LCI Industries — Q2 2018 Form 10-Q
Business and period: LCI supplies engineered components to recreational vehicle (RV), marine, transportation, housing and other OEM markets, and related aftermarket channels. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $684.5 million | $547.5 million | $1,334.9 million | $1,045.8 million |
| Gross profit | $150.5 million | $131.1 million | $291.2 million | $255.1 million |
| Operating profit | $64.1 million | $63.0 million | $123.9 million | $122.2 million |
| Net income | $47.2 million | $40.1 million | $94.6 million | $83.3 million |
| Diluted EPS | $1.86 | $1.59 | $3.70 | $3.29 |
- Q2 sales increased 25%, while net income rose 18%. Six-month sales increased 28% and net income rose 14%.
- Q2 gross margin was approximately 22.0% versus 23.9%; operating margin was 9.4% versus 11.5%. Six-month gross margin was 21.8% versus 24.4%, and operating margin was 9.3% versus 11.7%.
- Operating cash flow was $78.9 million for the six months, down from $96.7 million. Capital expenditures were $54.5 million and acquisitions used $153.4 million; investing cash outflow totaled $207.0 million. Financing provided $119.8 million, primarily reflecting credit-line activity. Cash declined by $8.2 million to $17.9 million.
- At June 30, cash was $17.9 million, current assets were $549.0 million and current liabilities were $203.4 million. Total assets were $1.205 billion and equity was $713.2 million.
- Debt was approximately $215.8 million, including $162.0 million drawn on the credit line, $50.0 million of shelf notes and $4.5 million of other borrowings. Remaining availability under the credit and shelf facilities was $260.6 million. The company reported covenant compliance and expected adequate liquidity for the next 12 months.
- The six-month effective tax rate was 21.9%, compared with 31.4%, primarily reflecting the lower federal rate under the Tax Cuts and Jobs Act and excess tax benefits from equity compensation.
Material changes and management commentary
- Q2 OEM sales increased 23% to $616.9 million; Aftermarket sales increased 51% to $67.5 million. For the first six months, OEM sales rose 26% and Aftermarket sales rose 45%.
- Acquisitions contributed approximately $64 million of Q2 sales. The company acquired Taylor Made, Hehr and STLA during the first half for preliminary consideration totaling about $153 million, net of cash acquired where applicable. Purchase accounting remained preliminary.
- Despite higher sales, Q2 operating profit increased only modestly, and OEM operating profit declined. Management cited higher steel, aluminum, foam and labor costs, tariffs, acquisition-related amortization and growth investments. It noted pricing, improved fixed-cost absorption and efficiency initiatives as offsets. Raw-material prices were expected to remain volatile.
- RVIA-reported wholesale shipments of travel trailers and fifth-wheels increased 7% in the first half; Q2 shipments were flat year over year. LCI cited content gains and market-share gains as contributors to RV-related sales growth. Management described industry fundamentals as strong and expressed confidence in growth through new products, market share, aftermarket sales, acquisitions and investment. RVIA projected 7% growth in 2018 and 2% in 2019 for travel-trailer and fifth-wheel shipments; these are industry projections, not company revenue guidance.
- Management estimated FY2018 depreciation and amortization of $70–$75 million and stock-based compensation of $20–$22 million. It expected capital investment to focus on growth, automation and lean manufacturing; no specific full-year capex amount was provided.
Risks, contingencies and unusual items
- Seasonality, RV dealer inventory levels, consumer demand and economic conditions can affect results. Management reported dealer inventory broadly in line with anticipated retail demand, while acknowledging shipment and order timing can vary.
- Steel and aluminum tariffs and other input-cost volatility may pressure margins; the company cannot assure that future cost increases can be passed through or that pricing will be timely. Variable-rate debt also exposes the company to interest-rate changes, though management said a hypothetical 0.25 percentage-point rate increase would not materially affect results.
- Operating cash flow was pressured by working-capital movements, including inventory growth; inventory turns fell to 7.0 from 7.8. Days sales outstanding increased to 23 from 20.
- Contingent acquisition consideration had a $7.0 million fair-value liability at June 30, with estimated undiscounted remaining payments of $8.9 million. Product recalls, environmental matters and ordinary-course litigation may create future costs; management did not expect unprovided litigation exposure to be material to financial position or annual results.
- Disclosure controls were concluded effective. The internal-control evaluation excluded the recently acquired Taylor Made, Hehr and STLA businesses under the SEC’s acquisition guidance.
Investor verification checklist
- Confirm how much of sales growth and future earnings reflects acquisitions versus organic growth, including integration progress and final purchase accounting.
- Track raw-material and labor inflation, tariff effects, pricing recovery and segment margins.
- Monitor RV retail demand, wholesale shipments, dealer inventories and LCI’s content-per-unit trends.
- Review working-capital conversion, inventory turnover, cash generation, acquisition spending and debt levels against covenant capacity.
- Assess potential changes in contingent consideration, warranty, recall, environmental and litigation exposures.