- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from _________________ to_________________ Commission File Number: 0-13646 DREW INDUSTRIES INCORPORATED (Exact Name of Registrant as Specified in its Charter) Delaware 13-3250533 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Mamaroneck Avenue, White Plains, N.Y. 10601 (Address of principal executive offices) (Zip Code) (914) 428-9098 Registrant's Telephone Number including Area Code (Former name, former address and former fiscal year, if changed since last year) Indicate by check marks whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities & Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 9,825,163 shares of common stock as of July 31, 2002. - -------------------------------------------------------------------------------- DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS FILED WITH QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 (UNAUDITED) ------------------------------------------------------------ Page PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME 3 CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-11 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-19 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 20 PART II - OTHER INFORMATION Not applicable SIGNATURES 21 SECTION 906 CERTIFICATION 21 DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended Three Months Ended June 30, June 30, --------------------- ------------------ 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------ (In thousands, except per share amounts) Net sales $ 163,592 $130,688 $88,873 $71,794 Cost of sales 123,682 102,099 67,121 55,070 --------- -------- ------- ------- Gross profit 39,910 28,589 21,752 16,724 Selling, general and administrative expenses 24,632 19,505 13,213 10,415 --------- -------- ------- ------- Operating profit 15,278 9,084 8,539 6,309 Interest expense, net 1,838 2,259 890 1,066 --------- -------- ------- ------- Income before income taxes and cumulative effect of change in accounting principle 13,440 6,825 7,649 5,243 Provision for income taxes 5,142 2,988 2,883 2,273 --------- -------- ------- ------- Income before cumulative effect of cha nge in accounting principle 8,298 3,837 4,766 2,970 Cumulative effect of change in accounting principle for goodwill (net of taxes of $2,825) (30,080) --------- -------- ------- ------- Net (loss) income $ (21,782) $ 3,837 $ 4,766 $ 2,970 ========= ======== ======= ======= Net income (loss) per common share: Income before cumulative effect of change in accounting principle: Basic $ .85 $ .40 $ .49 $ .31 ========= ======== ======= ======= Diluted $ .84 $ .40 $ .48 $ .31 ========= ======== ======= ======= Cumulative effect of change in accounting principle for goodwill, net of taxes: Basic $ (3.10) $ -- $ -- $ -- ========= ======== ======= ======= Diluted $ (3.03) $ -- $ -- $ -- ========= ======== ======= ======= Net (loss) income: Basic $ (2.24) $ .40 $ .49 $ .31 ========= ======== ======= ======= Diluted $ (2.19) $ .40 $ .48 $ .31 ========= ======== ======= ======= Weighted average common shares outstanding: Basic 9,717 9,656 9,753 9,656 ========= ======== ======= ======= Diluted 9,924 9,657 9,987 9,657 ========= ======== ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 3 DREW INDUSTRIES INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, ------------------ December 31, 2002 2001 2001 - -------------------------------------------------------------------------------------- (In thousands, except shares and per share amounts) ASSETS Current assets Cash and short-term investments $ 1,633 $ 3,139 $ 1,247 Accounts receivable, trade, less allowances 22,360 19,924 10,733 Inventories 32,922 29,834 27,898 Prepaid expenses and other current assets 4,062 4,395 4,427 -------- -------- -------- Total current assets 60,977 57,292 44,305 Fixed assets, net 72,643 67,923 69,944 Goodwill, net 5,972 39,620 38,303 Other intangible assets 881 1,013 1,073 Other assets 5,688 2,704 3,350 -------- -------- -------- Total assets $146,161 $168,552 $156,975 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness $ 9,639 $ 9,310 $ 9,630 Accounts payable, trade 15,406 12,606 6,025 Accrued expenses and other current liabilities 18,996 16,448 16,174 -------- -------- -------- Total current liabilities 44,041 38,364 31,829 Long-term indebtedness 40,633 53,942 43,691 Other long-term liabilities 260 245 245 -------- -------- -------- Total liabilities 84,934 92,551 75,765 -------- -------- -------- Commitments and Contingencies Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,964,688 shares at June 2002; 11,805,754 shares at June 2001 and 11,820,078 at December 2001 120 118 118 Paid-in capital 26,876 24,967 25,079 Retained earnings 53,698 70,383 75,480 -------- -------- --------- 80,694 95,468 100,677 Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467) --------- --------- --------- Total stockholders' equity 61,227 76,001 81,210 --------- --------- --------- Total liabilities and stockholders' equity $ 146,161 $ 168,552 $ 156,975 ========= ========= ========= 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 June 30, -------------------- 2002 2001 - --------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net (loss) income $(21,782) $ 3,837 Adjustments to reconcile net income to cash flows provided by operating activities: Cumulative effect of change in accounting principle for goodwill, net of taxes 