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, 2020 .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," "LCI," or "Lippert"), 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. We also supply engineered components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors, and service centers. We have two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. AtSeptember 30, 2021 , we operated over 100 manufacturing and distribution facilities located throughoutthe United States and inCanada ,Germany ,Ireland ,Italy ,the Netherlands , and theUnited Kingdom . See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information regarding our segments. Our OEM Segment manufactures or distributes a broad array of engineered components for the leading OEMs of leisure and mobile transportation industries. Approximately 62 percent of our OEM Segment net sales for the twelve months endedSeptember 30, 2021 were of components for travel trailer and fifth-wheel RVs, including: ? Steel chassis and related components ? Electric and manual entry steps ? Axles and suspension solutions ? Awnings and awning
accessories
? Slide-out mechanisms and solutions ? Electronic components
? Thermoformed bath, kitchen, and other products ? Appliances ? Vinyl, aluminum, and frameless windows
? Air conditioners
? Manual, electric, and hydraulic stabilizer and ? Televisions and sound systems
leveling systems ? Entry, luggage, patio, and ramp doors ? Other accessories
? Furniture and mattresses
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, appliances, air conditioners, sound systems, and the sale of replacement glass and awnings to fulfill insurance claims. Most industries where we sell products or where our products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, our 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 we sell our components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years, particularly as a result of the COVID-19 pandemic and related impacts. Additionally, many of the optional upgrades and non-critical replacement parts for RVs are purchased outside the normal product selling season, thereby causing these Aftermarket Segment sales to be counter-seasonal, but this may be different in the remainder of 2021 and future years as a result of the COVID-19 pandemic and related impacts.
COVID-19 UPDATE
The COVID-19 pandemic has caused significant uncertainty and disruption in the global economy and financial markets. The COVID-19 pandemic had an adverse effect on our financial results during the first half of 2020 due to
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LCI INDUSTRIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
government-mandated plant shutdowns. We took a variety of actions during 2020 to
help mitigate the adverse impacts, including temporary cost savings measures and
delays and reductions in capital expenditures.
Activity in most of the end markets we serve sequentially improved as 2020
progressed, and this trend has continued through the first nine months of 2021,
especially in the RV and marine OEM markets and our Aftermarket Segment. With RV
retail demand at record levels through the first nine months of 2021, the
industry has faced challenges with supply chain constraints, rising material
costs, and a tightened labor market, especially in northern Indiana . To address
these challenges, we have strategically managed working capital, including
intentionally building up levels of certain inventory items to avoid future
shortages. We continue to focus on our culture and leadership development
programs to focus on team member retention and regularly hold hiring events,
with COVID-19 safety measures, to fill open positions. As we build inventory
levels and invest in additional production capacity, we also closely monitor our
liquidity, and may need to seek additional financing, though such additional
financing may not be available on terms favorable to us, or at all. See
"Liquidity and Capital Resources" below for further discussion.
The health and safety of our team members have remained our top priority. We
continue to maintain the rigorous health and safety protocols we established in
2020. We leased a location to provide drive-thru rapid COVID-19 tests for our
team members in northern Indiana . We have encouraged team members to seek
vaccination when eligible and partnered with a local hospital to host private
vaccination days for our eligible northern Indiana team members and their
families.
We continue to closely monitor the impact of COVID-19 on all aspects of our business.
