UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

For the quarterly period ended: MARCH 31,JUNE 30, 2012

OR

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

For the transition period from _________________ to _________________

Commission File Number:  0-13646

DREW INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
 
Delaware 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
                                                                                 
200 Mamaroneck Avenue, White Plains, NY 10601
(Address of principal executive offices)  (Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No___

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 22,274,28122,309,243 shares of common stock as of April 30,July 31, 2012.

 
1
 


DREW INDUSTRIES INCORPORATED

INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2012

(UNAUDITED)
 
PART I –FINANCIAL INFORMATIONPage
    Page
PART I –
Item 1 – FINANCIAL STATEMENTSINFORMATION  
    
Item 1 – FINANCIAL STATEMENTS
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME 3
    
 CONDENSED CONSOLIDATED BALANCE SHEETS 4
    
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5
    
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 6
    
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
7 - 18– 19
    
 
Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 19 - 32
20 – 36
    
 
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 3337
    
 
Item 4 – CONTROLS AND PROCEDURES
 3337
    
PART II –
OTHER INFORMATION  
    
 
Item 1 – LEGAL PROCEEDINGS
 3438
    
 
Item 1A – RISK FACTORS
 3438
    
 
Item 6 – EXHIBITS
 3439
    
SIGNATURES 3540
   
EXHIBIT 31.1 – SECTION 302 CEO CERTIFICATION
 3641
   
EXHIBIT 31.2 – SECTION 302 CFO CERTIFICATION
 3742
   
EXHIBIT 32.1 – SECTION 906 CEO CERTIFICATION
3843
   
EXHIBIT 32.2 – SECTION 906 CFO CERTIFICATION
 3944
 
 
2
 
 
DREW INDUSTRIES INCORPORATED

PART I –  FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

  
Three Months Ended
March 31,
 
  2012  2011 
(In thousands, except per share amounts)      
       
Net sales $223,552  $168,833 
Cost of sales  178,729   130,954 
Gross profit  44,823   37,879 
Selling, general and administrative expenses  27,450   22,336 
Operating profit  17,373   15,543 
Interest expense, net  74   58 
Income before income taxes  17,299   15,485 
Provision for income taxes  6,183   6,098 
Net income $11,116  $9,387 
Net income per common share:        
Basic $0.50  $0.42 
Diluted $0.49  $0.42 
Weighted average common shares outstanding:        
Basic  22,442   22,219 
Diluted  22,642   22,377 
  
Six Months Ended 
June 30,   
  
 Three Months Ended
June 30, 
 
  2012   2011   2012   2011 
(In thousands, except per share amount)                
                 
Net sales $474,566  $354,881  $251,014  $186,048 
Cost of sales  383,320   274,943   204,591   143,989 
Gross profit  91,246   79,938   46,423   42,059 
Selling, general and administrative expenses  54,905   46,485   27,455   24,149 
Operating profit  36,341   33,453   18,968   17,910 
Interest expense, net  130   119   56   61 
Income before income taxes  36,211   33,334   18,912   17,849 
Provision for income taxes  13,387   12,982   7,204   6,884 
Net income $22,824  $20,352  $11,708  $10,965 
                 
Net income per common share:                
Basic $1.02  $0.91  $0.52  $0.49 
Diluted $1.01  $0.91  $0.52  $0.49 
                 
Weighted average common shares outstanding:                
Basic  22,479   22,244   22,516   22,270 
Diluted  22,686   22,417   22,731   22,458 
 
The accompanying notes are an integral part of these financial statements.
 
 
3
 
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 June 30,  December 31, 
 2012 2011  2011 
(In thousands, except per share amount)       
        
ASSETS         
Current assets         
Cash and cash equivalents $42,514  $36,774  $6,584 
Accounts receivable, net  50,900   44,050   22,620 
Inventories  91,413   83,556   92,052 
Deferred taxes  10,125   12,143   10,125 
Prepaid expenses and other current assets  9,631   6,163   6,187 
Total current assets  204,583   182,686   137,568 
Fixed assets, net  99,342   85,308   95,050 
Goodwill  21,177   8,600   20,499 
Other intangible assets, net  73,986   58,433   79,059 
Deferred taxes  14,496   15,385   14,496 
Other assets  5,618   3,969   4,411 
Total assets $419,202  $354,381  $351,083 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities            
Accounts payable, trade $44,372  $27,377  $15,742 
Accrued expenses and other current liabilities  48,665   39,101   36,169 
Total current liabilities  93,037   66,478   51,911 
Other long-term liabilities  21,305   20,279   21,876 
Total liabilities  114,342   86,757   73,787 
             
Stockholders’ equity            
Common stock, par value $.01 per share  250   247   248 
Paid-in capital  89,127   83,799   84,389 
Retained earnings  244,950   212,419   222,126 
Stockholders’ equity before treasury stock  334,327   296,465   306,763 
Treasury stock, at cost  (29,467)  (28,841)  (29,467)
Total stockholders’ equity  304,860   267,624   277,296 
Total liabilities and stockholders’ equity $419,202  $354,381  $351,083 
  March 31,  December 31, 
  2012  2011  2011 
(In thousands, except per share amount)         
          
ASSETS         
Current assets         
Cash and cash equivalents $3,541  $36,728  $6,584 
Accounts receivable, net  57,535   43,244   22,620 
Inventories  88,630   77,612   92,052 
Deferred taxes  10,125   12,143   10,125 
Prepaid expenses and other current assets  5,570   4,548   6,187 
Total current assets  165,401   174,275   137,568 
Fixed assets, net  95,438   81,151   95,050 
Goodwill  21,050   8,600   20,499 
Other intangible assets, net  76,309   59,250   79,059 
Deferred taxes  14,496   15,770   14,496 
Other assets  7,570   3,944   4,411 
Total assets $380,264  $342,990  $351,083 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
Current liabilities            
Accounts payable, trade $19,749  $29,209  $15,742 
Accrued expenses and other current liabilities  48,036   38,891   36,169 
Total current liabilities  67,785   68,100   51,911 
Other long-term liabilities  21,574   19,492   21,876 
Total liabilities  89,359   87,592   73,787 
             
Stockholders’ equity            
Common stock, par value $.01 per share  250   247   248 
Paid-in capital  86,880   82,538   84,389 
Retained earnings  233,242   201,454   222,126 
Stockholders’ equity before treasury stock  320,372   284,239   306,763 
Treasury stock, at cost  (29,467)  (28,841)  (29,467)
Total stockholders’ equity  290,905   255,398   277,296 
Total liabilities and stockholders’ equity $380,264  $342,990  $351,083 

The accompanying notes are an integral part of these financial statements.
 
 
4
 
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  
Six Months Ended
June 30,
 
  2012  2011 
(In thousands)      
       
Cash flows from operating activities:      
Net income $22,824  $20,352 
Adjustments to reconcile net income to cash flows provided by operating activities:        
Depreciation and amortization  12,361   10,016 
Stock-based compensation expense  3,069   2,209 
Deferred taxes  -   385 
Other non-cash items  1,131   162 
Changes in assets and liabilities, net of acquisitions of businesses:        
Accounts receivable, net  (28,280)  (31,160)
Inventories  1,227   (12,623)
Prepaid expenses and other assets  (4,642)  (1,926)
Accounts payable  28,630   16,026 
Accrued expenses and other liabilities  12,241   6,965 
Net cash flows provided by operating activities  48,561   10,406 
         
Cash flows from investing activities:        
Capital expenditures  (13,154)  (10,543)
Acquisitions of businesses  (1,473)  (7,250)
Proceeds from maturity of short-term investments  -   5,000 
Other investing activities  2,075   142 
Net cash flows used for investing activities  (12,552)  (12,651)
         
Cash flows from financing activities:        
Exercise of stock options and deferred stock units  1,471   504 
Proceeds from line of credit borrowings  37,702   - 
Repayments under line of credit borrowings  (37,702)  - 
Payment of contingent consideration related to acquisitions  (1,550)  (224)
Other financing activities  -   (141)
Net cash flows (used for) provided by financing activities  (79)  139 
         
Net increase (decrease) in cash  35,930   (2,106)
         
Cash and cash equivalents at beginning of period  6,584   38,880 
Cash and cash equivalents at end of period $42,514  $36,774 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Interest $216  $138 
Income taxes, net of refunds $12,582  $12,558 
  
Three Months Ended
March 31,
 
  2012  2011 
(In thousands)      
       
