and related impacts.
COVID-19 UPDATE
The COVID-19 pandemic has caused significant uncertainty and disruption in the global economy and financial markets. The COVID-19 pandemic had an adverse effect on our financial results during the first half of 2020 due to government-mandated plant shutdowns. We took a variety of actions during 2020 to help mitigate the adverse impacts, including temporary cost savings measures and delays and reductions in capital expenditures.
Activity in most of the end markets we serve sequentially improved as 2020 progressed, and this trend has continued into the first quarter of 2021, especially in the RV and marine OEM markets and our Aftermarket Segment. With RV retail
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
demand at record levels through the first three months of 2021, the industry has faced challenges with supply chain constraints, rising material costs, and a tightened labor market, especially in northern Indiana. To address these challenges, we have strategically managed working capital, including intentionally building up levels of certain inventory items to avoid future shortages. We have also expanded capacity outside of Elkhart County, Indiana, with new leased facilities and the acquisition of Wolfpack Chassis in Kendallville, Indiana during the quarter. We continue to focus on our culture and leadership development programs to focus on team member retention and regularly hold hiring events, with COVID-19 safety measures, to fill open positions. As we build inventory levels and invest in additional production capacity, we also closely monitor our liquidity, and may need to seek additional financing, though such additional financing may not be available on terms favorable to us, or at all. See "Liquidity and Capital Resources" below for further discussion.
The health and safety of our team members have remained our top priority. We continue to maintain the rigorous health and safety protocols we established in 2020. We leased a location to provide drive-thru rapid COVID-19 tests for our team members in northern Indiana. We have encouraged team members to seek vaccination when eligible and partnered with a local hospital in April 2021 to host a private vaccination day for our eligible northern Indiana team members and their families.
We continue to closely monitor the impact of COVID-19 on all aspects of our business.
FURRION UPDATE
At March 31, 2021, we had a receivable from Furrion Limited ("Furrion") of $42.7 million recorded for purchases of inventory stock following the termination of the distribution and supply agreement with Furrion. The termination agreement originally required Furrion to make periodic payments throughout 2020 and the first six months of 2021; however, due to the impacts of the COVID-19 pandemic, we are currently in negotiations impacting the timing of the repayment of this receivable. Accordingly, we have classified $7.8 million of the receivable as long-term, and recorded the receivable at its present value at March 31, 2021 based on the currently proposed payment plan.
Due to the nature of the Furrion distribution and supply arrangement, the operating margin related to sales of componentsFurrion products were dilutive to our consolidated operating margin prior to the aftermarket channelsend of these industries tend to be counter-seasonal.2019 when the agreement was terminated.
INDUSTRY BACKGROUND
OEM Segment
North American Recreational Vehicle Industry
An RV is a vehicle designed as temporary living quarters for recreational, camping, travel or seasonal use. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers).
The annual sales cycle for the RV industry generally starts in October after the “Open House” in Elkhart, Indiana where many of the largest RV OEMs display product to RV retail dealers and ends after the conclusion of the summer selling season in September in the following calendar year. Between October and March, industry-wide wholesale shipments of travel trailer and fifth-wheel RVs have historically exceeded retail sales as dealers build inventories to support anticipated sales. Between April and September, the spring and summer selling seasons, retail sales of travel trailer and fifth-wheel RVs have historically exceeded industry-wide wholesale shipments. Due to the COVID-19 pandemic, the 2020 Open House was canceled; however, the 2021 Open House is currently planned to take place in September. The seasonality of the RV industry has been, and will likely continue to be, impacted by the COVID-19 pandemic, and the timing of a return to historical seasonality is not possible to predict at this time.
According to the Recreation Vehicle Industry Association ("RVIA"), industry-wide wholesale shipments from the United States of travel trailer and fifth-wheel RVs in the first three months of 2021, our primary RV market, increased 49 percent to 131,200 units, compared to the first three months of 2020, primarily due to increased retail demand and dealers rebuilding inventory levels. Retail demand for travel trailer and fifth-wheel RVs increased 30 percent in the first three months of 2021 compared to the same period in 2020. Retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
industry-wide wholesale shipments. Based on the strength of retail sales and the current outlook from several RV OEMs and their dealer networks, most industry analysts continue to report that RV dealer inventory is in line with anticipated retail demand.
According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailer and fifth-wheel RVs in the first nine months of 2017, the Company’s primary RV market, increased 18 percent to 321,300 units, compared to the same period of 2016, as a result of:
An estimated 30,100 unit increase in retail demand in the first nine months of 2017, or 10 percent, as compared to the same period of 2016. In addition, retail demand is typically revised upward over the subsequent quarter by approximately five to ten percent, primarily due to delayed RV registrations.
Partially offset by RV dealers seasonally decreasing inventory levels by an estimated 3,200 units for the period ended September 30, 2017, lower than the decrease in inventory levels of 22,000 units in the same period of 2016.
While the Company measures itswe measure our OEM Segment RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., as well as the resulting estimated change in dealer inventories, for both the United States and Canada, is as follows:
|
| | | | | | | | | | | |
| | | | | | | | | Estimated |
| Wholesale | | Retail | | Unit Impact on |
| Units | | Change | | Units | | Change | | Dealer Inventories |
Quarter ended September 30, 2017(1) | 103,900 |
| | 26% | | 113,700 |
| | 5% | | (9,800) |
Quarter ended June 30, 2017 | 115,900 |
| | 17% | | 138,000 |
| | 12% | | (22,100) |
Quarter ended March 31, 2017 | 101,500 |
| | 12% | | 72,800 |
| | 16% | | 28,700 |
Quarter ended December 31, 2016 | 90,300 |
| | 20% | | 58,300 |
| | 17% | | 32,000 |
Twelve months ended September 30, 2017(1) | 411,600 |
| | 18% | | 382,800 |
| | 11% | | 28,800 |
| | | | | | | | | |
Quarter ended September 30, 2016 | 82,400 |
| | 20% | | 108,700 |
| | 9% | | (26,300) |
Quarter ended June 30, 2016 | 99,200 |
| | 12% | | 122,800 |
| | 9% | | (23,600) |
Quarter ended March 31, 2016 | 90,800 |
| | 11% | | 62,900 |
| | 15% | | 27,900 |
Quarter ended December 31, 2015 | 75,000 |
| | 4% | | 49,900 |
| | 16% | | 25,100 |
Twelve months ended September 30, 2016 | 347,400 |
| | 12% | | 344,300 |
| | 12% | | 3,100 |
| | | | | | | | | |
| |
(1)
| Retail sales data for September 2017 has not been published; therefore retail and dealer inventory data includes a Company estimate for retail units sold in September. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Estimated |
| Wholesale | | Retail | | Unit Impact on |
| Units | | Change | | Units | | Change | | Dealer Inventories |
Quarter ended March 31, 2021 | 131,200 | | | 49% | | 96,900 | | | 30% | | 34,300 |
Quarter ended December 31, 2020 | 115,200 | | | 38% | | 88,500 | | | 39% | | 26,700 |
Quarter ended September 30, 2020 | 110,100 | | | 37% | | 157,700 | | | 34% | | (47,600) |
Quarter ended June 30, 2020 | 66,800 | | | (34)% | | 131,500 | | | (5)% | | (64,700) |
Twelve months ended March 31, 2021 | 423,300 | | | 20% | | 474,600 | | | 20% | | (51,300) |
| | | | | | | | | |
Quarter ended March 31, 2020 | 88,000 | | | 4% | | 74,800 | | | (3)% | | 13,200 |
Quarter ended December 31, 2019 | 83,300 | | | (8)% | | 63,600 | | | (6)% | | 19,700 |
Quarter ended September 30, 2019 | 80,600 | | | (13)% | | 118,000 | | | (6)% | | (37,400) |
Quarter ended June 30, 2019 | 101,000 | | | (13)% | | 138,800 | | | (7)% | | (37,800) |
Twelve months ended March 31, 2020 | 352,900 | | | (8)% | | 395,200 | | | (6)% | | (42,300) |
| | | | | | | | | |
According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first ninethree months of 20172021 increased 1442 percent to 47,30014,300 units compared to the same periodfirst three months of 2016. The Company estimates retail2020, primarily due to OEM plant shutdowns in response to COVID-19 in the 2020 period. Retail demand for motorhome RVs increased 13one percent year-over-year in the first ninethree months of 2017, following2021, compared to an 11eight percent increaseyear-over-year decrease in retail demand in 2016.the same period of 2020.
