================================================================================ 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. ================================================================================
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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