LCI INDUSTRIES 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, as well as the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 .LCI Industries ("LCII" and collectively with its subsidiaries, the "Company," "we," "us," or "our"), through its wholly-owned subsidiary,Lippert Components, Inc. and its subsidiaries (collectively, "Lippert Components" or "LCI"), supplies, domestically and internationally, a broad array of engineered components for the leading original equipment manufacturers ("OEMs") in the recreation and transportation product markets, consisting primarily of recreational vehicles ("RVs") and adjacent industries, including buses; trailers used to haul boats, livestock, equipment, and other cargo; trucks; 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. The Company has two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. AtJune 30, 2020 , the Company operated over 90 manufacturing and distribution facilities located throughoutthe United States and inCanada ,Ireland ,Italy ,the Netherlands , and theUnited Kingdom . See Note 12 of the Notes to Condensed Consolidated Financial Statements for further information regarding the Company's segments. The Company's OEM Segment manufactures or distributes a broad array of engineered components for the leading OEMs of leisure and mobile transportation industries. Approximately 60 percent of the Company's OEM Segment net sales for the twelve months endedJune 30, 2020 were of components for travel trailer and fifth-wheel RVs, including: ? Steel chassis and related components ? Entry, luggage, patio, and ramp doors ? Axles and suspension solutions ? Furniture and
mattresses
? Slide-out mechanisms and solutions ? Electric and manual entry steps ? Thermoformed bath, kitchen, and other products ? Awnings and awning accessories ? Vinyl, aluminum, and frameless windows ? Electronic components
? Manual, electric, and hydraulic stabilizer and ? Other accessories
leveling systems
The Aftermarket Segment supplies many of these engineered components to the related aftermarket channels of the recreation and 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 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, 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, 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 may be different in 2020 and future years as a result of the COVID-19 pandemic and related impacts.
IMPACT OF COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of coronavirus ("COVID-19") a pandemic, and onMarch 13, 2020 the United States declared a national emergency related to COVID-19. The pandemic has caused significant uncertainty and disruption in the global economy and financial markets. The Company continues to closely monitor the impact of COVID-19 on all aspects of its business. For risks relating to the COVID-19 outbreak, see Item 1A. Risk Factors in Part II of this Report. 25 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Health and Safety
During this unprecedented crisis, the health and safety of the Company's team members has remained the top priority. The Company instituted a travel ban for all team members in early March and onMarch 25, 2020 , the Company issued a press release providing a business update regarding COVID-19, including that it was temporarily suspending production at select manufacturing facilities acrossNorth America andEurope . The temporary suspension of production was made on a plant-by-plant basis, consistent with government mandates or due to customer closures. Production at facilities considered essential continued, utilizing reduced staff in conjunction with heightened cleaning and sanitation processes. Team members that do not need to be physically present on the manufacturing floor to perform their work were required to work from home. The Company implemented a number of actions to ensure adherence to guidelines set forth by theWorld Health Organization and theCenters for Disease Control and Prevention .
