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, 2002 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||X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 9,709,863 shares of common stock as of April 30, 2002.
================================================================================ 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, 2002 (UNAUDITED) ---------- Page ---- PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME 3 CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-11 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-18 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 19 PART II - OTHER INFORMATION Not applicable SIGNATURES 20
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) <S> <C> <C> Net sales $ 74,719 $58,894 Cost of sales 56,561 47,029 -------- ------- Gross profit 18,158 11,865 Selling, general and administrative expenses 11,419 9,090 -------- ------- Operating profit 6,739 2,775 Interest expense, net 948 1,193 -------- ------- Income before income taxes and cumulative effect of change in accounting principle 5,791 1,582 Provision for income taxes 2,259 715 -------- ------- Income before cumulative effect of change in accounting principle 3,532 867 Cumulative effect of change in accounting principle for goodwill (net of taxes of $2,825) (30,080) -------- ------- Net (loss) income $(26,548) $ 867 ======== ======= Net income (loss) per common share: Income before cumulative effect of change in accounting principle: Basic $ .36 $ .09 ======== ======= Diluted $ .36 $ .09 ======== ======= Cumulative effect of change in accounting principle for goodwill, net of taxes: Basic $ (3.11) $ ======== ======= Diluted $ (3.05) $ ======== ======= Net (loss) income: Basic $ (2.74) $ .09 ======== ======= Diluted $ (2.69) $ .09 ======== ======= Weighted average common shares outstanding: Basic 9,681 9,656 ======== ======= Diluted 9,862 9,657 ======== ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
DREW INDUSTRIES INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> March 31, ----------------------- December 31, 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------------------ (In thousands, except shares and per share amounts) <S> <C> <C> <C> ASSETS Current assets Cash and short-term investments $ 1,416 $ 3,832 $ 1,247 Accounts receivable, trade, less allowances 20,734 17,249 10,733 Inventories 28,552 28,249 27,898 Prepaid expenses and other current assets 4,427 4,059 4,427 --------- --------- --------- Total current assets 55,129 53,389 44,305 Fixed assets, net 70,889 65,735 69,944 Goodwill, net 5,972 36,860 38,303 Other intangible assets 977 1,105 1,073 Other assets 5,795 2,823 3,350 --------- --------- --------- Total assets $ 138,762 $ 159,912 $ 156,975 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness $ 9,653 $ 8,657 $ 9,630 Accounts payable, trade 11,891 8,647 6,025 Accrued expenses and other current liabilities 17,829 13,202 16,174 --------- --------- --------- Total current liabilities 39,373 30,506 31,829 Long-term indebtedness 44,324 56,130 43,691 Other long-term liabilities 245 245 245 --------- --------- --------- Total liabilities 83,942 86,881 75,765 --------- --------- --------- Commitments and Contingencies Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,836,488 shares at March 2002; 11,805,754 shares at March 2001 and 11,820,078 at December 2001 118 118 118 Paid-in capital 25,237 24,967 25,079 Retained earnings 48,932 67,413 75,480 --------- --------- --------- 74,287 92,498 100,677 Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467) --------- --------- --------- Total stockholders' equity 54,820 73,031 81,210 --------- --------- --------- Total liabilities and stockholders' equity $ 138,762 $ 159,912 $ 156,975 ========= ========= ========= </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> Three Months Ended March 31, ------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> Cash flows from operating activities: Net (loss) income $(26,548) $ 867 Adjustments to reconcile net income to cash flows provided by operating activities: Cumulative effect of change in accounting principle for goodwill, net of taxes 30,080 Depreciation and amortization 1,722 2,176 Loss on disposal of fixed assets 1 26 Changes in assets and liabilities: Accounts receivable, net (10,001) (3,798) Inventories (654) 5,454 Prepaid expenses and other assets (327) (210) Accounts payable, accrued expenses and other current liabilities 7,521 1,903 -------- -------- Net cash flows provided by operating activities 1,794 6,418 -------- -------- Cash flows from investing activities: Capital expenditures (2,447) (1,684) Proceeds from sales of fixed assets 8 704 -------- -------- Net cash flows used for investing activities (2,439) (980) -------- -------- Cash flows from financing activities: Proceeds from line of credit and term loan 23,250 25,100 Repayments under line of credit and other borrowings (22,594) (27,256) Exercise of stock options 158 -------- -------- Net cash flows provided by (used for) financing activities 814 (2,156) -------- -------- Net increase in cash 169 3,282 Cash and cash equivalents at beginning of period 1,247 550 -------- -------- Cash and cash equivalents at end of period $ 1,416 $ 3,832 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 1,529 $ 1,879 Income taxes paid (received) $ 557 $ (11) </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENT 