NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of LCI Industries and its wholly-owned subsidiaries (“LCII” and collectively with its subsidiaries, the “Company”). LCII has no unconsolidated subsidiaries. LCII, 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 industrial product markets, consisting 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. At December 31, 2018, the Company operated over 65 manufacturing and distribution facilities located throughout the United States and in Canada, Ireland, Italy and the United Kingdom.
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 and 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. Additionally, sales of certain engineered components to the aftermarket channels of these industries tend to be counter-seasonal.
The Company is not aware of any significant events, except as disclosed in the Notes to Consolidated Financial Statements, which occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, inventories, goodwill and other intangible assets, net assets of acquired businesses, income taxes, warranty and product recall obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, contingent consideration, environmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other resources. Actual results and events could differ significantly from management estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at historical carrying value, net of write-offs and allowances. The Company establishes allowances based upon historical experience and any specific customer collection issues identified by the Company.
Uncollectible accounts receivable are written off when a settlement is reached or when the Company has determined the balance will not be collected.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution.
Fixed Assets
Fixed assets which are owned are stated at cost less accumulated depreciation, and are depreciated on a straight-line basis over the estimated useful lives of the properties and equipment. Leasehold improvements and leased equipment are amortized over the shorter of the lives of the leases or the underlying assets. Maintenance and repair costs that do not improve service potential or extend economic life are expensed as incurred.
Warranty
The Company provides warranty terms based upon the type of product sold. The Company estimates the warranty accrual based upon various factors, including historical warranty costs, current trends, product mix, and sales. The accounting for warranty accruals requires the Company to make assumptions and judgments, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required. See Note 7 - Accrued Expenses and Other Current Liabilities for further detail.
Income Taxes
Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse.
The Company accounts for uncertainty in tax positions by recognizing in its financial statements the impact of a tax position only if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Further, the Company assesses the tax benefits of the tax positions in its financial statements based on experience with similar tax positions, information obtained during the examination process and the advice of experts. The Company recognizes previously unrecognized tax benefits upon the earlier of the expiration of the period to assess tax in the applicable taxing jurisdiction or when the matter is constructively settled and upon changes in statutes or regulations and new case law or rulings. The Company classifies interest and penalties related to income taxes as a component of income tax expense in its Consolidated Statements of Income.
Goodwill
Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist. In 2018 and 2017, the Company assessed qualitative factors of its reporting units to determine whether it was more likely than not the fair value of the reporting unit was less than its carrying amount, including goodwill. The qualitative impairment test consists of an assessment of qualitative factors, including general economic and industry conditions, market share and input costs.
Other Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. Intangible assets are amortized using either an accelerated or straight-line method, whichever best reflects the pattern in which the estimated future economic benefits of the asset will be consumed. The useful lives of intangible assets are determined after considering the expected cash flows and other specific facts and circumstances related to each intangible asset.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, are tested for impairment when changes in circumstances indicate their carrying value may not be recoverable. A determination of impairment, if any, is made based on the undiscounted value of estimated future cash flows, salvage value or expected net sales proceeds, depending on the circumstances. Impairment is measured as the excess of the carrying value over the estimated fair value of such assets.
Asset Retirement Obligations
Asset retirement obligations are legal obligations associated with the retirement of long-lived assets. The Company records asset retirement obligations on certain of its owned and leased facilities and leased machinery and equipment. These liabilities are initially recorded at fair value and are adjusted for changes resulting from revisions to the timing or the amount of the original estimate.
Environmental Liabilities
Accruals for environmental matters are recorded when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against potentially responsible third parties, are adjusted periodically as assessment and remediation efforts progress or additional technical or legal information becomes available. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies and remedial activities, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and the Company’s ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs. It is possible some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably against the Company, and could materially affect operating results when resolved in future periods.
Foreign Currency Translation
The financial statements of the Company’s international subsidiaries generally are measured using the local currency as the functional currency. The translation from the applicable foreign currency to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate for the period. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. The Company reflects net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency as a component of foreign currency exchange gains or losses in selling, general and administrative expenses in the Consolidated Statements of Income.
Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, derivative instruments, and accounts payable approximate their fair value due to the short-term nature of these instruments.
Stock-Based Compensation
All stock-based compensation awards are expensed over their vesting period, based on fair value. For awards having a service-only vesting condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service periods. For awards with a performance vesting condition, which are subject to certain pre-established performance targets, the Company recognizes stock-based compensation expense on a graded-vesting basis to the extent it is probable the performance targets will be met. The fair value for stock options is determined using the Black-Scholes option-pricing model, while the fair values of deferred stock units, restricted stock units, restricted stock and stock awards are based on the market price of the Company’s common stock, all on the date the stock-based awards are granted.
Revenue Recognition
See Note 3 - Revenue for information regarding the Company’s revenue recognition policies.
Shipping and Handling Costs
The Company recognizes shipping and handling costs as fulfillment costs when control over products has transferred to the customer, and records the expense within selling, general and administrative expenses. Such costs aggregated $83.2 million, $68.6 million and $51.8 million in the years ended December 31, 2018, 2017 and 2016, respectively.
Legal Costs
The Company expenses all legal costs associated with litigation as incurred. Legal expenses are included in selling, general and administrative expenses in the Consolidated Statements of Income.
Fair Value Measurements
Fair value is determined using a hierarchy that has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04,
Simplifying the Test for Goodwill Impairment,
which amends Accounting Standards Codification (“ASC”) 350,
Intangibles - Goodwill and Other.
This ASU simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This ASU is effective for interim and annual reporting periods, beginning after December 15, 2019, and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2020 and does not expect the adoption to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This ASU is effective for interim and annual reporting periods, beginning after December 15, 2019, and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2020 and is currently assessing the impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires, in most instances, a lessee to recognize on its balance sheet a liability to make lease payments (the lease liability) and also a right-of-use asset representing its right to use the underlying asset for the lease term. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company will adopt ASU 2016-02 in the first quarter of 2019 using the cumulative-effect adjustment transition method approved by the FASB in July 2018. The Company will elect the package of practical expedients permitted under the transition guidance, which allows the carryforward of historical lease classification, the assessment of whether a contract is or contains a lease, and initial direct costs for any leases that exist prior to adoption of the new standard. The Company also will elect to keep leases with an initial term of 12 months or less off its Consolidated Balance Sheet and recognize the associated lease payments in its Consolidated Statements of Income on a straight-line basis over the lease term.
The Company is finalizing its implementation related to policies, processes and internal controls to comply with ASU 2016-02. While the Company is continuing to assess the potential impacts of this standard, the Company estimates that the adoption of ASU 2016-02 will result in the recognition of right-of-use assets and lease liabilities for operating leases of approximately $60 million to $75 million on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Income or Cash Flows. The standard also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to an entity’s lease portfolio. The Company is evaluating these disclosure requirements and is incorporating the collection of relevant data into our processes in preparation for disclosure in 2019.
Recently adopted accounting pronouncements
In August 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities,
which amends ASC 815,
Derivatives and Hedging.
This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted the provisions of ASU 2017-12 in the fourth quarter of 2018. The adoption did not result in a material impact to our financial results. See Note
13 -
Fair Value Measurements for further detail.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (“Topic 606”)
. Topic 606 supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition,
and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The adoption did not result in a cumulative effect adjustment to beginning retained earnings. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note
3 - Revenue for further detail
.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which amends ASC 230,
Statement of Cash Flows
. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. This ASU is effective for annual and interim periods beginning after December 15, 2017, and should be applied retrospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted this ASU effective January 1, 2018, with retrospective disclosure. As a result, the Company reclassified $2.4 million and $1.7 million of cash outflows from financing activities to cash outflows from operations for the years ended December 31, 2017 and 2016, respectively.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amended ASC 718,
Compensation - Stock Compensation
. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the Company present excess tax benefits on its Consolidated Statement of Cash Flows as an operating activity. The Company adopted ASU 2016-09 in the first quarter of 2017 and elected to apply this adoption prospectively. Prior periods were not adjusted. The adoption of the ASU resulted in the recognition of excess tax benefits in the provision for income taxes within the Consolidated Financial Statements of $8.4 million for the year ended December 31, 2017. Additionally, the Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity, adjusted prospectively. Finally, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award.
3. REVENUE
The Company recognizes revenue when performance obligations under the terms of contracts with customers are satisfied, which occurs with the transfer of control of the Company’s products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products to its customers. Sales, value added and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items, such as training, customer service, instruction manuals and service requirements, are generally immaterial in the context of the contract and are recognized as expense.