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 2021 and 2020 Open Houses were 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 historical seasonality is not possible to predict at this time. According to theRecreation Vehicle Industry Association ("RVIA"), industry-wide wholesale shipments fromthe United States of travel trailer and fifth-wheel RVs in the first nine months of 2021, our primary RV market, increased 51 percent to 401,000 units, compared to the first nine months of 2020, primarily due to increased retail demand and dealers rebuilding inventory levels. Retail demand for travel trailer and fifth-wheel RVs increased 15 percent in the first nine months of 2021 compared to the same period in 2020. Retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations. While we measure our OEM Segment RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported byStatistical Surveys, Inc. , as well as the resulting estimated change in dealer inventories, for boththe United States andCanada , is as follows: 29 --------------------------------------------------------------------------------
LCI INDUSTRIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Estimated
Wholesale Retail Unit Impact on
Units Change Units Change Dealer Inventories
Quarter ended September 30, 2021 136,000 24% 126,300 (21)% 9,700
Quarter ended June 30, 2021 133,800 100% 180,200 36% (46,400)
Quarter ended March 31, 2021 131,200 49% 114,400 52% 16,800
Quarter ended December 31, 2020 115,200 38% 89,400 41% 25,800
Twelve months ended September 30, 2021 516,200 48% 510,300 19% 5,900
Quarter ended September 30, 2020 110,100 37% 159,100 35% (49,000)
Quarter ended June 30, 2020 66,800 (34)% 132,500 (5)% (65,700)
Quarter ended March 31, 2020 88,000 4% 75,100 (3)% 12,900
Quarter ended December 31, 2019 83,300 (8)% 63,600 (6)% 19,700
Twelve months ended September 30, 2020 348,200 (2)% 430,300 7% (82,100)
According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the
first nine months of 2021 increased 51 percent to 42,800 units compared to the
first nine months of 2020, primarily due to OEM plant shutdowns in response to
COVID-19 in the 2020 period. Retail demand for motorhome RVs increased 4 percent
year-over-year in the first nine months of 2021, compared to a 2 percent
year-over-year decrease in retail demand in the same period of 2020.
Our 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. We believe there are significant opportunities in theseAdjacent Industries .
Aftermarket Segment
Many of our 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. We have teams dedicated to product technical and installation training as well as marketing support for our Aftermarket Segment customers. We also support 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 Aftermarket Segment also includes biminis, covers, buoys, fenders to the marine industry, towing products, truck accessories, appliances, air conditioners, televisions, sound systems, and the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements for RVs are purchased outside the normal product selling seasons, thereby causing certain Aftermarket Segment sales to be counter-seasonal, but this may be different in the remainder of 2021 and future years as a result of the COVID-19 pandemic and related impacts. According to Go RVing, estimated RV ownership inthe United States as of 2020 had increased to over 11 million households. This vibrant market is a key driver for aftermarket sales, as we anticipate owners 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 third quarter of 2021 were$1.2 billion , 41 percent higher than consolidated net sales for the same period of 2020 of$827.7 million . The increase was primarily driven by record RV retail demand and strong Aftermarket Segment sales growth. Net sales from acquisitions completed in 2020 and the first nine months 30 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) of 2021, primarilyFurrion Holdings Limited ("Furrion"),Veada Industries, Inc. andChallenger Door, LLC , contributed approximately$78.5 million in the third quarter of 2021. •Net income for the third quarter of 2021 was$63.4 million , or$2.49 per diluted share, compared to net income of$68.3 million , or$2.70 per diluted share, for the same period of 2020. •Consolidated operating profit during the third quarter of 2021 was$89.0 million compared to$94.4 million in the same period of 2020. Operating profit margin was 7.6 percent in the third quarter of 2021 compared to 11.4 percent in the same period of 2020. The decline is primarily a result of increased raw material, labor, and freight costs. •The cost of aluminum and steel used in certain of our manufactured components increased in the third quarter of 2021 compared to the same period of 2020. 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 effective tax rate of 24.9 percent for the nine months endedSeptember 30, 2021 was lower than the comparable prior year period of 26.2 percent, primarily due to the reduced rate impact of permanent tax differences with the growth in income before income taxes and an increase in the excess tax benefit related to the vesting of equity-based compensation awards and investments in life insurance contracts, as discussed below under "Income Taxes." •In March, June, andSeptember 2021 , we paid a quarterly dividend of$0.75 ,$0.90 , and$0.90 per share, aggregating to$18.9 million ,$22.7 million , and$22.7 million respectively. OEM Segment - Third Quarter
Net sales of the OEM Segment in the third quarter of 2021 increased
2021 2020 Change
RV OEMs:
Travel trailers and fifth-wheels $ 602,429 $ 417,050 44 %
Motorhomes 63,259 44,441 42 %
Adjacent Industries OEMs 280,593 180,563 55 %
Total OEM Segment net sales $ 946,281 $ 642,054 47 %
According to the RVIA, industry-wide wholesale unit shipments for the three
months ended
2021 2020 Change
Travel trailer and fifth-wheel RVs 136,200 110,100 24 % Motorhomes
13,300 11,300 18 %
In order to enhance comparability, our calculations of content in the OEM Segment discussion that follows were adjusted to remove the Company's sales of Furrion products from periods prior to the termination of the Company's distribution and supply agreement with Furrion at the end of 2019.
