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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from_________________ to ________________
Commission File Number: 0-13646
DREW INDUSTRIES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 MAMARONECK AVENUE, WHITE PLAINS, N.Y. 10601
(Address of principal executive offices)
(Zip Code)
(914) 428-9098
Registrant's Telephone Number including Area Code
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check marks 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 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 _XX_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 9,656,429 shares of common
stock as of July 27, 2001.
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DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
(UNAUDITED)
-----------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-10
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-17
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 18
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 19
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- ------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 130,688 $ 153,812 $ 71,794 $ 79,152
Cost of sales 102,099 121,497 55,070 62,925
--------- --------- -------- --------
GROSS PROFIT 28,589 32,315 16,724 16,227
Selling, general and administrative expenses 19,505 21,724 10,415 11,137
--------- --------- -------- --------
OPERATING PROFIT 9,084 10,591 6,309 5,090
Interest expense, net 2,259 1,879 1,066 1,010
--------- --------- -------- --------
INCOME BEFORE INCOME TAXES 6,825 8,712 5,243 4,080
Provision for income taxes 2,988 3,568 2,273 1,696
--------- --------- -------- --------
NET INCOME $ 3,837 $ 5,144 $ 2,970 $ 2,384
========= ========= ======== ========
NET INCOME PER COMMON SHARE:
Basic $ .40 $ .47 $ .31 $ .22
========= ========= ======== ========
Diluted $ .40 $ .47 $ .31 $ .22
========= ========= ======== ========
Weighted average common shares outstanding:
Basic 9,656 10,946 9,656 10,743
========= ========= ======== ========
Diluted 9,657 10,949 9,657 10,745
========= ========= ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
---------------------- December 31,
2001 2000 2000
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,139 $ 2,752 $ 550
Accounts receivable, trade, less allowances 19,924 20,830 13,451
Inventories (Note 4) 29,834 38,654 33,703
Prepaid expenses and other current assets 4,395 4,395 3,476
--------- --------- --------
TOTAL CURRENT ASSETS 57,292 66,631 51,180
FIXED ASSETS, net 67,923 62,571 66,301
GOODWILL, net (Note 3) 39,620 45,035 37,240
OTHER ASSETS 3,717 4,406 4,577
--------- --------- --------
TOTAL ASSETS $ 168,552 $ 178,643 $159,298
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, including current maturities of
long-term indebtedness $ 9,310 $ 9,344 $ 8,867
Accounts payable, trade 12,606 14,393 5,435
Accrued expenses and other current liabilities 16,448 16,888 14,511
--------- --------- --------
TOTAL CURRENT LIABILITIES 38,364 40,625 28,813
LONG-TERM INDEBTEDNESS (Note 5) 53,942 60,147 58,076
OTHER LONG-TERM LIABILITIES 245 2,110 245
--------- --------- --------
TOTAL LIABILITIES 92,551 102,882 87,134
--------- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,805,754 shares at June 2001,
June 2000 and December 2000 118 118 118
Paid-in capital 24,967 24,967 24,967
Retained earnings 70,383 70,143 66,546
--------- --------- --------
95,468 95,228 91,631
Treasury stock, at cost - 2,149,325 shares at June 2001,
June 2000 and December 2000 (19,467) (19,467) (19,467)
--------- --------- --------
TOTAL STOCKHOLDERS' EQUITY 76,001 75,761 72,164
--------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 168,552 $ 178,643 $159,298
========= ========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------
2001 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,837 $ 5,144
Adjustments to reconcile net income to
cash flows provided by operating
activities:
Depreciation and amortization 4,261 4,265
Loss on disposal of fixed assets 49 326
Changes in assets and liabilities:
Accounts receivable, net (5,120) (9,527)
Inventories 4,901 (5,272)
Prepaid expenses and other assets (535) (247)
Accounts payable, accrued expenses
and other current liabilities 7,873 7,936
------- -------
NET CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES 15,266 2,625
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,038) (14,953)
Acquisition of company's net assets and business (9,378)
Proceeds from sales of fixed assets 730 298
------- -------
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES (12,686) (14,655)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and term loan 42,000 52,470