For the majority of product sales, the Company transfers control and recognizes revenue when it ships the product from its facility to its customer. The amount of consideration the Company receives and the revenue recognized varies with sales discounts, volume rebate programs and indexed material pricing. When the Company offers customers retrospective volume rebates, it estimates the expected rebates based on an analysis of historical experience. The Company adjusts its estimate of revenue related to volume rebates at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. When the Company offers customers prompt pay sales discounts or agrees to variable pricing based on material indices, it estimates the expected discounts or pricing adjustments based on an analysis of historical experience. The Company adjusts its estimate of revenue related to sales discounts and indexed material pricing to the expected value of the consideration to which the Company will be entitled. The Company includes the variable
consideration in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur when the volume, discount or indexed material price uncertainties are resolved.
The Company has elected to recognize shipping and handling costs as fulfillment costs when control over products has transferred to the customer, and records the expense within selling, general and administrative expenses.
See Note
14
- Segment Reporting for the Company’s disclosures of disaggregated revenue.
4. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Acquisitions in 2018
Smoker Craft Furniture
In November 2018, the Company acquired the business and certain assets of the furniture manufacturing operation of Smoker Craft Inc., (“Smoker Craft”), a leading pontoon, aluminum fishing, and fiberglass boat manufacturer located in New Paris, Indiana. The purchase price was $28.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
28,091
|
|
|
Customer relationship and other identifiable intangible assets
|
$
|
18,540
|
Net tangible assets
|
1,357
|
Total fair value of net assets acquired
|
$
|
19,897
|
|
|
Goodwill (tax deductible)
|
$
|
8,194
|
The customer relationship intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
ST.LA. S.r.l.
In June 2018, the Company acquired 100 percent of the equity interests of ST.LA. S.r.l., (“STLA”), a manufacturer of bed lifts and other RV components for the European caravan market, headquartered in Pontedera, Italy. The purchase price was $14.8 million, net of cash acquired, paid at closing, and is subject to potential post-closing adjustments related to net working capital. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
14,845
|
|
|
Customer relationships and other identifiable intangible assets
|
$
|
7,000
|
Net tangible assets
|
296
|
Total fair value of net assets acquired
|
$
|
7,296
|
|
|
Goodwill (not tax deductible)
|
$
|
7,549
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Hehr
In February 2018, the Company acquired substantially all of the business assets of Hehr International Inc., (“Hehr”), a manufacturer of windows and tempered and laminated glass for the RV, transit, specialty vehicle, and other adjacent industries, headquartered in Los Angeles, California. The purchase price was $51.5 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The allocation of the purchase price was as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
51,460
|
|
|
Customer relationships and other identifiable intangible assets
|
$
|
21,500
|
Net tangible assets
|
11,990
|
Total fair value of net assets acquired
|
$
|
33,490
|
|
|
Goodwill (tax deductible)
|
$
|
17,970
|
The customer relationships intangible asset is being amortized over its estimated useful life of 13 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Taylor Made
In January 2018, the Company acquired 100 percent of the equity interests of Taylor Made Group, LLC, (“Taylor Made”), a marine supplier to boat builders and the aftermarket, as well as a key supplier to a host of other industrial end markets, headquartered in Gloversville, New York. The purchase price was $90.4 million, net of cash acquired, paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The allocation of the purchase price was as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
90,396
|
|
|
Customer relationships
|
$
|
10,900
|
Trade name
|
7,600
|
Other identifiable intangible assets
|
4,200
|
Net tangible assets
|
45,342
|
Total fair value of net assets acquired
|
$
|
68,042
|
|
|
Goodwill (tax deductible)
|
$
|
22,354
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The trade name intangible asset was determined to have an indefinite life and is not amortized, but will be evaluated annually for impairment. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Acquisitions in 2017
Metallarte S.r.l.
In June 2017, the Company acquired 100 percent of the equity interests of Metallarte S.r.l., (“Metallarte”), a manufacturer of entry and compartment doors for the European caravan market located near Siena, Italy, and its subsidiary, RV Doors, S.r.l., a manufacturer of driver-side doors located near Venice, Italy. The purchase price was $14.1 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
13,501
|
Contingent consideration
|
2,366
|
Total fair value of consideration given
|
$
|
15,867
|
|
|
Customer relationships
|
$
|
7,311
|
Other identifiable intangible assets
|
1,942
|
Net other liabilities
|
(327)
|
Total fair value of net assets acquired
|
$
|
8,926
|
|
|
Goodwill (not tax deductible)
|
$
|
6,941
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Lexington
In May 2017, the Company acquired the business and certain assets of Lexington LLC, (“Lexington”), a manufacturer of high quality seating solutions for the marine, RV, transportation, medical and office furniture industries located in Elkhart, Indiana. The purchase price was $40.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
40,062
|
|
|
Customer relationships
|
$
|
16,900
|
Other identifiable intangible assets
|
1,820
|
Net tangible assets
|
4,928
|
Total fair value of net assets acquired
|
$
|
23,648
|
|
|
Goodwill (tax deductible)
|
$
|
16,414
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
SessaKlein S.p.A.
In February 2017, the Company acquired 100 percent of the outstanding shares of SessaKlein S.p.A., (“SessaKlein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $6.5 million paid at closing, net of cash acquired, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the
Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
6,502
|
Contingent consideration
|
3,838
|
Total fair value of consideration given
|
$
|
10,340
|
|
|
Identifiable intangible assets
|
$
|
2,286
|
|
|
Net tangible assets
|
364
|
Total fair value of net assets acquired
|
$
|
2,650
|
|
|
Goodwill (not tax deductible)
|
$
|
7,690
|
Acquisitions in 2016
Camping Connection
In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.
Atwood Seating and Chassis Components
In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC, (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
12,463
|
|
|
Customer relationships
|
$
|
1,500
|
|
|
Net other assets
|
10,915
|
Total fair value of net assets acquired
|
$
|
12,415
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years.
Project 2000 S.r.l.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l., (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date.
The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration, net of cash acquired
|
$
|
16,618
|
Contingent consideration
|
1,322
|
Total fair value of consideration given
|
$
|
17,940
|
|
|
Customer relationships
|
$
|
9,696
|
Other identifiable intangible assets
|
6,141
|
Net other liabilities
|
(3,482)
|
Total fair value of net assets acquired
|
$
|
12,355
|
|
|
Goodwill (not tax deductible)
|
$
|
5,585
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Flair Interiors
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc., (“Flair”), a manufacturer of RV furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
8,100
|
|
|
Customer relationships
|
$
|
3,700
|
|
|
Net other assets
|
2,378
|
Total fair value of net assets acquired
|
$
|
6,078
|
|
|
Goodwill (tax deductible)
|
$
|
2,022
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Highwater Marine Furniture
In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC, (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. The purchase price was $10.0 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows
(in thousands)
:
|
|
|
|
|
|
Cash consideration
|
$
|
10,000
|
|
|
Customer relationship
|
$
|
8,100
|
|
|
Net tangible assets
|
1,307
|
Total fair value of net assets acquired
|
$
|
9,407
|
|
|
Goodwill (tax deductible)
|
$
|
593
|
The customer relationship intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines.
Goodwill
Changes in the carrying amount of goodwill by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
OEM Segment
|
|
Aftermarket Segment
|
|
Total
|
Net balance – December 31, 2016
|
$
|
74,663
|
|
$
|
14,535
|
|
$
|
89,198
|
Acquisitions – 2017
|
29,772
|
|
—
|
|
29,772
|
Other
|
5,206
|
|
7
|
|
5,213
|
Net balance – December 31, 2017
|
109,641
|
|
14,542
|
|
124,183
|
Acquisitions – 2018
|
50,698
|
|
5,369
|
|
56,067
|
Other
|
(82)
|
|
—
|
|
(82)
|
Net balance – December 31, 2018
|
$
|
160,257
|
|
$
|
19,911
|
|
$
|
180,168
|
The Company performed its annual goodwill impairment procedures for all of its reporting units as of November 30, 2018, 2017 and 2016, and concluded no goodwill impairment existed at that time. The Company plans to update its assessment as of November 30, 2019, or sooner if events occur or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying value. In conjunction with the Company’s change in reportable segments during the second quarter of 2016, goodwill was reassigned to reporting units using a relative fair value allocation. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. The goodwill balance as of each of December 31, 2018, 2017 and 2016 included $50.5 million of accumulated impairment, which occurred prior to December 31, 2016.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table.