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, 2001 $ 118 $ (19,467) $ 25,079 $ 75,480 $ 81,210 Net loss for three months ended March 31, 2002 (26,548) (26,548) Issuance of 16,410 shares of common stock pursuant to stock option plan 129 129 Income tax benefit relating to issuance of common stock pursuant to stock option plan 29 29 ------- ---------- --------- -------- --------- Balance - March 31, 2002 $ 118 $ (19,467) $ 25,237 $ 48,932 $ 54,820 ======= ========== ========= ======== ========= </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 include the accounts of Drew Industries Incorporated and its subsidiaries. There are no unconsolidated subsidiaries. Drew's wholly-owned active subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro"), Lippert Components, Inc. and its subsidiaries ("LCI"), and Lippert Tire and Axle, Inc. and its subsidiaries ("LTA"). Drew, through its wholly-owned subsidiaries, supplies a broad array of components for manufactured homes and recreational vehicles. All significant intercompany balances and transactions have been eliminated. The Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2001 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, 2002 and 2001. 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, thermo-formed bath and shower units, and axles. The MH segment also distributes 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, chassis and chassis parts. 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, 2001 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> Three Months Ended March 31, ---------------------------- 2002 2001 ---- ---- <S> <C> <C> Net sales: MH segment $ 40,011 $ 33,685 RV segment 34,708 25,209 -------- --------- Total $ 74,719 $ 58,894 ======== ========= Operating profit: MH segment $ 4,081 $ 2,061 RV segment 3,582 1,905 -------- --------- Total segments operating profit 7,663 3,966 Amortization of intangibles (177) (614) Corporate and other (747) (577) -------- --------- Operating profit 6,739 2,775 Interest expense, net 948 1,193 -------- --------- Income before income taxes and cumulative effect of change in accounting principle $ 5,791 $ 1,582 ======== ========= </TABLE> 3. 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. Inventories consist of the following (in thousands): March 31, -------------------- December 31, 2002 2001 2001 ------- ------- ------- Finished goods $ 7,782 $ 7,004 $ 7,272 Work in process 1,505 1,745 1,449 Raw Material 19,265 19,500 19,177 ------- ------- ------- Total $28,552 $28,249 $27,898 ======= ======= ======= 4. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. It also specifies criteria that intangible assets acquired in a purchase 8
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) combination must meet to be recognized apart from goodwill. SFAS No. 142 requires that the useful lives of all existing intangible assets be reviewed and adjusted if necessary. It also requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Other intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 142, the Company stopped amortizing goodwill effective January 1, 2002. The following schedule shows pro forma net income for the quarter ended March 31, 2001, excluding goodwill amortization expense (in thousands, except per share data): Quarter Ended March 31, 2001 ----------------------------------- Net Earnings Per Share Income Basic Diluted ------ ----- ------- Net income, as reported $ 867 $ .09 $ .09 Goodwill amortization expense, net of taxes of $70 388 .04 .04 -------- ------- -------- Pro forma net income $ 1,255 $ .13 $ .13 ======== ======= ======== The Company has reviewed the classification of its intangible assets and goodwill in accordance with SFAS No. 141 and has reclassified $574,000 of other assets to goodwill. The Company has reassessed the useful lives of its intangible assets as required by SFAS No. 142 and determined that the existing useful lives are reasonable. During the first quarter, in accordance with the goodwill impairment provisions of SFAS No. 142, the Company identified its reporting units and allocated its assets and liabilities, including goodwill, to its reporting units. In addition, the Company had a valuation of certain of its reporting units done by an independent appraiser, as of January 1, 2002, to assist the company in determining if there had been an impairment in the goodwill of any of such reporting units. Based on this appraisal and additional analyses performed by the Company, it was determined that there had been an impairment of goodwill in two reporting units. As a result, the Company recorded an impairment charge of $32,905,000 offset by a tax benefit of $2,825,000. Such charge has been recorded as a cumulative effect of change in accounting principle in the quarter ended March 31, 2002. 9
