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, 1996 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. 5,354,229 shares of common stock as of October 25, 1996.
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, 1996 (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 7-9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-12 CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION 13 Item 1 SIGNATURES 14
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Nine Months Ended Three Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- (In thousands, except per share amounts) <S> <C> <C> <C> <C> Net sales $127,259 $ 75,540 $44,815 $ 24,747 Cost of sales (Note 3) 95,416 54,905 33,688 18,113 ---------- -------- --------- -------- Gross profit 31,843 20,635 11,127 6,634 Selling, general and administrative expenses 14,821 10,826 4,952 3,560 ---------- -------- --------- -------- Operating profit 17,022 9,809 6,175 3,074 Interest (expense) income, net (239) 25 (97) 70 ---------- -------- --------- -------- Income before income taxes 16,783 9,834 6,078 3,144 Provision for income taxes 6,622 3,837 2,398 1,226 ---------- -------- --------- -------- Net income $ 10,161 $ 5,997 $ 3,680 $ 1,918 ========== ======== ========= ======== Net income per common share $ 1.90 $ 1.21 $ .69 $ .39 ========== ======== ========= ======== Weighted average common shares outstanding 5,340 4,944 5,343 4,953 ========== ======== ========= ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
DREW INDUSTRIES INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> September 30, December 31, 1996 1995 1995 ---- ---- ---- (In thousands, except shares and per share amounts) <S> <C> <C> <C> ASSETS Current assets Cash and short term investments $ 385 $ 5,822 $ 4,028 Accounts receivable, trade, less allowance for doubtful accounts 8,951 5,088 4,165 Inventories (Note 3) 21,694 9,073 11,024 Prepaid expenses and other current assets 1,977 1,360 1,521 ----- ------ ------ Total current assets 33,007 21,343 20,738 Fixed assets, net 10,220 4,507 5,594 Goodwill, net (Note 2) 11,824 165 319 Other assets 1,280 1,207 1,580 ----- ------ ------ Total assets $ 56,331 $ 27,222 $ 28,231 ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long- term debt and other long-term liabilities $ 282 $ 136 $ 128 Accounts payable, trade 7,453 3,286 3,511 Accrued expenses and other current liabilities 12,427 9,341 8,279 --------- --------- -------- Total current liabilities 20,162 12,763 11,918 Long-term indebtedness (Note 4) 2,972 Other long-term liabilities 1,755 343 311 --------- --------- -------- Total liabilities 24,889 13,106 12,229 --------- --------- -------- Commitments and Contingencies (Note 5) Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 5,593,604 shares at September 1996, 4,992,354 shares at September 1995 and 4,999,644 shares at December 1995 56 50 50 Paid-in capital 17,176 9,042 9,103 Retained earnings 17,358 5,372 7,197 --------- --------- -------- 34,590 14,464 16,350 Treasury stock, at cost - 239,875 shares at September 1996, 39,850 shares at September 1995 and 39,875 shares at December 1995 (3,148) (348) (348) ------ ------- ------- Total stockholders' equity 31,442 14,116 16,002 --------- --------- -------- Total liabilities and stockholders' equity $56,331 $27,222 $28,231 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1996 1995 ---- ---- (In thousands) <S> <C> <C> Cash flows from operating activities: Net income $10,161 $ 5,997 Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation and amortization 1,192 584 Gain on sale of fixed assets (26) Changes in assets and liabilities (excluding acquisition): Accounts receivable, net (1,839) (1,992) Inventories (3,704) 1,436 Prepaid expenses and other assets (89) 854 Accounts payable, accrued expenses and other current liabilities 4,850 3,257 -------- -------- Net cash flows provided by operating activities 10,545 10,136 -------- -------- Cash flows from investing activities: Capital expenditures (4,952) (669) Sale of fixed assets 861 Acquisition of net assets and business of Shoals Supply, Inc. (10,268) -------- -------- Net cash flows used for investing activities (14,359) (669) -------- -------- Cash flows from financing activities: Acquisition loan from Chase Manhattan Bank 5,982 Proceeds from line of credit with Chase Manhattan Bank 16,150 9,450 Repayments under line of credit and acquisition loan with Chase Manhattan Bank (19,682) (13,450) Repayments of term loans (94) (161) Exercise of stock options 579 380 Acquisition of treasury stock (2,800) (333) Other 36 -------- -------- Net cash flows provided by (used for) financing activities 171 (4,114) -------- -------- Net (decrease) increase in cash (3,643) 5,353 Cash and short-term investments at beginning of period 4,028 469 -------- -------- Cash and short-term investments at end of period $ 385 $ 5,822 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 197 $ 130 Income taxes $ 6,436 $ 3,467 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Total Stockholders' Common Treasury Paid-in Retained Equity ------ -------- ------- -------- ------ (In thousands, except shares) <S> <C> <C> <C> <C> <C> Balance - December 31, 1995 $ 50 $ (348) $ 9,103 $ 7,197 $ 16,002 Net income for nine months ended September 30, 1996 10,161 10,161 Issuance of 49,001 shares of common stock pursuant to stock option plan 386 386 Income tax benefit relating to issuance of common stock upon exercise of stock options 193 193 Issuance of 544,959 shares of common stock in connection with the acquisition of the assets and business of Shoals Supply, Inc. 6 7,494 7,500 Purchase of 200,000 shares of treasury stock (2,800) (2,800) ------- -------- --------- -------- -------- Balance - September 30, 1996 $ 56 $ (3,148) $ 17,176 $ 17,358 $31,442 ======= ======== ========= ======== ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 6
