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, 2021 .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, as well as direct to retail customers via the Internet. We have two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. AtJune 30, 2022 , we operated over 130 manufacturing and distribution facilities located throughoutNorth America andEurope . 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 RVs and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; trains; manufactured homes; and modular housing. Approximately 65 percent of our OEM Segment net sales for the twelve months endedJune 30, 2022 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 ? Tankless water
heaters
? Furniture and mattresses ? Other accessories 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, as well as direct to retail customers via the Internet. 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, current and future seasonal industry trends have been, and may in the future be, different than in prior years due to various factors, including fluctuations in dealer inventories and the timing of dealer orders, the impact of international, national, and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, the impact of severe weather conditions on the timing of industry-wide shipments from time to time, as well as the coronavirus ("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 Aftermarket Segment sales to be counter-seasonal, but this has been, and may in the future be, different as a result of the COVID-19 pandemic and related impacts.
COVID-19 AND
The ongoing COVID-19 pandemic has caused significant uncertainty and disruption in the global economy and financial markets since early 2020. With RV retail demand at record levels throughout 2021, the industry faced challenges with 26 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) supply chain constraints, rising material and freight costs, and increases in direct labor costs due to higher production volumes and a tightened labor market, especially inNorthern Indiana . These trends have continued through the first six months of 2022, and, with regard to supply chain constraints and freight costs, have also been impacted by the conflict betweenRussia andUkraine (the "Russia-Ukraine War"). To address these challenges, we have continued to strategically manage working capital, including carrying elevated 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. We continue to closely monitor the impact of COVID-19 and the Russia-Ukraine War on all aspects of our business. The extent to which COVID-19 and/or the Russia-Ukraine War may impact our liquidity, financial condition, and results of operations in the future remains uncertain.
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 six months of 2022, our primary RV market, increased eight percent to 285,900 units, compared to the first six months of 2021, primarily due to dealers rebuilding inventory levels partially offset by a decrease in retail demand. Retail demand for travel trailer and fifth-wheel RVs decreased 26 percent in the first six months of 2022 compared to the same period in 2021. Retail demand has declined from recent elevated levels, partially driven by elevated fuel prices and rising interest rates impacting retail consumers. 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: Estimated Wholesale Retail Unit Impact on Units Change Units Change Dealer Inventories Quarter ended June 30, 2022 133,700 0% 125,600 (30)% 8,100 Quarter ended March 31, 2022 152,200 16% 93,100 (19)% 59,100 Quarter ended December 31, 2021 130,400 13% 76,500 (14)% 53,900 Quarter ended September 30, 2021 136,000 24% 130,900 (18)% 5,100 Twelve months ended June 30, 2022 552,300 13% 426,100 (22)% 126,200 27 -------------------------------------------------------------------------------- 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 June 30, 2021 133,800 100% 180,500 36% (46,700) Quarter ended March 31, 2021 131,200 49% 114,500 52% 16,700 Quarter ended December 31, 2020 115,200 38% 89,400 40% 25,800 Quarter ended September 30, 2020 110,100 37% 159,100 35% (49,000) Twelve months ended June 30, 2021 490,300 54% 543,500 40% (53,200) According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first six months of 2022 increased three percent to 30,100 units compared to the first six months of 2021, primarily due to dealers rebuilding inventory levels. Retail demand for motorhome RVs decreased 12 percent year-over-year in the first six months of 2022, compared to a 32 percent year-over-year increase in retail demand in the same period of 2021. Retail demand has declined from recent elevated levels, partially driven by elevated fuel prices and rising interest rates impacting retail consumers. Our current estimate for full-year 2022 industry-wide wholesale shipments fromthe United States of travel trailer, fifth-wheel, and motorhome RVs are approximately 500,000 to 530,000 units. This estimate suggests a decrease of 35 to 45 percent in the second half of 2022 compared to actual wholesale shipments in the first half of 2022. This projected decline is being driven by current dealer inventory levels, as well as elevated gas prices and rising interest rates impacting retail consumers.
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 .
We currently expect production in the marine and manufactured housing markets to remain at or near current run rates through the remainder of 2022.
