Business context and reporting period
LCI Industries’ Form 10-K covers the fiscal year ended December 31, 2017, with audited comparisons for 2016 and 2015. The company manufactures and distributes components for recreational vehicles (RVs), related industries and aftermarket customers. OEM sales accounted for 92% of 2017 revenue; travel trailers and fifth-wheels were the largest end market. The business is seasonal, typically strongest in the second quarter and weakest in the fourth.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2.148 billion | $1.679 billion | +28% |
| Gross profit | $493.1 million | $428.9 million | +15% |
| Operating profit | $214.3 million | $200.9 million | +7% |
| Operating margin | 10.0% | 12.0% | Down 2.0 percentage points |
| Net income, GAAP | $132.9 million | $129.7 million | +2% |
| Diluted EPS, GAAP | $5.24 | $5.20 | +1% |
| Operating cash flow | $155.1 million | $203.4 million | Down $48.3 million |
| Capital expenditures | $87.2 million | $44.7 million | Nearly doubled |
2017 GAAP net income included a $13.2 million non-cash charge from the Tax Cuts and Jobs Act. Excluding that item, management reported non-GAAP adjusted net income of $146.1 million and adjusted diluted EPS of $5.76, versus $129.7 million and $5.20 in 2016. The adjusted 2017 effective tax rate was 31.4%, compared with 37.6% as reported.
OEM revenue rose 28% to $1.977 billion; aftermarket revenue rose 31% to $171.1 million. OEM operating margin declined to 9.6% from 11.7%; aftermarket margin declined to 14.0% from 15.3%. Cash flow from operations fell primarily due to a $78.7 million inventory increase. Cash and cash equivalents were $26.0 million at year-end, down from $86.2 million. Net working capital was $235.1 million, compared with $218.0 million.
At December 31, 2017, long-term debt was $49.9 million, with no borrowings outstanding on the revolving credit line. The company reported $197.6 million of availability under its $200 million credit line and $297.6 million of remaining availability across the credit and shelf-loan facilities, subject to covenant limits. Stockholders’ equity was $652.7 million. Dividends paid totaled $2.05 per share, or $51.1 million, versus $1.40 per share in 2016.
Material changes versus the prior comparable period
- Sales growth reflected an 18% increase in industry wholesale shipments of travel trailers and fifth-wheels, higher content per RV, market-share gains, adjacent-market and aftermarket growth, and $42 million of sales contributed by 2017 acquisitions.
- Operating profit grew more slowly than revenue and operating margin contracted. Management cited higher steel and aluminum costs, increased labor and fixed costs, acquisition-related costs and compensation; better fixed-cost absorption, pricing and efficiency initiatives partly offset these pressures.
- Inventory rose to $274.7 million from $188.7 million, contributing to lower operating cash flow. Inventory turnover nevertheless increased to 7.7 turns from 7.5.
- Capital spending increased to $87.2 million, including approximately $45 million for growth, lean and automation initiatives. Acquisitions of businesses used $60.6 million in cash, compared with $48.7 million in 2016.
- Major 2017 acquisitions were Lexington, SessaKlein and Metallarte. After year-end, the company acquired Taylor Made for a preliminary $88.9 million and Hehr for a preliminary $49.9 million.
Outlook, risks and unusual items
- Management estimated a 2018 effective income tax rate of approximately 22%–24%. It expected 2018 depreciation and amortization of $65 million–$70 million and stock-based compensation of $22 million–$24 million.
- Management viewed RV-industry fundamentals as positive for 2018 and cited an industry forecast for modest growth in travel-trailer and fifth-wheel wholesale shipments. It aimed to outgrow the market through product introductions, market-share gains, aftermarket expansion, acquisitions and investment. These are expectations, not guarantees.
- Key exposures include RV-industry cyclicality and seasonality, dealer and consumer credit availability, inventory levels, customer concentration, raw-material prices and supply, labor availability and costs, and the ability to pass cost increases through to customers. Thor and Berkshire Hathaway subsidiaries together accounted for 63% of 2017 sales.
- Other risks include acquisition integration, international expansion, foreign exchange, product warranty and recall claims, environmental remediation, regulatory compliance and IT/cybersecurity. The company reported existing or former sites affected by hazardous-material releases; timing and ultimate costs are uncertain. Management said pending legal matters, beyond amounts provided and anticipated insurance recoveries, were not expected to materially affect financial position or annual results.
- The $13.2 million TCJA charge was provisional and subject to adjustment. The company also disclosed $12.5 million of recorded contingent-consideration liabilities, with estimated undiscounted remaining payments of $15.3 million. Adoption of the new lease accounting standard was expected to materially increase recognized assets and liabilities.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether RV retail demand and dealer inventories support continued OEM production growth, and how results compare with the industry forecast.
- Whether margins recover as raw-material, labor and capacity costs evolve, and whether price increases offset cost inflation.
- Whether the substantial inventory build converts to sales and cash, and whether operating cash flow improves.
- How the 2018 acquisitions perform, integrate and affect debt, cash generation and contingent consideration.
- Final tax effects of the TCJA, including any adjustments to the provisional charge and the expected 2018 tax rate.
- Customer concentration and the company’s ability to maintain major customer relationships; assess liquidity and debt covenants alongside planned investment and dividends.