INDUSTRIES INCORPORATED
RECREATIONAL VEHICLES & MANUFACTURED HOMES
2004 Annual Report
QUALITY PRODUCTS FOR 600
500
400
300
200
100
0
12
10
8
6
4
2
0
1000
800
600
400
200
0
Net Sales (in millions)
Equity Per Common Share
Net Sales (in millions)
Equity Per Common Share
Year-End Debt to Equity Ratio
Year-End Stock Prices
Year–End Debt to Equity Ratio
Year–End Stock Prices
$253
$255
$325
$353
$531
$7.47
$8.40
$7.06
$9.18
$11.84
0.9
0.7
0.7
0.4
0.6
$5.75
$10.75
$16.05
$27.80
$36.17
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
Segment Results RV Products
Drew’s Sales Content
Per RV Shipped Industry-wide
$337
$419
$550
$684
$907
Segment Results MH Products
Drew’s Sales Content Per Manufactured
Home Produced Industry-wide
$606
$763
$916
$1,021
$1,457
Strong Growth Prospects
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
C O R P O R AT E PR O FI L E
Drew, through its wholly-owned subsidiaries, Kinro, Inc., and Lippert Components, Inc., is a leading national supplier
of a wide variety of components for recreational vehicles (RV) and manufactured homes (MH).
Drew’s products include windows, doors, chassis, chassis parts, RV slide-out mechanisms and power units, bath and
shower units, electric stabilizer jacks and trailers for hauling equipment, boats, personal watercrafts, and snowmobiles, as
well as chassis and windows for modular homes and offices.
From 50 factories located throughout the United States and one factory in Canada, Drew supplies nearly all leading
producers of RVs and MHs. RV products account for about 65 percent of consolidated sales, and MH products account
for about 35 percent.
The management of Drew is committed to acting ethically and responsibly, and to providing full and accurate disclosure to
the Company’s stockholders, employees and other stakeholders.
40
35
30
25
20
15
10
5
0
1.0
0.8
0.6
0.4
0.2
0.0
1500
1200
900
600
300
0
F I N A N C I A L H I G H L I G H T S
The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the historical Consolidated Financial Statements and Notes thereto included herein:
(In thousands, except per share amounts)
2004
2003
2002
2001
2000
Years Ended December 31,
Operating Data:
Net sales
Operating profit
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle
Provision for income taxes
Income from continuing operations before cumulative effect
$ 530,870
$ 43,996
$ 353,116
$ 34,277
$ 325,431
$ 29,213
$ 254,770
$ 20,345
$ 253,129
$ 17,067
$ 40,857
$ 15,749
$ 31,243
$ 11,868
$ 25,647
$ 9,883
$ 16,194
$ 6,364
$ 13,646
$ 5,652
of change in accounting principle
Discontinued operations1 (net of taxes)
Cumulative effect of change in accounting
principle for goodwill (net of taxes)
Net income (loss)
Income (loss) per common share:
Income from continuing operations:
Basic
Diluted
Discontinued operations:
Basic
Diluted
Cumulative effect of change in accounting
principle for goodwill:
Basic
Diluted
Net income (loss):
Basic
Diluted
Financial Data:
Working capital
Total assets
Long-term obligations
Stockholders’ equity
$ 25,108
$ 19,375
48
$
$ 15,764
$
(200) $
$ 9,830
$ 7,994
(896) $ (6,447)2
$ 25,108
$ 19,423
$ (30,162)
$ (14,598) $ 8,934
$ 1,547
$
$
2.44
2.37
$
$
1.92
1.88
$
$
2.44
2.37
$
$
1.92
1.88
$
$
$
$
$
$
$
$
1.61
1.57
$
$
1.02
1.02
$
$
.77
.77
(.02) $
(.02) $
(.10) $
(.10) $
(.62)
(.62)
(3.08)
(3.01)
(1.49) $
(1.46) $
.92
.92
$
$
.15
.15
$ 57,204
$ 238,053
$ 61,806
$ 122,044
$ 29,700
$ 160,104
$ 27,737
$ 93,653
$ 24,067
$ 145,396
$ 39,102
$ 70,104
$ 12,816
$ 156,975
$ 43,936
$ 81,210
$ 23,400
$ 159,298
$ 58,275
$ 72,164
1 Refers to the operations of the Company’s discontinued axle and tire refurbishing operation.
2 After a non-cash charge of $6.9 million in 2000 to reflect an impairment related to the Company’s axle and tire refurbishing operation.
1
DREW INDUSTRIES INCORPORATED
Letter to Stockholders
unprecedented increases in steel prices, which rose to double
and triple 2003 prices. We estimate that price increases for
steel cost us approximately $43 million during 2004.
Our operating management made extraordinary efforts
to obtain price increases or surcharges from our customers
to offset the steel price increases, without markup. Because
we did not receive the price increases as quickly as we had
expected, our net income in the second half of 2004 was
reduced by between $1.5 and $2.5 million, or $.15 to $.25
per diluted share after tax. Looking ahead, we believe the
sales price increases that we implemented in the first quarter
of 2005 are adequate to offset nearly all steel and other
raw material cost increases experienced in 2004.
In an action arising from a workplace injury, a California
state court jury awarded a former employee of our Lippert
Components subsidiary compensatory damages of
$464,000 and punitive damage of $4 million. As a result, we
recorded a charge of $1.9 million ($.09 per diluted share)
in the fourth quarter of 2004, and an additional charge of
$2.1 million ($.10 per diluted share) in the first quarter of 2005
when Lippert’s motion to reduce the punitive award was
denied. We are now considering appealing the jury’s awards.
A final challenge was the increased cost that many
public companies, including Drew, incurred as part of the
internal control reporting and assessment requirements of
the Sarbanes-Oxley Act. Our direct costs related to compli-
ance with this Act, without considering management time,
were approximately $1.1 million before taxes, which
reduced net income by approximately $0.06 per diluted
share for 2004. It is anticipated that these costs may be
slightly less in 2005. We are proud to say that we passed
these thorough tests of our internal controls.
We are also pleased to have recently completed the
restructuring of our line of credit with JPMorgan Chase,
KeyBank, and HSBC. The new line is for $60 million and
can be increased by $30 million with bank approval. In
addition, we increased our borrowing capacity with a shelf-
loan facility for $60 million with Prudential Investment
Management Inc. We expect these will serve as useful
sources of capital for future growth.
We are extremely proud to report our third consecutive
year of record sales and net income, driven by organic
growth and a successful acquisition. Net sales were up
50 percent from 2003, exceeding the half-billion dollar
mark for the first time in our history. Net income
increased 29 percent to more than $25 million, or $2.37
per diluted share.
Our continued market penetration, new product
launches and consistent operating and cost disciplines
made for an exceptional year for Drew. We gained market
share in our recreational vehicle (RV) product lines, and we
continued to add complementary lines through new product
development and acquisitions. All of these developments
bode well for 2005.
In May 2004, we acquired Zieman Manufacturing
Company for $27 million. Zieman’s sales for the eight months
after the acquisition were approximately $40 million, equal to
Zieman’s sales for all of 2003, and Zieman’s operations
were accretive to Drew’s earnings in 2004. Zieman continues
to implement improvements in production methods that
should further improve their margins. In addition, we are in
the process of expanding Zieman’s very profitable marine
and leisure trailer production from the West Coast to the
rest of the country. Production of these trailers has just
commenced in Indiana. Results of these operations are
included in our RV segment.
In addition to our growth, we are also proud of our
management team’s strong response to several obstacles
encountered during 2004. Foremost among these was the
2
2004 ANNUAL REPORT
Our Markets:
Industry shipments of RVs continued to grow during
2004, with RV shipments up 15 percent as a whole and
shipments of travel trailers and fifth wheel RVs, Drew’s pri-
mary RV market, up nearly 19 percent. Drew’s RV segment
far outperformed the industry by achieving a 58 percent
increase in sales to a record $348 million in 2004. Even
excluding sales price increases relating to steel and other raw
materials, and excluding the $23 million of RV segment sales
by newly-acquired Zieman, our RV segment achieved 2004
sales growth of approximately 36 percent, far exceeding
the industry as a whole.
New products introduced by Drew’s subsidiaries in 2004
or set for launch during 2005 include Lippert’s slide-out
mechanisms and leveling devices for motorhomes, as well
as axles and entry steps for towable RVs. Kinro is introducing
bath products for RVs and RV exterior parts that will be
fabricated on Kinro’s new large part thermoformer. The
aggregate market for all of these new products exceeds
$250 million, and although Drew’s present market share for
these products is small, we will aggressively seek to expand
in these product areas.
Despite flat shipments by the Manufactured Housing
(MH) industry, Drew’s MH segment sales increased 37
percent to $183 million in 2004 from $134 million in 2003.
Excluding price increases relating to steel and other raw
materials, and the $17 million of MH sales by newly-acquired
Zieman, Drew’s MH segment achieved sales growth
of approximately 10 percent, primarily through increased
market share.
We are encouraged by reports that MH industry pro-
duction is expected to increase in 2005 to between 135,000
and 145,000 homes, up from the 131,000 homes produced
in 2004. This projected increase is the result of lower repos-
sessions, modest industry inventory levels, and an increase
in the availability of credit, which is key to the health of the
market. Based on Drew’s current product content per
home, sales in our MH segment would be expected to
increase approximately $14 million in 2005 for every
10,000-home increase in industry production over 2004,
exclusive of any market share gains we can also achieve.
Given the growth of our business as well as the
increased legal and regulatory compliance requirements
and our ongoing hunt for acquisitions, we have added a
full-time legal officer. We are extremely pleased to welcome
Harvey F. Milman, Esq. as our Vice President-Chief Legal
Officer. Harvey has been a critical part of our team for
many years as outside counsel, and we look forward to his
expanded role on our management team. We are certain
that Harvey will significantly contribute to our future profit-
able growth.
As always, we want to thank our employees for their
dedication, creativity and hard work on behalf of Drew. We
also are grateful to our customers, suppliers, and associates,
all of whom were critical to achieving our best-ever results
in 2004. We look forward to continued success in 2005.
Edward W. Rose, III
CHAIRMAN OF THE BOARD
Leigh J. Abrams
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3
DREW INDUSTRIES INCORPORATED
G r ow t h a n d O p p o r t u n i t y
600
Net Sales (in millions)
Equity Per Common Share
$531 Million
Sales in 2004 were $531 million, an increase of more than 50 percent
from 2003, driven by innovation, strategic acquisitions and attention
to the needs of our customers. Income from continuing operations has
more than tripled from the year 2000, reaching more than
$25 million in 2004.
Net Sales (in millions)
$353
$325
$253
$255
400
500
200
300
12
10
8
6
$531
4
Equity Per Common Share
Year-End Debt to Equity Ratio
Year-End Stock Prices
Year–End Debt to Equity Ratio
Year–End Stock Prices
$7.47
$8.40
$7.06
$9.18
$11.84
0.9
0.7
0.7
0.4
0.6
$5.75
$10.75
$16.05
$27.80
$36.17
100
0
2
0
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
Segment Results RV Products
Drew’s Sales Content
Per RV Shipped Industry-wide
$337
$419
$550
$684
$907
Segment Results MH Products
Drew’s Sales Content Per Manufactured
Home Produced Industry-wide
$606
$763
$916
$1,021
$1,457
1000
Our wholly-owned subsidiaries, Kinro and Lippert
Components, continue to focus on opportunities to
increase both sales and profits through organic
growth, acquisitions and innovations. In the last five
years, we have invested more than $72 million in new
plants and equipment, and more than $47 million in
strategic acquisitions, while also significantly
expanding our R&D capabilities. This has enabled us
to continue to diversify our product offerings,
increase our manufacturing capabilities, and expand
geographically. As a result of these efforts, our
growth has far outpaced the industries we serve.
200
800
600
400
0
’00
’01
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’04
Potential sales for cur-
rent products exceeds
$2,000 per RV
’00
’01
’02
’03
’04
4
2004 ANNUAL REPORT
40
35
30
25
20
15
10
5
0
1.0
0.8
0.6
0.4
0.2
0.0
1500
1200
900
600
300
0
RECREATIONAL VEHICLES
The RV market’s long-term growth prospects are
Drew is also focused on growing market share in the
favorable due to growing interest by families in RV travel as
motorhome segment of the RV market. The Company has
well as strong positive demographic trends. The primary
recently introduced several products for motorhomes, such
owners of RVs are 50 and over, which is also the fastest-
as slide-out mechanisms and leveling devices, which have
growing segment of the general population and is expected
a market potential of from $80 million to $100 million. Other
to grow by more than 20 million people in the next 10 years.
new products being introduced for the RV market include
Additional growth drivers include the increasing popularity of
axles, steps, shower and bath units and large exterior
families vacationing together in RVs because of lifestyle and
parts, which have a combined market potential of more
preference for domestic travel. The market is also supported
than $150 million.
by a strong advertising campaign by the Recreational
Drew’s RV sales have far more than tripled since the
Vehicle Industry Association (RVIA), which has successfully
year 2000 and continued sales growth is anticipated as
promoted the RV lifestyle among younger families.
Drew continues to focus on product innovation and meeting
Drew currently supplies component parts primarily for
customer needs, and as the industry continues to grow
towable RVs, which are 81 percent of industry unit sales.
over the long term.
Since 2001, the travel trailer and fifth wheel towable segment
of the RV market has grown 55 percent, more than twice
as fast as the other RV segments.
5
DREW INDUSTRIES INCORPORATED
MANUFACTURED HOMES
Approximately 22 million people live in nearly 10 million
downturn began in 1998. Drew has maintained profitability
manufactured homes across
the United States.
in this segment by focusing on maximizing operating effi-
Manufactured homes today are a far cry from the “mobile
ciencies, pursuing acquisitions and concentrating on market
homes” of the past. These homes now come in a wide
share gains. In fact, since the year 2000, the operating
range of styles and sizes and offer many of the advantages
profit of Drew’s MH segment has increased more than 24
of traditional homes, but at a lower cost.
percent despite difficult industry conditions.
For millions of Americans, manufactured homes
The MH industry is showing signs of recovery, including
will continue to provide quality, affordable housing, and
lower inventory levels at retail dealers and a slowing of
the opportunity to realize the American dream of home
manufactured home repossessions. Additionally, improved
ownership.
lending practices have made new home loans more secure.
However, the manufactured housing market is not
As a result, it is widely believed that the MH market is likely
without its challenges. Over-production in the late 1990s
to expand over the coming years. Drew stands to gain
and credit issues have driven industry production down
substantially from any growth in this market, as sales of
more than 65 percent since 1998.
component parts by its MH segment should increase by
Despite the difficulties in the market, Drew’s MH seg-
more than $14 million for every additional 10,000 homes
ment has remained profitable every quarter since the
produced by the industry over 2004 levels.
