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: JUNESEPTEMBER 30, 2011

OR

o
¨		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)

Delaware13-3250533
(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 o¨

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 o¨

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 o¨ Accelerated filer x  Non-accelerated filer o¨ (Do not check if a smaller reporting company) Smaller reporting company o¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 22,087,26722,054,011 shares of common stock as of July 29,October 31, 2011.


 
 
 

DREW INDUSTRIES INCORPORATED

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

(UNAUDITED)
 
  Page
PART I –
FINANCIAL INFORMATION 
   
 
Item 1 – FINANCIAL STATEMENTS
 
   
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME3
   
 CONDENSED CONSOLIDATED BALANCE SHEETS4
   
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS5
   
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY6
   
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7 – 1719
   
 
Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1820 – 3338
   
 
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3439
   
 
Item 4 – CONTROLS AND PROCEDURES
3440
   
PART II –
OTHER INFORMATION 
   
 
Item 1 – LEGAL PROCEEDINGS
3541
   
 
Item 1A – RISK FACTORS
3541
   
 
Item 6 – EXHIBITS
3541
   
SIGNATURES3642
  
EXHIBIT 31.1 – SECTION 302 CEO CERTIFICATION
43
  
EXHIBIT 31.2 – SECTION 302 CFO CERTIFICATION
44
  
EXHIBIT 32.1 – SECTION 906 CEO CERTIFICATION
45
  
EXHIBIT 32.2 – SECTION 906 CFO CERTIFICATION
46
 
 
2
 

DREW INDUSTRIES INCORPORATED

PART I –  FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS


DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 Six Months Ended  Three Months Ended  Nine Months Ended  Three Months Ended 
 June 30,  June 30,  September 30,  September 30, 
 2011  2010  2011  2010  2011  2010  2011  2010 
(In thousands, except per share amounts)                        
                        
Net sales $354,881  $319,719  $186,048  $173,502  $521,570  $466,552  $166,689  $146,833 
Cost of sales  274,943   248,502   143,989   135,944   409,631   363,467   134,688   114,965 
Gross profit  79,938   71,217   42,059   37,558   111,939   103,085   32,001   31,868 
Selling, general and administrative expenses  46,485   43,089   24,149   21,714   69,362   62,337   22,877   19,248 
Other (income)  (79)  (79)  (79)  (79)
Operating profit  33,453   28,128   17,910   15,844   42,656   40,827   9,203   12,699 
Interest expense, net  119   140   61   58   197   168   78   28 
Income before income taxes  33,334   27,988   17,849   15,786   42,459   40,659   9,125   12,671 
Provision for income taxes  12,982   11,068   6,884   6,194   16,488   15,757   3,506   4,689 
Net income $20,352  $16,920  $10,965  $9,592  $25,971  $24,902  $5,619  $7,982 
                                
Net income per common share:                                
Basic $0.91  $0.77  $0.49  $0.43  $1.17  $1.13  $0.25  $0.36 
Diluted $0.91  $0.76  $0.49  $0.43  $1.16  $1.12  $0.25  $0.36 
                                
Weighted average common shares outstanding:                                
Basic  22,244   22,112   22,270   22,121   22,254   22,118   22,273   22,129 
Diluted  22,417   22,262   22,458   22,276   22,427   22,262   22,447   22,262 

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

 
3
 

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 June 30,  December 31,  September 30,  December 31, 
 2011  2010  2010  2011  2010  2010 
(In thousands, except per share amount)                  
                  
ASSETS                  
Current assets                  
Cash and cash equivalents $36,774  $47,073  $38,880  $1,472  $41,213  $38,880 
Short-term investments  -   10,993   4,999   -   15,993   4,999 
Accounts receivable, trade, less allowances  44,050   41,267   12,890   41,965   31,329   12,890 
Inventories  83,556   69,175   69,328   97,765   74,121   69,328 
Deferred taxes  12,142   9,879   12,142 
Prepaid expenses and other current assets  18,306   15,156   16,768   6,960   6,151   4,626 
Total current assets  182,686   183,664   142,865   160,304   178,686   142,865 
Fixed assets, net  85,308   79,930   79,848   90,884   80,215   79,848 
Goodwill  8,600   7,086   7,497   20,137   7,497   7,497 
Other intangible assets, net  58,433   60,421   57,419   80,746   59,171   57,419 
Deferred taxes  15,385   16,532   15,770   15,744   16,532   15,770 
Other assets  3,969   3,021   3,382   3,544   3,456   3,382 
Total assets $354,381  $350,654  $306,781  $371,359  $345,557  $306,781 
                        
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities                        
Accounts payable, trade $27,377  $29,380  $11,351  $30,106  $20,715  $11,351 
Accrued expenses and other current liabilities  39,101   42,127   33,723   39,413   36,743   33,723 
Total current liabilities  66,478   71,507   45,074   69,519   57,458   45,074 
Long-term indebtedness  8,075   -   - 
Other long-term liabilities  20,279   16,211   18,248   20,005   16,569   18,248 
Total liabilities  86,757   87,718   63,322   97,599   74,027   63,322 
                        
Stockholders’ equity                        
Common stock, par value $.01 per share  247   246   247   247   246   247 
Paid-in capital  83,799   76,140   79,986   84,942   77,216   79,986 
Retained earnings  212,419   214,350   192,067   218,038   222,332   192,067 
Stockholders’ equity before treasury stock  296,465   290,736   272,300   303,227   299,794   272,300 
Treasury stock, at cost  (28,841)  (27,800)  (28,841)  (29,467)  (28,264)  (28,841)
Total stockholders’ equity  267,624   262,936   243,459   273,760   271,530   243,459 
Total liabilities and stockholders’ equity $354,381  $350,654  $306,781  $371,359  $345,557  $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 
  September 30, 
  2011  2010 
(In thousands)      
       
Cash flows from operating activities:      
Net income $25,971  $24,902 
Adjustments to reconcile net income to cash flows provided by operating activities:        
Depreciation and amortization  15,069   12,726 
Stock-based compensation expense  3,352   2,787 
Deferred taxes  26   - 
Other non-cash items  751   (971)
Changes in assets and liabilities, net of acquisitions of businesses:        
Accounts receivable, net  (24,440)  (18,780)
Inventories  (20,581)  (16,650)
Prepaid expenses and other assets  (1,996)  (2,431)
Accounts payable, accrued expenses and other liabilities  18,127   18,835 
Net cash flows provided by operating activities  16,279   20,418 
         
Cash flows from investing activities:        
Capital expenditures  (17,721)  (7,706)
Acquisitions of businesses  (49,340)  (21,900)
Purchase of short-term investments  -   (20,985)
Proceeds from maturity of short-term investments  5,000   18,000 
Other investing activities  810   1,300 
Net cash flows used for investing activities  (61,251)  (31,291)
         
Cash flows from financing activities:        
Exercise of stock options and deferred stock units  504   190 
Purchase of treasury stock  (626)  (464)
Proceeds from line of credit borrowings  48,675   - 
Repayments under line of credit  (40,600)  - 
Other financing activities  (389)  (5)
Net cash flows provided by (used for) financing activities  7,564   (279)
         
Net decrease in cash  (37,408)  (11,152)
         
Cash and cash equivalents at beginning of period  38,880   52,365 
Cash and cash equivalents at end of period $1,472  $41,213 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Interest $263  $239 
Income taxes, net of refunds $17,101  $18,010 
  Six Months Ended 
  June 30, 
  2011  2010 
(In thousands)      
       
Cash flows from operating activities:      
Net income $20,352  $16,920 
Adjustments to reconcile net income to cash flows provided by operating activities:        
Depreciation and amortization  10,016   8,457 
Stock-based compensation expense  2,209   1,831 
Deferred taxes  385   - 
Other non-cash items  162   (754)
Changes in assets and liabilities, net of business acquisitions:        
Accounts receivable, net  (31,160)  (28,718)
Inventories  (12,623)  (11,959)
Prepaid expenses and other assets  (1,926)  (953)
Accounts payable, accrued expenses and other liabilities  22,991   32,898 
Net cash flows provided by operating activities  10,406   17,722 
         
Cash flows from investing activities:        
Capital expenditures  (10,543)  (4,471)
Acquisitions of businesses  (7,250)  (21,400)
Purchase of short-term investments  -   (12,992)
Proceeds from maturity of short-term investments  5,000   15,000 
Other investing activities  142   782 
Net cash flows used for investing activities  (12,651)  (23,081)
         
Cash flows from financing activities:        
Exercise of stock options and deferred stock units  504   70 
Other financing activities  (365)  (3)
Net cash flows provided by financing activities  139   67 
         
Net decrease in cash  (2,106)  (5,292)
         
Cash and cash equivalents at beginning of period  38,880   52,365 
Cash and cash equivalents at end of period $36,774  $47,073 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Interest $138  $161 
Income taxes, net of refunds $12,558  $8,752 

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, 2010 $247  $79,986  $192,067  $(28,841) $243,459 
Net income for the nine months ended September 30, 2011  -   -   25,971   -   25,971 
Issuance of 63,290 shares of common stock pursuant to stock options and deferred stock units  -   416   -   -   416 
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units  -   88   -   -   88 
Stock-based compensation expense  -   3,352   -   -   3,352 
Issuance of 47,506 deferred stock units relating to 2010 compensation  -   1,100   -   -   1,100 
Purchase of 33,856 shares of treasury stock  -   -   -   (626)  (626)
Balance - September 30, 2011 $247  $84,942  $218,038  $(29,467) $273,760 
  
Common
Stock
  
Paid-in
Capital
  
Retained
Earnings
  
Treasury
Stock
  
Total
Stockholders’
Equity
 
(In thousands, except shares)               
                
Balance - December 31, 2010 $247  $79,986  $192,067  $(28,841) $243,459 
Net income for the six months ended June 30, 2011  -   -   20,352   -   20,352 
Issuance of 55,749 shares of common stock pursuant to stock options and deferred stock units  -   416   -   -   416 
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units  -   88   -   -   88 
Stock-based compensation expense  -   2,209   -   -   2,209 
Issuance of 47,506 deferred stock units relating to 2010 compensation  -   1,100   -   -   1,100 
Balance - June 30, 2011 $247  $83,799  $212,419  $(28,841) $267,624 

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 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, truck caps and mid-size buses, as well as specialtyfor trailers used to haul boats, livestock, equipment and related axles.other cargo.

