10-Q 1 d56547_10q.txt QUARTERLY REPORT ================================================================================ 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, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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) N/A Indicate by check mark 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 for 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 by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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. 10,107,483 shares of common stock as of July 31, 2003. ================================================================================ 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, 2003 (UNAUDITED) -------------------------------------------------------------------------------- Page PART I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME................... 3 CONDENSED CONSOLIDATED BALANCE SHEETS......................... 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS............... 5 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ..... 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......... 7-12 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 13-22 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................... 23 Item 4 - CONTROLS AND PROCEDURES.............................. 24 PART II - OTHER INFORMATION Item 1 - LEGAL PROCEEDINGS.................................... 25 Item 6 - EXHIBITS AND REPORTS ON FORM 8-K..................... 25 SIGNATURES ...................................................... 26 EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION............................ 27 EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION............................ 28 EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION............................ 29 EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION............................ 30 2 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six Months Ended Three Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales $ 170,237 $ 157,905 $ 89,410 $ 85,718 Cost of sales 129,404 118,350 66,527 64,211 ---------------------------------------------- Gross profit 40,833 39,555 22,883 21,507 Selling, general and administrative expenses 25,299 24,068 13,298 12,922 ---------------------------------------------- Operating profit 15,534 15,487 9,585 8,585 Interest expense, net 1,618 1,804 807 873 ---------------------------------------------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 13,916 13,683 8,778 7,712 Provision for income taxes 5,443 5,227 3,433 2,905 ---------------------------------------------- Income from continuing operations before cumu- lative effect of change in accounting principle 8,473 8,456 5,345 4,807 Discontinued operations (net of taxes of $75 in 2003 and ($85) and ($22) for the six and three month periods in 2002, respectively) 138 (157) -- (40) ---------------------------------------------- Income before cumulative effect of change in accounting principle 8,611 8,299 5,345 4,767 Cumulative effect of change in accounting principle for goodwill (net of taxes of $2,825) -- (30,080) -- -- ---------------------------------------------- Net income (loss) $ 8,611 $ (21,781) $ 5,345 $ 4,767 ============================================== Net income (loss) per common share: Income from continuing operations before cumulative effect of change in accounting principle: Basic $ .85 $ .87 $ .53 $ .49 ============================================== Diluted $ .83 $ .85 $ .52 $ .48 ============================================== Discontinued operations, net of taxes: Basic $ .01 $ (.01) $ -- $ -- ============================================== Diluted $ .01 $ (.01) $ -- $ -- ============================================== Cumulative effect of change in accounting principle for goodwill, net of taxes: Basic $ -- $ (3.10) $ -- $ -- ============================================== Diluted $ -- $ (3.03) $ -- $ -- ============================================== Net income (loss): Basic $ .86 $ (2.24) $ .53 $ .49 ============================================== Diluted $ .84 $ (2.19) $ .52 $ .48 ============================================== Weighted average common shares outstanding: Basic 10,007 9,717 10,045 9,753 ============================================== Diluted 10,215 9,924 10,249 9,987 ==============================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, ----------------------- December 31, 2003 2002 2002 ---------------------------------------------------------------------------------------------- (In thousands, except shares) ASSETS Current assets Cash and cash equivalents $ 4,884 $ 1,633 $ 316 Accounts receivable, trade, less allowances 20,137 21,612 12,969 Inventories 31,825 30,729 37,143 Prepaid expenses and other current assets 5,596 4,048 8,618 Discontinued operations 6 3,253 1,211 ------------------------------------- Total current assets 62,448 61,275 60,257 Fixed assets, net 73,154 72,392 74,041 Goodwill 7,043 5,972 7,043 Other intangible assets 4,417 881 814 Other assets 3,062 5,641 3,241 ------------------------------------- Total assets $ 150,124 $ 146,161 $ 145,396 ===================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness $ 10,003 $ 9,639 $ 9,993 Accounts payable, trade 8,712 15,009 7,998 Accrued expenses and other current liabilities 20,249 18,291 17,699 Discontinued operations 131 1,102 500 ------------------------------------- Total current liabilities 39,095 44,041 36,190 Long-term indebtedness 26,759 40,633 38,812 Other long-term liabilities 3,245 260 290 ------------------------------------- Total liabilities 69,099 84,934 75,292 ------------------------------------- Commitments and Contingencies Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 12,249,408 shares at June 2003; 11,964,688 shares at June 2002 and 12,084,788 at December 2002 122 120 121 Paid-in capital 30,877 26,876 28,568 Retained earnings 69,493 53,698 60,882 ------------------------------------- 100,492 80,694 89,571 Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467) ------------------------------------- Total stockholders' equity 81,025 61,227 70,104 ------------------------------------- Total liabilities and stockholders' equity $ 150,124 $ 146,161 $ 145,396 =====================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, -------------------- 2003 2002 --------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income (loss) $ 8,611 $(21,781) Adjustments to reconcile net income (loss) to cash flows provided by operating activities: Cumulative effect of change in accounting principle for goodwill, net of taxes -- 30,080 Discontinued operations, net of taxes (138) 157 -------------------- Income from continuing operations 8,473 8,456 Depreciation and amortization 3,923 3,470 Loss on disposal of fixed assets 30 6 Deferred compensation 171 -- Changes in assets and liabilities: Accounts receivable, net (7,168) (11,119) Inventories 5,318 (5,203) Prepaid expenses and other assets 3,471 (212) Accounts payable, accrued expenses and other liabilities 2,099 12,152 -------------------- Net cash flows provided by continuing operating activities 16,317 7,550 Income (loss) from discontinued operations 138 (157) Changes in discontinued operations 836 28 -------------------- Net cash flows provided by operating activities 17,291 7,421 -------------------- Cash flows from investing activities: Capital expenditures (2,840) (5,143) Acquisition of company's net assets and business -- (601) Proceeds from sales of fixed assets 21 15 -------------------- Net cash flows used for investing activities (2,819) (5,729) -------------------- Cash flows from financing activities: Proceeds from line of credit 31,550 39,250 Repayments under line of credit and other borrowings (43,593) (42,299) Exercise of stock options 2,139 1,799 -------------------- Net cash flows used for financing activities (9,904) (1,250) -------------------- Net increase in cash 4,568 442 Cash and cash equivalents at beginning of period 316 1,191 -------------------- Cash and cash equivalents at end of period $ 4,884 $ 1,633 ==================== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 1,765 $ 2,018 Income taxes paid $ 2,309 $ 5,197
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Total Common Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity -------------------------------------------------------------------------------------------------------------------- (In thousands, except shares) Balance - December 31, 2002 $ 121 $ 28,568 $ 60,882 $(19,467) $ 70,104 Net income for six months ended June 30, 2003 8,611 8,611 Issuance of 164,620 shares of common stock pursuant to stock option plan 1 1,827 1,828 Income tax benefit relating to issuance of common stock pursuant to stock option plan 311 311 Deferred stock compensation expense and other 171 171 ------------------------------------------------------------- Balance - June 30, 2003 $ 122 $ 30,877 $ 69,493 $(19,467) $ 81,025 =============================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The Condensed Consolidated Financial Statements include the accounts of Drew Industries Incorporated and its subsidiaries ("Drew" or the "Company"). There are no unconsolidated subsidiaries. Drew's wholly-owned active subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro") and Lippert Components, Inc. and its subsidiaries ("LCI"). Drew, through its wholly-owned subsidiaries, supplies a broad array of components for recreational vehicles and manufactured homes. All significant intercompany balances and transactions have been eliminated. Certain prior year balances may have been reclassified to conform to current year presentation. The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2002 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, 2003 and 2002. All such adjustments are of a normal recurring nature. The Condensed 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 recreational vehicle products segment (the "RV segment") and the manufactured housing products segment (the "MH segment"). The RV segment, which accounted for 62 percent of consolidated net sales for the six months ended June 30, 2003 and 53 percent of the annual consolidated net sales for 2002, manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis, chassis parts and chassis slide out mechanisms and related power units. The MH segment, which accounted for 38 percent of consolidated net sales for the six months ended June 30, 2003 and 47 percent of the annual consolidated net sales for 2002, manufactures a variety of components used in the construction of manufactured homes, and to a lesser extent, modular housing and office units, including vinyl and aluminum windows and screens, chassis, chassis parts and thermo-formed bath and shower units. This shift in sales between segments resulted partly from the growth in the RV industry and the decline in the MH industry. The RV segment and the MH segment primarily sell their products to the producers of recreational vehicles and manufactured homes. 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. Intersegment sales are insignificant. Decisions concerning the allocation of the Company's resources are made by the Company's key executives. 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. Management of debt is considered a corporate function. The accounting policies of the RV and MH segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements, of the Company's December 31, 2002 Annual Report on Form 10-K. 7 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Information relating to segments follows (in thousands):
