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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, 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 XX No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 11,080,433 shares of common
stock as of October 31, 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 SEPTEMBER 30, 1997
(UNAUDITED)
------------------------------------------------------------
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>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $142,011 $127,259 $50,182 $44,815
Cost of sales (Note 4) 109,678 96,262 39,094 33,955
-------- -------- ------- -------
Gross profit 32,333 30,997 11,088 10,860
Selling, general and administrative expenses 16,422 14,821 5,773 4,952
-------- -------- ------- -------
Operating profit 15,911 16,176 5,315 5,908
Interest expense, net 1,496 239 635 97
-------- -------- ------- -------
Income before income taxes 14,415 15,937 4,680 5,811
Provision for income taxes 5,449 6,288 1,741 2,293
-------- -------- ------- -------
Net income $ 8,966 $ 9,649 $ 2,939 $ 3,518
======== ======== ======= =======
Net income per common share $ .95 $ .90 $ .32 $ .33
======== ======== ======= =======
Weighted average common shares outstanding 9,468 10,679 9,156 10,686
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 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 $ 1,242 $ 385 $ 1,545
Accounts receivable, trade, less allowance for
doubtful accounts 9,947 8,951 4,924
Inventories (Note 4) 22,293 22,210 22,686
Prepaid expenses and other current assets 3,913 1,977 2,549
-------- -------- --------
Total current assets 37,395 33,523 31,704
Fixed assets, net 19,840 10,220 10,865
Goodwill, net (Notes 2 and 3) 14,512 11,824 11,582
Other assets 1,549 1,280 1,132
-------- -------- --------
Total assets $ 73,296 $ 56,847 $ 55,283
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-
term debt and other long-term liabilities $ 5,297 $ 282 $ 276
Accounts payable, trade 5,498 7,453 3,958
Accrued expenses and other current liabilities 13,956 12,627 11,332
-------- -------- --------
Total current liabilities 24,751 20,362 15,566
Long-term indebtedness (Notes 2 and 5) 24,971 2,972 3,652
Other long-term liabilities 368 1,755 1,286
-------- -------- --------
Total liabilities 50,090 25,089 20,504
-------- -------- --------
Commitments and Contingencies (Note 6)
Stockholders' equity (Notes 2, 3 and 5)
Common stock, par value $.01 per share:
authorized 20,000,000 shares; issued
11,235,580 shares at September 1997;
11,187,208 shares at September 1996
and 11,202,946 shares at December 1996 112 112 112
Paid-in capital 17,479 17,120 17,218
Retained earnings 29,563 17,674 20,597
-------- -------- --------
47,154 34,906 37,927
Treasury stock, at cost - 2,079,770 shares at
September 1997; 479,750 shares
at September 1996 and 479,770
shares at December 1996 (23,948) (3,148) (3,148)
-------- -------- --------
Total stockholders' equity 23,206 31,758 34,779
-------- -------- --------
Total liabilities and stockholders' equity $ 73,296 $ 56,847 $ 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)
Nine Months Ended
September 30,
---------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 8,966 $ 9,649
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 1,531 1,192
Loss (gain) on sale of fixed assets 2 (26)
Changes in assets and liabilities (excluding
acquisitions):
Accounts receivable, net (4,148) (1,839)
Inventories 1,706 (2,858)
Prepaid expenses and other assets (1,845) (89)
Accounts payable, accrued expenses and other
current liabilities 2,589 4,516
-------- --------
Net cash flows provided by operating activities 8,801 10,545
-------- --------
Cash flows from investing activities:
Capital expenditures, (8,251) (4,952)
Sales of fixed assets 16 861
Acquisitions of businesses, net of cash received (6,576) (10,268)
-------- --------
Net cash flows used for investing activities (14,811) (14,359)
-------- --------
Cash flows from financing activities:
Proceeds from term loan 21,000
Acquisition loan 5,982
Proceeds from line of credit 56,000 16,150
Repayments under line of credit (48,050) (19,682)
Repayments of term loans (2,739) (94)
Exercise of stock options 278 579
Acquisition of treasury stock (20,800) (2,800)
Other 18 36
-------- --------
Net cash flows provided by financing activities 5,707 171
-------- --------
Net decrease in cash (303) (3,643)
Cash and short-term investments at beginning of period 1,545 4,028
-------- --------
Cash and short-term investments at end of period $ 1,242 $ 385
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 1,340 $ 197
Income taxes $ 7,666 $ 6,436
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 nine months ended
September 30, 1997 8,966 8,966
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 - September 30, 1997 $ 112 $(23,948) $17,479 $29,563 $23,206
======== ======== ======= ======= =======
</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 nine and three month periods ended September 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. Subsequent Event
On October 7, 1997, the Company acquired Lippert Components, Inc.
("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock
having a value of approximately $25.4 million. In addition, 230,769 contingently
issuable shares are subject to an earn-out. All 2,154,000 shares are restricted
and are subject to a registration rights agreement.
Lippert, which has 17 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 fiscal year ended September 30, 1997 were $99
million, on which they achieved earnings before interest, taxes and goodwill
amortization of approximately $8.6 million, excluding shareholder compensation,
benefits and related items which will not continue subsequent to the
acquisition. These earnings are net of other nonrecurring compensation and
startup costs of approximately $.5 million.
The acquisition will be accounted for as a purchase. The aggregate
purchase price will be allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. Based on
preliminary estimates which will be finalized at a later date, the excess of
purchase price over the fair value of the net assets acquired ("goodwill") was
approximately $30 million, which will be amortized over 30 years. The results of
the acquired business will be included in the Company's consolidated statements
of income beginning October 7, 1997.