The RVIA has projected an 11 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2017 and a two percent increase for 2018. Several RV OEMs, however, are introducing new product lines, additional features and adding production capacity. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence which was above historical averages in 2016. Additionally, retail sales of travel trailer and fifth-wheel RVs have increased in 93 of the last 95 months on a year-over-year basis. Industry resources report strong attendance and high consumer interest at RV shows around the United States and Canada thus far in 2017.
Although future retail demand is inherently uncertain, RV industry fundamentals in the first nine months of 2017, including generally low unemployment, low fuel prices and available credit for dealers and RV consumers, were strong, as evidenced by the 10 percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs in the first nine months of 2017. The Company believes the strong RV industry fundamentals, aided by product innovation, demographic tailwinds, industry promotion and the advent of stronger dealer networks, are positive signs for the remainder of 2017. The Company also remains confident in its ability
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
to exceed industry growth rates through new product introductions, market share gains, aftermarket sales, acquisitions and ongoing investments in research and development, engineering, quality and customer service.
Over the long term, the Company expects RV industry sales to be aided by positive demographics and the continued popularity of the “RV Lifestyle”. The number of consumers between the ages of 55 and 70 are projected to total 56 million by 2020, 27 percent higher than in 2010, according to U.S. Census figures, and one in ten vehicle-owning households between the ages of 50 and 64 own at least one RV. The RVIA reported much of the success of the RV industry has been driven by the Baby Boomer generation. The size of that generation is beginning to wane, and younger generations (Generation X and Millennials) are becoming more relevant to future industry growth. Generation X and Millennials are more diverse, requiring new and creative marketing approaches to attract them to the RV industry. The RVIA has an advertising campaign promoting the “RV Lifestyle” targeted at both parents aged 30 - 49 with children at home, as well as couples aged 50 - 64 with no children at home. In addition, the RV OEMs have developed more entry level units, specifically targeting younger families, in both towables and motorhomes. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented domestic vacations, and using RVs as second homes, are trends that could continue to motivate consumer demand for RVs. RVIA studies indicate RV vacations cost significantly less than other forms of vacation travel, even when factoring in fuel prices and the cost of RV ownership. More details can be found at www.RVIA.org.
Adjacent Industries
The Company’sOur portfolio of products used in RVs can also be used in other applications, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing (collectively, “Adjacent Industries”). In many cases, OEM customers of the Adjacent Industries are affiliated with RV OEMs through related subsidiaries. The Company believesWe believe there are significant opportunities in these Adjacent Industries and, as a result, fiveseven of theour last eighteleven business acquisitions completed by the Company were focused in Adjacent Industries.
The estimated potential content per unit the Company may supply to the Adjacent Industries varies by OEM product and differs from RVs. As a means to understand the potential of each of these markets, management reviews the number of retail units sold. The following are key target markets for Adjacent Industries component sales:
Enclosed trailers. According to Statistical Surveys, approximately 192,000 and 183,500 enclosed trailers were sold in 2016 and 2015, respectively.
Pontoon boats. Statistical Surveys also reported approximately 49,600 and 45,400 pontoon boats were sold in 2016 and 2015, respectively.
School buses. According to Wards Communications and R.L. Polk & Co., there were approximately 32,800 and 29,600 school buses sold in 2016 and 2015, respectively.
Manufactured housing. According to the Institute for Building Technology and Safety, there were approximately 81,100 and 70,500 manufactured home wholesale shipments in 2016 and 2015, respectively.
Aftermarket Segment
Many of the Company’sour OEM Segment products are also sold through various aftermarket channels, including dealerships, warehousewholesale distributors, and service centers, as well as direct to retail customers. The Company hascustomers via the Internet. This includes discretionary accessories and replacement service parts. We have teams dedicated to product technical and installation training andas well as marketing support for itsour Aftermarket Segment customers. The CompanyWe also supports twosupport multiple call centers to provide quick responses to customers for both product delivery and technical support. This support is designed for a rapid response to critical repairs, so customer downtime is minimized. The Aftermarket Segment also includes biminis, covers, buoys, fenders to the marine industry, towing products, truck accessories, and the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements for RVs are purchased outside the normal product selling seasons, thereby causing certain Aftermarket Segment sales to be counter-seasonal.counter-seasonal, but this may be different in 2021 and future years as a result of the COVID-19 pandemic and related impacts.
According to the RVIA, currentGo RVing, estimated RV ownership is nearly ninein the United States as of 2020 had increased to over 11 million units.households. Additionally, as a result of a vibrant secondary market, one-third of current owners purchased their RV new while the remaining two-thirds purchased a previously owned RV. This vibrant secondary market is a key driver for the aftermarket sales, as the Company anticipateswe anticipate owners of previously owned RVs will likely upgrade their units as well as replace parts and accessories which have been subjected to normal wear and tear.
