Drew Industries Incorporated (LCI Industries) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The registrant in this filing is Drew Industries Incorporated, which manufactured components primarily for recreational vehicles (RVs) and manufactured homes through Lippert and Kinro. The financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $287.2 million | $251.0 million | $539.8 million | $474.6 million |
| Gross profit | $61.4 million | $46.4 million | $109.0 million | $91.2 million |
| Operating profit | $25.7 million | $19.0 million | $39.3 million | $36.3 million |
| Net income | $15.9 million | $11.7 million | $24.2 million | $22.8 million |
| Diluted EPS | $0.67 | $0.52 | $1.03 | $1.01 |
- Q2 sales rose 14%; gross margin was 21.4% versus 18.5%, and operating margin was 9.0% versus 7.6%. Q2 net income increased 36%. Excluding the $0.4 million after-tax executive-succession charge, management reported net income of $16.3 million, or $0.69 per diluted share, up 39% year over year.
- Six-month sales rose 14% and net income rose 6%. Operating margin was 7.3% versus 7.7%, including $1.876 million of 2013 executive-succession charges.
- RV Segment sales grew 16% in Q2 and 15% year to date; Q2 segment operating profit was $22.6 million. Manufactured Housing (MH) Segment sales increased 5% in Q2 and 4% year to date; Q2 segment operating profit declined to $3.8 million from $4.1 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was $33.0 million, down from $48.6 million, reflecting principally a larger seasonal increase in receivables and a smaller increase in accounts payable. Investing cash outflow was $19.0 million, including $17.5 million of capital expenditures. Financing provided $7.9 million; cash increased $21.9 million to $31.9 million.
- At June 30, the company had no debt, $31.9 million cash, and $197.7 million of stated remaining availability under its credit and shelf-loan facilities. The $50 million revolving line had $47.7 million available after letters of credit; the $150 million shelf facility was subject to Prudential’s agreement to purchase notes. The company reported covenant compliance and said liquidity was adequate for anticipated needs over the next 12 months.
- Current assets were $212.1 million and current liabilities $90.9 million. Accounts receivable was $59.5 million; management reported 20 days sales outstanding. The contingent-consideration liability was $9.7 million, with $5.9 million expected to be paid over the next 12 months.
Changes, outlook and notable items
- RV industry wholesale shipments of travel trailers and fifth-wheels increased 11% in the first half; Drew’s related sales rose 13%, with management attributing the outperformance in part to market-share gains. Manufactured-home shipments rose 5%, while MH OEM sales were essentially flat, partly due to customer mix.
- Management cited improved production processes, labor efficiencies, lower material costs and higher sales volume as Q2 margin supports. Higher warranty costs, expanded capacity-related costs and planned investments partly offset these benefits. Steel and aluminum costs remain volatile; management did not expect a significant change in material costs as a percentage of sales in Q3 but noted uncertainty.
- Management cited an RVIA forecast of 8% growth in 2013 travel-trailer and fifth-wheel shipments, implying 3% second-half growth. Retail demand during the summer selling season was identified as an important indicator; weaker retail demand could lead dealers and OEMs to reduce orders. July consolidated sales were reported at $83 million, up 13% year over year; July industry figures were estimates, not yet published.
- The company expected $30–$34 million of 2013 capital expenditures, $26–$28 million of depreciation and amortization, and $10–$11 million of stock-based compensation. It estimated a full-year effective tax rate of 37%–38%.
- CEO Fredric Zinn retired in May; Jason Lippert became CEO and Scott Mereness became President. The corporate headquarters moved from New York to Indiana. The company recorded $1.8 million of pre-tax succession and relocation charges in the first half, expected no further related charges, and projected approximately $2 million of annual G&A savings after the transition, expected to finish in the latter half of 2013.
- The June acquisition of Midstates Tool & Die cost $1.5 million and had approximately $2 million in annualized sales. A $0.1 million impairment charge was recorded for a vacant facility. No goodwill impairment test was required during the first half.
- Risks highlighted include RV dealer inventory and retail-demand shifts, industry cyclicality and seasonality, raw-material price and availability, competition and pricing pressure, customer and dealer financial health, labor availability and costs, acquisition integration, and manufactured-home financing and regulatory conditions. Ordinary-course legal matters were not expected by management to have a material financial impact beyond amounts provided. Management reported effective disclosure controls; no material change in internal controls was reported.
Important facts for investors to verify
- Whether summer retail RV demand supported dealer inventories and the company’s shipment and sales outlook.
- Whether RV margin gains and labor efficiencies persist as seasonal sales decline, while planned capacity and systems investments continue.
- Warranty-claim trends, commodity costs, and the ability to pass future cost increases through to customers.
- Actual timing and realization of the projected $2 million annual savings from the leadership transition and relocation.
- Cash conversion and working-capital requirements, including receivables, inventory and contingent-consideration payments.
- Progress and final terms of the proposed credit-facility extension and line increase; the filing said negotiations were ongoing.