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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 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) N/A
Indicate by check mark 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 for 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 by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). 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. 10,107,483 shares of common
stock as of July 31, 2003.
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DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
(UNAUDITED)
- --------------------------------------------------------------------------------
Page
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME................... 3
CONDENSED CONSOLIDATED BALANCE SHEETS......................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS............... 5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ..... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......... 7-12
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 13-22
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK......................................... 23
Item 4 - CONTROLS AND PROCEDURES.............................. 24
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS.................................... 25
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K..................... 25
SIGNATURES ...................................................... 26
EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION............................ 27
EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION............................ 28
EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION............................ 29
EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION............................ 30
2
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales $ 170,237 $ 157,905 $ 89,410 $ 85,718
Cost of sales 129,404 118,350 66,527 64,211
----------------------------------------------
Gross profit 40,833 39,555 22,883 21,507
Selling, general and administrative expenses 25,299 24,068 13,298 12,922
----------------------------------------------
Operating profit 15,534 15,487 9,585 8,585
Interest expense, net 1,618 1,804 807 873
----------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle 13,916 13,683 8,778 7,712
Provision for income taxes 5,443 5,227 3,433 2,905
----------------------------------------------
Income from continuing operations before cumu-
lative effect of change in accounting principle 8,473 8,456 5,345 4,807
Discontinued operations (net of taxes of $75 in 2003
and ($85) and ($22) for the six and three month
periods in 2002, respectively) 138 (157) -- (40)
----------------------------------------------
Income before cumulative effect of change in
accounting principle 8,611 8,299 5,345 4,767
Cumulative effect of change in accounting principle
for goodwill (net of taxes of $2,825) -- (30,080) -- --
----------------------------------------------
Net income (loss) $ 8,611 $ (21,781) $ 5,345 $ 4,767
==============================================
Net income (loss) per common share:
Income from continuing operations before cumulative
effect of change in accounting principle:
Basic $ .85 $ .87 $ .53 $ .49
==============================================
Diluted $ .83 $ .85 $ .52 $ .48
==============================================
Discontinued operations, net of taxes:
Basic $ .01 $ (.01) $ -- $ --
==============================================
Diluted $ .01 $ (.01) $ -- $ --
==============================================
Cumulative effect of change in accounting principle
for goodwill, net of taxes:
Basic $ -- $ (3.10) $ -- $ --
==============================================
Diluted $ -- $ (3.03) $ -- $ --
==============================================
Net income (loss):
Basic $ .86 $ (2.24) $ .53 $ .49
==============================================
Diluted $ .84 $ (2.19) $ .52 $ .48
==============================================
Weighted average common shares outstanding:
Basic 10,007 9,717 10,045 9,753
==============================================
Diluted 10,215 9,924 10,249 9,987
==============================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
----------------------- December 31,
2003 2002 2002
- ----------------------------------------------------------------------------------------------
(In thousands, except shares)
ASSETS
Current assets
Cash and cash equivalents $ 4,884 $ 1,633 $ 316
Accounts receivable, trade, less allowances 20,137 21,612 12,969
Inventories 31,825 30,729 37,143
Prepaid expenses and other current assets 5,596 4,048 8,618
Discontinued operations 6 3,253 1,211
-------------------------------------
Total current assets 62,448 61,275 60,257
Fixed assets, net 73,154 72,392 74,041
Goodwill 7,043 5,972 7,043
Other intangible assets 4,417 881 814
Other assets 3,062 5,641 3,241
-------------------------------------
Total assets $ 150,124 $ 146,161 $ 145,396
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of
long-term indebtedness $ 10,003 $ 9,639 $ 9,993
Accounts payable, trade 8,712 15,009 7,998
Accrued expenses and other current liabilities 20,249 18,291 17,699
Discontinued operations 131 1,102 500
-------------------------------------
Total current liabilities 39,095 44,041 36,190
Long-term indebtedness 26,759 40,633 38,812
Other long-term liabilities 3,245 260 290
-------------------------------------
Total liabilities 69,099 84,934 75,292
-------------------------------------
Commitments and Contingencies
Stockholders' equity
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 12,249,408 shares at
June 2003; 11,964,688 shares at June 2002 and
12,084,788 at December 2002 122 120 121
Paid-in capital 30,877 26,876 28,568
Retained earnings 69,493 53,698 60,882
-------------------------------------
100,492 80,694 89,571
Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467)
-------------------------------------
Total stockholders' equity 81,025 61,227 70,104
-------------------------------------
Total liabilities and stockholders' equity $ 150,124 $ 146,161 $ 145,396