6
2004 ANNUAL REPORT
600
500
400
300
200
100
0
12
10
8
6
4
2
0
1000
800
600
400
200
0
Net Sales (in millions)
Equity Per Common Share
Net Sales (in millions)
Equity Per Common Share
Year-End Debt to Equity Ratio
Year-End Stock Prices
$253
$255
$325
$353
$531
$7.47
$8.40
$7.06
$9.18
$11.84
0.9
0.7
0.7
0.4
0.6
$5.75
$10.75
$16.05
S t r e n g t h o f M a n a g e m e n t
Seasoned Management Team
In large part, Drew’s success depends on the experience,
$27.80
innovation and energy of its senior management team
Year–End Debt to Equity Ratio
Year–End Stock Prices
$36.17
1.0
40
35
0.8
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
Segment Results RV Products
Drew’s Sales Content
Per RV Shipped Industry-wide
$337
$419
$550
$684
$907
Segment Results MH Products
Drew’s Sales Content Per Manufactured
Home Produced Industry-wide
$606
$763
$916
$1,021
$1,457
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
Potential sales for cur-
rent products exceeds
$2,200 per MH
0.6
0.4
0.2
0.0
30
25
20
15
10
5
0
The operating management of Drew’s subsidiaries,
Kinro and Lippert Components, is highly respected
in both the RV and MH industries. They have planned
and executed Drew’s growth and success, and
avoided the pitfalls that beset other companies in
our industries.
1500
1200
900
600
Drew is particularly pleased to note that David L.
Webster, president and CEO of Drew’s Kinro Inc.
subsidiary, was elected to the RV/MH Heritage
Foundation’s Hall of Fame class of 2005. David, who
serves on the board of the Manufactured Housing
Institute and American Architectural Manufacturers
Association, was recognized for his outstanding
leadership and service to the MH and RV industries
for more than 25 years.
300
0
7
DREW INDUSTRIES INCORPORATED
EXPERIENCED AND DEDICATED TEAM
Enhancing Shareholder Value
We consistently follow these basic strategies:
Satisfy customer needs.
Align management incentives with stockholder interests.
Our success stems largely from the ability of operating
Drew has a long-standing policy of motivating operating
management to respond quickly to the changing needs of
management and employees with profit incentive programs
customers with quality products, outstanding service and
and stock compensation plans, which we believe are among
reasonable prices.
Emphasize profitability.
While we continue to seek growth through the devel-
opment of new products, increased market share and
acquisitions, we remain focused on properly evaluating the
long-term profit potential of each expansion opportunity.
the best in our industries, designed to align the interests of
our employees with those of our stockholders.
Drew also encourages management to maintain
significant equity ownership interests in the Company.
TOP LEFT PHOTO (FROM LEFT TO RIGHT):
David L. Webster, L. Douglas Lippert, Edward W. Rose, III, James F. Gero,
Gene H. Bishop, Leigh J. Abrams, Frederick B. Hegi, Jr., David A. Reed.
8
2004 ANNUAL REPORT
C o n t e n t s
10
Management’s Discussion and Analysis
20
Consolidated Statements of Income
21
Consolidated Balance Sheets
22
Consolidated Statements of Cash Flows
23
Consolidated Statements of Stockholders’ Equity
24
Notes to Consolidated Financial Statements
35
Report of Independent Registered
Public Accounting Firm
36
Management’s Responsibility for
Financial Statements
9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunc-
tion with the Company’s historical Consolidated Financial
Statements and Notes thereto included in this Report.
The Company’s operations are conducted through its
operating subsidiaries. Its two primary operating subsidiaries,
Kinro, Inc. and its subsidiaries (“Kinro”) and Lippert Components,
Inc. and its subsidiaries (“Lippert”) have operations in both the
recreational vehicle (“RV”) and manufactured housing (“MH”)
segments. At December 31, 2004, the Company’s subsidiaries
operated 50 plants in the United States and one in Canada.
The RV segment accounted for 65 percent of consolidated
net sales for 2004 and 62 percent of consolidated net sales for
2003. The RV segment manufactures a variety of products used
in the production of recreational vehicles, including windows,
doors, chassis, chassis parts, slide-out mechanisms and related
power units, and electric stabilizer jacks. The RV segment also
manufactures specialty trailers for equipment hauling, boats,
personal watercraft and snowmobiles. The Company’s RV prod-
ucts are used primarily in travel trailers and fifth wheel RVs.
Travel trailers and fifth wheel RVs accounted for 69 percent of
all RVs shipped by the industry in 2004, up from 61 percent
in 2001. In recent months, the Company has begun to focus
its efforts on expanding its market share for products used
in motorhomes, and began selling slide-out mechanisms
for motorhomes in the second quarter of 2004. The Company
is also introducing leveling devices, axles, steps and bath
products for RVs.
The MH segment, which accounted for 35 percent of con-
solidated net sales for 2004 and 38 percent of consolidated net
sales for 2003, manufactures a variety of products 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.
On May 4, 2004, the Company acquired California-based
Zieman Manufacturing Company (“Zieman”). Zieman is a man-
ufacturer of specialty trailers for equipment hauling, boats, per-
sonal watercraft and snowmobiles, and chassis and chassis
parts for towable recreational vehicles and manufactured
homes. The purchase price was $21.4 million, plus $5.2 million
of Zieman’s debt which the Company assumed. The purchase
price was funded with borrowings under the Company’s credit
agreement. Zieman had 10 plants in 4 states in the western
United States.
The results of the acquired Zieman business have been
included in the Company’s Consolidated Statements of Income
beginning May 4, 2004. Zieman’s sales for its fiscal year ended
December 31, 2003 were approximately $42 million, and for the
year ended December 31, 2004 Zieman’s sales were $58 mil-
lion, including $40 million subsequent to its acquisition by the
Company. In 2003, Zieman had approximately $12 million in
sales of RV chassis and chassis parts, approximately $19 mil-
lion in sales of marine and leisure trailers, and $11 million of MH
chassis and chassis parts. The operations of Zieman are being
integrated with those of Lippert. The production processes and
raw materials used by Zieman are substantially similar to those
of Lippert, and it is expected that the operating margins achieved
by this newly-acquired business will, over time, approximate
those achieved by Lippert.
Until the second quarter of 2004, the Company’s RV seg-
ment included only recreational vehicle products, however, with
the Company’s acquisition of Zieman, the specialty trailer busi-
ness of Zieman has been added to the RV segment. Other
than sales of specialty trailers, which aggregated approximately
$17.5 million in 2004, sales to industries other than manufacturers
of RVs and manufactured homes are not significant. Interseg-
ment sales are insignificant.
I N D U S T R Y B A C K G R O U N D
Recreational Vehicle Industry
The Recreational Vehicle Industrial Association (“RVIA”)
reported a 15 percent increase in total industry shipments, to
370,100 RVs in 2004, from 320,800 in 2003. Shipments of travel
trailers and fifth wheel RVs, the Company’s primary market,
increased 19 percent in 2004. It has been reported by analysts
that industry-wide shipments included approximately 13,500
travel trailers, consisting of only the essential components, pur-
chased by the Federal Emergency Management Agency
(“FEMA”) to provide emergency housing to hurricane victims in
the southeastern United States. It is not expected that these
units will be resold to traditional RV consumers. Without the
FEMA units, the increase in industry shipments would have
been 11 percent. The RVIA is projecting a 2.5 percent decline
in wholesale shipments of all types of RVs in 2005, but they are
forecasting that shipments of travel trailers and fifth wheel RVs
will be approximately the same as in 2004. In the long term,
increasing industry RV sales are expected to continue to be
driven by positive demographics, as demand for RVs is stron-
gest from the over-50 age group, which is the fastest growing
segment of the population. According to US Census Bureau
projections, 10 years from now there will be in excess of 20 mil-
lion more people over the age of 50. Industry growth also con-
tinues 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 cus-
tomers in the 35 to 54 age group, and the number of RVs owned
by those 35 to 54 grew faster than all other age groups.
Manufactured Housing Industry
As a result of (i) limited credit availability for purchases of
manufactured homes, (ii) high interest rate spreads between
conventional mortgages on site built homes and chattel loans
for manufactured homes (chattel loans have been used to
finance approximately 30 percent of manufactured homes pur-
chased this year), and (iii) unusually high repossessions of man-
ufactured homes, industry production declined approximately
65 percent since 1998, to 131,000 homes in 2003, the lowest
10
2004 ANNUAL REPORT
production level in 40 years. However, based upon industry
reports, retail sales of manufactured homes have declined much
less severely than industry production in recent years. Almost
50 percent of retail sales in the last several years have been
filled by inventory reductions by dealers and manufacturers, and
the resale of repossessed homes, rather than new production. It
has been estimated that approximately 90,000 to 100,000 man-
ufactured homes were repossessed in each of 2001, 2002 and
2003, far in excess of historical repossession levels. It has been
reported that the level of repossessions of manufactured homes
has declined to between 80,000 and 85,000 homes this year.
The Manufactured Housing Institute (“MHI”) reported that
industry wholesale shipments of manufactured homes remained
at 131,000 in 2004, as a result of a 9 percent increase in whole-
sale shipments during the fourth quarter of 2004, from the com-
parable period in 2003. The increase in wholesale shipments in
the fourth quarter of 2004 was largely due to the shipment of
3,000 to 4,000 manufactured homes ordered by FEMA to pro-
vide emergency housing to hurricane victims in the southeast-
ern United States. These houses are not expected to be resold
by FEMA. The availability of financing for manufactured homes
has apparently improved somewhat in recent months, and is
expected to improve further, partially as a result of the entry of
several lenders into the market. In addition, in September 2003
Berkshire Hathaway Inc. acquired Clayton Homes and Oakwood
Homes, two of the leading producers of manufactured homes,
as well as 21st Mortgage. Since then, Berkshire has helped
Clayton raise substantial funds for its mortgage operations.
Further, as noted above, the level of repossessions of manufac-
tured homes has reportedly declined this year. Long-term pros-
pects for manufactured housing are favorable because
manufactured homes provide quality, affordable housing.
Steel Prices
Steel is one of the Company’s primary raw materials in both
segments, representing about 50 percent of the Company’s raw
material costs. In mid-December 2003 and continuing into
2004, the Company was notified by its steel suppliers of unprec-
edented steel cost increases. The prices the Company pays for
steel, depending on the type of steel purchased, are currently
double to triple the levels they were a year ago. To offset the
impact of higher steel costs, estimated to be $43 million, the
Company implemented surcharges and sales price increases
to its customers. The Company estimates that substantially all
steel cost increases received through the end of 2004 were
passed on to customers by early 2005. However, unrecovered
steel cost increases reduced net income in the second half of
2004 by between $1.5 million and $2.5 million.
The Company does not expect to earn additional profit
from the sales price increases implemented in response to ris-
ing steel costs. As a result, the Company’s material cost as a
percent of sales has increased, particularly for products which
are made primarily from steel. However, if steel costs remain
stable, the steel cost increases experienced in 2004 are not
expected to have a significant effect on operating profit in 2005
because they will be substantially offset by the sales price
increases which have been implemented, the last of which took
effect in early 2005. While the Company has historically been
able to obtain sales price increases to offset raw material cost
increases, there are no assurances that future raw material
cost increases can be passed on to customers in the form of
sales price increases. The aggregate cost of the Company’s
inventories of steel has increased substantially because of the
steel cost increases and higher quantities of steel on hand due
to the increase in sales volume.
The Company also experienced significant cost increases
in several of its other raw materials, which were also largely
passed on to customers by early 2005.
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:
RV segment
MH segment
Year Ended December 31,
2004
2003
2002
$347,584
183,286
$219,505
133,611
$171,094
154,337
Total
$530,870
$353,116
$325,431
Operating profit:
RV segment
MH segment
Amortization of intangibles
Corporate and other
Other income
$ 31,832
18,547
(1,032)
(5,779)
428
$ 24,779
14,358
(782)
(4,078)
$ 16,162
16,900
(746)
(3,103)
Total
$ 43,996
$ 34,277
$ 29,213
Net sales and operating profit by segment, as a percent of
the total, are as follows:
Net sales:
RV segment
MH segment
Total
Operating profit:
RV segment
MH segment
Amortization of intangibles
Corporate and other
Other income
Total
Year Ended December 31,
2004
2003
2002
65%
35%
62%
38%
53%
47%
100%
100%
100%
72%
42%
(2)%
(13)%
72%
42%
(2)%
(12)%
55%
58%
(2)%
(11)%
1% —
—
100%
100%
100%
Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003
Consolidated Highlights
• On May 4, 2004, the Company completed the acquisition of
California-based Zieman Manufacturing Company (“Zieman”),
a manufacturer of a variety of specialty trailers (trailers
for equipment hauling, boats, personal watercraft and snow-
mobiles), and chassis and chassis parts for RVs and
11
DREW INDUSTRIES INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
manufactured homes, with sales of approximately $42 million
in 2003. The acquisition was immediately accretive to the
Company’s earnings per share, adding approximately $.05
per share in the eight months since it was acquired.
• Net sales for 2004 were up 50 percent compared to 2003, or
more than 26 percent excluding sales price increases and
the acquisition of Zieman.
• Net income for 2004, of $25.1 million, was 29 percent higher
than in 2003. Net income did not increase as rapidly as net
sales for several reasons, including:
• Sales price increases did not fully offset the increases
in the cost of steel and other raw materials used by the
Company. With additional sales price increases imple-
mented in early 2005, substantially all increases in raw
material costs experienced in 2004 have been passed
on to customers.
• The Company did not earn any additional profit from the
sales price increases which have been implemented,
which caused the profit margin to decline.
• The Company recorded a charge of $1.9 million
($945,000 after taxes and the direct impact on incen-
tive compensation) related to an adverse jury verdict
related to a workplace injury. The Company intends to
move for a new trial or appeal the verdict based on the
advice of counsel that the verdict is unsupported by
the evidence.
• Costs related to compliance with the Sarbanes-Oxley
Act were approximately $1.1 million before taxes, with-
out considering management time, which reduced net
income by approximately $650,000 for 2004. It is antic-
ipated that these costs may be slightly less in 2005.
• During 2004, Drew’s Lippert subsidiary implemented
plans to close six profitable, but underperforming fac-
tories. The production at these factories will now be
absorbed by nearby Lippert factories. The anticipated
savings from consolidating production will more than
offset the charge of $890,000 ($450,000 after taxes
and the direct impact on incentive compensation) in
2004 relating to plant closings.
• Net sales of the Company’s MH segment increased 37 per-
cent in 2004, or more than 10 percent excluding sales price
increases and the acquisition of Zieman, compared to 2003,
while industry-wide wholesale shipments of manufactured
homes in 2004 were the same as in 2003.
