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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, 1999
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. 11,351,430 shares of common
stock as of October 22, 1999.
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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, 1999
(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 11-16
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
not applicable
SIGNATURES 17
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $254,799 $250,429 $ 79,703 $ 87,923
Cost of sales 196,438 199,475 60,964 69,975
-------- -------- -------- --------
Gross profit 58,361 50,954 18,739 17,948
Selling, general and administrative expenses 33,450 28,598 10,788 9,979
-------- -------- -------- --------
Operating profit 24,911 22,356 7,951 7,969
Interest expense, net 2,644 2,995 784 933
-------- -------- -------- --------
Income before income taxes 22,267 19,361 7,167 7,036
Provision for income taxes 8,898 7,650 2,837 2,756
-------- -------- -------- --------
Net income $ 13,369 $ 11,711 $ 4,330 $ 4,280
======== ======== ======== ========
Net income per common share:
Basic $ 1.17 $ 1.05 $ .38 $ .38
======== ======== ======== ========
Diluted $ 1.17 $ 1.03 $ .38 $ .38
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 11,402 11,140 11,376 11,142
======== ======== ======== ========
Diluted 11,438 11,366 11,389 11,351
======== ======== ======== ========
</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,
1999 1998 1998
- -----------------------------------------------------------------------------------------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short term investments $ 5,262 $ 1,531 $ 2,690
Accounts receivable, trade, less allowances 19,391 18,128 13,559
Inventories (Note 4) 31,483 31,371 35,400
Prepaid expenses and other current assets 4,755 3,997 6,032
--------- --------- ---------
Total current assets 60,891 55,027 57,681
Fixed assets, net 46,926 41,007 43,139
Goodwill, net (Note 3) 46,537 43,032 47,887
Other assets 4,964 6,151 5,718
--------- --------- ---------
Total assets $ 159,318 $ 145,217 $ 154,425
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-
term debt and other long-term liabilities $ 802 $ 754 $ 779
Accounts payable, trade 9,794 9,456 8,043
Accrued expenses and other current liabilities 21,036 20,157 17,229
--------- --------- ---------
Total current liabilities 31,632 30,367 26,051
Long-term indebtedness (Note 5) 45,344 50,169 57,947
Other long-term liabilities 1,665 1,370 1,665
--------- --------- ---------
Total liabilities 78,641 81,906 85,663
--------- --------- ---------
Commitments and Contingencies (Note 6)
Stockholders' equity
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,801,430 shares at
September 1999; 11,393,592 shares at September
1998 and 11,513,702 shares at December 1998 118 114 115
Paid-in capital 24,823 19,497 22,943
Retained earnings 61,177 44,302 47,808
--------- --------- ---------
86,118 63,913 70,866
Treasury stock, at cost - 450,000 shares at
September 1999; 49,300 shares at September 1998;
and 175,600 shares at December 1998 (5,441) (602) (2,104)
--------- --------- ---------
Total stockholders' equity 80,677 63,311 68,762
--------- --------- ---------
Total liabilities and stockholders' equity $ 159,318 $ 145,217 $ 154,425
========= ========= =========
</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>
Nine Months Ended
September 30,
--------------------
1999 1998
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,369 $ 11,711
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 6,029 4,819
Loss on disposal of fixed assets 256 14
Changes in assets and liabilities:
Accounts receivable, net (5,832) (8,947)
Inventories 3,917 (1,387)
Prepaid expenses and other assets 1,144 1,042
Accounts payable, accrued expenses and other current liabilities 5,558 7,990
-------- --------
Net cash flows provided by operating activities 24,441 15,242
-------- --------
Cash flows from investing activities:
Capital expenditures (8,138) (6,367)
Proceeds from sales of fixed assets 303 275
Acquisition of businesses, net of cash received (3,814)
-------- --------
Net cash flows used for investing activities (7,835) (9,906)
-------- --------
Cash flows from financing activities:
Proceeds from private placement of Senior Notes 40,000
Proceeds from Industrial Revenue Bond 4,153
Proceeds from line of credit 17,550 51,050
Repayments under line of credit and other borrowings (30,148) (99,710)
Acquisition of treasury stock (3,337) (602)
Exercise of stock options and other 1,901 276
-------- --------
Net cash flows used for financing activities (14,034) (4,833)
-------- --------
Net increase in cash 2,572 503
Cash and short-term investments at beginning of period 2,690 1,028
-------- --------
Cash and short-term investments at end of period $ 5,262 $ 1,531
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 3,324 $ 3,010
Income taxes $ 6,579 $ 7,420
</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, 1998 $ 115 $ (2,104) $ 22,943 $ 47,808 $ 68,762
Net income for nine months ended
September 30, 1999 13,369 13,369
Issuance of 289,890 shares of common stock
pursuant to stock option plan 3 1,200 1,203
Income tax benefit relating to issuance of
common stock upon exercise of stock options 680 680
Purchase of 274,400 shares of treasury stock (3,337) (3,337)
------ -------- --------- -------- ---------
Balance - September 30, 1999 $ 118 $ (5,441) $ 24,823 $ 61,177 $ 80,677
====== ======== ========= ======== ========
</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, 1998 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,
1999 and 1998. All such adjustments are of a normal recurring nature. The
Consolidated Financial Statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include some information and
notes necessary to conform with annual reporting requirements.
