-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eq64D88nou2GRgTy9gxzz7NK7oHf4hKScyQxnk46xpgLqq8Ru/rgFK+D9xxiG6cq KG/z+4PhzREm1jp1j3PCwQ== 0001169232-03-006450.txt : 20031110 0001169232-03-006450.hdr.sgml : 20031110 20031110095623 ACCESSION NUMBER: 0001169232-03-006450 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREW INDUSTRIES INCORPORATED CENTRAL INDEX KEY: 0000763744 STANDARD INDUSTRIAL CLASSIFICATION: METAL DOORS, SASH, FRAMES, MOLDING & TRIM [3442] IRS NUMBER: 133250533 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13646 FILM NUMBER: 03986877 BUSINESS ADDRESS: STREET 1: 200 MAMARONECK AVE CITY: WHITE PLAINS STATE: NY ZIP: 10601 BUSINESS PHONE: 9144289098 MAIL ADDRESS: STREET 1: 200 MAMARONECK AVE CITY: WHITE PLAINS STATE: NY ZIP: 10601 10-Q 1 d57346_10-q.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: SEPTEMBER 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. 10,127,483 shares of common stock as of October 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 SEPTEMBER 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........... 7-13 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 14-23 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......................................... 24 Item 4 - CONTROLS AND PROCEDURES............................... 25 PART II - OTHER INFORMATION Item 1 - LEGAL PROCEEDINGS..................................... 26 Item 6 - EXHIBITS AND REPORTS ON FORM 8-K...................... 26 SIGNATURES............................................................... 27 EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION............................. 28 EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION............................. 29 EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION............................. 30 EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION............................. 31 2 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended Three Months Ended September 30, September 30, ----------------------- -------------------- 2003 2002 2003 2002 - -------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales $266,344 $ 247,122 $96,107 $89,217 Cost of sales 200,041 186,455 70,637 68,105 -------------------------------------------------- Gross profit 66,303 60,667 25,470 21,112 Selling, general and administrative expenses 39,279 36,779 13,980 12,711 -------------------------------------------------- Operating profit 27,024 23,888 11,490 8,401 Interest expense, net 2,340 2,700 722 896 -------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 24,684 21,188 10,768 7,505 Provision for income taxes 9,629 8,041 4,186 2,814 -------------------------------------------------- Income from continuing operations before cumu- lative effect of change in accounting principle 15,055 13,147 6,582 4,691 Discontinued operations (net of taxes of $75 in 2003 and ($80) and $5 for the nine and three month periods in 2002, respectively) 138 (148) -- 9 -------------------------------------------------- Income before cumulative effect of change in accounting principle 15,193 12,999 6,582 4,700 Cumulative effect of change in accounting principle for goodwill (net of taxes of $2,825) -- (30,080) -- -- -------------------------------------------------- Net income (loss) $ 15,193 $ (17,081) $ 6,582 $ 4,700 ================================================== Net income (loss) per common share: Income from continuing operations before cumulative effect of change in accounting principle: Basic $ 1.50 $ 1.35 $ .65 $ .48 ================================================== Diluted $ 1.47 $ 1.32 $ .64 $ .47 ================================================== Discontinued operations, net of taxes: Basic $ .01 $ (.02) $ -- $ -- ================================================== Diluted $ .01 $ (.01) $ -- $ -- ================================================== Cumulative effect of change in accounting principle for goodwill, net of taxes: Basic $ -- $ (3.08) $ -- $ -- ================================================== Diluted $ -- $ (3.02) $ -- $ -- ================================================== Net income (loss): Basic $ 1.51 $ (1.75) $ .65 $ .48 ================================================== Diluted $ 1.48 $ (1.71) $ .64 $ .47 ================================================== Weighted average common shares outstanding: Basic 10,044 9,757 10,118 9,836 ================================================== Diluted 10,256 9,970 10,337 10,062 ==================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 DREW INDUSTRIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, ------------------------- December 31, 2003 2002 2002 - ------------------------------------------------------------------------------------------------------------------ (In thousands, except shares and per share amount) ASSETS Current assets Cash and cash equivalents $ 9,433 $ 2,107 $ 316 Accounts receivable, trade, less allowances 22,775 21,805 12,969 Inventories 35,232 34,235 37,143 Prepaid expenses and other current assets 5,253 5,939 8,618 Discontinued operations -- 1,817 1,211 ----------------------------------------- Total current assets 72,693 65,903 60,257 Fixed assets, net 72,816 73,860 74,041 Goodwill 10,219 6,912 7,043 Other intangible assets 4,456 922 814 Other assets 2,957 5,540 3,241 ----------------------------------------- Total assets $ 163,141 $ 153,137 $ 145,396 ========================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness $ 9,825 $ 9,900 $ 9,993 Accounts