================================================================================ 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, 1997 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. 11,080,433 shares of common stock as of October 31, 1997. ================================================================================
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, 1997 (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 11-15 CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION Not applicable SIGNATURES 16
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1997 1996 1997 1996 - --------------------------------------------------------------------------------------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> Net sales $142,011 $127,259 $50,182 $44,815 Cost of sales (Note 4) 109,678 96,262 39,094 33,955 -------- -------- ------- ------- Gross profit 32,333 30,997 11,088 10,860 Selling, general and administrative expenses 16,422 14,821 5,773 4,952 -------- -------- ------- ------- Operating profit 15,911 16,176 5,315 5,908 Interest expense, net 1,496 239 635 97 -------- -------- ------- ------- Income before income taxes 14,415 15,937 4,680 5,811 Provision for income taxes 5,449 6,288 1,741 2,293 -------- -------- ------- ------- Net income $ 8,966 $ 9,649 $ 2,939 $ 3,518 ======== ======== ======= ======= Net income per common share $ .95 $ .90 $ .32 $ .33 ======== ======== ======= ======= Weighted average common shares outstanding 9,468 10,679 9,156 10,686 ======== ======== ======= ======= </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, 1997 1996 1996 - ----------------------------------------------------------------------------------------------- (In thousands, except shares and per share amounts) <S> <C> <C> <C> ASSETS Current assets Cash and short term investments $ 1,242 $ 385 $ 1,545 Accounts receivable, trade, less allowance for doubtful accounts 9,947 8,951 4,924 Inventories (Note 4) 22,293 22,210 22,686 Prepaid expenses and other current assets 3,913 1,977 2,549 -------- -------- -------- Total current assets 37,395 33,523 31,704 Fixed assets, net 19,840 10,220 10,865 Goodwill, net (Notes 2 and 3) 14,512 11,824 11,582 Other assets 1,549 1,280 1,132 -------- -------- -------- Total assets $ 73,296 $ 56,847 $ 55,283 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long- term debt and other long-term liabilities $ 5,297 $ 282 $ 276 Accounts payable, trade 5,498 7,453 3,958 Accrued expenses and other current liabilities 13,956 12,627 11,332 -------- -------- -------- Total current liabilities 24,751 20,362 15,566 Long-term indebtedness (Notes 2 and 5) 24,971 2,972 3,652 Other long-term liabilities 368 1,755 1,286 -------- -------- -------- Total liabilities 50,090 25,089 20,504 -------- -------- -------- Commitments and Contingencies (Note 6) Stockholders' equity (Notes 2, 3 and 5) Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,235,580 shares at September 1997; 11,187,208 shares at September 1996 and 11,202,946 shares at December 1996 112 112 112 Paid-in capital 17,479 17,120 17,218 Retained earnings 29,563 17,674 20,597 -------- -------- -------- 47,154 34,906 37,927 Treasury stock, at cost - 2,079,770 shares at September 1997; 479,750 shares at September 1996 and 479,770 shares at December 1996 (23,948) (3,148) (3,148) -------- -------- -------- Total stockholders' equity 23,206 31,758 34,779 -------- -------- -------- Total liabilities and stockholders' equity $ 73,296 $ 56,847 $ 55,283 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, --------------------- 1997 1996 - -------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 8,966 $ 9,649 Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation and amortization 1,531 1,192 Loss (gain) on sale of fixed assets 2 (26) Changes in assets and liabilities (excluding acquisitions): Accounts receivable, net (4,148) (1,839) Inventories 1,706 (2,858) Prepaid expenses and other assets (1,845) (89) Accounts payable, accrued expenses and other current liabilities 2,589 4,516 -------- -------- Net cash flows provided by operating activities 8,801 10,545 -------- -------- Cash flows from investing activities: Capital expenditures, (8,251) (4,952) Sales of fixed assets 16 861 Acquisitions of businesses, net of cash received (6,576) (10,268) -------- -------- Net cash flows used for investing activities (14,811) (14,359) -------- -------- Cash flows from financing activities: Proceeds from term loan 21,000 Acquisition loan 5,982 Proceeds from line of credit 56,000 16,150 Repayments under line of credit (48,050) (19,682) Repayments of term loans (2,739) (94) Exercise of stock options 278 579 Acquisition of treasury stock (20,800) (2,800) Other 18 36 -------- -------- Net cash flows provided by financing activities 5,707 171 -------- -------- Net decrease in cash (303) (3,643) Cash and short-term investments at beginning of period 1,545 4,028 -------- -------- Cash and short-term investments at end of period $ 1,242 $ 385 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 1,340 $ 197 Income taxes $ 7,666 $ 6,436 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, 1996 $ 112 $ (3,148) $17,218 $20,597 $34,779 Net income for nine months ended September 30, 1997 8,966 8,966 Issuance of 32,634 shares of common stock pursuant to stock option plan 188 188 Income tax benefit relating to issuance of common stock upon exercise of stock options 90 90 Costs of two-for-one split of common stock (17) (17) Purchase of 1,600,000 shares of treasury stock (20,800) (20,800) -------- -------- ------- ------- ------- Balance - September 30, 1997 $ 112 $(23,948) $17,479 $29,563 $23,206 ======== ======== ======= ======= ======= </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, 1996 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, 1997 and 1996. 