Drew Industries Incorporated (now LCI Industries) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing registrant is Drew Industries Incorporated; the filing describes its RV and manufactured-housing components businesses.
Business context and results
The company manufactures components for recreational vehicles (RV), manufactured housing, and adjacent markets. RV products represented 87% of first-half sales. Second-quarter sales reached a company quarterly record, supported by acquisitions, market-share gains, and stronger industry shipments.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $251.0 million | $186.0 million | $474.6 million | $354.9 million |
| Gross profit | $46.4 million | $42.1 million | $91.2 million | $79.9 million |
| Operating profit | $19.0 million | $17.9 million | $36.3 million | $33.5 million |
| Net income | $11.7 million | $11.0 million | $22.8 million | $20.4 million |
| Diluted EPS | $0.52 | $0.49 | $1.01 | $0.91 |
Financial position, cash flow, and liquidity
- Q2 sales increased 35% year over year; net income rose 7%. First-half sales increased 34% and net income 12%.
- Q2 gross margin was approximately 18.5%, versus 22.6% a year earlier; operating margin was 7.6%, versus 9.6%. Management attributed pressure to labor and overtime, start-up costs, outsourcing and scrap, and higher fixed costs.
- First-half operating cash flow was $48.6 million, compared with $10.4 million a year earlier. Investing cash outflow was $12.6 million, including $13.2 million of capital expenditures. Cash increased to $42.5 million from $6.6 million at year-end 2011.
- No debt was outstanding at June 30. The company reported $47.0 million available under its credit line and $197.0 million of total remaining availability across its credit and shelf-loan facilities. It complied with covenants.
- Total assets were $419.2 million; total liabilities were $114.3 million. Current assets were $204.6 million and current liabilities $93.0 million.
Segments and material changes
- RV segment: Q2 sales rose 39% to $218.4 million; segment operating profit was $17.5 million, approximately flat year over year. First-half sales rose 36% to $414.0 million and operating profit increased to $34.3 million.
- Manufactured-housing segment: Q2 sales increased 13% to $32.6 million and operating profit rose to $4.0 million. First-half sales increased 18% to $60.6 million and operating profit to $7.2 million.
- Growth reflected acquisitions and market gains, as well as industry shipment increases: travel-trailer and fifth-wheel RV shipments rose 8% in Q2 and 9% in the first half; manufactured-home shipments rose 11% in Q2 and 20% in the first half.
- The company acquired a U.S. RV entry-door operation in February for approximately $1.7 million; the business had annualized sales of about $6 million. Management also cited substantial recent spending on acquisitions and capacity expansion.
Outlook, risks, and unusual items
- No earnings-per-share or revenue guidance was provided. Management expected full-year 2012 capital expenditures of $23–25 million, depreciation and amortization of $24–25 million, and an effective tax rate of approximately 38%.
- Management said production efficiencies should improve as seasonal sales moderate and new employees gain experience; investments include expanding capacity, leaner manufacturing, and an aluminum-extrusion operation. July 2012 sales were reported at $73 million, up 49% year over year, with acquisitions excluded growth estimated at approximately 35%.
- Management cited approximately $3.0 million of Q2 net-income impact from labor, overtime, and start-up costs, plus $1.5 million from higher material costs, relative to expectations. It expected these pressures to improve but noted that efficiency gains take time.
- First-half impairment charges included $0.3 million for vacant facilities and $0.6 million for an acquired patent’s intangible assets. Further impairment could result if relevant product sales underperform projections.
- Contingent acquisition consideration had a $13.9 million fair-value liability; management expected to pay $5.0 million over the next 12 months. The estimate depends on acquired-product sales forecasts and discount-rate assumptions.
- Key risks include cyclical RV and manufactured-housing demand, dealer inventory changes, customer and consumer credit availability, volatile steel and aluminum costs, labor availability and costs, competition and pricing, acquisition integration, and the ability to pass cost increases through to customers. Aluminum derivatives covered about 25% of anticipated annual purchases.
- A previously disclosed Kinro product-safety lawsuit was terminated after the Ninth Circuit affirmed dismissal of all claims. Management said other routine claims were not expected to have a material financial impact beyond amounts provided.
Important facts for investors to verify
- Whether higher sales translate into improved margins as hiring, start-up, outsourcing, and scrap costs ease.
- RV dealer inventory and retail-demand trends, particularly whether wholesale production continues to track consumer demand.
- Cash conversion and working-capital movements; first-half operating cash flow benefited from increases in payables and accrued liabilities.
- Progress and returns from capacity investments, the extrusion operation, acquisitions, and adjacent-market expansion.
- Changes in warranty costs, contingent consideration estimates, and impairment assumptions.