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, 1995 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, 1996 and 1995. 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. Acquisition On February 15, 1996, the Company acquired the assets and business of Shoals Supply, Inc., ("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. Shoals had 1995 net sales of approximately $56 million. The consideration for the acquisition was 544,959 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 was financed primarily with $3.2 million of the Company's short-term investments and a $6 million acquisition loan from Chase Manhattan Bank (formerly Chemical Bank). 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 $11,778,000, 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 February 16, 1996. The following pro forma condensed consolidated results of operations, however, assumes that the acquisition had occurred at the beginning of 1995. The unaudited pro forma data below is not necessarily indicative of the future results of operations of the combined operations (in thousands, except per share amount): Pro Forma Year End December 31, 1995 (unaudited) ----------- Net sales $ 155,827 ========== Net income $ 9,425 ========== Net income per common share $ 1.72 ========== Average common shares outstanding 5,492 ========== 7
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On June 28, 1996, the Company paid $2.8 million for the repurchase of 200,000 shares of its common stock issued in connection with the acquisition of Shoals. 3. Inventories Inventories are valued at the lower of cost (using the last-in, first-out method, and the first-in, first-out method for Shoals Supply, Inc., which was acquired on February 15, 1996) or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution. Quarterly inventories valued on the last-in, first-out method are based on an annual determination of quantities and costs as of the previous year-end. Therefore, such quarterly inventory valuations are based on estimates. 4. Long-Term Indebtedness At September 30, 1996, there were outstanding borrowings of $2,450,000 under the Company's $6 million credit agreement with Chase Manhattan Bank (formerly Chemical Bank) which matures on January 31, 1999 and is secured by the accounts receivable of the Company. In connection with the acquisition of Shoals on February 15. 1996, pursuant to an acquisition loan separate from the Company's $6 million credit agreement, Chase Manhattan Bank advanced $5,982,000 to the Company which had been repaid by September 30, 1996. 5. Contingencies Effective July 29, 1994, the Company spun off to its stockholders Leslie Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), the Company's former home improvement building products segment. On September 30, 1994, White Metal Rolling and Stamping Corp. ("White Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy Code. The net liabilities of White Metal of $3.7 million are substantially all accrued product liability costs. Although the Company was named as a defendant in certain product liability actions, the Company has not been held responsible, and the Company disclaims any liability for the obligations of White Metal. On May 6, 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 proceeding is based 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. In addition, the trustee alleges that White Metal made certain payments to the Company and Leslie-Locke which were preferential and are recoverable by White Metal. The complaint, 8
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) which appears to allege several duplicate claims, seeks damages in the aggregate amount of $10.6 million plus attorneys' fees, of which up to approximately $8.4 million is sought from the Company. Management believes that the trustee's allegations are without merit and have no basis in fact. The Company and Kinro deny any liability for any amount claimed and are 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 there will be no material adverse impact on the Company's financial condition or results of operations. 9
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company, through its wholly-owned subsidiaries Kinro, Inc. ("Kinro") and Shoals Supply, Inc. ("Shoals") manufactures and markets (i) windows, axles, tires and chassis parts for manufactured housing, (ii) windows and doors for recreational vehicles ("RV's") and (iii) to a lesser extent, windows for mini-buses. Kinro is one of the leading producers of windows for manufactured homes in the United States. Kinro also manufactures windows and doors for RV's. Many of the producers of manufactured homes, to whom Kinro sells windows, also manufacture RV's. Kinro's products are manufactured in nine 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 tenth 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. Shoals operates five domestic factories located in four states. RESULTS OF OPERATIONS Net sales for the nine months and quarter ended September 30, 1996 increased 68% and 81%, respectively, over the same period last year. Sales for the current year include Shoals' sales from February 15, 1996, the date that Shoals was acquired by the Company. Excluding Shoals, the Company's sales (consisting of Kinro's sales) increased 14% for the nine months and 16% for the quarter. The increase in Kinro's net sales resulted both from the sales of manufactured housing products which increased 17% for the nine months and 18% for the quarter, as well as the sales of RV products which increased 7% for the nine months and 11% for the quarter. Such increases, which exceed the industry-wide increases in shipments of manufactured homes and RV's are volume related . Year-to-date industry-wide shipments of manufactured homes are 10% ahead of last year and shipments of RV's of the types supplied by Kinro are 1% ahead of last year. Operating profit increased 74% to $17,022,000 for the nine months and 101% to $6,175,000 for the quarter ended September 1996. Included in the current year's period operating profit are the results of Shoals since February 15, 1996, the date that Shoals was acquired by the Company. Excluding Shoals, operating profit increased approximately 42% for the nine months and 58% for the quarter ended September 30, 1996. Kinro's gross margin improved over last year as a result of the stabilization of raw material prices and, to a lesser extent, a reduction in labor and overhead costs. Selling, general and administrative expenses, again excluding Shoals, increased 18% for both the nine months and quarter ended September 30, 1996 as a result of the increased sales and profits. Interest Expense, Net Interest expense, net increased $264,000 for the nine months ended September 30, 1996 over the nine months ended September 30, 1995 as a result of the funding required for the acquisition of Shoals and capital expenditures, partially offset by cash flow from operations. 10