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As a result of the allocation of the goodwill and the recognition of the impairment charge, goodwill by reportable segment is as follows (in thousands): <TABLE> <CAPTION> MH Segment RV Segment Total ---------- ---------- ----- <S> <C> <C> <C> Balance - December 31, 2001 $ 33,354 $ 4,949 $ 38,303 Reclassification of other intangible assets 505 69 574 --------- ------- --------- Balance - January 1, 2002 33,859 5,018 38,877 Impairment charge 30,698 2,207 32,905 --------- ------- --------- Balance - March 31, 2002 $ 3,161 $ 2,811 $ 5,972 ========= ======= ========= </TABLE> 5. Long-Term Indebtedness Long-term indebtedness consists of the following (in thousands): <TABLE> <CAPTION> March 31, -------------------- December 31, 2002 2001 2001 ------- ------- ------- <S> <C> <C> <C> Senior Notes payable at the rate of $8,000 per annum commencing January 28, 2001 with interest payable semiannually at the rate of 6.95% per annum $24,000 $32,000 $32,000 Notes payable pursuant to a credit agreement expiring October 15, 2003 consisting of a revolving loan, not to exceed $25,000; interest at prime rate or LIBOR plus a rate margin based upon the Company's performance 9,250 19,000 200 Term loan due August 1, 2001; interest at prime rate 5,000 Industrial Revenue Bonds, fixed rate 5.68% to 6.28%, due 2008 through 2015; secured by certain real estate and equipment 6,697 7,279 6,846 Real estate mortgage payable at the rate of $70 per month with a balloon payment of $3,371 in May 2006, interest at 9.03% per annum 5,178 5,268 Loans secured by certain real estate and equipment, due 2006 to 2011, primarily fixed rate 7.25% to 7.90% 8,852 1,508 9,007 ------- ------- ------- 53,977 64,787 53,321 Less current portion 9,653 8,657 9,630 ------- ------- ------- Total long-term indebtedness $44,324 $56,130 $43,691 ======= ======= ======= </TABLE> 10
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Pursuant to the Senior Notes, the credit agreement, and certain of the other loan agreements the Company is required to maintain minimum net worth and interest and fixed charge coverages and meet certain other financial requirements. Borrowings under the Senior Notes and the credit facility are secured only by capital stock of the Company's subsidiaries. The Company pays 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. 6. 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. Weighted average common shares outstanding - diluted is calculated as follows (in thousands): Three Months Ended March 31, ---------------- 2002 2001 ----- ----- Weighted average common shares outstanding - basic 9,681 9,656 Assumed issuance of common stock pertaining to stock options and warrants 181 1 ----- ----- Weighted average common shares outstanding - diluted 9,862 9,657 ===== ===== 11
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 54 percent of consolidated net sales for the quarter ended March 31, 2002 and 60 percent of the annual consolidated net sales for 2001, manufactures a variety of products used in the construction of manufactured homes, including aluminum and vinyl windows, chassis and chassis parts, thermo-formed bath and shower units, and axles. The MH segment also distributes new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment, which accounted for 46 percent of consolidated net sales for the quarter ended March 31, 2002 and 40 percent of the annual consolidated net sales for 2001, manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis and chassis parts. 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 operating subsidiaries. Its two primary operating subsidiaries, Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("LCI") have operations in both the MH and RV segments, while Lippert Tire and Axle, Inc. ("LTA") operates entirely within the MH segment. At March 31, 2002 the Company's subsidiaries operated 39 plants in 18 states and one in Canada. On June 1, 2001, the Company's subsidiary, Kinro, acquired the assets and business of the Better Bath division of Kevco, Inc. Better Bath manufactures and sells thermo-formed bath and shower units for the manufactured housing industry and had sales of approximately $27.7 million in 2000 and $22.3 million in 2001, including $13.2 million in the seven months after its acquisition by the Company. The results of the acquired business have been included in the Company's consolidated statement of income beginning June 1, 2001. The acquisition has been accounted for as a purchase. The aggregate purchase price of approximately $10.2 million has been allocated to the underlying assets based upon their respective estimated fair values. The excess of purchase price over the fair value of net assets acquired ("goodwill") was approximately $3.1 million. The Company has not recorded any impairment of this goodwill. Manufactured homes are attractive, quality built, and less expensive than site-built homes. The decline in the MH industry began in the spring of 1999, but conditions have recently shown signs of improving. The extremely high inventories of finished homes in the industry, and the excessive number of retail dealers of two years ago, have now both been reduced to more acceptable levels. Also, more manufactured homes are now financed with land, often making them eligible for lower cost conventional financing. The level of repossessions remains high, however, partly due to the economic slowdown. Industry experts are projecting a modest increase in production for 2002. The downturn in the RV industry, which began in 2000, is beginning to show signs of improving, as industry shipments have increased. The improvement in RV industry sales was temporarily interrupted by the events of September 11, as consumer confidence, a barometer of the RV industry, was severely affected. Consumer confidence indices have been mixed, but generally trending higher in recent months. The RV industry reported that last year's retail sales were somewhat stronger than wholesale shipments, suggesting that retailers had reduced inventory levels. Consequently, any increase in retail demand will quickly lead to 12