Other Intangible Assets
Other intangible assets, by segment, at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
OEM Segment
|
$
|
159,803
|
|
$
|
116,648
|
Aftermarket Segment
|
16,539
|
|
13,484
|
Other intangible assets
|
$
|
176,342
|
|
$
|
130,132
|
Other intangible assets consisted of the following at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
Cost
|
|
Accumulated
Amortization
|
|
Net
Balance
|
|
Estimated Useful
Life in Years
|
|
|
Customer relationships
|
$
|
191,919
|
|
$
|
54,889
|
|
$
|
137,030
|
|
6
|
to
|
16
|
Patents
|
58,787
|
|
40,079
|
|
18,708
|
|
3
|
to
|
19
|
Trade names (finite life)
|
10,885
|
|
5,507
|
|
5,378
|
|
3
|
to
|
15
|
Trade names (indefinite life)
|
7,600
|
|
—
|
|
7,600
|
|
Indefinite
|
|
|
Non-compete agreements
|
6,919
|
|
4,148
|
|
2,771
|
|
3
|
to
|
6
|
Other
|
309
|
|
141
|
|
168
|
|
2
|
to
|
12
|
Purchased research and development
|
4,687
|
|
—
|
|
4,687
|
|
Indefinite
|
|
|
Other intangible assets
|
$
|
281,106
|
|
$
|
104,764
|
|
$
|
176,342
|
|
|
|
|
The Company performed its annual intangible asset and other long-lived asset impairment procedures for all of its reporting units as of November 30, 2018, 2017 and 2016, and concluded no intangible asset and other long-lived asset impairment existed at that time.
Other intangible assets consisted of the following at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
Cost
|
|
Accumulated
Amortization
|
|
Net
Balance
|
|
Estimated Useful
Life in Years
|
|
|
Customer relationships
|
$
|
138,687
|
|
$
|
42,276
|
|
$
|
96,411
|
|
6
|
to
|
16
|
Patents
|
57,576
|
|
38,764
|
|
18,812
|
|
3
|
to
|
19
|
Trade names
|
10,995
|
|
5,381
|
|
5,614
|
|
3
|
to
|
15
|
Non-compete agreements
|
8,536
|
|
4,128
|
|
4,408
|
|
3
|
to
|
6
|
Other
|
309
|
|
109
|
|
200
|
|
2
|
to
|
12
|
Purchased research and development
|
4,687
|
|
—
|
|
4,687
|
|
Indefinite
|
|
|
Other intangible assets
|
$
|
220,790
|
|
$
|
90,658
|
|
$
|
130,132
|
|
|
|
|
Amortization expense related to other intangible assets was as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Cost of sales
|
$
|
5,350
|
|
$
|
5,631
|
|
$
|
5,967
|
Selling, general and administrative
|
15,912
|
|
13,942
|
|
11,791
|
Amortization expense
|
$
|
21,262
|
|
$
|
19,573
|
|
$
|
17,758
|
Estimated amortization expense for other intangible assets for the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
Cost of sales
|
$
|
4,600
|
|
$
|
3,200
|
|
$
|
2,300
|
|
$
|
1,700
|
|
$
|
1,300
|
Selling, general and administrative
|
17,000
|
|
16,000
|
|
15,400
|
|
15,000
|
|
14,300
|
Amortization expense
|
$
|
21,600
|
|
$
|
19,200
|
|
$
|
17,700
|
|
$
|
16,700
|
|
$
|
15,600
|
5. INVENTORIES
Inventories consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
|
|
|
Raw materials
|
$
|
284,467
|
|
$
|
233,187
|
|
|
|
|
Work in process
|
12,291
|
|
10,408
|
|
|
|
|
Finished goods
|
43,857
|
|
31,153
|
|
|
|
|
Inventories, net
|
$
|
340,615
|
|
$
|
274,748
|
|
|
|
|
6. FIXED ASSETS
Fixed assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Useful Life
|
(In thousands)
|
2018
|
|
2017
|
|
in Years
|
Land
|
$
|
22,962
|
|
$
|
19,176
|
|
|
Buildings and improvements
|
159,805
|
|
118,555
|
|
10 to 40
|
Leasehold improvements
|
16,132
|
|
12,707
|
|
3 to 10
|
Machinery and equipment
|
251,995
|
|
201,081
|
|
3 to 15
|
Furniture and fixtures
|
51,893
|
|
39,047
|
|
3 to 8
|
Construction in progress
|
56,447
|
|
33,490
|
|
|
Fixed assets, at cost
|
559,234
|
|
424,056
|
|
|
Less accumulated depreciation and amortization
|
236,358
|
|
195,106
|
|
|
Fixed assets, net
|
$
|
322,876
|
|
$
|
228,950
|
|
|
Depreciation and amortization of fixed assets was as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Cost of sales
|
$
|
35,656
|
|
$
|
27,042
|
|
$
|
22,993
|
Selling, general and administrative expenses
|
10,608
|
|
7,798
|
|
5,140
|
Total
|
$
|
46,264
|
|
$
|
34,840
|
|
$
|
28,133
|
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
|
Employee compensation and benefits
|
$
|
33,835
|
|
$
|
39,365
|
|
|
Current portion of accrued warranty
|
32,180
|
|
23,055
|
|
|
Customer rebates
|
6,193
|
|
11,124
|
|
|
Other
|
27,020
|
|
29,305
|
|
|
Accrued expenses and other current liabilities
|
$
|
99,228
|
|
$
|
102,849
|
|
|
Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various factors, including the Company’s historical warranty costs, current trends, product mix, and sales.
The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current and long-term portions, for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
38,502
|
|
$
|
32,393
|
|
$
|
26,204
|
Provision for warranty expense
|
31,819
|
|
25,399
|
|
20,985
|
Warranty liability from acquired businesses
|
760
|
|
150
|
|
125
|
Warranty costs paid
|
(24,551)
|
|
(19,440)
|
|
(14,921)
|
Balance at end of period
|
46,530
|
|
38,502
|
|
32,393
|
Less long-term portion
|
14,350
|
|
15,447
|
|
12,000
|
Current portion of accrued warranty at end of period
|
$
|
32,180
|
|
$
|
23,055
|
|
$
|
20,393
|
8. RETIREMENT AND OTHER BENEFIT PLANS
Defined Contribution Plan
The Company maintains a discretionary defined contribution 401(k) profit sharing plan covering all eligible employees. The Company contributed $6.8 million, $4.2 million and $3.1 million to this plan during the years ended December 31, 2018, 2017 and 2016, respectively.
Deferred Compensation Plan
The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). Pursuant to the Plan, certain management employees are eligible to defer all or a portion of their regular salary and incentive compensation. Participants deferred $6.9 million, $4.9 million and $2.3 million during the years ended December 31, 2018, 2017 and 2016, respectively. The amounts deferred under this Plan are credited with earnings or losses based upon changes in values of the notional investments elected by the Plan participants. Each Plan participant is fully vested in their deferred compensation and earnings credited to his or her account as all contributions to the Plan are made by the participant. The Company is responsible for certain costs of Plan administration, which are not significant, and will not make any contributions to the Plan. Pursuant to the Plan, payments to the Plan participants are made from the general unrestricted assets of the Company, and the Company’s obligations pursuant to the Plan are unfunded and unsecured. Participants withdrew $0.2 million, $0.2 million and $1.5 million from the Plan during the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018 and 2017, deferred compensation of $25.9 million and $20.7 million, respectively, was recorded in other long-term liabilities, and deferred compensation of $0.4 million and $0.2 million, respectively, was recorded in accrued expenses and other current liabilities. The Company invests approximately 85 percent of the amounts deferred by the Plan participants in life insurance contracts, matching the investments elected by the Plan participants. Deferred compensation assets and liabilities are recorded at contract value. At December 31, 2018 and 2017, life insurance contract assets of $22.2 million and $18.2 million, respectively, were recorded in other assets.
9. LONG-TERM INDEBTEDNESS
Long-term debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
|
Revolving Credit Facility
|
$
|
240,060
|
|
$
|
—
|
|
|
Shelf-Loan Facility
|
50,000
|
|
50,000
|
|
|
Other
(1)
|
4,425
|
|
—
|
|
|
Unamortized deferred financing fees
|
(361)
|
|
(76)
|
|
|
|
294,124
|
|
49,924
|
|
|
Less current portion
|
(596)
|
|
—
|
|
|
Long-term debt
|
$
|
293,528
|
|
$
|
49,924
|
|
|
(1)
Mortgage loan originating at the Metallarte location.