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
Consolidated Highlights
•Consolidated net sales in the thirdfirst quarter of 2017 increased to $555 million, 352021 were $1.0 billion, 52 percent higher than consolidated net sales for the thirdsame period of 2020 of $659.7 million. The increase was primarily driven by record RV retail demand and strong Aftermarket Segment sales growth. Net sales from acquisitions completed in 2020 and 2021, primarily Veada Industries, Inc. and Challenger Door, LLC, contributed approximately $41.2 million in the first quarter of 20162021. Additionally, the start of $412 million. Acquisitions completed by the Company overpandemic in the twelve months ended September 30, 2017, added $24 million in netfirst quarter of 2020 had a negative impact on sales in the third quarter of 2017. The 26 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, LCI’s primary OEM market, as well as increased content per RV unit, positively impacted net sales growth in the third quarter of 2017. Further, the Company organically increased sales to adjacent industries and the aftermarket.that quarter.
•Net income for the thirdfirst quarter of 2017 increased to $32.12021 was $74.1 million, or $1.26 per diluted share, up from net income of $29.8 million, or $1.19$2.93 per diluted share, compared to net income of $28.2 million, or $1.12 per diluted share, for the third quartersame period of 2016.2020.
•Consolidated operating profitsprofit during the third quarter of 2017 increased six percent, to $47.9 million from $45.1 million in the third quarter of 2016. Operating profit margin decreased to nine percent in the third quarter of 2017 from 11 percent compared to the third quarter of 2016.
The improvement in the Company’s operating results were partially offset by continued increases in input costs, primarily steel, aluminum and direct labor. Aluminum costs have increased in excess of 20 percent over the prior year. Labor continues to remain a challenge with Elkhart County unemployment rates at less than three percent, and, as a result, the Company has initiated price increases that will be fully implemented by the first quarter of 2018.
Lean manufacturing teams continue working2021 was $101.4 million compared to reduce cost and implement processes to better utilize available floorspace. The Company also has reduced direct labor attrition which improves efficiency and on-time deliveries, while reducing other costs associated with workforce turnover. The Company has implemented a number$44.3 million in the same period of cost saving initiatives during2020. Operating profit margin was 10.1 percent in the thirdfirst quarter of 2017.2021 compared to 6.7 percent in the same period of 2020, primarily as a result of fixed costs being spread over a larger sales base in the 2021 period and COVID-19-related shutdowns that began in March 2020 which negatively impacted the 2020 period.
•The cost of aluminum steel and foamsteel used in certain of the Company’sour manufactured components declined duringincreased in the first halfquarter of 2016; however, certain commodities experienced cost increases in2021 compared to the second halfsame period of 2016 and the first nine months of 2017 from market low points.2020. Raw material costs continueare subject to fluctuatecontinued fluctuation and are expectedbeing offset, in part, by contractual selling prices that are indexed to remain volatile.select commodities.
Thus far in 2017, the Company completed three acquisitions:
| |
◦ | In June 2017, the Company acquired 100 percent of the equity interests of Metallarte S.r.l. (“Metallarte”), a manufacturer of entry and compartment doors for the European caravan market located near Siena, Italy, and its subsidiary, RV Doors, S.r.l., a manufacturer of driver-side doors located near Venice, Italy. The purchase price was $14.1 million paid at closing, plus contingent consideration based on future sales by this operation. |
| |
◦ | In May 2017, the Company acquired the business and certain assets of Lexington LLC (“Lexington”), a manufacturer of high quality seating solutions for the marine, RV, transportation, medical and office furniture industries located in Elkhart, Indiana. The purchase price was $40.1 million paid at closing. |
| |
◦ | In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“Sessa Klein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $8.5 million paid at closing, plus contingent consideration based on future sales by this operation. |
Integration activities for these and previously acquired businesses are underway and proceeding in line with established plans. The Company plans to grow sales and leverage its purchasing power, manufacturing capabilities, engineering expertise and design resources to improve the cost structure of the acquired operations.
•The effective tax rate of 24.9 percent for the ninethree months ended September 30, 2017,March 31, 2021 was substantially lower than the comparable prior year period of 27.8 percent, primarily due to the recognitionreduced rate impact of excesspermanent tax benefits attributable todifferences with the adoption bygrowth in income before income taxes and an increase in the Company of Accounting Standards Update 2016-09, which simplified several aspects of the accounting for share-based payment transactions, including income tax consequences. The excess tax benefit equatedrelated to $5.9 million recognized in the first nine monthsvesting of 2017.equity-based compensation awards, as discussed below under “Income Taxes.”
Return on equity for the twelve months ended September 30, 2017, which is calculated by taking net income over equity, was 24.2 percent.
•In March June and September 2017, the Company2021, we paid a quarterly dividend of $0.50$0.75 per share, aggregating to $12.4$18.9 million.
OEM Segment - First Quarter
Net sales of the OEM Segment in the first quarter of 2021 increased $283.9 million, $12.4 million and $12.5 million, respectively.compared to the same period of 2020. Net sales of components to the following OEMs markets for the three months ended March 31 were:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | Change |
RV OEMs: | | | | | |
Travel trailers and fifth-wheels | $ | 503,016 | | | $ | 307,108 | | | 64 | % |
Motorhomes | 62,593 | | | 38,087 | | | 64 | % |
Adjacent Industries OEMs | 250,641 | | | 187,162 | | | 34 | % |
Total OEM Segment net sales | $ | 816,250 | | | $ | 532,357 | | | 53 | % |
According to the RVIA, industry-wide wholesale unit shipments for the three months ended March 31 were:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | Change |
Travel trailer and fifth-wheel RVs | 131,200 | | | 88,000 | | | 49 | % |
Motorhomes | 14,300 | | | 10,100 | | | 42 | % |
Our calculations of content in the OEM Segment discussion that follows were adjusted to remove Furrion sales from all prior periods to enhance comparability between periods following the termination of the agreement at the end of 2019.
The trend in our average product content per RV produced is an indicator of our overall market share of components for new RVs. Our average product content per type of RV, calculated based upon our net sales of components to domestic RV
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
OEM Segment - Third Quarter
Net sales of the OEM Segment in the third quarter of 2017 increased 35 percent, or $130 million, compared to the same period of 2016. Net sales of components to OEMs were to the following markets for the three months ended September 30:
|
| | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | Change |
RV OEMs: | | | | | |
Travel trailers and fifth-wheels | $ | 357,940 |
| | $ | 263,579 |
| | 36 | % |
Motorhomes | 41,595 |
| | 29,373 |
| | 42 | % |
Adjacent industries OEMs | 106,386 |
| | 82,963 |
| | 28 | % |
Total OEM Segment net sales | $ | 505,921 |
| | $ | 375,915 |
| | 35 | % |
According to the RVIA, industry-wide wholesale unit shipments for the three months ended September 30 were:
|
| | | | | | | | |
| 2017 | | 2016 | | Change |
Travel trailer and fifth-wheel RVs | 103,900 |
| | 82,400 |
| | 26 | % |
Motorhomes | 14,500 |
| | 12,800 |
| | 13 | % |
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the third quarter of 2017 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period, primarily due to market share gains.
