LCI Industries
Annual Report 2000

Plain-text annual report

2 0 0 0 A N N U A L R E P O R T I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D C O R P O R A T E P R O F I L E DREW, through its wholly-owned subsidiaries, Kinro, Inc., and Lippert Components, Inc., supplies a wide variety of components for manufactured homes and recreational vehicles. Drew operates 42 manufacturing facilities in 18 states and Canada, strategically located in proximity to our customers to minimize freight costs and reduce delivery times. Drew employs over 2,500 employees dedicated to ensuring the continued success of the Company by producing quality products and responding to the needs of its customers. DREW’s manufactured housing products segment produces vinyl and aluminum windows and screens, chassis and chassis parts, new and refurbished axles and galvanized roofing. This segment also distributes new and refurbished tires. On average, Drew supplies about $750 of components for each manufactured home built in the United States. DREW’s recreational vehicle products segment manufactures RV windows, doors and chassis. In 2000, sales of this segment increased 30%, and now account for 35% of Drew’s consolidated sales, up from 24% in 1999. R E C R E A T I O N A L V E H I C L E P R O D U C T S E G M E N T 3 5 % M A N U F A C T U R E D H O U S I N G P R O D U C T S E G M E N T 6 5 % DREW D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT S E L E C T E D F I N A N C I A L D A T A The following selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto included herein (in thousands, except per share amounts): OPERATING DATA Net sales Operating profit Income before income taxes Provision for income taxes Net income Income per common share: Net income per common share (basic) Net income per common share (diluted) FINANCIAL DATA Working capital Total assets Long-term obligations Stockholders’ equity 2000 $287,765 $ 7,535(1) $ 3,576 2,029 $ 1,547 $ $ .15 .15 $ 22,367 $159,298 $ 58,321 $ 72,164(2) Year Ended December 31, 1998 1999 1997 $324,455 $ 31,934 $ 28,566 11,375 $ 17,191 $ $ 1.51 1.51 $ 28,970 $156,044 $ 46,740 $ 84,089 $330,640 $ 28,942 $ 25,052 9,835 $ 15,217 $ $ 1.36 1.34 $ 31,630 $154,425 $ 59,612 $ 68,762 $208,365 $ 21,761 $ 19,256 7,262 $ 11,994 $ $ 1.22 1.19 $ 24,009 $130,349 $ 56,130 $ 51,953 1996 $168,151 $ 20,990 $ 20,664 8,092 $ 12,572 $ $ 1.18 1.15 $ 16,138 $ 55,283 4,938 $ $ 34,779 1) After a non-cash charge of $6,897,000 to reflect an impairment of goodwill, as well as an accrual of $409,000 for plant closing expenses, related to the Company’s axle and tire refurbishing operation. 2) After purchase of 1,640,025 shares of treasury stock for $13,472,000. Net Sales (dollars in millions) Net Income (dollars in millions) $331 $324 $288 $208 $168 $17.2 $15.2 $12.6 $12.0 Net Inc ome P er Co mm o n Shar e (d il uted ) (in dollars) $1.51 $1.34 $1.19 $1.15 ’96 ’97 ’98 ’99 ’00 ’96 ’97 ’98 ’99 ’00 ’96 ’97 ’98 ’99 ’00 $1.5 $.15 1 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D L E T T E R T O S T O C K H O L D E R S : For the first time since 1991, we report lower sales and operating profit than the prior year, in part as a result of lower industry-wide sales of manufactured homes and recreational vehicles. Sales by the Company’s manufactured housing (“MH”) products segment declined 24 percent in 2000, mirroring the 28 percent industry-wide reduction in the production of manufactured homes. On the positive side, the Company’s MH window product line achieved market share gains offsetting part of the industry-wide decline. However, sales of MH axle and tire products were lower substantially due to market share losses and lower selling prices. The 24 percent sales decline experienced by the MH products segment, along with competitive pricing pressures, rising production costs, and facility start-up costs and related production inefficiencies, caused the operating profit of this segment to fall 56 percent to $12.6 million for 2000. The slump in the manufactured housing industry, which began in the spring of 1999, continued throughout 2000. Although some progress has reportedly been made in reducing the inventory of homes at manufacturers and retail dealers, an oversupply persists. The problem is exacerbated by the lack of mortgage financing and higher mortgage interest rates, along with increased repossessions of homes by lenders. While the recent interest rate cuts should help, we do not anticipate any significant increase in industry-wide production of manufactured homes until (i) inventory levels are further reduced, (ii) repossessions return to more normal levels, (iii) credit availability improves, and (iv) manufactured housing mortgage interest rates decline. Sales by the Company’s recreational vehicle (“RV”) products segment increased nearly 30 percent in 2000, despite a 4 percent decline in industry-wide shipments of towable RVs, which decline began in the latter part of the year. The Company’s RV chassis product line continued to experience dramatic growth, with sales increasing 80 percent in 2000. This sales increase was made possible by the opening of five 2 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT new manufacturing facilities during 2000. Sales of RV window and door products also increased 8 percent due to market share gains. Although sales increased, operating profit of this segment declined 22 percent, partly as a result of start-up costs and lower operating efficiencies at the newly constructed RV chassis facilities. Competitive pricing pressures and higher labor costs also reduced profit levels. Sales of RVs have historically been closely tied to consumer confidence levels, which declined in recent months, after being very high for a number of years. Industry-wide sales of RVs fell 19 percent in the fourth quarter of 2000, and are likely to suffer if consumer confidence continues to fall. Some analysts believe the decline in sales by RV producers has, in part, been the result of efforts by retailers to reduce inventory and thus lower interest costs. This is supported by industry retail shipment statistics which are $.4 million down less than production. Again, recent interest rate cuts should help alleviate this problem. During the past few years, the axle and tire operation of our manufactured housing products segment has not performed well, primarily due to increased competition which severely affected operating margins. The Company has determined that goodwill related to this operation had been impaired and a non-cash charge of $6.9 million was recorded in the fourth quarter, as well as related plant closing charges of $.4 million. In January 2001 the axle operation closed two of its five factories. Despite the down-turn, we believe in the long-term prospects of the industries we serve and our Company. Thus during 2000, Drew took several actions that we hope will benefit stockholders in the long run. The Company acquired 1.6 million shares of its Common Stock in the open market for approximately $13.5 million. In addition, we expended $22 million for five new manufacturing facilities and other capital improvements, primarily for the Company’s RV segment. Although these factories experienced significant startup costs and were not profitable in 2000, they are expected to achieve profitability in the current year. The industry-wide declines in the manufactured housing and recreational vehicle industries are expected to continue into at least the middle of 2001. Therefore