UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152016
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from to |
Commission file number 001-13646
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| DREW INDUSTRIES INCORPORATED | |
| (Exact name of registrant as specified in its charter) |
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| Delaware | | 13-3250533 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification Number) |
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| 3501 County Road 6 East | | 46514 |
| Elkhart, Indiana | | (Zip Code) |
| (Address of principal executive offices) | | |
(574) 535-1125
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock, $.01 par value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229-405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-212b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,332,983,449.$1,940,584,601. The registrant has no non-voting common equity.
The number of shares outstanding of the registrant’s common stock, as of the latest practicable date (February 15, 2016)2017) was 24,380,29124,756,229 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the 20162017 Annual Meeting of Stockholders to be held on May 26, 201625, 2017 is incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain “forward-looking statements” with respect to our financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, acquisitions, plans and objectives of management, markets for the Company’s Common Stock and other matters. Statements in this Form 10-K that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and involve a number of risks and uncertainties.
Forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, net sales, expenses and income (loss), cash flow, and financial condition, whenever they occur in this Form 10-K are necessarily estimates reflecting the best judgment of the Company’s senior management at the time such statements were made. There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-K, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel steel based components and aluminum) and other components, seasonality and cyclicality in the industries to which we sell our products, availability of credit for financing the retail and wholesale purchase of products for which we sell our components, inventory levels of retail dealers and manufacturers, availability of transportation for products for which we sell our components, the financial condition of our customers, the financial condition of retail dealers of products for which we sell our components, retention and concentration of significant customers, the costs, pace of and successful integration of acquisitions and other growth initiatives, availability and costs of production facilities and labor, employee benefits, employee retention, realization and impact of expansion plans, efficiency improvements and cost reductions, the disruption of business resulting from natural disasters or other unforeseen events, the successful entry into new markets, the costs of compliance with environmental laws, laws of foreign jurisdictions in which we operate, and increased governmental regulation and oversight, information technology performance and security, the ability to protect intellectual property, warranty and product liability claims or product recalls, interest rates, oil and gasoline prices, the impact of international, national and regional economic conditions and consumer confidence on the retail sale of products for which we sell our components, and other risks and uncertainties discussed more fully under the caption “Risk Factors” in this Annual Report on Form 10-K, and in our subsequent filings with the Securities and Exchange Commission. The Company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.
DREWLCI INDUSTRIES INCORPORATED
TABLE OF CONTENTS
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PART I – | | |
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| | ITEM 1 - BUSINESS | |
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| | ITEM 1A - RISK FACTORS | |
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| | ITEM 1B - UNRESOLVED STAFF COMMENTS | |
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| | ITEM 2 - PROPERTIES | |
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| | ITEM 3 - LEGAL PROCEEDINGS | |
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| | ITEM 4 - MINE SAFETY DISCLOSURES | |
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PART II – | | |
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| | ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | |
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| | ITEM 6 - SELECTED FINANCIAL DATA | |
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| | ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
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| | ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
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| | ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
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| | ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
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| | ITEM 9A - CONTROLS AND PROCEDURES | |
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| | ITEM 9B - OTHER INFORMATION | |
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PART III – | | |
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| | ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | |
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| | ITEM 11 - EXECUTIVE COMPENSATION | |
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| | ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
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| | ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | |
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| | ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES | |
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PART IV – | | |
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| | ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES | |
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| ITEM 16 - FORM 10-K SUMMARY | |
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| EXHIBIT 23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
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| EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION | |
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| EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION | |
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| EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION | |
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| EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION | |
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PART I
Item 1. BUSINESS.
Summary
DrewLCI Industries Incorporated (“Drew”LCII” and collectively with its subsidiaries, the “Company” or the “Registrant”), through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of components in the United States and abroad for the leading original equipment manufacturers (“OEMs”) of recreational vehicles (“RVs”) and manufactured homes and for the related aftermarkets of those industries. The Company also supplies components for adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing;housing. The Company also supplies components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and factory-built mobile office units.service centers.
LCI’s products include steel chassis and related components; axles and suspension solutions; slide-out mechanisms and solutions; thermoformed bath, kitchen and other products; vinyl, aluminum and frameless windows; manual, electric and hydraulic stabilizer and leveling systems; furniture and mattresses; entry, luggage, patio and ramp doors; electric and manual entry steps; awnings and awning accessories; electronic components; televisions and sound systems; navigation systems; backup cameras; appliances; and other accessories.
The Company has two reportable segments: the recreational vehicle productsoriginal equipment manufacturers segment (the “RV“OEM Segment”) and the manufactured housing productsaftermarket segment (the “MH“Aftermarket Segment”). The RVOEM Segment accounted for 92 percent of consolidated net sales for 2015,2016, and the MHAftermarket Segment accounted for 8 percent of consolidated net sales for 2015.2016. Approximately 7371 percent of the Company’s RVOEM Segment net sales in 20152016 were of products sold to manufacturers of travel trailer and fifth-wheel RVs.
The Company is focused on profitable growth in its industries, both organic and through the acquisition of manufacturers of components for RVs, manufactured homes and adjacent industries.acquisitions. In order to support this growth, over the past several years the Company has expanded its geographic market and product lines, consolidated manufacturing facilities, and integrated manufacturing, distribution and administrative functions. At December 31, 2015,2016, the Company operated 4248 manufacturing and distribution facilities located throughout the United States and in 16 statesCanada and Quebec, Canada,Italy, and reported consolidated net sales of $1.4$1.7 billion for the year ended December 31, 2015.2016.
The Company was incorporated under the laws of Delaware on March 20, 1984, and is the successor to Drew National Corporation, which was incorporated under the laws of Delaware in 1962. The Company’s principal executive and administrative offices are located at 3501 County Road 6 East, Elkhart, Indiana 46514; telephone number (574) 535-1125; website www.drewindustries.comwww.lci1.com; e-mail drew@drewindustries.comLCII@lci1.com. The Company makes available free of charge on its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and amendments to those reports) filed with the SEC as soon as reasonably practicable after such materials are electronically filed.
Recent Developments
Sales and Profits
Consolidated net sales for 2015the year ended December 31, 2016 increased to a record $1.4$1.7 billion, 1820 percent higher than 2014.the consolidated net sales for the year ended December 31, 2015 of $1.4 billion. Acquisitions completed by the Company in 2015, as well as the Furrion Limited (“Furrion”) distribution and supply agreement for premium electronics (the “Furrion Agreement”),2016 added $52$64 million in net sales in 2015.sales. A five15 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary RVOEM market, as well as increased content per RV unit, through market share gains, also positively impacted net sales growth in 2015.
In 2015,growth. Further, the Company continued to groworganically increased sales to both adjacent industries and the aftermarketaftermarket. Net income for the RV and MH Segments. Aggregate net sales to adjacent industries increased 40 percent to $193 million and aftermarket net sales increased 62 percent to $103 million. Together, these markets now account for 21 percent of consolidated net sales, double the percentage from 2010.
For the full-year 2015, the Company’s net income2016 increased to $74.3$129.7 million, or $3.02$5.20 per diluted share, up from net income of $62.3$74.3 million, or $2.56$3.02 per diluted share, in 2014. Excluding certain charges for severance, environmental and legal costs in 2015, net income would have been $79.0 million in 2015, or $3.20 per diluted share, and excluding the 2014 loss on the sale of the Company's aluminum extrusion-related assets, net income would have been $63.5 million in 2014, or $2.61 per diluted share.2015.
In Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company describes in detail the increase in its sales and profits during 2015.2016.
Acquisitions
During 20152016 and early 20162017, the Company completed fivesix acquisitions:
In January 2015, the Company acquired the business and certain assets of EA Technologies, LLC (“EA Technologies”), an Elkhart, Indiana-based manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications. Net sales reported by EA Technologies for 2014 were $17 million. The purchase price was $9.2 million, of which $6.6 million was paid in the fourth quarter of 2014, with the balance paid at closing. In connection with this acquisition, the Company also acquired a 250,000 square foot facility.
In April 2015, the Company acquired the business and certain assets of Industries Spectal, Inc. (“Spectal”), a Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. Net sales reported by Spectal for 2014 were $25 million. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation.
In August 2015, the Company acquired the business and certain assets of Roehm Marine, LLC, also known as Signature Seating (“Signature”), a Ft. Wayne, Indiana-based manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats. Net sales reported by Signature for the twelve months ended June 2015 were approximately $16 million. The purchase price was $16.0 million paid at closing, plus contingent consideration based on future sales of this operation.
In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. Estimated net sales of the marine furniture business were approximately $20 million. The purchase price was $10.0 million paid at closing. Concurrently with the acquisition, the Company entered into a five-year supply agreement for marine furniture and other products with Highwater and Elkhart, Indiana-based Bennington, the largest manufacturer of pontoon boats in the United States.
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a Goshen, Indiana-based manufacturer of RV furniture. Net sales reported by Flair for 2015 were approximately $25 million.furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation.
In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing.
In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.
In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“SessaKlein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $8.5 million paid at closing, plus contingent consideration based on future sales by this operation.
Other Developments
On April 10, 2015,In March 2016, the Company initiated a specialregular quarterly dividend of $2.00$0.30 per share, which was increased later in the year to $0.50 per share. During 2016, total dividends of $1.40 per share of the Company’s Common Stock,common stock, representing an aggregate of $48.2$34.4 million, waswere paid to stockholders of record as of March 27, 2015.stockholders.
In July 2015,December 2016, the Company entered intoannounced a 6-year exclusive distributionchange of the Company’s corporate name to LCI Industries from Drew Industries Incorporated. Lippert Components’ business has grown considerably over the past decade, and supply agreement with Furrion, a Hong Kong based firm that designs, engineers and manufacturers premium electronics. This agreement provides the Companynew corporate name was selected to better align the investment community with the rights to distribute Furrion’s complete linestrength of products to OEMs and aftermarket customersthe LCI brand in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions, sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry.it serves.
RVOEM Segment
Through its wholly-owned subsidiaries, the Company manufactures or distributes a varietybroad array of products used incomponents for the productionleading OEMs of RVs including:
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● Steel chassis for towable RVs | ● Furniture and mattresses |
● Axles and suspension solutions for towable RVs | ● Entry, luggage, patio and ramp doors |
● Slide-out mechanisms and solutions | ● Electric and manual entry steps |
● Thermoformed bath, kitchen and other products | ● Awnings and awning accessories |
● Windows | ● Electronic components |
● Manual, electric and hydraulic stabilizer and
leveling systems | ● LED televisions, sound systems, navigation
systems and wireless backup cameras |
● Chassis components | ● Other accessories |
The Company also supplies certain of these products to the RV aftermarket and to adjacent industries, including buses,buses; trailers used to haul boats, livestock, equipment and other cargo,cargo; trucks; pontoon boats; trains; manufactured homes; and pontoon boats. modular housing.
In 2015,2016, the RVOEM Segment represented 92 percent of the Company’s consolidated net sales and 90 percent of consolidated segment operating profit. Approximately 71 percent of the Company’s OEM Segment net sales in 2016 were of products to manufacturers of travel trailer and fifth-wheel RVs. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers). Approximately 73 percent of the Company’s RV Segment net sales in 2015 were of products to manufacturers of travel trailer and fifth-wheel RVs.
Raw materials used by the Company’s RVOEM Segment, consisting primarily of steel (coil, sheet, tube and I-beam), extruded aluminum, glass, wood, fabric and foam are available from a number of sources, both domestic and foreign.
Operations of the Company’s RVOEM Segment consist primarily of fabricating, welding, thermoforming, painting, sewing and assembling components into finished products. The Company’s RVOEM Segment operations are conducted at 3848 manufacturing and warehouse facilities throughout the United States, and in Canada and Italy, strategically located in proximity to the customers they serve. Of these facilities, 7 also conduct operations in the Company’s MH Segment. See Item 2. “Properties.”
The Company’s RVOEM Segment products are sold primarily to major manufacturers of RVs such as Thor Industries (symbol: THO), Forest River (a Berkshire Hathaway company, symbol: BRKA), Jayco (a private company)Winnebago (symbol: WGO) and other RV OEMs, and to a lesser extent, to manufacturers in adjacent industries and distributors and retail dealers of aftermarket products.industries.
The RV industry is highly competitive, both among manufacturers of RVs and the suppliers of RV components, generally with low barriers to entry other than compliance with industry standards, codes and safety requirements, and the initial capital investment required to establish manufacturing operations. The Company competes with several other component suppliers on a regional and national basis with respect to a broad array of components for both towable and motorized RVs. The Company’s RV Segment operations compete on the basis of customer service,product quality functionality,and reliability, product innovation, price, customer service and reliability.customer satisfaction. Although definitive information is not readily available, the Company believes with respect to its principal RV products (i) it is the leading supplier of windows and doors for towable RVs; (ii) it is the leading supplier of chassis and slide-out mechanisms
for towable RVs; (iii) the leading suppliers of axles for towable RVs are the Company and Dexter Axle Company; (iv) it is the leading supplier of furniture for towable RVs, and the Company competes with several other manufacturers; (v) the Company is the leading supplier of leveling systems for towable RVs; and (vi) the leading suppliers of awnings for towable RVs are the Company, Carefree of Colorado and Dometic Corporation.
The Company’s share of the market for its products in adjacent industries cannot be readily determined; however, RVOEM Segment net sales to adjacent industries increased from $113$275 million in 20142015 to $172$332 million in 2015. The Company’s share2016, 21 percent of the aftermarket for RV parts also cannot be readily determined; however, RVtotal OEM Segment net sales to the aftermarket increased from $50 million in 2014 to $87 million in 2015.sales. The Company has made investments in people, technology and equipment to increase its share of boththe market in adjacent industries and the aftermarket, and is committed to continue these expansion efforts.
Detailed narrative information about the results of operations of the RVOEM Segment is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Financial information relating to the Company’s business segments is included in Note 214 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
MHAftermarket Segment
ThroughMany of the Company’s OEM Segment products are also sold through various aftermarket channels, including dealerships, warehouse distributors and service centers, as well as direct to retail customers. The Company has teams dedicated to product training and marketing support for its wholly-owned subsidiaries, the Company manufactures or distributes a variety of products used in the production of manufactured homes, including:
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●Vinyl and aluminum windows | ●Aluminum and vinyl patio doors |
●Thermoformed bath and kitchen products | ●Steel chassis and related components |
●Steel and fiberglass entry doors | ●Axles |
Aftermarket customers. The Company also supplies certainsupports two call centers to provide quick responses to customers for both product delivery and technical support. This support is designed for a rapid response to critical repairs so customer downtime is minimized. The Aftermarket Segment also includes the sale of these productsreplacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements are purchased outside the normal product selling seasons, thereby causing Aftermarket sales to be counter-seasonal.
According to the manufactured housingRecreation Vehicle Industry Association (“RVIA”), current estimated RV ownership had increased to nearly nine million units. Additionally, as a result of a vibrant secondary market, one third of current owners purchased their RV new while the remaining two-thirds purchased a previously owned RV. This vibrant secondary market is a key driver for the aftermarket, and to adjacent industries, including modular housing and mobile office units. In 2015, the MH Segment represented 8 percent of the Company’s consolidated net sales, and 10 percent of consolidated segment operating profit. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured byas the Company are suitable for both typesanticipates owners of homes. As a result, the Company is not always able to determine in which type of home its products are installed.
Raw materials used by the Company’s MH Segment, consisting primarily of steel (coil, sheet and I-beam), extruded aluminum and vinyl, glass, and ABS resin, are available from a number of sources, both domestic and foreign.
Operations of the Company’s MH Segment consist primarily of fabricating, welding, thermoforming, painting and assembling components into finished products. The Company’s MH Segment operations are conducted at 13 manufacturing and warehouse facilities throughout the United States, strategically located in proximity to the customers they serve. Of these facilities, 7 also conduct operations in the Company’s RV Segment. See Item 2. “Properties.”
The Company’s manufactured housing products are sold primarily to major producers of manufactured homes such as Clayton Homes (a Berkshire Hathaway company, symbol: BRKA), Cavco Industries, Inc. (symbol: CVCO), and other OEMs, and, to a lesser extent, to manufacturers in adjacent industries and distributors of aftermarket products.
The manufactured housing industry is also highly competitive among manufacturers and suppliers. The Company competes with several other component suppliers with respect to a broad array of components,previously owned RVs will likely upgrade their units as well as with manufacturers of manufactured homes with vertically integrated operations. The Company’s MH Segment competes on the basis of customer service, quality, product innovation, pricereplace parts and reliability. Although definitive information is not readily available, the Company believes with respectaccessories which have been subjected to its principal manufactured housing products (i) it is the leading supplier of windows for manufactured homes; (ii) the Company’s manufactured housing chassisnormal wear and chassis parts operations compete with several other manufacturers of chassis and chassis parts, as well as with builders of manufactured homes, many of which produce their own chassis and chassis parts; and (iii) the Company’s thermoformed bath and kitchen unit operation competes with several other manufacturers of bath and kitchen units.tear.
The Company’s share of the market for its products in adjacent industries and the aftermarket cannot be readily determined. MH SegmentAftermarket net sales to adjacent industries and the aftermarket was $20 million and $16increased from $103 million in 2015 respectively.to $131 million in 2016. The Company has madecontinues to make investments in people and technology and equipment to increase its share of both adjacent industries andgrow the aftermarket,Aftermarket Segment and is committed to continue these expansion efforts.
Detailed narrative information about the results of operations of the MHAftermarket Segment is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Financial information relating to the Company’s business segments is included in Note 214 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
Sales and Marketing
The Company’s sales activities are related to developing new customer relationships and maintaining existing customer relationships, primarily through the quality and reliability of its products, innovation, price, customer service price and customer satisfaction. As a result of the Company'sCompany’s strategic decision to increase its sales to the aftermarket and adjacent industries, as well as expand into international markets, the Company has increased its annual marketing and advertising expenditures over the past few years, which were approximately $2$3 million in 2015.2016.
The Company has several supply agreements or other arrangements with certain of its customers that provide for prices of various products to be fixed for periods generally not in excess of eighteen months; however, in certain cases the Company has the right to renegotiate the prices on sixty-days’ notice. Both the RVOEM Segment and the MHAftermarket Segment typically ship products on average within one to two weeks of receipt of orders from their customers and, as a result, neither segment has any significant backlog.
Capacity
In 2015,2016, the Company’s facilities operated at an average of approximately 55 percent of their practical capacity, assuming at least two shifts of production at all facilities. However, while certain facilities could add a second shift of production in the short term, the Company has found this to be inefficient over the long term. Capacity varies significantly based on seasonal demand, as well as by facility, product line and geographic region, with certain facilities at times operating below 50 percent utilization, and other facilities at times operating above 90 percent utilization.
At December 31, 2015,2016, the Company operated 4248 manufacturing and distribution facilities, and for most products has the ability to fill demand in excess of capacity at individual facilities by shifting production to other facilities, but the Company would incur additional freight costs. Capital expenditures for 20152016 were $29$45 million, and included approximately $15$25 million of “replacement” capital expenditures and approximately $14$20 million of “growth” capital expenditures. The ability to expand capacity in certain product areas, if necessary, as well as the potential to reallocate existing resources, is monitored regularly by management to help ensure the Company can maintain a high level of production efficiencies throughout its operations.
Seasonality
The RV and manufactured housing industries, as well as otherMost industries where the Company sells products or where its products are used, historically have been seasonal and generally at the highest levels when the weather is moderate. Accordingly, the Company’s sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the addition of major RV open houses for dealers to the September/October timeframe, and the impact of international, national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, the timing of dealer orders, as well as the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years. Additionally, sales of components to the aftermarket channels of these industries tend to be counter-seasonal.
International
Over the past several years, the Company has been gradually growing international RV sales, primarily in Europe and Australia, and export sales represented approximately 2 percent, 1 percent and 1 percent of consolidated net sales in 2015.2016, 2015 and 2014, respectively. The Company continues to focus on developing products tailored for international RV markets. The Company participates in the largest RV shows in Europe and has been receiving positive feedback on its products, especially its proprietary slide-out products. The Company has spent more than two years developing three slide-out systems suited to the needs of the European market, which were recently featured on new RV models. As a result, the Company believes it will see additional orders from European RV OEMs. The Company’s Director of International Business Development spends time in Australia, Europe and other international markets, assessing the dynamics of the local marketplace, building relationships with OEMs and helping the Company introduce its existing products and develop new products for those markets, with the goal of identifying long-term growth opportunities. The Company estimates the addressable market for annual net sales of its products outside of North America to be $750 million.
In May 2016, the Company acquired Project 2000 S.r.l., a manufacturer of motorized entry steps, bed lifts and RV accessories located near Florence, Italy, as a foundation for LCI in the European RV market. In February 2017, the Company also acquired Sessa Klein S.p.A., a manufacturer of highly engineered side window systems for both high speed and commuter trains located near Varese, Italy. The acquisition of Sessa Klein introduces the Company to a new adjacent industry for the European and U.S. train markets, and, the Company believes, will accelerate the opportunities to expand LCI's product offerings for the European RV market.
Intellectual Property
The Company holds 190over 200 United States and foreign patents and has over 50nearly 60 patent applications pending that relate to various products sold by the Company. The Company has also granted certain licenses that permit third parties to manufacture and sell products in consideration for royalty payments. The Company believes its patents are valuable and vigorously protects its patents when appropriate.
From time to time, the Company has received notices or claims it may be infringing certain patent or other intellectual property rights of others, and the Company has given notices to, or asserted claims against, others that they may be infringing certain patent or other intellectual property rights of the Company. However, no material litigation is currently pending as a result of these claims.The Company believes its patents are valuable and vigorously protects its patents when appropriate.
Research and Development
The Company strives to be an industry leader in product innovation and is focused on developing new products, as well as improving existing products. Research and development expenditures are expensed as they are incurred. Research and development expenses were approximately $9 million, $8 million in 2015 and $5 million in both2016, 2015 and 2014, and 2013, respectively.
Regulatory Matters
We are subject to numerous federal, state and local regulations governing the manufacture and sale of our products. Sales and manufacturing operations in foreign countries may be subject to similar regulations.
Rules promulgated under the Transportation Recall Enhancement, Accountability and Documentation Act (the “Tread Act”) require manufacturers of motor vehicles and certain motor vehicle related equipment to regularly make reports and submit documents and certain historical data to the National Highway Traffic Safety Administration (“NHTSA”) of the United States Department of Transportation (“DOT”) to enhance motor vehicle safety, and to respond to requests for information relating to specific complaints or incidents.
Trailers produced by the Company for hauling boats, personal watercraft, snowmobiles and equipment must comply with Federal Motor Vehicle Safety Standards (“FMVSS”) promulgated by NHTSA relating to lighting, braking, wheels, tires and other vehicle systems.
Windows and doors produced by the Company for the RV industry must comply with regulations promulgated by NHTSA governing safety glass performance, egress ability, door hinge and lock systems, egress window retention hardware, and baggage door ventilation. Windows produced by the Company for buses also must comply with FMVSS promulgated by NHTSA.
Upholstered products and mattresses produced by the Company for RVs and buses must comply with FMVSS promulgated by NHTSA regarding flammability. In addition, upholstered products and mattresses produced by the Company for RVs must comply with regulations promulgated by the Consumer Products Safety Commission regarding flammability, as well as standards for toxic chemical levels and labeling requirements promulgated by the California Office of Environmental Health Hazard Assessment. Plywood, particleboard and fiberboard used in RV products are required to comply with standards for formaldehyde emission levels promulgated by the California Air Resources Board and adopted by the Recreation Vehicle Industry Association (“RVIA”).RVIA.
Windows and entry doors produced by the Company for manufactured homes must comply with performance and construction regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”) and by the American Architectural Manufacturers Association relating to air and water infiltration, structural integrity, thermal performance, emergency exit conformance, and hurricane resistance. Certain of the Company’s products must also comply with the International Code Council standards, such as the IRC (International Residential Code), the IBC (International Building Code), and the IECC (International Energy Conservation Code) as well as state and local building codes. Thermoformed bath products manufactured by the Company for manufactured homes must comply with performance and construction regulations promulgated by HUD.
The Company believes it is currently operating in compliance, in all material respects, with applicable laws and regulations and has made reports and submitted information as required. The Company does not believe the expense of compliance with these laws and regulations, as currently in effect, will have a material effect on the Company's operations, financial condition or competitive position; however, there can be no assurance this trend will continue as health and safety laws, regulations or other pertinent requirements evolve.
Environmental
The Company’s operations are subject to certain Federal,federal, state and local regulatory requirements relating to the use, storage, discharge, transport and disposal of hazardous materials used during the manufacturing processes. Although the Company believes its operations have been consistent with prevailing industry standards, and are in substantial compliance with applicable environmental laws and regulations, one or more of the Company’s current or former operating sites, or adjacent sites owned by third-parties, have been affected by releases of hazardous materials. As a result, the Company may incur expenditures for future investigation and remediation of these sites, and recorded a pre-tax charge of $1.5 million related to environmental costsincluding in 2015.conjunction with voluntary remediation programs or third party claims. In the past, environmental compliance costs have not had, and are not expected in the future to have, a material effect on the Company’s operations or financial condition; however, there can be no assurance that this trend will continue.
Employees
The number of persons employed full-time by the Company at December 31, 20152016 was 6,576,7,654, compared to 5,8456,576 and 6,187 at December 31, 2014.2015 and 2014, respectively. The total at December 31, 20152016 included 5,3626,295 in manufacturing, 288337 in transportation, 93103 in sales, 172230 in customer support and servicing, and 661689 in administration. None of the employees of the Company are subject to collective bargaining agreements. The Company believes that relations with its employees are good.
Executive Officers
The following table sets forth our executive officers as of December 31, 2015:2016:
|
| |
| Name | Position |
| | |
| Jason D. Lippert | Chief Executive Officer and Director |
| Scott T. Mereness | President |
DavidBrian M. SmithHall | Chief Financial Officer |
| Robert A. Kuhns | Vice President – Chief Legal Officer and Secretary |
| Jamie M. Schnur | Chief Administrative Officer |
| Nick C. Fletcher | Chief Human Resources Officer |
Officers are elected annually by the Board of Directors. There are no family relationships between or among any of the executive officers or Directors of the Company. Additional information with respect to the Company’s Directors is included in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 2016.25, 2017.
JASON D. LIPPERT (age 43)44) became Chief Executive Officer of the Company effective May 10, 2013, and has been Chief Executive Officer of Lippert Components since February 2003. Mr. Lippert has over 1620 years of experience with DrewLCII and its subsidiaries, and has served in a wide range of leadership positions.
SCOTT T. MERENESS (age 44)45) became President of the Company effective May 10, 2013, and has been President of Lippert Components since July 2010. Mr. Mereness has over 1620 years of experience with DrewLCII and its subsidiaries, and has served in a wide range of leadership positions.
DAVIDBRIAN M. SMITHHALL (age 52)42) joined the Company in March 2013, and has been theserved as Corporate Controller since June 2013, and Chief Financial Officer of the Company since September 2015.November 2016. Prior to joining the Company, Mr. Smith served for the past tenhe spent more than 16 years as Senior Vice President and Chief Financial Officer of Key Safety Systems, Inc., a global leader in the design, development and manufacturing of passive safety systems primarily to the automotive industry.public accounting.
ROBERT A. KUHNS (age 50)51) joined the Company in March 2013, and has been Vice President – Chief Legal Officer and Secretary since July 2013. Prior to joining the Company, he was a partner in the Corporate Group at the Minneapolis office of Dorsey & Whitney LLP, a full-service global law firm.
JAMIE M. SCHNUR (age 44)45) became Chief Administrative Officer of the Company effective May 2013. Mr. Schnur has over 1920 years of experience with the Company, and has served in a wide range of leadership positions with Lippert Components.
NICK C. FLETCHER (age 55)56) joined the Company onin February 2013 as Vice President of Human Resources. Since January 2015, he has been Chief Human Resources Officer. Prior to joining the Company, Mr. Fletcher provided consulting services and held roles in senior level positions at American Commercial Lines, Continental Tire, Wabash National, Siemens and TRW.
Other Officers
BRIAN M. HALL (age 41) joined the Company in March 2013, and has been Corporate Controller since July 2013. Prior to joining the Company, he was a Senior Manager at Crowe Horwath LLP. Mr. Hall is a Certified Public Accountant.
Item 1A. RISK FACTORS.
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face, but represent the most significant risk factors that we believe may adversely affect the RV manufactured housing and other industries we supply our products to, as well as our business, operations or financial position. The risks and uncertainties discussed in this report are not exclusive and other risk factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Industry Risk Factors
Economic and business factors beyond our control, including cyclicality and seasonality in the industries where we sell our products, could lead to fluctuations in our operating results.
The RV, recreational boat and manufactured housing markets, as well as other markets where we sell many of our products or where our products are used, have been characterized by cycles of growth and contraction in consumer demand.demand, often because the purchase of such products are viewed as a consumer discretionary purchase. Periods of economic recession have adversely affected, and could again adversely affect, our operating results. Companies in these industries are subject to volatility in production levels, shipments, sales and operating results due to changes in external factors such as general economic conditions, including credit availability, consumer
confidence, employment rates, prevailing interest rates, inflation, fuel prices and other economic conditions affecting consumer demand and discretionary consumer spending, as well as demographic and political changes.changes, all of which are beyond our control. Consequently, our operating results for any prior period may not be indicative of results for any future period.
Additionally, manufacturing operations in most of the RV and manufactured housing industries, as well as other industries where we sell our products or where our products are used, historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, our sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter.seasonal. However, because of fluctuations in dealer inventories, and the impact of international, national and regional economic conditions and consumer confidence on retail sales of RVsproducts which include our components, and other products for which we sell our components,factors, current and future seasonal industry trends may be different than in prior years. Unusually severe weather conditions in some geographic areas may also, from time to time, impact the timing of industry-wide shipments from one period to another.
Reductions in the availability of wholesale financing limits the inventories carried by retail dealers of RVs and manufactured homes and other products which use our components, which would cause reduced production by our customers, and therefore reduced demand for our products.
Retail dealers of RVs and manufactured homes and other products which use our components generally finance their purchases of inventory with financing known as floor-plan financing provided by lending institutions. A dealer’s ability to obtain financing is significantly affected by the number of lending institutions offering floor planning, and by an institution’s lending limits, which are beyond our control. Reduction in the availability of floor-plan financing has in the past caused, and would likely cause, many dealers to reduce inventories, which would result in reduced production by OEMs, and consequently resulting in reduced demand for our products. Moreover, dealers which are unable to obtain adequate financing could cease operations. Their remaining inventories would likely be sold at discounts, disrupting the market. Such sales have historically caused a decline in orders for new inventory, which reduced demand for our products.
Conditions in the credit market could limit the ability of consumers to obtain retail financing for RVs and manufactured homes,other products which use our components, resulting in reduced demand for our products.
Retail consumers who purchase RVs and other products which use our components generally obtain retail financing from third party lenders. The availability, terms and cost of retail financing depend on the lending practices of financial institutions, governmental policies and economic and other conditions, all of which are beyond our control. Restrictions on the availability of consumer financing for RVs and manufactured homes and increases in the costs of such financing have in the past limited, and could again limit, the ability of consumers to purchase RVs and manufactured homes,such discretionary products, which would result in reduced production of RVs and manufactured homessuch products by our customers, and therefore reduce demand for our products.
Loans used to finance the purchase of manufactured homes usually have shorter terms and higher interest rates, and are more difficult to obtain, than mortgages for site-built homes. Historically, lenders required a higher down payment, higher credit scores and other criteria for these loans. Current lending criteria are higher than historical criteria, and many potential buyers of manufactured homes may not qualify.
The availability, cost, and terms of these manufactured housing loans are also dependent on economic conditions, lending practices of financial institutions, government policies, and other factors, all of which are beyond our control. Reductions in the availability of financing for manufactured homes and increases in the costs of this financing have limited, and could continue to limit, the ability of consumers to purchase manufactured homes, resulting in reduced production of manufactured homes by our customers, and therefore reduced demand for our products. In addition, certain provisions of the Dodd-Frank Act, which regulate financial transactions, could make certain types of mortgages more difficult to obtain – in particular those historically used to finance the purchase of manufactured homes. Although legislation has been introduced to address this matter, and the Bureau of Consumer Financial Protection has been reviewing this matter, there can be no assurance of the outcome.
Excess inventories at dealers and manufacturers can cause a decline in the demand for our products.
Dealers and manufacturers could accumulate unsold inventory. High levels of unsold inventory have in the past caused, and would cause, a reduction in orders, which would likely cause a decline in demand for our products.
Gasoline shortages, or high prices for gasoline, could lead to reduced demand for our products.
Fuel shortages, and substantial increases in the price of fuel, have had a materialan adverse effect on the RV industry as a whole in the past, and could again in the future. Travel trailer and fifth-wheel RVs, components for which represented approximately 7371 percent of our RVOEM Segment net sales in 2015,2016, are usually towed by light trucks or SUVs. Generally, these vehicles use more fuel than automobiles, particularly while towing RVs.RVs or other trailers. High prices for gasoline, or anticipation of potential fuel shortages, can affect consumer use and purchase of light trucks and SUVs, which could result in reduced demand for travel trailer and fifth-wheel RVs, and therefore reduced demand for our products.
The manufactured housing industry has experienced a significant long-term decline in shipments, which has led to reduced demand for our products.
Our MH Segment, which accounted for 8 percent of consolidated net sales for 2015, operates in an industry which has experienced a decline in production of new homes compared to the peak of production in 1998. The downturn was caused, in part, by limited availability and high cost of financing for manufactured homes, and was exacerbated by economic and political conditions during the financial crisis.
Although industry-wide wholesale production of manufactured homes has improved in recent years, our annual results of operations could decline if manufactured housing industry conditions were to worsen.
Company-Specific Risk Factors
A significant percentage of our sales are concentrated in the RV industry, and declines in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs could reduce demand for our products and adversely impact our operating results and financial condition.
In 2015,2016, the RVOEM Segment represented 92 percent of our consolidated net sales, and 90 percent of consolidated segment operating profit. Approximately 7371 percent of our RVOEM Segment net sales in 20152016 were of products to manufacturers of travel trailer and fifth-wheel RVs. While we measure our RVOEM Segment sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence which was above historical averages in 2015.2016. Declines in industry-wideindustry-
wide wholesale shipments of travel trailer and fifth-wheel RVs could reduce demand for our products and adversely affect our operating results and financial condition.
Although we have a large number of customers, the loss of any customer accounting for more than 10 percent of our consolidated net sales could have a material adverse impact on our operating results.
Two customers of both the OEM Segment and the Aftermarket Segment accounted for 63 percent of our consolidated net sales in 2016. The loss of either of these customers would have a material adverse impact on our operating results and financial condition. In addition, we generally do not have long-term agreements with our customers and cannot predict that we will maintain our current relationships with these customers or that we will continue to supply them at current levels.
Volatile raw material costs could adversely impact our financial condition and operating results.
The prices we pay for steel and aluminum represented approximately 45 percent and 15 percent, respectively, of our raw material costs in 2015.2016. These, and other key raw materials, have historically been volatile and can fluctuate dramatically with changes in the global demand and supply for such products.
Because competition and business conditions may limit the amount or timing of increases in raw material costs that can be passed through to our customers in the form of sales price increases, future increases in raw material costs could adversely impact our financial condition and operating results. Conversely, as raw material costs decline, we may not be able to maintain selling prices consistent with higher cost raw materials in our inventory, which could adversely affect our operating results.
Inadequate supply of raw materials or components used to make our products could adversely impact our financial condition and operating results.
Our business depends on our ability to source raw materials, such as steel, aluminum, glass, fabric and foam, and certain components, such as electric motors, televisions and appliances, in a timely and cost efficient manner. Most materials and components are readily available from a variety of sources. However, a few key components are currently produced by only a small group of quality suppliers that have the capacity to supply large quantities. If raw materials or components that are used in manufacturing our products or for which we act as a distributor, particularly those which we import, become unavailable, or if the supply of these raw materials and components is interrupted or delayed, our manufacturing and distribution operations could be adversely affected. We currently import, or purchase from suppliers who import, approximately 25 percent of our raw materials and components. Additionally, we have the exclusive right to distribute Furrion’s complete line of electronics and appliance products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada, which products are imported from China. Consequently, we rely on the free flow of goods through open and operational ports and on a consistent basis for a significant portion of our raw materials and components. Adverse political conditions, trade embargoes, increased tariffs or import duties, inclement weather, natural disasters, war, terrorism or labor disputes at various ports or otherwise adversely impacting our suppliers create significant risks for our business, particularly if these conditions or disputes result in work slowdowns, lockouts, strikes or other disruptions, and could have an adverse impact on our operating results if we are unable to fulfill customer orders or required to accumulate excess inventory or find alternate sources of supply, if available, at higher costs.
