Business Context and Reporting Period
Drew Industries Incorporated, through Lippert Components, Inc. (LCI), filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company supplies components to recreational vehicle (RV) and adjacent-industry original equipment manufacturers (OEMs), as well as related aftermarket channels. It operated 45 manufacturing and distribution facilities in the U.S., Canada, and Italy. The filing reorganized reporting into OEM and Aftermarket segments.
Financial Performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $440.8 million | $362.1 million | $863.6 million | $723.5 million |
| Gross profit | $116.9 million | $82.1 million | $225.3 million | $158.5 million |
| Operating profit | $59.4 million | $33.6 million | $115.1 million | $65.5 million |
| Net income | $37.6 million | $20.9 million | $73.5 million | $40.9 million |
| Diluted EPS | $1.51 | $0.85 | $2.96 | $1.67 |
Year-over-year sales grew 22% in Q2 and 19% in the first half; net income rose 80% and 80%, respectively. Q2 gross margin was approximately 26.5% versus 22.7%; operating margin was 13.5% versus 9.3%. First-half gross margin was approximately 26.1% versus 21.9%, and operating margin was 13.3% versus 9.0%. Management attributed improved profitability mainly to higher volume and fixed-cost absorption, lower material costs, acquisitions, cost initiatives, and product mix.
For the first half, operating cash flow was $133.0 million, investing cash outflow $47.1 million, and financing cash outflow $19.7 million; cash increased by $66.3 million to $78.6 million. Operating cash flow benefited from higher earnings, inventory reduction, and the timing of payments for taxes and compensation, partly offset by a larger seasonal rise in receivables. Capital expenditures were $13.0 million and acquisitions used $34.2 million.
At June 30, 2016, current assets were $355.7 million and current liabilities $166.6 million (current ratio approximately 2.1). Long-term indebtedness was $49.9 million, consisting principally of $50.0 million of fixed-rate notes; there were no line-of-credit borrowings. The company had $197.5 million available under its $200 million revolving credit facility and $100 million of remaining shelf-loan capacity, subject to Prudential approval. Total stated availability was $297.5 million, and the company reported compliance with debt covenants.
Material Changes and Business Developments
- OEM sales rose 21% in Q2 and 18% in the first half; Aftermarket sales rose 32% and 37%, respectively. First-half segment operating profit was $105.1 million for OEM and $10.1 million for Aftermarket.
- Growth reflected RV shipment increases, market-share gains, adjacent-industry sales, Furrion electronics distribution, and acquisitions. Acquisitions completed in 2016 were Highwater Marine Furniture, Flair Interiors, and Italy-based Project 2000; management said all were accretive to earnings and integration was underway.
- The company refinanced its revolving credit facility in April, increasing capacity from $100 million to $200 million and extending maturity to April 2021. It also amended its shelf-loan facility.
- Cash dividends were $0.30 per share in each of Q1 and Q2 2016. The prior-year comparison includes a $2.00-per-share special dividend paid in April 2015.
Outlook, Risks, and Contingencies
Management cited strong first-half RV industry conditions and noted RVIA forecasts for towable RV wholesale shipments to increase 6% in 2016 and 2% in 2017. It expects to pursue growth through new products, market-share gains, aftermarket expansion, acquisitions, and investment in engineering and operations; the filing does not provide specific consolidated revenue or earnings guidance. Estimated 2016 capital expenditures were $20–$26 million, depreciation and amortization $42–$47 million, stock-based compensation $15–$17 million, and the full-year effective tax rate approximately 35%–36%.
Steel and aluminum prices remain volatile and had risen from 2015 lows; the company cautioned that it may not be able to pass future cost increases to customers promptly or fully. Other stated risks include seasonality, dealer inventories, consumer demand and financing, customer concentration and financial condition, labor availability and retention, acquisition integration, competition, and environmental and product-recall exposure.
The Furrion distribution agreement carries minimum purchase obligations. The company did not achieve the July 2015–June 2016 obligation, primarily because of the timing and availability of new products; the parties were discussing revisions. Depending on revised terms and purchase shortfalls, Furrion may terminate the agreement or remove exclusivity. Contingent consideration liabilities were $10.5 million, with estimated remaining payments of $13.1 million. Management said ordinary-course litigation and tax matters were not expected to have a material financial impact; the IRS was auditing 2014.
Important Facts for Investors to Verify
- Whether the parties revised Furrion’s purchase obligations and whether exclusivity or distribution rights were affected.
- How much reported growth and margin improvement came from acquisitions, Furrion, market-share gains, volume, and lower material costs, and whether those benefits persist.
- Whether operating cash flow remains strong after the favorable timing of accrued liabilities and the first-half inventory reduction.
- Progress on acquisition integration, contingent consideration payments, and the planned renewal or replacement of the shelf-loan facility expiring in February 2017.
- Whether RV demand, dealer inventories, raw-material costs, and labor costs develop in line with management’s expectations.