LCII

Business Context and Reporting Period

Company: Drew Industries Incorporated (LCI Industries)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: September 30, 2010

Business Overview: The Company manufactures components for recreational vehicles (RVs) and manufactured homes through two reportable segments: the RV Segment (84% of sales) and the Manufactured Housing (MH) Segment (16% of sales). Operations are conducted through wholly-owned subsidiaries Lippert Components, Inc. and Kinro, Inc.

Key Financial Metrics

Note: All figures in thousands except per share amounts.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 59% year-over-year for the nine-month period, driven by a 71% increase in the RV Segment and a 16% increase in the MH Segment. This growth outpaced industry-wide wholesale shipments.
• Profitability Turnaround: The Company returned to profitability, reporting $24.9 million in net income for the nine months ended September 30, 2010, compared to a net loss of $27.0 million in the prior year period. The prior year loss included a $45.0 million non-cash goodwill impairment charge and $6.6 million in "extra" expenses (plant closings, staff reductions) which were not present in 2010.
• Segment Performance: RV Segment operating profit increased to $38.0 million (9 months) from $9.5 million. MH Segment operating profit rose to $8.2 million from $1.8 million.
• Acquisitions: The Company completed three acquisitions in the first nine months of 2010 for aggregate cash consideration of $21.9 million, including intellectual property for RV slide-out mechanisms and leveling systems.
• Cash Flow: Operating cash flow decreased to $20.4 million from $45.1 million, primarily due to a $16.7 million increase in inventory levels to support sales growth, compared to inventory reductions in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management anticipates raw material costs as a percent of sales in the fourth quarter of 2010 will be consistent with the third quarter. Capital expenditures are estimated at $11 million to $13 million for 2010 and $10 million to $12 million for 2011.
• Seasonality: While Q2 and Q3 are traditionally stronger, seasonal trends have been altered by dealer inventory build-ups in late 2009 and early 2010. Management notes that future seasonal trends may differ from historical norms due to the uncertain economic environment.
• Legal Proceedings: A class action lawsuit regarding "Better Bath" tubs was dismissed by the court on September 30, 2010, as plaintiffs lacked standing. Plaintiffs have until November 22, 2010, to appeal. Management believes the outcome will not be material.
• Risk Factors: Key risks include concentration of sales (top two customers represented 42% of sales in the first nine months), volatility in raw material costs (steel, aluminum), and credit availability for consumers purchasing RVs and manufactured homes.
• Unusual Items: The third quarter included a $0.6 million after-tax non-cash gain related to the re-evaluation of earn-out liabilities on acquisitions. The prior year included significant restructuring charges and goodwill impairment.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $16.7 million inventory increase and its impact on future working capital requirements.
• Customer Concentration: Assess the risk associated with the top two customers representing 42% of consolidated sales following their recent consolidation.
• Raw Material Costs: Monitor steel and aluminum price trends, as these significantly impact gross margins.
• Acquisition Integration: Review the performance of the three businesses acquired in 2010 and the potential liability for future earn-out payments (estimated present value of $11.8 million).
• Legal Appeal: Track the status of the appeal regarding the dismissed "Better Bath" litigation.