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 fluctuations in RV dealer inventories and volatile economic conditions, current seasonal industry trends may be different than in prior years.

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2010 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 sixnine and three month periods ended JuneSeptember 30, 2011 and 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; the recreational vehicle products segment (the “RV Segment”"RV Segment") and the manufactured housing products segment (the “MH Segment”"MH Segment"). Intersegment sales are insignificant.

The RV Segment, which accounted for 86 percent and 84 percent of consolidated net sales for the sixnine month periods ended JuneSeptember 30, 2011 and 2010, 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
●
● 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
and leveling systems  

The Company also supplies certain of these products as replacement parts to the RV aftermarket, and manufactures components for mid-sizetruck caps, buses, and for trailers used to haul boats, horses, livestock, equipment and other cargo. More thanApproximately 90 percent of the Company’s RV Segment net sales are components for travel trailer and fifth-wheel RVs.

 
7
 

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

The MH Segment, which accounted for 14 percent and 16 percent of consolidated net sales for the sixnine month periods ended JuneSeptember 30, 2011 and 2010, 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. 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’sCompany's resources are made by the Company’sCompany'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 Segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 2010 Annual Report on Form 10-K.

Information relating to segments follows (in thousands):

 Nine Months Ended  Three Months Ended 
 Six Months Ended  Three Months Ended  September 30,  September 30, 
 June 30,  June 30,  2011  2010  2011  2010 
 2011  2010  2011  2010             
Net sales:                        
RV Segment $303,428  $268,626  $157,199  $144,264  $439,656  $390,678  $136,228  $122,052 
MH Segment  51,453   51,093   28,849   29,238   81,914   75,874   30,461   24,781 
Total net sales $354,881  $319,719  $186,048  $173,502  $521,570  $466,552  $166,689  $146,833 
                                
Operating profit:                                
RV Segment $32,625  $26,893  $17,324  $14,009  $40,370  $37,997  $7,745  $11,104 
MH Segment  5,177   5,302   2,953   3,736   8,963   8,241   3,786   2,939 
Total segment operating profit  37,802   32,195   20,277   17,745   49,333   46,238   11,531   14,043 
Corporate  (4,043)  (3,944)  (1,946)  (2,017)  (5,846)  (5,814)  (1,803)  (1,870)
Other non-segment items  (306)  (123)  (421)  116   (831)  403   (525)  526 
Total operating profit $33,453  $28,128  $17,910  $15,844  $42,656  $40,827  $9,203  $12,699 
 
 
8
 

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

3.           Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

Starquest Products, LLC

On August 29, 2011, the Company acquired the business and assets of Starquest Products, LLC and its affiliated company. Starquest had annual sales of approximately $22 million, comprised primarily of windows for truck caps, which are fiberglass enclosures that fit over the bed of pick-up trucks, painted to automotive standards and designed to exact truck bed specifications. Starquest also manufactures windows and doors for horse trailers and certain types of buses. The purchase price of $22.6 million was funded from available cash plus approximately $12 million of borrowings pursuant to the Company’s $50 million line of credit, plus contingent consideration based on future sales of certain products. The results of the acquired business have been included in the Company’s RV Segment and in the Condensed Consolidated Statement of Income since the acquisition date.

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

Cash consideration $22,600 
Contingent consideration  40 
Total fair value of consideration given $22,640 
     
Customer relationships $12,540 
Other identifiable intangible assets  1,884 
Net tangible assets  2,871 
Total fair value of net assets acquired $17,295 
     
Goodwill (tax deductible) $5,345 

The customer relationships intangible asset will be amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and purchasing power with respect to these product lines.

EA Technologies, LLC

On August 22, 2011, the Company acquired from EA Technologies, LLC the business and certain assets of the towable RV chassis and slide-out mechanism operation previously owned by Dexter Chassis Group. The acquired business had annual sales of more than $40 million. The purchase price was $13.5 million paid at closing from available cash. The results of the acquired business have been included in the Company’s RV Segment and in the Condensed Consolidated Statement of Income since the acquisition date.

9

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

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

Cash consideration $13,500 
     
Customer relationships $7,060 
Net tangible assets  2,340 
Total fair value of net assets acquired $9,400 
     
Goodwill (tax deductible) $4,100 

The customer relationships intangible asset will be amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and manufacturing capacity with respect to these product lines.

M-Tec Corporation

On July 19, 2011, the Company acquired certain assets and business of Indiana-based M-Tec Corporation. M-Tec manufactures components for RVs and mobile office units. The acquired business hashad annual sales of approximately $12 million.million comprised primarily of components for RVs, mobile office units and manufactured homes. The purchase price was $6.0 million paid at closing from available cash, plus contingent consideration based on an earn-out. Atfuture sales of existing products. The results of the acquired business have been included in either the Company’s RV or MH Segments, as appropriate, and in the Condensed Consolidated Statement of Income since the acquisition date.

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

Cash consideration $5,990 
Contingent consideration  450 
Total fair value of consideration given $6,440 
     
Customer relationships $2,310 
Other identifiable intangible assets  315 
Net tangible assets  1,723 
Total fair value of net assets acquired $4,348 
     
Goodwill (tax deductible) $2,092 

The customer relationships intangible asset will be amortized over its estimated useful life of acquisition,15 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company estimated the aggregate earn-out payments would be $0.6 million.anticipates leveraging its existing manufacturing expertise and purchasing power with respect to these product lines.

10

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

Home-Style Industries

On January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style manufactureshad annual sales of approximately $12 million comprised primarily of 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. The purchase price was $7.3 million paid at closing from available cash, plus contingent consideration based on an earn-out. At the datefuture sales of acquisition, the Company estimated the aggregate earn-out payments would be $0.2 million.existing products in specific geographic regions. The results of the acquired business have been included in the Company’s RV Segment and in the Condensed Consolidated Statement of OperationsIncome since the acquisition date.

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

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 net assets acquired $6,297 
     
Goodwill (tax deductible) $1,103 
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 customer relationships intangible asset will be amortized over theirits estimated useful life of 12 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and purchasing power inwith respect to these product lines.

9
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Goodwill

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

 MH Segment  RV Segment  Total  MH Segment  RV Segment  Total 
                  
Accumulated cost – December 31, 2010 $9,251  $48,773  $58,024  $9,251  $48,773  $58,024 
Accumulated impairment – December 31, 2010  (9,251)  (41,276)  (50,527)  (9,251)  (41,276)  (50,527)
Net balance – December 31, 2010  -   7,497   7,497   -   7,497   7,497 
Acquisitions - 2011  -   1,103   1,103   774   11,866   12,640 
Net balance – June 30, 2011 $-  $8,600  $8,600 
Net balance – September 30, 2011 $774  $19,363  $20,137 

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 is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist, and is based on fair value, determined using discounted cash flows, appraised values or management’s estimates. No impairment tests were required or performed during the sixnine months ended JuneSeptember 30, 2011.

11

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

Other Intangible Assets

Other intangible assets consisted of the following at JuneSeptember 30, 2011 (in thousands):

  Gross  Accumulated  Net Estimated Useful
  Cost  Amortization  Balance Life in Years
           
Customer relationships $50,415  $13,445  $36,970 3 to 16
Patents  46,008   10,170   35,838 2 to 19
Tradenames  8,069   3,137   4,932 3 to 15
Non-compete agreements  4,136   1,130   3,006 3 to 7
Other intangible assets $108,628  $27,882  $80,746  
  
Gross
Cost
  
Accumulated
Amortization
  
Net
Balance
 
Estimated Useful
Life in Years
 
            
Non-compete agreements $3,247  $881  $2,366 3 to 7 
Customer relationships  28,505   12,589   15,916 3 to 16 
Tradenames  6,759   2,897   3,862 3 to 15 
Patents  45,688   9,399   36,289 2 to 19 
Other intangible assets $84,199  $25,766  $58,433   

At JuneSeptember 30, 2011, other intangible assets included $3.1$2.9 million related to the Company’s marine and leisure operation, which sells trailers primarily for hauling small and medium-sized boats and related axles. Over the last fewseveral years, industry shipments of small and medium-sized boats have declined significantly. From time to time throughout this period, the Company conducted impairment analyses on these operations, and the estimated fair value of these operations continued to exceed the corresponding carrying values, thus no impairment has been recorded. A further 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. No impairment tests were required or performed during the nine months ended September 30, 2011.

10
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.           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 approximates fair value. Effective January 1, 2011, cash in banks is fully FDIC insured.
 