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) increases in production which will ultimately increase demand for the segment's RV products. Also, the recent improvement in industry-wide RV sales may be partly the result of consumer preference for not flying and for vacationing and traveling in the U.S. rather than abroad. RESULTS OF OPERATIONS Net sales and operating profit are as follows (in thousands): Three Months Ended March 31, ---------------------------- 2002 2001 -------- -------- Net sales: MH segment $ 40,011 $ 33,685 RV segment 34,708 25,209 -------- -------- Total $ 74,719 $ 58,894 ======== ======== Operating profit: MH segment $ 4,081 $ 2,061 RV segment 3,582 1,905 -------- -------- Total segments operating profit 7,663 3,966 Amortization of intangibles (177) (614) Corporate and other (747) (577) -------- -------- Total $ 6,739 $ 2,775 ======== ======== MH Segment Net sales of the MH segment increased 19 percent in the quarter ended March 31, 2002, from the same period last year, despite no increase in industry-wide production of manufactured homes. A 15% increase in industry-wide production in January was apparently due to inventory building by dealers. March industry production, however, was 12% lower than last March. Sales of refurbished tires and axles by the MH segment declined due to the closure of two of such facilities and the sale of a third facility in 2001. Excluding sales of refurbished axles and tires and the Better Bath operation, which was acquired after last year's first quarter, net sales increased 14 percent for the quarter. Operating profit of the MH segment increased $2.0 million (98 percent) in the 2002 quarter from the same period in 2001. Excluding the results of the refurbished axles and tires operation as well as the results of Better Bath, which was acquired after last year's first quarter, operating profit for the MH segment increased by 57 percent for the three months. Such operating profit was 12.2 percent of sales compared to 8.9 percent for the same quarter last year, as material costs continued to be stable, except for steel, which were lower this quarter than last year's first quarter, after rising early last year. Selling, general and administrative expenses were up in dollar terms, largely following the trend of higher sales. The operating margin achieved by Better Bath has increased in recent months as production efficiencies improved and selling, general and administrative costs declined. The refurbished axles and tires operations reduced its 13
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) operating loss $.3 million partly as a result of the closure of two and the sale of one of its facilities in 2001. There have been no significant selling price changes by any of the Company's operations in the quarter. RV Segment The recreational vehicle products segment achieved a 38 percent sales increase in the first quarter of 2002 compared to the first quarter of 2001, on a significant increase in its market share in both its RV chassis and its RV window and door product lines. Industry-wide shipments of RV's increased 8 percent in the quarter. Long-term growth in RV sales may result from demographic trends, as demand for RV's is strongest from the over 50 population, which is the fastest growing segment of the population Operating profit of the RV segment increased $1.7 million (88 percent) for the quarter. This increase is attributable to the increase in sales as well as improved operating efficiencies. The segment's profit margin increased to 10.3 percent for the quarter, compared to 7.6 percent for the 2001 quarter. The improvement in profit margin was due to slightly lower steel costs, improved operating efficiencies and spreading of fixed costs over higher sales. Amortization of Intangibles, Corporate and Other Amortization of intangibles for the quarter was $437,000 less than the prior year's quarter, primarily as a result of the Company's adoption of Statement of Financial Accounting Standards No, 142, which requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Corporate and other expenses were $170,000 higher than last year's quarter as a result of higher incentive compensation based upon profit, higher professional fees for special projects, and a reduction in administrative fees charged to LBP, Inc. a former subsidiary that was spun off to shareholders in 1994. Interest Expense, Net Interest expense, net decreased $245,000 from the 2001 quarter, as a result of the reduction in debt during the year as well as savings resulting from interest rate reductions. New Accounting Standards Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. It also specifies criteria that intangible assets acquired in a purchase combination must meet to be recognized apart from goodwill. Statement No. 142 requires that the useful lives of all existing intangible assets be reviewed and adjusted if necessary. It also requires that 14
