Drew Industries Incorporated
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1997 Annual Report
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DREW
Company Profile
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Drew Industries Incorporated
"During 1997, Drew established the foundation for future growth and
profitability. Through strategic acquisitions and internal growth we have
expanded both our product lines and market territory. Future results should
benefit from this expansion, as well as from our recently completed refinancing
and plant additions."
Drew, through its wholly-owned subsidiaries, Kinro, Lippert and Shoals, supplies
a broad array of components for manufactured homes and recreational vehicles.
Manufactured products include windows, doors, chassis, chassis parts, galvanized
roofing and new and refurbished axles. The Company also distributes new and
refurbished tires. Approximately 85 percent of the Company's sales are for
manufactured homes and 15 percent are for recreational vehicles.
Our operating management is led by David L. Webster, President and Chief
Executive Officer of both Kinro and Shoals, who has more than 30 years of
experience in the manufactured housing industry. David, as CEO of Kinro, has
been the driving force behind Drew's growth and profitability over the past 18
years. Under David's leadership, Kinro and Shoals have built one of the finest
management teams in our industries.
With the October 1997 acquisition of Lippert Components, our superb
management group now has the additional talent and support of L. Douglas
Lippert, President and Chief Executive Officer of Lippert Components and his
experienced staff. Because of our "all star" management team, we have good
reason to be extremely confident about Drew's future performance.
The Company's common stock is traded on the American Stock Exchange
(Symbol: DW).
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KEY LOCATIONS
The Company's 35 manufacturing and warehouse facilities are concentrated in the
south east, south central and north central United States, as are the facilities
of our customers in the manufactured housing and recreational vehicle
industries. Our facilities are generally located within 250 miles of our major
customers in order to minimize freight costs and delivery times. In 1998, we
expect to close five older facilities and open two factories.
Financial Highlights
-----------------------------------------
Drew Industries Incorporated
(In thousands, except per share amounts) 1997 1996 1995
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Net Sales $208,365 $168,151 $100,084
Net Income(a) $ 11,994 $ 12,572 $ 8,123
Net Income Per Basic Common Share(a),(b) $ 1.22 $ 1.18 $ .82
Net Income Per Diluted Common Share(a),(b) $ 1.19 $ 1.15 $ .81
Working Capital(a) $ 24,009 $ 16,138 $ 9,648
Stockholders' Equity(a) $ 51,953 $ 34,779 $ 16,830
Book Value Per Common Share(a),(b) $ 4.67 $ 3.24 $ 1.70
- -------------------------------------------------------------------------------
(a) Years prior to 1997 have been restated to retroactively reflect the
adoption of the FIFO method to value that portion of the inventories for
which the LIFO method had previously been utilized for determining cost.
(b) Adjusted retroactively to give effect to two-for-one stock split effective
March 21, 1997.
1
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Letter to Stockholders
Drew Industries Incorporated
"Our primary goal is to continue to achieve outstanding returns for our
shareholders. Through incentive compensation, stock options and stock ownership,
all our key executives and managers participate in Drew's performance and are
highly motivated to achieve this goal."
Drew had another outstanding year in 1997. We established the foundation for
greater future growth and profitability, despite a temporary industry slowdown.
Today, Drew's $300 million annualized sales of windows, doors, chassis, chassis
parts, galvanized roofing, axles and tires to the manufactured housing industry
(85 percent of total sales) and to the RV industry are produced in 35 factories
in 16 states, by 2,250 employees.
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We are pleased to report:
o Record net sales of $208 million for 1997, an increase of 24 percent from
$168 million in 1996, were attained primarily as a result of three
acquisitions consummated in 1997.
o Earnings per share increased to $1.22 ($1.19 diluted) in 1997 from $1.18
($1.15 diluted) in 1996. Net income for 1997 of $12.0 million was lower
than last year's net income of $12.6 million, due to the interest expense
($850,000 net of taxes) applicable to the Company's purchase of 1.6
million shares from its Chairman in February 1997, which transaction was
below market and accretive to earnings per share.
o During 1997, Drew acquired Lippert Components, our largest acquisition
ever, with annual sales of $99 million and two additional companies with
annual sales of more than $13 million, for an aggregate purchase price of
$60 million, including 1.9 million shares of common stock. These three new
operations, with combined annual sales of more than $110 million, are
expected to be accretive to both net income and earnings per share in
1998, and have expanded both our product lines and market territory,
adding 19 factories and 700 employees.
2
o In March 1997, Drew effected a two-for-one stock split.
o In January 1998, Drew refinanced its debt, reducing its credit line from
$65 million to $25 million and sold $40 million of seven-year Senior Notes
at a favorable fixed interest rate of 6.95 percent.
Although total homes shipped by the manufactured housing industry during
1997 decreased 3 percent, a greater percentage of these homes were multi-
section homes (two or more sections combined into one unit). Accordingly, the
number of sections produced was equal to 1996 production. This trend toward a
larger, more traditional size home is a positive development for the industry
and increased the demand for Drew's products.
Our 1997 sales were further bolstered by the industry-wide trend to higher
quality homes, which increased demand for our higher quality vinyl windows. To
meet increased demand, we constructed and commenced operations at two new
factories, and added a product line to our California facility, all of which are
expected to be profitable in 1998.
We anticipate that manufactured housing will continue to gain market share
over the next several years, due to the affordability and improved quality of
these homes, as well as the innovative marketing efforts by the premiere
manufactured home builders in the industry.
It is our operating and acquisition strategy to continue to expand the
geographic territory and increase the market share of each of our product
categories. We have successfully accomplished this goal in the past and will
seek to do so in the future.
Since the acquisition of Lippert in October 1997, we have consolidated its
operations with similar operations of our Shoals subsidiary. Lippert's axle and
tire business was transferred to Shoals' facilities (except in Florida, where
Shoals has no facility), and Shoals transferred to Lippert its manufactured
housing chassis parts business. These consolidations should result in freight
and overhead savings and improved production efficiencies during 1998. Due to
the benefits of these consolidations, as well as improvements in our factories,
five older factories will be closed during 1998, and two will be opened. The
cost of vacating these factories is not material.
Although the RV industry represents only 15 percent of consolidated sales,
we were buoyed by the resurgence of sales of RV products in late 1997. This
strong sales trend has continued into early 1998.
During the first quarter of 1998, the Company will complete the
integration of the operations of the recently acquired Lippert business and the
start-up of newly constructed facilities. Costs associated with these actions,
and the continuing impact of competitive pressures which began in the second
quarter of 1997, will likely result in lower profits in the first quarter of
1998 as compared to last year's first quarter which benefited from very
favorable material costs and lower start-up costs.
The Company anticipates that full year 1998 results will benefit from
growth in the manufactured housing and RV industries, as well as from our
recently completed acquisitions, refinancing and plant expansions. As a result,
we look forward to continued strength in earnings and cash flow in 1998.
As always, our excellent results were attained because of the dedicated
efforts of our talented managerial team and thousands of hard working employees.
Sincerely,
/s/ Edward W. Rose, III
----------------------------
Edward W. Rose, III
Chairman of the Board
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/s/ Leigh J. Abrams
----------------------------
Leigh J. Abrams
President and Chief Executive Officer
3
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Our Business
Drew Industries Incorporated
MANUFACTURED HOUSING INDUSTRY
(85% of sales)
- -- Aluminum and vinyl windows and screens
- -- Chassis and chassis parts
- -- Axles and tires
- -- Galvanized steel roofing
RECREATIONAL VEHICLE INDUSTRY
(15% of sales)
- -- Windows and doors
- -- Chassis and chassis parts
STRATEGY TO CONTINUE
GROWTH AND PROFITABILITY
- -- Low cost producer
- -- "Quick response" manufacturing
- -- Reasonable prices
- -- Quality products
- -- Superior customer service
- -- Product line extensions and increased
market share
- -- Strategic acquisitions
What is a Manufactured Home?