The Company’s net sales growth in components for motorhomes during the third quarter of 2017 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period, primarily due to acquisitions completed in 2017. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.
The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the twelve months ended September 30,March 31, divided by the industry-wide wholesale shipments of the different typesproduct mix of RVs for the same period, was:
| | | | | | | | | | | | | | | | | |
Content per: | 2021 | | 2020 | | Change |
Travel trailer and fifth-wheel RV | $ | 3,476 | | | $ | 3,354 | | | 4 | % |
Motorhome | $ | 2,525 | | | $ | 2,327 | | | 9 | % |
|
| | | | | | | | | | |
Content per: | 2017 | | 2016 | | Change |
Travel trailer and fifth-wheel RV | $ | 3,172 |
| | $ | 3,025 |
| | 5 | % |
Motorhome | $ | 2,152 |
| | $ | 1,957 |
| | 10 | % |
The Company’sOur average product content per type of RV excludes international sales and sales to the Aftermarket Segment and Adjacent Industries. Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for the Company’sour products, as well as changes in the types of RVs produced industry-wide.
The Company’sOur increase in net OEM sales to RV OEMs of travel trailers, fifth-wheel, and motorhome components during the first quarter of 2021 was primarily driven by a recovery in RV retail demand beginning later in the second quarter of 2020 and continuing into the first quarter of 2021. The net sales increase further benefited from content gains during the first quarter of 2021.
Our increase in net sales to OEMs in Adjacent Industries increased during the thirdfirst quarter of 2017 primarily due to2021 was driven by acquisitions completedand a recovery in 2017retail demand for the marine industry and 2016other adjacent markets beginning later in the second quarter of 2020 and market share gains. The Company continues to believe there are significant opportunities in Adjacent Industries.continuing into the first quarter of 2021.
Operating profit of the OEM Segment was $41.0$79.3 million in the thirdfirst quarter of 2017,2021, an improvementincrease of $2.0$36.1 million compared to the same period of 2016.2020. The operating profit margin of the OEM Segment in the thirdfirst quarter of 20172021 increased to 9.7 percent compared to 8.1 percent for the same period of 2020 and was positively impacted by:
Better fixed cost absorption by spreading•Leveraging of fixed costs over a larger sales base, thatwhich increased operating profit by $130$20.0 million related to fixed selling, general, and administrative costs and $10.0 million related to fixed overhead costs.
•Pricing changes to targeted products, resulting in an increase in operating profit of $6.8 million compared to the same period of 2020.
Partially offset by:
•Increases in material commodity pricing, which impacted operating profit by $17.3 million, primarily related to increased steel and aluminum costs.
•Increases in direct labor costs due to production volumes and a tight labor market, which impacted operating profit by $4.9 million.
IncreasedAmortization expense on intangible assets for the OEM Segment was $6.5 million in the first quarter of 2021, compared to $6.4 million in the same period in 2020. Depreciation expense on fixed assets for the OEM Segment was $12.2 million in the first quarter of 2021, compared to $12.1 million in the same period of 2020.
Aftermarket Segment - First Quarter
Net sales of the Aftermarket Segment in the first quarter of 2021 increased 45 percent, or $56.7 million, compared to the same period of 2020. Net sales of components in the Aftermarket Segment were as follows for the three months ended March 31:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | Change |
Total Aftermarket Segment net sales | $ | 184,008 | | | $ | 127,313 | | | 45 | % |
Our net sales to Adjacent Industries OEMs.the Aftermarket Segment increased during the first quarter of 2021, primarily due to consumer demand in the outdoor recreational and transportation market and our distributor customers rebuilding their inventory levels.
Pricing changes
Operating profit of targeted products.
Investments over the past several yearsAftermarket Segment was $22.1 million in the first quarter of 2021, an increase of $21.1 million compared to increase capacitythe same period of 2020. The operating profit margin of the Aftermarket Segment was 12.0 percent in 2021, compared to 0.8 percent in 2020, and improve operating efficiencies. Further, the Company has implemented efficiency improvements, including lean manufacturing initiatives, increased use of automation
was positively impacted by:
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
•Leveraging of fixed costs over a larger sales base, which increased operating profit by $11.2 million related to fixed selling, general, and administrative costs and $4.0 million related to fixed overhead costs.
and employee retention initiatives. •The Company has also reduced direct labor attrition which improves efficiency and reduces other costs associated with workforce turnover.
Offset by:
Higher material costs for certain raw materials. Steel, aluminum and foam costs increased in the third quarterrecognition of 2017. Material costs are subject to global supply and demand forces and are expected to remain volatile.
Higher labor costs. While the Company seeks to continuously manage its labor cost, it has added staff to support the growth of the business. The results also reflect variable compensation increases based on achieving profitability targets. Additionally, competition for skilled workers has continued to tighten the labor market which has increased thehigher cost of labor.
Fixed costs, which were approximately $3 million to $4 million higher than in the third quarter of 2016. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected increase in net sales in 2017 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company has made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses, as well as amortization costs of intangible assets related to those businesses.
OEM Segment – Year to Date
Net sales of the OEM Segment in the first nine monthsquarter of 2017 increased 25 percent, or $295 million, compared2020 due to the first nine monthsinventory fair value step-up for CURT of 2016. Net sales of components to OEMs were to the following markets$6.2 million.
Partially offset by:
•Increases in transportation costs, primarily for third party freight, which reduced operating profit by $3.4 million.
Amortization expense on intangible assets for the nine months ended September 30:
|
| | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | Change |
RV OEMs: | | | | | |
Travel trailers and fifth-wheels | $ | 1,045,465 |
| | $ | 836,634 |
| | 25 | % |
Motorhomes | 114,887 |
| | 85,762 |
| | 34 | % |
Adjacent industries OEMs | 310,373 |
| | 253,088 |
| | 23 | % |
Total OEM Segment net sales | $ | 1,470,725 |
| | $ | 1,175,484 |
| | 25 | % |
According to the RVIA, industry-wide wholesale unit shipments for the nine months ended September 30, were:
|
| | | | | | | | |
| 2017 | | 2016 | | Change |
Travel trailer and fifth-wheel RVs | 321,300 |
| | 272,400 |
| | 18 | % |
Motorhomes | 47,300 |
| | 41,600 |
| | 14 | % |
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first nine months of 2017 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period primarily due to market share gains and acquisitions completed in 2017 and 2016.
The Company’s net sales growth in components for motorhomes during the first nine months of 2017 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period, primarily due to acquisitions completed in 2017 and 2016 and market share gains. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.