Six Months Ended Three Months Ended June 30, June 30, ----------------------- ----------------------- 2003 2002 2003 2002 -------------------------------------------------------------------------------------------- Net sales: RV segment $ 105,714 $ 78,814 $ 55,457 $ 44,106 MH segment 64,523 79,091 33,953 41,612 --------------------------------------------------- Total $ 170,237 $ 157,905 $ 89,410 $ 85,718 =================================================== Operating profit: RV segment $ 11,416 $ 7,638 $ 6,886 $ 4,056 MH segment 6,479 9,730 3,938 5,486 --------------------------------------------------- Total segments operating profit 17,895 17,368 10,824 9,542 Amortization of intangibles (375) (359) (182) (182) Corporate and other (1,986) (1,522) (1,057) (775) --------------------------------------------------- Operating profit $ 15,534 $ 15,487 $ 9,585 $ 8,585 ===================================================
3. Inventories Inventories are stated 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, ---------------------- ------------ 2003 2002 2002 ------------------------------------- Finished goods $ 6,843 $ 7,367 $ 7,681 Work in process 1,442 1,710 1,408 Raw material 23,540 21,652 28,054 ------------------------------------ Total $ 31,825 $ 30,729 $ 37,143 ==================================== 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 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. 8 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 of 2002, 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 its 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. The Company has elected to perform its annual goodwill impairment procedures for all of its reporting units as of November 30. During the fourth quarter of 2002 the Company updated its carrying value calculations and fair value estimates for each of its reporting units as of November 30, 2002. Based on the comparison of the carrying values to the estimated fair values, the Company concluded that no additional goodwill impairment existed at that time. The Company plans to update its review as of November 30, 2003, or sooner, if events occur or circumstances change that could reduce the fair value of a reporting unit below its carrying value. 5. Discontinued Operations The axle and tire refurbishing business of the Company's Lippert Tire and Axle, Inc. subsidiary ("LTA") did not perform well over the past several years, primarily due to increased competition and the decline in the manufactured housing industry, which severely affected operating margins. In January 2001, the axle and tire refurbishing business closed two of its five factories, and in July 2001 a third such operation was sold. In September 2002, the Company converted one of its two remaining tire and axle refurbishing facilities to a RV window production facility. The last axle and tire refurbishing operation was sold in January 2003 at a small gain. As a result, the axle and tire refurbishing business is classified as discontinued operations in the Condensed Consolidated Financial Statements pursuant to SFAS No. 144, adopted by the Company effective January 1, 2002. LTA continues to own a factory in Texas which was previously utilized in its axle and tire refurbishing business. This factory is being leased to the purchaser of the LTA's Texas operation. Since it is not probable that this factory will be sold within one year, it is not considered as held for sale under SFAS No. 144, and is not included in discontinued operations in the Condensed Consolidated Financial Statements. The proceeds from the disposition of all remaining significant assets of LTA's axle and tire refurbishing business, consisting primarily of inventory and accounts receivable, were collected during the first quarter of 2003. The discontinued axle and tire refurbishing business had previously been included in the Company's MH segment, and had revenues of $5.7 million in the first six months of 2002, which have been reclassified to discontinued operations. 9 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Long Term Indebtedness Long-term indebtedness consists of the following (in thousands):
June 30, --------------------- December 31, 2003 2002 2002 ---------------------------------------------------------------------------------------------------- Senior Notes payable at the rate of $8,000 per annum on January 28, with interest payable semiannually at the rate of 6.95% per annum $ 16,000 $ 24,000 $ 24,000 Notes payable pursuant to a Credit Agreement expiring October 15, 2005 consisting of a revolving loan, not to exceed $30,000; interest at prime rate or LIBOR plus a rate margin based upon the Company's performance -- 5,950 2,900 Industrial Revenue Bonds, interest rates at June 30, 2003 of 3.29% to 6.28%, due 2008 through 2017; secured by certain real estate and equipment 8,285 6,547 8,871 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 4,693 5,085 4,894 Other loans secured by certain real estate and equipment, due 2006 to 2016, primarily fixed rates of 7.25% to 8.72% 7,784 8,690 8,140 -------------------------------- 36,762 50,272 48,805 Less current portion 10,003 9,639 9,993 -------------------------------- Total long-term indebtedness $ 26,759 $ 40,633 $ 38,812 ================================
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 to meet certain other financial requirements. The Company is in compliance with all such requirements. Borrowings under the Senior Notes and the Credit Agreement are secured only by the capital stock of the Company's subsidiaries. The Company pays a commitment fee, accrued at the rate of 3/8 of one percent per annum, on the daily unused amount of the revolving line of credit 10 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Weighted Average Common Shares Outstanding Net income per diluted common share reflects the dilution of the weighted average common shares by the assumed issuance of common stock pertaining to stock options. 