LCI Industries — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. LCI supplies components to recreational vehicle (RV) and adjacent-industry original equipment manufacturers (OEMs), and to related aftermarket channels.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $498.3 million | $422.8 million | +18% |
| Gross profit / margin | $124.0 million / 24.9% | $108.4 million / 25.7% | +14% profit |
| Operating profit / margin | $59.1 million / 11.9% | $55.7 million / 13.2% | +6% profit |
| Net income | $43.1 million | $36.0 million | +20% |
| Diluted EPS | $1.71 | $1.45 | +18% |
| Operating cash flow | $22.8 million | $43.7 million | Down $20.9 million |
| Capital expenditures | $12.0 million | $6.5 million | Up $5.6 million |
Gross and operating margins declined year over year, while net margin was approximately 8.7%, versus 8.5%. The effective tax rate fell to 26.5% from 34.9%, primarily reflecting a $5.2 million excess tax benefit recognized upon adoption of share-based payment accounting guidance; this boosted reported net income.
OEM sales were $462.0 million, up 18%, and aftermarket sales were $36.3 million, up 20%. OEM operating profit rose to $54.4 million from $50.7 million; aftermarket operating profit fell to $4.7 million from $5.1 million, which management attributed mainly to a greater mix of lower-margin wholesale distributor sales. Travel trailer and fifth-wheel components accounted for about 71% of OEM segment sales in the quarter.
Cash, debt and liquidity
Cash was $64.4 million at March 31, 2017, down from $86.2 million at December 31, 2016. Current assets were $422.0 million and current liabilities $171.2 million. Long-term debt was $49.9 million; the company had no line-of-credit borrowings. Cash used in investing activities was $22.5 million, including $12.0 million in capital expenditures and $10.7 million for acquisitions. Financing used $22.0 million, including $12.4 million in dividends, or $0.50 per share.
Available borrowing capacity under the credit agreement and shelf-loan facility was reported as $297.5 million, subject to covenants and facility terms. The company said it was in compliance with its covenants and expected available liquidity to meet anticipated cash needs for the next 12 months. The shelf facility was extended through March 30, 2020; access to additional Prudential notes is constrained by the credit agreement’s $150 million aggregate debt limit, and the company said it was discussing a proposed amendment.
Material changes and management outlook
- Management cited acquisitions, market-share gains, higher product content per RV, and growth in adjacent industries and aftermarket sales as contributors to revenue growth. Acquisitions completed over the prior 12 months added about $17 million of Q1 2017 sales.
- Travel trailer and fifth-wheel wholesale shipments rose 12% and estimated retail sales rose 8% year over year. Dealers increased inventories by an estimated 33,300 units in the quarter; March retail and inventory figures included a company estimate because published data were unavailable.
- Management described RV industry fundamentals as strong and expressed confidence in growth from product introductions, market-share gains, aftermarket expansion, acquisitions and investment. The filing does not provide specific full-year revenue or EPS guidance. It expected 2017 depreciation and amortization of approximately $50–$55 million and stock-based compensation of $17–$19 million.
- Higher steel, aluminum and labor costs pressured margins; raw-material prices were described as volatile. Management cited fixed-cost absorption, product mix and efficiency initiatives as offsets, but noted continued spending to support growth.
- Operating cash flow was lower mainly because of seasonal receivables growth and smaller increases in payables and accrued liabilities than in the prior-year quarter. Receivables increased $71.2 million; days sales outstanding rose to 22 from 21 year over year.
- The company acquired Italian rail-window manufacturer Sessa Klein in February for $8.5 million at closing plus contingent consideration. Acquisition accounting was preliminary; recorded goodwill was $5.6 million. The company also changed its reportable segments to OEM and Aftermarket; management said the reporting change did not affect consolidated financial results.
Risks, contingencies and unusual items
- Seasonality, RV dealer inventory levels, consumer demand and confidence, customer financing, competition, and the cyclicality of end markets may affect results.
- Commodity cost increases may not be fully or promptly passed through to customers. The company held steel-price derivatives covering 33.6 million pounds through December 2018; a $0.6 million net loss was recorded in cost of sales in Q1.
- Contingent consideration liabilities were $13.4 million at quarter-end, including $5.8 million current; estimated undiscounted remaining payments were $17.8 million. Fair-value changes depend on acquired-product sales forecasts and discount-rate assumptions.
- The six-year Furrion distribution agreement includes minimum purchase obligations of $90 million for July 2016–June 2017, rising to $127 million and $172 million in the following two annual periods, subject to review and revision. Missing an obligation by more than 10% may permit termination or loss of exclusivity under specified conditions.
- The filing discusses potential product-recall, environmental and litigation exposures. Management did not expect liabilities beyond recorded provisions, including anticipated insurance recoveries, to be material to financial position or annual results. The IRS was auditing tax year 2014; resolution was not expected to be material.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. No material changes to the prior 10-K risk factors were reported.
Key facts investors should verify
- Whether RV retail demand and dealer inventory levels support continued OEM growth; Q1 shipment data include an estimate for March retail sales.
- Whether steel, aluminum and labor cost inflation can be offset through pricing, productivity and product mix without further margin pressure.
- Whether receivables, working capital and operating cash conversion improve as sales grow.
- How Sessa Klein integration, other acquisitions and contingent consideration affect future sales, costs and cash requirements.
- The effect of the $5.2 million share-based payment tax benefit on comparisons with future earnings and effective tax rates.
- Whether the proposed credit-agreement amendment changes access to the Prudential shelf facility, and whether the company continues to satisfy borrowing covenants.