The Company’s net sales to Adjacent Industries increased during the first nine months of 2017, primarily due to acquisitions completed in the fourth quarter of 2016 and the first nine months of 2017, and market share gains. Acquisitions added $33 million in net sales during the first nine months of 2017. The Company continues to believe there are significant opportunities in Adjacent Industries.
Operating profit of the OEMAftermarket Segment was $151.9$2.9 million in the first ninequarter of 2021, compared to $3.0 million in the same period of 2020. Depreciation expense on fixed assets for the Aftermarket Segment was $3.0 million in the first quarter of 2021, compared to $3.1 million in the same period of 2020.
Income Taxes
The effective tax rates for the three months ended March 31, 2021 and 2020 were 24.9 percent and 27.8 percent, respectively. The effective tax rate for the three months ended March 31, 2021 differed from the Federal statutory rate primarily due to state taxes, foreign taxes, and non-deductible expenses, partially offset by the recognition of 2017, an improvementexcess tax benefits as a component of $7.8 millionthe provision for income taxes, and Federal and Indiana research and development credits. The decrease in the effective tax rate for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily due to the decreased rate impact of permanent tax differences with the growth in income before income taxes and an increase in the excess tax benefit related to the vesting of equity-based compensation awards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of March 31, 2021, we had $63.3 million in cash and cash equivalents, and $142.4 million of availability under our revolving credit facility. Additionally, we have the ability to request up to $150.0 million in additional Senior Promissory Notes be purchased by Prudential under our Shelf-Loan Facility (each as defined in Note 8 of the Notes to Condensed Consolidated Financial Statements), subject to Prudential's approval. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a description of our credit facilities.
We maintain a level of liquidity sufficient to allow us to meet our cash needs in the short term. Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial condition, and maintain flexibility for our future strategic investments. We continuously assess our capital requirements, working capital needs, debt and leverage levels, debt and lease maturity schedules, capital expenditure requirements, dividends, future investments or acquisitions, and potential share repurchases. As discussed above under "COVID-19 Update," with RV retail demand at record levels through the first ninethree months of 2016. The operating profit margin2021, the industry has faced challenges with supply chain constraints, rising material costs, and a tightened labor market, especially in northern Indiana. To address these challenges, we have strategically managed working capital, including intentionally building up levels of certain inventory items to avoid future shortages, and have expanded our production capacity. As we build inventory levels and invest in additional production capacity, we also closely monitor our liquidity. In the event additional need for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all.
We believe the availability under the revolving credit facility under the Amended Credit Agreement (as defined in Note 8 of the OEM Segment inNotes to Condensed Consolidated Financial Statements), along with our cash flows from operations, are adequate to finance our anticipated cash requirements for the first nine months of 2017 was impacted by:
next twelve months.
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Better fixed cost absorption by spreading fixed costs over a sales base that increased by $295 million.
Increased sales to Adjacent Industries OEMs.
Pricing changesThe Condensed Consolidated Statements of targeted products.
Investments overCash Flows reflect the past several years to increase capacity and improve operating efficiencies. Further, the Company has implemented efficiency improvements, including lean manufacturing initiatives, increased use of automation and employee retention initiatives. The Company has also reduced direct labor attrition which improves efficiency and reduces other costs associated with workforce turnover.
Lower group health claims. The Company actively works to manage and reduce these costs, however, these costs remain subject to fluctuation.
Partially offset by:
Fixed costs, which were approximately $8 million to $9 million higher than in the first nine months of 2016. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected increase in net sales in 2017 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company has made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses, as well as amortization costs of intangible assets related to those businesses.
Higher material costs for certain raw materials. Steel, aluminum and foam costs increased in the first nine months of 2017. Material costs are subject to global supply and demand forces and are expected to remain volatile.
Higher labor costs. While the Company seeks to continuously manage its labor cost, it has added staff to support the growth of the business. The results also reflect variable compensation increases based on achieving profitability targets. Additionally, competition for skilled workers has continued to tighten the labor market which has increased the cost of labor.
Aftermarket Segment - Third Quarter
Net sales of the Aftermarket Segment in the third quarter of 2017 increased 34 percent, or $12 million, compared to the same period of 2016. Net sales of components were as followsfollowing for the three months ended September 30:March 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
Net cash flows provided by operating activities | $ | 4,847 | | | $ | 44,759 | |
Net cash flows used in investing activities | (24,341) | | | (101,749) | |
Net cash flows provided by financing activities | 33,987 | | | 119,845 | |
Effect of exchange rate changes on cash and cash equivalents | (2,995) | | | (215) | |
Net increase in cash and cash equivalents | $ | 11,498 | | | $ | 62,640 | |
Cash Flows from Operations
|
| | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | Change |
Total Aftermarket Segment net sales | $ | 48,893 |
| | $ | 36,455 |
| | 34 | % |
Net cash flows provided by operating activities were $4.8 million in the first three months of 2021, compared to $44.8 million in the first three months of 2020. The Company’sdecrease in net sales to the Aftermarket increased during the third quarter of 2017cash flows provided by operating activities was primarily due to changes in net assets and liabilities, net of acquisitions of businesses, which generated $93.4 million less cash than in the Company’s focusfirst three months of 2020. During the first three months of 2021, in an effort to address challenges with supply chain constraints, rising material costs, and a tightened labor market, we strategically managed working capital, including intentionally building up levels of certain inventory items and expanded production capacity. As a result, increases in inventory and receivables related to increased wholesale RV demand were the primary uses of cash generated from net assets. The decrease was partially offset by a $53.5 million increase in net income, adjusted for depreciation and amortization, stock-based compensation expense, deferred taxes, and other non-cash items.
Over the long term, based on building outour historical collection and payment patterns, as well qualified, customer-focused teamsas inventory turnover, and infrastructurealso giving consideration to service this market. With an estimated nine million householdsemerging trends and changes to the sales mix, we expect working capital to increase or decrease equivalent to approximately 10 to 15 percent of the increase or decrease, respectively, in North America owning an RV and the Company’s increasing content per unit, the Company continues to believenet sales. However, there are significant opportunitiesmany factors that can impact this relationship, especially in the RV aftermarket as the components sold to OEMs are subject to normal wearshort term.
Depreciation and tear over time.
Operating profit of the Aftermarket Segmentamortization was $6.9$24.5 million in the third quarterfirst three months of 2017, an increase of $0.82021, and is expected to be approximately $100 to $110 million compared tofor the same period of 2016; however, operating margin has decreased primarily due to the increase in net sales to wholesale distributors with lower margins traditionally experienced in aftermarket channels. As indicated, this business is still in an early growth stage and the Company has added staff to support anticipated growth and anticipates further cost increases in this area as it builds up the capabilities of this business.
