LCI Industries — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
LCI supplies engineered components to recreational vehicle (RV), marine, transportation, housing and other original equipment manufacturers (OEMs), and sells replacement products through aftermarket channels. The OEM segment accounted for 91% of 2018 sales; aftermarket accounted for 9%. The company operated more than 65 manufacturing and distribution facilities.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2,475.8 million | $2,147.8 million |
| Gross profit / margin | $520.3 million / 21.0% | $493.1 million / 23.0% |
| Operating profit / margin | $198.8 million / 8.0% | $214.3 million / 10.0% |
| Net income | $148.6 million | $132.9 million |
| Diluted EPS | $5.83 | $5.24 |
| Cash from operations | $156.6 million | $152.7 million |
| Capital expenditures | $119.8 million | $87.2 million |
| Cash and cash equivalents at year-end | $14.9 million | $26.0 million |
| Year-end debt carrying value | $294.1 million | $49.9 million |
| Working capital | $349.1 million | $235.1 million |
Fourth-quarter 2018 revenue was $536.6 million versus $547.1 million in Q4 2017; net income was $20.2 million versus $17.5 million, and diluted EPS was $0.80 versus $0.68. Q4 gross profit was $103.3 million, implying a gross margin of approximately 19.2%, compared with approximately 21.3% a year earlier.
FY2018 OEM sales rose 13% to $2,242.6 million, while OEM operating profit fell to $167.5 million from $190.3 million and segment margin declined to 7.5% from 9.6%. Aftermarket sales rose 36% to $233.2 million; segment operating profit increased to $31.3 million, with margin of 13.4% versus 14.0%.
The lower 2018 effective tax rate—22.8% versus 37.6%—helped lift GAAP net income despite lower operating profit. Results included a $0.6 million non-cash TCJA-related charge in 2018, compared with $13.2 million in 2017. Excluding those charges, management reported adjusted net income of $149.2 million in 2018 and $146.1 million in 2017; these are non-GAAP measures.
Operating cash flow was slightly higher year over year, but investing used $302.8 million, primarily for $119.8 million of capital expenditures and $184.8 million for acquisitions. Cash flow from financing was $135.1 million, including $240.0 million of net revolving-facility borrowings, $59.3 million of dividends and $28.7 million of share repurchases. Year-end current assets were $526.7 million and current liabilities $177.6 million. The company reported $240.1 million outstanding on its revolving facility and $357.7 million of availability under that facility; stated remaining availability under the revolving and shelf facilities together was $507.7 million.
Material changes and management commentary
- Revenue increased 15%, including approximately $231 million from 2018 acquisitions. The four acquisitions were Taylor Made, Hehr, ST.LA. and Smoker Craft.
- Adjacent-industry OEM sales increased 49% to $614.6 million. Aftermarket growth also reflected acquisitions and investment in customer-service infrastructure.
- Travel-trailer and fifth-wheel RV wholesale shipments fell 3% in 2018, while estimated retail sales rose 4%; motorhome wholesale shipments fell 8%. Management said dealer inventory normalization disrupted the usual wholesale cycle and expected a return to the normal cycle around mid-2019.
- Management attributed margin pressure principally to higher steel, aluminum and foam costs, tariffs and tariff uncertainty, increased labor costs, capacity and staffing investments, and acquisition-related amortization. Pricing, adjacent-market growth and efficiency efforts partly offset these pressures.
- Capital expenditures were approximately $120 million, including about $75 million for growth, lean manufacturing and automation initiatives. Average facility utilization was approximately 55% of practical capacity.
- The company amended its credit agreement in December 2018, increasing revolving capacity from $325 million to $600 million and extending maturity to December 2023. It reported compliance with debt covenants at year-end.
- Management estimated a 2019 effective tax rate of 24%–26%; depreciation and amortization of $73–$78 million and stock-based compensation of $16–$18 million were also expected. The RVIA projected a modest 2019 decline in travel-trailer and fifth-wheel wholesale shipments.
Risks, contingencies and unusual items
- Customer concentration is substantial: Thor represented 31% and Berkshire Hathaway subsidiaries 23% of 2018 sales, or 54% combined.
- Results are exposed to RV and other discretionary-market cyclicality, dealer inventories and financing, consumer credit availability, seasonality, and fuel prices. Steel and aluminum represented approximately 45% and 15% of raw-material costs, respectively; price volatility and the ability to pass through increases remain risks.
- Debt increased materially with acquisitions and investment. Revolver borrowings are variable-rate; the filing estimates a 100-basis-point rate increase would reduce annual cash flows by about $2.4 million at year-end borrowing levels.
- Acquisition integration, warranty claims, product recalls and liability, environmental remediation, foreign operations and currency, tariffs and import disruption, and IT/cybersecurity risks are discussed. Management believed unprovided legal liabilities would not be material, while noting outcomes are uncertain.
- Reported operating results include the TCJA-related charges noted above. Acquired businesses contributed $211.2 million of 2018 revenue and $190.5 million of year-end assets; their internal controls were excluded from the company’s 2018 controls assessment. Management and the auditor reported effective internal control over financial reporting for the assessed operations.
Investor verification points
- Reconcile the reported revenue and profit growth with acquisition contributions, organic growth, pricing and market-share changes.
- Track OEM and consolidated margins, especially the effects of commodity costs, tariffs, labor, and price pass-throughs.
- Monitor RV dealer inventories, wholesale shipments and retail demand against management’s mid-2019 cycle expectation and the 2019 industry outlook.
- Review debt, cash generation, acquisition spending, covenant headroom and variable-rate exposure as integration and capital needs continue.
- Assess customer concentration, acquired-business integration, warranty and recall reserves, and the potential costs of environmental or other contingencies.