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: MARCH 31, 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. 5,532,518 shares of common stock as of May 3, 1996.
DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS FILED WITH QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 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 Item 6 SIGNATURES 14
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, ---------------------------- 1996 1995 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales $34,114 $25,363 Cost of sales (Note 3) 25,330 18,247 ------- ------- Gross profit 8,784 7,116 Selling, general and administrative expenses 4,342 3,672 ------- ------- Operating profit 4,442 3,444 Interest expense, net 47 42 ------- ------- Income before income taxes 4,395 3,402 Provision for income taxes 1,729 1,333 ------- ------- Net income $ 2,666 $ 2,069 ======= ======= Net income per common share $ .51 $ .42 ======= ======= Weighted average common shares outstanding 5,239 4,934 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 3
DREW INDUSTRIES INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, ----------------- December 31, 1996 1995 1995 - -------------------------------------------------------------------------------- (In thousands, except shares and per share amounts) ASSETS Current assets Cash and short term investments $ 1,015 $ 245 $ 4,028 Accounts receivable, trade, less allowance for doubtful accounts 9,188 4,910 4,165 Inventories (Note 3) 17,047 10,355 11,024 Prepaid expenses and other current assets 1,688 1,385 1,521 ------- ------- ------- Total current assets 28,938 16,895 20,738 Fixed assets, net 8,227 4,273 5,594 Goodwill, net (Note 2) 12,070 188 319 Other assets 1,172 1,481 1,580 ------- ------- ------- Total assets $50,407 $22,837 $28,231 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term debt and other long-term liabilities $ 661 $ 169 $ 128 Accounts payable, trade 6,238 2,994 3,511 Accrued expenses and other current liabilities 9,811 7,946 8,279 ------- ------- ------- Total current liabilities 16,710 11,109 11,918 Long-term indebtedness (Note 4) 5,592 1,200 Other long-term liabilities 1,633 412 311 ------- ------- ------- Total liabilities 23,935 12,721 12,229 ------- ------- ------- Commitments and Contingencies (Note 5) Stockholders' equity (Note 3) Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 5,572,393 shares at March 1996, 4,947,008 shares at March 1995 and 4,999,644 shares at December 1995 56 49 50 Paid-in capital 16,901 8,692 9,103 Retained earnings 9,863 1,444 7,197 ------- ------- ------- 26,820 10,185 16,350 Treasury stock, at cost - 39,875 shares at March 1996, 15,700 shares at March 1995 and 39,875 shares at December 1995 (348) (69) (348) ------- ------- ------- Total stockholders' equity 26,472 10,116 16,002 ------- ------- ------- Total liabilities and stockholders' equity $50,407 $22,837 $28,231 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, -------------------- 1996 1995 - ------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 2,666 $ 2,069 Adjustments to reconcile income from continuing operations cash flows provided by operating activities: Depreciation and amortization 343 191 Changes in assets and liabilities (excluding acquisition): Accounts receivable, net (2,059) (1,814) Inventories 802 154 Prepaid expenses and other assets 402 602 Accounts payable, accrued expenses and other current liabilities 1,155 1,570 -------- ------- Net cash flows provided by operating activities 3,309 2,772 -------- ------- Cash flows from investing activities: Capital expenditures (1,763) (112) Acquisition of net assets and business of Shoals Supply, Inc. (9,856) -------- ------- Net cash flows used for investing activities (11,619) (112) -------- ------- Cash flows from financing activities: Acquisition loan from Chemical Bank 5,982 Proceeds from line of credit with Chemical Bank 1,850 3,900 Repayments under line of credit with Chemical Bank (2,832) (6,200) Repayments of term loans (30) (559) Exercise of stock options 304 29 Acquisition of treasury stock (54) Other 23 -------- ------- Net cash flows provided by (used for) financing activities 5,297 (2,884) -------- ------- Net decrease in cash (3,013) (224) Cash and short-term investments at beginning of period 4,028 469 -------- ------- Cash and short-term investments at end of period $ 1,015 $ 245 ======== ======= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 17 $ 80 Income taxes $ 317 $ 105 The accompanying notes are an integral part of these consolidated financial statements. 5