Proceeds from loans secured by real estate
and equipment 7,190
Proceeds from sale and leaseback of equipment 3,700
Repayments under line of credit and
other borrowings (52,635) (29,683)
Acquisition of treasury stock (13,472)
Other (246) 357
------- -------
NET CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES 9 9,672
------- -------
Net increase (decrease) in cash 2,589 (2,358)
Cash and cash equivalents at beginning of period 550 5,110
------- -------
Cash and cash equivalents at end of period $ 3,139 $ 2,752
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest on debt $ 2,375 $ 1,885
Income taxes, net of refunds $ 1,910 $ 1,580
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
5
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCE - DECEMBER 31, 2000 $ 118 $ (19,467) $ 24,967 $ 66,546 $ 72,164
Net income for six months ended
June 30, 2001 3,837 3,837
------ --------- -------- -------- --------
BALANCE - JUNE 30, 2001 $ 118 $ (19,467) $ 24,967 $ 70,383 $ 76,001
====== ========= ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
6
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Consolidated Financial Statements presented herein have been prepared
by the Company in accordance with the accounting policies described in its
December 31, 2000 Annual Report on Form 10-K and should be read in conjunction
with the Notes to Consolidated Financial Statements which appear in that report.
In the opinion of management, the information furnished in this Form 10-Q
reflects all adjustments necessary for a fair statement of the results of
operations as of and for the six and three month periods ended June 30, 2001 and
2000. All such adjustments are of a normal recurring nature. The Consolidated
Financial Statements have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include some information and notes necessary to
conform with annual reporting requirements.
2. SEGMENT REPORTING
The Company has two reportable operating segments, the manufactured housing
products segment (the "MH segment") and the recreational vehicle products
segment (the "RV segment"). The MH segment manufactures a variety of products
used in the construction of manufactured homes, including windows and screens,
chassis and chassis parts, thermo-formed bath and shower units, axles, and
galvanized roofing. The MH segment also distributes new tires and refurbishes
used axles and tires which it supplies to producers of manufactured homes. The
RV segment manufactures a variety of products used in the production of
recreational vehicles, including windows, doors and chassis. The MH segment and
the RV segment primarily sell their products to the producers of manufactured
homes and recreational vehicles, respectively. Each segment also supplies
related products to other industries, but sales of these products represent less
than 5 percent of the segment's net sales. The Company has only an insignificant
amount of intersegment sales.
Decisions concerning the allocation of the Company's resources are made by
the presidents of the Company's operating subsidiaries and the president of
Drew. This group evaluates the performance of each segment based upon segment
profit or loss, defined as income before interest, amortization of intangibles
and income taxes. The accounting policies of the MH and RV segments are the same
as those described in Note 1 of Notes to Consolidated Financial Statements, of
the Company's December 31, 2000 Annual Report on Form 10-K.
7
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information relating to segments follows (IN THOUSANDS):
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
Net sales:
MH segment $ 76,687 $ 103,083 $ 43,002 $ 52,486
RV segment 54,001 50,729 28,792 26,666
--------- --------- --------- ---------
Total $ 130,688 $ 153,812 $ 71,794 $ 79,152
========= ========= ========= =========
Operating profit:
MH segment $ 7,004 $ 8,426 $ 4,774 $ 3,869
RV segment 4,455 4,684 2,715 2,497
--------- --------- --------- ---------
Total segments operating profit 11,459 13,110 7,489 6,366
Amortization of intangibles (1,251) (1,347) (637) (673)
Corporate and other (1,124) (1,172) (543) (603)
--------- --------- --------- ---------
Operating profit 9,084 10,591 6,309 5,090
Interest expense, net 2,259 1,879 1,066 1,010
========= ========= ========= =========
Income before income taxes $ 6,825 $ 8,712 $ 5,243 $ 4,080
========= ========= ========= =========
3. ACQUISITION
On June 1, 2001, the Company's subsidiary, Kinro, acquired the assets and
business of the Better Bath division of Kevco, Inc. Better Bath manufactures and
sells thermo-formed bath and shower units for the manufactured housing industry
and had sales of approximately $27.7 million in 2000.