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, -------------------- -------------------- 2003 2002 2003 2002 -------------------------------------------------------------------------------- Weighted average common shares outstanding - basic 10,007 9,717 10,045 9,753 Assumed issuance of common stock pertaining to stock options 208 207 204 234 ------------------------------------------- Weighted average common shares outstanding - diluted 10,215 9,924 10,249 9,987 =========================================== 8. Stock Options As of April 1, 2002, the Company adopted the fair value method of accounting for stock options contained in Statement of Financial Standards No. 123 ("SFAS No. 123") "Accounting for Stock-Based Compensation," which is considered the preferable method of accounting for stock-based employee compensation. During the transition period, the Company will be utilizing the prospective method under SFAS No.148 "Accounting for Stock-Based Compensation - Transition and Disclosures." All employee stock options granted subsequent to April 1, 2002 are being expensed over the stock option vesting period based on fair value, determined using the Black-Scholes option-pricing method, at the date the options were granted. Historically the Company had applied the "disclosure only" option of SFAS No.123. Accordingly, no compensation cost has been recognized for stock options granted prior to January 1, 2002. The adoption of this new accounting policy for stock options resulted in a pretax charge of $60,000 for the six months ended June 30, 2003 and $30,000 for the three months ended June 2003. There was no impact on the consolidated financial statements for the six and three month periods ended June 30, 2002, since no stock options were granted during those periods. 11 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following table illustrates the effect on net income (loss) and net income (loss) per common share as if the fair value method had been applied to all outstanding and unvested awards in each period (in thousands):
Six Months Ended Three Months Ended June 30, June 30, ---------------------- ----------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------- Net income (loss), as reported $ 8,611 $ (21,781) $ 5,345 $ 4,767 Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 37 -- 18 -- Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect (177) (217) (89) (101) -------------------------------------------------- Pro forma net income (loss) $ 8,471 $ (21,998) $ 5,274 $ 4,666 ================================================== Net income (loss) per common share: Basic - as reported $ .86 $ (2.24) $ .53 $ .49 ================================================== Basic - pro forma $ .85 $ (2.26) $ .53 $ .48 ================================================== Diluted - as reported $ .84 $ (2.19) $ 52 $ .48 ================================================== Diluted - pro forma $ .83 $ (2.22) $ .51 $ .47 ==================================================
9. Subsequent Event On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC ("LTM"), with annual sales of approximately $4 million. LTM manufactures a variety of products for RVs, including slide-out mechanisms and specialty slide-out trays for batteries, LP tanks and storage, as well as electric stabilizer jacks, flexguard slide-out wire protection systems, and slide-out patio decks. The purchase price was $4.1 million, including $250,000 of LTM's debt which the Company repaid on closing. The purchase price was funded with Drew's available cash and a $350,000 note to the seller, bearing interest at the prime rate, payable in equal installments over the next five years. 12 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has two reportable operating segments, the recreational vehicle products segment (the "RV segment") and the manufactured housing products segment (the "MH segment"). The RV segment, which accounted for 62 percent of consolidated net sales for the six months ended June 30, 2003 and 53 percent of the annual consolidated net sales for 2002, manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis, chassis parts and RV slide-out mechanisms and related power units. The MH segment, which accounted for 38 percent of consolidated net sales for the six months ended June 30, 2003 and 47 percent of the annual consolidated net sales for 2002, manufactures a variety of components used in the construction of manufactured homes, and to a lesser extent, modular housing and office units, including vinyl and aluminum windows and screens, chassis, chassis parts and thermo-formed bath and shower units. This shift in sales between segments resulted partly from the growth in the RV industry and the decline in the MH industry. The RV segment and the MH segment primarily sell their products to the producers of recreational vehicles and manufactured homes. 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. Intersegment sales are insignificant. The Company's operations are conducted 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. At June 30, 2003, the Company's subsidiaries operated 40 plants in 18 states and one in Canada. INDUSTRY BACKGROUND Recreational Vehicle Industry The Recreational Vehicle Industrial Association ("RVIA") reported a one percent decline in shipments in the second quarter of 2003 as compared to the second quarter of 2002, while shipments in the first six months of 2003 were three percent above the first six months of 2002. However, shipments of travel trailers and fifth wheel RVs, the Company's primary market, increased seven percent for the quarter and 12 percent for the six month period. In 2002, the RVIA reported an increase of 21 percent in total RV shipments and 25 percent for travel trailers and fifth wheel RVs for the year. Increasing industry RV sales are expected to be driven by positive demographics, as demand for RVs is strongest from the over 50 age group, which is the fastest growing segment of the population. Industry growth also continues to be bolstered by the preference for domestic vacations, rather than foreign travel, and low interest rates. In recent years, the RVIA has employed an advertising campaign to attract customers in the 35 to 54 age group, and the number of RV's owned by those 35 to 54 grew faster than all other age groups. Manufactured Housing Industry While the Company believes retail demand for manufactured homes has remained fairly steady in recent years, limited credit availability, high interest rate spreads between conventional mortgages on site built homes and chattel loans for manufactured homes, and unusually high repossessions of manufactured homes, remain problems for the industry. Based upon industry reports, retail sales of manufactured homes have remained fairly steady at 250,000 to 300,000 homes annually since 2000. However, some of these retail sales have been filled by inventory reductions by dealers and the manufacturers and the resale of repossessed homes. It has been estimated that approximately 90,000 manufactured homes were repossessed in each of the last three years, with estimates as high as 115,000 homes to be repossessed in 2003, far in excess of historical repossession levels. In addition, it is estimated that inventories of new homes held by dealers and manufacturers were reduced by approximately 25,000 homes in 2002. 