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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: SEPTEMBER 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. 9,665,553 shares of common
stock as of October 26, 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 SEPTEMBER 30, 2001
(UNAUDITED)
---------------------------------------------
Page
PART I - FINANCIAL INFORMATION
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 11-16
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 17
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 18
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- ------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $205,971 $228,727 $75,283 $74,915
Cost of sales 159,609 183,086 57,510 61,589
-------- -------- ------- -------
GROSS PROFIT 46,362 45,641 17,773 13,326
Selling, general and
administrative expenses 31,166 32,166 11,661 10,442
-------- -------- ------- -------
OPERATING PROFIT 15,196 13,475 6,112 2,884
Interest expense, net 3,321 2,753 1,062 874
-------- -------- ------- -------
INCOME BEFORE INCOME TAXES 11,875 10,722 5,050 2,010
Provision for income taxes 5,043 4,552 2,055 984
-------- -------- ------- -------
NET INCOME $ 6,832 $ 6,170 $ 2,995 $ 1,026
======== ======== ======= =======
NET INCOME PER COMMON SHARE:
Basic $ .71 $ .58 $ .31 $ .11
======== ======== ======= =======
Diluted $ .71 $ .58 $ .31 $ .11
======== ======== ======= =======
Weighted average common
shares outstanding:
Basic 9,658 10,559 9,661 9,656
======== ======== ======= =======
Diluted 9,663 10,561 9,676 9,657
======== ======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September
-------------------- December 31,
2001 2000 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARES
AND PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,002 $ 1,891 $ 550
Accounts receivable, trade,
less allowances 21,905 19,393 13,451
Inventories (Note 4) 28,741 35,941 33,703
Prepaid expenses and other
current assets 3,736 3,977 3,476
--------- --------- ---------
TOTAL CURRENT ASSETS 55,384 61,202 51,180
FIXED ASSETS, net 68,966 67,201 66,301
GOODWILL, net (Note 3) 38,798 44,586 37,240
OTHER ASSETS 4,872 4,194 4,577
--------- --------- ---------
TOTAL ASSETS $ 168,020 $ 177,183 $ 159,298
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, including current
maturities of long-term indebtedness $ 9,555 $ 9,341 $ 8,867
Accounts payable, trade 11,882 11,929 5,435
Accrued expenses and other
current liabilities 18,020 16,730 14,511
--------- --------- ---------
TOTAL CURRENT LIABILITIES 39,457 38,000 28,813
LONG-TERM INDEBTEDNESS (Note 5) 49,251 60,286 58,076
OTHER LONG-TERM LIABILITIES 245 2,110 245
--------- --------- ---------
TOTAL LIABILITIES 88,953 100,396 87,134
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share:
authorized 20,000,000 shares;
issued 11,814,078 shares at
September 2001, and 11,805,754 shares
at September 2000 and December 2000 118 118 118
Paid-in capital 25,038 24,967 24,967
Retained earnings 73,378 71,169 66,546
--------- --------- ---------
98,534 96,254 91,631
Treasury stock, at cost - 2,149,325 shares
at September 2001, September 2000 and
December 2000 (19,467) (19,467) (19,467)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 79,067 76,787 72,164
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 168,020 $ 177,183 $ 159,298
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------
2001 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,832 $ 6,170
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 6,385 6,574
Loss on disposal of long-lived assets 172 325
Changes in assets and liabilities:
Accounts receivable, net (7,101) (8,090)
Inventories 4,818 (2,559)
Prepaid expenses and other assets (797) 92
Accounts payable, accrued expenses and
other current liabilities 8,657 5,314
-------- --------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 18,966 7,826
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,290) (21,196)
Acquisition of companies' net assets and business (10,402)
Sale of reconditioned axle and tire facility 1,786
Proceeds from sales of fixed assets 758 343
-------- --------
NET CASH FLOWS USED FOR INVESTING ACTIVITIES (14,148) (20,853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and term loan 53,950 76,895
Proceeds from loans secured by real estate
and equipment 13,317 2,000
Proceeds from sale and leaseback of equipment 3,700
Repayments under line of credit and
other borrowings (75,158) (55,973)
Acquisition of treasury stock (13,472)
Exercise of stock options and other (175) 358
-------- --------
NET CASH FLOWS (APPLIED TO) PROVIDED BY
FINANCING ACTIVITIES (4,366) 9,808
-------- --------
Net increase (decrease) in cash 452 (3,219)
Cash and cash equivalents at beginning of period 550 5,110
-------- --------
Cash and cash equivalents at end of period $ 1,002 $ 1,891
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest on debt $ 4,084 $ 4,052
