LCI Industries (NYSE: LCII) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. LCI supplies engineered components to recreational vehicle (RV), transportation, marine, and other markets through OEM and aftermarket segments.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $2,371.5 million | $2,475.8 million | -4% |
| Gross profit / margin | $539.2 million / 22.7% | $520.3 million / 21.0% | Margin +1.7 pts |
| Operating profit / margin | $200.2 million / 8.4% | $198.8 million / 8.0% | Profit +1%; margin +0.4 pts |
| Net income | $146.5 million | $148.6 million | -1% |
| Diluted EPS | $5.84 | $5.83 | Approximately flat |
| Operating cash flow | $269.5 million | $156.6 million | +$112.9 million |
| Capital expenditures | $58.2 million | $119.8 million | Lower by $61.6 million |
Fourth-quarter 2019 sales were $564.0 million versus $536.6 million in Q4 2018; net income was $28.8 million versus $20.2 million, and diluted EPS was $1.14 versus $0.80. Results are seasonal, with sales and profits historically strongest in Q2 and weakest in Q4.
- Segment trends: OEM sales fell 7% to $2,091.9 million, while aftermarket sales rose 20% to $279.6 million. OEM operating margin improved to 7.9% from 7.5%; aftermarket margin declined to 12.5% from 13.4%.
- Balance sheet and liquidity: Cash was $35.4 million; total indebtedness was $630.8 million, including $300 million of incremental term debt used partly to fund CURT. Working capital was $399.5 million. The company reported $331.8 million of revolving-facility availability in one passage and $481.8 million elsewhere; the filing text does not provide a clear reconciliation.
- Capital returns: Dividends totaled $2.55 per share, or $63.8 million. No shares were repurchased in 2019.
Material changes and business developments
- Lower RV wholesale shipments and dealer inventory correction drove the sales decline: North American travel-trailer and fifth-wheel wholesale shipments decreased 16%, and motorhome shipments decreased 19%. Adjacent-industry OEM sales rose 7% and aftermarket sales rose 20%, partly offsetting RV weakness.
- Steel and aluminum cost declines, targeted pricing, lower direct-labor costs, and lower insurance costs supported margins. Lower OEM volume, higher incentive compensation, expansion costs, and acquisition-related expenses offset some gains.
- LCI completed seven acquisitions in 2019, including CURT for $337.6 million. CURT reported full-year 2019 sales of $268 million, but its post-acquisition contribution to LCI’s reported results was not material. LCI reported $93 million of 2019 sales from acquisitions completed over the year.
- In January 2020, LCI acquired Polyplastic for $97.6 million, net of cash acquired, plus contingent consideration of up to $7.7 million.
- Furrion distribution ended effective December 31, 2019. Furrion product sales totaled $129.4 million in 2019 and are not expected to recur in 2020.
- LCI’s diversification target is for 60% of sales to come from outside the North American RV market by 2022; approximately 42% did so in 2019.
Outlook, risks, and unusual items
- Management expected RV wholesale and retail volumes to align more closely in 2020; the RVIA projected a modest decrease in travel-trailer and fifth-wheel wholesale shipments. Management estimated a 2020 effective tax rate of 24%–26%, depreciation and amortization of $105–$110 million, and stock-based compensation of $16–$21 million.
- The filing identifies the then-emerging novel coronavirus outbreak as a risk to employee availability, suppliers, supply chains, economic conditions, and demand. Other key exposures include RV cyclicality, dealer financing and inventory, customer concentration, commodity prices and tariffs, labor availability, acquisition integration, foreign exchange, interest rates, and product liability or recalls.
- Thor represented 27% of 2019 sales and Berkshire Hathaway subsidiaries 21%; together they accounted for 48%. The company notes it generally lacks long-term customer agreements.
- Variable-rate borrowings were $566.2 million at year-end. Management estimated that a 100-basis-point rate increase would reduce annual cash flow by approximately $5.7 million.
- Warranty accrual was $47.2 million. Management said ordinary-course litigation, after anticipated insurance recoveries, was not expected to create material liability beyond amounts provided, while noting outcomes are uncertain. The auditor highlighted acquisition valuation and warranty accrual estimates as critical audit matters.
- Auditors issued an unqualified opinion and concluded internal control over financial reporting was effective; the assessment excluded several businesses acquired during 2019. The lease accounting standard was adopted in 2019, adding recognized lease assets and liabilities.
Important facts for investors to verify
- Whether the RV inventory correction has ended and whether demand, dealer inventories, and wholesale shipments support the company’s 2020 outlook.
- The post-acquisition performance, integration costs, and debt impact of CURT and other 2019 acquisitions, including completion of purchase accounting valuations.
- The expected revenue and earnings impact of the discontinued Furrion distribution business and the contribution from Polyplastic.
- The conflicting reported amounts for revolving-credit availability and the company’s compliance with debt covenants as borrowing needs evolve.
- The sustainability of margin improvement, warranty reserves, and cash conversion, particularly if raw-material costs or customer demand change.