Aftermarket Segment
Many of our OEM Segment products are also sold through various aftermarket channels of the recreation and transportation product markets, primarily to retail dealers, 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 product, delivery, and technical support. This support is designed for a rapid response to critical repairs, so customer downtime is minimal. 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 has been, and may in the future be, different 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. We currently expect to see continued reduction in aftermarket volumes in the second half of 2022 as a result of fully stocked distribution channels, chip shortages impacting truck markets, and the impacts of inflation on consumers' discretionary spending. 28 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) RESULTS OF OPERATIONS Consolidated Highlights •Consolidated net sales in the second quarter of 2022 were$1.5 billion , 40 percent higher than consolidated net sales for the same period of 2021 of$1.1 billion . The increase was primarily driven by increased selling prices, market share gains, acquisitions, and increased wholesale shipments. Net sales from acquisitions completed in the twelve months endedJune 30, 2022 , primarilyFurrion Holdings Limited ("Furrion") andGirard Systems andGirard Products LLC (collectively, "Girard"), contributed approximately$80.7 million in the second quarter of 2022. •Net income for the second quarter of 2022 was$154.5 million , or$6.06 per diluted share, compared to net income of$67.9 million , or$2.67 per diluted share, for the same period of 2021. •Consolidated operating profit during the second quarter of 2022 was$218.8 million compared to$94.0 million in the same period of 2021. Operating profit margin was 14.2 percent in the second quarter of 2022 compared to 8.6 percent in the same period of 2021. The increase was primarily a result of increased selling prices which are indexed to select commodities, pricing changes to targeted products, and leveraging fixed costs over higher sales volumes, partially offset by increased raw material and freight costs. •The cost of aluminum and steel used in certain of our manufactured components increased in the second quarter of 2022 compared to the same period of 2021. Raw material costs are subject to continued fluctuation and are being partially offset by contractual selling prices which are indexed to select commodities. •The$26.7 million increase in selling, general and administrative costs in the second quarter of 2022 was primarily driven by incremental costs from recent acquisitions of$7.2 million , increases in personnel costs of$6.9 million , increases in transportation costs of$4.7 million due to higher volumes and rising freight costs, and incremental amortization of intangible assets from acquired businesses of$3.0 million . •The effective tax rate of 26.3 percent for the six months endedJune 30, 2022 was higher than the comparable prior year period of 25.0 percent, primarily due to decreases in the excess tax benefit related to the vesting of equity-based compensation awards and the cash surrender value of life insurance, plus a discrete tax adjustment for an acquisition-related tax election in the current year period, as discussed below under "Income Taxes." •InJune 2022 , we paid a quarterly dividend of$1.05 per share, aggregating to$26.7 million . OEM Segment - Second Quarter
Net sales of the OEM Segment in the second quarter of 2022 increased
2022 2021 Change RV OEMs: Travel trailers and fifth-wheels$ 814,509 $ 527,614 54 % Motorhomes 91,480 67,253 36 % Adjacent Industries OEMs 370,289 269,787 37 % Total OEM Segment net sales$ 1,276,278 $ 864,654 48 %
According to the RVIA, industry-wide wholesale unit shipments for the three
months ended
2022 2021 Change
Travel trailer and fifth-wheel RVs 133,700 133,800 0 % Motorhomes
14,800 14,800 - % 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 29 -------------------------------------------------------------------------------- LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OEMs for the different types of RVs produced for the twelve months ended
2022 2021 Change
Travel trailer and fifth-wheel RV
$ 3,569 $ 2,644 35 %
Our average product content per type of RV excludes international sales and
sales to the
Our increase in net sales to RV OEMs of travel trailers, fifth-wheel, and motorhome components during the second quarter of 2022 was driven by selling price increases, market share gains, and acquisitions during the second quarter of 2022.
Our increase in net sales to OEMs in
Operating profit of the OEM Segment was$190.6 million in the second quarter of 2022, an increase of$127.2 million compared to the same period of 2021. The operating profit margin of the OEM Segment in the second quarter of 2022 increased to 14.9 percent compared to 7.3 percent for the same period of 2021 and was positively impacted by: •Selling prices contractually tied to indices of select commodities increased, resulting in an increase in operating profit of$110.9 million compared to the same period of 2021.
