UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: SEPTEMBER 30, 2010MARCH 31, 2011

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission File Number:  0-13646

DREW INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 Mamaroneck Avenue, White Plains, NY 10601
(Address of principal executive offices)  (Zip Code)

(914) 428-9098
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)   N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x¨  No ¨ N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 21,974,42722,069,226 shares of common stock as of OctoberApril 29, 2010.2011.

 
 
 

DREW INDUSTRIES INCORPORATED

INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010MARCH 31, 2011

(UNAUDITED)
(UNAUDITED)

   Page
PART I –
FINANCIAL INFORMATION  
    
Item 1 –
FINANCIAL STATEMENTS  
    
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME 3
    
 CONDENSED CONSOLIDATED BALANCE SHEETS 4
    
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5
    
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 6
    
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 – 2017
    
Item 2 –
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21 18 – 38 31
    
Item 3 –
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 3932
    
Item 4 –
CONTROLS AND PROCEDURES 3932
    
PART II –
OTHER INFORMATION  
    
Item 1 –
LEGAL PROCEEDINGS 4033
    
Item 1A –
RISK FACTORS 
40
33
    
Item 2 6 –
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSEXHIBITS 4133
  
Item 6 –  EXHIBITS42
    
SIGNATURES  4334
    
EXHIBIT 31.1 –
SECTION 302 CEO CERTIFICATION 44
    
EXHIBIT 31.2 –
SECTION 302 CFO CERTIFICATION 45
    
EXHIBIT 32.1 –
SECTION 906 CEO CERTIFICATION 46
    
EXHIBIT 32.2 –
SECTION 906 CFO CERTIFICATION 47

 
2
 

DREW INDUSTRIES INCORPORATED

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
 
DREW INDUSTRIES INCORPORATED
PART I –  FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(Unaudited)

 Nine Months Ended  Three Months Ended 
 September 30,  September 30,  Three Months Ended 
 2010  2009  2010  2009  March 31, 
             2011  2010 
(In thousands, except per share amounts)                  
                  
Net sales $466,552  $293,248  $146,833  $121,666  $168,833  $146,217 
Cost of sales  363,467   238,895   114,965   93,692   130,954   112,558 
Gross profit  103,085   54,353   31,868   27,974   37,879   33,659 
Selling, general and administrative expenses  62,337   50,331   19,248   16,721   22,336   21,375 
Goodwill impairment  -   45,040   -   - 
Other (income)  (79)  (260)  (79)  (60)
Operating profit (loss)  40,827   (40,758)  12,699   11,313 
Operating profit  15,543   12,284 
Interest expense, net  168   614   28   179   58   82 
Income (loss) before income taxes  40,659   (41,372)  12,671   11,134 
Provision (benefit) for income taxes  15,757   (14,415)  4,689   3,945 
Net income (loss) $24,902  $(26,957) $7,982  $7,189 
Income before income taxes  15,485   12,202 
Provision for income taxes  6,098   4,874 
Net income $9,387  $7,328 
                        
Net income (loss) per common share:                
Net income per common share:        
Basic $1.13  $(1.24) $0.36  $0.33  $0.42  $0.33 
Diluted $1.12  $(1.24) $0.36  $0.33  $0.42  $0.33 
                        
Weighted average common shares outstanding:                        
Basic  22,118   21,724   22,129   21,847   22,219   22,102 
Diluted  22,262   21,724   22,262   21,994   22,377   22,248 

The accompanying notes are an integral part of these financial statements.

 
3
 

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 September 30,  December 31,  March 31,  December 31, 
 2010  2009  2009  2011  2010  2010 
(In thousands, except shares and per share amount)         
(In thousands, except per share amount)         
                  
ASSETS                  
Current assets                  
Cash and cash equivalents $41,213  $44,932  $52,365  $36,728  $41,733  $38,880 
Short-term investments  15,993   1,999   12,995   -   9,997   4,999 
Accounts receivable, trade, less allowances  31,329   27,728   12,541   43,244   34,608   12,890 
Inventories  74,121   57,184   57,757   77,612   61,813   69,328 
Prepaid expenses and other current assets  16,030   15,647   13,793   16,691   14,439   16,768 
Total current assets  178,686   147,490   149,451   174,275   162,590   142,865 
Fixed assets, less accumulated depreciation of $88,351 at September 2010, $81,239 at September 2009 and $82,053 at December 2009
  80,215   83,263   80,276 
Fixed assets, net  81,151   78,962   79,848 
Goodwill  7,497   -   -   8,600   7,673   7,497 
Other intangible assets, net  59,171   40,518   39,171   59,250   62,076   57,419 
Deferred taxes  16,532   14,922   16,532   15,770   16,532   15,770 
Other assets  3,456   3,072   2,635   3,944   2,699   3,382 
Total assets $345,557  $289,265  $288,065  $342,990  $330,532  $306,781 
                        
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities                        
Accounts payable, trade $20,715  $11,761  $7,513  $29,209  $19,462  $11,351 
Accrued expenses and other current liabilities  36,743   29,327   28,194   38,891   39,517   33,723 
Total current liabilities  57,458   41,088   35,707   68,100   58,979   45,074 
Other long-term liabilities  16,569   8,659   8,243   19,492   19,083   18,248 
Total liabilities  74,027   49,747   43,950   87,592   78,062   63,322 
                        
Stockholders’ equity                        
Common stock, par value $.01 per share: authorized 30,000,000 shares; issued 24,594,533 shares at September 2010, 24,497,558 shares at September 2009 and 24,561,358 at December 2009  246   245   246 
Common stock, par value $.01 per share  247   246   247 
Paid-in capital  77,216   72,547   74,239   82,538   75,266   79,986 
Retained earnings  222,332   194,526   197,430   201,454   204,758   192,067 
  299,794   267,318   271,915   284,239   280,270   272,300 
Treasury stock, at cost – 2,621,106 shares  (28,264)  (27,800)  (27,800)
Treasury stock, at cost  (28,841)  (27,800)  (28,841)
Total stockholders’ equity  271,530   239,518   244,115   255,398   252,470   243,459 
Total liabilities and stockholders’ equity $345,557  $289,265  $288,065  $342,990  $330,532  $306,781 

The accompanying notes are an integral part of these financial statements.

 
4
 

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 Nine Months Ended  Three Months Ended 
 September 30,  March 31, 
 2010  2009  2011  2010 
(In thousands)            
            
Cash flows from operating activities:            
Net income (loss) $24,902  $(26,957)
Adjustments to reconcile net income (loss) to cash flows provided by operating activities:        
Net income $9,387  $7,328 
Adjustments to reconcile net income to cash flows provided by operating activities:        
Depreciation and amortization  12,726   14,337   4,890   3,994 
Deferred taxes  -   (15,660)
(Gain) loss on disposal of fixed assets and other non-cash items  (971)  1,549 
Gain on disposal of fixed assets and other non-cash items  (109)  (50)
Stock-based compensation expense  2,787   3,043   1,113   988 
Goodwill impairment  -   45,040 
Changes in assets and liabilities, net of business acquisitions:                
Accounts receivable, net  (18,780)  (19,815)  (30,354)  (22,059)
Inventories  (16,650)  38,108   (6,679)  (3,961)
Prepaid expenses and other assets  (2,431)  1,830   (262)  (730)
Accounts payable, accrued expenses and other liabilities  18,835   3,600   25,097   23,152 
Net cash flows provided by operating activities  20,418   45,075   3,083   8,662 
                
Cash flows from investing activities:                
Capital expenditures  (7,706)  (1,915)  (3,136)  (1,190)
Acquisitions of businesses  (21,900)  (1,709)  (7,250)  (21,400)
Proceeds from sales of fixed assets  1,593   959 
Purchases of short-term investments  (20,985)  (1,999)
Purchase of short-term investments  -   (1,999)
Proceeds from maturities of short-term investments  18,000   -   5,000   5,000 
Other investing activities  (293)  (25)  (48)  256 
Net cash flows used for investing activities  (31,291)  (4,689)  (5,434)  (19,333)
                
Cash flows from financing activities:                
Proceeds from line of credit and other borrowings  -   5,775 
Repayments under line of credit and other borrowings  -   (14,458)
Exercise of stock options and deferred stock units  190   4,554   339   39 
Purchase of treasury stock  (464)  - 
Other financing activities  (5)  (17)  (140)  - 
Net cash flows used for financing activities  (279)  (4,146)
Net cash flows provided by financing activities  199   39 
                
Net (decrease) increase in cash  (11,152)  36,240 
Net decrease in cash  (2,152)  (10,632)
                
Cash and cash equivalents at beginning of period  52,365   8,692   38,880   52,365 
Cash and cash equivalents at end of period $41,213  $44,932  $36,728  $41,733 
                
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest $239  $412  $71  $85 
Income taxes, net of refunds $18,010  $3,729  $79  $888 

The accompanying notes are an integral part of these financial statements.

 
5
 

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

              Total 
  Common  Paid-in  Retained  Treasury  Stockholders’ 
  Stock  Capital  Earnings  Stock  Equity 
(In thousands, except shares)               
                
Balance – December 31, 2009 $246  $74,239  $197,430  $(27,800) $244,115 
Net income for the nine months ended September 30, 2010  -   -   24,902   -   24,902 
Issuance of 33,175 shares of  common stock pursuant to stock options and   deferred stock units  -   355   -   -   355 
Income tax impact of issuance of common stock pursuant to stock options and deferred stock units exercised  -   (165)  -   -   (165)
Stock-based compensation expense  -   2,787   -   -   2,787 
Purchase of 24,381 shares of treasury stock  -   -   -   (464)  (464)
Balance – September 30, 2010 $246  $77,216  $222,332  $(28,264) $271,530 
              Total 
  Common  Paid-in  Retained  Treasury  Stockholders’ 
  Stock  Capital  Earnings  Stock  Equity 
(In thousands, except shares)               
                
Balance - December 31, 2010 $247  $79,986  $192,067  $(28,841) $243,459 
Net income for the three months ended March 31, 2011  -   -   9,387   -   9,387 
Issuance of 25,200 shares of common stock pursuant to stock options and deferred stock units  -   262   -   -   262 
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units  -   77   -   -   77 
Stock-based compensation expense  -   1,113   -   -   1,113 
Issuance of 47,506 deferred stock units relating to 2010 compensation  -   1,100   -   -   1,100 
Balance - March 31, 2011 $247  $82,538  $201,454  $(28,841) $255,398 

The accompanying notes are an integral part of these financial statements.

 
6
 

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of Drew Industries Incorporated and its wholly-owned subsidiaries (“Drew” or the “Company”). Drew has no unconsolidated subsidiaries. Drew’s wholly-owned active subsidiaries are Lippert Components, Inc. and its subsidiaries (collectively “Lippert”), and Kinro, Inc. and its subsidiaries (collectively “Kinro”). Drew, through its wholly-owned subsidiaries,Lippert and Kinro, manufactures a broad array of components for recreational vehicles (“RVs”) and manufactured homes, and to a lesser extent manufactures components for modular housing and mid-size buses, as well as specialty trailers and related axles.

Because of the seasonality of the RV and manufactured housing industries, historically, the Company’s operating results in the first and fourth quarters have been the weakest, while the second and third quarters are traditionally stronger. However, because of increasesfluctuations in RV dealer inventories during the fourth quarter of 2009 and the first quarter of 2010,volatile raw material costs, seasonal industry trends have beenmay be different than in prior years.  Due to the uncertain economic environment, seasonal trends over the next few quarters may continue to be different than historical norms.

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 20092010 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.

In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations as of and for the nine and three month periods ended September 30, 2010March 31, 2011 and 2009.2010. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include some information necessary to conform to annual reporting requirements.

2.
Segment Reporting

The Company has two reportable segments,segments; the recreational vehicle products segment (the "RV Segment") and the manufactured housing products segment (the "MH Segment"). Intersegment sales are insignificant.

The RV Segment, which accounted for 8487 percent and 7885 percent of consolidated net sales for the nine-monththree month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively, manufactures a variety of products used primarily in the production of RVs, including:

●Towable steel chassis
 
●Aluminum windows and screens
●Towable axles and suspension solutions
● Chassis components
● Slide-out mechanisms and solutions
 
●Chassis componentsFurniture and mattresses
●Slide-out mechanisms and solutions
●Furniture and mattresses
●Thermoformed bath, kitchen and other products
 
●Entry and baggage doors
●Toy hauler ramp doors
●Entry steps
●Manual, electric and hydraulic stabilizer
 
●Other accessoriesEntry steps
and lifting systems
● Patio doors
 
● Other towable accessories
●Manual, electric and hydraulic stabilizer and lifting systems
● Specialty trailers for hauling boats, personal watercraft, snowmobiles and equipment
7

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company also supplies certain of these products as replacement parts to the RV aftermarket. More than 90 percent of the Company’s RV Segment net sales are components for travel trailer and fifth-wheel RVs, with the balance primarily comprisingcomprised of components for motorhomes and mid-size buses, as well as sales of specialty trailers and related axles. Travel trailers and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in the third quarter of 2010.

