Business Context and Reporting Period
Company: Drew Industries Incorporated (Note: Request metadata listed "LCI INDUSTRIES," but the filing is for Drew Industries).
Reporting Period: Fiscal year ended December 31, 2007.
Operations: The Company operates two reportable segments: the Recreational Vehicle (RV) Products Segment (74% of 2007 sales) and the Manufactured Housing (MH) Products Segment (26% of 2007 sales). Operations are conducted through wholly-owned subsidiaries Kinro, Inc. and Lippert Components, Inc. As of December 31, 2007, the Company operated 33 manufacturing facilities in 14 states, down from 48 facilities in 2005 due to consolidation efforts.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Net Sales | $668.6 million | $729.2 million |
| Operating Profit | $66.0 million | $55.3 million |
| Net Income | $39.8 million | $31.0 million |
| Diluted EPS | $1.80 | $1.42 |
| Operating Margin | 9.9% | 7.6% |
| Working Capital | $89.9 million | $62.0 million |
| Total Assets | $345.7 million | $311.3 million |
| Long-term Obligations | $23.1 million | $47.3 million |
| Cash & Equivalents | $56.2 million | $6.8 million |
| Operating Cash Flow | $84.9 million | $67.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 8% ($61 million) primarily due to an organic sales decline of approximately $106 million driven by downturns in both the RV and manufactured housing industries. This was partially offset by $18 million in acquisition-related sales and $28 million in price increases.
- Profit Growth: Despite lower sales, Net Income increased 28% and Operating Profit increased 19%. This was driven by significant cost-cutting measures, including the closure of 18 facilities and the reduction of over 120 salaried employees, which added approximately $6.1 million to operating profit.
- Segment Performance:
- RV Segment: Sales decreased 3%, but operating profit increased 45% to $63.1 million due to margin expansion (12.8% vs 8.6%) and the elimination of losses from a closed Indiana specialty trailer operation.
- MH Segment: Sales decreased 20% and operating profit decreased 25% to $15.1 million, reflecting an 18% industry-wide decline in manufactured home production.
- Debt Reduction: Long-term obligations decreased significantly from $47.3 million to $23.1 million, aided by strong operating cash flows and the repayment of $15 million in Senior Promissory Notes.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions: Completed three acquisitions in 2007: Extreme Engineering/Pivit Hitch ($10.8M), Coach Step ($3.0M), and Trailair/Equa-Flex (minimum $5.7M). These added new product lines including specialty trailers and suspension systems.
- Stock Repurchase: Authorized a repurchase of up to 1 million shares in November 2007; no shares had been repurchased as of February 29, 2008.
- Raw Material Costs: Steel represents ~50% of raw material costs. Suppliers notified the Company of cost increases of 10% or more effective Q1 2008. The Company historically passes these costs to customers but noted competitive pressures may limit this ability.
- Legal Contingencies:
- Weekend Warrior/Zieman: Class action regarding defective trailer frames settled; judgment approved Feb 2008 with no material liability expected.
- Gonzalez vs. Drew/Kinro: Class action alleging "Better Bath" tubs violate HUD fire safety standards. Company denies allegations citing independent testing compliance. Class certification was denied for the original plaintiff; a new plaintiff was added in March 2008. Outcome remains uncertain.
- Tax Audit: Indiana Department of Revenue audit for 1998-2000 resulted in a $1.2 million proposed adjustment. Company appealed; trial scheduled for September 2008.
- Industry Risks: Significant exposure to financing availability for manufactured homes (chattel loans) and RVs, gasoline prices, and consumer confidence. The MH industry has seen a 74% production decline since 1998.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top two customers (Thor Industries at 23% and Berkshire Hathaway subsidiaries at 20% of consolidated sales).
- Raw Material Pass-Through: Monitor Q1 2008 results to confirm the ability to pass on the notified 10%+ raw material cost increases without losing market share.
- MH Segment Impairment: Assess the risk of goodwill impairment in the MH Segment ($14.5 million in goodwill/intangibles) given the prolonged industry downturn.
- Legal Resolution: Track the status of the "Better Bath" litigation and the Indiana tax appeal for potential material charges.
- Facility Consolidation Benefits: Confirm that the projected $3 million+ annual operating profit improvement from facility closures materializes in 2008.