competitive price pressures may limit the Company’s ability to pass cost increases through to its customers. As a result, the Company’s operating results for the first half of 2001 are not anticipated to reach year-ago levels. The Company will continue its efforts to reduce costs wherever practicable, and management believes that operating efficiencies at its new facilities will continue to improve through the year. We thank all of our employees for their continued dedication and hard work. Sincerely, Edward W. Rose, III Chairman of the Board Leigh J. Abrams President and Chief Executive Officer 3 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D S T R A T E G I C V I S I O N Drew’s long-term goal is to enhance value for our stockholders. O U R S T R A T E G I E S A R E S I M P L E A N D D I R E C T : Satisfy customer needs while recognizing opportunities. Emphasize profitability. Bo ok Value ( per sh a re) (in dollars) Align management incentives with our goal to increase stockholder value. $7.44 $7.47 While annual results may vary, we believe that long-term adherence to these strategies will $6.06 enable us to achieve our goal. $4.57 $3.24 ’96 ’97 ’98 ’99 ’00 4 (cid:2) (cid:2) (cid:2) D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT Satisfy customer needs while recognizing opportunities Management’s key functions are to guide the Company through the complex daily demands of effectively and efficiently meeting the needs of customers, while maintaining the vision to recognize opportunities that present superior profit potential. Drew’s key executives have decades of industry experience. They are keenly aware that opportunities can be found both in periods of expansion and contraction. STRATEGIC VISION Drew’s continued profitability during the current down turn in our industries results from manage- ment’s ability to respond quickly to the changing business environment, as well as from our status as a valued supplier and partner to our customers. Management has also recognized trends and seized the opportunities which led to the rapid growth of our vinyl window and RV chassis product lines. Emphasize profitability Drew’s management seizes opportunities for profit growth. Thus, we will make acquisitions, but only at reasonable prices, and we will introduce new product lines only when they have adequate profit potential. While Drew continues to seek expansion through acquisition and internal growth, we remain focused on evaluating the long-term profit potential of expansion opportunities. Although growth is always accompanied by risk, we carefully analyze the risks against the success likely to be achieved. Align management incentives with our goal to increase stockholder value Effective management compensation plans motivate the success of corporate strategies. Drew has a long standing policy of rewarding operating management and employees through profit incentive programs and a stock option plan. This policy is designed to align employee interests with those of stockholders. Drew encourages management to maintain ownership of Drew stock. Directors and key management own more than 50 percent of Drew’s common shares, ensuring that they continually strive to enhance stockholder value. 5 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D I N D U S T R I E S Ma n ufacture d Housi ng P ro ducts Se gm en t Sal es (dollars in thousands) $271 $247 $187 $171 $134 MANUFACTURED HOUSING Manufactured housing offers the homeowner value and quality. Manufactured homes are built entirely in a factory-controlled environment, in accordance with strict federally regulated building codes. In 1999, the average cost per square foot of a manufactured home was $29.46, more than 50 percent less than the cost of a site-built home. Approximately 19 million people currently reside full-time in over 8 million manufactured homes in the U.S. RECREATIONAL VEHICLES RV Products Segment Sales (dollars in thousands) By combining transportation and temporary living quarters, RV travelers have the freedom and flexibility to travel where and when they want. Demographic trends continue to favor long-term growth in the RV industry. $101 Every day 12,000 people in the U.S. reach the age of 50, the prime age for ’96 ’97 ’98 ’99 ’00 RV buyers. About 8.6 million families in the U.S. own a motorized or tow- able RV and this is expected to continue to grow over the next decade. $78 $59 $37 $34 ’96 ’97 ’98 ’99 ’00 6 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has two reportable operating segments, the manufactured housing products segment (the “MH segment”) and the recreational vehicle products segment (the “RV segment”). The MH segment, which accounted for 65 percent of con- solidated sales in 2000, manufactures a variety of components used in the construction of manufactured homes, including aluminum and vinyl windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV seg- ment, which accounted for 35 percent of consolidated sales in 2000, manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment’s net sales. The Company’s operations are performed through its four primary operating subsidiaries. Kinro, Inc. (“Kinro”) and Lippert Components, Inc. (“LCI”) have operations in both the MH and RV segments, while Lippert Tire and Axle, Inc. (“LTA”) and Coil Clip, Inc. (“Coil Clip”) operate entirely within the MH segment and are suppliers to LCI. At December 31, 2000, the Company’s subsidiaries operated 42 plants in 18 states and Canada. R E S U LT S O F O P E R AT I O N S Net sales and operating profit are as follows (in thousands): Net sales: MH segment RV segment Total Operating profit: MH segment RV segment Amortization of intangibles Writedown of intangibles Corporate and other Total Year Ended December 31, 2000 1999 1998 $186,593 101,172 $287,765 $ 12,574 6,853 (2,694) (6,897) (2,301) $ 7,535 $246,509 77,946 $324,455 $ 28,330 8,819 (2,694) $271,287 59,353 $330,640 $ 28,572 4,974 (2,442) (2,521) (2,162) $ 31,934 $ 28,942 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 MH Segment Net sales of the MH segment declined 24 percent in 2000 from 1999 primarily as a result of a decline in industry-wide shipments of manufactured homes. Industry shipments declined 28 percent for the year after a decline of 7 percent for the year 1999. The Company’s market share of vinyl window sales continues to expand as sales of such windows decreased only 1 percent in 2000. Sales of axles and tires were down 32 percent primarily as a result of the continuation of competitive pres- sures in the refurbished products line. The slump in the manufactured housing industry, which began in the spring of 1999, continued throughout 2000. Although some progress has reportedly been made in reducing the inventory of homes at manufacturers and retail dealers, an oversupply persists. The problem is exacerbated by the lack of mortgage financing and higher mortgage interest rates, along with increased repossessions of homes by lenders. While the recent interest rate cuts should help, the Company does not anticipate any significant increase in industry-wide production of manufactured homes until (i) inventory levels are further reduced, (ii) repossessions return to more normal levels, (iii) credit availability improves, and (iv) manufactured housing mort- gage interest rates decline. Operating profit of the MH segment decreased $16 million (56 percent) in 2000 from 1999 primarily as a result of the reduction in sales. In addition, increases in the cost