2. Segment Reporting
The Company has two reportable operating segments, the manufactured
housing products segment (the "MH segment") and the recreational vehicle
products segment (the "RV segment"). The MH segment manufactures a variety of
products used in the construction of manufactured homes, including windows and
screens, chassis and chassis parts, axles, and galvanized roofing. The MH
segment also imports new tires and refurbishes used axles and tires which it
supplies to producers of manufactured homes. The RV segment manufactures a
variety of products used in the production of recreational vehicles, including
windows, doors and chassis. The MH segment and the RV segment primarily sell
their products to the producers of manufactured homes and recreational vehicles,
respectively. Each segment also supplies related products to other industries,
but sales of these products represent less than 5 percent of the segment's net
sales. The Company has only an insignificant amount of intersegment sales.
Decisions concerning the allocation of the Company's resources are made by
the presidents of the Company's operating subsidiaries and the president of
Drew. This group evaluates the performance of each segment based upon segment
profit or loss, defined as income before interest, amortization of intangibles
and income taxes. The accounting policies of the MH and RV segments are the same
as those described in Note 1 of Notes to Consolidated Financial Statements of
the Company's December 31, 1998 Annual Report on Form 10-K.
7
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information relating to segments follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
MH segment $ 195,709 $ 205,494 $ 59,726 $ 71,799
RV segment 59,090 44,935 19,977 16,124
--------- --------- --------- ---------
Total $ 254,799 $ 250,429 $ 79,703 $ 87,923
========= ========= ========= =========
Operating profit:
MH segment $ 22,148 $ 22,065 $ 6,889 $ 7,820
RV segment 6,680 3,462 2,258 1,469
--------- --------- --------- ---------
Total segments operating profit 28,828 25,527 9,147 9,289
Amortization of intangibles (2,020) (1,557) (673) (588)
Corporate and other (1,897) (1,614) (523) (732)
--------- --------- --------- ---------
Operating profit 24,911 22,356 7,951 7,969
Interest expense, net 2,644 2,995 784 933
--------- --------- --------- ---------
Income before income taxes $ 22,267 $ 19,361 $ 7,167 $ 7,036
========= ========= ========= =========
</TABLE>
3. Acquisitions
In May 1998 Lippert Components, Inc. ("Lippert") acquired the assets and
business of Coil Clip, Inc. ("Coil Clip") related to its supply of stamped steel
parts to the manufactured housing industry, and entered into an agreement
pursuant to which Coil Clip would supply certain steel parts to Lippert. In
December 1998 Lippert acquired the remaining assets and business of Coil Clip.
It is expected that these acquisitions will add approximately $12 million to the
Company's annual sales. The combined purchase price was approximately $10.8
million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets based upon their
respective estimated fair values at the date of acquisition. Intangible assets
of approximately $3.8 million are being amortized over useful lives averaging
approximately 5 years. The excess of purchase price over the fair value of the
net assets acquired ("goodwill") was approximately $2.6 million, which is being
amortized over 20 years.
4. Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market. Cost includes material, labor and overhead; market is
replacement cost or realizable value after allowance for costs of distribution.