7
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

The MH Segment, which accounted for 1613 percent and 2215 percent of consolidated net sales for the nine-three month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

●Vinyl and aluminum windows and screens
 
●Steel chassis
●Thermoformed bath and kitchen products
 
●Steel chassis parts
●Steel and fiberglass entry doors
 
●Axles
●Aluminum and vinyl patio doors
  

The Company also supplies windows, doors and thermoformed bath products as replacement parts to the manufactured housing aftermarket.

Sales of products other than components for RVs and manufactured homes are not considered significant. However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes. As a result, the Company is not always able to determine in which type of home its products are installed.

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 operating profit or loss, defined as income or loss before interest, corporate expenses, goodwill impairment, other non-segment items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of operating assets. Management of debt is a corporate function. The accounting policies of the RV and MH segmentsSegments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 20092010 Annual Report on Form 10-K.

Information relating to segments follows for the three months ended March 31, (in thousands):

 Nine Months Ended  Three Months Ended 
 September 30,  September 30, 
 2010  2009  2010  2009  2011  2010 
                  
Net sales:                  
RV Segment $390,678  $228,114  $122,052  $96,953  $146,229  $124,362 
MH Segment  75,874   65,134   24,781   24,713   22,604   21,855 
Total net sales $466,552  $293,248  $146,833  $121,666  $168,833  $146,217 
                        
Operating profit (loss):                
Operating profit:        
RV Segment $37,997  $9,490  $11,104  $10,205  $15,301  $12,883 
MH Segment  8,241   1,809   2,939   2,397   2,224   1,566 
Total segment operating profit  46,238   11,299   14,043   12,602   17,525   14,449 
Corporate  (5,814)  (4,930)  (1,870)  (1,752)  (2,097)  (1,926)
Goodwill impairment  -   (45,040)  -   - 
Other items  403   (2,087)  526   463 
Total operating profit (loss) $40,827  $(40,758) $12,699  $11,313 
Other non-segment items  115   (239)
Total operating profit $15,543  $12,284 
 
 
8

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)

Effective with the first quarter of 2010, amortization of intangibles, which was previously reported on a separate line, has been included as part of segment operating (loss) profit. The segment disclosures from 2009 have been reclassified to conform to the current year presentation, as follows:

  
Three Months Ended
  Year Ended 
(In thousands) March 31,  June 30,  September 30,  December 31,  December 31, 
  2009  2009  2009  2009  2009 
Operating (loss) profit:               
RV Segment $(5,863) $5,148  $10,205  $6,170  $15,660 
MH Segment  (2,181)  1,593   2,397   1,407   3,216 
Total segment operating (loss) profit  (8,044)  6,741   12,602   7,577   18,876 
Corporate  (1,560)  (1,618)  (1,752)  (1,612)  (6,542)
Goodwill impairment  (45,040)  -   -   -   (45,040)
Other items  (1,620)  (930)  463   (788)  (2,875)
Operating (loss) profit $(56,264) $4,193  $11,313  $5,177  $(35,581)

3.Acquisitions,
Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

Level-UpTM SystemHome-Style Industries

On February 18, 2010,January 28, 2011, the Company acquired the patent-pending designoperating assets and business of Home-Style Industries, and its affiliated companies. Home-Style manufactures a full line of upholstered furniture and mattresses primarily for a six-point leveling systemtowable RVs, in the Northwest U.S. market.  Home-Style’s sales for fifth-wheel RVs.2010 were $12 million. The purchase price was $1.4$7.3 million paid at closing from available cash, plus contingent consideration based on an earn-out. The results of the acquired business have been included in the Company’s Condensed Consolidated Statement of Operations beginning February 18, 2010.since the acquisition date.

The acquisition of this business was recorded on the acquisition date as follows (in thousands):

Cash consideration $1,400 
Contingent consideration  404 
Total fair value of consideration given $1,804 
     
Patents $1,157 
Other identifiable intangible assets  180 
Total fair value of assets acquired $1,337 
     
Goodwill (tax deductible) $467 
9

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cash consideration $7,250 
Contingent consideration  150 
Total fair value of consideration given $7,400 
     
Customer relationships $3,350 
Other identifiable intangible assets  365 
Net tangible assets  2,582 
Total fair value of assets acquired $6,297 
     
Goodwill (tax deductible) $1,103 

The Company will pay an earn-out depending on future unit sales of the leveling system in excess of pre-established hurdles over the next six years. The earn-out does not have a maximum; however, at the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.5 million to $1.0 million. The Company recorded a $0.4 million liability for the present value of the estimated earn-out payments, using internal sales projections, as well as a weighted average cost of capital of 17.4 percent at the date of acquisition. Each period, an expense, similar to interest, will be recorded in selling, general and administrative expenses over the term of the earn-out due to the accretion of the present value of the liability for the estimated earn-out payments. For further information on the required quarterly re-evaluation of the liability for the estimated earn-out payments, see Note 9 of the Notes to Condensed Consolidated Financial Statements.

The patentscustomer relationships will be amortized over their estimated useful life of 1312 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates an increaseleveraging its existing experience and purchasing power in the markets for the acquired product.these product lines.

Wall Slide and Other RV Products

On March 16, 2010, the Company acquired certain intellectual property and other assets from Schwintek, Inc. The purchase included certain products for which patents are pending, consisting of an innovative RV wall slide-out mechanism, an aluminum cylinder for use in leveling devices for motorhomes, and a power roof lift for tent campers. The purchase price was $20.0 million, paid at closing from available cash, plus earn-outs. The results of the acquired business have been included in the Company’s Condensed Consolidated Statement of Operations beginning March 16, 2010.Goodwill

The acquisition of this businessGoodwill by reportable segment was recorded as follows (in thousands):

Cash consideration $20,000 
Contingent consideration  9,929 
Total fair value of consideration given $29,929 
     
Patents $16,840 
In-process research and development  4,457 
Other identifiable intangible assets  1,603 
Identifiable tangible assets acquired  410 
Total fair value of assets acquired $23,310 
     
Goodwill (tax deductible) $6,619 

The Company will pay earn-outs depending on future unit sales of the acquired products in excess of pre-established hurdles over approximately the next five years. Two of the products have a maximum aggregate earn-out of $12.7 million, which, at the date of acquisition, the Company assumed would be achieved. The remaining products do not have a maximum; however, at the date of acquisition, the Company estimated the aggregate earn-out payments would be $1.5 million to $2.0 million for these products. The Company recorded a $9.9 million liability for the present value of the estimated earn-out payments, using internal sales projections, as well as a weighted average cost of capital of 17.2 percent at the date of acquisition. Each period, an expense, similar to interest, will be recorded in selling, general and administrative expenses over the term of the earn-out due to the accretion of the present value of the liability for the estimated earn-out payments. For further information on the required quarterly re-evaluation of the liability for the estimated earn-out payments, see Note 9 of the Notes to Condensed Consolidated Financial Statements.

10

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The patents will be amortized over their estimated useful life of 13 years.  The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates an increase in the markets for the acquired products, market share growth in both existing and new markets, as well as attainment of synergies.

Chassis Modification and Suspension Enhancement

On August 30, 2010, the Company acquired the operating assets of Sellers Mfg., Inc., which modifies chassis primarily for producers of Class A and Class C Motorhome RVs, transit buses, and specialized commercial trucks.  In addition, Sellers Mfg. manufactures the patented E-Z CruiseTM, a suspension enhancement system for transit buses and Class C Motorhomes, which improves the vehicle’s ride performance.  The purchase price was $0.5 million, paid at closing from available cash.  The results of the acquired business have been included in the Company’s Condensed Consolidated Statement of Operations beginning August 30, 2010.

Goodwill and Other Intangible Assets

Goodwill by reportable segment is as follows (in thousands):

  MH Segment  RV Segment  Total 
Goodwill at cost – December 31, 2009 $9,251  $41,276  $50,527 
Accumulated Impairment – December 31, 2009  (9,251)  (41,276)  (50,527)
Net Balance – December 31, 2009  -   -   - 
Acquisitions  -   7,497   7,497 
Net Balance – September 30, 2010 $-  $7,497  $7,497 
  MH Segment  RV Segment  Total 
Accumulated cost – December 31, 2010 $9,251  $48,773  $58,024 
Accumulated impairment – December 31, 2010  (9,251)  (41,276)  (50,527)
Net balance – December 31, 2010  -   7,497   7,497 
Acquisitions - 2011  -   1,103   1,103 
Net balance – March 31, 2011 $-  $8,600  $8,600 

Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill and other intangible assets with indefinite lives areis not amortized, but instead areis tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist. The impairment tests areexist, and is based on fair value, determined using discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.estimates. No impairment tests were required or performed during the ninethree months ended September 30, 2010.

During the first quarter of 2009, because the Company’s stock price on the New York Stock Exchange was below its book value, and due to the continued declines in industry-wide wholesale shipments of RVs and manufactured homes, the Company conducted an impairment analysis of the goodwill of each of its reporting units, resulting in the impairment and non-cash write-off of the entire $45.0 million of goodwill. The impairment analysis of goodwill conducted during the first quarter of 2009 was completed using Level 3 fair value inputs.

The fair value of each reporting unit was estimated with a discounted cash flow model utilizing internal forecasts and observable market data, to the extent available, to estimate future cash flows. The forecast included an estimate of long-term future growth rates based on management’s most recent views of the long-term outlook for each reporting unit.March 31, 2011.

 
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DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)

At March 31, 2009, the discount rate used in the discounted cash flow model prepared for the goodwill impairment analysis was 16.5 percent, derived by applying the weighted average cost of capital model which weights the cost of debt and equity financing. The Company also considered the relationship of debt to equity of other companies similar to the respective reporting units, as well as the risks and uncertainty inherent in the markets generally and in the Company’s internally developed forecasts.
Based on the analyses, the carrying value of the RV and manufactured housing reporting units exceeded their fair value. As a result, the Company performed the second step of the impairment test, which required the Company to determine the fair value of each reporting unit’s assets and liabilities, including all of the tangible and identifiable intangible assets of each reporting unit, excluding goodwill. The results of the second step implied that the fair value of goodwill was zero; therefore, during the first quarter of 2009, the Company recorded a non-cash impairment charge to write-off the entire $45.0 million of goodwill of these reporting units.

The non-cash goodwill impairment charge was largely the result of uncertainties in the economy, and in the RV and manufactured housing industries, as well as the 16.5 percent discount rate used to determine the present value of projected cash flows. Estimating the fair value of reporting units, and the reporting unit’s assets and liabilities, involves the use of estimates and significant judgments that are based on a number of factors including actual operating results, future business plans, economic projections and market data. Actual results may differ from forecasted results.Other Intangible Assets

Other intangible assets consistconsisted of the following at September 30, 2010March 31, 2011 (in thousands):

    Accumulated    Estimated Useful  Gross  Accumulated  Net Estimated Useful 
 Gross  Amortization  Net Life in Years  Cost  Amortization  Balance Life in Years 
                      
Non-compete agreements $3,153  $1,347  $1,806 3 to 7  $2,153  $657  $1,496 3 to 7 
Customer relationships  25,155   10,635   14,520 3 to 16   28,505   11,896   16,609 3 to 16 
Tradenames  7,269   3,050   4,219 5 to 15   6,759   2,685   4,074 3 to 15 
Patents  45,590   6,964   38,626 5 to 19   45,665   8,594   37,071 2 to 19 
Other intangible assets $81,167  $21,996  $59,171    $83,082  $23,832  $59,250   

At September 30, 2010,March 31, 2011, other intangible assets included $3.8$3.4 million related to the Company’s marine and leisure operation, which sells trailers and related trailer axlesprimarily for small and medium-sized boats.boats and related axles. Over the last few years, industry shipments of small and medium-sized boats have declined significantly. From time to time throughout this period, the Company conducted an impairment analysisanalyses on these operations, and the estimated fair value of these operations continuescontinued to exceed the corresponding bookcarrying values, thus no impairment has been recorded. A continued downturn in industry shipments of small and medium-sized boats, or in the profitability of the Company’s operations, could result in a future non-cash impairment charge for the related other intangible assets in the future.assets.

4.Cash
Cash and Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The U.S. Treasury Bills are recorded at cost which approximatedapproximates fair value.

12

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Effective January 1, 2011, cash in banks is fully FDIC insured.
(Unaudited)

Cash and investments consisted of the following at (in thousands):

  March 31,  December 31, 
  2011  2010  2010 
          
Cash in banks $31,727  $7,723  $11,664 
Money Market – Wells Fargo  5,001   12,005   9,039 
Money Market – JPMorgan Chase  -   10,006   4,177 
U.S. Treasury bills – cash equivalents  -   11,999   14,000 
Cash and cash equivalents  36,728   41,733   38,880 
U.S. Treasury bills – short-term investments  -   9,997   4,999 
Cash and investments $36,728  $51,730  $43,879 
  September 30,  December 31, 
  2010  2009  2009 
          
Cash in bank $8,164  $44,932  $49,365 
Money Market – Wells Fargo  14,031   -   - 
Money Market – JPMorgan Chase  12,018   -   - 
Treasury bills – cash equivalents  7,000   -   3,000 
Total cash and cash equivalents  41,213   44,932   52,365 
Treasury bills – short-term investments  15,993   1,999   12,995 
Total cash and investments $57,206  $46,931  $65,360 
10
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

5.Inventories

Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution.

