LCI Industries — Q3 2022 Form 10-Q
Business and period: LCI Industries supplies engineered components to recreation and transportation OEMs and related aftermarket channels. It reports OEM and Aftermarket segments. This filing covers the quarter and nine months ended September 30, 2022; amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,132.1 | $1,165.3 | $4,312.8 | $3,259.3 |
| Gross profit | $253.1 | $251.6 | $1,126.4 | $751.0 |
| Operating profit | $87.6 | $89.0 | $576.1 | $284.4 |
| Net income | $61.4 | $63.4 | $412.1 | $205.4 |
| Diluted EPS | $2.40 | $2.49 | $16.15 | $8.10 |
- Q3 net sales fell 3%; operating profit fell 2% and net income fell 3%. Gross margin was approximately 22.4% versus 21.6%; operating margin was 7.7% versus 7.6%.
- Nine-month sales rose 32%, while operating profit approximately doubled. Gross margin was approximately 26.1% versus 23.0%; operating margin was 13.4% versus 8.7%. Management attributed much of the improvement to selling-price increases, with commodity, labor, freight, and capacity costs offsetting gains.
- Q3 OEM sales declined 4% to $912.4; Aftermarket sales were essentially flat at $219.7. OEM operating margin improved to 7.1% from 6.8%; Aftermarket margin declined to 10.2% from 11.4%.
- Nine-month OEM sales increased 36% to $3,585.3 and Aftermarket sales increased 15% to $727.5. OEM operating margin rose to 14.0% from 7.9%; Aftermarket margin eased to 10.3% from 12.3%.
- Nine-month operating cash flow was $485.5, versus $12.3 a year earlier. Investing cash outflow was $157.3, including $103.7 of capital expenditures and $55.7 of acquisitions. Financing cash outflow was $364.9. Cash declined $39.5 to $23.4.
- At September 30, total debt carrying value was $1,062.0, compared with $1,303.0 at December 31, 2021. Cash was $23.4; revolver availability was $369.2. Current assets were $1,505.5 and current liabilities $500.1. The company reported compliance with debt covenants.
Material changes and unusual items
- Q3 travel-trailer and fifth-wheel OEM sales fell 18%; Adjacent Industries OEM sales grew 20%. The company said the nearly 40% decline in North American RV wholesale shipments drove lower RV OEM sales. Price realization, market-share gains, acquisitions, and Adjacent Industries growth partly offset volume weakness.
- For the first nine months, U.S. wholesale shipments of travel-trailer and fifth-wheel RVs decreased 10%, and management cited declining retail demand, elevated dealer inventories, fuel prices, and interest rates.
- Acquisitions contributed approximately $38.7 of Q3 sales. 2022 acquisitions included Girard, acquired for approximately $70.7, and two smaller businesses; acquisition and integration effects also affected margins.
- Interest expense for the first nine months increased to $19.4 from $10.8, primarily because of higher rates on variable-rate borrowings. The $50.0 shelf-loan balance was repaid in March 2022.
- Warranty expense provision was $36.4 for the first nine months, versus $18.8 in 2021; the ending accrued warranty liability was $59.1.
Outlook, risks, and contingencies
- Management estimated full-year 2022 U.S. wholesale shipments of travel-trailer, fifth-wheel, and motorhome RVs at approximately 480,000–500,000 units, implying a 45%–50% second-half decrease versus first-half shipments. It expected continued aftermarket volume reduction through year-end due to stocked distribution channels, truck-market chip shortages, inflation, and higher rates.
- Management expected marine and manufactured-housing production to remain near current run rates through the rest of 2022. Estimated 2022 capital expenditures were $110–$130; depreciation and amortization $130–$140; and stock-based compensation $25–$30. The filing does not provide a clear full-year earnings or revenue forecast.
- Key uncertainties include RV retail demand and dealer inventories, seasonality, steel and aluminum prices, labor and freight costs, supply-chain availability, interest rates, and geopolitical and pandemic effects, including the Russia-Ukraine conflict and China-Taiwan tensions. Management said commodity prices were expected to remain elevated near term and noted that future price increases may not fully or promptly offset costs.
- Management believed cash flows and revolver availability were adequate for anticipated cash needs over the next 12 months. It also disclosed possible product-recall, environmental, and litigation exposures; management did not expect liabilities beyond amounts provided, after anticipated insurance recoveries, to be material. A $1.9 reduction in contingent consideration was recorded after payment probability for an acquired product was judged remote.
Important facts for investors to verify
- Whether RV retail demand, wholesale shipments, and dealer inventory levels track management’s assumptions, and how these affect OEM volumes.
- Whether pricing continues to offset commodity, labor, freight, and capacity costs, particularly in the lower-margin Aftermarket segment.
- Cash conversion, inventory and receivables trends, and progress against the $110–$130 million full-year capital expenditure estimate.
- Variable-rate borrowing costs, debt reduction, revolver availability, and continued covenant compliance.
- Acquisition integration and returns, warranty claims, and any changes in recall, environmental, contingent-consideration, or litigation exposures.