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 expenses and balances have been restated to conform with the current year presentation. 2. Subsequent Event On October 7, 1997, the Company acquired Lippert Components, Inc. ("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock having a value of approximately $25.4 million. In addition, 230,769 contingently issuable shares are subject to an earn-out. All 2,154,000 shares are restricted and are subject to a registration rights agreement. Lippert, which has 17 plants in 12 states east of the Rocky Mountains, manufactures products for the manufactured housing and recreational vehicle industry, consisting primarily of chassis and chassis parts, refurbished axles and tires, and galvanized roofing. Lippert's sales for its fiscal year ended September 30, 1997 were $99 million, on which they achieved earnings before interest, taxes and goodwill amortization of approximately $8.6 million, excluding shareholder compensation, benefits and related items which will not continue subsequent to the acquisition. These earnings are net of other nonrecurring compensation and startup costs of approximately $.5 million. The acquisition will be accounted for as a purchase. The aggregate purchase price will be allocated to the underlying assets and liabilities based upon their respective estimated fair values at the date of acquisition. Based on preliminary estimates which will be finalized at a later date, the excess of purchase price over the fair value of the net assets acquired ("goodwill") was approximately $30 million, which will be amortized over 30 years. The results of the acquired business will be included in the Company's consolidated statements of income beginning October 7, 1997. The cash portion of the transaction has been financed by Drew's existing credit facility which was increased to $65 million to accommodate this acquisition. The new credit facility consists of a revolving line of credit of $33 million and a term loan of $32 million payable in quarterly payments of $2 million commencing March 31, 1998. 7
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Acquisitions Pritt Tire and Axle, Inc. On May 5, 1997 the Company's subsidiary, Shoals Supply, Inc. ("Shoals"), acquired the assets and business of Pritt Tire and Axle, Inc. ("Pritt") of Bristol, Indiana. Pritt, a privately-owned company, which refurbishes axles and tires used in the transportation of manufactured homes, will be operated as an additional branch of Shoals. The purchase price consisted of cash of $4,450,000 and a three-year warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per share. As part of this transaction, in the third quarter of 1997, Shoals acquired, from the former owner of Pritt, the manufacturing facility utilized by Pritt for approximately $1 million. 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 $2,910,000, 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 May 5, 1997. Pritt had 1996 net sales of $10.7 million. Shoals Supply, Inc. On February 15, 1996, the Company acquired the assets and business of Shoals, a privately-owned Alabama corporation which is a supplier of products used to transport manufactured homes. Shoals manufactures new axles and chassis parts, refurbishes used axles, and distributes new and refurbished tires. The consideration for the acquisition was 1,089,918 shares of common stock of the Company having a value of $7.5 million, cash of $1.6 million and a note for $760,000 payable over 5 years. In addition, the Company assumed $7.5 million of Shoals' bank debt and certain operating liabilities. The acquisition 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 goodwill of $11,757,000, 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. Shoals had 1996 net sales of $65 million, of which $57 million was for the 10 1/2 months since Shoals was acquired by the Company. 8
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Inventories Inventories are valued at the lower of cost or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution. During the first quarter of 1997, the Company adopted the FIFO method to value inventories for which the LIFO method had previously been utilized for determining cost. The FIFO method will better measure the current value of such inventories, provide a more appropriate matching of revenues and expenses, and conform all inventories of the Company to the same accounting method. Additionally, the change will enhance the comparability of the Company's financial statements by changing to the predominant method utilized in its industry. The Company applied this change retroactively which resulted in an increase in retained earnings of $828,000 at January 1, 1996 and $14,000 at January 1, 1997. The impact on net income for the nine months and three months ended September 30, 1996 was a reduction of $512,000 ($.05 per share) and $162,000 ($.01 per share), respectively. 