Inventories consisted of the following at (in thousands):

 September 30,  December 31,  March 31,  December 31, 
 2010  2009  2009  2011  2010  2010 
                  
Raw material $66,197  $51,465  $59,204 
Work in process  1,916   2,184   1,683 
Finished goods $6,897  $7,261  $9,264   9,499   8,164   8,441 
Work in process  1,792   2,016   1,576 
Raw material  65,432   47,907   46,917 
Total inventories $74,121  $57,184  $57,757 
Inventories $77,612  $61,813  $69,328 

6.Fixed Assets

Fixed assets consisted of the following at (in thousands):

  March 31,  December 31, 
  2011  2010  2010 
          
Fixed assets, at cost $170,023  $163,274  $166,125 
Less accumulated depreciation and amortization  88,872   84,312   86,277 
Fixed assets, net $81,151  $78,962  $79,848 

7.Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following at (in thousands):

  March 31,  December 31, 
  2011  2010  2010 
          
Employee compensation and benefits $12,352  $16,953  $16,643 
Warranty  4,804   3,637   4,005 
Sales rebates  3,442   1,975   1,668 
Other  18,293   16,952   11,407 
Accrued expenses and current liabilities $38,891  $39,517  $33,723 
  September 30,  December 31, 
  2010  2009  2009 
          
Accrued employee compensation and benefits $17,392  $14,287  $11,815 
Accrued warranty  5,885   3,832   3,340 
Other accrued expenses and current liabilities  13,466   11,208   13,039 
Total $36,743  $29,327  $28,194 
11
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations the Company considers various factors, including the Company’s (i) historical warranty experience, (ii) product mix, and (iii) sales patterns. The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current and long-term portions, atfor the three months ended (in thousands):

13

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 September 30,  December 31,  March 31, 
 2010  2009  2009  2011  2010 
Balance at beginning of period $4,686  $5,419  $5,419  $5,892  $4,591 
Provision for warranty expense  4,006   2,357   2,279   2,165   1,032 
Warranty costs paid  (2,172)  (2,390)  (3,012)  (1,078)  (649)
Total accrued warranty  6,520   5,386   4,686   6,979   4,974 
Less long-term portion  635   1,554   1,346 
Current accrued warranty $5,885  $3,832  $3,340 
Less long-term portion of accrued warranty  2,175   1,337 
Current portion of accrued warranty $4,804  $3,637 

7.8. Long-Term Indebtedness

The Company had no debt at September 30,borrowings during the three months ended March 31, 2011 and 2010, and 2009, respectively.had no debt outstanding at March 31, 2011 and 2010.

On November 25, 2008,February 24, 2011, the Company entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (collectively, the “Lenders”)., amending the Company’s previous $50.0 million line of credit that was scheduled to expire in December 2011. The maximum borrowings under the Company’s new line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the new line of credit is designated from time to time by the Company as either (i) the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2010 and 2009)March 31, 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2010 and 2009)March 31, 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires Decemberon January 1, 2011.2016. At September 30, 2010,March 31, 2011, the Company had availability of $44.5$44.8 million, as there were $5.5$5.2 million in outstanding letters of credit under the new line of credit.

Simultaneously, the Company entered into a $125.0$150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”)., amending and increasing the Company’s previous $125.0 million “shelf-loan” facility with Prudential. The new facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $125.0$150.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. TheThis new facility expires November 25, 2011. In June 2009, the Company paid in full the remaining outstanding Senior Promissory Notes before their scheduled maturity date.on February 24, 2014.

12
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined; provided however, that if the Company’s trailing twelve-month EBITDA is less than $50 million, the maximum leverage ratio covenant declines to 1.25 times the trailing twelve-month EBITDA.  At September 30, 2010, the Company’s trailing twelve-month EBITDA exceeded $50 million and, asdefined. As a result, the maximum leverage ratio covenant in both the line of credit and “shelf-loan” facilities was 2.5 times the trailing twelve-month EBITDA. At September 30, 2010, the maximum leverage ratio debt covenant limits the remaining availability under these facilities to $160.2 million. The $57.2was $174.9 million at March 31, 2011. This availability, together with the $36.7 million in cash and short-term investments at September 30, 2010, together with the borrowing availability under the line of credit and “shelf-loan” facility,March 31, 2011, are more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements and no borrowings under these facilities are expected.in 2011.

14

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Pursuant to the Credit Agreement and Senior Promissory Notes,“shelf-loan” facility at March 31, 2011, the Company is required to maintain minimum net worth, interest and fixed charge coverages, and to meet certain other financial requirements. At September 30, 2010,March 31, 2011, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.

Borrowings under both the line of credit and the “shelf-loan” facility are secured on a pari passu basis by first priority liens on the capital stock or other equity interests of each of the Company’s direct and indirect subsidiaries.

The $50.0 million line of credit is scheduled to expire December 1, 2011. The Company is currently discussing a new five-year line of credit with JPMorgan Chase and Wells Fargo, and expects the new line of credit to be completed by the end of 2010. The uncommitted “shelf-loan” facility with Prudential is also expected to be extended at the same time.

8.9.Stockholders’
Stockholders’ Equity

On November 29,The following reconciliation details the denominator used in the computation of basic and diluted earnings per share for the three months ended March 31, (in thousands):

  2011  2010 
Weighted average shares outstanding for basic earnings per share  22,219   22,102 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  158   146 
Weighted average shares outstanding for diluted earnings per share  22,377   22,248 

The weighted average diluted shares outstanding for the three months ended March 31, 2011 and 2010, excludes the effect of 1,476,540 and 1,224,790 stock options, respectively, because including them in the calculation of total diluted shares would have been anti-dilutive.

In February 2011, the Company issued 47,506 deferred stock units at $23.15, or $1.1 million, to certain executive officers in lieu of cash for a portion of their 2010 incentive compensation.

In 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions, or in block trades. Of this authorization, 447,400501,279 shares werehave been repurchased in 2008 at an average price of $18.58$18.65 per share, or $8.3$9.3 million in total. An additional 24,381 shares at an average cost of $19.00 per share, or $0.5 million, were repurchased during the third quarter of 2010. The aggregate cost of such repurchases was funded from the Company’s available cash. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

The following reconciliation details the denominator used in the computation of basic and diluted earnings per sharetable summarizes information about common stock at (in thousands)::

  March 31,  December 31, 
  2011  2010  2010 
Common stock authorized  30,000   30,000   30,000 
Common stock issued  24,720   24,581   24,675 
Treasury stock  2,651   2,597   2,651 
  Nine Months Ended  Three Months Ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
Weighted average shares outstanding for basic earnings per share  22,118   21,724   22,129   21,847 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  144   -   133   147 
Total for diluted shares  22,262   21,724   22,262   21,994 

The weighted average diluted shares outstanding for the nine months ended September 30, 2010 and 2009, excludes the effect of 1,172,223 and 1,861,873 stock options, respectively, and the three months ended September 30, 2010 and 2009, excludes the effect of 1,116,390 and 964,490 stock options, respectively, because including them in the calculation of total diluted shares would have been anti-dilutive.

 
1513

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

9.10.         Commitments and Contingencies

Litigation

On or about January 3, 2007, an action was commencedThere were no material developments during the first quarter in connection with the United States District Court, Central District of California, entitled, as amended, Gonzalez and Royalty vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath Components; Skyline Corporation, and Skyline Homes Inc. (Case No. CV06-08233).legal proceeding pending at December 31, 2010. See Note 10 of the Notes to Consolidated Financial Statements containedItem 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2009.2010.

The case purported to be a class action. During the course of the proceeding, the Court dismissed six claims asserted by the named plaintiffs.  On September 30, 2010, the Court dismissed the named plaintiffs’ seventh and final claim, concluding that plaintiffs had not demonstrated that they suffered any injury, and therefore did not have standing to bring a claim under the California Unfair Competition Law.  Plaintiffs have until November 22, 2010 to appeal.

Plaintiffs alleged that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of Kinro, and sold under the name “Better Bath” for use in manufactured homes, failed to comply with certain safety standards relating to flame spread established by the U.S. Department of Housing and Urban Development (“HUD”).  Plaintiffs alleged, among other things, that sale of these products is in violation of various provisions of the California Consumers Legal Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty Act (15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act (Cal. Civ. Code Sec. 1790 et seq.), and the California Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).

Plaintiffs sought to require defendants to notify members of the class of the allegations in the proceeding and the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair, replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to pay actual and punitive damages and plaintiffs’ attorneys fees.  The Company’s liability insurer denied coverage on the ground that plaintiffs did not sustain any personal injury or property damage.

Kinro conducted a comprehensive investigation of the allegations made in connection with the claims, including with respect to the HUD safety standards, test results, testing procedures, and the use of labels.  In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance with HUD regulations.

In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable 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 in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2010,March 31, 2011, would not be material to the Company’s financial position or annual results of operations.

16
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Contingent Consideration

In connection with the 2007several acquisitions of Trailair and Equa-Flex, the Company could pay an earn-out of up to $2.6 million, plus interest at 3 percent from the date of acquisition,since 2009, if certain sales targets for the acquired products are achieved, by Lippert over the five years subsequent to the acquisition. Cumulatively, less than $0.1 million has been paid based on such sales targets, and the Company does not anticipate any further payments.  In accordance with the accounting guidance in effect at the time, the Company did not record a liability for the fair value estimate of such earn-out payments, but rather these payments are recorded directly to goodwill.

In connection with the 2009 acquisitions of the QuickBiteTM coupler and the slide-out storage box for pick-up trucks, as well as the 2010 acquisitions of the Level-UpTM six-point leveling system, and certain intellectual property and other assets from Schwintek, Inc., the Company couldwould pay earn-outs if certain sales targets for the acquired products are achieved.earn-outs. The Company has recorded a liability for the fair value of these expected earn-out payments at March 31, 2011, based on the present value of these estimated earn-out payments at September 30, 2010the expected future cash flows using a market participant’s weighted average cost of capital of 16.317.7 percent.  The

The following istable summarizes the expected earn-outs as of September 30, 2010 (inMarch 31, 2011 (in thousands):

       Fair Value 
  Expiration Estimated  of Estimated 
Acquisition of Earn-out Payments  Payments 
Schwintek products 
March 2014(a)
 $14,878(b) $10,242 
Level-UpTM six-point leveling system
 February 2016  2,510(c)  1,576 
QuickBiteTM coupler
 October 2025  840(d)  178 
Home-Style products December 2014  229(c)  148 
Total   $18,457  $12,144 

(a)Earn-out payments for three of the four products expire in March 2014. Earn-out payments for the remaining product expire five years after the product is first sold to customers.
       Present Value 
  Expiration of Estimated  of Estimated 
Acquisition Earn-out Earn-out Payments  Earn-out Payments 
Schwintek products 
March 2014(1)
 $14,090(2) $9,742 
Level-Up™ six-point leveling system
 February 2016  2,371(3)  1,399 
QuickBite™ coupler
 October 2025  2,500(4)  635 
Slide-out storage box for pick-up trucks September 2015  -(3)  - 
Total   $18,961  $11,776 
(b)Two of the four products acquired have a combined remaining maximum earn-out payment of $12.7 million, which the Company has assumed will be achieved. Other than expiration of the earn-out period, the remaining products have no maximum on earn-out payments.

(1) Earn-out payments for three of the four products expire in March 2014. Earn-out payments for the remaining product expire five years after the product is first sold to customers.
(2) Two of the four products acquired have a combined
(c)Other than expiration of the earn-out period, these products have no maximum earn-out payment of $12.7 million, which the Company has assumed will be achieved. Other than expiration of the earn-out period, the remaining products have no cap on earn-out payments.
(3) Other than expiration of the earn-out period, these products have no cap on earn-out payments.
(d)
This product has a maximum earn-out payment of $2.5 million.
(4) This product has a maximum earn-out payment of $2.5 million.

As required, the liability for these estimated earn-out payments washas been re-evaluated quarterly during 2010,since inception, including most recently at September 30, 2010,March 31, 2011, considering actual sales of the acquired products, revisedupdated sales projections, and anthe updated market participant weighted average cost of capital. These quarterly re-evaluations during the first nine months of 2010 resulted in a $1.0 million reduction in the fair value of such estimated liabilities, because the earn-out payments are projected to be made later than originally expected, which reduces the present value of the liability. These adjustments resulted in a $1.0 million pre-tax gain for the nine months ended September 30, 2010, including a $0.9 million pre-tax gain for the three months ended September 30, 2010. Depending upon the weighted average cost of capital and future sales of the products which are subject to earn-outs, the Company could record further adjustments in future periods.

 
1714
 

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

In the first quarter of 2011, the net impact of the quarterly re-evaluation and accretion of the liability was a reduction to selling, general, and administrative expenses of $0.1 million, while in the first quarter of 2010 the net impact was an increase in selling, general, and administrative expenses of $0.1 million.

