10-Q 1 0001.txt FORM 10-Q ================================================================================ 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: June 30, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number: 0-13646 DREW INDUSTRIES INCORPORATED (Exact Name of Registrant as Specified in its Charter) Delaware 13-3250533 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Mamaroneck Avenue, White Plains, N.Y. 10601 (Address of principal executive offices) (Zip Code) (914) 428-9098 Registrant's Telephone Number including Area Code (Former name, former address and former fiscal year, if changed since last year) Indicate by check marks whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities & Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 9,656,429 shares of common stock as of August 4, 2000. ================================================================================ DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS FILED WITH QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 (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 7-9 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15 PART II - OTHER INFORMATION Not applicable SIGNATURES 16 DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six Months Ended Three Months Ended June 30, June 30, ---------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales $ 153,812 $ 175,096 $ 79,152 $ 89,209 Cost of sales 121,497 135,474 62,925 67,860 --------- ---------- --------- -------- Gross profit 32,315 39,622 16,227 21,349 Selling, general and administrative expenses 21,724 22,662 11,137 11,945 --------- ---------- --------- -------- Operating profit 10,591 16,960 5,090 9,404 Interest expense, net 1,879 1,860 1,010 857 --------- ---------- --------- -------- Income before income taxes 8,712 15,100 4,080 8,547 Provision for income taxes 3,568 6,061 1,696 3,450 --------- ---------- --------- -------- Net income $ 5,144 $ 9,039 $ 2,384 $ 5,097 ========= ========== ========= ======== Net income per common share: Basic $ .47 $ .79 $ .22 $ .44 ========= ========== ========= ======== Diluted $ .47 $ .79 $ .22 $ .44 ========= ========== ========= ======== Weighted average common shares outstanding: Basic 10,946 11,424 10,743 11,468 ========= ========== ========= ======== Diluted 10,949 11,475 10,745 11,490 ========= ========== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 3 DREW INDUSTRIES INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, ------------------------- December 31, 2000 1999 1999 --------------------------------------------------------------------------------------------------------------------------- (In thousands, except shares and per share amounts) ASSETS Current assets Cash and cash equivalents $ 2,752 $ 6,685 $ 5,110 Accounts receivable, trade, less allowances 20,830 17,757 11,303 Inventories (Note 3) 38,654 30,614 33,382 Prepaid expenses and other current assets 4,395 4,653 4,390 ---------- --------- ---------- Total current assets 66,631 59,709 54,185 Fixed assets, net 62,571 45,928 51,028 Goodwill, net 45,035 46,987 46,087 Other assets 4,406 5,214 4,744 ---------- --------- ---------- Total assets $ 178,643 $ 157,838 $ 156,044 ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness $ 9,344 $ 794 $ 1,717 Accounts payable, trade 14,393 11,420 6,391 Accrued expenses and other current liabilities 16,888 20,846 17,107 ---------- --------- ---------- Total current liabilities 40,625 33,060 25,215 Long-term indebtedness (Note 4) 60,147 45,547 44,630 Other long-term liabilities 2,110 1,665 2,110 ---------- --------- ---------- Total liabilities 102,882 80,272 71,955 ---------- --------- ---------- Commitments and Contingencies Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,805,754 shares at June 2000; 11,801,430 shares at June 1999 and 11,805,754 shares at December 1999 118 118 118 Paid-in capital 24,967 24,823 24,967 Retained earnings 70,143 56,847 64,999 ---------- --------- ---------- 95,228 81,788 90,084 Treasury stock, at cost - 2,149,325 shares at June 2000, 350,000 shares at June 1999 and 509,300 shares at December 1999 (Note 5) (19,467) (4,222) (5,995) ---------- --------- ---------- Total stockholders' equity 75,761 77,566 84,089 ---------- --------- ---------- Total liabilities and stockholders' equity $ 178,643 $ 157,838 $ 156,044 ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------------- 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 5,144 $ 9,039 Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation and amortization 4,265 3,954 Loss on disposal of fixed assets 326 323 Changes in assets and liabilities: Accounts receivable, net (9,527) (4,198) Inventories (5,272) 4,786 Prepaid expenses and other assets (247) 1,299 Accounts payable, accrued expenses and other current liabilities 7,936 6,994 -------- -------- Net cash flows provided by operating activities 2,625 22,197 -------- -------- Cash flows from investing activities: Capital expenditures (14,953) (5,846) Proceeds from sales of fixed assets 298 264 -------- -------- Net cash flows used for investing activities (14,655) (5,582) -------- -------- Cash flows from financing activities: Proceeds from line of credit 52,470 17,550 Repayments under line of credit and other borrowings (29,683) (29,948) Acquisition of treasury stock (13,472) (2,118) Exercise of stock options and other 357 1,896 -------- -------- Net cash flows provided by (used for) financing activities 9,672 (12,620) -------- -------- Net (decrease) increase in cash (2,358) 3,995 Cash and cash equivalents at beginning of period 5,110 2,690 -------- -------- Cash and cash equivalents at end of period $ 2,752 $ 6,685 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 1,885 $ 1,798 Income taxes $ 1,580 $ 3,030