5. Long-Term Indebtedness On May 15, 1997, the Company entered into a $60 million syndicated credit agreement with The Chase Manhattan Bank as lead bank. The credit facility includes a $21 million term loan and a $39 million revolving line of credit. Approximately $26 million was borrowed at closing, which was used to repay a short-term note of approximately $21 million issued to finance the Company's purchase of 1.6 million shares of Drew common stock from its Chairman, and $5 million to refinance borrowings under the Company's then existing $15 million line of credit with The Chase Manhattan Bank. The unused portion of the revolving line is available for working capital purposes and acquisitions. The agreement expires on May 15, 2002 and borrowings are secured by substantially all of the assets of the Company, except real estate. At September 30, 1997, there were outstanding borrowings of $29,600,000 under the credit facility. Subsequent to September 30, 1997, this credit facility was amended as described in Note 2. Interest on borrowings under the credit facility 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 1.5% over the LIBO rate. Furthermore, the Company is required to pay a commitment fee, accrued at the rate of 3/8 of 1% per annum, on the daily unused amount of the revolving line of credit. Pursuant to the agreement, the Company is required to maintain minimum net worth and income levels, and meet certain other financial requirements typical to secured borrowing arrangements. In addition, for the term of the credit agreement, the Company will be prohibited from declaring or paying dividends without the prior written consent of the lender. The Company has entered into interest rate hedge agreements to effectively convert variable rate debt to fixed rate debt in order to reduce the risk of incurring higher interest costs due to rising interest rates. At September 30, 1997, the Company had entered into contracts that expire in May 1998 and May 1999 which hedge interest related to $5 million and $10 million of debt, respectively. Both of these contracts have an effective rate of 7.94%. 9
DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Contingencies Effective July 29, 1994, the Company spun off to its stockholders Leslie Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), the Company's former home improvement building products segment. On September 30, 1994, White Metal Rolling and Stamping Corp. ("White Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy Code. The liabilities of White Metal are all 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 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie Building Products, Inc. and its subsidiary, Leslie-Locke, were served with a summons and complaint in an adversary proceeding commenced by the chapter 7 trustee of White Metal. The 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 $7.5 million is sought, jointly and severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke, based principally upon the trustee's allegations, previously disclosed by the Company, that the Company and its affiliated companies obtained tax benefits attributable to the use of White Metal's net operating losses. The trustee seeks to recover the purported value of the tax savings achieved, which appears to be approximately $7.5 million. Management believes that the trustee's allegations are without merit and have no basis in fact. In addition, 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. The Company 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 it has sufficient accruals for the defense of this proceeding and that such defense will not have a material adverse impact on the Company's financial condition or results of operations. 10
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 windows, axles, tires and chassis parts for manufactured housing; and windows and doors for recreational vehicles ("RV's"). 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 eleven plants located in geographic areas throughout the United States and one subcontract operation in Juarez, Mexico, which provide it with access to its major markets. A twelfth plant is currently under construction. Shoals, which was acquired by the Company on February 15, 1996, and is under the management umbrella of Kinro, is a supplier of products used to transport manufactured homes. Shoals manufactures new axles and chassis parts, refurbishes used axles and distributes new and refurbished tires. On May 5, 1997, Shoals acquired the assets and business of Pritt Tire and Axle, Inc., ("Pritt") which refurbishes axles and tires in one plant in Bristol, Indiana. Shoals operates five domestic factories located in five states. On October 7, 1997 the Company acquired Lippert Components, Inc. ("Lippert"). Lippert, which has 17 plants in 12 states east of the Rocky Mountains, manufactures products for the manufactured housing and recreational vehicle industry, consisting primarily of chassis and chassis parts, refurbished axles and tires, and galvanized roofing. Lippert's sales for its 1997 fiscal year were $99 million. RESULTS OF OPERATIONS Net sales for both the nine months and quarter ended September 30, 1997 increased 12% over the same period last year. The 1996 nine month sales include Shoals sales from February 15, 1996, and the 1997 sales include Pritt sales from May 5, 1997, the dates that these operations were acquired by the Company. Adjusting for the sales of Shoals for the month and a half before acquisition, and excluding the sales of Pritt since its acquisition, sales were up 2% for the nine months over the same period last year as a 3% increase in sales of manufactured housing products was offset by a 4% decrease in sales of RV