of labor and services could not be fully passed on to the customers due to competition. For the year 2000, plant consolidation, start-up costs and related production inefficiencies of about $1.0 million also impacted operating profit. Selling, general and administrative expenses were down in dollar terms, however, they increased as a percentage of sales due to the effect of lower sales on fixed costs. Drew’s axle and tire refurbishing operation has not performed well over the past several years, primarily due to increased competition, which severely affected operating margins. At the end of the third quarter of 2000, the Company announced that it was studying whether goodwill and fixed assets related to this operation had been impaired. Based upon this 7 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS evaluation, it was determined that goodwill had been impaired, resulting in a non-cash charge of $6,897,000, which, along with a charge of $409,000 for plant closing expenses, were recorded in the fourth quarter. The goodwill impairment charge is not included in the MH segment results in the above table. In January 2001, the axle and tire refurbishing operation closed two of its five factories. It is anticipated that lower sales and higher labor costs in certain areas will continue to adversely affect operating results in the near term. Margins of the manufactured housing segment for the year 2001 are also expected to be adversely affected by the continuation of competitive price pressures until at least the middle part of 2001. While start-up costs are expected to be lower in the future, it is anticipated that until the manufactured housing industry recovers, operating margins are unlikely to significantly improve. RV Segment Net sales of the RV segment increased 30 percent for 2000 compared to 1999. The five manufacturing plants opened by the Company in 2000 were primarily to accommodate the expansion of the Company’s RV chassis product line, which reflected an 80 percent increase in sales. In addition, sales of RV windows and doors increased 8 percent. The RV industry reported a 4 percent decline in shipments in 2000. Operating profit of the RV segment decreased 22 percent for the year 2000. Such reduction in operating profit was largely due to plant consolidation, start-up costs and related production inefficiencies of $1.7 million. Excluding these start-up and related costs, operating profit of this segment was 8.5 percent of net sales in 2000 compared to 11 percent in 1999. This decline resulted largely from increased material and labor costs that could not be passed on to customers due to competition. Margins of the RV segment for the year 2001 are expected to be adversely affected by the continuation of competitive price pressures at least through the early part of 2001. Amortization and Writedown of Intangibles, Corporate and Other Amortization and writedown of intangibles in 2000 include a non-cash charge of $6.9 million to reflect an impairment of goodwill relating to the Company’s axle and tire refurbishing operation. Amortization of goodwill in future periods will be reduced by approximately $.3 million per annum. Corporate and other expenses decreased $.2 million largely as a result of a reduction in incentive compensation. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 MH Segment Net sales of the MH segment declined 9 percent in 1999 from 1998 primarily as a result of a decline in industry-wide shipments of manufactured homes. Industry shipments declined 7 percent for the year after being 1 percent ahead of the prior year for the first half of 1999. The Company’s market share of vinyl window sales continued to expand as sales of such win- dows increased more than 10 percent in 1999, while sales of axles and tires were down 25 percent primarily as a result of com- petitive pressures in the refurbished products line. The Company’s customers, the producers of manufactured homes, had recently closed factories and cut back manufacturing schedules, due to the combination of excessive inventory of manufac- tured homes maintained by manufacturers and retailers, as well as declining retail sales due to tightening of mortgage credit and increasing repossessions. Despite the 9 percent decline in sales, operating profit of the MH segment decreased less than 1 percent from 1998. Gross margin percent improved, as the adverse effect of lower sales, competitive pressures in the axle and tire refurbishing product line and higher hourly labor costs were more than offset by temporary declines in certain raw material costs. The improvement in gross margin percent was partially offset by increases in selling, general and administrative expenses as a percentage of sales, reflecting the effect of reduced sales on fixed costs. RV Segment Net sales of the RV segment increased 31 percent for 1999 compared to 1998, primarily as a result of the expansion of the Company’s RV chassis product line. The Company added two RV chassis manufacturing plants in 1999 after adding three of such plants in 1998. In addition, sales of RV windows and doors increased 17 percent to $34 million. The RV industry reported a 10 percent increase in shipments in 1999. Operating profit increased 77 percent in 1999, as operating margins rose to 11 percent in 1999 from 8 percent in 1998. The improvement in operating margins resulted in part, from greater efficiencies at the new RV chassis facilities opened in 1998, as well as temporary declines in certain raw material costs. Production costs and operating efficiencies at the Company’s mature RV facilities also improved. The improvement in gross margin was partially offset by increases in selling, general and 8 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT administrative expenses including incentive compensation, which is based on profits at certain of the Company’s divisions, and additional general and administrative costs at the recently opened RV chassis facilities. Amortization of Intangibles, Corporate and Other Amortization of intangibles increased by $.3 million in 1999, primarily as a result of the effect of the full year in 1999 of the amortization of goodwill and other intangibles relating to the acquisition of Coil Clip, versus the partial year of such amortization in 1998. Corporate and other expenses increased $.4 million primarily as a result of a reduction in the shared services charged to LBP, Inc. (“LBP”) as described below. Shared Services Agreement Pursuant to a Shared Services Agreement, following the spin-off by the Company of LBP on July 29, 1994, the Company and LBP have shared certain administrative functions and employee services, such as management overview and planning, tax preparation, financial reporting, coordination of independent audit, stockholder relations, and regulatory matters. The Company has been reimbursed by LBP for such services. This Agreement has been extended and now expires on December 31, 2001 and may be further extended. The Company charged fees to LBP of approximately $.2 million in 2000, $.1 million in 1999 and $.5 million in 1998. These fees are recorded as a reduction of selling, general and administrative expenses. Interest Expense, Net Interest expense, net increased $.6 million in 2000 as debt was increased to fund $22 million of capital expenditures, as well as $13 million of treasury stock purchases, offset by cash flow from operations. Interest expense, net, decreased $.5 million in 1999 as cash flow from operations, which exceeded capital expenditures and working capital needs, was utilized to reduce debt. