LCI INDUSTRIES annual report, FY2013

Business context and reporting period

The supplied filing is Drew Industries Incorporated’s Form 10-K for the fiscal year ended December 31, 2013, not a filing under the name “LCI Industries.” Drew, through Lippert Components, made components primarily for recreational vehicles (RV) and manufactured homes. The RV segment represented 88% of sales; manufactured housing represented 12%. The filing reports fourth-quarter results as well as full-year results.

Financial performance and liquidity

Gross margin was approximately 21.0% versus 18.7%; operating margin was 7.7% versus 6.5%. Management attributed improved profitability mainly to manufacturing efficiencies, lower 2013 material costs and greater fixed-cost absorption. Cash flow less capital expenditures was approximately $50.1 million in 2013. The company paid a $2.00-per-share special dividend in January 2014, totaling $46.7 million; the dividend was recorded as payable at year-end.

Fourth-quarter 2013 sales were $224.9 million versus $200.2 million in the prior-year quarter; net income was $11.1 million versus $4.7 million.

Material changes versus the prior period

• Full-year sales increased 13%, while net income increased 34%. RV segment sales rose 14%; manufactured housing segment sales rose 1%.
• RV sales growth exceeded the 10% increase in wholesale shipments of travel trailers and fifth-wheel RVs. Sales to adjacent industries and the RV aftermarket also grew, by 26% and 33%, respectively.
• Manufactured-housing OEM sales were essentially flat even as industry shipments increased 10%; content per home and per floor each declined 9%, reflecting customer mix and market-share losses in certain products.
• RV segment operating margin improved to 7.6% from 6.0%; manufactured housing margin eased to 9.8% from 10.3%.
• Executive succession and headquarters relocation generated $1.876 million of 2013 charges, compared with $1.456 million in 2012. Management expects approximately $2 million in annual general and administrative savings from the completed transition and relocation.

Outlook, risks and unusual items

• No formal company-wide earnings or revenue guidance is stated. The filing cites an industry forecast for 4% growth in 2014 wholesale shipments of travel trailers and fifth-wheel RVs. First-two-month 2014 sales were approximately $176 million, up 5% year over year; management noted severe January weather disruptions and said recovery of delayed production was uncertain.
• Management estimated 2014 capital expenditures of $32–$36 million, depreciation and amortization of $27–$29 million, an effective tax rate of about 37%, and seasonal working-capital cash needs of $20–$30 million.
• Raw-material prices, especially steel and aluminum, were volatile and had increased in early 2014. The company warned it might not be able to pass cost increases through to customers promptly or fully.
• Customer concentration is significant: Thor accounted for 31% of 2013 sales and Berkshire Hathaway subsidiaries for 28%. The loss of either customer could materially affect results.
• Results are exposed to cyclical and seasonal RV and manufactured-housing demand, consumer and dealer financing availability, dealer inventories, fuel prices, competition, labor availability and acquisition integration. Environmental remediation costs may arise; ordinary-course litigation was not expected by management to create material exposure beyond recorded amounts.
• At year-end, unused availability under the credit and shelf-loan facilities was reported at $197.8 million. The revolving facility was increased to $75 million and extended to January 2019 in February 2014; the $150 million Prudential shelf facility was renewed through February 2017. The shelf facility is uncommitted and does not obligate Prudential to buy notes.
• Subsequent events included the February 2014 acquisition of Innovative Design Solutions for $36 million, plus contingent consideration, and a nine-year Goshen facility lease with $6.1 million in minimum payments.

Important facts for investors to verify

• Confirm the issuer and security identity: the source document names Drew Industries Incorporated and ticker DW, whereas the request metadata names LCI Industries.
• Review the sustainability of RV-driven growth and whether dealer retail demand supports production and inventory levels.
• Track customer concentration, manufactured-housing content per unit, and the company’s ability to pass through steel and aluminum cost changes.
• Assess execution and costs of capacity expansion, automation, the IDS acquisition, and the expected headquarters-related savings.
• Reconcile year-end cash and the dividend payable with the January 2014 dividend payment, and monitor working-capital use and facility borrowing.
• Note that the filing reports effective internal control over financial reporting and an unqualified audit opinion from KPMG.