Cash and investments consisted of the following at (in thousands):

  September 30,  December 31, 
  2011  2010  2010 
          
Cash in banks $1,472  $8,164  $11,664 
Money Market – Wells Fargo  -   14,031   9,039 
Money Market – JPMorgan Chase  -   12,018   4,177 
U.S. Treasury Bills – cash equivalents  -   7,000   14,000 
Cash and cash equivalents  1,472   41,213   38,880 
U.S. Treasury Bills – short-term investments  -   15,993   4,999 
Cash and investments $1,472  $57,206  $43,879 
 
  June 30,  December 31, 
  2011  2010  2010 
          
Cash in banks $31,772  $16,041  $11,664 
Money Market – Wells Fargo  5,002   12,020   9,039 
Money Market – JPMorgan Chase  -   5,012   4,177 
U.S. Treasury Bills – cash equivalents  -   14,000   14,000 
Cash and cash equivalents  36,774   47,073   38,880 
U.S. Treasury Bills – short-term investments  -   10,993   4,999 
Cash and investments $36,774  $58,066  $43,879 
12

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, 
  2011  2010  2010 
          
Raw material $84,294  $65,432  $59,204 
Work in process  2,335   1,792   1,683 
Finished goods  11,136   6,897   8,441 
Inventories $97,765  $74,121  $69,328 
  June 30,  December 31, 
  2011  2010  2010 
          
Raw material $72,367  $57,688  $59,204 
Work in process  2,181   1,792   1,683 
Finished goods  9,008   9,695   8,441 
Inventories $83,556  $69,175  $69,328 

6.           Fixed Assets

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

  September 30,  December 31, 
  2011  2010  2010 
          
Fixed assets, at cost $183,906  $168,566  $166,125 
Less accumulated depreciation and amortization  93,022   88,351   86,277 
Fixed assets, net $90,884  $80,215  $79,848 
  June 30,  December 31, 
  2011  2010  2010 
          
Fixed assets, at cost $176,685  $166,685  $166,125 
Less accumulated depreciation and amortization  91,377   86,755   86,277 
Fixed assets, net $85,308  $79,930  $79,848 
11
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

7.           Accrued Expenses and Other Current Liabilities

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

 June 30,  December 31,  September 30,  December 31, 
 2011  2010  2010  2011  2010  2010 
                  
Employee compensation and benefits $18,056  $19,232  $16,643  $16,180  $17,392  $16,643 
Warranty  4,860   4,833   4,005   5,665   5,885   4,005 
Sales rebates  3,878   2,234   1,668 
Other  12,307   15,828   11,407   17,568   13,466   13,075 
Accrued expenses and other current liabilities $39,101  $42,127  $33,723  $39,413  $36,743  $33,723 

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, for the sixnine months ended (in thousands):

 
13
  June 30, 
  2011  2010 
       
Balance at beginning of period $5,892  $4,713 
Provision for warranty expense  3,515   2,427 
Warranty costs paid  (2,166)  (1,309)
Total accrued warranty  7,241   5,831 
Less long-term portion of accrued warranty  2,381   998 
Current portion of accrued warranty $4,860  $4,833 

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

  September 30, 
  2011  2010 
       
Balance at beginning of period $5,892  $4,686 
Provision for warranty expense  5,291   3,966 
Warranty liability from acquired businesses  527   40 
Warranty costs paid  (3,467)  (2,172)
Total accrued warranty  8,243   6,520 
Less long-term portion of accrued warranty  2,578   635 
Current portion of accrued warranty $5,665  $5,885 

8.           Long-Term Indebtedness

The Company had no borrowings during the six months ended June$8.1 million outstanding at September 30, 2011 and 2010, andunder its line of credit at a weighted average interest rate of 2.5 percent. The Company had no debt outstanding at JuneSeptember 30, 20112010 and December 31, 2010.

On 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 JuneSeptember 30, 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at JuneSeptember 30, 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At JuneSeptember 30, 2011, the Company had availability of $44.8$38.3 million, as there were $5.2was $8.1 million of borrowing and $3.6 million in outstanding letters of credit under the new line of credit.

12
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Simultaneously, the Company entered into a $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 $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. At September 30, 2011 and 2010, as well as December 31, 2010, there were no Senior Promissory Notes outstanding. This new facility expires 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. As a result, the remaining availability under these facilities was $184.5$176.5 million at JuneSeptember 30, 2011. ThisThe Company believes this availability together with the $36.8 million in cash at June 30, 2011, areis more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements in 2011.for the next twelve months.

14

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

Pursuant to the Credit Agreement and “shelf-loan” facility, at JuneSeptember 30, 2011 the Company is required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At JuneSeptember 30, 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 Drew’sthe Company’s direct and indirect subsidiaries.

9.           Stockholders’ Equity

The following reconciliation details the denominator used in the computation of basic and diluted earnings per share (in thousands):

  Nine Months Ended  Three Months Ended 
  September 30,  September 30, 
  2011  2010  2011  2010 
Weighted average shares outstanding for basic earnings per share  22,254   22,118   22,273   22,129 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  173   144   174   133 
Weighted average shares outstanding for diluted earnings per share  22,427   22,262   22,447   22,262 
  Six Months Ended  Three Months Ended 
  June 30,  June 30, 
  2011  2010  2011  2010 
Weighted average shares outstanding for basic earnings per share  22,244   22,112   22,270   22,121 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  173   150   188   155 
Weighted average shares outstanding for diluted earnings per share  22,417   22,262   22,458   22,276 

The weighted average diluted shares outstanding for the sixnine months ended JuneSeptember 30, 2011 and 2010 excludes the effect of 1,334,8401,361,007 and 1,175,1401,172,223 shares of common stock subject to stock options, respectively, and the three months ended September 30, 2011 and 2010 excludes the effect of 1,413,340 and 1,116,390 stock options, respectively, because including such shares 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.compensation in accordance with their compensation arrangements.
13
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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, 501,279 shares have beenwere repurchased prior to 2011 at an average price of $18.65 per share, or $9.3 million in total. The aggregateDuring the third quarter of 2011, an additional 33,856 shares were repurchased at an average cost of such repurchases was funded from the Company’s available cash.$18.44 per share, or $0.6 million. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

15

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

The following table summarizes information about the Common Stock at (in thousands):

 June 30,  December 31,  September 30,  December 31, 
 2011  2010  2010  2011  2010  2010 
                  
Common stock authorized  30,000   30,000   30,000   30,000   30,000   30,000 
Common stock issued  24,730   24,584   24,675   24,738   24,595   24,675 
Treasury stock  2,651   2,597   2,651   2,684   2,621   2,651 
 
10.         Commitments and Contingencies

Litigation

See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2010. There were no material developments during the first sixnine months of 2011 in connection with the identified legal proceeding pending at December 31, 2010, except that the Plaintiffsin May 2011, plaintiffs filed an appeal brief with the Ninth Circuit Court of Appeals and defendant Kinro filed an answering brief. A decision is pending.

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 JuneSeptember 30, 2011, would not be material to the Company’s financial position or annual results of operations.

Contingent Consideration

In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay earn-outs.additional cash consideration. The Company has recorded a liability for the fair value of these expected earn-out payments at JuneSeptember 30, 2011, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 16.415.5 percent.

14
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes the expected earn-outs as of JuneSeptember 30, 2011 (in thousands):

     Fair Value 
  Estimated  of Estimated 
Acquisition Payments  Payments 
Schwintek products $14,728(a) $11,124 
Level-UpTM six-point leveling system
  2,209(b)  1,480 
Other acquired products  1,700(c)  869 
Total $18,637  $13,473 
Acquisition 
Expiration
of Earn-out
 
Estimated
Payments
  
Fair Value
of Estimated
Payments
 
Schwintek products 
March 2014(a)
 $14,806(b) $10,727 
Level-UpTM six-point leveling system
 February 2016  1,925(c)  1,248 
QuickBiteTM coupler
 October 2025  819(d)  190 
Home-Style products December 2014  229(c)  158 
Total   $17,779  $12,323 

 
(a)
Earn-out payments for three of the four products expire in March 2014. Earn-out payments for the remaining product expirewill cease five years after the product is first sold to customers.
(b)Two of the four products acquired have a combined remaining maximum earn-out payment of $12.7 million, of which the Company has assumedestimates $12.2 million will be achieved.paid. Other than expiration of the earn-out period, the remaining products have no maximum on earn-out payments.
 (c)(b)Other than expiration of the earn-out period in February 2016, these products have no maximum on earn-out payments.
 (d)(c)
This productEarn-out payments expire at various dates through October 2025. One of these products has a maximum earn-out payment of $2.5 million,.
while the remaining products have no maximum on earn-out payments.

As required, the liability for these estimated earn-out payments has beenis re-evaluated quarterly, since inception, including most recently at June 30, 2011, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending upon the weighted average cost of capital and future sales of the products which are subject to earn-outs, the Company could record adjustments in future periods.

16

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

In the first sixnine months of 2011, and 2010, the net impact of the quarterly re-evaluation and accretion of the liability was an increase toexpense recorded in selling, general, and administrative expenses of $0.3$1.0 million, while a gain of $0.1 million was recorded in selling, general, and $0.4 million, respectively.administrative expenses in the first nine months of 2010.

The following table provides a reconciliation of the Company’s contingent consideration liability, for the sixnine months ended JuneSeptember 30, 2011 (in thousands):

Balance at December 31, 2010 $12,104 
Acquisitions  640 
Payments  (226)
Accretion  1,391 
Fair value adjustments  (436)
Balance at September 30, 2011  13,473 
Less current portion in accrued expenses and other current liabilities  3,188 
Total long-term portion in other long-term liabilities $10,285 
Balance at December 31, 2010 $12,104 
Acquisitions  150 
Payments  (224)
Accretion  950 
Fair value adjustments  (657)
Balance at June 30, 2011  12,323 
Less current portion in accrued expenses and other current liabilities  1,675 
Total long-term portion in other long-term liabilities $10,648 

Environmental Liabilities

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against potentially responsible third parties, are 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 new 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 identified sites, the difficulty in assessing the involvement and financial capability of other 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 matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably against the Company.
15
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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, net 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, 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 could differ significantly from management estimates.

17

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

11.           Fair Value Measurements and Derivative Instruments

Recurring

Fair value is determined using a hierarchy that has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
  September 30, 2011  September 30, 2010 
  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Assets                        
Money market funds $-  $-  $-  $-  $26,049  $26,049  $-  $- 
U.S. Treasury Bills  -   -   -   -   22,993   22,993   -   - 
Total assets $-  $-  $-  $-  $49,042  $49,042  $-  $- 
                                 
Liabilities                                
Contingent consideration $13,473  $-  $-  $13,473  $11,776  $-  $-  $11,776 
Unrealized loss on derivative instrument  208   208   -   -   -   -   -   - 
Total liabilities $13,681  $208  $-  $13,473  $11,776  $-  $-  $11,776 
  June 30, 2011  December 31, 2010 
  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Assets                        
Money market funds $5,002  $5,002  $-  $-  $13,216  $13,216  $-  $- 
U.S. Treasury Bills  -   -   -   -   18,999   18,999   -   - 
Total assets $5,002  $5,002  $-  $-  $32,215  $32,215  $-  $- 
                                 
Liabilities                                
Contingent consideration $12,323  $-  $-  $12,323  $12,104  $-  $-  $12,104 
Total liabilities $12,323  $-  $-  $12,323  $12,104  $-  $-  $12,104 

Money market funds, and U.S. Treasury Bills and derivative instruments are valued using a market approach based on the quoted market prices of identical instruments. Contingent consideration liabilities are valued using Level 3 inputs. For further information on the inputs used in determining the fair value, and a roll-forward of the contingent consideration liability, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

16
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated their fair value due to the short-term nature of these instruments.