30,080 Depreciation and amortization 3,510 4,261 Loss on disposal of fixed assets 7 49 Changes in assets and liabilities: Accounts receivable, net (11,627) (5,120) Inventories (5,024) 4,901 Prepaid expenses and other assets (18) (535) Accounts payable, accrued expenses and other current liabilities 12,203 7,873 -------- -------- Net cash flows provided by operating activities 7,349 15,266 -------- -------- Cash flows from investing activities: Capital expenditures (5,143) (4,038) Acquisition of company's net assets and business (601) (9,378) Proceeds from sales of fixed assets 16 730 -------- -------- Net cash flows used for investing activities (5,728) (12,686) -------- -------- Cash flows from financing activities: Proceeds from line of credit 39,250 42,000 Proceeds from loans secured by real estate and equipment 7,190 Proceeds from sale and leaseback of equipment 3,700 Repayments under line of credit and other borrowings (42,299) (52,635) Exercise of stock options 1,799 Other 15 (246) -------- -------- Net cash flows (used for) provided by financing activities (1,235) 9 -------- -------- Net increase in cash 386 2,589 Cash and cash equivalents at beginning of period 1,247 550 -------- -------- Cash and cash equivalents at end of period $ 1,633 $ 3,139 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 2,018 $ 2,375 Income taxes paid $ 5,197 $ 1,910 The accompanying notes are an integral part of these consolidated financial statements. 5 DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Total Common Treasury Paid-in Retained Stockholders' Stock Stock Capital Earnings Equity - -------------------------------------------------------------------------------------------- (In thousands, except shares) Balance - December 31, 2001 $ 118 $(19,467) $25,079 $ 75,480 $81,210 Net loss for six months ended June 30, 2002 (21,782) (21,782) Issuance of 144,610 shares of common stock pursuant to stock option plan 2 1,556 1,558 Income tax benefit relating to issuance of common stock pursuant to stock option plan 241 241 -------- -------- ------- -------- ------- Balance - June 30, 2002 $ 120 $(19,467) $26,876 $ 53,698 $61,227 ======== ======== ======= ======== ======= 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 include the accounts of Drew Industries Incorporated and its subsidiaries. There are no unconsolidated subsidiaries. Drew's wholly-owned active subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro"), Lippert Components, Inc. and its subsidiaries ("LCI"), and Lippert Tire and Axle, Inc. and its subsidiaries ("LTA"). Drew, through its wholly-owned subsidiaries, supplies a broad array of components for manufactured homes and recreational vehicles. All significant intercompany balances and transactions have been eliminated. Except for the change in accounting for stock options, described in Note 7, the Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2001 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the results of operations as of and for the six and three month periods ended June 30, 2002 and 2001. All such adjustments are of a normal recurring nature. The Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include some information and notes necessary to conform with annual reporting requirements. 2. Segment Reporting The Company has two reportable operating segments, the manufactured housing products segment (the "MH segment") and the recreational vehicle products segment (the "RV segment"). The MH segment manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, thermo-formed bath and shower units, and axles. The MH segment also distributes new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis and chassis parts. 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, 2001 Annual Report on Form 10-K. 7 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Information relating to segments follows (in thousands): Six Months Ended Three Months Ended June 30, June 30, ---------------------- ------------------ 2002 2001 2002 2001 - ------------------------------------------------------------------------------- Net sales: MH segment $ 84,778 $ 76,687 $ 44,767 $ 43,002 RV segment 78,814 54,001 44,106 28,792 --------- --------- -------- -------- Total $ 163,592 $ 130,688 $ 88,873 $ 71,794 ========= ========= ======== ======== Operating profit: MH segment $ 9,521 $ 6,649 $ 5,440 $ 4,588 RV segment 7,638 4,801 4,056 2,896 --------- --------- -------- -------- Total segments operating profit 17,159 11,450 9,496 7,484 Amortization of intangibles (359) (1,251) (182) (637) Corporate and other (1,522) (1,115) (775) (538) --------- --------- -------- -------- Operating profit 15,278 9,084 8,539 6,309 Interest expense, net 1,838 2,259 890 1,066 --------- --------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle $ 13,440 $ 6,825 $ 7,649 $ 5,243 ========= ========= ======== ======== 3. 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): June 30, ------------------- December 31, 2002 2001 2001 ---- ---- ---- Finished goods $ 8,192 $ 7,207 $ 7,272 Work in process 1,710 1,401 1,449 Raw Material 23,020 21,226 19,177 ------- ------- ------- Total $32,922 $29,834 $27,898 ======= ======= ======= 4. