LCI Industries(LCII) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1 – FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements of LCI Industries, including statements of income, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items CONDENSED CONSOLIDATED STATEMENTS OF INCOME This section presents the company's financial performance over specific periods, detailing net sales, gross profit, operating profit, net income, and earnings per share Condensed Consolidated Statements of Income (Unaudited) | Metric (in thousands, except per share amounts) | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :--------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net sales | $1,014,639 | $1,536,150 | $1,987,949 | $3,180,718 | | Gross profit | $218,120 | $409,085 | $404,191 | $873,328 | | Operating profit | $55,174 | $218,789 | $75,217 | $488,490 | | Net income | $33,426 | $154,530 | $40,685 | $350,711 | | Basic EPS ($) | $1.32 | $6.07 | $1.61 | $13.82 | | Diluted EPS ($) | $1.31 | $6.06 | $1.60 | $13.76 | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME This section outlines the company's total comprehensive income, including net income and other comprehensive income components like foreign currency translation adjustments and actuarial gains on pension plans Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Metric (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income | $33,426 | $154,530 | $40,685 | $350,711 | | Net foreign currency translation adjustment | $763 | $(13,688) | $2,763 | $(16,570) | | Actuarial gain on pension plans | $100 | $13,985 | $100 | $13,985 | | Total comprehensive income | $34,289 | $154,827 | $43,548 | $348,126 | CONDENSED CONSOLIDATED BALANCE SHEETS This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (Unaudited) | Metric (in thousands) | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------ | :--------------------------- | :------------------------------- | | ASSETS | | | | Cash and cash equivalents | $22,094 | $47,499 | | Accounts receivable, net | $299,469 | $214,262 | | Inventories, net | $830,020 | $1,029,705 | | Total current assets | $1,235,245 | $1,390,776 | | Fixed assets, net | $478,885 | $482,185 | | Goodwill | $584,312 | $567,063 | | Other intangible assets, net | $477,307 | $503,320 | | Total assets | $3,076,397 | $3,246,912 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current maturities of long-term indebtedness | $27,712 | $23,086 | | Accounts payable, trade | $182,637 | $143,529 | | Total current liabilities | $441,452 | $421,300 | | Long-term indebtedness | $915,756 | $1,095,888 | | Total liabilities | $1,705,500 | $1,865,904 | | Total stockholders' equity | $1,370,897 | $1,381,008 | | Total liabilities and stockholders' equity | $3,076,397 | $3,246,912 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :---------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash flows provided by operating activities | $273,565 | $347,971 | | Net cash flows used in investing activities | $(55,589) | $(120,422) | | Net cash flows used in financing activities | $(243,319) | $(234,390) | | Net decrease in cash and cash equivalents | $(25,405) | $(7,908) | | Cash and cash equivalents at end of period | $22,094 | $54,988 | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY This section details changes in the company's stockholders' equity, including net income, stock issuance, compensation, other comprehensive income, and dividends Changes in Stockholders' Equity (Six Months Ended June 30, 2023) | Metric (in thousands) | Common Stock (in thousands) | Paid-in Capital (in thousands) | Retained Earnings (in thousands) | Accumulated Other Comprehensive Income (Loss) (in thousands) | Treasury Stock (in thousands) | Total Stockholders' Equity (in thousands) | | :-------------------------------- | :-------------------------- | :----------------------------- | :------------------------------- | :----------------------------------------------------------- | :---------------------------- | :---------------------------------------- | | Balance - December 31, 2022 | $285 | $234,956 | $1,221,279 | $6,704 | $(82,216) | $1,381,008 | | Net income | — | — | $40,685 | — | — | $40,685 | | Issuance of common stock (net) | $1 | $(9,586) | — | — | — | $(9,585) | | Stock-based compensation expense | — | $9,080 | — | — | — | $9,080 | | Other comprehensive income | — | — | — | $2,863 | — | $2,863 | | Cash dividends | — | — | $(53,154) | — | — | $(53,154) | | Dividend equivalents | — | $1,057 | $(1,057) | — | — | — | | Balance - June 30, 2023 | $286 | $235,507 | $1,207,753 | $9,567 | $(82,216) | $1,370,897 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering accounting policies, estimates, and specific financial line items 1. BASIS OF PRESENTATION This section describes the company's business, operational scope, seasonal trends, and the impact of economic conditions on its financial reporting - LCI Industries (LCII) and its subsidiaries, primarily Lippert Components, Inc., supply engineered components to OEMs in recreation, transportation, and housing markets (RVs, boats, buses, trailers, manufactured homes, modular housing) and their related aftermarkets[23] - The company operates over 120 manufacturing and distribution facilities across North America and Europe[23] - The company's sales and profits are historically highest in the second quarter and lowest in the fourth quarter due to seasonal industry trends, though these trends can be impacted by factors like dealer inventories, economic conditions, consumer confidence, and severe weather[24] - The preparation of financial statements requires management to make estimates and judgments, which are continuously evaluated based on historical experience and other available information, with actual results potentially differing significantly from these estimates[27] - Negative economic conditions, including financial and credit market fluctuations, increased inflation and interest rates, trade uncertainty, natural disasters, global public health crises (e.g., COVID-19), and armed conflicts (e.g., Russia-Ukraine), have negatively impacted and could continue to impact the Company's business, liquidity, financial condition, and results of operations[28] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the accounting principles applied in preparing the financial statements and notes any recent pronouncements - The Condensed Consolidated Financial Statements adhere to accounting policies described in the December 31, 2022 Annual Report on Form 10-K[29] - No recent accounting pronouncements not yet adopted are expected to materially impact the Condensed Consolidated Financial Statements[30] 3. EARNINGS PER SHARE This section details the calculation of basic and diluted earnings per share, including the treatment of common stock equivalents and antidilutive instruments Weighted Average Shares Outstanding for EPS Calculation (In thousands) | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Weighted average shares outstanding for basic EPS | 25,329 | 25,438 | 25,273 | 25,377 | | Common stock equivalents (stock-based awards) | 108 | 80 | 86 | 106 | | Weighted average shares outstanding for diluted EPS | 25,437 | 25,518 | 25,359 | 25,483 | | Equity instruments excluded (antidilutive) | 165 | 112 | 162 | 111 | - The Company's 1.125% convertible senior notes due 2026 were antidilutive for the three and six months ended June 30, 2023, as the average common stock price was below the conversion price of $165.65[31] - Warrants to purchase 2.8 million shares of common stock with a strike price of $259.84 per share were also considered antidilutive for the three and six months ended June 30, 2023, as the average share price was below the strike price[32] 4. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS This section reports on recent acquisitions, changes in goodwill by segment, and the composition of other intangible assets - During the first six months of 2023, the Company completed two acquisitions for an aggregate cash purchase consideration of $25.8 million, resulting in $18.3 million of goodwill[34] - The acquisition of Way Interglobal Network LLC in November 2022 for $54.8 million (including a $2.0 million holdback) had preliminary purchase price allocation adjustments in H1 2023 due to updated net working capital balances[35][36] Changes in Goodwill by Segment (In thousands) | Metric | OEM Segment (in thousands) | Aftermarket Segment (in thousands) | Total (in thousands) | | :---------------------------- | :------------------------- | :--------------------------------- | :------------------- | | Net balance – December 31, 2022 | $399,736 | $167,327 | $567,063 | | Acquisitions – 2023 | $18,314 | — | $18,314 | | Measurement period adjustments | $(2,905) | $(143) | $(3,048) | | Foreign currency translation | $1,721 | $262 | $1,983 | | Net balance – June 30, 2023 | $416,866 | $167,446 | $584,312 | Other Intangible Assets (In thousands) | Asset Type | Gross Cost (June 30, 2023) (in thousands) | Net Balance (June 30, 2023) (in thousands) | Net Balance (December 31, 2022) (in thousands) | | :------------------------ | :---------------------------------------- | :----------------------------------------- | :--------------------------------------------- | | Customer relationships | $517,588 | $337,331 | $356,711 | | Patents | $122,373 | $54,676 | $58,326 | | Trade names (finite life) | $98,650 | $74,600 | $76,430 | | Trade names (indefinite life) | $7,600 | $7,600 | $7,600 | | Non-compete agreements | $11,484 | $2,756 | $3,886 | | Other | $609 | $344 | $367 | | Total | $758,304 | $477,307 | $503,320 | 5. INVENTORIES This section provides a breakdown of inventory components and the associated obsolescence reserves Inventories, Net (In thousands) | Inventory Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------- | :--------------------------- | :------------------------------- | | Raw materials | $503,777 | $600,601 | | Work in process | $45,379 | $44,850 | | Finished goods | $280,864 | $384,254 | | Inventories, net | $830,020 | $1,029,705 | - Inventory obsolescence reserves were $61.5 million at June 30, 2023, up from $55.9 million at December 31, 2022[39] 6. FIXED ASSETS This section details the company's fixed assets, including their cost and accumulated depreciation and amortization Fixed Assets, Net (In thousands) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------- | :--------------------------- | :------------------------------- | | Fixed assets, at cost | $976,047 | $945,255 | | Less accumulated depreciation and amortization | $497,162 | $463,070 | | Fixed assets, net | $478,885 | $482,185 | 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES This section itemizes accrued expenses and other current liabilities, including employee compensation, warranty provisions, and deferred acquisition payments Accrued Expenses and Other Current Liabilities (In thousands) | Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------------------------- | :--------------------------- | :------------------------------- | | Employee compensation and benefits | $54,837 | $77,804 | | Current portion of accrued warranty | $41,988 | $35,148 | | Deferred acquisition payments and contingent consideration | $33,692 | $34,013 | | Other | $65,582 | $72,273 | | Total accrued expenses and other current liabilities | $196,099 | $219,238 | Accrued Warranty Activity (In thousands) | Metric | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Balance at beginning of period | $54,528 | $52,114 | | Provision for warranty expense | $40,128 | $28,164 | | Warranty costs paid | $(31,968) | $(18,646) | | Balance at end of period | $62,688 | $61,632 | | Less long-term portion | $(20,700) | $(21,460) | | Current portion of accrued warranty at end of period | $41,988 | $40,172 | 8. LONG-TERM INDEBTEDNESS This section details the company's long-term debt, including convertible notes, term loans, revolving credit facilities, and compliance with financial covenants Long-Term Debt (In thousands) | Debt Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------ | :--------------------------- | :------------------------------- | | Convertible Notes | $460,000 | $460,000 | | Term Loan | $365,000 | $375,000 | | Revolving Credit Loan | $122,960 | $289,067 | | Other | $3,440 | $3,959 | | Unamortized deferred financing fees | $(7,932) | $(9,052) | | Total | $943,468 | $1,118,974 | | Less current portion | $(27,712) | $(23,086) | | Long-term indebtedness | $915,756 | $1,095,888 | - The Credit Agreement provides for a $600.0 million revolving credit facility and a $400.0 million Term Loan, maturing on December 7, 2026, with variable interest rates based on a base rate or SOFR plus an applicable margin[44][45] - Availability under the revolving credit facility was $270.0 million at June 30, 2023, after accounting for certain limitations related to the maximum net leverage ratio covenant[45] - The Company issued $460.0 million in 1.125% Convertible Notes due 2026, with a conversion rate of 6.1469 shares per $1,000 principal amount at June 30, 2023[47][48] - The notes are convertible under certain