LCI Industries — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. LCI supplies engineered components to recreational vehicle, transportation, marine, housing, and related aftermarket markets. Its reportable segments are OEM and Aftermarket.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $586.2 million | $604.2 million | $1,807.5 million | $1,939.2 million |
| Gross profit | $135.5 million | $125.9 million | $416.7 million | $417.1 million |
| Operating profit | $49.2 million | $45.4 million | $162.6 million | $169.3 million |
| Net income | $35.8 million | $33.8 million | $117.7 million | $128.4 million |
| Diluted EPS | $1.42 | $1.33 | $4.70 | $5.03 |
| Operating margin | 8.4% | 7.5% | 9.0% | 8.7% |
Q3 gross margin was 23.1%, versus 20.8% a year earlier; nine-month gross margin was 23.1%, versus 21.5%. Nine-month effective tax rate rose to 24.6% from 22.1%, primarily due to lower excess tax benefits from equity compensation and higher state taxes.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $209.5 million, compared with $107.6 million in 2018. Management attributed the improvement mainly to working-capital movements, including lower inventory.
- Investing cash outflow was $101.3 million, including $53.9 million for acquisitions and $47.8 million of capital expenditures. Financing cash outflow was $94.8 million, including $39.7 million of net credit-facility repayments and $47.5 million of dividends.
- Cash and restricted cash totaled $27.5 million at September 30. Total debt was $272.4 million, down from $294.1 million at December 31, 2018. Revolver borrowings were $198.7 million; reported availability under the revolver was $398.7 million, and remaining availability under the credit and shelf facilities was $548.7 million.
- Current assets were $580.6 million and current liabilities were $256.1 million. The balance sheet included $70.5 million of operating lease liabilities; the company adopted the new lease accounting standard in 2019.
- The company was in compliance with its debt covenants and said cash flows and facility availability were adequate for anticipated needs over the next 12 months.
Changes and management commentary
- Q3 sales declined 3%, while nine-month sales declined 7%. The main pressure was weaker RV OEM demand: U.S. and Canadian travel-trailer and fifth-wheel wholesale shipments fell 13% in Q3 and 18% for the first nine months.
- Q3 OEM sales fell 5%; adjacent-industries OEM sales grew 3%. Aftermarket sales rose 16% in Q3, reflecting $6.0 million of organic growth and $4.4 million from acquisitions. For nine months, Aftermarket sales rose 16%, with $21.6 million organic growth and $7.0 million from acquisitions.
- Q3 operating profit improved despite lower sales. Management cited targeted pricing, manufacturing efficiencies, and $4.7 million lower insurance-related costs in the OEM segment. Higher fixed costs and capacity-related facility costs partly offset these benefits.
- For the first nine months, OEM operating profit declined $13.0 million; Aftermarket operating profit increased $6.3 million. Steel, aluminum, and foam costs remained elevated year to date, with tariffs increasing material costs by $2.0 million and lower scrap pricing costing $3.4 million versus the prior-year period.
Outlook, risks, and unusual items
- Management said the RV dealer inventory correction appeared near completion and expected industry shipments to return to normalized levels by year-end. The RVIA projected a modest full-year decrease in travel-trailer and fifth-wheel wholesale shipments. The filing gives no specific company revenue or earnings guidance.
- Management estimated full-year 2019 depreciation and amortization of $70–$75 million and stock-based compensation expense of $15–$17 million. Remaining 2019 capital expenditures and acquisitions were expected to be funded mainly from operating cash flow, with periodic revolver borrowings as needed.
- Raw-material prices remain volatile; the company uses commodity swaps to hedge part of its steel exposure. Management cautioned that future cost increases may not be fully or promptly passed through to customers. Other stated risks include seasonality, dealer inventories, consumer demand, competition, customer credit, acquisitions, labor and capacity costs, product recalls, and international operations.
- Acquisitions completed in 2019 included Ciesse, Lewmar, Lavet, and Femto. In October, after the quarter-end, LCI acquired SureShade for $14.0 million. Purchase accounting for several acquisitions remained preliminary.
- LCI and Furrion agreed to end their distribution and supply agreement effective December 31, 2019; Furrion will assume distribution from January 1, 2020. LCI expects Furrion to buy certain remaining inventory at LCI’s cost.
- Warranty liabilities totaled $49.7 million at September 30. Contingent consideration liabilities were $7.5 million, with estimated undiscounted remaining payments of $9.1 million. Management said pending legal matters, after expected insurance recoveries, were not expected to have a material financial impact beyond amounts accrued. No material changes to the prior annual report’s risk factors were reported.
Key facts for investors to verify
- Whether RV dealer inventory normalization and industry shipments developed as management expected, and how OEM demand affected subsequent sales.
- Whether margin improvement from pricing and efficiencies offset ongoing commodity, tariff, capacity, and fixed-cost pressures.
- Cash conversion and working-capital trends, acquisition spending, debt levels, and covenant headroom.
- Integration and final purchase accounting for recent acquisitions, including the subsequent SureShade acquisition.
- Financial and operational effects of the Furrion distribution transition, and any changes in warranty, recall, environmental, or litigation exposure.