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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: MARCH 31, 1999
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 |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 11,462,930 shares of common
stock as of April 27, 1999.
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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 MARCH 31, 1999
(UNAUDITED)
------------------------------------------------------------
Page
----
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-15
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 16
2
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales $85,887 $75,181
Cost of sales 67,614 60,101
------- -------
Gross profit 18,273 15,080
Selling, general and administrative expenses 10,717 8,969
------- -------
Operating profit 7,556 6,111
Interest expense, net 1,003 1,075
------- -------
Income before income taxes 6,553 5,036
Provision for income taxes 2,611 2,000
------- -------
Net income $ 3,942 $ 3,036
======= =======
Net income per common share:
Basic $ .35 $ .27
======= =======
Diluted $ .34 $ .27
======= =======
Weighted average common shares outstanding:
Basic 11,396 11,135
======= =======
Diluted 11,475 11,359
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
----------------------
1999 1998 1998
- ------------------------------------------------------------------------------------------
(In thousands, except shares and per share amounts)
ASSETS
Current assets
Cash and short term investments $ 4,731 $ 3,480 $ 2,690
Accounts receivable, trade, less allowances 18,437 16,816 13,559
Inventories (Note 4) 30,513 27,029 35,400
Prepaid expenses and other current assets 4,528 4,001 6,032
--------- --------- ---------
Total current assets 58,209 51,326 57,681
Fixed assets, net 44,114 40,436 43,139
Goodwill, net (Note 3) 47,437 43,821 47,887
Other assets 5,448 2,591 5,718
--------- --------- ---------
Total assets $ 155,208 $ 138,174 $ 154,425
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of
long-term debt and other long-term liabilities $ 788 $ 594 $ 779
Accounts payable, trade 10,264 6,966 8,043
Accrued expenses and other current liabilities 17,723 18,135 17,229
--------- --------- ---------
Total current liabilities 28,775 25,695 26,051
Long-term indebtedness (Note 5) 51,747 56,029 57,947
Other long-term liabilities 1,665 1,370 1,665
--------- --------- ---------
Total liabilities 82,187 83,094 85,663
--------- --------- ---------
Commitments and Contingencies (Note 6)
Stockholders' equity
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,793,000 shares at
March 1999; 11,373,928 shares at March 1998 and
11,513,702 shares at December 1998 118 113 115
Paid-in capital 24,765 19,340 22,943
Retained earnings 51,750 35,627 47,808
--------- --------- ---------
76,633 55,080 70,866
Treasury stock, at cost - 301,500 shares at March
1999 and 175,600 shares at December 1998 (3,612) (2,104)
--------- --------- ---------
Total stockholders' equity 73,021 55,080 68,762
--------- --------- ---------
Total liabilities and stockholders' equity $ 155,208 $ 138,174 $ 154,425
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
- -------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 3,942 $ 3,036
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 1,956 1,495
Loss on disposal of fixed assets 15 16
Changes in assets and liabilities:
Accounts receivable, net (4,878) (7,635)
Inventories 4,887 2,427
Prepaid expenses and other assets 1,484 1,703
Accounts payable, accrued expenses and other
current liabilities 2,715 3,478
-------- --------
Net cash flows provided by operating activities 10,121 4,520
-------- --------
Cash flows from investing activities:
Capital expenditures (2,320) (3,472)
Proceeds from sales of fixed assets 114 93
-------- --------
Net cash flows used for investing activities (2,206) (3,379)
-------- --------
Cash flows from financing activities:
Proceeds from private placement of Senior Notes 40,000
Proceeds from line of credit 17,000 25,000
Repayments under line of credit and other borrowings (23,198) (63,789)
Acquisition of treasury stock (1,508)
Exercise of stock options and other 1,832 100
-------- --------
Net cash flows (used for) provided by
financing activities (5,874) 1,311
-------- --------
Net increase in cash 2,041 2,452
Cash and short-term investments at beginning of period 2,690 1,028
-------- --------
Cash and short-term investments at end of period $ 4,731 $ 3,480
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 1,603 $ 902
Income taxes paid (received) $ (777) $ 185
The accompanying notes are an integral part of these consolidated financial
statements.