circumstances and redeemable by the Company on or after May 20, 2024, if specific stock price conditions are met[49][50][51] - An amendment to the Credit Agreement on May 23, 2023, adjusted certain financial covenants (increasing maximum total net leverage ratio and decreasing minimum debt service coverage ratio) for the two fiscal quarters ending June 30, 2023, and September 30, 2023, with the Company in compliance at June 30, 2023[55] 9. LEASES This section presents the components of lease expense, distinguishing between operating, short-term, and variable lease costs Components of Lease Expense (In thousands) | Lease Expense Type | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :----------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Operating lease expense | $15,670 | $13,236 | $30,914 | $26,148 | | Short-term lease expense | $1,307 | $1,934 | $2,787 | $3,774 | | Variable lease expense | $1,200 | $936 | $2,200 | $1,649 | | Total lease expense | $18,177 | $16,106 | $35,901 | $31,571 | 10. COMMITMENTS AND CONTINGENCIES This section outlines the company's financial commitments and potential liabilities from business combinations, product recalls, environmental regulations, and legal proceedings - The Company finances a portion of business combinations with holdback payments and contingent earnout provisions, measured at fair value quarterly, with contingent consideration balances not material at June 30, 2023[59] - The Company cooperates with customers on product recalls and may incur future expenses for investigations or recalls[60] - Operations are subject to environmental regulations, and the Company may incur expenditures for future investigation and remediation of sites affected by hazardous materials[61] - In the normal course of business, the Company is subject to legal proceedings, but management believes any monetary liability beyond current provisions would not be material to its financial position or results of operations[62] 11. STOCKHOLDERS' EQUITY This section provides details on common stock, dividends, stock-based awards, and stock repurchase programs Common Stock Information (In thousands) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Common stock authorized | 75,000 | 75,000 | | Common stock issued | 28,665 | 28,519 | | Treasury stock | 3,341 | 3,341 | | Common stock outstanding | 25,324 | 25,178 | Regular Quarterly Dividends Declared and Paid (In thousands, except per share data) | Period | Per Share ($) | Total Paid (in thousands) | | :---------------- | :------------ | :------------------------ | | First Quarter 2022 | $0.90 | $22,870 | | Second Quarter 2022 | $1.05 | $26,702 | | Third Quarter 2022 | $1.05 | $26,701 | | Fourth Quarter 2022 | $1.05 | $26,453 | | Total 2022 | $4.05 | $102,726 | | First Quarter 2023 | $1.05 | $26,563 | | Second Quarter 2023 | $1.05 | $26,591 | | Total 2023 | $2.10 | $53,154 | Deferred and Restricted Stock Units (DSUs & RSUs) Activity | Metric | Number of Shares | Weighted Average Price ($) | | :-------------------------- | :--------------- | :------------------------- | | Outstanding at December 31, 2022 | 277,774 | $120.92 | | Granted | 159,640 | $114.22 | | Vested | (129,583) | $112.24 | | Outstanding at June 30, 2023 | 301,404 | $118.55 | Performance Stock Units (PSUs) Activity | Metric | Number of Shares | Weighted Average Price ($) | | :-------------------------- | :--------------- | :------------------------- | | Outstanding at December 31, 2022 | 162,381 | $120.12 | | Granted | 140,953 | $108.42 | | Vested | (100,046) | $101.11 | | Outstanding at June 30, 2023 | 203,770 | $122.57 | - The Board authorized a $200.0 million stock repurchase program on May 19, 2022, expiring May 19, 2025, with no shares repurchased during the six months ended June 30, 2023[66] 12. SEGMENT REPORTING This section disaggregates the company's net sales and operating profit by its OEM and Aftermarket segments and geographical regions - The Company operates in two reportable segments: OEM Segment and Aftermarket Segment, with intersegment sales being insignificant[67] - The OEM Segment accounted for 76% of consolidated net sales for the six months ended June 30, 2023, primarily supplying engineered components to RVs and adjacent industries (boats, buses, trailers, manufactured homes)[68] - The Aftermarket Segment accounted for 24% of consolidated net sales for the six