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. It also specifies criteria that intangible assets acquired in a purchase combination 8 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) must meet to be recognized apart from goodwill. SFAS No. 142 requires that the useful lives of all existing intangible assets be reviewed and adjusted if necessary. It also requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Other intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 142, the Company stopped amortizing goodwill effective January 1, 2002. The following schedule shows pro forma net income for the six months and three months ended June 30, 2001, excluding goodwill amortization expense (in thousands, except per share data): Six Months Ended Three Months Ended June 30, 2001 June 30, 2001 --------------------------- --------------------------- Earnings Per Share Earnings Per Share Net ------------------ Net ------------------ Income Basic Diluted Income Basic Diluted ------ ----- ------- ------ ----- ------- Net income, as reported Goodwill amortization expense, $3,837 $.40 $.40 $2,970 $.31 $.31 net of taxes of $144 for the six months and $74 for the three months 783 .08 .08 395 .04 .04 ------ ---- ---- ------ ---- ---- Pro forma net income $4,620 $.48 $.48 $3,365 $.35 $.35 ====== ==== ==== ====== ==== ==== The Company has reassessed the useful lives of its intangible assets as required by SFAS No. 142 and determined that the existing useful lives are reasonable. During the first quarter, in accordance with the goodwill impairment provisions of SFAS No. 142, the Company identified its reporting units and allocated its assets and liabilities, including goodwill, to its reporting units. In addition, the Company had a valuation of certain of its reporting units done by an independent appraiser, as of January 1, 2002, to assist the Company in determining if there had been an impairment in the goodwill of any of such reporting units. Based on this appraisal and additional analyses performed by the Company, it was determined that there had been an impairment of goodwill in two reporting units. As a result, the Company recorded an impairment charge of $32,905,000 offset by a tax benefit of $2,825,000. Such charge has been recorded as a cumulative effect of change in accounting principle in the quarter ended March 31, 2002. During the first quarter the Company also reviewed the classification of its intangible assets and goodwill in accordance with SFAS No. 141 and reclassified $574,000 of other assets to goodwill. 9 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As a result of the allocation of the goodwill and the recognition of the impairment charge, goodwill by reportable segment is as follows (in thousands): MH Segment RV Segment Total ---------- ---------- ------- Balance - December 31, 2001 $33,354 $4,949 $38,303 Reclassification of other intangible assets 505 69 574 ------- ------ ------- Balance - January 1, 2002 33,859 5,018 38,877 Impairment charge 30,698 2,207 32,905 ------- ------ ------- Balance - June 30, 2002 $ 3,161 $2,811 $ 5,972 ======= ====== ======= 5. Long-Term Indebtedness Long-term indebtedness consists of the following (in thousands): June 30, ----------------- December 31, 2002 2001 2001 ------- ------- ------- Senior Notes payable at the rate of $8,000 per annum commencing January28, 2001 with interest payable semiannually at the rate of 6.95% per annum $24,000 $32,000 $32,000 Notes payable pursuant to a credit agreement expiring October 15, 2003 consisting of a revolving loan, not to exceed $25,000; interest at prime rate, or LIBOR plus a rate margin (1.7% during the second quarter) based upon the Company's performance 5,950 15,500 200 Industrial Revenue Bonds, fixed rate 5.68% to 6.28%, due 2008 through 2015; secured by certain real estate and equipment 6,547 7,137 6,846 Real estate mortgage payable at the rate of $70 per month with a balloon payment of $3,371 in May 2006, interest at 9.03% per annum 5,085 5,472 5,268 Loans secured by certain real estate and equipment, due 2006 to 2011, primarily fixed rate 7.25% to 7.90% 8,690 3,143 9,007 ------- ------- ------- 50,272 63,252 53,321 Less current portion 9,639 9,310 9,630 ------- ------- ------- Total long-term indebtedness $40,633 $53,942 $43,691 ======= ======= ======= Pursuant to the Senior Notes, the credit agreement, and certain of the other loan agreements the Company is required to maintain minimum net worth and interest and fixed charge coverages and meet certain other financial 10 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) requirements. Borrowings under the Senior Notes and the credit facility are secured only by capital stock of the Company's subsidiaries. The Company pays a commitment fee, accrued at the rate of 3/8 of 1 percent per annum, on the daily unused amount of the revolving line of credit. 