Cash flows from operating activities:      
Net income $11,116  $9,387 
Adjustments to reconcile net income to cash flows provided by operating activities:        
Depreciation and amortization  6,381   4,890 
Stock-based compensation expense  1,319   1,113 
Other non-cash items  461   (109)
Changes in assets and liabilities, net of acquisitions of businesses:        
Accounts receivable, net  (34,915)  (30,354)
Inventories  3,939   (6,679)
Prepaid expenses and other assets  (510)  (262)
Accounts payable  4,007   17,858 
Accrued expenses and other liabilities  11,362   7,239 
Net cash flows provided by operating activities  3,160   3,083 
         
Cash flows from investing activities:        
Capital expenditures  (5,684)  (3,136)
Acquisitions of businesses  (1,164)  (7,250)
Proceeds from maturity of short-term investments  -   5,000 
Other investing activities  25   (48)
Net cash flows used for investing activities  (6,823)  (5,434)
         
Cash flows from financing activities:        
Exercise of stock options and deferred stock units  974   339 
Proceeds from line of credit borrowings  37,702   - 
Repayments under line of credit borrowings  (37,702)  - 
Payment of contingent consideration  (354)  (3)
Other financing activities  -   (137)
Net cash flows provided by financing activities  620   199 
         
Net decrease in cash  (3,043)  (2,152)
         
Cash and cash equivalents at beginning of period  6,584   38,880 
Cash and cash equivalents at end of period $3,541  $36,728 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Interest $96  $71 
Income taxes, net of refunds $(9) $79 

The accompanying notes are an integral part of these financial statements.statements
 
 
5
 
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
Common
Stock
  
Paid-in
Capital
  
Retained
Earnings
  
Treasury
Stock
  
Total
Stockholders’
Equity
  
Common
Stock
  
Paid-in
Capital
  
Retained
Earnings
  
Treasury
Stock
  
Total
Stockholders’
Equity
 
(In thousands, except shares)                              
               
Balance - December 31, 2011 $248  $84,389  $222,126  $(29,467) $277,296 
December 31, 2011 $248  $84,389  $222,126  $(29,467) $277,296 
Net income  -   -   11,116   -   11,116   -   -   22,824   -   22,824 
Issuance of 130,812 shares of common stock pursuant to stock options and deferred stock units  2   900   -   -   902 
Issuance of 165,973 shares of common stock pursuant to stock options and deferred stock units
  2   1,382   -   -   1,384 
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units  -   72   -   -   72   -   87   -   -   87 
Stock-based compensation expense  -   1,319   -   -   1,319   -   3,069   -   -   3,069 
Issuance of 7,548 deferred stock units relating to prior year compensation  -   200   -   -   200   -   200   -   -   200 
Balance - March 31, 2012 $250  $86,880  $233,242  $(29,467) $290,905 
Balance - June 30, 2012 $250  $89,127  $244,950  $(29,467) $304,860 

 
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 buses, as well as for trailers used to haul boats, livestock, equipment and other cargo.

Because of fluctuations in RV dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to 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, 2011 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 six and three month periods ended March 31,June 30, 2012 and 2011. 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") and the manufactured housing products segment (the "MH Segment"). Intersegment sales are insignificant.

The RV Segment, which accounted for 87 percent and 86 percent of consolidated net sales for the threesix month periods ended March 31,June 30, 2012 and 2011, 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, baggage, patio and ramp doors
●Entry steps●Awnings
●Manual, electric and hydraulic stabilizerand leveling systems●Other accessories
 
                                                                                                                                                        
The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo. Nearly 90Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs.
 
 
7
 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The MH Segment, which accounted for 13 percent and 14 percent of consolidated net sales for the threesix month periods ended March 31,June 30, 2012 and 2011, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile 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 types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

Decisions concerning the allocation of the Company's resources are made by the Company's key executives, with oversight by the Board of Directors. 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, accretion, other non-segment items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of 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, 2011 Annual Report on Form 10-K.

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

  2012  2011 
Net sales:      
RV Segment $195,555  $146,229 
MH Segment  27,997   22,604 
Total net sales $223,552  $168,833 
         
Operating profit:        
RV Segment $16,781  $15,301 
MH Segment  3,131   2,224 
Total segment operating profit  19,912   17,525 
Corporate  (2,308)  (2,097)
Accretion related to contingent consideration  (481)  (474)
Other non-segment items  250   589 
Total operating profit $17,373  $15,543 
  
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
   2012  2011   2012  2011 
Net sales:              
RV Segment:              
RV OEMs:              
Travel Trailer and Fifth-Wheels $351,934  $269,800  $183,855  $139,148 
Motorhomes  14,192   8,940   8,240   4,316 
RV Aftermarket  9,359   8,061   5,369   4,092 
Adjacent Industries  38,501   16,627   20,967   9,643 
Total RV Segment net sales  413,986   303,428   218,431   157,199 
MH Segment:                
Manufactured Housing OEMs  40,490   34,625   21,778   19,775 
Manufactured Housing Aftermarket  8,740   8,439   4,471   4,449 
Adjacent Industries  11,350   8,389   6,334   4,625 
Total MH Segment net sales  60,580   51,453   32,583   28,849 
Total net sales $474,566  $354,881  $251,014  $186,048 
 
 
8
 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Operating profit:            
RV Segment $34,264  $32,625  $17,483  $17,324 
MH Segment  7,161   5,177   4,030   2,953 
Total segment operating profit  41,425   37,802   21,513   20,277 
Corporate  (4,524)  (4,043)  (2,216)  (1,946)
Accretion related to contingent consideration  (920)  (949)  (432)  (474)
Other non-segment items  360   643   103   53 
Total operating profit $36,341  $33,453  $18,968  $17,910 
3.           Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

RV Entry Door Operation

On February 21, 2012, the Company acquired the business and certain assets of the United States RV entry door operation of Euramax International, Inc. The acquired business had annualized sales of approximately $6 million. The purchase price was $1.7 million, of which $1.2 million was paid at closing, with the balance to be paid over the next three years. 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 $1,164 
Present value of future payments  482 
Total fair value of consideration given $1,646 
Customer relationships $270 
Other identifiable intangible assets  40 
Net tangible assets  785 
Total fair value of net assets acquired $1,095 
Goodwill (tax deductible) $551 
 
The customer relationships are being amortized over their estimated useful life of 7 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing manufacturing capacity and purchasing power to reduce costs in this product line.

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 
Accumulated cost – December 31, 2011 $10,025  $61,001  $71,026 
Accumulated impairment – December 31, 2011  (9,251)  (41,276)  (50,527)
Net balance – December 31, 2011  774   19,725   20,499 
Acquisitions – 2012  -   678   678 
Net balance – June 30, 2012 $774  $20,403  $21,177 

  MH Segment  RV Segment  Total 
Accumulated cost – December 31, 2011 $10,025  $61,001  $71,026 
Accumulated impairment – December 31, 2011
  (9,251)  (41,276)  (50,527)
Net balance – December 31, 2011  774   19,725   20,499 
Acquisitions – 2012  -   551   551 
Net balance – March 31, 2012 $774  $20,276  $21,050 

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. The impairment tests are based on fair value, determined using discounted cash flows, appraised values or management’s estimates. No impairment tests were required or performed during the threesix months ended March 31,June 30, 2012.
9
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Other Intangible Assets

Other intangible assets consisted of the following at March 31,June 30, 2012 (in thousands):
 
  
Gross
Cost
  
Accumulated
Amortization
  
Net
Balance
 Estimated Useful Life in Years
Customer relationships $50,105  $15,707  $34,398 3to16
Patents  45,930   12,629   33,301 2to19
Tradenames  7,959   3,913   4,046 5to15
Non-compete agreements  4,121   1,880   2,241 3to7
Other intangible assets $108,115  $34,129  $73,986    
Other intangible assets consisted of the following at December 31, 2011 (in thousands):
 
Gross
Cost
  
Accumulated
Amortization
  
Net
Balance
 
Estimated Useful
Life in Years
 
Gross
Cost
  
Accumulated
Amortization
  
Net
Balance
 Estimated Useful Life in Years
Customer relationships $50,015  $14,635  $35,380 3 to 16 $50,645  $14,483  $36,162 3to16
Patents  46,159   12,027   34,132 2 to 19  46,139   10,651   35,488 2to19
Tradenames  8,069   3,774   4,295 5 to 15  8,069   3,408   4,661 5to15
Non-compete agreements  4,096   1,594   2,502 3 to 7  4,136   1,388   2,748 3to7
Other intangible assets $108,339  $32,030  $76,309   $108,989  $29,930  $79,059    
 
At March 31,June 30, 2012, other intangible assets included $2.4$2.2 million related to the Company’s marine and leisure operation, which sells trailers and related axles primarily for hauling small and medium-sized boats. Over the last severalCompared to a few years ago, industry shipments of small and medium-sized boats have declined significantly. From time to time, throughout this period,the last few years, 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.