The accompanying notes are an integral part of these consolidated financial statements. 5 DREW INDUSTRIES INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Total Common Treasury Paid-in Retained Stockholders' Stock Stock Capital Earnings Equity ------------------------------------------------------------------------------------------------------------------- (In thousands, except shares) Balance - December 31, 1999 $ 118 $ (5,995) $ 24,967 $ 64,999 $ 84,089 Net income for six months ended June 30, 2000 5,144 5,144 Purchase of 1,640,025 shares of treasury stock (13,472) (13,472) ------- ------------ --------- -------- ---------- Balance - June 30, 2000 $ 118 $ (19,467) $ 24,967 $ 70,143 $ 75,761 ======= =========== ========= ======== =========
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, 1999 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 six and three month periods ended June 30, 2000 and 1999. All such adjustments are of a normal recurring nature. The Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include some information and notes necessary to conform with annual reporting requirements. 2. Segment Reporting The Company has two reportable operating segments, the manufactured housing products segment (the "MH segment") and the recreational vehicle products segment (the "RV segment"). The MH segment manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment's net sales. The Company has only an insignificant amount of intersegment sales. Decisions concerning the allocation of the Company's resources are made by the presidents of the Company's operating subsidiaries and the president of Drew. This group evaluates the performance of each segment based upon segment profit or loss, defined as income before interest, amortization of intangibles and income taxes. The accounting policies of the MH and RV segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements, of the Company's December 31, 1999 Annual Report on Form 10-K. 7 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Information relating to segments follows (in thousands):
Six Months Ended Three Months Ended June 30, June 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Net sales: MH segment $ 103,083 $ 135,983 $ 52,486 $ 68,518 RV segment 50,729 39,113 26,666 20,691 ----------- ----------- ----------- ----------- Total $ 153,812 $ 175,096 $ 79,152 $ 89,209 =========== =========== =========== =========== Operating profit: MH segment $ 8,426 $ 15,259 $ 3,869 $ 8,314 RV segment 4,684 4,422 2,497 2,449 ----------- ----------- ----------- ----------- Total segments operating profit 13,110 19,681 6,366 10,763 Amortization of intangibles (1,347) (1,347) (673) (674) Corporate and other (1,172) (1,374) (603) (685) ----------- ----------- ----------- ----------- Operating profit 10,591 16,960 5,090 9,404 Interest expense, net 1,879 1,860 1,010 857 ----------- ----------- ----------- ----------- Income before income taxes $ 8,712 $ 15,100 $ 4,080 $ 8,547 =========== =========== =========== ===========
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):
June 30, --------------------------- December 31, 2000 1999 1999 ---- ---- ---- Finished goods $ 110,502 $ 8,957 $ 10,494 Work in process 2,296 2,181 2,123 Raw Material 25,856 19,476 20,765 --------- --------- --------- Total $ 38,654 $ 30,614 $ 33,382 ========= ========= =========
8 DREW INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Long-Term Indebtedness The Company has $40 million of 6.95 percent, seven year Senior Notes issued in a private placement in January 1998, payable $8 million annually beginning January 2001. The Company also has a credit facility, which was increased from $25 million to $30 million in June 2000, with interest payable at the prime rate, with an option to convert a portion of the borrowings under the credit facility to a Eurodollar loan at 1 percent over the LIBO rate. Furthermore, the Company is required to pay a commitment fee, accrued at the rate of 3/8 of 1 percent per annum, on the daily unused amount of the revolving line of credit. The balance under this line of credit is $23.6 million at June 30, 2000. Pursuant to both the Senior Notes and the credit facility, the Company is required to maintain minimum net worth and interest and fixed charge coverages and meet certain other financial requirements. All of such requirements have been met for the six months ended June 30, 2000. Borrowings under both facilities are secured only by capital stock of the Company's subsidiaries. 5 Treasury Stock Purchases On May 1, 2000, the Company made a tender offer for up to 500,000 shares of its Common Stock at $8.00 per share. On May 31, 2000, such offer was increased to 1.3 million shares. Pursuant to the Offer to Purchase, the Company was entitled to purchase up to an additional two percent of its outstanding stock, or an aggregate potential purchase of 1,522,000 shares. The offer expired on June 13, 2000 and on June 16, 2000 the Company purchased all properly tendered an aggregate of 1,449,425 shares at a cost of $11.9 million including expenses. Earlier this year, the Company purchased, in the open market, 190,600 shares of its Common Stock at an average cost of $8.80 per share. The Company used its line of credit to purchase such shares. 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):
Six Months Ended Three Months Ended June 30, June 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding - basic 10,946 11,424 10,743 11,468 Assumed issuance of common stock pertaining to stock options and warrants 3 51 2 22 --------- --------- --------- --------- Weighted average common shares outstanding - diluted 10,949 11,475 10,745 11,490 ========= ========= ========= =========
