Drew Industries Incorporated (now LCI Industries) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing’s registrant name is Drew Industries Incorporated. The company manufactures components primarily for recreational vehicles (RVs) and manufactured homes.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $186.0 million | $173.5 million | $354.9 million | $319.7 million |
| Gross profit | $42.1 million | $37.6 million | $79.9 million | $71.2 million |
| Operating profit | $17.9 million | $15.8 million | $33.5 million | $28.1 million |
| Net income | $11.0 million | $9.6 million | $20.4 million | $16.9 million |
| Diluted EPS | $0.49 | $0.43 | $0.91 | $0.76 |
Q2 sales rose 7% and net income rose 14%; six-month sales increased 11% and net income increased 20%. Q2 gross margin was approximately 22.6% versus 21.6%, and operating margin was approximately 9.6% versus 9.1%. Six-month operating margin was approximately 9.4% versus 8.8%.
- Cash flow: Six-month operating cash flow was $10.4 million, down from $17.7 million. Investing used $12.7 million, including $10.5 million of capital expenditures and $7.3 million for the Home-Style acquisition. Cash decreased $2.1 million to $36.8 million.
- Liquidity and debt: Current assets were $182.7 million and current liabilities $66.5 million at June 30. The company had no borrowings or debt outstanding. It reported $44.8 million available under its $50 million credit line and $184.5 million total remaining availability across credit facilities, subject to covenants.
- Capital and obligations: Total liabilities were $86.8 million. The contingent consideration liability for acquisition earn-outs was $12.3 million.
Changes and operating drivers
- RV segment Q2 sales increased 9% to $157.2 million; segment operating profit rose to $17.3 million. Six-month RV sales increased 13% to $303.4 million.
- Manufactured housing segment Q2 sales declined 1% to $28.8 million and operating profit fell to $3.0 million. Six-month sales increased 1% to $51.5 million, while operating profit declined slightly to $5.2 million.
- Management attributed growth to increased product content, new products, market-share gains, acquisitions, and sales to other industries. RV industry wholesale shipments of travel trailers and fifth-wheel RVs rose 6% in Q2, while manufactured-home shipments fell 12%.
- Raw-material costs, especially steel and aluminum, rose sharply through March and then moderated. Management said pricing actions and production efficiencies largely offset the cost pressure in Q2; higher materials and warranty costs weighed on six-month segment results.
Outlook, risks, and notable items
- Management expected full-year 2011 capital expenditures of $24–25 million, including $10–11 million for an aluminum-extrusion project; this estimate was $2–3 million above prior expectations. Full-year depreciation and amortization was estimated at $19 million.
- Management expected a 2011 effective tax rate of approximately 39% and interest expense of approximately $0.2 million. It reported July 2011 sales of $49 million, up 3% year over year despite one fewer shipping day.
- Management remained optimistic about RV growth in 2012 and beyond but warned that economic conditions, consumer confidence, fuel prices, retail demand, financing availability, and dealer inventories could affect production. Wholesale RV shipments had exceeded retail sales in the first half, increasing dealer inventories.
- Manufactured housing remained weak amid tight credit, housing-market weakness, and low shipment levels. Other key risks include volatile raw-material costs, competition and pricing pressure, customer concentration and financial health, labor availability, and litigation.
- On July 19, 2011, after quarter-end, the company acquired M-Tec for $6.0 million plus estimated earn-outs; the business had approximately $12 million in annual sales. A pending legal matter was on appeal; management said no material developments had occurred during the first half. The filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Verify whether RV dealer inventory growth and retail demand support subsequent production and the company’s sales growth.
- Track cash conversion and working-capital requirements, particularly receivables and inventory; operating cash flow declined despite higher earnings.
- Assess whether pricing and efficiency gains continue to offset raw-material costs, and whether warranty costs or earn-out remeasurement affect margins.
- Review returns and execution risks for the aluminum-extrusion investment, higher planned capital spending, and the Home-Style and M-Tec acquisitions.
- Confirm ongoing covenant compliance, available facility capacity, and developments in the pending litigation and contingent earn-out obligations.