On December 14, 2018, the Company refinanced its credit agreement with JPMorgan Chase, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and other bank lenders (the “Amended Credit Agreement”). The Amended Credit Agreement amended and restated an existing credit agreement dated April 27, 2016 and now expires on December 14, 2023.
The Amended Credit Agreement increased the revolving credit facility from $325.0 million to $600.0 million, and permits the Company to borrow up to $250.0 million in approved foreign currencies, including Australian dollars, Canadian dollars, pounds sterling and euros. The maximum borrowings under the credit facility may be further increased by $300.0 million in additional revolving loans or incremental term loans, subject to the consent of the lenders providing such incremental facilities and certain other conditions. Interest on borrowings under the revolving credit facility is designated from time to time by the Company as either (i) the Alternate Base Rate (defined in the Amended Credit Agreement as the greatest of (a) the Prime Rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus 0.5 percent and (c) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for a one month interest period plus 1.0 percent), plus additional interest ranging from 0.0 percent to 0.625 percent (0.0 percent at December 31, 2018) depending on the Company’s total net leverage ratio, or (ii) the Adjusted LIBO Rate for a period equal to one, two, three, six or twelve months (with the consent of each lender) as selected by the Company, plus additional interest ranging from 0.875 percent to 1.625 percent (0.875 percent at
December 31, 2018) depending on the Company’s total net leverage ratio. At December 31, 2018 and 2017, the Company had $2.2 million and $2.4 million, respectively, in issued, but undrawn, standby letters of credit under the revolving credit facility. Availability under the Company’s revolving credit facility was $357.7 million at December 31, 2018.
On February 24, 2014, the Company entered into a $150.0 million shelf-loan facility (the “Shelf-Loan Facility”) with Prudential Investment Management, Inc. and its affiliates (“Prudential”). On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes (“Series A Notes”) to Prudential for a term of five years, at a fixed interest rate of 3.35 percent per annum, payable quarterly in arrears, of which the entire amount was outstanding at December 31, 2018. At December 31, 2018, the fair value of the Company’s long-term debt approximates the carrying value, as estimated using quoted market prices and discounted future cash flows based on similar borrowing arrangements.
On March 30, 2017, the Company amended its Shelf-Loan Facility to extend the term through March 30, 2020. In connection with this amendment, the facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million (excluding the Company’s Series A Notes already outstanding). Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential.
Borrowings under both the Amended Credit Agreement and the Shelf-Loan Facility are secured on a pari-passu basis by first priority liens on the capital stock or other equity interests of the Company’s direct and indirect subsidiaries (including up to 65 percent of the equity interest of certain “controlled foreign corporations”).
Pursuant to the Amended Credit Agreement and Shelf-Loan Facility, the Company shall not permit its net leverage ratio to exceed certain limits, shall maintain minimum debt service coverage ratio and must meet certain other financial requirements. At December 31, 2018 and 2017, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.
Availability under the Amended Credit Agreement and the Shelf-Loan Facility is subject to a maximum net leverage ratio covenant which limits the amount of consolidated outstanding indebtedness on a trailing twelve-month EBITDA, as defined. This limitation did not impact the Company’s borrowing availability at December 31, 2018. The remaining availability under these facilities was $507.7 million at December 31, 2018. The Company believes the availability under the Amended Credit Agreement and Shelf-Loan Facility is adequate to finance the Company’s anticipated cash requirements for the next twelve months.
10. INCOME TAXES
The components of earnings before income taxes consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
191,095
|
|
$
|
213,967
|
|
$
|
196,827
|
Foreign
|
1,257
|
|
(1,123)
|
|
2,345
|
Total earnings before income taxes
|
$
|
192,352
|
|
$
|
212,844
|
|
$
|
199,172
|
The provision for income taxes in the Consolidated Statements of Income was as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
22,297
|
|
$
|
62,274
|
|
$
|
61,073
|
State and local
|
6,416
|
|
10,720
|
|
10,560
|
Foreign
|
1,214
|
|
158
|
|
466
|
Total current provision
|
29,927
|
|
73,152
|
|
72,099
|
Deferred:
|
|
|
|
|
|
Federal
|
12,478
|
|
7,614
|
|
(2,506)
|
State and local
|
1,639
|
|
(806)
|
|
(110)
|
Foreign
|
(243)
|
|
—
|
|
18
|
Total deferred provision
|
13,874
|
|
6,808
|
|
(2,598)
|
Provision for income taxes
|
$
|
43,801
|
|
$
|
79,960
|
|
$
|
69,501
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law making significant changes to the Internal Revenue Code (“IRC”). The TCJA changes included a reduction of the corporate income tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017, a provision that allows for full expensing of certain qualified property, repeal of the manufacturing deduction, and further limitations on the deductibility of certain executive compensation. The TCJA contains other provisions that are not expected to materially affect the Company, including a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, limitations on the deductibility of interest expense, and the creation of U.S. tax base erosion provisions.
Following the enactment of the TCJA, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on the accounting and reporting impacts of the TCJA. For the year ended December 31, 2018, the Company finalized its tax accounting for the TCJA and pursuant to SAB 118 recorded a one-time non-cash charge of $0.6 million related to adjustments to deferred tax amounts provisionally recorded in the prior year. During the year ended December 31, 2017, the Company recorded a provisional one-time non-cash charge of $13.2 million related to the enactment of the TCJA, which resulted from the re-measurement of certain deferred tax assets using the lower U.S. corporate income tax rate.
The Company has historically reinvested all unremitted earnings of our foreign subsidiaries and affiliates, and therefore has not recognized any U.S. deferred tax liability on those earnings. The Company’s intent is to permanently reinvest these funds outside of the U.S.
The provision for income taxes differs from the amount computed by applying the federal statutory rate of 21 percent for 2018 and 35 percent for 2017 and 2016 to income before income taxes for the following reasons for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Income tax at federal statutory rate
|
$
|
40,394
|
|
$
|
74,495
|
|
$
|
69,710
|
State income tax, net of federal income tax impact
|
6,261
|
|
6,011
|
|
6,480
|
Foreign tax rate differential
|
(598)
|
|
(322)
|
|
(614)
|
Section 162(m) permanent addback
|
894
|
|
—
|
|
—
|
Domestic production deduction
|
—
|
|
(5,511)
|
|
(5,067)
|
Share-based payment compensation excess tax benefit
|
(2,914)
|
|
(7683)
|
|
—
|
Federal tax credits
|
(1,876)
|
|
(1,110)
|
|
(1736)
|
Changes in tax law (TCJA)
|
612
|
|
13,210
|
|
—
|
Other
|
1,028
|
|
870
|
|
728
|
Provision for income taxes
|
$
|
43,801
|
|
$
|
79,960
|
|
$
|
69,501
|
At December 31, 2018, the Company had domestic federal income taxes receivable of $10.2 million, domestic state income taxes receivable of $0.4 million, and foreign taxes payable of $0.6 million recorded. At December 31, 2017, the Company had domestic federal income taxes payable of $2.3 million, domestic state income taxes payable of $1.7 million, and foreign taxes receivable of $0.5 million recorded.
Deferred Income Tax Assets and Liabilities and Valuation Allowances
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
|
Deferred tax assets:
|
|
|
|
|
|
Goodwill and other intangible assets
|
$
|
3,854
|
|
$
|
5,773
|
|
|
Stock-based compensation
|
2,956
|
|
7,607
|
|
|
Deferred compensation
|
6,710
|
|
5,387
|
|
|
Warranty
|
10,931
|
|
9,282
|
|
|
Inventory
|
6,375
|
|
5,591
|
|
|
Other - domestic
|
4,276
|
|
2,966
|
|
|
Net operating loss and interest carryforwards - foreign
|
1,467
|
|
12
|
|
|
Total deferred tax assets before valuation allowance
|
36,569
|
|
36,618
|
|
|
Less: Valuation allowance - foreign
|
(1,261)
|
|
—
|
|
|
Total deferred tax assets net of valuation allowance
|
35,308
|
|
36,618
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Fixed assets
|
(24,360)
|
|
(12,462)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
$
|
10,948
|
|
$
|
24,156
|
|
|
At December 31, 2018 and 2017, the Company had foreign deferred tax liabilities of $8.5 million and $7.8 million, respectively, related to goodwill and other intangible assets included in other long-term liabilities on the Consolidated Balance Sheets.
As of December 31, 2018, the Company had deferred tax assets recorded related to foreign net operating loss carryforwards of $1.3 million. All of the deferred tax assets at December 31, 2018 related to net operating loss carryforwards have indefinite lives. Based upon historical results and indefinite future operating results, a valuation allowance has been established in the amount of $1.3 million at December 31, 2018.
