LCI Industries (LCII) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. LCI supplies engineered components to recreation and industrial OEMs and related aftermarket channels. Its two reportable segments are OEM and Aftermarket; RV travel trailers and fifth-wheels are a major demand driver.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $629.1 million | $684.5 million | $1,221.2 million | $1,334.9 million |
| Gross profit | $148.7 million | $150.5 million | $281.2 million | $291.2 million |
| Operating profit | $65.7 million | $64.1 million | $113.4 million | $123.9 million |
| Net income | $47.5 million | $47.2 million | $81.9 million | $94.6 million |
| Diluted EPS | $1.89 | $1.86 | $3.28 | $3.70 |
- Q2 operating margin was 10.4%, versus approximately 9.4% in Q2 2018; management cites targeted pricing and operational efficiencies. H1 operating margin was approximately 9.3% in both periods. Q2 gross margin was approximately 23.6%, versus 22.0%.
- H1 operating cash flow was $180.1 million, compared with $78.9 million. Investing cash outflow was $44.1 million, including $35.8 million of capital spending and $8.5 million for acquisitions. Financing cash outflow was $88.5 million, including net revolving-credit repayments and $31.3 million of dividends.
- Cash and cash equivalents were $15.1 million at June 30; restricted cash of $45.5 million was held in escrow for the Lewmar acquisition. Long-term indebtedness was $245.9 million, including $190.6 million under the revolver and $50.0 million of shelf notes. Revolver availability was $406.9 million; availability under the revolver and shelf facility combined was $556.9 million. The company reported covenant compliance and said liquidity was adequate for anticipated needs over the next 12 months.
- Operating lease right-of-use assets were $62.9 million, with current and long-term lease obligations totaling $65.5 million, following adoption of the new lease standard in January 2019.
Material changes versus prior period
- Q2 sales fell 8%; H1 sales fell 9%. OEM sales declined 10% in Q2 and 11% in H1, mainly reflecting lower RV production. Aftermarket sales rose 12% in Q2 and 15% in H1.
- RVIA-reported wholesale shipments of travel trailer and fifth-wheel RVs fell 13% in Q2 and 20% in H1; motorhome shipments fell 18% and 23%, respectively. LCI reported RV content gains that partly offset lower unit volumes.
- Q2 operating profit rose despite lower sales, while H1 operating profit declined. H1 OEM profit was pressured by lower volume, elevated input costs and facility costs; Aftermarket profit increased.
- H1 effective tax rate was 25%, versus 22%, primarily due to lower excess tax benefits from equity compensation and higher state income taxes.
Outlook, risks and unusual items
- Management expected RV dealer inventory normalization to be in its final stages, with a return toward the normal wholesale cycle in late 2019. It cited a modest 2019 decrease projected by RVIA in travel-trailer and fifth-wheel wholesale shipments. No specific full-year sales or earnings guidance is provided in the filing.
- Management said recent reductions from raw-material price highs could benefit margins, partly offset by contractual customer price reductions indexed to certain commodities. Steel, aluminum and other material costs remained volatile; tariffs had increased H1 material costs by $12.1 million year over year.
- Management estimated 2019 depreciation and amortization of $70–$75 million and stock-based compensation of $15–$17 million. It expected remaining 2019 capital spending and acquisitions to be funded primarily from operating cash flow, with periodic revolver borrowings as needed.
- Subsequent event: in August 2019, after quarter-end, LCI acquired Lewmar Marine Limited for $43.5 million, subject to working-capital adjustments. H1 acquisitions included Lavet and Femto, both in Italy; purchase accounting was incomplete at filing.
- Risks include RV cyclicality and dealer inventories, consumer demand, commodity prices and tariffs, competition and pricing, acquisition integration, labor and capacity costs, customer credit, product warranties/recalls, environmental matters, litigation, and international operations. The company disclosed a $7.7 million contingent-consideration liability and ongoing warranty obligations; management did not expect unprovided litigation exposure to be material to financial position or annual results.
Key facts for investors to verify
- Whether RV retail demand and dealer inventory normalization support a recovery in OEM volumes, and whether the late-2019 timing expectation was realized.
- Whether price changes, efficiency gains and easing material costs sustain margins amid tariff and commodity volatility.
- How Aftermarket and adjacent-industry growth, including marine, develops relative to continued dependence on RV OEMs.
- Lewmar’s final purchase-price allocation, funding and contribution, and integration results.
- Cash conversion and working-capital trends, debt levels and covenant capacity; note that reported cash includes substantial acquisition-restricted funds.
- Future warranty, product-recall, environmental, litigation and contingent-consideration costs.