payable, trade 12,864 13,768 7,998 Accrued expenses and other current liabilities 24,232 20,121 17,699 Discontinued operations 69 547 500 ----------------------------------------- Total current liabilities 46,990 44,336 36,190 Long-term indebtedness 25,363 42,052 38,812 Other long-term liabilities 2,997 275 290 ----------------------------------------- Total liabilities 75,350 86,663 75,292 ----------------------------------------- Commitments and Contingencies Stockholders' equity Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 12,257,208 shares at September 2003; 12,004,188 shares at September 2002 and 12,084,788 at December 2002 123 120 121 Paid-in capital 31,060 27,422 28,568 Retained earnings 76,075 58,399 60,882 ----------------------------------------- 107,258 85,941 89,571 Treasury stock, at cost - 2,149,325 shares (19,467) (19,467) (19,467) ----------------------------------------- Total stockholders' equity 87,791 66,474 70,104 ----------------------------------------- Total liabilities and stockholders' equity $ 163,141 $ 153,137 $ 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)
Nine Months Ended September 30, ----------------------- 2003 2002 - -------------------------------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income (loss) $ 15,193 $(17,081) 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) 148 ----------------------- Income from continuing operations 15,055 13,147 Depreciation and amortization 5,878 5,318 Loss on disposal of fixed assets 106 149 Deferred stock compensation 250 40 Changes in assets and liabilities: Accounts receivable, net (9,592) (11,312) Inventories 2,247 (8,709) Prepaid expenses and other assets 4,082 (2,161) Accounts payable, accrued expenses and other liabilities 9,498 12,756 ----------------------- Net cash flows provided by continuing operating activities 27,524 9,228 Income (loss) from discontinued operations 138 (148) Changes in discontinued operations 771 910 ----------------------- Net cash flows provided by operating activities 28,433 9,990 ----------------------- Cash flows from investing activities: Capital expenditures (3,906) (8,461) Business acquisitions, net of cash acquired (3,752) (1,816) Proceeds from sales of fixed assets 65 267 ----------------------- Net cash flows used for investing activities (7,593) (10,010) ----------------------- Cash flows from financing activities: Proceeds from line of credit 31,550 61,600 Proceeds from loans secured by real estate and equipment -- 2,750 Repayments under line of credit and other borrowings (45,517) (65,719) Exercise of stock options 2,244 2,305 ----------------------- Net cash flows (used for) provided by financing activities (11,723) 936 ----------------------- Net increase in cash 9,117 916 Cash and cash equivalents at beginning of period 316 1,191 ----------------------- Cash and cash equivalents at end of period $ 9,433 $ 2,107 ======================= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest on debt $ 2,717 $ 3,303 Income taxes paid $ 5,935 $ 7,954
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 nine months ended September 30, 2003 15,193 15,193 Issuance of 172,420 shares of common stock pursuant to stock option plan 2 1,905 1,907 Income tax benefit relating to issuance of common stock pursuant to stock option plan 337 337 Deferred stock compensation expense and other 250 250 --------------------------------------------------------------- Balance - September 30, 2003 $ 123 $ 31,060 $ 76,075 $(19,467) $ 87,791 ===============================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 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 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 financial position and results of operations as of and for the nine and three month periods ended September 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 nine months ended September 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 nine months ended September 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 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) those described in Note 1 of Notes to Consolidated Financial Statements, of the Company's December 31, 2002 Annual Report on Form 10-K. Information relating to segments follows (in thousands):
Nine Months Ended Three Months Ended September 30, September 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------------------------------------------------------------------------------------------------------- Net sales: RV segment $ 165,010 $ 125,956 $ 59,296 $ 47,142 MH segment 101,334 121,166 36,811 42,075 ---------------------------------------------------------- Total $ 266,344 $ 247,122 $ 96,107 $ 89,217 ========================================================== Operating profit: RV segment $ 19,392 $ 12,686 $ 7,976 $ 5,048 MH segment 11,219 14,169 4,740 4,439 ---------------------------------------------------------- Total segments operating profit 30,611 26,855 12,716 9,487 Amortization of intangibles (571) (551) (196) (192) Corporate and other (3,016) (2,416) (1,030) (894) ---------------------------------------------------------- Operating profit $ 27,024 $ 23,888 $ 11,490 $ 8,401 ==========================================================
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):