4.           Cash and Investments

Cash and investments consisted of the following at (in thousands):
  March 31,  December 31, 
  2012  2011  2011 
          
Cash in banks $3,541  $31,727  $6,584 
Money Market – Wells Fargo  -   5,001   - 
Cash and investments $3,541  $36,728  $6,584 
 
 
10
 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.           Cash and Investments

Cash and investments consisted of the following at (in thousands):
 
  
June 30,
  December 31, 
  2012  2011  2011 
          
Cash in banks $42,514  $31,772  $6,584 
Money Market – Wells Fargo  -   5,002   - 
Cash and investments $42,514  $36,774  $6,584 
5.           Inventories

Inventories consisted of the following at (in thousands):

  March 31,  December 31, 
  2012  2011  2011 
Raw materials $72,874  $66,197  $77,066 
Work in process  4,966   1,916   3,224 
Finished goods  10,790   9,499   11,762 
Total $88,630  $77,612  $92,052 
  
June 30,
  December 31, 
  2012  2011  2011 
Raw materials $73,023  $72,367  $77,066 
Work in process  4,239   2,181   3,224 
Finished goods  14,151   9,008   11,762 
Total $91,413  $83,556  $92,052 
 
6.           Fixed Assets

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

  June 30,  December 31, 
   2012  2011  2011 
Fixed assets, at cost $198,566  $176,685  $189,084 
Less accumulated depreciation and amortization  99,224   91,377   94,034 
Fixed assets, net $99,342  $85,308  $95,050 
 
  March 31,  December 31, 
  2012  2011  2011 
Fixed assets, at cost $192,265  $170,023  $189,084 
Less accumulated depreciation and amortization  96,827   88,872   94,034 
Fixed assets, net $95,438  $81,151  $95,050 
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):
 
  March 31,  December 31, 
   2012  2011  2011 
Employee compensation and benefits $14,638  $12,352  $14,258 
Warranty  6,780   4,804   5,882 
Sales rebates  5,089   3,442   3,337 
Contingent consideration related to acquisitions  4,823   1,675   3,292 
Other  16,706   16,618   9,400 
Accrued expenses and other current liabilities $48,036  $38,891  $36,169 
11
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
  June 30,  December 31, 
   2012  2011  2011 
Employee compensation and benefits $20,683  $18,056  $14,258 
Warranty  7,490   4,860   5,882 
Sales rebates  5,647   3,878   3,337 
Contingent consideration related to acquisitions  4,668   1,675   3,292 
Other  10,177   10,632   9,400 
Accrued expenses and other current liabilities $48,665  $39,101  $36,169 
 
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 threesix months ended (in thousands):

 March 31,  June 30, 
 2012  2011  2012  2011 
Balance at beginning of period $8,640  $5,892  $8,640  $5,892 
Provision for warranty expense  3,054   2,075   5,505   3,425 
Warranty liability from acquired businesses  -   90   89   90 
Warranty costs paid  (1,957)  (1,078)  (3,570)  (2,166)
Total accrued warranty  9,737   6,979   10,664   7,241 
Less long-term portion  2,957   2,175   3,174   2,381 
Current accrued warranty $6,780  $4,804  $7,490  $4,860 

8.           Long-Term Indebtedness

The Company had no debt outstanding at March 31,June 30, 2012 and 2011, and December 31, 2011.

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”). The maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the 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 March 31,June 30, 2012), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at March 31,June 30, 2012) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At March 31,June 30, 2012, the Company had $3.3$3.0 million in outstanding letters of credit under the line of credit. Availability under the Company’s line of credit was $46.7$47.0 million at March 31,June 30, 2012.
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”). The 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 March 31,June 30, 2012, there were no Senior Promissory Notes outstanding. This 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,This limitation did not impact the Company’s borrowing availability at June 30, 2012. The remaining availability under these facilities was $193.5$197.0 million at March 31,June 30, 2012. The Company believes this availability, together with the $3.5$42.5 million in cash at March 31,June 30, 2012, is more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements for the next twelve months.

Pursuant to the Credit Agreement and “shelf-loan” facility at March 31,June 30, 2012, the Company was required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At March 31,June 30, 2012, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.
12
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Borrowings under both the line of credit and the “shelf-loan” facility are secured on a pari passu basis by first priority liens on the capital stock or other equity interests of each of the Company’s direct and indirect subsidiaries.

9.           Stockholders’ Equity

The following table summarizes information about the Common Stock at (in thousands):
 
 
June 30,
  December 31, 
 March 31,  December 31,  2012  2011  2011 
 2012  2011  2011          
Common stock authorized  30,000   30,000   30,000   30,000   30,000   30,000 
Common stock issued  24,957   24,720   24,826   24,992   24,730   24,826 
Treasury stock  2,684   2,651   2,684   2,684   2,651   2,684 

13

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
The following reconciliation details the denominator used in the computation of basic and diluted earnings per share for the three months ended March 31, (in thousands):

  
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
  2012  2011  2012  2011 
             
Weighted average shares outstanding for basic earnings per share
  22,479   22,244   22,516   22,270 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  207   173   215   188 
Weighted average shares outstanding for diluted earnings per share  22,686   22,417   22,731   22,458 
  2012  2011 
Weighted average shares outstanding for basic earnings per share  22,442   22,219 
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units  200   158 
Weighted average shares outstanding for diluted earnings per share  22,642   22,377 

The weighted average diluted shares outstanding for the threesix months ended March 31,June 30, 2012 and 2011, excludes the effect of 674,550671,550 and 1,476,5401,334,840 shares of common stock subject to stock options, respectively, and the three months ended June 30, 2012 and 2011 excludes the effect of 668,550 and 1,193,140 stock options, respectively, because including such shares in the calculation of total diluted shares would have been anti-dilutive.

In February 2012, the Company issued 7,548 deferred stock units at $26.54, or $0.2 million, to certain executive officers in lieu of cash for a portion of their 2011 incentive compensation in accordance with their compensation arrangements.

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, 535,135 shares were repurchased prior to 2012 at an average price of $18.64 per share, or $10.0 million. No shares have been purchased in 2012. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

10.           Commitments and Contingencies

Litigation

See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2011. There were no material developments duringOn June 7, 2012, the first three monthsUnited States Court of 2012 in connection withAppeals for the identified legal proceeding pending at December 31, 2011.Ninth Circuit unanimously affirmed the decision of the United States District Court, Central District of California, which had granted Kinro’s motion for summary judgment dismissing all claims against Kinro asserted by Plaintiffs.  Consequently, the litigation is terminated.
13
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 March 31,June 30, 2012, would not be material to the Company’s financial position or annual results of operations.

14
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Contingent Consideration Related to Acquisitions

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 this contingent consideration at March 31,June 30, 2012, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 15.415.0 percent.

TThe following table summarizes the contingent consideration as of March 31,June 30, 2012 (in thousands):
 
Acquisition 
Estimated
Payments
  
Fair Value
of Estimated
Payments
 
Schwintek products $13,288(a) $10,876 
Level-UpTM six-point leveling system
  2,929(b)  2,112 
Other acquired products  1,089(c)  888 
Total $17,306  $13,876 
Acquisition 
Estimated
Payments
  
Fair Value
of Estimated
Payments
 
Schwintek products $13,885(a) $11,056 
Level-UpTM six-point leveling system
  3,230(b)  2,338 
Other acquired products  1,272(c)  1,035 
Total $18,387  $14,429 
 
(a)Contingent consideration for three of the four products expires in March 2014. Contingent consideration for the remaining product will cease five years after the product is first sold to customers. Two of the four products acquired have a combined remaining maximum contingent consideration of $12.7 million, of which the Company estimates $11.4$11.7 million will be paid. Other than expiration of the contingent consideration period, the remaining products have no maximum contingent consideration.

(b)Other than expiration of the contingent consideration period in February 2016, these products have no maximum contingent consideration.

(c)Contingent consideration expires at various dates through October 2025. Certain of these products have a combined maximum of $3.0$3.4 million, while the remaining products have no maximum contingent consideration.

As required, the liability for this contingent consideration is measured quarterly, 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 costs of capital and future sales of the products which are subject to contingent consideration, the Company could record adjustments in future periods.