6. Weighted Average Common Shares Outstanding Net income per diluted common share reflects the dilution of the weighted average common shares by the assumed issuance of common stock pertaining to stock options. The numerator, which is equal to net income, is constant for both the basic and diluted earnings per share calculations. Weighted average common shares outstanding - diluted is calculated as follows (in thousands): Six Months Ended Three Months Ended June 30, June 30, ---------------- ----------------- 2002 2001 2002 2001 ---- ---- ---- ---- Weighted average common shares outstanding - basic 9,717 9,656 9,753 9,656 Assumed issuance of common stock pertaining to stock options 207 1 234 1 ------ ------ ------ ------ Weighted average common shares outstanding - diluted 9,924 9,657 9,987 9,657 ====== ====== ====== ====== 7. Stock Options As of April 1, 2002, the Company adopted the fair value method of accounting for stock options contained in Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which is considered the preferable method of accounting for stock-based employee compensation. All future employee stock options will be expensed over the stock option vesting period based on fair value at the date the options are granted. Historically, the Company had applied the "disclosure only"option of SFAS 123. Accordingly, no compensation cost has been recognized for previously granted stock options. The adoption of this new accounting policy for stock options has no impact on the financial statements as of and for the six months ended June 30, 2002, since no stock options have been granted this year. Had the Company previously adopted this new accounting policy, diluted earnings per share would have been reduced by $.02 for the six months ended June 30, 2002. 11 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 52 percent of consolidated net sales for the six months ended June 30, 2002 and 60 percent of the annual consolidated net sales for 2001, manufactures a variety of products used in the construction of manufactured homes, including aluminum and vinyl windows and screens, chassis and chassis parts, thermo-formed bath and shower units, and axles. The MH segment also distributes new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment, which accounted for 48 percent of consolidated net sales for the six months ended June 30, 2002 and 40 percent of the annual consolidated net sales for 2001, manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis and chassis parts. 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 operating subsidiaries. Its two primary operating subsidiaries, Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("LCI") have operations in both the MH and RV segments, while Lippert Tire and Axle, Inc. ("LTA") operates entirely within the MH segment. At June 30, 2002 the Company's subsidiaries operated 40 plants in 18 states and one in Canada. On June 1, 2001, the Company's subsidiary, Kinro, acquired the assets and business of the Better Bath division of Kevco, Inc. Better Bath manufactures and sells thermo-formed bath and shower units for the manufactured housing industry and had sales of approximately $27.7 million in 2000 and $22.3 million in 2001, including $13.2 million in the seven months after its acquisition by the Company. The results of the acquired business have been included in the Company's consolidated statement of income beginning June 1, 2001. The acquisition has been accounted for as a purchase. The aggregate purchase price of approximately $10.2 million has been allocated to the underlying assets based upon their respective estimated fair values. The excess of purchase price over the fair value of net assets acquired ("goodwill") was approximately $3.1 million. The Company has not recorded any impairment of this goodwill. Manufactured homes are attractive, quality built, and less expensive than site-built homes. A decline in production by the MH industry began in the spring of 1999. Credit availability, high interest rate spreads between conventional mortgages and manufactured housing mortgages, and excessive repossessions remain problems for the industry. Retail demand for manufactured homes has remained strong, as manufactured homes have improved dramatically in appearance and quality, and still represent a significant cost advantage over site-built homes. Sales of homes have been constrained by the limited availability of affordable financing. As a result, the manufactured housing industry is predicting that approximately 180,000 new homes will be produced during 2002, down 7 percent from 2001. To reach 180,000 units this year, production in the second half of the year would have to be 8 percent below last year's levels. Industry production for June 2002 was 17 percent below last June. As a result of market share gains and efficiency improvements, Drew's manufactured housing segment has remained profitable throughout this extended industry-wide slump. The RV industry has reported higher shipment levels this year, after a downturn which began in 2000. This year the Company's RV product segment has outpaced the growth of the overall industry, which grew a reported 19 percent in the second quarter of 2002. The RV industry reported that retail sales have been somewhat stronger than wholesale shipments. Market share gains were accomplished in both the RV chassis product line and the RV window and door product line. The Company's RV products segment, as well as the entire RV industry, has been bolstered by the increased preference for domestic vacations rather than foreign air travel. Increasing RV sales are also being driven by positive demographics as demand for RV's is strongest from the over 50 population, which is the fastest 12 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) growing segment of the population. In recent years, the Recreation Vehicle Industrial Association has started a campaign to attract customers in the 35 to 54 age group. In the last four years, the number of RV's owned by those 35 to 54 grew faster than all other age groups. RESULTS OF OPERATIONS Net sales and operating profit are as follows (in thousands): Six Months Ended