products. The 3% increase in sales of manufactured housing products compares to a 3% industry-wide decline in shipments of manufactured homes. The decline in industry shipments is partially offset by the continuing growth of double section homes resulting in year to date industry floor shipments being flat with last year. Each section of a manufactured home represents a floor. The 4% decrease in sales of RV products for the nine months compared to an industry-wide 4% increase in shipments of RV's. For the quarter, excluding the impact of acquisitions, sales increased 4% over the same period last year as manufactured housing product sales increased 3% and RV product sales increased 6% in contrast to declines of RV product sales in prior quarters. Operating profit decreased 2% to $15,911,000 for the nine months. Included in the 1996 nine months operating profit are the results of Shoals for only the seven and a half months since acquisition. Operating profit for the nine months of 1997 are below last year because of competitive pressures, as well as approximately $400,000 of startup losses of new plants in 1997, offset by lower average material costs, and operating profit contributed by higher sales. 11
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For the third quarter, operating profit decreased 10% as a result of competitive pressures and higher average material costs offset by increased operating profit contributed by higher sales. Interest Expense, Net Interest expense, net increased $1,257,000 and $538,000 for the nine months and three months, respectively over the same periods in 1996. Such increase is primarily a result of the debt incurred in connection with the purchase of 1.6 million shares of the Company's stock from the Company's Chairman on February 14, 1997 for $20.8 million. In addition, interest increased as a result of the acquisition of Shoals in 1996 and Pritt in 1997. The Company has entered into interest rate hedge agreements to effectively convert variable rate debt to fixed rate debt in order to reduce the risk of incurring higher interest costs due to rising interest rates. At September 30, 1997, the Company had entered into contracts that expire in May 1998 and May 1999 which hedge interest related to $5 million and $10 million of debt, respectively. Both of these contracts have an effective rate of 7.94%. Accounting Changes Statement of Financial Accounting Standards No. 128 ("Statement 128"), "Earnings Per Share", will require presentation of "basic" and "diluted" earnings per share for periods ending after December 15, 1997. When adopted by the Company, the restatement of prior periods' reported earnings per share is not expected to be material. LIQUIDITY AND CAPITAL RESOURCES On May 15, 1997, the Company entered into a $60 million syndicated credit agreement with The Chase Manhattan Bank as lead bank. Approximately $26 million was borrowed at closing, which was used to repay a short-term note of approximately $21 million issued to finance the Company's purchase of 1.6 million shares of Drew common stock from its Chairman, and $5 million to refinance borrowings under the Company's then existing $15 million line of credit with The Chase Manhattan Bank. In October 1997 the Company's credit facility was increased to $65 million to accommodate the purchase of Lippert. The credit facility consists of a term loan of $32 million, payable in quarterly payments of $2 million commencing March 31, 1998, and a revolving line of credit of $33 million. The balance of the revolving line is available for working capital purposes and acquisitions. The agreement expires on May 15, 2002 and borrowings are secured by substantially all of the assets of the Company, except real estate. At September 30, 1997, there were outstanding borrowings of $29,600,000 under the credit facility. 12
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest on borrowings under the credit facility 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 1.5% over the LIBO rate. Furthermore, the Company is required to pay a commitment fee, accrued at the rate of 3/8 of 1% per annum, on the daily unused amount of the revolving line of credit. Pursuant to the agreement, the Company is required to maintain minimum of net worth and income levels and meet certain other financial requirements typical to secured borrowing arrangements. In addition, for the term of the credit agreement, the Company will be prohibited from declaring or paying dividends without the prior written consent of the lender. On February 14, 1997, the Company purchased 1.6 million shares of its common stock from the Company's Chairman of the Board for $20.8 million. The Company issued a short-term promissory note, bearing interest at 7% per annum, in payment for such shares. This note was paid by the Company on May 15, 1997 upon the consummation of the term loan portion of the credit facility with The Chase Manhattan Bank. The Statements of Cash Flows reflect the following: Nine Months Ended September 30, ------------------ 1997 1996 - -------------------------------------------------------------------------------- (In thousands) Cash flows provided by operating activities $ 8,801 $ 10,545 Cash flow used for investing activities $(14,811) $(14,359) Cash flows provided by financing activities $ 5,707 $ 171 Net cash provided by operating activities for the nine months ended September 30, 1997 was $8.8 million compared to $10.5 million for the 9 months ended September 30, 1996. Such