Aftermarket Segment – Year to Date
Net sales of the Aftermarket Segmentfull year 2021. Non-cash stock-based compensation expense in the first ninethree months of 2017 increased 292021 was $7.4 million. Non-cash stock-based compensation expense is expected to be approximately $20 to $30 million for the full year 2021.
Cash Flows from Investing Activities
Cash flows used in investing activities of $24.3 million in the first three months of 2021 were primarily comprised of $21.0 million for capital expenditures and $2.8 million for the acquisitions of businesses, net of cash acquired. Cash flows used in investing activities of $101.7 million in the first three months of 2020 were primarily comprised of $95.8 million for the acquisitions of businesses, net of cash acquired, and $8.0 million for capital expenditures.
Our capital expenditures are primarily for replacement and growth. Over the long term, based on our historical capital expenditures, the replacement portion has averaged approximately one to two percent or $29 million,of net sales, while the growth portion has averaged approximately two to three percent of net sales. However, there are many factors that can impact actual spending compared to these historical averages. We estimate full year 2021 capital expenditures of $130 to $150 million, including capacity expansions to meet elevated demand, which we expect to fund with cash flows from operations or periodic borrowings under the same period of 2016. Net sales of components wererevolving credit facility as follows for the nine months ended September 30:needed.
|
| | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | Change |
Total Aftermarket Segment net sales | $ | 129,908 |
| | $ | 100,515 |
| | 29 | % |
The Company’s net sales to the Aftermarket increased duringCapital expenditures and acquisitions in the first ninethree months of 20172021 were funded by cash from operations and borrowings under our credit agreement. Capital expenditures and acquisitions in the remainder of fiscal year 2021 are expected to be funded primarily duefrom cash generated from operations, as well as periodic borrowings under our revolving credit facility.
Cash Flows from Financing Activities
Cash flows provided by financing activities in the first three months of 2021 were primarily comprised of $67.4 million in net borrowings under our revolving credit facility, partially offset by payments of quarterly dividends of $18.9 million, cash outflows of $7.8 million related to vesting of stock-based awards, net of shares tendered for payment of taxes, and repayments of $3.9 million under the Company’s focus on building out well qualified, customer-focused teamsterm loan and infrastructure to service this market. With an estimated nine
other borrowings.
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
million households in North America owning an RV and the Company’s increasing content per unit, the Company continues to believe there are significant opportunities in the RV aftermarket as the components sold to OEMs are subject to normal wear and tear over time.
Operating profit of the Aftermarket Segment was $18.2 million in the first nine months of 2017, an increase of $2.1 million compared to the same period of 2016; however, operating margin has decreased primarily due to the increase in net sales to wholesale distributors with lower margins traditionally experienced in aftermarket channels. As indicated, this business is still in an early growth stage and the Company has added staff to support anticipated growth and anticipates further cost increases in this area as it builds up the capabilities of this business.
Income Taxes
The effective tax rates for the nine months ended September 30, 2017 and 2016 were 31.7% and 35.0%, respectively. The effective tax rate for the nine months ended September 30, 2017 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits as a component of the provision for income taxes attributable to the adoption of ASU 2016-09, the tax benefit relating to U.S. manufacturer’s deduction and Federal and Indiana research and development (“R&D”) credits offset by state taxes, foreign taxes and non-deductible expenses. The decrease in effective tax rate for the nine months ended September 30, 2017 as compared to the same period in 2016 was due primarily to the recognition of excess tax benefits attributable to the adoption of ASU 2016-09 in the first quarter of 2017.
Generally, calendar years 2014 - 2016 remain open for federal and state income tax purposes. The Company is currently being audited by the Internal Revenue Service for the tax year ended December 31, 2014.
The net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events which could impact our determination of unrecognized tax benefits. Although the ultimate timing for resolution of the disputed tax issues is uncertain, we may resolve certain tax matters within the next twelve months and pay amounts for other unresolved tax matters in order to limit the potential impact of interest charges. The resolution of these audits are not expected to be material to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Condensed Consolidated Statements of Cash Flows reflect the following for the nine months ended September 30:
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Net cash flows provided by operating activities | $ | 108,859 |
| | $ | 164,108 |
|
Net cash flows used for investing activities | (127,975 | ) | | (55,947 | ) |
Net cash flows used for financing activities | (47,292 | ) | | (25,406 | ) |
Net (decrease) increase in cash and cash equivalents | $ | (66,408 | ) | | $ | 82,755 |
|
Cash Flows from Operations
Net cash flows from operating activities in first nine months of 2017 were $55.2 million lower than the same period of 2016, primarily due to:
A $69.7 million seasonal increase in accounts receivable in the first nine months of 2017 compared to a $46.0 million increase in the same period of 2016, primarily due to increased net sales partially offset by the timing of payments by the Company’s customers. Overall, accounts receivable balances remain current with an increase in days sales outstanding to 22 at September 30, 2017, compared to 19 at September 30, 2016. The increase in days sales outstanding is due to growth in sales to adjacent and international customers which pay with longer terms.
A $33.8 million increase in inventory in the first nine months of 2017 compared to a $13.5 million decrease in the same period of 2016. Inventory turnover for the twelve months ended September 30, 2017 increased to 7.8 turns compared to 7.3 turns for the same period of 2016. The Company is working to improve inventory turnover;
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
however, inventory turns may trend lower due to growth in product categories such as imported furniture and Furrion electronics.
A $27.2 million increase in accrued expenses and other liabilities in the first nine months of 2017 compared to a $30.1 million increase in the same period of 2016, primarily due to timing of these payments.
Partially offset by:
A $12.0 million increase in net income in first nine months of 2017 compared to the same period of 2016.
Over the long term, based on the Company’s collection and payment patterns, inventory turnover, changes to the sales mix and other emerging trends, the Company expects working capital to increase or decrease approximately 10 to 15 percent of the increase or decrease in net sales, respectively. However, there are many factors that can impact this relationship, especially in the short term.
Depreciation and amortization was $39.9 million in the first nine months of 2017, and is expected to be approximately $55 million to $60 million for fiscal year 2017. Non-cash stock-based compensation in the first nine months of 2017 was $15.0 million. Non-cash stock-based compensation is expected to be approximately $19 million to $21 million in 2017.
Cash Flows from Investing Activities
Cash flows used for investing activities of $128.0 million in the first nine months of 2017 were primarily comprised of $60.3 million for capital expenditures and $67.9 million for the acquisition of businesses. Cash flows used for investing activities of $55.9 million in the first nine months of 2016 were primarily comprised of $21.9 million for capital expenditures and $34.2 million for the acquisition of businesses. Information detailing out the acquisitions in the first nine months of 2017 and 2016 are included in Note 2 of the Notes to the Condensed Consolidated Financial Statements.