RV Segment
Net sales of the RV segment increased 58 percent to $348
million in 2004. Excluding net sales of newly-acquired Zieman
and sales price increases (approximately $26 million), organic
sales growth of this segment was approximately 36 percent
compared to 2003, significantly greater than the 15 percent
industry-wide increase in shipments of RVs this year. The
organic sales growth of the RV segment included an increase
of $28 million, or nearly 75 percent, in sales of slide-out mecha-
nisms and related power units. The Company now has a very
substantial share of the market for slide-out mechanisms for
towable RVs, and expects future growth in sales of its slide-out
products to come largely from slide-out products for motor-
homes, which the Company began selling in the second quarter
of 2004.
The RV segment results for 2004 included sales by newly-
acquired Zieman (in the eight months since its acquisition) of
approximately $8 million of RV chassis and chassis parts and
more than $15 million of specialty trailers. Operating results of
the specialty trailers business are included in the RV segment.
The Company intends to expand Zieman’s specialty trailer busi-
ness from the West Coast, where Zieman now operates, to the
central United States.
Operating profit of the RV segment increased 28 percent to
$31.8 million in 2004. The operating profit margin of this seg-
ment declined to 9.2 percent of sales in 2004, from 11.3 per-
cent last year. The decline in the operating profit margin of the
RV segment resulted largely from continued increases in the
price of steel, and to a lesser extent aluminum, not all of which
were passed on to customers. Further, sales price increases
generally covered cost increases only, and did not include profit
margin. In addition, facility impairment and lease termination
charges aggregating $890,000 were recorded in this segment
in 2004, of which $550,000 was recorded in the fourth quarter
of 2004.
The increase in raw material prices aggregated approxi-
mately $29 million in the RV segment. In response to these cost
increases, the Company significantly raised its sales prices on
certain of its products during 2004 and early 2005. The Com-
pany believes that, on a consolidated basis, sales price increases
obtained in 2004 and early 2005 are adequate to offset substan-
tially all increases in raw material costs experienced in 2004.
Excluding the impact of the sales price increases described
above, labor and manufacturing overhead costs as a percent of
sales remained stable in 2004, compared to 2003, as higher
warranty and overtime costs offset the benefit of spreading of
fixed production costs over a larger sales base. The Company
has augmented its quality control effort to help minimize future
warranty costs. In 2004, the Company also increased its spend-
ing on research and development. Quality control costs and
research and development costs are expected to increase
further in 2005.
MH Segment
Net sales of the MH segment increased 37 percent to $183
million in 2004. Excluding net sales by newly-acquired Zieman
(approximately $17 million) and sales price increases (approxi-
mately $19 million), organic sales growth of this segment
in 2004 was approximately 10 percent, compared to the flat
industry-wide wholesale shipments of manufactured homes this
year. Organic sales growth by this segment resulted primarily
from market share gains.
12
2004 ANNUAL REPORT
In response to the substantial increases in the cost of steel
described above, and to a lesser extent, aluminum, the Com-
pany raised its sales prices on certain of its products. The
Company believes that, on a consolidated basis, sales price
increases obtained in 2004 and early 2005 are adequate to off-
set substantially all increases in raw material costs experienced
in 2004.
Operating profit of the MH segment increased 29 percent
to $18.5 million in 2004. The operating profit margin of this seg-
ment in 2004 declined to 10.1 percent of sales, from 10.7 per-
cent in 2003. Results of this segment for 2004 include a charge
of $1.9 million related to an adverse jury verdict related to a
workplace injury. The Company intends to move for a new trial
or appeal the verdict based on the advice of counsel that the
verdict is unsupported by the evidence. The operating profit
margin of this segment in 2004 was favorably impacted by the
spreading of fixed costs over a larger sales base; however, this
was partially offset by the inclusion of Zieman’s operations,
which currently have lower margins than Drew’s other opera-
tions in the MH segment.
As of November 30, 2004, the Company evaluated the fair
value of the goodwill associated with the MH segment, which
had a book value of $3.2 million, and determined that no impair-
ment had occurred. The Company will continue to monitor such
goodwill in light of conditions in the MH industry.
Corporate and Other
Corporate and other expenses for 2004 increased $1.7 mil-
lion compared to 2003, of which $1.2 million is due to higher
consulting, audit fees and other costs related to compliance with
Section 404 of Sarbanes-Oxley. Stock option expense increased
approximately $200,000, and corporate office incentive com-
pensation increased nearly $250,000, due to higher profit levels.
On a consolidated basis, stock option expense increased to
$900,000 in 2004, of which approximately $550,000 is included
in segment results.
Other Income
In February 2004, the Company sold certain intellectual
property rights relating to a process used to manufacture a new
composite material, and simultaneously entered into an equip-
ment lease and a license agreement with the buyer. The lease
is still not effective, as the lessor has not yet provided opera-
tional equipment and tooling. If operational equipment is prop-
erly installed, the Company plans to use the new composite
material to produce certain bath products for the manufactured
housing, modular housing, and recreational vehicle industries
on an exclusive, royalty-free basis, to compete against fiber-
glass bath products in these industries. The Company will also
have the right to use the new composite material on a royalty-
free, non-exclusive basis to manufacture various other products
for the manufactured housing, modular housing, and recreational
vehicle industries.
The sale price for the intellectual property rights was $4.0
million, consisting of cash of $100,000 at closing and a note of
$3.9 million, payable over five years. The Company had a mini-
mal basis in the intellectual property sold. In 2004, the Company
received payments aggregating approximately $.5 million, and
recorded a pre-tax gain on sale of $428,000. The note bears
interest at increasing annual interest rates, and is secured by a
lien on the intellectual property rights sold, a right of offset
against the lease, and a guaranty. The note is convertible at
the Company’s option into an equity interest in the new venture
that the buyer has formed to promote this process. Additional
gains, if any, will be recorded as payments on the $3.5 million
balance of the note are received. In January 2005, the
Company received a scheduled payment on the note of
$500,000 plus interest.
Year Ended December 31, 2003 Compared to Year
Ended December 31, 2002
Consolidated Highlights
• Income from continuing operations was up 23 percent in
2003, to a record $19.4 million.
• Operating profit margin increased to 9.7 percent for 2003,
from 9.0 percent in 2002.
• Net sales grew by 9 percent.
• On October 3, 2003, the Company completed the acquisition
of Indiana-based ET&T Frames, Inc. (“ET&T”), a manufac-
turer of specialty chassis and towable RV chassis products
with annual sales of approximately $7 million, for $3.6 million.
• On July 17, 2003, the Company completed the acquisition of
Kansas-based LTM Manufacturing, LLC (“LTM”), a manufac-
turer of innovative RV products with annual sales of approxi-
mately $4.5 million, for $4.1 million.
RV Segment
Net sales of the RV segment increased $48.4 million (28
percent) from 2002, largely due to increases in the Company’s
market share of all its primary RV product lines, including RV
slide-out mechanisms and related power units, chassis, and
windows and doors. Sales of RV slide-out mechanisms and
related power units doubled from 2002, to approximately
$37 million. The growth of this segment also resulted from the
industry-wide growth in RV shipments, in particular the
Company’s primary market of travel trailers and fifth wheel RVs,
as well as the continued trend towards using more slide-out
mechanisms in travel trailers and fifth wheel RVs. There were no
significant changes in sales prices by the Company’s RV seg-
ment in 2003.
The acquisitions of LTM and ET&T, completed in 2003,
added only approximately $4 million in sales in 2003, but have
substantial growth potential to exceed their combined pre-
acquisition annual historical sales of approximately $11.5 mil-
lion. In the latter part of 2003, the Company’s research and
development departments designed and developed new prod-
ucts such as leveling systems and slide-out mechanisms for
13
DREW INDUSTRIES INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
motor homes, and bath and shower units for RVs. For 2003, the
Company only had minimal sales to the motor home segment of
the RV industry.
Operating profit of the RV segment increased $8.6 million
(53 percent) in 2003 over 2002. 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
11.3 percent for 2003 from 9.4 percent in 2002 primarily because
of (i) the spreading of fixed costs over higher sales; (ii) greater
purchasing leverage for certain components; (iii) improved
operating efficiencies; and (iv) temporarily moderate steel costs
during the middle of 2003. The Company was notified by its
steel suppliers of unprecedented steel cost increases which
began in late 2003 and accelerated in 2004, as described in
“Industry Background” above. 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 health and
workers’ compensation insurance costs.
MH Segment
Net sales of the MH segment declined $20.7 million
(13 percent) in 2003, 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
reduction caused by the decline in industry shipments. There
were no significant changes in sales prices by the Company’s
MH segment during 2003.
Operating profit of the MH segment decreased $2.5 million
(15 percent) in 2003 largely because of the decline in sales.
This segment’s operating profit margin was 10.7 percent of
sales in 2003, which was slightly lower than the 11.0 percent
achieved for 2002, primarily because of higher health and work-
ers’ compensation insurance costs and the negative impact of
lower volume on fixed costs, partially offset by temporarily mod-
erate steel costs during the middle of 2003. The Company was
notified by its steel suppliers of unprecedented steel cost
increases which began in late 2003 and accelerated in 2004,
as described in “Industry Background” above. Selling, general
and administrative expenses for 2003 were down in dollar terms
following the trend of sales.
As of November 30, 2003, the Company evaluated the fair
value of the goodwill associated with the MH segment, which
had a book value of $3.2 million, and determined that no impair-
ment had occurred.
Corporate and Other
Corporate and other expenses increased $975,000 in
2003, primarily as a result of higher Directors and Officers
insurance costs ($101,000), incentive compensation due to
increased profits ($151,000), stock option expense resulting from
the adoption of Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for Stock-Based Compensation”
($120,000), expenses associated with the listing of the
Company’s stock on the New York Stock Exchange ($203,000)
and expenses related to corporate governance due to the imple-
mentation of the Sarbanes-Oxley Act requirements ($225,000).
Interest Expense, Net
Interest expense, net, for 2004 remained approximately the
same as in 2003, as lower debt levels early in the year were
offset by higher debt resulting from both the acquisition of
Zieman on May 4, 2004, and higher working capital levels
primarily for steel inventory and accounts receivable.
On October 18, 2004, the Company entered into a five-
year interest rate swap with KeyBank National Association with
a notional amount of $20,000,000 from which it will receive
periodic payments at the 3 month LIBOR rate plus the
Company’s applicable spread and make periodic payments at
a fixed rate of 3.3525% plus the Company’s applicable spread,
with settlement and rate reset dates every November 15,
February 15, May 15 and August 15. The notional amount of the
interest rate swap decreases by $1,000,000 on each quarterly
reset date beginning February 15, 2005. The fair value of the
swap was zero at inception. The Company has designated
this swap as a cash flow hedge of certain borrowings under the
credit agreement and recognized the effective portion of the
change in fair value as part of other comprehensive income,
with the ineffective portion recognized in earnings currently.
The fair value of this swap at December 31, 2004 was $59,000,
net of taxes of $38,000.
Provision for Income Taxes
The effective tax rate for 2004 was approximately 38.5%,
compared to 38.0% in 2003 and 38.5% in 2002. The increase
in the effective tax rate in 2004 is due in part to a change in the
composition of pre-tax income for state tax purposes.
Discontinued Operations
The axle and tire refurbishing business of Lippert Tire and
Axle (“LTA”) did not perform well from 2000 through 2002, pri-
marily due to increased competition and the decline in the man-
ufactured housing industry, which severely affected operating
margins. By January 2003, the axle and tire business of LTA had
ceased operation. As a result, the axle and tire refurbishing busi-
ness is classified as discontinued operations in the Consolidated
Financial Statements pursuant to SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” Discontinued
operations is presented net of tax expense (benefit) of $26,000 and
($102,000) for the years ended December 31, 2003 and 2002.
The proceeds from the disposition of all other significant
assets of LTA’s axle and tire refurbishing business, consisting
primarily of inventory and accounts receivable, were collected
in January 2003 and resulted in a small gain. The discontinued
axle and tire refurbishing business had previously been included
in the Company’s MH segment, and had revenues of $11.2 mil-
lion in 2002.
14
2004 ANNUAL REPORT
Recently Adopted and New Accounting Standards
As of April 1, 2002, the Company adopted the fair value
method of accounting for stock options contained in
SFAS No. 123, which is considered the preferable method of
accounting for stock-based employee compensation. During
the transition period, the Company is utilizing the prospective
method under SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosures.” All employee
stock options granted after January 1, 2002 are being expensed
over the stock option vesting period based on fair value, deter-
mined using the Black-Scholes option-pricing method, at the
date the options were granted. This resulted in charges to oper-
ations of $894,000, $197,000 and $10,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, relating to
options for 449,000 shares granted between 2002 and 2004.
Historically, the Company had applied the “disclosure only”
option of SFAS No. 123. Accordingly, no compensation cost
has been recognized for stock options granted prior to January
1, 2002. Had the Company previously adopted this new
accounting policy, diluted earnings per share would have been
reduced by $.02 for 2004, $.02 for 2003, and $.04 for 2002.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment,” a revision of SFAS No. 123 and super-
seding APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” SFAS No. 123R requires the Company to expense
grants made under the stock option plan. SFAS No. 123R is
effective for the first interim or annual period beginning after
June 15, 2005. Upon adoption of SFAS No. 123R, amounts pre-
viously disclosed under SFAS No. 123 for grants prior to January
1, 2002 will be recorded in the consolidated income statement.
The implementation of SFAS No. 123R is expected to have an
impact on net income of less than $75,000 in both 2005 and
2006 for options granted prior to January 1, 2002.
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
investing activities
Net cash flows provided by
Year Ended December 31,
2004
2003
2002
$ 8,880
$ 31,541
$ 12,200
$ (48,420)
$ (12,392)
$ (12,013)
(used for) financing activities $ 33,183
$ (10,684)
$ (1,062)
Cash Flows from Operations
Net cash flows from operating activities decreased approx-
imately $22.7 million in 2004, despite a $5.7 million increase in
net income, because of:
a) An increase of $6.1 million in accounts receivable (excluding
receivables obtained in the acquisition of Zieman on May 4,
2004), due largely to an increase in net sales, and, to a
lesser extent, an increase in days sales outstanding to
approximately 21 days. The increase in days sales outstand-
ing was partly due to the timing of collections. In addition,
the accounts receivable of newly-acquired Zieman have a
longer collection cycle.
b) Inventories increased $28.4 million during 2004 (excluding
the inventory obtained in the acquisition of Zieman on May 4,
2004), of which approximately $12 million is due to the
increase in the cost of steel and other raw materials, and
$10–$12 million is due to the increase in unit sales excluding
Zieman. Inventories have also increased because of the
recent introduction of several new products. Higher inven-
tory levels are required during the initial stages of product
introductions. The inventory increase is substantially all in
raw materials, as there was less than a two-week supply of
finished goods on hand at December 31, 2004.
c) The increase in inventory was partially offset by a $6.3 million
increase in accounts payable, accrued expenses and other
liabilities during 2004. The increase in these liabilities was
less than would be expected on a $28.4 million increase
in inventory, because inventories declined during the
fourth quarter of 2004, so that fourth quarter purchases, and
therefore year-end payables, were less than would otherwise
be expected. Trade payables are generally paid within the
discount period.