The acquisition has been accounted for as a purchase. The aggregate
purchase price of approximately $9.4 million has been allocated to the
underlying assets based upon their respective estimated fair values. The excess
of purchase price over the fair value of net assets acquired ("goodwill") was
approximately $3.2 million, which is being amortized over 20 years. The results
of the acquired business have been included in the Company's consolidated
statement of income beginning June 1, 2001.
4. INVENTORIES
Inventories are valued 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.
8
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories consist of the following (IN THOUSANDS):
June 30,
------------------ December 31,
2001 2000 2000
------- ------- -------
Finished goods $ 7,207 $10,502 $ 8,637
Work in process 1,401 2,296 1,938
Raw Material 21,226 25,856 23,128
------- ------- --------
Total $29,834 $38,654 $33,703
======= ======= ========
5. LONG-TERM INDEBTEDNESS
Long-term indebtedness consists of the following (in thousands):
June 30,
--------------------- December 31,
2001 2000 2000
---- ---- --------
Senior Notes payable at the rate of $8,000
per annum commencing January 28, 2001
with interest payable semiannually at the
rate of 6.95% per annum $ 32,000 $ 40,000 $ 40,000
Notes payable pursuant to a credit agreement
expiring August 17, 2002 consisting of a
revolving loan, not to exceed $30,000;
interest at prime rate, or LIBOR plus 1 percent 15,500 23,625 17,700
Industrial Revenue Bonds, fixed rate 5.68% to
6.28%, due 2008 through 2015; secured by
certain real estate and equipment 7,137 4,815 7,419
Real estate mortgage payable at the rate of $70,000
per month with a balloon payment of $3,371,000
in May 2006, interest at 9.05% per annum 5,472
Other loans secured by certain real estate and
equipment, due 2006 to 2011, fixed rate 8.72%
to 9.03% 3,143 1,051 1,534
Other 290
-------- -------- --------
63,252 69,491 66,943
Less current portion 9,310 9,344 8,867
-------- -------- --------
Total long-term indebtedness $ 53,942 $ 60,147 $ 58,076
======== ======== ========
Pursuant to both the Senior Notes and the credit facility, the Company is
required to maintain minimum net worth and interest and fixed charge coverages
and meet certain other financial requirements. Borrowings under both facilities
are secured only by capital stock of the Company's subsidiaries.
9
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company pays a commitment fee, accrued at the rate of _ of 1 percent
per annum, on the daily unused amount of the revolving line of credit.
During 2001, the Company refinanced a portion of its line of credit with
the proceeds of a $5.5 million loan secured by certain real estate, as well as a
$1.7 million equipment loan. In addition, the Company entered into a sale and
leaseback transaction for equipment for $3.7 million. The gain of $.5 million on
such transaction has been deferred and is being amortized over 36 months, the
term of the lease.
6. WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Net income per diluted common share reflects the dilution of the weighted
average common shares by the assumed issuance of common stock pertaining to
stock options and warrants. The numerator, which is equal to net income, is
constant for both the basic and diluted earnings per share calculations.
Weighted average common shares outstanding - diluted is calculated as follows
(IN THOUSANDS):
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 9,656 10,946 9,656 10,743
Assumed issuance of common stock
pertaining to stock options 1 3 1 2
------ ------- ------ -------
Weighted average common shares
outstanding - diluted 9,657 10,949 9,657 10,745
====== ======= ====== =======
10
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has two reportable operating segments, the manufactured housing
products segment (the "MH segment") and the recreational vehicle products
segment (the "RV segment"). The MH segment, which accounted for 59 percent of
consolidated net sales for the six months ended June 30, 2001 and 65 percent of
the annual consolidated net sales for 2000, manufactures a variety of products
used in the construction of manufactured homes, including windows and screens,
chassis and chassis parts, thermo-formed bath and shower units, axles, and
galvanized roofing. The MH segment also distributes new tires and refurbishes
used axles and tires which it supplies to producers of manufactured homes. The
RV segment, which accounted for 41 percent of consolidated net sales for the six
months ended June 30, 2001 and 35 percent of the annual consolidated net sales
for 2000, manufactures a variety of products used in the production of
recreational vehicles, including windows, doors and chassis. The MH segment and
the RV segment primarily sell their products to the producers of manufactured
homes and recreational vehicles, respectively. Each segment also supplies
related products to other industries, but sales of these products represent less
than 5 percent of the segment's net sales.
