Business context and reporting period
Drew Industries Incorporated, operating through Lippert Components, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company supplies components mainly to recreational vehicle (RV) and manufactured housing manufacturers. RV products generated 90% of first-half sales; manufactured housing products generated 10%. The company reported seasonality, with sales and profits historically strongest in the second quarter.
Financial performance
Amounts are in millions except per-share data and where indicated.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $321.8 | $287.2 | $607.2 | $539.8 |
| Gross profit | $72.0 | $61.4 | $135.2 | $109.0 |
| Operating profit | $29.1 | $25.7 | $55.2 | $39.3 |
| Net income | $18.6 | $15.9 | $34.8 | $24.2 |
| Diluted EPS | $0.77 | $0.67 | $1.43 | $1.03 |
| Operating margin | 9.1% | 9.0% | 9.1% | 7.3% |
- Q2 sales rose 12%, operating profit 13%, and net income 17% year over year. First-half sales rose 12%, operating profit 40%, and net income 44%.
- Q2 gross margin was approximately 22.4%, compared with 21.4%; first-half gross margin was approximately 22.3%, compared with 20.2%.
- Q2 RV Segment sales increased 15% to $289.8 million, while segment operating profit increased to $28.0 million from $22.6 million. Manufactured housing Segment sales declined 6% to $32.0 million and operating profit fell to $3.1 million from $3.8 million.
- First-half operating cash flow was $55.8 million, versus $33.0 million. Investing cash outflow was $97.4 million, including $82.2 million for acquisitions and $17.9 million of capital expenditures. Financing cash outflow was $24.7 million.
- Cash declined to $4,000 at June 30 from $66.3 million at year-end, reflecting the $46.7 million special dividend and acquisition spending. Current assets were $208.2 million and current liabilities $108.8 million. Total assets were $515.6 million; stockholders’ equity was $359.1 million.
- Long-term borrowings were $22.3 million, at rates of 1.9%–2.25%. The company reported $200.5 million of remaining availability under its credit and shelf-loan facilities, and compliance with its financial covenants.
Material changes and unusual items
- Three 2014 acquisitions added more than $40 million of annualized sales, according to management: Innovative Design Solutions, Star Design, and Actuant’s Power Gear and Kwikee RV business. The acquisitions contributed approximately $5 million of Q2 sales. Purchase prices were $36.6 million, $12.2 million, and $35.5 million, respectively.
- Acquisitions increased goodwill from $21.5 million at year-end to $61.9 million at June 30. Purchase accounting was preliminary for the Power Gear and Kwikee transaction and IDS acquisition.
- The company recorded a $2.0 million pretax loss on the sale of aluminum extrusion assets, alongside a six-year supply agreement. Management said outsourcing was immediately accretive to earnings. Excluding this loss, Q2 operating margin was 9.7%, versus 9.2% excluding prior-year executive succession charges.
- The $2-per-share special dividend was paid in January 2014. The company funded acquisitions and capital spending partly with periodic line-of-credit borrowings.
Outlook, commentary and risks
- Management cited continued RV market growth, market-share gains, new products, acquisitions, and operating-efficiency initiatives. RV wholesale shipments of travel trailers and fifth wheels rose 10% in the first half; motorhome shipments rose 19%. The RVIA forecast an 8% increase in 2014 travel-trailer and fifth-wheel shipments.
- July 2014 consolidated sales were approximately $98 million, up 17% year over year, or approximately 13% excluding acquisitions. Management cautioned that dealer inventories and retail demand could affect OEM orders; June retail data in the filing included an estimate.
- Manufactured-housing shipments rose 5% in the first half, but the company’s MH sales fell 7%. Management attributed the decline to customer mix and lost share in certain products; content per home and per floor each declined 12% over the trailing year.
- Capacity investments and two new leases add more than 700,000 square feet. Management estimated expansion initiatives reduced Q2 diluted EPS by $0.02–$0.03 and anticipated realignment costs over the next several quarters. It forecast full-year 2014 capital expenditures of $34–$38 million and an effective tax rate of approximately 37%–38%.
- Risks highlighted include volatile steel and aluminum prices, inability or delay in passing cost increases to customers, seasonality, consumer demand and dealer inventories, customer credit and concentration, acquisition integration, and manufactured-housing financing constraints. A 100-basis-point rate increase on June 30 debt would reduce annual cash flow by approximately $0.2 million.
- Contingent consideration liability was $6.7 million, with estimated remaining payments of $10.2 million and approximately $2.0 million expected within twelve months. Management said pending litigation was not expected to create a material additional financial impact, while noting outcomes are uncertain.
- Management expected 2014 depreciation and amortization of $30–$32 million and stock-based compensation of $11–$13 million. It expected facility availability to cover anticipated cash requirements for the next twelve months.
Most important facts for investors to verify
- Whether RV retail demand sustains production and whether dealer inventories remain aligned with demand.
- Whether acquisition revenue, synergies, integration, and preliminary purchase-price allocations meet management’s expectations.
- How expansion spending, realignment costs, and higher fixed costs affect margins and cash generation.
- Whether manufactured-housing market share and product content stabilize after the reported declines.
- Cash and borrowing needs after the special dividend and acquisitions, along with covenant compliance and contingent-consideration payments.
- That this filing is for Drew Industries Incorporated, not a registrant named LCI Industries; verify the applicable corporate identity and filing history when comparing periods.