months ended June 30, 2023, supplying engineered components to related aftermarket channels, including retail dealers, wholesale distributors, and direct to retail customers[69] Net Sales by Segment and Geography (In thousands) | Segment/Geography | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | OEM Segment | | | | | | U.S. | $665,868 | $1,188,038 | $1,334,319 | $2,497,467 | | International | $93,140 | $88,240 | $182,861 | $175,393 | | Total OEM | $759,008 | $1,276,278 | $1,517,180 | $2,672,860 | | Aftermarket Segment | | | | | | U.S. | $234,901 | $240,246 | $435,388 | $470,413 | | International | $20,730 | $19,626 | $35,381 | $37,445 | | Total Aftermarket | $255,631 | $259,872 | $470,769 | $507,858 | | Total Net Sales | $1,014,639 | $1,536,150 | $1,987,949 | $3,180,718 | Operating Profit by Segment (In thousands) | Segment | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | OEM Segment | $18,642 | $190,577 | $17,921 | $435,951 | | Aftermarket Segment | $36,532 | $28,212 | $57,296 | $52,539 | | Total operating profit | $55,174 | $218,789 | $75,217 | $488,490 | Revenue Disaggregated by Product (In thousands) | Product Category | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | OEM Segment: | | | | | | Chassis, chassis parts, and slide-out mechanisms | $202,735 | $486,591 | $400,791 | $1,046,311 | | Windows and doors | $220,094 | $301,985 | $438,705 | $632,343 | | Furniture and mattresses | $125,346 | $229,520 | $265,909 | $471,746 | | Axles and suspension solutions | $88,635 | $93,378 | $164,384 | $190,423 | | Other | $122,198 | $164,804 | $247,391 | $332,037 | | Total OEM Segment net sales | $759,008 | $1,276,278 | $1,517,180 | $2,672,860 | | Total Aftermarket Segment net sales | $255,631 | $259,872 | $470,769 | $507,858 | | Total Net Sales | $1,014,639 | $1,536,150 | $1,987,949 | $3,180,718 | ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides a comprehensive analysis of LCI Industries' financial performance, liquidity, and capital resources for the periods presented, discussing industry trends, segment-specific results, and the impact of economic factors on operations, along with forward-looking statements and risk disclosures - LCI Industries, through Lippert Components, Inc., supplies engineered components to OEMs in recreation, transportation, and housing markets (RVs, boats, buses, trailers, manufactured homes, modular housing) and their related aftermarkets[76] - The company operates two reportable segments: OEM Segment and Aftermarket Segment, with over 120 manufacturing and distribution facilities in North America and Europe[77] - Historically, sales and profits are highest in Q2 and lowest in Q4 due to seasonality, but this has been impacted by factors like dealer inventories, economic conditions, and the COVID-19 pandemic[79] - Negative economic conditions, including inflation, rising interest rates, trade uncertainty, and global conflicts, have negatively impacted and could continue to impact the Company's business[80][82] INDUSTRY BACKGROUND This section details the market conditions for the North American Recreational Vehicle (RV) industry and Adjacent Industries, including wholesale shipments, retail demand, and dealer inventory levels, along with the outlook for the Aftermarket Segment - The RV industry's annual sales cycle typically runs from October to September, with wholesale shipments exceeding retail sales from October to March to build dealer inventories, and retail sales exceeding wholesale shipments from April to September[84] - Industry-wide wholesale shipments of travel trailer and fifth-wheel RVs decreased 54% in the first six months of 2023 compared to 2022, primarily due to a 21% decrease in retail demand, driven by rising interest rates impacting consumers[85] Wholesale vs. Retail RV Unit Sales and Dealer Inventory Impact (United States and Canada) | Period | Wholesale Units (units) | Change (YoY) (%) | Retail Units (units) | Change (YoY) (%) | Estimated Unit Impact on Dealer Inventories (units) | | :-------------------------- | :---------------------- | :--------------- | :------------------- | :--------------- | :-------------------------------------------------- | | Quarter ended June 30, 2023 | 71,600 | (46)% | 105,300 | (19)% | (33,700) | | Quarter ended March 31, 2023 | 61,200 | (60)% | 71,400 | (25)% | (10,200) | | Twelve months ended June 30, 2023 | 268,200 | (51)% | 