Income taxes, net of refunds $ 4,109 $ 3,535
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, EXCEPT SHARES)
BALANCE - DECEMBER 31, 2000 $ 118 $ (19,467) $ 24,967 $ 66,546 $ 72,164
Net income for nine months ended
September 30, 2001 6,832 6,832
Issuance of 9,124 shares of common stock
pursuant to stock option plan 63 63
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 8 8
------- ---------- --------- -------- ---------
BALANCE - SEPTEMBER 30, 2001 $ 118 $ (19,467) $ 25,038 $ 73,378 $ 79,067
======= ========== ========= ======== =========
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 nine and three month periods ended September 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):
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- -------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Net sales:
MH segment $ 122,467 $ 150,579 $ 45,780 $ 47,496
RV segment 83,504 78,148 29,503 27,419
--------- --------- -------- --------
Total $ 205,971 $ 228,727 $ 75,283 $ 74,915
========= ========= ======== ========
Operating profit:
MH segment $ 10,928 $ 11,322 $ 4,279 $ 2,896
RV segment 7,938 6,025 3,128 1,341
--------- --------- -------- --------
Total segments operating profit 18,866 17,347 7,407 4,237
Amortization of intangibles (1,923) (2,020) (672) (673)
Corporate and other (1,747) (1,852) (623) (680)
--------- --------- -------- --------
Operating profit 15,196 13,475 6,112 2,884
Interest expense, net 3,321 2,753 1,062 874
--------- --------- -------- --------
Income before income taxes $ 11,875 $ 10,722 $ 5,050 $ 2,010
========= ========= ======== ========
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 $10.2 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):
September 30, December 31,
-------------------- -------
2001 2000 2000
------- ------- -------
Finished goods $ 6,408 $ 9,291 $ 8,637
Work in process 1,626 2,155 1,938
Raw Material 20,707 24,495 23,128
------- ------- -------
Total $28,741 $35,941 $33,703
======= ======= =======
5. LONG-TERM INDEBTEDNESS
Long-term indebtedness consists of the following (in thousands):
September 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 5,300 22,150 17,700
Industrial Revenue Bonds, fixed rate 5.68%
to 6.28%, due 2008 through 2015; secured
by certain real estate and equipment 6,993 6,557 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
9.03% per annum 5,357
Other loans secured by certain real estate
and equipment, due 2006 to 2011, fixed
rate 7.25% to 9.03% 9,156 1,534
Other 920 290
------- ------- -------
58,806 69,627 66,943
Less current portion 9,555 9,341 8,867
------- ------- -------
Total long-term indebtedness $49,251 $60,286 $58,076
======= ======= =======
Pursuant to certain of the loan agreements, the Company is required to
maintain minimum net worth and interest and fixed charge coverages and meet
certain other financial requirements. Borrowings under the Senior Notes and the
Credit Agreement 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 3/8 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 various loans aggregating $13.3 million secured by certain real
estate and equipment. 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.
Subsequent to September 30, 2001, the Company entered into a Restated and
Amended Credit Agreement (the "Restated Agreement"), which extends the
expiration date of the notes payable pursuant to the Credit Agreement to October
15, 2003. The Restated Agreement provides for maximum borrowings of $25 million.
The Restated Agreement also provides for an increase in the interest rate on
LIBOR loans, from LIBOR plus 1 percent and provides a performance schedule to
revise the interest rate on LIBOR loans depending on the Company's Debt Service
Coverage Ratio, as defined. Pursuant to the performance schedule, the interest
rate on new LIBOR loans is currently LIBOR plus 1.9 percent.
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):
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
2001 2000 2001 2000
----- ------ ----- -----
Weighted average common shares
outstanding - basic 9,658 10,559 9,661 9,656
Assumed issuance of common stock
pertaining to stock options 5 2 15 1
----- ------ ----- -----
Weighted average common shares
outstanding - diluted 9,663 10,561 9,676 9,657
===== ====== ===== =====
10
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 nine months ended September 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 nine months ended September 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 $10.2 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 operating
subsidiaries. Its two 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, and represent in the aggregate
approximately 16 percent of the Company's manufactured housing sales. At
September 30, 2001 the Company's subsidiaries operated 43 plants in 18 states
and Canada.