The following table provides a reconciliation of the Company’s contingent consideration liability, including both the current and long-term portions, for the ninethree months ended September 30, 2010March 31, 2011 (in thousands):

Balance at December 31, 2009 $1,370 
Balance at December 31, 2010 $12,104 
Acquisitions 10,333   150 
Payments (5)  (3)
Accretion 1,118   474 
Fair value adjustments  (1,040)  (581)
Balance at September 30, 2010 11,776 
Balance at March 31, 2011  12,144 
Less current portion in accrued expenses and other current liabilities  (1,361)  1,675 
Total long-term portion in other long-term liabilities $10,415  $10,469 

Vacant FacilitiesEnvironmental Liabilities

At September 30, 2010,Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the Company was attempting to sell four owned facilitiesamount of the liability can be reasonably estimated, based upon current law and vacant land with an aggregate carrying valueexisting technologies. These amounts, which are not discounted and are exclusive of $3.1 million, which were not being used in production. Additionally, the Company has leased toclaims against third parties, four owned facilities with a combined carrying amountare adjusted periodically as assessment and remediation efforts progress or additional technical or legal information becomes available. Environmental exposures are difficult to assess for numerous reasons, including the identification of $8.8 million, for onenew sites, developments at sites resulting from investigatory studies and remedial activities, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to five year terms, for a combined rental incomeidentified sites, the difficulty in assessing the involvement and financial capability of $78,000 per month. Eachother potentially responsible parties and the Company’s ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs. It is possible that some of these four leases also contains an option formatters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably against the lessee to purchase the facility at an amount in excess of carrying value. As of September 30, 2010, all of these owned facilities are classified in fixed assets in the Condensed Consolidated Balance Sheet since it is not probable that these assets will be sold within one year due to uncertainty in the real estate markets. In addition to the owned facilities, the Company is attempting to sublease four vacant facilities which it leases.Company.

To reflect the net losses and gains on sold facilities, and the write-downs to estimated fair value of facilities to be sold or subleased, the Company recorded net losses of $0.4 million and $2.1 million during the nine months ended September 30, 2010 and 2009, respectively, on such properties, including $0.3 million and ($0.1) million during the three months ended September 30, 2010 and 2009, respectively.

Use of Estimates

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesnet sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, earn-out payments, andenvironmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information 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 and events could differ significantly from management estimates.

 
1815
 

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

10.Fair Value Measurements
11.         Fair Value Measurements

Recurring

Accounting guidance establishesFair value is determined using a frameworkhierarchy that requireshas three levels based on the reliability of the inputs used to determine fair valuevalue. Level 1 refers to befair values determined based on the exchange price that would be receivedquoted prices in active markets for an asset, or paididentical assets. Level 2 refers to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

The valuation techniques required are based uponfair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflectThe following table presents the Company’s market assumptions. Accounting guidance requires the following fair value hierarchy:
·Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date.

·Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation.

·Level 3 – Values determined by models, significant inputs to which are unobservable and are primarily based on internally derived assumptions regarding the timing and amount of expected cash flows.

Long-lived assets, including goodwill and other intangible assets, may be measured at fair value if such assetson a recurring basis (in thousands):

   March 31, 2011  December 31, 2010 
  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Assets                        
Money market funds $5,001  $5,001  $-  $-  $13,216  $13,216  $-  $- 
U.S. Treasury bills  -   -   -   -   18,999   18,999   -   - 
Total assets $5,001  $5,001  $-  $-  $32,215  $32,215  $-  $- 
                                 
Liabilities                                
Contingent consideration $12,144  $-  $-  $12,144  $12,104  $-  $-  $12,104 
Total liabilities $12,144  $-  $-  $12,144  $12,104  $-  $-  $12,104 

Money market funds and U.S. Treasury bills are held for sale or if there isvalued using a determination that the asset is impaired. The determination of fair value ismarket approach based on the best information available; including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate.

During the first nine months of 2010, the Company completed three business combinations by which it acquired $32.3 million of assets, paid $21.9 million in cash, and agreed to potential future earn-out payments, originally estimated to be $10.3 million. The Company also completed two business combinations in 2009 with potential future earn-out payments. The Company usedidentical instruments. Contingent consideration liabilities are valued using Level 3 inputs. For further information on the inputs to value the assets and liabilities associated with these business combinations, as well as to updateused in determining the fair value, and a roll-forward of the potential future earn-out payments. See Notes 3 and 9contingent consideration liability, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

DuringThe carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated their fair value due to the first nine monthsshort-term nature of 2010these instruments.

Non-recurring

Certain assets and 2009,liabilities have been measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). The following table presents the Company reviewednon-recurring losses recognized using fair value measurements and the recoverabilitycarrying value of vacant facilitiesany assets and landliabilities which were measured using broker quotes and management’sfair value estimates which are Level 3 inputs. As a result, impairment charges of $0.4 million and $2.1 million were recorded during the nine months ended September 30, 2010 and 2009, respectively, on such properties, including $0.3 million and ($0.1) million during the three months ended September 30, 2010 and 2009, respectively.  The carrying value of these properties was $11.9 million at September 30, 2010. See Note 9 of the Notes to Condensed Consolidated Financial Statements.March 31, 2011 (in thousands):


  Carrying  Non-recurring 
  Value  Losses 
Assets      
Fixed assets $11,452  $- 
Acquisition of business  6,297   - 
Total assets $17,749  $- 
         
Liabilities        
Vacant leased facilities $1,069  $86 
Total liabilities $1,069  $86 
 
1916
 


DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

DuringAt March 31, 2011, the first quarterCompany had seven owned facilities and vacant land which it is attempting to sell. In addition to the owned facilities which the Company is attempting to sell, the Company is attempting to sublease four vacant facilities which it leases. The determination of 2009,fair value is based on the best information available, using Level 3 inputs, including internal cash flow estimates discounted at an appropriate interest rate, market prices for similar assets, broker quotes and independent appraisals, as appropriate.

Assets acquired and liabilities assumed in a business combination are recorded at fair value as of the acquisition date. Depending upon the type of asset acquired, the Company used Level 3 inputs to conduct an impairment analysis ofdifferent valuation techniques in determining the goodwillfair value of each asset. Those techniques include comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry specific economic and market conditions, weighted average cost of its reporting units, resulting in the impairment and non-cash write-off of the entire $45.0 million of goodwill at March 31, 2009. Seecapital, as well as other techniques as circumstances require. For further information on acquired assets, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

11.12.         New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance requires new disclosures, including the reasons for and amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and separate presentation of purchases, sales, issuances and settlements in the reconciliation of activity for Level 3 fair value measurements. It also clarifies guidance related to determining the appropriate classes of assets and liabilities and the information to be provided for valuation techniques used to measure fair value. This guidance with respect to significant transfers in and out of Levels 1 and 2 was effective for interim or annual periods beginning after December 15, 2009. The adoption of this portion of the guidance had no impact on the Company. This guidance2009, and with respect to Level 3 fair value measurements iswas effective for interim or annual periods beginning after December 15, 2010 and is not expected to have an2010. The adoption of the guidance had no impact on the Company.

 
2017
 

DREW INDUSTRIES INCORPORATED

ITEM 2 – 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 conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report.

The Company has two reportable segments,segments; the recreational vehicle (“RV”) products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). Intersegment sales are insignificant.

The Company’s operations are conducted through its wholly-owned operating subsidiaries, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”) and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Each has operations in both the RV and MH Segments. At September 30, 2010,March 31, 2011, the Company operated 25 plants26 facilities in the United States.

The RV Segment accounted for 8487 percent of consolidated net sales for the ninethree months ended September 30, 2010March 31, 2011 and 7983 percent of the annual consolidated net sales for 2009.2010. The RV Segment manufactures a variety of products used primarily in the production of RVs, including:

●Towable steel chassis
●Aluminum windows and screens
●Towable axles and suspension solutions
●Chassis components
●Slide-out mechanisms and solutions
●Furniture and mattresses
●Thermoformed bath, kitchen and other products
●Entry and baggage doors
●Toy hauler ramp doors
●Entry steps
● Patio doors
● Other accessories
● Manual, electric and hydraulic stabilizer
●Other accessories
and lifting systems
●Specialty trailers for hauling boats, personal
   and lifting systemswatercraft, snowmobiles and equipment

The Company also supplies certain of these products as replacement parts to the RV aftermarket. More than 90 percent of the Company’s RV Segment net sales are components for travel trailer and fifth-wheel RVs, with the balance primarily comprisingcomprised of components for motorhomes and mid-size buses, as well as sales of specialty trailers and related axles. Travel trailers and fifth-wheel RVs accounted for 8382 percent of all RVs shipped by the industry in the first nine months of 2010, up from 61 percent in 2001.

The MH Segment, which accounted for 1613 percent of consolidated net sales for the ninethree months ended September 30, 2010March 31, 2011 and 2117 percent of the annual consolidated net sales for 2009,2010, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

●Vinyl and aluminum windows and screens
●Steel chassis
●Thermoformed bath and kitchen products
●Steel chassis parts
●Steel and fiberglass entry doors
●Axles
●Aluminum and vinyl patio doors
 

The Company also supplies windows, doors, and thermoformed bath products as replacement parts to the manufactured housing aftermarket.

18

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Sales of products other than components for RVs and manufactured homes are not considered significant. However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes. As a result, the Company is not always able to determine in which type of home its products are installed.

21

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Because of the seasonality of the RV and manufactured housing industries, historically, the Company’s operating results in the first and fourth quarters have been the weakest, while the second and third quarters are traditionally stronger. However, because of increasesfluctuations in RV dealer inventories during the fourth quarter of 2009 and the first quarter of 2010,volatile raw material costs, seasonal industry trends have beenmay be different than in prior years.  Due to the uncertain economic environment, seasonal trends over the next few quarters may continue to be different than historical norms.

INDUSTRY BACKGROUND

Recreational Vehicle Industry

An RV is a vehicle designed as temporary living quarters for recreational, camping, travel or seasonal use. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers).

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 5910 percent, to 160,200or 4,900 units, forduring the first nine monthsquarter of 20102011, as compared to the same period of 2009. The increase in industry-wideprior year first quarter. This higher wholesale production in the first nine months of 2010 was a result of the following:

·In the first nine months of 2009, because of severe economic conditions, including low consumer confidence, limited credit availability for both dealers and consumers, and continued weakness in the real estate and mortgage markets, dealers reduced inventory levels by 38,000 units.
·Retail demand increased by 14,000 units, or 11 percent, in the first eight months of 2010, as compared to the same period in 2009.
·RV dealers increased inventory levels by 7,000 units in the first eight months of 2010.
·As a result, in order to meet the retail demand, additional wholesale production was required in 2010.

Recent dealer surveys, as well as the 8 percent year-over-year decline in industry-wide production of travel trailer and fifth-wheel RVs for September, the first monthly year-over-year decline since July 2009, suggest that RV dealers are cautious about their purchases and inventory levels during this seasonally slower fall and winter periods. Therefore, increases in dealer inventories of the magnitude experienced in the fourth quarter of 2009 and the first quarter of 2010 are unlikely2011 was due to recur.  Retail demand is the key to a sustained recovery.  Continuation of the positive trend in retail sales experienced from March through August 2010, would spur dealer orders and factory production in 2011. Althoughincreased retail demand has improved in 2010, there are still uncertainties regarding future retail demand due to high unemployment, tight credit, low consumer confidence and a weak economy.of an estimated 3,400 units, or 11 percent, with the balance comprised of increased RV dealer inventories.

While the Company measures its RV sales against industry-wide wholesale shipment statistics, it believes the underlying health of the RV industry is determined by retail demand. Retail sales of travel trailer and fifth-wheel RVs have been up year-over-year for twelve consecutive months through February 2011, the last month for which retail data is available. In anticipation of continued strong retail demand in the Spring and Summer selling seasons, RV dealers across the U.S. and Canada added an estimated aggregate of 27,600 travel trailer and fifth-wheel RVs to their inventories between December 2010 and March 2011, somewhat more than the 23,800 units added during the same period a year earlier.

A comparison of the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., for both the United States and Canada, is as follows:

  Wholesale  Retail  Unit Impact on 
  Change  Change  Dealer Inventories 
Quarter ended March 31, 2011  10% 11%(est.) 19,600(est.)
Quarter ended March 31, 2010  99%  8%  18,200 
             
Year ended December 31, 2010  44%  13%  13,200 
Year ended December 31, 2009  (25)%  (27)%  (26,000)
Year ended December 31, 2008  (29)%  (38)%  (41,300)

 
2219
 

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

  Wholesale  Retail  Unit Impact on 
  
Change
  
Change
  
Dealer Inventories
 
Quarter ended March 31, 2009  (61)%   (38)%   (4,103) 
Quarter ended June 30, 2009  (44)%   (33)%   (25,426) 
Quarter ended September 30, 2009  5%   (21)%   (8,440) 
Quarter ended December 31, 2009  88%   (7)%   12,070 
Quarter ended March 31, 2010  99%   7%   18,446 
Quarter ended June 30, 2010  80%   14%   (6,283) 
Quarter ended September 30, 2010  17%   
10%(1)
   
(5,202)(1)
 
(1) Through August 2010, the latest period for which retail information is available. 
             