September 30, December 31, --------------------------- ------------ 2003 2002 2002 --------------------------------------------------- Finished goods $ 6,690 $ 6,960 $ 7,681 Work in process 1,359 1,653 1,408 Raw material 27,183 25,622 28,054 ------------------------------------------------- Total $ 35,232 $ 34,235 $ 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 8 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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 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. 5. Discontinued Operations The axle and tire refurbishing business of the Company's Lippert Tire and Axle, Inc. subsidiary ("LTA") did not perform well between 2000 and 2002, 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 $9.4 million in the first nine 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):
September 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 -- 5,350 2,900 Industrial Revenue Bonds, interest rates at September 30, 2003 of 3.20% to 6.28%, due 2008 through 2017; secured by certain real estate and equipment 8,068 9,086 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 4,590 4,991 4,894 Other loans primarily secured by certain real estate and equipment, due 2006 to 2016, primarily fixed rates of 7.25% to 8.72% 6,530 8,525 8,140 --------------------------------- 35,188 51,952 48,805 Less current portion 9,825 9,900 9,993 --------------------------------- Total long-term indebtedness $25,363 $42,052 $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. During the third quarter of 2003, the Company prepaid $1.4 million of other loans with interest rates of 7.75 percent to 7.90 percent. There were no penalties on such pre-payments. 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):
Nine Months Ended Three Months Ended September 30, September 30, ---------------------- --------------------- 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding - basic 10,044 9,757 10,118 9,836 Assumed issuance of common stock pertaining to stock options 212 213 219 226 ----------------------------------------------------- Weighted average common shares outstanding - diluted 10,256 9,970 10,337 10,062 =====================================================
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. Prior to January 1, 2002, 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 $90,000 for the nine months ended September 30, 2003 and $30,000 for the three months ended September 30, 2003. There was no impact on the consolidated financial statements for the nine and three month periods ended September 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):
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- -------------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Net income (loss), as reported $ 15,193 $ (17,081) $ 6,582 $ 4,700 Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 55 -- 18 -- Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect (266) (304) (89) (87) --------------------------------------------------------------- Pro forma net income (loss) $ 14,982 $ (17,385) $ 6,511 $ 4,613 =============================================================== Net income (loss) per common share: Basic - as reported $ 1.51 $ (1.75) $ .65 $ .48 =============================================================== Basic - pro forma $ 1.49 $ (1.78) $ .64 $ .47 =============================================================== Diluted - as reported $ 1.48 $ (1.71) $ .64 $ .47 =============================================================== Diluted - pro forma $ 1.46 $ (1.74) $ .63 $ .46 ===============================================================
9. Acquisition On July 17, 2003, the Company acquired Kansas-based LTM Manufacturing LLC ("LTM"), with annual sales of approximately $4.5 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. Total consideration was allocated as follows (in thousands): Net tangible assets acquired $ 496 Identifiable intangible assets 430 Goodwill 3,176 ------ Total consideration $4,102 ====== 12 DREW INDUSTRIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. Subsequent Event On October 3, 2003, the Company acquired certain assets and liabilities of Indiana-based ET&T Frames, Inc. ("ET&T"), with annual sales of approximately $7 million. ET&T manufactures chassis primarily for specialty trailer units, consisting of park models, office units, cargo trailers and, to a lesser extent, chassis for towable recreational vehicles. This acquisition represents a significant expansion of Drew's chassis manufacturing business into specialty chassis. The $3.6 million purchase price includes the accounts receivable and certain inventory and fixed assets of ET&T. Production of ET&T's products was immediately transferred to the Company's existing factories, without adding any overhead. The purchase price was funded with Drew's available cash. 13 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 nine months ended September 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 nine months ended September 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 September 30, 2003, the Company's subsidiaries operated 41 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 third quarter of 2003, compared to the third quarter of 2002, while shipments in the first nine months of 2003 were two percent above the first nine months of 2002. Shipments of travel trailers and fifth wheel RVs, the Company's primary market, increased four percent for the quarter and nine percent for the nine month period. In 2002, the RVIA reported an increase of 21 percent in total RV shipments to near record levels and 25 percent for travel trailers and fifth wheel RVs for the year. Increasing industry RV sales are expected to continue 