=====================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------
2003 2002
- ---------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 8,611 $(21,781)
Adjustments to reconcile net income (loss) to cash flows provided
by operating activities:
Cumulative effect of change in accounting principle for goodwill,
net of taxes -- 30,080
Discontinued operations, net of taxes (138) 157
--------------------
Income from continuing operations 8,473 8,456
Depreciation and amortization 3,923 3,470
Loss on disposal of fixed assets 30 6
Deferred compensation 171 --
Changes in assets and liabilities:
Accounts receivable, net (7,168) (11,119)
Inventories 5,318 (5,203)
Prepaid expenses and other assets 3,471 (212)
Accounts payable, accrued expenses and other liabilities 2,099 12,152
--------------------
Net cash flows provided by continuing operating activities 16,317 7,550
Income (loss) from discontinued operations 138 (157)
Changes in discontinued operations 836 28
--------------------
Net cash flows provided by operating activities 17,291 7,421
--------------------
Cash flows from investing activities:
Capital expenditures (2,840) (5,143)
Acquisition of company's net assets and business -- (601)
Proceeds from sales of fixed assets 21 15
--------------------
Net cash flows used for investing activities (2,819) (5,729)
--------------------
Cash flows from financing activities:
Proceeds from line of credit 31,550 39,250
Repayments under line of credit and other borrowings (43,593) (42,299)
Exercise of stock options 2,139 1,799
--------------------
Net cash flows used for financing activities (9,904) (1,250)
--------------------
Net increase in cash 4,568 442
Cash and cash equivalents at beginning of period 316 1,191
--------------------
Cash and cash equivalents at end of period $ 4,884 $ 1,633
====================
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 1,765 $ 2,018
Income taxes paid $ 2,309 $ 5,197
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except shares)
Balance - December 31, 2002 $ 121 $ 28,568 $ 60,882 $(19,467) $ 70,104
Net income for six months ended
June 30, 2003 8,611 8,611
Issuance of 164,620 shares of common
stock pursuant to stock option plan 1 1,827 1,828
Income tax benefit relating to issuance
of common stock pursuant to stock option plan 311 311
Deferred stock compensation expense and other 171 171
-------------------------------------------------------------
Balance - June 30, 2003 $ 122 $ 30,877 $ 69,493 $(19,467) $ 81,025
=============================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of
Drew Industries Incorporated and its subsidiaries ("Drew" or the "Company").
There are no unconsolidated subsidiaries. Drew's wholly-owned active
subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro") and Lippert
Components, Inc. and its subsidiaries ("LCI"). Drew, through its wholly-owned
subsidiaries, supplies a broad array of components for recreational vehicles and
manufactured homes. All significant intercompany balances and transactions have
been eliminated. Certain prior year balances may have been reclassified to
conform to current year presentation.
The Condensed Consolidated Financial Statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2002 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, 2003 and
2002. All such adjustments are of a normal recurring nature. The Condensed
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 recreational
vehicle products segment (the "RV segment") and the manufactured housing
products segment (the "MH segment"). The RV segment, which accounted for 62
percent of consolidated net sales for the six months ended June 30, 2003 and 53
percent of the annual consolidated net sales for 2002, manufactures a variety of
products used in the production of recreational vehicles, including windows,
doors, chassis, chassis parts and chassis slide out mechanisms and related power
units. The MH segment, which accounted for 38 percent of consolidated net sales
for the six months ended June 30, 2003 and 47 percent of the annual consolidated
net sales for 2002, manufactures a variety of components used in the
construction of manufactured homes, and to a lesser extent, modular housing and
office units, including vinyl and aluminum windows and screens, chassis, chassis
parts and thermo-formed bath and shower units. This shift in sales between
segments resulted partly from the growth in the RV industry and the decline in
the MH industry. The RV segment and the MH segment primarily sell their products
to the producers of recreational vehicles and manufactured homes. 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. Intersegment sales are
insignificant.
Decisions concerning the allocation of the Company's resources are made by
the Company's key executives. 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. Management of debt is considered a
corporate function. The accounting policies of the RV and MH segments are the
same as those described in Note 1 of Notes to Consolidated Financial Statements,
of the Company's December 31, 2002 Annual Report on Form 10-K.
7
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Information relating to segments follows (in thousands):
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Net sales:
RV segment $ 105,714 $ 78,814 $ 55,457 $ 44,106
MH segment 64,523 79,091 33,953 41,612
---------------------------------------------------
Total $ 170,237 $ 157,905 $ 89,410 $ 85,718
===================================================
Operating profit:
RV segment $ 11,416 $ 7,638 $ 6,886 $ 4,056
MH segment 6,479 9,730 3,938 5,486
---------------------------------------------------
Total segments operating profit 17,895 17,368 10,824 9,542
Amortization of intangibles (375) (359) (182) (182)
Corporate and other (1,986) (1,522) (1,057) (775)
---------------------------------------------------
Operating profit $ 15,534 $ 15,487 $ 9,585 $ 8,585
===================================================
3. 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.