In September 2011, the Company entered into a derivative instrument for 3 million pounds of aluminum to manage a portion of the exposure to movements associated with aluminum costs in 2012, representing approximately 10 percent of the Company’s anticipated aluminum purchases in 2012. While this derivative instrument is considered to be an economic hedge of the underlying movement in the price of aluminum, it is not designated or accounted for as a hedge. The change in fair value of this instrument is “marked to market” at the end of each reporting period and the gain or loss is recorded in cost of goods sold in the Condensed Consolidated Statements of Income, with the corresponding amount recorded in the Condensed Consolidated Balance Sheet.

Non-recurring

Certain assets and liabilities have been measured at fair value on a nonrecurringnon-recurring basis using significant unobservable inputs (Level 3). The following table presents the non-recurring losses recognized using fair value measurements and the carrying value of any assets and liabilities which were measured using fair value estimates during the sixnine months ended June 30, 2011 (in thousands):

 
18
  Carrying  Non-recurring 
  Value  Losses 
Assets      
Fixed assets $11,327  $- 
Acquisition of business  6,297   - 
Total assets $17,624  $- 
         
Liabilities        
Vacant leased facilities $926  $172 
Total liabilities $926  $172 

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

  September 30, 2011  September 30, 2010 
  Carrying  Non-Recurring  Carrying  Non-Recurring 
  Value  Losses  Value  Losses 
Assets            
Vacant owned facilities $10,123  $-  $11,662  $- 
Net assets of acquired businesses  37,340   -   24,647   - 
Total assets $47,463  $-  $36,309  $- 
                 
Liabilities                
Vacant leased facilities $583  $203  $932  $308 
Total liabilities $583  $203  $932  $308 

At JuneSeptember 30, 2011, the Company owns sevenowned six 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 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 arewere recorded at fair value as of the acquisition date. Depending upon the type of asset acquired, the Company used different valuation techniques in determining the fair value of each asset. Those techniques includeincluded comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry specificindustry-specific economic and market conditions, weighted average cost of capital, as well as other techniques as circumstances require.required. For further information on acquired assets, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

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, and with respect to Level 3 fair value measurements was effective for interim or annual periods beginning after December 15, 2010. The adoption of the guidance had no significant impact on the Company.Company’s financial statements.

In August 2011, the FASB issued updated standards intended to simplify how an entity tests goodwill for impairment. Under the new guidance, an entity is no longer required to perform the two-step quantitative goodwill impairment test unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

 
1719
 

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

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; the recreational vehicle (“RV”) products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). IntersegmentInter-segment 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 JuneSeptember 30, 2011, the Company operated 2631 facilities in the United States.

The RV Segment accounted for 8684 percent of consolidated net sales for the sixnine months ended JuneSeptember 30, 2011 and 83 percent of the annual consolidated net sales for 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 and leveling systems  

The Company also supplies certain of these products as replacement parts to the RV aftermarket, and manufactures components for mid-sizetruck caps, buses, and for trailers used to haul boats, livestock, equipment and other cargo. More thanApproximately 90 percent of the Company’s RV Segment net sales are components for travel trailer and fifth-wheel RVs. Travel trailers and fifth-wheel RVs accounted for 82 percent of all RVs shipped by the industry in 2010, up from 61 percent in 2001.2010.

The MH Segment, which accounted for 1416 percent of consolidated net sales for the sixnine months ended JuneSeptember 30, 2011 and 17 percent of the annual consolidated net sales for 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  


20

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

The Company also supplies windows, doors, and thermoformed bath products as replacement parts to the manufactured housing aftermarket. 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 types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.
18
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 fluctuations in RV dealer inventories and volatile economic conditions, current seasonal industry trends may be different than in prior years.

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”), through May 2011, industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 89 percent, or 8,6008,400 units, during the first half of 2011, as compared to the first halfsame period of 2010.Retail sales of travel trailer and fifth-wheel RVs during the same period of 2011 were up 8 percent. Because wholesale shipments outpaced retail sales, dealer inventories grew by 15,300 units in the first five months of 2011.

RV dealers responded quickly to the slower than expected growth in retail sales by reducing their wholesale orders. As a result, between June and September 2011, industry-wide wholesale shipments of travel trailers and fifth-wheel RVs declined 1 percent. On the other hand, retail sales between June and August 2011, the last month for which retail sales are available, increased 3 percent. Further, recent months’ retail sales may be revised upward in future periods, as has happened in recent periods. As a result of retail sales exceeding wholesale shipments between June and August 2011, dealer inventories declined by 11,900 units, alleviating concerns that dealer inventory levels were too high.

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. So far this year, industry-wide wholesale shipments of travel trailer and fifth-wheel RVs have exceededTo date, retail sales whichin 2011, while below earlier expectations, increased an estimated 3 percent during the first six months of 2011. The increase in retail sales was less than previously expected by industry analysts, likely due to elevateddespite high gas prices, unfavorable weathernegative news regarding domestic and various negativeinternational economic factors which reducedconditions, and low consumer confidence. As a result, dealer inventories increased by about 16,000 units in the first half of 2011, which is 5,000 units more than the seasonal increase in the first half of 2010.

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., as well as the resulting increase or (decrease) in dealer inventories, is as follows:
  
Wholesale
Change
  
Retail
Change
  
Unit Impact on
Dealer Inventories
 
Quarter ended June 30, 2011  6% 2% (est.) (4,800) (est.)
Quarter ended March 31, 2011  10%  6%  21,200 
             
Year ended December 31, 2010  44%  13%  13,200 
Year ended December 31, 2009  (25%)  (27%)  (26,000)
Year ended December 31, 2008  (29%)  (19%)  (41,300)
Industry-wide shipments of RVs for the balance of 2011 will continue to depend to a significant extent on the course of the economy. Over the last few months, short-term forecasts for U.S. economic growth have been reduced. Retail demand for RVs, and therefore industry production levels, is highly dependent on economic conditions and consumer confidence. In addition, the seasonal increase in dealer inventories of towable RVs has been somewhat greater so far this year than last year. While dealer inventory levels are reportedly still in line with retail demand and lender expectations, most industry analysts expect RV dealers to be cautious in these uncertain economic times, and adjust their orders quickly based on changes in retail demand. These factors could impact industry production levels for the balance of 2011.

 
1921
 

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

Retail
  Wholesale  Retail  Unit Impact on 
  Change  Change  Dealer Inventories 
Quarter ended September 30, 2011  (2)% 3% (est.) (11,300) (est.)
Quarter ended June 30, 2011  6%  7%  (8,400)
Quarter ended March 31, 2011  10%  7%  20,800 
             
Year ended December 31, 2010  44%  13%  13,200 
Year ended December 31, 2009  (25)%  (27)%  (26,000)
Year ended December 31, 2008  (29)%  (19)%  (41,300)

During the third week of September 2011, many major RV manufacturers held an Open House event in Elkhart, Indiana, attracting an estimated 3,500 participants from dealerships throughout the country. The purpose of the event was for the manufacturers to display new products and take orders for delivery in the typically slow winter months. Many RV manufacturers and industry analysts have reported positive feedback from the event. Industry-wide production of travel trailer and fifth-wheel RVs increased by an estimated 10 – 20 percent in October 2011, compared to October 2010. In addition, a few RV manufacturers have recently announced special financing promotions for deliveries this Fall which many dealers may take advantage of, thus possibly accelerating orders.

Industry-wide retail sales, and therefore production levels of RVs are also dependentwill depend to a significant extent on the availabilitycourse of financing. Analyst reportsthe economy and consumer confidence. Over the last few months, forecasts for U.S. economic growth in 2012 have consistently cited improving credit conditions for both wholesale and retail purchases.

been mixed. The Company continues to be optimistic about its RV industry growth prospects for 2012 and beyond, and remains confident in its ability to exceed industry growth rates, through new products, market share gains, acquisitions and ongoing investment in customer service, market share gains and new products.service.

In the long-term, the Company expects RV industry sales to be drivenaided by positive demographics, and the continued popularity of the “RV Lifestyle”. Demand for RVs is strongest from the overEvery day, 11,000 Americans turn 50, age group, which is the fastest growing segment of the U.S. population.according to U.S. Census Bureau projections released in December 2009 estimate that the number of people over the age offigures, and one-in-ten vehicle-owning households between 50 will increase significantly by 2015.and 64 own at least one RV.
   
Further, the RVIA has a generic advertising campaign promoting the RV lifestyle. The current campaign 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 domestic vacations, and using RVs as second homes, also appear to motivate consumer demand for RVs. RVIA studies indicate that RV vacations cost significantly less than other forms of vacation.

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 code 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.

22

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

The Institute for Building Technology and Safety (“IBTS”) reported that industry-wide wholesale shipments of manufactured homes were 13,40023,200 units in the second quarterfirst 6 months of 2011, a decline of 12 percent compared tofrom the samecomparable period of 2010. Industry-wide wholesale shipments of manufactured homes during the first six months of 2010 were positively impacted by a Federal tax credit for first time home buyers, the benefits of which expired in the first half of 2010. ForIn the first six monthsthird quarter of 2011, there were 13,900 industry-wide wholesale shipments of manufactured homes, were 23,200 units, a declinean increase of 122 percent compared to the first six monthssame period of 2010. The manufactured housing industry benefitted from approximately 300 homes produced for FEMA during the third quarter of 2011, and it is expected that an additional 1,200 to 1,500 homes will be manufactured for FEMA in the fourth quarter of 2011.

Since 1998, industry-wide wholesale shipments of manufactured homes have declined 87 percent. This decline was primarilyManufactured housing has been negatively impacted by the result ofcontinued weakness in the entire housing market and limited credit availability, because ofas well as the 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. Further, manufactured housing has declined in recent years due to the continued weakness in the entire housing market.

