Business context and reporting period
This is Drew Industries Incorporated’s Form 10-K for the fiscal year ended December 31, 2012—not a quarterly filing. The filing identifies the registrant as Drew Industries (NYSE: DW), rather than LCI Industries; investors should verify the requested company identity. Drew manufactured components primarily for recreational vehicles (RV) and manufactured homes through its Lippert and Kinro subsidiaries. RV products generated 87% of 2012 sales; manufactured housing products generated 13%.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $901.1 million | $681.2 million |
| Gross profit / margin | $168.7 million / 18.7% | $139.7 million / 20.5% |
| Operating profit / margin | $58.1 million / 6.5% | $48.5 million / 7.1% |
| Net income | $37.3 million | $30.1 million |
| Diluted EPS | $1.64 | $1.34 |
| Operating cash flow | $72.7 million | $36.8 million |
| Capital expenditures | $32.0 million | $24.3 million |
| Cash at year-end / debt | $9.9 million / none | $6.6 million / none |
Working capital was $84.2 million, versus $85.7 million; current assets were $154.0 million and current liabilities $69.8 million. The company reported $47.0 million available under its $50 million revolving credit line and stated total availability across financing facilities was approximately $197 million. A $45.0 million special dividend ($2.00 per share) was paid in December 2012.
Material changes versus the prior comparable period
- Sales rose 32%; excluding acquisitions, sales increased 23%. Net income rose 24% and diluted EPS increased from $1.34 to $1.64.
- RV segment sales increased 37% to $780.9 million, while operating profit rose to $55.1 million. Its operating margin declined to 7.1% from 8.0%.
- Manufactured housing segment sales increased 9% to $120.2 million and operating profit rose to $13.3 million; its operating margin improved to 11.1% from 10.8%.
- Adjacent-industry sales increased 68% to $96.4 million; aftermarket sales increased 14% to $35.2 million. Together, these channels approached 15% of consolidated sales.
- Operating cash flow increased substantially, supported by higher earnings, a smaller inventory build, and changes in accrued liabilities. Inventory turns improved to 7.8 from 6.3, according to management.
Outlook, management commentary, risks and unusual items
- Management expected production efficiencies to improve during 2013, particularly in the second half, and anticipated recouping much of the RV margin lost in 2012. It cited hiring and training more than 1,000 employees, overtime, outsourcing, facility realignment, and investment/start-up costs as pressures on 2012 results.
- Management reported approximately $167 million of sales for January and February 2013, 19% above the comparable period, while cautioning that the trend might not continue. RVIA projected 2013 wholesale shipments of travel trailers and fifth-wheels to rise 8% to 261,200 units; this is industry guidance, not company sales guidance.
- Planned 2013 capital expenditures were $25–$30 million. Management expected $20–$30 million of seasonal working-capital use early in 2013 and an effective tax rate of approximately 37%–38%.
- A $1.5 million pre-tax charge was recorded in 2012 for executive succession and corporate relocation; a further $1.8 million charge was expected in 2013. Management estimated annual general and administrative savings of approximately $2 million after the transition. The CEO succession and headquarters relocation to Elkhart County, Indiana, were planned for 2013.
- Other notable items included a $1.2 million non-cash impairment of an acquired patent-related intangible asset and a $0.5 million impairment charge on vacant facilities. The company reported no goodwill impairment.
- Key risks include customer concentration (Thor represented 34% and Berkshire Hathaway subsidiaries 27% of 2012 sales), cyclical RV and manufactured-housing demand, dealer/customer financing and inventory levels, volatile steel and aluminum prices, labor availability and operating execution, competition, and acquisition integration. The company hedged a portion of expected aluminum purchases; its derivatives were not designated as accounting hedges.
- The company was negotiating extensions to its credit facilities and a proposed $25 million increase to the revolving line. It said it complied with financial covenants at year-end. The filing states routine legal matters were not expected to have a material financial impact; a previously disclosed product-liability class action was terminated after dismissal of all claims was affirmed in 2012.
Important facts for investors to verify
- Confirm whether this Drew Industries filing is the intended filing for LCI Industries and the relevant reporting period.
- Track whether efficiency initiatives deliver the expected 2013 margin recovery, especially given the 2012 decline in consolidated and RV segment margins.
- Assess customer concentration and the sensitivity of orders to RV retail demand, dealer inventories, and consumer and wholesale financing.
- Verify the outcome of the credit-facility negotiations, subsequent borrowing needs, and the cash and working-capital impact of the dividend and planned investment.
- Monitor whether adjacent-market and aftermarket growth produces sustainable margins, and review contingent acquisition payments, warranty costs, and raw-material exposure.