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 As a result of limited credit availability for purchases of manufactured homes, high interest rate spreads between conventional mortgages on site built homes and chattel loans for manufactured homes, and unusually high repossessions of manufactured homes, industry production has declined approximately 65 percent since 1998 to a projected 130,000 homes in 2003, the lowest production levels in 40 years. However, based upon industry reports, retail sales of manufactured homes have declined much less severely in recent years to an estimated 250,000 homes in 2003. Some of these retail sales have been filled by inventory reductions by dealers and manufacturers, and the resale of repossessed homes, rather than new production. It DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) has been estimated that approximately 90,000 manufactured homes were repossessed in each of the last three years, with estimates of 100,000 homes to be repossessed in 2003, far in excess of historical repossession levels. In addition, we believe that inventories of new homes held by dealers and manufacturers were reduced in 2002 and 2003. The Manufactured Housing Institute ("MHI") reported that the industry decline continued in 2003, as industry production of manufactured homes fell 20 percent in the third quarter of 2003 and 24 percent for the first nine months of 2003, as compared to the same periods in 2002. Repossessions and limited availability of chattel loans for home buyers have been continuing concerns for the manufactured housing industry. However, there have been some signs that repossessions are beginning to ease and the increase in land/home and conventional mortgages for manufactured homes, compared to higher cost and less secure chattel loans, have partially mitigated 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):
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- ------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Net sales: RV segment $ 165,010 $ 125,956 $ 59,296 $ 47,142 MH segment 101,334 121,166 36,811 42,075 --------------------------------------------------------------- Total $ 266,344 $ 247,122 $ 96,107 $ 89,217 =============================================================== Operating profit: RV segment $ 19,392 $ 12,686 $ 7,976 $ 5,048 MH segment 11,219 14,169 4,740 4,439 --------------------------------------------------------------- Total segments operating profit $ 30,611 26,855 12,716 9,487 Amortization of intangibles (571) (551) (196) (192) Corporate and other (3,016) (2,416) (1,030) (894) ---------------------------------------------------------------- Total $ 27,024 $ 23,888 $ 11,490 $ 8,401 ===============================================================
Consolidated Highlights o Income from continuing operations before cumulative effect of change in accounting principle was up 15 percent and 40 percent for the first nine months and third quarter of 2003, respectively. 15 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) o Operating profit margin for the third quarter increased to 12.0 percent, from 9.4 percent in the third quarter last year. o Net sales for both the first nine months and third quarter of 2003 grew by 8 percent from the comparable periods in 2002. o On October 3, the Company completed the acquisition of Indiana-based ET&T Frames, Inc., a manufacturer of specialty chassis and towable RV chassis products with annual sales of approximately $7 million, for $3.6 million. 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 $4.5 million, for $4.1 million. RV Segment Net sales of the RV segment increased $39.1 million (31 percent) and $12.2 million (26 percent) in the first nine months and third quarter of 2003, respectively, compared to the comparable periods of 2002. These improvements are largely due to increases in the Company's market share of all primary product lines in this segment, including RV slide-out mechanisms and related power units, chassis, and windows and doors. Sales of RV slide-out mechanisms and related power units were up 84% from the third quarter of 2002 to approximately $10 million. The expansion of this segment also resulted from the industry-wide growth in the RV sales, in particular the Company's primary market of travel trailers and fifth wheel RVs. Long-term growth in industry-wide 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, although RV sales may be subject to periodic swings. There have been no significant changes in sales prices by the Company's RV segment since the third quarter of 2002. Operating profit of the RV segment increased $6.7 million (53 percent) and $2.9 million (58 percent) for the first nine months and third quarter of 2003, respectively. This growth is attributable to both an increase in unit sales and an increase in the segment's operating profit margin. Operating profit margin increased to 11.8 percent for the first nine months and 13.5 percent for the third quarter of 2003, from 10.1 percent and 10.7 percent for the comparable periods in 2002. This margin improvement was achieved by the spreading of fixed costs over higher sales, improved operating efficiencies and more moderate steel costs compared to the higher steel costs in the second half of last year. However, steel prices have been volatile and are expected to increase over the next couple of quarters. Operating results at several of the Company's facilities improved significantly, especially those in Rialto, California, and Goshen, Bristol