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) Retained Total Common Treasury Paid-in Earnings Stockholders' Stock Stock Capital (Deficit) Equity - ------------------------------------------------------------------------------- (In thousands, except shares) Balance - December 31, 1995 $50 $(348) $ 9,103 $7,197 $16,002 Net income for three months ended March 31, 1996 2,666 2,666 Issuance of 27,790 shares of common stock pursuant to stock option plan 222 222 Income tax benefit relating to issuance of common stock upon exercise of stock options 82 82 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 --- ----- ------- ------ ------- Balance - March 31, 1996 $56 $(348) $16,901 $9,863 $26,472 === ===== ======= ====== ======= 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 three month periods ended March 31, 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. Certain prior year balances have been reclassified to conform with the current year presentation. 2. Acquisition On February 15, 1996, the Company acquired the assets and business of Shoals Supply, Inc., ("Shoals"), a privately-owned Alabama corporation which manufactures, refurbishes and distributes new and used axles, tires and chassis components for the manufactured housing industry. Shoals had 1995 net sales of approximately $56 million. The consideration for the acquisition was 544,959 shares of common stock of Drew Industries having a value of $7.5 million, cash at closing of $1,225,000, 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 with $3,225,000 of the Company's short-term investments and a $6 million acquisition loan from 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 $11,809,000, 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) Shoals contributed operating profit of $440,000 and net income of approximately $180,000 on net sales of $7,347,000 for the month and a half since its acquisition by the Company on February 15, 1996. 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 March 31, 1996, there were no outstanding borrowings under the Company's $6 million credit agreement with Chemical Bank which matures on July 29, 1997 and is secured by substantially all assets of the Company. The entire $6.0 million line of credit was available for borrowings for general corporate purposes. 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. Pursuant to the Agreement, the Company is required to maintain minimum net worth, working capital, and income levels, and meet certain other financial requirements typical to secured borrowing arrangements. In addition, for the term of the loan, the Company will be prohibited from declaring or paying dividends without the prior written consent of the lender. Borrowings under the line of credit in March 1995, aggregating $1,200,000, were classified as long-term since such borrowings were less than an estimate of the minimum amount of borrowings expected to be available during the subsequent year. In connection with the acquisition of Shoals, pursuant to a separate acquisition loan, Chemical Bank advanced $5,982,000 to the Company which was paid down to $5,000,000 at March 31, 1996. The unpaid balance of this advance will be refinanced in approximately three months. The Company has the availability under its $6 million credit agreement to refinance this advance, and accordingly, such advance has been classified as long-term debt at March 31, 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. 8
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 $3.6 million are substantially all accrued product liability costs. While Drew was named as a defendant in certain actions commenced in connection with these claims, Drew has not been held responsible, and Drew disclaims any liability for the obligations of White Metal. On May 6, 1996, the Company and its subsidiary, Kinro, Inc. 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 Drew, that Drew 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 Drew 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 Drew. Management believes that the trustee's allegations are without merit and have no basis in fact. Drew and Kinro deny any liability for any amount claimed and will vigorously defend against the allegations. Management believes it has substantial and meritorious defenses, however, an estimate of potential loss, if any, cannot be made at this time. 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 eight 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. Shoals, which was acquired by Drew on February 15, 1996, and is under the management umbrella of Kinro, manufactures, refurbishes and distributes new and used axles and tires and chassis parts for the manufactured housing industry. Shoals operates five domestic factories located in four states. RESULTS OF OPERATIONS Net sales for the quarter ended March 31, 1996 increased 34% over the same period last year. The current quarter's sales 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 6% for the quarter. The increase in Kinro's net sales resulted from the sales of manufactured housing products which increased 13% for the three months. Such increase, which exceeds the industry-wide increase in shipments of manufactured homes, is volume related including the continuing growth in sales of Kinro's new vinyl window along with greater demand for storm windows. Net sales of the RV division decreased 8% for the three months compared to a 6% industry-wide decrease in shipments of RV's. Industry projections of shipments of RV categories supplied by Kinro indicate