Inventories consist of the following (in thousands):
June 30, December 31,
---------------------- ------------
2003 2002 2002
-------------------------------------
Finished goods $ 6,843 $ 7,367 $ 7,681
Work in process 1,442 1,710 1,408
Raw material 23,540 21,652 28,054
------------------------------------
Total $ 31,825 $ 30,729 $ 37,143
====================================
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 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.
8
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 of 2002, 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 its 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.
The Company has elected to perform its annual goodwill impairment
procedures for all of its reporting units as of November 30. During the fourth
quarter of 2002 the Company updated its carrying value calculations and fair
value estimates for each of its reporting units as of November 30, 2002. Based
on the comparison of the carrying values to the estimated fair values, the
Company concluded that no additional goodwill impairment existed at that time.
The Company plans to update its review as of November 30, 2003, or sooner, if
events occur or circumstances change that could reduce the fair value of a
reporting unit below its carrying value.
5. Discontinued Operations
The axle and tire refurbishing business of the Company's Lippert Tire and
Axle, Inc. subsidiary ("LTA") did not perform well over the past several years,
primarily due to increased competition and the decline in the manufactured
housing industry, which severely affected operating margins. In January 2001,
the axle and tire refurbishing business closed two of its five factories, and in
July 2001 a third such operation was sold. In September 2002, the Company
converted one of its two remaining tire and axle refurbishing facilities to a RV
window production facility. The last axle and tire refurbishing operation was
sold in January 2003 at a small gain. As a result, the axle and tire
refurbishing business is classified as discontinued operations in the Condensed
Consolidated Financial Statements pursuant to SFAS No. 144, adopted by the
Company effective January 1, 2002.
LTA continues to own a factory in Texas which was previously utilized in
its axle and tire refurbishing business. This factory is being leased to the
purchaser of the LTA's Texas operation. Since it is not probable that this
factory will be sold within one year, it is not considered as held for sale
under SFAS No. 144, and is not included in discontinued operations in the
Condensed Consolidated Financial Statements.
The proceeds from the disposition of all remaining significant assets of
LTA's axle and tire refurbishing business, consisting primarily of inventory and
accounts receivable, were collected during the first quarter of 2003.
The discontinued axle and tire refurbishing business had previously been
included in the Company's MH segment, and had revenues of $5.7 million in the
first six months of 2002, which have been reclassified to discontinued
operations.
9
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Long Term Indebtedness
Long-term indebtedness consists of the following (in thousands):
June 30,
--------------------- December 31,
2003 2002 2002
- ----------------------------------------------------------------------------------------------------
Senior Notes payable at the rate of $8,000 per annum
on January 28, with interest payable
semiannually at the rate of 6.95% per annum $ 16,000 $ 24,000 $ 24,000
Notes payable pursuant to a Credit Agreement expiring
October 15, 2005 consisting of a revolving loan, not
to exceed $30,000; interest at prime rate or LIBOR plus
a rate margin based upon the Company's performance -- 5,950 2,900
Industrial Revenue Bonds, interest rates at June 30, 2003
of 3.29% to 6.28%, due 2008 through 2017; secured by
certain real estate and equipment 8,285 6,547 8,871
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 4,693 5,085 4,894
Other loans secured by certain real estate and equipment, due
2006 to 2016, primarily fixed rates of 7.25% to 8.72% 7,784 8,690 8,140
--------------------------------
36,762 50,272 48,805
Less current portion 10,003 9,639 9,993
--------------------------------
Total long-term indebtedness $ 26,759 $ 40,633 $ 38,812
================================
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 to meet certain other financial
requirements. The Company is in compliance with all such requirements.
Borrowings under the Senior Notes and the Credit Agreement are secured only by
the capital stock of the Company's subsidiaries.
The Company pays a commitment fee, accrued at the rate of 3/8 of one
percent per annum, on the daily unused amount of the revolving line of credit
10
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. 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,
-------------------- --------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 10,007 9,717 10,045 9,753
Assumed issuance of common stock
pertaining to stock options 208 207 204 234
-------------------------------------------
Weighted average common shares
outstanding - diluted 10,215 9,924 10,249 9,987
===========================================
8. Stock Options
As of April 1, 2002, the Company adopted the fair value method of
accounting for stock options contained in Statement of Financial Standards No.
123 ("SFAS No. 123") "Accounting for Stock-Based Compensation," which is
considered the preferable method of accounting for stock-based employee
compensation. During the transition period, the Company will be utilizing the
prospective method under SFAS No.148 "Accounting for Stock-Based Compensation -
Transition and Disclosures." All employee stock options granted subsequent to
April 1, 2002 are being expensed over the stock option vesting period based on
fair value, determined using the Black-Scholes option-pricing method, at the
date the options were granted.