The Company enacted rigorous health and safety protocols as it resumed
production in early May. For example, the Company implemented health screenings
of team members for potential symptoms, conducts extensive and frequent
disinfecting of workspaces, implemented social distancing restrictions for
production personnel, provided masks to team members
Operations
As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures in attempts to contain the virus, such as travel bans and restrictions, limits on gatherings, face mask requirements, quarantines, shelter-in-place orders, and business shutdowns. The Company temporarily suspended production at certain facilities, starting with locations inItaly and other parts ofEurope . Certain of the Company's North American operations, which were considered non-essential, were temporarily suspended starting the last week of March, negatively impacting the Company's results of operations for the first quarter of 2020, especially in the OEM Segment. These temporary production shutdowns continued through April, and most of the Company's facilities reopened in early May and were fully operational through June. The shutdowns continued to negatively impact the Company's results of operations through the first half of the second quarter of 2020. The Company instituted several cost saving and cash preservation measures starting in late March and continuing into the second quarter in an effort to conserve liquidity and mitigate the impact of lost revenue from suspended operations. The following list includes many, but not all, of the cost savings and cash preservation measures employed to date: •temporary layoffs of production employees at suspended facilities; •salary reductions for the executive leadership team; •reduction of the quarterly retainer for the Board of Directors; •elimination of discretionary spending; •delay of non-essential capital expenditures; •deferral of lease payments to lessors; •temporary hiring freezes and furloughs of non-critical team members; and •postponing merit increases for salaried employees until the end of the fiscal year. The Company cannot assure you that these cost-saving efforts will be successful in mitigating the impact of the COVID-19 pandemic on its business, liquidity, results of operations, or financial condition. As the Company returned to fully operational status later in the second quarter, several of the cost savings and cash preservation measures listed above were reversed, including executive salary and director retainer reductions, furloughs, and hiring freezes. Due to the uncertainty surrounding the COVID-19 pandemic, the Company remains disciplined with other cost savings and cash preservation measures, such as delaying capital expenditures and reducing or eliminating non-critical business expenses including travel. Most of the OEM customers the Company supplies inNorth America resumed operations in earlyMay 2020 at reduced capacity to fulfill retail dealer backlog orders. The Company resumed operations to varying degrees for the majority of its facilities onMay 4, 2020 to meet the demand requirements of its customers. Retail demand, especially in the RV and marine markets, picked up significantly later in the second quarter, leading to a record month of June for net sales for the Company with fully operational facilities. While production at the Company's facilities has continued through June and July, current plans 26 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
are subject to change as the ultimate duration and impact of the COVID-19 pandemic on the Company's and its customers' operations is presently unclear.
Customers and Demand
Prior to the COVID-19 impact in mid-March, the RV industry experienced a return to positive retail sales growth. This growth concluded 16 months of consecutive year-over-year declines, and provided an indication that the inventory re-balancing the industry had been addressing had reached its conclusion. As a result of the COVID-19 pandemic and many government mandated stay-at-home orders and campground closures, retail sales abruptly declined beginning in mid-March. Despite the abrupt decline in retail sales to the Company's OEM channels, many aftermarket channels remained open through the period as dealerships remained open to service customers' products. The Company stayed in close communication with its OEM customers in regards to their plans to resume operations and ramped up production quickly to meet its customers' demand when facilities reopened in early May. As noted above, later in the second quarter, retail demand for North American RV and marine markets increased significantly resulting in the highest total net sales in the month of June in Company history. The sharp rebound in sales in June resulted in a significant increase in accounts receivable at the end of the second quarter. The Company continues to closely monitor cash collections of its trade receivables, and to date has not identified any significant collection concerns with its customers. The Company experienced a positive impact following the initial shutdown from the COVID-19 pandemic, as interest rates and fuel prices remain at historic lows, both of which are favorable for the industries the Company serves, and retail consumers are looking for vacation options that avoid large gatherings and allow for social distancing. The end products for many of the markets the Company supplies, such as RVs and boats, can provide safer alternatives for vacations and recreation as opposed to air travel, visiting large cities, theme parks, and cruises. However, given the significant negative effects and uncertainties associated with the COVID-19 pandemic, other impacts, such as long-termU.S. and global economic disruptions, may ultimately be counter to, and outweigh, any positive vacation and recreation factors.
