Drew Industries Incorporated (LCI Industries per request metadata) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 8, 2013. The filing identifies the registrant as Drew Industries Incorporated. Through Lippert and Kinro, it manufactures components primarily for recreational vehicles (RVs) and manufactured housing. RV products generated 88% of nine-month sales.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $250.9 million | $226.3 million | $790.6 million | $700.9 million |
| Gross profit | $56.1 million | $41.5 million | $165.2 million | $132.8 million |
| Operating profit | $22.8 million | $14.9 million | $62.1 million | $51.3 million |
| Net income | $14.8 million | $9.8 million | $39.0 million | $32.6 million |
| Diluted EPS | $0.62 | $0.43 | $1.65 | $1.43 |
| Gross margin | 22.4% | 18.4% | 20.9% | 18.9% |
| Operating margin | 9.1% | 6.6% | 7.9% | 7.3% |
Quarterly sales rose 11% and net income rose 52% year over year. Nine-month sales increased 13% and net income 20%. Growth reflected stronger RV demand, market-share gains, new products, and sales to aftermarket and adjacent markets. RV segment sales rose 12% in Q3 and 14% year to date; MH segment sales rose 5% and 4%, respectively. YTD RV operating profit increased to $54.1 million from $40.9 million, while MH operating profit declined to $9.9 million from $10.4 million.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $61.7 million, versus $44.6 million; investing cash use was $26.3 million, including $26.1 million of capital expenditures. Cash increased $42.9 million to $52.9 million.
- At September 30, the company reported no debt, $52.9 million of cash, and $197.8 million of total remaining borrowing availability. This included $47.8 million under its $50 million credit line and availability under a $150 million shelf-loan facility. The shelf facility was due to expire in February 2014; an extension and a $25 million credit-line increase were under negotiation.
- Current assets were $222.3 million and current liabilities $85.1 million. The company was in compliance with debt covenants and said liquidity was adequate for anticipated needs over the next 12 months.
- Capital expenditures were forecast at $33–$35 million for 2013 and $32–$36 million for 2014. Management estimated 2013 depreciation and amortization of $26–$28 million and expected a full-year effective tax rate of about 37%; its 2014 tax-rate estimate was 37%–38%.
Material changes, outlook and risks
- Management cited lower material costs, production efficiencies and better fixed-cost absorption as drivers of margin improvement. It cautioned that commodity prices remain volatile and that seasonally lower Q4 sales could dilute margins; planned capacity and other investments may also weigh on near-term margins.
- Management estimated 2014 wholesale shipments of travel-trailer and fifth-wheel RVs would grow 5%, citing the RVIA forecast. Company sales in October 2013 were approximately $95 million, up 12% year over year, according to management; industry statistics were not yet available. The company reported record trailing-12-month sales above $1 billion.
- Management expected approximately $2 million in annual general and administrative savings beginning in Q4 2013 following the completed executive transition and headquarters relocation. The company recorded $1.876 million of succession-related charges in the first nine months of 2013, with no further related charges expected; associated obligations are payable through 2015.
- RV dealer inventories rose an estimated 16,000 units over the 12 months ended September 2013. Management warned that orders and production could weaken if retail demand fails to support production. RV demand is sensitive to economic conditions and consumer confidence.
- Manufactured-housing shipments improved, but the segment faced customer-mix effects and market-share losses in certain products. Management cited tight credit, competition from low-priced foreclosed homes, and possible effects of Dodd-Frank mortgage rules as industry risks.
- Other exposures include steel and aluminum price changes, the ability to pass cost increases through to customers, customer and dealer financial health, seasonality, competition, labor availability and acquisition-related estimates. Contingent consideration liabilities totaled $8.5 million, with about $5.0 million expected to be paid within 12 months. The company reported ordinary-course litigation and said any exposure beyond recorded amounts, including anticipated insurance recoveries, was not expected to be material to financial position or annual results.
Key facts for investors to verify
- Whether RV retail demand and dealer inventory trends sustain OEM production and the company’s sales growth.
- Whether RV market-share gains and efficiency improvements persist, and whether MH segment market-share declines continue.
- Completion and terms of the proposed credit and shelf-facility extensions and credit-line increase.
- Delivery of expected cost savings, capital-investment returns, and management’s tax-rate and spending estimates.
- Actual payments and valuation changes for acquisition contingent consideration, and developments in warranty costs and litigation.