341,700 | (21)% | (73,500) | - Industry-wide wholesale shipments of motorhome RVs decreased 17% in H1 2023, with retail demand down 12% year-over-year, attributed to inflation and rising interest rates[86][88] - The Company estimates full-year 2023 industry-wide wholesale shipments for travel trailer, fifth-wheel, and motorhome RVs to be approximately 290,000 to 310,000 units, a 37-41% decrease from 2022, due to dealer inventory levels, inflation, and rising interest rates[89] - Economic uncertainty is expected to negatively impact consumer discretionary purchases in Adjacent Industries (trailers, boats) in H2 2023, while manufactured homes, buses, and trains are anticipated to maintain current production rates[91] - The Aftermarket Segment is expected to see a slight increase in sales in H2 2023 as distribution channel inventories stabilize, though tempered by inflation and rising interest rates on consumer discretionary spending[94] RESULTS OF OPERATIONS This section provides a detailed breakdown of the company's consolidated and segment-specific financial results for the three and six months ended June 30, 2023, compared to the prior year, highlighting key revenue and profit drivers, including the impact of commodity costs and fixed expenses Consolidated Financial Highlights (In millions, except per share amounts) | Metric | Q2 2023 (in millions) | Q2 2022 (in millions) | Change (YoY) (%) | YTD 2023 (in millions) | YTD 2022 (in millions) | Change (YoY) (%) | | :---------------------- | :-------------------- | :-------------------- | :--------------- | :--------------------- | :--------------------- | :--------------- | | Net sales | $1,014.6 | $1,536.2 | (34)% | $1,987.9 | $3,180.7 | (37.5)% | | Net income | $33.4 | $154.5 | (78.4)% | $40.7 | $350.7 | (88.4)% | | Diluted EPS ($) | $1.31 | $6.06 | (78.4)% | $1.60 | $13.76 | (88.4)% | | Operating profit | $55.2 | $218.8 | (74.8)% | $75.2 | $488.5 | (84.6)% | | Operating profit margin | 5.4% | 14.2% | (8.8) pp | 3.8% | 15.4% | (11.6) pp | - Consolidated net sales decreased primarily due to a nearly 44% decrease in North American RV wholesale shipments and decreased selling prices indexed to commodities, partially offset by $17.2 million from acquisitions in Q2 2023[96] - Consolidated operating profit margin decreased due to lower selling prices (commodity-indexed) and the impact of fixed costs on reduced organic sales, partially offset by decreases in material commodity costs[96][97] OEM Segment Net Sales by Market (In thousands) | Market | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (YoY) (%) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | Change (YoY) (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------------- | :---------------------- | :---------------------- | :--------------- | | Travel trailers and fifth-wheels | $338,739 | $814,509 | (58)% | $669,292 | $1,767,735 | (62)% | | Motorhomes | $71,185 | $91,480 | (22)% | $140,736 | $178,734 | (21)% | | Adjacent Industries OEMs | $349,084 | $370,289 | (6)% | $707,152 | $726,391 | (3)% | | Total OEM Segment net sales | $759,008 | $1,276,278 | (41)% | $1,517,180 | $2,672,860 | (43)% | OEM Segment Average Product Content per RV | Content per: | 2023 ($) | 2022 ($) | Change (YoY) (%) | | :------------------------ | :------- | :------- | :--------------- | | Travel trailer and fifth-wheel | $5,487 | $5,379 | 2% | | Motorhome | $3,760 | $3,557 | 6% | - OEM Segment operating profit decreased significantly in Q2 2023 (by $171.9 million) and YTD 2023 (by $418.0 million) due to decreased commodity-indexed selling prices, the impact of fixed costs on reduced organic sales, and a sales mix shift to lower margin products, partially offset by decreases in material commodity costs and reduced G&A[101][105][106][108] Aftermarket Segment Net Sales (In thousands) | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (YoY) (%) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | Change (YoY) (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------------- | :---------------------- | :--------------------- | :--------------- | | Total Aftermarket Segment net sales | $255,631 | $259,872 | (2)% | $470,769 | $507,858 | (7)% | - Aftermarket Segment operating profit increased in Q2 2023 (by $8.3 million) and YTD 2023 (by $4.8 million), driven by decreases in material commodity costs and pricing changes, partially