8
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consist of the following (in thousands):
September 30,
----------------- December 31,
1999 1998 1998
---- ---- ----
Finished goods $ 9,007 $ 9,183 $10,629
Work in process 2,136 2,319 2,052
Raw Material 20,340 19,869 22,719
------- ------- -------
Total $31,483 $31,371 $35,400
======= ======= =======
5. Long-Term Indebtedness
The Company has $40 million of 6.95 percent, seven year Senior Notes
issued in a private placement in January 1998. The Company also has a $25
million credit facility with interest payable at the prime rate, with an option
to convert a portion of the borrowings under the credit facility to a Eurodollar
loan at 1 percent over the LIBO rate. Furthermore, the Company is required to
pay a commitment fee, accrued at the rate of 3/8 of 1 percent per annum, on the
daily unused amount of the revolving line of credit. At September 30, 1999,
there were no borrowings under the line of credit.
Pursuant to both the Senior Notes and the credit facility, the Company is
required to maintain minimum net worth and interest and fixed charge coverages
and meet certain other financial requirements. All of such requirements have
been met for the nine months ended September 30, 1999. Borrowings under both
facilities are secured only by capital stock of the Company's subsidiaries.
6. Contingencies
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime'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
claims, and related costs, resulting from its discontinued ladder manufacturing
business. 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 LBP, Inc.
and its subsidiary, Prime, 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 have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14,1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the trustee elected not to replead. The trustee could appeal the court's
decision dismissing these claims on termination of the proceeding.
Other than the dismissed tax-related claims, 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. Although
these claims were not dismissed, the Company believes that the claims are
without merit, 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 the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
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 and warrants. The numerator, which is equal to net income, is
constant for both the basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 11,401,888 11,140,139 11,376,430 11,141,798
Assumed issuance of common stock
pertaining to stock options and warrants 36,347 226,349 12,398 209,177
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 11,438,235 11,366,488 11,388,828 11,350,975
========== ========== ========== ==========
</TABLE>
10
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has two reportable operating segments, the manufactured
housing products segment (the "MH segment") and the recreational vehicle
products segment (the "RV segment"). The MH segment, which accounted for 75
percent of consolidated net sales for the quarter ended September 30, 1999 and
82 percent of consolidated net sales for the quarter ended September 30, 1998,
manufactures a variety of products used in the construction of manufactured
homes, including windows and screens, chassis and chassis parts, axles, and
galvanized roofing. The MH segment also imports new tires and refurbishes used
axles and tires which it supplies to producers of manufactured homes. The RV
segment, which accounted for 25 percent of consolidated net sales for the
quarter ended September 30, 1999 and 18 percent of consolidated net sales for
the quarter ended September 30, 1998, manufactures a variety of products used in
the production of recreational vehicles, including windows, doors and chassis.
The MH segment and the RV segment primarily sell their products to the producers
of manufactured homes and recreational vehicles, respectively. Each segment also
supplies related products to other industries, but sales of these products
represent less than 5 percent of the segment's net sales.
The Company's operations are performed through its four primary operating
subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("Lippert")
have operations in both the MH and RV segments, while Shoals Supply, Inc.
("Shoals") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH
segment. At September 30, 1999 the Company's subsidiaries operated 37 plants in
17 states.
In May 1998 Lippert acquired the assets and business of Coil Clip related
to its supply of stamped steel parts to the manufactured housing industry, and
entered into an agreement pursuant to which Coil Clip would supply certain steel
parts to Lippert. In December 1998 Lippert acquired the remaining assets and
business of Coil Clip. Coil Clip's sales to the manufactured housing industry
were approximately $5 million annually, and its sales of related steel parts to
other industries were approximately $7 million annually.
RESULTS OF OPERATIONS
Net sales and operating profit are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
MH segment $ 195,709 $ 205,494 $ 59,726 $ 71,799
RV segment 59,090 44,935 19,977 16,124
--------- --------- --------- ---------
Total $ 254,799 $ 250,429 $ 79,703 $ 87,923
========= ========= ========= =========
Operating profit:
MH segment $ 22,148 $ 22,065 6,889 7,820
RV segment 6,680 3,462 2,258 1,469
--------- --------- --------- ---------
Total segments operating profit 28,828 25,527 9,147 9,289
Amortization of intangibles (2,020) (1,557) (673) (588)
Corporate and other (1,897) (1,614) (523) (732)
--------- --------- --------- ---------
Operating profit 24,911 22,356 7,951 7,969
Interest expense, net 2,644 2,995 784 933
--------- --------- --------- ---------
Income before income taxes $ 22,267 $ 19,361 $ 7,167 $ 7,036
========= ========= ========= =========
</TABLE>
11
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MH Segment
Net sales of the MH segment declined 5 percent for the nine month period
and 17 percent for the quarter, compared to the same periods in 1998. The
decline in sales resulted from continued competition in the Company's axle and
tire refurbishing product line, as well as a recent decline in industry-wide
shipments of manufactured homes. Sales of the Company's vinyl windows continued
to expand even though industry shipments of homes declined.