Suppliers
The Company has not yet experienced any significant impacts or interruptions to its supply chain as a result of the COVID-19 pandemic. However, certain of our suppliers have or are expected to face difficulties maintaining operations due to government-ordered restrictions, future outbreaks, and shelter-in-place mandates. Although the Company regularly monitors the financial health of companies in the Company's supply chain, financial hardship on the Company's suppliers caused by the COVID-19 pandemic could cause a disruption in the Company's ability to obtain raw materials or components required to manufacture its products, adversely affecting operations. To mitigate the risk of any potential supply chain interruptions from the COVID-19 pandemic, the Company increased certain inventory levels during the first quarter of 2020. Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, could result in higher costs or delays, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Liquidity In response to the COVID-19 pandemic, the Company borrowed a series of draws under its revolving credit facility to increase its cash position and improve financial flexibility in March andApril 2020 . The Company made net repayments on its revolving credit facility of approximately$62 million in the second quarter of 2020 as production resumed and operating cash flow improved with the increase in retail demand. See "Liquidity and Capital Resources - Credit Facilities" section below for further discussion on liquidity.
FURRION UPDATE
InAugust 2019 , the Company and Furrion agreed to terminate their distribution and supply agreement effectiveDecember 31, 2019 , and transition all sale and distribution of Furrion products then handled by the Company to Furrion. EffectiveJanuary 1, 2020 , Furrion is responsible for distributing its products directly to the customer and assumed all responsibilities previously carried out by the Company relating to Furrion products. Upon termination of the agreement, Furrion purchased from the Company all non-obsolete stock and certain obsolete and slow-moving stock of Furrion products at the cost paid by the Company. AtJune 30, 2020 the Company had a receivable of$52.0 million recorded for purchases of inventory 27 -------------------------------------------------------------------------------- LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) stock by Furrion. The agreement requires Furrion to make periodic payments throughout 2020 and the first six months of 2021. Due to the impacts of the COVID-19 pandemic, the Company is currently in negotiations that would impact the timing of the repayment of this receivable. Accordingly, the Company has classified$34.7 million of the receivable as long-term, and discounted the receivable to present value inJune 2020 based on the currently proposed payment plan. Due to the nature of the Furrion distribution and supply arrangement, the historical operating margin related to sales of Furrion products were dilutive to the Company's consolidated operating margin. Sales of Furrion products included in the historical results of the Company are presented below by period and by market within the Company's segments. (In thousands) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Full Year 2019 OEM Segment Furrion sales: RV OEMs: Travel trailers and fifth-wheel RVs$ 23,574 $ 25,636 $ 23,375 $ 22,393 $ 94,978 Motorhomes 830 1,037 971 780 3,618 Adjacent industries OEMs 490 612 573 607 2,282 Total OEM Segment Furrion sales 24,894 27,285 24,919 23,780 100,878 Aftermarket Segment Furrion sales: Total Aftermarket Segment Furrion sales 8,915 9,545 8,473 3,614 30,547 Total Furrion Sales$ 33,809 $ 36,830 $ 33,392 $ 27,394 $ 131,425 (In thousands) Q1 2018 Q2 2018 Q3 2018 Q4 2018 Full Year 2018 OEM Segment Furrion sales: RV OEMs: Travel trailers and fifth-wheel RVs$ 23,367 $ 22,964 $ 23,117 $ 21,572 $ 91,020 Motorhomes 739 812 828 875 3,254 Adjacent industries OEMs 468 485 309 281 1,543 Total OEM Segment Furrion sales 24,574 24,261 24,254 22,728 95,817 Aftermarket Segment Furrion sales: Total Aftermarket Segment Furrion sales 3,951 7,011 5,454 3,250 19,666 Total Furrion Sales$ 28,525 $ 31,272 $ 29,708 $ 25,978 $ 115,483 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" inElkhart, 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 recently canceled. 