5
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------
(In thousands, except shares)
Balance - December 31, 1998 $ 115 $(2,104) $22,943 $47,808 $68,762
Net income for three months ended
March 31, 1999 3,942 3,942
Issuance of 279,298 shares of common stock
pursuant to stock option plan 3 1,164 1,167
Income tax benefit relating to issuance of
common stock upon exercise of stock options 658 658
Purchase of 123,900 shares of treasury stock (1,508) (1,508)
------- ------- ------- ------- -------
Balance - March 31, 1998 $ 118 $(3,612) $24,765 $51,750 $73,021
======= ======= ======= ======= =======
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, 1998 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 three month periods ended March 31, 1999 and 1998.
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, axles, and galvanized roofing. The MH
segment also imports 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, 1998 Annual Report on Form 10-K.
7
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
To determine the Company's reportable segments, management considered,
among other factors, the underlying long-term economic characteristics of its
operations, and the Company's management structure. The long-term growth
potential of the Company's various products are significantly dependent upon the
two industries to which the Company supplies such products. While industry
shipments of manufactured homes are dependent upon factors such as the quality
of the homes, comparative price to site-built homes, availability of financing,
and zoning restrictions; industry shipments of recreational vehicles are more
dependent upon levels of disposable income, consumer confidence and age
demographics.
Information relating to segments follows (in thousands):
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Net sales:
MH segment $67,465 $62,331
RV segment 18,422 12,850
------- -------
Total $85,887 $75,181
======= =======
Operating profit:
MH segment $ 6,945 $ 6,274
RV segment 1,973 685
------- -------
Total segments operating profit 8,918 6,959
Amortization of intangibles (673) (458)
Corporate and other (689) (390)
------- -------
Operating profit 7,556 6,111
Interest expense, net 1,003 1,075
------- -------
Income before income taxes $ 6,553 $ 5,036
======= =======
3. Acquisitions
In May 1998 Lippert acquired the assets and business of Coil Clip related
to its supply of stamped steel parts to the manufactured housing industry, and
entered into an agreement pursuant to which Coil Clip would supply certain steel
parts to Lippert. In December 1998 Lippert acquired the remaining assets and
business of Coil Clip. It is expected that these acquisitions will add
approximately $12 million to the Company's annual sales. The combined purchase
price was approximately $10.8 million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets based upon their
respective estimated fair values at the date of acquisition. Intangible assets
of approximately $3.8 million are being amortized over useful lives averaging
approximately 5 years. The excess of purchase price over the fair value of the
net assets acquired ("goodwill") was approximately $2.6 million, which is being
amortized over 20 years.
8
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Inventories consist of the following (in thousands):
March 31,
------------------- December 31,
1999 1998 1998
---- ---- ----
Finished goods $ 8,685 $ 6,677 $10,629
Work in process 2,059 1,874 2,052
Raw Material 19,769 18,478 22,719
------- ------- -------
Total $30,513 $27,029 $35,400
======= ======= =======
5. Long-Term Indebtedness
The Company has $40 million of 6.95 percent, seven year Senior Notes
issued in a private placement in January 1998. The Company also has a $25
million credit facility with interest payable at the prime rate, with an option
to convert a portion of the borrowings under the credit facility to a Eurodollar
loan at 1 percent over the LIBO rate. Furthermore, the Company is required to
pay 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.
Pursuant to both the Senior Notes and the credit facility, the Company is
required to maintain minimum net worth and interest and fixed charge coverages
and meet certain other financial requirements. All of such requirements have
been met for the three months ended March 31, 1999. Borrowings under both
facilities are secured only by capital stock of the Company's subsidiaries.
6. Contingencies
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime'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 all product liability
claims, and related costs, resulting from its discontinued ladder manufacturing
business. 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.
9
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, 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 have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14,1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the court's decision
dismissing these claims on termination of the proceeding.