The Company's customers, the producers of manufactured homes, have
recently closed factories and cut back manufacturing schedules, due to the
combination of excessive inventory of manufactured homes at both manufacturers
and retailers, and declining retail sales due to tightening of mortgage credit.
This, in turn, has affected the Company's sales of manufactured housing
products, which represented 75 percent of consolidated third quarter sales.
Industry analysts have estimated that the excess inventory situation
should be resolved within six months to one year. The Company believes that when
the excess inventory of homes is resolved, the industry will resume its
long-term growth trend. The Company will continue to invest its resources in
order to increase market share for its manufactured housing products.
Despite the decline in sales, operating profit percentages of the MH
segment increased over last year in both the nine and three month periods. Gross
margin percent improved, as the adverse effect of competitive pressures in the
axle and tire refurbishing product line were more than offset by lower product
costs. The improvement in gross margin percent was partially offset by increases
in selling, general and administrative expenses as a percentage of sales,
reflecting the effect of reduced sales on fixed costs.
Margins for the balance of the year are expected to be adversely affected
by increases in certain raw material costs.
RV Segment
Net sales of the RV segment increased 32 percent for the nine month period
and 24 percent for the quarter compared to the same period in 1998, as a result
of the expansion of the Company's RV chassis product line as well as the 13
percent increase in shipments reported by the RV industry this year.
Operating profit increased 93 percent for the nine months and 54 percent
for the quarter. Operating margins were 11 percent in the 1999 nine and three
month periods compared to 8 percent and 9 percent in 1998 for the nine months
and quarter, respectively. The improvement in operating margins resulted from
gross margin increases, in part due to greater efficiencies at the new RV
chassis facilities opened last year, as well as lower costs for some raw
materials. Production costs and operating efficiencies at the Company's mature
RV facilities also improved. The improvement in gross margin was partially
offset by increases in selling, general and administrative expenses including
incentive compensation, which is based on profits at certain of the Company's
divisions, and additional general and administrative costs at the recently
opened RV chassis facilities.
Margins for the balance of the year are expected to be adversely affected
by increases in certain raw material costs.
12
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Amortization of Intangibles, Corporate and Other
Amortization of intangibles increased by $.5 million for the nine months
ended September 1999 as a result of the goodwill and other intangibles relating
to the acquisition of Coil Clip. Corporate and other expenses increased $.3
million for the nine months as a result of non-recurring gains recorded in 1998
and a reduction of cost recoveries in 1999 relating to the Shared Services
Agreement described below. Corporate and other expenses declined for the quarter
primarily as a result of more favorable aluminum hedging results.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the Spin-off by the
Company of LBP, Inc. on July 29, 1994, the Company and LBP have shared certain
administrative functions and employee services, such as management overview and
planning, tax preparation, financial reporting, coordination of independent
audit, stockholder relations, and regulatory matters. The Company has been
reimbursed by LBP for the fair market value of such services. This Agreement has
been extended and now expires on December 31, 1999 and may be further extended.
The Company charged fees to LBP of $108,000 in the 1999 nine month period and
$467,000 in the 1998 period. The reduction in the fees was a result of LBP's
sale of its operating assets in June 1998. These fees reduce selling, general
and administrative expenses.
Interest Expense, Net
Interest expense, net decreased $351,000 and $149,000 for the nine months
and quarter, respectively, as a result of lower average debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Statements of Cash Flows reflect the following (in thousands):
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Net cash flows provided by operating activities $ 24,441 $ 15,242
Net cash flows used for investing activities $ (7,835) $ (9,906)
Net cash flows used for financing activities $(14,034) $ (4,833)
Net cash provided by operating activities primarily resulted from net
income before depreciation and amortization, adjusted by seasonal changes in
operating assets. The increase in receivables was approximately $3.1 million
less than the prior year's increase as a result of both lower sales and a slight
slowdown in collections. Inventories were reduced by $3.9 million primarily in
the refurbished axles and tires operations, largely in response to lower sales
of these products.