Year ended December 31, 2009
  (25)%   (27)%   (25,899) 
Year ended December 31, 2008
  (29)%   (19)%   (41,287) 

Even though consumer confidence has recently been inconsistent, and gas prices continue to rise, recent reports cite continued strength in retail sales, as well as improving credit conditions. Consumer confidence and the availability of financing have historically been important factors in the overall growth in the RV industry, and although these factors have improved over the past couple years, there can be no assurance these factors will improve further.

In the long-term, the Company expects RV industry sales to be driven by positive demographics, and the continued popularity of the “RV Lifestyle”. Demand for RVs is strongest from the over 50 age group, which is the fastest growing segment of the U.S. population. U.S. Census Bureau projections released in December 2009 project that there will be 10 million more people over the age of 50 by 2015.

Further, in 1997, the RVIA beganhas a generic advertising campaign promoting the RV lifestyle. The current phasecampaign is targeted at both parents aged 30-49 with children at home, as well as couples aged 50-64 with no children at home. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented vacations, and using RVs as second homes, also appear to motivate consumer demand for RVs.

Manufactured Housing Industry

Manufactured homes are built entirely in a factory on permanent steel undercarriages or chassis to which axles and wheels are attached. The homes are then transported to a manufactured housing dealer which sells and transports the home to the buyer’s home site. The manufactured home is installed pursuant to a federal building code administered by the U.S. Department of Housing and Urban Development (“HUD”). The federal standards regulate manufactured housing design and construction, methods to site and secure the home at a home site, strength and durability, transportability, fire resistance, energy efficiency and quality. The HUD Codecode also sets performance standards for the heating, plumbing, air conditioning, thermal and electrical systems. It is the only federally regulated national building code. On-site additions, such as garages, decks and porches, often add to the attractiveness of manufactured homes and must be built to local, state or regional building codes. A manufactured home may be sited on owned or leased land.

The Institute for Building Technology and Safety (“IBTS”) reported that for the full year 2009,first three months of 2011, industry-wide wholesale shipments of manufactured homes were 49,7009,700 units, a decline of 39 percent compared to the full year 2008. However, estimates are that in 2009, manufactured housing dealers reduced inventory by approximately 10,000 units, implying that retail demand in 2009 was higher than industry-wide wholesale shipments. For the first nine months of 2010, industry-wide wholesale shipments of manufactured homes were 40,000 units, an increase of 613 percent compared to the first nine monthsquarter of 2009. This increase was apparently partially due to the tax credit available to first-time home buyers during the first six months of 2010, while industry-wide2010. Industry-wide wholesale shipments of manufactured homes during the thirdfirst quarter of 2010 when thelikely benefitted from a now expired tax credit expired, were consistent with the same period of 2009.for first-time home buyers.

23

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Since 1998, industry-wide wholesale shipments of manufactured homes have declined 8687 percent. This decade-plus decline was primarily the result of limited credit availability because of high credit standards applied to purchases of manufactured homes, high down payment requirements, and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes. In addition,Further, manufactured housing has declined in recent years due to the continued weakness in the several years leading up to 2008, many traditional buyers of manufactured homes were able to purchase site-built homes instead of manufactured homes, as subprime mortgages were readily available at unrealistic terms.housing market.

20

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

For the 20 years prior to the sub-prime boom in home financing, manufactured housing industry-wide wholesale shipments represented 20 percent or more of single-family housing starts. During the sub-prime years, 2003 to 2007, when extremely low cost loans were available for financing purchases of site-built homes, many traditional buyers of manufactured homes were able to purchase site-built homes instead of manufactured homes, and manufactured housing’s share of the single-family market dropped precipitously, to well below 10 percent. Since the sub-prime “bubble” burst in 2007 and 2008, this market share has increased somewhat, to about 12 percent, despite that interest rates for manufactured home loans remain historically high relative to rates for site-built home loans. Accordingly, the Company believes the manufactured housing industry may begin to experience a modest recovery when the economy improves and home buyers begin to look for affordable housing. However, because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, fluctuating consumer confidence, high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes, and tightthe current retail and wholesale credit markets, the Company expects industry-wide wholesale shipments of manufactured homes to remain low until these conditions improve. There are no industry forecasts for the manufactured housing industry.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) was signed into law in July, 2008. The SAFE Act is intended to establish minimum state standards for licensing and registration of mortgage lenders, brokers and originators. According to the Manufactured Housing Institute and the RVIA, this legislation, when fully implemented, could make loans for manufactured homes and RVs more difficult to obtain, resulting in fewer retail sales.

The Company also believes that long-term growth prospects for manufactured housing may be positive because of (i) the quality and affordability of the homes,home, (ii) the favorable demographic trends, including the increasing number of retirees who, in the past, had represented a significant market for manufactured homes, (iii) pent-up demand by retirees who have been unable or unwilling to sell their primary residence and purchase a manufactured home, and (iv) the unavailability of subprimesub-prime mortgages for site-built homes.

Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. For 2010, larger multi-section manufactured homes represented 59 percent of the total manufactured homes produced, down from 63 percent in 2009 and down significantly from 80 percent in 2003. During the first three months of 2011, multi-section homes were 54 percent of the total manufactured homes produced. Multi-section manufactured homes contain more of the Company’s products than single-section manufactured homes. The decline in multi-section homes over the past few years may be partly due to the weak site-built housing market, as a result of which many retirees have not been able to sell their primary residence, or may have been unwilling to sell at currently depressed prices, and purchase a more affordable manufactured home as many had done historically.

RESULTS OF OPERATIONS

Net sales and operating profit are as follows for the three months ended March 31, (in thousands):
  2011  2010 
Net sales:      
RV Segment $146,229  $124,362 
MH Segment  22,604   21,855 
Total net sales $168,833  $146,217 
         
Operating profit:        
RV Segment $15,301  $12,883 
MH Segment  2,224   1,566 
Total segment operating profit  17,525   14,449 
Corporate  (2,097)  (1,926)
Other non-segment items  115   (239)
Total operating profit
 $15,543  $12,284 

 
2421
 

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

RESULTS OF OPERATIONS

Net sales and operating profit (loss) are as follows (in thousands):
  Nine Months Ended  Three Months Ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
             
Net sales:            
RV Segment $390,678  $228,114  $122,052  $96,953 
MH Segment  75,874   65,134   24,781   24,713 
Total net sales $466,552  $293,248  $146,833  $121,666 
                 
Operating profit (loss):                
RV Segment $37,997  $9,490  $11,104  $10,205 
MH Segment  8,241   1,809   2,939   2,397 
Total segment operating profit  46,238   11,299   14,043   12,602 
Corporate  (5,814)  (4,930)  (1,870)  (1,752)
Goodwill impairment  -   (45,040)  -   - 
Other items  403   (2,087)  526   463 
Total operating profit (loss) $40,827  $(40,758) $12,699  $11,313 

Effective with the first quarter of 2010, amortization of intangibles, which was previously reported on a separate line, has been included as part of segment operating (loss) profit. The segment disclosures from 2009 have been reclassified to conform to the current year presentation, as follows:

  Three Months Ended  Year Ended 
(In thousands) March 31,  June 30,  September 30,  December 31,  December 31, 
  2009  2009  2009  2009  2009 
Operating (loss) profit:               
RV Segment $(5,863) $5,148  $10,205  $6,170  $15,660 
MH Segment  (2,181)  1,593   2,397   1,407   3,216 
Total segment operating (loss) profit  (8,044)  6,741   12,602   7,577   18,876 
Corporate  (1,560)  (1,618)  (1,752)  (1,612)  (6,542)
Goodwill impairment  (45,040)  -   -   -   (45,040)
Other items  (1,620)  (930)  463   (788)  (2,875)
Operating (loss) profit $(56,264) $4,193  $11,313  $5,177  $(35,581)

During the nine and three month periods ended September 30, 2009, the Company recorded $6.6 million and $0.5 million, respectively, of “extra” expenses resulting primarily from plant closings, staff reductions, increased bad debts, and obsolete inventory and tooling. These expenses were largely due to the unprecedented conditions in the RV and manufactured housing industries at that time. In addition, the Company recorded $45 million of charges for goodwill impairment during the first quarter of 2009. The Company did not incur “extra” expenses in the first nine months of 2010.

The following table reconciles cost of sales, selling, general and administrative expenses, goodwill impairment, operating (loss) profit, net (loss) income and net (loss) income per diluted share for the nine and three month periods ended September 30, 2009 to these same items before the “extra” expenses and charges for goodwill impairment. The Company finds this information useful in analyzing and reviewing the results of operations. This table is intended to provide investors this information on the Company’s results of operations before the “extra” expenses and charges for goodwill impairment to provide comparability between the nine and three month periods ended September 30, 2010 and 2009.

25

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

(In thousands) 
Nine Months Ended September 30, 2009
  
Three Months Ended September 30, 2009
 
  
GAAP
  
Adjustments
  
Non-GAAP
  
GAAP
  
Adjustments
  
Non-GAAP
 
Cost of sales $238,895  $(3,541) $235,354  $93,692  $(986) $92,706 
Selling, general and administrative expenses $50,331  $(3,030) $47,301  $16,721  $517  $17,238 
Goodwill impairment $45,040  $(45,040) $-  $-  $-  $- 
Operating (loss) profit $(40,758) $51,611  $10,853  $11,313  $469  $11,782 
Net (loss) income $(26,957) $33,406  $6,449  $7,189  $304  $7,493 
Net (loss) income per diluted share $(1.24) $1.53  $0.29  $0.33  $0.01  $0.34 

The following table reconciles RV Segment and MH Segment operating (loss) profit, goodwill impairment, other items, and operating (loss) profit for the nine and three month periods September 30, 2009 to these same items before the “extra” expenses and charges for goodwill impairment. The Company finds this information useful in analyzing and reviewing the results of operations. This table is intended to provide investors this information on the Company’s results of operations before the “extra” expenses and charges for goodwill impairment to provide comparability between the nine and three month periods ended September 30, 2010 and 2009.

(In thousands) 
Nine Months Ended September 30, 2009
  
Three Months Ended September 30, 2009
 
  
GAAP
  
Adjustments
  
Non-GAAP
  
GAAP
  
Adjustments
  
Non-GAAP
 
RV Segment operating profit $9,490  $3,962  $13,452  $10,205  $949  $11,154 
MH Segment operating profit $1,809  $639  $2,448  $2,397  $(46) $2,351 
Goodwill impairment $(45,040) $45,040  $-  $-  $-  $- 
Other items $(2,087) $1,970  $(117) $463  $(434) $29 
Operating (loss) profit $(40,758) $51,611  $10,853  $11,313  $469  $11,782 

Consolidated Highlights

 ·
§
Net sales in the third2011 first quarter increased 15 percent to $169 million, from $146 million in the first quarter of 2010, reached $147 million, 21primarily due to increases in industry-wide shipments of travel trailer and fifth-wheel RVs, as well as continuing increases in Drew’s average product content in these types of RVs. Net sales of the Company’s RV Segment in the first quarter of 2011, which represented 87 percent higher than the $122 million of consolidated net sales, in the third quarter of 2009. This sales increase was largely the result ofincreased 18 percent, compared to a 1710 percent increase in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs,RVs. Net sales of the Company’s primary market. The RVManufactured Housing Segment in the first quarter of 2011, which represented 8313 percent of consolidated net sales, increased 3 percent, compared to a 13 percent decrease in industry-wide production of manufactured homes. The Company’s sales growth exceeded the 2010 third quarter. In addition,RV and manufactured housing industry change during the first quarter of 2011, primarily because the Company increased its average product content per unit produced, as a result of new products, market share gains, and recent acquisitions, the Company’s product content for RVs increased 9 percent for the 12 months ended September 30, 2010, compared to the year-earlier period. Industry-wide production of manufactured homes in the third quarter of 2010 increased one percent from the third quarter of 2009.acquisitions.

Because of the seasonality of the RV and manufactured housing industries, historically, the Company’s operating results in the first and fourth quarters have been the weakest, while the second and third quarters are traditionally stronger. However, because of increasesfluctuations in RV dealer inventories during the fourth quarter of 2009 and the first quarter of 2010,volatile raw material costs, seasonal industry trends have beenmay be different than in prior years. Due

The Company’s net sales for the month of April 2011 were $60 million, a 6 percent increase from the month of April 2010, despite having one less shipping day this year than the prior year.

§For the first quarter of 2011, the Company reported net income of $9.4 million, ($0.42 per diluted share), a 28 percent increase over net income of $7.3 million ($0.33 per diluted share) reported in the first quarter of 2010.