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. Other intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement No. 144, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 142, the Company stopped amortizing goodwill effective January 1, 2002. The following schedule shows pro forma net income for the quarter ended March 31, 2001, excluding goodwill amortization expense (in thousands, except per share data): Quarter Ended March 31, 2001 -------------------------------- Net Earnings Per Share Income Basic Diluted ------ ----- ------- Net income, as reported $ 867 $ .09 $ .09 Goodwill amortization expense, net of taxes of $70 388 .04 .04 -------- ------- -------- Pro forma net income $ 1,255 $ .13 $ .13 ======== ======= ======== The Company has reviewed the classification of its intangible assets and goodwill in accordance with SFAS No. 141 and has reclassified $574,000 of other assets to goodwill. The Company has reassessed the useful lives of its intangible assets as required by SFAS No. 142 and determined that the existing useful lives are reasonable. During the first quarter, in accordance with the goodwill impairment provisions of SFAS No. 142, the Company identified its reporting units and allocated its assets and liabilities, including goodwill, to its reporting units. In addition, the Company had a valuation of certain of its reporting units done by an independent appraiser, as of January 1, 2002, to assist the company in determining if there had been an impairment in the goodwill of any of such reporting units. Based on this appraisal and additional analyses performed by the Company, it was determined that there had been an impairment of goodwill in two reporting units. As a result, the Company recorded an impairment charge of $32,905,000 offset by a tax benefit of $2,825,000. Such charge has been recorded as a cumulative effect of change in accounting principle in the quarter ended March 31, 2002. As a result of the allocation of the goodwill and the recognition of the impairment charge, goodwill by reportable segment is as follows (in thousands): <TABLE> <CAPTION> MH Segment RV Segment Total ---------- ---------- ----- <S> <C> <C> <C> Balance - December 31, 2001 $ 33,354 $ 4,949 $ 38,303 Reclassification of other intangible assets 505 69 574 --------- ------- --------- Balance - January 1, 2002 33,859 5,018 38,877 Impairment charge 30,698 2,207 32,905 --------- ------- --------- Balance - March 31, 2002 $ 3,161 $ 2,811 $ 5,972 ========= ======= ========= </TABLE> 15
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement Obligations." SFAS No.143 requires companies to record a liability for asset retirement obligations associated with the retirement of long-lived assets. Such liabilities should be recorded at fair value in the period in which a legal obligation is created, which typically would be upon acquisition or completion of construction. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company is in the process of reviewing the impact of SFAS No.143 and does not anticipate that it will have a material impact on the earnings or financial position of the Company. Also in August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.144 supercedes SFAS No.121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 retains the fundamental provision of SFAS No.121 related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of, but excludes goodwill from its scope and provides additional guidance on the accounting for long-lived assets held for sale. The provisions of SFAS No.144 are effective for fiscal years beginning after December 15, 2001. Accordingly, the Company adopted the provision of SFAS No. 144 effective January 1, 2002. The implementation of SFAS No. 144 did not have a material impact on the earnings or financial position of the Company. LIQUIDITY AND CAPITAL RESOURCES The Statements of Cash Flows reflect the following (in thousands): <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2002 2001 --------- -------- <S> <C> <C> Net cash flows provided by operating activities $ 1,794 $ 6,418 Net cash flows (used for) investment activities $ (2,439) $ (980) Net cash flows provided by (used for) financing activities $ 814 $ (2,156) </TABLE> Net cash flows from operating activities of $1.8 million compares to $6.4 million for the prior year's quarter. The lower net cash flows from operating activities this quarter is primarily the result of the $10 million increase in accounts receivable. This increase is the result of the 27% increase in sales this quarter, as well as the timing of collections. Days sales in receivables outstanding were consistent for the two quarters. Inventories rose modestly in the quarter while they declined $5.5 million in the 2001 quarter, as a result of a concerted effort to reduce inventory levels at all locations. The increase in trade payables and accruals result primarily from the timing of payment due dates. Trade payables are generally paid within the discount period. Accruals for incentive compensation based upon profits were $1.1 million higher than at March 2001. 16
