Business context and reporting period
This is Drew Industries Incorporated’s Form 10-K for the fiscal year ended December 31, 2011, including fourth-quarter results. The filing identifies the issuer as Drew Industries; it is the company associated with the LCI Industries name in the request. Drew manufactures components principally for recreational vehicles (RV) and manufactured housing (MH). RV represented 84% of 2011 sales and MH 16%.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $681.2 million | $572.8 million |
| Operating profit | $48.5 million | $45.4 million |
| Net income | $30.1 million | $28.0 million |
| Diluted EPS | $1.34 | $1.26 |
| Cash from operations | $36.8 million | $42.1 million |
| Capital expenditures | $24.3 million | $10.1 million |
Annual gross profit was $139.7 million, or 20.5% of sales, versus $126.2 million, or 22.0%, in 2010. Operating margin was 7.1%, versus 7.9%. RV sales rose 20% to $570.6 million, while segment operating profit increased 3% to $45.7 million; its margin declined to 8.0% from 9.3%. MH sales rose 16% to $110.5 million and segment operating profit increased to $12.0 million; its margin improved to 10.8% from 10.0%.
Fourth-quarter sales were $159.6 million versus $106.2 million in Q4 2010; gross profit was $27.8 million versus $23.1 million; pretax income was $5.8 million versus $4.6 million; and net income was $4.1 million versus $3.1 million. Diluted EPS was $0.18 versus $0.14. Fourth-quarter gross margin was approximately 17.4%, compared with 21.7% a year earlier.
Operating cash flow fell despite higher earnings, principally due to working-capital investment, including higher receivables and inventory. At year-end, cash was $6.6 million, working capital was $85.7 million, total assets were $351.1 million and stockholders’ equity was $277.3 million. The company had no debt outstanding; $46.4 million was available under its revolving line, and reported remaining availability across its credit and shelf facilities of $188.8 million. Borrowings under the line peaked at $19.2 million during 2011.
Material changes versus the prior comparable period
- Sales growth exceeded industry growth: RV segment sales increased 20% versus 7% growth in wholesale travel-trailer and fifth-wheel shipments; MH sales increased 16% versus 3% growth in manufactured-home production.
- Management attributed outperformance to acquisitions, market-share gains, higher product content per unit, new products, adjacent-market sales and price increases. Adjacent-market sales rose 75% to $45 million.
- Five businesses were acquired in 2011 for approximately $50.3 million in cash consideration. These added about $40 million of sales after acquisition dates; management estimated they could add a further $55 million of sales in 2012 based on historical run rates.
- Cash from operations decreased to $36.8 million from $42.1 million, while investing cash outflow increased to $69.1 million, including $50.3 million for acquisitions and $24.3 million in capital expenditures.
Outlook, management commentary, risks and contingencies
- For the first two months of 2012, sales were approximately $140 million, up 37% year over year; excluding acquisitions and price increases, management reported growth of approximately 19%. The RV industry association projected 6% growth in 2012 wholesale shipments of travel trailers and fifth-wheels. Management expressed confidence in outperforming industry growth, while noting retail demand and economic conditions remained uncertain.
- Management expected $10–$20 million of seasonal working-capital cash use in early 2012 and approximately $17 million of 2012 capital expenditures, including $3 million for the aluminum-extrusion operation. It expected 2012 depreciation and amortization of approximately $23 million and an effective tax rate of approximately 38%.
- Raw-material inflation, particularly steel and aluminum, and unusually high production costs in one product line, along with acquisition integration and start-up costs, reduced 2011 net income by approximately $7 million in aggregate. Management said these factors had improved in recent months and expected further improvement; the timing and extent are uncertain.
- Key risks include economic and industry cyclicality, consumer and dealer financing availability, dealer inventories, volatile raw-material costs and ability to pass them through, labor availability, customer financial health and concentration, and acquisition integration. Two customers represented 36% and 27% of consolidated sales, respectively.
- A purported class action over manufactured-home bathtub flame-spread standards remained on appeal after all claims were dismissed at trial level. The company said independent testing supported compliance and considered a material loss remote, but the insurer had denied coverage. Environmental remediation obligations and future impairment of marine/leisure intangibles were also identified as potential exposures; no material environmental impact was forecast, subject to uncertainty.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether the strong early-2012 sales trend continued, and how much growth came from organic volume, acquisitions and price increases.
- Whether lower segment margins and Q4 gross margin recover as raw-material costs, production inefficiencies and integration costs change.
- Whether working capital and inventory levels convert into cash as sales grow, given lower operating cash flow and planned seasonal cash use.
- Actual acquisition performance, integration progress, contingent earn-out payments and returns on the aluminum-extrusion investment.
- Customer concentration, credit and demand conditions in RV and manufactured housing markets, and developments in the bathtub litigation and environmental matters.