From 2006 through 2010, through facility consolidations, staff reductions and synergies, the Company reduced annual fixed costs by more than $20 million, and improved production efficiencies. Many of these fixed costs reductions and efficiency improvements are permanent, and will continue to the uncertain economic environment, seasonal trendsbenefit future operating results. However, in response to increased demand for its products, over the nextpast few quarters may continuethe Company has added capacity and employees, adding about $2 million to be different than historical norms.$3 million of fixed costs on an annualized basis.

§On January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style manufactures a full line of upholstered furniture and mattresses primarily for towable RVs, in the Northwest U.S. market. Home-Style’s sales for 2010 were $12 million, which going forward would increase the Company’s content per travel trailer and fifth-wheel RV by $60 per unit. The purchase price was $7.3 million paid at closing from available cash, plus estimated contingent consideration of $0.2 million.

§The cost of the Company’s primary raw materials increased sharply since November 2010, adding $2 million to cost of sales in the first quarter of 2011. The Company estimates that the effect of these higher costs on second quarter 2011 cost of sales will be greater than in the first quarter. The Company has worked closely with customers to significantly reduce the impact of these incremental cost increases through sales price increases and increased market share, and has implemented new production efficiencies.

 
2622
 

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

The Company’s net sales for the month of October 2010 were $40 million, a 2 percent decline from the month of October 2009. In 2009, the Company’s fourth quarter sales were aided by RV dealer inventory restocking.

·For the third quarter ended September 30, 2010, the Company reported net income of $8.0 million, or $0.36 per diluted share, compared to $7.2 million, or $0.33 per diluted share for the comparable period in 2009.

Results forOver the 2010 third quarter include an after tax non-cash gain of $0.6 million ($0.03 per diluted share) related to a required quarterly adjustment to previously estimated future earn-out payments on acquisitions. Each quarter the Company is required to re-evaluate the fair value of the liability for estimated earn-out payments based upon the projected timing and extent of future sales, as well as the discount rate. The third quarter re-evaluations resulted in a reduction in the fair value of such estimated liabilities, because the earn-out payments are projected to be made later than originally expected, which reduces the present value of the liability. Depending upon the discount rate and future sales of the products which are subject to earn-outs, the Company could record further adjustments in future periods.

The 2009 third quarter included $0.5 million ($0.02 per diluted share) of “extra” expenses, net of taxes, primarily due to plant consolidations related to unprecedented conditions in the RV and manufactured housing industries during that period.

·Because so much has changed over the past year, the Company also finds it useful to compare the results for the current quarter to the most recently completed quarter.  Due to greater than normal seasonal decline in industry-wide production of RVs, the Company’s third quarter 2010 sales were $27 million below second quarter levels.  However, third quarter 2010 operating profit declined only $3 million from second quarter 2010 levels, or 12 percent of the sales decline.  This was better than the 20 percent incremental margin decline the Company would typically expect, primarily due to the $1 million pre-tax gain on the earn-out liability adjustment, and lower worker compensation and group insurance costs.

In addition, in an effort to retain key employees in preparation for 2011 production levels, management retained a larger workforce during the seasonal slowdown, but this additional cost was offset by significantly reducing overtime.

Rawpast several years, material costs have been volatile. While the impact of material costs fluctuates significantly from quarter to quarter, on an annual basis from 2006 through 2010, material costs have remained relatively consistent as a percent of sales, fluctuating by only a couple percentage points. Strong relationships and cooperation with customers again reduced the impact of recent raw material cost increases, as it has in the third quarter of 2010 were consistent with the second quarter of 2010. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.past.

While the Company has historically been able to obtain sales price increases to offset the majority of raw material cost increases, there can be no assurance that future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such increases will match the raw material cost increases. Also, to mitigate the impact of higher raw material costs, the Company attempts to gain additional sales volume from customers. TheFurther, the Company also continues to exploreimplement improved product design, efficiency improvements, and less costly alternative sources of raw materials and components, both domestic and imported.

27

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

 ·§DuringEstimates for the first nine monthsfull year 2011 are that capital expenditures will be $21 million to $23 million, including $4 million for the purchase of 2010,four new facilities, three of which the Company completedhad previously been leasing. Additionally, included in the acquisitionfull year estimate, due to the Company’s new products and market share gains, and after completing an extensive analysis of three businesses, for aggregate cash consideration of $21.9 million paid at closing, and licensedreturn on investment, the rightsCompany has initiated a project to use a patent for $0.3 million. In addition, contingent earn-out could be paid over approximately the next 6 years depending upon the level of sales generated from certain of the acquired products. These acquisitions included a series of new patent-pending RV products, including an innovative wall slide-out mechanism, new leveling devices, a new power roof lift for tent campers, and an advanced remote locking system for entry doors, as well as an operation withadd the capability to customize standard chassisextrude aluminum, primarily for motorhomes, transit buses and specialized commercial trucks.internal use. Capital expenditures for this aluminum extrusion project are expected to aggregate $8 million to $9 million over the next six to twelve months.

RV Segment – ThirdFirst Quarter

Net sales of the RV Segment net sales in the thirdfirst quarter of 20102011 increased 2618 percent, or $22 million to $146 million, compared to the 2009 third quarter.  Drew’sfirst quarter of 2010. The Company’s sales growth exceeded the 1710 percent increase in industry-wide wholesale production of travel trailers and fifth-wheel RVs, largely due to the Company’s market share gains and new product introductions,introductions. Sales to travel trailer and fifth-wheel RVs original equipment manufacturers (“OEMs”) increased $19 million to $132 million, or 17 percent, in the first quarter of 2011 as well as growthcompared to the same period of 2010, including approximately $2 million due to the acquisition of Home-Style in aftermarket sales.January 2011. More than 90 percent of the Company’s RV Segment net sales were components for travel trailer and fifth-wheel RVs.

TheIn addition, sales of the Company’s RV Segment sales of replacement parts inbenefitted from the aftermarket for existing RVs were approximately $11 millionfollowing:

·Sales to motorhome OEMs increased 10 percent to $5 million. While this is less than the 21 percent increase in industry-wide wholesale production of motorhomes because of the loss of market share by some of the Company’s motorhome customers, in the past year the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration.
·Sales of replacement parts in the aftermarket increased 37 percent to $4 million.
·Sales to other industries, including specialty trailers and components for mid-size buses, increased 32 percent to $5 million.

23

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

According to the RVIA, industry-wide wholesale shipments for the twelvethree months ended September 30, 2010, an increase of 23 percent from the twelve months ended September 30, 2009. The Company is increasing its efforts to gain market share in sales of replacement parts in the aftermarket.March 31, were:

  2011  2010  Change 
Travel Trailer and         
Fifth-Wheel RVs  54,200   49,300   10%
Motorhomes  6,900   5,700   21%

The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. Content per RV is also impacted by changes in selling prices for the Company’s products. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components for the different types of RVs produced for the last twelve months ended September 30,March 31, divided by the industry-wide wholesale shipments of the different types of RVs for the twelve months ended September 30, was approximately:same period, was:

  2010  2009  Change 
Content per Travel Trailer and Fifth-Wheel RV
 $2,196  $2,023   9%
Content per Motorhome $540  $532   2%
Content per Travel Trailer, Fifth-Wheel and Motorhome
 $2,017  $1,889   7%
  2011  2010  Change 
Content per Travel Trailer and         
Fifth-Wheel RV $2,210  $2,118   4%
Content per Motorhome $676  $860   (21)%

The Company’s average product content per type of RV excludes sales of replacement parts to the aftermarket, and sales to other industries. In the third quarter of 2010, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to other industries. This refinement had no impact on total RV Segment sales or trends of content per unit. Prior periods have been reclassified to conform to this presentation.

28

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

According to the RVIA, industry-wide wholesale shipments for the twelve months ended September 30, were as follows:

  2010  2009  Change 
Travel Trailer and Fifth-Wheel RVs
  197,600   120,800   64%
Motorhomes  24,000   11,900   102%
Total Travel Trailers, Fifth-Wheels and Motorhomes
  221,600   132,700   67%

RV Segment operating profit in the third quarter of 2010 increased $0.9 million compared to the same period in 2009. This operating profit increase was 4 percent of the increase in net sales, significantly less than the Company’s expected 20 percent incremental margin.
The operating margin of the RV Segment in the third quarter of 2010 was negatively impacted by:
·Volatile raw material costs. Raw material costs as a percent of sales were two percent higher than during the third quarter of 2009, when raw material costs were unusually low. Raw material costs remained low during the fourth quarter of 2009. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.
·Approximately $1 million of excess production costs incurred as a result of greater than anticipated increases in demand in certain product lines. Significant steps to control these costs have been implemented, including adding production capacity, and improving production flow and material usage.
·Higher incentive compensation compared to the third quarter of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.
·Higher than average warranty costs as a percent of sales in the third quarter of 2010, as compared to lower than average warranty costs as a percent of sales in the third quarter of 2009.
Partially offset by:
·The spreading of fixed manufacturing and selling, general and administrative costs over a $25 million larger sales base.
·Lower overtime.
·In the third quarter of 2009, the Company had $0.9 million of “extra” expenses related primarily to equipment write-downs, largely due to the unprecedented conditions in the manufactured housing industry at that time.

29

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

At September 30, 2010, the Company had $3.8 million of other intangible assets related to its marine and leisure operation, which sells trailers and related trailer axles for small and medium-sized boats. Over the last few years, industry shipments of small and medium-sized boats have declined significantly. From time to time, throughout this period, the Company conducted an impairment analysis on these operations, and the estimated fair value of these operations continues to exceed the corresponding book values, thus no impairment has been recorded. A continued downturn in industry shipments of small and medium-sized boats, or in the profitability of the Company’s operations, could result in a non-cash impairment charge for the related other intangible assets in the future.

RV Segment – Year to Date

Net sales of the RV Segment in the first nine months of 2010 increased 71 percent, or $163 million, compared to the same period of 2009. Drew’s sales growth exceeded the 59 percent increase in industry-wide wholesale production of travel trailers and fifth-wheel RVs, largely due to the Company’s market share gains and new product introductions, as well as growth in aftermarket sales.

Operating profit of the RV Segment was $38.0$15.3 million in the first nine monthsquarter of 2010,2011, an improvementincrease of $28.5$2.4 million compared to the same periodfirst quarter of 2009,2010, largely due to the $163$22 million increase in net sales. The Company incurred $4.0 million of “extra” expenses in the first nine months of 2009 related to plant closings, staff reductions, increased bad debts, equipment write-downs, and obsolete inventory and tooling, largely due to the unprecedented conditions in the RV industry at that time. Excluding these “extra” expenses, the Company’s RV Segment operating profit increased $24.5 million from the same period last year. This adjusted increase in RV Segment operating profit was 1511 percent of the increase in net sales, less than the Company’s expected 20 percent incremental margin.
 
The operating margin of the RV Segment in the first nine monthsquarter of 20102011 was negatively impacted by:
 
 ·Approximately $3Volatile raw material costs. Raw materials costs increased sharply since November 2010, adding $1.1 million to cost of excess productionsales for the RV Segment. While the Company expects the impact of these higher costs incurred as a resulton second quarter cost of sales will be greater than anticipatedin the first quarter, the Company has worked closely with its customers to significantly reduce the impact of these incremental cost increases in demand in certain product lines. Significant steps to control these costs have been implemented, including adding production capacity,through sales price increases and improving production flow and material usage.
increased market share.
 ·Higher incentive compensation comparedwarranty costs largely due to product line expansion over the first nine months of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.
·Higher severance costs.past few years.
 
Partially offset by:
 
·Improved operating efficiencies resulting in lower labor and overtime costs.
 ·The spreading of fixed manufacturing and selling, general and administrative costs over a $163$22 million larger sales base.
·Lower health insurance costs and bad debt expense.
·Improved operating efficiencies in certain product lines due to the increase in sales, partially offset by higher overtime costs.
·Volatile raw material costs. Raw material costs during the nine months ended September 30, 2010 were lower than during the first nine months of 2009, although such costs were higher than during the second half of 2009, when raw material costs were unusually low. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.

 
3024
 

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

MH Segment – ThirdFirst Quarter

Net sales of the MH Segment in the thirdfirst quarter of 2010 were consistent with the third quarter of 2009. While industry-wide shipments of manufactured homes in the third quarter of 20102011 increased one3 percent, or $1 million to $23 million, compared to the same period last year, industry-wide shipmentsfirst quarter of larger, multi-section homes, in which the Company has more content, declined eight percent, while smaller single-section homes increased 18 percent.2010. The impact of this industry-wide shipments decline in multi-section homes on MH SegmentCompany’s sales growth was largely due to the following:
·Sales of replacement parts in the aftermarket increased 13% percent to $5 million.
·Sales to other industries, including modular housing and office units, increased 58% percent to $3 million.
Partially offset by increased sales of replacement parts in the aftermarket.by:
·Sales to OEMs of manufactured homes which decreased 4 percent, significantly less than the 13 percent decrease in industry-wide wholesale production of manufactured homes. The Company’s performance was better than the industry due to market share gains.