We import a portion of our raw materials and the components we sell and the effect of foreign exchange rates could adversely affect our operating results.
We negotiate for the purchase of a significant portion of raw materials and semi-finished components with suppliers that are not located in the United States. As such, the prices we pay in part are dependent upon the rate of exchange for US Dollars versus the currency of the local supplier. A dramatic weakening of the US Dollar could increase our cost of goods sold and such cost increases may not be offset through price increases for our products, adversely impacting our margins.
Inadequate supply of raw materials or components used to make our products could adversely impact our financial condition and operating results.
Our business depends on our ability to source raw materials, such as steel and aluminum, and certain components in a timely and cost efficient manner. If raw materials or components that are used in manufacturing our products, particularly those which we import, become unavailable, or if the supply of these raw materials and components is interrupted or delayed, our manufacturing operations could be adversely affected. We currently import, or purchase from suppliers who import, approximately 24 percent of our raw materials and components. Consequently, we rely on the free flow of goods through open and operational ports and on a consistent basis for a significant portion of our raw materials and components. Labor disputes at various ports or at our suppliers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions, and could have an adverse impact on our operating results if we are unable to fulfill customer orders or required to accumulate excess inventory or find alternate sources of supply, if available, at higher costs.
The loss of any customer accounting for more than 10 percent of our consolidated net sales could have a material adverse impact on our operating results.
Two customers of the RV Segment accounted for a combined 39 percent, and another customer of both the RV Segment and the MH Segment accounted for 26 percent, of our consolidated net sales in 2015. The loss of any of these customers would have a material adverse impact on our operating results and financial condition.
Changes in consumer preferences relating to our products, or the inability to develop innovative new products, could cause reduced sales.
Changes in consumer preferences or ourfor RV, manufactured housing and recreational boat models, and for the components we make for such products, occur over time. Our inability to anticipate changes in consumer preferences for RVssuch products, or manufactured homes, or for the products we make for RVs and manufactured homes,delays in responding to such changes, could reduce demand for our products and adversely affect our net sales and operating resultsresults. Similarly, we believe our ability to remain competitive also depends on our ability to develop innovative new products or enhanced features of existing products. Delays in the introduction or market acceptance of new products or product features could have an adverse effect on our net sales and financial condition.operating results.
Competitive pressures could reduce demand for our products or impact our sales prices.
The industries in which we are engaged are highly competitive and generally characterized by low barriers to entry, and we have numerous existing and potential competitors. Competition is based upon product quality and reliability, product innovation, price, customer service and customer satisfaction. Competitive pressures have, from time to time, resulted in a reduction of our profit margins and/or reduction in our market share. Domestic and foreign competitors may lower prices on products which currently compete with our products, or develop product improvements, which could reduce demand for our products or cause us to reduce prices for our products. Sustained increases in these competitive pressures could have a material adverse effect on our results of operations. In addition, the manufacture by our customers themselves of products supplied by us could reduce demand for our products and adversely affect our operating results and financial condition.
Increases in demand could result in difficulty obtaining additional skilled labor, and available capacity may initially not be utilized efficiently.
In certain geographic regions in which we have a larger concentration of manufacturing facilities we have experienced, and could again experience, shortages of qualified employees. Competition for skilled workers, especially during improving economic times, may increase the cost of our labor and create employee retention and recruitment challenges, as employees with knowledge and experience have the ability to change employers relatively easily. If such conditions become extreme, we may not be able to increase production to timely satisfy demand, and may initially incur higher labor and production costs, which could adversely impact our operating results and financial condition.
We may incur unexpected expenses, or face unanticipated delays, in connection with expansion plans or investments we make in our business, which could adversely impact our operating results.
It may take longer than initially anticipated for us to realize expected results from investments in research and development or acquired businesses, as well as initiatives we have implemented to increase capacity and improve production efficiencies, automation, customer service and other aspects of our business, or we may incur unexpected expenses in connection with these matters. These conditionsExpansion plans may involve the acquisition of existing manufacturing facilities that require upgrades and improvements or the need to build new manufacturing facilities. Such activities may be delayed or incur unanticipated costs which could have an adverse effect on our operating results. Similarly, competition for desirable production facilities, especially during times of increasing production, may increase the cost of acquiring production facilities or limit the availability of obtaining such facilities. In addition, the start-up of operations in new facilities may incur unanticipated costs and inefficiencies which may adversely affect our profitability during the ramp up of production in those facilities. Delays in the construction, re-configuration or relocation of facilities could result in an adverse impact to our operating results or a loss of market share.
Natural disasters, whether or not caused by climate change, unusual weather conditions, epidemic outbreaks, terrorist acts and political events could disrupt business and result in lower sales and otherwise adversely affect our financial condition.performance.
Our facilities may be affected by natural disasters, such as tornadoes, hurricanes, fires, floods, earthquakes, and unusual weather conditions, as well as other external events such as epidemic outbreaks, terrorist attacks or disruptive political events, any one of which could adversely affect our business and result in lower sales. In the event that one of our manufacturing or distribution facilities was affected by a disaster or other event, we could be forced to shift production to one of our other facilities or to cease operations. Although we maintain insurance for damage to our property and disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing or distribution facilities or customer service centers could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.
We have recently entered new markets in order to enhance our growth potential. Uncertainties with respect to these new markets could impact our operating results.
We are a leading supplier of components for RVs and manufactured housing, and currently have a significant share of the market for certain of our products, which limits our ability to expand our market share for those products. We have made investments in order to expand the sale of our products in the RV and manufactured housing aftermarket, and in adjacent industries, beyond RVssuch as buses, trucks, pontoon boats and manufactured housing.trains, where we may have less familiarity with OEM or consumer preferences and could encounter difficulties in attracting customers due to a reduced level of familiarity with our brands. We arehave also made investments to expand the sale of our products in the aftermarket of our industries, and are
exploring opportunities to increase export sales of our products to international markets. Limited operating experience or limited brand recognition in new markets may limit our business expansion strategy. Lack of demand for our products in these markets or competitive pressures requiring us to lower prices for our products could adversely impact our business growth in these markets and our results of operations.
As we grow, we will face the risk that our existing resources and systems, including management resources, accounting and finance personnel and operating systems, may be inadequate to support our growth. We cannot assure you that we will be able to retain the personnel or make the changes in our systems that may be required to support our growth. Failure to secure these resources and implement these systems on a timely basis could have an adverse effect on our results of operations. In addition, hiring additional personnel and implementing changes and enhancements to our systems will require capital expenditures and other increased costs that could also have an adverse impact on our results of operations.
If acquired businesses are not successfully integrated into our operations, our financial condition and operating results could be adversely impacted.
We have completed several business acquisitions and may continue to engage in acquisitions or similar activities, includingsuch as joint ventures and other business transactions. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions, our ability to compete effectively for acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Such acquisitions, joint ventures and other business transactions that involve potential risks, includingincluding:
the failure to successfully integrate departments and realize systems, including IT and accounting systems, technologies, books and records and procedures,
the expected benefits of such transactions,need for additional investments post-acquisition that could be greater than anticipated,
the assumption of liabilities of the acquired businesses that could be greater than anticipated,
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and possible culture conflicts. write-off of significant amounts of goodwill or other assets that could adversely affect our operating results, and
the potential loss of key employees or existing customers or adverse effects on existing business relationships with suppliers and customers.
Integrating acquired operations is a significant challenge and there is no assurance that we will be able to manage the integrations successfully. If we are unable to efficiently integrate these businesses, the attention of our management could be diverted from our existing operations and the ability of the management teams at these business units to meet operational and financial expectations could be adversely impacted, which could impair our ability to execute our business plans. Failure to successfully integrate acquired operations or to realize the expected benefits of such acquisitions may have an adverse impact on our results of operations and financial condition.
As we expand our business internationally, we will be subject to new operational and financial risks.
We have been gradually growing sales overseas, primarily in Europe and Australia, and export sales represented approximately 2 percent, 1 percent and 1 percent of consolidated net sales in 2016, 2015 and 2014, respectively. We plan to continue pursuing international opportunities. In May 2016, we acquired Project 2000 S.r.l., a manufacturer of motorized entry steps, bed lifts and RV accessories, located near Florence, Italy, as a foundation for LCI in the European RV market. In February 2017, we also acquired Sessa Klein S.p.A., a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The acquisition of Sessa Klein introduces us to a new adjacent industry for the European and U.S. train markets, and, we believe, will accelerate the opportunities to expand our product offerings for the European RV market.
Business outside of the United States is subject to various risks, many of which are beyond our control, including: adverse political and economic conditions; changes in tariffs, trade restrictions, trade agreements, and taxation; difficulties in managing or overseeing foreign operations and agents; differences in regulatory environments, labor practices and market practices; cultural and linguistic differences; foreign currency fluctuations and limitations on the repatriation of funds because of foreign exchange controls; different liability standards; and intellectual property laws of countries which do not protect our rights in our intellectual property to the same extent as the laws of the United States. The occurrence or consequences of any of these factors may have an adverse impact on our operating results and financial condition, as well as impact our ability to operate in international markets.
The loss of key management could reduce our ability to execute our business strategy and could adversely affect our business and results of operations.
We are dependent on the knowledge, experience and skill of our managerial personnel.leadership team. The loss of the services of one or more key managers or the failure to attract or retain qualified managementmanagerial, technical, sales and marketing, operations and customer service staff could impair our ability to conduct and manage our business and execute our business strategy, which would have a materialan adverse effect on our business, financial condition and results of operations.
Our business is subject to numerous international, federal, state and local regulations, and increased costs of compliance, failure in our compliance efforts or events beyond our control could result in damages, expenses or liabilities that could adversely impact our financial condition and operating results.
We are subject to numerous federal, state and local regulations governing the manufacture and sale of our products, including regulations and standards promulgated by the National Highway Traffic Safety Administration (“NHTSA”) of the United States Department of Transportation (“DOT”), the Consumer Products Safety Commission, the United States Department of Housing and Urban Development (“HUD”), and consumer safety standards promulgated by state regulatory agencies and industry associations, and theassociations. The failure to comply with present or future regulations and standards could subject us to lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls of our products. Sales and manufacturing operations in foreign countries may be subject to similar regulations. Any major recalls of our products, voluntary or involuntary, could adversely impact our reputation, net sales, financial condition and operating results. Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected. In addition, our failure to comply with present or future regulations could result in fines being imposed on us, potential civil and criminal liability, suspension of sales or production or cessation of operations.
Further, certain U.S. and foreign laws and regulations affect our activities. Areas of our business affected by such laws and regulations include, but are not limited to, labor, advertising, consumer protection, quality of services, warranty, product liability, real estate, intellectual property, tax, import and export duties, tariffs, competition, environmental, and competition.health and safety. We are also subject to compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”), and other anti-corruption and anti-bribery laws applicable to our operations. Compliance with these laws and others may be onerous and costly, at times, and may be inconsistent from jurisdiction to jurisdiction, which further complicates compliance efforts. Violations of anythese laws and regulations could lead to significant penalties, including restraints on our export or import privileges, monetary fines, criminal proceedings and regulatory or other actions that could adversely affect our results of operations. We have instituted various policies and procedures to ensure compliance. However, we cannot assure you that employees, contractors, vendors or our agents will not violate such laws could subject us to sanctionsand regulations or other penalties that could negatively affect our reputation, businesspolicies and operating results.procedures.
In addition, potentially significant expenditures could be required in order to comply with evolving healthcare, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future by governmental authorities. Our operating profit margin in 20152016 was impacted by higher health insurance costs, largely due to increased employee participation, which we believe is largely due to the new healthcare requirements, and operating profit will likely continue to be impacted in future periods.
Our risk management policies and procedures may not be fully effective in achieving their purposes.
Our policies, procedures, controls and oversight to monitor and manage our enterprise risks may not be fully effective in achieving their purpose and may leave exposure to identified or unidentified risks. Past or future misconduct by our employees or vendors could result in violations of law by us, regulatory sanctions and/or serious reputational harm or financial harm. We monitor our policies, procedures and controls; however, we cannot assure you that our policies, procedures and controls will be sufficient to prevent all forms of misconduct. We review our compensation policies and practices as part of our overall enterprise risk management program, but it is possible that our compensation policies could incentivize inappropriate risk taking or misconduct. If such inappropriate risks or misconduct occurs, it is possible that it could have an adverse effect on our results of operations and/or our financial condition.
Our operations are subject to certain environmental laws and regulations, and costs of compliance, investigation or remediation of environmental conditions could have an adverse effect on our business and results of operations.
Our operations are also subject to certain complex federal, state and local environmental laws and regulations relating to air, water, noise pollution and the use, storage, discharge and disposal of hazardous materials used during the manufacturing processes. Under certain of these laws, namely the Comprehensive Environmental Response, Compensation, and Liability Act and its state counterparts, liability for investigation and remediation of hazardous substance contamination at currently or formerly owned or operated facilities or at third-party waste disposal sites is joint and several. Our failure to comply with these regulations could cause us to become subject to fines and penalties or otherwise have an adverse impact on our business. Although we believe that our operations and facilities have been and are being operated in compliance, in all material respects, with such laws and
regulations, one or more of our current or former operating sites, or adjacent sites owned by third-parties, have been affected by releases of hazardous materials. As a result, we may incur expenditures for future investigation and remediation.remediation, including in conjunction with voluntary remediation programs or third party claims. If other potentially responsible persons (“PRPs”) are unable or otherwise not obligated to contribute to remediation costs, we could be held responsible for their portion of the remediation costs, and those costs could be material. The operation of our manufacturing facilities entails risks, and we cannot assure that our costs in relation to these environmental matters or compliance with environmental laws in general will not have an adverse effect on our business and results of operations.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on certain trademarks and patents, including contractual rights with third parties. Our success depends, in part, on our ability to protect our intellectual property against dilution, infringement, and competitive pressure by defending our intellectual property rights. To protect our property rights, we rely on intellectual property laws of the U.S., European Union, Canada, and other countries, as well as contractual and other legal rights. However, we cannot assure you that these measures will be successful in any given instance, particularly in countries outside the U.S. We endeavor to protect our rights; however, third parties may infringe upon our intellectual property rights. We may be forced to take steps to protect our rights, including through litigation. This could result in a diversion of resources. The inability to protect our intellectual property rights could have a material adverse effect onresult in competitors manufacturing and marketing similar products which could adversely affect our business.market share and results of operations. Competitors may challenge, invalidate or avoid the application of our existing or future intellectual property rights that we receive or license. We may also be subject to claims by third parties, seeking to enforce their claimed intellectual property rights. The loss of protection for our intellectual property could reduce the market value of our products and services, lower our profits, and could otherwise have an adverse effect on our business, financial condition or results of operation.
Compliance with conflict mineral disclosure requirements will create additional compliance cost and may create reputational challenges.
The SEC adopted rules pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act setting forth new disclosure requirements concerning the use or potential use of certain minerals, deemed conflict minerals (tantalum, tin, gold and tungsten), that are mined from the Democratic Republic of Congo and adjoining countries. These requirements necessitate due diligence efforts on our part to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. There will bedisclosures that began in May 2014. We have incurred costs associated with complyingand diverted internal resources to comply with these disclosure requirements, including for diligence to determine the sources of conflictthose minerals that may be used in our products and other potential changesor necessary to products, processes or sourcesthe production of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be onlyCompliance costs are expected to continue in future periods, subject to any regulatory changes implemented by the new administration in Washington, D.C. Further action or clarification from the SEC or a limited number of suppliers
offering conflict-free minerals, we cannot be surecourt regarding required disclosures could result in reputational challenges that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices, which could adversely affect our ability to meet customer demand. We may also face reputational challengesimpact future sales if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.and are required to make such disclosures.
If our information technology systems fail to perform adequately or are breached, our operations could be disrupted and could adversely affect our business, reputation and results of operation.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, inventory, supply chain, order entry and fulfillment, manufacturing, distribution, warranty administration, invoicing, collection of payments, and other business processes. We use information systems to report and support the audit of our operational and financial results. Additionally, we rely upon information systems in our sales, marketing, human resources and communication efforts. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, security breaches, telecommunications failures, computer viruses, hackers, and other manipulation or improper use of our systems. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could adversely affect our business. Due to our reliance on our information systems, we have established various levels of security, backup and disaster recovery procedures. Further, we have selected and have begun implementing a new enterprise resource planning (“ERP”) system, the full implementation of which is expected to take several years; however, there may be other challenges and risks as we upgrade and standardize our ERP system on a company-wide basis.
IfAdditionally, because we expandaccept debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (the “PCI Standard”), issued by the Payment Card Industry Security Standards Council. The PCI Standard contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing and
transmission of cardholder data. Complying with the PCI Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology such as those necessary to maintain compliance with the PCI Standard or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our payment-related systems could have an adverse effect on our business, internationally, we will be subject to new operationalfinancial condition and financial risksresults of operations.
We could incur warranty claims in excess of reserves.
We receive warranty claims from our customers in the ordinary course of our business. Although we maintain reserves for such claims, which to date have been gradually growing sales overseas, primarilyadequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A significant increase in Europewarranty claims exceeding our current warranty expense levels could have an adverse effect on our results of operations and Australia,financial condition.
In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and export sales represented approximately 1 percentcustomer satisfaction actions. Although we estimate and reserve for the cost of 2015 consolidated net sales. these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
We planmay be subject to continue pursuing international opportunities. Business outsideproduct liability claims if people or property are harmed by the products we sell.
Some of the United Statesproducts we sell may expose us to product liability claims relating to personal injury, death, or property damage, and may require product recalls or other actions. Although we maintain liability and product recall insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, even if a product liability claim is subject to various risks,not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that our products caused property damage or personal injury could damage our brand identity and our reputation with existing and potential consumers and have an adverse effect on our business, financial condition and results of operations.
We could incur asset impairment charges for goodwill, intangible assets or other long-lived assets.
A portion of our total assets as of December 31, 2016 are comprised of goodwill, intangible assets and other long-lived assets. At least annually, we review goodwill for impairment. Long-lived assets, identifiable intangible assets and goodwill are also reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable from future cash flows. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Our determination of future cash flows, future recoverability and fair value of our long-lived assets includes significant estimates and assumptions. Changes in those estimates or assumptions or lower than anticipated future financial performance may result in the identification of an impaired asset and a non-cash impairment charge, which could be material. Any such charge could adversely affect our operating results and financial condition.
Our stock price may be volatile.
The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our control, including: changes in tariffs, trade restrictions, trade agreements,control. These factors include: the perceived prospects of our business and taxations; difficulties in managing or overseeing foreign operationsour industries as a whole; differences between our actual financial and agents; differences in regulatory environments, labor practices and market practices; cultural and linguistic differences; foreign currency fluctuations and limitations on the repatriation of funds because of foreign exchange controls; different liability standards; and intellectual property laws of countries which do not protect our rights in our intellectual property to the same extent as the laws of the United States. The occurrence or consequences of any of these factors may have an adverse impact on our operating results and financial condition, as well as impactthose expected by investors and analysts; changes in analysts’ recommendations or projections; changes affecting the availability of financing in the wholesale and consumer lending markets; actions or announcements by competitors; changes in the regulatory environment in which we operate; significant sales of shares by a principal stockholder; actions taken by stockholders that may be contrary to Board of Director recommendations; and changes in general economic or market conditions. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our abilitycommon stock for reasons unrelated to operate in international markets.our performance.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
The Company’s manufacturing operations are conducted at facilities that are used for both manufacturing and warehousing. Many of the properties listed manufacture and warehouse products sold through both the OEM Segment and Aftermarket Segment. Square footage is not allocated across the segments. In addition, the Company maintains administrative facilities used for corporate and administrative functions. The Company’s primary administrative offices are located in Elkhart and Goshen, Indiana. Total administrative space company-wide aggregates approximately 251,000 square feet. At December 31, 2015,2016, the Company’s properties were as follows:
|
| | | | | | | | | | | |
| | | | RV SEGMENT | | | | |
| | | | | | | | |
| City | | State/Province | | Square Feet | | Owned | | Leased |
Double Springs(1) | | Alabama | | 54,500109,000 |
| | | | ☑ | | |
| Gilbert | | Arizona | | 11,600 |
| | | | | | ☑ |
Rialto(1) | | California | | 56,43062,700 |
| | | | ☑ | | |
| Lakeland | | Florida | | 15,000 |
| | | | | | ☑ |
NampaKissimmee | | IdahoFlorida | | 147,0004,246 |
| | | | | | ☑ |
Nampa(1)
Fitzgerald | | IdahoGeorgia | | 29,22579,000 |
| | | | ☑ | | |
| Nampa | | Idaho | | 125,000 |
| | | | | | ☑ |
| Nampa | | Idaho | | 83,500 |
| | | | ☑ | | |
| Nampa | | Idaho | | 22,000 |
| | | | | | ☑ |
| Twin Falls | | Idaho | | 16,060 |
| | | | | | ☑ |
Goshen(1) | | Indiana | | 459,200410,000 |
| | | | ☑ | | |
|
| | | | | | | | | | | |
| South Bend | | Indiana | | RV SEGMENT379,902 | | | | |
| | | | | | | | |
City | | State/Province | | Square Feet | | Owned | | Leased☑ |
| Goshen | | Indiana | | 355,960 |
| | | | ☑ | | |
| Goshen | | Indiana | | 363,000341,000 |
| | | | | | ☑ |
| Elkhart | | Indiana | | 308,864 |
| | | | ☑ | | |
South BendElkhart | | Indiana | | 275,973250,000 |
| | | | ☑ | | ☑ |
| Elkhart | | Indiana | | 250,000160,000 |
| | | | ☑ | | |
| Goshen | | Indiana | | 153,200 |
| | | | ☑ | | |
| Goshen | | Indiana | | 144,500 |
| | | | ☑ | | |
| Fort Wayne | | Indiana | | 140,000 |
| | | | | | ☑ |
Goshen (1)
| | Indiana | | 138,700 |
| | | | ☑ | | |
| Middlebury | | Indiana | | 122,226 |
| | | | ☑ | | |
| Auburn | | Indiana | | 119,000 |
| | | | | | ☑ |
| Goshen | | Indiana | | 118,125 |
| | | | ☑ | | |
| Goshen | | Indiana | | 110,000 |
| | | | ☑ | | |
| Elkhart | | Indiana | | 102,900 |
| | | | | | ☑ |
| Middlebury | | Indiana | | 101,776 |
| | | | ☑ | | |
| Goshen | | Indiana | | 95,960 |
| | | | | | ☑ |
| Elkhart | | Indiana | | 92,000 |
| | | | ☑ | | |
| Goshen | | Indiana | | 87,800 |
| | | | ☑ | | |
| Elkhart | | Indiana | | 87,000 |
| | | | | | ☑ |
| Goshen | | Indiana | | 53,50074,200 |
| | | | ☑ | | |
| Howe | | Indiana | | 60,000 |
| | | | ☑ | | |
| Goshen | | Indiana | | 50,00053,500 |
| | | | ☑ | | |
| Elkhart | | Indiana | | 28,000 |
| | | | | | ☑ |
| Goshen | | Indiana | | 22,000 |
| | | | | | ☑ |
| Elkhart | | Indiana | | 18,000 |
| | | | | | ☑ |
Sterling HeightsMillersburg | | MichiganIndiana | | 27,36310,000 |
| | | | | | ☑ |
| Calenzano | | Italy | | 15,000 |
| | | | | | ☑ |
| Sterling Heights | | Michigan | | 37,018 |
| | | | | | ☑ |
|
| | | | | | | | | | | |
| City | | State/Province | | Square Feet | | Owned | | Leased |
| Jackson Center | | Ohio | | 12,000 |
| | | | | | ☑ |
| Pendleton | | Oregon | | 56,800 |
| | | | ☑ | | |
McMinnville(1) | | Oregon | | 17,85035,700 |
| | | | ☑ | | |
GranbyDenver | | QuebecPennsylvania | | 60,00040,200 |
| | | | | | ☑ |
| Granby | | Quebec | | 65,000 |
| | | | ☑ | | |
| Chester | | South Carolina | | 108,600 |
| | | | ☑ | | |
| Gaffney | | South Carolina | | 55,000 |
| | | | | | ☑ |
| Myrtle Beach | | South Carolina | | 9,800 |
| | | | | | ☑ |
| Springfield | | Tennessee | | 60,000 |
| | | | | | ☑ |
Waxahachie(1) | | Texas | | 25,000195,000 |
| | | | ☑ | | |
| Kaysville | | Utah | | 70,000 |
| | | | | | ☑ |
| | | | | 4,043,1875,234,137 |
| | (2)(1)
| | | | |
____________________________
| |
| (1) | These plants also produce products for the MH Segment. The square footage indicated above represents that portion of the building that is utilized for the manufacture of products for the RV Segment. |
| |
(2) | At December 31, 2014,2015, the Company’s RV SegmentCompany used an aggregate of 3,353,867 4,791,182 square feet for manufacturing and warehousing. |
At December 31, 2016, the Company maintained the following facilities, or partial facilities, not currently used in production. The Elkhart property lease expires in May 2017 and the remaining properties are currently leased to third parties.
|
| | | | | | | | | | | |
| | | | MH SEGMENT | | | | |
| | | | | | | | |
| City | | StateState/Province | | Square Feet | | Owned | | Leased |
Double Springs (1)
Phoenix | | AlabamaArizona | | 54,50061,000 |
| | | | ☑ | | |
Rialto (1)
Mishawaka | | CaliforniaIndiana | | 6,270332,356 |
| | | | ☑ | | |
Fitzgerald | | Georgia | | 79,000 |
| | | | ☑ | | |
Nampa(1)
| | Idaho | | 54,275 |
| | | | ☑ | | |
GoshenElkhart | | Indiana | | 110,000 |
| | | | ☑ | | |
|
| | | | | | | | | | | |
| | | | MH SEGMENT | | | | |
| | | | | | | | |
City | | State | | Square Feet | | Owned | | Leased |
Howe | | Indiana | | 60,000 |
| | | | ☑ | | |
Goshen (1)
| | Indiana | | 25,000 |
| | | | ☑ | | |
Goshen (1)
| | Indiana | | 14,500 |
| | | | ☑ | | |
Arkansas City | | Kansas | | 7,800144,000 |
| | | | | | ☑ |
McMinnville (1)
South Bend | | OregonIndiana | | 17,850 |
| | | | ☑ | | |
Denver | | Pennsylvania | | 40,200134,235 |
| | | | | | ☑ |
ChesterMishawaka | | South CarolinaIndiana | | 108,600 |
| | | | ☑ | | |
Waxahachie (1)
| | Texas | | 170,000107,600 |
| | | | ☑ | | |
| | | | | 747,995779,191 |
| | (2)
| | | | |
____________________________
| |
(1) | These plants also produce products for the RV Segment. The square footage indicated above represents that portion of the building that is utilized for the manufacture of products for the MH Segment. |
| |
(2) | At December 31, 2014, the Company’s MH Segment used an aggregate of 747,995 square feet for manufacturing and warehousing. |
|
| | | | | | | | | |
| | | | ADMINISTRATIVE | | | | |
| | | | | | | | |
City | | State/Province | | Square Feet | | Owned | | Leased |
Double Springs | | Alabama | | 7,200 |
| | ☑ | | |
Elkhart | | Indiana | | 49,200 |
| | | | ☑ |
Goshen | | Indiana | | 40,000 |
| | ☑ | | |
South Bend | | Indiana | | 25,000 |
| | | | ☑ |
Goshen | | Indiana | | 25,000 |
| | | | ☑ |
Elkhart | | Indiana | | 20,000 |
| | ☑ | | |
Goshen | | Indiana | | 15,500 |
| | ☑ | | |
Goshen | | Indiana | | 11,000 |
| | ☑ | | |
Elkhart | | Indiana | | 8,000 |
| | ☑ | | |
Goshen | | Indiana | | 6,000 |
| | | | ☑ |
Goshen | | Indiana | | 1,680 |
| | ☑ | | |
Sterling Heights | | Michigan | | 6,387 |
| | | | ☑ |
Granby | | Quebec | | 5,000 |
| | | | ☑ |
Gaffney | | South Carolina | | 2,500 |
| | | | ☑ |
Springfield | | Tennessee | | 2,500 |
| | | | ☑ |
Waxahachie | | Texas | | 16,000 |
| | | | ☑ |
Waxahachie | | Texas | | 5,000 |
| | ☑ | | |
Kaysville | | Utah | | 5,000 |
| | | | ☑ |
| | | | 250,967 |
| | | | |
At December 31, 2015, the Company maintained the following facilities, or partial facilities, not currently used in production.
|
| | | |
City | State | Square Feet |
Phoenix* | Arizona | 61,000 |
|
South Bend* | Indiana | 238,164 |
|
Goshen | Indiana | 68,125 |
|
____________________________
*Currently leased to a third party.
Item 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that, after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided for in the Consolidated Balance Sheet as of December 31, 2015,2016, would not be material to the Company’s financial position or annual results of operations.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
As of January 29, 2016,31, 2017, there were 373343 holders of the Company’s Common Stock,common stock, in addition to beneficial owners of shares held in broker and nominee names. The Company’s Common Stockcommon stock trades on the New York Stock Exchange under the symbol “DW”“LCII”.
Information concerning the high and low closing prices of the Company’s Common Stockcommon stock for each quarter during 20152016 and 20142015 is set forth in Note 1516 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
Equity Compensation Plan Information as of December 31, 20152016:
| | | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | (b) | (c) | (a) | (b) | (c) |
| Equity compensation plans approved by security holders | 1,002,000 | $3.25 | 1,305,440 | 765,949 | $0.60 | 1,049,752 |
| Equity compensation plans not approved by security holders | N/A | N/A | N/A | N/A | N/A | N/A |
| Total | 1,002,000 | $3.25 | 1,305,440 | 765,949 | $0.60 | 1,049,752 |
Pursuant to the DrewLCI Industries Incorporated Equity Award and Incentive Plan, As Amended and Restated (the “Plan”), which was approved by stockholders in May 2011, the Company may grant to its directors, employees, and consultants equity-based awards, such as stock options, restricted stock and deferred stock units. The number of shares available for granting awards under the Plan was 1,049,752 at December 31, 2016, and 1,305,440 at December 31, 2015, and 1,389,506 at December 31, 2014.2015. The Plan is the Company’s only equity compensation plan.
Dividend Information
On April 10,In each of 2014 and 2015, the Company paid a special cash dividend of $2.00 per share to holders of record of its Common Stock on March 27, 2015, and on January 6, 2014,common stock. In 2016, the Company paidinitiated a special cashregular quarterly dividend of $2.00$0.30 per share, which was increased later in the year to holders$0.50 per share. During 2016, total dividends of record$1.40 per share of its Common Stock on December 20, 2013. common stock, representing an aggregate of $34.4 million, were paid to stockholders.
Future dividend policy with respect to the Common Stockcommon stock will be determined by the Board of Directors of the Company in light of prevailing financial needs and earnings of the Company and other relevant factors. The Company’s dividend policy is not subject to specific restrictions in its financing agreements, but rather is limited by certain of the debt covenant calculations.
Item 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected historical financial and operating information of the Company and is derived from the Company’s Consolidated Financial Statements. Historical financial data may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included in Item 7 and Item 8 of this Report, respectively.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| (In thousands, except per share amounts) | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Data: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
| | $ | 901,123 |
| | $ | 681,166 |
| | $ | 1,678,898 |
| | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
| | $ | 901,123 |
|
| Severance | | $ | 3,716 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,716 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Sale of extrusion assets | | $ | — |
| | $ | 1,954 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,954 |
| | $ | — |
| | $ | — |
|
| Executive succession | | $ | — |
| | $ | — |
| | $ | 1,876 |
| | $ | 1,456 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,876 |
| | $ | 1,456 |
|
| Operating profit | | $ | 116,254 |
| | $ | 95,487 |
| | $ | 78,298 |
| | $ | 58,132 |
| | $ | 48,548 |
| | $ | 200,850 |
| | $ | 116,254 |
| | $ | 95,487 |
| | $ | 78,298 |
| | $ | 58,132 |
|
| Income before income taxes | | $ | 114,369 |
| | $ | 95,057 |
| | $ | 77,947 |
| | $ | 57,802 |
| | $ | 48,256 |
| | $ | 199,172 |
| | $ | 114,369 |
| | $ | 95,057 |
| | $ | 77,947 |
| | $ | 57,802 |
|
| Provision for income taxes | | $ | 40,024 |
| | $ | 32,791 |
| | $ | 27,828 |
| | $ | 20,462 |
| | $ | 18,197 |
| | $ | 69,501 |
| | $ | 40,024 |
| | $ | 32,791 |
| | $ | 27,828 |
| | $ | 20,462 |
|
| Net income | | $ | 74,345 |
| | $ | 62,266 |
| | $ | 50,119 |
| | $ | 37,340 |
| | $ | 30,059 |
| | $ | 129,671 |
| | $ | 74,345 |
| | $ | 62,266 |
| | $ | 50,119 |
| | $ | 37,340 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 3.06 |
| | $ | 2.60 |
| | $ | 2.15 |
| | $ | 1.66 |
| | $ | 1.35 |
| | $ | 5.26 |
| | $ | 3.06 |
| | $ | 2.60 |
| | $ | 2.15 |
| | $ | 1.66 |
|
| Diluted | | $ | 3.02 |
| | $ | 2.56 |
| | $ | 2.11 |
| | $ | 1.64 |
| | $ | 1.34 |
| | $ | 5.20 |
| | $ | 3.02 |
| | $ | 2.56 |
| | $ | 2.11 |
| | $ | 1.64 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per common share | | | $ | 1.40 |
| | $ | 2.00 |
| | $ | 2.00 |
| | $ | — |
| | $ | 2.00 |
|
| | | | | | | | | | | | |
| Financial Data: | | | | | | | | | | | | | | | | | | | | |
| Net working capital | | $ | 169,580 |
| | $ | 100,451 |
| | $ | 107,339 |
| | $ | 84,243 |
| | $ | 85,657 |
| | $ | 218,043 |
| | $ | 146,964 |
| | $ | 100,451 |
| | $ | 107,339 |
| | $ | 84,243 |
|
| Total assets | | $ | 622,946 |
| | $ | 543,841 |
| | $ | 453,184 |
| | $ | 373,868 |
| | $ | 351,083 |
| | $ | 786,904 |
| | $ | 622,856 |
| | $ | 543,841 |
| | $ | 453,184 |
| | $ | 373,868 |
|
| Long-term obligations | | $ | 85,509 |
| | $ | 41,758 |
| | $ | 21,380 |
| | $ | 19,843 |
| | $ | 21,876 |
| | $ | 87,284 |
| | $ | 85,419 |
| | $ | 41,758 |
| | $ | 21,380 |
| | $ | 19,843 |
|
| Stockholders’ equity | | $ | 438,575 |
| | $ | 394,898 |
| | $ | 313,613 |
| | $ | 284,245 |
| | $ | 277,296 |
| | $ | 550,269 |
| | $ | 438,575 |
| | $ | 394,898 |
| | $ | 313,613 |
| | $ | 284,245 |
|
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in Item 8 of this Report.
DrewLCI Industries Incorporated (“Drew”LCII”, and collectively with its subsidiaries, the “Company”), through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of components in the United States and abroad for the leading original equipment manufacturers (“OEMs”) of recreational vehicles (“RVs”) and manufactured homes and for the related aftermarkets of those industries. The Company also supplies components for adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing;housing. The Company also supplies components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and factory-built mobile office units.service centers.
The Company haspreviously had two reportable segments:segments, the recreational vehicle products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). The Company has recently increased its focus on the significant opportunities in the aftermarket for its products, primarily sales to retail dealers, wholesale distributors and service centers. Additionally, over the past several years, sales of components for manufactured homes have become a smaller part of the Company’s business, largely due to the growth the Company has experienced with respect to its components sold to customers for traditional recreational vehicles as well as the expanded use of its components in other non-RV applications, which we refer to as adjacent industries. Unit growth for MH Segment products has also been lower over the last decade, primarily due to the real estate, credit and economic environment, including the availability of site built homes at stable prices and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes. In response to these changes in
the Company’s business, subsequent to March 31, 2016, the Company modified its internal reporting structure, reflecting a change in how its chief operating decision maker (“CODM”) assesses the performance of the Company’s operating results and makes decisions about resource allocations. The Company’s new reportable segments are the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. At December 31, 2015,2016, the Company operated 4248 manufacturing and distribution facilities inlocated throughout the United States and Canada.in Canada and Italy.
