- --------------------------------------------------------------------------------
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.
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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, 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