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133,” which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, “Accounting for Derivative Instruments and Hedging Activities,” which amends some of the pro- visions of SFAS No. 133. The Company has adopted the provisions of SFAS No. 133 and SFAS No. 138 effective January 1, 2001. The adoption of these statements does not have a material impact on the earnings or financial position of the Company. L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S The Statements of Cash Flows reflect the following (in thousands): Net cash flows provided by operating activities Net cash flows (used for) investment activities Net cash flows provided by (used for ) financing activities Year Ended December 31, 2000 $ 9,853 $(21,537) $ 7,124 1999 $ 29,626 $(12,963) $(14,243) 1998 $ 17,955 $(18,554) $ 2,261 Net cash provided by net income was partially offset by changes in operating assets in 2000. In addition to seasonal changes in operating assets, days sales in accounts receivable increased, although no significant customer delinquencies were experienced. Inventories increased in 2000 compared to a decrease last year, partly because of the slowdown in sales as well as the higher inventory requirement of the expanding RV segment. The Company has reduced inventories by $5 million from this year’s highest level and inventory reduction efforts continue. Working capital other than cash decreased $3.3 million in 1999 in response to the reduction in net sales late in 1999. In 1998, $4.3 million of operating cash flow was utilized to fund increases in working capital and other assets. Cash flows used for investing activities consisted of capital expenditures, including five factories constructed by LCI, primarily to accommodate the expansion of the RV chassis product lines. Capital expenditures for 2000 were approximately $22 million, which was funded from cash flow from operations and borrowings under the Company’s line of credit, as well as approximately $5 million of Industrial Revenue Bonds. Capital expenditures of $13.4 million in 1999 included the construction of a new manufactured housing products plant, two RV products plants, and the initial costs of replacement of a plant that man- ufactures products from both of the Company’s segments by a larger and more efficient plant. Cash flows used for investing 9 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS activities in 1998 consisted of $10.4 million for the acquisition of Coil Clip and $8.5 million for capital expenditures, including three RV chassis factories. Such capital expenditures were primarily funded by cash flows from operations. Capital expendi- tures for 2001 are expected to be $7 to $9 million. Such capital expenditures will be funded by cash flow from operations as well as real estate and equipment financing where feasible. Cash flows provided by financing activities for 2000 included increases in debt of approximately $20.6 million offset by $13.5 million used to acquire treasury stock. Cash flows used for financing activities for 1999 included a reduction in debt of approximately $12.4 million, and $3.9 million used to acquire treasury stock, offset by $2.0 million from the exercise of stock options. Cash flows provided by financing activities for 1998 included increases in debt of approximately $3.3 million, and $1.0 million from the exercise of stock options, offset by $2.1 million used to acquire treasury stock. On June 16, 2000, the Company purchased 1,449,425 shares of its common stock at $8.00 per share, net to the sellers in cash, or an aggregate of $11.8 million including expenses, pursuant to a self-tender offer. Earlier in 2000, the Company pur- chased, on the open market, 190,000 shares of its common stock at an average cost of $8.80 per share. The Company used its line of credit to purchase such shares. The line of credit was increased from $25 million to $30 million to accommodate the purchase of shares. The Company has outstanding $40 million of 6.95 percent, seven year Senior Notes. Repayment of these notes is due $8 million annually beginning on January 28, 2001. The Company also has a $30 million revolving credit facility with The Chase Manhattan Bank, as agent, which expires on May 15, 2002. Availability under the Company’s $30 million line of credit, which was $10.8 million at December 31, 2000, combined with available cash and cash flow from operations, as well as anticipated real estate and equipment financing, are adequate to finance the Company’s working capital and capital expenditure requirements. I N F L AT I O N The prices of raw materials, consisting primarily of aluminum, vinyl, steel, glass and tires, are influenced by demand and other factors specific to these commodities rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. In order to hedge the impact of future price fluctuations on a portion of its future aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. At December 31, 2000, the Company had no futures contracts outstanding. As described above, operating profits have been adversely affected by increases in labor rates and other costs, which could not be fully passed on to customers due to competition. 10 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Net sales Cost of sales Gross profit Selling, general and administrative expenses Writedown of goodwill Operating profit Interest expense, net Income before income taxes Provision for income taxes (Note 9) Net income Income per common share (Note 11): Net income per common share (basic) Net income per common share (diluted) The accompanying notes are an integral part of these consolidated financial statements. 2000 $287,765 230,600 57,165 42,733 6,897 7,535 3,959 3,576 2,029 Year Ended December 31, 1999 $324,455 249,129 75,326 43,392 31,934 3,368 28,566 11,375 1998 $330,640 262,741 67,899 38,957 28,942 3,890 25,052 9,835 $ 1,547 $ 17,191 $ 15,217 $ $ .15 .15 $ $ 1.51 1.51 $ $ 1.36 1.34 11 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D CONSOLIDATED BALANCE SHEETS (In thousands, except shares and per share amounts) ASSETS Current assets Cash and cash equivalents Accounts receivable, trade, less allowances of $1,023 in 2000 and $521 in 1999 Inventories (Note 4) Prepaid expenses and other current assets (Note 9) Total current assets Fixed assets, net (Note 5) Goodwill, net (Note 3) Other assets (Note 9) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness (Note 8) Accounts payable, trade Accrued expenses and other current liabilities (Note 6) Total current liabilities Long-term indebtedness (Note 8) Other long-term liabilities (Note 9) Total liabilities Commitments and contingencies (Note 10) Stockholders’ equity (Note 11) Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,805,754 shares in 2000 and 1999 Paid-in capital Retained earnings Treasury stock, at cost—2,149,325 shares in 2000 and 509,300 shares in 1999 Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. December 31, 2000 1999 $ 550 13,451 33,703 3,476 51,180 66,301 37,240 4,577 $ 5,110 11,303 33,382 4,390 54,185 51,028 46,087 4,744 $159,298 $156,044 $ 8,867 5,435 14,511 28,813 58,076 245 87,134 118 24,967 66,546 91,631 (19,467) 72,164 $ 1,717 6,391 17,107 25,215 44,630 2,110 71,955 118 24,967 64,999 90,084 (5,995) 84,089 $159,298 $156,044 12 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation and amortization