The tragic events of September 11 weigh heavily on the country. The
ramifications of this terrible loss, to the national economy and to the
industries the Company serves, are not yet fully known and the full effects may
not be known for some time to come. However, the Company's sales through early
October did not decline significantly, apparently because customers were filling
their backlog orders. In the weeks following September 11, sales by the
Manufactured Housing industry softened, but have now returned to pre- September
11 levels. Recreational Vehicle industry sales have also softened, but in the
long term may be strong if people favor travel within the United States by RV,
over flying within the United States or abroad. The Company is well positioned
to weather a continued economic downturn. The Company's $25 million line of
credit, which has recently been extended to October 2003, currently has
outstanding debt of less than $5 million. In addition, the Company's operating
efficiencies are high.
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):
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- ------------------
2001 2000 2001 2000
-------- -------- ------- -------
Net sales:
MH segment $122,467 $150,579 $45,780 $47,496
RV segment 83,504 78,148 29,503 27,419
-------- -------- ------- -------
Total $205,971 $228,727 $75,283 $74,915
======== ======== ======= =======
Operating profit:
MH segment $ 10,928 $ 11,322 $ 4,279 $ 2,896
RV segment 7,938 6,025 3,128 1,341
-------- -------- ------- -------
Total segments operating profit 18,866 17,347 7,407 4,237
Amortization of intangibles (1,923) (2,020) (672) (673)
Corporate and other (1,747) (1,852) (623) (680)
-------- -------- ------- -------
Operating profit $ 15,196 $ 13,475 $ 6,112 $ 2,884
======== ======== ======= =======
MH SEGMENT
Net sales of the MH segment decreased 19 percent in the nine months ended
September 30, 2001 and 4 percent in the third quarter, from the same periods
last year. The industry reported a 29 percent decrease in the industry-wide
production of manufactured homes for the nine months ended September 2001, which
moderated to 15 percent in the third quarter. Sales of refurbished axles and
tires by the MH segment declined more than sales of other MH products due to the
closure of two of such facilities during the first quarter and the sale of a
third facility in the third quarter. Excluding sales of refurbished axles and
tires and the Better Bath operation, which has been included in the Company's
consolidated statement of income since its acquisition on June 1, 2001, net
sales decreased 16 percent for the nine months and 5 percent for the quarter.
Excluding the results of Better Bath, operating profit of the MH segment
decreased $.4 million (4 percent) for the nine months of 2001, but increased
$1.1 million (39 percent) in the third quarter from the same periods in 2000
despite the reduction in sales for both periods. The refurbished axles and tires
operations reduced its operating loss partly as a result of the closure of two
and the sale of one of its facilities in the current year. In addition, material
costs of this operation were reduced since last year. Excluding the results of
the refurbished axles and tires operation as well as the results of Better Bath,
operating results for the MH segment decreased by 12 percent for the nine months
and increased 15 percent for the three months. Material costs continued to be
stable, except for steel, which came down approximately 5 percent this year
after rising last year. Improved operating efficiencies in the nine months of
2001 offset the effect of fixed costs and lower sales. Selling, general and
administrative expenses were down in dollar terms, largely
12
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
following the trend of lower sales. There have been no significant selling price
increases in the years 2000 and 2001.
RV SEGMENT
Net sales of the RV segment increased 7 percent in the nine months of 2001
and 8 percent in the third quarter primarily as a result of the continuing
expansion of the Company's RV chassis product line. Such increase compares
favorably to the 15 percent decrease in shipments of towable RV's reported by
the RV industry for the first ninth months of 2001, which moderated to 6 percent
in the third quarter. 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. While the recent
interest rate cuts by the Federal Reserve Board and the stabilization of
gasoline prices may help the RV industry, the current political and economic
climate makes estimating future results extremely difficult. This is especially
true because sales of RV's are tied to consumer confidence levels, which dropped
substantially since September 11.
Operating profit increased $1.9 million (32 percent) for the nine month
period and $1.8 million (133 percent) in the third quarter. This increase is
attributable to the increase in sales as well as improved operating efficiencies
in the five plants opened in 2000. The segment's profit margin increased to 9.5
percent and 10.6 percent for the nine months and three months of 2001,
respectively, compared to 7.7 percent and 4.9 percent, respectively, in 2000.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles for the nine months was $97,000 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 $568,000 for the nine month period and
$188,000 for the quarter, as a result of higher average debt balances. The
higher debt balances resulted from capital expenditures and treasury stock
purchases in 2000, as well as the Better Bath acquisition in June 2001,
partially offset by cash flow from operating activities.
NEW ACCOUNTING STANDARDS
Effective January I, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The adoption of these
pronouncements has not had a material impact on the earnings or financial
position of the Company.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No.141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of
13
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
accounting. It also specifies criteria that intangible assets acquired in a
purchase combination must meet to be recognized apart from goodwill. SFAS No.