a decline of 5% in 1996 and an increase in 1997. Operating profit increased 29% to $4,442,000 for the quarter ended March 1996. Included in the current quarter's operating profit are the results of Shoals for the month and a half since acquisition. Excluding Shoals, operating profit increased 17%. Kinro's 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 8% for the quarter primarily as a result of the increase in sales. Shoals contributed operating profit of $440,000 and net income of approximately $180,000 on net sales of $7,347,000 for the month and a half since its acquisition by the Company on February 15, 1996. Interest Expense, Net Interest expense, net approximates the 1995 quarter's interest. Prior to the February 15, 1996 acquisition of Shoals, Drew received interest income on the its short-term investments. After the acquisition, Drew incurred interest expense on its acquisition debt. 10
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, there were no outstanding borrowings under the Company's $6 million credit agreement with Chemical Bank which matures on July 29, 1997 and is secured by substantially all assets of the Company. The entire $6.0 million line of credit was available for borrowings for general corporate purposes. 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. In connection with the acquisition of Shoals, pursuant to a separate acquisition loan, Chemical Bank advanced $5,982,000 to the Company which was paid down to $5,000,000 at March 31, 1996. The unpaid balance of this advance will be refinanced in approximately three months. The Statements of Cash Flows reflect the following: Three Months Ended March 31, ----------------------- 1996 1995 - -------------------------------------------------------------------------------- (In thousands) Cash flows provided by operating activities $ 3,309 $ 2,772 Cash flow used for investing activities $(11,619) $ (112) Cash flows provided by (used for) financing activities $ 5,297 $(2,884) Net cash provided by operating activities for the quarter ended March 31, 1996 was $3.3 million compared to $2.8 million for the quarter ended March 31, 1995. Accounts receivable reflect seasonal increases of $2.1 million and $1.8 million in 1996 and 1995, respectively. Inventories increased $.8 million in 1996 primarily as a result of the increased sales volume. Payables increased $1.2 million and $1.6 million in the 1996 and 1995 quarters, respectively. These changes in current assets and liabilities do not include the value of the assets and liabilities acquired in connection with the Shoals acquisition. Cash flows used for investing activities are primarily the cost of the Shoals acquisition as well as capital expenditures, which were $1.8 million for the 1996 quarter and are expected to be approximately $7 million for the year. Cash flows provided by (used for) financing activities results from funds borrowed and common stock issued for the acquisition of Shoals in 1996 as well as debt repayments from operating cash flow offset by funds provided by the exercise of employees' stock options and the income tax benefits provided therefrom. Debt was increased by $7.4 million and reduced $2.9 million for the quarters ended March 31, 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. 11
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 $3.6 million are substantially all accrued product liability costs. While Drew was named as a defendant in certain actions commenced in connection with these claims, Drew has not been held responsible, and Drew disclaims any liability for the obligations of White Metal. On May 6, 1996, the Company and its subsidiary, Kinro, Inc. 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 Drew, that Drew 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 Drew 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 Drew. Management believes that the trustee's allegations are without merit and have no basis in fact. Drew and Kinro deny any liability for any amount claimed and will vigorously defend against the allegations. Management believes it has substantial and meritorious defenses, however, an estimate of potential loss, if any, cannot be made at this time. INFLATION The prices of raw materials, consisting primarily of aluminum and glass, are influenced by demand and other factors specific to these commodities rather than being directly affected by inflationary pressures. Aluminum prices had been volatile and average 1995 prices were substantially higher than they were in 1994. Prices have stabilized since the middle of 1995. 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 March 31, 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. Item 6 - Exhibits and Reports on Form 8-K On February 29, 1996, and amended on April 29, 1996, Registrant filed a current report on Form 8-K wherein Registrant reported in Item 2 the acquisition of substantially all the assets and the business, and assumed certain liabilities, of Shoals Supply, Inc. 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 May 9, 1996 14