Business Context and Reporting Period
Company: Drew Industries Incorporated (LCI INDUSTRIES)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Drew Industries operates two reportable segments: the Recreational Vehicle (RV) products segment (79% of 2009 sales) and the Manufactured Housing (MH) products segment (21% of 2009 sales). The Company manufactures components such as chassis, windows, doors, axles, and furniture for these industries. Operations are conducted through subsidiaries Kinro, Inc. and Lippert Components, Inc., with 24 manufacturing facilities across 12 states.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Sales | $397.8 million | $510.5 million |
| Operating Profit (Loss) | ($35.6 million) | $19.9 million |
| Net Income (Loss) | ($24.1 million) | $11.7 million |
| Net Income (Loss) Per Share (Diluted) | ($1.10) | $0.53 |
| Operating Cash Flow | $63.3 million | $4.7 million |
| Cash and Short-Term Investments | $65.4 million | $8.7 million |
| Total Debt | $0 | $8.7 million |
| Working Capital | $113.7 million | $84.4 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 22% to $397.8 million, driven by a 15% decline in the RV Segment and a 40% decline in the MH Segment due to severe economic downturns and reduced industry shipments.
- Profitability: The Company reported a net loss of $24.1 million, compared to net income of $11.7 million in 2008. This was primarily due to a $45.0 million non-cash goodwill impairment charge recorded in the first quarter of 2009.
- Segment Performance:
- RV Segment: Sales fell 15% to $312.5 million; operating profit was $20.5 million.
- MH Segment: Sales fell 40% to $85.3 million; operating profit was $3.8 million.
- Liquidity Improvement: Despite the net loss, the Company generated $63.3 million in operating cash flow, largely due to a $37.5 million reduction in inventory. The Company paid off all outstanding debt, ending the year with $65.4 million in cash and short-term investments.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a recovery in the RV industry, citing a 31% projected increase in industry-wide wholesale shipments for 2010. Sales for the first two months of 2010 more than doubled compared to the same period in 2009. No industry forecast exists for the manufactured housing sector, which is expected to remain low in the first half of 2010.
- Cost Management: Aggressive cost-cutting measures implemented since 2006 have improved annual operating profit by nearly $25 million compared to a scenario without these actions. Fixed cost reductions are expected to benefit 2010 results by an additional $3 million.
- Acquisitions: The Company completed several small acquisitions in 2009 (QuickBite coupler, tool box design, entry doors) and announced a potential acquisition of Schwintek, Inc. assets in February 2010.
- Risks:
- Customer Concentration: Two customers (Thor Industries and Berkshire Hathaway subsidiaries) accounted for 49% of consolidated net sales in 2009.
- Raw Material Costs: Steel and aluminum costs are volatile; increases in the second half of 2009 are expected to modestly reduce 2010 operating profit.
- Legal Contingency: A class-action lawsuit regarding "Better Bath" tubs alleges non-compliance with HUD flame spread standards. While the Company believes the products are compliant and intends to vigorously defend the claim, a material liability could result if the court rules against them.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the discounted cash flow model that led to the $45 million write-off of all goodwill.
- Customer Concentration: Assess the financial stability of Thor Industries and Berkshire Hathaway subsidiaries, which represent nearly half of total sales.
- Inventory Levels: Confirm that the $37.5 million inventory reduction was driven by demand rather than obsolescence, and monitor future inventory build-up.
- Legal Proceedings: Monitor the status of the Gonzalez vs. Drew Industries class-action lawsuit regarding bathtub safety standards.
- Debt Covenants: Review the leverage ratio covenants on the $50 million line of credit and $125 million shelf-loan facility, noting that availability is currently limited to $37.8 million due to EBITDA thresholds.