Writedown of goodwill Deferred taxes Loss (gain) on disposal of fixed assets Changes in assets and liabilities, excluding acquisitions of businesses: Accounts receivable, net Inventories Prepaid expenses and other assets Accounts payable, accrued expenses and other liabilities Net cash flows provided by operating activities Cash flows from investing activities: Capital expenditures Acquisitions of companies’ net assets and businesses Proceeds from sales of fixed assets Net cash flows used for investing activities Cash flows from financing activities: Proceeds from private placement of Senior Notes Proceeds from Industrial Revenue Bonds Proceeds from other notes and loans Proceeds under line of credit and other borrowings Repayments under line of credit and other borrowings Acquisition of treasury stock Exercise of stock options and other Net cash flows provided by (used for) financing activities Net (decrease) increase in cash Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flows information: Cash paid during the year for: Interest on debt Income taxes, net of refunds The accompanying notes are an integral part of these consolidated financial statements. Year Ended December 31, 2000 1999 1998 $ 1,547 $ 17,191 $15,217 8,954 6,897 (2,304) 264 (2,148) (321) 363 (3,399) 9,853 (21,890) 353 (21,537) 4,561 350 88,995 (73,310) (13,472) 7,124 (4,560) 5,110 8,142 1,054 (82) 2,256 2,018 799 (1,752) 29,626 (13,384) 421 (12,963) 400 17,550 (30,329) (3,891) 2,027 (14,243) 2,420 2,690 6,836 50 135 (3,595) (3,743) (392) 3,447 17,955 (8,450) (10,449) 345 (18,554) 40,000 5,713 500 75,000 (117,890) (2,104) 1,042 2,261 1,662 1,028 $ 550 $ 5,110 $ 2,690 $ 4,103 $ 3,653 $ 3,421 $ 9,058 $ 3,072 $10,053 13 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except shares) Balance—December 31, 1997 Net income Issuance of 150,538 shares of common stock pursuant to stock option plan Income tax benefit relating to issuance of common stock pursuant to stock option plan Resolution of earnout contingency relating to 230,769 shares of common stock in connection with the acquisition of the assets and business of Lippert Components, Inc. Purchase of 175,600 shares of treasury stock Balance—December 31, 1998 Net income Issuance of 292,052 shares of common stock pursuant to stock option plan Income tax benefit relating to issuance of common stock pursuant to stock option plan Purchase of 333,700 shares of treasury stock Balance—December 31, 1999 Net income Purchase of 1,640,025 shares of treasury stock Balance—December 31, 2000 Common Stock $113 Treasury Stock $ — Paid-In Capital $19,249 Retained Earnings $32,591 15,217 Total Stockholders’ Equity $ 51,953 15,217 2 115 3 118 $118 654 386 2,654 22,943 1,230 794 24,967 656 386 2,654 (2,104) 68,762 17,191 1,233 794 (3,891) 84,089 1,547 (13,472) 47,808 17,191 64,999 1,547 $24,967 $66,546 $ 72,164 (2,104) (2,104) (3,891) (5,995) (13,472) $(19,467) The accompanying notes are an integral part of these consolidated financial statements. 14 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 . S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Basis of Presentation The Consolidated Financial Statements include the accounts of Drew Industries Incorporated and its subsidiaries. Drew’s wholly-owned active subsidiaries are Kinro, Inc. and its subsidiaries (“Kinro”), Lippert Components, Inc. and its subsidiaries (“LCI”), and Lippert Tire and Axle, Inc. and its subsidiaries (“LTA”). Drew, through its wholly-owned subsidiaries, supplies a broad array of components for manufactured homes and recreational vehicles. All significant inter- company balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform with current presentation. Manufactured products include aluminum and vinyl windows, doors, chassis, chassis parts, galvanized roofing and new and refurbished axles. The Company also distributes new and refurbished tires. In 2000, approximately 65 percent of the Company’s sales were made by its manufactured housing products segment and 35 were made by its recreational vehicles products segment. At December 31, 2000, the Company operated 42 plants in 18 states and Canada. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Investments, which consist of government-backed money market funds are recorded at cost which approximates market value. 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. The Company periodically purchases commodity futures to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements. Gains and losses on such futures contracts are deferred until recognized in income as a component of cost of sales when the finished products are sold. Cash flow from such futures contracts are included in operating activities in the Consolidated Statements of Cash Flows. Fixed Assets Fixed assets are depreciated principally on a straight-line basis over the estimated useful lives of properties and equipment. Leasehold improvements and leased equipment are amortized over the shorter of the lives of the leases or the underlying assets. Amortization of assets recorded under capital leases is included in depreciation expense. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. The Company’s subsidiaries generally file separate state income tax returns on the same basis as the Federal income tax return. Goodwill Goodwill is the excess of cost over the fair value of net tangible assets acquired and is amortized on a straight-line basis primarily over thirty years. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future operating cash flows in relation to the goodwill and other long-lived assets of the subsidiary. Based on its review, the Company recorded an impairment charge of $6,897,000 on the goodwill applicable to its axle and tire refurbishing business. Revenue Recognition Revenue is recognized upon shipment of goods to customers. Shipping and Handling Costs The Company records shipping and handling costs within selling, general and administrative expenses. Such costs aggregated $11,357,000, $11,151,000 and $10,441,000 in 2000, 1999 and 1998, respectively. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 15 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 . S E G M E N T R E P O R T I N G The Company has two reportable operating segments, the manufactured housing products segment (the “MH segment”) and the recreational vehicle products segment (the “RV segment”). The MH segment manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manu- factured homes. The RV segment manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment’s net sales. The Company has only an insignificant amount of intersegment sales. Decisions concerning the allocation of the Company’s resources are made by the Company’s key executives. This group evaluates the performance of each segment based upon segment profit or loss, defined as income before interest, amor- tization of intangibles and income taxes. Management of debt is considered a corporate function. The accounting policies of the MH and RV segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements. Information relating to segments follows (in thousands): Year ended December 31, 2000 Revenues from external customers(a) Segment operating profit (loss) Segment assets(c) Expenditures for long-lived assets(d) Depreciation and amortization Year ended December 31, 1999 Revenues from external customers(a) Segment operating profit (loss) Segment assets(c) Expenditures for long-lived assets(d) Depreciation and amortization Year ended December 