Net sales and operating profit were as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| Net sales: | | | | | |
| RV Segment: | | | | | |
| RV OEMs: | | | | | |
| Travel trailers and fifth-wheels | $ | 938,787 |
| | $ | 841,497 |
| | $ | 727,783 |
|
| Motorhomes | 86,513 |
| | 70,332 |
| | 47,937 |
|
| RV aftermarket | 87,447 |
| | 49,570 |
| | 25,334 |
|
| Adjacent industries | 172,181 |
| | 113,049 |
| | 92,640 |
|
| Total RV Segment net sales | 1,284,928 |
| | 1,074,448 |
| | 893,694 |
|
| MH Segment: | | | | | |
| Manufactured housing OEMs | 82,032 |
| | 77,421 |
| | 80,245 |
|
| Manufactured housing aftermarket | 15,559 |
| | 14,186 |
| | 13,719 |
|
| Adjacent industries | 20,547 |
| | 24,727 |
| | 27,918 |
|
| Total MH Segment net sales | 118,138 |
| | 116,334 |
| | 121,882 |
|
| Total net sales | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
|
| | | | | | |
| Operating profit: | | | | | |
| RV Segment | $ | 107,485 |
| | $ | 86,571 |
| | $ | 68,248 |
|
| MH Segment | 12,485 |
| | 10,870 |
| | 11,926 |
|
| Total segment operating profit | 119,970 |
| | 97,441 |
| | 80,174 |
|
| Severance | (3,716 | ) | | — |
| | — |
|
| Sale of extrusion assets | — |
| | (1,954 | ) | | — |
|
| Executive succession | — |
| | — |
| | (1,876 | ) |
| Total operating profit | $ | 116,254 |
| | $ | 95,487 |
| | $ | 78,298 |
|
In the third quarter of 2015, the Company refined its methodology for categorizing sales within the RV Segment. This change improves accuracy, but has no impact on total RV Segment net sales or trends. Prior periods have been reclassified to conform to this presentation. |
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| Net sales: | | | | | |
| OEM Segment: | | | | | |
| RV OEMs: | | | | | |
| Travel trailers and fifth-wheels | $ | 1,099,882 |
| | $ | 938,787 |
| | $ | 841,497 |
|
| Motorhomes | 116,191 |
| | 86,513 |
| | 70,332 |
|
| Adjacent industries OEMs | 332,018 |
| | 274,760 |
| | 215,197 |
|
| Total OEM Segment net sales | 1,548,091 |
| | 1,300,060 |
| | 1,127,026 |
|
| Aftermarket Segment: | | | | | |
| Total Aftermarket Segment net sales | 130,807 |
| | 103,006 |
| | 63,756 |
|
| Total net sales | $ | 1,678,898 |
| | $ | 1,403,066 |
| | $ | 1,190,782 |
|
| | | | | | |
| Operating profit: | | | | | |
| OEM Segment | $ | 180,850 |
| | $ | 105,224 |
| | $ | 88,744 |
|
| Aftermarket Segment | 20,000 |
| | 14,746 |
| | 8,697 |
|
| Total segment operating profit | 200,850 |
| | 119,970 |
| | 97,441 |
|
| Severance | — |
| | (3,716 | ) | | — |
|
| Sale of extrusion assets | — |
| | — |
| | (1,954 | ) |
| Total operating profit | $ | 200,850 |
| | $ | 116,254 |
| | $ | 95,487 |
|
Corporate expenses are allocated between the segments based upon net sales. Accretion related to contingent consideration and other non-segment items areis included in the segment to which they relate.it relates.
Net sales and operating profit by segment, as a percent of the total, were as follows for the years ended December 31:
|
| | | | | |
| | 2015 | | 2014 | | 2013 |
| Net sales | | | | | |
| RV Segment | 92% | | 90% | | 88% |
| MH Segment | 8% | | 10% | | 12% |
| Total net sales | 100% | | 100% | | 100% |
| | | | | | |
| Operating Profit: | | | | | |
| RV Segment | 90% | | 89% | | 85% |
| MH Segment | 10% | | 11% | | 15% |
| Total segment operating profit | 100% | | 100% | | 100% |
|
| | | | | |
| | 2016 | | 2015 | | 2014 |
| Net sales: | | | | | |
| OEM Segment | 92% | | 93% | | 95% |
| Aftermarket Segment | 8% | | 7% | | 5% |
| Total net sales | 100% | | 100% | | 100% |
| | | | | | |
| Operating Profit: | | | | | |
| OEM Segment | 90% | | 88% | | 91% |
| Aftermarket Segment | 10% | | 12% | | 9% |
| Total segment operating profit | 100% | | 100% | | 100% |
Operating profit margin by segment was as follows for the years ended December 31:
|
| | | | | |
| | 2015 | | 2014 | | 2013 |
| RV Segment | 8.4% | | 8.1% | | 7.6% |
| MH Segment | 10.6% | | 9.3% | | 9.8% |
|
| | | | | |
| | 2016 | | 2015 | | 2014 |
| OEM Segment | 11.7% | | 8.1% | | 7.9% |
| Aftermarket Segment | 15.3% | | 14.3% | | 13.6% |
The Company’s RVOEM Segment manufactures or distributes a varietybroad array of products used incomponents for the productionleading OEMs of RVs and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing. Approximately 71 percent of the Company’s OEM Segment net sales for the year ended December 31, 2016 were of components for travel trailer and fifth-wheel RVs, including:
|
| |
● Steel chassis for towable RVsand related components | ● Furniture and mattresses |
● Axles and suspension solutions for towable RVs | ● Entry, luggage, patioElectric and ramp doorsmanual entry steps |
| ● Slide-out mechanisms and solutions | ● ElectricAwnings and manual entry stepsawning accessories |
| ● Thermoformed bath, kitchen and other products | ● Awnings and awning accessoriesElectronic components |
● WindowsVinyl, aluminum and frameless windows | ● Electronic componentsAppliances |
● Manual, electric and hydraulic stabilizer and
leveling systems | ● LED televisions,Televisions, sound systems, navigation
systems and wireless backup cameras |
● Chassis componentsEntry, luggage, patio and ramp doors | ● Other accessories |
The Company alsoAftermarket Segment supplies certainmany of these productscomponents to the related aftermarket channels of the RV aftermarket and to adjacent industries, including buses, trailers usedprimarily to haul boats, livestock, equipmentretail dealers, wholesale distributors and other cargo,service centers. The Aftermarket Segment also includes the sale of replacement glass and pontoon boats. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheels, folding camping trailers and truck campers). Approximately 73 percent of the Company’s RV Segment net sales in 2015 were of productsawnings to original equipment manufacturers (“OEMs”) of travel trailer and fifth-wheel RVs. Travel trailer and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in 2015.fulfill insurance claims.
The Company’s MH Segment manufactures or distributes a variety of products used in the production of manufactured homes, including:
|
| |
●Vinyl and aluminum windows | ●Aluminum and vinyl patio doors |
●Thermoformed bath and kitchen products | ●Steel chassis and related components |
●Steel and fiberglass entry doors | ●Axles |
The Company also supplies certain of these products to the manufactured housing aftermarket and to adjacent industries, including modular housing and mobile office units. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.
The RV and manufactured housing industries, as well as otherMost industries where the Company sells products or where its products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, the Company’s sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the impact of international, national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years. Additionally, sales of components to the aftermarket channels of these industries tend to be counter-seasonal.
Over the past several years, largely due to the growth the Company has experienced in its RV Segment, the MH Segmentis now a smaller part of the Company. MH Segment net sales were 8 percent of consolidated 2015 net sales. In addition, the Company has recently increased its focus on the significant opportunities in the aftermarket. The Company continues to evaluate the information provided to its Chief Operating Decision Maker (“CODM”), and assess how changes to its reporting structures would be used by the CODM to assess the performance of the Company’s operating segments and make decisions about resource allocations. Any such changes could necessitate a revision to the operating segments the Company reports.INDUSTRY BACKGROUND
INDUSTRY BACKGROUNDOEM Segment
Recreational Vehicle Industry
An RV is a vehicle designed as temporary living quarters for recreational, camping, travel or seasonal use. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers).
The annual sales cycle for the RV industry has historically startedgenerally starts in October after the “Open House” in Elkhart, Indiana where many of the largest RV OEMs display product to RV retail dealers, and ends after the conclusion of the summer selling season in September in the following calendar year. Between October and March, industry-wide wholesale shipments of travel trailer and fifth-wheel RVs have historically exceeded retail sales as dealers build inventories to support anticipated sales. Between April and September, the spring and summer selling seasons, retail sales of travel trailer and fifth-wheel RVs have historically exceeded industry-wide wholesale shipments. Based on the strength of retail sales and the current outlook from several RV OEMs and their dealer surveys and information from wholesale finance companies,networks, most industry analysts continue to report that RV dealer inventories of travel trailer and fifth-wheel RVs are in-lineinventory is in line with anticipated retail demand in the upcoming
spring 2016 selling season. During 2015, wholesale sales of travel trailers and fifth-wheel RV exceeded retail sales by less than 1 percent, indicating dealers are managing their inventories more tightly and suggesting that changes in retail demand could more closely affect wholesale sales than in recent history.
demand.
According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailer and fifth-wheel RVs in 2015,2016, the Company’s primary RV markets,market, increased 515 percent to 314,400362,700 units, compared to 2014,2015, as a result of:
An estimated 35,90033,300 unit increase in retail demand in 2015,2016, or 1311 percent, as compared to 2014.2015. In addition, retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.
RV dealers increasing inventory levels by 1,200an estimated 12,300 units in 2016, compared to the decrease in inventory levels of 2,700 units in 2015.
While the Company measures its OEM Segment RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., as well as the resulting estimated change in dealer inventories, for both the United States and Canada, is as follows:
| | | | Wholesale | | Retail | | Estimated Unit Impact on Dealer | Wholesale | | Retail | | Estimated Unit Impact on Dealer |
| | Units | | Change | | Units | | Change | | Inventories | Units | | Change | | Units | | Change | | Inventories |
| Year ended December 31, 2016 | | 362,700 |
| | 15% | | 350,400 | | 11% | | 12,300 |
| Year ended December 31, 2015 | 314,400 |
| | 5% | | 313,200 | | 13% | | 1,200 | 314,400 |
| | 5% | | 317,100 | | 14% | | (2,700) |
| Year ended December 31, 2014 | 298,900 |
| | 12% | | 277,300 | | 11% | | 21,600 | 298,900 |
| | 12% | | 277,300 | | 11% | | 21,600 |
| Year ended December 31, 2013 | 268,000 |
| | 10% | | 250,800 | | 13% | | 17,200 | |
According to the RVIA, industry-wide wholesale shipments of motorhome RVs in 20152016 increased 816 percent to 47,30054,800 units compared to 2014.2015. Retail demand for motorhome RVs also increased 1211 percent in 2015,2016, following a 1615 percent increase in retail demand in 2014.2015.
The RVIA has projected a modest increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2016.2017. Several RV OEM customersOEMs, however, are introducing new product lines and additional features, and adding production capacity. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence which was above historical averages in 2015. Furthermore,2016. Additionally, retail sales of travel trailer and fifth-wheel RVs have increased in 7284 of the last 7486 months on a year-over-year basis. Industry resources report strong attendance and high consumer interest at RV shows around the United States and Canada in late 20152016 and into early 2016.2017.
Although future retail demand is inherently uncertain, RV industry fundamentals in 2015,2016, including generally low unemployment, low fuel prices and available credit for dealers and RV consumers, were strong, as evidenced by the 13estimated 11 percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs. The Company believes the strong RV industry fundamentals, aided by product innovation, demographic tailwinds, industry promotion and the advent of stronger dealer networks, are positive signs for 2016.2017. The Company also remains confident in its ability to exceed industry growth rates through new product introductions, market share gains, aftermarket sales, acquisitions and ongoing investments in research and development, engineering, quality and customer service.
Over the long term, the Company expects RV industry sales to be aided by positive demographics and the continued popularity of the “RV Lifestyle”. The number of consumers between the ages of 55 and 70 are projected to total 56 million by 2020, 27 percent higher than in 2010, according to U.S. Census figures, and one in ten vehicle-owning households between the ages of 50 and 64 own at least one RV. The RVIA reported much of the success of the RV industry has been driven by the Baby Boomer generation. The size of that generation is beginning to wane, and younger generations, Generation X and Millennials are becoming more relevant to future industry growth. Generation X and Millennials are more diverse, requiring new and creative marketing approaches to attract them to the RV industry. The RVIA has an advertising campaign promoting the “RV Lifestyle” targeted at both parents aged 30 - 49 with children at home, as well as couples aged 50 - 64 with no children at home. In addition, the RV OEMs have developed more entry level units, specifically targeting younger families, in both towables and motorhomes. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented domestic vacations, and using RVs as second homes, are trends that could continue to motivate consumer demand for RVs. RVIA studies indicate RV vacations cost significantly less than other forms of vacation travel, even when factoring in fuel prices and the cost of RV ownership. More details can be found at www.RVIA.org.
Manufactured Housing Industry
Manufactured homes are built entirely in a factory on permanent steel undercarriages or chassis to which axles and wheels are attached. The homes are then transported to a manufactured housing dealer which sells and transports the home to the buyer’s home site. The manufactured home is installed pursuant to a federal building code administered by the U.S. Department of Housing and Urban Development (“HUD”). The federal standards regulate manufactured housing design and construction, methods to site and secure the home at a home site, strength and durability, transportability, fire resistance, energy efficiency and quality. The HUD code also sets performance standards for the heating, plumbing, air conditioning, thermal and electrical systems. It is the only federally regulated national building code.
Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. A typical section may range in size from 800 to 1,200 square feet. During 2015, multi-section homes were 54 percent of the total manufactured homes produced, consistent with 2012 - 2014. Multi-section homes averaged 64 percent of the total manufactured homes produced between 2007 - 2010. Multi-section manufactured homes generally contain more of the Company’s products than single-section manufactured homes.Adjacent Industries
The Company’s portfolio of products used in RVs can also be used in other applications, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing (collectively, “Adjacent Industries”). In many cases, OEM customers of the Adjacent Industries are affiliated with RV OEMs through related subsidiaries. The Company believes there are significant opportunities in these Adjacent Industries and, as a result, four of the last six business acquisitions completed by the Company were focused in Adjacent Industries.
The estimated potential content per unit the Company may supply to the Adjacent Industries varies by OEM product and differs from RVs. As a means to understand the potential of each of these markets, management reviews the number of retail units sold. The following are key target markets for Adjacent Industries component sales:
Enclosed trailers. According to Statistical Surveys, approximately 176,000, 184,000 and 174,000 enclosed trailers were sold in 2016, 2015 and 2014, respectively.
Pontoon boats. Statistical Surveys also reported approximately 44,800, 41,300 and 38,500 pontoon boats were sold in 2016, 2015 and 2014, respectively.
School buses. According to Wards Communications and R.L. Polk & Co., there were approximately 32,800, 29,600 and 28,200 school buses sold in 2016, 2015 and 2014, respectively.
Manufactured housing. According to the Institute for Building Technology and Safety, (“IBTS”) reportedthere were approximately 81,100, 70,500 and 64,300 manufactured home wholesale shipments in 2016, 2015 and 2014, respectively.
Aftermarket Segment
Many of the Company’s OEM Segment products are also sold through various aftermarket channels, including dealerships, warehouse distributors and service centers, as well as direct to retail customers. The Company has teams dedicated to product training and marketing support for its Aftermarket customers. The Company also supports two call centers to provide quick responses to customers for both product delivery and technical support. This support is designed for a rapid response to critical repairs so customer downtime is minimized. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements are purchased outside the normal product selling seasons, thereby causing Aftermarket sales to be counter-seasonal.
According to the RVIA, current estimated RV ownership had increased to nearly nine million units. Additionally, as a result of a vibrant secondary market, one third of current owners purchased their RV new while the remaining two-thirds purchased a previously owned RV. This vibrant secondary market is a key driver for the aftermarket, as the Company anticipates owners of previously owned RVs will likely upgrade their units as well as replace parts and accessories which have been subjected to normal wear and tear.
RESULTS OF OPERATIONS
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Highlights
Consolidated net sales for the year ended December 31, 2016 increased to a record $1.7 billion, 20 percent higher than consolidated net sales for the year ended December 31, 2015 of $1.4 billion. Acquisitions completed by the Company in 2016 added $64 million in net sales. The 15 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, LCI’s primary OEM market, as well as increased content per RV unit, positively impacted net sales growth in 2016. Further, the Company organically increased sales to adjacent industries and the aftermarket.
Net income for the full-year 2016 increased to $129.7 million, or $5.20 per diluted share, up from net income of $74.3 million, or $3.02 per diluted share, in 2015.
Consolidated operating profits during 2016 increased 73 percent, to $200.9 million from $116.3 million in 2015. Operating profit margin increased to 12.0 percent in 2016 from 8.3 percent in 2015.
The Company continues to take actions to improve its cost structure. The Company seeks to continuously manage its labor cost, particularly indirect labor, while supporting the growth of the business. Lean manufacturing teams continue working to reduce cost and implement processes to better utilize available floorspace. The Company has also reduced direct labor attrition which improves efficiency and reduces other costs associated with workforce turnover.
The cost of aluminum and steel used in certain of the Company’s manufactured homescomponents declined during the second half of 2015 and continued into 2016; however, certain commodities have experienced cost increases in the second half of 2016 from market low points. Raw material costs continue to fluctuate and are expected to remain volatile.
During 2016, the Company completed five acquisitions, all of which have been accretive to earnings:
Camping Connection -- A Myrtle Beach, South Carolina and Kissimmee, Florida RV repair and service provider, with estimated annual sales of $2 million, completed November 2016;
Atwood Seating and Chassis Components -- An Elkhart, Indiana-based seating and chassis components business of Atwood Mobile Products, a subsidiary of Dometic Group, with estimated annual sales of $30 million, completed November 2016;
Project 2000 S.r.l. -- An Italian manufacturer of innovative, space-saving bed lifts and retractable steps, with estimated annual sales of $14 million, completed May 2016;
Flair Interiors -- A Goshen, Indiana-based manufacturer of RV furniture, with estimated annual sales of $25 million, completed February 2016; and
Highwater Marine Furniture -- An Elkhart, Indiana-based marine furniture operation providing furniture solutions for Highwater Marine, LLC, a manufacturer of pontoon boats. Estimated annual sales for the marine furniture operation were 70,500 units$20 million, completed January 2016.
Integration activities for these acquired businesses are underway and proceeding in 2015, an increaseline with established plans. The Company plans to grow sales and leverage its purchasing power, manufacturing capabilities, engineering expertise and design resources to improve the cost structure of 10the acquired operations.
Return on equity for 2016, which is calculated by taking net income over equity, improved to 26.0 percent, from 2014. For the full year 2014, there18.4 percent return on equity in 2015.
In April, June and September 2016, the Company paid a quarterly dividend of $0.30 per share, aggregating $7.3 million, $7.4 million and $7.4 million, respectively. In December 2016, the Company paid a quarterly dividend of $0.50 per share, aggregating $12.4 million.
OEM Segment
Net sales of the OEM Segment in 2016 increased 19 percent, or $248 million, compared to 2015. Net sales of components to OEMs were 64,300to the following markets for the years ending December 31:
|
| | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | Change |
| RV OEMs: | | | | | |
| Travel trailers and fifth-wheels | $ | 1,099,882 |
| | $ | 938,787 |
| | 17% |
| Motorhomes | 116,191 |
| | 86,513 |
| | 34% |
| Adjacent industries OEMs | 332,018 |
| | 274,760 |
| | 21% |
| Total OEM Segment net sales | $ | 1,548,091 |
| | $ | 1,300,060 |
| | 19% |
According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were:
|
| | | | | | | |
| | 2016 | | 2015 | | Change |
| Travel trailer and fifth-wheel RVs | 362,700 |
| | 314,400 |
| | 15% |
| Motorhomes | 54,800 |
| | 47,300 |
| | 16% |
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during 2016 exceeded the increase in industry-wide wholesale shipments of manufactured homes, an increase of 7 percent comparedtravel trailer and fifth-wheel RVs during the same period primarily due to 2013.acquisitions completed in 2016.
ForThe Company’s net sales growth in components for motorhomes during 2016 exceeded the 20 years prior to the sub-prime boomincrease in home financing, manufactured housing industry-wide wholesale shipments represented 20 percent or more of single-family housing starts. During the sub-prime years of 2003 - 2007, when low cost loans were available for financing purchases of site-built homes, many traditional buyers of manufactured homes were able to purchase site-built homes instead of manufactured homes, and manufactured housing’s share of the single-family market dropped to below 10 percent. Since the sub-prime “bubble” burst in 2007 and 2008, this market share has averaged about 11 percent, despite interest rates for manufactured home loans remaining historically high relative to interest rates for site-built home loans. Accordingly, the Company believes the manufactured housing industry may experience a modest recovery if the economy continues to improve and home buyers look at affordable housing options. However, because of the current real estate, credit and economic environment, including the availability of site built homes at stable prices and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes, the Company expects industry-wide wholesale shipments of manufactured homesmotorhomes during the same period primarily due to market share gains and acquisitions completed in 2016. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.
The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the years ended December 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
|
| | | | | | | | | |
| Content per: | 2016 | | 2015 | | Change |
| Travel trailer and fifth-wheel RV | $ | 3,022 |
| | $ | 2,987 |
| | 1% |
| Motorhome | $ | 2,011 |
| | $ | 1,810 |
| | 11% |
The Company’s average product content per type of RV excludes international sales and sales to the Aftermarket and Adjacent Industries. Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of RVs produced industry-wide.
The Company’s net OEM sales to Adjacent Industries increased during 2016 primarily due to market share gains and acquisitions completed in 2016 and 2015. The Company continues to believe there are significant opportunities in Adjacent Industries.
Operating profit of the OEM Segment was $180.9 million in 2016, an improvement of $75.6 million compared to 2015. The operating profit margin of the OEM Segment in 2016 was impacted by:
Better fixed cost absorption by spreading fixed costs over a $248 million larger sales base.
Increasing sales to Adjacent Industries OEMs.
Lower material costs for certain raw materials. Steel and aluminum costs declined in the second half of 2015 and continued into 2016. Costs for these commodities experienced some increases in the second and third quarters of 2016. Material costs, which are subject to global supply and demand forces, are expected to remain low untilvolatile.
Sales mix and pricing changes of products, including increased sales of fifth-wheel products which has a higher margin.
Indirect labor cost savings initiated in the fourth quarter of 2015 to reduce such costs on an annualized basis.
Investments over the past several years to increase capacity and improve operating efficiencies. Further, the Company has implemented efficiency improvements, including lean manufacturing initiatives, increased use of automation and employee retention initiatives. The Company has also reduced direct labor attrition which improves efficiency and reduces other costs associated with workforce turnover.
Lower group health and workers’ compensation claims. The Company actively works to manage and reduce these conditions improve.costs, however, these costs remain subject to fluctuation.
Partially offset by:
Fixed costs which were approximately $6 million to $7 million higher than in 2015. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected increase in net sales in 2016 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company has made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses, as well as amortization costs of intangible assets related to those businesses.
While the Company seeks to continuously manage its labor cost, it has added staff to support the growth of the business. The results also reflect variable compensation increases based on achieving profitability targets.
In addition, certain provisionsAftermarket Segment
Net sales of the Dodd-Frank Act, which regulate financial transactions, have made certain typesAftermarket Segment in 2016 increased 27 percent, or $28 million, compared to the same period of mortgages, including chattel loans, more difficult or more expensive2015. Net sales of components were as follows for the years ended December 31:
|
| | | | | | | | | | |
| (In thousands) | | 2016 | | 2015 | | Change |
| Total Aftermarket Segment net sales | | $ | 130,807 |
| | $ | 103,006 |
| | 27% |
The Company’s net sales to obtain –the Aftermarket increased during 2016 primarily due to the Company’s focus on building out well qualified, customer-focused teams and infrastructure to service this market. With an estimated nine million households in particular those historically usedNorth America owning an RV and the Company’s increasing content per unit, the Company continues to financebelieve there are significant opportunities in the purchase of manufactured homes. AlthoughRV aftermarket as the Consumer Financial Protection Bureau has been reviewing this mattercomponents sold to OEMs are subject to normal wear and legislation has been passed by the U.S. House of Representatives to address this matter, there can be no assurancetear over time.
Operating profit of the outcome.Aftermarket Segment was $20.0 million in 2016, an increase of $5.3 million compared to 2015, primarily due to the increase in net sales and the higher margins traditionally experienced in aftermarket channels. As indicated, this business is still in an early growth stage and the Company has added staff to support anticipated growth and anticipates further cost increases in this area as it builds up the capabilities of this business.
Nevertheless, the Company believes long-term growth prospects for manufactured housing remain positive because of the quality and affordability of the home, and favorable demographic trends, including the increasing number of retirees who, in the past, had represented a significant market for manufactured homes.
RESULTS OF OPERATIONS
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Highlights
Consolidated net sales for the year ended December 31, 2015 increased to a record $1.4 billion, 18 percent higher than the year ended December 31, 2014. Acquisitions completed by the Company in 2015, as well as the Furrion Limited (“Furrion”) distribution and supply agreement for premium electronics (the “Furrion Agreement”), added $52 million in net sales in 2015. The five percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary RVOEM market, as well as increased content per unit through market share gains, positively impacted net sales growth in 2015.
In 2015, Further, the Company continued to groworganically increased sales to both adjacent industries and the aftermarket for the RV and manufactured housing segments. Aggregate net sales to adjacent industries increased 40 percent to $193 million and aftermarket net sales increased 62 percent to $103 million. Together, these markets now account for 21 percent of consolidated net sales, double the percentage from 2010.aftermarket.
For the full-year 2015, the Company’s net income increased to $74.3 million, or $3.02 per diluted share, up from net income of $62.3 million, or $2.56 per diluted share, in 2014. Excluding certain charges for severance, environmental and legal costs in 2015, net income would have been $79.0 million in 2015, or $3.20 per diluted share, and excluding the 2014 loss on the sale of the Company's aluminum extrusion-related assets, net income would have been $63.5 million in 2014, or $2.61 per diluted share.
Consolidated operating profits during 2015 increased 22 percent, to $116.3 million in 2015 from $95.5 million in 2014. Operating profit margin increased to 8.3 percent in 2015 from 8.0 percent in 2014.
Raw material costs continuecontinued to fluctuate. In particular, aluminum rose nearly 20 percent during the second half of 2014, and dropped during the second half of 2015. Similarly, the cost of steel used in certain of the Company’s manufactured components dropped during the course of 2015; however, certain market prices have increased in early 2016 from the low points experienced during 2015. Raw material costs are expected to remain volatile.
During 2015, the Company completed three acquisitions:
Signature Seating -- A Ft. Wayne, Indiana-based manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats, with annual sales of approximately $16 million;
Spectal Industries -- A Quebec, Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs, with annual sales of $25 million.million; and
EA Technologies -- An Elkhart, Indiana-based manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications, with annual sales of $17 million.
The Company plans to grow sales and leverage its purchasing power and manufacturing capabilities in addition to its engineering and design resources to improve the cost structure of the acquired operations. After funding these acquisitions in 2015, the Company believes it has access to sufficient financial capital and staff to take advantage of additional investment opportunities.
For 2015, the Company achieved an 18.4 percent return on equity, an improvement from the 17.5 percent return on equity in 2014.
In April 2015, the Company paid a special dividend of $2.00 per share, aggregating $48.2 million.
RVOEM Segment
Net sales of the RVOEM Segment in 2015 increased 2015 percent, or $210$173 million, compared to 2014. Net sales of components to OEMs were to the following markets for the years ending December 31:
| | | (In thousands) | 2015 | | 2014 | | Change | | 2015 | | 2014 | | Change |
| RV OEMs: | | | | | | | | | |
| Travel trailers and fifth-wheels | $ | 938,787 |
| | $ | 841,497 |
| | 12% | | $ | 938,787 |
| | $ | 841,497 |
| | 12% |
| Motorhomes | 86,513 |
| | 70,332 |
| | 23% | | 86,513 |
| | 70,332 |
| | 23% |
| RV aftermarket | 87,447 |
| | 49,570 |
| | 76% | |
| Adjacent industries | 172,181 |
| | 113,049 |
| | 52% | | 274,760 |
| | 215,197 |
| | 28% |
| Total RV Segment net sales | $ | 1,284,928 |
| | $ | 1,074,448 |
| | 20% | |
| Total OEM Segment net sales | | | $ | 1,300,060 |
| | $ | 1,127,026 |
| | 15% |
According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were:
|
| | | | | | | | |
| | | 2015 | | 2014 | | Change |
| Travel trailer and fifth-wheel RVs | | 314,400 |
| | 298,900 |
| | 5% |
| Motorhomes | | 47,300 |
| | 43,900 |
| | 8% |
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during 2015 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period primarily due to market shareshares gains and acquisitions completed in 2015, which acquisitions added $6 million in net sales during 2015.
The Company’s net sales growth in components for motorhomes during 2015 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period primarily due to market share gains and an acquisition completed in 2014, which acquisition added $8 million in net sales during 2015.2014. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.
The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the years ended December 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
|
| | | | | | | | | | |
| Content per: | | 2015 | | 2014 | | Change |
| Travel trailer and fifth-wheel RV | | $ | 2,987 |
| | $ | 2,816 |
| | 6% |
| Motorhome | | $ | 1,810 |
| | $ | 1,602 |
| | 13% |
In the third quarter of 2015, the Company refined the calculation of RV content per unit. This change improves accuracy, but has no impact on total RV Segment net sales or trends of content per unit. Prior periods have been reclassified to conform to this presentation.
The Company’s average product content per type of RV excludes sales to the aftermarketAftermarket and adjacent industries.Adjacent Industries. Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of RVs produced industry-wide.
The Company’s net OEM sales to the RV aftermarketAdjacent Industries increased during 2015 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $20 million in net sales during 2015. With an estimated 10 million households in North America owning an RV and the Company’s increasing content per unit, the Company continues to believe there are significant opportunities in the RV aftermarket.
The Company’s net sales to adjacent industries, including components for buses, trailers used to haul boats, livestock, equipment and other cargo, and pontoon boats, increased during 2015 primarily due to market share gains and acquisitions completed in 2015, which acquisitions added $37 million in net sales during 2015. The Company continues to believe there are significant sales growth opportunities in adjacent industries.
Over the past several years, the Company has been gradually growing international RV sales, primarily in Europe and Australia, and export sales represented approximately 1 percent of consolidated net sales in 2015. The Company continues to focus on developing products tailored for international RV markets. The Company participates in the largest RV shows in Europe and has been receiving positive feedback on its products, especially its proprietary slide-out products. The Company has spent more than two years developing three slide-out systems suited to the needs of the European market, which were recently featured on new RV models. As a result, the Company believes it will see additional orders from European RV OEMs. The Company estimates the addressable market for annual net sales of its products outside of North America to be $750 million.
Excluding the severance charges in 2015 and the loss on sale of extrusion assets in 2014, operatingOperating profit of the RVOEM Segment was $107.5$105.2 million in 2015, an improvement of $20.9$16.5 million reflecting a 10 percent incremental margin compared to 2014. This increase in RV Segment operating profit was less than the Company’s expected 15 to 20 percent incremental margin. The operating profit margin of the RVOEM Segment in 2015 was adversely impacted by:
Fixed costs which were approximately $15 to $20 million higher than in 2014. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected increase in net sales in 2015 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses as well as related amortization of intangible assets. As industry-wide wholesale shipments growth has slowed from multi-year double-digit rates to mid-single-digit rates, the Company evaluated its expenses and in the fourth quarter of 2015 initiated a focused program to reduce indirect labor costs to improve operating leverage. Annual cost savings of approximately $8 to $10 million were identified and implemented late in 2015 and will comecame from aligning staff levels more closely to anticipated growth.
An increase in stock-based compensation of approximately $3.2 million due to the implementation of the new 2015 compensation program for management.
Sales mix changes of its products, including lower sales of fifth-wheel products.
A charge of $1.5 million related to environmental costs.
A voluntary safety recall of the Company’s double and triple Coach Steps, for which the Company recorded a reserve of $1.1 million for the contingent obligation in selling, general and administrative expenses.
Partially offset by:
Investments over the past several years to increase capacity and improve operating efficiencies, which benefit operating results. The Company added capacity ahead of projected demand, which enabled it to efficiently fulfill customer orders as demand increased. Further, the Company has implemented additional efficiency improvements, including lean, automation and employee retention initiatives to improve operating efficiencies going forward.
Lower material costs for certain raw material inputs. After increasing in the latter part of 2014, steel and aluminum costs declined over the course of 2015. Nevertheless, material costs, which are subject to global supply and demand forces, remain volatile.
Better fixed costs absorption by spreading fixed costs over a $212$173 million larger sales base.
MHAftermarket Segment
Net sales of the MHAftermarket Segment in 2015 increased 262 percent, or $2$39 million, compared to the same period of 2014. Net sales of components were to the following marketsas follows for the years endingended December 31:
|
| | | | | | | | | | |
| (In thousands) | | 2015 | | 2014 | | Change |
| Manufactured housing OEMs | | $ | 82,032 |
| | $ | 77,421 |
| | 6% |
| Manufactured housing aftermarket | | 15,559 |
| | 14,186 |
| | 10% |
| Adjacent industries | | 20,547 |
| | 24,727 |
| | (17)% |
| Total MH Segment net sales | | $ | 118,138 |
| | $ | 116,334 |
| | 2% |
|
| | | | | | | | | | |
| (In thousands) | | 2015 | | 2014 | | Change |
| Total Aftermarket Segment net sales | | $ | 103,006 |
| | $ | 63,756 |
| | 62% |
According to the IBTS, industry-wide wholesale shipments for the years ended December 31, were:
|
| | | | | | | | |
| | | 2015 | | 2014 | | Change |
| Total homes produced | | 70,500 |
| | 64,300 |
| | 10% |
| Total floors produced | | 109,600 |
| | 99,200 |
| | 10% |
Industry-wide wholesale shipments of manufactured homes increased during 2015 when compared to 2014, as well as theThe Company’s net sales of components for new manufactured homesto the Aftermarket increased during 2015 primarily due to customer mix, as the Company’s content per unit varies between customers.
Manufactured homes contain one or more “floors” or sections which can be joinedfocus on building out well qualified, customer-focused teams and infrastructure to make larger homes. The larger homes typically contain more of the Company’s products. The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components to manufactured housing OEMs for newly produced manufactured homes for the years ended December 31, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:
|
| | | | | | | | | | |
| Content per: | | 2015 | | 2014 | | Change |
| Home produced | | $ | 1,163 |
| | $ | 1,203 |
| | (3)% |
| Floor produced | | $ | 748 |
| | $ | 783 |
| | (4)% |
The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket and sales to adjacent industries. Content per manufactured home and content per floor are impacted by market share changes, acquisitions and new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of floors produced industry-wide.service this market.
Operating profit of the MHAftermarket Segment was $12.5$15 million in 2015, an increase of $1.6$6 million compared to 2014, primarily due to the increase in net sales fromand the higher unit sales.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Consolidated Highlights
Consolidated net sales for the year ended December 31, 2014 increased to $1.2 billion, 17 percent higher than the year ended December 31, 2013, primarily due to the 20 percent increasemargins traditionally experienced in net sales of the Company’s RV Segment. Acquisitions completed byaftermarket channels. As indicated, this business is still in an early growth stage and the Company in 2014 added $36 million in net sales in 2014. The twelve percent increase
in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary RV market, as well as increased content per unit through market share gains, positively impacted net sales growth in 2014.
In 2014, the Company continuedstaff to grow both adjacent industries and the aftermarket for the RV and manufactured housing segments. Aggregate net sales to adjacent industries increased 14 percent to $138 million and aftermarket net sales increased 63 percent to $64 million.
For the full-year 2014, the Company’s net income increased to $62.3 million, or $2.56 per diluted share, up from net income of $50.1 million, or $2.11 per diluted share, in 2013. Excluding the loss related to the sale of the Company’s aluminum extrusion-related assets in 2014 and charges for executive succession in 2013, net income would have been $63.5 million in 2014, or $2.61 per diluted share, up from net income of $51.3 million, or $2.16 per diluted share, in 2013. Net income in 2014 was also impacted by facility start-up and realignment costs, which reduced net income per diluted share by approximately $0.09.