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 10 percent to 11 percent, despite that interest rates for manufactured home loans remain historically high relative to rates for site-built home loans. Accordingly, theThe 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 the current retail and wholesale credit markets, the Company expects industry-wide wholesale shipments of manufactured homes to remain low until these conditions improve.

20
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company also believes that long-term growth prospects for manufactured housing may be positively influenced by (i) the quality and affordability of the home, (ii) the favorable demographic trends, including the increasing number of retirees who, in the past, had represented a significant market for manufactured homes, and (iii) pent-up demand by retirees who have been unable or unwilling to sell their primary residence and purchase a manufactured home.

Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. For 2010, largerDuring the first nine months of 2011, multi-section manufactured homes represented 59were 53 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, and down significantly from 80 percent in 2003.respectively. During the first sixnine months of 2011, industry-wide shipments of single-section homes increased 7 percent, while multi-section homes were 54declined 17 percent, ofboth compared to the total manufactured homes produced.same period last year. 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 (in thousands):

 Nine Months Ended  Three Months Ended 
 Six Months Ended  Three Months Ended  September 30,  September 30, 
 June 30,  June 30,  2011  2010  2011  2010 
 2011  2010  2011  2010             
Net sales:                        
RV Segment $303,428  $268,626  $157,199  $144,264  $439,656  $390,678  $136,228  $122,052 
MH Segment  51,453   51,093   28,849   29,238   81,914   75,874   30,461   24,781 
Total net sales $354,881  $319,719  $186,048  $173,502  $521,570  $466,552  $166,689  $146,833 
                                
Operating profit:                                
RV Segment $32,625  $26,893  $17,324  $14,009  $40,370  $37,997  $7,745  $11,104 
MH Segment  5,177   5,302   2,953   3,736   8,963   8,241   3,786   2,939 
Total segment operating profit  37,802   32,195   20,277   17,745   49,333   46,238   11,531   14,043 
Corporate  (4,043)  (3,944)  (1,946)  (2,017)  (5,846)  (5,814)  (1,803)  (1,870)
Other non-segment items  (306)  (123)  (421)  116   (831)  403   (525)  526 
Total operating profit $33,453  $28,128  $17,910  $15,844  $42,656  $40,827  $9,203  $12,699 
 
 
2123
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)


Consolidated Highlights

 §Net sales in the 2011 secondthird quarter increased 714 percent to $186$167 million, from $174$147 million in the secondthird quarter of 2010, the result of a 912 percent increase in the Company’s RV Segment sales, and a 123 percent declineincrease in the Company’s Manufactured Housing Segment sales. The RV Segment, which manufactures components primarily for travel trailer and fifth-wheel RVs, represented 84 percent of consolidated net sales, while Manufactured Housing Segment sales represented 16 percent. Industry-wide wholesale shipments of travel trailer and fifth-wheel RVs increased 6decreased 2 percent in the 2011 secondthird quarter, while industry-wide production of manufactured homes declined 12increased 2 percent. The Company’s sales growth outperformed the RVindustry-wide wholesale shipments of RVs and manufactured housing industrieshomes during the secondthird quarter of 2011 primarily because the Company increased its average product content per unit produced as a result of new products,acquisitions, market share gains, and acquisitions, andnew products, as well as increased sales of components to other industries, such as mid-size buses, modular housing, mobile office units, truck caps, and specialty trailers.trailers used to haul boats, livestock, equipment and other cargo. Further, the Company implemented sales price increases in 2011 due to higher raw material costs.

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 fluctuations in RV dealer inventories and volatile economic conditions, current seasonal industry trends may be different than in prior years.

 §·
The Company’s net sales for the month of JulyOctober 2011 were $49$62 million, more than a 355 percent increase from the month of July 2010, despite having one less shipping day this yearOctober 2010. Excluding the impact of sales price increases and acquisitions, sales for October 2011 were up more than 30 percent, exceeding the prior year. Compared to the second quarter, salesestimated growth in July typically decline temporarily due to the annual one-week plant closures around July 4th by many RV manufacturers.
industry-wide production of RVs and manufactured homes.

 §·For the secondthird quarter of 2011, the Company reported net income of $11.0$5.6 million ($0.490.25 per diluted share), a 1430 percent increase overdecrease from the net income of $9.6$8.0 million ($0.430.36 per diluted share) reported in the secondthird quarter of 2010.2010, largely due to:

 §The costHigher raw material costs as a percent of sales, which reduced net income by about $1 million. Raw material costs, in particular steel and aluminum, increased during the Company’s primary raw materials, increased sharply between November 2010 and Marchfirst half of 2011, before leveling off. Since Maynegatively impacting the operating results in the third quarter of 2011 as the cost of steel has declined slightly from its recent high, but remains above 2010 levels. The Company worked closely with customers to offset these incremental cost increases with sales price increases and increased market share, and has implemented new production efficiencies. As a result,by the increased cost of raw materialsCompany did not have a significant impact onfully offset the Company’s consolidated results in the second quarter of 2011.peak raw material costs.

Over the past 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 net sales, fluctuating by only a couple of percentage points. Strong relationships and cooperation with customers again reduced the impact of recent raw material cost increases, as it has in the 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. Further, the Company continues to implement improved product design, efficiency improvements, and less costly alternative sources of raw materials and components, both domestic and imported.
 
2224
 

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

Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.

 §On July 19,Higher than usual production costs for one product line, in part related to increased demand, which reduced net income by about $1 million. The Company has taken corrective action to help ensure that these production costs improve over the next few quarters.

§Results for the prior year third quarter benefitted from an after-tax gain of $0.6 million, related to an adjustment to previously estimated future earn-out payments on acquisitions, which did not recur in the current year third quarter.

§Start-up and integration costs related to three acquisitions, the new aluminum extrusion operation, and new product introductions, which reduced net income by $0.6 million. Additional start-up and integration costs are expected in the fourth quarter of 2011, although the impact is expected to be less than in the third quarter of 2011.

·During the third quarter of 2011, the Company acquired certain assets and businesscompleted three acquisitions as follows:

§a manufacturer of Indiana-based M-Tec Corporation. M-Tec manufactures components for RVs and mobile office units. The acquired business hasunits, with annual sales of approximately $12 million. The purchase price was $6.0 million, paid at closing from available cash, plus contingent consideration based on an earn-out. Atwhich expands the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.6 million.Company’s product offerings,

Approximately two-thirds of M-Tec’s historical sales were RV related, split evenly between towable RVs, and motorhomes.
§a manufacturer of towable RV chassis and slide-out mechanisms with annual sales of more than $40 million. These acquired operations have been consolidated into the Company’s existing facilities, which is expected to minimize fixed costs and improve production efficiencies, and

§Starquest Products, a manufacturer of windows for truck caps, horse trailers, and certain types of buses, with annual sales of approximately $22 million. The new markets and customers of this business provide the Company with the opportunity to expand sales of its existing products.

These new motorhome sales are expected to add approximately $150 in content per motorhome on an annual basis, and the new towable RV sales would increase content per towable RV by approximately $20 per unit on an annual basis. The remaining one-third of M-Tec’s sales will be included in the Company’s MH Segment.
The M-Tec acquisition was the Company’s second acquisition of the year, following the January 2011 acquisition of Home-Style, the leading manufacturer of RV furniture and mattresses in the growing Northwest RV market. The twothree acquisitions completed so far this year alone add an aggregate of nearly $25more than $75 million to the Company’s annual sales, and increase its profit potential. Theof which $9 million occurred in the 2011 third quarter. Further, the Company plans to use its purchasing power and manufacturing expertisecapabilities to reduce the cost structure of the acquired operations.

 §·Estimates forDuring the third quarter of 2011, are that capital expenditures will be $24 million to $25 million for the full year, including $4 million for four new facilities that have been purchased, three of which the Company had previously been leasing, and $10 millioncontinued to $11 million for the aluminum extrusion project. The full year 2011 capital expenditure estimate is approximately $2 million to $3 million higher than previously expected largely due to additional investments to improve information systems and increase planned production capacity at theinvest in a new aluminum extrusion facility.operation. In early October 2011, the Company began production on the first press of this operation and, as a result, expects to realize lower aluminum costs beginning in early 2012. The Company expects to bring two additional presses on-line over the next several months.

·The Company also invested in several new product lines, including a new RV awning product line.

25

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

RV Segment – SecondThird Quarter

Net sales of the RV Segment in the secondthird quarter of 2011 increased 912 percent or $13 million to $157 million, compared to the secondthird quarter of 2010, largely due2010. Net sales of components were to the 6 percent increase following markets (in thousands):

  2011  2010  Change 
RV Original Equipment Manufacturers:         
Travel Trailer and         
Fifth-Wheels $120,671  $110,586   9%
Motorhomes  3,687   3,867   (5)%
RV Aftermarket  3,013   3,763   (20)%
Other  8,857   3,836   131%
Total $136,228  $122,052   12%

According to the RVIA, industry-wide wholesale productionshipments for the three months ended September 30, were:

  2011  2010  Change 
Travel Trailer and         
Fifth-Wheel RVs  47,500   48,600   (2)%
Motorhomes  5,300   6,200   (15)%

The Company outperformed the industry-wide wholesale shipments of travel trailers and fifth-wheel RVs. Sales to travel trailer and fifth-wheel RVs original equipment manufacturers (“OEMs”) increased $12 million to $142 million, or 9 percent, in the second quarter of 2011 as compared to the same period of 2010, exceeding the 6 percent increase in industry-wide wholesale production of travel trailers and fifth-wheel RVs primarily due to the acquisition of Home-Stylefour acquisitions completed in January 2011 and sales price increases, which added $3$9 million and $4 million, respectively, in net sales during the third quarter of 2011.

Sales of components to motorhome OEMs declined less than the decrease in industry-wide wholesale production of motorhomes, due to acquisitions, which added $1 million in net sales during the secondthird quarter of 2011. More than 90 percent of the Company’s RV Segment net sales were components for travel trailer and fifth-wheel RVs.