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the Company had short-term investments of $3.5 million and no bank debt. Such short-term investments were used to finance a portion of the February 15, 1996 acquisition of Shoals. The acquisition price consisted of $10.3 million of cash and assumed bank debt, and 544,959 shares of common stock of the Company valued at $7.5 million. The balance of the purchase price was financed with the proceeds of a separate $6 million acquisition loan from Chase Manhattan Bank (formerly Chemical Bank) which was repaid by September 30, 1996. On June 28, 1996, 200,000 shares of the Drew common stock were repurchased from the seller of Shoals for $2.8 million, which was financed by the Company's existing line of credit. At September 30, 1996, there were outstanding borrowings of $2,450,000 under the Company's $6 million credit agreement with Chase Manhattan Bank which matures on January 31, 1999 and is secured by the accounts receivable of the Company. The line of credit, of which $3.5 million is available at September 30, 1996, is adequate for the Company's anticipated needs. Interest 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 2.25% over the LIBO rate. The Statements of Cash Flows reflect the following: <TABLE> <CAPTION> Nine Months Ended September 30 1996 1995 ---- ---- (In thousands) <S> <C> <C> Cash flows provided by operating activities $ 10,545 $ 10,136 Cash flows used for investing activities $ (14,359) $ (669) Cash flows provided by (used for) financing activities $ 171 $ (4,114) </TABLE> Net cash provided by operating activities, which do not include the value of the assets and liabilities acquired in connection with the Shoals acquisition, was $10.5 million for the nine months ended September 30, 1996 compared to $10.1 million for the nine months ended September 30, 1995. Accounts receivable reflected seasonal increases of $1.8 million and $2.0 million in 1996 and 1995, respectively. Inventories increased $3.7 million in 1996 compared to a reduction of $1.4 million in 1995 reflecting an inventory buildup primarily to accommodate increased sales. Accounts payable, accrued expenses and other current liabilities increased $4.9 million and $3.3 million in the 1996 and 1995 periods, respectively. Cash flows used for investing activities are primarily the $10.3 million cost of the Shoals acquisition as well as capital expenditures, which were $5.0 million for the 1996 period. Capital expenditures are expected to approximate $7 million for the year which is more than the aggregate capital expenditures for the previous four years. Such capital expenditures are primarily for the construction of two new plants and the purchase of related machinery and equipment. 11
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash flows provided by (used for) financing activities include funds borrowed for the acquisition of Shoals in February 1996, as well as the repurchase from the seller of Shoals of 200,000 shares of treasury stock for $2.8 million on June 28, 1996. Such borrowings were offset by debt repayments from operating cash flow and exercise of employees' stock options. Debt was increased by $3.2 million and reduced $4.2 million for the nine months ended September 30, 1996 and 1995, respectively. Effective July 29, 1994, the Company spun off to stockholders Leslie Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), the Company's 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 net liabilities of White Metal of $3.7 million are substantially all accrued product liability costs. Although the Company was named as a defendant in certain product liability actions, the Company has not been held responsible, and the Company disclaims any liability for the obligations of White Metal. On May 6, 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 proceeding is based 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. In addition, the trustee alleges that White Metal made certain payments to the Company and Leslie-Locke which were preferential and are recoverable by White Metal. The complaint, which appears to allege several duplicate claims, seeks damages in the aggregate amount of $10.6 million plus attorneys' fees, of which up to approximately $8.4 million is sought from the Company. Management believes that the trustee's allegations are without merit and have no basis in fact. The Company and Kinro deny any liability for any amount claimed and are 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 there will be no 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 of these commodities have historically been volatile. In order to hedge the impact of future price fluctuations on a portion of its future aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. At September 30, 1996 the Company had no futures contracts outstanding. 12
DREW INDUSTRIES INCORPORATED Part II - Other Information Item 1 - Legal Proceedings On May 6, 1996, the Company was served with a Summons and Complaint in an adversary proceeding entitled In re White Metal Rolling and Stamping Corp., Debtor, Alan Nisselson, Chapter 7 Trustee of White Metal Rolling and Stamping Corp., Plaintiff vs. Drew Industries , Inc., Leslie-Locke, Inc., Leslie Building Products, Inc. and Kinro, Inc. pending in the United States Bankruptcy Court, Southern District of New York (Adversary Proceeding No. 96/961 8544A). See Note 5 of Notes to Consolidated Financial Statements for a description of this proceeding. 13
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 11, 1996 14