LCI Industries (Drew Industries Incorporated) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The filing registrant is Drew Industries Incorporated, which operates through Lippert Components. Its business supplies components primarily to recreational vehicle (RV) and manufactured housing manufacturers.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $285.4 million | $252.6 million |
| Gross profit | $63.2 million | $47.6 million |
| Operating profit | $26.0 million | $13.6 million |
| Net income | $16.2 million | $8.4 million |
| Diluted EPS | $0.67 | $0.36 |
| Operating margin | 9.1% | 5.4% |
| Gross margin | 22.2% | 18.8% |
| Operating cash flow | $27.3 million | $(1.1) million |
| Capital expenditures | $6.8 million | $8.9 million |
Sales rose 13% year over year; net income increased 93%. The effective tax rate was 37.7%, versus 37.8%. At March 31, cash was $6.1 million, debt was $10.0 million, and total stockholders’ equity was $337.7 million. The company reported $212.8 million of remaining availability under its credit and shelf-loan facilities and said liquidity was adequate for anticipated needs over the next 12 months.
Segments and material changes
- RV Segment: Sales increased 16% to $259.0 million, representing 91% of consolidated sales. Segment operating profit rose to $23.7 million from $12.3 million. Travel trailer and fifth-wheel component sales benefited from 13% industry shipment growth and company market-share gains.
- Manufactured Housing Segment: Sales fell 8% to $26.3 million; operating profit declined to $2.3 million from $2.5 million. Despite 6% industry shipment growth, the company cited customer mix and market-share losses for certain products.
- Operating-margin improvement reflected better labor efficiency, fewer production inefficiencies, lower warranty and payroll costs, lower material costs, and higher sales spreading fixed costs. These benefits were partly offset by $3–$4 million of higher fixed costs and profit-based incentive compensation.
- Operating cash flow improved by $28.4 million year over year, reflecting higher earnings, inventory reductions, and increased payables and accruals, partly offset by a larger seasonal receivables increase.
- Cash fell from $66.3 million at year-end, principally in connection with the $46.7 million special dividend, acquisitions, and capital spending. Net investing cash use was $52.8 million; financing cash use was $34.7 million.
Outlook, risks, and unusual items
- Management cited a 5% RVIA forecast increase in 2014 travel-trailer and fifth-wheel wholesale shipments. It also noted uncertainty around retail demand, dealer inventories, economic conditions, and consumer confidence. April 2014 sales were approximately $113 million, up 13% year over year; April industry statistics were not yet available.
- Management estimated a 2014 effective tax rate of approximately 37%, depreciation and amortization of $30–$32 million, stock-based compensation of $11–$13 million, and capital expenditures of $32–$36 million. Additional capital spending could be required.
- Two 2014 acquisitions—Innovative Design Solutions and Star Design—had combined stated purchase consideration of approximately $48.8 million, including deferred and contingent consideration for IDS. They added electronic systems and thermoformed plastics capabilities; their results were included from their respective acquisition dates.
- The company entered long-term leases for manufacturing consolidation and expanded warehousing and distribution capacity. Management expects some realignment costs over coming quarters, though not at the scale of 2012–2013.
- In April, the company sold certain aluminum extrusion assets and entered a six-year supply agreement. It expected a roughly $2 million pretax loss in Q2 2014, while anticipating the outsourcing would be immediately earnings-accretive.
- Key risks include RV demand and seasonality, dealer inventory adjustments, raw-material price volatility and ability to pass on cost increases, customer and market-share concentration, labor availability, acquisition integration, and manufactured-housing financing constraints. The filing says outstanding litigation was not expected to have a material financial impact beyond recorded amounts.
Important facts for investors to verify
- Whether RV retail demand and dealer inventory levels support continued production and sales growth.
- Whether improved margins are sustainable as capacity investments, facility relocations, and realignment costs affect results.
- Whether the MH Segment’s content and market-share declines persist despite industry shipment growth.
- Acquisition performance, purchase-price allocations, and contingent consideration, including the sensitivity of estimates to sales forecasts.
- Cash and borrowing needs after the special dividend, acquisitions, and planned capital expenditures; covenant compliance and facility availability.
- The timing and actual impact of the aluminum-asset sale and supply agreement, including the expected Q2 loss and claimed earnings benefit.