Other than the dismissed tax-related claims, 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. Although
these claims were not dismissed, the Company believes that the claims are
without merit, 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 the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
7. 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.
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
Weighted average common shares
outstanding - basic 11,396,200 11,135,088
Assumed issuance of common stock
pertaining to stock options and warrants 78,735 224,366
---------- ----------
Weighted average common shares
outstanding - diluted 11,474,935 11,359,454
========== ==========
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 79
percent of the 1999 quarter's consolidated net sales and 82 percent of the
annual consolidated net sales for 1998, manufactures a variety of products used
in the construction of manufactured homes, including windows and screens,
chassis and chassis parts, axles, and galvanized roofing. The MH segment also
imports new tires and refurbishes used axles and tires which it supplies to
producers of manufactured homes. The RV segment, which accounted for 21 percent
of the 1999 quarter's consolidated net sales and 18 percent of the annual
consolidated net sales for 1998, 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's operations are performed through its four primary operating
subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("Lippert")
have operations in both the MH and RV segments, while Shoals Supply, Inc.
("Shoals") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH
segment. At March 31, 1999 the Company's subsidiaries operated 34 plants in 16
states.
In May 1998 Lippert acquired the assets and business of Coil Clip related
to its supply of stamped steel parts to the manufactured housing industry, and
entered into an agreement pursuant to which Coil Clip would supply certain steel
parts to Lippert. In December 1998 Lippert acquired the remaining assets and
business of Coil Clip. Coil Clip's sales to the manufactured housing industry
were approximately $5 million annually, and its sales of related steel parts to
other industries were approximately $7 million annually.
RESULTS OF OPERATIONS
Net sales and operating profit are as follows (in thousands):
3 Months Ended March 31,
------------------------
1999 1998
------- -------
Net sales:
MH segment $67,465 $62,331
RV segment 18,422 12,850
------- -------
Total $85,887 $75,181
======= =======
Operating profit:
MH segment $ 6,945 $ 6,274
RV segment 1,973 685
------- -------
Total segments operating profit 8,918 6,959
Amortization of intangibles (673) (458)
Corporate and other (689) (390)
------- -------
Total $ 7,556 $ 6,111
======= =======
11
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MH Segment
Net sales of the MH segment increased 8 percent in the 1999 period over
1998 partially as a result of the Coil Clip acquisition in December 1998.
Excluding Coil Clip's sales, net sales increased 6 percent. This increase is
volume related and is in line with the increase in the industry-wide shipments
of manufactured homes for January and February 1999, the latest period for which
industry statistics are available.
Operating profit of the MH segment increased 11 percent in the 1999 period
over 1998 partially as a result of the increased sales. Operating margins
improved slightly, as the adverse effect of competitive pressures in the axle
and tire refurbishing product line were offset by lower product costs and
improved efficiencies in other product lines. In addition, the 1998 quarter
included startup costs relating to the Company's vinyl window manufacturing
plant.
RV Segment
Net sales of the RV segment increased 43 percent in 1999 period as a
result of the expansion of the Company's RV chassis product line as well as the
continuing growth of the RV window line. Such increase is substantially higher
than the 11 percent increase in shipments reported by the RV industry.
Operating profit almost tripled as operating margins were 11 percent in
the 1999 period compared to 5 percent in 1998. The improvement in operating
margins is in part due to greater efficiencies at last year's new RV chassis
facilities, as well as startup costs at such facilities during last year's first
quarter. Production costs and operating efficiencies at the Company's mature RV
facilities also improved.
Amortization of Intangibles, Corporate and Other
Amortization of intangibles increased by $.2 million in 1999 as a result
of the goodwill and other intangibles relating to the acquisition of Coil Clip.
Corporate and other expenses increased $.3 million as a result of non-recurring
gains recorded in 1998 and a reduction of cost recoveries in 1999 relating to
the Shared Services Agreement described below.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the spin-off by the
Company of LBP, Inc. on July 29, 1994, the Company and LBP 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 LBP for the fair market value of such services. This Agreement has
been extended and now expires on December 31, 1999 and may be further extended.