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o Affordable single family housing
o Superior quality home
-- Built in a factory in one or more sections
-- Built to a national building code
o Typical prices, excluding land, range from under $14,000 to $100,000
o Homes may have cathedral ceilings, two to four bedrooms, walk-in closets,
custom cabinets and brand name appliances
o Delivered on a chassis to a homesite, often in a planned community, and
typically placed on a permanent foundation
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SINGLE SECTION
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Average Price: $28,200
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Average Sq. Ft.: 1,100
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MULTI-SECTION
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Average Price: $47,300
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Average Sq. Ft.: 1,600
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Industry Shipments--Manufactured Homes
(in thousands)
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4
Strong Manufactured Housing
Growth Prospects
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o Affordability
-- 52% cost advantage over site built homes
o Financing readily available
o Improved quality leads to home value appreciation
o Easing of zoning restrictions
o Job growth in target market
--Median family incomes of $26,000 to $40,000
o Lower apartment starts and low vacancy rates
o Demographics--those over 50 years old and first-time home buyers
What is a Recreational Vehicle?
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Traveling home which may provide kitchen, sleeping and bathroom facilities
o Towables--80% of industry units
o Motor Homes--20% of industry units
Strong RV Growth Prospects
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o Positive demographic trends
--Largest market--
those over 50 years old
o Increasing demand for leisure time activities should result in sales
growth of RV's
o National advertising campaign targeting younger generation
o Low interest rates continue to spur sales growth
Industry Shipments--Recreational Vehicles
(in thousands)
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"Manufactured homes represent over 25% of all single family housing starts. The
quality, affordability, financing and appearance of today's manufactured home
should enable the industry's market share to grow faster"
5
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Operations
Drew Industries Incorporated
Drew's broad array of products are produced and distributed by its wholly-owned
subsidiaries Kinro, Lippert and Shoals. The Company's 35 facilities are
strategically located in 16 states to meet the needs of our customers.
[THE FOLLOWING TABLE WAS DEPICTED AS A PIE GRAPH IN THE PRINTED MATERIAL]
Sales by Product Line
Product Line Sales
------------------------------------ -----
Mfg. Housing Galvanized Roofing 1%
Mfg. Housing Windows and Screens 40%
Mfg. Housing Chassis and Parts 16%
Mfg. Housing Axles and Tires 26%
RV Windows, Doors, Chassis and Parts 17%
Kinro is one of the largest producers of vinyl and aluminum windows for
manufactured homes. Kinro supplies primary and storm windows, as well as
screens, patio doors and windows in a variety of architectural sizes and shapes.
Kinro is also a leading supplier of windows and doors for recreational vehicles.
In 1996 Kinro inaugurated a glass tempering operation to supply its own glass
requirements as well as those of customers.
Lippert is one of the largest suppliers of chassis, chassis parts and
galvanized roofing for manufactured homes. In addition, Lippert is becoming a
significant supplier of chassis for recreational vehicles.
Shoals manufactures new and refurbished axles, and distributes new and
used tires for manufactured homes. Shoals is one of the largest suppliers of
such products.
Drew's growth in recent years has resulted primarily from the acquisitions
of Lippert, Pritt and Shoals, which expanded our product lines and broadened our
geographic territory. Internal growth has also been a key factor to our success.
Due to the rapid increase in demand for these new products, Drew recently
completed new facilities in Indiana (2), Texas and Tennessee. New facilities
will be completed in 1998 in West Virginia and Georgia. These facilities are
equipped with the most efficient production equipment available today. In 1998,
five older facilities will be closed reducing freight and production costs,
while maintaining customer service. The recently completed acquisitions and new
factories will also enable us to improve operating efficiencies.
Growth in the manufactured housing industry stems largely from the quality
of the homes produced. Drew has committed its resources to supplying the leading
producers of manufactured homes with the high quality, cost effective components
they demand.
Our significant market share for many products and numerous awards of
excellence from our customers, testify to the expertise of our operating
management, the efforts of our employees, and our dedication to continual
product improvement and customer service. Strong cash flow generated by our
highly efficient factories has enabled Drew to commit the resources necessary to
support this dedication.
6
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Drew Industries Incorporated
The Company, through its wholly-owned subsidiaries Kinro, Inc. ("Kinro"),
Lippert Components, Inc. ("Lippert") and Shoals Supply, Inc. ("Shoals") is a
leading supplier of a broad array of components for manufactured homes and
recreational vehicles. Manufactured products include windows, doors, chassis,
chassis parts, galvanized roofing and new and refurbished axles. The Company
also distributes new and refurbished tires. Approximately 85 percent of the
Company's sales are for manufactured homes and 15 percent are for recreational
vehicles ("RV's"). Many of the producers of manufactured homes, to whom the
Company sells windows, also manufacture RV's. At December 31, 1997, the Company
operated 34 plants in 15 states.
On May 5, 1997 Shoals acquired the assets and business of Pritt Tire and
Axle, Inc. ("Pritt") which is being operated as an additional branch of Shoals.
Pritt had 1996 sales of $10.7 million.
Lippert, which was acquired by the Company on October 7, 1997,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing. At December 31, 1997, Lippert had 17 plants
in 12 states east of the Rocky Mountains. Lippert's sales for its fiscal year
ended September 30, 1997 were $99 million, on which they achieved earnings
before interest, taxes and goodwill amortization, of approximately $8.2 million,
excluding shareholder compensation, benefits and related items which did not
continue subsequent to the acquisition. These earnings are net of other
nonrecurring compensation and startup costs of approximately $.5 million.
RESULTS OF OPERATIONS
Net sales, gross profit and operating profit are (in thousands):
Year Ended December 31,
----------------------------------------
1997 1996 1995
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Net sales $208,365 $168,151 $100,084
Gross profit $ 46,281 $ 41,420 $ 27,980
Operating profit $ 21,761 $ 20,990 $ 13,289
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Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 increased 24% over last
year. Net sales for the current year include Lippert's net sales of $21.1
million from October 7, 1997, the date that Lippert was acquired by the Company.
Also included are Pritt's net sales of $8.2 million from May 5, 1997, the date
that Pritt was acquired by the Company. Excluding net sales of operations
acquired in 1997, and adjusting for the 1 1/2 months prior to the Shoals
acquisition in 1996, the Company's net sales increased 2% for the year. The
increase in net sales resulted both from sales of manufactured housing products
and sales of RV products, which both reflected modest increases for the year.
Such increases compare to a 3% industry-wide decline in shipments of
manufactured homes and a 3% increase in sales of RV's. The decline in industry
shipments of manufactured homes is partially offset by the continuing growth of
multi-section homes resulting in year-to-date industry floor shipments being 1%
ahead of last year.
Operating profit increased 4% to $21.8 million for 1997. Included in the
current year's operating profit are the results of Lippert and Pritt since the
dates that they were acquired by the Company. Lippert's contribution to the
Company's operating profit was $1.0 million on net sales of $21.1 million for
the three months since its acquisition. Pritt's contribution to the Company's
operating profit was $.5 million on net sales of $8.2 million for the eight
months since its acquisition. Excluding the operations acquired in 1997,
operating profit decreased approximately 6% for 1997, and gross profit
percentage decreased 1% because of competitive pressures, as well as $400,000 of
startup costs relating to three new plants opened by Kinro in 1997. Selling,
general and administrative expenses, again excluding the operations acquired in
1997, decreased 3% as a result of lower incentive compensation due to reduced
profits.