The Company’s MH Segment sales of replacement parts inAccording to the aftermarket, primarily comprised of windows, doors and thermoformed bath products, were approximately $16 millionIBTS, industry-wide wholesale shipments for the twelvethree months ended September 30, 2010, an increase of 32 percent from the twelve months ended September 30, 2009. The Company is increasing its efforts to gain market share in sales of replacement parts in the aftermarket.March 31, were:

  2011  2010  Change 
Total Homes Produced  9,700   11,200   (13)%
Total Floors Produced  15,100 �� 18,100   (16)%

The trend in the Company’s average product content per manufactured home produced is an indicator of the Company’s overall market share of components for new manufactured homes. Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. The larger homes typically contain more of the Company’s products. Content per manufactured home and content per floor are also impacted by changes in selling prices for the Company’s products. The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components for newly produced manufactured homes produced for the twelve months ended September 30,March 31, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the twelve months ended September 30, was approximately:same period, was:

 2010  2009  Change  2011  2010  Change 
Content per Home Produced $1,391  $1,397   0% $1,401  $1,356   3%
Content per Floor Produced $857  $854   0% $877  $825   6%

The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket, and sales to other industries. In the third quarter of 2010, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to other industries. This refinement had no impact on total MH Segment sales or trends of content per unit. Prior periods have been reclassified to conform to this presentation.

According to the IBTS, industry-wide wholesale shipments for the twelve months ended September 30, were as follows:

  2010  2009  Change 
Total Homes Produced
  51,900   54,200   (4)%
Total Floors Produced  84,100   88,600   (5)%

MH Segment operating profit in the third quarter of 2010 increased $0.5 million compared to the same period in 2009, despite level sales. This profit improvement was primarily the result of lower overhead and administrative costs.

31

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

MH Segment – Year to Date

Net sales of the MH Segment for the first nine months of 2010 increased 16 percent, or $11 million, from the same period of 2009. This increase was significantly better than the six percent increase in industry-wide wholesale shipments of manufactured homes, largely as a result of new products, market share gains and increased sales of replacement parts to the aftermarket, partially offset by customer mix.

Operating profit of the MH Segment was $8.2$2.2 million in the first nine monthsquarter of 2010,2011, an improvementincrease of $6.4$0.7 million compared to the same period of 2009,in 2010, partly due to the $11$1 million increase in net sales. In the first nine months of 2009, the Company had $0.6 million of “extra” expenses related to plant closings, staff reductions, increased bad debts and obsolete inventory, largely due to the unprecedented conditions in the manufactured housing industry at that time.

The operating margin of the MH Segment in the first nine monthsquarter of 20102011 was positively impacted by:
 
 ·Lower health insuranceretirement costs and bad debt expense.
as compared to the first quarter of 2010.
 ·The spreading of fixed manufacturing and selling, general and administrative costs over an $11 milliona larger sales base.
·Improved operating efficiencies due to the increase in sales.
·Implementation of cost-cutting measures.
·Volatile raw material costs. Raw material costs during the nine months ended September 30, 2010 were lower than during the first nine months of 2009, although such costs were higher than during the second half of 2009, when raw material costs were unusually low. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.
Partially offset by:
·Higher incentive compensation compared to the first nine months of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.
·Higher severance costs.
·Higher transportation costs.
Corporate

Corporate expenses for the first nine months of 2010 and the third quarter of 2010 increased $0.9 million and $0.1, respectively, relative to comparable periods in 2009, due primarily to an increase in performance-based compensation as a result of higher profits.

 
3225
 

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Goodwill ImpairmentPartially offset by:
·Volatile raw material costs. Raw materials costs have increased sharply since November 2010, adding $0.5 million to cost of sales for the MH Segment. While the Company expects the impact of these higher costs on second quarter cost of sales will be greater than in the first quarter, the Company has worked closely with its customers to significantly reduce the impact of these incremental cost increases through sales price increases and increased market share.

DuringCorporate

Corporate expenses for the first quarter of 2009, because the Company’s stock price on the New York Stock Exchange was below its book value, and due2011 increased $0.2 million compared to the continued declines in industry-wide wholesale shipments of RVs and manufactured homes, the Company conducted an impairment analysis of the goodwill of each of its reporting units. The fair value of each reporting unit was estimated with a discounted cash flow model utilizing internal forecasts and observable market data, to the extent available, to estimate future cash flows, using a weighted average cost of capital of 16.5 percent. The forecast included an estimate of long-term future growth rates based on management’s most recent views of the long-term outlook for each reporting unit.

Based on the analyses, the carrying value of the RV and manufactured housing reporting units exceeded their fair value. As a result, the Company performed the second step of the impairment test, which required the Company to determine the fair value of each reporting unit’s assets and liabilities, including all of the tangible and identifiable intangible assets of each reporting unit, excluding goodwill. The results of the second step implied that the fair value of goodwill was zero; therefore during the first quarter of 2009,2010, primarily due to higher professional fees, and higher stock option expense due to the Company recorded a non-cash impairment charge to write-off the entire $45.0 million of goodwill of these reporting units.November 2010 stock option grant.

Other Non-Segment Items

OtherSelling, general and administrative expenses include the following other non-segment items includefor the followingthree months ended March 31, (in thousands):

  Nine Months Ended  Three Months Ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
             
Selling, general and administrative expenses:            
Legal $(131) $(376) $(64) $(31)
Net loss on sold facilities and write-downs to estimated current fair value of facilities to be sold  (446)  (2,241)  (280)  (114)
Other  205   157   18   435 
Net gain on insurance claim  859   -   457   - 
Incentive compensation impact of other non-segment items  (85)  113   (20)  113 
Earn-outs fair value adjustment  1,040   -   934   - 
Earn-outs accretion  (1,118)  -   (598)  - 
Other income from the collection of a previously reserved note  79   260   79   60 
  $403  $(2,087) $526  $463 
  2011  2010 
Write-downs to estimated current fair value of facilities to be sold or subleased $-  $(126)
Earn-outs fair value adjustment  581   - 
Earn-outs accretion  (474)  (144)
Other income, net  8   31 
Total other non-segment items – income (expense) $115  $(239)

Income Taxes

The income tax rate forin the first nine months of 2010 was 38.8 percent, consistent with the 38.5 percent rate for all of 2009, excluding the impact of the goodwill impairment charge. The tax rate for the third quarter of 20102011 was 37.039.4 percent, lower than the 39.539.9 percent forincome tax rate in the first six monthsquarter of 2010 due primarily to the expiration of certain state and federal tax statute of limitations.2010. The full year 20102011 effective income tax rate is expected to be approximately 38 percent to 39 percent.

33
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense, Net

Interest expense, for the first nine months of 2010 was $0.2 million, primarily consisting of commitment and letter of credit fees under the line of credit. Interest expense iscredit, partially offset by interest income. Interest income, in 2010 onfor the Company’s $57.2 millionfirst three months of 2011 was consistent with the same period of 2010. Despite significant cash and investments isbalances during the first quarter of 2011, interest income was not significant, due to low interest rates and the Company’s policy of investing in only extremely safe investments. Interest expense for the full year 2011 is expected to be approximately $0.2 million.

26

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

LIQUIDITY AND CAPITAL RESOURCES

The Statements of Cash Flows reflect the following for the ninethree months ended September 30,March 31, (in thousands):

  2010  2009 
Net cash flows provided by operating activities $20,418  $45,075 
Net cash flows used for investing activities  (31,291)  (4,689)
Net cash flows used for financing activities  (279)  (4,146)
Net (decrease) increase in cash $(11,152) $36,240 
  2011  2010 
Net cash flows provided by operating activities $3,083  $8,662 
Net cash flows used for investing activities  (5,434)  (19,333)
Net cash flows provided by financing activities  199   39 
Net decrease in cash $(2,152) $(10,632)

Cash Flows from Operating ActivitiesOperations

Net cash flows from operating activities in the first ninethree months of 20102011 of $20.4$3.1 million were $24.7$5.6 million lowerless than the $45.1$8.7 million in the first ninethree months of 20092010, as a result of:

 ·An $8.3 million larger increase in accounts receivable in the first three months of 2011, compared to the first three months of 2010, due to higher sales in March 2011 as compared to March 2010. Accounts receivable balances remain current, with only 20 days sales outstanding at March 31, 2011.
·A $16.7$2.7 million larger increase in inventories in the first ninethree months of 2011, compared to the first three months of 2010, compareddue to a $38.1 million decrease in the first nine months of 2009. During 2009, the Company reduced inventory through consumption of higher priced inventory on hand, and reduced inventory purchases. As a result of the 59 percentseasonal increase in net sales and the increase in raw material costs. Inventory turnover for the first ninetwelve months ofended March 31, 2011 continues to be strong, at 6.4 turns, consistent with the 6.5 turns for the full year 2010, and better than the Company increased inventory balances by $16.7 million during6.1 turns for the same period. Inventory turnover reached approximately seven turns at September 30, 2010, compared to four turns at September 30, 2009.twelve months ended March 31, 2010.
Partially offset by:
 ·AnA $2.1 million increase in after-tax operating resultsnet income in the first ninethree months of 2011 compared to the first three months of 2010.
 ·An $18.8A $1.9 million larger increase in accounts payable, accrued expenses and other liabilities in the first ninethree months of 2011, compared to the first three months of 2010, compared to an increase of $3.6 million in the first nine months of 2009,primarily due largely to the timing of payments for inventory purchases. Accounts payable at September 30, 2009 was lower than at September 30, 2010, primarily due to significantly reduced purchases during the third quarter of 2009 in an effort to decrease inventories. In addition, accrued liabilitiesexpenses and taxes payableother liabilities increased in 20102011 due to the increase in sales, production and earnings.

During the second quarter of 2011, the Company expects the inventory balance to increase modestly, as lower priced inventory is replaced by higher priced raw materials.

Depreciation and amortization was $12.7$4.9 million in the first ninethree months of 2010,2011, and is expected to aggregate $17$18 million to $19 million for the full year 2010 and approximately $16 million in 2011. Non-cash stock-based compensation was $2.7$2.2 million in the first ninethree months of 2011, including $1.1 million for 2010 incentive compensation in lieu of cash, and is expected to be approximately $4$5 million to $6 million for the full year.year 2011.

Cash Flows from Investing Activities

Cash flows used for investing activities of $5.4 million in the first three months of 2011 included the acquisition of Home-Style for $7.3 million and capital expenditures of $3.1 million, both of which were financed from available cash, partially offset by $5.0 million received from the maturity of U.S. Treasury Bills classified as short-term investments.

 
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DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Cash FlowsOn January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style manufactures a full line of upholstered furniture and mattresses primarily for towable RVs, in the Northwest U.S. market. Home-Style’s sales for 2010 were $12 million, which going forward would increase the Company’s content per travel trailer and fifth-wheel RV by $60 per unit. The purchase price was $7.3 million paid at closing from Investing Activitiesavailable cash.

Cash flows usedEstimates for investing activities of $31.3 million in the first nine months of 2010 included acquisitions of businesses of $21.9 million and capital expenditures of $7.7 million, both of which were paid from available cash. The Company estimatesfull year 2011 are that capital expenditures will be $11$21 million to $13$23 million, including $4 million for the purchase of four new facilities, three of which the Company had previously been leasing. Additionally, included in 2010,the full year estimate, due to the Company’s new products and market share gains, and after completing an extensive analysis of return on investment, the Company has initiated a project to add the capability to extrude aluminum, primarily for internal use. Capital expenditures for this aluminum extrusion project are expected to be funded by cash flows from operations. Further, the Company estimates that capital expenditures will be $10aggregate $8 million to $12$9 million in 2011. However, certain capital projects included inover the 2010 capital expenditure forecast may not be completed until next year, which would cause the estimate for 2011six to increase. Additional capital expenditures may be required in 2011 depending on the extent of sales growth and other initiatives by the Company.

During the first nine months of 2010, the Company purchased $21.0 million of short-term U.S. Treasury Bills not classified as cash equivalents, and received $18.0 million from the maturity of short-term U.S. Treasury Bills not classified as cash equivalents. The Company’s priorities for its cash are liquidity and security. The Company has chosen to invest in short-term U.S. Treasury Bills primarily due to the high levels of security and liquidity provided by these instruments.

Cash and investments consisted of the following at September 30, 2010 (in thousands):

Cash in bank $8,164 
Money Market – Wells Fargo  14,031 
Money Market – JPMorgan Chase  12,018 
Treasury bills – cash equivalents  7,000 
Total cash and cash equivalents  41,213 
Treasury bills – short-term investments  15,993 
Total cash and investments $57,206 
twelve months.

At September 30, 2010,March 31, 2011, the Company was attempting to sell fourseven owned facilities and vacant land with an aggregate carrying value of $3.1$11.5 million, which wereare not being used in production. Additionally, theThe Company has leased to third parties four of these owned facilities with a combined carrying amountvalue of $8.8$8.7 million, for one to five year terms, for a combined rental income of $78,000$79,000 per month. Each of these four leases also contains an option for the lessee to purchase the facility at an amount in excess of carrying value. In addition to thethese seven owned facilities, the Company is attempting to sublease four vacant facilities which it leases.