Historically the Company had applied the "disclosure only" option of SFAS
No.123. Accordingly, no compensation cost has been recognized for stock options
granted prior to January 1, 2002.
The adoption of this new accounting policy for stock options resulted in a
pretax charge of $60,000 for the six months ended June 30, 2003 and $30,000 for
the three months ended June 2003. There was no impact on the consolidated
financial statements for the six and three month periods ended June 30, 2002,
since no stock options were granted during those periods.
11
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table illustrates the effect on net income (loss) and net income
(loss) per common share as if the fair value method had been applied to all
outstanding and unvested awards in each period (in thousands):
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- -----------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 8,611 $ (21,781) $ 5,345 $ 4,767
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 37 -- 18 --
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effect (177) (217) (89) (101)
--------------------------------------------------
Pro forma net income (loss) $ 8,471 $ (21,998) $ 5,274 $ 4,666
==================================================
Net income (loss) per common share:
Basic - as reported $ .86 $ (2.24) $ .53 $ .49
==================================================
Basic - pro forma $ .85 $ (2.26) $ .53 $ .48
==================================================
Diluted - as reported $ .84 $ (2.19) $ 52 $ .48
==================================================
Diluted - pro forma $ .83 $ (2.22) $ .51 $ .47
==================================================
9. Subsequent Event
On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC
("LTM"), with annual sales of approximately $4 million. LTM manufactures a
variety of products for RVs, including slide-out mechanisms and specialty
slide-out trays for batteries, LP tanks and storage, as well as electric
stabilizer jacks, flexguard slide-out wire protection systems, and slide-out
patio decks. The purchase price was $4.1 million, including $250,000 of LTM's
debt which the Company repaid on closing. The purchase price was funded with
Drew's available cash and a $350,000 note to the seller, bearing interest at the
prime rate, payable in equal installments over the next five years.
12
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has two reportable operating segments, the recreational
vehicle products segment (the "RV segment") and the manufactured housing
products segment (the "MH segment"). The RV segment, which accounted for 62
percent of consolidated net sales for the six months ended June 30, 2003 and 53
percent of the annual consolidated net sales for 2002, manufactures a variety of
products used in the production of recreational vehicles, including windows,
doors, chassis, chassis parts and RV slide-out mechanisms and related power
units. The MH segment, which accounted for 38 percent of consolidated net sales
for the six months ended June 30, 2003 and 47 percent of the annual consolidated
net sales for 2002, manufactures a variety of components used in the
construction of manufactured homes, and to a lesser extent, modular housing and
office units, including vinyl and aluminum windows and screens, chassis, chassis
parts and thermo-formed bath and shower units. This shift in sales between
segments resulted partly from the growth in the RV industry and the decline in
the MH industry. The RV segment and the MH segment primarily sell their products
to the producers of recreational vehicles and manufactured homes. 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. Intersegment sales are
insignificant.
The Company's operations are conducted 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. At June
30, 2003, the Company's subsidiaries operated 40 plants in 18 states and one in
Canada.
INDUSTRY BACKGROUND
Recreational Vehicle Industry
The Recreational Vehicle Industrial Association ("RVIA") reported a one
percent decline in shipments in the second quarter of 2003 as compared to the
second quarter of 2002, while shipments in the first six months of 2003 were
three percent above the first six months of 2002. However, shipments of travel
trailers and fifth wheel RVs, the Company's primary market, increased seven
percent for the quarter and 12 percent for the six month period. In 2002, the
RVIA reported an increase of 21 percent in total RV shipments and 25 percent for
travel trailers and fifth wheel RVs for the year. Increasing industry RV sales
are expected to be driven by positive demographics, as demand for RVs is
strongest from the over 50 age group, which is the fastest growing segment of
the population. Industry growth also continues to be bolstered by the preference
for domestic vacations, rather than foreign travel, and low interest rates. In
recent years, the RVIA has employed an advertising campaign to attract customers
in the 35 to 54 age group, and the number of RV's owned by those 35 to 54 grew
faster than all other age groups.
Manufactured Housing Industry
While the Company believes retail demand for manufactured homes has
remained fairly steady in recent years, limited credit availability, high
interest rate spreads between conventional mortgages on site built homes and
chattel loans for manufactured homes, and unusually high repossessions of
manufactured homes, remain problems for the industry. Based upon industry
reports, retail sales of manufactured homes have remained fairly steady at
250,000 to 300,000 homes annually since 2000. However, some of these retail
sales have been filled by inventory reductions by dealers and the manufacturers
and the resale of repossessed homes. It has been estimated that approximately
90,000 manufactured homes were repossessed in each of the last three years, with
estimates as high as 115,000 homes to be repossessed in 2003, far in excess of
historical repossession levels. In addition, it is estimated that inventories of
new homes held by dealers and manufacturers were reduced by approximately 25,000
homes in 2002.