During the first quarter of 1998, the Company will continue the
integration of the operations of the recently acquired Lippert business, while
completing the start-up of several newly constructed facilities. Costs
associated with these actions and the continuing impact of competitive pressures
which began in the second quarter of 1997, will likely result in lower profits
in the first quarter of 1998, as compared to last year's first quarter which
benefitted from very favorable material costs. However, the Company anticipates
that full year 1998 will benefit from growth in the manufactured housing
industry, as well as from recently completed acquisitions, refinancing and plant
expansions. As a result, improved earnings and cash flow are expected in 1998.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 increased 68% over 1995.
Sales for 1996 include Shoals' sales from February 15, 1996, the date that
Shoals was acquired by the Company. Excluding Shoals, the Company's
7
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------
Drew Industries Incorporated
sales (consisting of Kinro's sales) increased 11% for the year. The increase in
Kinro's net sales resulted both from the sales of manufactured housing products,
which increased 14%, and sales of RV products which increased 5% for the year.
Such increases, which exceed the industry-wide increases in shipments of
manufactured homes and RV's, are volume related. 1996 industry-wide shipments of
manufactured homes were 7% higher than 1995 and shipments of RV's of the types
supplied by Kinro were 1% higher than 1995.
Operating profit increased 58% to $21.0 million for 1996. Included in the
1996 operating profit are the results of Shoals since February 15, 1996, the
date that Shoals was acquired by the Company. Excluding Shoals, operating profit
increased approximately 25% for 1996 as a result of the 11% increase in net
sales and an improvement in gross profit as a percent of sales. The increase in
gross profit percentage resulted from lower aluminum prices which had been
volatile and, to a lesser extent, a reduction in labor and overhead costs. The
Company purchases aluminum futures on the London Metal Exchange to hedge against
potential price increases. Selling, general and administrative expenses, again
excluding Shoals, increased 20% for 1996 as a result of the increased sales as
well as increased profits upon which incentive compensation is based. Shoals'
contribution to the Company's operating profit was $4.4 million on net sales of
$57 million for the 10 1/2 months since its acquisition.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the Spin-off by the
Company of Leslie Building Products, Inc. on July 29, 1994, the Company and
Leslie Building Products have shared certain administrative functions and
employee services, such as management overview and planning, tax preparation,
financial reporting, coordination of independent audit, stockholder relations,
and regulatory matters. The Company has been reimbursed by Leslie Building
Products for the fair market value of such services. This Agreement has been
extended and now expires on December 31, 1998 and may be further extended. The
Company charged fees to Leslie Building Products of $526,000 during 1997,
$509,000 during 1996, and $588,000 during 1995. These fees are recorded as a
reduction of selling, general and administrative expenses.
Interest (Expense) Income Net
Interest expense, net, increased to $2.5 million in 1997 from $.3 million
in 1996 primarily as a result of debt incurred for the purchase of 1.6 million
shares of treasury stock from the Company's Chairman for $20.8 million, as well
as $31.8 million for acquisitions.
Net interest expense increased by $460,000 for 1996 from 1995 primarily as
a result of debt incurred for the acquisition of Shoals and the $2.8 million
purchase of treasury stock, partially offset by cash flow from operations.
Accounting Changes
During the first quarter of 1997, the Company adopted the FIFO method to
value that portion of inventories for which the LIFO method had previously been
utilized for determining cost. The FIFO method will better measure the current
value of such inventories, provide a more appropriate matching of revenues and
expenses, and conform all inventories of the Company to the same accounting
method. Additionally, the change will enhance the comparability of the Company's
financial statements by changing to the predominant method utilized in its
industry. The Company applied this change retroactively which resulted in an
increase in retained earnings of $527,000 at January 1, 1995. The impact on net
income for the years ended December 31, 1996 and 1995 was a reduction of
$814,000 ($.07 per share) and an increase of $301,000 ($.03 per share),
respectively.
New Accounting Standards
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
establishes standards for computing and presenting both basic and diluted
earnings per share ("EPS"). Basic EPS represents the earnings available to each
common share outstanding during the reporting period. Diluted EPS reflect the
earnings available to each common share after the effect of all potentially
dilutive common shares, such as stock options and warrants. All prior period
income per share data have been restated to conform with SFAS No. 128.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," which permits companies
either to adopt a new method of accounting for employee stock options and
similar equity instruments or to continue following the historical accounting
method with supplemental pro forma disclosures. The Company is continuing its
historical practice, and provides the necessary additional information in
footnote disclosure.
8
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," and SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," for fiscal years beginning after December
15, 1997. These statements address presentation and disclosure matters and will
have no impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following:
Year Ended December 31,
---------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net cash flows provided by
operating activities $ 11,009 $ 11,927 $ 9,593
Net cash flows (used for)
investment activities $(42,032) $(14,948) $ (1,941)
Net cash flows provided
by (used for) financing
activities $ 30,506 $ 538 $ (4,093)
- --------------------------------------------------------------------------------
Net cash provided by operating activities for 1997, which does not include
the balance of the assets and liabilities of the acquired operations on the date
of the acquisition of such operations, primarily resulted from net income. The
$1.2 million increase in depreciation and amortization was offset by changes in
working capital.
Cash flows used for investing activities in 1997 was primarily the $31.8
million cash portion of the cost of acquisitions and, in 1996 was primarily the
$10 million cost of the Shoals acquisition. Capital expenditures for 1997 of
$10.4 million include three plants for Kinro and the purchase of related
equipment, as well as two new factories being constructed by Lippert. Capital
expenditures for 1996 of $5.8 million were primarily for the construction of two
new plants and the purchase of related machinery and equipment. Capital
expenditures for 1998 are expected to approximate $6 to $8 million. Such capital
expenditures will be funded from Industrial Revenue Bonds as well as cash flow
from operations.
Cash flows provided by financing activities in 1997 includes increases in
debt of approximately $51 million, of which $20.8 million was used for the
acquisition of treasury stock and $31.8 million was used for acquisitions. Cash
flows provided by financing activities in 1996 included the borrowing of $6
million for the acquisition of Shoals, and $2.8 million used to acquire 400,000
shares of treasury stock.
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Amortization of the seven year
Senior Notes is $8 million annually beginning at the end of year three.
Proceeds of the Senior Notes were used to reduce borrowings under Drew's
$65 million credit facility with The Chase Manhattan Bank, as agent.
Simultaneously, such credit facility was replaced with a $25 million revolving
credit facility which expires on May 15, 2002.
Effective July 29, 1994, the Company spun off to its stockholders Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"),
the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy Code. The liabilities of White Metal are primarily
product liability costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, were served with a
summons and complaint in an adversary proceeding commenced by the chapter 7
trustee of White Metal. The complaint, which appears to allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $7.5 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations that the
Company and its affiliated companies obtained tax benefits attributable to the
use of White Metal's net operating losses. The trustee seeks to recover the
purported value of the tax savings achieved. Management believes that the
trustee's allegations are without merit and have no basis in fact. In addition,
the trustee alleges that White Metal made certain payments to the Company which
were preferential and are recoverable by White Metal, in the approximate amount
of $900,000. The Company denies liability for any such amount and is vigorously
defending against the allegations. However, an estimate of potential loss, if
any, cannot be made at this time. The Company believes that it has sufficient
accruals for the defense of this proceeding and that such defense will not have
a material adverse impact on the Company's financial condition or results of
operations.