Consolidated operating profits during 2014 increased 22 percent, to $95.5 million in 2014 from $78.3 million in 2013. Operating profit margin increased to 8.0 percent in 2014 from 7.7 percent in 2013. As a result of facility start-up and realignment costs, as well as higher health insurance costs, the Company’s incremental margin in 2014 was lower than its historical average.
| |
▪ | During 2014 the Company completed four acquisitions, which added approximately $68 million of acquired annual sales, of which $36 million occurred in 2014. The four operations acquired by the Company during 2014 were: |
| |
▪ | Innovative Design Solutions, Inc. (“IDS”) - A designer, developer and manufacturer of electronic systems encompassing a wide variety of RV, automotive, medical and industrial applications, with annual sales of $19 million, of which $15 million were to the Company; |
| |
▪ | Star Design, LLC (“Star Design”) - A manufacturer of thermoformed sheet plastic products for the RV, bus and specialty vehicle industries, with annual sales of $10 million; |
| |
▪ | Power Gear® and Kwikee® brands (RV business of Actuant Corporation) - A manufacturer of leveling systems, slide-out mechanisms and steps, primarily for motorhome RVs, with annual sales of $28 million;
|
| |
▪ | Duncan Systems, Inc. (“Duncan Systems”) - A supplier of replacement motorhome windshields, awnings, and RV, heavy truck, and specialty vehicle glass and windows, primarily to fulfill insurance claims, with annual sales of $26 million. |
For 2014, the Company achieved a 17.5 percent return on equity, an improvement from the 16.0 percent return on equity in 2013.
In January 2014, the Company paid a special dividend of $2.00 per share, aggregating $47 million.
RV Segment
Net sales of the RV Segment in 2014 increased 20 percent, or $181 million, compared to 2013. Net sales of components were to the following markets for the years ending December 31:
|
| | | | | | | | | | |
| (In thousands) | | 2014 | | 2013 | | Change |
| RV OEMs: | | | | | | |
| Travel trailers and fifth-wheels | | $ | 841,497 |
| | $ | 727,783 |
| | 16% |
| Motorhomes | | 70,332 |
| | 47,937 |
| | 47% |
| RV aftermarket | | 49,570 |
| | 25,334 |
| | 96% |
| Adjacent industries | | 113,049 |
| | 92,640 |
| | 22% |
| Total RV Segment net sales | | $ | 1,074,448 |
| | $ | 893,694 |
| | 20% |
According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were:
|
| | | | | | | | |
| | | 2014 | | 2013 | | Change |
| Travel trailer and fifth-wheel RVs | | 298,900 |
| | 268,000 |
| | 12% |
| Motorhomes | | 43,900 |
| | 38,300 |
| | 15% |
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during 2014 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $4 million in net sales during 2014.
The Company’s net sales to the RV aftermarket increased during 2014 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $9 million in net sales during 2014. With an estimated 10 million households in North America owning an RV, the Company continues to believe there are significant opportunities in the RV aftermarket.
The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the years ended December 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
|
| | | | | | | | | | |
| Content per: | | 2014 | | 2013 | | Change |
| Travel trailer and fifth-wheel RV | | $ | 2,816 |
| | $ | 2,713 |
| | 4% |
| Motorhome | | $ | 1,602 |
| | $ | 1,272 |
| | 26% |
The Company’s average product content per type of RV excludes sales to the aftermarket and adjacent industries. Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of RVs produced industry-wide.
The Company’s net sales to the RV aftermarket increased during 2014 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $15 million in net sales during 2014.
The Company’s net sales to adjacent industries, including components for buses, trailers used to haul boats, livestock, equipment and other cargo, truck campers and truck caps, increased during 2014 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $8 million in net sales during 2014.
Operating profit of the RV Segment was $86.6 million in 2014, an improvement of $18.3 million compared to 2013. This increase in RV Segment operating profit was less than the Company’s expected 15 to 20 percent incremental margin. The operating profit margin of the RV Segment in 2014 was adversely impacted by:
Higher health insurance costs, largely due to increased employee participation.
Fixed costs, which were approximately $15 million higher than in 2013. In response to the increase in net sales, the Company bolstered its administrative staff during 2014, including the teams that were acquired through acquisitions and new employees hired in preparation for future growth and investment opportunities.
In early 2014, the Company entered into two new leases which added more than 700,000 square feet of production and distribution capacity. These two new leased facilities became operational during the latter half of 2014 and the realignment of the related operations were completed.
Partially offset by:
The elimination of production inefficiencies and costs incurred as a result of significant growth which occurred in 2012 and early 2013.
Lower payroll costs as a percent of sales, largely due to a reduction in state unemployment tax rates and improved employee retention.
Lower warranty costs as a percent of sales, largely due to lower claim experience.
The spreading of fixed costs over a $181 million larger sales base.
MH Segment
Net sales of the MH Segment in 2014 decreased 5 percent, or $6 million, compared to 2013. Net sales of components were to the following markets for the years ending December 31:
|
| | | | | | | | | | |
| (In thousands) | | 2014 | | 2013 | | Change |
| Manufactured housing OEMs | | $ | 77,421 |
| | $ | 80,245 |
| | (4)% |
| Manufactured housing aftermarket | | 14,186 |
| | 13,719 |
| | 3% |
| Adjacent industries | | 24,727 |
| | 27,918 |
| | (11)% |
| Total MH Segment net sales | | $ | 116,334 |
| | $ | 121,882 |
| | (5)% |
According to the IBTS, industry-wide wholesale shipments for the years ended December 31, were:
|
| | | | | | | | |
| | | 2014 | | 2013 | | Change |
| Total homes produced | | 64,300 |
| | 60,200 |
| | 7% |
| Total floors produced | | 99,200 |
| | 92,900 |
| | 7% |
The Company’s net sales growth in components for new manufactured homes was less than the increase in industry-wide wholesale shipments of manufactured homes, primarily due to customer mix, as the Company’s content per unit varies between customers, and loss of market share for certain products. Content per manufactured home and content per floor are impacted by market share changes, acquisitions and new product introductions, changes in selling prices for the Company’s products, as well as changes in the types of floors produced industry-wide.
Net sales to the manufactured housing aftermarket increased due to market share gains.
The trend in the Company’s average product content per manufactured home produced is an indicator of the Company’s overall market share of components for new manufactured homes. Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. The larger homes typically contain more of the Company’s products. The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components to manufactured housing OEMs for newly produced manufactured homes for the years ended December 31, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:
|
| | | | | | | | | | |
| Content per: | | 2014 | | 2013 | | Change |
| Home produced | | $ | 1,203 |
| | $ | 1,332 |
| | (10)% |
| Floor produced | | $ | 783 |
| | $ | 864 |
| | (9)% |
The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket and sales to adjacent industries. Content per manufactured home and content per floor are impacted by market share changes, acquisitions and new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of floors produced industry-wide.
Operating profit of the MH Segment was $10.9 million in 2014, a decrease of $1.1 million compared to 2013 primarily due to the decline in net sales.support anticipated growth.
Sale of Extrusion Assets
In April 2014, the Company entered into a six-year aluminum extrusion supply agreement, and concurrently sold certain aluminum extrusion assets. The Company recorded a pre-tax loss of $2.0 million in the second quarter of 2014 on the sale of the aluminum extrusion-related assets. In connection with the sale, the Company received $0.3 million at closing and a $7.2 million note receivable collectible over the next four years, recorded at its present value of $6.4 million on the date of closing. During 2015 and
2016 - 2014, the Company received installments of $3.8$5.8 million under the note. At December 31, 2015,2016, the present value of the remaining amount due under the note receivable was $3.2$1.4 million.
In July 2015, the Company agreed to terminate the supply agreement, and as consideration the Company received a $2.0 million note receivable collectible in 2019 and 2020. The Company recorded this note receivable at its present value of $1.6 million and a corresponding gain of $1.6 million in the 2015 third quarter. At December 31, 2015,2016, the present value of the remaining amount due under the note receivable was $1.6$1.7 million.
Severance and Executive Succession
In 2015, the Company initiated a focused program to reduce indirect labor costs. In connection with this cost reduction program and certain changes at the executive level, the Company incurred severance charges of $3.7 million.
In 2013, in connection with the Company’s executive succession and corporate relocation from White Plains, New York to Elkhart County, Indiana, the Company recorded pre-tax charges of $1.9 million, related to contractual obligations for severance and the acceleration of equity awards held by certain employees whose employment terminated as a result of the executive succession and relocation to Indiana. The liability for executive succession and severance obligations were paid through 2015.
Provision for Income Taxes
The effective income tax rate for 20152016 was 34.9 percent compared to 35.0 percent more than the 34.5 percent in 2014.2015. Both 20152016 and 20142015 benefited from federal and state tax credits, as well as the reversal of federal and state tax reserves, due to the closure of the statutes of limitation of federal and state tax years, with a larger benefit in 2014.2016. The Company estimates the 20162017 effective income tax rate to be approximately 3534 percent to 36 percent.
The effective income tax rate for 20142015 was 34.535.0 percent compared to 35.734.5 percent in 2013.2014.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect the following for the years ended December 31:
| | | (In thousands) | | 2015 | | 2014 | | 2013 | | 2016 | | 2015 | | 2014 |
| Net cash flows provided by operating activities | | $ | 95,018 |
| | $ | 107,020 |
| | $ | 82,677 |
| | $ | 203,407 |
| | $ | 95,018 |
| | $ | 107,020 |
|
| Net cash flows used for investing activities | | (66,116 | ) | | (144,074 | ) | | (36,055 | ) | | (91,707 | ) | | (66,116 | ) | | (144,074 | ) |
| Net cash flows (used for) provided by financing activities | | (16,601 | ) | | (29,222 | ) | | 9,719 |
| |
| Net increase (decrease) in cash | | $ | 12,301 |
| | $ | (66,276 | ) | | $ | 56,341 |
| |
| Net cash flows used for financing activities | | | (37,835 | ) | | (16,601 | ) | | (29,222 | ) |
| Net increase (decrease) in cash and cash equivalents | | | $ | 73,865 |
| | $ | 12,301 |
| | $ | (66,276 | ) |
Cash Flows from Operations
Net cash flows from operating activities in 2016 were $108.4 million higher than in 2015, primarily due to:
A $56.5 million increase in the change for accounts payable and accrued expenses and other liabilities in 2016 compared to a $37.1 million decrease in 2015, primarily due to the increases in sales, production and earnings, as well as the timing of these payments.
A $55.3 million increase in net income in 2016 compared to 2015.
A smaller increase in the change for inventories of $23.4 million in 2016 compared to 2015. The increase in inventories in 2016 was primarily due to increases in sourced products and acquisitions completed in 2016. Inventory turnover for 2016 increased to 7.5 turns compared to 6.9 turns for 2015. The Company is working to improve inventory turnover, however, inventory turns may trend lower due to growth in product categories such as imported furniture and Furrion electronics.
Increases in non-cash charges against net income in 2016 including:
A $4.5 million increase in depreciation and amortization primarily due to investments in acquisitions and capital expenditures.
A $1.4 million increase in stock-based compensation in 2016 compared to 2015.
Partially offset by:
A $13.9 million increase in accounts receivable in 2016 compared to a $2.1 million decrease in 2015, primarily due to an increase in days sales outstanding to 16 at December 31, 2016, compared to 14 at December 31, 2015.
A higher increase in the change for prepaid expense and other assets of $13.3 million in 2016 compared to 2015. The increase in 2016 was primarily due to a $4.5 million higher tax receivable at December 31, 2016, as well as an increase in short-term deposits related to 2017 capital expenditures and inventory.
Over the long term, based on the Company’s historical collection and payment patterns, as well as inventory turnover, and also giving consideration to emerging trends and changes to the sales mix, the Company expects working capital to increase or decrease equivalent to approximately 10 to 15 percent of the increase or decrease, respectively, in net sales. However, there are many factors that can impact this relationship, especially in the short term.
Depreciation and amortization was $46.2 million in 2016, and is expected to be approximately $50 million to $55 million for fiscal year 2017. Non-cash stock-based compensation in 2016 was $15.7 million, including $0.3 million of deferred stock units issued to certain executive officers in lieu of cash for a portion of their 2015 incentive compensation in accordance with their compensation arrangements. Non-cash stock-based compensation is expected to be approximately $17 million to $19 million in 2017.
Net cash flows from operating activities in 2015 were $12.0 million lower than in 2014, primarily due to:
A larger increase in the change for inventories of $9.3 million in 2015 compared to 2014. The increase in inventories in 2015 was primarily due to increases in sourced products, including inventory to support the Furrion Agreement (discussed immediately below) and acquisitions completed in 2015. A portion of the increase in inventory iswas also due to strategic positions to take advantage of favorable market conditions and includeincluded the strategic onboarding of a new supplier. Inventory turnover for 2015 decreased to 6.9 turns compared to 8.2 turns for 2014. The Company is working to improve inventory turnover over the coming quarters, however, inventory turns may trend lower due to growth in product categories such as imported furniture and Furrion electronics.
In July 2015, the Company entered into a 6-year exclusive distribution and supply agreement with Furrion Limited (“Furrion”), a Hong Kong based firm that designs, engineers and manufactures premium electronics. This agreement provides the Company with the rights to distribute Furrion’s complete line of products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions, sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry. In connection with this agreement, the Company acquired Furrion’s current inventory, as well as Furrion’s deposits on inventory scheduled for delivery, for approximately $11 million.
A $5.9 million decrease in accounts payable and accrued expenses and other liabilities in 2015 compared to a $31.2 million increase in 2014, primarily due to increased imports and other prepaid inventories, efforts to increase consignments, as well as the timing of purchases.
Partially offset by:
A $12.1 million increase in net income in 2015 compared to 2014.
Increases in non-cash charges against net income in 2015 including:
A $9.0 million increase in depreciation and amortization primarily due to investments in acquisitions and capital expenditures.
A $3.2 million increase in stock-based compensation in 2015 compared to 2014.
An increase in deferred taxes of $1.1 million in 2015 compared to a $5.5 million decrease in 2014 due to an increase in certain expenses currently not deductible for tax purposes in 2015.
Over the long term, based on the Company’s historical collection and payment patterns, as well as inventory turnover, and also giving consideration to emerging trends and changes to the sales mix, the Company expects working capital to increase or decrease equivalent to approximately 11 to 14 percent of the increase or decrease, respectively, in net sales. However, there are many factors that can impact this relationship, especially in the short term.
Depreciation and amortization was $41.6 million in 2015, and is expected to be approximately $42 million to $47 million for fiscal year 2016. Non-cash stock-based compensation in 2015 was $16.1 million, including $2.0 million of deferred stock units issued to certain executive officers in lieu of cash for a portion of their 2014 incentive compensation in accordance with their compensation arrangements. Non-cash stock-based compensation is expected to be approximately $16 million to $18 million in 2016.
Net cash flows from operating activities in 2014 were $24.3 million higher than in 2013, primarily due to:
A $12.1 million increase in net income in 2014 compared to 2013.
A $24.0 million larger increase in the change for accounts payable and accrued expenses and other liabilities in 2014 compared to 2013, primarily due to the increases in sales, production and earnings, as well as the timing of these payments.
An $8.5 million smaller increase in the change for accounts receivable in 2014 compared to 2013, primarily due to a decrease in days sales outstanding to 15 at December 31, 2014, compared to 17 at December 31, 2013.
A $5.1 million increase in depreciation and amortization primarily due to the acquisitions completed during 2014 and capital expenditures over the last couple years.
Partially offset by:
An $18.5 million larger increase in the change for inventories in 2014 as compared to 2013. The larger increase in inventories in 2014 was primarily to support the 41 percent increase in net sales in January 2015. Higher raw material costs and increased lead time on imports also contributed to the increase in inventory. Inventory turnover for 2014 improved to 8.2 turns compared to 7.9 turns for 2013.
An increase in deferred taxes of $5.5 million in 2014 compared to a $0.3 million decrease in 2013 due to an increase in certain expenses not currently deductible for tax purposes in 2014.
Cash Flows from Investing Activities
Cash flows used for investing activities of $91.7 million in 2016 were primarily comprised of $48.7 million for the acquisition of businesses and $44.7 million for capital expenditures.
In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. The purchase price was $10.0 million paid at closing.
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a manufacturer of RV furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation.
In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing.
In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.
The Company’s capital expenditures are primarily for replacement and growth. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately 2 percent of net sales, while the growth portion has averaged approximately 8 to 11 percent of the annual increase in net sales. However, there are many factors that can impact the actual spending compared to these historical averages. In 2016 and 2015 capital expenditures of $44.7 million and $29.0 million, respectively, were in line with historical averages.
The 2016 capital expenditures and acquisitions were funded by cash from operations and periodic borrowings under the Company’s line of credit and $50 million of Senior Promissory Notes issued under the “shelf-loan” facility with Prudential. Capital expenditures in 2017 are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under the Company’s line of credit.
Cash flows used for investing activities of $66.1 million in 2015 were primarily comprised of $29.0 million for capital expenditures and $41.1 million for the acquisition of businesses and $29.0 million for capital expenditures.businesses.
In January 2015, the Company acquired the business and certain assets of EA Technologies, LLC (“EA Technologies”), a manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications. The purchase price was $9.2 million, of which $6.6 million was paid in the fourth quarter of 2014, with the balance paid at closing.
In April 2015, the Company acquired the business and certain assets of Industries Spectal, Inc. (“Spectal”), a Quebec, Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation.
In August 2015, the Company acquired the business and certain assets of Roehm Marine, LLC, also known as Signature Seating (“Signature”), a manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats. The purchase price was $16.0 million paid at closing, plus contingent consideration based on future sales of this operation.
The Company’s capital expenditures are primarily for replacement and growth. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately 2 percent of net sales, while the growth portion has averaged approximately 10 to 12 percent of the annual increase in net sales. However, there are many factors that can impact the actual spending compared to these historical averages. In 2015 capital expenditures of $29 million were in line with historical averages. However, in 2014, the Company’s capital expenditures were $42.5 million, higher than the aforementioned historical averages. The increased spending was the result of several long-term growth and capacity expansion initiatives. As such, coupled with the success achieved in lean manufacturing to free up additional manufacturing space, the Company believes it is well positioned to meet the increased manufacturing demands expected for 2016 and into 2017 with capital expenditures at or below the historical levels.
The Company estimates capital expenditures will be $20 million to $26 million in 2016, including $11 million to $14 million of “replacement” capital expenditures and $9 million to $12 million of “growth” capital expenditures. Additional capital expenditures may be required in 2016 depending on the extent of the sales growth, the effect of any acquisitions and other initiatives by the Company.
The 2015 capital expenditures and acquisitions were funded by cash from operations and periodic borrowings under the Company’s line of credit and $50 million of Senior Promissory Notes issued under the “shelf-loan” facility with Prudential. The
2016 capital expenditures are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under the Company’s line of credit.
Cash flows used for investing activities of $144.1 million in 2014 were primarily comprised of $42.5 million for capital expenditures and $106.8 million for the acquisition of businesses.
In February 2014, the Company acquired IDS, a designer, developer and manufacturer of electronic systems encompassing a wide variety of RV applications. IDS also manufactures electronic systems for automotive, medical and industrial applications. The purchase price was $35.9 million, of which $34.2 million was paid at closing, with the balance to be paid out annually over the subsequent three years, plus contingent consideration based on future sales of this operation.
In March 2014, the Company acquired the business and certain assets of Star Design, LLC, which manufactures thermoformed sheet plastic products for the RV, bus and specialty vehicle industries. The purchase price was $12.2 million paid at closing.
In June 2014, the Company acquired the RV business of Actuant Corporation, which manufactures leveling systems, slide-out mechanisms and steps, primarily for motorhome RVs, under the Power Gear and Kwikee brands. The purchase price was $35.5 million, paid at closing.
In August 2014, the Company acquired the business and certain assets of Duncan Systems, Inc., an aftermarket distributor of replacement motorhome windshields, awnings, and RV, heavy truck and specialty vehicle glass and windows, primarily to fulfill insurance claims. The purchase price was $18.0 million paid at closing, plus contingent consideration based on future sales of this operation.
Cash Flows from Financing Activities
Cash flows used byfor financing activities in 2016 primarily included the payment of dividends of $34.4 million paid to stockholders. The Company had no outstanding borrowings under the line of credit as of December 31, 2016, but borrowings reached a high of $33.0 million during 2016. In addition, the Company made $4.9 million in payments for contingent consideration related to acquisitions.
Cash flows used for financing activities in 2015 included the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $48.2 million, paid to stockholders of record as of March 27, 2015, partially offset by a net increase in indebtedness of $34.4 million. The increase in indebtedness includesincluded new debt comprised of $50.0 million of Senior Promissory Notes drawn in March 2015 under the Prudential Investment Management, Inc. “shelf-loan” facility, partially offset by a $15.7 million decrease in debt due to paying down the Company’s line of credit. The Company had no outstanding borrowings under the line of credit as of December 31, 2015, but borrowings reached a high of $71.6 million during 2015. In addition, in 2015, the Company made $4.0 million in payments for contingent consideration related to acquisitions.
Cash flows used for financing activities in 2014 included the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $46.7 million, paid to stockholders of record as of December 20, 2013, partially offset by a net increase in indebtedness of $15.6$15.7 million. The increase in indebtedness was due to borrowings under the Company’s line of credit. In addition, in 2014, the Company received $5.8 million in cash and the related tax benefits from the exercise of stock-based compensation, offset by $3.7 million in payments for contingent consideration related to acquisitions.
In connection with certain business acquisitions, if established sales targets for the acquired products are achieved, the Company is contractually obligated to pay additional cash consideration. The Company has recorded a $10.8$9.2 million liability for the aggregate fair value of these expected contingent consideration liabilities at December 31, 2015,2016, including $3.9$5.8 million recorded as a current liability. For further information, see Note 11 of the Notes to the Consolidated Financial Statements.
On February 24, 2014, the Company entered into a $75.0 million line of credit (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., amending an existing facility first entered into in 2008. On March 3, 2015, in accordance with the terms of the Credit Agreement, the Company increased its line of credit by $25.0 million to $100.0 million. Interest on borrowings under the line of credit was designated from time to time by the Company as either (i) the Prime Rate, minus a rate ranging from 0.75 to 1.0 percent (minus 1.0 percent at December 31, 2015), but not less than 1.5 percent, or (ii) LIBOR, plus additional interest ranging from 1.75 to 2.0 percent (plus 1.75 percent at December 31, 2015) depending on the Company’s performance and financial condition.
On April 27, 2016, the Company announced the refinancing of its line of credit through an agreement with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and 1st Source Bank. The Credit Agreement expiresagreement amends and restates the existing line of credit, which was scheduled to expire on January 1, 2019.2019, and now expires on April 27, 2021 (the “Amended Credit Agreement”). In connection with this amendment and restatement, the line of credit was increased from $100.0 million to $200.0 million, and contains a feature allowing the Company to draw up to $50.0 million in approved foreign currencies, including Australian dollars, Canadian dollars, pound sterling and euros. The maximum borrowings under the line of credit can be further increased by $125.0 million, subject to certain conditions. At December 31, 2016 and 2015, the Company had $2.5 million and $2.7 million, respectively, in outstanding, but undrawn, standby letters of credit under the line of credit primarily to secure certain insurance arrangements.credit. Availability under the Company’s line of credit was $97.3$197.5 million at December 31, 2015.2016.
On February 24, 2014, the Company also entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”). The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million, to mature no more than twelve12 years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. This facility expires on February 24, 2017. On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes to Prudential under the “shelf-loan” facility, for a term of five years, at a fixed interest rate of 3.35 percent per annum, payable quarterly in arrears, of which the entire amount was outstanding at December 31, 2015.2016. At December 31, 2016, the fair value of the Company’s long-term debt approximates the carrying value, as estimated using quoted market prices and discounted future cash flows based on similar borrowing arrangements.
On April 27, 2016, the Company also amended and restated its “shelf-loan” facility with Prudential to conform certain covenants and other terms to the Amended Credit Agreement. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after
the Company issues a request to Prudential. Availability under the Company’s “shelf-loan” facility, subject to the approval of Prudential, was $100.0 million at December 31, 2015.2016.
Pursuant to the Amended Credit Agreement and “shelf-loan” facility, at December 31, 2015, the Company wasis required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At December 31, 2016 and 2015, the Company was in compliance with all such requirements.requirements, and expects to remain in compliance for the next twelve months.
Availability under both the Amended Credit Agreement and the “shelf-loan” facilitiesfacility is subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined in the agreements.defined. This limitation did not impact the Company’s borrowing availability at December 31, 2015.2016. The remaining availability under these facilities was $197.3$297.5 million at December 31, 2015.2016. The undrawn “shelf-loan” facility expired February 24, 2017, and the Company and Prudential are currently discussing renewal terms. The Company believes the availability under the Amended Credit Agreement and “shelf-loan” facility in conjunction with cash from operations is adequate to finance the Company’s anticipated cash requirements for the next twelve months.
Additional information on the Company’s Credit Agreement and “shelf-loan” facility is included in Note 9 of the Notes to the Condensed Consolidated Financial Statements.
Future minimum commitments relating to the Company’s contractual obligations at December 31, 20152016 were as follows:
| | | | Payments due by period | Payments due by period |
| | | | Less than | | | | | | More than | | | | | Less than | | | | | | More than | | |
| (In thousands) | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | | Other | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | | Other |
| Total indebtedness | $ | 50,000 |
| | $ | — |
| | $ | — |
| | $ | 50,000 |
| | $ | — |
| | $ | — |
| $ | 50,000 |
| | $ | — |
| | $ | — |
| | $ | 50,000 |
| | $ | — |
| | $ | — |
|
Interest on fixed rate indebtedness (a) | 7,063 |
| | 1,675 |
| | 3,350 |
| | 2,038 |
| | — |
| | — |
| 5,388 |
| | 1,675 |
| | 3,350 |
| | 363 |
| | — |
| | — |
|
| Operating leases | 39,672 |
| | 7,472 |
| | 12,314 |
| | 8,795 |
| | 11,091 |
| | — |
| 40,503 |
| | 9,388 |
| | 14,046 |
| | 9,052 |
| | 8,017 |
| | — |
|
Employment contracts (b) | 15,200 |
| | 8,311 |
| | 6,889 |
| | — |
| | — |
| | — |
| 7,441 |
| | 7,070 |
| | 221 |
| | 150 |
| | — |
| | — |
|
Deferred compensation (c) | 11,485 |
| | 185 |
| | 2,892 |
| | 951 |
| | 4,118 |
| | 3,339 |
| 13,574 |
| | 160 |
| | 609 |
| | 3,486 |
| | 5,380 |
| | 3,939 |
|
Royalty agreements and contingent consideration payments (d) | 14,444 |
| | 4,045 |
| | 7,287 |
| | 2,034 |
| | 1,078 |
| | — |
| 11,639 |
| | 6,252 |
| | 2,275 |
| | 1,560 |
| | 1,552 |
| | — |
|
Purchase obligations (e) | 587,854 |
| | 238,553 |
| | 261,447 |
| | 87,854 |
| | — |
| | — |
| 539,891 |
| | 300,741 |
| | 238,280 |
| | 870 |
| | — |
| | — |
|
Taxes (f) | 2,927 |
| | 2,927 |
| | — |
| | — |
| | — |
| | — |
| 3,100 |
| | 3,100 |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 728,645 |
| | $ | 263,168 |
| | $ | 294,179 |
| | $ | 151,672 |
| | $ | 16,287 |
| | $ | 3,339 |
| $ | 671,536 |
| | $ | 328,386 |
| | $ | 258,781 |
| | $ | 65,481 |
| | $ | 14,949 |
| | $ | 3,939 |
|
| |
| (a) | The Company has used the contractual payment dates and the fixed interest rates in effect as of December 31, 2015,2016, to determine the estimated future interest payments for fixed rate indebtedness. |
| |
| (b) | Includes amounts payable under employment contracts and arrangements, and retirement and severance agreements. |
| |
| (c) | Includes amounts payable under deferred compensation arrangements. The Other column represents the liability for deferred compensation for employees that have elected to receive payment upon separation from service from the Company. |
| |
| (d) | Comprised of estimated future contingent consideration payments for which a liability has been recorded in connection with business acquisitions over the past few years.acquisitions. |
| |
| (e) | Primarily comprised of (i) purchase orders issued in the normal course of business and (ii) long term purchase commitments, for which the Company has estimated the expected future obligation based on current prices and usage. |
| |
| (f) | Represents unrecognized tax benefits, as well as related interest and penalties. |
These commitments are described more fully in the Notes to Consolidated Financial Statements.
CORPORATE GOVERNANCE
The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. The Company’s governance documents and committee charters and key practices have been posted to the Company’s website (www.drewindustries.comwww.lci1.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company has also established a Whistleblower Policy, which includes a toll-free hotline (877-373-9123) to report complaints about the Company’s accounting, internal controls, auditing matters or other concerns. The Whistleblower Policy and procedure for complaints can be found on the Company’s website (www.drewindustries.comwww.lci1.com).
CONTINGENCIES
Additional information required by this item is included under Item 3 of Part I of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America which requires certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes. Actual results could differ from these estimates and assumptions. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s Consolidated Financial Statements. Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to the critical accounting policies.
Inventories
Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). The Company estimates an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand and market conditions. To the extent actual demand or market conditions in the future differ from original estimates, adjustments to recorded inventory reserves may be required.
Self-Insurance
The Company is self-insured for certain health and workers’ compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical lag information and other data provided by third-party claims administrators. This estimation process is subjective, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required.
Warranty
The Company provides warranty terms based upon the type of product sold. The Company estimates the warranty accrual based upon various factors, including (i) historical warranty costs, (ii) current trends, (iii) product mix, and (iv) sales. The accounting for warranty accruals requires the Company to make assumptions and judgments, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required.
Income Taxes
The Company’s tax provision is based on pre-tax income, statutory tax rates, federal and state tax credits, and tax planning strategies. Significant management judgment is required in determining the tax provision and in evaluating the Company’s tax position. The Company establishes additional provisions for income taxes when, despite the belief the tax positions are fully supportable, there remain certain tax positions that are likely to be challenged and may or may not be sustained on review by tax authorities. The Company adjusts these tax accruals in light of changing facts and circumstances. The effective tax rate in a given financial statement period may be materially impacted by changes in the expected outcome of tax audits. The Company’s accompanying Consolidated Balance Sheets also include deferred tax assets resulting from deductible temporary differences, which are expected to reduce future taxable income. These assets are based on management’s estimate of realizability, which is reassessed each quarter based upon the Company’s forecast of future taxable income. Failure to achieve forecasted taxable income could affect the ultimate realization of certain deferred tax assets, and may result in the recognition of a valuation reserve. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.
Fair Value of Net Assets of Acquired Businesses
The Company values the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company uses different valuation techniques in determining the fair value. Those techniques include comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, a market participant’s weighted average cost of capital, as well as other techniques as circumstances required. By their nature, these assumptions require judgment, and if management had
chosen different assumptions, the fair value of net assets of acquired businesses would have been different. For further information on acquired assets and liabilities, see Notes 32 and 13 of the Notes to Consolidated Financial Statements.
Impairment of Long-Lived Assets, including Other Intangible Assets and Goodwill
The Company performs recoverability and impairment tests of noncurrent assets in accordance with accounting principles generally accepted in the United States. For certain assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. When such events or circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value would be recorded.
For other assets, impairment tests are required at least annually, or more frequently, if events or circumstances indicate that an asset may be impaired. The impairment test for other assets consists of an assessment of qualitative factors. If such qualitative factors do not support that the fair value of the reporting unit is greater than the carrying amount, the Company then uses a discounted cash flow model to estimate the fair value of the reporting unit.
The Company’s assessment of the recoverability and impairment tests of noncurrent assets involve critical accounting estimates. These estimates require significant management judgment, include inherent uncertainties and are often interdependent; therefore, they do not change in isolation. Factors that management must estimate include, among others, the economic life of the asset, sales volume, pricing, cost of raw materials, delivery costs, inflation, cost of capital, tax rates, capital spending and proceeds from the sale of assets. These factors are even more difficult to predict when financial markets are highly volatile. The estimates management uses when assessing the recoverability of noncurrent assets are consistent with those management uses in its internal planning. When performing impairment tests, management estimates the fair values of the assets using management’s best assumptions, which is believed to be consistent with what a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus accounting estimates may change from period to period. If other assumptions and estimates had been used when these tests were performed, impairment charges could have resulted. As mentioned above, these factors do not change in isolation and, therefore, the Company does not believe it is practicable or meaningful to present the impact of changing a single factor. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future impairment charges could result.
Contingent Consideration Payments
In connection with several acquisitions, in addition to the cash paid at closing, additional payments could be required depending upon the level of sales generated from certain of the acquired products. The fair value of the aggregate estimated contingent consideration payments has been recorded as a liability in the Consolidated Balance Sheets. Each quarter, the Company is required to re-evaluate the fair value of the liability for the estimated contingent consideration payments for such acquisitions. The fair value of the contingent consideration payments is estimated using a discounted cash flow model. This model involves the use of estimates and significant judgments that are based on a number of factors including sales of certain products, future business plans, economic projections, weighted average cost of capital, and market data. Actual results may differ from forecasted results.
Other Estimates
The Company makes a number of other estimates and judgments in the ordinary course of business including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, lease terminations, asset retirement obligations, long-lived assets, executive succession, post-retirement benefits, stock-based compensation, segment allocations, environmental liabilities, contingencies and litigation. Establishing reserves for these matters requires management’s estimate and judgment with regard to risk and ultimate liability or realization. As a result, these estimates are based on management’s current understanding of the underlying facts and circumstances and may also be developed in conjunction with outside advisors, as appropriate. Due to uncertainties related to the ultimate outcome of these issues or the possibilities of changes in the underlying facts and circumstances, actual results and events could differ significantly from management estimates.
New Accounting Pronouncements
Information required by this item is included in Note 1415 of the Notes to the Consolidated Financial Statements.
INFLATION
The prices of key raw materials, consisting primarily of steel and aluminum, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. The Company did not experience any significant increases in its labor costs in 20152016 related to inflation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 2015,2016, the Company had $50.0$49.9 million of fixed rate debt outstanding. Assuming there is an increasedecrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to December 31, 2015,2016, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be approximately $0.3 million lower per annum than if the fixed rate financing could be obtained at current market rates.
The Company is also exposed to changes in the prices of raw materials, specifically steel and aluminum. The Company has, from time to time, entered into derivative instruments for the purpose of managing a portion of the exposures associated with fluctuations in steel and aluminum prices. While these derivative instruments are subject to fluctuations in value, these fluctuations are generally offset by the changes in fair value of the underlying exposures. At December 31, 2015,See Note 13 of the Company had noNotes to Consolidated Financial Statements for a more detailed discussion of derivative instruments outstanding.instruments.
The Company has historically been able to obtain sales price increases to partially offset the majority of raw material cost increases. However, there can be no assurance future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases will match raw material cost increases.