13 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As a result of these factors and general economic conditions, the Manufactured Housing Institute ("MHI") reported industry production of manufactured homes fell 25 percent in the second quarter of 2003 and 26 percent for the first six months of 2003, as compared to the same periods in 2002, and are now about 65 percent below the peak levels of 1998. Industry projections for 2003 production range between 130,000 and 140,000 manufactured homes, compared to 373,000 manufactured homes produced in 1998 and 168,000 homes in 2002. The reduced availability of chattel loans has also been a concern for the manufactured housing industry as several lenders have either exited the manufactured housing industry or tightened their credit approval criteria. However, the increase in land/home and conventional mortgages for manufactured homes, compared to higher cost and less secure chattel loans, is expected to partially mitigate the limited availability of chattel loans for manufactured homes. As a result of market share gains and efficiency improvements, Drew's MH segment has remained profitable throughout this extended industry-wide slump. Long-term prospects for manufactured housing are still favorable because it provides quality, affordable housing which the country needs. RESULTS OF OPERATIONS Net sales and operating profit are as follows (in thousands):
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 2003 2002 2003 2002 --------------------------------------------------------------------------------------------- Net sales: RV segment $ 105,714 $ 78,814 $ 55,457 $ 44,106 MH segment 64,523 79,091 33,953 41,612 --------------------------------------------------- Total $ 170,237 $ 157,905 $ 89,410 $ 85,718 =================================================== Operating profit: RV segment $ 11,416 $ 7,638 $ 6,886 $ 4,056 MH segment 6,479 9,730 3,938 5,486 --------------------------------------------------- Total segments operating profit $ 17,895 17,368 10,824 9,542 Amortization of intangibles (375) (359) (182) (182) Corporate and other (1,986) (1,522) (1,057) (775) --------------------------------------------------- Total $ 15,534 $ 15,487 $ 9,585 $ 8,585 ===================================================
Consolidated Highlights o Income from continuing operations before cumulative effect of change in accounting principle was up 11 percent for the second quarter. o Operating profit margin for the second quarter increased to 10.7 percent, from 10.0 percent in the second quarter last year, partially offsetting a decline in the first quarter operating profit margin. 14 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) o Net sales for the first six months and second quarter of 2003 grew by 8 percent and 4 percent, respectively, from the comparable periods in 2002. o On July 17, the Company completed the acquisition of Kansas-based LTM Manufacturing, LLC, a manufacturer of innovative RV products with annual sales of approximately $4 million, for $4.1 million. RV Segment The RV segment achieved a sales increase of 34 percent ($26.9 million) and 26 percent ($11.4 million) in the first six months and second quarter of 2003, respectively, compared to the comparable periods of 2002. These increases are due to increases in market share of all primary product lines in this segment, including chassis, RV slide-out mechanisms and related power units, and windows and doors, as well as to the overall growth in the RV industry, in particular the Company's primary market of travel trailers and fifth wheel RVs. Long-term growth in RV sales may result from demographic trends, as demand for RVs is strongest from the over 50 population, which is the fastest growing segment of the population. There have been no significant changes in sales prices by the Company's RV segment in the quarter or since the second quarter of 2002. Operating profit of the RV segment increased $3.8 million (49 percent) and $2.8 million (70 percent) for the first six months and second quarter of 2003, respectively. This increase is primarily attributable to an increase in unit sales. The segment's operating profit margin also increased to 10.8 percent for the first six months and 12.4 percent for the second quarter of 2003, from 9.7 percent and 9.2 percent for the comparable periods in 2002. The increase in the operating profit margin of the RV segment was achieved by the spreading of fixed costs over higher sales, improved operating efficiencies and the continued expansion of slide out mechanisms and related power units. Also contributing to margin improvements was improved operating results at several of the Company's facilities, especially those in Rialto, California, and Goshen and Middlebury, Indiana. The 2002 second quarter profit margin was also negatively affected by approximately $0.5 million of startup costs relating to a new facility which opened in the third quarter of 2002 and other newly obtained business in the second quarter of 2002. Partially offsetting this increase in operating profit margin in 2003 as compared to 2002 were legal and other costs related to the settlement of patent litigation on the Company's slide-out mechanisms in February 2003, higher steel costs, higher insurance costs and