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
---------------------------------------------------------
Drew Industries Incorporated
INFLATION
The prices of raw materials, consisting primarily of aluminum, 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 prices fluctuations on a portion of its future aluminum raw
material requirements, the Company periodically purchases aluminum futures
contracts on the London Metal Exchange. At December 31, 1997, the Company
currently had futures contracts for 3.3 million pounds at an aggregate cost of
$2.4 million, which was approximately current market value.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company has addressed this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company had previously decided to upgrade its computer systems. These upgrades
will allow the Company to achieve Year 2000 compliance. The cost of these
upgrades, which are currently in progress and expected to be completed during
1998, are not material to the Company's results of operations or financial
position. Remaining expenditures, primarily capital in nature, are expected to
be less than $.5 million. No significant expenditures were required to
specifically achieve Year 2000 compliance.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
regarding its operating strategy, its products and performance and its views of
industry prospects, which could be construed to be forward looking statements
within the meaning of the Securities and Exchange Act of 1934. These statements
reflect the Company's current views with respect to future plans, events and
financial performance. The Company has identified certain risk factors which
could cause actual plans and results to differ substantially from those included
in the forward looking statements. These factors include pricing pressures due
to competition, raw material costs (particularly aluminum, steel and glass),
adverse weather conditions impacting retail sales, inventory adjustments by
retailers and interest rates. In addition, general economic conditions may
affect the retail sale of manufactured homes and RV's.
10
Selected Financial Data
---------------------------------------------
Drew Industries Incorporated
The following selected financial data should be read in conjunction with
the consolidated financial statements and related notes thereto included herein
(in thousands, except per share amounts):
Year Ended December 31,
---------------------------------------------------------------
1997 1996(a) 1995(a) 1994(a) 1993(a)
- -----------------------------------------------------------------------------------------------------------------------
Operating Data
Net sales $ 208,365 $ 168,151 $ 100,084 $ 82,965 $ 67,065
=======================================================================================================================
Operating profit $ 21,761 $ 20,990 $ 13,289 $ 10,258 $ 8,006
=======================================================================================================================
Income from continuing operations before income taxes $ 19,256 $ 20,664 $ 13,423 $ 10,245 $ 8,645 (b)
Provision for income taxes 7,262 8,092 5,300 3,999 2,183 (b)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 11,994 12,572 8,123 6,246 6,462
Discontinued operations, net (c) (111) (726)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 11,994 $ 12,572 $ 8,123 $ 6,135 $ 5,736
=======================================================================================================================
Income per basic common share (d):
Income from continuing operations $ 1.22 $ 1.18 $ .82 $ .64 $ .68
Discontinued operations, net (.01) (.08)
- -----------------------------------------------------------------------------------------------------------------------
Net income per common share (basic) $ 1.22 $ 1.18 $ .82 $ .63 $ .60
=======================================================================================================================
Income per diluted common share (d):
Income from continuing operations $ 1.19 $ 1.15 $ .81 $ .62 $ .64
Discontinued operations, net (.01) (.07)
- -----------------------------------------------------------------------------------------------------------------------
Net income per common share (diluted) $ 1.19 $ 1.15 $ .81 $ .61 $ .57
=======================================================================================================================
Financial Data
Working capital $ 24,009 $ 16,138 $ 9,648 $ 6,544 $ 17,457
Total assets $ 130,349 $ 55,283 $ 29,593 $ 22,946 $ 31,319
Long-term obligations (e) $ 56,130 $ 4,938 $ 311 $ 3,939 $ 2,513
Stockholders' equity (f) $ 51,953 $ 34,779 $ 16,830 $ 8,599 $ 22,127
- -----------------------------------------------------------------------------------------------------------------------
(a) Years prior to 1997 have been restated to retroactively reflect the adoption
of the FIFO method to value that portion of the inventories for which the
LIFO method had previously been utilized for determining cost. The impact on
net income was a reduction of $814,000 ($.07 per share) for 1996, an
increase of $301,000 ($.03 per share) for 1995, a reduction of $676,000
($.07 per share) for 1994 and a reduction of $94,000 ($.01 per share) for
1993.
(b) In 1993 the Company received Federal income tax refunds of $1,142,000, as
well as interest thereon of $745,000.
(c) Operating results of Leslie Building Products prior to Spin-off on July 29,
1994.
(d) Adjusted to give effect to two-for-one stock split effective March 21, 1997.
(e) Includes long-term indebtedness, as well as long-term portion of deferred
income taxes, obligations under capital leases and postretirement
obligations.
(f) On July 29, 1994, the date of the Spin-off of Leslie Building Products,
Inc., the net assets of Leslie Building Products were $20.3 million.
Accordingly, upon the Spin-off the Company's equity was reduced by $20.3
million.
11
Consolidated Statements of Income
---------------------------------------------
Drew Industries Incorporated
Year Ended December 31,
-----------------------------------
(In thousands, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------
Net sales (Note 11) $ 208,365 $ 168,151 $ 100,084
Cost of sales 162,084 126,731 72,104
- ----------------------------------------------------------------------------------
Gross profit 46,281 41,420 27,980
Selling, general and administrative expenses 24,520 20,430 14,691
- ----------------------------------------------------------------------------------
Operating profit 21,761 20,990 13,289
Interest (expense) income, net (2,505) (326) 134
- ----------------------------------------------------------------------------------
Income before income taxes 19,256 20,664 13,423
Provision for income taxes (Note 8) 7,262 8,092 5,300
- ----------------------------------------------------------------------------------
Net income $ 11,994 $ 12,572 $ 8,123
==================================================================================
Income per common share (Note 10):
Net income per common share (basic) $ 1.22 $ 1.18 $ .82
==================================================================================
Net income per common share (diluted) $ 1.19 $ 1.15 $ .81
==================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
12
Consolidated Statements of Income
---------------------------------------------
Drew Industries Incorporated
December 31,
----------------------
(In thousands, except shares and per share amounts) 1997 1996
- ----------------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 1,028 $ 1,545
Accounts receivable, trade, less allowances of
$528 in 1997 and $308 in 1996 9,181 4,924
Inventories (Note 3) 29,456 22,686
Prepaid expenses and other current assets (Note 8) 6,610 2,549
- ----------------------------------------------------------------------------------
Total current assets 46,275 31,704
Fixed assets, net (Note 4) 38,096 10,865
Goodwill, net (Note 2) 44,215 11,582
Other assets 1,763 1,132
- ----------------------------------------------------------------------------------
Total assets $ 130,349 $ 55,283
==================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of
long-term indebtedness and obligations under
capital leases (Notes 7 and 9) $ 643 $ 276
Accounts payable, trade 6,372 3,958
Accrued expenses and other current liabilities (Note 5) 15,251 11,332
- ----------------------------------------------------------------------------------
Total current liabilities 22,266 15,566
Long-term indebtedness (Note 7) 54,760 3,652
Other long-term liabilities (Note 8) 1,370 1,286
- ----------------------------------------------------------------------------------
Total liabilities 78,396 20,504
- ----------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 10)
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,363,166 shares in
1997 and 11,202,946 shares in 1996 113 112
Paid-in capital 19,249 17,218
Retained earnings 32,591 20,597
- ----------------------------------------------------------------------------------
51,953 37,927
Treasury stock, at cost--479,770 shares in 1996 (3,148)
- ----------------------------------------------------------------------------------
Total stockholders' equity 51,953 34,779
- ----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 130,349 $ 55,283
==================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
13
Consolidated Statements of Cash Flows
---------------------------------------------
Drew Industries Incorporated
Year Ended December 31,
------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,994 $ 12,572 $ 8,123
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 2,972 1,712 797
Deferred taxes 325 (297) (259)
Gain on disposal of fixed assets (34) (37) (3)
Changes in assets and liabilities:
Accounts receivable, net 2,170 2,188 (1,069)
Inventories (86) (3,284) (1,013)
Prepaid expenses and other assets (3,414) (74) 400
Accounts payable, accrued expenses and other current liabilities (2,918) (853) 2,617
- -------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 11,009 11,927 9,593