As of December 31, 2017, the Company had a valuation allowance recorded against other Italian deferred tax assets of $0.8 million. The decrease in the valuation allowance relates to the full release of the $0.8 million booked against the Italian deferred tax assets at December 31, 2017.
The Company has concluded it is more likely than not it will realize the benefit of all other existing deferred tax assets, net of the valuation allowances mentioned above.
Unrecognized Tax Benefits
The following table reconciles the total amounts of unrecognized tax benefits, at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
4,145
|
|
$
|
3,747
|
|
$
|
2,854
|
Changes in tax positions of prior years
|
114
|
|
(174)
|
|
214
|
Additions based on tax positions related to the current year
|
802
|
|
1,255
|
|
1,252
|
Payments
|
—
|
|
(211)
|
|
—
|
Closure of tax years
|
(736)
|
|
(472)
|
|
(573)
|
Balance at end of period
|
$
|
4,325
|
|
$
|
4,145
|
|
$
|
3,747
|
In addition, the total amount of accrued interest and penalties related to taxes, recognized as a liability, was $0.2 million, $0.2 million and $0.2 million at December 31, 2018, 2017 and 2016, respectively.
The total amount of unrecognized tax benefits, net of federal income tax benefits, of $3.9 million, $3.7 million and $2.9 million at December 31, 2018, 2017 and 2016, respectively, would, if recognized, increase the Company’s earnings, and lower the Company’s annual effective tax rate in the year of recognition.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities in these jurisdictions. For U.S. federal and state income tax purposes, tax years 2017, 2016 and 2015 remain subject to examination.
The Company has assessed its risks associated with all tax return positions, and believes its tax reserve estimates reflect its best estimate of the deductions and positions it will be able to sustain, or it may be willing to concede as part of a settlement. At this time, the Company does not anticipate any change in its tax reserves in the next twelve months. The Company will continue to monitor the progress and conclusion of all audits and will adjust its estimated liability as necessary.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company’s lease commitments are primarily for real estate, machinery and equipment, and vehicles. The significant real estate leases provide for renewal options and require the Company to pay for property taxes and all other costs associated with the leased property.
Future minimum lease payments under operating leases at December 31, 2018 are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
$
|
18,807
|
|
|
|
2020
|
15,113
|
|
|
|
2021
|
12,449
|
|
|
|
2022
|
9,113
|
|
|
|
2023
|
6,627
|
|
|
|
Thereafter
|
23,894
|
|
|
|
Total minimum lease payments
|
$
|
86,003
|
|
|
|
Rent expense for operating leases was $24.2 million, $15.2 million and $11.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Contingent Consideration
In connection with several business acquisitions, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a liability for the fair value of this contingent consideration at December 31, 2018 and 2017, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 12.1 percent and 13.6 percent, respectively.
As required, the liability for this contingent consideration is measured at fair value quarterly, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending upon the weighted average costs of capital and future sales of the products which are subject to contingent consideration, the Company could record adjustments in future periods.
The following table provides a reconciliation of the Company’s contingent consideration liability for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
12,545
|
|
$
|
9,241
|
|
$
|
10,840
|
Acquisitions
|
43
|
|
7,288
|
|
1,322
|
Payments
|
(4,803)
|
|
(7,682)
|
|
(4,944)
|
Accretion
(a)
|
951
|
|
1,652
|
|
1,274
|
Fair value adjustments
(a) (
b
)
|
(944)
|
|
1,257
|
|
749
|
Net foreign currency translation adjustment
|
(490)
|
|
789
|
|
—
|
Balance at end of the period
(
c
)
|
7,302
|
|
12,545
|
|
9,241
|
Less current portion in accrued expenses and other current liabilities
|
(17)
|
|
(4,658)
|
|
(5,829)
|
Total long-term portion in other long-term liabilities
|
$
|
7,285
|
|
$
|
7,887
|
|
$
|
3,412
|
g.
Recorded in selling, general and administrative expense
s in the Consolidated Statements of Income.
h.
Inc
ludes adjustments to assumptions on weighted average cost of capital and relevant sales projections.
i.
Amounts represent the fair value of estimated remaining payments. The total estimated remaining undiscounted payments as of
December 31, 2018 were $9.1 million. The liability for contingent consideration expires at various dates through September 2029. Certain of the contingent consideration arrangements are subject to a maximum payment amount, while the remaining arrangements have no maximum contingent consideration.
Furrion Distribution and Supply Agreement
In July 2015, the Company entered into a six-year exclusive distribution and supply agreement with Furrion Limited (“Furrion”), a Hong Kong based firm that designs, engineers and supplies premium electronics. This agreement provides the Company with the rights to distribute Furrion’s complete line of products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of televisions, sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry.
In connection with this agreement, the Company entered into minimum purchase obligations (“MPOs”), which Furrion and the Company agreed to review after the first year on an annual basis and adjust as necessary based upon current economic and industry conditions, the development and customer acceptance of new Furrion products, competition and other factors which impact demand for Furrion products.
Subject to agreed upon revisions to the MPOs, Furrion has the right to either terminate the distribution agreement with six months’ notice or remove exclusivity from the Company if the Company misses an MPO in any given year by more than ten percent, after taking into account excess purchases from the previous year. If exclusivity is withdrawn, the Company at its election may terminate the distribution agreement with six months’ notice. Upon termination of the agreement, Furrion has agreed to purchase from the Company any non-obsolete stocks of Furrion products at the cost paid by the Company.
Product Recalls
From time to time, the Company cooperates with and assists its customers on their product recalls and inquiries, and occasionally receives inquiries directly from the National Highway Traffic Safety Administration regarding reported incidents involving the Company’s products. As a result, the Company has incurred expenses associated with product recalls from time to time, and may incur expenditures for future investigations or product recalls.
Environmental
The Company’s operations are subject to certain Federal, state and local regulatory requirements relating to the use, storage, discharge and disposal of hazardous materials used during the manufacturing processes. Although the Company believes its operations have been consistent with prevailing industry standards, and are in substantial compliance with applicable environmental laws and regulations, one or more of the Company’s current or former operating sites, or adjacent
sites owned by third-parties, have been affected, and may in the future be affected, by releases of hazardous materials. As a result, the Company may incur expenditures for future investigation and remediation of these sites, including in conjunction with voluntary remediation programs or third-party claims.
Litigation
In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, management believes that, after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Consolidated Balance Sheet as of December 31, 2018, would not be material to the Company’s financial position or annual results of operations.
12. STOCKHOLDERS’ EQUITY
Dividends
In 2016, the Company initiated the payment of regular quarterly dividends. The table below summarizes the regular quarterly dividends declared and paid during the years ended December 31, 2018, 2017, and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Per Share
|
|
Record Date
|
|
Payment Date
|
|
Total Paid
|
First Quarter 2016
|
$
|
0.30
|
|
04/01/16
|
|
04/15/16
|
|
$
|
7,344
|
Second Quarter 2016
|
0.30
|
|
06/06/16
|
|
06/17/16
|
|
7,363
|
Third Quarter 2016
|
0.30
|
|
08/19/16
|
|
09/02/16
|
|
7,371
|
Fourth Quarter 2016
|
0.50
|
|
11/28/16
|
|
12/09/16
|
|
12,359
|
Total 2016
|
$
|
1.40
|
|
|
|
|
|
$
|
34,437
|
|
|
|
|
|
|
|
|
First Quarter 2017
|
$
|
0.50
|
|
03/06/17
|
|
03/17/17
|
|
$
|
12,442
|
Second Quarter 2017
|
0.50
|
|
05/19/17
|
|
06/02/17
|
|
12,445
|
Third Quarter 2017
|
0.50
|
|
08/18/17
|
|
09/01/17
|
|
12,459
|
Fourth Quarter 2017
|
0.55
|
|
11/17/17
|
|
12/01/17
|
|
13,711
|
Total 2017
|
$
|
2.05
|
|
|
|
|
|
$
|
51,057
|
|
|
|
|
|
|
|
|
First Quarter 2018
|
$
|
0.55
|
|
03/16/18
|
|
03/29/18
|
|
$
|
13,858
|
Second Quarter 2018
|
0.60
|
|
06/04/18
|
|
06/15/18
|
|
15,127
|
Third Quarter 2018
|
0.60
|
|
08/31/18
|
|
09/14/18
|
|
15,129
|
Fourth Quarter 2018
|
0.60
|
|
11/26/18
|
|
12/07/18
|
|
15,156
|
Total 2018
|
$
|
2.35
|
|
|
|
|
|
$
|
59,270
|
Stock-Based Awards
Prior to stockholder approval of the LCI Industries 2018 Omnibus Incentive Plan (the “2018 Plan) in May 2018, the Company granted to its directors, employees, and other eligible persons common stock-based awards, such as stock options, deferred and restricted stock units, restricted stock, and stock awards pursuant to the LCI Industries Equity Award and Incentive Plan, as Amended and Restated (the “2011 Plan”), which was approved by stockholders in May 2011. On May 24, 2018, the Company’s stockholders approved the 2018 Plan, which provides that the number of shares of common stock that may be the subject of awards and issued under the 2018 Plan is 1,500,000, plus shares subject to any awards outstanding as of May 24, 2018 under the 2011 Plan that subsequently expire, are forfeited or canceled, are settled for cash, are not issued in shares, or are tendered or withheld to pay the exercise price or satisfy any tax withholding obligations related to the award. Following the stockholders’ approval of the 2018 Plan, no further awards may be made under the 2011 Plan. Executive officers and other employees of the Company and its subsidiaries and affiliates, and independent directors, consultants, and others who provide substantial services to the Company and its subsidiaries and affiliates, are eligible to be granted awards under the 2018 Plan. Under the 2018 Plan, the Compensation Committee of LCII’s Board of Directors is authorized to grant stock options, stock appreciation rights, restricted stock awards, stock unit awards, other stock-based awards, and cash incentive awards.