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 the historical seasonality is not possible to predict at this time. 28 -------------------------------------------------------------------------------- LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) According to theRecreation Vehicle Industry Association ("RVIA"), industry-wide wholesale shipments fromthe United States of travel trailer and fifth-wheel RVs in the first six months of 2020, the Company's primary RV market, decreased 17 percent to 154,800 units, compared to the first six months of 2019, primarily due to OEM plant shutdowns in response to COVID-19. Retail demand for travel trailer and fifth-wheel RVs decreased 15 percent in the first six months of 2020 compared to the same period in 2019. Retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations. While the Company measures its 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 byStatistical Surveys, Inc. , as well as the resulting estimated change in dealer inventories, for boththe United States andCanada , is as follows: Estimated Wholesale Retail Unit Impact on Units Change Units Change Dealer Inventories Quarter ended June 30, 2020 66,800 (34)% 111,600 (20)% (44,800) Quarter ended March 31, 2020 88,000 4% 73,000 (6)% 15,000 Quarter ended December 31, 2019 83,300 (8)% 63,600 (6)% 19,700 Quarter ended September 30, 2019 80,500 (13)% 117,900 (6)% (37,400) Twelve months ended June 30, 2020 318,600 (14)% 366,100 (10)% (47,500) Quarter ended June 30, 2019 101,000 (13)% 138,800 (7)% (37,800) Quarter ended March 31, 2019 84,800 (27)% 77,400 (5)% 7,400 Quarter ended December 31, 2018 90,300 (17)% 67,500 (1)% 22,800 Quarter ended September 30, 2018 92,400 (11)% 124,900 4% (32,500) Twelve months ended June 30, 2019 368,500 (17)% 408,600 (3)% (40,100) According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first six months of 2020 decreased 33 percent to 17,000 units compared to the first six months of 2019, primarily due to OEM plant shutdowns in response to COVID-19. Retail demand for motorhome RVs decreased 1 percent in the first six months of 2020, following a 19 percent decrease in retail demand in the same period of 2019. Adjacent Industries The Company's 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; boats; trains; manufactured homes; and modular housing (collectively, "Adjacent Industries "). In many cases, OEM customers of theAdjacent Industries are affiliated with RV OEMs through related subsidiaries. The Company believes there are significant opportunities in theseAdjacent Industries and, as a result, five of the last eight business acquisitions completed by the Company were focused inAdjacent Industries .
Aftermarket Segment
Many of the Company's OEM Segment products are also sold through various
aftermarket channels, including dealerships, wholesale distributors, and service
centers, as well as direct to retail customers via the Internet. This includes
discretionary accessories and replacement service parts. The Company has teams
dedicated to product technical and installation training as well as marketing
support for its Aftermarket Segment customers. The Company also supports
multiple call centers to provide 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 Company's call centers
are considered essential services and have continued to provide service
throughout the COVID-19 pandemic. 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
29
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
product selling seasons, thereby causing certain Aftermarket Segment sales to be
counter-seasonal, but may be different in 2020 and future years as a result of
the COVID-19 pandemic and related impacts.
According to the RVIA, estimated RV ownership in the United States has increased
to over nine million units. 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 aftermarket sales, as the Company anticipates 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.