Net cash flows from operating activities increased approxi-
mately $19.3 million in 2003, as a result of a $3.6 million increase
in income from continuing operations, as well as:
a) A smaller increase in accounts receivable for 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 19
days. This was due to the timing of collections.
b) A decline in inventories for 2003, excluding the effect of
business acquisitions, compared to an increase in invento-
ries in 2002. The decline in 2003 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,
2003 and 2002. The impact of the rise in steel prices on
inventory and the Company’s strategic buying of steel before
the steel price increases took effect, did not impact inven-
tory until 2004.
c) A decline in prepaid expenses and other current assets
compared to an increase in 2002. The decline in 2003 was
primarily due to the utilization of prepaid Federal income
taxes and an escrow deposit, both of which were uses of
cash in 2002.
15
DREW INDUSTRIES INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 pay-
ments and purchases at the end of 2003. Trade payables
are generally paid within the discount period.
Cash Flows from Investing Activities
Cash flows used for investing activities of $48.4 million in
2004 consists of the acquisition of Zieman for $21.4 million
(excluding $5.2 million of debt assumed), as well as capital
expenditures of $27.1 million. Capital expenditures and the
acquisition were financed with equipment and real estate financ-
ing of $9.3 million, borrowings under the Company’s credit agree-
ment, and cash flow from operations. Capital expenditures in
2005 are expected to be $12–$15 million, which are expected
to be financed primarily with cash flow from operations and a
$2 million real estate mortgage.
Cash flows used for investing activities of $12.4 million in
2003 consists of capital expenditures ($5.1 million) and the
acquisitions of LTM and ET&T for a combined $7.4 million. The
capital expenditures and acquisitions in 2003 were funded with
the Company’s available cash. Cash flows used for investing
activities for 2002 of $12.0 million include capital expenditures
of $10.5 million as well as $2.1 million for acquisitions. Capital
expenditures and the acquisition in 2002 were funded by cash
flow from operations and a new $2.8 million Industrial Devel-
opment Bond, which partially financed the construction of a
larger factory and related equipment to replace a leased facility to
provide additional capacity for the Company’s vinyl window line.
Cash Flows from Financing Activities
Cash flows provided by financing activities for 2004
included a net increase in debt of $31.4 million, and cash flows
provided by the exercise of employee stock options of $2.1 mil-
lion. The increase in debt includes $34.7 million, net of repay-
ments, borrowed under the Company’s credit agreement, and
$9.3 million of new equipment and real estate financing, offset
by debt payments of $12.6 million. Cash flows used for financ-
ing activities for 2003 included a net decrease in debt of $14.4
million, partially funded by $3.7 million received from the exer-
cise of employee stock options. Cash flows used for financing
activities for 2002 included a net decrease in debt of $4.5 mil-
lion partially funded by $3.3 million received from the exercise
of employee stock options.
During 2004, in order to help finance the acquisition of
Zieman and capital expenditures, the maximum borrowings
under the Company’s credit agreement was increased to $45
million at December 31, 2004, from $30 million at December 31,
2003. Availability under the Company’s credit agreement was
$5.0 million at December 31, 2004, net of $5.3 million in letters
of credit. At December 31, 2004, the Company was in compli-
ance with all debt covenants, except for one covenant pursuant
to the Senior Notes and the credit agreement related to capital
expenditures. A waiver was obtained for the credit agreement,
and the Senior Notes were paid off in accordance with their
original terms. The Company expects to be in compliance with
all debt covenants for the next 12 months.
At December 31, 2004, the Company had outstanding $8
million of 6.95 percent seven-year Senior Notes. The notes orig-
inally aggregated $40 million, and repayment of these notes is
$8 million annually. The final scheduled payment of $8 million
was made in January 2005.
Certain of the Company’s loan agreements contain pre-
payment penalties. Borrowings under the Senior Notes and the
credit agreement are secured only by capital stock of the
Company’s subsidiaries.
Future minimum commitments relating to the Company’s
contractual obligations at December 31, 2004 are as follows
(in thousands):
2005
2006
2007
After
2007
Total
Long-term
indebtedness
Operating leases
Employment
contracts
Royalty
$12,121
2,457
$41,892
1,681
$3,581
1,137
$13,830
1,924
$71,424
7,199
2,199
1,500
1,214
994
5,907
agreement (a)
1,250
1,250
313
Purchase
obligations (b)
3,844
3,100
2,813
6,944
Total
$21,871 $49,423 $6,245 $16,748 $94,287
(a) In addition to the minimum commitments shown here, the Royalty agree-
ment provides for the Company to pay a royalty of 1 percent for the right to
use certain patents related to slide-out systems commencing January 1,
2007 through the expiration of the patents, with payments subsequent to
January 1, 2007 not to exceed $5 million.
(b) These contractual obligations include commitments for capital expendi-
tures and other obligations.
These commitments are described more fully in the Notes
to the Consolidated Financial Statements.
On January 28, 2005, corresponding with the final pay-
ment on the Senior Notes, the maximum borrowings under the
Company’s credit agreement was increased to $55 million.
On February 11, 2005, the Company consummated the
refinancing of its line of credit with JPMorgan Chase Bank, N.A.,
Key Bank National Association and HSBC Bank USA, National
Association (collectively, the “Lenders”). The maximum borrow-
ings under the credit agreement were increased to $60 million
and can be increased by an additional $30 million, upon
approval of the Lenders. Interest on borrowings from the credit
agreement is designated from time to time by the Company as
either the Prime Rate, or LIBOR plus additional interest from 1
percent to 1.80 percent, currently 1.25 percent, depending on
the Company’s performance and financial condition. This credit
agreement expires June 30, 2009.
Simultaneously, the Company consummated a three-year
“shelf-loan” facility with Prudential Investment Management,
Inc. (“Prudential”), pursuant to which the Company can issue,
and Prudential’s affiliates may, in their sole discretion, consider
purchasing in one or a series of transactions, senior promissory
16
2004 ANNUAL REPORT
notes (the “Senior Promissory Notes”) of the Company in the
aggregate principal amount of up to $60 million, to mature no
more than seven years after the date of original issue of each
transaction. Prudential and its affiliates have no obligation to
purchase the Senior Promissory Notes. Interest payable on the
principal of the Senior Promissory Notes will be at rates deter-
mined within five business days after the Company gives
Prudential a request for purchase of Senior Promissory Notes.
The credit agreement is, and the Senior Promissory Notes
if and when issued will be, secured by first priority liens on the
capital stock (or other equity interests) of each of the Company’s
direct and indirect subsidiaries in favor of the Lenders and
Prudential on a pari passu basis.
C O R P O R AT E G O V E R N A N C E
The Company is in compliance with the corporate gover-
nance requirements of the Securities and Exchange Commission
and the New York Stock Exchange. The Company’s governance
documents and committee charters and key practices have been
posted to the Company’s website (www.drewindustries.com)
and are updated periodically. The website also contains, or pro-
vides direct links to, all SEC filings, press releases and investor
presentations. The Company has also established a toll-free
hotline (877-373-9123) to report complaints about the Company’s
accounting, internal controls, auditing matters or other concerns.
The Company received notification in November from
Institutional Stockholders Services, Inc. (“ISS”), a Rockville,
Maryland-based independent research firm that advises institu-
tional investors, that Drew’s corporate governance policies out-
ranked 98.5 percent of all companies listed in the Russell 3000
index. Drew has no business relationships with ISS.
C O N T I N G E N C I E S
Lippert is a defendant in an action entitled SteelCo., Inc. v.
Lippert Components, Inc. and DOES 1 through 20, inclusive,
commenced in Superior Court of the State of California, County
of San Bernardino, on July 16, 2002. On motion of Lippert, the
case was removed to the U.S. District Court, Central District of
California, Riverside Division.
Plaintiff alleges that Lippert violated certain provisions of the
California Business and Professions Code (Sec. 17000 et. seq.)
by allegedly selling chassis and component parts below Lippert’s
costs, engaging in acts intended to destroy competition, wrong-
fully interfering with plaintiff’s economic advantage, and engag-
ing in unfair competition. Plaintiff seeks compensatory damages
of $8.2 million, treble damages, punitive damages, costs and
expenses incurred in the proceeding, and injunctive relief.
Management believes that the case has no merit, and Lippert
is vigorously defending against the allegations in the complaint.
In addition, Lippert asserted counterclaims against plaintiff.
Court-ordered mediation did not result in settlement. On
February 22, 2005, the court granted Lippert’s motion for par-
tial summary judgment limiting plaintiff’s damages to those
incurred prior to December 31, 2002, thereby reducing plain-
tiff’s damage claim from over $8 million (before trebling) to an
amount which the Company believes could be less than $1 mil-
lion based on counsel’s analysis of the testimony of plaintiff’s
and Lippert’s damage experts, although there can be no assur-
ance of the outcome. The court also granted Lippert’s motions
for partial summary judgment as to all aspects of plaintiff’s
unfair competition claim and plaintiff’s claim for an injunction.
The court denied Lippert’s attempt to limit damages to those
incurred prior to May 10, 2002, and certain other aspects of
Lippert’s defense. The court set a trial date of April 5, 2005.
Lippert is a defendant in an action entitled Marlon Harris v.
Lippert Components, Inc. pending in the Superior Court of the
State of California, County of San Bernardino (Case No. SCVSS
094954). Plaintiff, a former employee of Lippert, sustained inju-
ries to his arm and hand while operating a power brake press,
allegedly due to the removal of or failure to provide guards on
the machine.
In December 2004, a jury rendered a verdict in favor of
plaintiff that included compensatory damages of $464,000 and
punitive damages of $4 million. Counsel for Lippert has advised
the Company that, under California law, the award for punitive
damages will most likely be reduced to not in excess of four
times the compensatory damages, or a maximum of $1.9 mil-
lion, although there can be no assurance of the final decision.
Lippert intends to move for a new trial or appeal the verdict
based on the advice of counsel for Lippert that the verdict is
unsupported by the evidence. It is anticipated that a final deci-
sion by the court concerning the reduction of punitive damages
will be reached shortly. In 2004, the Company recorded a
charge of $1.9 million ($945,000 after taxes and the direct
impact on incentive compensation) related to this case.
On August 6, 2004, Keystone RV Company, Inc. filed
a third-party petition against Lippert in an action entitled
Feagins, et. al. v. D.A.R., Inc. d/b/a Fun Time RV, et. al. pending
in the Probate Court, Denton County, State of Texas (Case No.
IA-2002-330-01). Keystone’s claim is for proportionate respon-
sibility/contribution from Lippert in connection with a wrongful
death action against defendants arising from an accident involv-
ing an RV allegedly manufactured by Keystone. Keystone
alleges that Lippert supplied certain components of the RV.
Neither plaintiffs nor any of the other five defendants filed claims
against Lippert. Lippert’s counsel has advised that, at this stage
of the case, based on the current theories of plaintiff’s expert,
Lippert did not commit any act or omission that contributed to
or caused the accident; however, plaintiff’s expert could change
his theory to focus on an alleged act or omission by Lippert. A
co-defendant’s expert could also assert a theory of liability
against Lippert. Plaintiffs seek compensatory damages in
17
DREW INDUSTRIES INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
excess of $130 million plus $25 million of exemplary damages
from each defendant. The case is in the discovery stage, and
there has been no determination of liability. Lippert’s liability
insurer has assigned counsel to defend Keystone’s claim
against Lippert.
In the normal course of business, the Company is subject
to proceedings, lawsuits and other claims. All such matters are
subject to many uncertainties and outcomes that are not pre-
dictable with assurance. While these matters could materially
affect operating results when resolved in future periods, it is
management’s opinion that after final disposition, including
anticipated insurance recoveries, any monetary liability or finan-
cial impact to the Company beyond that provided in the
Consolidated Balance Sheet as of December 31, 2004, would
not be material to the Company’s financial position or annual
results of operations.
C R I T I C A L A C C O U N T I N G P O L I C I E S
The Company’s consolidated financial statements have
been prepared in conformity with accounting principles gener-
ally accepted in the United States of America which requires
that certain estimates and assumptions be made that affect the
amounts and disclosures reported in those financial statements
and the related accompanying notes. Actual results could differ
from these estimates and assumptions. The following critical
accounting policies, some of which are impacted significantly
by judgments, assumptions and estimates, affect the Company’s
consolidated financial statements. Management has discussed
the development and selection of its critical accounting policies
with the Audit Committee of the Company’s Board of Directors
and the Audit Committee has reviewed the disclosure presented
below relating to the critical accounting policies.
Inventories
Inventories (finished goods, work in process and raw mate-
rials) are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost is determined based solely on
those charges incurred in the acquisition and production of the
related inventory (i.e. material, labor and manufacturing over-
head costs). The Company estimates an inventory reserve for
excess quantities and obsolete items based on specific identifi-
cation and historical write-offs, taking into account future
demand and market conditions. If actual demand or market
conditions in the future are less favorable than those estimated,
additional inventory reserves may be required.
Self-Insurance
The Company is self-insured for certain health and workers’
compensation benefits up to certain stop-loss limits. Such costs
are accrued based on known claims and an estimate of incurred,
but not reported (IBNR) claims. IBNR claims are estimated using
historical lag information and other data provided by claims
administrators. This estimation process is subjective, and to the
extent that future actual results differ from original estimates,
adjustments to recorded accruals may be necessary.
Income Taxes
The Company’s tax provision is based on pre-tax income,
statutory tax rates and tax planning strategies. Significant man-
agement judgment is required in determining the tax provision
and in evaluating the Company’s tax position. The Company’s
accompanying Consolidated Balance Sheets include certain
deferred tax assets resulting from deductible temporary differ-
ences, which are expected to reduce future taxable income.
These assets are based on management’s estimate of realiz-
ability based upon forecasted taxable income. Realizability of
these assets is reassessed at the end of each reporting period
based upon the Company’s forecast of future taxable income.
Failure to achieve forecasted taxable income could affect the
ultimate realization of certain deferred tax assets, and may result
in the recording of a valuation reserve. For additional informa-
tion, see Note 9 of Notes to Consolidated Financial Statements.
Impairment of Long-Lived Assets
The Company periodically evaluates whether events or cir-
cumstances have occurred that indicate that long-lived assets
may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances occur, the
Company assesses the recoverability of long-lived assets by
determining whether the carrying value will be recovered
through the expected undiscounted future cash flows resulting
from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value
of the asset, an impairment loss equal to the excess of the asset’s
carrying value over its fair value would be recorded. The long-
term nature of these assets requires the estimation of its cash
inflows and outflows several years into the future. Actual results
and events could differ significantly from management estimates.
