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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 0-13646
DREW INDUSTRIES INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Mamaroneck Avenue, White Plains, N.Y. 10601
(Address of principal executive offices)
(Zip Code)
(914) 428-9098
Registrant's Telephone Number including Area Code
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check marks whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities & Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 9,155,810 shares of common
stock as of July 28, 1997.
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<PAGE>
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, 1997
(UNAUDITED)
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Page
----
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-15
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 16
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------- -----------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $91,829 $82,444 $50,201 $48,330
Cost of sales (Note 3) 70,584 62,307 39,119 36,731
------- ------- ------- -------
Gross profit 21,245 20,137 11,082 11,599
Selling, general and administrative expenses 10,649 9,869 5,553 5,527
------- ------- ------- -------
Operating profit 10,596 10,268 5,529 6,072
Interest expense, net 861 142 562 95
------- ------- ------- -------
Income before income taxes 9,735 10,126 4,967 5,977
Provision for income taxes 3,708 3,995 1,886 2,363
------- ------- ------- -------
Net income $ 6,027 $ 6,131 $ 3,081 $ 3,614
======= ======= ======= =======
Net income per common share $ .63 $ .57 $ .34 $ .33
======= ======= ======= =======
Weighted average common shares outstanding 9,602 10,673 9,155 10,966
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------- December 31,
1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short term investments $ 1,379 $ 560 $ 1,545
Accounts receivable, trade, less allowance for
doubtful accounts 9,320 9,582 4,924
Inventories (Note 3) 22,264 18,444 22,686
Prepaid expenses and other current assets 2,932 1,907 2,549
-------- -------- --------
Total current assets 35,895 30,493 31,704
Fixed assets, net 15,238 9,564 10,865
Goodwill, net (Note 2) 14,443 12,045 11,582
Other assets 1,300 1,077 1,132
-------- -------- --------
Total assets $ 66,876 $ 53,179 $ 55,283
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-
term debt and other long-term liabilities $ 6,972 $ 305 $ 276
Accounts payable, trade 6,835 7,482 3,958
Accrued expenses and other current liabilities 12,218 10,841 11,332
-------- -------- --------
Total current liabilities 26,025 18,628 15,566
Long-term indebtedness (Note 4) 20,199 4,961 3,652
Other long-term liabilities 385 1,614 1,286
-------- -------- --------
Total liabilities 46,609 25,203 20,504
-------- -------- --------
Commitments and Contingencies (Note 5)
Stockholders' equity (Notes 2 and 4)
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,235,580 shares at June 1997;
11,147,102 shares at June 1996 and 11,202,946 shares at
December 1996 112 112 112
Paid-in capital 17,479 16,856 17,218
Retained earnings 26,624 14,156 20,597
-------- -------- --------
44,215 31,124 37,927
Treasury stock, at cost - 2,079,770 shares at June 1997; 479,750
shares at June 1996 and 479,770 shares at December 1996 (23,948) (3,148) (3,148)
-------- -------- --------
Total stockholders' equity 20,267 27,976 34,779
-------- -------- --------
Total liabilities and stockholders' equity $ 66,876 $ 53,179 $ 55,283
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1997 1996
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,027 $ 6,131
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 948 782
Changes in assets and liabilities (excluding acquisitions):
Accounts receivable, net (3,521) (2,453)
Inventories 1,830 767
Prepaid expenses and other assets (541) 259
Accounts payable, accrued expenses and other current liabilities 2,263 2,823
-------- --------
Net cash flows provided by operating activities 7,006 8,309
-------- --------
Cash flows from investing activities:
Capital expenditures, net of disposals (4,265) (3,411)
Acquisitions of businesses, net of cash received (5,534) (10,268)
-------- --------
Net cash flows used for investing activities (9,799) (13,679)
-------- --------
Cash flows from financing activities:
Proceeds from term loan 21,000
Acquisition loan 5,982
Proceeds from line of credit 23,575 9,125
Repayments under line of credit (21,275) (10,707)
Repayments of term loans (158) (62)
Exercise of stock options 278 315
Acquisition of treasury stock (20,800) (2,800)
Other 7 49
-------- --------
Net cash flows provided by financing activities 2,627 1,902
-------- --------
Net decrease in cash (166) (3,468)
Cash and short-term investments at beginning of period 1,545 4,028
-------- --------
Cash and short-term investments at end of period $ 1,379 $ 560
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 758 $ 129
Income taxes $ 5,009 $ 4,330
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ 112 $ (3,148) $ 17,218 $ 20,597 $ 34,779
Net income for six months ended
June 30, 1997 6,027 6,027
Issuance of 32,634 shares of common stock
pursuant to stock option plan 188 188
Income tax benefit relating to issuance of
common stock upon exercise of stock options 90 90
Costs of two-for-one split of common stock (17) (17)
Purchase of 1,600,000 shares of treasury stock (20,800) (20,800)
------ --------- --------- -------- ---------
Balance - June 30, 1997 $ 112 $ (23,948) $ 17,479 $ 26,624 $ 20,267
====== ========== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Consolidated Financial Statements presented herein have been prepared
by the Company in accordance with the accounting policies described in its
December 31, 1996 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, 1997 and
1996. 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. Certain prior year expenses and
balances have been restated to conform with the current year presentation.