RESULTS OF OPERATIONS
Consolidated Highlights
•Consolidated net sales in the second quarter of 2020 were$525.8 million , 16 percent lower than consolidated net sales for the same period of 2019 of$629.1 million . The decrease was primarily driven by declining shipments in the RV OEM industry at the beginning of the quarter due to OEM plant shutdowns in response to COVID-19. The termination of the Furrion supply agreement resulted in a decrease of$36.8 million of net sales in the second quarter of 2020 compared to the same period of 2019. These decreases were partially offset by acquisitions completed by the Company over the twelve months endedJune 30, 2020 , which added$103 million in net sales in the second quarter of 2020, and organic growth in the Aftermarket Segment and international markets. •Net income for the second quarter of 2020 was$13.2 million , or$0.52 per diluted share, compared to net income of$47.5 million , or$1.89 per diluted share, for the same period of 2019. •Net income and earnings per share for the second quarter of 2020 were negatively impacted by$0.5 million , or$0.02 per share, due to the recognition of higher cost of sales resulting from the non-cash charge for inventory fair value step-up for CURT, net of tax. •Consolidated operating profit during the second quarter of 2020 was$20.8 million compared to$65.7 million in the same period of 2019. Operating profit margin was 4.0 percent in the second quarter of 2020 compared to 10.4 percent in the same period of 2019, primarily as a result of OEM plant shutdowns in response to COVID-19. •The cost of aluminum and steel used in certain of the Company's manufactured components decreased in the second quarter of 2020 compared to the same period of 2019. Raw material costs are subject to continued fluctuation and are being offset, in part, by contractual selling prices that are indexed to select commodities. •The increase in selling, general, and administrative costs of$25.0 million was driven by incremental costs from recent acquisitions of$32.2 million , including warehousing and distribution costs of$10.6 million associated with Curt and amortization on intangible assets from acquired businesses of$4.3 million , partially offset by organic cost reductions in the second quarter of 2020 compared to the same period of 2019. •The effective tax rate of 26.3 percent for the six months endedJune 30, 2020 was higher than the comparable prior year period of 24.7 percent, primarily due to a year-over-year reduction in the excess tax benefits related to the vesting of equity-based compensation awards, the reduction of income before income taxes, and an increase in non-deductible expenses, as discussed below under "Income Taxes." •In March andJune 2020 , the Company paid a quarterly dividend of$0.65 per share, aggregating to$16.3 million and$16.3 million , respectively.
OEM Segment - Second Quarter
Net sales of the OEM Segment in the second quarter of 2020 decreased
2020 2019 Change
RV OEMs:
Travel trailers and fifth-wheels $ 212,518 $ 343,051 (38) %
Motorhomes 24,713 41,357 (40) %
Adjacent Industries OEMs 130,581 168,960 (23) %
Total OEM Segment net sales $ 367,812 $ 553,368 (34) %
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
According to the RVIA, industry-wide wholesale unit shipments for the three
months ended
2020 2019 Change
Travel trailer and fifth-wheel RVs 66,800 101,000 (34) % Motorhomes
6,900 12,700 (46) %
The Company's 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 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 domestic RV OEMs for the different types of
RVs produced for the twelve months ended June 30 , divided by the industry-wide
wholesale shipments of the different product mix of RVs for the same period,
was:
Content per: 2020 2019 Change
Travel trailer and fifth-wheel RV $ 3,371 $ 3,230 4 %
Motorhome $ 2,308 $ 2,396 (4) %
The Company's 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's products, as well as changes in
the types of RVs produced industry-wide.
The Company's decrease in net sales to RV OEMs of travel trailers, fifth-wheel,
and motorhome components during the second quarter of 2020 related to declines
in industry-wide wholesale unit shipments resulting from the shutdowns of OEMs
in response to the COVID-19 pandemic and the termination of the Furrion supply
agreement. The net sales decrease was partially offset by content gains during
the second quarter of 2020 for travel trailers and fifth-wheel RVs. Motorhome
content was negatively impacted by a continued market-shift to smaller units in
the second quarter of 2020.
The Company's decrease in net sales to OEMs in Adjacent Industries during the
second quarter of 2020 were driven by OEM customer shutdowns in the Company's
Adjacent Industries in response to the COVID-19 pandemic.
Operating profit of the OEM Segment was $1.8 million in the second quarter of
2020, a decrease of $50.9 million compared to the same period of 2019. The
operating profit margin of the OEM Segment in the second quarter of 2020
decreased to 0.5 percent compared to 9.5 percent for the same period of 2019 and
was negatively impacted by:
•The impact of COVID-19 as OEMs suspended production beginning in March 2020 due
to government mandates and a reduction in customer demand, which negatively
impacted operating profit by an estimated $31.2 million .
•Selling price changes from contractual reductions indexed to select commodities
of $4.9 million .
•A financing charge of $2.3 million to discount the Furrion account receivable
balance to present value as a result of proposed changes to scheduled payments.
•Additional amortization related to intangible assets from acquisitions in the
past twelve months, which reduced operating profit by $2.1 million .
