LCI Industries — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. LCI Industries supplies engineered components to recreational vehicle, marine, transportation and related markets through OEM and Aftermarket segments. The company reported substantial COVID-19-related disruption early in the quarter, followed by a strong demand rebound and record monthly sales in June.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $525.8 million | $629.1 million | $1,185.4 million | $1,221.2 million |
| Gross profit | $128.7 million | $148.7 million | $287.3 million | $281.2 million |
| Operating profit | $20.8 million | $65.7 million | $65.0 million | $113.4 million |
| Net income | $13.2 million | $47.5 million | $41.4 million | $81.9 million |
| Diluted EPS | $0.52 | $1.89 | $1.64 | $3.28 |
Q2 sales declined 16% year over year; first-half sales declined 3%. Q2 operating margin was 4.0%, versus 10.4% a year earlier. Gross margin was approximately 24.5%, versus 23.6%. The six-month effective tax rate was 26.3%, compared with 24.7%.
- OEM: Q2 sales fell 34% to $367.8 million and operating profit fell to $1.8 million, from $52.7 million. COVID-related shutdowns, lower shipments and the Furrion agreement termination weighed on results. Six-month OEM sales fell 17%.
- Aftermarket: Q2 sales rose 109% to $158.0 million, primarily from acquisitions, while operating profit increased to $19.0 million. Margin declined to 12.0% from 17.1%, reflecting acquired-product mix, acquisition-related amortization and inventory fair-value step-up costs. Six-month sales rose 110%, but operating profit was essentially flat at $20.1 million.
- Acquisitions added approximately $103 million to Q2 sales and $142.7 million to first-half Aftermarket sales. Polyplastic was acquired in January for $95.8 million net of cash acquired, plus contingent consideration; CURT and Lewmar also affected comparisons.
Cash flow, debt and liquidity
- First-half operating cash flow was $102.1 million, down from $180.1 million. Capital expenditures were $14.5 million; operating cash flow less capital expenditures was approximately $87.6 million.
- Investing cash outflow was $105.2 million, including $94.7 million for acquisitions. Financing cash inflow was $32.1 million. Cash increased to $62.3 million from $35.4 million at year-end.
- Total indebtedness was $702.1 million at June 30, versus $630.8 million at December 31, 2019. Revolver borrowings were $346.1 million; reported revolver availability was $251.2 million. Including potential Shelf-Loan Facility notes, aggregate remaining availability was $401.2 million.
- The company reported compliance with debt covenants and said cash flows and available facilities should fund anticipated needs for the next 12 months, while warning COVID-19 could affect covenant compliance or require alternative financing.
- Current assets were $697.3 million and current liabilities $309.9 million. The company paid $32.7 million in dividends during the half year, including $0.65 per share in each quarter.
Changes, outlook and risks
- Temporary production suspensions and customer shutdowns affected results through early Q2. Most facilities reopened in early May and were fully operational by later in the quarter. Retail demand in RV and marine markets rebounded sharply, producing record June net sales.
- Management gave no revenue or earnings forecast. It estimated full-year 2020 depreciation and amortization of $95–$105 million and stock-based compensation expense of $13–$18 million. Capital spending was being managed cautiously.
- COVID-19 remains a key uncertainty, including possible renewed closures, weaker demand, supply interruptions, operating-cost pressures and debt-covenant risks. Management cited low interest rates, low fuel prices and consumer interest in socially distanced recreation as potential supports, but said broader economic effects could outweigh them.
- Furrion owed the company $52.0 million for inventory at quarter-end. Because of pandemic-related payment negotiations, $34.7 million was classified as long-term and discounted; a $2.3 million financing charge reduced first-half OEM operating profit. Management reported no significant customer collection concerns to date.
- Other exposures include product recalls and warranty claims, environmental matters, litigation, commodity-price volatility and contingent acquisition consideration. Management said litigation exposure beyond amounts provided was not expected to be material. The company had $5.8 million of contingent consideration liabilities.
- The company recognized a $6.3 million actuarial gain on Dutch pension plans assumed with Polyplastic in other comprehensive income. The CURT inventory fair-value step-up reduced Q2 net income by $0.5 million, or $0.02 per share.
Investor verification priorities
- Track post-quarter RV and marine retail demand, OEM shipments, dealer inventory levels and whether the June rebound persisted.
- Monitor collection and revised payment terms for the $52.0 million Furrion receivable, including the long-term portion and discount.
- Reconcile acquisition contributions, integration costs, segment margins and remaining purchase-accounting adjustments.
- Review operating cash conversion, receivables and working-capital needs, debt balances, facility availability and covenant headroom.
- Assess the ongoing effects of COVID-19 on facilities, customers, suppliers, capital spending and the quarterly dividend.