Additional information required by this item is included under the caption “Inflation” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Drew Industries Incorporated:LCI Industries:
We have audited the accompanying consolidated balance sheets of DrewLCI Industries Incorporated and subsidiaries (the “Company”) as of December 31, 20152016 and 2014,2015, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015.2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DrewLCI Industries Incorporated and subsidiaries as of December 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015,2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Chicago, Illinois
February 29, 201628, 2017
DREW
LCI INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
| | | | Year ended December 31, | Year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| (In thousands, except per share amounts) | | | | | | | | | | |
| | | | | | | | | | | |
| Net sales | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
| $ | 1,678,898 |
| | $ | 1,403,066 |
| | $ | 1,190,782 |
|
| Cost of sales | 1,097,064 |
| | 935,859 |
| | 802,467 |
| 1,249,995 |
| | 1,097,064 |
| | 935,859 |
|
| Gross profit | 306,002 |
| | 254,923 |
| | 213,109 |
| 428,903 |
| | 306,002 |
| | 254,923 |
|
| Selling, general and administrative expenses | 186,032 |
| | 157,482 |
| | 132,935 |
| 228,053 |
| | 186,032 |
| | 157,482 |
|
| Severance | 3,716 |
| | — |
| | — |
| — |
| | 3,716 |
| | — |
|
| Sale of extrusion assets | — |
| | 1,954 |
| | — |
| — |
| | — |
| | 1,954 |
|
| Executive succession | — |
| | — |
| | 1,876 |
| |
| Operating profit | 116,254 |
| | 95,487 |
| | 78,298 |
| 200,850 |
| | 116,254 |
| | 95,487 |
|
| Interest expense, net | 1,885 |
| | 430 |
| | 351 |
| 1,678 |
| | 1,885 |
| | 430 |
|
| Income before income taxes | 114,369 |
| | 95,057 |
| | 77,947 |
| 199,172 |
| | 114,369 |
| | 95,057 |
|
| Provision for income taxes | 40,024 |
| | 32,791 |
| | 27,828 |
| 69,501 |
| | 40,024 |
| | 32,791 |
|
| Net income | $ | 74,345 |
| | $ | 62,266 |
| | $ | 50,119 |
| $ | 129,671 |
| | $ | 74,345 |
| | $ | 62,266 |
|
| | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | |
| Basic | $ | 3.06 |
| | $ | 2.60 |
| | $ | 2.15 |
| $ | 5.26 |
| | $ | 3.06 |
| | $ | 2.60 |
|
| Diluted | $ | 3.02 |
| | $ | 2.56 |
| | $ | 2.11 |
| $ | 5.20 |
| | $ | 3.02 |
| | $ | 2.56 |
|
| | | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | | |
| Basic | 24,295 |
| | 23,911 |
| | 23,321 |
| 24,631 |
| | 24,295 |
| | 23,911 |
|
| Diluted | 24,650 |
| | 24,334 |
| | 23,753 |
| 24,933 |
| | 24,650 |
| | 24,334 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
LCI INDUSTRIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | |
| | | | | | |
| Consolidated net income | $ | 129,671 |
| | $ | 74,345 |
| | $ | 62,266 |
|
| Other comprehensive loss: | | | | | |
| Net foreign currency translation adjustment | (1,798 | ) | | — |
| | — |
|
| Total comprehensive income | $ | 127,873 |
| | $ | 74,345 |
| | $ | 62,266 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
LCI INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| (In thousands, except per share amount) | | | | | | |
| | | | | | | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | $ | 12,305 |
| | $ | 4 |
| $ | 86,170 |
| | $ | 12,305 |
|
| Accounts receivable, net | 41,509 |
| | 37,987 |
| 57,374 |
| | 41,509 |
|
| Inventories, net | 170,834 |
| | 132,492 |
| 188,743 |
| | 170,834 |
|
| Deferred taxes | 22,616 |
| | 18,709 |
| |
| Prepaid expenses and other current assets | 21,178 |
| | 18,444 |
| 35,107 |
| | 21,178 |
|
| Total current assets | 268,442 |
| | 207,636 |
| 367,394 |
| | 245,826 |
|
| Fixed assets, net | 150,600 |
| | 146,788 |
| 172,748 |
| | 150,600 |
|
| Goodwill | 83,619 |
| | 66,521 |
| 89,198 |
| | 83,619 |
|
| Other intangible assets, net | 100,935 |
| | 96,959 |
| 112,943 |
| | 100,935 |
|
| Deferred taxes | 6,775 |
| | 11,744 |
| 31,989 |
| | 29,391 |
|
| Other assets | 12,575 |
| | 14,193 |
| 12,632 |
| | 12,485 |
|
| Total assets | $ | 622,946 |
| | $ | 543,841 |
| $ | 786,904 |
| | $ | 622,856 |
|
| | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current liabilities | | | | | | |
| Accounts payable, trade | $ | 29,700 |
| | $ | 49,534 |
| $ | 50,616 |
| | $ | 29,700 |
|
| Accrued expenses and other current liabilities | 69,162 |
| | 57,651 |
| 98,735 |
| | 69,162 |
|
| Total current liabilities | 98,862 |
| | 107,185 |
| 149,351 |
| | 98,862 |
|
| Long-term indebtedness | 50,000 |
| | 15,650 |
| 49,949 |
| | 49,910 |
|
| Other long-term liabilities | 35,509 |
| | 26,108 |
| 37,335 |
| | 35,509 |
|
| Total liabilities | 184,371 |
| | 148,943 |
| 236,635 |
| | 184,281 |
|
| | | | | | | |
| Stockholders’ equity | | | | | | |
| Common stock, par value $.01 per share: authorized | | | | | | |
| 75,000 shares; issued 27,039 shares at December 31, 2015 | | | | |
| and 26,534 shares at December 31, 2014 | 270 |
| | 265 |
| |
| 75,000 shares; issued 27,434 shares at December 31, 2016 | | | | |
| and 27,039 shares at December 31, 2015 | | 274 |
| | 270 |
|
| Paid-in capital | 166,566 |
| | 147,186 |
| 185,981 |
| | 166,566 |
|
| Retained earnings | 301,206 |
| | 276,914 |
| 395,279 |
| | 301,206 |
|
| Accumulated other comprehensive loss | | (1,798 | ) | | — |
|
| Stockholders’ equity before treasury stock | 468,042 |
| | 424,365 |
| 579,736 |
| | 468,042 |
|
| Treasury stock, at cost, 2,684 shares at December 31, 2015 | | | | |
| and December 31, 2014 | (29,467 | ) | | (29,467 | ) | |
| Treasury stock, at cost, 2,684 shares at December 31, 2016 | | | | |
| and December 31, 2015 | | (29,467 | ) | | (29,467 | ) |
| Total stockholders’ equity | 438,575 |
| | 394,898 |
| 550,269 |
| | 438,575 |
|
| Total liabilities and stockholders’ equity | $ | 622,946 |
| | $ | 543,841 |
| $ | 786,904 |
| | $ | 622,856 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DREWLCI INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 74,345 |
| | $ | 62,266 |
| | $ | 50,119 |
| $ | 129,671 |
| | $ | 74,345 |
| | $ | 62,266 |
|
| Adjustments to reconcile net income to cash flows provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 41,624 |
| | 32,596 |
| | 27,500 |
| 46,167 |
| | 41,624 |
| | 32,596 |
|
| Stock-based compensation expense | 14,043 |
| | 10,817 |
| | 10,839 |
| 15,420 |
| | 14,043 |
| | 10,817 |
|
| Deferred taxes | 1,062 |
| | (5,493 | ) | | 269 |
| (2,598 | ) | | 1,062 |
| | (5,493 | ) |
| Other non-cash items | 1,335 |
| | 2,796 |
| | 1,867 |
| 1,540 |
| | 1,335 |
| | 2,796 |
|
| Changes in assets and liabilities, net of acquisitions of businesses: | | | | | | | | | | |
| Accounts receivable, net | 2,082 |
| | (606 | ) | | (9,013 | ) | (13,899 | ) | | 2,082 |
| | (606 | ) |
| Inventories, net | (31,276 | ) | | (21,940 | ) | | (3,403 | ) | (7,856 | ) | | (31,276 | ) | | (21,940 | ) |
| Prepaid expenses and other assets | (2,249 | ) | | (4,610 | ) | | (2,288 | ) | (15,553 | ) | | (2,249 | ) | | (4,610 | ) |
| Accounts payable, trade | (21,783 | ) | | 21,269 |
| | 2,296 |
| 18,800 |
| | (21,783 | ) | | 21,269 |
|
| Accrued expenses and other liabilities | 15,835 |
| | 9,925 |
| | 4,491 |
| 31,715 |
| | 15,835 |
| | 9,925 |
|
| Net cash flows provided by operating activities | 95,018 |
| | 107,020 |
| | 82,677 |
| 203,407 |
| | 95,018 |
| | 107,020 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Capital expenditures | (28,989 | ) | | (42,458 | ) | | (32,595 | ) | (44,671 | ) | | (28,989 | ) | | (42,458 | ) |
| Acquisitions of businesses | (41,058 | ) | | (106,782 | ) | | (4,750 | ) | |
| Acquisitions of businesses, net of cash acquired | | (48,725 | ) | | (41,058 | ) | | (106,782 | ) |
| Proceeds from note receivable | 2,000 |
| | 1,750 |
| | — |
| 2,000 |
| | 2,000 |
| | 1,750 |
|
| Proceeds from sales of fixed assets | 2,337 |
| | 3,587 |
| | 1,444 |
| 698 |
| | 2,337 |
| | 3,587 |
|
| Other investing activities | (406 | ) | | (171 | ) | | (154 | ) | (1,009 | ) | | (406 | ) | | (171 | ) |
| Net cash flows used for investing activities | (66,116 | ) | | (144,074 | ) | | (36,055 | ) | (91,707 | ) | | (66,116 | ) | | (144,074 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
Exercise of stock-based awards, net of shares tendered for
payment of taxes | 1,470 |
| | 5,769 |
| | 15,175 |
| 2,574 |
| | 1,470 |
| | 5,769 |
|
| Proceeds from line of credit borrowings | 614,629 |
| | 425,330 |
| | 135,452 |
| 81,458 |
| | 614,629 |
| | 425,330 |
|
| Repayments under line of credit borrowings | (630,279 | ) | | (409,680 | ) | | (135,452 | ) | (81,458 | ) | | (630,279 | ) | | (409,680 | ) |
| Payment of special dividend | (48,227 | ) | | (46,706 | ) | | — |
| |
| Payment of dividends | | (34,437 | ) | | (48,227 | ) | | (46,706 | ) |
| Proceeds from shelf-loan borrowing | 50,000 |
| | — |
| | — |
| — |
| | 50,000 |
| | — |
|
| Payment of contingent consideration related to acquisitions | (3,974 | ) | | (3,739 | ) | | (5,456 | ) | (4,944 | ) | | (3,974 | ) | | (3,739 | ) |
| Other financing activities | (220 | ) | | (196 | ) | | — |
| (1,028 | ) | | (220 | ) | | (196 | ) |
| Net cash flows (used for) provided by financing activities | (16,601 | ) | | (29,222 | ) | | 9,719 |
| |
| Net cash flows used for financing activities | | (37,835 | ) | | (16,601 | ) | | (29,222 | ) |
| | | | | | | | | | | |
| Net increase (decrease) in cash | 12,301 |
| | (66,276 | ) | | 56,341 |
| |
| Net increase (decrease) in cash and cash equivalents | | 73,865 |
| | 12,301 |
| | (66,276 | ) |
| | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | 4 |
| | 66,280 |
| | 9,939 |
| 12,305 |
| | 4 |
| | 66,280 |
|
| Cash and cash equivalents at end of year | $ | 12,305 |
| | $ | 4 |
| | $ | 66,280 |
| $ | 86,170 |
| | $ | 12,305 |
| | $ | 4 |
|
| | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | |
| Interest | $ | 2,113 |
| | $ | 641 |
| | $ | 364 |
| $ | 1,992 |
| | $ | 2,113 |
| | $ | 641 |
|
| Income taxes, net of refunds | $ | 33,782 |
| | $ | 30,947 |
| | $ | 26,799 |
| $ | 65,792 |
| | $ | 33,782 |
| | $ | 30,947 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DREWLCI INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| | | | Common Stock | Paid-in Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders’ Equity |
| (In thousands, except shares and per share amounts) | | |
| Balance - December 31, 2012 | $ | 254 |
| $ | 100,412 |
| $ | 213,046 |
| $ | (29,467 | ) | $ | 284,245 |
| |
| Net income | — |
| — |
| 50,119 |
| — |
| 50,119 |
| |
| Issuance of 681,426 shares of common stock pursuant to stock-based awards | 7 |
| 13,440 |
| — |
| — |
| 13,447 |
| |
| Income tax benefit relating to issuance of common stock pursuant to stock-based awards | — |
| 1,534 |
| — |
| — |
| 1,534 |
| |
| Stock-based compensation expense | — |
| 10,839 |
| — |
| — |
| 10,839 |
| |
| Issuance of 3,776 deferred stock units relating to prior year compensation | — |
| 135 |
| — |
| — |
| 135 |
| |
| Special cash dividend ($2.00 per share) | — |
| — |
| (46,706 | ) | — |
| (46,706 | ) | |
| Balance - December 31, 2013 | 261 |
| 126,360 |
| 216,459 |
| (29,467 | ) | 313,613 |
| $ | 261 |
| $ | 126,360 |
| $ | 216,459 |
| $ | — |
| $ | (29,467 | ) | $ | 313,613 |
|
| Net income | — |
| — |
| 62,266 |
| — |
| 62,266 |
| — |
| — |
| 62,266 |
| — |
| — |
| 62,266 |
|
| Issuance of 476,047 shares of common stock pursuant to stock-based awards | 4 |
| 2,298 |
| — |
| — |
| 2,302 |
| 4 |
| 2,298 |
| — |
| — |
| — |
| 2,302 |
|
| Income tax benefit relating to issuance of common stock pursuant to stock-based awards | — |
| 3,914 |
| — |
| — |
| 3,914 |
| — |
| 3,914 |
| — |
| — |
| — |
| 3,914 |
|
| Stock-based compensation expense | — |
| 10,817 |
| — |
| — |
| 10,817 |
| — |
| 10,817 |
| — |
| — |
| — |
| 10,817 |
|
| Issuance of 43,188 deferred stock units relating to prior year compensation | — |
| 1,986 |
| — |
| — |
| 1,986 |
| — |
| 1,986 |
| — |
| — |
| — |
| 1,986 |
|
| Dividend equivalents on stock-based awards | — |
| 1,811 |
| (1,811 | ) | — |
| — |
| — |
| 1,811 |
| (1,811 | ) | — |
| — |
| — |
|
| Balance - December 31, 2014 | 265 |
| 147,186 |
| 276,914 |
| (29,467 | ) | 394,898 |
| 265 |
| 147,186 |
| 276,914 |
| — |
| (29,467 | ) | 394,898 |
|
| Net income | — |
| — |
| 74,345 |
| — |
| 74,345 |
| — |
| — |
| 74,345 |
| — |
| — |
| 74,345 |
|
| Issuance of 505,312 shares of common stock pursuant to stock-based awards | 5 |
| (7,563 | ) | — |
| — |
| (7,558 | ) | |
| Issuance of 505,312 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | | 5 |
| (7,563 | ) | — |
| — |
| — |
| (7,558 | ) |
| Income tax benefit relating to issuance of common stock pursuant to stock-based awards | — |
| 9,028 |
| — |
| — |
| 9,028 |
| — |
| 9,028 |
| — |
| — |
| — |
| 9,028 |
|
| Stock-based compensation expense | — |
| 14,043 |
| — |
| — |
| 14,043 |
| — |
| 14,043 |
| — |
| — |
| — |
| 14,043 |
|
| Issuance of 36,578 deferred stock units relating to prior year compensation | — |
| 2,046 |
| — |
| — |
| 2,046 |
| — |
| 2,046 |
| — |
| — |
| — |
| 2,046 |
|
| Special cash dividend ($2.00 per share) | — |
| — |
| (48,227 | ) | — |
| (48,227 | ) | — |
| — |
| (48,227 | ) | — |
| — |
| (48,227 | ) |
| Dividend equivalents on stock-based awards | — |
| 1,826 |
| (1,826 | ) | — |
| — |
| — |
| 1,826 |
| (1,826 | ) | — |
| — |
| — |
|
| Balance - December 31, 2015 | $ | 270 |
| $ | 166,566 |
| $ | 301,206 |
| $ | (29,467 | ) | $ | 438,575 |
| 270 |
| 166,566 |
| 301,206 |
| — |
| (29,467 | ) | 438,575 |
|
| Net income | | — |
| — |
| 129,671 |
| — |
| — |
| 129,671 |
|
| Issuance of 395,274 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | | 4 |
| (5,413 | ) | — |
| — |
| — |
| (5,409 | ) |
| Income tax benefit relating to issuance of common stock pursuant to stock-based awards | | — |
| 7,983 |
| — |
| — |
| — |
| 7,983 |
|
| Stock-based compensation expense | | — |
| 15,420 |
| — |
| — |
| — |
| 15,420 |
|
| Issuance of 4,784 deferred stock units relating to prior year compensation | | — |
| 264 |
| — |
| — |
| — |
| 264 |
|
| Other comprehensive loss | | — |
| — |
| — |
| (1,798 | ) | — |
| (1,798 | ) |
| Cash dividends ($1.40 per share) | | — |
| — |
| (34,437 | ) | — |
| — |
| (34,437 | ) |
| Dividend equivalents on stock-based awards | | — |
| 1,161 |
| (1,161 | ) | — |
| — |
| — |
|
| Balance - December 31, 2016 | | $ | 274 |
| $ | 185,981 |
| $ | 395,279 |
| $ | (1,798 | ) | $ | (29,467 | ) | $ | 550,269 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of DrewLCI Industries Incorporated and its wholly-owned subsidiaries (“Drew”LCII” and collectively with its subsidiaries, the “Company”). DrewLCII has no unconsolidated subsidiaries. Drew,LCII, through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of components in the United States and abroad for the leading original equipment manufacturers (“OEMs”) of recreational vehicles (“RVs”) and manufactured homes and for the related aftermarkets of those industries, and also supplies components for adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing;housing. The Company also supplies components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and factory-built mobile office units.service centers. At December 31, 2015,2016, the Company operated 4248 manufacturing and distribution facilities.facilities located throughout the United States and in Canada and Italy.
The RV and manufactured housing industries, as well as otherMost industries where the Company sells products or where its products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, the Company’s sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the impact of international, national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, current and future seasonal industry trends may be different than in prior years. Additionally, sales of components to the aftermarket channels of these industries tend to be counter-seasonal.
The Company is not aware of any significant events, except as disclosed in the Notes to Consolidated Financial Statements, which occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Consolidated Financial Statements.
All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at historical carrying value, net of write-offs and allowances. The Company establishes allowances based upon historical experience and any specific customer collection issues identified by the Company. Uncollectible accounts receivable are written off when a settlement is reached or when the Company has determined the balance will not be collected.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution.
Fixed Assets
Fixed assets which are owned are stated at cost less accumulated depreciation, and are depreciated on a straight-line basis over the estimated useful lives of the properties and equipment. Leasehold improvements and leased equipment are amortized over the shorter of the lives of the leases or the underlying assets. Maintenance and repair costs that do not improve service potential or extend economic life are expensed as incurred; significant improvements are capitalized.incurred.
Warranty
The Company provides warranty terms based upon the type of product sold. The Company estimates the warranty accrual based upon various factors, including (i) historical warranty costs, (ii) current trends, (iii) product mix, and (iv) sales. The accounting
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
for warranty accruals requires the Company to make assumptions and judgments, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required.
Income Taxes
Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse.
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company accounts for uncertainty in tax positions by recognizing in its financial statements the impact of a tax position only if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Further, the Company assesses the tax benefits of the tax positions in its financial statements based on experience with similar tax positions, information obtained during the examination process and the advice of experts. The Company recognizes previously unrecognized tax benefits upon the earlier of the expiration of the period to assess tax in the applicable taxing jurisdiction or when the matter is constructively settled and upon changes in statutes or regulations and new case law or rulings.
The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements.
Goodwill
Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist. In 20152016 and 2014,2015, the Company assessed qualitative factors of its reporting units to determine whether it was more likely than not the fair value of the reporting unit was less than its carrying amount, including goodwill. The qualitative impairment test consists of an assessment of qualitative factors, including general economic and industry conditions, market share and input costs.
Other Intangible Assets
Intangible assets with estimable useful lives are amortized, primarily on an accelerated basis, over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The amortization of other intangible assets is done using a method, straight-line or accelerated, which best reflects the pattern in which the estimated future economic benefits of the asset will be consumed. The useful lives of intangible assets are determined after considering the expected cash flows and other specific facts and circumstances related to each intangible asset.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, are tested for impairment when changes in circumstances indicate their carrying value may not be recoverable. A determination of impairment, if any, is made based on the undiscounted value of estimated future cash flows, salvage value or expected net sales proceeds, depending on the circumstances. Impairment is measured as the excess of the carrying value over the estimated fair value of such assets.
Asset Retirement Obligations
Asset retirement obligations are legal obligations associated with the retirement of long-lived assets. The Company records asset retirement obligations on certain of its owned and leased facilities and leased machinery and equipment. These liabilities are initially recorded at fair value and are adjusted for changes resulting from revisions to the timing or the amount of the original estimate.
Environmental Liabilities
Accruals for environmental matters are recorded when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against potentially responsible third parties, are adjusted periodically as assessment and remediation efforts progress or additional technical or legal information becomes available. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies and remedial
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
activities, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and the Company’s ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs. It is possible some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably against the Company, and could materially affect operating results when resolved in future periods.
DREW INDUSTRIES INCORPORATEDForeign Currency Translation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)The “functional currency” of the Company’s subsidiaries in Italy is the respective local currency. The translation from the applicable foreign currency to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Income (Loss).
Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated their fair value due to the short-term nature of these instruments.
Stock-Based Compensation
All stock-based compensation awards are expensed over their vesting period, based on fair value. For awards having a service-only vesting condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service periods. For awards with a performance vesting condition, which are subject to certain pre-established performance targets, the Company recognizes stock-based compensation expense on a graded-vesting basis to the extent it is probable the performance targets will be met. The fair value for stock options is determined using the Black-Scholes option-pricing model, while the fair values of deferred stock units, restricted stock units, restricted stock and stock awards are based on the market price of the Company’s Common Stock, all on the date the stock-based awards are granted.
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collectability is reasonably assured, and the sales price is fixed or determinable. Sales taxes collected from customers and remitted to governmental authorities, which are not significant, are accounted for on a net basis and therefore are excluded from net sales in the Consolidated Statements of Income.
Shipping and Handling Costs
The Company records shipping and handling costs within selling, general and administrative expenses. Such costs aggregated $51.8 million, $45.8 million $40.9 million and $36.4$40.9 million in the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively.
Legal Costs
The Company expenses all legal costs associated with litigation as incurred. Legal expenses are included in selling, general and administrative expenses in the Consolidated Statements of Income.
Fair Value Measurements
Fair value is determined using a hierarchy that has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates,
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, inventories, goodwill and other intangible assets, net assets of acquired businesses, income taxes, warranty and product recall obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, contingent consideration, environmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other resources. Actual results and events could differ significantly from management estimates.
2. SEGMENT REPORTINGACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Acquisitions in 2017
SessaKlein S.p.A.
In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“SessaKlein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $8.5 million paid at closing, plus contingent consideration based on future sales by this operation. The Company is unable to make all the disclosures required by ASC 805-10-50-2 at this time as the initial accounting and pro forma analysis for this business combination is incomplete.
Acquisitions in 2016
Camping Connection
In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.
Atwood Seating and Chassis Components
In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):
|
| | | |
| Cash consideration | $ | 12,463 |
|
| | |
| Customer relationships | $ | 2,116 |
|
| Net other assets | 10,347 |
|
| Total fair value of net assets acquired | $ | 12,463 |
|
The Company has two reportable segments: the recreational vehicle products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). Intersegment sales are insignificant.customer relationships intangible asset is being amortized over its preliminary estimated useful life of 15 years.
Project 2000 S.r.l.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The RV Segment, which accounted for 92 percent, 90 percent, and 88 percentacquisition of consolidated net sales forthis business was preliminarily recorded on the years ended December 31, 2015, 2014 and 2013 respectively, manufactures or distributes a variety of products used acquisition date as follows (in the production of RVs, including:thousands):
|
| |
● Steel chassis for towable RVs | ● Furniture and mattresses |
● Axles and suspension solutions for towable RVs | ● Entry, luggage, patio and ramp doors |
● Slide-out mechanisms and solutions | ● Electric and manual entry steps |
● Thermoformed bath, kitchen and other products | ● Awnings and awning accessories |
● Windows | ● Electronic components |
● Manual, electric and hydraulic stabilizer and
leveling systems | ● LED televisions, sound systems, navigation
systems and wireless backup cameras |
● Chassis components | ● Other accessories |
|
| | | |
| Cash consideration net of cash acquired | $ | 16,137 |
|
| Contingent consideration | 1,322 |
|
| Total fair value of consideration given | $ | 17,459 |
|
| | |
| Customer relationships | $ | 9,694 |
|
| Other identifiable intangible assets | 5,193 |
|
| Net other assets | 128 |
|
| Total fair value of net assets acquired | $ | 15,015 |
|
| | |
| Goodwill (not tax deductible) | $ | 2,444 |
|
The Company also supplies certaincustomer relationships intangible asset is being amortized over its preliminary estimated useful life of these products to15 years. The consideration given was greater than the RV aftermarket, and to adjacent industries, including buses and trailers used to haul boats, livestock, equipment and other cargo, and pontoon boats. Approximately 73 percentfair value of the Company’s RV Segment net salesassets acquired, resulting in 2015 weregoodwill, because the Company anticipates the attainment of products to original equipment manufacturers (“OEMs”) of travel trailersynergies and fifth-wheel RVs.
The MH Segment, which accounted for 8 percent, 10 percent and 12 percent of consolidated net salesan increase in the markets for the years ended December 31, 2015, 2014 and 2013, respectively, manufactures or distributes a variety of products used in the production of manufactured homes, including:
|
| |
●Vinyl and aluminum windows | ●Aluminum and vinyl patio doors |
●Thermoformed bath and kitchen products | ●Steel chassis and related components |
●Steel and fiberglass entry doors | ●Axles |
The Company also supplies certain of these products to the manufactured housing aftermarket, and to adjacent industries, including modular housing and mobile office units. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.
Decisions concerning the allocation of the Company’s resources are made by the Company’s key executives, with oversight by the Board of Directors. This group evaluates the performance of each segment based upon segment operating profit or loss, generally defined as income or loss before interest and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of assets. Management of debt is a corporate function. The accounting policies of the RV and MH Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements.
Corporate expenses are allocated between the segments based upon net sales. Accretion related to contingent consideration and other non-segment items are included in the segment to which they relate.
Information relating to segments follows for the years ended December 31:
|
| | | | | | | | | | | | | | | |
| | Segments | Corporate | |
| (In thousands) | RV | MH | Total | and Other | Total |
| 2015 | | | | | |
Net sales to external customers (a) | $ | 1,284,928 |
| $ | 118,138 |
| $ | 1,403,066 |
| $ | — |
| $ | 1,403,066 |
|
Operating profit (loss) (b) | $ | 107,485 |
| $ | 12,485 |
| $ | 119,970 |
| $ | (3,716 | ) | $ | 116,254 |
|
Total assets (c) | $ | 519,795 |
| $ | 27,702 |
| $ | 547,497 |
| $ | 75,449 |
| $ | 622,946 |
|
Expenditures for long - lived assets (d) | $ | 30,126 |
| $ | 1,193 |
| $ | 31,319 |
| $ | — |
| $ | 31,319 |
|
| Depreciation and amortization | $ | 39,065 |
| $ | 2,412 |
| $ | 41,477 |
| $ | 147 |
| $ | 41,624 |
|
| | | | | | |
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
| | | | | | | | | | | | | | | |
| | Segments | Corporate | |
| (In thousands) | RV | MH | Total | and Other | Total |
| 2014 | | | | | |
Net sales to external customers (a) | $ | 1,074,448 |
| $ | 116,334 |
| $ | 1,190,782 |
| $ | — |
| $ | 1,190,782 |
|
Operating profit (loss) (b) | $ | 86,571 |
| $ | 10,870 |
| $ | 97,441 |
| $ | (1,954 | ) | $ | 95,487 |
|
Total assets (c) | $ | 451,264 |
| $ | 29,482 |
| $ | 480,746 |
| $ | 63,095 |
| $ | 543,841 |
|
Expenditures for long - lived assets (d) | $ | 145,406 |
| $ | 2,039 |
| $ | 147,445 |
| $ | — |
| $ | 147,445 |
|
| Depreciation and amortization | $ | 29,933 |
| $ | 2,568 |
| $ | 32,501 |
| $ | 95 |
| $ | 32,596 |
|
| | | | | | |
| 2013 | | | | | |
Net sales to external customers (a) | $ | 893,694 |
| $ | 121,882 |
| $ | 1,015,576 |
| $ | — |
| $ | 1,015,576 |
|
Operating profit (loss) (b) | $ | 68,248 |
| $ | 11,926 |
| $ | 80,174 |
| $ | (1,876 | ) | $ | 78,298 |
|
Total assets (c) | $ | 306,139 |
| $ | 32,948 |
| $ | 339,087 |
| $ | 114,097 |
| $ | 453,184 |
|
Expenditures for long - lived assets (d) | $ | 34,989 |
| $ | 2,682 |
| $ | 37,671 |
| $ | — |
| $ | 37,671 |
|
| Depreciation and amortization | $ | 24,615 |
| $ | 2,806 |
| $ | 27,421 |
| $ | 79 |
| $ | 27,500 |
|
| |
(a) | Thor Industries, Inc., a customer of the RV Segment, accounted for 29 percent, 33 percent and 34 percent of the Company’s consolidated net sales for the years ended December 31, 2015, 2014 and 2013, respectively. Berkshire Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton Homes, Inc.), a customer of both segments, accounted for 26 percent, 28 percent and 28 percent of the Company’s consolidated net sales for the years ended December 31, 2015, 2014 and 2013, respectively. Jayco, Inc., a customer of the RV Segment, accounted for 10 percent of the Company's consolidated net sales for the year ended December 31, 2015. No other customer accounted for more than 10 percent of consolidated net sales in the years ended December 31, 2015, 2014 and 2013. |
| |
(b) | Certain general and administrative expenses are allocated between the segments based upon net sales or operating profit, depending upon the nature of the expense. |
| |
(c) | Segment assets include accounts receivable, inventories, fixed assets, goodwill and other intangible assets. Corporate and other assets include cash and cash equivalents, prepaid expenses and other current assets, deferred taxes, and other assets. |
| |
(d) | Expenditures for long-lived assets include capital expenditures, as well as fixed assets, goodwill and other intangible assets purchased as part of the acquisition of businesses. The Company purchased $38.6 million, $105.0 million and $4.8 million of long-lived assets, as part of the acquisitions of businesses in the years ended December 31, 2015, 2014 and 2013, respectively. |
Net sales by product were as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| RV Segment: | | | | | |
| Chassis, chassis parts and slide-out mechanisms | $ | 638,261 |
| | $ | 564,543 |
| | $ | 493,244 |
|
| Windows and doors | 245,016 |
| | 204,054 |
| | 181,934 |
|
| Furniture and mattresses | 163,380 |
| | 133,371 |
| | 100,196 |
|
| Axles and suspension solutions | 114,531 |
| | 92,261 |
| | 69,818 |
|
| Other | 123,740 |
| | 80,219 |
| | 48,502 |
|
| Total RV Segment net sales | $ | 1,284,928 |
| | $ | 1,074,448 |
| | $ | 893,694 |
|
| | | | | | |
| MH Segment: | | | | | |
| Windows and doors | $ | 73,035 |
| | $ | 66,140 |
| | $ | 67,029 |
|
| Chassis and chassis parts | 29,798 |
| | 33,842 |
| | 38,359 |
|
| Other | 15,305 |
| | 16,352 |
| | 16,494 |
|
| Total MH Segment net sales | $ | 118,138 |
| | $ | 116,334 |
| | $ | 121,882 |
|
| | | | | | |
| Total net sales | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
|
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The composition of net sales was as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| Net sales: | | | | | |
| RV Segment: | | | | | |
| RV OEMs: | | | | | |
| Travel trailers and fifth-wheels | $ | 938,787 |
| | $ | 841,497 |
| | $ | 727,783 |
|
| Motorhomes | 86,513 |
| | 70,332 |
| | 47,937 |
|
| RV aftermarket | 87,447 |
| | 49,570 |
| | 25,334 |
|
| Adjacent industries | 172,181 |
| | 113,049 |
| | 92,640 |
|
| Total RV Segment net sales | $ | 1,284,928 |
| | $ | 1,074,448 |
| | $ | 893,694 |
|
| | | | | | |
| MH Segment: | | | | | |
| Manufactured housing OEMs | $ | 82,032 |
| | $ | 77,421 |
| | $ | 80,245 |
|
| Manufactured housing aftermarket | 15,559 |
| | 14,186 |
| | 13,719 |
|
| Adjacent industries | 20,547 |
| | 24,727 |
| | 27,918 |
|
| Total MH Segment net sales | $ | 118,138 |
| | $ | 116,334 |
| | $ | 121,882 |
|
| | | | | | |
| Total net sales | $ | 1,403,066 |
| | $ | 1,190,782 |
| | $ | 1,015,576 |
|
In the third quarter of 2015, the Company refined its methodology for categorizing sales within the RV Segment. This change improves accuracy, but has no impact on total RV Segment net sales or trends. Prior periods have been reclassified to conform to this presentation.
Potential Future Changes to Reporting Segments
Over the past several years, largely due to the growth the Company has experienced in its RV Segment, the MH Segment is now a smaller part of the Company. Net sales to manufactured housing OEMs are 6 percent of consolidated net sales for the year ending December 31, 2015. In addition, the Company has recently increased its focus on the significant opportunities in the aftermarket. The Company continues to evaluate the information provided to its Chief Operating Decision Maker (“CODM”), and assess how changes to its reporting structures would be used by the CODM to assess the performance of the Company’s operating segments and make decisions about resource allocations. Any such changes could necessitate a revision to the operating segments the Company reports.
3. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Acquisitions in 2016acquired products.
Flair Interiors
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a manufacturer of RV furniture. Net sales reported by Flair for 2015 were approximately $25 million.furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
|
| | | |
| Cash consideration | $ | 8,100 |
|
| | |
| Customer relationships | $ | 3,700 |
|
| Net other assets | 2,378 |
|
| Total fair value of net assets acquired | $ | 6,078 |
|
| | |
| Goodwill (tax deductible) | $ | 2,022 |
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Highwater Marine Furniture
In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. Estimated net sales of the marine furniture business were approximately $20 million. The purchase price was $10.0 million paid at closing. The results of the acquired business will behave been included primarily in the Company’s RVOEM Segment and in the Consolidated Statements of Income subsequent tosince the acquisition date. The Company is acquisition of this business was recorded on the acquisition date as follows (in the process of allocating the consideration for the fair value of the assets acquired.thousands):
|
| | | |
| Cash consideration | $ | 10,000 |
|
| | |
| Customer relationships | $ | 8,100 |
|
| Net tangible assets | 1,307 |
|
| Total fair value of net assets acquired | $ | 9,407 |
|
| | |
| Goodwill (tax deductible) | $ | 593 |
|
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines.
Acquisitions in 2015
Signature Seating
In August 2015, the Company acquired the business and certain assets of Roehm Marine, LLC, also known as Signature Seating (“Signature”), a manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats. Net sales reported by Signature for the twelve months ended June 2015 were approximately $16 million. The purchase price was $16.0 million paid at closing, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
| | | Cash consideration | $ | 16,000 |
| $ | 16,000 |
|
| Contingent consideration | 3,556 |
| 3,556 |
|
| Total fair value of consideration given | $ | 19,556 |
| $ | 19,556 |
|
| | | |
| Customer relationships | $ | 7,500 |
| $ | 7,500 |
|
| Other identifiable intangible assets | 390 |
| |
| Net tangible assets | 3,633 |
| |
| Net other assets | | 4,023 |
|
| Total fair value of net assets acquired | $ | 11,523 |
| $ | 11,523 |
|
| | | |
| Goodwill (tax deductible) | $ | 8,033 |
| $ | 8,033 |
|
The customer relationships intangible asset is being amortized over its preliminary estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines, and also believes the diversified customer base will further its expansion into adjacent industries.
Spectal Industries
In April 2015, the Company acquired the business and certain assets of Industries Spectal, Inc. (“Spectal”), a Quebec, Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. Net sales reported by Spectal for 2014 were $25 million. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included primarily in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
| | | Cash consideration | $ | 22,335 |
| $ | 22,335 |
|
| Contingent consideration | 1,211 |
| 1,211 |
|
| Total fair value of consideration given | $ | 23,546 |
| $ | 23,546 |
|
| | | |
| Customer relationships | $ | 10,100 |
| $ | 10,100 |
|
| Other identifiable intangible assets | 700 |
| |
| Net tangible assets | 3,681 |
| |
| Net other assets | | 4,381 |
|
| Total fair value of net assets acquired | $ | 14,481 |
| $ | 14,481 |
|
| | | |
| Goodwill (tax deductible) | $ | 9,065 |
| $ | 9,065 |
|
The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines, and also believes the diversified customer base will further its expansion into adjacent industries.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
EA Technologies
In January 2015, the Company acquired the business and certain assets of EA Technologies, LLC (“EA Technologies”), a manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications. Net sales reported by EA Technologies for 2014 were $17 million. The purchase price was $9.2 million, of which $6.6 million was paid in the fourth quarter of 2014, with the balance paid at closing. The results of the acquired business have been included in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
| | | Cash consideration | $ | 9,248 |
| $ | 9,248 |
|
| | | |
| Customer relationships | $ | 400 |
| |
| Other identifiable intangible assets | 80 |
| |
| Identifiable intangible assets | | $ | 480 |
|
| Net tangible assets | 8,868 |
| 8,868 |
|
| Total fair value of net assets acquired | $ | 9,348 |
| $ | 9,348 |
|
| | | |
| Gain on bargain purchase | $ | 100 |
| $ | 100 |
|
Acquisitions in 2014
Duncan Systems
In August 2014, the Company acquired the business and certain assets of Duncan Systems, Inc. (“Duncan Systems”), an aftermarket distributor of replacement motorhome windshields, awnings, and RV, heavy truck and specialty vehicle glass and windows, primarily to fulfill insurance claims. Net sales reported by Duncan Systems for the twelve months ended July 2014 were $26 million. The purchase price was $18.0 million paid at closing, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included in the Company’s RVAftermarket Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
| | | Cash consideration | $ | 18,000 |
| $ | 18,000 |
|
| Contingent consideration | 1,914 |
| 1,914 |
|
| Total fair value of consideration given | $ | 19,914 |
| $ | 19,914 |
|
| | | |
| Customer relationships | $ | 10,500 |
| $ | 10,500 |
|
| Other identifiable intangible assets | 930 |
| |
| Net tangible assets | 4,070 |
| |
| Net other assets | | 5,000 |
|
| Total fair value of net assets acquired | $ | 15,500 |
| $ | 15,500 |
|
| | | |
| Goodwill (tax deductible) | $ | 4,414 |
| $ | 4,414 |
|
The customer relationships intangible asset is being amortized over its estimated useful life of 14 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in market share for the distributed products.