In the first quartersix months of 2012 and 2011, the net impact of the quarterly measurement and accretion of the liability was an expense recorded in selling, general, and administrative expenses of $0.2$0.8 million while in the first quarter of 2011 the net impact was a reduction in selling, general, and administrative expenses of $0.1 million.$0.3 million, respectively.
 
 
1415
 

DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
The following table provides a reconciliation of the Company’s contingent consideration liability for the threesix months ended March 31,June 30, 2012 (in thousands):

Balance at December 31, 2011 $14,561 
Acquisitions  67 
Payments  (1,550)
Accretion  920 
Fair value adjustments  (122)
Balance at June 30, 2012  13,876 
Less current portion in accrued expenses and other current liabilities  4,668 
Total long-term portion in other long-term liabilities $9,208 
Balance at December 31, 2011 $14,561 
Acquisitions  - 
Payments  (354)
Accretion  481 
Fair value adjustments  (259)
Balance at March 31, 2012  14,429 
Less current portion in accrued expenses and other current liabilities  4,823 
Total long-term portion in other long-term liabilities $9,606 

Use of Estimates

The preparation of 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, contingent consideration, 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.

11.           Fair Value Measurements

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.

Recurring

Certain assets and liabilities are recorded at fair value on a recurring basis each quarter. The following table presents the Company’s assets and liabilities that were measured at fair value on a recurring basis at (in thousands):

  March 31, 2012  December 31, 2011 
  Total  Level 1  Level 2   Level 3  Total  Level 1  Level 2  Level 3 
Assets                        
Deferred compensation $3,654  $3,654  $-  $-  $2,564  $2,564  $-  $- 
Total assets $3,654  $3,654  $-  $-  $2,564  $2,564  $-  $- 
                                 
Liabilities                                
Contingent consideration related to acquisitions
 $14,429  $-  $-  $14,429  $14,561  $-  $-  $14,561 
Deferred compensation  5,740   5,740   -   -   4,468   4,468   -   - 
Unrealized loss on derivative instruments  219   -   219   -   436   -   436   - 
Total liabilities $20,388  $5,740  $219  $14,429  $19,465  $4,468  $436  $14,561 
 
 
1516
 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Recurring

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at (in thousands):
  June 30, 2012  December 31, 2011 
  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Assets                        
Deferred compensation $3,468  $3,468  $-  $-  $2,564  $2,564  $-  $- 
Total assets $3,468  $3,468  $-  $-  $2,564  $2,564  $-  $- 
                                 
Liabilities                                
Contingent consideration related to acquisitions $13,876  $-  $-  $13,876  $14,561  $-  $-  $14,561 
Deferred compensation  5,837   5,837   -   -   4,468   4,468   -   - 
Unrealized loss on derivative instruments  431   -   431   -   436   -   436   - 
Total liabilities $20,144  $5,837  $431  $13,876  $19,465  $4,468  $436  $14,561 
 
Deferred Compensation
Deferred compensation assets and liabilities were valued using a market approach based on the quoted market prices of identical instruments.

Contingent Consideration Related to Acquisitions
Liabilities for contingent consideration related to acquisitions were valued using management’s projections for long-term sales forecasts, including assumptions regarding market share gains and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next five years, the Company’s long-term sales growth forecasts averagedfor products subject to contingent consideration arrangements average approximately 40 percent per year. 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.

Changes in either of the inputs in isolation would result in a change in the fair value measurement. A change in the assumptions used for sales forecasts would result in a directionally similar change in the fair value liability, while a change in the weighted average cost of capital would result in a directionally opposite change in the fair value liability. If there is an increase in the fair value liability, the Company would record a charge to selling, general and administrative expenses, and if there is a decrease in the fair value liability, the Company would record a benefit in selling, general and administrative expenses.

Derivative Instruments
In September 2011,At June 30, 2012, the Company entered intohad derivative instruments for 38.1 million pounds of aluminum, approximately 1025 percent of the Company’s anticipated annual aluminum purchases, in 2012, in order to manage a portion of the exposure to movements associated with aluminum costs. During the first quarter of 2012, the first three of suchThese derivative instruments or 750,000 pounds, were settledexpire between July 2012 and September 2013, at a lossan average mid-west aluminum price of $0.1 million.$1.03 per pound. While the remainingthese derivative instruments are considered to be economic hedges of the underlying movement in the price of aluminum, they are not designated or accounted for as a hedge. These remaining derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net gain or loss was recorded in cost of sales in the Condensed Consolidated Statements of Income, with the corresponding liability recorded in accruedaccrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet. During the first six months of 2012, derivative instruments for 1.5 million pounds were settled at a loss of $0.2 million.

 
1617
 

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

Certain assets and liabilities are measured at the lower of cost or fair value on a non-recurring basis. The following table presents the carrying value on the measurement date of any assets and liabilities which were measured at fair value and recorded at the lower of cost or fair value, on a non-recurring basis, using significant unobservable inputs (Level 3), and the corresponding non-recurring losses or (gains) recognized during the (in thousands)::

 
Three Months Ended
March 31, 2012
  
Three Months Ended
March 31, 2011
  
Six Months Ended
June 30, 2012
  
Six Months Ended
June 30, 2011
 
 
Carrying
Value
  
Non-Recurring
Losses/(Gain)
  
Carrying
Value
  
Non-Recurring
Losses/(Gain)
  
Carrying
Value
  Non-Recurring
Losses
  
Carrying
Value
  
Non-Recurring
Losses
 
Assets                        
Vacant owned facilities $10,324  $265  $11,452  $-  $7,392  $282  $11,327  $- 
Other intangible assets  642   600   -   -   642   600   -   - 
Net assets of acquired businesses  1,095   -   6,297   -   1,345   -   6,297   - 
Total assets $12,061  $865  $17,749  $-  $9,379  $882  $17,624  $- 
                
Liabilities                                
Vacant leased facilities $32  $(156) $1,069  $86  $13  $10  $926  $172 
Total liabilities $32  $(156) $1,069  $86  $13  $10  $926  $172 

Vacant Owned Facilities
During the first quartersix months of 2012, the Company reviewed the recoverability of the carrying value of seven vacant owned facilities. The determination of fair value was based on the best information available, including internal cash flow estimates, market prices for similar assets, broker quotes and independent appraisals, as appropriate. At March 31,During the first six months of 2012, the fair value of two of these vacant owned facilities did not exceed their carrying value, therefore an impairment charge of $0.3 million was recorded in selling, general, and administrative expenses in the Condensed Consolidated Statements of Income. At March 31,June 30, 2012, the remaining five vacant owned facilities, hadwith an estimated combined fair value of $13.2 million. Six of these facilities$10.1 million, were classified in fixed assets in the Condensed Consolidated Balance SheetsSheets. During the second quarter of 2012, the Company sold at carrying value one of the facilities previously recorded as a vacant facility and the other facility, which was sold on April 4, 2012 for $2.0 million, was classified in other assets.reopened another.  The Company has leased to third parties fourthree of these owned facilities with a combined carrying value of $8.2$6.1 million, for one to five year terms, for a combined rental income of $0.1 million per month. Each of these fourthree leases also contains an option for the lessee to purchase the facility at an amount in excess of carrying value.

During the first quartersix months of 2011, the fair value of these vacant owned facilities exceeded their carrying value, therefore no impairment charges were recorded.
18
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Other Intangible Assets
During the first quartersix months of 2012, the Company reviewed the recoverability of amortizable intangible assets associated with an acquired patent. Based on the analyses, the carrying value of these intangible assets exceeded the undiscounted cash flows expected to be generated. As a result, the Company was required to determine the fair value of these intangible assets. Fair value was determined based on the present value of internal cash flow estimates. The resulting fair value of these intangible assets was $0.6 million below the carrying value, therefore the Company recorded a non-cash impairment charge of $0.6 million, of which $0.5 million was recorded in cost of sales in the Condensed Consolidated Statements of Income. If future sales of this product are lower than management’s projections, further impairments could be recorded.

17
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Net Assets of Acquired Businesses
The Company valued the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company used different valuation techniques in determining the fair value. Those techniques included comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, a market participant’s weighted average cost of capital, as well as other techniques as circumstances required. For further information on acquired assets and liabilities, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

Vacant Leased Facilities
The Company recorded a gaincharge of $0.2less than $0.1 million in selling, general and administrative expenses in the Condensed Consolidated Statements of Income in the first quartersix months of 2012 due to the early termination of leases of vacant facilities by the lessor. In the first quartersix months of 2011, the Company recorded a charge of $0.1$0.2 million in selling, general and administrative expenses in the Condensed Consolidated Statements of Income related to the exit from leased facilities.