142 requires that goodwill and intangible assets with indefinite lives no longer
be amortized, but rather be tested for impairment at least annually. Other
intangible assets will continue to be amortized over their useful lives. The
provisions of SFAS No.141 are effective immediately, with the exception of
transitional provisions related to business combinations initiated prior to June
30, 2001, which are delayed until the adoption of SFAS No.142. The provisions of
SFAS No.142 are required to be adopted effective January 1, 2002.
The Company will apply the transitional provisions of SFAS No.141 and the
provisions of SFAS No.142 beginning in the first quarter of 2002. The Company
will evaluate its existing intangible assets and goodwill and make any necessary
reclassifications in order to conform with the new criteria in SFAS No.141. In
accordance with SFAS No.142, the company will reassess the useful lives of its
intangible assets and will test its goodwill and intangible assets for
impairment and recognize any impairment loss as a cumulative effect of change in
accounting principle in 2002. The Company expects that the application of the
non- amortization provisions of SFAS No.142 will result in the elimination of
annual goodwill amortization expense of approximately $1.6 million. At this time
it is not practicable to estimate the impact of adopting the impairment
provisions of SFAS No.142 on the earnings and financial position of the Company.
In August 2001. the FASB issued SFAS No.143, "Accounting for Asset
Retirement Obligations." SFAS No.143 requires companies to record a liability
for asset retirement obligations associated with the retirement of long-lived
assets. Such liabilities should be recorded at fair value in the period in which
a legal obligation is created, which typically would be upon acquisition or
completion of construction. The provisions of SPAS No. 143 are effective for
fiscal years beginning after June 15, 2002. The Company is in the process of
reviewing the impact of SFAS No.143 and does not anticipate that it will have a
material impact on the earnings and financial position of the Company.
Also in August 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No.144 supercedes SFAS
No.121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 retains the fundamental provision of
SFAS No.121 related to the recognition and measurement of the impairment of
long-lived assets to be held and used and the measurement of long-lived assets
to be disposed of, but excludes goodwill from its scope and provides additional
guidance on the accounting for long-lived assets held for sale. The provisions
of SFAS No.144 are effective for fiscal years beginning after December 15, 2001.
The Company does not expect that the impact of the implementation of SFAS No.
144 will materially differ from the impact of the existing requirements under
SFAS No. 121.
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DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following (IN THOUSANDS):
Nine Months Ended
September 30,
----------------------
2001 2000
-------- --------
Net cash flows provided by operating activities $ 18,966 $ 7,826
Net cash flows (used for) investment activities $(14,148) $(20,853)
Net cash flows (used for) provided by
financing activities $ (4,366) $ 9,808
Net cash provided by operations includes a reduction in inventory of $4.8
million in 2001. Inventories increased $2.6 million in the first nine 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 September 30, 2001 and 2000.
Cash flows used for investing activities in 2001 included 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 $21.2 million in
the first nine months of 2000 and $6.3 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,
which is being 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 $7.9 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 $23.3 million of which $13.5 million
was used to acquire treasury stock.
Availability under the Company's line of credit, which was $23.2 million at
September 30, 2001, is adequate to finance the Company's working capital and
capital expenditure requirements. Subsequent to September 30, 2001, the Company
entered into a Restated and Amended Credit Agreement (the "Restated Agreement"),
which extends the expiration date of the notes payable pursuant to the Credit
Agreement to October 15, 2003. The Restated Agreement provides for a reduction
in maximum borrowings from $30 million to $25 million. The Restated Agreement
also provides for an increase in the interest rate on LIBOR loans, from LIBOR
plus 1 percent and provides a performance schedule to revise the interest rate
on LIBOR loans depending on the Company's Debt Service Coverage Ratio, as
defined. Pursuant to the performance schedule, the interest rate on new LIBOR
loans is currently LIBOR plus 1.9 percent.
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.
15
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
INFLATION
The prices of raw materials, consisting primarily of aluminum, vinyl,
steel, glass, ABS resin 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 September
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 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.
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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, ABS
resin 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 September 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 September 30, 2001, the Company had $53.5
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 (reduced to $25
million subsequent to September 30, 2001), that is subject to a variable
interest rate. At September 30, 2001, $5.3 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 $5.3
million, future cash flows would be affected by $.1 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.
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DREW INDUSTRIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DREW INDUSTRIES INCORPORATED
Registrant
By /s/ FREDRIC M. ZINN
---------------------------
Fredric M. Zinn
Executive Vice-President and
Chief Financial Officer
November 14, 2001
18