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (10,377) (5,841) (1,944)
Acquisitions of companies' net assets and businesses (31,804) (9,941)
Proceeds from sales of fixed assets 149 834 3
- -------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (42,032) (14,948) (1,941)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Acquisition loan 5,982
Equipment loan 1,560
Proceeds under line of credit and other borrowings 118,150 23,737 9,450
Repayments under line of credit and other borrowings (69,050) (27,228) (13,651)
Acquisition of treasury stock (20,800) (2,800) (333)
Exercise of stock options and other 646 847 441
- -------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used for) financing activities 30,506 538 (4,093)
- -------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (517) (2,483) 3,559
Cash and short term investments at beginning of year 1,545 4,028 469
- -------------------------------------------------------------------------------------------------------------
Cash and short term investments at end of year $ 1,028 $ 1,545 $ 4,028
=============================================================================================================
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest on debt $ 1,981 $ 285 $ 132
Income taxes $ 8,433 $ 7,986 $ 4,856
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
14
Consolidated Statements of Stockholders' Equity
---------------------------------------------------
Drew Industries Incorporated
Retained Total
Common Treasury Paid-in Earnings Stockholders'
(In thousands, except shares) Stock Stock Capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1994 $ 99 $ (15) $ 8,613 $ (98) $ 8,599
Net income 8,123 8,123
Issuance of 114,536 shares of common
stock pursuant to stock option plan 1 289 290
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 151 151
Acquisition of 59,750 shares of treasury stock (333) (333)
- ------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1995 100 (348) 9,053 8,025 16,830
Net income 12,572 12,572
Issuance of 113,740 shares of common
stock pursuant to stock option plan 1 427 428
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 249 249
Issuance of 1,089,918 shares of common stock
in connection with the acquisition of the
assets and business of Shoals Supply, Inc. 11 7,489 7,500
Purchase of 400,020 shares of treasury stock (2,800) (2,800)
- ------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1996 112 (3,148) 17,218 20,597 34,779
Net income 11,994 11,994
Issuance of 85,990 shares of common
stock pursuant to stock option plan 1 383 384
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 267 267
Issuance of 2,154,000 shares of common stock in connection
with the acquisition of Lippert Components, Inc. 23,948 1,399 25,347
Purchase of 1,600,000 shares of treasury stock (20,800) (20,800)
Costs of two-for-one split of common stock (18) (18)
- ------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1997 $ 113 $ -- $ 19,249 $ 32,591 $ 51,953
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
15
Notes to Consolidated Financial Statements
----------------------------------------------
Drew Industries Incorporated
1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Drew
Industries Incorporated and its subsidiaries. Drew's wholly-owned active
subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro"), Shoals Supply, Inc.
and its subsidiaries ("Shoals"), and Lippert Components, Inc. ("Lippert"). Drew,
through its wholly-owned subsidiaries, supplies a broad array of components for
manufactured homes and recreational vehicles. Manufactured products include
windows, doors, chassis, chassis parts, roofs and new and refurbished axles. The
Company also distributes new and refurbished tires. Approximately 85 percent of
the Company's sales are for manufactured homes and 15 percent are for
recreational vehicles. At December 31, 1997 the Company operated 34 plants in 15
states. All significant intercompany balances and transactions have been
eliminated. On February 13, 1997 the Board of Directors declared a two-for-one
split of its Common Stock, payable in the form of a 100 percent stock dividend
on March 21, 1997 to stockholders of record on March 4, 1997. Where appropriate,
all share and per share amounts included in the consolidated financial
statements and notes thereto have been adjusted retroactively to give effect to
the stock split.
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.
During the first quarter of 1997, the Company adopted the FIFO method to
value that portion of the inventories for which the LIFO method had previously
been utilized for determining cost. The FIFO method will better measure the
current value of such inventories, provide a more appropriate matching of
revenues and expenses, and conform all inventories of the Company to the same
accounting method. Additionally, the change will enhance the comparability of
the Company's financial statements by changing to the predominant method
utilized in its industry. The Company applied this change retroactively which
resulted in an increase in retained earnings of $527,000 at January 1, 1995. The
impact on net income for the years ended December 31, 1996 and 1995 was a
reduction of $814,000 ($.07 per share) and an increase of $301,000 ($.03 per
share), respectively.
The Company periodically purchases commodity futures to hedge the impact
of future price fluctuations on a portion of its aluminum raw material
requirements. Gains and losses on such futures contracts are deferred until
recognized in income as a component of cost of sales when the finished products
are sold. Cash flows from such futures contracts are included in operating
activities in the Consolidated Statements of Cash Flows.
Fixed Assets
Fixed assets are depreciated principally on a straight-line basis over the
estimated useful lives of properties and equipment. Leasehold improvements and
leased equipment are amortized over the shorter of the lives of the leases or
the underlying assets. Amortization of assets recorded under capital leases is
included in depreciation expense. Maintenance and repairs are charged to
operations as incurred; significant betterments are capitalized.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company's subsidiaries generally file separate state income tax
returns on the same basis as the Federal income tax return.
New Accounting Standards
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
establishes standards for computing and presenting both basic and diluted
earnings per share ("EPS"). Basic EPS represents the earnings available to each
common share outstanding during the reporting period. Diluted EPS reflect the
earnings available to each common share after the effect of all potentially
dilutive common shares, such as stock options and warrants.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," which permits companies
either to adopt a new method of accounting for employee stock options and
similar equity instruments or to continue following the historical accounting
method with supplemental pro forma disclosures. The Company is continuing its
historical practice, and provides the necessary additional information in
footnote disclosure.
Goodwill
Goodwill is the excess of cost over the fair value of net tangible assets
acquired and is amortized on a straight-line basis primarily over thirty years.
The balance of goodwill of $44.2 million at December 31, 1997 primarily relates
to the acquisitions of Lippert on October 7, 1997, Pritt on May 5, 1997 and
Shoals on February 15, 1996.
16
The Company periodically reviews the value of its goodwill to determine if
an impairment has occurred. The Company measures the potential impairment of
recorded goodwill by the undiscounted value of expected future operating cash
flows in relation to its net capital investment in the subsidiary. Based on its
review, the Company does not believe that an impairment of its goodwill has
occurred.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
2. Acquisitions
Lippert Components, Inc.
On October 7, 1997, the Company acquired Lippert for $27 million in cash
and 1,923,231 shares of Drew common stock having a value of approximately $25.3
million. In addition, 230,769 shares are held in escrow pending the results of
an earnout. All 2,154,000 shares are restricted and are subject to a
registration rights agreement. The cash portion of the transaction has been
financed by Drew's then existing credit facility.
Lippert, which has 17 plants in 12 states east of the Rocky Mountains,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing. The refurbishing of axles and tires, except
for the Florida operation, has now been transferred to Shoals, while Shoals has
transferred to Lippert all of its chassis parts business.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") was $30.1 million, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning October 7, 1997. Lippert's sales for
its fiscal year ended September 30, 1997 were $99 million, on which they
achieved earnings before interest, taxes and goodwill amortization of
approximately $8.2 million, excluding shareholder compensation, benefits and
related items which will not continue subsequent to the acquisition. These
earnings are net of other nonrecurring compensation and startup costs of
approximately $.5 million.
Pritt Tire and Axle, Inc.
On May 5, 1997 the Company's subsidiary, Shoals acquired the assets and
business of Pritt Tire and Axle, Inc. ("Pritt") of Bristol, Indiana. Pritt
refurbishes axles and tires used in the transportation of manufactured homes.
The purchase price consisted of cash of $4.4 million and a three-year
warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per
share. As part of this transaction, in the third quarter of 1997, Shoals
acquired, from the former owner of Pritt, the manufacturing facility utilized by
Pritt for approximately $1 million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") is $2.9 million, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning May 5, 1997. Pritt had 1996 net
sales of $10.7 million.