On June 1, 2001, the Company's subsidiary, Kinro, acquired the assets and
business of the Better Bath division of Kevco, Inc. Better Bath manufactures and
sells thermo-formed bath and shower units for the manufactured housing industry
and had sales of approximately $27.7 million in 2000.
The acquisition has been accounted for as a purchase. The aggregate
purchase price of approximately $9.4 million has been allocated to the
underlying assets based upon their respective estimated fair values. The excess
of purchase price over the fair value of net assets acquired ("goodwill") was
approximately $3.2 million, which is being amortized over 20 years. The results
of the acquired business have been included in the Company's consolidated
statement of income beginning June 1, 2001.
The Company's operations are performed through its four primary operating
subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("LCI") have
operations in both the MH and RV segments, while Lippert Tire and Axle, Inc.
("LTA") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH
segment. At June 30, 2001 the Company's subsidiaries operated 42 plants in 18
states and Canada.
11
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Net sales and operating profit are as follows (IN THOUSANDS):
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- ---------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
Net sales:
MH segment $ 76,687 $ 103,083 $ 43,002 $ 52,486
RV segment 54,001 50,729 28,792 26,666
--------- --------- -------- --------
Total $ 130,688 $ 153,812 $ 71,794 $ 79,152
========= ========= ======== ========
Operating profit:
MH segment $ 7,004 $ 8,426 $ 4,774 $ 3,869
RV segment 4,455 4,684 2,715 2,497
--------- --------- -------- --------
Total segments operating profit 11,459 13,110 7,489 6,366
Amortization of intangibles (1,251) (1,347) (637) (673)
Corporate and other (1,124) (1,172) (543) (603)
--------- --------- -------- --------
Operating profit $ 9,084 $ 10,591 $ 6,309 $ 5,090
========= ========= ======== ========
MH SEGMENT
Net sales of the MH segment decreased 26 percent in the six months ended
June 30, 2001 and 18 percent in the second quarter, from the same periods last
year. The industry reported a 35 percent decrease in the industry-wide
production of manufactured homes for the six months ended June 2001, which
moderated to 29% in the second quarter. Excluding sales of the Better Bath
operation, which has been included in the Company's consolidated statement of
income since June 1, 2001, net sales decreased 27% for the six months and 21%
for the quarter. Sales of refurbished axles and tires by the MH segment declined
more than sales of other MH products due to continuing competitive pressures,
and the closure of two of such facilities during the first quarter.
Operating profit of the MH segment decreased 17 percent in the first half
of 2001, but increased 23 percent in the second quarter from the same periods in
2000 despite the reduction in sales. Labor and overhead costs, which increased
in the first quarter, moderated in the second quarter. Material costs continued
to be stable, except for steel, which came down approximately 5 percent since
last year's second quarter. For the quarter and six months, efficiencies
improved, resulting in improved margins in contrast to last year, which incurred
startup and plant consolidation costs. Lower production costs in the first six
months of 2001 offset last year's cost increases that could not be passed on to
customers. Selling, general and administrative expenses were down in dollar
terms, however, they increased as a percentage of sales because of lower sales
and fixed costs. There have been no significant selling price increases in the
years 2000 and 2001.
12
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
While there continues to be a reduction in industry-wide inventories of
manufactured homes, and while mortgage interest rates for manufactured homes
have reportedly declined, a significant increase in industry-wide production of
manufactured homes is not anticipated until (i) inventory levels are further
reduced, (ii) repossessions return to normal levels, (iii) credit availability
improves, and (iv) manufactured housing mortgage interest rates decline further.
Several of these factors are currently showing improvement.