Impairment of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are evaluated for
impairment at the reporting unit level on an annual basis and
between annual tests whenever events or circumstances indi-
cate that the carrying value of a reporting unit may exceed its
fair value. The Company conducts its required annual impair-
ment test during the fourth quarter of each fiscal year. The
impairment test uses a discounted cash flow model to estimate
the fair value of a reporting unit. This model requires the use
of long-term planning forecasts and assumptions regarding
industry-specific economic conditions that are outside the con-
trol of the Company. Actual results and events could differ sig-
nificantly from management estimates.
Legal Contingencies
The Company is subject to proceedings, lawsuits and other
claims in the normal course of business. Each quarter, the
Company formally evaluates pending proceedings, lawsuits
and other claims with counsel. These contingencies require the
judgment of management in assessing the likelihood of adverse
outcomes and the potential range of probable losses. Liabilities
for legal matters are accrued for when it is probable that a liability
18
2004 ANNUAL REPORT
Other Estimates
The Company makes a number of other estimates and
judgments in the ordinary course of business related to product
returns, doubtful accounts, warranty obligations, lease termina-
tions, asset retirement obligations, post-retirement benefits and
contingencies. Establishing reserves for these matters requires
management’s estimate and judgment with regard to risk and
ultimate liability or realization. As a result, these estimates are
based on management’s current understanding of the underlying
facts and circumstances and may also be developed in conjunc-
tion with outside advisors, as appropriate. Because of uncer-
tainties related to the ultimate outcome of these issues or the
possibilities of changes in the underlying facts and circum-
stances, additional charges related to these issues could be
required in the future.
I N F L AT I O N
The prices of raw materials, consisting primarily of steel,
vinyl, aluminum, 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. In mid-
December 2003 and continuing into the second half of 2004,
the Company was notified by its steel suppliers of unprece-
dented steel cost increases. Depending upon the type of steel
purchased, steel costs are currently double or triple the levels
they were prior to December 2003. Steel costs appear to have
stabilized and further cost increases are not projected for 2005.
In 2004, the Company has also received cost increases from
suppliers of aluminum, vinyl and ABS resin. The Company expe-
rienced modest increases in its labor costs in 2004 and 2003
related to inflation.
has been incurred and the amount of the liability can be reason-
ably estimated, based upon current law and existing information.
Estimates of contingencies may change in the future due to new
developments or changes in legal approach. Actual results and
events could differ significantly from management estimates.
Stock Options
In 2002, the Company adopted the fair value method of
accounting for stock options as contained in SFAS No. 123,
“Accounting for Stock-Based Compensation,” which is consid-
ered the preferable method of accounting for stock-based
employee compensation. As a result, the fair value of all
employee stock options granted after January 1, 2002 is being
charged against earnings over the period of time during which
the options vest. To determine fair value, the Company uses a
method known as the Black-Scholes option-pricing method.
Fair value is determined as of the date the option is granted.
The fair value of options granted before January 1, 2002
are not being charged against earnings since the Company is
using the prospective method, as allowed under SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and
Disclosures.”
If the Company had charged compensation cost of options
granted prior to January 1, 2002 to earnings, by using the mod-
ified prospective method under SFAS No. 148, net income (loss)
would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
Net income (loss), as reported
Add: Stock-based employee
compensation expense for
stock options included in
reported net income (loss),
net of related tax effects
Deduct: Total stock-based
employee compensation
expense for stock options
determined under fair
value method for all stock
option awards, net of
related tax effects
Year Ended December 31,
2004
2003
2002
$ 25,108
$ 19,423
$ (14,598)
550
122
6
(799)
(409)
(392)
Pro forma net income (loss)
$ 24,859
$ 19,136
$ (14,984)
Net income (loss) per
common share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
$ 2.44
$ 2.42
$ 2.37
$ 2.35
$ 1.92
$ 1.90
$ 1.88
$ 1.86
$
$
$
$
(1.49)
(1.53)
(1.46)
(1.50)
19
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other income
Operating profit
Interest expense, net
Income from continuing operations before income taxes and cumulative
effect of change in accounting principle
Provision for income taxes
Income from continuing operations before cumulative effect of change
in accounting principle
Discontinued operations (net of taxes)
Income before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle for goodwill
(net of taxes of $2,743)
Net income (loss)
Income (loss) per common share:
Income from continuing operations before cumulative effect of change
in accounting principle:
Basic
Diluted
Discontinued operations, net of taxes:
Basic
Diluted
Cumulative effect of change in accounting principle for goodwill, net of taxes:
Basic
Diluted
Net income (loss):
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended December 31,
2004
2003
2002
$ 530,870
414,491
$ 353,116
266,435
$ 325,431
246,844
116,379
72,811
428
43,996
3,139
40,857
15,749
25,108
25,108
86,681
52,404
34,277
3,034
31,243
11,868
19,375
48
19,423
78,587
49,374
29,213
3,566
25,647
9,883
15,764
(200)
15,564
(30,162)
$ 25,108
$ 19,423
$ (14,598)
$
$
2.44
2.37
$
$
1.92
1.88
$
$
2.44
2.37
$
$
1.92
1.88
$
$
$
$
$
$
$
$
1.61
1.57
(.02)
(.02)
(3.08)
(3.01)
(1.49)
(1.46)
20
2004 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, trade, less allowances of $1,526 in 2004 and $1,400 in 2003
Inventories
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Goodwill
Other intangible assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable, including current maturities of long-term indebtedness
Accounts payable, trade
Accrued expenses and other current liabilities
Total current liabilities
Long-term indebtedness
Other long-term liabilities
Total liabilities
Stockholders’ equity
Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 12,459,853
shares in 2004 and 12,353,168 shares in 2003
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost—2,149,325 shares in 2004 and 2003
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2004
2003
$ 2,424
26,099
72,332
10,552
111,407
99,781
16,755
6,070
4,040
$ 8,781
14,844
37,311
7,478
68,414
72,211
12,333
4,953
2,193
$238,053
$160,104
$ 12,121
13,371
28,711
54,203
59,303
2,503
$ 9,931
9,089
19,694
38,714
24,825
2,912
$116,009
$ 66,451
125
35,914
105,413
59
141,511
(19,467)
124
32,691
80,305
113,120
(19,467)
122,044
93,653
$238,053
$160,104
21
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows provided by operating
$ 25,108
$ 19,423
$ (14,598)
Year Ended December 31,
2004
2003
2002
activities:
Cumulative effect of change in accounting principle for goodwill, net of taxes
Discontinued operations, net of taxes
Income from continuing operations
Depreciation and amortization
Deferred taxes
Loss on disposal of fixed assets
Stock-based compensation expense
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Net cash flows provided by continuing operating activities
Income (loss) from discontinued operations
Changes in discontinued operations
Net cash flows provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of company’s business
Proceeds from sales of fixed assets
Other
(48)
19,375
7,863
383
92
411
(1,001)
218
2,524
926
30,791
48
702
31,541
(5,073)
(7,397)
78
30,162
200
15,764
7,332
1,748
125
83
(2,476)
(11,501)
(4,542)
4,534
11,067
(200)
1,333
12,200
(10,538)
(2,070)
595
25,108
9,300
(1,394)
828
1,113
(6,127)
(28,447)
2,232
6,267
8,880
8,880
(27,058)
(21,388)
369
(343)
Net cash flows used for investing activities
(48,420)
(12,392)
(12,013)
Cash flows from financing activities:
Proceeds from credit agreement and other borrowings
Repayments under credit agreement and other borrowings
Exercise of stock options
Other
221,846
(190,418)
2,111
(356)
31,550
(45,949)
3,715
77,350
(81,866)
3,348
106
Net cash flows provided by (used for) financing activities
33,183
(10,684)
(1,062)
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.
(6,357)
8,781
8,465
316
(875)
1,191
$
2,424
$ 8,781
$
316
$
3,228
$ 15,053
$ 3,071
$ 9,449
$ 3,895
$ 10,038
22
2004 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except shares)
Balance—December 31, 2001
Net loss
Issuance of 264,710 shares of common
stock pursuant to stock option plan
Income tax benefit relating to issuance
of common stock pursuant to stock
option plan
Stock-based compensation expense
Balance—December 31, 2002
Net income
Issuance of 268,380 shares of common
stock pursuant to stock option plan
Income tax benefit relating to issuance
of common stock pursuant to stock
option plan
Stock-based compensation expense
Balance—December 31, 2003
Net income
Unrealized gain on interest rate swap,
net of taxes
Comprehensive income
Issuance of 106,685 shares of common
stock pursuant to stock option plan
Income tax benefit relating to issuance
of common stock pursuant to stock
option plan
Stock-based compensation expense
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
$118
$25,079
$ 75,480
(14,598)
$—
Treasury
Stock
$(19,467)
Total
Stockholders’
Equity
$ 81,210
(14,598)
3
2,877
468
144
121
28,568
60,882
19,423
—
(19,467)
3
2,848
864
411
124
32,691
80,305
25,108
1
1,280
830
1,113
(19,467)
—
59
2,880
468
144
70,104
19,423
2,851
864
411
93,653
25,108
59
25,167
1,281
830
1,113
Balance—December 31, 2004
$125
$35,914
$ 105,413
$59
$(19,467)
$ 122,044
The accompanying notes are an integral part of these consolidated financial statements.
23
DREW INDUSTRIES INCORPORATED
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
Maintenance and repairs are charged to operations as incurred;
significant betterments are capitalized.
Basis of Presentation
Income Taxes
The Consolidated Financial Statements include the accounts
of Drew Industries Incorporated and its subsidiaries. Drew has
no unconsolidated subsidiaries. Drew’s wholly-owned active
subsidiaries are Kinro, Inc. and its subsidiaries (“Kinro”), and
Lippert Components, Inc. and its subsidiaries (“Lippert”). Drew,
through its wholly-owned subsidiaries, supplies a broad array of
components for recreational vehicles (“RVs”) and manufactured
homes (“MHs”), and to a lesser extent specialty trailers for lei-
sure products. All significant intercompany balances and trans-
actions have been eliminated. Certain prior year balances have
been reclassified to conform to current year presentation.
Manufactured products include vinyl and aluminum windows
and doors, chassis, chassis parts, RV slide-out mechanisms
and related power units, electric stabilizer jacks, and bath and
shower units. The axle and tire refurbishing business of Lippert
Tire and Axle, Inc. (“LTA”), the Company’s wholly-owned sub-
sidiary, was discontinued. The last of LTA’s operations was sold
in January 2003.
Approximately 65 percent of the Company’s sales in 2004
were made by its RV products segment and 35 percent were
made by its MH products segment. At December 31, 2004,
the Company operated 50 plants in 18 states and one plant
in 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 money market
funds, are recorded at cost which approximates market value. At
December 31, 2004, the Company had $2,109,000 in restricted
cash, primarily related to an Industrial Revenue Bond entered
into by the Company in October 2004.
Accounts Receivable
Accounts receivable are stated at the historical carrying
amount, net of write-offs and allowances. The Company estab-
lishes allowances based upon historical experience and any
specific customer collection issues that the Company has iden-
tified. Uncollectible accounts receivable are written off when a
settlement is reached or when the Company has determined
that the balance will not be collected.
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.
Fixed Assets
Fixed assets are depreciated on a straight-line basis over
the estimated useful lives of properties and equipment. Lease-
hold improvements and leased equipment are amortized over
the shorter of the lives of the leases or the underlying assets.
The Company accounts for income taxes under the provi-
sions of Statement of Financial Accounting Standards (“SFAS”)
No. 109, “Accounting for Income Taxes.” Deferred tax assets
and liabilities are determined based on the temporary differ-
ences between the financial reporting and tax bases of assets
and liabilities, applying enacted statutory tax rates in effect for
the year in which the differences are expected to reverse.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price and
related costs over the value assigned to the net tangible and
identifiable intangible assets of businesses acquired. As of
December 31, 2004 and 2003, goodwill that arose from acqui-
sitions was $16,755,000 and $12,333,000, respectively. Under
SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
and other intangible assets with indefinite lives are not amor-
tized, but instead are tested for impairment annually, or more
frequently if certain circumstances indicate a possible impair-
ment may exist. The Company evaluates the recoverability of
goodwill using a two-step impairment test approach at the
reporting unit level. In the first step the fair value for the report-
ing unit is compared to its book value including goodwill. Fair
value is determined based on discounted cash flows, appraised
values or management’s estimates, depending upon the nature
of the assets. In the case that the fair value of the reporting unit
is less than the book value, a second step is performed which
compares the implied fair value of the reporting unit’s goodwill
to the book value of the goodwill. The fair value for the goodwill is
determined based on the difference between the fair values of the
reporting unit and the net fair values of the identifiable assets and
liabilities of such reporting units. If the fair value of the goodwill
is less than the book value, the difference is recognized as an
impairment. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective esti-
mated useful lives to the estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.”
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets
in accordance with SFAS No. 144, “Accounting for the Impair-
ment or Disposal of Long-Lived Assets.” SFAS No. 144 estab-
lishes a uniform accounting model for long-lived assets. The
Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Upon such an
occurrence, recoverability of assets to be held and used is
measured by comparing the carrying amount of an asset to
forecasted undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of the asset
exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized by the amount by which the
24
2004 ANNUAL REPORT
carrying amount of the asset exceeds the fair value of the asset.
For long-lived assets held for sale, assets are written down to
fair value, less cost to sell. Fair value is determined based on
discounted cash flows, appraised values or management’s esti-
mates, depending upon the nature of the assets. In 2004, the
Company recorded a charge to operations of $513,000 related
to impairments of long-lived assets, and an additional charge to
operations of $377,000 related to lease terminations, both of
which are recorded in cost of sales in the Consolidated State-
ments of Income. In 2003, the Company recorded a charge to
operations of $80,000 related to impairments of long-lived
assets which is recorded in cost of sales in the Consolidated
Statements of Income. There were no impairments of long-lived
assets in 2002.
Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and short-term borrowings
approximated fair values due to the short-term maturities of
these instruments. The fair value of the Company’s borrowings
under its credit agreement and other variable rate borrowings
approximate the book value due to their floating rate interest
rate terms. The fair value of the Company’s Senior Notes and
other fixed rate borrowings are estimated based on year-end
prevailing market interest rates for similar debt instruments. The
fair value of the Company’s interest rate swap is based upon
prevailing market values for similar instruments.
Stock Options
In 2002, the Company adopted the fair value method of
accounting for stock options as contained in SFAS No. 123,
“Accounting for Stock-Based Compensation,” which is consid-
ered the preferable method of accounting for stock-based
employee compensation. During the transition period, the
Company is utilizing the prospective method under SFAS No.
148, “Accounting for Stock-Based Compensation—Transition
and Disclosures.” All employee stock options granted after
January 1, 2002 are being expensed on a straight line basis
over the stock option vesting period based on fair value, deter-
mined using the Black-Scholes option-pricing method, at the
date the options were granted. This resulted in charges to oper-
ations of $894,000, $197,000 and $10,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, relating to
options for 449,000 shares granted between 2002 and 2004.