The number of shares available for future awards under the 2018 Plan and 2011 Plan, as applicable, was 1,570,274, 737,689 and 1,049,752 at December 31, 2018, 2017 and 2016, respectively.
Stock-based compensation resulted in charges to operations as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Stock options
|
$
|
—
|
|
$
|
—
|
|
$
|
444
|
Deferred and restricted stock units
|
12,427
|
|
10,696
|
|
7,830
|
Restricted stock
|
590
|
|
1,191
|
|
1,770
|
Stock awards
|
1,048
|
|
8,149
|
|
5,376
|
Stock-based compensation expense
|
$
|
14,065
|
|
$
|
20,036
|
|
$
|
15,420
|
Stock-based compensation expense is recorded in the Consolidated Statements of Income in the same line as cash compensation to those employees is recorded, primarily in selling, general and administrative expenses. In addition, the Company issued deferred stock units to certain executive officers in lieu of cash for a portion of prior year incentive compensation, in accordance with their compensation arrangements, of $6.9 million and $0.3 million, for the years ended December 31, 2017 and 2016, respectively.
Stock Options
The 2018 Plan provides for the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code, and non-qualified stock options. The exercise price for stock options granted under the 2018 Plan must be at least equal to 100 percent of the fair market value of the shares subject to such stock option on the date of grant. The exercise price may be paid in cash, by withholding of shares otherwise issuable upon exercise, or by delivery of shares of the Company’s common stock already owned. Historically, upon exercise of stock options, new shares have been issued instead of using treasury shares.
No stock options were outstanding as of December 31, 2018 and 2017. Previously issued stock options expired six years from the date of grant, and either vested ratably over the service period of five years for employees or, for certain executive officers, based on achievement of specified performance conditions. As a result of the Company’s executive succession and corporate relocation in 2014, the vesting of certain stock options was accelerated pursuant to contractual obligations with certain employees whose employment terminated as a result of the relocation to Indiana. Transactions in stock options under the 2011 Plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Option Shares
|
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
212,030
|
|
|
|
$
|
15.38
|
Exercised
|
(183,600)
|
|
|
|
15.10
|
Forfeited
|
(1,550)
|
|
|
|
17.17
|
Outstanding at December 31, 2016
|
26,880
|
|
|
|
17.17
|
Exercised
|
(26,180)
|
|
|
|
17.17
|
Forfeited
|
(700)
|
|
|
|
17.17
|
Outstanding at December 31, 2017
|
—
|
|
|
|
$
|
—
|
Exercisable at December 31, 2017
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
Additional information for the exercise of stock options is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2017
|
|
2016
|
Intrinsic value of stock options exercised
|
|
|
$
|
2,340
|
|
$
|
13,204
|
Cash receipts from stock options exercised
|
|
|
$
|
450
|
|
$
|
2,772
|
Income tax benefits from stock option exercises
|
|
|
$
|
900
|
|
$
|
4,435
|
Grant date fair value of stock options vested
|
|
|
$
|
—
|
|
$
|
506
|
Deferred and Restricted Stock Units
The 2018 Plan provides for the grant or issuance of stock units, including those that have deferral periods, such as deferred stock units (“DSUs”), those with time-based vesting provisions, such as restricted stock units (“RSUs”), and those to directors, employees and other eligible persons. Recipients of DSUs and RSUs are entitled to receive shares at the end of a specified vesting or deferral period. Holders of DSUs and RSUs receive dividend equivalents based on dividends granted to holders of the common stock, which dividend equivalents are payable in additional DSUs and RSUs, and are subject to the same vesting criteria as the original grant.
DSUs vest (i) ratably over the service period, (ii) at a specified future date, or (iii) for certain officers, based on achievement of specified performance conditions. RSUs vest (i) ratably over the service period or (ii) at a specified future date. As a result of the Company’s executive succession and corporate relocation, the vesting of certain deferred stock units was accelerated pursuant to contractual obligations with certain employees whose employment terminated. In addition, DSUs are issued in lieu of certain cash compensation. Transactions in DSUs and RSUs under the 2011 Plan or the 2018 Plan, as applicable, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
527,513
|
|
$
|
44.94
|
Issued
|
10,742
|
|
72.01
|
Granted
|
173,097
|
|
54.67
|
Dividend equivalents
|
9,075
|
|
87.01
|
Forfeited
|
(10,893)
|
|
48.98
|
Vested
|
(203,087)
|
|
43.55
|
Outstanding at December 31, 2016
|
506,447
|
|
$
|
50.00
|
Issued
|
68,340
|
|
108.61
|
Granted
|
95,079
|
|
109.50
|
Dividend equivalents
|
9,799
|
|
104.12
|
Forfeited
|
(3,094)
|
|
72.96
|
Vested
|
(227,516)
|
|
40.39
|
Outstanding at December 31, 2017
|
449,055
|
|
$
|
72.55
|
Issued
|
5,354
|
|
106.10
|
Granted
|
101,650
|
|
103.20
|
Dividend equivalents
|
8,036
|
|
89.66
|
Forfeited
|
(9,557)
|
|
76.71
|
Vested
|
(290,132)
|
|
74.83
|
Outstanding at December 31, 2018
|
264,406
|
|
$
|
83.84
|
As of December 31, 2018, there was $11.9 million of total unrecognized compensation cost related to DSUs and RSUs, which is expected to be recognized over a weighted average remaining period of 1.2 years.
Restricted Stock
The 2011 Plan provided for, and the 2018 Plan provides for, the grant of restricted stock to directors, employees and other eligible persons. As of December 31, 2018, no restricted stock awards had been granted under the 2018 Plan. The restriction period is established by the Compensation Committee, but may not be less than one year. Holders of restricted stock have all the rights of a stockholder of the Company, including the right to vote and the right to receive dividends granted to holders of the common stock, payable in additional shares of restricted stock, and subject to the same vesting criteria as the original grant. Shares of restricted stock are not transferable during the restriction period. Restricted stock grants, which were all made to directors, were as follows
(in thousands except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Granted
|
—
|
|
14,018
|
|
17,439
|
Weighted average stock price
|
$
|
—
|
|
$
|
92.25
|
|
$
|
74.55
|
Fair value of stock granted
|
$
|
—
|
|
$
|
1,293
|
|
$
|
1,300
|
Stock Awards and Performance Stock Units
The 2011 Plan provides for stock awards and the 2018 Plan provides for performance stock units (“PSUs”s) that vest at a specific future date based on achievement of specified performance conditions. Transactions under the 2011 Plan or the 2018 Plan, as applicable, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Stock Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
262,456
|
|
$
|
49.36
|
Granted
|
86,918
|
|
54.47
|
Dividend equivalents
|
3,811
|
|
88.04
|
Forfeited
|
(10,832)
|
|
53.95
|
Vested
|
(109,731)
|
|
39.94
|
Outstanding at December 31, 2016
|
232,622
|
|
$
|
55.60
|
Granted
|
103,382
|
|
90.36
|
Dividend equivalents
|
5,249
|
|
104.93
|
|
|
|
|
Vested
|
(69,434)
|
|
51.20
|
Outstanding at December 31, 2017
|
271,819
|
|
$
|
70.29
|
Issued
|
5,641
|
|
106.10
|
Granted
|
111,246
|
|
106.10
|
Dividend equivalents
|
6,280
|
|
90.47
|
Forfeited
|
(71,618)
|
|
86.65
|
Vested
|
(136,000)
|
|
64.32
|
Outstanding at December 31, 2018
|
187,368
|
|
$
|
91.39
|
As of December 31, 2018, there was $0.7 million of total unrecognized compensation cost related to outstanding stock awards, which is expected to be recognized over a weighted average remaining period of 0.20 years.