13
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As a result of these factors and general economic conditions, the
Manufactured Housing Institute ("MHI") reported industry production of
manufactured homes fell 25 percent in the second quarter of 2003 and 26 percent
for the first six months of 2003, as compared to the same periods in 2002, and
are now about 65 percent below the peak levels of 1998. Industry projections for
2003 production range between 130,000 and 140,000 manufactured homes, compared
to 373,000 manufactured homes produced in 1998 and 168,000 homes in 2002. The
reduced availability of chattel loans has also been a concern for the
manufactured housing industry as several lenders have either exited the
manufactured housing industry or tightened their credit approval criteria.
However, the increase in land/home and conventional mortgages for manufactured
homes, compared to higher cost and less secure chattel loans, is expected to
partially mitigate the limited availability of chattel loans for manufactured
homes.
As a result of market share gains and efficiency improvements, Drew's MH
segment has remained profitable throughout this extended industry-wide slump.
Long-term prospects for manufactured housing are still favorable because it
provides quality, affordable housing which the country needs.
RESULTS OF OPERATIONS
Net sales and operating profit are as follows (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
Net sales:
RV segment $ 105,714 $ 78,814 $ 55,457 $ 44,106
MH segment 64,523 79,091 33,953 41,612
---------------------------------------------------
Total $ 170,237 $ 157,905 $ 89,410 $ 85,718
===================================================
Operating profit:
RV segment $ 11,416 $ 7,638 $ 6,886 $ 4,056
MH segment 6,479 9,730 3,938 5,486
---------------------------------------------------
Total segments operating profit $ 17,895 17,368 10,824 9,542
Amortization of intangibles (375) (359) (182) (182)
Corporate and other (1,986) (1,522) (1,057) (775)
---------------------------------------------------
Total $ 15,534 $ 15,487 $ 9,585 $ 8,585
===================================================
Consolidated Highlights
o Income from continuing operations before cumulative effect of
change in accounting principle was up 11 percent for the
second quarter.
o Operating profit margin for the second quarter increased to
10.7 percent, from 10.0 percent in the second quarter last
year, partially offsetting a decline in the first quarter
operating profit margin.
14
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
o Net sales for the first six months and second quarter of 2003
grew by 8 percent and 4 percent, respectively, from the
comparable periods in 2002.
o On July 17, the Company completed the acquisition of
Kansas-based LTM Manufacturing, LLC, a manufacturer of
innovative RV products with annual sales of approximately $4
million, for $4.1 million.
RV Segment
The RV segment achieved a sales increase of 34 percent ($26.9 million) and
26 percent ($11.4 million) in the first six months and second quarter of 2003,
respectively, compared to the comparable periods of 2002. These increases are
due to increases in market share of all primary product lines in this segment,
including chassis, RV slide-out mechanisms and related power units, and windows
and doors, as well as to the overall growth in the RV industry, in particular
the Company's primary market of travel trailers and fifth wheel RVs. Long-term
growth in RV sales may result from demographic trends, as demand for RVs is
strongest from the over 50 population, which is the fastest growing segment of
the population. There have been no significant changes in sales prices by the
Company's RV segment in the quarter or since the second quarter of 2002.
Operating profit of the RV segment increased $3.8 million (49 percent) and
$2.8 million (70 percent) for the first six months and second quarter of 2003,
respectively. This increase is primarily attributable to an increase in unit
sales. The segment's operating profit margin also increased to 10.8 percent for
the first six months and 12.4 percent for the second quarter of 2003, from 9.7
percent and 9.2 percent for the comparable periods in 2002. The increase in the
operating profit margin of the RV segment was achieved by the spreading of fixed
costs over higher sales, improved operating efficiencies and the continued
expansion of slide out mechanisms and related power units. Also contributing to
margin improvements was improved operating results at several of the Company's
facilities, especially those in Rialto, California, and Goshen and Middlebury,
Indiana. The 2002 second quarter profit margin was also negatively affected by
approximately $0.5 million of startup costs relating to a new facility which
opened in the third quarter of 2002 and other newly obtained business in the
second quarter of 2002. Partially offsetting this increase in operating profit
margin in 2003 as compared to 2002 were legal and other costs related to the
settlement of patent litigation on the Company's slide-out mechanisms in
February 2003, higher steel costs, higher insurance costs and start up costs at
the Company's Bristol, Indiana plant
MH Segment
Net sales of the MH segment declined 18 percent ($14.6 million) and
18 percent ($7.7 million) in the six and three month periods ended June 30,
2003, respectively, from the same periods last year, which was less of a decline
than the industry. The Company has captured market share and increased sales of
products for modular homes and office units partially offsetting the sales
reduction caused by the Manufactured Housing industry decline. There have been
no significant changes in sales prices by the Company's MH segment in the
quarter or since the second quarter of 2002, except selling price increases for
chassis parts in the second half of 2002.