2. Acquisitions
Pritt Tire and Axle, Inc.
On May 5, 1997 the Company's subsidiary, Shoals Supply, Inc. ("Shoals"),
acquired the assets and business of Pritt Tire and Axle, Inc. ("Pritt") of
Bristol, Indiana. Pritt, which refurbishes axles and tires used in the
transportation of manufactured homes, will be operated as an additional branch
of Shoals.
The purchase price consisted of cash of $4,450,000 and a three-year
warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per
share. In a separate transaction, subsequent to June 30, 1997, Shoals acquired,
from the former owner of Pritt, the manufacturing facility utilized by Pritt for
approximately $1 million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") is $2,860,000, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning May 5, 1997. Pritt had 1996 net
sales of $10.7 million.
Shoals Supply, Inc.
On February 15, 1996, the Company acquired the assets and business of
Shoals, a privately-owned Alabama corporation which is a supplier of products
used to transport manufactured homes. Shoals manufactures new axles and chassis
parts, refurbishes used axles, and distributes new and refurbished tires.
7
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The consideration for the acquisition was 1,089,918 shares of common stock
of the Company having a value of $7.5 million, cash of $1.6 million and a note
for $760,000 payable over 5 years. In addition, the Company assumed $7.5 million
of Shoals' bank debt and certain operating liabilities.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
goodwill of $11,757,000, is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning February 16, 1996. Shoals had 1996
net sales of $65 million, of which $57 million was for the 10 1/2 months since
Shoals was acquired by the Company.
3. Inventories
Inventories are valued at the lower of cost or market. Cost includes
material, labor and overhead; market is replacement cost or realizable value
after allowance for costs of distribution.
During the first quarter of 1997, the Company adopted the FIFO method to
value inventories for which the LIFO method had previously been utilized for
determining cost. The FIFO method will better measure the current value of such
inventories, provide a more appropriate matching of revenues and expenses, and
conform all inventories of the Company to the same accounting method.
Additionally, the change will enhance the comparability of the Company's
financial statements by changing to the predominant method utilized in its
industry. The Company applied this change retroactively which resulted in an
increase in retained earnings of $828,000 at January 1, 1996 and $14,000 at
January 1, 1997. The impact on net income for the six months and three months
ended June 30, 1996 was a reduction of $350,000 ($.04 per share) and $201,000
($.02 per share), respectively.
4. Long-Term Indebtedness
On May 15, 1997, the Company entered into a $60 million syndicated credit
agreement with The Chase Manhattan Bank as lead bank. The credit facility
includes a $21 million term loan and a $39 million revolving line of credit.
Approximately $26 million was borrowed at closing, which was used to repay a
short-term note of approximately $21 million issued to finance the Company's
purchase of 1.6 million shares of Drew common stock from its Chairman, and $5
million to refinance borrowings under the Company's then existing $15 million
line of credit with The Chase Manhattan Bank. The balance of the revolving line
is available for working capital purposes and acquisitions. The agreement
expires on May 15, 2002 and borrowings are secured by substantially all of the
assets of the Company, except real estate. At June 30, 1997, there were
outstanding borrowings of $5,450,000 under the revolving line of credit.
