Business context and reporting period
Drew Industries Incorporated, operating through Lippert Components, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company supplies components to recreational vehicle (RV), manufactured housing, aftermarket and adjacent markets. It reported two segments: RV and manufactured housing (MH). The filing identifies Drew Industries as the registrant; it does not identify the company as LCI Industries.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $362.1 | $321.8 | $723.5 | $607.2 |
| Gross profit | $82.1 | $72.0 | $158.5 | $135.2 |
| Operating profit | $33.6 | $29.1 | $65.5 | $55.2 |
| Net income | $20.9 | $18.6 | $40.9 | $34.8 |
| Diluted EPS | $0.85 | $0.77 | $1.67 | $1.43 |
- Q2 sales rose 13%, net income 12%, and diluted EPS 10% year over year. Six-month sales rose 19%, net income 18%, and diluted EPS 17%.
- Q2 gross margin was 22.7% versus 22.4%; operating margin was 9.3% versus 9.1% as reported. The 2014 quarter included a $2.0 million pretax loss on extrusion-asset sales; excluding that item, 2014 operating margin was 9.7%. Six-month gross and operating margins were approximately 21.9% and 9.0%, respectively, versus 22.3% and 9.1% as reported in 2014.
- RV segment sales increased 14% in Q2 and 21% in the first half. MH sales declined 5% in Q2 and 2% in the first half. RV represented 92% of first-half consolidated sales.
- Q2 interest expense was $0.6 million; the six-month total was $0.8 million. The six-month effective tax rate was 36.7%; management estimated a full-year rate of approximately 37%.
Cash flow, debt and liquidity
- First-half operating cash flow was $36.4 million, down from $55.8 million. Capital expenditures were $14.7 million, making operating cash flow less capital expenditures $21.7 million, compared with $37.9 million in 2014.
- Cash used in investing was $38.0 million, including $25.1 million for acquisitions. Financing provided $13.4 million; the company paid a $48.2 million special dividend ($2.00 per share). Cash at June 30 was $11.8 million.
- Long-term indebtedness was $80.0 million: $30.0 million drawn on the credit line and $50.0 million of five-year notes bearing fixed interest at 3.35%. The credit-line rate was 1.9% weighted average. Remaining availability under the credit and shelf-loan facilities was $167.3 million; the company reported covenant compliance.
- Current assets were $284.2 million and current liabilities $130.3 million at June 30. Inventory was $163.4 million, up from $132.5 million at year-end; management attributed the increase partly to advance imported-component purchases and higher steel inventory.
Changes, outlook and material items
- Management said Q2 incremental margins fell short of its 15%–20% target, citing higher fixed costs from capacity expansion, acquired teams, higher stock compensation and seasonal production shifts. It said most capacity investments were largely complete and expected to benefit from additional sales; efficiency initiatives included lean operations and automation.
- RVIA projected travel-trailer and fifth-wheel wholesale shipments to rise 7% in 2015 and 4% in 2016. Management cited strong early-2015 RV retail demand and dealer inventories it considered broadly in line with expected demand, while noting that retail demand, consumer confidence and dealer orders remain uncertain. Manufactured-housing shipments remained low despite a 9% first-half industry increase.
- Management forecast 2015 capital expenditures of $28–$32 million, depreciation and amortization of $39–$41 million, and stock-based compensation of $15–$16 million. July 2015 sales were approximately $112 million, up 11% year over year, or 5% excluding acquisitions. No formal earnings or EPS guidance was provided.
- In July, the company entered a six-year exclusive Furrion distribution and supply agreement and acquired inventory and inventory deposits for about $11 million. Minimum purchases rise from $60 million for July 2015–June 2016 to $172 million for July 2018–June 2019; missing a threshold by more than 10% could allow termination or loss of exclusivity.
- In February 2015, NHTSA opened a preliminary evaluation concerning alleged failures of the company’s Coach Step. The company said it could not predict the inquiry’s outcome or estimate potential recall costs. Other litigation was not expected by management to have a material financial effect beyond amounts provided, excluding the NHTSA matter.
- The company was negotiating a one-year extension of its credit and shelf-loan facilities and a credit-line increase to $125 million. It also reported a $1.6 million gain in Q3 2015 from terminating an extrusion supply agreement, after the reporting period.
Investor verification priorities
- Track whether sales growth converts into improved margins as expanded capacity is utilized, and whether the stated 15%–20% incremental-margin target is achieved.
- Monitor inventory growth, turnover (7.6 turns for the twelve months ended June 30, versus 8.2 for full-year 2014), and operating cash flow.
- Assess the Furrion agreement’s sales contribution, required purchases, profitability and exposure if demand falls short of minimum obligations.
- Follow NHTSA’s Coach Step evaluation and any potential recall scope, costs or customer impact.
- Verify progress on refinancing extensions, available borrowing capacity, covenant compliance and debt levels after the special dividend and acquisitions.
- Separate organic growth from acquisition contributions and monitor RV demand, dealer inventories, raw-material prices, and the weaker MH segment.