start up costs at the Company's Bristol, Indiana plant MH Segment Net sales of the MH segment declined 18 percent ($14.6 million) and 18 percent ($7.7 million) in the six and three month periods ended June 30, 2003, respectively, from the same periods last year, which was less of a decline than the industry. The Company has captured market share and increased sales of products for modular homes and office units partially offsetting the sales reduction caused by the Manufactured Housing industry decline. There have been no significant changes in sales prices by the Company's MH segment in the quarter or since the second quarter of 2002, except selling price increases for chassis parts in the second half of 2002. Operating profit of the MH segment decreased $3.3 million (33 percent) in the six month period and $1.5 million (28 percent) in the second quarter of 2003 from the same periods in 2002 largely as a result of the decrease in sales. This segment's operating profit margin was 10.0 percent of sales in the six month period and 15 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 11.6 percent in the second quarter of 2003, compared to 12.3 percent and 13.2 percent for the same periods last year, respectively, as steel costs were higher this quarter than in last year's second quarter, after rising in the second half of last year. However, steel prices paid by the Company have declined from the extremely high levels of the second half of 2002 and early 2003. Higher group insurance costs and the impact of lower volume on fixed costs also negatively impacted operating profit. Selling, general and administrative expenses were down in dollar terms, largely following the trend of sales, but remained steady as a percent of sales. Selling, general and administrative expenses for the second quarter of 2003 were reduced by approximately $0.3 million due to the recovery of a receivable which had been written off in the fourth quarter of 2002. The Company debuted a new one-piece tub/shower unit featuring two new innovations, the VEC(TM) technology and the VEC Shield (TM) finish at the National Plastic Exposition (NPE) in Chicago on June 23-27, 2003. The Company believes that the VEC Shield (TM) finish represents a significant improvement over traditional gel coated fiberglass. The Company is currently in negotiations to lease equipment in order to utilize the VEC (TM) technology to produce bath products for the manufactured housing industry. If lease negotiations are completed during the third quarter, production should commence in early 2004. Corporate and Other Corporate and other expenses were $464,000 and $282,000 higher than last year's first six months and second quarter, respectively, primarily as a result of higher insurance costs, stock option expense resulting from the adoption of SFAS 123 and expenses related to corporate governance due to the implementation of the Sarbanes-Oxley requirements. Taxes The effective tax rate for the first six months of 2003 was approximately 39.1 percent as compared to 38.2 percent for the first six months of 2002. The increase in the effective tax rate is due to a change in the composition of pretax income for state tax purposes. Interest Expense, Net Interest expense, net, decreased $186,000 and $66,000 from the first six months and second quarter of 2002, respectively, as a result of the reduction in debt levels, and to a lesser extent, savings resulting from interest rate reductions. The interest expense for 2003 also includes $102,000 related to imputed interest on the liability recorded for minimum royalty payments for the fiscal years 2003 through 2006. New Accounting Standards As of April 1, 2002, the Company adopted the fair value method of accounting for stock options contained in Statement of Financial Standards No. 123 ("SFAS No. 123") "Accounting for Stock-Based Compensation," which is considered the preferable method of accounting for stock-based employee compensation. During the transition period, the Company will be utilizing the prospective method under SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosures." All employee stock options granted subsequent to April 1, 2002 have been expensed over the stock option vesting period based on fair value, determined using the Black-Scholes option-pricing method, at the date the options were granted. 16 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Historically the Company had applied the "disclosure only" option of SFAS No. 123. Accordingly, no compensation cost had been recognized for stock options granted prior to January 1, 2002. The adoption of this new accounting policy for stock options resulted in a pretax charge of $60,000 and $30,000 for the six and three month periods ended June 30, 2003, respectively. There was no impact on the financial statements for the six and three month periods ended June 30, 2002, since no stock options were granted during those periods. The Company has historically granted stock options to employees during the fourth quarter every other year. Management currently expects the next such grant of stock options to take place in the fourth quarter of 2003. As a result, the pretax charge relating to stock options will increase subsequent to the next grant of stock options. 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 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 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 of 2002, 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. The Company has elected to perform its annual goodwill impairment procedures for all of its reporting units as of November 30. During the fourth quarter of 2002, the Company updated its carrying value calculations and fair value estimates for each of its reporting units as of November 30, 2002. Based upon the comparison of the carrying values to the estimated fair values, the Company concluded that no additional goodwill impairment exists. The Company plans to update its review as of November 30, 2003, or sooner, if events occur or circumstances change that could reduce the fair value of a reporting unit below its carrying value. 