Operating profit of the MH segment decreased $3.3 million (33 percent) in
the six month period and $1.5 million (28 percent) in the second quarter of 2003
from the same periods in 2002 largely as a result of the decrease in sales. This
segment's operating profit margin was 10.0 percent of sales in the six month
period and
15
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
11.6 percent in the second quarter of 2003, compared to 12.3 percent and 13.2
percent for the same periods last year, respectively, as steel costs were higher
this quarter than in last year's second quarter, after rising in the second half
of last year. However, steel prices paid by the Company have declined from the
extremely high levels of the second half of 2002 and early 2003. Higher group
insurance costs and the impact of lower volume on fixed costs also negatively
impacted operating profit. Selling, general and administrative expenses were
down in dollar terms, largely following the trend of sales, but remained steady
as a percent of sales. Selling, general and administrative expenses for the
second quarter of 2003 were reduced by approximately $0.3 million due to the
recovery of a receivable which had been written off in the fourth quarter of
2002.
The Company debuted a new one-piece tub/shower unit featuring two new
innovations, the VEC(TM) technology and the VEC Shield (TM) finish at the
National Plastic Exposition (NPE) in Chicago on June 23-27, 2003. The Company
believes that the VEC Shield (TM) finish represents a significant improvement
over traditional gel coated fiberglass. The Company is currently in negotiations
to lease equipment in order to utilize the VEC (TM) technology to produce bath
products for the manufactured housing industry. If lease negotiations are
completed during the third quarter, production should commence in early 2004.
Corporate and Other
Corporate and other expenses were $464,000 and $282,000 higher than last
year's first six months and second quarter, respectively, primarily as a result
of higher insurance costs, stock option expense resulting from the adoption of
SFAS 123 and expenses related to corporate governance due to the implementation
of the Sarbanes-Oxley requirements.
Taxes
The effective tax rate for the first six months of 2003 was approximately
39.1 percent as compared to 38.2 percent for the first six months of 2002. The
increase in the effective tax rate is due to a change in the composition of
pretax income for state tax purposes.
Interest Expense, Net
Interest expense, net, decreased $186,000 and $66,000 from the first six
months and second quarter of 2002, respectively, as a result of the reduction in
debt levels, and to a lesser extent, savings resulting from interest rate
reductions. The interest expense for 2003 also includes $102,000 related to
imputed interest on the liability recorded for minimum royalty payments for the
fiscal years 2003 through 2006.
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 Standards No.
123 ("SFAS No. 123") "Accounting for Stock-Based Compensation," which is
considered the preferable method of accounting for stock-based employee
compensation. During the transition period, the Company will be utilizing the
prospective method under SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosures." All employee stock options granted subsequent to
April 1, 2002 have been expensed over the stock option vesting period based on
fair value, determined using the Black-Scholes option-pricing method, at the
date the options were granted.
16
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Historically the Company had applied the "disclosure only" option of SFAS
No. 123. Accordingly, no compensation cost had been recognized for stock options
granted prior to January 1, 2002.
The adoption of this new accounting policy for stock options resulted in a
pretax charge of $60,000 and $30,000 for the six and three month periods ended
June 30, 2003, respectively. There was no impact on the financial statements for
the six and three month periods ended June 30, 2002, since no stock options were
granted during those periods. The Company has historically granted stock options
to employees during the fourth quarter every other year. Management currently
expects the next such grant of stock options to take place in the fourth quarter
of 2003. As a result, the pretax charge relating to stock options will increase
subsequent to the next grant of stock options.
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". In accordance with SFAS
No. 142, the company stopped amortizing goodwill effective January 1, 2002.
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 of 2002, 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.
The Company has elected to perform its annual goodwill impairment
procedures for all of its reporting units as of November 30. During the fourth
quarter of 2002, the Company updated its carrying value calculations and fair
value estimates for each of its reporting units as of November 30, 2002. Based
upon the comparison of the carrying values to the estimated fair values, the
Company concluded that no additional goodwill impairment exists. The Company
plans to update its review as of November 30, 2003, or sooner, if events occur
or circumstances change that could reduce the fair value of a reporting unit
below its carrying value.
17
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 for
fiscal years beginning after June 15, 2002. Accordingly, the Company adopted the
provisions of SFAS No.143 effective January 1, 2003. The implementation of SFAS
No. 143 did not 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 provisions 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.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exist an Activity (Including Certain
Costs Incurred in a Restructuring)." The principal difference between SFAS
No.146 and EITF 94-3 relates to the recognition of a liability for a cost
associated with an exit or disposal activity. SFAS No. 146 requires that a
liability be recognized for those costs only when the liability is incurred. A
commitment to an exit or disposal plan no longer will be a sufficient basis for
recording a liability for those activities. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002.