offset by the impact of fixed costs on reduced organic sales and higher production facility costs[110][112][115] - Interest expense, net, increased to $20.6 million for YTD 2023 from $12.4 million in YTD 2022, primarily due to higher global interest rates on variable-rate debt[116] - The effective tax rate for YTD 2023 was 25.4%, down from 26.3% in YTD 2022, mainly due to an increased benefit related to the cash surrender value of life insurance[117] LIQUIDITY AND CAPITAL RESOURCES This section outlines the company's financial position, cash flow activities, and ability to meet short-term and long-term financial needs, detailing operating, investing, and financing cash flows, available credit, and future capital expenditure plans - As of June 30, 2023, the Company had $22.1 million in cash and cash equivalents and $270.0 million available under its revolving credit facility[119][121] - Management believes these resources are adequate to finance anticipated cash requirements for the next twelve months[121] Summary of Cash Flows (In thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash flows provided by operating activities | $273,565 | $347,971 | | Net cash flows used in investing activities | $(55,589) | $(120,422) | | Net cash flows used in financing activities | $(243,319) | $(234,390) | | Net decrease in cash and cash equivalents | $(25,405) | $(7,908) | - Operating cash flows decreased primarily due to a $310.0 million decrease in net income, partially offset by a $235.8 million net change in assets and liabilities, mainly from a $209.3 million decrease in inventory[123] - Cash used in investing activities for YTD 2023 was $55.6 million, primarily for $34.1 million in capital expenditures and $25.9 million for acquisitions[125] - Full-year 2023 capital expenditures are estimated at $60 to $80 million[126] - Cash used in financing activities for YTD 2023 was $243.3 million, mainly comprising $168.5 million in net repayments under the revolving credit facility, $53.2 million in dividends, and $10.7 million in Term Loan repayments[128] - The Credit Agreement includes financial covenants, which were amended on May 23, 2023, to adjust the maximum total net leverage ratio and minimum debt service coverage ratio for Q2 and Q3 2023, with the Company in compliance at June 30, 2023[131] CORPORATE GOVERNANCE This section confirms the company's adherence to corporate governance requirements and the availability of related documents and policies - The Company complies with SEC and NYSE corporate governance requirements, with governance documents and committee charters available on its investor website[133] - A Whistleblower Policy, including a toll-free hotline, is in place for reporting complaints about accounting, internal controls, auditing, or other concerns[133] CONTINGENCIES This section refers to the detailed disclosures on commitments and contingencies provided in the financial statement notes - Information regarding commitments and contingencies is included in Note 10 of the Notes to Condensed Consolidated Financial Statements[134] INFLATION This section discusses the impact of inflation and commodity price volatility on raw material costs and the company's ability to pass these costs to customers - Prices of key raw materials (steel and aluminum) are influenced by demand, commodity-specific factors, and inflationary pressures, decreasing in H1 2023 but historically volatile[135] - While commodity prices are expected to remain generally consistent in upcoming quarters of 2023, there is no assurance that raw material costs will not increase, or that future cost increases can be fully passed on to customers[135][146] NEW ACCOUNTING PRONOUNCEMENTS This section refers to the disclosures on new accounting pronouncements provided in the financial statement notes - Information on new accounting pronouncements is included in Note 2 of the Notes to Condensed Consolidated Financial Statements[136] USE OF ESTIMATES This section highlights management's reliance on estimates and judgments in financial reporting and the potential for actual results to differ - The preparation of financial statements requires management to make estimates and judgments (e.g., product returns, inventories, goodwill, income taxes, warranty obligations)[137] - Estimates are based on historical experience and assumptions, but actual results and events could