and Middlebury, Indiana. Partially offsetting these increases in operating profit margin were legal and other costs related to the settlement of patent litigation on the Company's slide-out mechanisms in February 2003 and higher insurance costs. MH Segment Net sales of the MH segment declined $19.8 million (16 percent) and $5.3 million (13 percent) in the nine and three month periods ended September 30, 2003, respectively, from the same periods last year, which was less of a decline than that experienced by the industry as a whole. The Company has captured market share and increased sales of products for modular homes and office units partially offsetting the sales 16 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) reduction caused by the Manufactured Housing industry decline. There have been no significant changes in sales prices by the Company's MH segment since the third quarter of 2002, except selling price increases for certain chassis parts in the second half of 2002. Operating profit of the MH segment increased $0.3 million (7 percent) in the third quarter of 2003 from the third quarter of 2002, because this segment's operating profit margin rose to 12.9 percent of sales in the third quarter of 2003, compared to 10.6 percent for the same period last year. The increase in the operating profit margin in the third quarter of 2003 was largely a result of more moderate steel costs as compared to the second half of 2002 when steel prices were very high due to import tariff, which offset the effect of lower sales. However, steel prices have been volatile and are expected to increase over the next couple of quarters. Operating profit of the MH segment decreased $3.0 million (21 percent) in the first nine months of 2003 from the same period in 2002, largely because of the decline in sales. This segment's operating profit margin was 11.1 percent of sales in the first nine months of 2003, compared to 11.7 percent for the same period last year, primarily because of the carryover of high steel prices from 2002 into the first half of 2003. Higher group insurance costs and the impact of lower volume on fixed costs also negatively impacted operating profit for all of 2003. Selling, general and administrative expenses for the nine and three month periods of 2003 were down in dollar terms, largely following the trend of sales, but remained steady as a percent of sales. The Company is currently in negotiations to lease equipment in order to utilize certain new technology (the VEC Shield(TM)") to produce bath products for the manufactured housing industry. If lease negotiations are completed during the fourth quarter, production of these new bath products should commence in early 2004, and will compete favorably with fiberglass bath products, which the Company does not currently produce. Corporate and Other Corporate and other expenses were $600,000 and $136,000 higher than last year's first nine months and third quarter, respectively, primarily as a result of higher insurance costs, incentive compensation due to increased profits, 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 nine months of 2003 was approximately 39.0 percent as compared to 38.0 percent for the first nine 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 $360,000 and $174,000 from the first nine months and third 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 the first nine months of 2003 also includes $167,000 related to imputed interest on the liability recorded for minimum royalty payments for the fiscal years 2003 through 2006. 17 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Prior to January 1, 2002, 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 $90,000 and $30,000 for the nine and three month periods ended September 30, 2003, respectively. There was no impact on the financial statements for the nine and three month periods ended September 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 or Disposal of Long-Lived Assets." 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. 18 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 Exit 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 19 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. LIQUIDITY AND CAPITAL RESOURCES The Statements of Cash Flows reflect the following (in thousands):
Nine Months Ended September 30, ---------------------------- 2003 2002 ---- ---- Net cash flows provided by operating activities $ 28,433 $ 9,990 Net cash flows used for investment activities $ (7,593) $ (10,010) Net cash flows used for financing activities $ (11,723) $ 936
Net cash flows from operating activities of $28.4 million for 2003 were approximately $18.5 million higher than such cash flows in 2002 as a result of an increase in income from continuing operations, as well as: a) A smaller seasonal increase in accounts receivable for the first nine 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 to approximately 21 days. 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 September 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 increase in accounts payable, accrued expenses and other current liabilities. This change is primarily from the timing of payment due dates and purchases at the end of 2002. Trade payables are generally paid within the discount period. Cash flows used for investing activities of $7.6 million consists of capital expenditures ($3.9 million) and the acquisition of LTM Manufacturing LLC ("LTM") for $3.8 million in cash. Capital expenditures for 2003 are expected to approximate $7.0 million and are expected to be funded by cash flow from operations. Capital expenditures for the full year 2002 were $10.5 million, including $8.5 million in the first nine months of 2002. 