9 DREW INDUSTRIES INCORPORATED ITEM 2. 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 67 percent of consolidated net sales for the six months ended June 30, 2000 and 76 percent of the annual consolidated net sales for 1999, manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment, which accounted for 33 percent of consolidated net sales for the six months ended June 30, 2000 and 24 percent of the annual consolidated net sales for 1999, manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment's net sales. The Company's operations are performed through its four primary operating subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("LCI") have operations in both the MH and RV segments, while Lippert Tire and Axle, Inc. (formerly known as Shoals Supply, Inc.) ("LTA") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH segment. At June 30, 2000 the Company's subsidiaries operated 39 plants in 18 states. RESULTS OF OPERATIONS Net sales and operating profit are as follows (in thousands):
Six Months Ended Three Months Ended June 30, June 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Net sales: MH segment $ 103,083 $ 135,983 $ 52,486 $ 68,518 RV segment 50,729 39,113 26,666 20,691 ----------- ----------- ---------- ---------- Total $ 153,812 $ 175,096 $ 79,152 $ 89,209 =========== =========== ========== ========== Operating profit: MH segment $ 8,426 $ 15,259 $ 3,869 $ 8,314 RV segment 4,684 4,422 2,497 2,449 ----------- ----------- ---------- ---------- Total segments operating profit 13,110 19,681 6,366 10,763 Amortization of intangibles (1,347) (1,347) (673) (674) Corporate and other (1,172) (1,374) (603) (685) ----------- ----------- ---------- ----------- Operating profit 10,591 16,960 5,090 9,404 Interest expense, net 1,879 1,860 1,010 857 ----------- ----------- ---------- ---------- Total $ 8,712 $ 15,100 $ 4,080 $ 8,547 =========== =========== ========== ==========
10 DREW INDUSTRIES INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) MH Segment Net sales of the MH segment decreased 24 percent in the six months ended June 30, 2000, and 23 percent in the second quarter, from the same periods last year, compared to a 23 percent decrease in the industry- wide production of manufactured homes. Sales of refurbished axles and tires by the MH segment declined more than sales of other MH products due to competitive pressures. The industry decline in production of manufactured homes had been anticipated, as the producers of manufactured homes have closed factories and reduced production schedules because of excess inventories of homes at dealers and manufacturers. In addition, tightened mortgage credit requirements coupled with rising interest rates, have slowed retail sales of manufactured homes, while home repossessions have increased. It is anticipated that conditions in the manufactured housing industry will continue to adversely impact Drew's sales for the balance of 2000 and into early 2001, as the manufactured housing industry reduces its inventory of unsold homes. Operating profit of the MH segment decreased 45 percent in the first half of 2000 and 53 percent in the second quarter period from the same periods in 1999 primarily as a result of the reduction in sales, which caused a reduction of about $6 million in operating profits in the six months. In addition, increases in the cost of labor and services could not be fully passed on to customers due to competition. Selling, general and administrative expenses were down in dollar terms, however, they increased as a percentage of sales due to the effect of lower sales on fixed costs. Plant consolidation costs of about $.8 million also impacted operating profit. It is anticipated that lower sales, higher labor costs in certain areas and higher interest rates will continue to adversely affect operating results in the near term. While start -up costs will be lower in the future, it is expected that until the manufactured housing industry recovers, operating margins are unlikely to significantly improve. RV Segment Net sales of the RV segment increased 30 percent in the first half of 2000 and 29 percent in the second quarter as a result of the expansion of the Company's RV chassis product line as well as the continuing growth of the RV window line. Such increase is substantially higher than the 2 percent increase in shipments reported by the RV industry for January to June 2000. Industry sales of towable RV's, the primary market for the Company's RV products, have remained strong, but industry shipments for the second quarter were one percent below last year's high second quarter levels. Industry sales of motor homes declined recently due to excess retail inventory and the end of the model year. Operating profit increased only 6 percent for the six month period, as startup costs of $.7 million resulting from the continuing expansion of the RV chassis product line, as well as higher labor and material costs, reduced the operating margin of this segment. Operating profit of this segment was up only two percent in the second quarter for the same reasons. 11 DREW INDUSTRIES INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Amortization of Intangibles, Corporate and Other Amortization of intangibles for the six months and second quarter was equal to the prior year. Corporate and other expenses decreased $202,000 largely as a result of lower incentive compensation expense. Shared Services Agreement Pursuant to a Shared Services Agreement, following the spin-off by the Company of LBP, Inc. on July 29, 1994, the Company and LBP have shared certain administrative functions and employee services, such as management overview and planning, acquisition searches, tax preparation, financial reporting, coordination of independent audit, stockholder relations, and regulatory matters. The Company has been reimbursed by LBP for the fair market value of such services. This Agreement has been extended and now expires on December 31, 2000 and may be further extended. The Company charged fees to LBP of $105,000 in the first six months of 2000 and $72,000 in the first six months of 1999. These fees reduce selling, general and administrative expenses. Interest Expense, Net Interest expense, net increased $19,000 for the six month period and $153,000 for the second quarter as a result of increases in debt to fund capital expenditures, the purchase of shares of the Company's common stock, and the increase in inventory as described below. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities ." In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which amends some of the provisions of FASB 133. The Company plans to adopt the provisions of SFAS 133 and SFAS 138 in the first quarter of 2001. The Company is in the process of determining what the effect of SFAS 133 and SFAS 138 will be on earnings and financial position. 12 DREW INDUSTRIES INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES The Statements of Cash Flows reflect the following (in thousands):