Weighted Average Common Shares Outstanding
The following reconciliation details the denominator used in the computation of basic and diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Weighted average shares outstanding for basic earnings per share
|
25,178
|
|
25,020
|
|
24,631
|
Common stock equivalents pertaining to stock-based awards
|
285
|
|
355
|
|
302
|
Weighted average shares outstanding for diluted earnings per share
|
25,463
|
|
25,375
|
|
24,933
|
The weighted average diluted shares outstanding for the years ended December 31, 2018, 2017 and 2016, exclude the effect of 94,747, 104,073 and 184,277 shares of common stock, respectively, subject to stock-based awards. Such shares were excluded from total diluted shares because they were anti-dilutive or the specified performance conditions that those shares were subject to were not yet achieved.
Stock Repurchase Program
On October 31, 2018, the Company’s Board of Directors authorized a new stock repurchase program granting the Company authority to repurchase up to $150.0 million of the Company’s common stock over a
three
-year period. The timing of stock repurchases and the number of shares will depend upon the market conditions and other factors. Share repurchases, if any, will be made in the open market or in privately negotiated transactions in accordance with applicable securities laws. The stock repurchase program may be modified, suspended or terminated at any time by the Board of Directors. In 2018, the Company purchased 402,570 shares at a weighted average price of $71.28 per share, totaling $28.7 million.
13. FAIR VALUE MEASUREMENTS
Recurring
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
2017
|
|
|
|
(In thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|
$
|
930
|
$
|
—
|
$
|
930
|
$
|
—
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
7,302
|
$
|
—
|
$
|
—
|
$
|
7,302
|
|
$
|
12,545
|
$
|
—
|
$
|
—
|
$
|
12,545
|
Derivative liabilities
|
1,108
|
—
|
1,108
|
—
|
|
—
|
—
|
—
|
—
|
Derivative Instruments
The Company’s objectives in using commodity derivatives are to add stability to expense and to manage its exposure to certain commodity price movements. To accomplish this objective, the Company uses commodity swaps as part of its commodity risk management strategy. Commodity swaps designated as cash flow hedges involve fixing the price on a fixed volume of a commodity on specified dates. The commodity swaps are typically cash settled for their fair value at or close to their settlement dates.
At December 31, 2018, the Company had five commodity swap derivative instruments for a total of 34.4 million pounds of steel used to hedge its commodity price risk on a portion of the exposure to movements associated with steel costs. These derivatives expire at various dates through February 2020, at an average steel price of $0.39 per pound. These derivatives are designated and qualify as cash flow hedges of commodity price risk; therefore, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified in the period during which the hedged transactions affects earnings within the same income statement line item as the earnings effect of the hedged transaction. These derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of the reporting period. At December 31, 2018, the $1.1 million corresponding liability was recorded in accrued expenses and other current liabilities ($0.9 million) and other long-term liabilities ($0.2 million) as reflected in the Consolidated Balance Sheets.
At December 31, 2017, the Company had derivative instruments for 12.0 million pounds of steel in order to manage a portion of the exposure to movements associated with steel costs. These derivative instruments expired in December 2018, at an average steel price of $0.25 per pound. While these derivative instruments were considered to be economic hedges of the underlying movement in the price of steel, they were not designated or accounted for as a hedge. These derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net gain or loss was recorded in cost of sales in the Consolidated Statements of Income. At December 31, 2017, the $0.9 million corresponding asset was recorded in prepaid expenses and other current assets as reflected in the Consolidated Balance Sheets.
Contingent Consideration Related to Acquisitions
Liabilities for contingent consideration related to acquisitions were estimated at fair value using management’s projections for long-term sales forecasts, including assumptions regarding market share gains and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next
six
years, the Company’s long-term sales growth forecasts for products subject to contingent consideration arrangements average approximately 13 percent per year. For further information on the inputs used in determining the fair value, and a roll-forward of the contingent consideration liability, see Note 11 of the Notes to Consolidated Financial Statements.
Changes in either of the inputs in isolation would result in a change in the fair value measurement. A change in the assumptions used for sales forecasts would result in a directionally similar change in the fair value liability, while a change in the weighted average cost of capital would result in a directionally opposite change in the fair value liability. If there is an increase in the fair value liability, the Company would record a charge to selling, general and administrative expenses, and if
there is a decrease in the fair value liability, the Company would record a benefit in selling, general and administrative expenses.
Non-recurring
The following table presents the carrying value at December 31 of any assets and liabilities which were measured at fair value and recorded at the lower of cost or fair value, on a non-recurring basis, using significant unobservable inputs (Level 3), and the corresponding non-recurring losses or gains recognized during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
(In thousands)
|
Carrying
Value
|
|
Non-Recurring
Losses/(Gains)
|
|
Carrying
Value
|
|
Non-Recurring
Losses/(Gains)
|
|
Carrying
Value
|
|
Non-Recurring
Losses/(Gains)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of acquired businesses
|
$
|
128,725
|
|
$
|
—
|
|
$
|
35,224
|
|
$
|
—
|
|
$
|
41,808
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets of Acquired Businesses
The Company valued the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company used different valuation techniques in determining the fair value. Those techniques included comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, a market participant’s weighted average cost of capital, as well as other techniques as circumstances required. For further information on acquired assets and liabilities, see Note 4 of the Notes to Consolidated Financial Statements.
14. SEGMENT REPORTING
The Company has two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant.
The OEM Segment, which accounted for 91 percent, 92 percent and 92 percent of consolidated net sales for each of the years ended December 31, 2018, 2017 and 2016, respectively, manufactures and distributes a broad array of engineered components for the leading OEMs in the recreation and industrial product markets, consisting 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 64 percent of the Company’s OEM Segment net sales in 2018 were of components for travel trailer and fifth-wheel RVs.
The Aftermarket Segment, which accounted for 9 percent, 8 percent and 8 percent of consolidated net sales for each of the years ended December 31, 2018, 2017 and 2016, respectively, supplies engineered components to the related aftermarket channels of the RV and adjacent industries, primarily to retail dealers, wholesale distributors and service centers. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims.
Decisions concerning the allocation of the Company’s resources are made by the Company’s Chief Operating Decision Maker (“CODM”), with oversight by the Board of Directors. The CODM evaluates the performance of each segment based upon segment operating profit or loss, generally defined as income or loss before interest and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of assets. Management of debt is a corporate function. The accounting policies of the OEM and Aftermarket Segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements.
