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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: SEPTEMBER 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. 10,127,483 shares of common
stock as of October 31, 2003.
================================================================================
DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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........... 7-13
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 14-23
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK.......................................... 24
Item 4 - CONTROLS AND PROCEDURES............................... 25
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS..................................... 26
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K...................... 26
SIGNATURES............................................................... 27
EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION............................. 28
EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION............................. 29
EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION............................. 30
EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION............................. 31
2
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- --------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales $266,344 $ 247,122 $96,107 $89,217
Cost of sales 200,041 186,455 70,637 68,105
--------------------------------------------------
Gross profit 66,303 60,667 25,470 21,112
Selling, general and administrative expenses 39,279 36,779 13,980 12,711
--------------------------------------------------
Operating profit 27,024 23,888 11,490 8,401
Interest expense, net 2,340 2,700 722 896
--------------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle 24,684 21,188 10,768 7,505
Provision for income taxes 9,629 8,041 4,186 2,814
--------------------------------------------------
Income from continuing operations before cumu-
lative effect of change in accounting principle 15,055 13,147 6,582 4,691
Discontinued operations (net of taxes of $75 in 2003
and ($80) and $5 for the nine and three month
periods in 2002, respectively) 138 (148) -- 9
--------------------------------------------------
Income before cumulative effect of change in
accounting principle 15,193 12,999 6,582 4,700
Cumulative effect of change in accounting principle
for goodwill (net of taxes of $2,825) -- (30,080) -- --
--------------------------------------------------
Net income (loss) $ 15,193 $ (17,081) $ 6,582 $ 4,700
==================================================
Net income (loss) per common share:
Income from continuing operations before cumulative
effect of change in accounting principle:
Basic $ 1.50 $ 1.35 $ .65 $ .48
==================================================
Diluted $ 1.47 $ 1.32 $ .64 $ .47
==================================================
Discontinued operations, net of taxes:
Basic $ .01 $ (.02) $ -- $ --
==================================================
Diluted $ .01 $ (.01) $ -- $ --
==================================================
Cumulative effect of change in accounting principle
for goodwill, net of taxes:
Basic $ -- $ (3.08) $ -- $ --
==================================================
Diluted $ -- $ (3.02) $ -- $ --
==================================================
Net income (loss):
Basic $ 1.51 $ (1.75) $ .65 $ .48
==================================================
Diluted $ 1.48 $ (1.71) $ .64 $ .47
==================================================
Weighted average common shares outstanding:
Basic 10,044 9,757 10,118 9,836
==================================================
Diluted 10,256 9,970 10,337 10,062
==================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
------------------------- December 31,
2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except shares and per share amount)
ASSETS
Current assets
Cash and cash equivalents $ 9,433 $ 2,107 $ 316
Accounts receivable, trade, less allowances 22,775 21,805 12,969
Inventories 35,232 34,235 37,143
Prepaid expenses and other current assets 5,253 5,939 8,618
Discontinued operations -- 1,817 1,211
-----------------------------------------
Total current assets 72,693 65,903 60,257
Fixed assets, net 72,816 73,860 74,041
Goodwill 10,219 6,912 7,043
Other intangible assets 4,456 922 814
Other assets 2,957 5,540 3,241
-----------------------------------------
Total assets $ 163,141 $ 153,137 $ 145,396
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of
long-term indebtedness $ 9,825 $ 9,900 $ 9,993
Accounts payable, trade 12,864 13,768 7,998
Accrued expenses and other current liabilities 24,232 20,121 17,699
Discontinued operations 69 547 500
-----------------------------------------
Total current liabilities 46,990 44,336 36,190
Long-term indebtedness 25,363 42,052 38,812
Other long-term liabilities 2,997 275 290
-----------------------------------------
Total liabilities 75,350 86,663 75,292
-----------------------------------------
Commitments and Contingencies
Stockholders' equity
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 12,257,208 shares at September 2003;
12,004,188 shares at September 2002 and 12,084,788 at
December 2002 123 120 121
Paid-in capital 31,060 27,422 28,568
Retained earnings 76,075 58,399 60,882
-----------------------------------------
107,258 85,941 89,571
Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467)
-----------------------------------------
Total stockholders' equity 87,791 66,474 70,104
-----------------------------------------
Total liabilities and stockholders' equity $ 163,141 $ 153,137 $ 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)
Nine Months Ended
September 30,
-----------------------
2003 2002
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 15,193 $(17,081)
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) 148