•Pricing changes to targeted products, resulting in an increase in operating
profit of
•Leveraging of fixed costs over a larger sales base, which increased operating profit by$9.9 million related to fixed selling, general, and administrative costs and by$3.6 million related to fixed overhead costs.
Partially offset by:
•Increases in material commodity costs, which negatively impacted operating
profit by
•Sales mix increase of lower margin products from the acquisition of Furrion and related integration costs, which negatively impacted operating profit by$6.3 million .
•Additional amortization related to intangible assets from acquisitions
completed in the last twelve months, which reduced operating profit by
Amortization expense on intangible assets for the OEM Segment was$10.1 million in the second quarter of 2022, compared to$7.8 million in the same period in 2021. Depreciation expense on fixed assets for the OEM Segment was$14.4 million in the second quarter of 2022, compared to$12.1 million in the same period of 2021. OEM Segment - Year to Date Net sales of the OEM Segment in the first six months of 2022 increased 59 percent, or$1.0 billion , compared to the first six months of 2021. Net sales of components to OEMs were to the following markets for the six months endedJune 30 : (In thousands) 2022 2021
Change
RV OEMs: Travel trailers and fifth-wheels$ 1,767,735 $ 1,030,630 72 % Motorhomes 178,734 129,846 38 % Adjacent Industries OEMs 726,391 520,428 40 % Total OEM Segment net sales$ 2,672,860 $ 1,680,904 59 % 30
--------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
According to the RVIA, industry-wide wholesale unit shipments for the six months
ended
2022 2021 Change
Travel trailer and fifth-wheel RVs 285,900 265,000 8 % Motorhomes
30,600 29,100 5 %
Our increase in net sales to RV OEMs of travel trailers, fifth-wheel, and motorhome components during the first six months of 2022 was driven by selling price increases, market share gains, and acquisitions during the first six months of 2022.
Our increase in net sales to OEMs inAdjacent Industries during the first six months of 2022 was driven by selling price increases, market share gains, and wholesale production growth. We continue to believe there are significant opportunities inAdjacent Industries . Operating profit of the OEM Segment was$436.0 million in the first six months of 2022, an increase of$293.3 million compared to the same period of 2021. The operating profit margin of the OEM Segment in the first six months of 2022 increased to 16.3 percent, compared to 8.5 percent for the same period of 2021, and was positively impacted by: •Selling prices contractually tied to indices of select commodities increased, resulting in an increase in operating profit of$260.6 million compared to the same period of 2021.
•Pricing changes to targeted products, resulting in an increase in operating
profit of
•Leveraging of fixed costs over a larger sales base, which increased operating profit by$26.5 million related to fixed selling, general, and administrative costs and by$10.5 million related to fixed overhead costs.
Partially offset by:
•Increases in material commodity costs, which negatively impacted operating
profit by
•Sales mix increase of lower margin products from the acquisition of Furrion and related integration costs, which negatively impacted operating profit by$11.3 million .
•Additional amortization related to intangible assets from acquisitions
completed in the last twelve months, which reduced operating profit by
Amortization expense on intangible assets for the OEM Segment was$20.2 million in first six months of 2022, compared to$14.3 million in the same period of 2021. Depreciation expense on fixed assets for the OEM Segment was$28.9 million in first six months of 2022, compared to$24.8 million in the same period of 2021.
Aftermarket Segment - Second Quarter
Net sales of the Aftermarket Segment in the second quarter of 2022 increased 13 percent, or$30.8 million , compared to the same period of 2021. Net sales of components in the Aftermarket Segment were as follows for the three months endedJune 30 : (In thousands) 2022 2021
Change
Total Aftermarket Segment net sales
Net sales of the Aftermarket Segment increased during the second quarter of 2022, primarily due to selling price increases to targeted products and acquisitions.