Accordingly, the Company adopted the provisions of SFAS No. 146 effective
January 1, 2003. The implementation of SFAS No. 146 did not have a material
impact on the earnings or financial position of the Company.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor
to recognize a liability for the non-contingent component of a guarantee; that
is, the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at its inception. The recognition of the
liability is required even if it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements. FIN 45 also requires additional
disclosures related to guarantees. The recognition measurement provisions of FIN
45 are effective for all guarantees entered into or modified after December 31,
2002. FIN 45 also requires additional disclosures related to guarantees in
interim and annual financial statements. Accordingly, the Company adopted the
provisions of FIN 45, effective January 1, 2003. The implementation of FIN 45
did not have an impact on the earnings or financial position of the company.
18
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):
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Net cash flows provided by operating activities $ 17,291 $ 7,421
Net cash flows used for investment activities $ (2,819) $ (5,729)
Net cash flows used for financing activities $ (9,904) $ (1,250)
Net cash flows from operating activities of $17.3 million for 2003 were
approximately $9.9 million higher than such cash flows in 2002 as a result of:
a) A smaller seasonal increase in accounts receivable for the first six
months of 2003. The increase in accounts receivable was lower than
2002, even though sales were higher in 2003, due to a reduction in
the days sales outstanding in receivables. This was due to the
timing of collections.
b) A decline in inventories this year compared to an increase in
inventories in the prior year. The decline in the current year
resulted from a concerted effort by management to reduce inventories
at all locations, as well as, strategic buying of certain raw
materials at December 31, 2002. The inventory decrease is
substantially all in raw materials, as there was only approximately
a two week supply of finished goods on hand at December 31, 2002,
and June 30, 2003 and 2002.
c) A decline in prepaid expenses and other current assets primarily due
to the utilization of prepaid Federal income taxes.
d) The above items were partially offset by a smaller seasonal increase
in accounts payable, accrued expenses and other current liabilities.
This change is primarily from the timing of payment due dates and
purchases. Purchases were impacted by the rising inventories during
the second quarter of 2002, while inventories were declining in
2003. Trade payables are generally paid within the discount period.
Cash flows used for investing activities of $2.8 million consist of
capital expenditures. Capital expenditures for 2003 are expected to approximate
$7.5 million and are expected to be funded by cash flow from operations. Capital
expenditures for the full year 2002 were $10.5 million, including $5.1 million
in the first six months of 2002.
Cash flows used for financing activities for the first six months of 2003
include a net decrease in debt of $12.0 million, partially funded by $2.1
million received from the exercise of employee stock options. Cash flows
provided by financing activities for the first six months of 2002 include a net
decrease in debt of $3.0 million. Total debt has been reduced by $13.5 million
since June 2002.
19
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Availability under the Company's line of credit, which availability was
$27.4 million at June 30, 2003, net of $2.6 million in letters of credit, along
with anticipated cash flows from operations, is adequate to finance the
Company's working capital and anticipated capital expenditure requirements. The
Company is in compliance with all of its debt covenants and expects to remain in
compliance for the next twelve months. Certain of the Company's loan agreements
contain prepayment penalties.
The Company has outstanding $16 million of 6.95 percent, seven year Senior
Notes. The notes originally aggregated $40 million, and repayment of these notes
is $8 million annually, of which the first three payments were made annually
since January 2001.
SUBSEQUENT EVENT
On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC
("LTM"), with annual sales of approximately $4 million. LTM manufactures a
variety of products for RVs, including slide-out mechanisms and specialty
slide-out trays for batteries, LP tanks and storage, as well as electric
stabilizer jacks, flexguard slide-out wire protection systems, and slide-out
patio decks. The purchase price was $4.1 million, including $250,000 of LTM's
debt which the Company repaid on closing. The purchase price was funded with
Drew's available cash and a $350,000 note to the seller, bearing interest at the
prime rate, payable in equal installments over the next five years.
CORPORATE GOVERNANCE
The Company is in compliance with the new corporate governance
requirements of the Securities and Exchange Commission and the American Stock
Exchange as required by the Sarbanes-Oxley Act of 2002. The Company's governance
documents and committee charters have been posted to the Company's website
(www.drewindustries.com) and will be updated periodically. The website also
contains, or provides direct links to all SEC filings, press releases and
investor presentations. The Company has also established a toll-free hotline to
report complaints about the Company's accounting, internal controls, auditing
matters or other concerns.