Power Gear and Kwikee Brands
In June 2014, the Company acquired the RV business of Actuant Corporation, which manufactures leveling systems, slide-out mechanisms and steps, primarily for motorhome RVs, under the Power Gear and Kwikee brands. Net sales reported by the acquired business for the twelve months ended May 2014 were $28 million, consisting of sales to OEMs and the aftermarket. The purchase price was $35.5 million, paid at closing. The results of the acquired business have been included primarily in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The acquisition of this business was recorded on the acquisition date as follows (in thousands):
|
| | | |
| Cash consideration | $ | 35,500 |
|
| | |
| Customer relationships | $ | 12,300 |
|
| Patents | 5,300 |
|
| Other identifiable intangible assets | 2,130 |
|
| Net tangible assets | 2,227 |
|
| Total fair value of net assets acquired | $ | 21,957 |
|
| | |
| Goodwill (tax deductible) | $ | 13,543 |
|
The customer relationships intangible asset is being amortized over its estimated useful life of 14 years and the patents are being amortized over their estimated useful life of 8eight years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.
Star Design
In March 2014, the Company acquired the business and certain assets of Star Design, LLC (“Star Design”). Net sales reported by Star Design for 2013 were $10 million, comprised primarily of thermoformed sheet plastic products for the RV, bus and specialty vehicle industries. The.The purchase price was $12.2 million paid at closing. The results of the acquired business have been included primarily in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
| | | Cash consideration | $ | 12,232 |
| $ | 12,232 |
|
| | | |
| Customer relationships | $ | 4,400 |
| $ | 4,400 |
|
| Other identifiable intangible assets | 610 |
| |
| Net tangible assets | 2,108 |
| |
| Net other assets | | 2,718 |
|
| Total fair value of net assets acquired | $ | 7,118 |
| $ | 7,118 |
|
| | | |
| Goodwill (tax deductible) | $ | 5,114 |
| $ | 5,114 |
|
The customer relationships intangible asset is being amortized over its estimated useful life of 14 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines, and also believes the diversified customer base will further its expansion into adjacent industries.
Innovative Design Solutions
In February 2014, the Company acquired Innovative Design Solutions, Inc. (“IDS”), a designer, developer and manufacturer of electronic systems encompassing a wide variety of RV applications. IDS also manufactures electronic systems for automotive, medical and industrial applications. Net sales reported by IDS for 2013 were $19 million, of which $15 million were to the Company. The purchase price was $35.9 million, of which $34.2 million was paid at closing, with the balance to be paid out annually over the subsequent three years, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included primarily in the Company’s RVOEM Segment and in the Consolidated Statements of Income since the acquisition date.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The acquisition of this business was recorded on the acquisition date as follows (in thousands):
|
| | | |
| Cash consideration | $ | 34,175 |
|
| Present value of future payments | 1,739 |
|
| Contingent consideration | 710 |
|
| Total fair value of consideration given | $ | 36,624 |
|
| | |
| Patents | $ | 6,000 |
|
| Customer relationships | 4,000 |
|
| Other identifiable intangible assets | 3,180 |
|
| Net tangible assets | 1,894 |
|
| Total fair value of net assets acquired | $ | 15,074 |
|
| | |
| Goodwill (tax deductible) | $ | 21,550 |
|
The patents are being amortized over their estimated useful life of 10 years and the customer relationships intangible asset is being amortized over its estimated useful life of 12 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates an increase in the markets for the acquired products, market share growth in both existing and new markets, as well as attainment of synergies.
Acquisitions in 2013Goodwill
Fortress Technologies
In December 2013, the Company acquired the business and certain assets of Fortress Technologies, LLC (“Fortress”), a manufacturer of specialized RV chassis. Net sales reportedGoodwill by Fortress for 2013 were $3 million. The results of the acquired business have been included in the Company’s RV Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this businessreportable segment was recorded on the acquisition date as follows (in thousands):follows:
|
| | | |
| Cash consideration | $ | 3,299 |
|
| | |
| Working capital, net | $ | (111 | ) |
| Net tangible assets | 3,410 |
|
| Total fair value of net assets acquired | $ | 3,299 |
|
Midstates Tool & Die and Engineering
In June 2013, the Company acquired the business and certain assets of Midstates Tool & Die and Engineering, Inc. (“Midstates”), a manufacturer of tools and dies, as well as automation equipment. Net sales reported by the acquired business for the twelve months ended May 2013 were $2 million. The results of the acquired business have been included in the Company’s RV Segment and in the Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):
|
| | | |
| Cash consideration | $ | 1,451 |
|
| | |
| Non-compete agreement | $ | 40 |
|
| Net tangible assets | 1,043 |
|
| Total fair value of net assets acquired | $ | 1,083 |
|
| | |
| Goodwill (tax deductible) | $ | 368 |
|
|
| | | | | | | | | | | |
| (In thousands) | OEM Segment | | Aftermarket Segment | | Total |
| Net balance – December 31, 2014 | $ | 52,815 |
| | $ | 13,706 |
| | $ | 66,521 |
|
| Acquisitions – 2015 | 17,007 |
| | 91 |
| | 17,098 |
|
| Net balance – December 31, 2015 | 69,822 |
| | 13,797 |
| | 83,619 |
|
| Acquisitions – 2016 | 5,059 |
| | 738 |
| | 5,797 |
|
| Other | (218 | ) | | — |
| | (218 | ) |
| Net balance – December 31, 2016 | $ | 74,663 |
| | $ | 14,535 |
| | $ | 89,198 |
|
The consideration given was greaterCompany performed its annual goodwill impairment procedures for all of its reporting units as of November 30, 2016, 2015 and 2014, and concluded no goodwill impairment existed at that time. The Company plans to update its review as of November 30, 2017, or sooner if events occur or circumstances change that could more likely than not reduce the fair value of assets acquired, resultinga reporting unit below its carrying value. In conjunction with the Company’s change in reportable segments during the second quarter of 2016 (see Note 14), goodwill becausewas reassigned to reporting units using a relative fair value allocation. In addition, the Company anticipatescompleted an assessment of any potential goodwill impairment for all reporting units immediately prior to the toolreallocation and diedetermined that no impairment existed. The goodwill balance includes $50.5 million of accumulated impairment, which occurred prior to December 31, 2014.
Any change in the goodwill amounts resulting from foreign currency translations and automation capabilitiespurchase accounting adjustments are presented as “Other” in the above table.
Other Intangible Assets
Other intangible assets, by segment, consisted of the acquired business will help improve its operating efficiencies.following at December 31:
|
| | | | | | | |
| (In thousands) | 2016 | | 2015 |
| OEM Segment | $ | 97,689 |
| | $ | 84,752 |
|
| Aftermarket Segment | 15,254 |
| | 16,183 |
|
| Other intangible assets | $ | 112,943 |
| | $ | 100,935 |
|
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Sale
Other intangible assets consisted of Extrusion Assetsthe following at December 31, 2016:
|
| | | | | | | | | | | | | | | |
| (In thousands) | Gross
Cost | | Accumulated
Amortization | | Net
Balance | | Estimated Useful
Life in Years |
| Customer relationships | $ | 110,784 |
| | $ | 32,414 |
| | $ | 78,370 |
| | 6 | to | 16 |
| Patents | 56,468 |
| | 34,066 |
| | 22,402 |
| | 3 | to | 19 |
| Tradenames | 10,041 |
| | 5,667 |
| | 4,374 |
| | 3 | to | 15 |
| Non-compete agreements | 5,852 |
| | 2,975 |
| | 2,877 |
| | 3 | to | 6 |
| Other | 309 |
| | 76 |
| | 233 |
| | 2 | to | 12 |
| Purchased research and development | 4,687 |
| | — |
| | 4,687 |
| | Indefinite |
| Other intangible assets | $ | 188,141 |
| | $ | 75,198 |
| | $ | 112,943 |
| | | | |
Other intangible assets consisted of the following at December 31, 2015:
|
| | | | | | | | | | | | | | | |
| (In thousands) | Gross
Cost | | Accumulated
Amortization | | Net
Balance | | Estimated Useful
Life in Years |
| Customer relationships | $ | 94,560 |
| | $ | 30,514 |
| | $ | 64,046 |
| | 6 | to | 16 |
| Patents | 54,293 |
| | 28,255 |
| | 26,038 |
| | 3 | to | 19 |
| Tradenames | 8,935 |
| | 4,751 |
| | 4,184 |
| | 3 | to | 15 |
| Non-compete agreements | 4,493 |
| | 2,800 |
| | 1,693 |
| | 3 | to | 6 |
| Other | 594 |
| | 307 |
| | 287 |
| | 2 | to | 12 |
| Purchased research and development | 4,687 |
| | — |
| | 4,687 |
| | Indefinite |
| Other intangible assets | $ | 167,562 |
| | $ | 66,627 |
| | $ | 100,935 |
| | | | |
Amortization expense related to other intangible assets was as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| Cost of sales | $ | 5,967 |
| | $ | 6,017 |
| | $ | 5,092 |
|
| Selling, general and administrative | 11,791 |
| | 10,038 |
| | 7,612 |
|
| Amortization expense | $ | 17,758 |
| | $ | 16,055 |
| | $ | 12,704 |
|
Estimated amortization expense for other intangible assets for the next five years is as follows:
|
| | | | | | | | | | | | | | | |
| (In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 |
| Cost of sales | $ | 5,809 |
| $ | 4,973 |
| $ | 4,330 |
| $ | 3,283 |
| $ | 2,743 |
|
| Selling, general and administrative | 10,989 |
| 10,405 |
| 9,362 |
| 8,060 |
| 7,466 |
|
| Amortization expense | $ | 16,798 |
| $ | 15,378 |
| $ | 13,692 |
| $ | 11,343 |
| $ | 10,209 |
|
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. RECEIVABLES
The following table provides a reconciliation of the activity related to the Company’s allowance for doubtful accounts receivable, for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 844 |
| | $ | 917 |
| | $ | 705 |
|
| Provision for doubtful accounts | (83 | ) | | (5 | ) | | 178 |
|
| Additions related to acquired businesses | 29 |
| | 33 |
| | 58 |
|
| Recoveries | — |
| | 8 |
| | 4 |
|
| Accounts written off | (135 | ) | | (109 | ) | | (28 | ) |
| Balance at end of period | $ | 655 |
| | $ | 844 |
| | $ | 917 |
|
In addition to the allowance for doubtful accounts receivable, the Company had an allowance for prompt payment discounts in the amount of $0.5 million and $0.4 million at December 31, 2016 and 2015, respectively.
4. INVENTORIES
Inventories consisted of the following at December 31:
|
| | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | |
| Raw materials | $ | 155,044 |
| | $ | 144,397 |
| | |
| Work in process | 7,509 |
| | 4,932 |
| | |
| Finished goods | 26,190 |
| | 21,505 |
| | |
| Inventories, net | $ | 188,743 |
| | $ | 170,834 |
| | |
5. NOTES RECEIVABLE
In April 2014, the Company entered into a six-year aluminum extrusion supply agreement, and concurrently sold certain aluminum extrusion assets. The Company recorded a pre-tax loss of $2.0 million in the second quarter of 2014 on the sale of the aluminum extrusion-related assets. In connection with the sale, the Company received $0.3 million at closing and a $7.2 million note receivable collectible over the next four years, recorded at its present value of $6.4 million on the date of closing. During 2015 and2016 - 2014, the Company received installments of $3.8$5.8 million under the note. At December 31, 2015,2016, the present value of the remaining amount due under the note receivable was $3.2 million.$1.4 million included in prepaid expenses and other current assets.
In July 2015, the Company agreed to terminate the supply agreement, and as consideration the Company received a $2.0 million note receivable collectible in 2019 and 2020. The Company recorded this note receivable at its present value of $1.6 million and a corresponding gain of $1.6 million in the 2015 third quarter. At December 31, 2015,2016, the present value of the remaining amount due under the note receivable was $1.6 million.$1.7 million included in other assets.
Goodwill
Goodwill by reportable segment was as follows:
|
| | | | | | | | | | | |
| (In thousands) | RV Segment | | MH Segment | | Total |
| Accumulated cost | $ | 61,679 |
| | $ | 10,025 |
| | $ | 71,704 |
|
| Accumulated impairment | (41,276 | ) | | (9,251 | ) | | (50,527 | ) |
| Net balance – December 31, 2012 | 20,403 |
| | 774 |
| | 21,177 |
|
| Acquisitions – 2013 | 368 |
| | — |
| | 368 |
|
| Net balance – December 31, 2013 | 20,771 |
| | 774 |
| | 21,545 |
|
| Acquisitions – 2014 | 44,976 |
| | — |
| | 44,976 |
|
| Net balance – December 31, 2014 | 65,747 |
| | 774 |
| | 66,521 |
|
| Acquisitions – 2015 | 17,098 |
| | — |
| | 17,098 |
|
| Net balance – December 31, 2015 | $ | 82,845 |
| | $ | 774 |
| | $ | 83,619 |
|
| | | | | | |
| Accumulated cost | $ | 124,121 |
| | $ | 10,025 |
| | $ | 134,146 |
|
| Accumulated impairment | (41,276 | ) | | (9,251 | ) | | (50,527 | ) |
| Net balance – December 31, 2015 | $ | 82,845 |
| | $ | 774 |
| | $ | 83,619 |
|
The Company performed its annual goodwill impairment procedures for all of its reporting units as of November 30, 2015, 2014 and 2013, and concluded no goodwill impairment existed at that time. The Company plans to update its review as of November 30, 2016, or sooner if events occur or circumstances change that could reduce the fair value of a reporting unit below its carrying value.
Other Intangible Assets
Other intangible assets, by segment, consisted of the following at December 31:
|
| | | | | | | |
| (In thousands) | 2015 | | 2014 |
| RV Segment | $ | 100,418 |
| | $ | 95,075 |
|
| MH Segment | 517 |
| | 1,884 |
|
| Other intangible assets | $ | 100,935 |
| | $ | 96,959 |
|
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other intangible assets consisted of the following at December 31, 2015:
|
| | | | | | | | | | | | | | | |
| (In thousands) | Gross
Cost | | Accumulated
Amortization | | Net
Balance | | Estimated Useful
Life in Years |
| Customer relationships | $ | 94,560 |
| | $ | 30,514 |
| | $ | 64,046 |
| | 6 | to | 16 |
| Patents | 54,293 |
| | 28,255 |
| | 26,038 |
| | 3 | to | 19 |
| Tradenames | 8,935 |
| | 4,751 |
| | 4,184 |
| | 3 | to | 15 |
| Non-compete agreements | 4,493 |
| | 2,800 |
| | 1,693 |
| | 3 | to | 6 |
| Other | 594 |
| | 307 |
| | 287 |
| | 2 | to | 12 |
| Purchased research and development | 4,687 |
| | — |
| | 4,687 |
| | Indefinite |
| Other intangible assets | $ | 167,562 |
| | $ | 66,627 |
| | $ | 100,935 |
| | | | |
Other intangible assets consisted of the following at December 31, 2014:
|
| | | | | | | | | | | | | | | |
| (In thousands) | Gross
Cost | | Accumulated
Amortization | | Net
Balance | | Estimated Useful
Life in Years |
| Customer relationships | $ | 81,260 |
| | $ | 27,553 |
| | $ | 53,707 |
| | 6 | to | 16 |
| Patents | 54,333 |
| | 22,389 |
| | 31,944 |
| | 3 | to | 19 |
| Tradenames | 9,173 |
| | 4,525 |
| | 4,648 |
| | 3 | to | 15 |
| Non-compete agreements | 3,948 |
| | 2,233 |
| | 1,715 |
| | 3 | to | 6 |
| Other | 360 |
| | 102 |
| | 258 |
| | 2 | to | 12 |
| Purchased research and development | 4,687 |
| | — |
| | 4,687 |
| | Indefinite |
| Other intangible assets | $ | 153,761 |
| | $ | 56,802 |
| | $ | 96,959 |
| | | | |
Amortization expense related to other intangible assets was as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| Cost of sales | $ | 6,017 |
| | $ | 5,092 |
| | $ | 3,610 |
|
| Selling, general and administrative | 10,038 |
| | 7,612 |
| | 6,398 |
|
| Amortization expense | $ | 16,055 |
| | $ | 12,704 |
| | $ | 10,008 |
|
Estimated amortization expense for other intangible assets for the next five years is as follows:
|
| | | | | | | | | | | | | | | |
| (In thousands) | 2016 | 2017 | 2018 | 2019 | 2020 |
| Cost of sales | $ | 6,186 |
| $ | 5,732 |
| $ | 4,911 |
| $ | 4,235 |
| $ | 3,014 |
|
| Selling, general and administrative | 9,523 |
| 8,460 |
| 7,813 |
| 7,174 |
| 5,983 |
|
| Amortization expense | $ | 15,709 |
| $ | 14,192 |
| $ | 12,724 |
| $ | 11,409 |
| $ | 8,997 |
|
4. RECEIVABLES
The following table provides a reconciliation of the activity related to the Company’s allowance for doubtful accounts receivable, for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| Balance at beginning of period | $ | 917 |
| | $ | 705 |
| | $ | 677 |
|
| Provision for doubtful accounts | (5 | ) | | 178 |
| | 194 |
|
| Additions related to acquired businesses | 33 |
| | 58 |
| | 5 |
|
| Recoveries | 8 |
| | 4 |
| | 1 |
|
| Accounts written off | (109 | ) | | (28 | ) | | (172 | ) |
| Balance at end of period | $ | 844 |
| | $ | 917 |
| | $ | 705 |
|
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the allowance for doubtful accounts receivable, the Company had an allowance for prompt payment discounts in the amount of $0.4 million and $0.4 million at December 31, 2015 and 2014, respectively.
5. INVENTORIES
Inventories consisted of the following at December 31:
|
| | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | |
| Raw materials | $ | 144,397 |
| | $ | 111,366 |
| | |
| Work in process | 4,932 |
| | 2,624 |
| | |
| Finished goods | 21,505 |
| | 18,502 |
| | |
| Inventories, net | $ | 170,834 |
| | $ | 132,492 |
| | |
6. FIXED ASSETS
Fixed assets consisted of the following at December 31:
| | | | | | | Estimated Useful | | | | Estimated Useful |
| (In thousands) | 2015 | | 2014 | Life in Years | 2016 | | 2015 | Life in Years |
| Land | $ | 11,064 |
| | $ | 10,792 |
| | $ | 13,802 |
| | $ | 11,064 |
| |
| Buildings and improvements | 89,616 |
| | 85,002 |
| 10 to 40 | 106,831 |
| | 89,616 |
| 10 to 40 |
| Leasehold improvements | 11,147 |
| | 8,114 |
| 3 to 10 | 11,918 |
| | 11,147 |
| 3 to 10 |
| Machinery and equipment | 153,784 |
| | 138,025 |
| 3 to 15 | 167,691 |
| | 153,784 |
| 3 to 15 |
| Furniture and fixtures | 20,653 |
| | 20,729 |
| 3 to 8 | 27,053 |
| | 20,653 |
| 3 to 8 |
| Construction in progress | 5,512 |
| | 9,515 |
| | 10,067 |
| | 5,512 |
| |
| Fixed assets, at cost | 291,776 |
| | 272,177 |
| | 337,362 |
| | 291,776 |
| |
| Less accumulated depreciation and amortization | 141,176 |
| | 125,389 |
| | 164,614 |
| | 141,176 |
| |
| Fixed assets, net | $ | 150,600 |
| | $ | 146,788 |
| | $ | 172,748 |
| | $ | 150,600 |
| |
Depreciation and amortization of fixed assets was as follows for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Cost of sales | $ | 21,289 |
| | $ | 16,364 |
| | $ | 14,667 |
| $ | 22,993 |
| | $ | 21,289 |
| | $ | 16,364 |
|
| Selling, general and administrative expenses | 4,137 |
| | 3,440 |
| | 2,773 |
| 5,140 |
| | 4,137 |
| | 3,440 |
|
| Total | $ | 25,426 |
| | $ | 19,804 |
| | $ | 17,440 |
| $ | 28,133 |
| | $ | 25,426 |
| | $ | 19,804 |
|
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at December 31:
| | | (In thousands) | 2015 | | 2014 | | 2016 | | 2015 | |
| Employee compensation and benefits | $ | 25,147 |
| | $ | 21,473 |
| | $ | 47,459 |
| | $ | 25,147 |
| |
| Current portion of accrued warranty | 17,020 |
| | 14,516 |
| | 20,393 |
| | 17,020 |
| |
| Customer rebates | | 9,329 |
| | 7,993 |
| |
| Other | 26,995 |
| | 21,662 |
| | 21,554 |
| | 19,002 |
| |
| Accrued expenses and other current liabilities | $ | 69,162 |
| | $ | 57,651 |
| | $ | 98,735 |
| | $ | 69,162 |
| |
Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various factors, including the Company’s (i) historical warranty costs, (ii) current trends, (iii) product mix, and (iv) sales.
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current and long-term portions, for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 21,641 |
| | $ | 17,325 |
| | $ | 12,729 |
| $ | 26,204 |
| | $ | 21,641 |
| | $ | 17,325 |
|
| Provision for warranty expense | 17,267 |
| | 12,860 |
| | 13,874 |
| 20,985 |
| | 17,267 |
| | 12,860 |
|
| Warranty liability from acquired businesses | 240 |
| | 688 |
| | 21 |
| 125 |
| | 240 |
| | 688 |
|
| Warranty costs paid | (12,944 | ) | | (9,232 | ) | | (9,299 | ) | (14,921 | ) | | (12,944 | ) | | (9,232 | ) |
| Balance at end of period | 26,204 |
| | 21,641 |
| | 17,325 |
| 32,393 |
| | 26,204 |
| | 21,641 |
|
| Less long-term portion | 9,184 |
| | 7,125 |
| | 5,594 |
| 12,000 |
| | 9,184 |
| | 7,125 |
|
| Current portion of accrued warranty | $ | 17,020 |
| | $ | 14,516 |
| | $ | 11,731 |
| $ | 20,393 |
| | $ | 17,020 |
| | $ | 14,516 |
|
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. RETIREMENT AND OTHER BENEFIT PLANS
Defined Contribution Plan
The Company maintains a discretionary defined contribution 401(k) profit sharing plan covering all eligible employees. The Company contributed $3.1 million, $2.5 million $1.8 million and $1.4$1.8 million to this plan during the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively.
Deferred Compensation Plan
The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). Pursuant to the Plan, certain management employees are eligible to defer all or a portion of their regular salary and incentive compensation. Participants deferred $2.3 million, $1.2 million $1.6 million and $1.7$1.6 million during the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively. The amounts deferred under this Plan are credited with earnings or losses based upon changes in values of the notional investments elected by the Plan participants. Each Plan participant is fully vested in their deferred compensation and earnings credited to his or her account as all contributions to the Plan are made by the participant. The Company is responsible for certain costs of Plan administration, which are not significant, and will not make any contributions to the Plan. Pursuant to the Plan, payments to the Plan participants are made from the general unrestricted assets of the Company, and the Company’s obligations pursuant to the Plan are unfunded and unsecured. Participants withdrew $1.5 million, $0.8 million $0.4 million and $0.2$0.4 million from the Plan during the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively. At December 31, 20152016 and 2014,2015, deferred compensation of $11.7$13.4 million and $10.7$11.7 million, respectively, was recorded in other long-term liabilities, and deferred compensation of $0.2 million and $0.8$0.2 million, respectively, was recorded in accrued expenses and other current liabilities. The Company invests approximately 60 percent of the amounts deferred by the Plan participants in life insurance contracts, matching the investments elected by the Plan participants. Deferred compensation assets and liabilities are recorded at contract value. At December 31, 2016 and 2015, life insurance contract assets of $8.2 million and $7.8 million, respectively, were recorded in other assets.
9. LONG-TERM INDEBTEDNESS
At December 31, 2016 and 2015, the Company had no outstanding borrowings on its line of credit. At December 31, 2014, the Company had $15.7 million of outstanding borrowings on its line of credit at a weighted average interest rate of 1.9 percent.
On February 24, 2014, the Company entered into a $75.0 million line of credit (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. On March 3, 2015, in accordance with the terms of the Credit Agreement, the Company increased its line of credit by $25.0 million to $100.0 million. Interest on borrowings under the line of credit iswas designated from time to time by the Company as either (i) the Prime Rate, minus a rate ranging from 0.75 to 1.0 percent (minus 1.0 percent at December 31, 2015), but not less than 1.5 percent, or (ii) LIBOR, plus additional interest ranging from 1.75 to 2.0 percent (plus 1.75 percent at December 31, 2015) depending on the Company’s performance and financial condition.
On April 27, 2016, the Company announced the refinancing of its line of credit through an agreement with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and 1st Source Bank. The Credit Agreement expiresagreement amends and restates the existing line of credit, which was scheduled to expire on January 1, 2019.2019, and now expires on April 27, 2021 (the “Amended Credit Agreement”). In connection with this amendment and restatement, the line of credit was increased from $100.0 million to $200.0 million, and contains a feature allowing the Company to draw up to $50.0 million in approved foreign currencies, including Australian dollars, Canadian dollars, pound sterling and euros. The maximum borrowings under the line of credit can be further increased by $125.0 million, subject to certain conditions. Interest on borrowings under the new line of credit is designated from time to time by the Company as either (i) the Alternate Base Rate (defined in the Amended Credit Agreement as the greatest of (a) the Prime Rate of JPMorgan Chase, (b) the federal funds effective rate plus 0.5 percent and (c) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for a one month interest period plus 1.0 percent), plus additional interest ranging from 0.0 percent to 0.625 percent (0.0 percent at December 31, 2016) depending on the Company’s performance and financial condition, or (ii) the Adjusted LIBO Rate for a period equal to one, two, three, six or twelve months as selected by the Company, plus additional interest ranging from 1.0 percent to 1.625 percent (1.0 percent at December 31, 2016) depending on the Company’s performance and financial condition. At December 31, 20152016 and 2014,2015, the Company had $2.7$2.5 million and $1.9$2.7 million, respectively, in outstanding, but undrawn, standby letters of credit under the line of credit. Availability under the Company’s line of credit was $97.3$197.5 million at December 31, 2015.2016.
On February 24, 2014, the Company also entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”). The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$150.0 million, to mature no more than twelve12 years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
determined by Prudential within five business days after the Company issues a request to Prudential. This facility expires on February 24, 2017. On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes to Prudential for a term of five years, at a fixed interest rate of 3.35 percent per annum, payable quarterly in arrears, of which the entire amount was outstanding at December 31, 2015. Availability under the Company’s “shelf-loan” facility, subject to the approval of Prudential, was $100.0 million at December 31, 2015.2016. At December 31, 2015,2016, the fair value of the Company’s long-term debt approximates the carrying value, as estimated using quoted market prices and discounted future cash flows based on similar borrowing arrangements.
On April 27, 2016, the Company also amended and restated its “shelf-loan” facility with Prudential to conform certain covenants and other terms to the Amended Credit Agreement. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. Availability under the Company’s “shelf-loan” facility, subject to the approval of Prudential, was $100.0 million at December 31, 2016.
Borrowings under both the line of credit and the “shelf-loan” facility are secured on a pari-passu basis by first priority liens on the capital stock or other equity interests of each of the Company’s direct and indirect subsidiaries.subsidiaries (including up to 65 percent of the equity interest of certain “controlled foreign corporations.”)
Pursuant to the Amended Credit Agreement and “shelf-loan” facility, at December 31, 2015 and 2014, the Company wasis required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At December 31, 20152016 and 2014,2015, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.
Availability under both the Amended Credit Agreement and the “shelf-loan” facilitiesfacility is subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined in the agreements.defined. This limitation did not impact the Company’s borrowing availability at December 31, 2015.2016. The remaining availability under these facilities was $197.3$297.5 million at December 31, 2015.2016. The undrawn “shelf-loan” facility expired February 24, 2017, and the Company and Prudential are currently discussing renewal terms. The Company believes the availability under the Amended Credit Agreement and “shelf-loan” facility in conjunction with cash from operations is adequate to finance the Company’s anticipated cash requirements for the next twelve months.
10. INCOME TAXES
The components of earnings before income taxes consisted of the following for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| United States | $ | 196,827 |
| | $ | 113,280 |
| | $ | 95,057 |
|
| Foreign | 2,345 |
| | 1,089 |
| | — |
|
| Total earnings before income taxes | $ | 199,172 |
| | $ | 114,369 |
| | $ | 95,057 |
|
The provision for income taxes in the Consolidated Statements of Income was as follows for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Current: | | | | | | | | | | |
| Federal | $ | 31,292 |
| | $ | 32,142 |
| | $ | 23,430 |
| $ | 61,073 |
| | $ | 31,132 |
| | $ | 32,142 |
|
| State | 7,670 |
| | 6,142 |
| | 4,129 |
| |
| State and local | | 10,560 |
| | 7,670 |
| | 6,142 |
|
| Foreign | | 466 |
| | 160 |
| | — |
|
| Total current provision | $ | 38,962 |
| | $ | 38,284 |
| | $ | 27,559 |
| 72,099 |
| | 38,962 |
| | 38,284 |
|
| Deferred: | | | | | | | | | | |
| Federal | $ | 466 |
| | $ | (4,545 | ) | | $ | 68 |
| (2,506 | ) | | 466 |
| | (4,545 | ) |
| State | 596 |
| | (948 | ) | | 201 |
| |
| State and local | | (110 | ) | | 596 |
| | (948 | ) |
| Foreign | | 18 |
| | — |
| | — |
|
| Total deferred provision | $ | 1,062 |
| | $ | (5,493 | ) | | $ | 269 |
| (2,598 | ) | | 1,062 |
| | (5,493 | ) |
| Provision for income taxes | $ | 40,024 |
| | $ | 32,791 |
| | $ | 27,828 |
| $ | 69,501 |
| | $ | 40,024 |
| | $ | 32,791 |
|
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for income taxes differs from the amount computed by applying the federal statutory rate to income before income taxes for the following reasons for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Income tax at federal statutory rate | $ | 40,029 |
| | $ | 33,270 |
| | $ | 27,281 |
| $ | 69,710 |
| | $ | 40,029 |
| | $ | 33,270 |
|
| State income tax, net of federal income tax impact | 5,373 |
| | 3,376 |
| | 2,815 |
| 6,480 |
| | 4,386 |
| | 3,376 |
|
| Foreign tax rate differential | | (614 | ) | | (82 | ) | | — |
|
| Manufacturing credit pursuant to Jobs Creation Act | (2,336 | ) | | (2,258 | ) | | (1,444 | ) | (5,067 | ) | | (2,336 | ) | | (2,258 | ) |
| Federal tax credits | (1,049 | ) | | (681 | ) | | (747 | ) | (1,736 | ) | | (919 | ) | | (681 | ) |
| Other | (1,993 | ) | | (916 | ) | | (77 | ) | 728 |
| | (1,054 | ) | | (916 | ) |
| Provision for income taxes | $ | 40,024 |
| | $ | 32,791 |
| | $ | 27,828 |
| $ | 69,501 |
| | $ | 40,024 |
| | $ | 32,791 |
|
At December 31, 2015,2016, federal income taxes receivable of $8.1$12.7 million and state income taxes receivable of $0.4 million were included in prepaid expenses and other current assets. At December 31, 2014,2015, federal and state income taxes receivable of $1.3$8.1 million were included in prepaid expenses and other current assets, and state income taxes payable of $0.8$0.4 million were included in accrued expenses and other current liabilities.
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows at December 31:
| | | (In thousands) | 2015 | | 2014 | | 2016 | | 2015 | |
| Deferred tax assets: | | | | | | | | |
| Goodwill and other intangible assets | $ | 11,879 |
| | $ | 14,066 |
| | $ | 10,952 |
| | $ | 11,879 |
| |
| Stock-based compensation | 7,428 |
| | 7,172 |
| | 7,550 |
| | 7,428 |
| |
| Deferred compensation | 5,310 |
| | 5,040 |
| | 5,184 |
| | 5,310 |
| |
| Warranty | 8,809 |
| | 7,845 |
| | 11,679 |
| | 8,809 |
| |
| Inventory | 5,974 |
| | 3,897 |
| | 6,572 |
| | 5,974 |
| |
| Other | 4,922 |
| | 3,189 |
| | 5,000 |
| | 4,922 |
| |
| Total deferred tax assets | 44,322 |
| | 41,209 |
| | 46,937 |
| | 44,322 |
| |
| Deferred tax liabilities: | | | | | | | | |
| Fixed assets | (14,931 | ) | | (10,756 | ) | | (14,948 | ) | | (14,931 | ) | |
| Net deferred tax assets | $ | 29,391 |
| | $ | 30,453 |
| | $ | 31,989 |
| | $ | 29,391 |
| |
The Company concluded it is more likely than not the deferred tax assets at December 31, 20152016 will be realized in the ordinary course of operations based on projected future taxable income and scheduling of deferred tax liabilities.
Excess tax benefits on stock-based compensation of $8.0 million, $9.0 million $3.9 million and $1.5$3.9 million were credited directly to stockholders’ equity during the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively, relating to tax benefits which exceeded the compensation cost for stock-based compensation recognized in the Consolidated Financial Statements.
At December 31, 2015,2016, the remaining pool of excess tax benefits from prior exercises of stock-based compensation in stockholders’ equity was $23.4$31.5 million.
Unrecognized Tax Benefits
The following table reconciles the total amounts of unrecognized tax benefits, at December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 1,526 |
| | $ | 1,369 |
| | $ | 1,701 |
| $ | 2,854 |
| | $ | 1,526 |
| | $ | 1,369 |
|
| Changes in tax positions of prior years | 912 |
| | 84 |
| | (29 | ) | 214 |
| | 912 |
| | 84 |
|
| Additions based on tax positions related to the current year | 866 |
| | 603 |
| | 676 |
| 1,252 |
| | 866 |
| | 603 |
|
| Payments | (85 | ) | | — |
| | (126 | ) | — |
| | (85 | ) | | — |
|
| Closure of tax years | (365 | ) | | (530 | ) | | (853 | ) | (573 | ) | | (365 | ) | | (530 | ) |
| Balance at end of period | $ | 2,854 |
| | $ | 1,526 |
| | $ | 1,369 |
| $ | 3,747 |
| | $ | 2,854 |
| | $ | 1,526 |
|
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, the total amount of accrued interest and penalties related to taxes, recognized as a liability, was $0.2 million, $0.2 million and $0.2 million at December 31, 2016, 2015 2014 and 2013,2014, respectively.
The total amount of unrecognized tax benefits, net of federal income tax benefits, of $2.9 million, $2.7 million $1.2 million and $1.0$1.2 million at December 31, 2016, 2015 2014 and 2013,2014, respectively, would, if recognized, increase the Company’s earnings, and lower the Company’s annual effective tax rate in the year of recognition.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company periodically undergoes examinations by the Internal Revenue Service (“IRS”), as well as various state and foreign taxing authorities. The IRS and other taxing authorities may challenge certain deductions and positions reported by the Company on its income tax returns. For U.S. federal income tax purposes, the tax year 2014 is currently under audit, while tax years 2012 through 20142013 and 2015 remain subject to examination. For Indiana state income tax purposes, the tax years 20122013 through 20142015 remain subject to examination. Approximately 80 percent of the Company’s operations are located in Indiana. In other major jurisdictions, open years are generally 2013 or later.