In addition, sales of the Company’s RV Segment in the second quarter of 2011 benefitted from sales to other industries, including components for mid-size buses and for trailers used to haul boats, livestock, equipment and other cargo, which increased 39 percent to $7 million. Sales to motorhome OEMs in the second quarter of 2011 declined 16 percent to $5 million, compared to flat industry-wide wholesale shipments of motorhomes, due to the loss of market share by some of the Company’s motorhome customers. However, 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. Second quarter 2011 sales of replacement parts in the aftermarket remained constant at $3 million.
23
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

AccordingSales to other related industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains and acquisitions which added $2 million in net sales during the RVIA, industry-wide wholesale shipments forthird quarter of 2011. The Company believes there are significant opportunities in these adjacent markets. The acquisition of Starquest during the three months ended June 30, were:third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team added earlier in 2011, is expected to accelerate the Company’s growth in these adjacent markets.
  2011  2010  Change 
Travel Trailer and         
Fifth-Wheel RVs  66,000   62,300   6%
Motorhomes  7,800   7,800   0%

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. 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 JuneSeptember 30, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:

  2011  2010  Change 
Content per Travel Trailer and         
Fifth-Wheel RV $2,289  $2,179   5%
Content per Motorhome $658  $726   (9)%

  2011  2010  Change 
Content per Travel Trailer and         
Fifth-Wheel RV $2,229  $2,132   5%
Content per Motorhome $642  $813   (21%)
26
 

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

The Company’s average product content per type of RV excludes sales of replacement parts to the aftermarket, and sales to other industries. Content per RV is impacted by market share gains, acquisitions and new product introductions, as well as changes in selling prices for the Company’s products. The Company’s content per motorhome for the twelve months ended September 30, 2011 declined 9 percent, primarily because of the loss of market share by certain of the Company’s motorhome customers.

Operating profit of the RV Segment was $17.3$7.7 million in the secondthird quarter of 2011, an increasea decrease of $3.3$3.4 million compared to the secondthird quarter of 2010, largely due todespite the $13$14 million increase in net sales. This increase in RV Segment operating profit was 26 percent of the increase in net sales, more than the Company’s expected 20 percent incremental margin.sales.
The operating margin of the RV Segment in the second quarter of 2011 was positively impacted by:
·Improved labor efficiencies. In the second quarter of 2010, the Company incurred higher production costs due to greater-than-expected increases in demand. While the Company still expects to reduce labor costs in certain product lines, labor efficiencies generally improved compared to last year.
·Lower workers’ compensation costs due to improved claims experience.
·The spreading of fixed manufacturing and selling, general and administrative costs over a $13 million larger sales base.
Partially offset by:
·Increased promotional costs.
·An increase in annualized fixed costs of $2 million to $3 million, which have been added over the past year to expand capacity and meet the increase in sales demand.

 
2427
 

DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Material costs as a percent of net sales in the second quarter of 2011 were about the same as in the second quarter of 2010. The cost of steel and aluminum, the Company’s primary raw materials, increased sharply between November 2010 and March 2011, before leveling off. Since May 2011, the cost of steel has declined slightly from its recent high, but remains above 2010 levels. The Company worked closely with customers to offset these incremental cost increases with sales price increases and increased market share, and has implemented new production efficiencies.
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. During the second quarter of 2011, the Company expensed approximately $0.1 million in startup costs associated with the aluminum extrusion project. In the second half of 2011, the Company expects to incur $0.5 million to $0.8 million in additional startup costs, consistent with original estimates.
RV Segment – Year to Date

Net sales of the RV Segment in the first six months of 2011 increased 13 percent, or $35 million, to $303 million, compared to the same period of 2010, largely due to an 8 percent increase in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs. Sales to travel trailer and fifth-wheel RVs OEMs increased $31 million to $275 million, or 13 percent, in the first six months of 2011 as compared to the same period of 2010, largely due to the 8 percent increase in industry-wide wholesale production of travel trailers and fifth-wheel RVs.  The Company exceeded the industry-wide increase primarily due to the acquisition of Home-Style in January 2011 which added $6 million in net sales, as well as new product introductions and market share gains. More than 90 percent of the Company’s RV Segment net sales were components for travel trailer and fifth-wheel RVs.

In addition, net sales of the Company’s RV Segment in the first six months of 2011 benefitted from the following:

·Sales to other industries, including components for mid-size buses and for trailers used to haul boats, livestock, equipment and other cargo, increased 36 percent to $12 million.
·Sales of replacement parts in the aftermarket increased 12 percent to $7 million.
Partially offset by:
·Sales to motorhome OEMs declined 4 percent to $9 million, less than the 9 percent increase in industry-wide wholesale production of motorhomes because of the loss of market share by some of the Company’s motorhome customers. However, 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.
According to the RVIA, industry-wide wholesale shipments for the six months ended June 30, were:
  2011  2010  Change 
Travel Trailer and         
Fifth-Wheel RVs  120,200   111,600   8%
Motorhomes  14,700   13,500   9%
25
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating profit of the RV Segment was $32.6 million in the first six months of 2011, an improvement of $5.7 million compared to the same period of 2010, largely due to the $35 million increase in net sales. This increase in RV Segment operating profit was 16 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 six monthsthird quarter of 2011 was negatively impacted by:
 
 ·VolatileHigher raw material costs. The cost ofRaw material costs, in particular steel and aluminum, increased monthly during the Company’s primaryfirst half of 2011, negatively impacting the operating results in the third quarter of 2011 as the sales price increases implemented did not fully offset the peak raw materials, increased sharply between November 2010 and March 2011, before leveling off. Since Maymaterial costs.  Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has declined slightly from its recent high, but remains above 2010 levels. The Company worked closely with customers to partially offset these incremental cost increases with sales price increases and increased market share, and has implemented new production efficiencies.also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as a percent of net sales in the secondCompany begins to use the lower cost raw materials.
·Start-up and integration costs associated with the three acquisitions completed during the third quarter of 2011, were aboutas well as the same asnew aluminum extrusion operation and the new RV awning product line. Additional start-up and integration costs are expected in the secondfourth quarter of 2010.2011, although the impact is expected to be less than in the third quarter of 2011.
 
 ·Higher warrantythan usual production costs largely due tofor one product line, expansionin part related to increased demand. The Company has taken corrective action to help ensure that these production costs improve over the past several years.
·Increased promotional costs.next few quarters.
 
 ·An increase in annualized fixed costs of $2 million to $3 million, which have been added over the past year to expand capacity and meet the increase in sales demand.demand, plus additional depreciation and amortization due to recent acquisitions and capital expenditures.
 
Partially offset by:
 
 ·Improved labor efficiencies. In the first six months of 2010, the Company incurred higher production costs due to greater-than-expected increases in demand. While the Company still expects to reduce labor costs in certain product lines, labor efficiencies generally improved compared to last year.
·Lower workers’ compensation costs due to improved claims experience.incentive compensation.
 
 ·The spreading of fixed manufacturing and selling, general and administrative costs over a $35$14 million larger sales base.

MHRV Segment – Second QuarterYear to Date

Net sales of the MHRV Segment in the second quarterfirst nine months of 2011 of $29 million were 1increased 13 percent less than the second quarter of 2010, despite a 12 percent decline in industry-wide wholesale production of manufactured homes. The Company was able to outperform the industry duecompared to the following:same period of 2010. Net sales of components were to the following markets (in thousands):

·Sales to OEMS of manufactured homes decreased only 4 percent compared to the 12 percent industry-wide decline, primarily due to market share gains.
·Sales to other industries, including modular housing and office units, increased 51 percent to $4 million.
Partially offset by:
·Sales of replacement parts in the aftermarket declined 12 percent to $4 million.
  2011  2010  Change 
RV Original Equipment Manufacturers:         
Travel Trailer and         
Fifth-Wheels $395,645  $354,317   12%
Motorhomes  13,101   13,710   (4)%
RV Aftermarket  9,793   9,816   0%
Other  21,117   12,835   65%
Total $439,656  $390,678   13%

According to the IBTS,RVIA, industry-wide wholesale shipments for the threenine months ended JuneSeptember 30, were:

  2011  2010  Change
Total Homes Produced  13,400   15,200   (12%)
Total Floors Produced  20,800   24,700   (16%)
  2011  2010  Change 
Travel Trailer and         
Fifth-Wheel RVs  167,700   160,200   5%
Motorhomes  20,000   19,700   2%

 
2628
 

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

The Company outperformed the industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to the four acquisitions completed in 2011 and sales price increases, which added $15 million and $6 million, respectively, in net sales during the first nine months of 2011.

Sales of components to motorhome OEMs declined 4 percent, compared to a 2 percent increase in industry-wide wholesale production of motorhomes. Excluding the impact of acquisitions, which added $1 million in sales during the first nine months of 2011, the Company’s sales of components for motorhomes declined 9 percent, primarily because of the loss of market share by certain of the Company’s motorhome customers. However, 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 to other related industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains and acquisitions which added $2 million in net sales during the first nine months of 2011. The Company believes there are significant opportunities in these adjacent markets. The acquisition of Starquest during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team added earlier in 2011, is expected to accelerate the Company’s growth in these adjacent markets.

Operating profit of the RV Segment was $40.4 million in the first nine months of 2011, an improvement of $2.4 million compared to the same period of 2010. This increase in RV Segment operating profit was 5 percent of the $49 million 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 months of 2011 was negatively impacted by:
 
·Higher raw material costs. Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011, negatively impacting the operating results as the sales price increases implemented did not fully offset the peak raw material costs.  Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.
·Start-up and integration costs associated with the three acquisitions completed during the third quarter of 2011, as well as the new aluminum extrusion operation and the new RV awning product line. Additional start-up and integration costs are expected in the fourth quarter of 2011, although the impact is expected to be less than in the third quarter of 2011.
·Higher than usual production costs for one product line, in part related to increased demand. The Company has taken corrective action to help ensure that these production costs improve over the next few quarters.
·Increased promotional costs due to new products being offered by the Company.
·An increase in annualized fixed costs of $2 million to $3 million, which have been added over the past year to expand capacity and meet the increase in sales demand, plus additional depreciation and amortization due to recent acquisitions and capital expenditures.
Partially offset by:
·Lower overtime due to improved labor efficiencies in certain operations.
·Lower workers’ compensation costs due to improved claims experience.
29

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

·The spreading of fixed manufacturing and selling, general and administrative costs over a $49 million larger sales base.

