Business context and reporting period
Drew Industries Incorporated, through Lippert Components (LCI), filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company supplies components for recreational vehicles (RVs), manufactured homes, and adjacent markets; it operated 44 facilities in the United States and Canada. RV products represented 93% of quarterly sales. The business is seasonal, with sales and profits generally strongest in the second quarter.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $422.8 million | $361.5 million | +17% |
| Gross profit | $108.4 million | $76.4 million | +42% |
| Gross margin | 25.6% | 21.1% | +4.5 percentage points |
| Operating profit | $55.7 million | $31.8 million | +75% |
| Operating margin | 13.2% | 8.8% | +4.4 percentage points |
| Net income | $36.0 million | $20.1 million | +79% |
| Diluted EPS | $1.45 | $0.82 | +77% |
| Operating cash flow | $43.5 million | $7.1 million | +$36.4 million |
Sales growth reflected stronger RV shipments and $25 million of sales attributed to acquisitions completed over the preceding 12 months and the Furrion distribution agreement. Management cited higher aftermarket and adjacent-market sales, cost savings, improved fixed-cost absorption, and lower costs for some materials as contributors to margin improvement. The effective tax rate was 34.9%, versus 36.6%, benefiting from higher tax credits.
Segments and material changes
- RV segment: Sales were $391.7 million, up 17%; operating profit was $51.3 million versus $29.1 million. RV aftermarket sales rose 45% and adjacent-industry sales rose 55%. Travel trailer and fifth-wheel sales grew 9%, slightly below industry shipment growth of 11%, partly because entry-level units carry less company content. Motorhome sales rose 28%, with management citing market-share gains.
- Manufactured housing (MH) segment: Sales were $31.1 million, up 16%; operating profit was $4.4 million versus $2.7 million. Industry shipments increased 24%, while segment content per home declined year over year.
- Adjacent-industry and aftermarket sales together represented 21% of consolidated sales, double their share in 2010. After quarter-end, the company changed its internal reporting structure and expected to evaluate revised reportable segments for Q2 2016.
Cash, debt, and liquidity
Cash was $27.9 million at March 31, 2016, compared with $12.3 million at year-end 2015. Current assets were $321.2 million and current liabilities $155.4 million. The company reported $49.9 million of long-term indebtedness, representing $50.0 million of fixed-rate notes; there were no outstanding revolver borrowings at quarter-end. Revolver availability was $97.4 million and total availability under the credit and shelf-loan facilities was $197.4 million. The company was in compliance with its covenants.
Investing cash outflow was $24.3 million, including $18.1 million for acquisitions and $6.3 million for capital expenditures. Financing cash outflow was $3.6 million. Operating cash generation benefited from earnings, lower inventory, and the timing of payables, accrued liabilities, and tax payments; it was partly offset by a seasonal $63.3 million increase in receivables.
Outlook, risks, and unusual items
- Management described RV industry conditions as favorable and cited 11% growth in first-quarter travel-trailer and fifth-wheel wholesale shipments and 7% growth in estimated retail demand. It expected modest industry shipment growth for 2016 and expressed confidence in outperforming industry growth through new products, share gains, aftermarket sales, and acquisitions. This is commentary, not quantified sales or earnings guidance.
- Management estimated a 2016 effective tax rate of 35%–36%, depreciation and amortization of $42–$47 million, stock-based compensation of $15–$17 million, and capital expenditures of $20–$26 million. Additional capital spending could be needed depending on growth, acquisitions, and other initiatives.
- Three acquisitions were completed in 2016: Highwater Marine Furniture and Flair Interiors during the quarter, and Italy-based Project 2000 in May, after quarter-end. Project 2000’s purchase price was $18.8 million plus contingent consideration; it reported approximately $12 million in 2015 sales.
- The six-year Furrion agreement includes minimum purchase obligations of $60 million for July 2015–June 2016, rising to $172 million for July 2018–June 2019. Missing an annual target by more than 10%, subject to specified adjustments, may allow Furrion to terminate or remove exclusivity.
- Contingent consideration liabilities were $10.3 million at quarter-end, with estimated remaining payments of $13.3 million. A voluntary recall of certain Coach Steps, initiated in 2015, had a $1.1 million reserve recorded in that year. Environmental matters and ordinary-course litigation remain contingencies; management did not expect unprovided liabilities to be material to financial position or annual results.
- Steel and aluminum prices remain volatile, and the company cannot assure that cost increases can be passed through to customers or that price changes will be timely. Other cited risks include industry cyclicality, dealer inventories, customer demand and credit, acquisitions and integration, labor availability and costs, and regulatory and environmental obligations.
- On April 27, 2016, the revolving credit facility was refinanced and increased from $100 million to $200 million, with a new maturity of April 27, 2021 and potential additional capacity subject to conditions. The shelf-loan facility was also amended. These were post-quarter events.
Investor verification priorities
- Assess how much sales and earnings growth came from organic demand versus acquisitions and the Furrion agreement, and whether the improved margins are sustainable.
- Track receivables, inventory turnover, and operating cash flow, including the effects of seasonal working capital and tax-payment timing.
- Review the Furrion purchase commitments against actual sales and the agreement’s termination and exclusivity provisions.
- Monitor acquisition integration, contingent consideration estimates, and the Coach Step recall reserve and claims.
- Confirm post-quarter credit-facility terms, covenant headroom, and whether management’s capital-spending and tax estimates remain current.