13
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash flows used for investing activities consisted of capital
expenditures, including the construction of three RV chassis facilities. Such
capital expenditures were funded by cash flows from operations. Capital
expenditures for 1999, primarily for the RV and MH chassis operations, are
expected to approximate $12 million, which will be funded from cash flow from
operations. It is presently expected that capital expenditures for the year 2000
will range from $15 million to $23 million.
Cash flows used for financing activities for 1999 included a reduction in
debt of approximately $12.6 million, and $3.3 million used to acquire treasury
stock, offset by $1.9 million from the exercise of stock options. Cash flows
used for financing activities in 1998 is primarily a reduction of debt of
approximately $4.5 million. Availability under the Company's $25 million line of
credit, which is unused at September 30, 1999, combined with available cash and
cash flow from operations, is adequate to finance the Company's working capital
and capital expenditure requirements.
Contingencies
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime'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
claims, and related costs, resulting from its discontinued ladder manufacturing
business. 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 LBP, Inc.
and its subsidiary, Prime, 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 have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14,1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the court's decision
dismissing these claims on termination of the proceeding.
Other than the dismissed tax-related claims, 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. Although
these claims were not dismissed, the Company believes that the claims are
without merit, 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 the defense of this proceeding
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, vinyl and tires, are influenced by demand and other factors specific to
these commodities rather than being directly affected by inflationary pressures.
14
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Prices of certain commodities have historically been volatile and increased raw
material costs are expected to affect margins in the fourth quarter. 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. At October 22, 1999, the Company
had no futures contracts outstanding.
YEAR 2000
The "Year 2000" issue is the result of computer programs being written
using two digits rather than four digits to define a specific year. Such a
computer program may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system failures or miscalculations.
The Company has addressed this risk to the reliability and availability of
its financial, operational and administrative information systems. Prior to the
public concerns about the Year 2000 issue, the Company had decided to upgrade
its computer systems in order to enhance the information flow, capacity and
functionality of its systems. The upgrades to the computer systems will allow
the Company to achieve Year 2000 compliance. Some of the Company's manufacturing
processes are reliant on computer technology and all such significant processes
have been verified to be Year 2000 compliant. The installation and testing of
certain critical systems has been completed at a cost of less than $1 million,
and the balance of the systems should be completed before the end of the year at
a cost of approximately $.5 million. The Company has obtained assurances from
its software vendors that the new systems will be Year 2000 compliant upon the
installation of recently issued software upgrades.
Approximately 70 percent of the Company's sales are to publicly-owned
companies which file periodic reports pursuant to the Securities Exchange Act of
1934, including all customers which represent more than 3 percent of the
consolidated net sales. The Company has reviewed the Year 2000 disclosures in
such filings and found that, while many of these companies address certain
risks, all expect to be Year 2000 compliant before the end of 1999.
While the Company believes that its internal computer systems, as well as
those of vendors who provide data processing services to the Company, will be
Year 2000 compliant, the most reasonably likely worst case Year 2000 scenario
could include system failures by the Company's vendors, customers, utilities or
financial institutions which could result in significant disruptions to the
Company's operations. The Company believes, however, that its alternative
sources of supply of critical raw materials, diverse customer list, numerous
facilities and financial resources mitigate the likelihood of a severe adverse
impact on the Company's operating results. The Company is considering
contingency plans, such as maintaining easily accessible back-up of critical
information as the year 2000 approaches, to minimize the impact of short-term
disruptions caused by systems failures of third parties.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
regarding its operating strategy, its products and performance and its views of
industry prospects, which could be construed to be forward looking statements
within the meaning of the Securities Exchange Act of 1934. These statements
reflect the Company's current views with respect to future plans, events and
financial performance.
15
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has identified certain risk factors which could cause actual
plans and results to differ substantially from those included in the forward
looking statements. These factors include pricing pressures due to competition,
raw material costs (particularly aluminum, vinyl, steel and glass), periodic
inventory adjustments by retailers of manufactured homes in response to changes
in retail sales and other business conditions, interest rates and the Year 2000
issue. In addition, general economic conditions may affect the retail sale of
manufactured homes and RV's.
16
<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 9, 1999
17
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