The Company has assessed its risks associated with all tax return positions, and believes its tax reserve estimates reflect its best estimate of the deductions and positions it will be able to sustain, or it may be willing to concede as part of a settlement. At this time, the Company cannot estimate the range of reasonably possible change in its tax reserve estimates in 2016.2017. While these tax matters could materially affect operating results when resolved in future periods, it is management’s opinion that after
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
final disposition, any monetary liability or financial impact to the Company beyond that provided for in the Consolidated Balance Sheet as of December 31, 2015,2016, would not be material to the Company’s financial position or annual results of operations.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company’s lease commitments are primarily for real estate, machinery and equipment, and vehicles. The significant real estate leases provide for renewal options and require the Company to pay for property taxes and all other costs associated with the leased property.
Future minimum lease payments under operating leases at December 31, 20152016 are as follows (in thousands):
| | | 2016 | $ | 7,472 |
| | |
| 2017 | 6,761 |
| | $ | 9,388 |
| |
| 2018 | 5,553 |
| | 7,978 |
| |
| 2019 | 4,752 |
| | 6,068 |
| |
| 2020 | 4,043 |
| | 4,936 |
| |
| 2021 | | 4,116 |
| |
| Thereafter | 11,093 |
| | 8,017 |
| |
| Total minimum lease payments | $ | 39,674 |
| | $ | 40,503 |
| |
Rent expense for operating leases was $11.5 million, $9.8 million $8.6 million and $7.1$8.6 million for the years ended December 31, 2016, 2015 2014 and 2013,2014, respectively.
Contingent Consideration
In connection with several business acquisitions, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a liability for the fair value of this contingent consideration at December 31, 20152016 and 2014,2015, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 13.913.7 percent and 15.013.9 percent, respectively.
As required, the liability for this contingent consideration is measured at fair value quarterly, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending upon the weighted average costs of capital and future sales of the products which are subject to contingent consideration, the Company could record adjustments in future periods.
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides a reconciliation of the Company’s contingent consideration liability for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 8,129 |
| | $ | 7,414 |
| | $ | 11,519 |
| $ | 10,840 |
| | $ | 8,129 |
| | $ | 7,414 |
|
| Acquisitions | 4,766 |
| | 3,370 |
| | — |
| 1,322 |
| | 4,766 |
| | 3,370 |
|
| Payments | (3,974 | ) | | (3,739 | ) | | (5,456 | ) | (4,944 | ) | | (3,974 | ) | | (3,739 | ) |
Accretion (a) | 1,196 |
| | 1,075 |
| | 1,308 |
| 1,274 |
| | 1,196 |
| | 1,075 |
|
Fair value adjustments (a) | 723 |
| | 9 |
| | 43 |
| 749 |
| | 723 |
| | 9 |
|
Balance at end of the period (b) | 10,840 |
| | 8,129 |
| | 7,414 |
| 9,241 |
| | 10,840 |
| | 8,129 |
|
| Less current portion in accrued expenses and other current liabilities | (3,877 | ) | | (3,622 | ) | | (3,462 | ) | (5,829 | ) | | (3,877 | ) | | (3,622 | ) |
| Total long-term portion in other long-term liabilities | $ | 6,963 |
| | $ | 4,507 |
| | $ | 3,952 |
| $ | 3,412 |
| | $ | 6,963 |
| | $ | 4,507 |
|
| |
| (a) | Recorded in selling, general and administrative expense in the Consolidated Statements of Income. |
| |
| (b) | Amounts represent the fair value of estimated remaining payments. The total estimated remaining undiscounted payments as of December 31, 20152016 are $14.4$11.6 million. The liability for contingent consideration expires at various dates through September 2029. Certain of the contingent consideration arrangements are subject to a maximum payment amount, while the remaining arrangements have no maximum contingent consideration. |
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Furrion Distribution and Supply Agreement
In July 2015, the Company entered into a 6-yearsix-year exclusive distribution and supply agreement with Furrion Limited (“Furrion”), a Hong Kong based firm that designs, engineers and manufacturessupplies premium electronics. This agreement provides the Company with the rights to distribute Furrion’s complete line of products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions, sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry. Furrion’s sales were approximately $35 million in 2014.
In connection with this agreement, the Company acquired Furrion’s current inventory, as well as Furrion’s deposits on inventory scheduled for delivery, for approximately $11 million. In addition, the Company entered into the following minimum purchase obligations (“MPOs”):, which the Company anticipates will be revised from time to time:
|
| | | | |
| July 2015 - June 2016 | $ 60 million | | |
| | July 2016 - June 2017 | $ 90 million | | |
| | July 2017 - June 2018 | $127 million | | |
| | July 2018 - June 2019 | $172 million | | |
If the Company misses an MPO in any given year by more than ten percent, after taking into account excess purchases from the previous year, Furrion has the right to either terminate the distribution agreement with six months’ notice or remove exclusivity from the Company. If exclusivity is withdrawn, the Company, at its election, can terminate the distribution agreement with six months’ notice. Upon termination of the agreement, Furrion has agreed to purchase from the Company any non-obsolete stocks of Furrion products at the cost paid by the Company. After the first year, Furrion and the Company have agreed to review these MPOs after the first year on an annual basis and adjust the MPOs as necessary based upon current economic and industry conditions, the development and customer acceptance of new Furrion products, competition and other factors which impact demand for Furrion products. Despite good market acceptance of Furrion products during the first year of the distribution agreement, the MPO was not achieved for the year ended June 30, 2016, primarily due to the timing of development and availability of anticipated new products from Furrion. As a result, the parties are currently in discussions to revise the MPOs, and the Company and Furrion are working together to increase product availability and new product introductions.
Subject to agreed upon revisions to the MPOs, Furrion has the right to either terminate the distribution agreement with six months’ notice or remove exclusivity from the Company if the Company misses an MPO in any given year by more than ten percent, after taking into account excess purchases from the previous year. If exclusivity is withdrawn, the Company at its election may terminate the distribution agreement with six months’ notice. Upon termination of the agreement, Furrion has agreed to purchase from the Company any non-obsolete stocks of Furrion products at the cost paid by the Company.
Product Recalls
From time to time, the Company cooperates with and assists its customers on their product recalls and inquiries, and occasionally receives inquiries directly from the National Highway Traffic Safety Administration (“NHTSA”) regarding reported incidents involving the Company’s products. In February 2015, NHTSA opened a Preliminary Evaluation asAs a result, of four Vehicle Owner Questionnaires (VOQs) alleging failure of the Company’s electrically powered step (“Coach Step”), which was primarily supplied for motorhome RVs between model years 2008 and 2014. The Coach Step was no longer manufactured after 2014. In March 2015, NHTSA sent a formal request for information, data and supporting documentation from the Company regarding the Coach Step, which the Company provided in April 2015. After a thorough review of the designhas incurred expenses associated with product recalls from time to time, and operation of the Coach Step, the Company initiated a voluntary safety recall in September 2015 of all double and triple Coach Steps. The Company recorded a reserve of $1.1 millionmay incur expenditures for the contingent obligation in selling, general and administrative expenses.future investigations or product recalls.
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Environmental
The Company’s operations are subject to certain Federal, state and local regulatory requirements relating to the use, storage, discharge and disposal of hazardous materials used during the manufacturing processes. Although the Company believes its operations have been consistent with prevailing industry standards, and are in substantial compliance with applicable environmental laws and regulations, one or more of the Company’s current or former operating sites, or adjacent sites owned by third-parties, have been affected by releases of hazardous materials. As a result, the Company may incur expenditures for future investigation and remediation of these sites, and recorded a pre-tax charge of $1.5 million related to environmental costsincluding in 2015.conjunction with voluntary remediation programs or third party claims.
Litigation
In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that, after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
provided in the Consolidated Balance Sheet as of December 31, 2015,2016, would not be material to the Company’s financial position or annual results of operations.
Executive Succession and Severance
In 2015, the Company initiated a focused program to reduce indirect labor costs. In connection with this cost reduction program and certain changes at the executive level, the Company incurred severance charges of $3.7 million.
In 2013, in connection with the Company’s executive succession and corporate relocation from White Plains, New York to Elkhart County, Indiana, the Company recorded pre-tax charges of $1.9 million, related to contractual obligations for severance and the acceleration of equity awards held by certain employees whose employment terminated as a result of the executive succession and relocation to Indiana. The liability for executive succession and severance obligations were paid through 2015.
12. STOCKHOLDERS'STOCKHOLDERS’ EQUITY
Special DividendDividends
On April 10, 2015, a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $48.2 million, was paid to stockholders of record as of March 27, 2015. On January 6, 2014, a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $46.7 million, was paid to stockholders of record as of December 20, 2013. In connection with these special dividends, holders of deferred stock units, restricted stock and stock awards were credited with deferred stock units, restricted stock or stock equal to $2.00 per special dividend for each deferred stock unit, share of restricted stock or stock award, representing $1.8 million in total for each of the 2015 and 2014 special dividends. In connection with each of these special cash dividends, the exercise price of all outstanding stock options was reduced by $2.00 per share. These reductions in exercise price were made pursuant to the terms of the outstanding awards, resulting in no incremental stock-based compensation expense.
In 2016, the Company initiated the payment of regular quarterly dividends. The table below summarizes the regular quarterly dividends declared and paid during the year ended December 31, 2016:
|
| | | | | | | | | | | |
| (In thousands, except per share data) | Per Share | | Record Date | | Payment Date | | Total Paid |
| First Quarter 2016 | $ | 0.30 |
| | 04/01/16 | | 04/15/16 | | $ | 7,344 |
|
| Second Quarter 2016 | 0.30 |
| | 06/06/16 | | 06/17/16 | | 7,363 |
|
| Third Quarter 2016 | 0.30 |
| | 08/19/16 | | 09/02/16 | | 7,371 |
|
| Fourth Quarter 2016 | 0.50 |
| | 11/28/16 | | 12/09/16 | | 12,359 |
|
| Total 2016 | $ | 1.40 |
| | | | | | $ | 34,437 |
|
Stock-Based Awards
Pursuant to the DrewLCI Industries Incorporated Equity Award and Incentive Plan, as Amended and Restated (the “Equity Plan”), which was approved by stockholders in May 2011, the Company may grant to its directors, employees, and other eligible persons Common Stock-based awards, such as stock options, restricted stock and deferred stock units. All such awards granted under the Equity Plan must be approved by the Compensation Committee of Drew’sLCII’s Board of Directors (the “Committee”). The Committee determines the period for which all such awards may be exercisable, but in no event may such an award be exercisable more than 10 years from the date of grant. The number of shares available under the Equity Plan, and the exercise price of all such awards granted
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
under the Equity Plan, are subject to adjustments by the Committee to reflect stock splits, dividends, recapitalization, mergers, or other major corporate actions.
At the Annual Meeting of Stockholders held on May 22, 2014, stockholders approved an amendment to the Equity Plan to increase the number of shares of common stock available for issuance pursuant to awards by 1,678,632 shares.
The number of shares available for granting awards was 1,049,752, 1,305,440 1,389,506 and 246,3681,389,506 at December 31, 2016, 2015 2014 and 2013,2014, respectively.
Stock-based compensation resulted in charges to operations as follows for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Stock options | $ | 974 |
| | $ | 1,412 |
| | $ | 2,325 |
| $ | 444 |
| | $ | 974 |
| | $ | 1,412 |
|
| Deferred stock units | 7,023 |
| | 4,343 |
| | 5,425 |
| 7,830 |
| | 7,023 |
| | 4,343 |
|
| Restricted stock | 1,031 |
| | 910 |
| | 911 |
| 1,770 |
| | 1,031 |
| | 910 |
|
| Stock awards | 5,015 |
| | 4,152 |
| | 2,178 |
| 5,376 |
| | 5,015 |
| | 4,152 |
|
| Stock-based compensation expense | $ | 14,043 |
| | $ | 10,817 |
| | $ | 10,839 |
| $ | 15,420 |
| | $ | 14,043 |
| | $ | 10,817 |
|
Stock-based compensation expense is recorded in the Consolidated Statements of Income in the same line as cash compensation to those employees is recorded, primarily in selling, general and administrative expenses. In addition, for the years ended December 31, 2016, 2015 2014 and 2013,2014, the Company issued deferred stock units to certain executive officers in lieu of cash for a portion of prior year incentive compensation, in accordance with their compensation arrangements, of $0.3 million, $2.0 million $2.0
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
million and $0.1$2.0 million, respectively. In February 2016,2017, the Company issued deferred stock units valued at $0.3$6.9 million, to certain officers in lieu of cash for a portion of their 20152016 incentive compensation in accordance with their compensation arrangements.
Stock Options
The Equity Plan provides for the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code, and non-qualified stock options. The exercise price for stock options granted under the Equity Plan must be at least equal to 100 percent of the fair market value of the shares subject to such stock option on the date of grant. The exercise price may be paid in cash or in shares of the Company’s Common Stock which have been held for a minimum of six months. Historically, upon exercise of stock options, new shares have been issued instead of using treasury shares.
Outstanding stock options expire six years from the date of grant, and either vest ratably over the service period of five years for employees or, for certain executive officers, based on achievement of specified performance conditions. As a result of the Company’s executive succession and corporate relocation, the vesting of certain stock options was accelerated pursuant to contractual obligations with certain employees whose employment terminated as a result of the relocation to Indiana.
Transactions in stock options under the Equity Plan are summarized as follows:
| | | | Number of Option Shares | | Stock Option Exercise Price | | Weighted Average Exercise Price | Number of Option Shares | Weighted Average Exercise Price |
| Outstanding at December 31, 2012 | 1,320,819 |
| $ 8.09 - $29.11 | $ | 19.92 |
| |
| Exercised | (574,288 | ) | $ 8.09 - $29.11 | $ | 23.04 |
| |
| Forfeited | (22,870 | ) | $ 8.09 - $29.11 | $ | 19.36 |
| |
| Outstanding at December 31, 2013 | 723,661 |
| $ 8.09 - $21.17 | $ | 15.46 |
| 723,661 |
| $ | 15.46 |
|
| Exercised | (258,530 | ) | $ 6.09 - $19.17
| $ | 12.89 |
| (258,530 | ) | $ | 12.89 |
|
| Forfeited | (11,800 | ) | $6.09 - $19.17
| $ | 16.93 |
| (11,800 | ) | $ | 16.93 |
|
| Reduction for cash dividend | — |
| $ 6.09 - $19.17 | $ | (2.00 | ) | |
| Reduction for special cash dividend | | — |
| $ | (2.00 | ) |
Outstanding at December 31, 2014
| 453,331 |
| $15.49 - $19.17
| $ | 16.89 |
| 453,331 |
| $ | 16.89 |
|
| Exercised | (214,601 | ) | $13.49 - $19.17
| $ | 14.48 |
| (214,601 | ) | $ | 14.48 |
|
| Forfeited | (26,700 | ) | $13.49 - $19.17
| $ | 14.30 |
| (26,700 | ) | $ | 14.30 |
|
| Reduction for cash dividend | — |
| $13.49 - $17.17
| $ | (2.00 | ) | |
| Reduction for special cash dividend | | — |
| $ | (2.00 | ) |
| Outstanding at December 31, 2015 | 212,030 |
| $13.67 - $17.17
| $ | 15.38 |
| 212,030 |
| $ | 15.38 |
|
| Exercisable at December 31, 2015 | 162,170 |
| $13.67 - $17.17
| $ | 14.83 |
| |
| Exercised | | (183,600 | ) | $ | 15.10 |
|
| Forfeited | | (1,550 | ) | $ | 17.17 |
|
Outstanding at December 31, 2016 (a) | | 26,880 |
| $ | 17.17 |
|
Exercisable at December 31, 2016 (a) | | 26,880 |
| $ | 17.17 |
|
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| |
| (a) | The aggregate intrinsic value for option shares outstanding and option shares exercisable is $2.4 million. The weighted average remaining term for option shares outstanding and option shares exercisable is 0.9 years. |
Additional information for the exercise of stock options is as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2015 | | 2014 | | 2013 |
| Intrinsic value of stock options exercised | $ | 9,424 |
| | $ | 7,860 |
| | $ | 9,062 |
|
| Cash receipts from stock options exercised | $ | 3,280 |
| | $ | 3,333 |
| | $ | 13,231 |
|
| Income tax benefits from stock option exercises | $ | 2,885 |
| | $ | 3,660 |
| | $ | 3,473 |
|
| Grant date fair value of stock options vested | $ | 1,055 |
| | $ | 1,561 |
| | $ | 2,252 |
|
The following table summarizes information about stock options outstanding at December 31, 2015:
|
| | | | | | | | | | | |
| Exercise Price | | Option Shares Outstanding | | Remaining Life in Years | | Option Shares Exercisable | |
| $ | 13.67 |
| | 108,450 |
| | 0.9 | | 108,450 |
| |
| $ | 17.17 |
| | 103,580 |
| | 1.9 | | 53,720 |
| |
| Total Shares | | 212,030 |
| (a) | | | 162,170 |
| (a) |
| |
(a) | The aggregate intrinsic value for option shares outstanding and option shares exercisable is $9.6 million and $7.5 million, respectively. The weighted average remaining term for option shares outstanding and option shares exercisable is 1.4 years and 1.2 years, respectively. |
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2015, there was $0.4 million of total unrecognized compensation costs related to unvested stock options, which are expected to be recognized over a weighted average remaining period of 0.9 years. |
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| Intrinsic value of stock options exercised | $ | 13,204 |
| | $ | 9,424 |
| | $ | 7,860 |
|
| Cash receipts from stock options exercised | $ | 2,772 |
| | $ | 3,280 |
| | $ | 3,333 |
|
| Income tax benefits from stock option exercises | $ | 4,435 |
| | $ | 2,885 |
| | $ | 3,660 |
|
| Grant date fair value of stock options vested | $ | 506 |
| | $ | 1,055 |
| | $ | 1,561 |
|
Deferred and Restricted Stock Units
The Equity Plan provides for the grant or issuance of deferred stock units (“DSUs”) and restricted stock units (“RSUs”) to directors, employees and other eligible persons. Recipients of DSUs and RSUs are entitled to receive shares at the end of a specified vesting or deferral period. Holders of DSUs and RSUs receive dividends granted to holders of the Common Stock, payable in additional DSUs and RSUs, and are subject to the same vesting criteria as the original grant.
DSUs vest (i) ratably over the service period, (ii) at a specified future date, or (iii) for certain officers, based on achievement of specified performance conditions. RSUs vest (i) ratably over the service period or (ii) at a specified future date. As a result of the Company’s executive succession and corporate relocation, the vesting of certain deferred stock units was accelerated pursuant to contractual obligations with certain employees whose employment terminated. In addition, DSUs are issued in lieu of cash compensation.
Transactions in DSUs and RSUs under the Equity Plan are summarized as follows:
| | | | Number of Shares | Stock Price | Number of Shares | Weighted Average Price |
| Outstanding at December 31, 2012 | 613,754 |
| $ 6.16 - $33.32 | |
| Issued | 32,462 |
| $33.84 - $48.53 | |
| Granted | 140,461 |
| $36.58 - $50.85 | |
Forfeited
| (4,505 | ) | $30.50 | |
| Exercised | (89,211 | ) | $20.20 - $30.65 | |
| Outstanding at December 31, 2013 | 692,961 |
| $ 6.16 - $50.85 | 692,961 |
| $ | 30.26 |
|
| Issued | 56,212 |
| $36.68 - $51.46 | 56,212 |
| $ | 46.08 |
|
| Granted | 187,490 |
| $45.98 - $46.95 | 187,490 |
| $ | 46.94 |
|
| Dividend equivalents | 27,532 |
| $50.45 | 27,532 |
| $ | 50.45 |
|
| Forfeited | (38,855 | ) | $26.98 - $50.89 | (38,855 | ) | $ | 29.83 |
|
| Exercised | (187,052 | ) | $19.98 - $50.89 | (187,052 | ) | $ | 29.90 |
|
Outstanding at December 31, 2014
| 738,288 |
| $ 6.16 - $51.20
| 738,288 |
| $ | 36.96 |
|
| Issued | 54,982 |
| $52.20 - $60.92
| 54,982 |
| $ | 47.51 |
|
| Granted | 90,184 |
| $52.20 - $61.53 | 90,184 |
| $ | 60.22 |
|
| Dividend equivalents | 20,922 |
| $59.94 | 20,922 |
| $ | 59.94 |
|
| Forfeited | (23,604 | ) | $30.50 - $60.29 | (23,604 | ) | $ | 44.78 |
|
| Exercised | (353,259 | ) | $20.89 - $51.46 | (353,259 | ) | $ | 32.62 |
|
| Outstanding at December 31, 2015 | 527,513 |
| $ 6.16 - $61.53 | 527,513 |
| $ | 44.94 |
|
| Issued | | 10,742 |
| $ | 72.01 |
|
| Granted | | 173,097 |
| $ | 54.67 |
|
| Dividend equivalents | | 9,075 |
| $ | 87.01 |
|
| Forfeited | | (10,893 | ) | $ | 48.98 |
|
| Exercised | | (203,087 | ) | $ | 43.55 |
|
| Outstanding at December 31, 2016 | | 506,447 |
| $ | 50.00 |
|
As of December 31, 2015,2016, there was $12.7$14.4 million of total unrecognized compensation costs related to DSUs and RSUs, which is expected to be recognized over a weighted average remaining period of 1.91.5 years.
Restricted Stock
The Equity Plan provides for the grant of restricted stock to directors, employees and other eligible persons. The restriction period is established by the Committee, but may not be less than one year. Holders of restricted stock have all the rights of a
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
stockholder of the Company, including the right to vote and the right to receive dividends granted to holders of the Common Stock, payable in additional shares of restricted stock, and subject to the same vesting criteria as the original grant. Shares of restricted stock are not transferable during the restriction period. Restricted stock grants, which were all made to directors, were as follows (in thousands except share and per share amounts):
| | | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Granted | 20,558 |
| | 19,439 |
| | 17,885 |
| 17,439 |
| | 20,558 |
| | 19,439 |
|
| Stock price | $58.96 - $61.53 |
| | $ | 46.82 |
| | $ | 50.89 |
| |
| Weighted average stock price | | $ | 74.55 |
| | $ | 59.60 |
| | $ | 46.82 |
|
| Fair value of stock granted | $ | 1,220 |
| | $ | 910 |
| | $ | 910 |
| $ | 1,300 |
| | $ | 1,220 |
| | $ | 910 |
|
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2015,2016, there was $1.0$0.5 million of total unrecognized compensation costs related to restricted stock, which is expected to be recognized over a weighted average remaining period of 0.80.4 years.
Stock Awards
In accordance with the Executive Employment and Non-Competition Agreementsemployment agreements for various officers of the Company, such officers are entitled to receive an annual long-term award consisting of the right to earn shares of common stock. These shares are earned during the subsequent three year period based on growth in the Company’s earnings per diluted share.
Transactions in stock awards under the Equity Plan are summarized as follows:
| | | | Number of Shares | Stock Price | Number of Shares | Stock Price |
| Outstanding at December 31, 2012 | 90,102 |
| $26.88 | |
| Granted | 103,500 |
| $32.25 - $43.70 | |
| Outstanding at December 31, 2013 | 193,602 |
| $26.88 - $43.70 | 193,602 |
| $ | 30.84 |
|
| Granted | 103,500 |
| $51.20 | 103,500 |
| $ | 51.20 |
|
| Dividend equivalents | 7,675 |
| $50.45 | 7,675 |
| $ | 50.45 |
|
| Exercised | (31,959 | ) | $26.88 | (31,959 | ) | $ | 26.88 |
|
Outstanding at December 31, 2014
| 272,818 |
| $26.88 - $51.45
| 272,818 |
| $ | 39.03 |
|
| Granted | 96,010 |
| $60.29 | 96,010 |
| $ | 60.29 |
|
| Dividend equivalents | 8,992 |
| $59.94 | 8,992 |
| $ | 59.94 |
|
| Forfeited | (16,534 | ) | $60.29 | (16,534 | ) | $ | 60.29 |
|
| Exercised | (98,830 | ) | $26.88 - $43.70 | (98,830 | ) | $ | 29.70 |
|
| Outstanding at December 31, 2015 | 262,456 |
| $32.25 - $60.29 | 262,456 |
| $ | 49.36 |
|
| Granted | | 86,918 |
| $ | 54.47 |
|
| Dividend equivalents | | 3,811 |
| $ | 88.04 |
|
| Forfeited | | (10,832 | ) | $ | 53.95 |
|
| Exercised | | (109,731 | ) | $ | 39.94 |
|
| Outstanding at December 31, 2016 | | 232,622 |
| $ | 55.60 |
|
As of December 31, 2015,2016, there was $6.7$7.6 million of total unrecognized compensation costs related to outstanding stock awards, which is expected to be recognized over a weighted average remaining period of 1.51.4 years.
Weighted Average Common Shares Outstanding
The following reconciliation details the denominator used in the computation of basic and diluted earnings per share for the years ended December 31:
| | | (In thousands) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Weighted average shares outstanding for basic earnings per share | 24,295 |
| | 23,911 |
| | 23,321 |
| 24,631 |
| | 24,295 |
| | 23,911 |
|
| Common stock equivalents pertaining to stock-based awards | 355 |
| | 423 |
| | 432 |
| 302 |
| | 355 |
| | 423 |
|
| Weighted average shares outstanding for diluted earnings per share | 24,650 |
| | 24,334 |
| | 23,753 |
| 24,933 |
| | 24,650 |
| | 24,334 |
|
The weighted average diluted shares outstanding for the years ended December 31, 2016, 2015 2014 and 2013,2014, exclude the effect of 184,277, 255,547 293,860 and 303,240293,860 shares of common stock, respectively, subject to stock-based awards. Such shares were
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
excluded from total diluted shares because they were anti-dilutive or the specified performance conditions that those shares were subject to were not yet achieved.
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. FAIR VALUE MEASUREMENTS
Recurring
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at
December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 |
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | | Total | Level 1 | Level 2 | Level 3 |
| Assets | | | | | | | | | |
| Deferred compensation | $ | 7,774 |
| $ | 7,774 |
| $ | — |
| $ | — |
| | $ | 7,388 |
| $ | 7,388 |
| $ | — |
| $ | — |
|
| Total assets | $ | 7,774 |
| $ | 7,774 |
| $ | — |
| $ | — |
| | $ | 7,388 |
| $ | 7,388 |
| $ | — |
| $ | — |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Contingent consideration | $ | 10,840 |
| $ | — |
| $ | — |
| $ | 10,840 |
| | $ | 8,129 |
| $ | — |
| $ | — |
| $ | 8,129 |
|
| Deferred compensation | 11,836 |
| 11,836 |
| — |
| — |
| | 11,478 |
| 11,478 |
| — |
| — |
|
| Total liabilities | $ | 22,676 |
| $ | 11,836 |
| $ | — |
| $ | 10,840 |
| | $ | 19,607 |
| $ | 11,478 |
| $ | — |
| $ | 8,129 |
|
Deferred Compensation
The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). The amounts deferred under the Plan are credited with earnings or losses based upon changes in values of the notional investments elected by the Plan participants. The Company invests approximately 65 percent of the amounts deferred by the Plan participants in life insurance contracts, matching the investments elected by the Plan participants. Deferred compensation assets and liabilities were valued using a market approach based on the quoted market prices of identical instruments. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 |
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | | Total | Level 1 | Level 2 | Level 3 |
| Assets | | | | | | | | | |
Unrealized gain on derivative instruments | $ | 2,296 |
| $ | — |
| $ | 2,296 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Liabilities | | | | | | | | | |
| Contingent consideration | $ | 9,241 |
| $ | — |
| $ | — |
| $ | 9,241 |
| | $ | 10,836 |
| $ | — |
| $ | — |
| $ | 10,836 |
|
Contingent Consideration Related to Acquisitions
Liabilities for contingent consideration related to acquisitions were fair valued using management’s projections for long-term sales forecasts, including assumptions regarding market share gains and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next six years, the Company’s long-term sales growth forecasts for products subject to contingent consideration arrangements average approximately 1314 percent per year. For further information on the inputs used in determining the fair value, and a roll-forward of the contingent consideration liability, see Note 11 of the Notes to Consolidated Financial Statements.
Changes in either of the inputs in isolation would result in a change in the fair value measurement. A change in the assumptions used for sales forecasts would result in a directionally similar change in the fair value liability, while a change in the weighted average cost of capital would result in a directionally opposite change in the fair value liability. If there is an increase in the fair value liability, the Company would record a charge to selling, general and administrative expenses, and if there is a decrease in the fair value liability, the Company would record a benefit in selling, general and administrative expenses.
Derivative Instruments
At December 31, 2016, the Company had derivative instruments for 40.8 million pounds of steel, in order to manage a portion of the exposure to movements associated with steel costs. These derivative instruments expire through December 2018, at an average steel price of $0.25 per pound. While these derivative instruments are considered to be economic hedges of the underlying movement in the price of steel, they are not designated or accounted for as a hedge. These derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net gain was recorded in cost of sales in the Consolidated Statements of Income. At December 31, 2016 the $2.3 million corresponding asset was recorded in other current assets as reflected in the Consolidated Balance Sheets.
Non-recurring
The following table presents the carrying value on the measurement date of any assets and liabilities which were measured at fair value and recorded at the lower of cost or fair value, on a non-recurring basis, using significant unobservable inputs (Level 3), and the corresponding non-recurring losses recognized during the years ended December 31:
| | | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| (In thousands) | Carrying
Value | | Non-Recurring
Losses | | Carrying
Value | | Non-Recurring
Losses | | Carrying
Value | | Non-Recurring
Losses | Carrying
Value | | Non-Recurring
Losses | | Carrying
Value | | Non-Recurring
Losses | | Carrying
Value | | Non-Recurring
Losses |
| Assets | | | | | | | | | | | | | | | | | | | | | | |
| Vacant owned facilities | $ | 2,537 |
| | $ | — |
| | $ | 3,863 |
| | $ | — |
| | $ | 3,197 |
| | $ | 145 |
| $ | 2,496 |
| | $ | — |
| | $ | 2,537 |
| | $ | — |
| | $ | 3,863 |
| | $ | — |
|
| Other intangible assets | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net assets of acquired businesses | 28,727 |
| | — |
| | 66,169 |
| | — |
| | 4,382 |
| | — |
| 44,250 |
| | — |
| | 28,727 |
| | — |
| | 66,169 |
| | — |
|
| Total assets | $ | 31,264 |
| | $ | — |
| | $ | 70,032 |
| | $ | — |
| | $ | 7,579 |
| | $ | 145 |
| $ | 46,746 |
| | $ | — |
| | $ | 31,264 |
| | $ | — |
| | $ | 70,032 |
| | $ | — |
|
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Vacant Owned Facilities
During 2016, the Company reviewed the recoverability of the carrying value of one vacant owned facility. At December 31, 2016, the Company had one vacant owned facility, with an estimated fair value of over $3.0 million and a carrying value of $2.5 million, classified in fixed assets in the Consolidated Balance Sheets.
During 2015, the Company reviewed the recoverability of the carrying value of three vacant owned facilities, of which one of these facilities was sold and one was reopened. At December 31, 2015, the Company had one vacant owned facility with an estimated fair value of $3.1over $3.0 million and a carrying value of $2.5 million, classified in fixed assets in the Consolidated Balance Sheets.
During 2014, the Company reviewed the recoverability of the carrying value of four vacant owned facilities. At December 31, 2014, the Company had three vacant owned facilities, with an combined estimated combined fair value of $4.2 million and a combined carrying value of $3.9 million, classified in fixed assets in the Consolidated Balance Sheets.
During 2013, the Company reviewed the recoverability of the carrying value of six vacant owned facilities. The fair value of two of these vacant owned facilities did not exceeded their carrying value, therefore an impairment charge of $0.1 million was recorded in selling, general, and administrative expenses in the Consolidated Statements of Income. At December 31, 2013, the Company had three vacant owned facilities, with an estimated combined fair value of $3.6 million and a combined carrying value of $3.2 million, classified in fixed assets in the Consolidated Balance Sheets.
The determination of fair value was based on the best information available, including internal cash flow estimates, market prices for similar assets, broker quotes and independent appraisals, as appropriate.
Net Assets of Acquired Businesses
The Company valued the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company used different valuation techniques in determining the fair value. Those techniques included comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, a market participant’s weighted average cost of capital, as well as other techniques as circumstances required. For further information on acquired assets and liabilities, see Note 32 of the Notes to Consolidated Financial Statements.
14. SEGMENT REPORTING
The Company previously had two reportable segments, the recreational vehicle products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). The Company has recently increased its focus on the significant opportunities in the aftermarket for its products, primarily sales to retail dealers, wholesale distributors and service centers. Additionally, over the past several years, sales of components for manufactured homes have become a smaller part of the Company’s business, largely due to the growth the Company has experienced with respect to its components sold to customers for traditional recreational vehicles as well as the expanded use of its components in other non-RV applications, which we refer to as adjacent industries. Unit growth for MH Segment products has also been lower over the last decade, primarily due to the real estate, credit and economic environment, including the availability of site built homes at stable prices and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes. In response to these changes in the Company’s business, subsequent to March 31, 2016, the Company modified its internal reporting structure, reflecting a change in how its chief operating decision maker (“CODM”) assesses the performance of the Company’s operating results and makes decisions about resource allocations. The Company’s new reportable segments are the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant.
The OEM Segment, which accounted for 92 percent, 93 percent and 95 percent of consolidated net sales for each of the years ended December 31, 2016, 2015 and 2014, respectively, manufactures or distributes a broad array of components for the leading OEMs of RVs and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing. Approximately 71 percent of the Company’s OEM Segment net sales in 2016 were of components for travel trailer and fifth-wheel RVs.
The Aftermarket Segment, which accounted for 8 percent, 7 percent and 5 percent of consolidated net sales for each of the years ended December 31, 2016, 2015 and 2014, respectively, supplies components to the related aftermarket channels of the RV and adjacent industries, primarily to retail dealers, wholesale distributors and service centers. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims.
Decisions concerning the allocation of the Company’s resources are made by the Company’s CODM, with oversight by the Board of Directors. The CODM evaluates the performance of each segment based upon segment operating profit or loss,
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
generally defined as income or loss before interest and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of assets. Management of debt is a corporate function. The accounting policies of the OEM and Aftermarket Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The change in reported segments had no effect on the Company’s net income, total assets or liabilities, or stockholders’ equity.