The Company’s capital expenditures are primarily for replacement and growth. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately 2 percent of net sales, while the growth portion has averaged approximately 8 to 11 percent of the annual increase in net sales. However, there are many factors that can impact the actual spending compared to these historical averages. During 2017, the Company has focused capital investment in growth, automation and lean manufacturing initiatives.
The first nine months of 2017 capital expenditures and acquisitions were primarily fundedprovided by cash from operations. Capital expenditures in 2017 are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under the Company’s line of credit.
Cash Flows from Financing Activities
Cash flows used for financing activities in the first ninethree months of 20172020 were primarily comprised of payments$144.8 million of dividendsnet borrowings under our revolving credit facility, partially offset by cash outflows of $0.50 per share$4.5 million related to the vesting of the Company’s common stock, representing an aggregate of $12.4 million, $12.4 million and $12.5 million, respectively, paid to stockholders of record as of March 6, 2017, May 19, 2017 and August 18, 2017, respectively. In addition, the Company had $7.3 millionstock-based awards, net of shares tendered for payment of taxes. Further, the Company paid $2.6 million in contingent consideration related to acquisitions.
Cash flows used for financing activities in the first nine months of 2016 were primarily comprised of payments of dividends of $0.30 per share of the Company’s common stock, representing an aggregate of $7.3 million, $7.4 million and $7.4 million, respectively, paid to stockholders of record as of April 1, 2016, June 6, 2016 and August 19, 2016, respectively. In addition, the Company received $3.6 million in cash and the related tax benefits from the exercise of stock-based compensation, which was partially offset by $3.2 million of shares tendered for payment of taxes. Further, the Company paid $2.7 million in contingent consideration related to acquisitions.
In connection with certain business acquisitions, if established sales targets for the acquired business are achieved, the Companywe will pay additional cash consideration. The Company hasWe have recorded a $17.0$4.5 million liability for the aggregate fair value of these expected contingent consideration liabilities at September 30, 2017, including $6.6 million recorded as a current liability.March 31, 2021. For further information, see Note 710 of the Notes to the Condensed Consolidated Financial Statements.
On April 27, 2016, the Company refinanced its line of credit through an agreement with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and 1st Source Bank. The agreement amended and restated the existing line of credit, which now expires on April 27, 2021 (the “Amended Credit Agreement”). In connection with this amendment and
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
restatement, the line of credit was increased from $100.0 million to $200.0 million, and contains a feature allowing the Company to draw up to $50.0 million in approved foreign currencies, including Australian dollars, Canadian dollars, pound sterling and euros. The maximum borrowings under the line of credit can be further increased by $125.0 million, subject to certain conditions. At September 30, 2017, the Company had $2.4 million in issued, but undrawn, standby letters of credit under the line of credit. Availability under the Company’s line of credit was $197.6 million at September 30, 2017.
On March 30, 2017, the Company amended its “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”) to extend the term through March 30, 2020. In connection with this amendment, the facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million (excluding the Company’s Series A Notes already outstanding). Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. Availability under the Company’s “shelf-loan” facility was $150.0 million at September 30, 2017. However, the Amended Credit Agreement limits the aggregate indebtedness outstanding to Prudential from time to time to $150.0 million; therefore, currently the Company can only access an additional $100 million under the shelf-loan facility.
Pursuant to the Amended Credit Agreement and “shelf-loan” facility, the Company is requiredShelf-Loan Facility include both financial and non-financial covenants. The covenants dictate that we shall not permit our net leverage ratio to exceed certain limits, shall maintain a minimum interestdebt service coverage ratio, and fixed charge coverages, and tomust meet certain other financial requirements. At September 30, 2017, the Company wasMarch 31, 2021, we were in compliance with all such requirements, and expectswe expect to remain in compliance for the next twelve months.
Availability under bothWe have paid regular quarterly dividends since 2016. Future dividend policy with respect to our common stock will be determined by our Board of Directors in light of our prevailing financial needs, earnings, and other relevant factors, including any limitations in our debt agreements, such as maintenance of certain financial ratios. In October 2018, our Board of Directors authorized a stock repurchase program. No shares were repurchased in the Amended Credit Agreement and the “shelf-loan” facility is subject to a maximum leverage ratio covenant which limits the amountfirst three months of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined. This limitation did not impact the Company’s borrowing availability at September 30, 2017. The remaining availability under these facilities, not including the potential increase of $125 million under the Amended Credit Agreement, was $297.6 million at September 30, 2017. The Company believes the availability under the Amended Credit Agreement and “shelf-loan” facility is adequate to finance the Company’s anticipated cash requirements for the next twelve months.
Additional information on the Company’s Amended Credit Agreement and “shelf-loan” facility is included in2021. See Note 611 of the Notes to the Condensed Consolidated Financial Statements.Statements for additional information related to our dividend program.
CORPORATE GOVERNANCE
The Company isWe are in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. The Company’sOur governance documents and committee charters and key practices have been posted to the Company’s“Investors” section of our website (www.lci1.com/investorswww.lci1.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company hasWe have also established a Whistleblower Policy, which includes a toll-free hotline (877-373-9123) to report complaints about the Company’sour accounting, internal controls, auditing matters or other concerns. The Whistleblower Policy and procedure for complaints can be found on the Company’sour website (www.lci1.com/investorswww.lci1.com).
CONTINGENCIES
Information required by this item is included in Note 710 of the Notes to the Condensed Consolidated Financial Statements and under Item 1 of Part I of this Quarterly Report on Form 10-Q.is incorporated herein by reference.
INFLATION
The prices of key raw materials, consisting primarily of steel aluminum, and foam,aluminum, and components used by the Companyus which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. We did not experience any significant increases in our labor costs in the first three months of 2021 related to inflation.
NEW ACCOUNTING PRONOUNCEMENTS
Information required by this item is included in Note 112 of the Notes to the Condensed Consolidated Financial Statements.
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Companyus to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates itswe evaluate our estimates, including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, inventories, goodwill and other intangible assets, net assets of acquired businesses, income taxes, warranty and product recall obligations, self-insurance obligations, operating lease terminations,right-of-use assets and obligations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, contingent consideration, environmental liabilities, contingencies and litigation. The Company bases itsWe base our estimates on historical experience, other available information and various other
LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
assumptions 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 not readily apparent from other resources. Actual results and events could differ significantly from management'smanagement estimates.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain “forward-looking statements” with respect to the Company’sour financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, acquisitions, plans and objectives of management, markets for the Company’s Common Stockcommon stock, the impact of legal proceedings, and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and involve a number of risks and uncertainties.
Forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, net sales, expenses and income (loss), capital expenditures, tax rate, cash flow, and financial condition, liquidity, covenant compliance, retail and wholesale demand, integration of acquisitions, R&D investments, and industry trends, whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of the Company’s senior management at the time such statements were made. There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, the impacts of COVID-19, or other future pandemics, on the global economy and on the Company's customers, suppliers, employees, business and cash flows, pricing pressures due to domestic and foreign competition, costs and availability of, and tariffs on, raw materials (particularly steel and aluminum) and other components, seasonality and cyclicality in the industries to which the Company sells itswe sell our products, availability of credit for financing the retail and wholesale purchase of products for which the Company sells itswe sell our components, inventory levels of retail dealers and manufacturers, availability of transportation for products for which the Company sells itswe sell our components, the financial condition of the Company’sour customers, the financial condition of retail dealers of products for which the Company sells itswe sell our components, retention and concentration of significant customers, the costs, pace of and successful integration of acquisitions and other growth initiatives, availability and costs of production facilities and labor, employeeteam member benefits, employeeteam member retention, realization and impact of expansion plans, efficiency improvements and cost reductions, the disruption of business resulting from natural disasters or other unforeseen events, the successful entry into new markets, the costs of compliance with environmental laws, laws of foreign jurisdictions in which we operate, other operational and financial risks related to conducting business internationally, and increased governmental regulation and oversight, information technology performance and security, the ability to protect intellectual property, warranty and product liability claims or product recalls, interest rates, oil and gasoline prices, and availability, the impact of international, national and regional economic conditions and consumer confidence on the retail sale of products for which the Company sells itswe sell our components, and other risks and uncertainties discussed more fully under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020, and in the Company’s subsequent filings with the Securities and Exchange Commission.SEC, including the Company's Quarterly Reports on Form 10-Q. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. The Company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.
LCI INDUSTRIES
ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
At September 30, 2017, the Company had $49.9 million of fixedWe are exposed to market risk related to changes in short-term interest rates on our variable rate debt outstanding. Assuming there is a decrease of 100 basis points indebt. Depending on the interest rate for borrowingsoption selected as more fully described in Note 8 of the Notes to Condensed Consolidated Financial Statements, interest is charged based on an indexed rate plus an applicable margin. Assuming a similar nature subsequent to September 30, 2017, which the Company becomes unable to capitalize onhypothetical increase of 0.25 percent in the short-term asindexed interest rate (which approximates a resultten percent increase of the structureweighted-average interest rate on our borrowings as of its fixed rate financing, future cash flowsMarch 31, 2021), our results of operations would not be approximately $0.5 million lower per annum than if the fixed rate financing could be obtained at current market rates.materially affected.
The Company isWe are also exposed to changes in the prices of raw materials, specifically steel and aluminum. The Company has,We have, from time to time, entered into derivative instruments for the purpose of managing a portion of the exposures associated with fluctuations in steel and aluminum prices. While these derivative instruments are subject to fluctuations in value, these fluctuations are generally offset by the changes in fair value of the underlying exposures. See Note 9 of the Notes to Condensed Consolidated Financial Statements for a more detailed discussion of derivative instruments.
The Company hasWe have historically been able to obtain sales price increases to partially offset the majority of raw material cost increases. However, there can be no assurance future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases will match raw material cost increases.
Additional information required by this item is included under the caption “Inflation” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report.report.
ITEM 4 – CONTROLS AND PROCEDURES
| |
a) | Evaluation of Disclosure Controls and Procedures |
The Company maintainsa.Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’sour Exchange Act reports is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the Company’sour management, including itsour principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a-1513a-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The CompanyWe continually evaluates itsevaluate our disclosure controls and procedures to determine if changes are appropriate based upon changes in the Company’sour operations or the business environment in which it operates.we operate.
As of the end of the period covered by this Form 10-Q, the Companywe performed an evaluation, under the supervision and with the participation of the Company’sour management, including the Company’sour principal executive officer and the Company’sour principal financial officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures. Based on the foregoing, the Company’sour principal executive officer and principal financial officer concluded that the Company’sour disclosure controls and procedures were effective.effective as of March 31, 2021.
| |
b) | Changes in Internal Control over Financial Reporting |
The Company has selectedb.Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We began implementation of a new enterprise resource planning (“ERP”) system. Implementation of the new ERP software begansystem in late 2013. To date, 23 locations have been put on this ERP system. The roll-out plan is continually evaluated in the context of priorities for the business and may change as the needs of the business dictate. The Company anticipatesWe anticipate enhancements to controls due to both the installation of the new ERP system and business process changes resulting therefrom.
There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30 2017, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
LCI INDUSTRIES
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
In the normal course of business, the Company iswe are subject to proceedings, lawsuits, regulatory agency inquiries and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance SheetsSheet as of September 30, 2017,March 31, 2021, would not be material to the Company’sour financial position or annual results of operations.
ITEM 1A – RISK FACTORS
There have been no material changes to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange CommissionSEC on February 28, 2017.26, 2021.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There has been no activity with respect to our stock repurchase program during the three months ended March 31, 2021. At March 31, 2021, we had $121.3 million remaining in the current share repurchase authorization. Please refer to our Annual Report on Form 10-K as filed with the SEC on February 26, 2021 for further information on the program.
ITEM 6 – EXHIBITS
a) Exhibits as required by item 601 of Regulation S-K:
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1) | 31.1 Certification of Chief Executive Officer required by Rule 13a-14(a). Exhibit 31.1 is filed herewith. | | | | | | | | | 1 | | LCI Industries Restated Certificate of Incorporation, as amended effective December 30, 2016 (incorporated by reference to Exhibit 3.1 included in the Registrant’s Form 10-K for the year ended December 31, 2016). | 2 | | Amended and Restated Bylaws of LCI Industries, as amended May 25, 2017 (incorporated by reference to Exhibit 3.2 included in the Registrant’s Form 8-K filed on May 31, 2017). | 3. | | Certification of Chief Executive Officer required by Rule 13a-14(a). Exhibit 31.1 is filed herewith. | 4. | | Certification of Chief Financial Officer required by Rule 13a-14(a). Exhibit 31.2 is filed herewith. | 5. | | Certification of Chief Executive Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.1 is filed herewith. | 6. | | Certification of Chief Financial Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.2 is filed herewith. | 7. | 101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Stockholders’ Equity; and (vi) Notes to Condensed Consolidated Financial Statements. | 8. | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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2) | 31.2 Certification of Chief Financial Officer required by Rule 13a-14(a). Exhibit 31.2 is filed herewith. |
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3) | 32.1 Certification of Chief Executive Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.1 is filed herewith. |
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4) | 32.2 Certification of Chief Financial Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.2 is filed herewith. |
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5) | 101 Interactive Data Files. |
LCI INDUSTRIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LCI INDUSTRIES |
Registrant |
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LCI INDUSTRIES |
Registrant |
By | |
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By | /s/ Brian M. Hall |
Brian M. Hall |
Chief Financial Officer |
November 7, 2017May 4, 2021 |