31, 1998 Revenues from external customers(a) Segment operating profit (loss) Segment assets(c) Expenditures for long-lived assets(d) Depreciation and amortization MH $186,593 12,574 61,792 7,793 4,003 $246,509 28,330 63,949 7,311 3,830 $271,287 28,572 68,256 5,622 3,436 Segments RV $101,172 6,853 51,614 14,083 1,979 $ 77,946 8,819 31,608 6,049 1,309 $ 59,353 4,974 23,842 4,118 942 Total $287,765 19,427 113,406 21,876 5,982 $324,455 37,149 95,557 13,360 5,139 $330,640 33,546 92,098 9,740 4,378 Corporate and Other Intangibles Total $ (2,301) 5,790 14 18 $ (2,521) 10,865 323 17 $ (2,162) 10,225 584 16 $ (9,591)(b) 40,102 2,954 $ (2,694) 49,622 54 2,986 $ (2,442) 52,102 10,045 2,442 $287,765 7,535 159,298 21,890 8,954 $324,455 31,934 156,044 13,737 8,142 $330,640 28,942 154,425 20,369 6,836 (a) One customer accounted for 15 percent, 14 percent and 15 percent of the Company’s net sales in the years ended December 31, 2000, 1999 and 1998, respectively. Another customer accounted for 10 percent of the Company’s net sales in 1998. Both segments had sales to each of such customers. (b) After a non-cash charge of $6,897,000 to reflect an impairment of goodwill related to the Company’s axle and tire refurbishing operation. (c) Segment assets include accounts receivable, inventory and fixed assets. Corporate and other assets include cash and cash equivalents, prepaid expenses and other current assets, and other assets, excluding intangible assets. Intangibles include goodwill and deferred charges which are not considered in the measurement of each segment’s performance. (d) Segment expenditures for long-lived assets include capital expenditures and fixed assets purchased as part of the acquisition of companies and businesses. Expenditures for other long-term assets are not included in the segment since they are not considered in the measurement of each segment’s performance. 3 . A C Q U I S I T I O N S A N D G O O D W I L L Coil Clip, Inc. On December 16, 1998, the Company’s subsidiary, LCI, acquired the assets and business of Coil Clip, Inc. (“Coil Clip”), a fabricator of specialty steel parts, located in Boaz, Alabama. Previously, in May 1998, LCI acquired the manufactured housing business of Coil Clip and entered into a supply agreement to purchase steel from Coil Clip. The purchase price consisted of cash of approximately $3.8 million for the May transaction and $6.5 million, including a $.5 million note, for the December transaction. 16 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT The acquisition has been accounted for as a purchase. The aggregate purchase price has been allocated to the underlying assets based upon their respective estimated fair values at the date of acquisition. Intangible assets of approximately $3.8 mil- lion are being amortized over useful lives averaging approximately 5 years. The excess of purchase price over the fair value of the net assets acquired (“goodwill”) was approximately $2.6 million, which is being amortized over 20 years. The results of the acquired business have been included in the Company’s consolidated statements of income beginning December 16, 1998. Pro forma results of Coil Clip prior to acquisition are not included because they are not material. Goodwill Goodwill of $37,240,000 at December 31, 2000, is net of accumulated amortization of $5,159,000. At December 31, 1999, goodwill of $46,087,000 was net of amortization of $4,606,000. Amortization of goodwill was $1,797,000, $1,800,000 and $1,583,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Drew’s axle and tire refurbishing operation has not performed well over the past several years, primarily due to increased competition, which severely affected operating margins. At the end of the third quarter of 2000, the Company announced that it was studying whether goodwill and fixed assets related to this operation had been impaired. Based upon this evaluation, it was determined that goodwill had been impaired resulting in a non-cash charge of $6,897,000 in the fourth quar- ter. In January 2001, the axle and tire refurbishing operation closed two of its five factories. 4 . I N V E N T O R I E S Inventories consist of the following (in thousands): Finished goods Work in process Raw materials Total 5 . F I X E D A S S E T S Fixed assets, at cost, consist of the following (in thousands): Land Buildings and improvements Leasehold improvements Machinery and equipment Transportation equipment Furniture and fixtures Construction in progress Less accumulated depreciation and amortization Fixed assets, net Depreciation and amortization of fixed assets consists of (in thousands): Charged to cost of sales Charged to selling, general and administrative expenses December 31, 2000 $ 8,637 1,938 23,128 $33,703 1999 $10,494 2,123 20,765 $33,382 Estimated Useful Life in Years 8 to 45 2 to 11 3 to 10 3 to 7 3 to 8 December 31, 2000 $ 6,762 44,733 1,225 30,396 2,244 3,269 13 88,642 22,341 $66,301 1999 $ 4,931 29,203 1,128 25,515 1,849 3,137 2,029 67,792 16,764 $51,028 Year Ended December 31, 2000 $5,047 953 $6,000 1999 $4,167 989 $5,156 1998 $3,459 786 $4,245 17 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 . A C C R U E D E X P E N S E S A N D O T H E R C U R R E N T L I A B I L I T I E S Accrued expenses and other current liabilities consist of the following (in thousands): Accrued employee compensation and fringes Accrued insurance Income taxes Accrued expenses and other Total December 31, 2000 $ 6,134 1,314 885 6,178 $14,511 1999 $ 7,718 2,169 912 6,308 $17,107 7 . R E T I R E M E N T A N D O T H E R B E N E F I T P L A N S The Company has discretionary defined contribution profit sharing plans covering substantially all eligible employees. The Company contributed $833,000, $784,000 and $715,000 to these plans during the years ended December 31, 2000, 1999 and 1998, respectively. 8 . L O N G - T E R M I N D E B T E D N E S S Long-term indebtedness consists of the following (in thousands): Senior Notes payable at the rate of $8,000 per annum commencing January 28, 2001 with interest payable semiannually at the rate of 6.95% per annum Notes payable pursuant to a credit agreement expiring May 15, 2002 consisting of a revolving loan, not to exceed $30,000; interest at prime rate or LIBO plus 1 percent Industrial Revenue Bonds, fixed rate 5.68% to 6.28%, due 2008 through 2015; secured by certain real estate and equipment Loans secured by certain real estate and equipment, due 2011, fixed rate 8.72% Other Less current portion Total long-term indebtedness December 31, 2000 1999 $40,000 $40,000 17,700 7,419 1,534 290 66,943 8,867 $58,076 5,038 1,309 46,347 1,717 $44,630 Pursuant to both the Senior Notes and the credit facility, which was increased from $25 million to $30 million during 2000, the Company is required to maintain minimum net worth and interest and fixed charge coverages and meet certain other financial requirements. Borrowings under both facilities are secured only by capital stock of the Company’s subsidiaries. The Company pays a commitment fee, accrued at the rate of 3⁄8 of 1 percent per annum, on the daily unused amount of the revolving line of credit. The approximate amount of maturities of long-term indebtedness (in thousands) are: 2002—$26,521; 2003—$8,752; 2004—$8,792; 2005—$8,490; 2006—$486; 2007 to 2011—$3,537 and 2012 to 2016—$1,498. The Company believes the interest rates on Industrial Revenue Bonds and real estate and equipment loans have not changed significantly. Therefore, the book value of such debt approximates fair value. The Company believes that interest rates on instruments similar to its $40 million Senior Notes have increased, and that the fair value of such notes are approx- imately $38.6 million at December 31, 2000. 