Business context and reporting period
Drew Industries Incorporated, operating through Lippert Components, supplies components for recreational vehicles (RVs), manufactured homes and adjacent markets. This Form 10-Q covers the quarter and nine months ended September 30, 2015; financial figures are unaudited. The filing identifies the registrant as Drew Industries Incorporated, notwithstanding the request metadata naming LCI Industries.
The company reported two segments: RV products and manufactured housing (MH). RV generated 92% of nine-month sales; MH generated 8%. The company operated 42 manufacturing facilities in the United States and Canada.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $345.3 million | $294.3 million | $1,068.8 million | $901.4 million |
| Gross profit | $74.1 million | $62.5 million | $232.6 million | $197.7 million |
| Operating profit | $27.2 million | $23.1 million | $92.6 million | $78.3 million |
| Net income | $17.3 million | $15.5 million | $58.2 million | $50.3 million |
| Diluted EPS | $0.70 | $0.64 | $2.36 | $2.07 |
| Operating cash flow | Not provided separately | Not provided separately | $44.8 million | $67.0 million |
Q3 sales rose 17% and nine-month sales 19% year over year. Q3 gross margin was approximately 21.5% versus 21.2%; operating margin was 7.9% versus 7.8%. Nine-month gross margin was approximately 21.8% versus 21.9%, and operating margin was approximately 8.7% in both periods. The nine-month 2014 comparison includes a $2.0 million loss on the sale of extrusion assets; 2015 includes a $1.6 million gain from terminating the related supply agreement.
Nine-month investing cash outflow was $61.0 million, including $21.8 million of capital expenditures and $41.1 million for acquisitions. Operating cash flow less capital expenditures was approximately $22.9 million, down from $36.9 million in 2014. Management attributed lower operating cash flow primarily to larger increases in inventory and receivables and a smaller increase in accounts payable.
At September 30, cash was $7.3 million, current assets $306.2 million and current liabilities $128.7 million. Long-term indebtedness was $91.8 million: $41.8 million of variable-rate credit-line borrowings and $50.0 million of fixed-rate notes bearing 3.35%. Total debt was $40.0 million at September 30, 2014 and $15.7 million at December 31, 2014. Credit-line availability was $55.5 million; combined remaining availability under the credit and shelf-loan facilities was $155.5 million. The company reported covenant compliance and said available facilities were adequate for anticipated needs over the next 12 months.
Material changes versus comparable periods
- Q3 RV segment sales increased 19% to $313.1 million; MH segment sales increased 5% to $32.2 million. Nine-month RV sales rose 21% to $979.3 million, while MH sales rose 1% to $89.5 million.
- RV growth reflected market-share gains, acquisitions, stronger aftermarket and adjacent-industry sales, and industry production growth. Q3 RV aftermarket sales increased 64% and adjacent-industry sales 59%. Nine-month RV aftermarket sales nearly doubled, partly reflecting acquisitions.
- Q3 consolidated operating margin improved slightly, but management said incremental margins were below its 13%–17% target. Higher fixed costs, capacity and staffing investments, lower-content towable mix, and increased stock-based compensation weighed on margins; lower material costs and improved fixed-cost absorption partly offset these pressures.
- Cash flow from operations fell by $22.2 million year over year for the nine-month period, despite higher earnings. Inventory increased to $178.8 million from $127.1 million at September 30, 2014; receivables increased to $84.4 million from $64.5 million.
- The company paid a $2.00-per-share special dividend totaling $48.2 million in April. It also acquired EA Technologies, Spectal and Signature Seating in 2015; acquired businesses and the Furrion distribution agreement contributed to sales and inventory growth.
Outlook, commentary, risks and unusual items
- Management cited strong RV retail demand and estimated 11% growth in travel-trailer and fifth-wheel retail sales during the first nine months. RVIA projections cited in the filing called for 5% growth in 2015 and 3% in 2016 wholesale shipments for those RV categories. Management said dealer inventories appeared in line with anticipated demand, but cautioned that OEM production could be adjusted if retail demand did not keep pace.
- October 2015 consolidated sales were approximately $129 million, up 11% year over year; excluding acquisitions, they were up 5%.
- The company initiated a program targeting $12 million–$14 million in annual indirect-labor cost savings, with at least $2.5 million of severance charges anticipated in Q4 2015. Management expected 2015 capital expenditures of $28 million–$29 million, depreciation and amortization of $40 million–$42 million, and a full-year effective tax rate of approximately 36%–37%.
- The six-year exclusive Furrion distribution agreement carries minimum purchase obligations of $60 million, $90 million, $127 million and $172 million for successive July-to-June periods beginning July 2015. Missing an annual minimum by more than 10%, subject to the agreement’s carryover provision, may allow Furrion to terminate the agreement or withdraw exclusivity. Furrion agreed to repurchase non-obsolete inventory at cost upon termination.
- A voluntary recall of certain discontinued electrically powered Coach Steps followed an NHTSA evaluation; the company recorded a $1.1 million reserve. Management’s assessment was that other proceedings and claims, beyond amounts provided, were not expected to have a material financial impact, though outcomes remain uncertain.
- Key risks cited include seasonal and cyclical demand, dealer and OEM inventory changes, consumer confidence and financing availability, raw-material price volatility, labor costs, customer concentration, acquisition integration, and the ability to realize cost reductions. Steel and aluminum prices had declined during the first nine months but remained volatile; no commodity derivatives were outstanding at quarter-end.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Implementation of a new ERP system had begun and was expected to take several years.
Important facts for investors to verify
- Whether RV retail demand and dealer inventory levels support the company’s expected production and sales trends, particularly after the reported slowdown in wholesale growth.
- Whether the $12 million–$14 million annual cost-saving target is achieved, and the timing and total cost of severance and implementation.
- Whether operating cash conversion improves as inventory rises and inventory turnover declines; management reported 7.2 turns versus 8.2 for full-year 2014.
- Performance and working-capital implications of the Furrion agreement, including the escalating purchase commitments, inventory exposure and exclusivity conditions.
- Final Coach Step recall costs, contingent acquisition payments, and any material developments in litigation or other contingencies.
- Debt, borrowing availability and covenant headroom as the company funds acquisitions, capital spending and shareholder distributions.