Drew Industries Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing registrant is Drew Industries Incorporated, which the supplied request identifies as LCI Industries.
Business context
Drew manufactures components primarily for recreational vehicles (RV) and manufactured housing. The RV segment generated 89% of quarterly sales; the manufactured housing (MH) segment generated 11%. The company reported operating 29 U.S. plants.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $252.6m | $223.6m | +13% |
| Gross profit | $47.6m | $44.8m | +6% |
| Gross margin | 18.8% | 20.0% | Down 1.2 percentage points |
| Operating profit | $13.6m | $17.4m | -22% |
| Operating margin | 5.4% | 7.8% | Down 2.4 percentage points |
| Net income | $8.4m | $11.1m | -25% |
| Diluted EPS | $0.36 | $0.49 | -27% |
| Operating cash flow | $(1.1)m | $3.2m | Down $4.2m |
| Capital expenditures | $8.9m | $5.7m | Up $3.3m |
Sales growth was led by the RV segment, up 15% to $224.0m; MH sales rose 2% to $28.6m. RV operating profit fell to $14.5m from $16.8m, and MH operating profit fell to $2.7m from $3.1m. Reported Q1 results included $1.1m of executive succession and relocation charges; excluding those charges, management said net income was $9.1m, or $0.39 per diluted share.
Balance sheet and liquidity
At March 31, 2013, cash was $4.0m, the company had no debt outstanding, and stockholders’ equity was $300.9m. Current assets were $188.4m and current liabilities $89.6m. The quarter-end cash balance was down $5.9m from year-end, reflecting operating cash use and investment spending.
Operating cash flow was pressured by a $12.8m inventory increase and a $32.4m increase in accounts receivable, partly offset by higher accounts payable. Management attributed inventory growth primarily to support record April sales. The company periodically borrowed under its credit line during the quarter, with borrowings reaching $21.2m, and repaid them; it expected seasonal borrowing to recur.
Available borrowing capacity was reported as $197.1m across the credit and shelf-loan facilities, including $47.1m available under the $50m line of credit after letters of credit. The company said it was covenant-compliant and considered liquidity adequate for the next 12 months. It was negotiating a two-year extension of the facilities and a $25m increase to the credit line.
Changes, outlook and material items
- Management attributed lower operating margins versus Q1 2012 to production inefficiencies, expansion and start-up costs, facility consolidation and realignment, elevated staffing ahead of demand, and higher material costs than in late 2012. It said efficiencies were improving sequentially and expected further improvement, particularly in the second half of 2013.
- Management reported record April sales of $100m, up 20% year over year. It estimated April travel-trailer and fifth-wheel shipments rose 15%, and manufactured-home production rose 5%–10%.
- The RVIA projected 2013 wholesale shipments of travel trailers and fifth-wheels to increase 8% to 261,200 units. Management cautioned that future orders depend on retail demand and dealer inventory; Spring and Summer retail sales were described as important indicators. MH industry shipments were essentially flat in Q1.
- Management estimated 2013 capital expenditures of $27m–$32m, depreciation and amortization of $25m–$27m, stock-based compensation of $9m–$10m, and an effective tax rate of approximately 37%–38%. It estimated $1.3m of contingent-consideration accretion expense for full-year 2013. No formal consolidated revenue or EPS guidance is stated in the supplied filing text.
- CEO Fredric Zinn was scheduled to retire May 10, 2013; Jason Lippert was named successor CEO and Scott Mereness successor President. Headquarters relocation to Indiana led to $1.1m of Q1 pre-tax charges, with a further $0.7m expected in Q2 and no additional related charges expected thereafter. Management estimated annual G&A savings of $2m after the transition; related obligations are payable through 2015.
- Contingent consideration liabilities totaled $10.9m, including $5.4m current; the company expected to pay $6.2m over the next 12 months. Actual sales and valuation assumptions could change the liability and earnings impact.
- Steel and aluminum prices were described as volatile. Aluminum derivatives covered about 10% of anticipated annual purchases and were not designated as accounting hedges. Management cautioned that future raw-material cost increases may not be passed through fully or promptly.
- Management cited risks including RV and manufactured-housing demand, dealer and manufacturer inventories, customer credit and concentration, raw-material and labor costs, pricing competition, financing availability, acquisition integration, and realization of efficiency improvements. Ordinary-course legal matters were not expected by management to materially affect financial position or annual results beyond recorded provisions.
Important facts for investors to verify
- Whether the expected second-half production-efficiency gains materialized and improved operating margins.
- Whether April’s record sales continued, and whether RV retail demand supported dealer inventories and subsequent OEM orders.
- Whether inventory, receivables, and seasonal borrowing converted into operating cash flow as sales grew.
- Progress and final terms of the credit-facility extension and proposed $25m line increase.
- Actual succession and relocation costs, timing of the projected $2m annual savings, and payment of contingent consideration.
- Trends in steel and aluminum prices, the company’s ability to pass costs through, and the effect of derivative positions.