Corporate expenses are allocated between the segments based upon net sales. Accretion related to contingent consideration and other non-segment items are included in the segment to which they relate. Information relating to segments follows for the years ended December 31:
|
| | | | | | | | | | | | | | | |
| | Segments | Corporate | |
| (In thousands) | OEM | Aftermarket | Total | and Other | Total |
| 2016 | | | | | |
Net sales to external customers (a) | $ | 1,548,091 |
| $ | 130,807 |
| $ | 1,678,898 |
| $ | — |
| $ | 1,678,898 |
|
Operating profit (b) | 180,850 |
| 20,000 |
| 200,850 |
| — |
| 200,850 |
|
Total assets (c) | 569,385 |
| 65,211 |
| 634,596 |
| 152,308 |
| 786,904 |
|
Expenditures for long - lived assets (d) | 80,588 |
| 6,014 |
| 86,602 |
| — |
| 86,602 |
|
| Depreciation and amortization | $ | 42,593 |
| $ | 3,298 |
| $ | 45,891 |
| $ | 276 |
| $ | 46,167 |
|
| | | | | | |
| 2015 | | | | | |
Net sales to external customers (a) | $ | 1,300,060 |
| $ | 103,006 |
| $ | 1,403,066 |
| $ | — |
| $ | 1,403,066 |
|
Operating profit (loss) (b) | 105,224 |
| 14,746 |
| 119,970 |
| (3,716 | ) | 116,254 |
|
Total assets (c) | 500,734 |
| 56,683 |
| 557,417 |
| 65,439 |
| 622,856 |
|
Expenditures for long - lived assets (d) | 65,492 |
| 2,095 |
| 67,587 |
| — |
| 67,587 |
|
| Depreciation and amortization | $ | 38,583 |
| $ | 2,898 |
| $ | 41,481 |
| $ | 143 |
| $ | 41,624 |
|
| | | | | | |
| 2014 | | | | | |
Net sales to external customers (a) | $ | 1,127,026 |
| $ | 63,756 |
| $ | 1,190,782 |
| $ | — |
| $ | 1,190,782 |
|
Operating profit (loss) (b) | 88,744 |
| 8,697 |
| 97,441 |
| (1,954 | ) | 95,487 |
|
Total assets (c) | 441,127 |
| 54,489 |
| 495,616 |
| 48,225 |
| 543,841 |
|
Expenditures for long - lived assets (d) | 119,715 |
| 27,655 |
| 147,370 |
| — |
| 147,370 |
|
| Depreciation and amortization | $ | 30,954 |
| $ | 1,554 |
| $ | 32,508 |
| $ | 88 |
| $ | 32,596 |
|
| |
| (a) | Thor Industries, Inc. (“Thor”), a customer of both segments, accounted for 37 percent, 28 percent and 33 percent of the Company’s consolidated net sales for the years ended December 31, 2016, 2015 and 2014, respectively. Berkshire Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton Homes, Inc.), a customer of both segments, accounted for 26 percent, 26 percent and 28 percent of the Company’s consolidated net sales for the years ended December 31, 2016, 2015 and 2014, respectively. Jayco, Inc., a customer of both segments, accounted for 10 percent of the Company’s consolidated net sales for the year ended December 31, 2015, this customer was subsequently acquired by Thor and is included in the Thor’s 2016 percentage above. No other customer accounted for more than 10 percent of consolidated net sales in the years ended December 31, 2016, 2015 and 2014. International sales, primarily in Europe and Australia, and export sales represented approximately 2 percent, 1 percent and 1 percent of consolidated net sales in 2016, 2015 and 2014, respectively. |
| |
| (b) | Certain general and administrative expenses are allocated between the segments based upon net sales or operating profit, depending upon the nature of the expense. |
| |
| (c) | Segment assets include accounts receivable, inventories, fixed assets, goodwill and other intangible assets. Corporate and other assets include cash and cash equivalents, prepaid expenses and other current assets, deferred taxes, and other assets. |
| |
| (d) | Expenditures for long-lived assets include capital expenditures, as well as fixed assets, goodwill and other intangible assets purchased as part of the acquisition of businesses. The Company purchased $42.0 million, $38.6 million and $105.0 million of long-lived assets, as part of the acquisitions of businesses in the years ended December 31, 2016, 2015 and 2014, respectively. |
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net sales by product were as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| OEM Segment: | | | | | |
| Chassis, chassis parts and slide-out mechanisms | $ | 743,160 |
| | $ | 664,542 |
| | $ | 593,756 |
|
| Windows and doors | 335,717 |
| | 301,171 |
| | 258,915 |
|
| Furniture and mattresses | 245,596 |
| | 161,840 |
| | 132,356 |
|
| Axles and suspension solutions | 115,538 |
| | 108,464 |
| | 88,909 |
|
| Other | 108,080 |
| | 64,043 |
| | 53,090 |
|
| Total OEM Segment net sales | 1,548,091 |
| | 1,300,060 |
| | 1,127,026 |
|
| Total Aftermarket Segment net sales | 130,807 |
| | 103,006 |
| | 63,756 |
|
| Total net sales | $ | 1,678,898 |
| | $ | 1,403,066 |
| | $ | 1,190,782 |
|
The composition of net sales was as follows for the years ended December 31:
|
| | | | | | | | | | | |
| (In thousands) | 2016 | | 2015 | | 2014 |
| Net sales: | | | | | |
| OEM Segment: | | | | | |
| RV OEMs: | | | | | |
| Travel trailers and fifth-wheels | $ | 1,099,882 |
| | $ | 938,787 |
| | $ | 841,497 |
|
| Motorhomes | 116,191 |
| | 86,513 |
| | 70,332 |
|
| Adjacent industries OEMs | 332,018 |
| | 274,760 |
| | 215,197 |
|
| Total OEM Segment net sales | 1,548,091 |
| | 1,300,060 |
| | 1,127,026 |
|
| Aftermarket Segment: | | | | | |
| Total Aftermarket Segment net sales | 130,807 |
| | 103,006 |
| | 63,756 |
|
| Total net sales | $ | 1,678,898 |
| | $ | 1,403,066 |
| | $ | 1,190,782 |
|
15. NEW ACCOUNTING PRONOUNCEMENTS
In November 2015,August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17,2016-15, Balance Sheet Classification of Deferred Taxes.Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current.provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. This ASU is effective for annual and interim periods beginning after December 15, 2016,2017, and canshould be applied prospectively or retrospectively to adjustments with early adoption permitted at the beginning of an interim or annual reporting period. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s results of operations, cash flows or financial position.
In September 2015,March 2016, the FASB issued ASU 2015-16,2016-09, Simplifying theImprovements to Employee Share-Based Payment Accounting for Measurement-Period Adjustments., which amended ASC 718, Compensation - Stock Compensation. This ASU applies to restating prior periods to reflect adjustments made to provisional amounts recognized in a business combination. Undersimplifies several aspects of the new guidance, an acquirer must recognize adjustments to provisional amounts identified duringaccounting for share-based payment transactions, including income tax consequences, the measurement period inclassification of awards as either equity or liabilities, and the reporting period in whichclassification on the adjustment amounts are determined.statement of cash flows. This ASUpronouncement is effective for annual and interimreporting periods beginning after December 15, 2016. The guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statement of income, instead of additional paid-in capital in the consolidated balance sheet. For the years ended December 31, 2016, 2015 and is2014, $8.0 million, $9.0 million and $3.9 million, respectively, of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted as of the respective dates. Additionally, excess tax benefits will be applied prospectivelyclassified as operating activities in the consolidated statement of cash flow instead of in financing activities as required under the current guidance. The Company has not selected a transition method, and except as described above, does not expect the provisions of ASU 2016-09 to adjustmentshave an impact on the Company’s consolidated financial position or results of operations.
LCI INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires, in most instances, a lessee to provisional amounts occurringrecognize on its balance sheet a liability to make lease payments (the lease liability) and also a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years beginning after the effective dateDecember 15, 2018, including interim periods within those periods, using a modified retrospective approach with early adoption permitted at the beginning of an interim or annual reporting period.permitted. The Company is evaluating the effect of adopting this new accounting guidance.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. During the first quarter of 2016, the Company elected to retrospectively adopt ASU 2015-17, thus reclassifying current deferred tax assets to non-current on the accompanying Consolidated Balance Sheet. As a result, the Company reclassified $22,616 from current assets to long-term assets as of December 31, 2015. The adoption of this guidance but does not expect adoption will have a materialhas no impact on the Company’s results of operations and cash flows or financial position.flows.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This ASU applies to inventory measured using the first-in, first-out (“FIFO”) or average cost methods. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. Adoption of this ASU will not have a material impact on the Company’s results of operations, cash flows or financial position.
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than asliability. In August 2015, the FASB issued an asset. AmortizationASU that allows the presentation of debt issuance costs related to line-of-credit arrangements to continue to be an asset on the costs would be reported as interest expense.balance sheet under the simplified guidance, regardless of whether there are any outstanding borrowings on the related arrangements. The amendments in this ASUthese ASUs are to be applied retrospectively and are effective for interim and annual reporting periods beginning after December 15, 2015. AdoptionThe Company adopted these ASUs retrospectively effective January 1, 2016, and has reclassified all debt issuance costs, with the exception of those related to the revolving credit facility, as a reduction from the carrying amount of the related debt liability for both current and prior periods. The adoption of this ASU will not have a materialguidance had no impact on the Company’s results of operations and cash flows or financial position.flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU 2014-09 provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts with customers to provide goods and services. The guidance also provides a five-step analysismodel for the measurement and recognition of transactions to determine whengains and how revenuelosses on the sale of certain non-financial assets, such as property and equipment, including real estate. ASU 2014-09 is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU iseffective for annual reporting periods, andincluding interim reporting periods within those years,periods, beginning after December 15, 2017, with early2017. The new standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption permitted for years beginning after December 15, 2016,or a modified retrospective approach. ASU 2014-09 also requires entities to be applied retrospectivelydisclose both quantitative and qualitative information to each period presented or as a cumulative-effect adjustment asenable users of the datefinancial statements to understand the nature, amount, timing, and uncertainty of adoption. revenue and cash flows arising from contracts with customers.
The Company is evaluating the effect of adopting this new accounting guidance, but does not expectanticipate the adoption of this standard will have a material impact on its reported current net sales; however, given its acquisition strategy, there may be additional revenue streams acquired prior to the adoption date. The Company’s results of operations, cash flowstechnical analysis is on-going with respect to variable consideration, whether certain contracts’ revenues will be recognized over time or at a point in time, and whether costs to obtain a contract will be capitalized. Further, the Company is continuing to assess what incremental disaggregated revenue disclosures will be required in its consolidated financial position.statements. The Company continues to evaluate transition methods, and expect to finalize its determination once all other significant matters are concluded.
DREWLCI INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15.16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Interim unaudited financial information follows:
| | | (In thousands, except per share amounts) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
| Year ended December 31, 2016 | | | | | | | | | | | |
| Net sales | | | $ | 422,798 |
| | $ | 440,831 |
| | $ | 412,370 |
| | $ | 402,899 |
| | $ | 1,678,898 |
|
| Gross profit | | | $ | 108,441 |
| | $ | 116,904 |
| | $ | 105,550 |
| | $ | 98,008 |
| | $ | 428,903 |
|
| Income before income taxes | | | $ | 55,252 |
| | $ | 58,975 |
| | $ | 44,742 |
| | $ | 40,203 |
| | $ | 199,172 |
|
| Net income | | | $ | 35,959 |
| | $ | 37,569 |
| | $ | 29,844 |
| | $ | 26,299 |
| | $ | 129,671 |
|
| | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | |
| Basic | | | $ | 1.46 |
| | $ | 1.52 |
| | $ | 1.21 |
| | $ | 1.06 |
| | $ | 5.26 |
|
| Diluted | | | $ | 1.45 |
| | $ | 1.51 |
| | $ | 1.19 |
| | $ | 1.05 |
| | $ | 5.20 |
|
| | | | | | | | | | | | |
| Stock market price: | | | | | | | | | | | |
| High | | | $ | 64.46 |
| | $ | 85.09 |
| | $ | 102.46 |
| | $ | 112.95 |
| | $ | 112.95 |
|
| Low | | | $ | 52.85 |
| | $ | 60.75 |
| | $ | 84.61 |
| | $ | 84.20 |
| | $ | 52.85 |
|
| Close (at end of quarter) | | | $ | 64.46 |
| | $ | 84.84 |
| | $ | 98.02 |
| | $ | 107.75 |
| | $ | 107.75 |
|
| | | | | | | | | | | | |
| Year ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 361,457 |
| | $ | 362,085 |
| | $ | 345,296 |
| | $ | 334,228 |
| | $ | 1,403,066 |
| | $ | 361,457 |
| | $ | 362,085 |
| | $ | 345,296 |
| | $ | 334,228 |
| | $ | 1,403,066 |
|
| Gross profit | | $ | 76,403 |
| | $ | 82,060 |
| | $ | 74,125 |
| | $ | 73,414 |
| | $ | 306,002 |
| | $ | 76,403 |
| | $ | 82,060 |
| | $ | 74,125 |
| | $ | 73,414 |
| | $ | 306,002 |
|
| Income before income taxes | | $ | 31,649 |
| | $ | 33,019 |
| | $ | 26,576 |
| | $ | 23,125 |
| | $ | 114,369 |
| | $ | 31,649 |
| | $ | 33,019 |
| | $ | 26,576 |
| | $ | 23,125 |
| | $ | 114,369 |
|
| Net income | | $ | 20,073 |
| | $ | 20,869 |
| | $ | 17,263 |
| | $ | 16,140 |
| | $ | 74,345 |
| | $ | 20,073 |
| | $ | 20,869 |
| | $ | 17,263 |
| | $ | 16,140 |
| | $ | 74,345 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.83 |
| | $ | 0.86 |
| | $ | 0.71 |
| | $ | 0.66 |
| | $ | 3.06 |
| | $ | 0.83 |
| | $ | 0.86 |
| | $ | 0.71 |
| | $ | 0.66 |
| | $ | 3.06 |
|
| Diluted | | $ | 0.82 |
| | $ | 0.85 |
| | $ | 0.70 |
| | $ | 0.65 |
| | $ | 3.02 |
| | $ | 0.82 |
| | $ | 0.85 |
| | $ | 0.70 |
| | $ | 0.65 |
| | $ | 3.02 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Stock market price: | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 64.61 |
| | $ | 62.60 |
| | $ | 59.42 |
| | $ | 61.90 |
| | $ | 64.61 |
| | $ | 64.61 |
| | $ | 62.60 |
| | $ | 59.42 |
| | $ | 61.90 |
| | $ | 64.61 |
|
| Low | | $ | 47.63 |
| | $ | 55.26 |
| | $ | 52.42 |
| | $ | 53.55 |
| | $ | 47.63 |
| | $ | 47.63 |
| | $ | 55.26 |
| | $ | 52.42 |
| | $ | 53.55 |
| | $ | 47.63 |
|
| Close (at end of quarter) | | $ | 61.54 |
| | $ | 58.02 |
| | $ | 54.61 |
| | $ | 60.89 |
| | $ | 60.89 |
| | $ | 61.54 |
| | $ | 58.02 |
| | $ | 54.61 |
| | $ | 60.89 |
| | $ | 60.89 |
|
| | | | | | | | | | | | |
| Year ended December 31, 2014 | | | | | | | | | | | |
| Net sales | | $ | 285,377 |
| | $ | 321,783 |
| | $ | 294,271 |
| | $ | 289,351 |
| | $ | 1,190,782 |
| |
| Gross profit | | $ | 63,200 |
| | $ | 72,012 |
| | $ | 62,483 |
| | $ | 57,228 |
| | $ | 254,923 |
| |
| Income before income taxes | | $ | 25,926 |
| | $ | 29,075 |
| | $ | 22,941 |
| | $ | 17,115 |
| | $ | 95,057 |
| |
| Net income | | $ | 16,164 |
| | $ | 18,618 |
| | $ | 15,488 |
| | $ | 11,996 |
| | $ | 62,266 |
| |
| | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | |
| Basic | | $ | 0.68 |
| | $ | 0.78 |
| | $ | 0.65 |
| | $ | 0.50 |
| | $ | 2.60 |
| |
| Diluted | | $ | 0.67 |
| | $ | 0.77 |
| | $ | 0.64 |
| | $ | 0.49 |
| | $ | 2.56 |
| |
| | | | | | | | | | | | |
| Stock market price: | | | | | | | | | | | |
| High | | $ | 54.20 |
| | $ | 54.15 |
| | $ | 50.83 |
| | $ | 51.69 |
| | $ | 54.20 |
| |
| Low | | $ | 45.53 |
| | $ | 45.80 |
| | $ | 41.00 |
| | $ | 41.95 |
| | $ | 41.00 |
| |
| Close (at end of quarter) | | $ | 54.20 |
| | $ | 50.01 |
| | $ | 42.19 |
| | $ | 51.07 |
| | $ | 51.07 |
| |
The sum of per share amounts for the four quarters may not equal the total per share amounts for the year as a result of changes in the weighted average common shares outstanding or rounding.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its disclosure controls and procedures to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.
As of the end of the period covered by this Form 10-K, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
(a) Management’s Annual Report on Internal Control over Financial Reporting.
We are responsible for the preparation and integrity of the Consolidated Financial Statements appearing in the Annual Report on Form 10-K. We are also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the Consolidated Financial Statements, as well as to safeguard assets from unauthorized use or disposition. The Company continually evaluates its system of internal control over financial reporting to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.
Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Guidelines for Business Conduct. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2015.2016.
KPMG LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Report and, as part of their audit, has issued their attestation report on the effectiveness of our internal control over financial reporting, included elsewhere in this Form 10-K.
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| /s/ Jason D. Lippert | /s/ DavidBrian M. SmithHall |
| Chief Executive Officer | Chief Financial Officer |
| | |
(b) Report of the Independent Registered Public Accounting Firm.
The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is included in Item 8. “Financial Statements and Supplementary Data.”
(c) Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2015,2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company has selected a new enterprise resource planning (“ERP”) system, and has begun implementing that system. Although toImplementation of the new ERP software began in late 2013. To date, there21 locations have been no significant changesput on this ERP software. The roll-out plan is continually evaluated in the Company’s internal controls,context of priorities for the business and may change as needs of the business dictate. The Company anticipates internalenhancements to controls will be strengthened incrementally due to both to the installation of the new ERP software and business process changes. The full implementation is expected to take several years.changes resulting therefrom.
Item 9B. OTHER INFORMATION.
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to the Company’s Directors, Executive Officers and Corporate Governance is incorporated by reference from the information contained under the proposal entitled “Election of Directors” and under the caption “Corporate Governance and Related Matters – Board Committees” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 201625, 2017 (the “2016“2017 Proxy Statement”) and from the information contained under “Executive Officers of the Registrant” in Part I, Item 1, “Business,” in this Report.
Information regarding Section 16 reporting compliance is incorporated by reference from the information contained under the caption “Voting Securities – Compliance with Section 16(a) of the Exchange Act” in the Company’s 20162017 Proxy Statement.
The Company has adopted Governance Principles, Guidelines for Business Conduct, a Whistleblower Policy, and a Code of Ethics for Senior Financial Officers (“Code of Ethics”), each of which, as well as the Charter and Key Practices of the Company’s Audit Committee, Risk Committee, Compensation Committee, and Corporate Governance and Nominating Committee, are available on the Company’s website at www.drewindustries.comwww.lci1.com/investors. A copy of any of these documents will be furnished, without charge, upon written request to Secretary, DrewLCI Industries, Incorporated, 3501 County Road 6 East, Elkhart, Indiana 46514.
If the Company makes any substantive amendment to the Code of Ethics or the Guidelines for Business Conduct, or grants a waiver to a Director or Executive Officer from a provision of the Code of Ethics or the Guidelines for Business Conduct, the Company will disclose the nature of such amendment or waiver on its website or in a Current Report on Form 8-K. There have been no waivers to Directors or Executive Officers of any provisions of the Code of Ethics or the Guidelines for Business Conduct.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the information contained under the caption “Executive Compensation” and “Director Compensation” in the Company’s 20162017 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference from the information contained under the caption “Voting Securities – Security Ownership of Certain Beneficial Owners and Management” in the Company’s 20162017 Proxy Statement and the Equity Compensation Plan Information contained in Part I, Item 5 in this Report.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item with respect to transactions with related persons and director independence is incorporated by reference from the information contained under the captions “Transactions with Related Persons” and “Corporate Governance and Related Matters – Board of Directors and Director Independence” in the Company’s 20162017 Proxy Statement.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference from the information contained under the proposal entitled “Appointment of Auditors – Fees for Independent Auditors” in the Company’s 20162017 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents Filed:
(1) Financial Statements.
(2) Exhibits. See Item 15 (b) - “List of Exhibits” incorporated herein by reference.
(b) Exhibits - List of Exhibits.
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Exhibit Number | Description |
| 3.1* | DrewLCI Industries Incorporated Restated Certificate of Incorporation.Incorporation, as amended effective December 30, 2016. |
| 3.2 | Amended and Restated By-laws of DrewLCI Industries Incorporated (incorporated by reference to Exhibit 4.23.2 included in the Registrant’s Registration Statement on Form S-88-K filed on December 31, 2014 (Registration No. 333-201336))19, 2016). |
| 10.221 | Form of Indemnification Agreement between Registrant and its officers and independent directors (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed on May 26, 2015). |
10.231†* | Executive Non-Qualified Deferred Compensation Plan, as amended. |
10.233 | Second Amended and Restated Credit Agreement dated as of November 25, 2008 by and among Kinro, Inc., Lippert Components, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent, and Wells Fargo Bank, N.A. individually and as Documentation Agentamended (incorporated by reference to Exhibit 10.110.231 included in the Registrant’sRegistrant's Form 8-K filed on10-K for the year ended December 2, 2008). |
10.257 | First Amendment dated February 24, 2011 to the Second Amended and Restated Credit Agreement dated as of November 25, 2008 among Kinro, Inc., Lippert Components, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent, and Wells Fargo Bank, N.A. individually and as Documentation Agent (incorporated by reference to Exhibit 10.1 included in the Registrant’s Form 8-K filed on February 25, 2011)31, 2015). |
| 10.259† | DrewLCI Industries Incorporated Equity Award and Incentive Plan, As Amended and Restated (incorporated by reference to Appendix A included in the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 11, 2014). |
10.263† | Executive Compensation and Non-Competition Agreement between Registrant and Joseph S. Giordano III, dated February 10, 2012 (incorporated by reference to Exhibit 10(iii)(A) included in the Registrant’s Form 8-K filed on February 13, 2012). |
| 10.268† | Change in Control Agreement between Registrant and Jason D. Lippert, dated April 9, 2012 (incorporated by reference to Exhibit 10.02 included in the Registrant’s Form 8-K filed on April 10, 2012). |
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| 10.269† | Change in Control Agreement between Registrant and Scott T. Mereness, dated April 9, 2012 (incorporated by reference to Exhibit 10.03 included in the Registrant’s Form 8-K filed on April 10, 2012). |
10.270† | Amended and Restated Executive Employment and Non-Competition Agreement among Drew Industries Incorporated, Lippert Components Manufacturing, Inc., Kinro Manufacturing, Inc. and Jason D. Lippert, dated February 26, 2013 (incorporated by reference to Exhibit 10(iii)(A) included in the Registrant’s Form 8-K filed on February 26, 2013). |
10.271† | Amended and Restated Executive Employment and Non-Competition Agreement among Drew Industries Incorporated, Lippert Components Manufacturing, Inc., Kinro Manufacturing, Inc. and Scott T Mereness, dated March 4, 2013 (incorporated by reference to Exhibit 10(iii)(A) included in the Registrant’s Form 8-K filed on March 5, 2013). |
10.272† | Amendment to Executive Compensation and Non-Competition Agreement between Registrant and Joseph S. Giordano III, dated April 10, 2013 (incorporated by reference to Exhibit 10(iii)(A) included in the Registrant’s Form 8-K filed on April 11, 2013). |
| 10.273† | Amendment to Change in Control Agreement between Registrant and Jason D. Lippert, dated May 10, 2013 (incorporated by reference to Exhibit 10(ii)(A)-2 included in the Registrant’s Form 8-K filed on May 10, 2013). |
| 10.274† | Amendment to Change in Control Agreement between Registrant and Scott T. Mereness, dated May 10, 2013 (incorporated by reference to Exhibit 10(ii)(A)-3 included in the Registrant’s Form 8-K filed on May 10, 2013). |
10.276† | Severance Agreement between Registrant and Robert A. Kuhns, dated February 11, 2014 (incorporated by reference to Exhibit 10(iii)(A) included in the Registrant’s Form 8-K filed on February 14, 2014). |
10.277† | Description of 2014 executive compensation arrangement between Registrant and Robert A. Kuhns (incorporated by reference to Item 5.02 included in the Registrant’s Form 8-K filed on February 14, 2014). |
| 10.278† | Change in Control Agreement between Registrant and Robert A. Kuhns, dated April 4, 2013, as amended May 20, 2013. |
10.279 | Second Amendment dated as of February 24, 2014 to Second Amended and Restated Credit Agreement dated as of November 25, 2008 among Kinro, Inc., Lippert Components, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent, and Wells Fargo Bank N.A., individually and as Documentation Agent2013 (incorporated by reference to Exhibit 10.110.278 included in the Registrant’s Form 8-K filed on February 26, 2014). |
10.280 | Restated Revolving Credit Note dated as of February 24, 2014 by Lippert Components, Inc., payable to10-K for the order of JPMorgan Chase Bank, N.A. in the principal amount of Forty-Five Million ($45,000,000) Dollars (incorporated by reference to Exhibit 10.2 included in the Registrant’s Form 8-K filed on February 26, 2014). |
10.281 | Restated Revolving Credit Note dated as of February 24, 2014 by Lippert Components, Inc., payable to the order of Wells Fargo Bank, N.A. in the principal amount of Thirty Million ($30,000,000) Dollars (incorporated by reference to Exhibit 10.3 included in the Registrant’s Form 8-K filed on February 26, 2014). |
10.282 | Third Amended and Restated Pledge and Security Agreement dated as of February 24, 2014, made by Drew Industries Incorporated, Lippert Components, Inc. and Lippert Components Manufacturing, Inc., in favor of JPMorgan Chase Bank, N.A. as Collateral Agent (incorporated by reference to Exhibit 10.4 included in the Registrant’s Form 8-K filed on February 26, 2014)year ended December 31, 2013). |
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10.283 | Third Amended and Restated Company Guarantee Agreement dated as of February 24, 2014, made by Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.5 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.284 | Third Amended and Restated Subsidiary Guarantee Agreement dated as of February 24, 2014, made by each direct and indirect subsidiary of Drew Industries Incorporated and Lippert Components, Inc., with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.6 included in the Registrant’s Form 8-K filed on February 26, 2014). |
10.285 | Third Amended and Restated Subordination Agreement dated as of February 24, 2014, made by Drew Industries Incorporated and each direct and indirect subsidiary of Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.7 included in the Registrant’s Form 8-K filed February 26, 2014). |
| 10.286 | Third Amended and Restated Note Purchase and Private Shelf Agreement dated as of February 24, 2014, by and among Prudential Investment Management, Inc. and Affiliates, and Lippert Components, Inc., guaranteed by Drew Industries Incorporated (incorporated by reference to Exhibit 10.8 included in the Registrant’s Form 8-K filed February 26, 2014). |
| 10.287 | Form of Shelf Note of Lippert Components, Inc. pursuant to the Third Amended and Restated Note Purchase and Private Shelf Agreement (incorporated by reference to Exhibit 10.9 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.288 | Amended and Restated Parent Guarantee Agreement dated as of February 24, 2014, made by Drew Industries Incorporated in favor of Prudential Investment Management, Inc. and the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.10 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.289 | Amended and Restated Subsidiary Guarantee Agreement dated as of February 24, 2014, made by each direct and indirect subsidiary (other than Lippert Components, Inc.) of Drew Industries Incorporated, in favor of Prudential Investment Management, Inc. and each of the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.11 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.290 | Amended and Restated Pledge and Security Agreement dated as of February 24, 2014, made by Drew Industries Incorporated, Lippert Components, Inc., Lippert Components Manufacturing, Inc. and the other Subsidiary Guarantors, in favor of JPMorgan Chase Bank, N.A., as Trustee for the benefit of the Noteholders (incorporated by reference to Exhibit 10.12 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.291 | Amended and Restated Subordination Agreement dated as of February 24, 2014, made by Lippert Components, Inc., Drew Industries Incorporated and each direct and indirect subsidiary of Drew Industries Incorporated, with and in favor of Prudential Investment Management, Inc. and each of the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.13 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.292 | Amended and Restated Collateralized Trust Agreement dated as of February 24, 2014, by and among Lippert Components, Inc. and Prudential Investment Management, Inc. and each of the Noteholders thereto from time to time, and JPMorgan Chase Bank, N.A. as Trustee for the Noteholders (incorporated by reference to Exhibit 10.14 included in the Registrant’s Form 8-K filed February 26, 2014). |
10.293 | Second Amended and Restated Intercreditor Agreement dated as of February 24, 2014 by and among Prudential Investment Management, Inc. and Affiliates, JPMorgan Chase Bank, N.A. (as Lender and Administrative Agent), Wells Fargo Bank, N.A. (as Lender), and JPMorgan Chase Bank, N.A. (as Collateral Agent and Trustee) (incorporated by reference to Exhibit 10.15 included in the Registrant’s Form 8-K filed February 26, 2014). |
| 10.294† | Form of Executive Employment Agreement (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed March 4, 2015). |
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10.295† | 2015 Annual Incentive Plan (incorporated by reference to Exhibit 10.2 included in the Registrant's Form 8-K filed March 4, 2015). |
| 10.296† | Form of Performance Stock Award (incorporated by reference to Exhibit 10.3 included in the Registrant's Form 8-K filed March 4, 2015). |
| 10.297† | Form of Deferred Stock Award (incorporated by reference to Exhibit 10.4 included in the Registrant's Form 8-K filed March 4, 2015). |
10.298 | Incremental Joinder Agreement dated March 3, 2015 among Lippert Components, Inc., Drew Industries Incorporated, each subsidiary of Drew Industries Incorporated listed therein, the Lenders listed therein, and JPMorgan Chase Bank, individually and as Administrative Agent (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed March 6, 2015). |
| 10.299 | Form of 3.35% Series A Senior Notes due March 20, 2020 of Lippert Components, Inc. pursuant to the Third Amended and Restated Note Purchase and Private Shelf Agreement (incorporated by reference to Exhibit 10.2 included in the Registrant's Form 8-K filed March 23, 2015). |
| 10.300† | Transition, Separation and General Release Agreement, dated August 14, 2015, between Drew Industries Incorporated and Joseph S. Giordano III (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed August 20, 2015). |
| 10.301† | Transition, Separation and General Release Agreement, dated January 1, 2016, between Drew Industries Incorporated and Todd Driver (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed January 7, 2016). |
| 10.302† | 2016 Annual Incentive Plan (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed February 12, 2016). |
| 10.303 | Third Amended and Restated Credit Agreement dated as of April 27, 2016 among Drew Industries Incorporated, Lippert Components, Inc., Lippert Components Canada, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent, Wells Fargo Bank N.A., individually and as Documentation Agent, Bank of America, N.A., and 1st Source Bank (together with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Bank of America, N.A., the “Lenders”) (incorporated by reference to Exhibit 10.1 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.304 | Form of Revolving Credit Note dated as of April 27, 2016 by Lippert Components, Inc., and Lippert Components Canada, Inc., payable to the order of the Lenders pursuant to that certain Third Amended and Restated Credit Agreement (incorporated by reference to 10.2 included in the Registrant's Form 8-K filed May 3, 2016).
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| 10.305 | Fourth Amended and Restated Pledge and Security Agreement dated as of April 27, 2016, made by Drew Industries Incorporated, Lippert Components, Inc. and certain subsidiaries thereof, in favor of JPMorgan Chase Bank, N.A. as Collateral Agent (incorporated by reference to Exhibit 10.3 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.306 | Fourth Amended and Restated Company Guarantee Agreement dated as of April 27, 2016, made by Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.4 included in the Registrant's Form 8-K filed May 3, 2016).
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| 10.307 | Fourth Amended and Restated Subsidiary Guarantee Agreement dated as of April 27, 2016, made by certain subsidiaries of Drew Industries Incorporated and Lippert Components, Inc., with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.5 included in the Registrant's Form 8-K filed May 3, 2016). |
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| 10.308 | Fourth Amended and Restated Subordination Agreement dated as of April 27, 2016, made by Drew Industries Incorporated and certain subsidiaries of Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.6 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.309 | Fourth Amended and Restated Note Purchase and Private Shelf Agreement dated as of April 27, 2016, by and among PGIM, Inc. and Affiliates, and Lippert Components, Inc., guaranteed by Drew Industries Incorporated (incorporated by reference to Exhibit 10.7 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.310 | Form of Shelf Note of Lippert Components, Inc. pursuant to the Fourth Amended and Restated Note Purchase and Private Shelf Agreement (incorporated by reference to Exhibit 10.8 included in the Registrant's Form 8-K filed May 3, 2016).
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| 10.311 | Second Amended and Restated Parent Guarantee Agreement dated as of April 27, 2016, made by Drew Industries Incorporated in favor of PGIM, Inc. and the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.9 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.312 | Second Amended and Restated Subsidiary Guarantee Agreement dated as of April 27, 2016, made by certain subsidiaries (other than Lippert Components, Inc.) of Drew Industries Incorporated, in favor of PGIM, Inc. and the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.10 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.313 | Second Amended and Restated Pledge and Security Agreement dated as of April 27, 2016, made by Drew Industries Incorporated, Lippert Components, Inc., Lippert Components Manufacturing, Inc. and the other Subsidiary Guarantors, in favor of JPMorgan Chase Bank, N.A., as Collateral Agent for the benefit of the Noteholders (incorporated by reference to Exhibit 10.11 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.314 | Second Amended and Restated Subordination Agreement dated as of April 27, 2016, made by Lippert Components, Inc., Drew Industries Incorporated and certain subsidiaries of Drew Industries Incorporated, with and in favor of PGIM, Inc. and the Noteholders thereto from time to time (incorporated by reference to Exhibit 10.12 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.315 | Second Amended and Restated Collateral Agency Agreement dated as of April 27, 2016, by and among Lippert Components, Inc. and PGIM, Inc. and the Noteholders thereto from time to time, and JPMorgan Chase Bank, N.A. as collateral agent for the Noteholders (incorporated by reference to Exhibit 10.13 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.316 | Third Amended and Restated Intercreditor Agreement dated as of April 27, 2016 by and among PGIM, Inc. and Affiliates, JPMorgan Chase Bank, N.A. (as Administrative Agent, as Credit Agreement Collateral Agent and Notes Collateral Agent) (incorporated by reference to Exhibit 10.14 included in the Registrant's Form 8-K filed May 3, 2016). |
| 10.317† | Description of the transition, separation and severance compensation arrangement between Registrant and David M. Smith (incorporated by reference to Item 5.02 included in the Registrant's Form 8-K filed September 26, 2016). |
| 10.318†* | Grantor Trust Agreement, effective January 15, 2017, between Registrant and Wells Fargo Bank, National Association. |
| 14.1* | Code of Ethics for Senior Financial Officers. |
| 14.2* | Guidelines for Business Conduct. |
| 21* | Subsidiaries of the Registrant. |
| 23* | Consent of Independent Registered Public Accounting Firm. |
| 24* | Powers of Attorney (included on the signature page of this Report). |
| 31.1* | Certification of Chief Executive Officer required by Rule 13a-14(a). |
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| 31.2* | Certification of Chief Financial Officer required by Rule 13a-14(a). |
| 32.1* | Certification of Chief Executive Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| 32.2* | Certification of Chief Financial Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| 101 | Interactive Data Files. |
*Filed herewith
†Denotes a compensation plan or arrangement
Item 16. FORM 10-K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Date: | February 29, 201628, 2017 | DREWLCI INDUSTRIES INCORPORATED | |
| | | | | |
| | By: | /s/ Jason D. Lippert | |
| | | | Jason D. Lippert | |
| | | Chief Executive Officer | |
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated.
Each person whose signature appears below hereby authorizes Jason D. Lippert and DavidBrian M. Smith,Hall, or either of them, to file one or more amendments to the Annual Report on Form 10-K which amendments may make such changes in such Report as either of them deems appropriate, and each such person hereby appoints Jason D. Lippert and DavidBrian M. Smith,Hall, or either of them, as attorneys-in-fact to execute in the name and on behalf of each such person individually, and in each capacity stated below, such amendments to such Report.
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| Date | Signature | Title |
| | | |
February 29, 201628, 2017 | By: /s/ Jason D. Lippert (Jason D. Lippert) | Chief Executive Officer and Director (principal executive officer) |
| | | |
February 29, 2016 | By: /s/ David M. Smith
(David M. Smith)
| Chief Financial Officer
(principal financial officer)
|
| | |
February 29, 201628, 2017 | By: /s/ Brian M. Hall (Brian M. Hall) | Corporate ControllerChief Financial Officer
(principal financial and accounting officer) |
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February 29, 201628, 2017 | By: /s/ James F. Gero (James F. Gero) | Chairman of the Board of Directors |
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February 29, 201628, 2017 | By: /s/ Leigh J. Abrams (Leigh J. Abrams) | Director |
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February 29, 201628, 2017 | By: /s/ Frank J. Crespo (Frank J. Crespo) | Director |
| | |
| February 28, 2017 | By: /s/ Brendan J. Deely (Brendan J. Deely) | Director |
| | |
| February 28, 2017 | By: /s/ Tracy D. Graham (Tracy D. Graham) | Director |
| | |
| February 28, 2017 | By: /s/ Frederick B. Hegi, Jr. (Frederick B. Hegi, Jr.) | Director |
| | | |
February 29, 2016 | By: /s/ David A. Reed
(David A. Reed)
| Director |
| | |
February 29, 201628, 2017 | By: /s/ John B. Lowe, Jr. (John B. Lowe, Jr.) | Director |
| | | |
February 29, 201628, 2017 | By: /s/ Brendan J. DeelyKieran M. O’Sullivan (Brendan J. Deely)
(Kieran M. O’Sullivan)
| Director |
| | | |
February 29, 201628, 2017 | By: /s/ Frank J. CrespoDavid A. Reed (Frank J. Crespo) | Director |
| | |
February 29, 2016 | By: /s/ Kieran M. O’Sullivan
(Kieran M. O’Sullivan)(David A. Reed)
| Director |