The term loan, the balance of which is $21,000,000 at June 30, 1997, is
payable in the amount of $2,500,000 each on July 31, 1997 and October 31, 1997,
followed by quarterly payments of $842,000 commencing January 31, 1998.
8
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest on borrowings under the credit facility is payable at .25% over
the prime rate. In addition, the Company has the option to either fix the rate
or convert a portion of the loan to a Eurodollar loan at 1.5% over the LIBO
rate. Furthermore, the Company is required to pay a commitment fee, accrued at
the rate of 3/8 of 1% per annum, on the daily unused amount of the revolving
line of credit. Pursuant to the agreement, the Company is required to maintain
minimum net worth, working capital, and income levels and meet certain other
financial requirements typical to secured borrowing arrangements. In addition,
for the term of the credit agreement, the Company will be prohibited from
declaring or paying dividends without the prior written consent of the lender.
The Company has entered into interest rate hedge agreements to effectively
convert variable rate debt to fixed rate debt in order to reduce the risk of
incurring higher interest costs due to rising interest rates. At June 30, 1997,
the Company had entered into contracts that expire in May 1998 and May 1999
which hedge interest related to $5 million and $10 million of debt,
respectively. Both of these contracts have an effective rate of 7.94%.
5. Contingencies
Effective July 29, 1994, the Company spun off to its stockholders Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"),
the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy Code. The liabilities of White Metal are all product
liability costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, were served with a
summons and complaint in an adversary proceeding commenced by the chapter 7
trustee of White Metal. The complaint, which appears to allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $8.4 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations, previously
disclosed by the Company, that the Company and its affiliated companies obtained
tax benefits attributable to the use of White Metal's net operating losses. The
trustee seeks to recover the purported value of the tax savings achieved, which
appears to be approximately $7.5 million. Management believes that the trustee's
allegations are without merit and have no basis in fact. In addition, the
trustee alleges that White Metal made certain payments to the Company which were
preferential and are recoverable by White Metal, in the approximate amount of
$900,000. The Company denies liability for any such amount and is vigorously
defending against the allegations. However, an estimate of potential loss, if
any, cannot be made at this time. The Company believes that it has sufficient
accruals for the defense of this proceeding and that such defense will not have
a material adverse impact on the Company's financial condition or results of
operations.
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Subsequent Event
On July 21, 1997, the Company announced an agreement in principle to
acquire Lippert Components, Inc ("Lippert") for 2,154,000 shares of Drew common
stock and $27 million in cash.
Lippert, which has 16 plants in 12 states east of the Rocky Mountains,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing.
Lippert's sales for its 1996 fiscal year were $107 million, on which they
achieved pro forma operating profit of approximately $11 million. Combined
annualized sales of Drew and Lippert Components will be approximately $300
million.
The transaction will be financed by Drew's existing $60 million line of
credit. The purchase is expected to be consummated within 90 days from the
announcement date.
10
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company, through its wholly-owned subsidiaries Kinro, Inc. ("Kinro")
and Shoals Supply, Inc. ("Shoals") manufactures and markets i) windows, axles,
tires and chassis parts for manufactured housing, ii) windows and doors for
recreational vehicles ("RV's") and (iii) to a lesser extent, windows for
mini-buses.
Kinro is one of the leading producers of windows for manufactured homes in
the United States. Kinro also manufactures windows and doors for RV's. Many of
the producers of manufactured homes, to whom Kinro sells windows, also
manufacture RV's. Kinro's products are manufactured in eleven plants located in
geographic areas throughout the United States and one subcontract operation in
Juarez, Mexico, which provide it with access to its major markets. A twelfth
plant is currently under construction.
Shoals, which was acquired by the Company on February 15, 1996, and is
under the management umbrella of Kinro, manufactures, refurbishes and
distributes new and used axles and tires and chassis parts used to transport
manufactured homes. On May 5, 1977, Shoals acquired the assets and business of
Pritt Tire and Axle, Inc., ("Pritt") which refurbishes axles and tires in one
plant in Bristol, Indiana. Shoals operates five domestic factories located in
five states.