amounts do not include balances of the assets and liabilities of acquired businesses on the date of the acquisition. Accounts receivable reflect seasonal increases of $4.1 million and $1.8 million in 1997 and 1996, respectively. The variation in accounts receivable changes is primarily attributable to the timing of customers' payments in late December. Inventories were reduced $1.7 million in 1997 partially as a result of the reduction of the inventory of tires which was higher than typical at December 1996. Payables increased $2.6 million and $4.5 million in the 1997 and 1996 periods, respectively, as a result of timing of payments and receipt of goods. Capital expenditures for the 1997 period are $8.3 million compared to $5.0 for the nine months ended September 30, 1996. Capital expenditures were funded by cash flow from operations. Cash flows used for investing activities include the acquisition of Pritt in 1997 and the Shoals acquisition in 1996. 13
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash flows provided by financing activities in the 1997 period includes increases in debt of approximately $26 million. These funds were primarily used for the acquisition of treasury stock and the acquisition of Pritt. Effective July 29, 1994, the Company spun off to its stockholders Leslie Building Products, Inc. and its subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), the Company's former home improvement building products segment. On September 30, 1994, White Metal Rolling and Stamping Corp. ("White Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy code. The liabilities of White Metal are all 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 7, 1996, the Company and its subsidiary, Kinro, Inc., and Leslie Building Products, Inc. and its subsidiary, Leslie-Locke were served with a summons and complaint in an adversary proceeding commenced by the chapter 7 trustee of White Metal. The 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 $7.5 million is sought, jointly and severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke, based principally upon the trustee's allegations, previously disclosed by the Company, that the Company and its affiliated companies obtained tax benefits attributable to the use of White Metal's net operating losses. The trustee seeks to recover the purported value of the tax savings achieved, which appears to be approximately $7.5 million. Management believes that the trustee's allegations are without merit and have no basis in fact. In addition, 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. The Company 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 it has sufficient accruals for the defense of this proceeding and that such defense 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 and tires, are influenced by demand and other factors specific to these commodities rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. In order to hedge the impact of future prices fluctuations on a portion of its future aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. The Company currently has futures contracts for 3.3 million pounds at an aggregate cost of $2.4 million, which is approximately current market value. 14
DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SUBSEQUENT EVENT On October 7, 1997, the Company acquired Lippert Components, Inc. ("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock having a value of approximately $25.4 million. In addition, 230,769 contingently issuable shares are subject to an earn-out. All 2,154,000 shares are restricted and are subject to a registration rights agreement. In connection with the acquisition, the principal stockholder of Lippert entered into an employment and non-competition agreement to continue as President and Chief Executive Officer of Lippert for a period of three years. Lippert, which has 17 plants in 12 states east of the Rocky Mountains, manufactures products for the manufactured housing and recreational vehicle industry, consisting primarily of chassis and chassis parts, refurbished axles and tires, and galvanized roofing. Lippert's sales for its fiscal year ended September 30, 1997 were $99 million, on which they achieved earnings before interest, taxes and goodwill amortization of approximately $8.6 million, excluding shareholder compensation, benefits and related items which will not continue subsequent to the acquisition. These earnings are net of other nonrecurring compensation and startup costs of approximately $.5 million. The acquisition will be accounted for as a purchase. The aggregate purchase price will be allocated to the underlying assets and liabilities based upon their respective estimated fair values at the date of acquisition. Based on preliminary estimates which will be finalized at a later date, the excess of purchase price over the fair value of the net assets acquired ("goodwill") was approximately $30 million, which will be amortized over 30 years. The results of the acquired business will be included in the Company's consolidated statements of income beginning October 7, 1997. The cash portion of the transaction has been financed by Drew's existing credit facility which was increased to $65 million to accommodate this acquisition. The new credit facility consists of a revolving line of credit of $33 million and a term loan of $32 million payable in quarterly payments of $2 million commencing March 31, 1998. 15
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 12, 1997 16