The cash portion of the transaction has been financed by Drew's existing
credit facility which was increased to $65 million to accommodate this
acquisition. The new credit facility consists of a revolving line of credit of
$33 million and a term loan of $32 million payable in quarterly payments of $2
million commencing March 31, 1998.
7
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. 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, a privately-owned company, 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. As part of this transaction, in the third quarter of 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 $2,910,000, 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.
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.
8
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. 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 nine months and three months
ended September 30, 1996 was a reduction of $512,000 ($.05 per share) and
$162,000 ($.01 per share), respectively.
5. 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 unused portion 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 September 30, 1997,
there were outstanding borrowings of $29,600,000 under the credit facility.
Subsequent to September 30, 1997, this credit facility was amended as described
in Note 2.
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 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 September 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%.
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 $7.5 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke,
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.
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 windows, axles,
tires and chassis parts for manufactured housing; and windows and doors for
recreational vehicles ("RV's").
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, 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. On May 5,
1997, 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.
On October 7, 1997 the Company acquired Lippert Components, Inc.
("Lippert"). Lippert, which has 17 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 1997 fiscal
year were $99 million.
RESULTS OF OPERATIONS
Net sales for both the nine months and quarter ended September 30, 1997
increased 12% over the same period last year. The 1996 nine 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.
Adjusting for the sales of Shoals for the month and a half before acquisition,
and excluding the sales of Pritt since its acquisition, sales were up 2% for the
nine months over the same period last year as a 3% increase in sales of
manufactured housing products was offset by a 4% decrease in sales of RV
products. The 3% 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
section homes resulting in year to date industry floor shipments being flat with
last year. Each section of a manufactured home represents a floor. The 4%
decrease in sales of RV products for the nine months compared to an
industry-wide 4% increase in shipments of RV's. For the quarter, excluding the
impact of acquisitions, sales increased 4% over the same period last year as
manufactured housing product sales increased 3% and RV product sales increased
6% in contrast to declines of RV product sales in prior quarters.
Operating profit decreased 2% to $15,911,000 for the nine months. Included
in the 1996 nine months operating profit are the results of Shoals for only the
seven and a half months since acquisition. Operating profit for the nine months
of 1997 are below last year because of competitive pressures, as well as
approximately $400,000 of startup losses of new plants in 1997, offset by lower
average material costs, and operating profit contributed by higher sales.
11
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
For the third quarter, operating profit decreased 10% as a result of
competitive pressures and higher average material costs offset by increased
operating profit contributed by higher sales.
Interest Expense, Net
Interest expense, net increased $1,257,000 and $538,000 for the nine
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 for $20.8 million. In addition, interest increased
as a result of the acquisition of Shoals in 1996 and Pritt in 1997.
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 September 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. When adopted by
the Company, the restatement of 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. 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. In October 1997 the Company's credit
facility was increased to $65 million to accommodate the purchase of Lippert.
The credit facility consists of a term loan of $32 million, payable in quarterly
payments of $2 million commencing March 31, 1998, and a revolving line of credit
of $33 million. 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 September 30, 1997, there were outstanding borrowings of
$29,600,000 under the credit facility.
12
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (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 of net worth 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:
Nine Months Ended
September 30,
------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Cash flows provided by operating activities $ 8,801 $ 10,545
Cash flow used for investing activities $(14,811) $(14,359)
Cash flows provided by financing activities $ 5,707 $ 171
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $8.8 million compared to $10.5 million for the 9 months
ended September 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 $4.1 million and $1.8 million in 1997
and 1996, respectively. The variation in accounts receivable changes is
primarily attributable to the timing of customers' payments in late December.
Inventories were reduced $1.7 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 $2.6 million and $4.5 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 $8.3 million compared to $5.0
for the nine months ended September 30, 1996. Capital expenditures were funded
by cash flow from operations. Cash flows used for investing activities include
the acquisition of Pritt in 1997 and the Shoals acquisition in 1996.
13
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Cash flows provided by financing activities in the 1997 period includes
increases in debt of approximately $26 million. These funds were primarily used
for the acquisition of treasury stock and the acquisition of Pritt.
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 $7.5 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke,
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.
14
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SUBSEQUENT EVENT
On October 7, 1997, the Company acquired Lippert Components, Inc.
("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock
having a value of approximately $25.4 million. In addition, 230,769 contingently
issuable shares are subject to an earn-out. All 2,154,000 shares are restricted
and are subject to a registration rights agreement. In connection with the
acquisition, the principal stockholder of Lippert entered into an employment and
non-competition agreement to continue as President and Chief Executive Officer
of Lippert for a period of three years.
Lippert, which has 17 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 fiscal year ended September 30, 1997 were $99
million, on which they achieved earnings before interest, taxes and goodwill
amortization of approximately $8.6 million, excluding shareholder compensation,
benefits and related items which will not continue subsequent to the
acquisition. These earnings are net of other nonrecurring compensation and
startup costs of approximately $.5 million.
The acquisition will be accounted for as a purchase. The aggregate
purchase price will be allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. Based on
preliminary estimates which will be finalized at a later date, the excess of
purchase price over the fair value of the net assets acquired ("goodwill") was
approximately $30 million, which will be amortized over 30 years. The results of
the acquired business will be included in the Company's consolidated statements
of income beginning October 7, 1997.
The cash portion of the transaction has been financed by Drew's existing
credit facility which was increased to $65 million to accommodate this
acquisition. The new credit facility consists of a revolving line of credit of
$33 million and a term loan of $32 million payable in quarterly payments of $2
million commencing March 31, 1998.
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
November 12, 1997
16
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