12.           New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance expands required disclosures, including the reasons for and amounts of all transfers in and out of Levels 1 and 2 fair value measurements, and for Level 3 fair value measurements adds (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes used, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and the interrelationships between those inputs. This guidance was effective for interim or annual periods beginning after December 15, 2011. The adoption of thethis guidance had no impact on the Company’s financial statements other than additional disclosures.

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 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of thethis guidance is not expected to have a significant impact on the Company’s financial statements.

 
1819
 

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 products segment (the "RV Segment") and the manufactured housing products segment (the "MH Segment"). Intersegment sales are insignificant.

The Company’s operations are conducted through its wholly-owned operating subsidiaries, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”) and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Each has operations in both the RV and MH Segments. At March 31,June 30, 2012, the Company operated 2931 plants in the United States.

The RV Segment, which accounted for 87 percent of consolidated net sales for the threesix months ended March 31,June 30, 2012 and 84 percent of the annual consolidated net sales for 2011, 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, baggage, patio and ramp doors
●Entry steps●Awnings
●Manual, electric and hydraulic stabilizer and leveling systems●Other accessories

The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo. Nearly 90Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs. Travel trailer and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in 2011.

The MH Segment, which accounted for 13 percent of consolidated net sales for the threesix months ended March 31,June 30, 2012 and 16 percent of the annual consolidated net sales for 2011, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile 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 types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.
19
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Because of fluctuations in RV dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to be different than in prior years.
 
20
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INDUSTRY BACKGROUND

Recreational Vehicle Industry

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

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 119 percent in the first quarterhalf of 2012 to 60,400131,500 units compared to the first quarterhalf of 2011, as a result of:

 ·
An estimated 68 percent increase in retail demand in the first quarterhalf of 2012 to 35,300117,200 units, as compared to the same period of 2011.2011, despite continued concerns about high unemployment and slower economic growth in the U.S.
 ·
RV dealers seasonally increasing inventory levels by an estimated 25,1002,700 more units in the first quarterhalf of 2012 than in the first half of 2011, in anticipation of strong retail demand in the upcoming Spring and Summer selling seasons.season.

In anticipation of continued strong retail demand in the Spring and Summer selling seasons,third quarter of 2012, RV dealers across the U.S. and Canada added an estimated aggregate of 40,80030,000 travel trailer and fifth-wheel RVs to their inventories between October 2011 and Marchin the nine months ended June 2012, more than the 31,50022,400 units added during the same period a year earlier. Although dealer inventories seasonally increased in this six-monthnine-month period more than the seasonal increase in the same six-monthnine-month period a year earlier, most analysts believe dealer inventories are appropriate heading into the 2012 Spring selling season.Summer. Further, RV dealers, although cautious, are generally comfortable with their level of travel trailer and fifth-wheel RV inventory.

While the Company measures its RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. Industry-wide retail sales of travel trailer and fifth-wheel RVs increased by an estimated 6 percent in the first quarter of 2012 despite continued concerns about high unemployment and slower economic growth in the U.S.

A comparison of the number of units and 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, for both the United States and Canada, is as follows:

  Wholesale  Retail  Unit Impact on 
  Units  %  Units  %  Dealer Inventories 
Quarter ended June 30, 2012(1)
  71,100   8%  78,700   5%  (7,600)
Quarter ended March 31, 2012  60,400   11%  38,500   15%  21,900 
Quarter ended December 31, 2011  45,200   16%  29,500   4%  15,700 
                     
Quarter ended June 30, 2011  66,000   6%  75,100   8%  (9,100)
Quarter ended March 31, 2011  54,200   10%  33,500   7%  20,700 
Quarter ended December 31, 2010  39,000   4%  28,300   12%  10,700 
                     
Year ended December 31, 2011  212,900   7%  197,400   6%  15,500 
Year ended December 31, 2010  199,200   44%  186,000   13%  13,200 
  
Wholesale
Change
  
Retail
Change
  Unit Impact on Dealer Inventories 
Quarter ended March 31, 2012  11%    6%(est.)    25,100(est.)  
Quarter ended March 31, 2011  10%    7%   20,700  
Year ended December 31, 2011  7%    6%    15,500  
Year ended December 31, 2010  44%    13%    13,200  
(1)    Retail sales data for June 2012 has not been published yet, therefore retail and dealer inventory data include an estimate for retail units sold.
 
2021
 
 
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OFNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
(Unaudited)
 
In FebruaryMay 2012, the RVIA projected a 6an 8 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2012, to 226,200229,100 units. WhileSince shipments increased 9 percent in the first half of 2012, this implies that industry-wide wholesale shipments in the second half of 2012 would be 5 percent higher than the second half of 2011. Further, while production over the last six months was strong, unless retail demand matches these production levels, dealers could reduce the pace of their orders, and our customers, the original equipment manufacturers (“OEMs”), would need to adjust their production levels in future months. Although future retail demand is still uncertain, reports of increased traffic and sales at consumer RV shows over recent months and steady consumer confidence over the last few months are encouraging signs for the RV industry. The Company is also encouraged that several key customers have expressed their optimism by announcing expansion projects to increase capacity. Retail sales in the traditionally strong Spring selling season will be a key indicator of consumer demand for RVs in 2012.

Ultimately, industry-wide retail sales, and therefore production levels of RVs will depend to a significant extent on the course of the economy. The Company is encouraged that several key customers have expressed their long-term optimism by announcing expansion projects to increase capacity. The Company also remains confident in its ability to exceed industry growth rates, through new products, market share gains, acquisitions and ongoing investments in quality and in customer service.
 
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. In the long-term, the Company expects RV industry sales to be aided by positive demographics, and the continued popularity of the “RV Lifestyle”.

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.

The Institute for Building Technology and Safety (“IBTS”) reported that for the first three monthshalf of 2012, industry-wide wholesale shipments of manufactured homes were 12,80027,700 units, an increase of 3220 percent compared to the first half of 2011. In the second quarter of 2011. The month2012, there were 14,900 industry-wide wholesale shipments of March 2012 wasmanufactured homes, an increase of 11 percent compared to the eighth consecutive monthsame period of increases in industry-wide production. Over this eight month period, excluding an estimated 2,000 homes purchased by FEMA, the increase in industry-wide production has averaged 32 percent.2011.

TheShipments by the manufactured housing industry has been in declinedeclined for over a decade althoughfor a variety of reasons. Recently it appears that the need for affordable housing may be gaining momentum. However, because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, historically low 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 tomay remain low until these conditions improve. In addition, certain provisions of the recently enacted Dodd-Frank Act which regulate financial transactions could make certain types of mortgages historically used to finance the purchase of manufactured homes more difficult to obtain. If this law remains unchanged, industry sales of manufactured homes could decline significantly.significantly, although legislation has been recently introduced to reduce regulatory burdens impeding access to affordable manufactured housing financing.
 
 
2122
 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
(continued)
 
Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. During 2011, multi-section homes were 51 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, respectively. During 2011, industry-wide shipments of single-section homes increased 24 percent, while multi-section homes declined 11 percent, both compared to 2010. This trend towards smaller single-section homes has continued in the first quarterhalf of 2012. 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 multi-section manufactured home as many had done historically.

The Company believes that long-term growth prospects for manufactured housing may be positive because of (i) the quality and affordability of the home, (ii) 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.

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.

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

The Company’s operations are conducted through its wholly-owned operating subsidiaries, Lippert Components, Inc. and operating profit were as followsits subsidiaries (collectively, “Lippert”) and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Each has operations in both the RV and MH Segments. At June 30, 2012, the Company operated 31 plants in the United States.

The RV Segment, which accounted for 87 percent of consolidated net sales for the threesix months ended March 31, (June 30, 2012 and 84 percent of the annual consolidated net sales for 2011, manufactures a variety of products used primarily in thousands)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, baggage, patio and ramp doors
●Entry steps● Awnings
●Manual, electric and hydraulic stabilizer and leveling systems●Other accessories
The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo. Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs. Travel trailer and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in 2011.

The MH Segment, which accounted for 13 percent of consolidated net sales for the six months ended June 30, 2012 and 16 percent of the annual consolidated net sales for 2011, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile office units, including:
 
  2012  2011 
Net sales:      
RV Segment $195,555  $146,229 
MH Segment  27,997   22,604 
Total net sales $223,552  $168,833 
         
Operating profit:        
RV Segment $16,781  $15,301 
MH Segment  3,131   2,224 
Total segment operating profit  19,912   17,525 
Corporate  (2,308)  (2,097)
Accretion related to contingent consideration  (481)  (474)
Other non-segment items  250   589 
Total operating profit $17,373  $15,543 
● 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 types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

Because of fluctuations in dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to be different than in prior years.
20
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INDUSTRY BACKGROUND

Recreational Vehicle Industry

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

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 9 percent in the first half of 2012 to 131,500 units compared to the first half of 2011, as a result of:

·
An estimated 8 percent increase in retail demand in the first half of 2012 to 117,200 units, as compared to the same period of 2011, despite continued concerns about high unemployment and slower economic growth in the U.S.
·
RV dealers seasonally increasing inventory levels by an estimated 2,700 more units in the first half of 2012 than in the first half of 2011, in anticipation of strong retail demand in the upcoming Summer selling season.