The trend in our average product content per RV produced is an indicator of our overall market share of components for new RVs. Our average product content per type of RV, calculated based upon our net sales of components to domestic RV OEMs for the different types of RVs produced for the twelve months endedSeptember 30 , divided by the industry-wide wholesale shipments of the different product mix of RVs for the same period, was: Content per: 2021 2020 Change
Travel trailer and fifth-wheel RV
$ 2,732 $ 2,399 14 % Our average product content per type of RV excludes international sales and sales to theAftermarket Segment and Adjacent Industries . Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for our products, as well as changes in the types of RVs produced industry-wide. 31 -------------------------------------------------------------------------------- LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Our increase in net sales to RV OEMs of travel trailers, fifth-wheel, and motorhome components during the third quarter of 2021 was primarily driven by a recovery in RV retail demand beginning later in the second quarter of 2020 and continuing through the third quarter of 2021. The net sales increase further benefited from content gains and price increases during the third quarter of 2021. Our increase in net sales to OEMs inAdjacent Industries during the third quarter of 2021 was driven by acquisitions and a recovery in retail demand for the marine industry and other adjacent markets beginning later in the second quarter of 2020 and continuing through the third quarter of 2021. Operating profit of the OEM Segment was$64.1 million in the third quarter of 2021, a decrease of$1.4 million compared to the same period of 2020. The operating profit margin of the OEM Segment in the third quarter of 2021 decreased to 6.8 percent compared to 10.2 percent for the same period of 2020 and the operating profit margin was negatively impacted by: •Increases in material commodity pricing and production supplies, which negatively impacted operating profit by$98.3 million , primarily related to increased steel and aluminum costs. •Increases in production labor costs due to higher production volumes and a tight labor market, which reduced operating profit by$15.7 million . •Increases in transportation costs, primarily for third party freight, which reduced operating profit by$5.7 million . Partially offset by: •Selling prices contractually tied to indexes of select commodities increased, resulting in an increase in operating profit of$52.5 million compared to the same period of 2020. •Pricing changes to targeted products, resulting in an increase in operating profit of$31.4 million compared to the same period of 2020. •Leveraging of fixed costs over a larger sales base, which increased operating profit by$11.5 million related to fixed selling, general, and administrative costs and$5.4 million related to fixed overhead costs. Amortization expense on intangible assets for the OEM Segment was$8.6 million in the third quarter of 2021, compared to$6.9 million in the same period in 2020. Depreciation expense on fixed assets for the OEM Segment was$12.8 million in the third quarter of 2021, compared to$11.9 million in the same period of 2020. OEM Segment - Year to Date Net sales of the OEM Segment in the first nine months of 2021 increased 70 percent, or$1.1 billion , compared to the first nine months of 2020. Net sales of components to OEMs were to the following markets for the nine months endedSeptember 30 : (In thousands) 2021 2020 Change RV OEMs: Travel trailers and fifth-wheels$ 1,633,059 $ 936,676 74 % Motorhomes 193,105 107,241 80 % Adjacent Industries OEMs 801,021 498,306 61 % Total OEM Segment net sales$ 2,627,185 $ 1,542,223 70 %
According to the RVIA, industry-wide wholesale unit shipments for the nine
months ended
2021 2020 Change
Travel trailer and fifth-wheel RVs 401,000 264,800 51 % Motorhomes
42,400 28,300 50 %
Our increase in net sales to RV OEMs of travel trailers, fifth-wheel, and
motorhome components during the first nine months of 2021 was primarily driven
by a recovery in RV retail demand beginning later in the first nine months of
2020 and
32
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LCI INDUSTRIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)continuing through the first nine months of 2021. The net sales increase further benefited from content gains during the first nine months of 2021.