Six Months Ended June 30, 2000 1999 ---- ---- Net cash flows provided by operating activities $ 2,625 $ 22,197 Net cash flows (used for) investment activities $ (14,655) $ (5,582) Net cash flows provided by (used for) financing activities $ 9,672 $ (12,620)
Net cash provided by net income was offset by changes in operating assets in 2000. In addition to seasonal changes in operating assets, days sales in accounts receivable increased, although no significant delinquencies were experienced. Inventories increased in the first half of 2000 compared to a decrease in last year's first half partly because of the slowdown in sales as well as the higher inventory requirement of the expanding RV segment which added three plants since last June. The Company has implemented a plan to reduce inventories over the next three to six months. Cash flows used for investing activities consisted of capital expenditures, including five factories being constructed by LCI, primarily to accommodate the expansion of the RV chassis product lines. Such capital expenditures were funded by cash flows from operations, and borrowings under the Company's line of credit. Capital expenditures for 2000 are expected to approximate $25 million, which are expected to be funded from cash flow from operations, as well as approximately $10 million of Industrial Revenue Bonds and real estate loans. Cash flows provided by financing activities for the first half of 2000 included increases in debt of approximately $23 million offset by $13 million used to acquire treasury stock. Cash flows used for financing activities for 1999 included reductions in debt of approximately $12 million, and $2 million used to acquire treasury stock, offset by $2 million from the exercise of stock options. Availability under the Company's line of credit and Industrial Revenue Bonds and real estate loans is adequate to finance the Company's working capital and capital expenditure requirements. On June 16, 2000, the Company purchased 1,449,425 shares of its common stock at $8.00 per share, net to the sellers in cash, or an aggregate of $11.8 million including expenses, pursuant to a self-tender offer. Earlier this year, the Company purchased, on the open market, 190,600 shares of its Common Stock at an average cost of $8.80 per share. The Company used its line of credit to purchase such shares. The line of credit was increased from $25 million to $30 million to accommodate the purchase of shares. 13 DREW INDUSTRIES INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) INFLATION The prices of raw materials, consisting primarily of aluminum, vinyl, 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 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 June 30, 2000, the Company had futures contracts outstanding for approximately 2.8 million pounds of aluminum at costs aggregating approximately $.1 million above market value. As described above, operating profits have been adversely affected by increases in labor rates which could not be fully passed on to customers due to competition. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report contains certain statements, including the Company's plans regarding its operating strategy, its products, costs, and performance and its views of industry prospects, which could be construed to be forward looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company's current views with respect to future plans, events and financial performance. The Company has identified certain risk factors which could cause actual plans and results to differ substantially from those included in the forward looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, and tires), adverse weather conditions impacting retail sales, inventory adjustments by retailers, availability and costs of labor, interest rates and mortgage credit conditions. In addition, general economic conditions may affect the retail sale of manufactured homes and RV's. 14 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 June 30, 2000, the Company had futures contracts outstanding for approximately 2.8 million pounds of aluminum at costs aggregating approximately $.1 million above market value. The Company is exposed to changes in interest rates primarily as a result of its financing activities. At June 30, 2000, the Company had $46 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 take advantage of in the short-term as a result of the structure of its fixed rate financing, future cash flows would be affected by approximately $.5 million per annum. The Company also has a $30 million line of credit that is subject to a variable interest rate. At June 30, 2000, $23.6 million of this line of credit was utilized. Assuming an increase of 100 basis points in the interest rate for borrowings under this line of credit, and outstanding borrowings of $23.6 million, future cash flows would be affected by $.2 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. 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 August 4, 2000 16