The Company recently received notification from Institutional Stockholders
Services, Inc., ("ISS") a Rockville, Maryland based independent research firm
that advises institutional investors, that Drew's corporate governance policies
outranked 98.4 percent of all companies listed in the Russell 3000 index. Drew
has no business relationships with ISS.
CONTINGENCIES
LCI is a defendant in an action entitled SteelCo, Inc. Vs. Lippert
Components, Inc. and DOES 1 through 20, inclusive commenced in the Superior
Court of the State of California, County of San Bernardino, San Bernardino
District on July 16, 2002.
Plaintiff alleges that LCI violated certain provisions of the California
Business and Professions Code (Sec. 17000 et. Seq.) by allegedly selling chassis
and component parts below LCI's costs, engaged in acts
20
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
intended to destroy competition, wrongfully interfering with plaintiff's
economic advantage, and engaging in unfair competition. Plaintiff seeks damages
in an unspecified amount, treble damages, punitive damages, costs and expenses
incurred in the proceeding and injunctive relief.
LCI is vigorously defending against the allegations in the complaint, and
has asserted counterclaims against Plaintiff. The case is in discovery.
INFLATION
The prices of raw materials, consisting primarily of vinyl, aluminum,
steel, glass and ABS resin 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. Since
the second quarter of 2002, the Company experienced modest increases in its
labor costs related to inflation.
USE OF ESTIMATES
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of America
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 recreational vehicle and manufactured housing
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 vinyl, aluminum,
steel, glass and ABS resin), availability of retail and wholesale financing for
manufactured homes, availability and
21
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
costs of labor, inventory levels of retailers and manufacturers, the financial
condition of our customers, interest rates, and adverse weather conditions
impacting retail sales. In addition, general economic conditions and consumer
confidence may affect the retail sale of recreational vehicles and manufactured
homes.
22
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, steel,
vinyl, glass and ABS resins are subject to price volatility.
The Company is exposed to changes in interest rates primarily as a result
of its financing activities. At June 30, 2003, the Company had $34.3 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 approximately $343,000 lower per annum,
than if the fixed rate financing could be done at current market rates.
The Company also has a $30 million line of credit. At June 30, 2003, the
Company had no outstanding borrowings on the line of credit. At June 30, 2003,
the Company had $2.5 million of variable rate debt. Assuming an increase of 100
basis points in the interest rate for borrowings under these variable rate
loans, and outstanding borrowings of $2.5 million, future cash flows would be
affected by $25,000 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.
23
DREW INDUSTRIES INCORPORATED
Item 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Securities
Exchange Act of 1934 ("The Exchange Act") reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure, in accordance with the definition of "disclosure
controls and procedures" in Rule 13a - 14 (c) under the Exchange Act. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, cannot provide absolute assurance of achieving the desired control
objectives. Management considered in its evaluation the cost-benefit
relationship of possible controls and procedures.
As of the end of the period covered by this quarterly report, the Company
performed an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
b) Changes in Internal Controls
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
24
DREW INDUSTRIES INCORPORATED
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
LCI is a defendant in an action entitled SteelCo, Inc. vs. Lippert
Components, Inc. and DOES 1 through 20, inclusive commenced in the Superior
Court of the State of California, County of San Bernardino, San Bernardino
District, on July 16, 2002.
Plaintiff alleges that LCI violated certain provisions of the California
Business and Professions Code (Sec. 17000 et. seq.) by allegedly selling chassis
and component parts below LCI's costs, engaging in acts intended to destroy
competition, wrongfully interfering with plaintiff's economic advantage, and
engaging in unfair competition. Plaintiff seeks damages in an unspecified
amount, treble damages, punitive damages, costs and expenses incurred in the
proceeding and injunctive relief.
LCI is vigorously defending against the allegations in the complaint, and
has asserted counterclaims against Plaintiff. The case is in discovery.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits as required by item 601 of Regulation 8-K:
1) 31.1 Certification of Chief Executive Officer pursuant to
13a-14(a) under the Securities Exchange Act of 1934. Exhibit
31.1 is filed herewith.
2) 31.2 Certification of Chief Financial Officer pursuant to
13a-14(a) under the Securities Exchange Act of 1934. Exhibit
31.2 is filed herewith.
3) 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350. Exhibit 32.1 is filed herewith.
4) 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350. Exhibit 32.2 is filed herewith.
b) Reports on Form 8-K filed during the quarter ended June 30, 2003:
1) On April 24, 2003 the Company filed a current report on Form
8-K announcing results for the first quarter of 2003.
2) On May 5, 2003, the Company filed a current report on Form 8-K
disclosing the election of David A. Reed as a director of Drew
Industries Incorporated.
3) On June 3, 2003, the Company filed a current report on Form
8-K announcing a presentation at the Red Chip Partners San
Francisco Investors Conference 2003.
25
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 12, 2003
26