Business context and reporting period
Drew Industries Incorporated (ticker DW), through Lippert Components, supplies components mainly to recreational vehicle (RV) and manufactured-housing producers. This is its Form 10-K for the fiscal year ended December 31, 2014, filed March 2, 2015. The filing identifies the issuer as Drew Industries, not LCI Industries. RV products generated 90% of 2014 sales; manufactured-housing products generated 10%.
Financial performance and liquidity
Unless stated otherwise, amounts are U.S. dollars. Annual results improved, led by RV demand, market-share gains, acquisitions, and growth in aftermarket and adjacent markets.
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $1,190.8 million | $1,015.6 million |
| Gross profit / margin | $254.9 million / 21.4% | $213.1 million / 21.0% |
| Operating profit / margin | $95.5 million / 8.0% | $78.3 million / 7.7% |
| Net income | $62.3 million | $50.1 million |
| Diluted EPS | $2.56 | $2.11 |
| Operating cash flow | $107.0 million | $82.7 million |
| Capital expenditures | $42.5 million | $32.6 million |
- Fourth quarter: Sales were $289.4 million versus $224.9 million in Q4 2013; net income was $12.0 million versus $11.1 million; diluted EPS was $0.49 versus $0.46. Q4 2014 gross profit was $57.2 million, or about 19.8% of sales, compared with $48.0 million, or about 21.3%, in Q4 2013.
- Segments: RV sales rose 20% to $1,074.4 million and operating profit increased to $86.6 million; RV operating margin improved to 8.1% from 7.6%. Manufactured-housing sales declined 5% to $116.3 million and operating profit fell to $10.9 million; its margin decreased to 9.3% from 9.8%.
- Liquidity and debt: Year-end cash was $4,000, down from $66.3 million; working capital was $100.5 million. Long-term debt was $15.7 million, versus no debt at year-end 2013. The company reported $57.4 million available under its $75 million credit line and $207.4 million of remaining availability across the credit and shelf facilities. It was compliant with covenants.
- Balance sheet: Total assets were $543.8 million, total liabilities $148.9 million, and stockholders’ equity $394.9 million. Acquisitions contributed to increases in goodwill and intangible assets.
Material changes versus the prior comparable period
- Annual sales increased 17%; net income rose 24%, while diluted EPS increased from $2.11 to $2.56.
- RV sales growth exceeded the primary travel-trailer and fifth-wheel wholesale market’s 12% shipment growth. RV aftermarket sales nearly doubled to $49.6 million; RV adjacent-industry sales grew 22% to $113.0 million.
- Manufactured-housing industry shipments rose 7%, but the company’s MH sales fell 5%. The filing attributes the decline mainly to customer mix and lost share in some products; content per manufactured home declined 10%.
- Operating cash flow increased, but investing cash outflow rose to $144.1 million, largely reflecting $106.8 million for acquisitions and $42.5 million of capital spending. Financing cash outflow included a $46.7 million special dividend. Year-end cash consequently fell sharply.
- Four acquisitions completed in 2014 contributed $36 million of that year’s sales; a fifth, EA Technologies, was acquired in January 2015. Together, the five were reported to add approximately $85 million of annual sales.
Outlook, commentary, risks and unusual items
- Management cited strong RV fundamentals and strong early-2015 retail-show activity. January 2015 sales were approximately $115 million, up 41% year over year, or about 34% excluding acquisitions; management cautioned that unusually severe January 2014 weather affected the comparison. The filing does not provide formal full-year sales or earnings guidance.
- Management expected 2015 capital spending of $30–$35 million, depreciation and amortization of $36–$38 million, and seasonal working-capital use of $20–$30 million in the first months of 2015. It estimated a 2015 effective tax rate of 37%–38% and expected health-insurance costs as a percentage of sales to remain near 2014 levels.
- Higher health-insurance costs and facility start-up and realignment costs restrained margins; management said these costs reduced 2014 diluted EPS by about $0.11 and $0.09, respectively. Aluminum prices rose nearly 20% in the second half of 2014. Price increases were implemented and expected to be largely in place by the end of Q1 2015.
- Unusual items included a $2.0 million pretax loss on the sale of aluminum-extrusion assets. Excluding that loss and 2013 executive-succession charges, management reported adjusted net income of $63.5 million in 2014 versus $51.3 million in 2013; these are company-presented adjusted figures.
- Key risks include RV cyclicality and seasonality, dealer inventories and consumer financing, volatile steel and aluminum costs, skilled-labor availability, acquisition integration, and customer concentration. Thor Industries accounted for 33% of 2014 sales and Berkshire Hathaway subsidiaries for 28%. Environmental matters, litigation and tax positions remain subject to uncertainty; management said amounts beyond recorded provisions were not expected to be material, while noting outcomes could affect future-period results.
Important facts for investors to verify
- Confirm the extent to which sales growth and margins reflect organic demand and market-share gains versus acquired businesses and price changes.
- Monitor RV retail demand and dealer inventories against wholesale shipments, and assess the impact of the company’s dependence on two customers representing 61% of sales.
- Track cash conversion, inventory growth, acquisition spending, debt usage and credit availability after the substantial decline in year-end cash.
- Evaluate whether planned pricing and operating efficiencies offset raw-material, health-insurance, start-up and capacity-expansion costs.
- Review acquisition integration and returns, contingent consideration, and the execution and costs of the multi-year ERP implementation.