RESULTS OF OPERATIONS
Net sales for the six months and quarter ended June 30, 1996 increased 11%
and 4%, respectively over the same period last year. The 1996 six month sales
include Shoals sales from February 15, 1996, and the 1997 sales include Pritt
sales from May 5, 1997, the dates that these operations were acquired by the
Company. Excluding the impact of these acquisitions, sales were approximately
the same as last year, as a 2% increase in sales of manufactured housing
products was offset by a 9% decrease in sales of RV products. The 2% increase in
sales of manufactured housing products compares to a 3% industry-wide decline in
shipments of manufactured homes. The decline in industry shipments is partially
offset by the continuing growth of double wide units resulting in only a .2%
decrease in floor shipments. Each section of a manufactured home represents a
floor. The 9% decrease in sales of RV products for the six months compared to an
industry-wide 4% increase in shipments of RV's. There has been no significant
loss of RV accounts by Kinro, however, the Company's RV operations are
concentrated in the Midwest where industry shipments were affected by severe
weather conditions. In addition, some of the Company's RV customers may have
experienced a decline in market share.
Operating profit increased 3% to $10,596,000 for the six months and
decreased 9% to $5,529,000 for the quarter ended June 1997. Included in the 1996
six months operating profit are the results of Shoals for only the four and a
half months since acquisition. Gross profit percentage for the 1997 periods are
below last year because of competitive pressures, as well as approximately
$400,000 of startup losses in 1997 attributable to Kinro's new plant in Dayton,
Tennessee which produces aluminum and vinyl windows. In addition, the current
year includes Shoals, which operates at a lower gross profit percentage than
Kinro, for the entire six months while Shoals was only included for 4-1/2 months
in the 1996 period. Shoals' selling general and administrative expenses,
however, are lower than Kinro's. Selling, general and administrative expenses
decreased as a percentage of sales for the six and three month periods in 1997
from the comparable periods in 1996.
11
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Expense, Net
Interest expense, net increased $719,000 and $467,000 for the six months
and three months, respectively over the same periods in 1996. Such increase is
primarily a result of the debt incurred in connection with the purchase of 1.6
million shares of the Company's stock from the Company's chairman on February
14, 1997. In addition, interest was incurred since May 5, 1997 on the $4.4
million payment for the acquisition of Pritt, and debt attributable to the
purchase of Shoals was outstanding for only four and a half months in the 1996
six month period. Such increases in interest expense were offset by the savings
from debt reduction resulting from operating cash flow.
The Company has entered into interest rate hedge agreements to effectively
convert variable rate debt to fixed rate debt in order to reduce the risk of
incurring higher interest costs due to rising interest rates. At June 30, 1997,
the Company had entered into contracts that expire in May 1998 and May 1999
which hedge interest related to $5 million and $10 million of debt,
respectively. Both of these contracts have an effective rate of 7.94%.
Accounting Changes
Statement of Financial Accounting Standards No. 128 ("Statement 128"),
"Earnings Per Share", will require presentation of "basic" and "diluted"
earnings per share for periods ending after December 15, 1997. The effect on
prior periods' reported earnings per share is not expected to be material.
LIQUIDITY AND CAPITAL RESOURCES
On May 15, 1997, the Company entered into a $60 million syndicated credit
agreement with The Chase Manhattan Bank as lead bank. The credit facility
includes a $21 million term loan and a $39 million revolving line of credit.
Approximately $26 million was borrowed at closing, which was used to repay a
short-term note of approximately $21 million issued to finance the Company's
purchase of 1.6 million shares of Drew common stock from its Chairman, and $5
million to refinance borrowings under the Company's then existing $15 million
line of credit with The Chase Manhattan Bank. The balance of the revolving line
is available for working capital purposes and acquisitions. The agreement
expires on May 15, 2002 and borrowings are secured by substantially all of the
assets of the Company, except real estate. At June 30, 1997, there were
outstanding borrowings of $5,450,000 under the revolving line of credit.
The term loan, the balance of which is $21,000,000 at June 30, 1997 is
payable in the amount of $2,500,000 each on July 31, 1997 and October 31, 1997,
followed by quarterly payments of $842,000 commencing January 31, 1998.
Interest on borrowings under the credit facility is payable at .25% over
the prime rate. In addition, the Company has the option to either fix the rate
or convert a portion of the loan to a Eurodollar loan at 1.5% over the LIBO
rate. Furthermore, the Company is required to pay a commitment fee, accrued at
the rate of
12
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
3/8 of 1% per annum, on the daily unused amount of the revolving line of credit.
