LCI Industries — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. LCI supplies engineered components to recreation and industrial original equipment manufacturers (OEMs) and related aftermarket channels. Its reportable segments are OEM and Aftermarket.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $592.2 million | $650.5 million | Down 9% |
| Gross profit / margin | $132.6 million / 22.4% | $140.7 million / 21.6% | Profit down 6%; margin up |
| Operating profit / margin | $47.8 million / 8.1% | $59.8 million / 9.2% | Profit down 20% |
| Net income | $34.4 million | $47.3 million | Down 27% |
| Diluted EPS | $1.38 | $1.86 | Down 26% |
| Operating cash flow | $52.6 million | $(5.1) million | Improved |
| Capital expenditures | $24.4 million | $26.0 million | Down $1.6 million |
Gross margin improved despite lower sales, while operating margin declined. Management attributed operating-margin pressure mainly to fixed costs spread over lower RV OEM sales and elevated material costs. Higher interest expense and a higher effective tax rate also weighed on earnings. The effective tax rate was 24.0%, versus 19.4%; management cited lower excess tax benefits from equity awards.
Segments and material changes
- OEM: Sales were $531.8 million, down 11%; operating profit was $40.4 million, versus $53.9 million. Travel trailer and fifth-wheel sales declined 22%, and motorhome sales declined 15%; adjacent-industries sales rose 19%.
- Aftermarket: Sales increased 20% to $60.4 million; operating profit rose to $7.3 million from $5.9 million. Management cited market development, customer-service infrastructure, and acquisitions.
- RVIA data cited in the filing show first-quarter wholesale shipments fell 28% for travel trailers and fifth-wheels and 27% for motorhomes. LCI said content per travel trailer/fifth-wheel rose 6% and motorhome content rose 7% over the respective trailing 12-month comparisons.
- Acquisitions completed in the preceding 12 months contributed approximately $31 million of Q1 2019 sales, according to management.
Cash, debt, and liquidity
- Cash was $14.3 million at March 31, 2019. Current assets were $553.1 million and current liabilities $215.2 million.
- Long-term indebtedness was $286.3 million; the debt table reports $286.7 million before the current portion. Net revolving-credit repayments were $7.1 million during the quarter.
- Revolving-facility availability was $364.4 million; availability under the revolving and shelf-loan facilities together was $514.4 million. LCI reported compliance with debt covenants and said it expects adequate funding for anticipated needs over the next 12 months.
- Operating cash flow improved from a use of $5.1 million to a source of $52.6 million, helped by lower inventories and other working-capital movements. Receivables were a significant cash use in both periods.
- The company paid a $0.60-per-share quarterly dividend, totaling $15.0 million.
Outlook, risks, and unusual items
- No specific company revenue or earnings guidance is provided. Management said it expects the RV wholesale cycle to return to normal in late 2019; the RVIA projected a modest decrease in 2019 travel-trailer and fifth-wheel shipments.
- Management expects steel and aluminum costs to remain volatile, citing tariffs, and noted higher foam costs and labor pressures. LCI said pricing increases have historically offset some raw-material inflation, but future pass-through and timing are not assured.
- For fiscal 2019, management estimated depreciation and amortization of $73–$78 million and stock-based compensation of $15–$17 million. Capital spending and acquisitions were expected to be funded primarily from operating cash flow and periodic revolver borrowings.
- LCI adopted lease accounting Topic 842 on January 1, 2019, recognizing $66.4 million of right-of-use assets and $69.0 million of operating lease obligations at adoption. At quarter-end it reported $68.3 million of operating lease liabilities.
- Acquisition-related contingent consideration was recorded at $7.4 million, with estimated undiscounted remaining payments of $9.1 million. Warranty accruals totaled $49.4 million. The company also disclosed potential product-recall, environmental, and litigation exposures; management did not expect unprovided litigation matters to materially affect financial position or annual results.
- Key stated risks include RV demand and dealer inventory cycles, customer and consumer financing, raw-material prices and availability, labor, acquisitions and integration, customer concentration, product liability and recalls, and general economic conditions. Management reported disclosure controls were effective at March 31, 2019.
Investor verification priorities
- Track RV dealer inventory normalization, wholesale shipments, retail demand, and the company’s expected late-2019 return to a normal wholesale cycle.
- Assess whether aftermarket and adjacent-industries growth and higher product content can offset weaker RV OEM volumes.
- Monitor gross and operating margins for evidence that pricing, lean initiatives, and capacity utilization are offsetting tariffs, materials, and labor costs.
- Reconcile operating cash flow and receivables movements with sales trends, and monitor debt, covenant headroom, and contingent payments.
- Review the effect of the higher tax rate, lease obligations, warranty costs, and any product-recall or environmental developments.