RV SEGMENT
Net sales of the RV segment increased 6 percent in the first half of 2001
and 8 percent in the second quarter as a result of the continuing expansion of
the Company's RV chassis product line and the RV window line. Such increase
compares favorably to the 20 percent decrease in shipments reported by the RV
industry for the first six months of 2001. Historically, sales of RV's have been
closely tied to consumer confidence levels, which have remained relatively high
despite uncertain economic conditions. New RV models are typically introduced by
the industry each July, when prior year models are closed out and new models are
stocked. Orders for new models during the summer are partly dependent on
retailers' level of inventory of old models. Some analysts believe that
retailers have been reducing inventory in order to lower their interest costs.
Lower inventories of old models at retailers may aid producers' sales of new
models. In addition, recent interest rate cuts by the Federal Reserve Board and
the stabilization of gasoline prices should further help the RV industry.
Operating profit decreased 5 percent for the six month period, but
increased 9 percent in the second quarter. Improved operating efficiencies in
the five plants opened since early 2000 resulted in higher margins in the second
quarter, however, this was offset by increases in delivery and plant
administrative costs.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles for the six months was $96,000 less than the
prior year's period, as a result of the $6.9 million writedown of goodwill in
the fourth quarter of 2000, partially offset by additions resulting from the
acquisition described in Note 3 of Notes to Consolidated Financial Statements.
INTEREST EXPENSE, NET
Interest expense, net increased $380,000 for the six month period and
$56,000 for the quarter, as a result of the increase in average debt balances
resulted from the funds expended for five new factories and $13.5 million for
treasury stock in 2000. This increase was partially offset by savings resulting
from interest rate reductions and operating cash flow.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
13
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which delays the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities," which amends
some of the provisions of SFAS No. 133. The Company has adopted the provisions
of SFAS No. 133 and SFAS No. 138 effective January 1, 2001. The adoption of
these statements does not have a material impact on the earnings or financial
position of the Company.
In July 2001, the FASB issued Statement No.141, ("Business Combinations"),
and Statement No.142, ("Goodwill and Other Intangible Assets"). Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No.121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of").
The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141. Upon adoption of
Statement 142, the Company will be required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and
14
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with Statement 141, to its carrying amount, both of which would be measured as
of the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of change in
accounting principle in the Company's statement of earnings.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $38.8 million and unamortized identifiable intangible
assets in the amount of $1.3 million, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $1,797,000 and $775,000 for the year ended December 31, 2000 and the six
months ended June 30, 2001, respectively. Because of the extensive effort needed
to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following (IN THOUSANDS):
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Net cash flows provided by operating activities $ 15,266 $ 2,625
Net cash flows (used for) investment activities $(12,686) $(14,655)
Net cash flows provided by financing activities $ 9 $ 9,672
Net cash provided by operations includes a reduction in inventory of $4.9
million in 2001. Inventories increased $5.3 million in the first six months of
2000 partly because of the slowdown in sales as well as the anticipated higher
inventory requirement of the expanding RV segment. Since that time, the
Company's efforts to reduce inventories have been successful. Accounts
receivable increased seasonally at June 30, 2001, but the change from December
2000 is less than normal since the balance at December 2000 was higher than
typical as a result of slower collections at that time.
Cash flows used for investing activities in 2001 consisted primarily of the
acquisition of the assets and business of Better Bath as described in Note 3 of
Notes to Consolidated Financial Statements. Capital expenditures, primarily to
accommodate the expansion of the RV chassis product lines were $15.0 million in
the first six months of 2000 and only $4.0 million in 2001. Capital expenditures
for all of 2000 were approximately $22 million, which was funded from the
Company's revolving line of credit, as well as Industrial Revenue Bonds. Capital
expenditures for 2001, are expected to be $7 to $9 million for all of 2001,
15
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
which is expected to be funded from operating cash flow and new financing
secured by real estate and equipment.
Cash flows used for financing activities represent a net reduction in debt
of $3.7 million for the 2001 period, offset by a sale and leaseback of equipment
of $3.7 million. Cash flows provided by financing activities for the 2000 period
included increases in debt of approximately $23.1 million offset by $13.5
million used to acquire treasury stock.
