LCI Industries(LCII) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's Q2 and H1 2020 financial performance was significantly impacted by COVID-19, resulting in substantial declines in net sales and income, while acquisitions increased assets and operating cash flow decreased Condensed Consolidated Statements of Income (Unaudited) | (In thousands, except per share amounts) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $525,765 | $629,068 | $1,185,435 | $1,221,240 | | Operating profit | $20,782 | $65,657 | $65,048 | $113,412 | | Net income | $13,186 | $47,527 | $41,400 | $81,893 | | Diluted EPS | $0.52 | $1.89 | $1.64 | $3.28 | Condensed Consolidated Balance Sheets (Unaudited) | (In thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $697,291 | $670,791 | | Total assets | $2,018,274 | $1,862,595 | | Total current liabilities | $309,871 | $271,258 | | Total liabilities | $1,201,644 | $1,061,923 | | Total stockholders' equity | $816,630 | $800,672 | Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $102,101 | $180,115 | | Net cash flows used in investing activities | ($105,166) | ($44,065) | | Net cash flows provided by (used in) financing activities | $32,093 | ($88,500) | | Net increase in cash and cash equivalents | $26,913 | $45,732 | Notes to Condensed Consolidated Financial Statements Notes detail significant impacts of COVID-19, recent acquisitions, and accounting policy changes, including debt structure amendments and a notable shift in segment sales mix - In January 2020, the Company acquired Polyplastic Group B.V. for a purchase price of $95.8 million, net of cash acquired, plus potential contingent consideration, adding $57.7 million in goodwill[38] - Measurement period adjustments for the December 2019 CURT acquisition resulted in a $14.5 million decrease in the fair value of net assets acquired and a corresponding increase in goodwill to $116.4 million[41] - Goodwill increased from $351.1 million at year-end 2019 to $418.8 million at June 30, 2020, primarily due to the Polyplastic acquisition and measurement period adjustments for CURT[45] - Following the termination of the Furrion supply agreement, the company holds a $52.0 million receivable from Furrion, with $34.7 million reclassified as long-term and discounted due to renegotiated payment terms impacted by COVID-19[72][114] Segment Net Sales Contribution (Six Months Ended June 30) | Segment | 2020 % of Total Sales | 2019 % of Total Sales | | :--- | :--- | :--- | | OEM Segment | 76% | 89% | | Aftermarket Segment | 24% | 11% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A details the significant operational and financial impacts of COVID-19, including temporary shutdowns and a June rebound, alongside the Furrion agreement termination, Q2 sales declines, margin compression, and liquidity management Impact of COVID-19 COVID-19 led to temporary production suspensions and cost-saving measures, followed by a sharp rebound in demand and operations by Q2 end, with the company drawing on credit for liquidity - The company temporarily suspended production at select manufacturing facilities across North America and Europe starting March 25, 2020, due to government mandates and customer closures[100][102] - Cost-saving measures included temporary executive salary reductions, furloughs, delayed capital expenses, and postponing merit increases[103] - Operations resumed for most facilities on May 4, 2020, with a sharp rebound in retail demand for RV and marine markets leading to a record sales month in June[104][108] - To improve financial flexibility, the company drew on its revolving credit facility in March and April 2020, but made net repayments of approximately $62 million in Q2 as operating cash flow improved[111] Results of Operations Q2 2020 consolidated net sales and income declined significantly, primarily due to a substantial drop in OEM segment sales, while the Aftermarket segment grew due to acquisitions, impacting overall operating margins and the effective tax rate Q2 2020 Consolidated Highlights vs. Q2 2019 | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $525.8M | $629.1M | -16% | | Operating Profit | $20.8M | $65.7M | -68% | | Operating Margin | 4.0% | 10.4% | -6.4 p.p. | | Net Income | $13.2M | $47.5M | -72% | Q2 2020 Segment Performance vs. Q2 2019 | Segment | Net Sales | % Change | Operating Profit | % Change | Operating Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | OEM | $367.8M | -34% | $1.8M | -96% | 0.5% | | Aftermarket | $158.0M | +109% | $19.0M | +46% | 12.0% | - The increase in Aftermarket segment sales was primarily due to acquisitions contributing approximately $78.3 million in sales for the quarter[140] - The effective tax rate for the first six months of 2020 was 26.3%, up from 24.7% in 2019, mainly due to reduced excess tax benefits from equity awards and an increase in non-deductible expenses[146] Liquidity and Capital Resources For H1 2020, net cash from operations decreased, while investing activities increased due to acquisitions, and financing activities provided cash through net borrowings, with the company confident in its liquidity for the next twelve months Cash Flow Summary (Six Months Ended June 30) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $102,101 | $180,115 | | Net cash flows used in investing activities | ($105,166) | ($44,065) | | Net cash flows provided by (used in) financing activities | $32,093 | ($88,500) | - Cash used in investing activities included $94.7 million for business acquisitions and $14.5 million for capital expenditures in the first six months of 2020[151] - Financing activities included $79.2 million in net borrowings under the revolving credit facility and $32.7 million in dividend payments during the first half of 2020[155] - The company has a contingent consideration liability of $5.8 million at June 30, 2020, related to past acquisitions[157] Quantitative and Qualitative Disclosures About Market Risk The company faces market risk from variable interest rates and volatile raw material prices, historically offsetting cost increases through price adjustments, though future assurance is not guaranteed - The company is exposed to market risk from variable interest rates on its debt and price fluctuations of raw materials like steel and aluminum[172][173] - The company has historically passed on a majority of raw material cost increases to customers through price adjustments, but cannot guarantee this will continue in the future[174] Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2020, with no material changes to internal controls, while continuing a multi-year ERP system implementation - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[178] - No material changes were made to the internal control over financial reporting during the second quarter of 2020[178] - The company is continuing the implementation of a new ERP system, which is now live at 35 locations[179] PART II – OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings, which management believes will not materially impact its financial position or results of operations - Management states that any monetary liability from ongoing legal proceedings, after final disposition and anticipated insurance recoveries, is not expected to be material to the company's financial position[181] Risk Factors A new risk factor details the material and adverse effects of the COVID-19 pandemic, including operational disruptions, financial market volatility, and potential debt covenant breaches, with the ultimate impact remaining highly uncertain - A new risk factor has been added to address the material and adverse effects of the COVID-19 pandemic on the business, financial condition, and results of operations[183] - Specific risks cited include disruptions to operations, supply chain, and customer demand; increased costs; financial market volatility; and potential breaches of debt covenants[184][185][187][189] - The ultimate impact of the pandemic is described as highly uncertain and unpredictable, depending on its duration, spread, and the governmental response[193] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no stock repurchase activity during the first six months of 2020, with $121.3 million remaining under its share repurchase authorization - There was no stock repurchase activity during the six months ended June 30, 2020[195] - The company has $121.3 million remaining in its share repurchase authorization as of June 30, 2020[195] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data in Inline XBRL format - The report includes required CEO and CFO certifications under Rules 13a-14(a) and 13a-14(b) (Sections 302 and 906)[199]