-----------------------
Income from continuing operations 15,055 13,147
Depreciation and amortization 5,878 5,318
Loss on disposal of fixed assets 106 149
Deferred stock compensation 250 40
Changes in assets and liabilities:
Accounts receivable, net (9,592) (11,312)
Inventories 2,247 (8,709)
Prepaid expenses and other assets 4,082 (2,161)
Accounts payable, accrued expenses and other liabilities 9,498 12,756
-----------------------
Net cash flows provided by continuing operating activities 27,524 9,228
Income (loss) from discontinued operations 138 (148)
Changes in discontinued operations 771 910
-----------------------
Net cash flows provided by operating activities 28,433 9,990
-----------------------
Cash flows from investing activities:
Capital expenditures (3,906) (8,461)
Business acquisitions, net of cash acquired (3,752) (1,816)
Proceeds from sales of fixed assets 65 267
-----------------------
Net cash flows used for investing activities (7,593) (10,010)
-----------------------
Cash flows from financing activities:
Proceeds from line of credit 31,550 61,600
Proceeds from loans secured by real estate and equipment -- 2,750
Repayments under line of credit and other borrowings (45,517) (65,719)
Exercise of stock options 2,244 2,305
-----------------------
Net cash flows (used for) provided by financing activities (11,723) 936
-----------------------
Net increase in cash 9,117 916
Cash and cash equivalents at beginning of period 316 1,191
-----------------------
Cash and cash equivalents at end of period $ 9,433 $ 2,107
=======================
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 2,717 $ 3,303
Income taxes paid $ 5,935 $ 7,954
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 nine months ended
September 30, 2003 15,193 15,193
Issuance of 172,420 shares of common
stock pursuant to stock option plan 2 1,905 1,907
Income tax benefit relating to issuance
of common stock pursuant to stock option plan 337 337
Deferred stock compensation expense and other 250 250
---------------------------------------------------------------
Balance - September 30, 2003 $ 123 $ 31,060 $ 76,075 $(19,467) $ 87,791
===============================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 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 financial
position and results of operations as of and for the nine and three month
periods ended September 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 nine months ended September 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 nine months ended September 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
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
those described in Note 1 of Notes to Consolidated Financial Statements, of the
Company's December 31, 2002 Annual Report on Form 10-K.
Information relating to segments follows (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------
Net sales:
RV segment $ 165,010 $ 125,956 $ 59,296 $ 47,142
MH segment 101,334 121,166 36,811 42,075
----------------------------------------------------------
Total $ 266,344 $ 247,122 $ 96,107 $ 89,217
==========================================================
Operating profit:
RV segment $ 19,392 $ 12,686 $ 7,976 $ 5,048
MH segment 11,219 14,169 4,740 4,439
----------------------------------------------------------
Total segments operating profit 30,611 26,855 12,716 9,487
Amortization of intangibles (571) (551) (196) (192)
Corporate and other (3,016) (2,416) (1,030) (894)
----------------------------------------------------------
Operating profit $ 27,024 $ 23,888 $ 11,490 $ 8,401
==========================================================
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):
September 30, December 31,
--------------------------- ------------
2003 2002 2002
---------------------------------------------------
Finished goods $ 6,690 $ 6,960 $ 7,681
Work in process 1,359 1,653 1,408
Raw material 27,183 25,622 28,054
-------------------------------------------------
Total $ 35,232 $ 34,235 $ 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
8
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." 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 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.
5. Discontinued Operations
The axle and tire refurbishing business of the Company's Lippert Tire and
Axle, Inc. subsidiary ("LTA") did not perform well between 2000 and 2002,
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 $9.4 million in the
first nine 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):
September 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 -- 5,350 2,900
Industrial Revenue Bonds, interest rates at September 30, 2003 of 3.20%
to 6.28%, due 2008 through 2017; secured by
certain real estate and equipment 8,068 9,086 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 4,590 4,991 4,894
Other loans primarily secured by certain real estate and
equipment, due 2006 to 2016, primarily fixed rates
of 7.25% to 8.72% 6,530 8,525 8,140
---------------------------------
35,188 51,952 48,805
Less current portion 9,825 9,900 9,993
---------------------------------
Total long-term indebtedness $25,363 $42,052 $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.
During the third quarter of 2003, the Company prepaid $1.4 million of
other loans with interest rates of 7.75 percent to 7.90 percent. There were no
penalties on such pre-payments.
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):
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 10,044 9,757 10,118 9,836
Assumed issuance of common stock
pertaining to stock options 212 213 219 226
-----------------------------------------------------
Weighted average common shares
outstanding - diluted 10,256 9,970 10,337 10,062
=====================================================
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.