17 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. Accordingly, the Company adopted the provisions of SFAS No.143 effective January 1, 2003. The implementation of SFAS No. 143 did not 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 provisions 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. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exist an Activity (Including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS No.146 and EITF 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred. A commitment to an exit or disposal plan no longer will be a sufficient basis for recording a liability for those activities. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Accordingly, the Company adopted the provisions of SFAS No. 146 effective January 1, 2003. The implementation of SFAS No. 146 did not have a material impact on the earnings or financial position of the Company. In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor to recognize a liability for the non-contingent component of a guarantee; that is, the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at its inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. FIN 45 also requires additional disclosures related to guarantees. The recognition measurement provisions of FIN 45 are effective for all guarantees entered into or modified after December 31, 2002. FIN 45 also requires additional disclosures related to guarantees in interim and annual financial statements. Accordingly, the Company adopted the provisions of FIN 45, effective January 1, 2003. The implementation of FIN 45 did not have an impact on the earnings or financial position of the company. 18 DREW INDUSTRIES INCORPORATED 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, ------------------------- 2003 2002 ---- ---- Net cash flows provided by operating activities $ 17,291 $ 7,421 Net cash flows used for investment activities $ (2,819) $ (5,729) Net cash flows used for financing activities $ (9,904) $ (1,250) Net cash flows from operating activities of $17.3 million for 2003 were approximately $9.9 million higher than such cash flows in 2002 as a result of: a) A smaller seasonal increase in accounts receivable for the first six months of 2003. The increase in accounts receivable was lower than 2002, even though sales were higher in 2003, due to a reduction in the days sales outstanding in receivables. This was due to the timing of collections. b) A decline in inventories this year compared to an increase in inventories in the prior year. The decline in the current year resulted from a concerted effort by management to reduce inventories at all locations, as well as, strategic buying of certain raw materials at December 31, 2002. The inventory decrease is substantially all in raw materials, as there was only approximately a two week supply of finished goods on hand at December 31, 2002, and June 30, 2003 and 2002. c) A decline in prepaid expenses and other current assets primarily due to the utilization of prepaid Federal income taxes. d) The above items were partially offset by a smaller seasonal increase in accounts payable, accrued expenses and other current liabilities. This change is primarily from the timing of payment due dates and purchases. Purchases were impacted by the rising inventories during the second quarter of 2002, while inventories were declining in 2003. Trade payables are generally paid within the discount period. Cash flows used for investing activities of $2.8 million consist of capital expenditures. Capital expenditures for 2003 are expected to approximate $7.5 million and are expected to be funded by cash flow from operations. Capital expenditures for the full year 2002 were $10.5 million, including $5.1 million in the first six months of 2002. Cash flows used for financing activities for the first six months of 2003 include a net decrease in debt of $12.0 million, partially funded by $2.1 million received from the exercise of employee stock options. Cash flows provided by financing activities for the first six months of 2002 include a net decrease in debt of $3.0 million. Total debt has been reduced by $13.5 million since June 2002. 19 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Availability under the Company's line of credit, which availability was $27.4 million at June 30, 2003, net of $2.6 million in letters of credit, along with anticipated cash flows from operations, is adequate to finance the Company's working capital and anticipated capital expenditure requirements. The Company is in compliance with all of its debt covenants and expects to remain in compliance for the next twelve months. Certain of the Company's loan agreements contain prepayment penalties. The Company has outstanding $16 million of 6.95 percent, seven year Senior Notes. The notes originally aggregated $40 million, and repayment of these notes is $8 million annually, of which the first three payments were made annually since January 2001. SUBSEQUENT EVENT On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC ("LTM"), with annual sales of approximately $4 million. LTM manufactures a variety of products for RVs, including slide-out mechanisms and specialty slide-out trays for batteries, LP tanks and storage, as well as electric stabilizer jacks, flexguard slide-out wire protection systems, and slide-out patio decks. The purchase price was $4.1 million, including $250,000 of LTM's debt which the Company repaid on closing. The purchase price was funded with Drew's available cash and a $350,000 note to the seller, bearing interest at the prime rate, payable in equal installments over the next five years. CORPORATE GOVERNANCE The Company is in compliance with the new corporate governance requirements of the Securities and Exchange Commission and the American Stock Exchange as required by the Sarbanes-Oxley Act of 2002. The Company's governance documents and committee charters have been posted to the Company's website (www.drewindustries.com) and will be updated