LCI Industries — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. LCI Industries supplies engineered components to recreational vehicle and other transportation OEMs and related aftermarket channels. Its reportable segments are OEM and Aftermarket.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $659.7 million | $592.2 million | +11% |
| Gross profit | $158.6 million | $132.6 million | +20% |
| Operating profit | $44.3 million | $47.8 million | −7% |
| Operating margin | 6.7% | 8.1% | −1.4 percentage points |
| Net income | $28.2 million | $34.4 million | −18% |
| Diluted EPS | $1.12 | $1.38 | −19% |
| Interest expense, net | $5.2 million | $2.5 million | Higher year over year |
| Operating cash flow | $44.8 million | $52.6 million | −15% |
Sales growth primarily reflected $99.5 million of incremental sales from acquisitions and organic Aftermarket growth, partly offset by weaker OEM shipments late in the quarter. Gross margin was approximately 24.0%, versus 22.4% a year earlier. The company reported a 27.8% effective tax rate, compared with 24.0%.
Segments and material changes
- OEM: Sales were $532.4 million, essentially flat year over year. Operating profit increased to $43.2 million from $40.4 million and margin improved to 8.1% from 7.6%. Lower commodity costs and manufacturing efficiencies helped; contractual price reductions and COVID-related shutdowns partly offset these benefits. Travel-trailer and fifth-wheel content per unit rose 3%, while motorhome content declined 5%.
- Aftermarket: Sales more than doubled to $127.3 million, primarily from acquisitions, including CURT and Lewmar. Operating profit fell to $1.1 million from $7.3 million; margin was 0.8% versus 12.2%. The CURT inventory fair-value step-up reduced operating profit by $6.2 million, while seasonal product mix and added depreciation and amortization also weighed on results.
- Q1 net income and EPS included a $4.7 million after-tax, non-cash impact from the CURT inventory fair-value step-up, or approximately $0.19 per share.
- The January acquisition of Polyplastic cost $95.8 million net of cash acquired, plus contingent consideration of up to $7.7 million. Acquisition purchase-price allocations remain subject to finalization.
- Furrion distribution ended effective January 1, 2020. Furrion sales had historically carried margins dilutive to the company; LCI reported a $53.0 million receivable for inventory purchased by Furrion, payable over 2020 and the first half of 2021.
Cash, debt and liquidity
- Cash was $98.0 million at March 31, 2020, up from $35.4 million at year-end. Investing cash outflow was $101.7 million, including $95.8 million for acquisitions and $8.0 million of capital expenditures. Financing provided $119.8 million, principally from net revolving-credit borrowings.
- Total indebtedness was $768.8 million, versus $630.8 million at December 31, 2019. Long-term debt on the balance sheet was $750.5 million. Revolver borrowings were $408.3 million; the term loan was $296.3 million.
- At March 31, revolving-credit availability was $191.7 million; availability under the revolver and shelf facility combined was $341.7 million. The company was compliant with debt covenants at quarter-end and said available facilities and operating cash flow were expected to meet anticipated needs for the next 12 months.
- As of April 30, 2020, revolving borrowings were $438.0 million, with $159.3 million of availability and $191.3 million of cash. The company was discussing possible covenant, borrowing and financing options with its banks.
Outlook, risks and unusual items
- COVID-19 caused temporary facility suspensions beginning in March, customer shutdowns and lower demand; the filing says these effects negatively affected Q1, especially OEM operations. Most facilities resumed operations to varying degrees on May 4, 2020. The duration and financial impact remained uncertain, and the company provided no specific revenue or earnings guidance.
- Management described cost and cash-preservation actions including workforce reductions and furloughs, executive and director pay reductions, spending and hiring controls, delayed capital expenditures, lease deferrals and postponed merit increases. The company cautioned these measures might not offset pandemic impacts.
- Management cited possible demand recovery from consumers seeking socially distanced travel, but cautioned that broader economic disruption could outweigh any benefit. Risks include customer and supplier interruptions, raw-material and transportation costs, weaker demand, liquidity and covenant pressure, and possible changes to dividends.
- Q1 RV wholesale shipments of travel trailers and fifth-wheels increased 4%, while motorhome shipments fell 21%. The company noted that historical seasonality may not hold during the pandemic.
- Contingent consideration liabilities were $7.3 million, with estimated undiscounted remaining payments of $8.7 million. Management said ordinary-course litigation, environmental and product-recall matters were not expected to create material additional financial exposure beyond amounts provided, though outcomes are uncertain.
Important facts for investors to verify
- Subsequent-quarter sales, production levels and margins as facilities and OEM customers resume operations.
- Cash collections, revolving-credit usage, covenant headroom and any outcome of discussions with banking partners.
- Whether acquisition integration, CURT seasonal mix and inventory step-up effects continue to pressure Aftermarket profitability.
- Collection timing of Furrion’s $53.0 million receivable and completion of acquisition purchase-price valuations.
- Any changes to the quarterly dividend and the company’s ability to manage pandemic-related uncertainty and working-capital needs.