LCI Industries(LCII) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for LCI Industries for the three and nine months ended September 30, 2020, compared to the same periods in 2019, including statements of income, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with accompanying notes Condensed Consolidated Statements of Income Net sales for Q3 2020 increased by 41.2% YoY to $827.7 million, driving net income up by 90.8% to $68.3 million, while for the nine months ended September 30, 2020, net sales grew 11.4% to $2.01 billion, and net income decreased slightly by 6.8% to $109.7 million compared to the prior year period Condensed Consolidated Statements of Income (Unaudited) | (In thousands, except per share amounts) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $827,729 | $586,221 | $2,013,164 | $1,807,461 | | Gross profit | $221,439 | $135,473 | $508,786 | $416,720 | | Operating profit | $94,433 | $49,153 | $159,481 | $162,565 | | Net income | $68,347 | $35,809 | $109,747 | $117,702 | | Diluted EPS | $2.70 | $1.42 | $4.35 | $4.70 | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for Q3 2020 was $71.7 million, a significant increase from $36.6 million in Q3 2019, while for the nine-month period, total comprehensive income was $117.6 million in 2020, compared to $113.8 million in 2019, influenced by foreign currency adjustments and actuarial gains Condensed Consolidated Statements of Comprehensive Income (Unaudited) | (In thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $68,347 | $35,809 | $109,747 | $117,702 | | Total comprehensive income | $71,746 | $36,609 | $117,586 | $113,791 | Condensed Consolidated Balance Sheets As of September 30, 2020, total assets were $2.11 billion, an increase from $1.86 billion at year-end 2019, driven by increases in accounts receivable, goodwill, and other intangible assets, primarily from acquisitions, while total liabilities rose to $1.24 billion from $1.06 billion, and stockholders' equity increased to $875.6 million Condensed Consolidated Balance Sheets (Unaudited) | (In thousands) | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $795,672 | $670,791 | | Total assets | $2,110,683 | $1,862,595 | | Total current liabilities | $400,523 | $271,258 | | Total liabilities | $1,235,121 | $1,061,923 | | Total stockholders' equity | $875,562 | $800,672 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities was $212.5 million, a slight increase from $209.5 million in the prior year period, while cash used in investing activities increased to $119.6 million, primarily due to acquisitions, and cash used in financing activities decreased to $59.2 million Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $212,487 | $209,542 | | Net cash flows used in investing activities | ($119,600) | ($101,326) | | Net cash flows used in financing activities | ($59,206) | ($94,825) | | Net increase in cash, cash equivalents, and restricted cash | $32,828 | $12,549 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on accounting policies, the impact of COVID-19, acquisitions, segment performance, and other financial items, including the acquisition of Polyplastic for $95.8 million and measurement period adjustments for the CURT acquisition, as well as the termination of its distribution agreement with Furrion, resulting in a $49.0 million receivable, and strong growth in the Aftermarket segment largely due to acquisitions - The company supplies engineered components for RVs and adjacent industries like buses, trailers, and boats, operating over 90 facilities in North America and Europe[23] - In January 2020, the company acquired Polyplastic Group B.V. for $95.8 million, plus potential contingent consideration, with this acquisition included in the OEM Segment[36] - The company terminated its distribution agreement with Furrion Limited effective December 31, 2019, and as of September 30, 2020, has a receivable of $49.0 million from Furrion for inventory purchases, with repayment terms under negotiation due to COVID-19 impacts[66] Segment Net Sales (Nine Months Ended Sep 30) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | OEM Segment | $1,542,223 | $1,596,698 | | Aftermarket Segment | $470,941 | $210,763 | | Total net sales | $2,013,164 | $1,807,461 | Segment Operating Profit (Nine Months Ended Sep 30) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | OEM Segment | $110,485 | $131,434 | | Aftermarket Segment | $48,996 | $31,131 | | Total operating profit | $159,481 | $162,565 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the significant factors affecting financial results, including the strong rebound in demand post-COVID-19 shutdowns, which drove record sales in Q3 2020, substantial growth in the Aftermarket segment boosted by the CURT acquisition, the impact of the Furrion agreement termination on comparability, and maintained strong liquidity with revolving credit facility repayments as operations and cash flow improved significantly in the latter half of the period Impact of COVID-19 The COVID-19 pandemic led to temporary production suspensions in late Q1 and early Q2 2020, prompting cost-saving measures including salary reductions and delayed capital expenditures, but operations fully resumed by late Q2, and a sharp rebound in retail demand for RVs and boats led to record monthly sales from June through September, with the company continuing to prioritize employee health and safety and manage supply chain risks - The company temporarily suspended production at select facilities starting March 25, 2020, but all facilities were fully operational by the end of the second quarter[92][94] - A strong rebound in retail demand in the RV and marine markets led to record net sales for the company in June, July, August, and September 2020[98][100] - In