The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2004
2003
2002
Risk-free interest rate
Expected volatility
Expected life
Contractual life
Dividend yield
Fair value of options granted
3.54%
34.7%
5.2 years
6.0 years
N/A
$11.81
3.30%
32.5%
4.8 years
6.0 years
N/A
$8.62
3.14%
37.5%
5.0 years
6.0 years
N/A
$5.96
Historically, the Company had applied the “disclosure only” option of SFAS No. 123. Accordingly, no compensation cost has
been recognized for stock options granted prior to January 1, 2002. If compensation cost for the Company’s stock option plan had
been recognized in the income statement based upon the fair value method, net income (loss) would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):
Net income (loss), as reported
Add: Stock-based employee compensation expense for stock options included in reported
net income (loss), net of related tax effects
Deduct: Total stock-based employee compensation expense for stock options determined
under fair value method for all stock option awards, net of related tax effects
Pro forma net income (loss)
Net income (loss) per common share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
Year Ended December 31,
2004
2003
2002
$ 25,108
$ 19,423
$ (14,598)
550
122
6
(799)
(409)
(392)
$ 24,859
$ 19,136
$ (14,984)
$ 2.44
$ 2.42
$ 2.37
$ 2.35
$ 1.92
$ 1.90
$ 1.88
$ 1.86
$
$
$
$
(1.49)
(1.53)
(1.46)
(1.50)
Revenue Recognition
Use of Estimates
The Company recognizes revenue when products are
shipped and the customer takes ownership and assumes risk of
loss, collection of the relevant receivable is probable, and the
sales price is fixed or determinable.
Shipping and Handling Costs
The Company records shipping and handling costs within
selling, general and administrative expenses. Such costs aggre-
gated $19,332,000, $14,621,000 and $13,473,000 in 2004, 2003
and 2002, respectively.
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 ongoing basis, the Company evalu-
ates its estimates, including those related to product returns,
doubtful accounts, inventories, goodwill and other intangible
assets, income taxes, warranty obligations, self-insurance
25
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
obligations, lease terminations, asset retirement obligations,
long-lived assets, 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.
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment,” a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation” and superseding APB Opinion
No. 25, “Accounting for Stock Issued to Employees.” SFAS No.
123R requires the Company to expense grants made under its
stock option plan. SFAS No. 123R is effective for the first interim
or annual period beginning after June 15, 2005. Upon adoption
of SFAS No. 123R, amounts previously disclosed under SFAS
No. 123 for grants prior to January 1, 2002 will be recorded in
the Consolidated Income Statement. The implementation of
SFAS No. 123R is expected to have an impact on earnings
of less than $75,000 in both 2005 and 2006 for options granted
prior to January 1, 2002.
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
recreational vehicle products segment (the “RV segment”) and
Information relating to segments follows (in thousands):
the manufactured housing products segment (the “MH seg-
ment”). The RV segment manufactures a variety of products
used in the production of recreational vehicles, including win-
dows, doors, chassis, chassis parts, slide-out mechanisms and
related power units, and electric stabilizer jacks. The RV segment
also manufactures specialty trailers for equipment hauling,
boats, personal watercraft and snowmobiles. The MH segment
manufactures a variety of products used in the construction of
manufactured homes, and to a lesser extent, modular housing
and office units, including vinyl and aluminum windows, chassis,
chassis parts, and thermo-formed bath and shower units. Inter-
segment sales are insignificant. Until the second quarter of 2004,
the Company’s RV segment included only recreational vehicle
products, however, with the Company’s acquisition of California-
based Zieman Manufacturing Company (“Zieman”), the
specialty trailer business of Zieman has been added to the RV
segment. Other than sales of specialty trailers, which aggre-
gated approximately $17.5 million in 2004, sales to industries
other than manufacturers of RVs and MHs are not significant.
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 RV and MH segments are the same as those described in
Note 1 of Notes to Consolidated Financial Statements.
Year ended December 31, 2004
Revenues from external customers(a)
Segment operating profit (loss)
Segment assets(b)
Expenditures for long-lived assets(c)
Depreciation and amortization
Year ended December 31, 2003
Revenues from external customers(a)
Segment operating profit (loss)
Segment assets(b)
Expenditures for long-lived assets(c)
Depreciation and amortization
Year ended December 31, 2002
Revenues from external customers(a)
Segment operating profit (loss)
Segment assets(b)
Expenditures for long-lived assets(c)
Depreciation and amortization
Segments
RV
MH
Total
Corporate
and Other
Intangibles
Total
$347,584
31,832
120,974
25,466
4,196
$219,505
24,779
69,158
3,725
3,055
$171,094
16,162
61,320
3,781
2,795
$183,286
18,547
77,196
13,377
4,043
$133,611
14,358
55,172
1,798
4,007
$154,337
16,900
62,804
7,475
3,774
$530,870
50,379
198,170
38,843
8,239
$353,116
39,137
124,330
5,524
7,062
$325,431
33,062
124,124
11,256
6,569
$ (5,351)
16,301
36
29
$ (4,078)
17,822
26
19
$ (3,103)
12,543
16
17
$ (1,032)
23,582
1,032
$
(782)
17,952
782
$
(746)
8,729
746
$ 530,870
43,996
238,053
38,879
9,300
$ 353,116
34,277
160,104
5,550
7,863
$ 325,431
29,213
145,396
11,272
7,332
a)
One customer of the RV segment accounted for 22 percent, 23 percent and 20 percent of the Company’s consolidated net sales in the years ended
December 31, 2004, 2003 and 2002, respectively. Another customer of the RV segment accounted for 12 percent and 11 percent of the Company’s con-
solidated net sales in the years ended December 31, 2004 and 2003, respectively. One customer of both segments accounted for 12 percent of the
Company’s consolidated net sales in each of the three years ended December 31, 2004.
b) Segment assets include accounts receivable, inventories and fixed assets. Corporate and other assets include cash and cash equivalents, prepaid expenses
and other current assets, discontinued operations, deferred taxes and other assets, excluding intangible assets. Intangibles include goodwill, other intangible
assets and deferred charges which are not considered in the measurement of each segment’s performance.
c)
Segment expenditures for long-lived assets include capital expenditures and fixed assets purchased as part of the acquisition of companies and busi-
nesses. The Company purchased $11,821,000, $477,000 and $734,000 of fixed assets as part of the acquisitions of businesses in 2004, 2003 and 2002,
respectively. Expenditures for other long-lived assets, goodwill and other intangible assets are not included in the segment since they are not considered in
the measurement of each segment’s performance.
26
2004 ANNUAL REPORT
Product revenue was as follows (in thousands):
Total consideration was allocated as follows (in thousands):
2004
2003
$153,861
98,040
65,581
17,231
12,871
$ 97,839
78,599
37,569
561
4,937
Net tangible assets acquired
Identifiable intangible assets
Goodwill
Total consideration
Less: Debt assumed
Total cash consideration
347,584
219,505
Other Acquisitions
$19,644
2,600
4,384
26,628
(5,240)
$21,388
Recreational Vehicles:
Chassis and chassis parts
Windows, doors and screens
Slide-out mechanisms
Specialty trailers
Other
Manufactured Housing:
Windows, doors and screens
Chassis and chassis parts
Shower and bath units
Other
Net Sales
80,222
68,606
17,159
17,299
75,962
36,385
15,734
5,530
183,286
133,611
$530,870
$353,116
3 . A C Q U I S I T I O N S , G O O D W I L L ,
I N TA N G I B L E A S S E T S A N D
D I S C O N T I N U E D O P E R AT I O N S
Acquisition of Zieman
On May 4, 2004, the Company acquired California-based
Zieman. Zieman is a manufacturer of specialty trailers for equip-
ment hauling, boats, personal watercraft and snowmobiles, and
chassis and chassis parts for towable recreational vehicles and
manufactured homes. The purchase price was $21.4 million,
plus $5.2 million of Zieman’s debt which the Company assumed.
The purchase price was funded with borrowings under the
Company’s credit agreement. Zieman had 10 plants in 4 states
in the western United States.
The results of the acquired Zieman business have been
included in the Company’s Consolidated Statements of Income
beginning May 4, 2004. Zieman’s sales for its fiscal year ended
December 31, 2003 were approximately $42 million, and for the
year ended December 31, 2004 Zieman’s sales were approxi-
mately $58 million, including $40 million subsequent to its
acquisition by the Company. In 2003, Zieman had approxi-
mately $12 million in sales of RV chassis and chassis parts,
approximately $19 million in sales of marine and leisure trailers,
and $11 million of MH chassis and chassis parts. The opera-
tions of Zieman are being integrated with those of Lippert. The
production processes and raw materials used by Zieman are
substantially similar to those of Lippert, and it is expected that
the operating margins achieved by this newly-acquired busi-
ness will, over time, approximate those achieved by Lippert.
On July 17, 2003, the Company acquired Kansas-based
LTM Manufacturing LLC (“LTM”), with annual sales of approxi-
mately $4.5 million. LTM, the holder of several innovative patents,
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 pur-
chase 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.
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, chas-
sis for towable recreational vehicles. This acquisition repre-
sented an expansion of Drew’s chassis manufacturing business
into specialty chassis. The $3.6 million purchase price included
the accounts receivable and certain inventory and fixed assets
of ET&T. Production of ET&T’s products was immediately trans-
ferred to the Company’s existing factories, without adding
any overhead. The purchase price was funded with Drew’s
available cash.
Total consideration for the LTM and ET&T acquisitions was
allocated as follows (in thousands):
Net tangible assets acquired
Identifiable intangible assets
Goodwill
Total cash consideration
$ 739
1,330
5,328
$7,397
In 2002, the Company acquired, for $1.4 million, the busi-
ness of a manufacturer of RV chassis, which had approxi-
mately $7 million of annual sales. Production for these newly
acquired accounts has been integrated into the Company’s
existing factories.
27
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Intangible Assets
Other intangible assets consist of the following at December
31, 2004 (in thousands):
Accumulated
Gross Amortization Net
Estimated
Useful Life
in Years
Non-compete
agreements
Customer
relationships
Tradenames
Patents
Royalty
agreement(a)
Other intangible
assets
$ 549
$350
$ 199
5 to 7
2,700
800
795
424
108
65
8 to 12
7
8 to 12
2,276
692
730
3,897
2,173
$ 6,070
Other intangible assets consist of the following at December
(2005), $735,000 (2006), $596,000 (2007), $471,000 (2008)
and $365,000 (2009).
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 liabili-
ties, 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
$2,743,000. Such charge was recorded as a cumulative effect
of change in accounting principle in 2002.
Goodwill by reportable segment is as follows (in thousands):
MH Segment
RV Segment
Total
31, 2003 (in thousands):
Accumulated
Gross Amortization Net
Estimated
Useful Life
in Years
Balance—
January 1, 2003
Acquisitions in 2003
Non-compete
agreements
Customer
relationships
Patents
Royalty
agreement(a)
Other intangible
assets
$2,480
$2,088
$ 392
5 to 7
900
452
41
9
8
12
859
443
1,694
3,259
$ 4,953
(a) In February 2003, the Company entered into an agreement for a non-
exclusive license for certain patents related to slide-out-systems.
Royalties are payable on an annual declining percentage of sales of cer-
tain slide-out systems produced by the Company, with a minimum annual
royalty of $1,000,000 for 2002 and annual minimum royalties of
$1,250,000 for 2003 through 2006. The agreement also provides for the
Company to pay a royalty of 1% commencing January 1, 2007 through
the expiration of the patents, with payments subsequent to January 1,
2007 not to exceed $5 million. At December 31, 2004, the Company has
a liability of $2,624,000 relating to the present value of the remaining
minimum royalties, classified in the Balance Sheet in accrued expenses
and other current liabilities ($1,119,000) and other long-term liabilities
($1,505,000). The royalty agreement asset was reduced by $1,086,000 in
each of 2004 and 2003. Payments of $1,250,000 and $938,000 were
made in 2004 and 2003, respectively. The balance due of $312,000 for
2004 was paid in January 2005. At December 31, 2003, the Company
had a liability of $3,673,000 relating to the present value of the remaining
minimum royalties, classified in the Balance Sheet in accrued expenses
and other current liabilities ($1,049,000) and other long-term liabilities
($2,624,000). The expense related to the royalty agreement asset is clas-
sified in the Consolidated Statements of Income in Cost of Sales. In addi-
tion, the Company recorded $201,000 and $228,000 of interest expense
related to the accretion of the minimum royalty payments liability for 2004
and 2003, respectively.
Amortization expense related to intangible assets (exclud-
ing goodwill) amounted to $740,000, $472,000 and $409,000
for 2004, 2003 and 2002, respectively. Estimated amortization
expense for the next five fiscal years is as follows: $839,000
$3,161
3,161
40
$ 3,882
5,290
$ 7,043
5,290
9,172
4,344
38
12,333
4,384
38
Balance—
December 31, 2003
Acquisitions in 2004
Other
Balance—
December 31, 2004
$3,201
$13,554
$16,755
The Company has elected to perform its annual goodwill
impairment procedures for all of its reporting units as of
November 30, and therefore, the Company updated its carrying
value calculations and fair value estimates for each of its report-
ing units as of November 30, 2004. Based on the comparison
of the carrying values to the estimated fair values, the Company
has concluded that no goodwill impairment existed at that time.
The Company plans to update its review as of November 30,
2005, or sooner, if events occur or circumstances change
that could reduce the fair value of a reporting unit below its
carrying value.
Discontinued Operations
The axle and tire refurbishing business of LTA did not per-
form well from 2000 through 2002, primarily due to increased
competition and the decline in the manufactured housing indus-
try, which severely affected operating margins. By January
2003, the axle and tire business of LTA had ceased operation.
As a result, the axle and tire refurbishing business is classified
as discontinued operations in the Consolidated Financial State-
ments pursuant to SFAS No. 144. Discontinued operations are
presented net of tax expense (benefit) of $26,000 and ($102,000)
for the years ended December 31, 2003 and 2002, respectively.
The proceeds from the disposition of all other significant
assets of LTA’s axle and tire refurbishing business, consisting
primarily of inventory and accounts receivable, were collected
28
2004 ANNUAL REPORT
in January 2003 and resulted in a small gain. The discontinued
axle and tire refurbishing business had previously been included
in the Company’s MH segment, and had revenues of $11.2 million
in 2002.
