LCI Industries — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. LCI supplies components to RV and adjacent-industry manufacturers and aftermarket customers. The OEM segment generated 92% of nine-month sales; travel trailer and fifth-wheel RV components represented about 71% of OEM sales.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $554.8m | $412.4m | $1,600.6m | $1,276.0m |
| Gross profit | $121.2m | $105.6m | $376.3m | $330.9m |
| Operating profit | $47.9m | $45.1m | $170.1m | $160.3m |
| Net income | $32.1m | $29.8m | $115.4m | $103.4m |
| Diluted EPS | $1.26 | $1.19 | $4.56 | $4.15 |
- Q3 sales grew 35%, while operating profit grew 6% and net income grew 8%. Operating margin declined to about 8.6% from 10.9%; gross margin was about 21.9% versus 25.6%.
- Nine-month sales grew 25%, operating profit 6%, and net income 12%. Nine-month operating margin was about 10.6% versus 12.6%; gross margin was about 23.5% versus 25.9%.
- Q3 OEM sales rose 35% to $505.9m and aftermarket sales rose 34% to $48.9m. Nine-month OEM and aftermarket sales increased 25% and 29%, respectively. Acquisitions contributed $24m of Q3 sales and $33m of nine-month sales.
Cash, debt and liquidity
- Nine-month operating cash flow was $108.9m, down from $164.1m. Investing used $128.0m, including $60.3m of capital expenditures and $67.9m for acquisitions; financing used $47.3m, including $37.3m of dividends.
- Cash fell to $19.8m from $86.2m at year-end 2016. Receivables rose to $139.1m and inventory to $229.8m; management attributed weaker operating cash flow largely to working-capital growth.
- Long-term debt was $49.9m, consisting of fixed-rate notes; there were no revolver borrowings. Available borrowing capacity was $297.6m, and the company reported compliance with financial covenants. Current assets were $434.1m and current liabilities $198.0m.
Changes, outlook and risks
- Growth reflected higher RV shipments, increased product content and market-share gains, alongside acquisitions. RVIA data showed nine-month travel-trailer and fifth-wheel wholesale shipments up 18%; LCI’s sales in that category rose 25% year to date.
- Margins faced higher steel, aluminum, foam and labor costs, plus increased capacity, staffing and acquisition-related expenses. Management said aluminum costs were more than 20% above the prior year and that price increases were expected to be fully implemented by Q1 2018. Raw-material costs remain volatile.
- Management cited strong RV fundamentals and opportunities in adjacent markets and aftermarket sales. RVIA forecasts cited by the company projected 11% growth in 2017 and 2% in 2018 for travel-trailer and fifth-wheel shipments; these are industry forecasts, not company sales guidance. The filing provides no specific company revenue or earnings guidance.
- Management estimated 2017 depreciation and amortization of $55–$60m and stock-based compensation of $19–$21m. It expected available facilities to cover anticipated cash needs over the next 12 months.
- Risks include seasonality and cyclicality, dealer inventories and consumer demand, raw-material and labor costs, customer credit and concentration, acquisition integration, product warranty/recall exposure, and environmental and litigation matters. Management said recorded legal contingencies beyond existing accruals were not expected to be material; outcomes remain uncertain.
- Three 2017 acquisitions—Metallarte, Lexington and Sessa Klein—added products and markets; purchase accounting remained preliminary. The company recorded $17.0m of contingent-consideration liabilities, with estimated undiscounted remaining payments of $20.2m.
Investor verification points
- Check whether pricing actions offset continued material and labor inflation and support margin recovery.
- Monitor operating cash conversion, receivables, inventory and the low cash balance amid investment, acquisitions and dividends.
- Assess RV retail demand, dealer inventory, wholesale shipments and the extent to which sales growth depends on acquisitions versus organic gains.
- Review acquisition integration, preliminary purchase valuations and contingent-consideration assumptions.
- Reconcile the filing’s excess-tax-benefit amounts: the accounting note reports $5.2m, while MD&A cites $5.9m.