LCI Industries (NYSE: LCII) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports annual results, not a standalone fourth-quarter summary. LCI supplies engineered components to recreational vehicle (RV), marine, transportation, housing and related aftermarket markets through OEM and Aftermarket segments.
Financial results and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $4.473 billion | $2.796 billion |
| Gross profit | $1.043 billion | $706.1 million |
| Operating profit / margin | $398.4 million / 8.9% | $222.9 million / 8.0% |
| Net income | $287.7 million | $158.4 million |
| Diluted EPS | $11.32 | $6.27 |
| Cash from operations | $(111.6) million | $231.4 million |
| Capital expenditures | $98.5 million | $57.3 million |
- Sales rose 60%; net income increased 81.6%. Gross margin was approximately 23.3%, versus 25.3% in 2020, reflecting higher cost of sales relative to revenue.
- OEM sales were $3.644 billion, up 68%, with an 8.4% operating margin versus 7.2%. Aftermarket sales were $829.1 million, up 32%, with an 11.3% margin versus 10.6%.
- Operating cash flow turned negative primarily as inventory increased $516.7 million and receivables increased $58.8 million amid supply constraints, elevated demand and deliberate inventory building.
- At year-end, cash was $62.9 million; inventory was $1.096 billion, up from $493.9 million. Total indebtedness was approximately $1.303 billion before unamortized financing fees; the balance sheet reported $1.303 billion including current and long-term debt, net of fees. Revolver availability was $168.3 million. The company reported compliance with debt covenants.
- Quarterly dividends totaled $3.45 per share, or $87.2 million, in 2021.
Material changes and key developments
- Growth was driven by record RV retail demand, higher OEM and aftermarket volumes, acquisitions, content gains and pricing. 2021 U.S. wholesale shipments of travel trailer and fifth-wheel RVs rose 40%; retail demand rose 10%.
- Acquisitions contributed approximately $269.9 million of 2021 sales. The six 2021 acquisitions included Furrion, Exertis, Schaudt and Ranch Hand.
- LCI issued $460 million of 1.125% convertible senior notes due 2026. It also entered related convertible-note hedge and warrant transactions. Debt financing and borrowings supported acquisitions, investment and operations.
- Steel and aluminum costs increased sharply. Management cited $306.2 million of adverse OEM operating-profit impact from material commodity costs, partly offset by indexed pricing and other price increases. Higher freight and labor costs also pressured results.
- Two customers accounted for 43% of consolidated sales: Thor Industries (23%) and Berkshire Hathaway (20%). Sales outside the North American RV OEM market represented 47% of 2021 revenue, down from 50% in 2020, as RV OEM demand grew especially strongly.
Outlook, risks and contingencies
- Management estimated 2022 capital expenditures of $130–$150 million, an effective tax rate of approximately 24–26%, and depreciation and amortization of approximately $140–$150 million. The filing did not provide a specific revenue or earnings forecast.
- Management expected commodity prices and labor costs to remain elevated in 2022. It said it believed cash flows and available credit were adequate for anticipated requirements over the next 12 months, while noting additional financing might be needed and might not be available on favorable terms.
- Principal risks include demand cyclicality and seasonality; dependence on the RV market and major customers; supply-chain, imported-component and transportation constraints; steel and aluminum volatility; tight labor availability and retention; acquisition integration; interest-rate exposure; and COVID-19-related uncertainty.
- At year-end, variable-rate revolving and term-loan borrowings totaled $799 million; a 1 percentage-point rate increase was estimated to reduce annual cash flow by about $8 million.
- Recorded product warranty accrual was $52.1 million. Management believed litigation liabilities beyond amounts provided, including anticipated insurance recoveries where applicable, would not be material, but outcomes remain uncertain. Environmental investigations, recalls and warranty claims could generate future costs.
- Auditor KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The audit identified estimation of certain product warranty accruals as a critical audit matter.
Important facts for investors to verify
- Whether elevated RV demand, dealer inventories and wholesale shipments remain sustainable, and how demand normalization would affect sales and margins.
- Whether inventory growth converts into sales and cash; operating cash flow was negative despite record earnings.
- Whether pricing actions can continue to offset commodity, freight and labor inflation, and whether customer contracts permit timely repricing.
- Progress on integrating 2021 acquisitions, including Furrion and Exertis, and the final purchase-price allocations and acquisition-related obligations.
- Debt repayment, revolving-credit availability, covenant headroom, variable-rate exposure and the terms and potential dilution implications of the convertible notes and warrants.
- Customer concentration, workforce retention, supplier dependence and the adequacy of warranty reserves, particularly for acquired product lines.