June 30,Three Months Ended June 30, ---------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net sales: MH segment $ 84,778 $ 76,687 $ 44,767 $ 43,002 RV segment 78,814 54,001 44,106 28,792 -------- -------- -------- -------- Total $163,592 $130,688 $ 88,873 $ 71,794 ======== ======== ======== ======== Operating profit: MH segment $ 9,521 $ 6,649 $ 5,440 $ 4,588 RV segment 7,638 4,801 4,056 2,896 -------- -------- -------- -------- Total segments operating profit 17,159 11,450 9,496 7,484 Amortization of intangibles (359) (1,251) (182) (637) Corporate and other (1,522) (1,115) (775) (538) -------- -------- -------- -------- Total $ 15,278 $ 9,084 $ 8,539 $ 6,309 ======== ======== ======== ======== On a consolidated basis, the Company's operating profit, or EBIT, was 9.6 percent of net sales for the second quarter and 9.3 percent of net sales for the six months of 2002. These results compare to a margin of 8.8 percent for the second quarter and 7.0 percent for the six months ended June 30, 2001. This margin increase was due to market share gains, profits from Better Bath, and some efficiency improvements. The increase in margins was a bit less than expected, as a result of approximately $.5 million of start-up costs which were incurred between a new plant in Portland, Oregon, which is opening in the third quarter, and other new business obtained on the west coast during the second quarter. The Company has a goal of achieving a consolidated operating margin of 10 percent on an annual basis, but that goal will probably not be achieved this year. The Company's results are seasonal, so a 10 percent margin must be exceeded in peak months in order to achieve the target for the year. MH Segment Net sales of the MH segment increased 11 percent in the six months and 4 percent in the quarter ended June 30, 2002, from the same periods last year, despite a 5 percent decline in industry-wide production of manufactured homes for the six months ended June. The Company outperformed the industry primarily because of market share gains from sales of its high-end vinyl window products. Sales from the acquisition of Better Bath in June 2001 were largely offset by a decrease in sales due to the contraction of the Company's axle and tire business. 13 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating profit of the MH segment increased $2.9 million (43 percent) in the six month period and $.9 million (19 percent) in the quarter ended June 30, 2002, from the same period in 2001. Excluding the results of the refurbished axles and tires operation as well as the results of Better Bath, which was acquired in June 2001, operating profit for the MH segment increased by 27 percent for the six months. Operating profit of the segment was 11.2 and 12.2 percent of sales for the six months and quarter ended June 30, 2002, respectively, compared to 8.7 percent and 10.7 percent for the same periods in 2001. Overall, material costs were fairly stable, with some rising and some falling. One area that was up and may continue to go up is related to certain steel costs, which were up 10 to 15 percent in the quarter, and are expected to increase further in the third quarter. This cost increase had only a modest impact on results in the second quarter, but the full impact of these cost increases could reach $300,000 to $400,000 per month. However, the Company has had some success passing these steel cost increases through to customers, and these sales price increases, which will be effective later in the third quarter, should cover more than half of the steel cost increases. Selling, general and administrative expenses were up in dollar terms, largely following the trend of higher sales. The operating margin achieved by Better Bath has increased in recent months as production efficiencies improved and selling, general and administrative costs declined. RV Segment The recreational vehicle products segment achieved a 46 percent sales increase in the first six months of 2002 compared to the first six months of 2001, and a 53 percent second quarter to second quarter increase, as a result of a significant increase in the market share of both its RV chassis and its RV window and door product lines. The sales gains far exceeded the 14 percent increase in industry-wide shipments of RV's in the six months ended June 2002. Long-term growth in RV sales may result from demographic trends, as demand for RV's is strongest from the over 50 population, which is the fastest growing segment of the population. In recent years, the Recreation Vehicle Industrial Association has started a campaign to attract customers in the 35 to 54 age group, which has been successful. In addition, RV sales have been bolstered by the increased preference for domestic vacations rather than foreign air travel. Operating profit of the RV segment increased $2.8 million (59 percent) for the six months and $1.2 million (40 percent) for the quarter ended June 30, 2002. This increase is attributable to the increase in sales. The segment's profit margin was 9.7 percent for the six months and 9.2 percent for the quarter, compared to 8.9 percent and 10.0 percent for the 2001 periods. The second quarter profit margin was affected by approximately $.5 million of startup costs relating to a new facility opening in the third quarter and other recently obtained business in the second quarter of 2002. Amortization of Intangibles, Corporate and Other Amortization of intangibles decreased $892,000 for the six months and $455,000 for the quarter from the same periods in the prior year, primarily as a result of the Company's adoption of Statement of Financial Accounting Standards No, 142, which requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Excluding goodwill amortization expense, pro forma net income would have been increased $783,000 ($.08 per share) for the six months and $395,000 ($.04 per share) for the quarter ended June 30, 2001. 