differ significantly from management's estimates[139] FORWARD-LOOKING STATEMENTS This section cautions readers about forward-looking statements, noting that actual results may differ due to various risk factors, and disclaims any obligation to update them - This Form 10-Q contains forward-looking statements regarding financial condition, results of operations, business strategies, and other matters, which are estimates reflecting management's best judgment[140][141] - Numerous factors, many beyond the Company's control, could cause actual results to differ materially from forward-looking statements, including economic impacts, pricing pressures, raw material costs, seasonality, credit availability, and regulatory changes[141] - Readers are cautioned not to place undue reliance on these statements, and the Company disclaims any obligation to update them, except as required by law[141] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section describes the company's exposure to market risks, specifically related to fluctuations in short-term interest rates on variable-rate debt and changes in raw material prices, and outlines its approach to managing these risks - The Company is exposed to market risk from changes in short-term interest rates on its variable-rate debt, though a hypothetical 0.25% increase in the indexed interest rate would not materially affect results of operations[144] - The Company is also exposed to changes in steel and aluminum prices and has used derivative instruments to manage these exposures, but had no outstanding commodity derivative instruments at June 30, 2023[145] - Historically, the Company has been able to obtain sales price increases to partially offset raw material cost increases, but there is no assurance this will continue or that timing will match cost increases[146] ITEM 4 – CONTROLS AND PROCEDURES This section confirms that LCI Industries' management, including its principal executive and financial officers, evaluated the effectiveness of its disclosure controls and procedures, concluding they were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of June 30, 2023[149][150] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[150] PART II – OTHER INFORMATION ITEM 1 – LEGAL PROCEEDINGS This section states that LCI Industries is involved in various legal proceedings in the normal course of business, but management believes that any resulting monetary liability or financial impact beyond current provisions would not be material to the company's financial position or results of operations - The Company is subject to proceedings, lawsuits, regulatory agency inquiries, and other claims in the normal course of business[153] - Management believes that any monetary liability or financial impact beyond current provisions would not be material to the Company's financial position or results of operations after final disposition, including anticipated insurance recoveries[153] ITEM 1A – RISK FACTORS This section confirms that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K filed with the SEC on February 24, 2023 - There have been no material changes to the risk factors discussed in Part I, Item 1A – Risk Factors in the Company's Annual Report on Form 10-K filed on February 24, 2023[155] ITEM 5 – OTHER INFORMATION This section reports that no directors or officers of LCI Industries adopted or terminated any Rule 10b5-1 trading arrangements during the three months ended June 30, 2023 - No directors or officers adopted or terminated any Rule 10b5-1(c) trading arrangements or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[157] ITEM 6 – EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including corporate organizational documents, amendments to the credit agreement, CEO and CFO certifications, and interactive data files in XBRL format - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Amendment No. 5 to the Fourth Amended and Restated Credit Agreement, CEO and CFO certifications (Sections 302 and 906), and Inline XBRL financial information[159] SIGNATURES This section contains the official signature block for the Form 10-Q, confirming its submission by LCI Industries, signed by Lillian D. Etzkorn, Chief Financial Officer, on August 8, 2023 - The report was duly caused to be signed on behalf of LCI Industries by Lillian D. Etzkorn, Chief Financial Officer, on August 8, 2023[161]