The following tables presents the Company’s revenues disaggregated by segment and geography based on the billing address of the Company’s customers for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
(In thousands)
|
U.S. (a)
|
|
Int’l (b)
|
|
Total
|
OEM Segment:
|
|
|
|
|
|
RV OEMs:
|
|
|
|
|
|
Travel trailers and fifth-wheels
|
$
|
1,431,574
|
|
$
|
9,156
|
|
$
|
1,440,730
|
Motorhomes
|
143,488
|
|
43,809
|
|
187,297
|
Adjacent industries OEMs
|
574,100
|
|
40,489
|
|
614,589
|
Total OEM Segment net sales
|
2,149,162
|
|
93,454
|
|
2,242,616
|
Aftermarket Segment:
|
|
|
|
|
|
Total Aftermarket Segment net sales
|
222,588
|
|
10,603
|
|
233,191
|
Total net sales
|
$
|
2,371,750
|
|
$
|
104,057
|
|
$
|
2,475,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
(In thousands)
|
U.S. (a)
|
|
Int’l (b)
|
|
Total
|
OEM Segment:
|
|
|
|
|
|
RV OEMs:
|
|
|
|
|
|
Travel trailers and fifth-wheels
|
$
|
1,403,079
|
|
$
|
2,904
|
|
$
|
1,405,983
|
Motorhomes
|
138,895
|
|
20,522
|
|
159,417
|
Adjacent industries OEMs
|
398,919
|
|
12,304
|
|
411,223
|
Total OEM Segment net sales
|
1,940,893
|
|
35,730
|
|
1,976,623
|
Aftermarket Segment:
|
|
|
|
|
|
Total Aftermarket Segment net sales
|
160,637
|
|
10,510
|
|
171,147
|
Total net sales
|
$
|
2,101,530
|
|
$
|
46,240
|
|
$
|
2,147,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
(In thousands)
|
U.S. (a)
|
|
Int’l (b)
|
|
Total
|
OEM Segment:
|
|
|
|
|
|
RV OEMs:
|
|
|
|
|
|
Travel trailers and fifth-wheels
|
$
|
1,097,385
|
|
$
|
2,497
|
|
$
|
1,099,882
|
Motorhomes
|
108,961
|
|
7,230
|
|
116,191
|
Adjacent industries OEMs
|
325,550
|
|
6,468
|
|
332,018
|
Total OEM Segment net sales
|
1,531,896
|
|
16,195
|
|
1,548,091
|
Aftermarket Segment:
|
|
|
|
|
|
Total Aftermarket Segment net sales
|
124,733
|
|
6,074
|
|
130,807
|
Total net sales
|
$
|
1,656,629
|
|
$
|
22,269
|
|
$
|
1,678,898
|
(a)
Net sales to customers in the United States of America
(b)
Net sales to customers domiciled in countries outside of the United States of America
Corporate expenses are allocated between the segments based upon net sales. Accretion related to contingent consideration and other non-segment items are included in the segment to which they relate. Information relating to segments follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
|
|
|
|
Corporate
|
|
|
(In thousands)
|
OEM
|
|
Aftermarket
|
|
Subtotal
|
|
and Other
|
|
Total
|
2018
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(a)
|
$
|
2,242,616
|
|
$
|
233,191
|
|
$
|
2,475,807
|
|
$
|
—
|
|
$
|
2,475,807
|
Operating profit
(b)
|
167,459
|
|
31,329
|
|
198,788
|
|
—
|
|
198,788
|
Total assets
(c)
|
1,034,254
|
|
129,776
|
|
1,164,030
|
|
79,863
|
|
1,243,893
|
Expenditures for long-lived assets
(d)
|
247,895
|
|
20,544
|
|
268,439
|
|
—
|
|
268,439
|
Depreciation and amortization
|
63,447
|
|
4,079
|
|
67,526
|
|
—
|
|
67,526
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(a)
|
$
|
1,976,623
|
|
$
|
171,147
|
|
$
|
2,147,770
|
|
$
|
—
|
|
$
|
2,147,770
|
Operating profit
(b)
|
190,276
|
|
24,005
|
|
214,281
|
|
—
|
|
214,281
|
Total assets
(c)
|
785,926
|
|
76,309
|
|
862,235
|
|
83,623
|
|
945,858
|
Expenditures for long-lived assets
(d)
|
148,570
|
|
4,875
|
|
153,445
|
|
—
|
|
153,445
|
Depreciation and amortization
|
50,751
|
|
3,662
|
|
54,413
|
|
314
|
|
54,727
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(a)
|
$
|
1,548,091
|
|
$
|
130,807
|
|
$
|
1,678,898
|
|
$
|
—
|
|
$
|
1,678,898
|
Operating profit
(b)
|
180,850
|
|
20,000
|
|
200,850
|
|
—
|
|
200,850
|
Total assets
(c)
|
569,385
|
|
65,211
|
|
634,596
|
|
152,308
|
|
786,904
|
Expenditures for long-lived assets
(d)
|
80,588
|
|
6,014
|
|
86,602
|
|
—
|
|
86,602
|
Depreciation and amortization
|
42,593
|
|
3,298
|
|
45,891
|
|
276
|
|
46,167
|
(a)
Thor Industries, Inc. (“Thor”), a customer of both segments, accounted for 31 percent, 38 percent and 37 percent of the Company’s consolidated net sales for the years ended December 31, 2018, 2017 and 2016, respectively. Berkshire Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton Homes, Inc.), a customer of both segments, accounted for 23 percent, 25 percent and 26 percent of the Company’s consolidated net sales for the years ended December 31, 2018, 2017 and 2016, respectively. No other customer accounted for more than 10 percent of consolidated net sales in the years ended December 31, 2018, 2017 and 2016.
(b)
Certain general and administrative expenses are allocated between the segments based upon net sales or operating profit, depending upon the nature of the expense.
(c)
Segment assets include accounts receivable, inventories, fixed assets, goodwill and other intangible assets. Corporate and other assets include cash and cash equivalents, prepaid expenses and other current assets, deferred taxes, and other assets.
(d)
Expenditures for long-lived assets include capital expenditures, as well as fixed assets, goodwill and other intangible assets purchased as part of the acquisition of businesses. The Company purchased $150.9 million, $65.0 million and $42.0 million of long-lived assets, as part of the acquisitions of businesses in the years ended December 31, 2018, 2017 and 2016, respectively.
Net sales by OEM Segment product were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
OEM Segment:
|
|
|
|
|
|
Chassis, chassis parts and slide-out mechanisms
|
$
|
908,065
|
|
$
|
914,397
|
|
$
|
743,160
|
Windows and doors
|
615,644
|
|
424,625
|
|
335,717
|
Furniture and mattresses
|
380,514
|
|
342,680
|
|
245,596
|
Axles and suspension solutions
|
122,897
|
|
123,513
|
|
115,538
|
Other
|
215,496
|
|
171,408
|
|
108,080
|
Total OEM Segment net sales
|
2,242,616
|
|
1,976,623
|
|
1,548,091
|
Total Aftermarket Segment net sales
|
233,191
|
|
171,147
|
|
130,807
|
Total net sales
|
$
|
2,475,807
|
|
$
|
2,147,770
|
|
$
|
1,678,898
|
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Interim unaudited financial information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Year
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
650,492
|
|
$
|
684,455
|
|
$
|
604,244
|
|
$
|
536,616
|
|
$
|
2,475,807
|
Gross profit
|
140,733
|
|
150,456
|
|
125,901
|
|
103,254
|
|
520,344
|
Income before income taxes
|
58,719
|
|
62,428
|
|
43,633
|
|
27,572
|
|
192,352
|
Net income
|
47,336
|
|
47,224
|
|
33,812
|
|
20,179
|
|
148,551
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.88
|
|
$
|
1.87
|
|
$
|
1.34
|
|
$
|
0.80
|
|
$
|
5.90
|
Diluted
|
$
|
1.86
|
|
$
|
1.86
|
|
$
|
1.33
|
|
$
|
0.80
|
|
$
|
5.83
|
|
|
|
|
|
|
|
|
|
|
Stock market price:
|
|
|
|
|
|
|
|
|
|
High
|
$
|
132.30
|
|
$
|
104.90
|
|
$
|
102.23
|
|
$
|
80.89
|
|
$
|
132.30
|
Low
|
$
|
99.46
|
|
$
|
80.95
|
|
$
|
98.40
|
|
$
|
59.68
|
|
$
|
59.68
|
Close (at end of quarter)
|
$
|
104.15
|
|
$
|
90.15
|
|
$
|
69.35
|
|
$
|
66.80
|
|
$
|
66.80
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
498,336
|
|
$
|
547,483
|
|
$
|
554,814
|
|
$
|
547,137
|
|
$
|
2,147,770
|
Gross profit
|
124,014
|
|
131,087
|
|
121,220
|
|
116,793
|
|
493,114
|
Income before income taxes
|
58,692
|
|
62,626
|
|
47,616
|
|
43,910
|
|
212,844
|
Net income
|
43,145
|
|
40,137
|
|
32,138
|
|
17,464
|
|
132,884
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.73
|
|
$
|
1.61
|
|
$
|
1.28
|
|
$
|
0.70
|
|
$
|
5.31
|
Diluted
|
$
|
1.71
|
|
$
|
1.59
|
|
$
|
1.26
|
|
$
|
0.68
|
|
$
|
5.24
|
|
|
|
|
|
|
|
|
|
|
Stock market price:
|
|
|
|
|
|
|
|
|
|
High
|
$
|
117.15
|
|
$
|
106.23
|
|
$
|
116.63
|
|
$
|
132.73
|
|
$
|
132.73
|
Low
|
$
|
94.98
|
|
$
|
86.25
|
|
$
|
93.08
|
|
$
|
104.15
|
|
$
|
86.25
|
Close (at end of quarter)
|
$
|
99.80
|
|
$
|
102.40
|
|
$
|
115.85
|
|
$
|
130.00
|
|
$
|
130.00
|
The sum of per share amounts for the four quarters may not equal the total per share amounts for the year as a result of changes in the weighted average common shares outstanding or rounding.