response to the pandemic, the company implemented cost-saving measures such as temporary layoffs, executive salary reductions, and deferral of non-essential capital expenditures[95] Results of Operations Consolidated net sales in Q3 2020 rose 41% YoY to $827.7 million, driven by a strong recovery in RV and marine markets and $98.6 million in sales from acquisitions, with the OEM segment sales growing 26% to $642.1 million, while the Aftermarket segment sales surged 149% to $185.7 million, largely due to the CURT acquisition, and operating profit margin improved to 11.4% in Q3 2020 from 8.4% in Q3 2019, benefiting from higher sales volume and leverage of fixed costs - Consolidated net sales in Q3 2020 were $827.7 million, a 41% increase from Q3 2019, primarily driven by a recovery in retail demand and sales from acquired businesses of $98.6 million[118] Q3 2020 Segment Net Sales vs. Q3 2019 | (In thousands) | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | OEM Segment | $642,054 | $511,550 | 26% | | Aftermarket Segment | $185,675 | $74,671 | 149% | - The average product content per travel trailer and fifth-wheel RV for the twelve months ended September 30, 2020, increased by 5% to $3,428[121] - The Aftermarket segment's Q3 2020 sales increase was primarily due to acquisitions contributing approximately $78.0 million[131] Liquidity and Capital Resources For the first nine months of 2020, the company generated $212.5 million in cash from operations, with capital expenditures of $28.7 million and $94.9 million used for acquisitions, and initially drew on its revolving credit facility for liquidity during the pandemic but made net repayments of approximately $162 million from May through September as cash flow improved, believing its liquidity is adequate for the next twelve months Cash Flow Summary (Nine Months Ended Sep 30) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $212,487 | $209,542 | | Net cash flows used in investing activities | ($119,600) | ($101,326) | | Net cash flows used in financing activities | ($59,206) | ($94,825) | - Capital expenditures for the first nine months of 2020 were $28.7 million, down from $47.8 million in the same period of 2019, as the company delayed non-essential spending[141][144] - The company made net repayments on its revolving credit facility of approximately $162 million from May through September 30, 2020, as operating cash flow improved[103] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are related to interest rate changes on its variable-rate debt and price fluctuations of raw materials, particularly steel and aluminum, with management stating that a hypothetical 0.25% increase in interest rates would not materially affect results, though there is no assurance that raw material cost increases can continue to be passed on - The company is exposed to market risk from changes in short-term interest rates on variable-rate debt, but a hypothetical 0.25% increase in the indexed rate would not have a material effect[159] - The company is exposed to price volatility in raw materials, specifically steel and aluminum, and has used derivative instruments to manage this risk[160] Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were concluded to be effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter, and the company is continuing its multi-year implementation of a new ERP system - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[165] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[165] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings and claims in the normal course of business, with management believing that the final outcome of these matters will not have a material adverse effect on the company's financial position or results of operations - Management believes that after final disposition, any monetary liability from legal proceedings would not be material to the Company's financial position or results of operations[168] Risk Factors This section updates the company's risk factors, highlighting the material and adverse effects of the COVID-19 pandemic, with key risks cited including disruptions to employee productivity, facility closures, supply chain interruptions, reduced customer demand, increased costs, and potential breaches of debt covenants - The report adds a significant risk factor related to the COVID-19 pandemic, stating it has materially and adversely affected, and could continue to affect, the business[170] - Specific pandemic-related risks include disruptions to operations and supply chains, reduced demand, increased costs, financial market volatility, and potential breaches of debt covenants[171][172][175][176] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no stock repurchase activity during the nine months ended September 30, 2020, and as of that date, $121.3 million remained available under the current share repurchase authorization - There was no activity under the company's stock repurchase program during the nine months ended September 30, 2020[182] - At September 30, 2020, $121.3 million remained in the current share repurchase authorization[182] Exhibits This section lists the exhibits filed with the Form 10-Q, which include corporate governance documents, an amendment to a note purchase agreement, CEO and CFO certifications (Sections 302 and 906), and financial data formatted in Inline XBRL - The report includes required exhibits such as CEO and CFO certifications under Rules 13a-14(a) and Section 1350, and financial statements formatted in Inline XBRL[185][186] Signatures Signatures The Form 10-Q report was officially signed on behalf of LCI Industries by Brian M Hall, the Chief Financial Officer, on November 2, 2020 - The report was signed by Brian M Hall, Chief Financial Officer, on November 2, 2020[188]