Availability under the Company's line of credit, which was $13.0 million at
June 30, 2001, is adequate to finance the Company's working capital and capital
expenditure requirements. However, in 2001, the Company has refinanced a portion
of its prior year capital expenditures with new financing secured by real estate
and equipment. The Company intends to obtain additional real estate and
equipment financing later this year.
In July 2001, the Company sold the business of one of its axle and tire
refurbishing factories for cash of approximately $1.8 million. The Company had
previously closed two factories of its axle and tire business early in the year,
and now has two such refurbishing factories remaining.
On June 16, 2000, the Company purchased 1,449,425 shares of its common
stock at $8.00 per share, net to the sellers in cash, or an aggregate of $11.8
million including expenses, pursuant to a self-tender offer. Earlier in 2000,
the Company purchased, on the open market, 190,000 shares of its common stock at
an average cost of $8.80 per share. The Company used its line of credit to
purchase such shares. The line of credit was increased from $25 million to $30
million to accommodate the purchase of shares.
The Company has outstanding $32 million of 6.95 percent, seven year Senior
Notes. Repayment of these notes is $8 million annually, of which the first $8
million payment was made in January 2001.
INFLATION
The prices of raw materials, consisting primarily of aluminum, vinyl,
steel, glass and tires, are influenced by demand and other factors specific to
these commodities rather than being directly affected by inflationary pressures.
Prices of certain commodities have historically been volatile. In order to hedge
the impact of future price fluctuations on a portion of its future aluminum raw
material requirements, the Company periodically purchases aluminum futures
contracts on the London Metal Exchange. At June 30, 2001, the Company had no
futures contracts outstanding.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans and
expectations regarding its operating strategies, products, and costs, and its
views of the prospects of the manufactured housing and recreational vehicle
industries, which are forward-looking statements and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements reflect
16
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the Company's views, at the time such statements were made, with respect to the
Company's future plans, objectives, events, and financial results such as
revenues, expenses, income, earnings per share, capital expenditures, and other
financial items. Forward-looking statements are not guarantees of future
performance; they are subject to risks and uncertainties. The Company does not
undertake to update forward- looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are 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 pricing
pressures due to competition, raw material costs (particularly aluminum, vinyl,
steel, glass, ABS resin, and tires), availability of retail and wholesale
financing for manufactured homes, availability and costs of labor, inventory
adjustments by retailers and manufacturers, interest rates, and adverse weather
conditions impacting retail sales. In addition, general economic conditions may
affect the retail sale of manufactured homes and recreational vehicles.
17
DREW INDUSTRIES INCORPORATED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of its
operations due to its purchases of certain commodities, and its investing and
financing activities.
Certain raw materials, particularly aluminum, vinyl, steel, glass and tires
are subject to price volatility. While effective hedges for most of these raw
materials are not available, the Company periodically purchases aluminum futures
contracts to hedge the impact of future price fluctuations on a portion of its
aluminum raw material requirements. At June 30, 2001, the Company had no futures
contracts outstanding.
The Company is exposed to changes in interest rates primarily as a result
of its financing activities. At June 30, 2001, the Company had $47.7 million of
fixed rate debt. Assuming a decrease of 100 basis points in the interest rate
for borrowings of a similar nature, 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 affected by approximately $.5 million per
annum.
The Company also has a $30 million line of credit, that is subject to a
variable interest rate. At June 30, 2001, $15.0 million of the line of credit
was utilized. Assuming an increase of 100 basis points in the interest rate for
borrowings under these variable rate loans, and outstanding borrowings of $15.0
million, future cash flows would be affected by $.2 million per annum.
In addition, the Company is exposed to changes in interest rates as a
result of temporary investments in government backed money market funds,
however, such investing activity is not material to the Company's financial
position, results of operations, or cash flow.
If the actual change in interest rates is substantially different than 100
basis points, the net impact of interest rate risk on the Company's cash flow
may be materially different than that disclosed above.
18