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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, 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 August 2, 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 JUNE 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
Item 6 17
SIGNATURES 18
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $175,096 $162,506 $ 89,209 $ 87,325
Cost of sales 135,474 129,500 67,860 69,399
-------- -------- -------- --------
Gross profit 39,622 33,006 21,349 17,926
Selling, general and administrative expenses 22,662 18,619 11,945 9,650
-------- -------- -------- --------
Operating profit 16,960 14,387 9,404 8,276
Interest expense, net 1,860 2,062 857 987
-------- -------- -------- --------
Income before income taxes 15,100 12,325 8,547 7,289
Provision for income taxes 6,061 4,894 3,450 2,894
-------- -------- -------- --------
Net income $ 9,039 $ 7,431 $ 5,097 $ 4,395
======== ======== ======== ========
Net income per common share:
Basic $ .79 $ .67 $ .44 $ .39
======== ======== ======== ========
Diluted $ .79 $ .65 $ .44 $ .39
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 11,424 11,141 11,468 11,147
======== ======== ======== ========
Diluted 11,475 11,374 11,490 11,395
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
---------------------- December 31,
1999 1998 1998
- --------------------------------------------------------------------------------
(In thousands, except shares and per share amounts)
ASSETS
Current assets
Cash and short term investments $ 6,685 $ 3,445 $ 2,690
Accounts receivable, trade,
less allowances 17,757 17,408 13,559
Inventories (Note 4) 30,614 29,537 35,400
Prepaid expenses and other
current assets 4,653 4,050 6,032
--------- --------- ---------
Total current assets 59,709 54,440 57,681
Fixed assets, net 45,928 41,247 43,139
Goodwill, net (Note 3) 46,987 43,426 47,887
Other assets 5,214 5,811 5,718
--------- --------- ---------
Total assets $ 157,838 $ 144,924 $ 154,425
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Notes payable, including
current maturities of
long-term debt and other
long-term liabilities $ 794 $ 794 $ 779
Accounts payable, trade 11,420 11,547 8,043
Accrued expenses and other
current liabilities 20,846 18,307 17,229
--------- --------- ---------
Total current liabilities 33,060 30,648 26,051
Long-term indebtedness (Note 5) 45,547 53,364 57,947
Other long-term liabilities 1,665 1,370 1,665
--------- --------- ---------
Total liabilities 80,272 85,382 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 June 1999;
11,381,492 shares at June 1998
and 11,513,702 shares at
December 1998 118 114 115
Paid-in capital 24,823 19,406 22,943
Retained earnings 56,847 40,022 47,808
--------- --------- ---------
81,788 59,542 70,866
Treasury stock, at cost -
350,000 shares at June 1999
and 175,600 shares at
December 1998 (4,222) (2,104)
--------- --------- ---------
Total stockholders' equity 77,566 59,542 68,762
--------- --------- ---------
Total liabilities and
stockholders' equity $ 157,838 $ 144,924 $ 154,425
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------------
1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 9,039 $ 7,431
Adjustments to reconcile net income to
cash flows provided by operating
activities:
Depreciation and amortization 3,954 3,111
Loss on disposal of fixed assets 323 25
Changes in assets and liabilities:
Accounts receivable, net (4,198) (8,227)
Inventories 4,786 447
Prepaid expenses and other assets 1,299 1,565
Accounts payable, accrued expenses
and other current liabilities 6,994 8,231
-------- --------
Net cash flows provided by
operating activities 22,197 12,583
-------- --------
Cash flows from investing activities:
Capital expenditures (5,846) (5,378)
Proceeds from sales of fixed assets 264 113
Acquisition of businesses, net of
cash received (3,814)
-------- --------
Net cash flows used for
investing activities (5,582) (9,079)
-------- --------
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 35,600
Repayments under line of credit and
other borrowings (29,948) (80,998)
Acquisition of treasury stock (2,118)
Exercise of stock options and other 1,896 158
-------- --------
Net cash flows used for
financing activities (12,620) (1,087)
-------- --------
Net increase in cash 3,995 2,417
Cash and short-term investments at
beginning of period 2,690 1,028
-------- --------
Cash and short-term investments at
end of period $ 6,685 $ 3,445
======== ========
Supplemental disclosure of cash
flows information:
Cash paid during the period for:
Interest on debt $ 1,798 $ 1,244
Income taxes $ 3,030 $ 4,242
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 six months ended
June 30, 1999 9,039 9,039
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 174,400 shares of treasury stock (2,118) (2,118)
------- ------- ------- ------- -------
Balance - June 30, 1999 $ 118 $(4,222) $24,823 $56,847 $77,566
======= ======= ======= ======= =======
</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 six and three month periods ended June 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>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
MH segment $ 135,983 $ 133,695 $ 68,518 71,364
RV segment 39,113 28,811 20,691 15,961
--------- --------- --------- ---------
Total $ 175,096 $ 162,506 $ 89,209 $ 87,325
========= ========= ========= =========
Operating profit:
MH segment $ 15,259 $ 14,245 8,314 7,971
RV segment 4,422 1,993 2,449 1,308
--------- --------- --------- ---------
Total segments operating profit 19,681 16,238 10,763 9,279
Amortization of intangibles (1,347) (969) (674) (511)
Corporate and other (1,374) (882) (685) (492)
--------- --------- --------- ---------
Operating profit 16,960 14,387 9,404 8,276
Interest expense, net 1,860 2,062 857 987
--------- --------- --------- ---------
Income before income taxes $ 15,100 $ 12,325 $ 8,547 $ 7,289
========= ========= ========= =========
</TABLE>
3. Acquisitions
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. 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):
June 30,
--------------------- December 31,
1999 1998 1998
---- ---- ----
Finished goods $ 8,957 $ 9,678 $10,629
Work in process 2,181 1,944 2,052
Raw Material 19,476 17,915 22,719
------- ------- -------
Total $30,614 $29,537 $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 June 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 six months ended June 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