Operating profit of the Aftermarket Segment was$28.2 million in the second quarter of 2022, a decrease of$2.4 million compared to the same period of 2021. The operating profit margin of the Aftermarket Segment was 10.9 percent in the second quarter of 2022, compared to 13.4 percent in the same period in 2021, and was negatively impacted by: •Increases in material commodity costs and production supplies, which negatively impacted operating profit by$31.7 million , primarily related to increased steel and aluminum costs.
•The impact of fixed costs due to reduced organic volumes, which decreased
operating profit by
31 --------------------------------------------------------------------------------LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
•Investments in marketing activities and administrative structure of
•Increases in direct labor costs due to production volumes and a tight labor
market, which reduced operating profit by
•Increases in transportation costs, primarily for third party freight, which
reduced operating profit by
•Increases in production overhead costs in order to meet growing sales demands,
which negatively impacted operating profit by
Partially offset by:
•Pricing changes to targeted products, resulting in an increase in operating
profit of
•Sales mix increase of higher margin products from the acquisition of Furrion,
which positively impacted operating profit by
Amortization expense on intangible assets for the Aftermarket Segment was$3.8 million in the second quarter of 2022, compared to$3.5 million in the same period of 2021. Depreciation expense on fixed assets for the Aftermarket Segment was$3.6 million in the second quarter of 2022, compared to$3.3 million in the same period of 2021.
Aftermarket Segment - Year to Date
Net sales of the Aftermarket Segment in the first six months of 2022 increased 23 percent, or$94.8 million , compared to the same period of 2021. Net sales of components in the Aftermarket Segment were as follows for the six months endedJune 30 : (In thousands) 2022 2021
Change
Total Aftermarket Segment net sales
Net sales of the Aftermarket Segment increased during the first six months of 2022 primarily due to selling price increases and sales from acquisitions.
Operating profit of the Aftermarket Segment was$52.5 million in the first six months of 2022, a decrease of$0.3 million compared to the same period of 2021. The operating profit margin of the Aftermarket Segment was 10.3 percent in the first six months of 2022, compared to 12.8 percent in the same period in 2021, and was negatively impacted by: •Increases in material commodity costs and production supplies, which negatively impacted operating profit by$52.0 million , primarily related to increased steel and aluminum costs.
•Investments in marketing costs, information technology, and administrative
structure of
•Increases in transportation costs, primarily for third party freight, which
reduced operating profit by
•Increases in production overhead costs in order to meet sales demands, which
negatively impacted operating profit by
•The impact of fixed costs due to reduced organic volumes, which decreased
operating profit by
•Increases in direct labor costs due to production volumes and a tight labor
market, which reduced operating profit by
•Additional amortization related to intangible assets from acquisitions
completed in the last twelve months, which reduced operating profit by
Partially offset by:
•Pricing changes to targeted products, resulting in an increase in operating
profit of
•Sales mix increase of higher margin products from the acquisition of Furrion
and integration costs, which positively impacted operating profit by
Amortization expense on intangible assets for the Aftermarket Segment was$7.6 million in first six months of 2022, compared to$6.4 million in the same period of 2021. Depreciation expense on fixed assets for the Aftermarket Segment was$7.1 million in first six months of 2022, compared to$5.8 million in the same period of 2021. 32
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LCI INDUSTRIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Income Taxes The effective tax rates for the six months endedJune 30, 2022 and 2021 were 26.3 percent and 25.0 percent, respectively. The effective tax rate for the six months endedJune 30, 2022 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 increase in the effective tax rate for the six months endedJune 30, 2022 as compared to the same period in 2021 was primarily due to decreases in the excess tax benefit related to the vesting of equity-based compensation awards and the cash surrender value of life insurance plus a discrete tax adjustment in the current year period for an acquisition-related tax election.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As ofJune 30, 2022 , we had$55.0 million in cash and cash equivalents, and$286.7 million of availability under our revolving credit facility under the Credit Agreement. We paid off the full outstanding$50.0 million balance of our Shelf-Loan Facility inMarch 2022 . 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. With elevated demand continuing into the first six months of 2022, 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 reinvest in the business, 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 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 six months ended
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