Business Context and Reporting Period
Company: Drew Industries Incorporated (filing as LCI Industries in metadata, but text confirms Drew Industries)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: The Company operates two reportable segments: the Recreational Vehicle (RV) products segment (83% of 2010 sales) and the Manufactured Housing (MH) products segment (17% of 2010 sales). It manufactures components such as chassis, windows, doors, axles, and furniture for travel trailers, fifth-wheel RVs, and manufactured homes. Operations are conducted through wholly-owned subsidiaries Lippert Components, Inc. and Kinro, Inc., with 25 manufacturing facilities across 11 states.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $572.8 million | $397.8 million |
| Operating Profit | $45.4 million | ($35.6 million) loss |
| Net Income | $28.0 million ($1.26 diluted EPS) | ($24.1 million) loss (($1.10) diluted EPS) |
| Operating Margin | 7.9% | (8.9%) |
| Cash and Investments | $43.9 million | $65.4 million |
| Long-term Obligations | $18.2 million | $8.2 million |
| Working Capital | $97.8 million | $113.7 million |
| Capital Expenditures | $10.1 million | $3.1 million |
Note: The 2009 net loss included a $45.0 million non-cash goodwill impairment charge and $9.0 million in "extra" expenses related to the recession.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 44% to $573 million, driven by a 53% increase in the RV Segment and a 12% increase in the MH Segment. This outpaced industry-wide wholesale shipments of travel trailers (up 44%) and manufactured homes (up 1%).
- Profitability Turnaround: The Company returned to profitability with $28.0 million in net income, reversing the $24.1 million loss in 2009. The 2009 loss was heavily impacted by goodwill impairment and restructuring costs not present in 2010.
- Segment Performance: RV Segment operating profit rose to $44.4 million (9.3% margin) from $15.7 million (5.0% margin). MH Segment operating profit increased to $9.6 million (10.0% margin) from $3.2 million (3.8% margin).
- Acquisitions: The Company spent $21.9 million on cash acquisitions in 2010, including intellectual property from Schwintek, Inc. ($20.0 million) and assets from Sellers Mfg., Inc. ($0.5 million).
- Dividend: A special cash dividend of $1.50 per share ($33.0 million aggregate) was paid in December 2010, the first cash dividend in the Company's history.
Guidance, Outlook, and Risks
Outlook: Management expects continued strength in the RV industry, citing a projected 9% increase in industry-wide wholesale shipments for 2011. The Company anticipates capital expenditures of $13 million to $15 million in 2011, funded by operating cash flows.
Management Commentary:
- Raw Materials: Costs for steel, aluminum, and ABS resin began increasing in November 2010 and continued through March 2011. While the Company historically passes these costs to customers, there is no assurance this will continue.
- Production Efficiency: Approximately $3 million in excess production costs were incurred in 2010 due to overtime and temporary labor needed to meet unexpected demand. Management has implemented steps to control these costs.
- Liquidity: The Company has no debt outstanding and substantial borrowing capacity ($161.1 million available under credit facilities).
Risks and Contingencies:
- Customer Concentration: Two customers accounted for 67% of consolidated net sales in 2010 (Thor Industries at 41% and Berkshire Hathaway at 26%).
- Raw Material Volatility: Steel represents approximately 50% of raw material costs. Price volatility could adversely impact margins if costs cannot be passed through.
- Legal Proceedings: A class action lawsuit regarding flame spread standards for "Better Bath" bathtubs is pending appeal. The Company believes a material loss is remote but acknowledges the risk if the appeal is successful.
- Industry Cyclicality: Results are sensitive to consumer confidence, credit availability for RVs and manufactured homes, and gasoline prices.
Investor Verification Checklist
- Customer Concentration: Verify the stability of relationships with Thor Industries and Berkshire Hathaway, which collectively represent over two-thirds of revenue.
- Raw Material Hedging: Assess the Company's ability to pass on rising steel and aluminum costs to customers without losing market share.
- Acquisition Integration: Monitor the performance of the Schwintek, Inc. assets and the Home-Style Industries acquisition (closed Jan 2011) to ensure projected earn-outs and synergies are realized.
- Legal Exposure: Track the status of the "Better Bath" class action appeal to confirm the Company's assessment that liability is remote.
- Inventory Levels: Review inventory turnover (6.5 times in 2010 vs. 4.8 times in 2009) to ensure inventory buildup aligns with actual retail demand and does not lead to future write-downs.