periodically. The website also contains, or provides direct links to all SEC filings, press releases and investor presentations. The Company has also established a toll-free hotline to report complaints about the Company's accounting, internal controls, auditing matters or other concerns. The Company recently received notification from Institutional Stockholders Services, Inc., ("ISS") a Rockville, Maryland based independent research firm that advises institutional investors, that Drew's corporate governance policies outranked 98.4 percent of all companies listed in the Russell 3000 index. Drew has no business relationships with ISS. CONTINGENCIES LCI is a defendant in an action entitled SteelCo, Inc. Vs. Lippert Components, Inc. and DOES 1 through 20, inclusive commenced in the Superior Court of the State of California, County of San Bernardino, San Bernardino District on July 16, 2002. Plaintiff alleges that LCI violated certain provisions of the California Business and Professions Code (Sec. 17000 et. Seq.) by allegedly selling chassis and component parts below LCI's costs, engaged in acts 20 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) intended to destroy competition, wrongfully interfering with plaintiff's economic advantage, and engaging in unfair competition. Plaintiff seeks damages in an unspecified amount, treble damages, punitive damages, costs and expenses incurred in the proceeding and injunctive relief. LCI is vigorously defending against the allegations in the complaint, and has asserted counterclaims against Plaintiff. The case is in discovery. INFLATION The prices of raw materials, consisting primarily of vinyl, aluminum, steel, glass and ABS resin 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. Since the second quarter of 2002, the Company experienced modest increases in its labor costs related to inflation. USE OF ESTIMATES The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments 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 recreational vehicle and manufactured housing 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 vinyl, aluminum, steel, glass and ABS resin), availability of retail and wholesale financing for manufactured homes, availability and 21 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) costs of labor, inventory levels of retailers and manufacturers, the financial condition of our customers, interest rates, and adverse weather conditions impacting retail sales. In addition, general economic conditions and consumer confidence may affect the retail sale of recreational vehicles and manufactured homes. 22 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, steel, vinyl, glass and ABS resins are subject to price volatility. The Company is exposed to changes in interest rates primarily as a result of its financing activities. At June 30, 2003, the Company had $34.3 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 approximately $343,000 lower per annum, than if the fixed rate financing could be done at current market rates. The Company also has a $30 million line of credit. At June 30, 2003, the Company had no outstanding borrowings on the line of credit. At June 30, 2003, the Company had $2.5 million of variable rate debt. Assuming an increase of 100 basis points in the interest rate for borrowings under these variable rate loans, and outstanding borrowings of $2.5 million, future cash flows would be affected by $25,000 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. 23 DREW INDUSTRIES INCORPORATED Item 4. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Securities Exchange Act of 1934 ("The Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, in accordance with the definition of "disclosure controls and procedures" in Rule 13a - 14 (c) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management considered in its evaluation the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this quarterly report, the Company performed an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. b) Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 24 DREW INDUSTRIES INCORPORATED PART II - OTHER INFORMATION Item 1 - Legal Proceedings LCI is a defendant in an action entitled SteelCo, Inc. vs. Lippert Components, Inc. and DOES 1 through 20, inclusive commenced in the Superior Court of the State of California, County of San Bernardino, San Bernardino District, on July 16, 2002. Plaintiff alleges that LCI violated certain provisions of the California Business and Professions Code (Sec. 17000 et. seq.) by allegedly selling chassis and component parts below LCI's costs, engaging in acts intended to destroy competition, wrongfully interfering with plaintiff's economic advantage, and engaging in unfair competition. Plaintiff seeks damages in an unspecified amount, treble damages, punitive damages, costs and expenses incurred in the proceeding and injunctive relief. LCI is vigorously defending against the allegations in the complaint, and has asserted counterclaims against Plaintiff. The case is in discovery. Item 6 - Exhibits and Reports on Form 8-K a) Exhibits as required by item 601 of Regulation 8-K: 1) 31.1 Certification of Chief Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.1 is filed herewith. 2) 31.2 Certification of Chief Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.2 is filed herewith. 3) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.1 is filed herewith. 4) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 is filed herewith. b) Reports on Form 8-K filed during the quarter ended June 30, 2003: 1) On April 24, 2003 the Company filed a current report on Form 8-K announcing results for the first quarter of 2003. 2) On May 5, 2003, the Company filed a current report on Form 8-K disclosing the election of David A. Reed as a director of Drew Industries Incorporated. 3) On June 3, 2003, the Company filed a current report on Form 8-K announcing a presentation at the Red Chip Partners San Francisco Investors Conference 2003. 25 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 August 12, 2003 26