Business context and reporting period
This is Drew Industries Incorporated’s Form 10-K for the fiscal year ended December 31, 2015. Drew’s wholly owned subsidiary, Lippert Components (LCI), supplies components for recreational vehicles (RVs), manufactured homes and adjacent markets. The filing is for the parent company, Drew Industries—not a separate LCI Industries filing. RV products generated 92% of 2015 sales; manufactured housing products generated 8%.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $1.403 billion | $1.191 billion |
| Gross profit / margin | $306.0 million / 21.8% | $254.9 million / 21.4% |
| Operating profit / margin | $116.3 million / 8.3% | $95.5 million / 8.0% |
| Net income | $74.3 million | $62.3 million |
| Diluted EPS | $3.02 | $2.56 |
| Operating cash flow | $95.0 million | $107.0 million |
| Capital expenditures | $29.0 million | $42.5 million |
| Cash at year-end | $12.3 million | $0.004 million |
| Long-term debt | $50.0 million | $15.7 million |
| Net working capital | $169.6 million | $100.5 million |
2015 investing cash outflow was $66.1 million, including $41.1 million for acquisitions. Financing cash outflow was $16.6 million, including a $48.2 million special dividend, partly offset by new debt. The company had no revolver borrowings at year-end; $97.3 million remained available under its $100 million credit line and $100 million remained available under the Prudential shelf facility, subject to approval. Total availability was reported as $197.3 million. The company reported compliance with debt covenants.
Material changes versus the prior year
- Sales rose 18%; operating profit increased 22% and net income rose 19%. Management cited acquisitions and the Furrion distribution agreement, industry shipment growth, and increased product content per RV.
- RV segment sales increased 20% to $1.285 billion; MH segment sales increased 2% to $118.1 million. RV aftermarket sales grew 76% and RV adjacent-industry sales 52%.
- Operating cash flow declined $12.0 million, principally reflecting inventory growth and lower accounts payable and accrued liabilities. Inventory turnover fell to 6.9 turns from 8.2.
- 2015 included $3.7 million of severance charges, $1.5 million of environmental charges and a $1.1 million reserve for a voluntary Coach Step recall. Management’s stated adjusted net income, excluding certain 2015 charges, was $79.0 million, or $3.20 per diluted share; this is a company-presented adjusted measure.
Outlook, commentary and risks
- Management described RV industry fundamentals as positive and cited an industry forecast for a modest increase in 2016 travel-trailer and fifth-wheel shipments. It expected to pursue growth through market-share gains, new products, aftermarket and adjacent markets, acquisitions and international expansion; no specific company revenue or earnings guidance was provided.
- Management estimated $8–$10 million in annual savings from an indirect-labor cost program initiated late in 2015. It also said 2015 RV incremental operating margin was 10%, below its expected 15%–20% range.
- Planned 2016 capital expenditures were $20–$26 million. The company estimated 2016 depreciation and amortization of $42–$47 million and an effective tax rate of approximately 35%–36%.
- The six-year Furrion agreement includes minimum purchase obligations rising from $60 million for July 2015–June 2016 to $172 million for July 2018–June 2019. Missing an annual minimum by more than 10%, after permitted carryover, could allow Furrion to terminate the agreement or withdraw exclusivity.
- Key risks include dependence on RV demand and a concentrated customer base, raw-material price and supply volatility, seasonality and dealer financing/inventory, acquisition integration, labor availability, environmental obligations, product recalls, and execution of the new ERP implementation. Thor accounted for 29% of sales, Berkshire Hathaway subsidiaries 26%, and Jayco 10% in 2015.
- Other notable activity: three acquisitions were completed in 2015, followed by two acquisitions in January and February 2016. The auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether RV shipment and retail-demand trends support management’s 2016 outlook, and how closely dealer inventories track demand.
- Whether the announced cost savings are realized and margins recover from the below-target 2015 incremental margin.
- Furrion sales, inventory requirements, minimum-purchase performance and the economics of the exclusive distribution arrangement.
- Customer concentration and the company’s ability to sustain growth in aftermarket and adjacent markets without undue margin or working-capital pressure.
- Inventory levels and turnover, cash conversion, acquisition-related contingent consideration, and remaining liquidity under borrowing covenants.
- Resolution and future cost of the Coach Step recall, environmental matters and other contingencies; the filing does not provide a clear final cost for these exposures.