LCI Industries — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter filing; quarterly results are included. LCI Industries, formerly Drew Industries Incorporated, supplies components to RV and adjacent-industry manufacturers and aftermarket channels.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1.679 billion | $1.403 billion |
| Gross profit / margin | $428.9 million / 25.5% | $306.0 million / 21.8% |
| Operating profit / margin | $200.9 million / 12.0% | $116.3 million / 8.3% |
| Net income | $129.7 million | $74.3 million |
| Diluted EPS | $5.20 | $3.02 |
| Operating cash flow | $203.4 million | $95.0 million |
| Capital expenditures | $44.7 million | $29.0 million |
- FY2016 sales rose 20%, operating profit rose 73%, and net income rose 74%. Sales growth reflected strong RV shipments, higher content per RV, organic expansion in adjacent markets and aftermarket, and $64 million of sales from 2016 acquisitions.
- OEM revenue was $1.548 billion, up 19%; aftermarket revenue was $130.8 million, up 27%. Segment operating margins were 11.7% and 15.3%, respectively. Travel trailer and fifth-wheel RV components represented about 71% of OEM sales.
- Cash and cash equivalents were $86.2 million at year-end, versus $12.3 million. Net working capital was $218.0 million, versus $147.0 million; current assets were $367.4 million and current liabilities $149.4 million.
- Long-term debt was $49.9 million, comprising fixed-rate notes bearing 3.35% and due in 2020. There were no year-end borrowings under the revolving credit facility; $197.5 million remained available under its $200 million commitment. Total availability under the credit and shelf-loan facilities was reported as $297.5 million, subject to terms and covenants.
- Operating cash flow increased substantially, supported by higher earnings and changes in payables and accrued liabilities. The company paid $34.4 million in dividends and invested $48.7 million in acquisitions.
- Fourth-quarter 2016 sales were $402.9 million and net income was $26.3 million, compared with $334.2 million and $16.1 million, respectively, in fourth-quarter 2015. Fourth-quarter diluted EPS was $1.05 versus $0.65.
Material changes and developments
- LCI completed five acquisitions in 2016 across RV furniture, pontoon furniture, Italian RV products, chassis and seating components, and RV service centers. It acquired Italian train-window maker Sessa Klein for $8.5 million in February 2017.
- The company changed its reporting segments in 2016 from RV and manufactured housing to OEM and aftermarket, reflecting management’s revised focus and internal reporting. This did not affect consolidated income, assets, liabilities, or equity.
- In April 2016, LCI refinanced and expanded its revolving credit facility from $100 million to $200 million and extended its maturity to April 2021. It initiated regular quarterly dividends in 2016, paying $1.40 per share for the year.
- Reported operating-margin improvement reflected stronger fixed-cost absorption, lower costs for certain materials, sales mix and pricing, and cost-efficiency initiatives. Benefits were partly offset by higher fixed costs, staffing and acquisition-related costs.
Outlook, risks, and contingencies
- Management cited strong 2016 RV-industry fundamentals and expected a modest increase in 2017 wholesale shipments of travel trailer and fifth-wheel RVs, based on the RVIA outlook. LCI said it aimed to outgrow the industry through new products, market-share gains, aftermarket growth, acquisitions, and investment; this is management’s expectation, not firm guidance.
- Management estimated a 2017 effective tax rate of approximately 34%–36%. Depreciation and amortization was expected to be $50 million–$55 million, and stock-based compensation $17 million–$19 million. No specific 2017 revenue or earnings forecast was provided.
- Key exposures include RV-industry cyclicality and seasonality, dealer and consumer financing availability, high customer concentration, steel and aluminum price volatility, imported supply and currency exposure, labor availability and costs, acquisition integration, product liability and warranty claims, environmental remediation, and IT and ERP implementation risks.
- Two customers accounted for 63% of consolidated sales in 2016: Thor Industries represented 37% and Berkshire Hathaway subsidiaries 26%. LCI generally lacked long-term customer agreements.
- Under its six-year Furrion distribution agreement, LCI missed the minimum purchase obligation for the year ended June 30, 2016, primarily because of delayed product availability. The parties were discussing revised obligations; Furrion could terminate or remove exclusivity under specified conditions.
- Contingent consideration liabilities were $9.2 million at year-end, with estimated undiscounted remaining payments of $11.6 million. Legal matters and potential environmental remediation were described, but management did not expect unprovided amounts to materially affect financial position or annual results. The filing does not provide a clear quantified estimate for possible environmental or litigation exposure.
- The undrawn Prudential shelf-loan facility expired February 24, 2017; renewal discussions were ongoing. LCI said revolving-credit availability was adequate for expected cash needs over the next 12 months and reported covenant compliance at year-end.
Most important facts for investors to verify
- Whether RV shipments and retail demand sustain the growth underlying 2016 results, and how exposed results remain to RV seasonality and dealer inventories.
- Customer concentration and the stability of relationships with Thor and Berkshire Hathaway subsidiaries.
- Progress on Furrion minimum-purchase revisions, product availability, and the continued exclusivity of the distribution arrangement.
- Integration performance and returns from 2016 acquisitions and Sessa Klein, including final purchase accounting and contingent consideration.
- Renewal status and terms of the expired Prudential shelf-loan facility, alongside revolving-credit capacity and covenant headroom.
- Exposure to raw-material costs, warranty and recall costs, and environmental liabilities; assess whether recorded reserves remain adequate.