LCI Industries (LCII) — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2017; financial comparisons are with the quarter and six months ended June 30, 2016. LCI supplies components to RV and adjacent-industry OEMs and aftermarket channels. The OEM segment represented 92% of first-half 2017 sales; the company operated 52 manufacturing and distribution facilities.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $547.5m (+24%) | $440.8m | $1,045.8m (+21%) | $863.6m |
| Gross profit | $131.1m | $116.9m | $255.1m | $225.3m |
| Operating profit | $63.0m (+6%) | $59.4m | $122.2m (+6%) | $115.1m |
| Net income | $40.1m (+7%) | $37.6m | $83.3m (+13%) | $73.5m |
| Diluted EPS | $1.59 | $1.51 | $3.29 | $2.96 |
| Operating margin | 11.5% | 13.5% | 11.7% | 13.3% |
Q2 gross margin was 23.9% versus 26.5% a year earlier; first-half gross margin was 24.4% versus 26.1%. The filing attributes pressure principally to higher material and labor costs and higher fixed costs, partly offset by sales growth, mix, pricing, and efficiency improvements. First-half effective tax rate was 31.4% versus 35.6%, including a $5.2m benefit from adopting share-based compensation guidance.
- Segments, Q2: OEM sales rose 24% to $502.8m and operating profit was $56.4m; aftermarket sales rose 32% to $44.7m and operating profit was $6.6m.
- Cash flow, first half: operating cash flow was $97.7m versus $133.4m; capital expenditures were $43.3m, and acquisitions used $67.9m. Investing cash outflow was $110.9m; financing cash outflow was $35.1m. Cash declined $48.2m to $38.0m.
- Balance sheet at June 30: current assets $415.1m; current liabilities $195.1m (current ratio approximately 2.1x); long-term debt $49.9m; total liabilities $304.9m; equity $619.8m. No line-of-credit borrowings were outstanding. Revolver availability was $197.6m and total remaining availability under the credit and shelf facilities was $297.6m, subject to covenants.
Changes versus prior comparable period
Sales growth reflected stronger RV wholesale shipments, increased product content and market share, adjacent-industry and aftermarket growth, and acquisitions. First-half travel-trailer and fifth-wheel shipments rose 14%; LCI’s related sales rose 20%. Acquisitions added $17m of Q2 sales and $19m for the first half. Despite higher operating profit in dollars, operating margins narrowed. Operating cash flow fell $35.6m, with working-capital movements and payment timing among the cited factors. Cash-funded capital expenditures and acquisition spending increased substantially.
Outlook, risks and unusual items
- Management described first-half RV demand and industry fundamentals as strong and expressed confidence in growth through market-share gains, product introductions, aftermarket expansion, acquisitions, and investment. RVIA projected 10% growth in 2017 travel-trailer and fifth-wheel wholesale shipments and 3% in 2018. No specific company-wide sales or earnings guidance is provided in the filing.
- Management expected 2017 depreciation and amortization of approximately $55m–$60m and stock-based compensation of $19m–$21m. Capital expenditures were expected to be funded primarily from operating cash flow, with periodic revolver borrowings also possible.
- Key risks include volatile steel and aluminum costs, labor availability and expense, seasonal and cyclical RV demand, dealer inventories, customer financing and consumer confidence, acquisition integration, and the ability to pass cost increases through to customers. The company noted that aftermarket growth investments may increase costs.
- Three 2017 acquisitions—Metallarte, Lexington, and Sessa Klein—were recorded using preliminary valuations. Contingent consideration liability was $16.2m, with estimated undiscounted remaining payments of $20.2m. Product recalls, environmental matters, and ordinary-course litigation may create future costs; management did not expect unprovided litigation exposure to be material.
- The company had $49.9m of fixed-rate debt and no revolver borrowings, was in compliance with debt covenants, and expected adequate financing availability for the next 12 months. Raw-material derivatives covered 26.4m pounds of steel through December 2018; hedges are not designated for hedge accounting.
Most important facts for investors to verify
- How much future sales growth is organic versus acquisition-driven, and whether acquired operations meet integration and synergy expectations.
- Whether rising steel, aluminum, labor, and capacity costs continue to compress margins, and how effectively pricing offsets them.
- Whether operating cash flow and working-capital conversion improve as sales grow, given the first-half cash decline and investment outlays.
- Whether RV retail demand, dealer inventory levels, and wholesale shipments support management’s growth expectations.
- How the preliminary acquisition valuations, contingent consideration, tax audit, and other disclosed contingencies develop.