Shoals Supply, Inc.
On February 15, 1996, the Company acquired the assets and business of
Shoals, a supplier of products used to transport manufactured homes. Shoals
manufactures new axles and chassis parts, refurbishes used axles, and
distributes new and refurbished tires. The manufacture of chassis parts has
since been transferred to Lippert, while Lippert has transferred to Shoals the
refurbishing of axles and tires, except for the Florida operation.
The consideration for the acquisition was 1,089,918 shares of common stock
of the Company having a value of $7.5 million, cash of $1.6 million and a note
for $.8 million payable over 5 years. In addition, the Company assumed $7.5
million of Shoals' bank debt and certain operating liabilities.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
goodwill of $11.8 million is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning February 16, 1996. Shoals had 1996
net sales of $65 million, of which $57 million was for the 10 1/2 months since
Shoals was acquired by the Company.
The following pro forma condensed consolidated results of operations
assumes that the acquisitions had occurred at the beginning of 1996. The
unaudited pro forma data below is not necessarily indicative of the
17
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------
Drew Industries Incorporated
future results of operations of the combined operations (in thousands, except
per share amounts):
Pro Forma Year End
December 31,
------------------------
(unaudited) 1997 1996
- --------------------------------------------------------------------------------
Net sales $288,671 $293,640
================================================================================
Net income $ 13,955 $ 17,374
================================================================================
Net income per common share:
Basic $ 1.23 $ 1.36
================================================================================
Diluted $ 1.21 $ 1.34
================================================================================
Average common shares outstanding:
Basic 11,325 12,779
Diluted 11,575 13,012
Goodwill of $44,215,000 at December 31, 1997, is net of accumulated
amortization of $1,223,000. Amortization of goodwill was $765,000, $494,000 and
$23,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
3. Inventories
Inventories consist of the following (in thousands):
December 31,
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Finished goods $ 8,989 $ 6,045
Work in process 1,746 1,810
Raw materials 18,721 14,831
- --------------------------------------------------------------------------------
Total $29,456 $22,686
================================================================================
4. Fixed Assets
Fixed assets, at cost, consist of the following (in thousands):
Estimated
December 31,
---------------- Useful Life
1997 1996 In Years
- -------------------------------------------------------------------------------
Land $ 3,252 $ 479
Buildings and improvements 16,140 2,964 8 to 45
Leasehold improvements 779 745 5 to 25
Machinery and equipment 17,490 7,943 5 to 8
Automotive equipment 1,523 420 2 to 3
Furniture and fixtures 2,294 1,019 3 to 8
Capitalized real estate leases 925 925 15
Construction in progress 4,391 3,078
- -------------------------------------------------------------------
46,794 17,573
Less accumulated depreciation
and amortization 8,698 6,708
- -------------------------------------------------------------------
Fixed assets, net $38,096 $10,865
===================================================================
Depreciation and amortization of fixed assets consists of (in thousands):
Year Ended December 31,
----------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Charges to cost of sales $1,674 $ 908 $ 554
Charges to selling, general
and administrative expenses 376 203 116
- --------------------------------------------------------------------------------
$2,050 $1,111 $ 670
================================================================================
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following
(in thousands):
December 31,
-----------------------
1997 1996
- --------------------------------------------------------------------------------
Accrued employee compensation $ 3,384 $ 3,063
Accrued employee benefits 3,244 2,291
Accrued workmen's compensation
and other insurance 3,353 2,128
Income taxes 690 1,628
Accrued expenses and other 4,580 2,222
- --------------------------------------------------------------------------------
Total $15,251 $11,332
================================================================================
6. Retirement and Other Benefit Plans
The Company has discretionary defined contribution profit sharing plans
covering substantially all eligible employees. The Company contributed $336,000,
$206,000, and $92,000 to this Plan during the years ended December 31, 1997,
1996 and 1995, respectively.
7. Long-term Indebtedness
On May 15, 1997, the Company entered into a $60 million syndicated credit
agreement with The Chase Manhattan Bank as lead bank. The credit facility was
subsequently amended to $65 million on October 7, 1997 in connection with the
Lippert acquisition. Borrowings were secured by substantially all of the assets
of the Company, except real estate. At December 31, 1997, there were outstanding
borrowings of $52,600,000 under the credit facility.
18
Interest on borrowings under the $65 million credit facility was payable
at .25% over the prime rate. In addition, the Company had the option to either
fix the rate or convert a portion of the loan to a Eurodollar loan at 1.5% over
the LIBO rate. Furthermore, the Company was required to pay a commitment fee,
accrued at the rate of 3/8 of 1% per annum, on the daily unused amount of the
revolving line of credit. Pursuant to the agreement, the Company was required to
maintain minimum net worth and income levels, and meet certain other financial
requirements typical to secured borrowing arrangements. In addition, the Company
was prohibited from declaring or paying dividends without the prior written
consent of the lender.
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Amortization of the seven year
Senior Notes is $8 million annually beginning at the end of year three.
Proceeds of the Senior Notes were used to reduce borrowings under Drew's
$65 million credit facility with The Chase Manhattan Bank, as agent.
Simultaneously, such credit facility was replaced with a $25 million revolving
credit facility which expires on May 15, 2002.
Interest on borrowings under the new credit facility is payable at the
prime rate. In addition, the Company has the option to convert a portion of the
loan to a Eurodollar loan at 1% over the LIBO rate. Furthermore, the Company is
required to pay a commitment fee, accrued at the rate of 3/8 of 1% per annum, on
the daily unused amount of the revolving line of credit.
Pursuant to both the Senior Notes and the new 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.
The Company has entered into interest rate hedge agreements to effectively
convert variable rate debt to fixed rate debt in order to reduce the risk of
incurring higher interest costs due to rising interest rates. At December 31,
1997, the Company had entered into contracts that expire in May 1998 and May
1999 which hedge interest related to $5 million and $10 million of debt,
respectively. Both of these contracts had an effective rate of 7.94%. Such rate
was revised to 7.44% as a result of the new credit agreement.
Long-term indebtedness consists of the following (in thousands):
December 31,
---------------------
1997 1996
- --------------------------------------------------------------------------------
Notes payable pursuant to a $65,000
credit agreement expiring May 15, 2002
consisting of:
Term loan payable in quarterly
installments of $2,000 commencing
March 31, 1998 $32,000
Revolving loan, not to exceed $33,000 20,600
Notes payable pursuant to a credit
agreement expiring January 31, 1999
consisting of revolving loan, not to
exceed $6,000 $3,150
Equipment note payable in 84 monthly
payments of $24 commencing
February 1, 1998 with interest at
7.25% per annum 1,560
Other 1,148 632
- --------------------------------------------------------------------------------
55,308 3,782
Less current portion (reflecting terms of
new credit agreement and Senior Notes) 548 130
- --------------------------------------------------------------------------------
Total long-term indebtedness $54,760 $ 3,652
================================================================================
8. Income Taxes
The income tax provision (benefit) in the Consolidated Statements of
Income is as follows (in thousands):
Year Ended December 31,
-----------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $ 6,312 $ 6,988 $ 4,625
State 625 1,401 934
Deferred:
Federal 200 (200) (245)
State 125 (97) (14)
- --------------------------------------------------------------------------------
Total income tax provision $ 7,262 $ 8,092 $ 5,300
================================================================================
19
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------
Drew Industries Incorporated
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 (in thousands):
Year Ended December 31,
-----------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 6,740 $ 7,232 $ 4,698
State income taxes, net of
Federal income tax benefit 487 861 626
Other 35 (1) (24)
- --------------------------------------------------------------------------------
Provision for income taxes $ 7,262 $ 8,092 $ 5,300
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are as follows (in thousands):
December 31,
----------------
1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 179 $ 115
Inventories 438 371
Capital leases 22 61
Other asset valuation allowances 1,114 139
Employee benefits other than pensions 101 28
Vacation and holiday pay 268 264
Other accruals 2,138 1,196
- --------------------------------------------------------------------------------
Total deferred tax assets 4,260 2,174
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets 2,368 309
Long-term obligations 16 64
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,384 373
- --------------------------------------------------------------------------------
Net deferred tax asset $1,876 $1,801
================================================================================
The Company concluded that it is more likely than not that the deferred
tax assets at December 31, 1997 will be realized in the ordinary course of
operations based on scheduling of deferred tax liabilities and income from
operating activities.