18 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT 9 . I N C O M E TA X E S The income tax provision in the Consolidated Statements of Income is as follows (in thousands): Year Ended December 31, 2000 1999 Current: Federal State Deferred: Federal State Total income tax provision $ 3,611 722 (2,216) (88) $ 2,029 $ 9,031 1,290 938 116 $11,375 $9,835 1998 $8,747 1,038 37 13 The provision for income taxes differs from the amount computed by applying the Federal statutory rate to income before income taxes for the following reasons (in thousands): Income tax at Federal statutory rate State income taxes, net of Federal income tax benefit Non-deductible expenses Other Provision for income taxes Year Ended December 31, 2000 $ 1,252 412 453 (88) $ 2,029 1999 $ 9,998 914 456 7 $11,375 1998 $8,768 683 392 (8) $9,835 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are as follows (in thousands): December 31, Deferred tax assets: Accounts receivable Inventories Goodwill and other assets Accrued insurance Employee benefits Other accruals Total deferred tax assets Deferred tax liabilities: Fixed assets Long-term obligations Total deferred tax liabilities Net deferred tax asset 2000 $ 324 669 3,155 464 698 577 5,887 2,779 2,779 $3,108 1999 $ 163 569 833 634 709 653 3,561 2,756 1 2,757 $ 804 The Company concluded that it is more likely than not that the deferred tax assets at December 31, 2000 will be realized in the ordinary course of operations based on scheduling of deferred tax liabilities and income from operating activities. Net deferred income tax assets are classified in the Consolidated Balance Sheets as follows (in thousands): Prepaid expenses and other current assets Other assets Other long-term liabilities December 31, 2000 $2,575 533 $3,108 1999 $ 2,669 (1,865) $ 804 19 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 0 . C O M M I T M E N T S A N D C O N T I N G E N C I E S Leases The Company’s lease commitments are primarily for real estate and vehicles. The significant real estate leases provide for renewal options and periodic rental adjustments to reflect price index changes and require the Company to pay for property taxes and all other costs associated with the leased property. Most vehicle leases provide for contingent payments based upon miles driven and other factors. Future minimum lease payments under operating leases at December 31, 2000 are summarized as follows (in thousands): 2001 2002 2003 2004 2005 Thereafter Total lease obligations $ 3,607 2,634 1,948 1,330 633 520 $10,672 Rent expense was $4,303,000, $3,754,000 and $3,636,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In order to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. At December 31, 2000, the Company had no futures contracts outstanding. The Company has employment contracts with three of its employees, which expire on various dates through January 2004. The minimum commitments under these contracts are $1,007,000 in 2001, $519,000 in 2002 and $400,000 in 2003. In addition, an arrangement with three employees of the Company provides for incentives to be paid, based on a percentage of profits as defined. 1 1 . S T O C K H O L D E R S ’ E Q U I T Y Stock Options Pursuant to the Drew Industries Incorporated Stock Option Plan (the “Plan”), the Company may grant its directors and/or key employees options to purchase Drew Common Stock. The Plan provides for the grant of stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code and non-qualified stock options (“NQSOs”). Under the Plan, the Stock Option Committee (“the Committee”) determines the period for which each stock option may be exercisable, but in no event may a stock option be exercisable more than 10 years from the date of grant thereof. The number of shares available under the Plan, and the exercise price of options granted under the Plan, are subject to adjust- ments that may be made by the Committee to reflect stock splits, stock dividends, recapitalization, mergers, or other major corporate action. The exercise price for options granted under the Plan shall be at least equal to 100 percent of the fair market value of the shares subject to such option on the date of grant. The exercise price may be paid in cash or in shares of Drew Common Stock which have been held for at least six months. Options granted under the Plan become exercisable in annual installments as determined by the Committee. 20 Transactions in stock options under this plan are summarized as follows: Outstanding at December 31, 1997 Granted Exercised Canceled Outstanding at December 31, 1998 Granted Exercised Canceled Outstanding at December 31, 1999 Granted Expired Canceled Outstanding at December 31, 2000 Exercisable at December 31, 2000 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT Number of Option Shares 859,112 34,000 (150,538) (50,288) 692,286 557,000 (292,052) (13,500) 943,734 15,000 (10,000) (42,000) 906,734 364,770 Option Price $11.79–$12.50 $ 3.62–$12.13 $ 6.94–$12.13 $ 8.81–$ 9.31 $ 3.67–$ 6.94 $12.13–$12.50 $ 5.68 $ 7.35 $ 8.81–$12.50 $ 5.68–$12.50 $ 5.68–$12.50 The respective number of shares available for granting options were 276,166, 249,166 and 291,666 at December 31, 2000, 1999 and 1998, respectively. The Company adopted the disclosure-only option under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants included no dividend yields, risk-free interest rates of 5.0 percent, 6.0 percent and 5.0 percent; assumed expected volatilities of 29.4 percent, 27.8 percent and 26.6 percent; and expected lives of 5, 5 and 5 years for 2000, 1999 and 1998, respectively. If compensation cost for the Company’s stock option plan had been recognized in the income statement based upon the fair market method, net income would have been reduced to the pro forma amounts indicated below: Net income (in thousands) As reported Pro forma Earnings per share (basic) As reported Pro forma Earnings per share (diluted) As reported Pro forma Year Ended December 31, 2000 1999 1998 $1,547 $1,232 $ .15 $ .12 $ .15 $ .12 $17,191 $16,902 $ 1.51 $ 1.48 $ 1.51 $ 1.48 $15,217 $14,947 $ 1.36 $ 1.34 $ 1.34 $ 1.31 The following table summarizes information about stock options outstanding at December 31, 2000: Option Exercise Price $ 5.68 $ 6.94 $ 8.81 $ 9.20 $ 9.31 $10.75 $11.63 $11.79 $12.13 $12.48 $12.50 Shares Outstanding Option Remaining Life (Years) Shares Exercisable 15,000 25,134 340,000 15,000 150,000 15,000 33,000 15,000 273,600 15,000 14,000 5.0 0.1 4.9 4.0 4.0 1.0 4.3 3.0 2.9 2.0 3.6 15,000 18,810 68,000 15,000 30,000 15,000 6,600 15,000 162,360 15,000 4,000 21 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Outstanding stock options expire in five to six years from the date they are granted; options vest over service periods that range from zero to five years. Treasury Stock In accordance with authorizations of the Board of Directors, on June 16, 2000, the Company purchased 1,449,425 shares of its common stock at $8.00 per share, net to the sellers in cash, or an aggregate of $11.8 million including expenses, pursuant to a self-tender offer. Earlier in the year, the Company purchased, on the open market, 190,600 shares of its common stock at an average cost of $8.80 per share. The Company purchased 333,700 shares of its common stock at a cost of $3,891,000 in 1999 and 175,600 shares of such stock at a cost of $2,104,000 in 1998. Weighted Average Common Shares Outstanding The following reconciliation details the denominator used in the computation of basic and diluted earnings per share: Weighted average shares outstanding for basic earnings per share Common stock equivalents pertaining to: Stock options Warrants Total for diluted shares Year Ended December 31, 2000 1999 1998 10,347,725 11,385,400 11,178,588 687 33,579 931 201,724 6,169 10,348,412 11,419,910 11,386,481 The numerator is constant for both the basic and diluted earnings per share calculations. 