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 11,423,513 11,140,960 11,467,623 11,147,383
Assumed issuance of common stock
pertaining to stock options and warrants 51,051 233,312 22,873 247,430
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 11,474,564 11,374,272 11,490,496 11,394,813
========== ========== ========== ==========
</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 78
percent of consolidated net sales for the six months ended June 30, 1999 and 82
percent of the annual consolidated net sales for 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
22 percent of consolidated net sales for the six months ended June 30, 1999 and
18 percent of the annual consolidated net sales for 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 June 30, 1999 the Company's subsidiaries operated 36 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>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
MH segment $ 135,983 $ 133,695 $ 68,518 71,364
RV segment 39,113 28,811 20,691 15,961
--------- --------- --------- ---------
Total $ 175,096 $ 162,506 $ 89,209 $ 87,325
========= ========= ========= =========
Operating profit:
MH segment $ 15,259 $ 14,245 8,314 7,971
RV segment 4,422 1,993 2,449 1,308
--------- --------- --------- ---------
Total segments operating profit 19,681 16,238 10,763 9,279
Amortization of intangibles (1,347) (969) (674) (511)
Corporate and other (1,374) (882) (685) (492)
--------- --------- --------- ---------
Operating profit 16,960 14,387 9,404 8,276
Interest expense, net 1,860 2,062 857 987
--------- --------- --------- ---------
Income before income taxes $ 15,100 $ 12,325 $ 8,547 $ 7,289
========= ========= ========= =========
</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 increased 2 percent for the six month period
and declined 4 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 slight decline in industry-wide
shipments of manufactured homes. Sales of the Company's vinyl windows continued
to expand.
Operating profit of the MH segment increased 7 percent for the six month
period and 4 percent for the quarter compared to the same periods in 1998. Gross
margins improved, as the adverse effect of competitive pressures in the axle and
tire refurbishing product line were more than offset by lower product costs and
improved efficiencies in the segment's other product lines. The improvement in
gross margin was partially offset by increases in selling, general and
administrative expenses including increases in incentive compensation, which is
based on profits at certain of the Company's divisions.
It appears that industry-wide sales of manufactured homes have continued
to decline in the early part of the third quarter. In addition, margins for the
balance of year may be adversely affected by anticipated increases in certain
raw material costs.
RV Segment
Net sales of the RV segment increased 36 percent for the six month period
and 30 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
continuing growth of the RV window line. Such increase is substantially higher
than the 12 percent increase in shipments reported by the RV industry.
Operating profit more than doubled for the six months and increased 87
percent for the quarter. Operating margins were 11 percent and 12 percent in the
1999 periods compared to 7 percent and 8 percent in 1998 for the six 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 start-up costs at such facilities during
last year's first quarter. 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.
Margins for the balance of the year may be adversely affected by
anticipated 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 $.4 million for the six months
ended June 1999 as a result of the goodwill and other intangibles relating to
the acquisition of Coil Clip. Corporate and other expenses increased $.5 million
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.
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 $72,000 in the 1999 six month period and
$350,000 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 $202,000 and $130,000 for the six 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):
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Net cash flows provided by operating activities $ 22,197 $12,583
Net cash flows used for investment activities $ (5,582) $(9,079)
Net cash flows used for financing activities $(12,620) $(1,087)
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 $4.0 million
less than the prior year's increase as a result of the timing of collections.
Inventories were reduced by $4.8 million primarily in the refurbished axles and
tires operations, largely as a result of increased competition for the purchase
of used axles and tires.
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 an RV chassis factory. 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.
Cash flows used for financing activities for 1999 included reductions in
debt of approximately $12.4 million, and $2.1 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 $1.2 million. Availability under the Company's $25 million line of
credit, which is unused at June 30, 1999, is adequate to finance the Company's
working capital and capital expenditure requirements.
In July, 1999 the Company purchased, at an average price of approximately
$12.19 per share, the 100,000 shares remaining of the 450,000 share purchase of
treasury stock authorized by the Board of Directors.
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.
14
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. At July 21, 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 in the early fall of 1999 at
a cost of less than $.5 million. The Company has obtained assurances from its
software vendors that the new systems will be Year 2000 compliant.
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 and adjusting inventory levels as the year 2000 approaches, to
minimize the impact of short-term disruptions caused by systems failures of
third parties.
15
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
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.
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
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
On June 1, 1999, Registrant filed a current report on Form 8-K wherein
Registrant reported in Item 5 the amendment and restatement of the Drew
Industries Incorporated Stock Option Plan.
17
<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 10, 1999
18
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