MH Segment – Third Quarter

Net sales of the MH Segment in the third quarter of 2011 increased 23 percent compared to the same period of 2010.  Net sales of components were to the following markets (in thousands):

  2011  2010  Change 
Manufactured Housing Original         
Equipment Manufacturers $23,168  $18,321   26%
Manufactured Housing Aftermarket  4,254   4,121   3%
Other  3,039   2,339   30%
Total $30,461  $24,781   23%

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

  2011  2010  Change 
Total Homes Produced  13,900   13,600   2%
Total Floors Produced  21,300   21,700   (2)%

The increase in net sales was primarily due to market share gains, acquisitions and sales price increases, as well as $1 million of FEMA-related orders. The manufactured housing industry benefitted from approximately 300 homes produced for FEMA during the third quarter of 2011, and it is expected that an additional 1,200 to 1,500 homes will be manufactured for FEMA in the fourth quarter.

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. 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 for the twelve months ended JuneSeptember 30, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:

 2011  2010  Change  2011  2010  Change 
Content per Home Produced $1,434  $1,392   3% $1,527  $1,370   11%
Content per Floor Produced $910  $851   7% $980  $846   16%

The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket, and sales to other industries. Content per manufactured home and content per floor are impacted by market share gains, acquisitions and new product introductions, as well as changes in selling prices for the Company’s products.

30

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

Operating profit of the MH Segment was $3.0$3.8 million in the secondthird quarter of 2011, a decreasean increase of $0.8 million compared to the same period in 2010, largely due to the $6 million increase in net sales. This increase in MH Segment operating profit was 15 percent of the increase in net sales, less than the Company’s expected 20 percent incremental margin, primarily due to higher raw material costs. The cost ofcosts, partially offset by improved operating efficiencies. Raw material costs, in particular steel and aluminum, increased monthly during the Company’s primaryfirst half of 2011, negatively impacting the operating results in the third quarter of 2011 as the sales price increases implemented did not fully offset the peak raw materials, increased sharply between November 2010 and March 2011, before leveling off. Since Maymaterial costs. Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has declined slightly from its recentalso declined. As a result, the Company expects the impact of high but remains above 2010 levels. Theraw material costs to decline over the coming months, as the Company worked closely with customersbegins to partially offset these incrementaluse the lower cost increases with sales price increases and increased market share, and has implemented new production efficiencies.raw materials.

MH Segment – Year to Date

Net sales of the MH Segment for the first sixnine months of 2011 increased 18 percent to $51 million, compared to the same period of 2010.  The Company’sNet sales growth was largely dueof components were to the following:following markets (in thousands):

·Sales to other industries, including modular housing and office units, increased 46 percent to $7 million.
·Sales of replacement parts in the aftermarket increased 2 percent to $9 million.
Partially offset by:
·Sales to OEMs of manufactured homes decreased 4 percent, significantly less than the 12 percent decrease in industry-wide wholesale production of manufactured homes, due to market share gains.
  2011  2010  Change 
Manufactured Housing Original         
Equipment Manufacturers $58,623  $55,406   6%
Manufactured Housing Aftermarket  12,693   13,000   (2)%
Other  10,598   7,468   42%
Total $81,914  $75,874   8%

According to the IBTS, industry-wide wholesale shipments for the sixnine months ended JuneSeptember 30, were:

  2011  2010  Change 
Total Homes Produced  37,100   40,000   (7)%
Total Floors Produced  57,400   64,500   (11)%
  2011  2010  Change 
Total Homes Produced  23,200   26,400   (12%)
Total Floors Produced  36,000   42,800   (16%)

The increase in net sales was primarily due to market share gains, acquisitions and sales price increases, as well as $1 million of FEMA-related orders. The manufactured housing industry benefitted from approximately 300 homes produced for FEMA during the third quarter of 2011, and it is expected that an additional 1,200 to 1,500 homes will be manufactured for FEMA in the fourth quarter.

Operating profit of the MH Segment was $5.2$9.0 million in the first sixnine months of 2011, a decreasean increase of $0.1$0.7 million compared to the same period in 2010, despite a 1largely due to the $6 million increase in net sales. This increase in MH Segment operating profit was 12 percent of the increase in net sales, overless than the same period.Company’s expected 20 percent incremental margin.

The operating margin of the MH Segment in the first nine months of 2011 was negatively impacted by:
 
·Higher raw material costs. Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011, negatively impacting the operating results as the sales price increases implemented did not fully offset the peak raw material costs.  Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.
Partially offset by:
·Improved operating efficiencies.
·The spreading of fixed manufacturing and selling, general and administrative costs over a $6 million larger sales base

 
2731
 

DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The operating margin of the MH Segment in the first six months of 2011 was negatively impacted by:
·Volatile raw material costs. The cost of steel and aluminum, the Company’s primary raw materials, increased sharply between November 2010 and March 2011, before leveling off. Since May 2011, the cost of steel has declined slightly from its recent high, but remains above 2010 levels. The Company worked closely with customers to partially offset these incremental cost increases with sales price increases and increased market share, and has implemented new production efficiencies.
Partially offset by:
·Lower workers’ compensation, group health insurance and warranty costs due to improved claims experience.
·Lower retirement costs.

Other Non-Segment Items

Selling, general and administrative expenses include the following other non-segment items (in thousands):

 Six Months Ended  Three Months Ended  Nine Months Ended  Three Months Ended 
 June 30,  June 30,  September 30,  September 30, 
 2011  2010  2011  2010  2011  2010  2011  2010 
Write-downs to estimated current fair value of facilities to be sold or subleased $-  $(166) $-  $(40)
            
Net gain (loss) on sale or write-down to fair value of vacant facilities $122  $(446) $122  $(280)
Acquisition related earn-outs:                                
Fair value adjustment  656   105   75   105   441   1,040   (215)  934 
Accretion  (949)  (533)  (474)  (389)
Accretion (1)
  (1,394)  (1,118)  (445)  (598)
Net gain on insurance claim  -   402   -   402   -   859   -   457 
Other  (13)  69   (22)  38   -   68   13   13 
Total other non-segment items $(306) $(123) $(421) $116  $(831) $403  $(525) $526 

(1)In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a liability for the fair value of these expected earn-out payments at September 30, 2011, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 15.5 percent. 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.

Income Taxes

The effective tax rate for the first sixnine months of 2011 and second2010 was 38.8 percent. The effective tax rate of 38.4 percent for the third quarter of 2011 was 38.9 percent and 38.6 percent, respectively, lowerhigher than the effective tax rate of 39.637.0 percent in the 2010 third quarter.  The 2010 tax rate in the third quarter was lower than normal due primarily to the expiration of certain state and 39.2federal tax statute of limitations. The full year 2011 effective tax rate is expected to be approximately 38.5 percent for the same periods of 2010, respectively. In the second quarter of 2011, the Company recorded a benefit of $0.2 million from a credit available under the Hiring Incentives to Restore Employment (HIRE) Act of 2010, and identified other opportunities which will save the Company approximately $0.7 million in state taxes annually.39 percent.

Further, inIn May 2011, Indiana lowered its corporate income tax rate from 8.5 percent currently, to 6.5 percent over 4 years, beginning in 2012. When fully implemented, this tax rate reduction will annually save the Company about $150,000 in state taxes for every $10 million of consolidated pre-tax income. However, since the law was enacted in the second quarterAs a result of 2011, the Company is required to adjust its deferred tax benefits for thethis lower tax rates, and the Company recorded a tax charge of $0.3 million in the second quarter of 2011. In addition, as thestate tax rate reduction is phased in overIndiana, and additional state tax credits received in connection with the next four years,Company’s recent acquisitions and new projects, the Company will record an estimated $0.4 million of cumulative additional charges to adjust its future deferred tax benefits

The full year 2011 effective 2012 tax rate is expected to bedecline to approximately 3938 to 38.5 percent.
28
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense, Net

Interest expense during 2011, primarily consisting of commitment and letter of credit fees under the line of credit, partially offset by interest income, was consistent with the comparable periods of 2010. Despite significant cash balances during the first six months 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.

LIQUIDITY AND CAPITAL RESOURCES

The Statements of Cash Flows reflect the following for the sixnine months ended JuneSeptember 30, (in thousands):

  2011  2010 
Net cash flows provided by operating activities $16,279  $20,418 
Net cash flows used for investing activities  (61,251)  (31,291)
Net cash flows provided by (used for) financing activities  7,564   (279)
Net decrease in cash $(37,408) $(11,152)

  2011  2010 
Net cash flows provided by operating activities $10,406  $17,722 
Net cash flows used for investing activities  (12,651)  (23,081)
Net cash flows provided by financing activities  139   67 
Net decrease in cash $(2,106) $(5,292)
32
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Cash Flows from Operations

Net cash flows from operating activities in the first sixnine months of 2011 of $10.4$16.3 million were $7.3$4.1 million less than the $17.7$20.4 million in the first sixnine months of 2010, despite a $3.4$1.1 million increase in net income. This decline was primarily a result of:

 ·A $9.9$5.7 million smallerlarger increase in accounts payable, accrued expenses and other liabilitiesreceivable in the first sixnine months of 2011, compared to the first sixnine months of 2010, due primarily due to the timing of payments for inventory purchases and other operational liabilities.22 percent higher net sales in September 2011 as compared to September 2010. Accounts receivable balances remain current, with only 23 days sales outstanding at September 30, 2011.
 
 ·A $2.4$3.9 million larger increase in accounts receivableinventories in the first sixnine months of 2011, compared to the first sixnine months of 2010, due to both higher raw material costs and increased inventory quantities. The increased inventory quantities were in part to ensure uninterrupted supply during the integration of the acquired operations. However, based on current RV and manufactured housing industry demand, the present inventory levels are higher net salesthan needed on an on-going basis, and the Company is working to improve inventory turns on a sustainable basis. Inventory turnover for the twelve months ended September 30, 2011 was 6.0 turns, lower than the 6.5 turns for the full year 2010 and the 6.8 turns for the twelve months ended September 30, 2010.
Partially offset by:
·A $2.3 million increase in June 2011 as compareddepreciation and amortization, primarily due to June 2010. Accounts receivable balances remain current, with only 21 days sales outstanding at June 30, 2011.capital expenditures and acquisitions.