Partially offset by:
•Reductions in material commodity pricing of $5.4 million , primarily related to
decreased steel and aluminum costs.
•Investments over the past several years to improve operating efficiencies,
including lean manufacturing initiatives and increased use of automation, which
reduced direct labor expenses by $2.2 million .
Amortization expense on intangible assets for the OEM Segment was $6.3 million
in the second quarter of 2020, compared to $5.1 million in the same period of
2019. Depreciation expense on fixed assets for the OEM Segment was $11.5 million
in the second quarter of 2020, compared to $11.6 million in the same period of
2019.
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)OEM Segment - Year to Date
Net sales of the OEM Segment in the first six months of 2020 decreased 17 percent, or$185.0 million , compared to the first six months of 2019. Net sales of components to OEMs were to the following markets for the six months endedJune 30 : (In thousands) 2020 2019 Change RV OEMs: Travel trailers and fifth-wheels$ 519,626 $ 659,922 (21) % Motorhomes 62,800 86,357 (27) % Adjacent Industries OEMs 317,743 338,869 (6) % Total OEM Segment net sales$ 900,169 $ 1,085,148 (17) %
According to the RVIA, industry-wide wholesale unit shipments for the six months
ended
2020 2019 Change
Travel trailer and fifth-wheel RVs 154,800 185,800 (17) % Motorhomes
17,000 25,500 (33) %
The Company's decrease in net sales to RV OEMs of travel trailers, fifth-wheel,
and motorhome components during the first six months of 2020 related to declines
in industry-wide wholesale unit shipments resulting from the shutdowns of OEMs
in response to the COVID-19 pandemic and the termination of the Furrion supply
agreement. The net sales decrease was partially offset by content gains during
the first six months of 2020 for travel trailers and fifth-wheel RVs. Motorhome
content was negatively impacted by a continued market-shift to smaller units in
the first six months of 2020.
The Company's net sales to Adjacent Industries OEMs decreased during the first
six months of 2020, primarily due to OEM plant shutdowns in response to
COVID-19. The net sales decrease was partially offset by acquisitions completed
in 2020 and 2019 and market share gains. OEM marine net sales were $71.4 million
in the first six months of 2020, a decrease of $21.0 million compared to the
same period of 2019. The Company continues to believe there are significant
opportunities in Adjacent Industries .
Operating profit of the OEM Segment was $45.0 million in the first six months of
2020, a decrease of $48.1 million compared to the same period of 2019. The
operating profit margin of the OEM Segment in the first six months of 2020
decreased to 5.0 percent compared to 8.6 percent for the same period of 2019 and
was negatively impacted by:
•The impact of COVID-19 as OEMs suspended production beginning in March 2020 due
to government mandates and a reduction in customer demand, which negatively
impacted operating profit by an estimated $37.3 million .
•Selling price changes from contractual reductions indexed to select commodities
of $13.7 million .
•A financing charge of $2.3 million to discount the Furrion account receivable
balance to present value as a result of proposed changes to scheduled payments.
•Additional amortization related to intangible assets from acquisitions in the
past twelve months, which reduced operating profit by $4.1 million .
Partially offset by:
•Reductions in material commodity pricing of $14.8 million primarily related to
decreased steel and aluminum costs.
•Investments over the past several years to improve operating efficiencies,
including lean manufacturing initiatives and increased use of automation, which
reduced direct labor expenses by $3.3 million .