14 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Corporate and other expenses for the six months were $407,000 higher than last year's period as a result of higher incentive compensation based upon profit, higher professional fees for special projects, higher insurance costs, and a reduction in administrative fees charged to LBP, Inc. a former subsidiary that was spun off to shareholders in 1994. The increase in corporate and other expenses was $237,000 for the second quarter over the second quarter of 2001. Interest Expense, Net Interest expense, net decreased $421,000 for the six months and $176,000 for the quarter from the same periods in 2001, as a result of the reduction in debt during the year as well as savings resulting from interest rate reductions. Recently Adopted and New Accounting Standards As of April 1, 2002, the Company adopted the fair value method of accounting for stock options contained in statement of Financial accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which is considered the preferable method of accounting for stock-based employee compensation. All future employee stock options will be expensed over the stock option vesting period based on fair value at the date the options are granted. Historically, the Company had applied the "disclosure only"option of SFAS 123. Accordingly, no compensation cost has been recognized for previously granted stock options. The adoption of this new accounting policy for stock options has no impact on the financial statements as of and for the six months ended June 30, 2002, since no stock options have been granted this year. Had the Company previously adopted this new accounting policy, diluted earnings per share would have been reduced by $.02 for the six months ended June 30, 2002. Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. It also specifies criteria that intangible assets acquired in a purchase combination must meet to be recognized apart from goodwill. Statement No. 142 requires that the useful lives of all existing intangible assets be reviewed and adjusted if necessary. It also requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Other intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement No. 144, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". 15 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In accordance with SFAS No. 142, the Company stopped amortizing goodwill effective January 1, 2002. The following schedule shows pro forma net income for the six months and the quarter ended June 30, 2001, excluding goodwill amortization expense (in thousands, except per share data): Six Months Ended Three Months Ended June 30, 2001 June 30, 2001 -------------------------- ------------------------ Earnings Per Share Earnings per Share Net ------------------ Net ------------------ Income Basic Diluted Income Basic Diluted ------ ----- ------- ------ ----- ------- Net income, as reported $3,837 $ .40 $ .40 $2,970 $ .31 $ .31 Goodwill amortization expense, net of taxes of $144 for the six months and $74 for the three months 783 .08 .08 395 .04 .04 ------ ------ ------ ------ ------ ------ Pro forma net income $4,620 $ .48 $ .48 $3,365 $ .35 $ .35 ====== ====== ====== ====== ====== ====== The Company has reassessed the useful lives of its intangible assets as required by SFAS No. 142 and determined that the existing useful lives are reasonable. During the first quarter, in accordance with the goodwill impairment provisions of SFAS No. 142, the Company identified its reporting units and allocated its assets and liabilities, including goodwill, to its reporting units. In addition, the Company had a valuation of certain of its reporting units done by an independent appraiser, as of January 1, 2002, to assist the Company in determining if there had been an impairment in the goodwill of any of such reporting units. Based on this appraisal and additional analyses performed by the Company, it was determined that there had been an impairment of goodwill in two reporting units. As a result, the Company recorded an impairment charge of $32,905,000 offset by a tax benefit of $2,825,000. Such charge has been recorded as a cumulative effect of change in accounting principle in the quarter ended March 31, 2002. During the first quarter, the Company also reviewed the classification of its intangible assets and goodwill in accordance with SFAS No. 141 and has reclassified $574,000 of other assets to goodwill. As a result of the allocation of the goodwill and the recognition of the impairment charge, goodwill by reportable segment is as follows (in thousands): MH Segment RV Segment Total ---------- ---------- ----- Balance - December 31, 2001 $33,354 $4,949 $38,303 Reclassification of other intangible assets 505 69 574 ------- ------ ------- Balance - January 1, 2002 33,859 5,018 38,877 Impairment charge 30,698 2,207 32,905 ------- ------ ------- Balance - March 31, 2002 and June 30, 20 $23,161 $2,811 $ 5,972 ======= ====== ======= In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement Obligations." SFAS No.143 requires companies to record a liability for asset retirement obligations associated with the retirement of long-lived assets. Such liabilities should be recorded at fair value in the period in which a legal obligation is created, which typically would be upon acquisition or completion of construction. The provisions of SFAS No. 143 are effective 16 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) for fiscal years beginning after June 15, 2002. The Company is in the process of reviewing the impact of SFAS No.143 and does not anticipate that it will have a material impact on the earnings or financial position of the Company. Also in August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.144 supercedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 retains the fundamental provision of SFAS No.121 related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of, but excludes goodwill from its scope and provides additional guidance on the accounting for long-lived assets held for sale. The provisions of SFAS No.144 are effective for fiscal years beginning after December 15, 2001. Accordingly, the Company adopted the provision of SFAS No. 144 effective January 1, 2002. The implementation of SFAS No. 144 did not have a material impact on the earnings or financial position of the Company. LIQUIDITY AND CAPITAL RESOURCES The Statements of Cash Flows reflect the following (in thousands): Six Months Ended June 30, ------------------------- 2002 2001 ---- ---- Net cash flows provided by operating activities $ 7,349 $ 15,266 Net cash flows (used for) investment activities $(5,728) $(12,686) Net cash flows (used for) provided by financing activit$es $(1,235) $ 9 Net cash flows from operating activities of $7.3 million for the six months ended June 30, 2002 were approximately $7.9 million lower than such cash flows in the comparable period last year, despite the $4.5 million increase in income before the cumulative effect of change in accounting principle for goodwill. The lower net cash flows from operating activities in the current year is primarily attributable to: a. The larger seasonal increase in accounts receivable due to the increase in sales over the prior year, as well as the timing of collections. Days sales outstanding of receivables were approximately the same at the end of June 2002 and 2001. b. The seasonal increase in inventories this year compared to a decline in inventories in the prior year. The decline in the prior year resulted from a concerted effort to reduce inventories at all locations. Inventories at June 30, 2002 are up only 10 percent from June 30, 2001 despite the 24 percent increase in sales in the second quarter. c. The larger increase in accounts payable, accrued expenses and other current liabilities resulting primarily from the timing of payment due dates and purchases. Trade payables are generally paid within the discount period. Accruals for incentive compensation based upon profits (affecting in excess of 150 employees) were $1.4 million higher than at June 2001. 17 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash flows used for investing activities of $5.7 million consist of capital expenditures. Capital expenditures for 2002 are expected to approximate $9 million, funded by cash flow from operations and new financing secured by real estate and equipment. Included in the 2002 capital expenditures will be the construction of a larger factory to replace a leased facility to provide additional capacity for the Company's rapidly growing vinyl window line. Capital expenditures for 2001 were $8.2 million, including $4.0 million in the first six months of 2001 which was offset by $.7 million of fixed asset sales. Investing activities for the period ended June 2001 include $9.4 million relating to the acquisition of Better Bath. Cash flows used for financing activities for the 2002 six month period include a net decrease in debt of $3.0 million partially offset by $1.8 million received from the exercise of employee stock options. For the six month period in 2001 new borrowings of $10.9 million secured by real estate and equipment, were offset by a net reduction of other debt. Total debt at June 30, 2002 is $13.2 million less than at June 30, 2001. Availability under the Company's line of credit, which was $17.6 million at June 30, 2002, is adequate to finance the Company's working capital and capital expenditure requirements. However, the Company expects to fund a portion of its current year capital expenditures with new financing secured by real estate and equipment. The Company has outstanding $24 million of 6.95 percent, seven year Senior Notes. Repayment of these notes is $8 million annually, of which the first two payments were made in January 2002 and 2001. In addition to the line of credit and the Senior Notes, in 2001 the Company improved its liquidity by raising $13.3 million through long-term equipment and real estate mortgages, and $3.7 million from the sale and leaseback of equipment. Subsequent to the end of the second quarter of 2002, the Company raised $2.75 million through an Industrial Revenue Bond that is being used to construct a factory providing for the expansion of the Company's vinyl window line. OATHS OF