The Company charged fees to LBP of $45,000 in the 1999 quarter and $150,000 in
the 1998 quarter. These fees reduce selling, general and administrative
expenses.
Interest Expense, Net
Interest expense, net decreased $72,000 in the 1999 period on
approximately the same average debt.
12
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):
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Net cash flows provided by
operating activities $ 10,121 $ 4,520
Net cash flows (used for)
investment activities $ (2,206) $(3,379)
Net cash flows (used for) provided by
financing activities $ (5,874) $ 1,311
Net cash provided by operating activities primarily resulted from net
income before depreciation and amortization, seasonal changes in operating
assets, timing of collections of receivables, and reductions in inventory levels
in 1999.
Cash flows used for investing activities consisted of capital
expenditures, including an RV chassis factory constructed by Lippert. Such
capital expenditures were funded by cash flows from operations. Capital
expenditures for 1999 are expected to approximate $7 to $9 million, which will
be funded from cash flow from operations.
Cash flows used for financing activities for 1999 included reductions in
debt of approximately $6.2 million, and $1.5 million used to acquire treasury
stock, offset by $1.8 million from the exercise of stock options. Cash flows
provided by financing activities in 1998 is primarily an increase in debt of
approximately $1.2 million. Availability under the Company's line of credit is
adequate to finance the Company's working capital and capital expenditure
requirements.
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime'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 all product liability
claims, and related costs, resulting from its discontinued ladder manufacturing
business. 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.
13
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, 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 have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14,1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the court's decision
dismissing these claims on termination of the proceeding.
Other than the dismissed tax-related claims, 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. Although
these claims were not dismissed, the Company believes that the claims are
without merit, 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 the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
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 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 March 31, 1999, the Company had
futures contracts outstanding for approximately 3.3 million pounds of aluminum
at approximately market value.
YEAR 2000
The "Year 2000" issue is the result of computer programs being written
using two digits rather than four digits to define a specific year. Such a
computer program may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system failures or miscalculations.
The Company has addressed this risk to the reliability and availability of
its financial, operational and administrative information systems. Prior to the
public concerns about the Year 2000 issue, the Company had decided to upgrade
its computer systems in order to enhance the information flow, capacity and
functionality of its systems. The upgrades to the computer systems will allow
the Company to achieve Year 2000 compliance. Some of the Company's manufacturing
processes are reliant on computer technology and all such significant processes
have been verified to be Year 2000 compliant. The installation and testing of
certain critical systems has been completed at a cost of less than $1 million,
and the balance of the systems should be completed in the summer of 1999 at a
cost of less than $.5 million. The Company has obtained assurances from its
software vendors that the new systems will be Year 2000 compliant.
14
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Approximately 70 percent of the Company's sales are to publicly-owned
companies which file periodic reports pursuant to the Securities Exchange Act of
1934, including all customers which represent more than 3 percent of the
consolidated net sales. The Company has reviewed the Year 2000 disclosures in
such filings and found that, while many of these companies address certain
risks, all expect to be Year 2000 compliant before the end of 1999.
While the Company believes that its internal computer systems, as well as
those of vendors who provide data processing services to the Company, will be
Year 2000 compliant, there can be no assurance that Year 2000 system failures by
the Company's vendors, customers or financial institutions will not result in
significant disruptions to the Company's operations. The Company believes,
however, that its alternative sources of supply of critical raw materials,
diverse customer list and financial resources mitigate the likelihood of a
severe adverse impact on the Company's operating results. The Company will also
consider operating strategies, such as maintaining easily accessible back-up of
critical information and adjusting inventory levels as the year 2000 approaches,
to minimize the impact of short-term disruptions caused by systems failures of
third parties.
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 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, vinyl, steel and glass), periodic
inventory adjustments by retailers of manufactured homes in response to changes
in retail sales and other business conditions, interest rates, and the Year 2000
issue. In addition, general economic conditions may affect the retail sale of
manufactured homes and RV's.
15
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
Principal Financial Officer
May 10, 1999
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