In anticipation of continued strong retail demand in the third quarter of 2012, RV dealers across the U.S. and Canada added an estimated aggregate of 30,000 travel trailer and fifth-wheel RVs to their inventories in the nine months ended June 2012, more than the 22,400 units added during the same period a year earlier. Although dealer inventories seasonally increased in this nine-month period more than the seasonal increase in the same nine-month period a year earlier, most analysts believe dealer inventories are appropriate heading into the Summer. Further, RV dealers, although cautious, are generally comfortable with their level of travel trailer and fifth-wheel RV inventory.

While the Company measures its RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and 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, for both the United States and Canada, is as follows:
  Wholesale  Retail  Unit Impact on 
  Units  %  Units  %  Dealer Inventories 
Quarter ended June 30, 2012(1)
  71,100   8%  78,700   5%  (7,600)
Quarter ended March 31, 2012  60,400   11%  38,500   15%  21,900 
Quarter ended December 31, 2011  45,200   16%  29,500   4%  15,700 
                     
Quarter ended June 30, 2011  66,000   6%  75,100   8%  (9,100)
Quarter ended March 31, 2011  54,200   10%  33,500   7%  20,700 
Quarter ended December 31, 2010  39,000   4%  28,300   12%  10,700 
                     
Year ended December 31, 2011  212,900   7%  197,400   6%  15,500 
Year ended December 31, 2010  199,200   44%  186,000   13%  13,200 
(1)    Retail sales data for June 2012 has not been published yet, therefore retail and dealer inventory data include an estimate for retail units sold.
21
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In May 2012, the RVIA projected an 8 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2012, to 229,100 units. Since shipments increased 9 percent in the first half of 2012, this implies that industry-wide wholesale shipments in the second half of 2012 would be 5 percent higher than the second half of 2011. Further, while production over the last six months was strong, unless retail demand matches these production levels, dealers could reduce the pace of their orders, and our customers, the original equipment manufacturers (“OEMs”), would need to adjust their production levels in future months.

Ultimately, industry-wide retail sales, and therefore production levels of RVs will depend to a significant extent on the course of the economy. The Company is encouraged that several key customers have expressed their long-term optimism by announcing expansion projects to increase capacity. The Company also remains confident in its ability to exceed industry growth rates, through new products, market share gains, acquisitions and ongoing investments in quality and in customer service.
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. In the long-term, the Company expects RV industry sales to be aided by positive demographics, and the continued popularity of the “RV Lifestyle”.

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.

The Institute for Building Technology and Safety (“IBTS”) reported that for the first half of 2012, industry-wide wholesale shipments of manufactured homes were 27,700 units, an increase of 20 percent compared to the first half of 2011. In the second quarter of 2012, there were 14,900 industry-wide wholesale shipments of manufactured homes, an increase of 11 percent compared to the same period of 2011.

Shipments by the manufactured housing industry declined for over a decade for a variety of reasons. Recently it appears that the need for affordable housing may be gaining momentum. However, because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, historically low 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, industry-wide wholesale shipments of manufactured homes may remain low until these conditions improve. In addition, certain provisions of the recently enacted Dodd-Frank Act which regulate financial transactions could make certain types of mortgages historically used to finance the purchase of manufactured homes more difficult to obtain. If this law remains unchanged, industry sales of manufactured homes could decline significantly, although legislation has been recently introduced to reduce regulatory burdens impeding access to affordable manufactured housing financing.
 
 
22
 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
(continued)
 
Consolidated HighlightsManufactured homes contain one or more “floors” or sections which can be joined to make larger homes. During 2011, multi-section homes were 51 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, respectively. During 2011, industry-wide shipments of single-section homes increased 24 percent, while multi-section homes declined 11 percent, both compared to 2010. This trend towards smaller single-section homes has continued in the first half of 2012. 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 multi-section manufactured home as many had done historically.

§
Net sales in the 2012 first quarter reached an all-time quarterly record of $224 million, an increase of 32 percent from the $169 million in the first quarter of 2011. Net sales of the Company’s RV Segment in the first quarter of 2012 increased 34 percent compared to an 11 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs. Net sales of the Company’s Manufactured Housing Segment increased 24 percent compared to a 32 percent increase in industry-wide production of manufactured homes.The Company believes that long-term growth prospects for manufactured housing may be positive because of (i) the quality and affordability of the home, (ii) 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.
Because of fluctuations in RV dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to be different than in prior years.
§The Company’s net sales for the month of April 2012 were $80 million, a 34 percent increase from the month of April 2011. Excluding the impact of acquisitions, Drew’s net sales for April 2012 were up approximately 22 percent. Initial sales orders for May have remained strong.

§For the first quarter of 2012, the Company reported net income of $11.1 million, ($0.49 per diluted share), an 18 percent increase over net income of $9.4 million ($0.42 per diluted share) reported in the first quarter of 2011.

·The Company’s operating margin improved in the first quarter of 2012 compared to the fourth quarter of 2011, which was impacted by higher material costs, higher production costs in one product line, and start-up and acquisition-related integration costs, which reduced fourth quarter 2011 net income by $2.7 million, or $0.12 per diluted share. The aggregate impact of these items on net income declined to about $1.2 million, or $0.05 per diluted share, in the first quarter of 2012, and the Company expects continued improvements in the second quarter.

·As a result of the greater than expected increase in demand in the 2012 first quarter, the Company incurred additional labor, overtime, and related costs, which adversely impacted net income by approximately $0.9 million or $0.04 per diluted share. These higher labor, overtime, and related costs are expected to improve during the second quarter of 2012.

§On February 21, 2012, the Company acquired the business and certain assets of the United States RV entry door operation of Euramax International, Inc. The acquired business had annualized sales of approximately $6 million. The purchase price was $1.7 million, of which $1.2 million was paid at closing, with the balance to be paid over the next three years.

§In late 2011, the Company launched an aluminum extrusion operation. Production began in the fourth quarter of 2011 with one extrusion press, and in the first quarter of 2012, the Company began production on its second aluminum extrusion line. The Company expects a third line to be in production before the end of the 2012 second quarter. The Company expects to produce most of its aluminum extrusion needs in-house at a cost savings.

§After investing over $52 million for six acquisitions and $30 million in capital expenditures over the fifteen months ended March 31, 2012, the Company was debt-free and had $4 million in cash, along with significant borrowing capacity. The Company remains well-positioned to continue to take advantage of investment opportunities to further improve our results.
23
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

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 products segment (the "RV Segment") and the manufactured housing products segment (the "MH Segment"). Intersegment sales are insignificant.

The Company’s operations are conducted through its wholly-owned operating subsidiaries, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”) and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Each has operations in both the RV and MH Segments. At June 30, 2012, the Company operated 31 plants in the United States.

The RV Segment, which accounted for 87 percent of consolidated net sales for the six months ended June 30, 2012 and 84 percent of the annual consolidated net sales for 2011, 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, baggage, patio and ramp doors
●Entry steps● Awnings
●Manual, electric and hydraulic stabilizer and leveling systems●Other accessories
The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo. Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs. Travel trailer and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in 2011.

The MH Segment, which accounted for 13 percent of consolidated net sales for the six months ended June 30, 2012 and 16 percent of the annual consolidated net sales for 2011, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile 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 types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

Because of fluctuations in dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to be different than in prior years.
20
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INDUSTRY BACKGROUND

Recreational Vehicle Industry

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

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 9 percent in the first half of 2012 to 131,500 units compared to the first half of 2011, as a result of:

·
An estimated 8 percent increase in retail demand in the first half of 2012 to 117,200 units, as compared to the same period of 2011, despite continued concerns about high unemployment and slower economic growth in the U.S.
·
RV dealers seasonally increasing inventory levels by an estimated 2,700 more units in the first half of 2012 than in the first half of 2011, in anticipation of strong retail demand in the upcoming Summer selling season.