EXECUTIVE OFFICERS The Securities and Exchange Commission is now requiring that the CEOs and CFOs of approximately 950 of the largest public companies file statements under oath to the effect that they know of no material misstatements or omissions in the financial statements. Although the Company is not one of the 950 largest public companies, the Company's CEO and CFO will be filing such statements with the SEC on a voluntary basis, beginning this quarter. In addition, the Chairman of the Board and of the Audit Committee, will file the same oath regarding the Company's financial statements. INFLATION The prices of raw materials, consisting primarily of aluminum, vinyl, steel, glass, ABS resin, axles 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. The Company purchased no futures contracts in 2001 or 2002, and at June 30, 2002, the Company had no futures contracts outstanding. The Company experienced modest increases in its labor costs since the first quarter of 2001. 18 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) USE OF ESTIMATES The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, insurance obligations, lease termination obligations, post-retirement benefits, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates under different assumptions or conditions. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report contains certain statements, including the Company's plans and expectations regarding its operating strategies, products, and costs, and its views of the prospects of the manufactured housing and recreational vehicle industries, which are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's views, at the time such statements were made, with respect to the Company's future plans, objectives, events, and financial results such as revenues, expenses, income, earnings per share, capital expenditures, and other financial items. Forward-looking statements are not guarantees of future performance; they are subject to risks and uncertainties. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. There are a number of factors, many of which are beyond the Company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, ABS resin, axles, and tires), availability of retail and wholesale financing for manufactured homes, availability and costs of labor, inventory levels of retailers and manufacturers, interest rates, and adverse weather conditions impacting retail sales. In addition, general economic conditions and consumer confidence may affect the retail sale of manufactured homes and recreational vehicles. 19 DREW INDUSTRIES INCORPORATED Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk in the normal course of its operations due to its purchases of certain commodities, and its investing and financing activities. Certain raw materials, particularly aluminum, vinyl, steel, glass and tires are subject to price volatility. While effective hedges for most of these raw materials are not available, the Company periodically purchases aluminum futures contracts to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements. At June 30, 2002, the Company had no futures contracts outstanding. Certain steel costs increased 10 percent to 15 percent in the second quarter and are expected to increase further in the third quarter. The Company is exposed to changes in interest rates primarily as a result of its financing activities. At June 30, 2002, the Company had $44.1 million of fixed rate debt. Assuming a decrease of 100 basis points in the interest rate for borrowings of a similar nature, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be affected by approximately $.4 million per annum. The Company also has a $25 million line of credit. At June 30, 2002, $6.0 million of the line of credit was borrowed. The Company also had $0.2 million of other variable rate borrowings. Assuming an increase of 100 basis points in the interest rate for borrowings under these variable rate loans, and outstanding borrowings of $6.2 million, future cash flows would be affected by $.1 million per annum. In addition, the Company is exposed to changes in interest rates as a result of temporary investments in government backed money market funds, however, such investing activity is not material to the Company's financial position, results of operations, or cash flow. If the actual change in interest rates is substantially different than 100 basis points, the net impact of interest rate risk on the Company's cash flow may be materially different than that disclosed above. 20 DREW INDUSTRIES INCORPORATED SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DREW INDUSTRIES INCORPORATED Registrant By /s/ Fredric M. Zinn --------------------------- Fredric M. Zinn Executive Vice President and Chief Financial Officer August 7, 2002 SECTION 906 CERTIFICATION The undersigned, Leigh J. Abrams, Principal Executive Officer, and Fredric M. Zinn, Principal Financial Officer, hereby certify that: a) The foregoing Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and b) The information contained in the foregoing Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By /s/ Leigh J. Abrams --------------------------- Leigh J. Abrams President, Chief Executive Officer and Principal Executive Officer By /s/ Fredric M. Zinn --------------------------- Fredric M. Zinn Executive Vice President, Chief Financial Officer and Principal Financial Officer August 7, 2002 21