On March 16,Cash flows used for investing activities of $19.3 million in the first quarter of 2010 consisted of the Company acquired certain intellectual property and other assets fromacquisition of Schwintek, Inc. The purchase included certain productsInc for which patents are pending, consisting of an innovative RV wall slide-out mechanism, an aluminum cylinder for use in leveling devices for motorhomes, and a power roof lift for tent campers. The purchase price was $20.0 million paid at closing from available cash, plus earn-outs depending on future unit salesand the acquisition of these products in excess of pre-established hurdles over approximately the next five years. At September 30, 2010, the Company has recorded a $9.7 million liability for the present value of the estimated earn-out payments.

On February 18, 2010, the Company acquired the patent-pending design for a six-point leveling system for fifth-wheel RVs. The purchase price wasRVs for $1.4 million, paid at closingas well as $1.2 million of capital expenditures, all of which were financed from available cash, plus an earn-out depending on future unit sales of the leveling system in excess of pre-established hurdles over the next six years. At September 30, 2010,cash.  In addition, the Company has recorded a $1.4 million liability for the present value of the estimated earn-out payments.

35

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Cash flows used for investing activities of $4.7 million in the first nine months of 2009 included capital expenditures of $1.9 million, the purchase ofpurchased $2.0 million of short-term U.S. Treasury bills classified as short-term investments. This was partially offset by $5.0 million received from the maturity of U.S. Treasury Bills the acquisition of the patents for the QuickBite CouplerTM, and other intellectual properties and assets. The minimum aggregate purchase price in the QuickBite acquisition was $0.5 million, of which $0.3 million was paid at closing and the balance was paid on May 15, 2010, plus an earn-out depending on future unit sales of the product. At September 30, 2010, the Company has recorded a $0.6 million liability for the present value of the estimated earn-out payments.classified as short-term investments.

Cash Flows from Financing Activities

CashThere were no significant cash flows used forfrom financing activities for the first ninethree months of 2010 were not significant.ended March 31, 2011 and 2010. At September 30, 2010,March 31, 2011, the Company had no debt outstanding.outstanding, and made no borrowings during the first three months of 2011.

Cash flows used for financing activitiesIn connection with several acquisitions since 2009, if certain sales targets for the first nine monthsacquired products are achieved, the Company would pay earn-outs to the sellers. The Company has recorded a $12.1 million liability for the fair value of 2009these expected earn-out payments at March 31, 2011. For further information see Note 10 of $4.1 million were primarily duethe Notes to net debt payments of $8.7 million offset by $4.6 million received from the exercise of stock options.Condensed Consolidated Financial Statements.

On November 25, 2008,February 24, 2011, the Company entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (collectively, the “Lenders”)., amending the Company’s previous $50.0 million line of credit that was scheduled to expire in December 2011. The maximum borrowings under the Company’s new line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the new line of credit is designated from time to time by the Company as either (i) the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2010)March 31, 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2010)March 31, 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires Decemberon January 1, 2011.2016. At September 30, 2010,March 31, 2011, the Company had availability of $44.5$44.8 million, as there were $5.5$5.2 million in outstanding letters of credit under the new line of credit.

28

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Simultaneously, the Company entered into a $125.0$150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”)., amending and increasing the Company’s previous $125.0 million “shelf-loan” facility with Prudential. The new facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $125.0$150.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. TheThis new facility expires November 25, 2011. In June 2009, the Company paid in full the remaining outstanding Senior Promissory Notes before their scheduled maturity date.on February 24, 2014.

Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined; provided however, that if the Company’s trailing twelve-month EBITDA is less than $50 million, the maximum leverage ratio covenant declines to 1.25 times the trailing twelve-month EBITDA. At September 30, 2010, the Company’s trailing twelve month EBITDA exceeded $50 million and, asdefined. As a result, the maximum leverage ratio covenant in both the line of credit and “shelf-loan” facilities was 2.5 times the trailing twelve month EBITDA. At September 30, 2010, the maximum leverage ratio debt covenant limits the remaining availability under these facilities to $160.2 million. The $57.2was $174.9 million at March 31, 2011. This availability, together with the $36.7 million in cash and short-term investments at September 30, 2010, together with the borrowing availability under the line of credit and “shelf-loan” facility,March 31, 2011, are more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements and no borrowings under these facilities are expected.in 2011.

36

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Pursuant to the Credit Agreement and Senior Promissory Notes,”shelf-loan” facility at March 31, 2011, the Company is required to maintain minimum net worth, interest and fixed charge coverages, and to meet certain other financial requirements. At September 30, 2010,March 31, 2011, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.

The $50.0 millionBorrowings under both the line of credit is scheduled to expire December 1, 2011.  The Company is currently discussing a new five-year line of credit with JPMorgan Chase and Wells Fargo, and expects the new line of credit to be completed by the end of 2010.  The uncommitted “shelf-loan” facility with Prudential is also expected to be extended atare secured on a pari passu basis by first priority liens on the same time.capital stock or other equity interests of each of the Company’s direct and indirect subsidiaries.

On November 29,In 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions, or in block trades. Of this authorization, 447,400501,279 shares werehave been repurchased in 2008 at an average price of $18.58$18.65 per share, or $8.3$9.3 million in total. An additional 24,381 shares at an average cost of $19.00 per share, or $0.5 million, were repurchased during the third quarter of 2010. The aggregate cost of such repurchases was funded from the Company’s available cash. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

CORPORATE GOVERNANCE

The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) 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 provides 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.
29

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

CONTINGENCIES

Additional information required by this item is included under Item 1 of Part II of this Quarterly Report on Form 10-Q.

INFLATION

The prices of key raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile, and after rising significantly during the first part ofvolatile. Since November 2010, began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain otherthese key raw materials again increased. The Company did not experience any significant increase in its labor costs in the first ninethree months of 20102011 related to inflation.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance requires new disclosures, including the reasons for and amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and separate presentation of purchases, sales, issuances and settlements in the reconciliation of activity for Level 3 fair value measurements. It also clarifies guidance related to determining the appropriate classes of assets and liabilities and the information to be provided for valuation techniques used to measure fair value. This guidance with respect to significant transfers in and out of Levels 1 and 2 was effective for interim or annual periods beginning after December 15, 2009. The adoption of this portion of the guidance had no impact on the Company. This guidance2009, and with respect to Level 3 fair value measurements iswas effective for interim or annual periods beginning after December 15, 2010 and is not expected to have an2010. The adoption of the guidance had no impact on the Company.

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DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

USE OF ESTIMATES

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesnet sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, earn-outs payments, environmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information 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 and events couldmay differ significantly from management estimates.these estimates under different assumptions or conditions.

30

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the Company’s Common Stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933 (the “Securities Act”).

Forward-looking statements, including, without limitation, those relating to our future business prospects, revenues,net sales, expenses, and income (loss), cash flow, and financial condition, whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of our senior management at the time such statements were made, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by forward-looking statements. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. You should consider forward-looking statements, therefore, in light of various important factors, including those set forth in this Form 10-Q, and in our subsequent filings with the Securities and Exchange Commission.Commission (“SEC”).

There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel and steel-based components, vinyl, aluminum, glass and ABS resin) and other components, availability of credit for financing the retail and wholesale purchase of manufactured homes and recreational vehicles (“RVs”), availability and costs of labor, inventory levels of retail dealers and manufacturers, levels of repossessed manufactured homes and RVs, the disposition into the market by the Federal Emergency Management Agency (“FEMA”), by sale or otherwise, of RVs or manufactured homes purchased by FEMA, changes in zoning regulations for manufactured homes, sales declines in the RV or manufactured housing industries, the financial condition of our customers, the financial condition of retail dealers of RVs and manufactured homes, retention and concentration of significant customers, interest rates, oil and gasoline prices, and the outcome of litigation. In addition, international, national and regional economic conditions and consumer confidence affect the retail sale of RVs and manufactured homes.

 
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DREW INDUSTRIES INCORPORATED

Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has historically been exposed to changes in interest rates primarily as a result of its financing activities. At September 30, 2010,March 31, 2011, the Company had no outstanding borrowings.

Additional information required by this item is included under the caption “Inflation” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report.

Item 4 – CONTROLS AND PROCEDURES

 a)Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its disclosure controls and procedures to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.

As of the end of the period covered by this Form 10-Q, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 b)Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2010March 31, 2011 or subsequent to the date the Company completed its evaluation, whichthat have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Over the last few years, the internal controls at Lippert have been incrementally strengthened due both to the installation of enterprise resource planning (“ERP”) software and business process changes. In the last several quarters,three months, the Company implementedcontinued to implement certain significant functions of the ERP software and business process changes at Kinro.changes. Implementation of additional functions of the ERP software and business process changes are planned at Kinro for the balancenext couple of 2010 and the first half of 2011. The Company also anticipates that it will continue to implement additional functionalities of the ERP software at both Lippert and Kinroquarters to further strengthen the Company’s internal control.

 
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DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

On or about January 3, 2007, an action was commencedThere were no material developments during the first quarter in connection with the United States District Court, Central District of California, entitled, as amended, Gonzalez and Royalty vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath Components; Skyline Corporation, and Skyline Homes Inc. (Case No. CV06-08233).legal proceeding pending at December 31, 2010. See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2009.

The case purported to be a class action. During the course of the proceeding, the Court dismissed six claims asserted by the named plaintiffs.  On September 30, 2010, the Court dismissed the named plaintiffs’ seventh and final claim, concluding that plaintiffs had not demonstrated that they suffered any injury, and therefore did not have standing to bring a claim under the California Unfair Competition Law.  Plaintiffs have until November 22, 2010 to appeal.

Plaintiffs alleged that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of Kinro, and sold under the name “Better Bath” for use in manufactured homes, failed to comply with certain safety standards relating to flame spread established by the U.S. Department of Housing and Urban Development (“HUD”).  Plaintiffs alleged, among other things, that sale of these products is in violation of various provisions of the California Consumers Legal Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty Act (15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act (Cal. Civ. Code Sec. 1790 et seq.), and the California Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).

Plaintiffs sought to require defendants to notify members of the class of the allegations in the proceeding and the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair, replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to pay actual and punitive damages and plaintiffs’ attorneys fees.  The Company’s liability insurer denied coverage on the ground that plaintiffs did not sustain any personal injury or property damage.

Kinro conducted a comprehensive investigation of the allegations made in connection with the claims, including with respect to the HUD safety standards, test results, testing procedures, and the use of labels.  In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance with HUD regulations.2010.

In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable 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 in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2010,March 31, 2011, would not be material to the Company’s financial position or annual results of operations.

Item 1A – RISK FACTORS

There have been no material changes to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 11, 2010, except as noted below.

40
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
We were involved in certain litigation, which, if decided against us, could have had a material adverse effect on our financial condition.

At December 31, 2009, a case was pending against Kinro, purporting to be a class action, in which it was alleged that certain bathtubs manufactured by Kinro for use in manufactured homes failed to comply with certain safety standards relating to flame spread. Kinro denied the allegations, vigorously defended against the claims and, based on extensive investigation, consistently maintained that the bathtubs were in compliance with applicable regulations. During the course of the proceeding, the Court dismissed six claims asserted by the named plaintiffs.  On September 30, 2010, the Court dismissed the named plaintiffs’ seventh and final claim, concluding that plaintiffs had not demonstrated that they suffered any injury, and therefore did not have standing to bring a claim under the California Unfair Competition Law.  Plaintiffs have until November 22, 2010 to appeal.  Further detail regarding the litigation is provided in this Form 10-Q in Part II Item 1. “Legal Proceedings.”

The loss of any customer accounting for more than 10 percent of our consolidated net sales, and the consolidation of customers in our industry, could have a material adverse impact on our operating results.

In the third quarter of 2010, our largest customer acquired our third largest customer.  Combined for the first nine months of 2010, these customers represented 42 percent of our consolidated sales.

The concentration of sales of our products to fewer customers as a result of consolidation of manufacturers in the industries we serve could adversely impact our operating results.

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS2011.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Issuer Purchases of Equity Securities
             
Period
 
(a)
Total
Number of
Shares
Purchased
  
(b)
Average
Price Paid
per Share
  
(c)
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
  
(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 
September 1 - 30, 2010  24,381  $19.00   24,381   528,219 

On November 29, 2007, the Company announced a stock repurchase of up to 1,000,000 shares, of which 471,781 shares have been repurchased at an average price of $18.60 per share, or $8.8 million in total.

 The aggregate cost of the repurchases during the third quarter of 2010 in the amount of $0.5 million was funded from the Company’s available cash.

41
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Item 6 – EXHIBITS

a)Exhibits as required by item 601 of Regulation S-K:

 1)31.1 Certification of Chief Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.1 is filed herewith.

 2)31.2 Certification of Chief Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.2 is filed herewith.

 3)32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.1 is filed herewith.

 4)32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 is filed herewith.

 
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DREW INDUSTRIES INCORPORATED
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DREW INDUSTRIES INCORPORATED
Registrant
 
By/s/By  /s/ Joseph S. Giordano III
Joseph S. Giordano III
Chief Financial Officer and Treasurer
November 8, 2010May 9, 2011

 
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