Prior to January 1, 2002, 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 $90,000 for the nine months ended September 30, 2003 and
$30,000 for the three months ended September 30, 2003. There was no impact on
the consolidated financial statements for the nine and three month periods ended
September 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):
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 15,193 $ (17,081) $ 6,582 $ 4,700
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 55 -- 18 --
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effect (266) (304) (89) (87)
---------------------------------------------------------------
Pro forma net income (loss) $ 14,982 $ (17,385) $ 6,511 $ 4,613
===============================================================
Net income (loss) per common share:
Basic - as reported $ 1.51 $ (1.75) $ .65 $ .48
===============================================================
Basic - pro forma $ 1.49 $ (1.78) $ .64 $ .47
===============================================================
Diluted - as reported $ 1.48 $ (1.71) $ .64 $ .47
===============================================================
Diluted - pro forma $ 1.46 $ (1.74) $ .63 $ .46
===============================================================
9. Acquisition
On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC
("LTM"), with annual sales of approximately $4.5 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. Total
consideration was allocated as follows (in thousands):
Net tangible assets acquired $ 496
Identifiable intangible assets 430
Goodwill 3,176
------
Total consideration $4,102
======
12
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Subsequent Event
On October 3, 2003, the Company acquired certain assets and liabilities of
Indiana-based ET&T Frames, Inc. ("ET&T"), with annual sales of approximately $7
million. ET&T manufactures chassis primarily for specialty trailer units,
consisting of park models, office units, cargo trailers and, to a lesser extent,
chassis for towable recreational vehicles. This acquisition represents a
significant expansion of Drew's chassis manufacturing business into specialty
chassis. The $3.6 million purchase price includes the accounts receivable and
certain inventory and fixed assets of ET&T. Production of ET&T's products was
immediately transferred to the Company's existing factories, without adding any
overhead. The purchase price was funded with Drew's available cash.
13
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 nine months ended September 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 nine months ended September 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
September 30, 2003, the Company's subsidiaries operated 41 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 third quarter of 2003, compared to the third
quarter of 2002, while shipments in the first nine months of 2003 were two
percent above the first nine months of 2002. Shipments of travel trailers and
fifth wheel RVs, the Company's primary market, increased four percent for the
quarter and nine percent for the nine month period. In 2002, the RVIA reported
an increase of 21 percent in total RV shipments to near record levels and 25
percent for travel trailers and fifth wheel RVs for the year. Increasing
industry RV sales are expected to continue 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
As a result of limited credit availability for purchases of manufactured
homes, high interest rate spreads between conventional mortgages on site built
homes and chattel loans for manufactured homes, and unusually high repossessions
of manufactured homes, industry production has declined approximately 65 percent
since 1998 to a projected 130,000 homes in 2003, the lowest production levels in
40 years. However, based upon industry reports, retail sales of manufactured
homes have declined much less severely in recent years to an estimated 250,000
homes in 2003. Some of these retail sales have been filled by inventory
reductions by dealers and manufacturers, and the resale of repossessed homes,
rather than new production. It
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
has been estimated that approximately 90,000 manufactured homes were repossessed
in each of the last three years, with estimates of 100,000 homes to be
repossessed in 2003, far in excess of historical repossession levels. In
addition, we believe that inventories of new homes held by dealers and
manufacturers were reduced in 2002 and 2003.
The Manufactured Housing Institute ("MHI") reported that the industry
decline continued in 2003, as industry production of manufactured homes fell 20
percent in the third quarter of 2003 and 24 percent for the first nine months of
2003, as compared to the same periods in 2002. Repossessions and limited
availability of chattel loans for home buyers have been continuing concerns for
the manufactured housing industry. However, there have been some signs that
repossessions are beginning to ease and the increase in land/home and
conventional mortgages for manufactured homes, compared to higher cost and less
secure chattel loans, have partially mitigated 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):
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------
Net sales:
RV segment $ 165,010 $ 125,956 $ 59,296 $ 47,142
MH segment 101,334 121,166 36,811 42,075
---------------------------------------------------------------
Total $ 266,344 $ 247,122 $ 96,107 $ 89,217
===============================================================
Operating profit:
RV segment $ 19,392 $ 12,686 $ 7,976 $ 5,048
MH segment 11,219 14,169 4,740 4,439
---------------------------------------------------------------
Total segments operating profit $ 30,611 26,855 12,716 9,487
Amortization of intangibles (571) (551) (196) (192)
Corporate and other (3,016) (2,416) (1,030) (894)
----------------------------------------------------------------
Total $ 27,024 $ 23,888 $ 11,490 $ 8,401
===============================================================
Consolidated Highlights
o Income from continuing operations before cumulative effect of
change in accounting principle was up 15 percent and 40
percent for the first nine months and third quarter of 2003,
respectively.
