LCI Industries — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparison is with the corresponding 2021 periods. LCI supplies engineered components to recreation and transportation OEMs and related aftermarket channels. It reports OEM and Aftermarket segments and operated more than 130 facilities in North America and Europe.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1.536 billion | $1.094 billion | $3.181 billion | $2.094 billion |
| Gross profit | $409.1 million | $257.6 million | $873.3 million | $499.4 million |
| Operating profit | $218.8 million | $94.0 million | $488.5 million | $195.4 million |
| Net income | $154.5 million | $67.9 million | $350.7 million | $142.0 million |
| Diluted EPS | $6.06 | $2.67 | $13.76 | $5.60 |
Q2 gross margin was approximately 26.6% versus 23.5%; operating margin was 14.2% versus 8.6%. First-half gross margin was approximately 27.5% versus 23.8%; operating margin was 15.4% versus 9.3%. Higher selling prices, product pricing actions, increased volumes and fixed-cost leverage supported profitability, partly offset by higher material and freight costs.
- Segment results: Q2 OEM sales rose 48% to $1.276 billion and operating profit increased to $190.6 million; its operating margin was 14.9%, up from 7.3%. Aftermarket sales rose 13% to $259.9 million, but operating profit fell to $28.2 million and margin declined to 10.9% from 13.4%.
- Cash flow: First-half operating cash flow was $348.0 million, compared with $23.9 million in 2021. Investing cash use was $120.4 million, including $70.8 million of capital expenditures and $51.8 million for acquisitions. Financing cash use was $234.4 million. Cash declined $7.9 million to $55.0 million.
- Liquidity and debt: Total debt carrying amount was $1.123 billion at June 30, compared with $1.303 billion at December 31, 2021. The company had $286.7 million available under its revolving facility and $29.4 million of issued, undrawn letters of credit. Current assets were $1.698 billion and current liabilities $638.2 million. It repaid the $50 million shelf-loan balance in March.
- Other metrics: Inventory was $1.155 billion, up from $1.096 billion at year-end. The first-half effective tax rate was 26.3%, versus 25.0%. Dividends paid in the first half totaled $49.6 million; the Q2 dividend was $1.05 per share.
Material changes and business developments
- Q2 sales increased 40%; first-half sales increased 52%. Management attributed growth principally to selling-price increases, market-share gains, acquisitions and higher wholesale shipments. Recent acquisitions, primarily Furrion and Girard, contributed approximately $80.7 million of Q2 sales.
- OEM accounted for 84% of first-half sales, compared with 80% a year earlier. OEM sales grew 59% for the half, while Aftermarket sales grew 23%.
- The March 2022 Girard acquisition had approximately $70 million of consideration, including $20 million paid July 1. Purchase accounting remained preliminary. The company also completed another acquisition for $1.7 million during the first half.
- Higher commodity-indexed and targeted product pricing helped offset rising steel, aluminum, labor and freight costs. In Q2, commodity cost increases reduced OEM operating profit by $60.1 million and Aftermarket operating profit by $31.7 million, according to management’s analysis.
Outlook, risks and contingencies
- RV outlook: Management estimated 2022 U.S. wholesale shipments of travel-trailer, fifth-wheel and motorhome RVs at approximately 500,000–530,000 units, implying a 35%–45% second-half decline from first-half shipments. The filing cites dealer inventory levels, elevated fuel prices and rising interest rates as factors. First-half retail demand for travel trailers and fifth-wheels declined 26% year over year, despite an 8% increase in wholesale shipments.
- Other outlook: Management expected marine and manufactured-housing production to remain near current run rates for the rest of 2022, but anticipated lower Aftermarket volumes due to stocked distribution channels, truck-market chip shortages and pressure on discretionary spending. Full-year capital expenditures were estimated at $120–$140 million; depreciation and amortization at $130–$140 million; and stock-based compensation at $25–$30 million.
- Operating risks: COVID-19 and the Russia-Ukraine conflict, supply-chain disruption, inflation, volatile steel and aluminum prices, labor availability and costs, freight, seasonality, dealer inventories, consumer demand, interest rates and acquisition integration could affect results. Management said the future effect of the pandemic and war remained uncertain.
- Liquidity: Management believed operating cash flow and revolving-credit availability would cover anticipated cash requirements for the next 12 months. The company was in compliance with debt covenants at June 30 and expected to remain compliant over the next 12 months. A hypothetical 0.25% increase in indexed interest rates was not expected to materially affect results.
- Contingencies and unusual items: Management described ordinary-course litigation, product-recall and environmental exposures, but did not expect unprovided amounts to materially affect financial position or results after resolution. A $1.9 million contingent-consideration liability reduction was recorded after management judged payment for a product-related sales target to be remote. No material subsequent event was identified before filing.
Important facts for investors to verify
- Whether second-half RV wholesale shipments and retail demand track management’s 500,000–530,000 full-year shipment estimate, and how dealer inventory levels evolve.
- Whether price increases continue to offset commodity, freight and labor inflation without materially weakening customer demand or margins.
- Whether the inventory build converts into sales and cash flow, given inventory of $1.155 billion and management’s stated working-capital strategy.
- Whether Aftermarket volume and margins recover, and whether OEM growth and profitability remain durable as industry shipments moderate.
- Final purchase accounting and integration performance for Girard and prior acquisitions, along with debt, liquidity and covenant capacity.