Our increase in net sales to OEMs inAdjacent Industries during the first nine months of 2021 was driven by acquisitions and a recovery in retail demand for the marine industry and other adjacent markets beginning later in the first nine months of 2020 and continuing through the first nine months of 2021. We continue to believe there are significant opportunities inAdjacent Industries . Operating profit of the OEM Segment was$206.8 million in the first nine months of 2021, an increase of$96.3 million compared to the same period of 2020. The operating profit margin of the OEM Segment in the first nine months of 2021 increased to 7.9 percent compared to 7.2 percent for the same period of 2020 and the operating profit margin was positively impacted by: •Leveraging of fixed costs over a larger sales base, partially related to COVID-19 shutdowns in 2020, which increased operating profit by$72.2 million related to fixed selling, general, and administrative costs and$36.0 million related to fixed overhead costs. •Selling prices contractually tied to indexes of select commodities increased, resulting in an increase in operating profit of$69.9 million compared to the same period of 2020. •Pricing changes to targeted products, resulting in an increase in operating profit of$51.3 million compared to the same period of 2020. Partially offset by: •Increases in material commodity pricing, which negatively impacted operating profit by$165.8 million , primarily related to increased steel and aluminum costs. •Increases in direct labor costs due to higher production volumes and a tight labor market, which reduced operating profit by$28.6 million . •Increases in transportation costs, primarily for third party freight, which reduced operating profit by$12.7 million .
Aftermarket Segment - Third Quarter
Net sales of the Aftermarket Segment in the third quarter of 2021 increased 18 percent, or$33.4 million , compared to the same period of 2020. Net sales of components in the Aftermarket Segment were as follows for the three months endedSeptember 30 : (In thousands) 2021 2020
Change
Total Aftermarket Segment net sales
Our net sales to the Aftermarket Segment increased during the third quarter of 2021, primarily due to increased consumer demand in the outdoor recreational and transportation market and our distributor customers rebuilding their inventory levels. Operating profit of the Aftermarket Segment was$24.9 million in the third quarter of 2021, a decrease of$4.0 million compared to the same period of 2020. The operating profit margin of the Aftermarket Segment was 11.4 percent in the third quarter of 2021, compared to 15.6 percent in the same period in 2020, and the operating profit margin was negatively impacted by: •Increases in material commodity pricing and production supplies, which negatively impacted operating profit by$9.9 million , primarily related to increased steel and aluminum costs. •Increases in transportation costs, primarily for third party freight, which reduced operating profit by$3.9 million . •Increases in direct labor costs due to higher production volumes and a tight labor market, which reduced operating profit by$1.8 million . •Additional amortization related to long-lived assets from recent acquisitions, which reduced operating profit by$1.0 million . 33 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Partially offset by: •Pricing changes to targeted products, resulting in an increase in operating profit of$9.8 million compared to the same period of 2020. Amortization expense on intangible assets for the Aftermarket Segment was$3.9 million in the third quarter of 2021, compared to$2.9 million in the same period of 2020. Depreciation expense on fixed assets for the Aftermarket Segment was$3.7 million in the third quarter of 2021, compared to$2.9 million in the same period of 2020.