20 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) On July 17, 2003, the Company acquired Kansas-based LTM, with annual sales of approximately $4.5million. 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 $3.8 million of 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. Cash flows used for financing activities for the first nine months of 2003 include a net decrease in debt of $14.0 million, partially funded by $2.2 million received from the exercise of employee stock options. Cash flows provided by financing activities for the first nine months of 2002 include a net decrease in debt of $1.4 million. Total debt has been reduced by $16.8 million since September 2002. Availability under the Company's line of credit, which availability was $27.7 million at September 30, 2003, net of $2.3 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 October 3, 2003, the Company acquired certain assets and liabilities of Indiana-based ET&T Frames, Inc. ("ET&T"), with annual sales of approximately $7 million. ET&T manufactures chassis primarily for specialty trailer units, consisting of park models, office units, cargo trailers and, to a lesser extent chassis for towable recreational vehicles. This acquisition represents a significant expansion of Drew's chassis manufacturing business into specialty chassis. The $3.6 million purchase price includes the accounts receivable and certain inventory and fixed assets of ET&T. Production of ET&T's products was immediately transferred to the Company's existing factories, without adding any overhead. The purchase price was funded with Drew's available cash. 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 are 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. 21 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company received notification in November from Institutional Stockholders Services, Inc., ("ISS") a Rockville, Maryland based independent research firm that advises institutional investors, that Drew's corporate governance policies outranked 99.9 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 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 third 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. 22 DREW INDUSTRIES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 costs of labor, inventory levels of retailers and manufacturers, levels of repossessed manufactured homes, 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. 23 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 September 30, 2003, the Company had $32.4 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 $324,000 lower per annum, than if the fixed rate financing could be done at current market rates. At September 30, 2003, the Company had no outstanding borrowings on its $30 million line of credit. At September 30, 2003, the Company had $2.8 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 $2.8 million, future cash flows would be affected by $28,000 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. 24 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 during the third quarter of 2003 or subsequent to the date the Company completed its evaluation. 25 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 September 30, 2003: 1) On July 14, 2003, the Company filed a current report on Form 8-K announcing it had received high marks for its corporate governance policies from one of the nation's leading governance advocates. 2) On July 21, 2003, the Company filed a current report on Form 8-K announcing the time of the Company's conference call and webcast to announce second-quarter 2003 results. 3) On July 24, 2003, the Company filed a current report on Form 8-K announcing results for the second quarter of 2003. 26 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 November 10, 2003 27 EX-31.1 3 d57346_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Leigh J. Abrams, President and CEO, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Drew Industries Incorporated; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 By /s/ Leigh J. Abrams - ---------------------- Leigh J. Abrams, President and CEO 28 EX-31.2 4 d57346_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Fredric M. Zinn, Executive Vice President and CFO, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Drew Industries Incorporated; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 By /s/ Fredric M. Zinn - ---------------------- Fredric M. Zinn, Executive Vice President and CFO 29 EX-32.1 5 d57346_ex32-1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Drew Industries Incorporated (the "Company") for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Leigh J. Abrams, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. By /s/ Leigh J. Abrams ------------------- Leigh J. Abrams President, Chief Executive Officer and Principal Executive Officer November 10, 2003 30 EX-32.2 6 d57346_ex32-2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Drew Industries Incorporated (the "Company") for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Fredric M. Zinn, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. By /s/ Fredric M. Zinn ------------------- Fredric M. Zinn Executive Vice-President, Chief Financial Officer and Principal Financial Officer November 10, 2003 31 -----END PRIVACY-ENHANCED MESSAGE-----