In anticipation of continued strong retail demand in the third quarter of 2012, RV dealers across the U.S. and Canada added an estimated aggregate of 30,000 travel trailer and fifth-wheel RVs to their inventories in the nine months ended June 2012, more than the 22,400 units added during the same period a year earlier. Although dealer inventories seasonally increased in this nine-month period more than the seasonal increase in the same nine-month period a year earlier, most analysts believe dealer inventories are appropriate heading into the Summer. Further, RV dealers, although cautious, are generally comfortable with their level of travel trailer and fifth-wheel RV inventory.

While the Company measures its RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and 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, for both the United States and Canada, is as follows:
  Wholesale  Retail  Unit Impact on 
  Units  %  Units  %  Dealer Inventories 
Quarter ended June 30, 2012(1)
  71,100   8%  78,700   5%  (7,600)
Quarter ended March 31, 2012  60,400   11%  38,500   15%  21,900 
Quarter ended December 31, 2011  45,200   16%  29,500   4%  15,700 
                     
Quarter ended June 30, 2011  66,000   6%  75,100   8%  (9,100)
Quarter ended March 31, 2011  54,200   10%  33,500   7%  20,700 
Quarter ended December 31, 2010  39,000   4%  28,300   12%  10,700 
                     
Year ended December 31, 2011  212,900   7%  197,400   6%  15,500 
Year ended December 31, 2010  199,200   44%  186,000   13%  13,200 
(1)    Retail sales data for June 2012 has not been published yet, therefore retail and dealer inventory data include an estimate for retail units sold.
21
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In May 2012, the RVIA projected an 8 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2012, to 229,100 units. Since shipments increased 9 percent in the first half of 2012, this implies that industry-wide wholesale shipments in the second half of 2012 would be 5 percent higher than the second half of 2011. Further, while production over the last six months was strong, unless retail demand matches these production levels, dealers could reduce the pace of their orders, and our customers, the original equipment manufacturers (“OEMs”), would need to adjust their production levels in future months.

Ultimately, industry-wide retail sales, and therefore production levels of RVs will depend to a significant extent on the course of the economy. The Company is encouraged that several key customers have expressed their long-term optimism by announcing expansion projects to increase capacity. The Company also remains confident in its ability to exceed industry growth rates, through new products, market share gains, acquisitions and ongoing investments in quality and in customer service.
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. In the long-term, the Company expects RV industry sales to be aided by positive demographics, and the continued popularity of the “RV Lifestyle”.

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.

The Institute for Building Technology and Safety (“IBTS”) reported that for the first half of 2012, industry-wide wholesale shipments of manufactured homes were 27,700 units, an increase of 20 percent compared to the first half of 2011. In the second quarter of 2012, there were 14,900 industry-wide wholesale shipments of manufactured homes, an increase of 11 percent compared to the same period of 2011.

Shipments by the manufactured housing industry declined for over a decade for a variety of reasons. Recently it appears that the need for affordable housing may be gaining momentum. However, because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, historically low 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, industry-wide wholesale shipments of manufactured homes may remain low until these conditions improve. In addition, certain provisions of the recently enacted Dodd-Frank Act which regulate financial transactions could make certain types of mortgages historically used to finance the purchase of manufactured homes more difficult to obtain. If this law remains unchanged, industry sales of manufactured homes could decline significantly, although legislation has been recently introduced to reduce regulatory burdens impeding access to affordable manufactured housing financing.
22
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. During 2011, multi-section homes were 51 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, respectively. During 2011, industry-wide shipments of single-section homes increased 24 percent, while multi-section homes declined 11 percent, both compared to 2010. This trend towards smaller single-section homes has continued in the first half of 2012. 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 multi-section manufactured home as many had done historically.

The Company believes that long-term growth prospects for manufactured housing may be positive because of (i) the quality and affordability of the home, (ii) 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.

RESULTS OF OPERATIONS

Net sales and operating profit are as follows (in thousands):
  
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
   2012  2011   2012  2011 
Net sales:              
RV Segment:              
RV OEMs:              
Travel Trailer and Fifth-Wheels $351,934  $269,800  $183,855  $139,148 
Motorhomes  14,192   8,940   8,240   4,316 
RV Aftermarket  9,359   8,061   5,369   4,092 
Adjacent Industries  38,501   16,627   20,967   9,643 
Total RV Segment net sales  413,986   303,428   218,431   157,199 
MH Segment:                
Manufactured Housing OEMs  40,490   34,625   21,778   19,775 
Manufactured Housing Aftermarket  8,740   8,439   4,471   4,449 
Adjacent Industries  11,350   8,389   6,334   4,625 
Total MH Segment net sales  60,580   51,453   32,583   28,849 
Total net sales $474,566  $354,881  $251,014  $186,048 
23
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating profit:            
RV Segment $34,264  $32,625  $17,483  $17,324 
MH Segment  7,161   5,177   4,030   2,953 
Total segment operating profit  41,425   37,802   21,513   20,277 
Corporate  (4,524)  (4,043)  (2,216)  (1,946)
Accretion related to contingent consideration  (920)  (949)  (432)  (474)
Other non-segment items  360   643   103   53 
Total operating profit $36,341  $33,453  $18,968  $17,910 

Consolidated Highlights

§Net sales in the 2012 second quarter increased to $251 million, a Company record for any quarter, and 35 percent higher than in the 2011 second quarter. This sales growth was primarily the result of a 39 percent sales increase by Drew’s RV Segment, which accounted for 87 percent of Drew’s consolidated net sales. RV Segment sales growth was largely due to acquisitions, market share gains, and an 8 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, Drew’s primary RV market. In addition, sales to adjacent markets more than doubled to $27 million this quarter, largely as a result of acquisitions and an increase in sales of axles to non-RV markets. Drew’s MH Segment also reported strong sales growth in the second quarter of 2012, due to an 11 percent increase in industry-wide production of manufactured homes. Excluding the impact of acquisitions, consolidated sales were up 23 percent.

Sales for the twelve months ended June 2012 exceeded $800 million, also a Company record for any twelve month period.

Because of fluctuations in dealer inventories, and volatile economic conditions, current and future seasonal industry trends are likely to be different than in prior years.

§The Company’s net sales for the month of July 2012 were $73 million, a 49 percent increase from the month of July 2011. Excluding the impact of acquisitions, the Company’s net sales for July 2012 were up approximately 35 percent. It is estimated that industry-wide shipments of travel trailer and fifth-wheel RVs increased 20 to 25 percent in July 2012.

§For the second quarter of 2012, the Company reported net income of $11.7 million, ($0.52 per diluted share), a 7 percent increase over net income of $11.0 million ($0.49 per diluted share) in the second quarter of 2011.

The Company’s operating profit margin was 7.6 percent in the second quarter of 2012 compared to 7.8 percent in the 2012 first quarter. Profit margins continue to be impacted by excess labor, overtime, and related costs, as well as start-up costs associated with the new aluminum extrusion operation and the new RV awning product line, all of which reduced net income by approximately $3.0 million or $0.13 per diluted share compared to expectations. These higher costs were the result of lower operating efficiencies primarily due to greater than expected demand which caused the Company to hire, train and support 1,100 more employees since the second quarter of 2011.
24
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Material cost as a percent of sales was also higher than in the first quarter, partly due to increased outsourcing costs due to capacity limitations, as well as higher scrap costs. The higher material cost reduced net income by $1.5 million, or $0.06 per diluted share compared to expectations.

These costs are expected to improve as sales slow seasonally over the balance of 2012 and recently hired employees become better trained and more efficient. Further, the Company is expanding capacity, developing leaner manufacturing strategies, and exploring technology to improve production capabilities. The full impact of these investments takes time to realize, but the Company expects production efficiencies to improve.

§In late 2011, the Company launched an aluminum extrusion operation. The third press began production during the second quarter of 2012. Once all three presses are producing at or near capacity, the Company expects to supply most of its aluminum extrusion needs in-house at a cost savings and then begin to sell extrusion to outside customers as well.

§After investing $53 million for seven acquisitions and $37 million in capital expenditures over the last eighteen months, at June 30, 2012 the Company was debt-free and had $43 million in cash, along with significant borrowing capacity. The Company remains well-positioned to continue to take advantage of investment opportunities to further improve results.