1 2 . Q U A R T E R LY R E S U LT S O F O P E R AT I O N S ( U N A U D I T E D ) Interim unaudited financial information follows (in thousands, except per share amounts): Year Ended December 31, 2000 Net sales Gross profit Net income Net income per common share (basic) Net income per common share (diluted) Year Ended December 31, 1999 Net sales Gross profit Net income Net income per common share (basic) Net income per common share (diluted) First Quarter $74,660 16,088 2,760 .25 .25 $ $85,887 18,273 3,942 .35 .34 $ Second Quarter $79,152 16,227 2,384 .22 .22 $ $89,209 21,349 5,097 .44 44 $ Third Quarter $74,915 13,326 1,026 .11 .11 $ $79,703 18,739 4,330 .38 .38 $ Fourth Quarter $59,038 11,524 (4,623) (.48) (.48) $ $69,656 16,965 3,822 .34 .34 $ Year $287,765 57,165 1,547 .15 .15 $ $324,455 75,326 17,191 1.51 1.51 $ The sum of net income per common share for the four quarters does not equal the total net income per common share for 2000 due to changes in the average number of shares outstanding. 22 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT The Board of Directors and Stockholders Drew Industries Incorporated: We have audited the accompanying consolidated balance sheets of Drew Industries Incorporated and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Drew Industries Incorporated and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Stamford, Connecticut February 7, 2001 23 2000 ANNUAL REPORT D R E W I N D U S T R I E S I N C O R P O R A T E D MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Company has prepared and is responsible for the consolidated financial statements and related financial information included in this report. These consolidated financial statements were prepared in accordance with generally accepted accounting principles which are consistently applied and appropriate in the circumstances. These consolidated financial statements necessarily include amounts determined using management’s best judgements and estimates. The Company maintains accounting and other control systems which provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Although accounting controls are designed to achieve this objective, it must be recognized that errors or irregularities may occur. In addition, it is necessary to assess and consider the relative costs and the expected benefits of the internal accounting controls. The Company’s independent auditors, KPMG LLP, provide an independent, objective review of the consolidated financial statements and underlying transactions. They perform such tests and other procedures as they deem necessary to express an opinion on the financial statements. The report of KPMG LLP accompanies the consolidated financial statements. Leigh J. Abrams President and Chief Executive Officer Fredric M. Zinn Executive Vice President and Chief Financial Officer F O R WA R D - L O O K I N G S TAT E M E N T S A N D R I S K F A C T O R S This report contains certain statements, including the Company’s plans regarding its operating strategy, its products, costs, and performance and its views of industry prospects, which could be construed to be forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company’s current views with respect to future plans, events and financial performance. The Company has identified certain risk factors which could cause actual plans and results to differ substantially from those included in the forward-looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, and tires), adverse weather conditions impacting retail sales, inventory adjust- ments by retailers and manufacturers, availability and costs of labor, interest rates, and the availability of retail financing for manufactured homes. In addition, general economic conditions may affect the retail sale of manufactured homes and RVs. P E R S H A R E M A R K E T P R I C E R A N G E The Company’s common stock is traded on the American Stock Exchange. A summary of the high and low closing prices of the Company’s common stock on the American Stock Exchange is as follows: Quarter Ended March 31 Quarter Ended June 30 Quarter Ended September 30 Quarter Ended December 31 2000 1999 High $9.44 $8.13 $8.06 $6.38 Low $7.00 $6.88 $6.25 $5.25 High $12.75 $13.00 $12.19 $ 9.69 Low $11.38 $11.25 $ 8.75 $ 8.44 The closing price per share for the common stock on March 9, 2001 was $5.90 and there were 970 holders of Drew Common Stock, not including beneficial owners of shares held in broker and nominee names. 24 D R E W I N D U S T R I E S I N C O R P O R A T E D 2000 ANNUAL REPORT C O R P O R A T E I N F O R M A T I O N BOARD OF DIRECTORS Edward W. Rose, III(a) Chairman of the Board of Drew Industries Incorporated President of Cardinal Investment Company James F. Gero(a) Chairman and Chief Executive Officer of Sierra Technologies, Inc. Gene H. Bishop(a) Retired Bank Executive J. Thomas Schieffer(a) President of J. Thomas Schieffer Management Company Leigh J. Abrams President and Chief Executive Officer of Drew Industries Incorporated L. Douglas Lippert President and Chief Executive Officer of Lippert Components, Inc. David L. Webster President and Chief Executive Officer of Kinro, Inc. (a) Members of Audit Committee and Compensation Committee of the Board of Directors CORPORATE OFFICERS TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 EXECUTIVE OFFICES 200 Mamaroneck Avenue White Plains, NY 10601 (914) 428-9098 Website: www.drewindustries.com E-mail: drew@drewindustries.com KINRO, INC. David L. Webster President and Chief Executive Officer Corporate Headquarters 4381 Green Oaks Boulevard West Arlington, TX 76016 (817) 483-7791 LIPPERT COMPONENTS, INC. L. Douglas Lippert President and Chief Executive Officer Corporate Headquarters 2375 Tamiami Trail North Suite 110 Naples, FL 34103 (941) 659-2005 Leigh J. Abrams President and Chief Executive Officer Fredric M. Zinn Executive Vice President and Chief Financial Officer Harvey J. Kaplan Treasurer and Secretary John F. Cupak Controller FORM 10-K A copy of the Annual Report on Form 10-K as filed by the Corporation with the Securities and Exchange Commission is avail- able upon request, without charge, by writing to: Treasurer Drew Industries Incorporated 200 Mamaroneck Avenue White Plains, NY 10601 GENERAL COUNSEL Harvey F. Milman, Esq. Gilbert, Segall and Young LLP 430 Park Avenue New York, NY 10022-3592 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS KPMG LLP Stamford Square 3001 Summer Street Stamford, CT 06905 TOP PHOTO (FROM LEFT TO RIGHT): Gene H. Bishop, James F. Gero, J. Thomas Schieffer, Edward W. Rose, III, Leigh J. Abrams, David L. Webster, L. Douglas Lippert. m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D D R E W I N D U S T R I E S I N C O R P O R AT E D 200 Mamaroneck Avenue White Plains, NY 10601 www.drewindustries.com 

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