Net deferred income tax assets of $3,023,000 and $1,946,000 are included
in prepaid expenses and other current assets, and net deferred tax liabilities
of $1,147,000 and $145,000 are included in other long-term liabilities, in the
Consolidated Balance Sheets at December 31, 1997 and 1996, respectively.
9. Commitments and Contingencies
Leases
The Company's lease commitments are primarily for real estate and
vehicles. The significant real estate leases provide for renewal options and
periodic rental adjustments to reflect price index changes and require the
Company to pay for property taxes and all other costs associated with the leased
property. The interest rate on the capital leases is 13.5%. Most vehicle leases
provide for contingent payments based upon miles driven and other factors.
Future minimum lease payments under capital and operating leases at
December 31, 1997 are summarized as follows (in thousands):
Years Capital Operating
- --------------------------------------------------------------------------------
1998 $99 $2,715
1999 2,340
2000 2,093
2001 1,642
2002 943
Thereafter 443
- --------------------------------------------------------------------------------
Total lease obligations 99 $10,176
========
Less amount representing interest 4
- ------------------------------------------------------------------
Present value of net minimum lease
payments (payable within one year) $95
==================================================================
Rent expense was $3,087,000, $2,522,000, and $1,760,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Other
Effective July 29, 1994, the Company spun off to its stockholders Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"),
the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy Code. The liabilities of White Metal are primarily
product liability costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
20
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, were served with a
summons and complaint in an adversary proceeding commenced by the chapter 7
trustee of White Metal. The complaint, which appears to allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $7.5 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations that the
Company and its affiliated companies obtained tax benefits attributable to the
use of White Metal's net operating losses. The trustee seeks to recover the
purported value of the tax savings achieved. Management believes that the
trustee's allegations are without merit and have no basis in fact. In addition,
the trustee alleges that White Metal made certain payments to the Company which
were preferential and are recoverable by White Metal, in the approximate amount
of $900,000. The Company denies liability for any such amount and is vigorously
defending against the allegations. However, an estimate of potential loss, if
any, cannot be made at this time. The Company believes that it has sufficient
accruals for the defense of this proceeding and that such defense will not have
a material adverse impact on the Company's financial condition or results of
operations.
In order to hedge the impact of future price fluctuations on a portion of
its aluminum raw material requirements, the Company periodically purchases
aluminum futures contracts on the London Metal Exchange. At December 31, 1997,
the Company had futures contracts outstanding for 3.3 million pounds of aluminum
at a cost of $2.6 million which approximates market value.
The Company has employment contracts with five of its employees which
expire on various dates through July 2002. The minimum commitments under these
contracts are $1,180,000 in 1998, $978,000 in 1999, $896,000 in 2000, $608,000
in 2001 and $89,000 in 2002. In addition, an arrangement with another employee
of the Company provides for incentives to be paid, based on a percentage of
profits as defined.
10. Stockholders' Equity
Stock Options and Warrants
Pursuant to the Drew Industries Incorporated Stock Option Plan (the
"Plan"), the Company may grant its directors and/or key employees options to
purchase Drew Common Stock. The Plan provides for the grant of stock options
that qualify as incentive stock options ("ISO") under Section 422 of the Code
and non-qualified stock options ("NQSOs").
Under the Plan, the Committee determines the period for which each stock
option may be exercisable, but in no event may a stock option be exercisable
more than 10 years from the date of grant thereof. The number of shares
available under the Plan, and the exercise price of options granted under the
Plan, are subject to adjustments that may be made by the Committee to reflect
stock splits, stock dividends, recapitalization, mergers, or other major
corporate action. Under the terms of the Plan, the number of shares that each
holder of options was entitled to purchase as well as the option price was
adjusted to reflect the two-for-one stock split effective March 21, 1997.
The exercise price for options granted under the Plan shall be at least
equal to 100% of the fair market value of the shares subject to such option on
the date of grant. The exercise price may be paid in cash or in shares of Drew
Common Stock. Options granted under the Plan become exercisable in annual
installments as determined by the Committee.
Transactions in stock options under this plan are summarized as follows:
Number of
Option Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 707,734 $ 1.24-$ 4.94
Granted 10,000 $ 7.35
Exercised (114,536) $ 1.24-$ 4.27
- ----------------------------------------------------------
Outstanding at December 31, 1995 603,198 $ 1.24-$ 7.35
Granted 169,140 $ 6.94-$10.75
Exercised (113,740) $ 1.24-$ 4.27
Canceled (15,442) $ 3.03-$ 6.94
- ----------------------------------------------------------
Outstanding at December 31, 1996 643,156
Granted 326,000 $12.13-$12.48
Exercised (85,990) $ 1.24-$ 6.94
Canceled (24,054) $ 6.94-$12.13
- ----------------------------------------------------------
Outstanding at December 31, 1997 859,112
==========================================================
Exercisable at December 31, 1997 464,176 $ 3.62-$12.48
==========================================================
21
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------
Drew Industries Incorporated
The Company adopted the disclosure-only option under SFAS No.123,
Accounting for Stock-Based Compensation ("FAS 123"), as of December 31, 1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average assumptions used for
grants included no dividend yields, risk-free interest rates of 5.0%, 5.9% and
5.4%; assumed expected volatilities of 40.2%, 30.3% and 29.8%; and expected
lives of 5, 5, and 5 years; for 1997, 1996 and 1995, respectively. The
respective number of shares available for granting options were 275,378, 177,324
and 331,022 at December 31, 1997, 1996 and 1995, respectively.
If compensation cost for the Company's stock option plan had been
recognized in the income statement based upon the fair market method, net income
would have been reduced to $11,806,000, $12,498,000 and $8,107,000 and earnings
per basic share would have been reduced to $1.20 ($1.17 diluted ), $1.17 ($1.14
diluted) and $.82 ($.81 diluted) in 1997, 1996 and 1995, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Average
Option Remaining Option
Exercise Shares Life Shares
Price Outstanding (Years) Exercisable
- --------------------------------------------------------------------------------
$ 3.62 23,160 1.0 23,160
$ 3.67 69,480 1.1 69,480
$ 4.26 329,374 1.3 329,374
$ 6.94 87,098 3.1 2,162
$ 7.35 10,000 3.0 10,000
$10.75 15,000 4.0 15,000
$12.13 310,000 5.9 0
$12.48 15,000 5.0 15,000
- --------------------------------------------------------------------------------
859,112 464,176
================================================================================
Outstanding stock options expire in five to six years from the date they
are granted; options vest over service periods that range from zero to five
years.
In connection with the acquisition of Pritt on May 5, 1997, the Company
issued a warrant to purchase 40,000 shares of its common stock at $11 per share.
The warrant expires May 5, 2000.
Treasury Stock
On February 14, 1997, the Company purchased 1.6 million shares from its
chairman for $13 per share, which was below the market price at that time. These
treasury shares were included in the shares issued in connection with the
acquisition of Lippert.