Inventory turnoverIn September 2011, the Company entered into a derivative instrument for 3 million pounds of aluminum to manage a portion of the twelve months ended June 30, 2011 continuesexposure to movements associated with aluminum costs in 2012, representing approximately 10 percent of the Company’s anticipated aluminum purchases in 2012. While this derivative instrument is considered to be strong, at 6.2 turns, lower thanan economic hedge of the 6.5 turnsunderlying movement in the price of aluminum, it is not designated or accounted for the full year 2010 and the 6.9 turns for the twelve months ended June 30, 2010, due largely to the higher raw material costs.as a hedge. This derivative instrument will be settled on a monthly basis throughout 2012.

Depreciation and amortization was $10.0$15.1 million in the first sixnine months of 2011, and is expected to aggregate $19$20 million for the full year 2011. Non-cashFurther, the Company estimates that depreciation and amortization will be $22 million in 2012.

In the first nine months of 2011, non-cash stock-based compensation expense was $2.2 million in the first six months of 2011, and$3.3 million. Additionally, certain executives were issued $1.1 million of deferred stock units of $1.1 million in lieu of cash for 2010 incentive compensation.compensation in accordance with their compensation arrangements. Non-cash stock-based compensation is expected to be $5 million to $6 million for the full year 2011.

Cash Flows from Investing Activities

Cash flows used for investing activities of $12.7$61.3 million in the first sixnine months of 2011 included the acquisition of Home-Stylefour acquisitions for $7.3$49.3 million and capital expenditures of $10.5 million, both of which$17.7 million.  These were financedfunded from available cash, partially offset byincluding $5.0 million received from the maturity of U.S. Treasury Bills classified as short-term investments.investments, plus borrowings pursuant to the Company’s $50 million line of credit.

 
2933
 

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

On January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style manufactureshad annual sales of approximately $12 million comprised primarily of 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 contingent consideration based on an earn-out.future sales of existing products in specified geographic regions. At the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.2 million.

On July 19, 2011, the Company acquired certain assets and business of Indiana-based M-Tec Corporation. M-Tec manufactures components for RVs and mobile office units. The acquired business hashad annual sales of approximately $12 million.million comprised primarily of components for RVs, mobile office units and manufactured homes. The purchase price was $6.0 million paid at closing from available cash, plus contingent consideration based on an earn-out.future sales of existing products. At the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.6 million.

On August 22, 2011, the Company acquired from EA Technologies, LLC the business and certain assets of the towable RV chassis and slide-out mechanism operation previously owned by Dexter Chassis Group. The acquired business had annual sales of more than $40 million. The purchase price was $13.5 million paid at closing from available cash.

On August 29, 2011, the Company acquired the business and assets of Starquest Products, LLC and its affiliated company. Starquest had annual sales of approximately $22 million, comprised primarily of windows for truck caps, which are fiberglass enclosures that fit over the bed of pick-up trucks, painted to automotive standards and designed to exact truck bed specifications. Starquest also manufactures windows and doors for horse trailers and certain types of buses. The purchase price of $22.6 million was funded from available cash plus borrowings pursuant to the Company’s $50 million line of credit, plus contingent consideration based on future sales of certain products. At the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.1 million.

Estimates for 2011 are that capital expenditures will be $24 million to $25 million for the full year, including $4 million for four new facilities the Company has purchased, three of which the Company had previously been leasing, and $10 million to $11 million for the Company’s new aluminum extrusion project. The full year 2011operation. Further, the Company estimates that capital expenditure estimate is approximately $2expenditures will be $14 to $16 million to $3 million higher than previously expected largely due to additional investments to improve information systems and increase planned production capacity at the new aluminum extrusion facility.in 2012.

At JuneSeptember 30, 2011, the Company was attempting to sell sevensix owned facilities and vacant land with an aggregate carrying value of $11.3$10.1 million, which are not being used in production. The Company has leased to third parties four of these owned facilities with a combined carrying value of $8.6$8.5 million, for one to five year terms, for a combined rental income of $0.1 million 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 these sevensix owned facilities, the Company is attempting to sublease four vacant facilities which it leases.

Cash flows used for investing activities of $23.1$31.3 million in the first sixnine months of 2010 consisted of the acquisition of certain assets and business of Schwintek, IncInc. for $20.0 million, and the acquisition of the patent-pending design for a six-point leveling system for fifth-wheel RVs for $1.4 million, and the acquisition of the operating assets of Sellers Mfg., Inc. for $0.5 million, as well as $4.5$7.7 million of capital expenditures, all of which were financed from available cash. In addition, the Company purchased $13.0 million of short-term U.S. Treasury bills classified as short-term investments, which was more than offset by $15.0 million received from the maturity of U.S. Treasury Bills classified as short-term investments.

34

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

Cash Flows from Financing Activities

There were no significant cashCash flows fromprovided by financing activities for the sixfirst nine months ended June 30,of 2011 and 2010. At June 30,of $7.6 million were primarily due to a net increase in indebtedness of $8.1 million, at a weighted average interest rate of 2.5 percent. During the 2011 third quarter, the Company’s borrowings on its line of credit reached a high of $15.8 million. During 2011, the Company had no debt outstanding,has invested $67.1 million in acquisitions and made no borrowings duringcapital expenditures, utilizing its available cash and necessitating borrowing under its line of credit. Due to the six months ended June 30, 2011.seasonal nature of the business, the Company expects the indebtedness to decline over the balance of the year.

In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay earn-outs to the sellers. The Company has recorded a $12.3$13.5 million liability for the aggregate fair value of these expected earn-out payments at JuneSeptember 30, 2011. For further information see Note 10 of the Notes to Condensed Consolidated Financial Statements.
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DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

On 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 JuneSeptember 30, 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at JuneSeptember 30, 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At JuneSeptember 30, 2011, the Company had availability of $44.8$38.3 million, as there were $5.2was $8.1 million of borrowing and $3.6 million in outstanding letters of credit under the new line of credit.

Simultaneously, the Company entered into a $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 $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. At September 30, 2011 and 2010, there were no Senior Promissory Notes outstanding. This new facility expires 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. As a result, the remaining availability under these facilities was $184.5$176.5 million at JuneSeptember 30, 2011. ThisThe Company believes this availability together with the $36.8 million in cash at June 30, 2011, areis more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements in 2011.for the next twelve months.

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

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

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 Drew’sthe Company’s direct and indirect subsidiaries.

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, 501,279 shares have beenwere repurchased prior to 2011 at an average price of $18.65 per share, or $9.3 million in total. The aggregateDuring the third quarter of 2011, an additional 33,856 shares were repurchased at an average cost of such repurchases was funded from the Company’s available cash.$18.44 per share, or $0.6 million. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

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

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)(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.

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,and 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 certainthese commodities have historically been volatile, and after rising significantly during the first part of 2011, for certain raw materials, have recently moderated. The Company did not experience any significant increase in its labor costs in the first sixnine months of 2011 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, and with respect to Level 3 fair value measurements was effective for interim or annual periods beginning after December 15, 2010. The adoption of the guidance had no significant impact on the Company.Company’s financial statements.

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

In August 2011, the FASB issued updated standards intended to simplify how an entity tests goodwill for impairment. Under the new guidance, an entity is no longer required to perform the two-step quantitative goodwill impairment test unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

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, net 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 may differ from these estimates under different assumptions or conditions.
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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, acquisitions, 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, 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.

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

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)aluminum) 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, 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, the successful integration of recent acquisitions, 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 beenis exposed to changes in interest rates primarily as a result of its financing activities. At JuneSeptember 30, 2011, the Company had no outstanding borrowings.$8.1 million of variable rate debt outstanding. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to September 30, 2011, future cash flows would be reduced by less than $0.1 million per annum.

If the actual change in interest rates is substantially different than 100 basis points, or the outstanding borrowings change significantly, the net impact of interest rate risk on the Company’s cash flow may be materially different than that disclosed above.

The Company is also exposed to changes in the prices of raw materials, specifically steel and aluminum. In the third quarter of 2011, the Company entered into a derivative instrument for the purpose of managing a portion of the exposures associated with fluctuations in aluminum costs. While this derivative instrument is subject to fluctuations in value, these fluctuations are generally offset by the changes in fair value of the underlying exposures. See Note 11 of the Notes to Condensed Consolidated Financial Statements for a more detailed discussion of derivative instruments.

The Company has historically been able to obtain sales price increases to offset the majority of raw material cost increases, however 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.

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.

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

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 JuneSeptember 30, 2011 or subsequent to the date the Company completed its evaluation, that 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 have been incrementally strengthened due both to the installation of enterprise resource planning (“ERP”) software and business process changes. In the last sixnine months, the Company continued to implement certain significant functions of the ERP software and business process changes. Implementation of additional functions of the ERP software and business process changes are planned for the next couple of quarters to further strengthen the Company’s internal control. In addition, the Company plans to convert systems used by recently acquired businesses to its existing ERP software and business processes over the next few quarters.

 
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DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2010. There were no material developments during the first sixnine months of 2011 in connection with the identified legal proceeding pending at December 31, 2010, except that the Plaintiffsin May 2011, plaintiffs filed an appeal brief with the Ninth Circuit Court of Appeals and defendant Kinro filed an answering brief. A decision is pending.

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 JuneSeptember 30, 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, 2011.2011, except as noted below.

Risks related to recent acquisitions could adversely affect our operating results.

During the third quarter of 2011, the Company completed three acquisitions. Whether these acquisitions are successful will depend on our ability to achieve the strategic objectives related to the acquired businesses. The Company may not realize the anticipated benefits from these acquisitions because we may not achieve expected operating efficiencies, we could lose customers and key personnel, and management’s attention may be diverted from our existing business.

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
 Registrant
   
 By/s/ Joseph S. Giordano III
 Joseph S. Giordano III
 Chief Financial Officer and Treasurer
 AugustNovember 8, 2011


 
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