15
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
o Operating profit margin for the third quarter increased to
12.0 percent, from 9.4 percent in the third quarter last year.
o Net sales for both the first nine months and third quarter of
2003 grew by 8 percent from the comparable periods in 2002.
o On October 3, the Company completed the acquisition of
Indiana-based ET&T Frames, Inc., a manufacturer of specialty
chassis and towable RV chassis products with annual sales of
approximately $7 million, for $3.6 million.
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 $4.5
million, for $4.1 million.
RV Segment
Net sales of the RV segment increased $39.1 million (31 percent) and $12.2
million (26 percent) in the first nine months and third quarter of 2003,
respectively, compared to the comparable periods of 2002. These improvements are
largely due to increases in the Company's market share of all primary product
lines in this segment, including RV slide-out mechanisms and related power
units, chassis, and windows and doors. Sales of RV slide-out mechanisms and
related power units were up 84% from the third quarter of 2002 to approximately
$10 million. The expansion of this segment also resulted from the industry-wide
growth in the RV sales, in particular the Company's primary market of travel
trailers and fifth wheel RVs. Long-term growth in industry-wide 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, although RV
sales may be subject to periodic swings. There have been no significant changes
in sales prices by the Company's RV segment since the third quarter of 2002.
Operating profit of the RV segment increased $6.7 million (53 percent) and
$2.9 million (58 percent) for the first nine months and third quarter of 2003,
respectively. This growth is attributable to both an increase in unit sales and
an increase in the segment's operating profit margin. Operating profit margin
increased to 11.8 percent for the first nine months and 13.5 percent for the
third quarter of 2003, from 10.1 percent and 10.7 percent for the comparable
periods in 2002. This margin improvement was achieved by the spreading of fixed
costs over higher sales, improved operating efficiencies and more moderate steel
costs compared to the higher steel costs in the second half of last year.
However, steel prices have been volatile and are expected to increase over the
next couple of quarters. Operating results at several of the Company's
facilities improved significantly, especially those in Rialto, California, and
Goshen, Bristol and Middlebury, Indiana. Partially offsetting these increases in
operating profit margin were legal and other costs related to the settlement of
patent litigation on the Company's slide-out mechanisms in February 2003 and
higher insurance costs.
MH Segment
Net sales of the MH segment declined $19.8 million (16 percent) and
$5.3 million (13 percent) in the nine and three month periods ended September
30, 2003, respectively, from the same periods last year, which was less of a
decline than that experienced by the industry as a whole. The Company has
captured market share and increased sales of products for modular homes and
office units partially offsetting the sales
16
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
reduction caused by the Manufactured Housing industry decline. There have been
no significant changes in sales prices by the Company's MH segment since the
third quarter of 2002, except selling price increases for certain chassis parts
in the second half of 2002.
Operating profit of the MH segment increased $0.3 million (7 percent) in
the third quarter of 2003 from the third quarter of 2002, because this segment's
operating profit margin rose to 12.9 percent of sales in the third quarter of
2003, compared to 10.6 percent for the same period last year. The increase in
the operating profit margin in the third quarter of 2003 was largely a result of
more moderate steel costs as compared to the second half of 2002 when steel
prices were very high due to import tariff, which offset the effect of lower
sales. However, steel prices have been volatile and are expected to increase
over the next couple of quarters. Operating profit of the MH segment decreased
$3.0 million (21 percent) in the first nine months of 2003 from the same period
in 2002, largely because of the decline in sales. This segment's operating
profit margin was 11.1 percent of sales in the first nine months of 2003,
compared to 11.7 percent for the same period last year, primarily because of the
carryover of high steel prices from 2002 into the first half of 2003. Higher
group insurance costs and the impact of lower volume on fixed costs also
negatively impacted operating profit for all of 2003. Selling, general and
administrative expenses for the nine and three month periods of 2003 were down
in dollar terms, largely following the trend of sales, but remained steady as a
percent of sales.
The Company is currently in negotiations to lease equipment in order to
utilize certain new technology (the VEC Shield(TM)") to produce bath products
for the manufactured housing industry. If lease negotiations are completed
during the fourth quarter, production of these new bath products should commence
in early 2004, and will compete favorably with fiberglass bath products, which
the Company does not currently produce.
