Business Context and Reporting Period
Company: Drew Industries Incorporated (Note: Metadata referenced "LCI Industries," but the filing is for Drew Industries, which owns Lippert Components, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2011
Business Overview: The Company manufactures components for recreational vehicles (RVs) and manufactured homes through two reportable segments: the RV Segment (87% of sales) and the Manufactured Housing (MH) Segment (13% of sales). Operations are conducted through subsidiaries Lippert Components, Inc. and Kinro, Inc.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $168,833 | $146,217 |
| Gross Profit | $37,879 | $33,659 |
| Operating Profit | $15,543 | $12,284 |
| Net Income | $9,387 | $7,328 |
| Diluted EPS | $0.42 | $0.33 |
| Cash and Cash Equivalents | $36,728 | $41,733 |
| Total Debt Outstanding | $0 | $0 |
| Operating Cash Flow | $3,083 | $8,662 |
Liquidity: The Company maintains a $50.0 million line of credit (with $44.8 million available) and a $150.0 million "shelf-loan" facility. Total liquidity availability is approximately $174.9 million under credit facilities plus $36.7 million in cash.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15% year-over-year to $168.8 million. The RV Segment grew 18% to $146.2 million, outpacing the 10% industry-wide increase in wholesale shipments. The MH Segment grew 3% to $22.6 million despite a 13% industry decline.
- Profitability: Net income rose 28% to $9.4 million. Operating profit increased 27% to $15.5 million.
- Acquisition: On January 28, 2011, the Company acquired Home-Style Industries for $7.3 million in cash plus contingent consideration. This acquisition added approximately $2 million to Q1 sales.
- Cost Pressures: Raw material costs increased sharply since November 2010, adding approximately $2.0 million to the cost of sales in Q1 2011. Management expects this impact to be greater in Q2 2011.
- Cash Flow: Operating cash flow decreased $5.6 million to $3.1 million, primarily due to an $8.3 million larger increase in accounts receivable and a $2.7 million larger increase in inventories compared to Q1 2010.
Guidance, Outlook, and Risks
- Capital Expenditures: Full-year 2011 CapEx is estimated at $21 million to $23 million. This includes $4 million for purchasing four facilities and $8 million to $9 million for a new aluminum extrusion project.
- Tax Rate: The effective income tax rate for the full year 2011 is expected to be approximately 39%.
- Interest Expense: Expected to be approximately $0.2 million for the full year 2011.
- Outlook: Management anticipates continued strong retail demand for RVs in the Spring and Summer seasons. However, the MH industry is expected to remain low due to the broader housing market environment and credit availability.
- Risks: Key risks include volatile raw material costs (steel, aluminum, vinyl), the ability to pass cost increases to customers, and the potential for future impairment charges related to the marine and leisure operation if industry shipments continue to decline.
- Contingencies: The Company has recorded a $12.1 million liability for contingent consideration (earn-outs) related to past acquisitions.
Investor Verification Checklist
- Raw Material Hedging: Verify the Company's specific strategies for mitigating the projected increase in raw material costs for Q2 2011.
- Inventory Turnover: Monitor inventory levels given the $2.7 million larger increase in Q1 2011 compared to the prior year; ensure turnover remains strong (6.4 turns reported).
- Acquisition Integration: Assess the performance of the Home-Style Industries acquisition and the realization of the projected $60 per unit content increase.
- Contingent Liabilities: Review the $12.1 million earn-out liability and the sales targets required to trigger these payments.
- Market Share: Confirm the sustainability of the 18% RV segment growth relative to the 10% industry growth, specifically regarding market share gains versus price increases.