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash flows used for investing activities of $2.4 million consist of capital expenditures. Capital expenditures for 2002 are expected to approximate $8 million and will be funded by cash flow from operations and new financing secured by real estate and equipment. Included in the 2002 capital expenditures will be the construction of a larger factory to replace a leased facility to provide additional capacity for the Company's rapidly growing vinyl window line. Capital expenditures for 2001 were $8.2 million, including $1.7 million in the first quarter of 2001 which was offset by $.8 million of fixed asset sales. Cash flows provided by financing activities for the 2002 quarter include a net increase in debt of $.6 million as well as $.2 million received from the exercise of employee stock options. Cash flows used by financing activities for the first quarter of 2001 represent net reductions in debt of $2.2 million. Total debt has been reduced by $10.8 million since March 2001 despite the $10.2 million cash paid for the acquisition of Better Bath in June 2001. Availability under the Company's line of credit, which was $14.3 million at March 31, 2002, is adequate to finance the Company's working capital and capital expenditure requirements. However, the Company expects to fund a portion of its current year capital expenditures with new financing secured by real estate and equipment. The Company has outstanding $24 million of 6.95 percent, seven year Senior Notes. Repayment of these notes is $8 million annually, of which the first two payments were made in January 2002 and 2001. In addition to the line of credit and the Senior Notes, in 2001 the Company improved its liquidity by raising $13.3 million through long-term equipment and real estate mortgages, and $3.7 million from the sale and leaseback of equipment. INFLATION The prices of raw materials, consisting primarily of aluminum, vinyl, steel, glass, ABS resin, axles 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 price fluctuations on a portion of its future aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. The Company purchased no futures contracts in 2001 or during the first quarter of 2002, and at March 31, 2002, the Company had no futures contracts outstanding. The Company experienced modest increases in its labor costs since the first quarter of 2001. USE OF ESTIMATES The preparation of these financial statements requires the Company to make estimates and judgments 17
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, insurance obligations, lease termination obligations, post-retirement benefits, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates under different assumptions or conditions. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report contains certain statements, including the Company's plans and expectations regarding its operating strategies, products, and costs, and its views of the prospects of the manufactured housing and recreational vehicle industries, which are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's views, at the time such statements were made, with respect to the Company's future plans, objectives, events, and financial results such as revenues, expenses, income, earnings per share, capital expenditures, and other financial items. Forward-looking statements are not guarantees of future performance; they are subject to risks and uncertainties. The Company does not undertake to update forward- looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. There are a number of factors, many of which are beyond the Company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, ABS resin, axles, and tires), availability of retail and wholesale financing for manufactured homes, availability and costs of labor, inventory levels of retailers and manufacturers, interest rates, and adverse weather conditions impacting retail sales. In addition, general economic conditions and consumer confidence may affect the retail sale of manufactured homes and recreational vehicles. 18
DREW INDUSTRIES INCORPORATED Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk in the normal course of its operations due to its purchases of certain commodities, and its investing and financing activities. Certain raw materials, particularly aluminum, vinyl, steel, glass and tires are subject to price volatility. While effective hedges for most of these raw materials are not available, the Company periodically purchases aluminum futures contracts to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements. At March 31, 2002, the Company had no futures contracts outstanding. The Company is exposed to changes in interest rates primarily as a result of its financing activities. At March 31, 2002, the Company had $44.7 million of fixed rate debt. Assuming a decrease of 100 basis points in the interest rate for borrowings of a similar nature, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be affected by approximately $.4 million per annum. The Company also has a $25 million line of credit. At March 31, 2002, $9.3 million of the line of credit was borrowed. Assuming an increase of 100 basis points in the interest rate for borrowings under these variable rate loans, and outstanding borrowings of $9.3 million, future cash flows would be affected by $.1 million per annum. In addition, the Company is exposed to changes in interest rates as a result of temporary investments in government backed money market funds, however, such investing activity is not material to the Company's financial position, results of operations, or cash flow. If the actual change in interest rates is substantially different than 100 basis points, the net impact of interest rate risk on the Company's cash flow may be materially different than that disclosed above. 19
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 Executive Vice President and Chief Financial Officer May 15, 2002 20