LCI Industries / Drew Industries Incorporated: Q3 2012 Form 10-Q
Reporting entity: The supplied filing is for Drew Industries Incorporated, not an entity named LCI Industries. It covers the quarter and nine months ended September 30, 2012; financial statements are unaudited. Drew manufactured components mainly for recreational vehicles (RVs) and manufactured homes through its RV and manufactured-housing (MH) segments.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2011 period.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $226.3 | $166.7 | $700.9 | $521.6 |
| Gross profit | $41.5 | $32.0 | $132.8 | $111.9 |
| Operating profit | $14.9 | $9.2 | $51.3 | $42.7 |
| Net income | $9.8 | $5.6 | $32.6 | $26.0 |
| Diluted EPS | $0.43 | $0.25 | $1.43 | $1.16 |
| Gross margin | 18.4% | 19.2% | 18.9% | 21.5% |
| Operating margin | 6.6% | 5.5% | 7.3% | 8.2% |
- Q3 sales increased 36%, operating profit 62%, and net income 74%. Nine-month sales rose 34% and net income 25%. Q3 operating margin improved, while gross margin was lower; nine-month gross and operating margins also declined.
- Q3 RV-segment sales grew 43% to $195.0 million; MH-segment sales increased 3% to $31.4 million. Nine-month sales grew 39% in RV and 12% in MH. RV accounted for 87% of nine-month consolidated sales.
- Operating cash flow was $44.6 million for the nine months, versus $16.3 million in 2011. Investing activities used $18.2 million, including $22.0 million of capital expenditures; financing activities used $0.4 million. Cash increased $26.0 million to $32.6 million.
- At September 30, cash was $32.6 million, current assets $202.7 million, and current liabilities $80.5 million. No debt was outstanding. Disclosed borrowing availability was $196.6 million; the company reported compliance with its debt covenants.
Changes, outlook, and notable items
- Management attributed RV growth to stronger industry shipments, acquisitions, market-share gains, and adjacent-market sales. Towable RV wholesale shipments rose 19% in Q3 and 12% year to date. MH industry shipments rose 13% year to date, but only 2% in Q3.
- Management cited labor and overtime costs, constrained production capacity, tempered-glass outsourcing, start-up and integration costs, and higher fixed costs as pressures on RV profitability. Lower steel and aluminum costs and sales growth partly offset these effects. Efficiency initiatives were taking longer than expected; the company expected further improvement before the 2013 selling season.
- October 2012 consolidated sales were approximately $85 million, up 35% year over year, according to management. It estimated October RV shipments rose 30%, while MH production declined 5%–10%. These are management estimates, not reported quarterly results.
- Management expected a 2012 effective tax rate of approximately 37% and a 2013 rate of approximately 38%. It forecast 2012 capital expenditures of $27–$28 million and 2013 expenditures of $25–$30 million, with 2012–2013 spending expected to be funded from operating cash flow.
- Unusual charges included a $1.2 million non-cash impairment of an acquired patent-related intangible asset and a $0.5 million impairment charge for vacant facilities during the first nine months. The contingent-consideration liability was $12.6 million; management expected $5.7 million of payments over the next 12 months.
- Risks highlighted include volatile steel and aluminum prices, labor availability and costs, customer and dealer inventory adjustments, consumer demand and financing conditions, capacity and execution challenges, acquisition integration, and weakness in manufactured housing. The filing noted that RV dealer inventories had risen faster than retail sales over the preceding 12 months, creating potential for OEM production adjustments.
- A previously disclosed lawsuit against Kinro was terminated after the Ninth Circuit affirmed dismissal of all claims. Management said other ordinary-course claims were not expected to have a material financial impact beyond amounts provided.
Important facts for investors to verify
- Confirm the reporting company and its relationship, if any, to LCI Industries; this filing names Drew Industries Incorporated as registrant.
- Assess whether RV demand and dealer inventory levels support continued OEM production, and whether October shipment estimates translated into subsequent orders.
- Track whether capacity, labor, glass-supply, and efficiency initiatives improve incremental margins as management expected.
- Review cash conversion and working-capital needs, including planned inventory builds, capital spending, and contingent-consideration payments.
- Monitor raw-material costs, warranty and insurance claims, impairment assumptions, and the company’s ability to maintain covenant compliance.