Pursuant to the agreement, the Company is required to maintain minimum net
worth, working capital, and income levels and meet certain other financial
requirements typical to secured borrowing arrangements. In addition, for the
term of the credit agreement, the Company will be prohibited from declaring or
paying dividends without the prior written consent of the lender.
On February 14, 1997, the Company purchased 1.6 million shares of its
common stock from the Company's Chairman of the Board for $20.8 million. The
Company issued a short-term promissory note, bearing interest at 7% per annum,
in payment for such shares. This note was paid by the Company on May 15, 1997
upon the consummation of the term loan portion of the credit facility with The
Chase Manhattan Bank.
The Statements of Cash Flows reflect the following:
Six Months Ended
June 30,
----------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Cash flows provided by operating activities $ 7,006 $ 8,309
Cash flow used for investing activities $(9,799) $(13,679)
Cash flows provided by financing activities $ 2,627 $ 1,902
Net cash provided by operating activities for the six months ended June
30, 1997 was $7.0 million compared to $8.3 million for the 6 months ended June
30, 1996. Such amounts do not include balances of the assets and liabilities of
acquired businesses on the date of the acquisition. Accounts receivable reflect
seasonal increases of $3.5 million and $2.5 million in 1997 and 1996,
respectively. Inventories were reduced $1.8 million in 1997 partially as a
result of the reduction of the inventory of tires which was higher than typical
at December 1996. Payables increased $2.3 million and $2.8 million in the 1997
and 1996 periods, respectively, as a result of timing of payments and receipt of
goods.
Capital expenditures for the 1997 period are $4.3 million and are expected
to approximate $10 million for the full year. Capital expenditures for the six
months ended June 30, 1996 were $3.4 million. Cash flows used for investing
include the acquisition of Pritt in 1997 and the Shoals acquisition in 1996.
Cash flows provided by financing activities in the 1997 period includes
increases in debt of $2.3 million and $.3 million of proceeds from the exercise
of employees' stock options.
Effective July 29, 1994, the Company spun off to its stockholders Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"),
the Company's former home improvement building products segment.
13
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy code. The liabilities of White Metal are all product
liability costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke were served with a
summons and complaint in an adversary proceeding commenced by the chapter 7
trustee of White Metal. The complaint, which appears to allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $8.4 million is sought, jointly and
severally, for the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations, previously
disclosed by the Company, that the Company and its affiliated companies obtained
tax benefits attributable to the use of White Metal's net operating losses. The
trustee seeks to recover the purported value of the tax savings achieved, which
appears to be approximately $7.5 million. Management believes that the trustee's
allegations are without merit and have no basis in fact. In addition, the
trustee alleges that White Metal made certain payments to the Company which were
preferential and are recoverable by White Metal, in the approximate amount of
$900,000. The Company denies liability for any such amount and is vigorously
defending against the allegations. However, an estimate of potential loss, if
any, cannot be made at this time. The Company believes that it has sufficient
accruals for the defense of this proceeding and that such defense will not have
a material adverse impact on the Company's financial condition or results of
operations.
INFLATION
The prices of raw materials, consisting primarily of aluminum, steel,
glass and tires, are influenced by demand and other factors specific to these
commodities rather than being directly affected by inflationary pressures.
Prices of certain commodities have historically been volatile. In order to hedge
the impact of future prices 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 currently has futures
contracts for 3.3 million pounds at an aggregate cost of $2.4 million, which is
approximately current market value.
SUBSEQUENT EVENT
On July 21, 1997, the Company announced an agreement in principle to
acquire Lippert Components, Inc ("Lippert") for 2,154,000 shares of Drew common
stock and $27 million in cash.
Lippert, which has 16 plants in 12 states east of the Rocky Mountains,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing.
14
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Lippert's sales for its 1996 fiscal year were $107 million, on which they
achieved pro forma operating profit of approximately $11 million. Combined
annualized sales of Drew and Lippert Components will be approximately $300
million.
The transaction will be financed by Drew's existing $60 million line of
credit. The purchase is expected to be consummated with 90 days from the
announcement date.
15
<PAGE>
DREW INDUSTRIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DREW INDUSTRIES INCORPORATED
Registrant
By /s/ Fredric M. Zinn
------------------------
Fredric M. Zinn
Principal Financial Officer
August 11, 1997
16
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