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)Aftermarket Segment - Second Quarter
Net sales of the Aftermarket Segment in the second quarter of 2020 increased 109 percent, or$82.3 million , compared to the same period of 2019. Net sales of components in the Aftermarket Segment were as follows for the three months endedJune 30 : (In thousands) 2020 2019
Change
Total Aftermarket Segment net sales
%
The Company's net sales to the Aftermarket Segment increased during the second quarter of 2020, primarily due to acquisitions that contributed approximately$78.3 million in sales, increases in market share, and the Company's focus on building out well-qualified, customer-focused teams, and infrastructure to service this market. The increase was partially offset by lost sales related to the termination of the Furrion supply agreement. Operating profit of the Aftermarket Segment was$19.0 million in the second quarter of 2020, an increase of$6.0 million compared to the same period of 2019 primarily due to sales from acquisitions. The operating profit margin of the Aftermarket Segment was 12.0 percent in 2020, compared to 17.1 percent in 2019, and was negatively impacted by: •Sales mix of lower margin CURT and Lewmar products, which negatively impacted operating profit by$2.5 million . •Additional amortization and depreciation related to long-lived assets from the CURT and Lewmar acquisitions, which reduced operating profit by$2.2 million . •The recognition of higher cost of sales due to the inventory fair value step-up for CURT of$0.7 million . •A financing charge of$0.7 million to discount the Furrion account receivable balance to present value as a result of proposed changes to scheduled payments. •The impact of COVID-19 beginning inMarch 2020 due to a reduction in customer demand, which negatively impacted operating profit by an estimated$1.3 million . Partially offset by: •Termination of the Furrion supply agreement, which had dilutive margins to the aftermarket business, positively impacted margins by$0.2 million . Amortization expense on intangible assets for the Aftermarket Segment was$2.9 million in the second quarter of 2020, compared to$0.6 million in the same period of 2019. Depreciation expense on fixed assets for the Aftermarket Segment was$3.4 million in the second quarter of 2020, compared to$1.4 million in the same period of 2019.
Aftermarket Segment - Year to Date
Net sales of the Aftermarket Segment in the first six months of 2020 increased 110 percent, or$149.2 million , compared to the same period of 2019. Net sales of components in the Aftermarket Segment were as follows for the six months endedJune 30 : (In thousands) 2020 2019
Change
Total Aftermarket Segment net sales
The Company's net sales to the Aftermarket Segment increased during the first six months of 2020 primarily due to sales from acquisitions of$142.7 million and organic growth of$6.5 million . Operating profit of the Aftermarket Segment was$20.1 million in the first six months of 2020, a decrease of$0.2 million compared to the same period of 2019 primarily due to the impact of COVID-19, partially offset by sales from acquisitions. The operating profit margin of the Aftermarket Segment was 7.0 percent in 2020, compared to 14.9 percent in 2019, and was negatively impacted by: •Sales mix of lower margin CURT and Lewmar products, which negatively impacted operating profit by$8.1 million . •The recognition of higher cost of sales due to the inventory fair value step-up for CURT of$6.9 million . •Additional amortization and depreciation related to long-lived assets from the CURT and Lewmar acquisitions, which reduced operating profit by$4.6 million . 33 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) •A financing charge of$0.7 million to discount the Furrion account receivable balance to present value as a result of proposed changes to scheduled payments. •The impact of COVID-19 beginning inMarch 2020 due to a reduction in customer demand, which negatively impacted operating profit by an estimated$2.7 million . Partially offset by: •Termination of the Furrion supply agreement, which had dilutive margins to the aftermarket business, positively impacted margins by$0.3 million .
Income Taxes
The effective tax rates for the six months endedJune 30, 2020 and 2019 were 26.3 percent and 24.7 percent, respectively. The effective tax rate for the six months endedJune 30, 2020 differed from the Federal statutory rate primarily due to state taxes, foreign taxes, and non-deductible expenses, partially offset by the recognition of excess tax benefits as a component of the provision for income taxes attributable to the adoption of Accounting Standards Update ("ASU") 2016-09, and Federal andIndiana research and development credits. The increase in the effective tax rate for the six months endedJune 30, 2020 as compared to the same period in 2019 was due primarily to a reduction in the excess tax benefits related to the vesting of equity-based compensation awards, an increase in non-deductible expenses, and lower income before income taxes.
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