Corporate and Other
Corporate and other expenses were $600,000 and $136,000 higher than last
year's first nine months and third quarter, respectively, primarily as a result
of higher insurance costs, incentive compensation due to increased profits,
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 nine months of 2003 was approximately
39.0 percent as compared to 38.0 percent for the first nine 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 $360,000 and $174,000 from the first nine
months and third 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 the first nine months of 2003 also includes
$167,000 related to imputed interest on the liability recorded for minimum
royalty payments for the fiscal years 2003 through 2006.
17
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Prior to January 1, 2002, 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 $90,000 and $30,000 for the nine and three month periods ended
September 30, 2003, respectively. There was no impact on the financial
statements for the nine and three month periods ended September 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 or Disposal of Long-Lived Assets." 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.
18
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
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 Exit 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
19
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following (in thousands):
Nine Months Ended
September 30,
----------------------------
2003 2002
---- ----
Net cash flows provided by operating activities $ 28,433 $ 9,990
Net cash flows used for investment activities $ (7,593) $ (10,010)
Net cash flows used for financing activities $ (11,723) $ 936
Net cash flows from operating activities of $28.4 million for 2003 were
approximately $18.5 million higher than such cash flows in 2002 as a result of
an increase in income from continuing operations, as well as:
a) A smaller seasonal increase in accounts receivable for the first
nine 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 to approximately 21
days. 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 September 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 increase in
accounts payable, accrued expenses and other current liabilities.
This change is primarily from the timing of payment due dates and
purchases at the end of 2002. Trade payables are generally paid
within the discount period.
Cash flows used for investing activities of $7.6 million consists of
capital expenditures ($3.9 million) and the acquisition of LTM Manufacturing LLC
("LTM") for $3.8 million in cash. Capital expenditures for 2003 are expected to
approximate $7.0 million and are expected to be funded by cash flow from
operations. Capital expenditures for the full year 2002 were $10.5 million,
including $8.5 million in the first nine months of 2002.
20
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On July 17, 2003, the Company acquired Kansas-based LTM, with annual sales
of approximately $4.5million. 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 $3.8 million of 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.
Cash flows used for financing activities for the first nine months of 2003
include a net decrease in debt of $14.0 million, partially funded by $2.2
million received from the exercise of employee stock options. Cash flows
provided by financing activities for the first nine months of 2002 include a net
decrease in debt of $1.4 million. Total debt has been reduced by $16.8 million
since September 2002.
Availability under the Company's line of credit, which availability was
$27.7 million at September 30, 2003, net of $2.3 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 October 3, 2003, the Company acquired certain assets and liabilities of
Indiana-based ET&T Frames, Inc. ("ET&T"), with annual sales of approximately $7
million. ET&T manufactures chassis primarily for specialty trailer units,
consisting of park models, office units, cargo trailers and, to a lesser extent
chassis for towable recreational vehicles. This acquisition represents a
significant expansion of Drew's chassis manufacturing business into specialty
chassis. The $3.6 million purchase price includes the accounts receivable and
certain inventory and fixed assets of ET&T. Production of ET&T's products was
immediately transferred to the Company's existing factories, without adding any
overhead. The purchase price was funded with Drew's available cash.
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 are 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.
21
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company received notification in November from Institutional
Stockholders Services, Inc., ("ISS") a Rockville, Maryland based independent
research firm that advises institutional investors, that Drew's corporate
governance policies outranked 99.9 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 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 third 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.
22
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 costs of labor, inventory levels of
retailers and manufacturers, levels of repossessed manufactured homes, 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.
23
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 September 30, 2003, the Company had $32.4
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 $324,000 lower
per annum, than if the fixed rate financing could be done at current market
rates.
At September 30, 2003, the Company had no outstanding borrowings on its
$30 million line of credit. At September 30, 2003, the Company had $2.8 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 $2.8 million, future cash flows would be affected by $28,000 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.
24
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 during
the third quarter of 2003 or subsequent to the date the Company completed its
evaluation.
25
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 September 30,
2003:
1) On July 14, 2003, the Company filed a current report on
Form 8-K announcing it had received high marks for its
corporate governance policies from one of the nation's
leading governance advocates.
2) On July 21, 2003, the Company filed a current report on
Form 8-K announcing the time of the Company's conference
call and webcast to announce second-quarter 2003
results.
3) On July 24, 2003, the Company filed a current report on
Form 8-K announcing results for the second quarter of
2003.
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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
November 10, 2003
27