Aftermarket Segment - Year to Date
Net sales of the Aftermarket Segment in the first nine months of 2021 increased 34 percent, or$161.2 million , compared to the same period of 2020. Net sales of components in the Aftermarket Segment were as follows for the nine months endedSeptember 30 : (In thousands) 2021 2020
Change
Total Aftermarket Segment net sales
Our net sales to the Aftermarket Segment increased during the first nine months of 2021 primarily due to organic growth of$135.8 million and sales from acquisitions of$25.4 million . Operating profit of the Aftermarket Segment was$77.7 million in the first nine months of 2021, an increase of$28.7 million compared to the same period of 2020, primarily due to sales from organic growth, and the impact of COVID-19 in 2020. The operating profit margin of the Aftermarket Segment was 12.3 percent in the first nine months of 2021, compared to 10.4 percent in the same period in 2020, and the operating profit margin was positively impacted by: •Leveraging of fixed costs over a larger sales base, partially related to COVID-19 shutdowns in 2020, which increased operating profit by$16.8 million related to fixed selling, general, and administrative costs and$10.0 million related to fixed overhead costs. •Pricing changes to targeted products, resulting in an increase in operating profit of$17.5 million compared to the same period of 2020. •The recognition of higher cost of sales during the first nine months of 2020 due to the inventory fair value step-up for CURT of$7.3 million . Partially offset by: •Increases in material commodity pricing and production supplies, which negatively impacted operating profit by$21.4 million , primarily related to increased steel and aluminum costs. •Increases in transportation costs, primarily for third party freight, which reduced operating profit by$13.7 million . •Increases in direct labor costs due to higher production volumes and a tight labor market, which reduced operating profit by$4.4 million .
Income Taxes
The effective tax rates for the nine months endedSeptember 30, 2021 and 2020 were 24.9 percent and 26.2 percent, respectively. The effective tax rate for the nine months endedSeptember 30, 2021 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, and Federal andIndiana research and development credits. The decrease in the effective tax rate for the nine months endedSeptember 30, 2021 as compared to the same period in 2020 was primarily due to the decreased rate impact of permanent tax differences with the growth in income before income taxes and an increase in the excess tax benefit related to the vesting of equity-based compensation awards and investments in life insurance contracts.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As ofSeptember 30, 2021 , we had$72.6 million in cash and cash equivalents, and$267.2 million of availability under our revolving credit facility under the Amended Credit Agreement (as defined in Note 9 of the Notes to Condensed 34 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Consolidated Financial Statements). Additionally, we have the ability to request up to$150.0 million in additional Senior Promissory Notes be purchased by Prudential under our Shelf-Loan Facility (each as defined in Note 9 of the Notes to Condensed Consolidated Financial Statements), subject to Prudential's approval. See Note 9 of the Notes to Condensed Consolidated Financial Statements for a description of our credit facilities. We maintain a level of liquidity sufficient to allow us to meet our cash needs in the short term. Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial condition, and maintain flexibility for our future strategic investments. We continuously assess our capital requirements, working capital needs, debt and leverage levels, debt and lease maturity schedules, capital expenditure requirements, dividends, future investments or acquisitions, and potential share repurchases. As discussed above under "COVID-19 Update," with RV retail demand at record levels through the first nine months of 2021, the industry has faced challenges with supply chain constraints, rising material costs, and a tightened labor market, especially in northernIndiana . To address these challenges, we have strategically managed working capital, including intentionally building up levels of certain inventory items to avoid future shortages, and have expanded our production capacity. As we build inventory levels and invest in additional production capacity, we also closely monitor our liquidity. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. We believe the availability under the revolving credit facility under the Amended Credit Agreement, along with our cash flows from operations, are adequate to finance our anticipated cash requirements for the next twelve months.
The Condensed Consolidated Statements of Cash Flows reflect the following for
the nine months ended
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