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
December 31,
2004
2003
$10,816
2,112
59,404
$ 7,438
1,165
28,708
$72,332
$37,311
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
December 31,
2004
2003
$ 12,362
$ 6,897
60,423
1,438
47,187
3,113
4,997
14,013
54,329
1,616
39,342
2,452
4,432
419
143,533
109,487
43,752
37,276
Estimated
Useful Life
in Years
10 to 39
2 to 11
3 to 10
3 to 7
3 to 10
Fixed assets, net
$ 99,781
$ 72,211
Depreciation and amortization of fixed assets consists of
(in thousands):
Charged to cost of sales
Charged to selling, general and
Year Ended December 31,
2004
2003
2002
$7,115
$6,354
$5,604
administrative expenses
1,132
726
694
Total
$8,247
$7,080
$6,298
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 expenses and other
Total
December 31,
2004
2003
$16,497
12,214
$12,033
7,661
$28,711
$19,694
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 $1,105,000, $994,000 and $914,000 to
these plans during the years ended December 31, 2004, 2003
and 2002, 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 on January 28, with interest payable
semi-annually at the rate of 6.95% per annum,
final payment due January 28, 2005
Notes payable pursuant to a credit agreement
expiring April 30, 2006 consisting of a line of
credit, not to exceed $45,000 at December 31,
2004 and $30,000 at December 31, 2003;
interest at prime rate or LIBOR plus a
rate margin based upon the Company’s
performance(a) (b)
Industrial Revenue Bonds, interest rates at
December 31, 2004 of 2.15% to 6.28%, due
2008 through 2017; secured by certain real
estate and equipment
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
Other loans primarily secured by certain real
estate and equipment, due 2005 to 2011, with
fixed rates of 5.18% to 9.31%
Other loans primarily secured by certain real
estate and equipment, due 2006 to 2016, with
variable rates of 3.75% to 7.00%
Less current portion
December 31,
2004
2003
$ 8,000
$ 16,000
34,725
10,917
7,858
4,035
4,484
9,183
2,569
4,564
71,424
12,121
3,845
34,756
9,931
Total long-term indebtedness
$ 59,303
$ 24,825
(a) The weighted average interest rate on these borrowings, including the
affect of the interest rate swap noted below, was 4.66 percent at
December 31, 2004. Pursuant to the performance schedule, the interest
rate on LIBOR loans was LIBOR plus 1.5 percent at December 31, 2004
and 2003.
(b) As of December 31, 2004 and 2003, the Company had letters of credit of
$5.3 million and $2.9 million outstanding under this credit agreement,
respectively.
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. At
December 31, 2004, the Company was in compliance with all
such requirements, except for one covenant pursuant to the
Senior Notes and the credit agreement related to capital expen-
ditures. A waiver was obtained for the credit agreement, and
the Senior Notes were paid off in January 2005 in accordance
29
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with their original terms. Certain of the Company’s loan agree-
ments contain prepayment penalties. Borrowings under the
Senior Notes and the credit agreement are secured only by
capital stock of the Company’s subsidiaries.
On May 4, 2004, simultaneous with the acquisition of
Zieman, the maximum borrowing under the credit agreement
was increased from $30 million to $50 million and the expiration
date of the credit agreement was extended until April 30, 2006.
In addition, the commitment fee was reduced to 1/4 of one per-
cent per annum from 3/8 of one percent per annum, on the
daily unused amount. On June 24, 2004, the maximum borrow-
ing under the credit agreement was increased from $50 million
to $54 million through July 30, 2004, and increased again, to
$55 million, on August 31, 2004, to meet the seasonally high
cash flow needs of the Company. The maximum borrowing
under the credit agreement automatically reduced to $50 million
on October 31, 2004 and $45 million on November 30, 2004.
On January 28, 2005, corresponding with the final pay-
ment on the Senior Notes, the maximum borrowings under the
Company’s credit agreement was increased to $55 million.
On February 11, 2005, the Company consummated the
refinancing of its line of credit with JPMorgan Chase Bank, N.A.,
Key Bank National Association and HSBC Bank USA, National
Association (collectively, the “Lenders”). The maximum borrow-
ings under the credit agreement were increased to $60 million
and can be increased by an additional $30 million, upon
approval of the Lenders. Interest on borrowings from the credit
agreement is designated from time to time by the Company as
either the Prime Rate, or LIBOR plus additional interest at from
1 percent to 1.80 percent, currently 1.25 percent, depending on
the Company’s performance and financial condition. This credit
agreement expires June 30, 2009.
Simultaneously, the Company consummated a three-year
“shelf-loan” facility with Prudential Investment Management,
Inc. (“Prudential”), pursuant to which the Company can issue,
and Prudential’s affiliates may, in their sole discretion, consider
purchasing in one or a series of transactions, senior promissory
notes (the “Senior Promissory Notes”) of the Company in the
aggregate principal amount of up to $60 million, to mature no
more than seven years after the date of original issue of each
transaction. Prudential and its affiliates have no obligation to
purchase the Senior Promissory Notes. Interest payable on the
principal of the Senior Promissory Notes will be at rates deter-
mined within five business days after the Company gives
Prudential a request for purchase of Senior Promissory Notes.
The credit agreement is, and the Senior Promissory Notes
if and when issued will be, secured by first priority liens on the
capital stock (or other equity interests) of each of the Company’s
direct and indirect subsidiaries in favor of the Lenders and
Prudential on a pari passu basis.
The Company has unsecured letters of credit outstanding,
unrelated to the credit agreement, which aggregate $3.8 million
and $1.7 million at December 31, 2004 and 2003, respectively.
In connection with the acquisition of Zieman, the Com-
pany assumed $5.2 million of Zieman’s debt. Included in
Zieman’s debt was a line of credit for $2.5 million, which was
repaid on October 29, 2004. The remaining debt of Zieman
consists of Industrial Revenue Bonds, real estate mortgages
and other loans.
The amount of maturities of long-term indebtedness are as
follows (in thousands):
2005
2006
2007
2008
2009
Thereafter
Less current portion
Total long-term indebtedness
$12,121
41,892
3,581
5,115
2,714
6,001
71,424
12,121
$59,303
On October 18, 2004, the Company entered into a five-year
interest rate swap with KeyBank National Association with a
notional amount of $20,000,000 from which it will receive peri-
odic payments at the 3 month LIBOR rate plus the Company’s
applicable spread and make periodic payments at a fixed rate
of 3.3525% plus the Company’s applicable spread, with settle-
ment and rate reset dates every November 15, February 15,
May 15 and August 15. The notional amount of the interest rate
swap decreases by $1,000,000 on each quarterly reset date
beginning February 15, 2005. The fair value of the swap was
zero at inception. The Company has designated this swap
as cash flow hedge of certain borrowings under the credit
agreement and recognized the effective portion of the change
in fair value as part of other comprehensive income, with the
ineffective portion recognized in earnings currently. The fair
value of this swap at December 31, 2004 was $59,000, net of
taxes of $38,000.
The Company believes the interest rates on instruments
similar to its debt approximate the rates paid by the Company.
Therefore, the book value of such debt approximates fair value
at December 31, 2004 and 2003.
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):
Current:
Federal
State
Deferred:
Federal
State
Year Ended December 31,
2004
2003
2002
$14,655
2,487
$10,009
1,476
$7,137
998
(1,114)
(279)
516
(133)
1,475
273
Total income tax provision
$15,749
$11,868
$9,883
30
2004 ANNUAL REPORT
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
Year Ended December 31,
2004
2003
2002
$14,300
$10,935
$8,976
1,435
152
(138)
873
90
(30)
826
79
2
Provision for income taxes
$15,749
$11,868
$9,883
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2004 and 2003 are as follows
(in thousands):
Deferred tax assets:
Accounts receivable
Inventories
Goodwill and other assets
Accrued insurance
Employee benefits
Other
December 31,
2004
2003
$
722
1,330
3,638
1,806
1,324
1,502
$ 465
885
4,055
764
836
711
Total deferred tax assets
10,322
7,716
Deferred tax liabilities:
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets
4,354
38
3,920
4,392
3,920
$ 5,930
$3,796
The Company concluded that it is more likely than not that
the deferred tax assets at December 31, 2004 will be realized in
the ordinary course of operations based on scheduling of
deferred tax liabilities and income from operating activities.
Tax benefits on stock option exercises of $830,000,
$864,000 and $468,000 were credited directly to stockholders’
equity for 2004, 2003 and 2002, respectively, relating to stock
options granted prior to January 1, 2002.
Net deferred 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,
2004
2003
$6,585
(655)
$3,547
249
$5,930
$3,796
Also, included in prepaid expenses and other current
assets are Federal income tax refunds receivable of $572,000
and $852,000 at December 31, 2004 and 2003, respectively.
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, machinery and equipment, 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 asso-
ciated with the leased property.
Future minimum lease payments under operating leases at
December 31, 2004 are summarized as follows (in thousands):
2005
2006
2007
2008
2009
Thereafter
Total lease obligations
$2,457
1,681
1,137
886
528
510
$7,199
Rent expense was $4,855,000, $4,896,000 and $4,608,000
for the years ended December 31, 2004, 2003 and 2002,
respectively.
In 2001, the Company entered into a sale and leaseback of
equipment which contained an option to repurchase such
equipment for $1,554,000 in 2004. The Company exercised the
option and repurchased the equipment in 2004.
The Company has employment contracts with eight of its
employees and four consultants, which expire on various dates
through May 2009. The minimum commitments under these con-
tracts are $2,199,000 in 2005, $1,500,000 in 2006, $1,214,000
in 2007, $763,000 in 2008 and $231,000 in 2009. In addition,
the contracts with three of the employees, and an arrangement
with one other employee of the Company, provide for incentives
to be paid based on a percentage of profits, as defined.
Purchase Commitments
On October 8, 2004, the Company entered into an agree-
ment to purchase approximately 37 acres of land and several
buildings consisting of approximately 468,000 sq. ft. of manu-
facturing and office space. The purchase price is $6.2 million,
payable $0.5 million upon signing the agreement and $2.6 mil-
lion upon the current tenant vacating the property. Both pay-
ments will be paid into escrow until the final payment of $3.1
million is made on January 2, 2006 when title will pass to the
Company. Until the closing, which is subject to the completion
of environmental due diligence and other conditions, the
Company will lease such property from the owner as the current
tenant vacates the property. The property is owned by a primary
owner of a significant customer of the Company. This space will
primarily be used to consolidate existing office space and manu-
facturing capacity from other leased facilities, as well as to pro-
vide manufacturing capacity for new product developments.
31
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
Lippert is a defendant in an action entitled SteelCo., Inc. v.
Lippert Components, Inc. and DOES 1 through 20, inclusive,
commenced in Superior Court of the State of California, County
of San Bernardino, on July 16, 2002. On motion of Lippert, the
case was removed to the U.S. District Court, Central District of
California, Riverside Division.
Plaintiff alleges that Lippert violated certain provisions of
the California Business and Professions Code (Sec. 17000 et.
seq.) by allegedly selling chassis and component parts below
Lippert’s costs, engaging in acts intended to destroy competi-
tion, wrongfully interfering with plaintiff’s economic advantage,
and engaging in unfair competition. Plaintiff seeks compensa-
tory damages of $8.2 million, treble damages, punitive dam-
ages, costs and expenses incurred in the proceeding, and
injunctive relief.
Management believes that the case has no merit, and
Lippert is vigorously defending against the allegations in
the complaint. In addition, Lippert asserted counterclaims
against plaintiff.
Court-ordered mediation did not result in settlement. On
February 22, 2005, the court granted Lippert’s motion for partial
summary judgment limiting plaintiff’s damages to those incurred
prior to December 31, 2002, thereby reducing plaintiff’s dam-
age claim from over $8 million (before trebling) to an amount
which the Company believes could be less than $1 million
based on counsel’s analysis of the testimony of plaintiff’s and
Lippert’s damage experts, although there can be no assurance
of the outcome. The court also granted Lippert’s motions for
partial summary judgment as to all aspects of plaintiff’s unfair
competition claim and plaintiff’s claim for an injunction. The
court denied Lippert’s attempt to limit damages to those
incurred prior to May 10, 2002, and certain other aspects of
Lippert’s defense. The court set a trial date of April 5, 2005.
Lippert is a defendant in an action entitled Marlon Harris
v. Lippert Components, Inc. pending in the Superior Court of
the State of California, County of San Bernardino (Case No.
SCVSS 094954). Plaintiff, a former employee of Lippert, sus-
tained injuries to his arm and hand while operating a power
brake press, allegedly due to the removal of or failure to provide
guards on the machine.
In December 2004, a jury rendered a verdict in favor of
plaintiff that included compensatory damages of $464,000 and
punitive damages of $4 million. Counsel for Lippert has advised
the Company that, under California law, the award for punitive
damages will most likely be reduced to not in excess of four
times the compensatory damages, or a maximum of $1.9 mil-
lion, although there can be no assurance of the final decision.
Lippert intends to move for a new trial or appeal the verdict
based on the advice of counsel for Lippert that the verdict is
unsupported by the evidence. It is anticipated that a final deci-
sion by the court concerning the reduction of punitive damages
will be reached shortly. In 2004, the Company recorded a
charge of $1.9 million ($945,000 after taxes and the direct
impact on incentive compensation) related to this case.
On August 6, 2004, Keystone RV Company, Inc. filed a
third-party petition against Lippert in an action entitled Feagins,
et. al. v. D.A.R., Inc. d/b/a Fun Time RV, et. al. pending in the
Probate Court, Denton County, State of Texas (Case No.
IA-2002-330-01). Keystone’s claim is for proportionate respon-
sibility/contribution from Lippert in connection with a wrongful
death action against defendants arising from an accident involv-
ing an RV allegedly manufactured by Keystone. Keystone
alleges that Lippert supplied certain components of the RV.
Neither plaintiffs nor any of the other five defendants filed claims
against Lippert. Lippert’s counsel has advised that, at this stage
of the case, based on the current theories of plaintiff’s expert,
Lippert did not commit any act or omission that contributed to
or caused the accident; however, plaintiff’s expert could change
his theory to focus on an alleged act or omission by Lippert. A
co-defendant’s expert could also assert a theory of liability
against Lippert. Plaintiffs seek compensatory damages in
excess of $130 million plus $25 million of exemplary damages
from each defendant. The case is in the discovery stage, and
there has been no determination of liability. Lippert’s liability
insurer has assigned counsel to defend Keystone’s claim
against Lippert.
In the normal course of business, the Company is subject
to proceedings, lawsuits and other claims. All such matters are
subject to many uncertainties and outcomes that are not pre-
dictable with assurance. While these matters could materially
affect operating results when resolved in future periods, it is
management’s opinion that after final disposition, including
anticipated insurance recoveries, any monetary liability or finan-
cial impact to the Company beyond that provided in the con-
solidated balance sheet as of December 31, 2004, would not
be material to the Company’s financial position or annual results
of operations.
