Drew Industries Incorporated — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; unaudited. The filing identifies the issuer as Drew Industries Incorporated, although the request metadata names LCI Industries.
Business context
Drew manufactures components primarily for recreational vehicles (RV) and manufactured housing (MH), through its Lippert and Kinro subsidiaries. The RV segment generated 87% of Q1 sales and the MH segment 13%. The company reported operating 29 U.S. plants.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $223.6 million | $168.8 million | +32% |
| Gross profit | $44.8 million | $37.9 million | +18% |
| Operating profit | $17.4 million | $15.5 million | +12% |
| Net income | $11.1 million | $9.4 million | +18% |
| Diluted EPS | $0.49 | $0.42 | +17% |
| Operating cash flow | $3.2 million | $3.1 million | Roughly unchanged |
Gross margin was approximately 20.1%, down from 22.4%; operating margin was approximately 7.8%, down from 9.2%. Net margin was approximately 5.0%, versus 5.6%. Segment sales and operating profit were $195.6 million and $16.8 million for RV, and $28.0 million and $3.1 million for MH.
Cash was $3.5 million at March 31, 2012, down from $6.6 million at year-end 2011. Current assets were $165.4 million and current liabilities $67.8 million. The company had no debt outstanding at quarter-end; seasonal line borrowings reached $16.2 million during the quarter and were repaid. Availability was $46.7 million under the $50 million revolver, after letters of credit, and the filing reported $193.5 million of remaining availability across the credit and shelf-loan facilities. Prudential was not obligated to purchase notes under the shelf facility. The company said it was in covenant compliance.
Operating cash flow was supported by a $3.9 million inventory reduction but constrained by a $34.9 million increase in accounts receivable. Investing used $6.8 million, including $5.7 million of capital expenditures and $1.2 million of acquisition cash consideration. Financing provided $0.6 million. The company reported $14.4 million of acquisition-related contingent consideration liabilities.
Material changes versus prior period
- Sales rose 32%, with RV segment sales up 34% and MH sales up 24%. RV sales growth outpaced the 11% increase in industry wholesale shipments; MH sales growth trailed the industry’s 32% production increase.
- Revenue growth did not translate proportionately into operating profit growth; margins declined amid higher production and labor costs, acquisition and start-up costs, and increased SG&A.
- Q1 2012 included a $0.6 million non-cash impairment of acquired patent-related intangible assets and a $0.3 million impairment charge on two vacant facilities. A $0.2 million gain from early termination of vacant-facility leases partly offset facility-related expense.
- The effective tax rate fell to 35.7% from 39.4%, primarily because certain federal tax statutes of limitations expired.
Outlook, management commentary and risks
- Management cited record quarterly sales and reported April sales of $80 million, up 34% year over year, or approximately 22% excluding acquisitions; initial May orders were described as strong. These are reported results and commentary, not formal full-year sales guidance.
- Management expected operating improvements in Q2 as recently hired employees gained experience and acquisition, production and start-up costs eased. It also expected the impact of these costs to continue improving.
- Management estimated full-year 2012 capital expenditures of $18–$20 million, including $5 million for the aluminum extrusion operation, and depreciation and amortization of about $23 million. It expected a full-year effective tax rate of approximately 38%.
- RVIA projected a 6% increase in 2012 wholesale shipments of travel trailer and fifth-wheel RVs. Management cautioned that dealer orders could slow if retail demand does not keep pace with production and inventory additions. RV retail demand and dealer inventories remain key uncertainties.
- MH shipments were recovering from a prolonged industry decline, but management cited weak consumer confidence, financing constraints, repossessed homes, low-priced site-built alternatives and potential effects of Dodd-Frank provisions as risks.
- Other material risks include volatile steel and aluminum costs, ability to pass cost increases through to customers, customer and dealer financial health, labor availability and costs, acquisition integration, competition, and litigation. A further decline in small- and medium-sized boat shipments or related profitability could trigger additional impairment of marine-related intangible assets.
- Q1’s greater-than-expected demand caused approximately $0.9 million of additional labor and overtime costs. The company hedged about 10% of anticipated 2012 aluminum purchases with derivatives; the remaining instruments were not designated as accounting hedges.
- No material developments were reported in the identified pending legal proceeding. Management said other ordinary-course claims were not expected to materially affect financial position or annual results beyond amounts provided, while acknowledging uncertain outcomes.
Important facts for investors to verify
- Confirm the issuer and ticker: this supplied filing is for Drew Industries Incorporated, not an entity identified in the filing as LCI Industries.
- Track whether RV retail demand supports dealer inventories and sustains the reported April sales strength and May orders.
- Monitor margin recovery and whether higher labor, production, integration and start-up costs decline as management expected.
- Assess cash conversion and working capital, particularly receivables, inventory trends, and any need for seasonal revolver borrowing.
- Review execution and returns on the aluminum extrusion investment, planned capital spending, and recent acquisitions.
- Monitor contingent consideration estimates and potential further asset impairments, as both depend on sales forecasts and other management assumptions.