LCI Industries — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. LCI supplies engineered components to recreational vehicle and other recreation and transportation OEMs, and to related aftermarket channels. It reports OEM and Aftermarket segments. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $827.7 | $586.2 | $2,013.2 | $1,807.5 |
| Gross profit | $221.4 | $135.5 | $508.8 | $416.7 |
| Gross margin | 26.8% | 23.1% | 25.3% | 23.0% |
| Operating profit | $94.4 | $49.2 | $159.5 | $162.6 |
| Operating margin | 11.4% | 8.4% | 7.9% | 9.0% |
| Net income | $68.3 | $35.8 | $109.7 | $117.7 |
| Diluted EPS | $2.70 | $1.42 | $4.35 | $4.70 |
Q3 sales increased 41% and net income nearly doubled year over year, reflecting the sharp recovery in RV and marine demand, acquisition contributions, and improved fixed-cost absorption. Nine-month sales rose 11%, but operating profit fell 2% and net income fell 7%, reflecting first-half COVID-19 disruption, among other items.
- Q3 by segment: OEM sales were $642.1 million, up 26%, with $65.5 million operating profit and a 10.2% margin. Aftermarket sales were $185.7 million, up 149%, with $28.9 million operating profit and a 15.6% margin. Acquisitions contributed substantially to Aftermarket growth.
- Nine-month segment results: OEM sales were $1,542.2 million, down 3%, and operating profit was $110.5 million, down from $131.4 million. Aftermarket sales were $470.9 million, up 123%, and operating profit was $49.0 million, up from $31.1 million; its margin declined to 10.4% from 14.8%.
- Cash flow: Nine-month operating cash flow was $212.5 million, versus $209.5 million. Investing used $119.6 million, including $94.9 million for acquisitions and $28.7 million for capital expenditures. Financing used $59.2 million, including $51.5 million of dividends. Cash increased $32.8 million to $68.2 million.
- Balance sheet and liquidity: At September 30, cash was $68.2 million, current assets $795.7 million, and current liabilities $400.5 million. Total indebtedness was $635.9 million, compared with $630.8 million at year-end 2019. Revolver availability was $310.9 million; including potential additional shelf notes, aggregate remaining availability was $460.9 million. The company reported compliance with debt covenants.
- Other metrics: Nine-month interest expense was $10.8 million versus $6.5 million. The nine-month effective tax rate was 26.2%, compared with 24.6%. The company declared quarterly dividends of $0.65, $0.65, and $0.75 per share during the first three quarters of 2020.
Material changes and unusual items
- COVID-19-related shutdowns and reduced customer demand hurt first-half OEM results; most facilities reopened in early May and all were fully operational later in Q2. Management reported record monthly sales in June, July, August, and September as RV and marine demand rebounded.
- Acquisitions materially changed the sales mix. CURT, acquired in December 2019, and Polyplastic, acquired in January 2020, contributed to reported growth. Nine-month Aftermarket sales included $220.7 million from acquisitions and $39.5 million of organic growth.
- Q3 operating margin benefited from higher volume and lower steel and aluminum costs. Nine-month OEM operating profit was pressured by an estimated $31.0 million COVID-19 impact and $18.8 million in commodity-indexed selling-price reductions, partly offset by $15.1 million of lower material costs and $9.8 million of labor savings from efficiency initiatives.
- Nine-month Aftermarket margin was weighed down by lower-margin acquired product mix, a $7.3 million CURT inventory fair-value step-up, and acquisition-related depreciation and amortization. The terminated Furrion distribution arrangement removed historically dilutive-margin sales.
- The company recorded a $49.0 million receivable from Furrion for inventory purchases; $27.0 million was classified as long-term and measured at present value under a proposed payment plan. Repayment timing was under negotiation due to COVID-19 impacts.
- Polyplastic’s purchase price allocation remained subject to measurement-period adjustments, including for acquired intangible assets and pension obligations. Contingent consideration liabilities totaled $6.2 million.
Outlook, risks, and contingencies
No specific full-year revenue or earnings guidance is provided. Management said demand remained elevated but emphasized that the duration and effects of the pandemic, industry seasonality, and a return to historical patterns were uncertain. It planned to remain disciplined on capital spending and non-critical expenses. The company estimated full-year 2020 depreciation and amortization of $95–$105 million and stock-based compensation expense of $15–$20 million; capital expenditures and acquisitions for the remainder of the year were expected to be funded primarily by operating cash flow and periodic revolver borrowings.
- COVID-19 could again disrupt company, customer, or supplier operations; weaken demand; increase costs; impair collections or access to financing; or affect debt covenant compliance and dividends. Supply-chain and transportation interruptions remain risks.
- Other notable exposures include volatile steel and aluminum prices, customer and dealer financial health, seasonality and cyclicality, acquisition integration, product warranties and recalls, environmental matters, and litigation. Management said existing legal matters were not expected to create material additional financial impact beyond amounts provided, while acknowledging outcomes are uncertain.
- Management believed operating cash flow and available credit were adequate for anticipated needs over the next 12 months, but cautioned that pandemic effects could alter liquidity or covenant compliance.
Key facts for investors to verify
- Whether elevated RV and marine retail demand persists, and how wholesale shipments, dealer inventories, and seasonal trends develop.
- Furrion’s repayment progress and timing for the $49.0 million receivable, including the $27.0 million long-term portion.
- Acquisition integration, acquired-business margins, and any remaining purchase accounting adjustments or contingent payments.
- Working-capital and cash-collection trends as sales scale, alongside debt levels, revolver availability, and covenant headroom.
- Whether commodity costs, pricing actions, and COVID-19-related supply or operating disruptions materially change margins or the company’s stated spending plans.