Business context and reporting period
LCI Industries filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company supplies engineered components to recreational vehicle (RV), adjacent industrial and aftermarket markets through its OEM and Aftermarket segments. Its business is seasonal, with sales and profits historically strongest in the second quarter and weakest in the fourth.
Financial performance
- Third quarter: Net sales were $604.2 million, up 9% year over year. Net income was $33.8 million, up 5%; diluted EPS was $1.33 versus $1.26.
- First nine months: Net sales were $1.939 billion, up 21%. Net income was $128.4 million, up 11%; diluted EPS was $5.03 versus $4.56.
- Margins and operating profit: Third-quarter gross margin was approximately 20.8% versus 21.9% a year earlier; operating profit was $45.4 million versus $47.9 million, and operating margin was approximately 7.5% versus 8.6%. For the first nine months, gross margin was approximately 21.5% versus 23.5%, and operating profit was $169.3 million versus $170.1 million.
- Segments: Third-quarter OEM sales rose 7% to $540.0 million, while segment operating profit fell to $36.9 million from $41.0 million. Aftermarket sales rose 31% to $64.3 million, and operating profit increased to $8.4 million from $6.9 million. Nine-month sales increased 19% in OEM and 40% in Aftermarket.
- Cash flow: Nine-month operating cash flow was $107.6 million, approximately flat year over year. Capital expenditures were $92.5 million and acquisitions used $156.7 million; investing cash outflow was $248.1 million. Financing provided $132.7 million, and cash decreased $7.8 million to $18.3 million.
- Liquidity and debt: At September 30, cash was $18.3 million, current assets were $556.7 million, and current liabilities were $182.7 million. Debt was approximately $244.0 million, versus $49.9 million at year-end 2017. The company reported $232.8 million of remaining availability under its credit and shelf-loan facilities and compliance with debt covenants.
Material changes versus prior comparable periods
- Sales growth reflected acquisitions, increased content per RV, market-share gains, and stronger adjacent-industry and aftermarket sales. Acquisitions completed in the prior twelve months added $56 million of third-quarter sales, according to management.
- OEM sales of travel trailer and fifth-wheel components declined 5% in the quarter, while industry wholesale shipments declined 11%; adjacent-industry OEM sales increased 48%. Management attributed RV outperformance partly to market-share gains, pricing and new products.
- Higher steel, aluminum and foam costs—particularly costs associated with tariffs—along with labor costs and acquisition-related costs pressured operating margins. Management cited pricing, fixed-cost absorption and efficiency initiatives as partial offsets.
- The nine-month effective tax rate fell to 22.1% from 31.7%, primarily reflecting the lower federal rate under the Tax Cuts and Jobs Act and other tax items.
- The company completed three 2018 acquisitions: Taylor Made, Hehr and ST.LA. Their preliminary purchase accounting included goodwill and identifiable intangible assets; valuations were still being finalized.
Outlook, risks and unusual items
- Management said RV wholesale shipments were disrupted as dealers normalized inventory and expected a return to the normal wholesale cycle early in 2019. RVIA projected 2018 travel-trailer and fifth-wheel shipments to remain level and a 2% decline in 2019. Management cited favorable retail demand and industry fundamentals but did not provide company revenue or earnings guidance.
- Raw-material prices remain volatile, and the company cautioned that future cost increases may not be fully passed through to customers or matched in timing by price increases. Other cited risks include seasonality, dealer inventory, economic and consumer conditions, labor availability and cost, acquisition integration, customer concentration, product liability and recalls, and environmental matters.
- The company recorded $23.5 million of warranty expense in the first nine months; the accrued warranty liability was $45.3 million at period-end. It also had $7.1 million of contingent-consideration liabilities, with estimated remaining payments of $9.1 million undiscounted.
- Management said pending legal matters, after expected insurance recoveries where applicable, were not expected to create a material financial impact beyond amounts provided, while noting outcomes are uncertain. Environmental investigations or remediation and future product recalls could result in expenditures.
- On October 31, 2018, after quarter-end, the board authorized a share-repurchase program of up to $150 million over three years. The company also expected 2018 depreciation and amortization of approximately $70–$75 million and stock-based compensation of approximately $18–$20 million.
- The company plans to adopt the lease accounting standard on January 1, 2019, expecting recognition of operating-lease right-of-use assets and liabilities, with no material impact expected on income or cash flows.
Important facts for investors to verify
- Whether cost inflation and tariffs continue to compress OEM margins, and how effectively price increases offset them.
- Dealer inventory normalization, RV wholesale shipments and retail demand, especially against the company’s expectation of a return to normal wholesale patterns in early 2019.
- Acquisition integration, final purchase-price allocations, and the acquired businesses’ contribution to sales, margins and cash generation.
- Working-capital trends: inventory was $325.8 million at September 30, and management reported inventory turnover of 6.6 times versus 7.8 times a year earlier; days sales outstanding increased to 26 from 22.
- Debt, borrowing availability and covenant headroom as acquisitions, capital spending and any share repurchases are funded.
- Potential exposure from warranties, contingent consideration, product recalls, environmental matters and pending litigation.
- The filing’s acquisition-sales figures use different descriptions: management cited $56 million of third-quarter sales from acquisitions completed over the prior twelve months, while the controls discussion cited $63.5 million of quarter sales from the Taylor Made, Hehr and ST.LA acquisitions; investors may wish to clarify the scope of these amounts.