Other Income
In February 2004, the Company sold certain intellectual
property rights relating to a process used to manufacture a new
composite material, and simultaneously entered into an equip-
ment lease and a license agreement with the buyer. The lease
is still not effective, as the lessor has not yet provided opera-
tional equipment and tooling. If operational equipment is prop-
erly installed, the Company plans to use the new composite
material to produce certain bath products for the manufactured
housing, modular housing, and recreational vehicle industries
on an exclusive, royalty-free basis, to compete against fiber-
glass bath products in these industries. The Company will also
have the right to use the new composite material on a royalty-
free, non-exclusive basis to manufacture various other products
for the manufactured housing, modular housing, and recreational
vehicle industries.
32
2004 ANNUAL REPORT
The sale price for the intellectual property rights was $4.0
million, consisting of cash of $100,000 at closing and a note of
$3.9 million, payable over five years. The Company had a mini-
mal basis in the intellectual property sold. In 2004, the Company
received payments aggregating approximately $.5 million, and
recorded a pre-tax gain on sale of $428,000. The note bears
interest at increasing annual interest rates, and is secured by a
lien on the intellectual property rights sold, a right of offset
against the lease, and a guaranty. The note is convertible at the
Company’s option into an equity interest in the new venture that
the buyer has formed to promote this process. Additional gains,
if any, will be recorded as payments on the $3.5 million balance
of the note are received. In January 2005, the Company received
a scheduled payment on the note of $500,000 plus interest.
11 . S T O C K H O L D E R S ’ E Q U I T Y
Stock-Based Awards
In May 2002, the Company’s Stockholders voted to adopt
the Drew Industries Incorporated 2002 Equity Award and
Incentive Plan (the “2002 Equity Plan”), to replace the prior
Stock Option Plan (the “Prior Plan”). Pursuant to the 2002 Equity
Plan, the Company may grant its directors, employees, and
consultants Drew Common Stock-based awards, such as
options and restricted or deferred stock.
The 2002 Equity Plan provides for the grant of stock options
that qualify as incentive stock options under Section 422 of the
Internal Revenue Code, and non-qualified stock options. Under
the 2002 Equity Plan, as under the Prior Plan, the Compensation
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 2002
Equity Plan, and the exercise price of options granted under the
2002 Equity Plan, are subject to adjustments that may be made
by the Committee to reflect stock splits, stock dividends, recap-
italization, mergers, or other major corporate actions.
The exercise price for options granted under the 2002
Equity 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 held for a minimum of six months. Options
granted under the 2002 Equity Plan become exercisable in
annual installments as determined by the Committee.
In 2004 and 2003, pursuant to the 2002 Equity Plan, the
Company awarded 6,418 and 12,503 deferred stock units,
respectively, to certain directors in lieu of cash fees earned by
such directors. The number of deferred stock units awarded is
determined by dividing 115 percent of the fee earned by the
closing price of the Common Stock on the date the fees were
earned. The deferral period is generally two years from the date
of the election to defer, unless extended. In 2004, the Company
issued 4,405 shares of restricted stock in accordance with the
performance-based incentive compensation of an employee,
pursuant to an employment agreement.
Transactions in stock options and deferred stock units under the 2002 Equity Plan and the Prior Plan are summarized as follows:
Outstanding at December 31, 2001
Issued
Granted
Exercised
Outstanding at December 31, 2002
Issued
Granted
Exercised
Canceled
Outstanding at December 31, 2003
Issued
Granted
Exercised
Canceled
Deferred Stock Units
Stock Options
Number of
Shares
Stock Price
at Date
of Issuance
Number of
Option Shares Option Price
4,604
$13.74–$16.30
4,604
12,503
17,107
6,418
$15.17–$25.56
$27.80–$41.01
1,106,910
20,000
(264,710)
862,200
396,500
(268,380)
(6,000)
984,320
32,500
(102,280)
(6,900)
$15.75
$ 5.68–$12.48
$ 25.56–$27.60
$ 8.81–$12.50
$ 8.81–$12.50
$32.30–$32.31
$ 8.81–$25.56
$ 9.10–$25.56
Outstanding at December 31, 2004
Exercisable at December 31, 2004
23,525
$13.74–$41.01
907,640
$ 5.68–$32.31
486,840
$ 5.68–$27.60
The number of shares available for granting awards under the 2002 Equity Plan was 456,636 and 493,059 at December 31,
2004 and 2003, respectively.
33
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock
options outstanding at December 31, 2004:
Option
Exercise
Price
$ 5.68
$ 8.81
$ 9.10
$ 9.20
$ 9.25
$ 9.31
$11.63
$15.75
$25.56
$27.60
$32.30
$32.31
Shares
Outstanding
Option
Remaining
Life (Years)
Shares
Exercisable
15,000
100,900
174,840
15,000
15,000
150,000
3,000
20,000
356,400
25,000
25,000
7,500
1.0
0.9
2.9
1.0
2.0
0.9
0.3
4.0
4.9
5.0
6.0
5.9
15,000
100,900
78,240
15,000
15,000
150,000
3,000
20,000
64,700
25,000
—
—
Outstanding stock options expire in five to six years from
the date they are granted; options vest over service periods that
range from one to five years.
Weighted Average Common Shares Outstanding
The following reconciliation details the denominator used
in the computation of basic and diluted earnings per share:
Year Ended December 31,
2004
2003
2002
Weighted average
shares outstanding
for basic earnings
per share
Common stock equiva-
lents pertaining to:
Stock options
Total for diluted
10,281,611
10,075,406
9,789,513
317,759
221,502
219,114
shares
10,599,370 10,296,908 10,008,627
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, 2004
Net sales
Gross profit
Income from continuing operations before income taxes
Net income
Net income per common share:
Basic
Diluted
Stock market price
High
Low
Close (at end of quarter)
Year Ended December 31, 2003
Net sales
Gross profit
Income from continuing operations
Discontinued operations
Net income
Net income per common share:
Income from continuing operations
Basic
Diluted
Discontinued operations
Basic
Diluted
Net income
Basic
Diluted
Stock market price(a)
High
Low
Close (at end of quarter)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$108,023
24,879
9,823
5,992
$141,687
32,560
13,362
8,151
$148,830
32,902
12,174
7,514
$132,330
26,038
5,498
3,451
$530,870
116,379
40,857
25,108
.58
.57
.79
.77
.73
.71
.33
.33
2.44
2.37
$ 39.78
$ 27.21
$ 35.08
$ 41.68
$ 34.76
$ 40.70
$ 40.85
$ 32.45
$ 35.85
$ 36.60
$ 31.27
$ 36.17
$ 41.68
$ 27.21
$ 36.17
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$ 80,827
17,950
5,138
138
3,266
$ 89,410
22,883
8,778
—
5,345
$ 96,107
25,470
10,768
—
6,582
$ 86,772
20,378
6,559
(90)
4,230
$ 353,116
86,681
31,243
48
19,423
.31
.31
.02
.01
.33
.32
.53
.52
—
—
.53
.52
.65
.64
—
—
.65
.64
.42
.41
—
—
.42
.41
1.92
1.88
—
—
1.92
1.88
$ 16.24
$ 14.95
$ 15.21
$ 18.25
$ 15.01
$ 18.20
$ 19.10
$ 17.90
$ 18.51
$ 28.28
$ 18.69
$ 27.80
$ 28.28
$ 14.95
$ 27.80
(a) On December 11, 2003, the Company’s stock was listed for trading on the New York Stock Exchange under the symbol “DW.” Simultaneously, the Company’s
stock ceased trading on the American Stock Exchange.
The sum of per share amounts for the four quarters may not equal the total per share amounts for the year as a result of
changes in the weighted average common shares outstanding.
34
2004 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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,
2004. We also have audited management’s assessment,
included in the accompanying Management’s Responsibility for
Financial Statements, that Drew Industries Incorporated and
subsidiaries maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria estab-
lished in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is respon-
sible for these consolidated financial statements, for maintain-
ing effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these
consolidated financial statements, an opinion on management’s
assessment, and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on
our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the finan-
cial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained
in all material respects. Our audit of financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial report-
ing included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, test-
ing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of finan-
cial statements for external purposes in accordance with gener-
ally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and pro-
cedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide rea-
sonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accor-
dance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inad-
equate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Drew Industries Incorporated acquired Zieman Manufac-
turing Company during 2004, and management excluded from
its assessment of the effectiveness of Drew Industries
Incorporated’s internal control over financial reporting as of
December 31, 2004, Zieman Manufacturing Company’s internal
control over financial reporting associated with total assets of
$33 million and total revenue of $40 million as of and for the
year ended December 31, 2004.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Drew Industries Incorporated and subsid-
iaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, management’s assessment that Drew Industries
Incorporated and subsidiaries maintained effective internal con-
trol over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in
Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO). Furthermore, in our opinion, Drew Industries Incorporated
and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
As discussed in Note 3 to the consolidated financial state-
ments, the Company adopted SFAS No. 142, “Goodwill and
Other Intangible Assets” as of January 1, 2002.
Stamford, Connecticut
March 14, 2005
35
DREW INDUSTRIES INCORPORATED
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
We are responsible for the preparation and integrity of the
consolidated financial statements appearing in the annual
report on Form 10-K. The consolidated financial statements
were prepared in conformity with accounting principles gener-
ally accepted in the United States and include amounts based
on management’s estimates and judgments. All other financial
information in this report has been presented on a basis consis-
tent with the information included in the financial statements.
We are also responsible for establishing and maintaining
adequate internal controls over financial reporting. We maintain
a system of internal controls that is designed to provide reason-
able assurance as to the fair and reliable preparation and pre-
sentation of the consolidated financial statements, as well as to
safeguard assets from unauthorized use or disposition.
Our control environment is the foundation for our system of
internal controls over financial reporting and is embodied in our
Guidelines for Business Conduct. It sets the tone of our organi-
zation and includes factors such as integrity and ethical values.
Our internal controls over financial reporting are supported by
formal policies and procedures which are reviewed, modified
and improved as changes occur in business conditions and
operations.
The Audit Committee of the Board of Directors, which is
composed solely of outside directors, meets periodically with
members of management, internal audit and the independent
auditors to review and discuss internal controls over financial
reporting and accounting and financial reporting matters. The
independent auditors and internal audit report to the Audit
Committee and accordingly have full and free access to the
Audit Committee at any time.
We conducted an evaluation of the effectiveness of our
internal controls over financial reporting based on the frame-
work in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documenta-
tion of controls, evaluation of the design effectiveness of con-
trols, testing of the operating effectiveness of controls and a
conclusion on this evaluation. Although there are inherent limita-
tions in the effectiveness of any system of internal controls over
financial reporting, based on our evaluation, we have concluded
that our internal controls over financial reporting were effective
as of December 31, 2004.
The Company acquired Zieman Manufacturing Company
during 2004, and management excluded from its assessment
of the effectiveness of the Company’s internal control over finan-
cial reporting as of December 31, 2004, Zieman Manufacturing
Company’s internal control over financial reporting associated
with total assets of $33 million and total revenue of $40 million
as of and for the year ended December 31, 2004.
KPMG LLP, an independent registered public accounting
firm, has issued an attestation report on management’s assess-
ment of internal control over financial reporting, which is
included herein.
LEIGH J. ABRAMS
President and
Chief Executive Officer
FREDRIC M. ZINN
Executive Vice President and
Chief Financial Officer
36
2004 ANNUAL REPORT
CORPORATE INFORMATION
B OA R D O F D I R E C T O R S
Edward W. Rose, III (1)
Chairman of the Board of
Drew Industries Incorporated
President of
Cardinal Investment Company
James F. Gero (1)(2)(3)
Private Investor, Chairman
Orthofix International, N.V.
Gene H. Bishop (1)(3)*
Retired Bank Executive
Frederick B. Hegi, Jr.(2)(3)
Founding Partner
Wingate Partners
David A. Reed (2)(3)
Managing Partner of
Causeway Capital Partners, L.P.
Leigh J. Abrams
President and Chief Executive Officer
of Drew Industries Incorporated
L. Douglas Lippert
Chairman of Lippert Components, Inc.
David L. Webster
Chairman, President and Chief
Executive Officer of Kinro, Inc.
Members of the Committees of the
Board of Directors, as follows
(1) Compensation Committee
(2) Audit Committee
(3) Corporate Governance and
Nominating Committee
* Mr. Bishop will retire in 2005 and will not
stand for re-election at the Annual Meeting
of Stockholders in May 2005.
C O R P O R AT E O F F I C E R S
Leigh J. Abrams
President and Chief Executive Officer
Fredric M. Zinn
Executive Vice President and
Chief Financial Officer
Harvey F. Milman, Esq.
Vice President-Chief Legal Officer
John F. Cupak
Director of Internal Audit,
and Secretary
Joseph S. Giordano III
Corporate Controller and Treasurer
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I N D E P E N D E N T R E G I S T E R E D
P U B L I C AC C O U N T I N G F I R M
KPMG LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
T R A N S F E R AG E N T
A N D R E G I S T R A R
American Stock Transfer
& Trust Company
59 Maiden Lane
New York, NY 10038
(212) 936-5100
(800) 937-5449
website: www.amstock.com
E X E C U T I V E O F F I C E S
200 Mamaroneck Avenue
White Plains, NY 10601
(914) 428-9098
website: www.drewindustries.com
E-mail: drew@drewindustries.com
K I N R O, I N C .
David L. Webster
Chairman, President and
Chief Executive Officer
Corporate Headquarters
4381 Green Oaks Boulevard West
Arlington, TX 76016
(817) 483-7791
L I P P E R T C O M P O N E N T S , I N C .
L. Douglas Lippert
Chairman
Jason Lippert
President and Chief Executive Officer
Corporate Headquarters
2766 College Avenue
Goshen, IN 46526
(574) 535-2085
C O R P O R AT E G O V E R N A N C E
Copies of the Company’s Governance
Principles, Guidelines for Business
Conduct, Code of Ethics for Senior
Financial Officers, and the Charters
and Key Practices of the Audit,
Compensation, and Corporate
Governance and Nominating
Committees are on the Company’s
website, and are available upon
request, without charge, by writing to:
Secretary
Drew Industries Incorporated
200 Mamaroneck Avenue
White Plains, NY 10601
F O R M 10 - K A N D
C E O / C F O C E R T I F I C AT I O N S
Upon written request, we will
provide without charge, a copy of
our Form 10-K for the fiscal year
ended December 31, 2004.
Requests should be directed to:
Secretary
Drew Industries Incorporated
200 Mamaroneck Avenue
New York, NY 10601
Our Form 10-K is also available
through links on our website
www.drewindustries.com.
The most recent certifications by our
Chief Executive Officer and Chief
Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
are filed as exhibits to our Form 10-K.
We have also filed with the New York
Stock Exchange the most recent
Annual CEO Certification as
required by Section 303A.12 (a) of
the New York Stock Exchange
Listed Company Manual.
DREW INDUSTRIES INCORPORATED
INDUSTRIES INCORPORATED
2 0 0 M a m a r o n e c k A v e n u e , W h i t e P l a i n s , N Y 1 0 6 0 1
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RECREATIONAL VEHICLES & MANUFACTURED HOMES