Weighted Average Common Shares Outstanding
Net income per basic common share is based on 9,845,138 shares, 10,688,552
shares and 9,894,810 shares for the years ended December 31, 1997, 1996 and
1995, respectively, the weighted average of common shares outstanding after
giving effect to the stock split effective March 21, 1997. Net income per
diluted common share is based on 10,090,106 shares, 10,916,608 shares and
10,047,612 shares for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in diluted average shares outstanding results from
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.
In connection with the acquisition of Lippert on October 7, 1997, the
Company issued 230,769 shares of common stock to the sellers which are being
held in escrow pending the results of an earnout. Such shares are not considered
outstanding for the calculation of weighted average common shares outstanding
until the contingency is resolved.
11. Significant Customers
One customer accounted for 16%, 17% and 10%, of the Company's net sales in
the years ended December 31, 1997, 1996 and 1995, respectively. Another customer
accounted for 10% of the Company's net sales in 1997.
22
12. Quarterly Results of Operations (Unaudited)
Interim unaudited financial information follows (in thousands, except per
share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 (a)
Net sales $41,628 $50,201 $50,182 $66,354 $208,365
Gross profit 10,163 11,082 11,088 13,948 46,281
Net income 2,946 3,081 2,939 3,028 11,994
Net income per common share (basic) $ .30 $ .34 $ .32 $ .29 $ 1.22
Net income per common share (diluted) .29 .33 .31 .28 1.19
Year Ended December 31, 1996 (b)
Net sales $34,114 $48,330 $44,815 $40,892 $168,151
Gross profit 8,538 11,599 10,860 10,423 41,420
Net income 2,517 3,614 3,518 2,923 12,572
Net income per common share (basic) $ .24 $ .33 $ .33 $ .27 $ 1.18
Net income per common share (diluted) .24 .32 .32 .27 1.15
- -------------------------------------------------------------------------------------------------
(a) Includes results of operations of Pritt and Lippert since their acquisitions
by the Company on May 5, and October 7, 1997, respectively.
(b) Includes results of operations of Shoals since its acquisition by the
Company on February 15, 1996.
Independent Auditors' Report
-------------------------------------------
Drew Industries Incorporated
The Board of Directors and Stockholders
Drew Industries Incorporated:
We have audited the accompanying consolidated balance sheets of Drew
Industries Incorporated and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drew
Industries Incorporated and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 1 of the consolidated financial statements, the
Company changed its method of accounting for inventories in 1997.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
February 11, 1998
23
Management's Responsibility
for Financial Statements
---------------------------------------------
Drew Industries Incorporated
The management of the Company has prepared and is responsible for the
consolidated financial statements and related financial information included in
this report. These consolidated financial statements were prepared in accordance
with generally accepted accounting principles which are consistently applied and
appropriate in the circumstances. These consolidated financial statements
necessarily include amounts determined using management's best judgements and
estimates.
The Company maintains accounting and other control systems which provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company. Although accounting controls
are designed to achieve this objective, it must be recognized that errors or
irregularities may occur. In addition, it is necessary to assess and consider
the relative costs and the expected benefits of the internal accounting
controls.
The Company's independent auditors, KPMG Peat Marwick LLP, provide an
independent audit of the consolidated financial statements and underlying
transactions. They perform such tests and other procedures as they deem
necessary to express an opinion on the financial statements. The report of KPMG
Peat Marwick LLP accompanies the consolidated financial statements.
The Audit Committee of the Board of Directors consists solely of
non-employee directors. The Committee meets periodically with management and the
independent auditors to review audit results, financial reporting, internal
accounting controls and other financial matters. The independent auditors have
free access to the Committee.
/s/ Leigh J. Abrams
Leigh J. Abrams
President and Chief Executive Officer
/s/ Fredric M. Zinn
Fredric M. Zinn
Chief Financial Officer
Per Share Market Price Range (1)
-----------------------------------------------------
Drew Industries Incorporated
A summary of the high and low closing prices of the Company's common stock
on the American Stock Exchange is as follows:
1997 1996
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
Quarter Ended March 31 $13.81 $10.75 $ 8.00 $ 6.75
Quarter Ended June 30 $13.00 $10.63 $ 9.25 $ 7.32
Quarter Ended September 30 $14.38 $11.75 $12.32 $ 8.38
Quarter Ended December 31 $14.13 $11.06 $13.62 $10.62
- --------------------------------------------------------------------------------
(1) Adjusted retroactively to give effect to a two-for-one stock split effective
March 21, 1997 to holders of record on March 4, 1997.
The closing price per share for the common stock on March 9, 1998 was
$12.75 and there were 2,302 holders of Drew Common Stock, not including
beneficial owners of shares held in broker and nominee names.
Dividend Information
Drew has not paid any cash dividends on its outstanding shares of Common
Stock. On February 13, 1997, Drew declared a two-for-one stock split by means of
a 100 percent stock dividend, payable on March 21, 1997 to stockholders of
record on March 4, 1997.
24
Corporate Information
----------------------------------------------------
Drew Industries Incorporated
Board of Directors
EDWARD W. ROSE, III(a)
Chairman of the Board of
Drew Industries Incorporated
President of Cardinal Investment Company
JAMES F. GERO(a)
Chairman and Chief Executive Officer of
Sierra Technologies, Inc.
GENE BISHOP(a)
Retired Bank Executive
LEIGH J. ABRAMS
President and Chief Executive Officer of
Drew Industries Incorporated
DAVID L. WEBSTER
President and Chief Executive Officer of
Kinro, Inc. and Shoals Supply, Inc.
L. DOUGLAS LIPPERT
President and Chief Executive Officer of
Lippert Components, Inc.
(a) Members of Audit Committee and Compensation Committee of the Board of
Directors
Corporate Officers
LEIGH J. ABRAMS
President and Chief Executive Officer
FREDRIC M. ZINN
Chief Financial Officer
HARVEY J. KAPLAN
Treasurer and Secretary
JOHN F. CUPAK
Controller
Form 10-K
A copy of the Annual Report on Form 10-K as filed by the Corporation with the
Securities and Exchange Commission is available upon request, without charge, by
writing to:
Treasurer
Drew Industries Incorporated
200 Mamaroneck Avenue
White Plains, NY 10601
General Counsel
Harvey F. Milman, Esq.
Gilbert, Segall and Young LLP
430 Park Avenue
New York, NY 10022-3592
Independent Certified Public Accountants
KPMG Peat Marwick LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Transfer Agent and Registrar
ChaseMellon Shareholder Services
85 Challenger Road
Ridgefield, NJ 07660
Executive Offices
200 Mamaroneck Avenue
White Plains, NY 10601
(914) 428-9098
Kinro, Inc.
Shoals Supply, Inc.
DAVID L. WEBSTER
President and Chief Executive Officer
Corporate Headquarters
4381 Green Oaks Boulevard West
Arlington, TX 76016
(817) 483-7791
Lippert Components, Inc.
L. DOUGLAS LIPPERT
President and Chief Executive Officer
Corporate Headquarters
608 Wright Avenue
Alma, MI 48801
(517) 463-8341
Forward Looking Statements and Risk Factors
This Report contains certain statements, including the Company's plans regarding
its operating strategy, its products and performance and its views of industry
prospects, which could be construed to be forward looking statements within the
meaning of the Securities and Exchange Act of 1934. These statements reflect the
Company's current views with respect to future plans, events and financial
performance. The Company has identified certain risk factors which could cause
actual plans and results to differ substantially from those included in the
forward looking statements. These factors include pricing pressures due to
competition, raw material costs (particularly aluminum, steel and glass),
adverse weather conditions impacting retail sales, inventory adjustments by
retailers and interest rates. In addition, general economic conditions may
affect the retail sale of manufactured homes and RV's.
DREW
DREW INDUSTRIES INCORPORATED
200 Mamaroneck Avenue
White Plains, NY 10601
Designed by Curran & Connors, Inc.