Business context and reporting period
Drew Industries Incorporated’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014. The company operates through Lippert Components and supplies components mainly to recreational vehicle (RV) and manufactured housing businesses. The filing identifies Drew Industries as the registrant; it does not identify the registrant as LCI Industries.
Operations comprise RV and manufactured housing (MH) segments. RV products generated 90% of nine-month sales. The business is seasonal, historically strongest in the second quarter and weakest in the fourth.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $294.3 million | $250.9 million | $901.4 million | $790.6 million |
| Gross profit | $62.5 million | $56.1 million | $197.7 million | $165.2 million |
| Operating profit | $23.1 million | $22.8 million | $78.3 million | $62.1 million |
| Net income | $15.5 million | $14.8 million | $50.3 million | $39.0 million |
| Diluted EPS | $0.64 | $0.62 | $2.07 | $1.65 |
| Operating margin | 7.8% | 9.1% | 8.7% | 7.9% |
Q3 sales rose 17%, while operating profit increased only modestly and operating margin contracted. Management cited higher steel and aluminum, health insurance, and capacity expansion and start-up costs. Those cost pressures reduced Q3 net income by an estimated $0.11 per diluted share; expansion initiatives reduced it by a further estimated $0.04 per diluted share. Nine-month results benefited from stronger RV sales and acquisitions; reported 2014 operating profit included a $2.0 million pretax loss on the sale of extrusion assets. The prior-year nine-month period included a $1.9 million executive-succession charge.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $67.0 million, versus $61.7 million a year earlier. Investing used $126.2 million, mainly for $100.2 million of acquisitions and $30.0 million of capital expenditures. Financing used $7.1 million, including a $46.7 million special dividend, partly offset by a $40.0 million net increase in borrowings. Cash fell by $66.3 million to $4,000.
- At September 30, current assets were $222.6 million and current liabilities were $106.5 million. Inventories were $127.1 million, up from $101.2 million at year-end; management attributed the increase partly to sales growth, higher input costs and advance purchases ahead of a threatened dock strike, which had passed.
- Long-term debt was $40.0 million, compared with none at year-end 2013. The borrowing rate was 1.9%. The $75 million credit line had $33 million available after $2 million of letters of credit; combined stated availability under credit and shelf-loan facilities was $183 million. The shelf facility had no notes outstanding. The company reported covenant compliance and said available funding was adequate for anticipated requirements over the next 12 months.
- Capital expenditures were forecast at $38–$40 million for 2014 and $36–$40 million for 2015. Depreciation and amortization was expected at $31–$33 million for 2014 and $35–$37 million for 2015.
Material changes and operating developments
- RV segment Q3 sales increased 21% to $263.6 million; MH segment sales declined 7% to $30.7 million. RV growth reflected acquisitions, market-share gains, new products and higher industry shipments. MH sales fell despite higher industry shipments, with management citing customer mix and lost share in certain products.
- Four 2014 acquisitions added about $15 million of Q3 sales and an estimated $67 million to annual run-rate sales. Acquisitions included Duncan Systems, Power Gear/Kwikee, Star Design and Innovative Design Solutions. The Duncan Systems acquisition was described as immediately accretive.
- Two new leased facilities added more than 700,000 square feet of production and distribution capacity and were operational; management expected them to be fully occupied by year-end 2014. A 12-year school-bus window supply agreement with Blue Bird was expected to generate approximately $10 million in annual sales.
- October 2014 sales reached a monthly record of approximately $115 million, 21% above October 2013; excluding acquisitions, sales were up approximately 15%.
Outlook, risks and contingencies
Management expected higher raw-material, health-insurance and other costs to weigh on the year-over-year Q4 comparison. Planned price increases were expected to be fully in place in Q1 2015; additional facility realignment costs were anticipated in Q4 2014. The company estimated full-year 2014 and 2015 effective tax rates of approximately 36% and 37%–38%, respectively. RVIA projections cited by management indicated 8% growth in 2014 and 4% in 2015 wholesale shipments of travel-trailer and fifth-wheel RVs; these are industry projections, not company revenue guidance. No specific company sales or earnings guidance was provided.
Key risks include volatile steel and aluminum prices and uncertainty over passing costs through to customers, weaker RV retail demand or dealer order adjustments, seasonality, manufactured-housing financing constraints, acquisition integration and contingent payments, and execution and cybersecurity risks associated with a multi-year ERP implementation. The company had $8.3 million of recorded contingent-consideration liabilities, with estimated remaining payments of $12.0 million. Management said ordinary-course litigation outcomes were uncertain but did not expect exposure beyond recorded amounts to be material to financial position or annual results.
Important facts for investors to verify
- Confirm the registrant and issuer identity: this filing is for Drew Industries Incorporated, not a filing labeled LCI Industries.
- Track whether Q4 cost pressures, facility realignment costs and planned price increases affect margins as management anticipated.
- Assess RV dealer inventories and retail demand against wholesale shipments, and monitor the MH segment’s continuing sales and content-per-home declines.
- Review acquisition integration, contribution to earnings and sales, contingent consideration estimates, and the company’s low period-end cash balance relative to acquisition and investment spending.
- Monitor capital spending, borrowing availability and covenant compliance, as well as ERP implementation and related control risks.