LCI Industries — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. LCI supplies engineered components to RV and adjacent-industry original equipment manufacturers (OEMs) and related aftermarket channels. The company reported two segments: OEM and Aftermarket.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $650.5 million | $498.3 million | +31% |
| Gross profit / margin | $140.7 million / 21.6% | $124.0 million / 24.9% | Margin down 3.3 points |
| Operating profit / margin | $59.8 million / 9.2% | $59.1 million / 11.9% | Profit +1%; margin down 2.7 points |
| Net income | $47.3 million | $43.1 million | +10% |
| Diluted EPS | $1.86 | $1.71 | +9% |
| Operating cash flow | $(5.1) million | $21.7 million | Down $26.8 million |
OEM sales were $600.2 million, up 30%; Aftermarket sales were $50.3 million, up 39%. The filing attributes growth to acquisitions, higher RV shipments, increased product content, and organic gains in adjacent industries and aftermarket sales.
Cash and equivalents were $5.0 million at March 31, versus $26.0 million at year-end 2017. Inventories were $323.9 million, up from $274.7 million at year-end. Total assets were $1.179 billion and stockholders’ equity was $678.8 million. Long-term indebtedness was $226.2 million, including $177 million drawn on the revolving credit line and $50 million of fixed-rate notes. Revolver availability was $145.6 million; combined remaining availability under the credit and shelf-loan facilities was $245.6 million. The company said liquidity was adequate for anticipated needs over the next 12 months and reported compliance with its debt covenants.
Material changes and management commentary
- Q1 acquisitions of Taylor Made and Hehr cost a preliminary $88.4 million and $50.1 million, respectively. Together they contributed $36.1 million of quarterly sales; purchase accounting remains preliminary.
- Revenue grew substantially faster than operating profit. Management cited higher steel, aluminum, foam, and labor costs, as well as $2–3 million of additional fixed costs, as pressures on OEM profitability. Tariffs contributed to rising steel and aluminum costs.
- Operating cash flow turned negative, primarily reflecting a $17.2 million inventory cash use and working-capital needs. Inventory turnover fell to 7.4 times from 7.7 times for the comparable trailing-twelve-month periods.
- The effective tax rate declined to 19.4% from 26.5%, primarily due to the lower federal rate under the Tax Cuts and Jobs Act and excess tax benefits from equity compensation. The company recorded a one-time, non-cash $13.2 million TCJA-related charge in 2017; no further measurement-period adjustment was recorded in Q1 2018.
- The company paid a quarterly dividend of $0.55 per share, totaling $13.9 million.
Outlook, risks, and contingencies
Management described RV-industry fundamentals as strong and cited a 15% increase in Q1 wholesale shipments of travel trailer and fifth-wheel RVs, alongside 9% retail growth. RVIA projected 7% growth in 2018 wholesale shipments for those RV categories. These are industry indicators, not company earnings guidance. Management expects to pursue growth through market-share gains, new products, aftermarket sales, acquisitions, and investment; it also noted the usual seasonality of the business.
Management expected 2018 depreciation and amortization of approximately $65–70 million and stock-based compensation of approximately $22–24 million. It said raw-material prices would remain volatile and that passing cost increases to customers, or timing price increases to match costs, is not assured. Other disclosed risks include RV cyclicality and dealer inventories, customer and consumer financing, labor availability and cost, acquisition integration, product warranty/recall exposure, environmental matters, litigation, and foreign-exchange and interest-rate risks.
Contingent consideration liabilities were $10.3 million at quarter-end, with estimated undiscounted remaining payments of $12.4 million. The company disclosed ordinary-course legal matters, possible future environmental investigation or remediation costs, and potential product-recall expenses; management did not expect amounts beyond recorded provisions and anticipated insurance recoveries to materially affect financial position or annual results. The company’s disclosure controls were assessed as effective; its evaluation of internal controls excluded the newly acquired Taylor Made and Hehr businesses.
Important facts for investors to verify
- Whether sales growth and acquisition integration translate into improved operating margins, given rising material, labor, and fixed costs.
- Inventory levels, turnover, and operating cash conversion, particularly as sales expand.
- Debt usage, facility availability, covenant headroom, and progress on the proposed credit-agreement amendment concerning Prudential borrowings.
- Final purchase accounting and subsequent performance of Taylor Made and Hehr, including any post-closing working-capital adjustments.
- RV retail demand and dealer inventories versus wholesale shipments, as well as the company’s ability to pass through commodity-cost increases.