RV Segment – FirstSecond Quarter

Net sales of the RV Segment in the firstsecond quarter of 2012 increased 3439 percent compared to the firstsecond quarter of 2011. Net sales of components were to the following markets (in thousands):

 2012  2011  Change 
 2012  2011  Change          
RV OEMs:                  
Travel Trailers and Fifth-Wheels $170,924  $132,223   29% $183,855  $139,148   32%
Motorhomes  5,952   4,624   29%  8,240   4,316   91%
RV Aftermarket  3,990   3,969   1%  5,369   4,092   31%
Adjacent Industries  14,689   5,413   171%  20,967   9,643   117%
Total RV Segment net sales $195,555  $146,229   34% $218,431  $157,199   39%

According to the RVIA, industry-wide wholesale shipments for the three months ended March 31,June 30, were:

  2012  2011  Change 
Travel Trailer and Fifth-Wheel RVs  71,100   66,000   8%
Motorhomes  7,600   7,800   (3)%
  
2012
  2011  Change 
Travel Trailer and Fifth-Wheel RVs  60,400   54,200   11%
Motorhomes  6,900   6,900   0%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs outperformedduring the second quarter of 2012 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to themarket share gains of $16 million, net sales from acquisitions completed during the last twelve months ended March 31, 2012, which addedof $15 million, in net sales, as well as sales price increases of $5 million and market share gains of $3 million.

The Company’s net sales growth in components for motorhomes exceeded the increasechange in industry-wide wholesale shipments of motorhomes primarily due to acquisitions. Excluding the impactmarket share gains of $3 million, and acquisitions which added $2$1 million in net sales during the firstsecond quarter of 2012, the Company’s net sales of components for motorhomes declined 12 percent, primarily because of the loss of market share by certain of the Company’s motorhome customers. However, in2012. 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.

25
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Net sales to adjacent industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains of $4$6 million and acquisitions which added $5 million in net sales during the firstsecond quarter of 2012. The Company believes there are significant opportunities in these adjacent industries. One ofCustomer relationships gained through an acquisition completed by the acquisitions completedCompany during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team which was added earlier in 2011, are expected to continue to accelerate the Company’s growth in these adjacent industries.
24
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 to RV OEMs for the different types of RVs produced for the twelve months ended March 31,June 30, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
 
Content per:
 2012   2011  Change 
Travel Trailer and Fifth-Wheel RV $2,596  $2,188   19%
Motorhome $857  $612   40%
Content per: 2012  2011  Change 
Travel Trailer and Fifth-Wheel RVs $2,489  $2,196   13%
Motorhomes $692  $647   7%
On a proforma basis, including the impact of acquisitions as if they had been completed at the beginning of the twelve month period ended June 30, 2012, content per travel trailer and fifth-wheel RV was $2,650.

The Company’s average product content per type of RV excludes sales of replacement parts to the aftermarket, and sales to adjacent 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. In the first quarter of 2012, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to adjacent industries. There was no change in total reported net sales for the RV Segment, and all prior periods have also been refined for consistency.

Operating profit of the RV Segment was $16.8$17.5 million in the firstsecond quarter of 2012, an increase of $1.5$0.2 million compared to the firstsecond quarter of 2011. This increase in RV Segment operating profit was less than the Company’s expected 15 - 20 percent incremental margin.

The operating margin of the RV Segment in the firstsecond quarter of 2012 was negatively impacted by:
 
 ·Start-upExcess labor, overtime and integrationrelated costs due to greater than expected demand, as well as start-up costs associated with the acquisitions completed in 2011, as well as the new aluminum extrusion operation and the new RV awning product line.
Higher material costs largely due to increased outsourcing related to capacity limitations, as well as higher scrap costs.

These costs are expected to improve as sales slow seasonally over the balance of 2012 and recently hired employees become better trained and more efficient. Further, the Company is expanding capacity, developing leaner manufacturing strategies, and exploring technology to improve production capabilities. The full impact of these investments takes time to realize, but the Company expects production efficiencies to improve.
26
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
·Fixed costs improvedwere approximately $2 million higher than in the first quarter of 2012, as compared to the fourthsecond quarter of 2011, primarily due to additional staff and are expected to continue to improve.facilities, as well as higher amortization, largely from acquisitions and other investments.

 ·Higher than usual productionwarranty and health insurance costs, in one product line, although such costs were less than was incurred in the fourth quarter of 2011. Continued improvement is expected.
·Additional labor, overtime and related costsprimarily due to the higher than expected surge in sales. These costs are expected to improve in the second quarter of 2012claims experience, as many recently hired employees become fully trained and more efficient.
·Higher fixed selling, general & administrative costs, including amortization, largely related to the acquisitions completed in 2011, the investment in sales teams for the aftermarket and adjacent industries, and to meet the increased sales demand. The Company expects continued increases on the returns on these investments.
·Higher workers compensation insurance, repairs andwell as higher supplies expenses.expense.
 
Partially offset by:
·Improved raw material costs.  Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011. In response, the Company implemented sales price increases, although such sales price increases did not fully offset the impact of the raw material cost increases. In the second half of 2011, raw material costs declined somewhat, however not to the levels at the end of 2010. In 2012, raw material costs have continued to fluctuate, but not to the extent of volatility experienced throughout 2011.
 
 ·The spreading of fixed manufacturing and selling, general and administrative costs over a $49$61 million larger sales base.  In addition, incentive compensation, which is based on profits, did not change proportionately with net sales.

RV Segment – Year to Date

Net sales of the RV Segment in the first six months of 2012 increased 36 percent compared to the first six months of 2011. Net sales of components were to the following markets (in thousands):

  2012  2011  Change 
RV OEMs:         
Travel Trailers and Fifth-Wheels $ 351,934 $351,934  $269,800   30%
Motorhomes  14,192   8,940   59%
RV Aftermarket  9,359   8,061   16%
Adjacent Industries  38,501   16,627   132%
Total RV Segment net sales $413,986  $303,428   36%

According to the RVIA, industry-wide wholesale shipments for the six months ended June 30, were:

  2012  2011  Change 
Travel Trailer and Fifth-Wheel RVs  131,500   120,200   9%
Motorhomes  14,500   14,700   (1%)

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first six months of 2012 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to the acquisitions completed during the twelve months ended June 30, 2012, which added $29 million in net sales, market share gains of $19 million, as well as sales price increases of $8 million.

The Company’s net sales growth in components for motorhomes exceeded the change in industry-wide wholesale shipments of motorhomes primarily due to acquisitions which added $3 million in net sales during the first six months of 2012, as well as market share gains of $2 million. 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.
 
2527
 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
(Continued)Net sales to adjacent industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains of $12 million and acquisitions which added $10 million in net sales during the first six months of 2012. The Company believes there are significant opportunities in these adjacent industries. Customer relationships gained through an acquisition completed by the Company during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team which was added earlier in 2011, are expected to accelerate the Company’s growth in these adjacent industries.

Operating profit of the RV Segment was $34.3 million in the first six months of 2012, an increase of $1.6 million compared to the first six months of 2011. This increase in RV Segment operating profit was less than the Company’s expected 15 - 20 percent incremental margin.

The operating margin of the RV Segment in the first six months of 2012 was negatively impacted by:
·Excess labor, overtime and related costs due to greater than expected demand, as well as start-up and integration costs associated with the acquisitions completed in 2011 and the new aluminum extrusion operation and the new RV awning product line.
Higher material costs largely due to increased outsourcing costs due to capacity limitations, as well as higher scrap costs.

These costs are expected to improve as sales slow seasonally over the balance of 2012 and recently hired employees become better trained and more efficient. Further, the Company is developing leaner manufacturing strategies, capacity and exploring technology to improve production capabilities. The full impact of these investments takes time to realize, but the Company expects production efficiencies to improve.

·Fixed costs were approximately $4 million higher than in the first half of 2011, primarily due to additional staff and facilities, as well as higher amortization, largely from acquisitions and other investments.

·Higher warranty and health insurance costs, primarily due to higher claims experience, as well as higher supplies expense.
Partially offset by:
·The spreading of fixed manufacturing and selling, general and administrative costs over a $111 million larger sales base.  In addition, incentive compensation, which is based on profits, did not change proportionately with net sales.
28
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
MH Segment – FirstSecond Quarter

Net sales of the MH Segment in the firstsecond quarter of 2012 increased 2413 percent compared to the same period of 2011. Net sales of components were to the following markets (in thousands):

 2012  2011  Change  2012  2011  Change 
Manufactured Housing OEMs $18,712  $14,850   26% $21,778  $19,775   10%
Manufactured Housing Aftermarket  4,269   3,990   7%  4,471   4,449   -%
Adjacent Industries  5,016   3,764   33%  6,334   4,625   37%
Total MH Segment net sales $27,997  $22,604   24% $32,583  $28,849   13%

According to the IBTS, industry-wide wholesale shipments for the three months ended March 31,June 30, were:

  2012  2011  Change 
Total Homes Produced  14,900   13,400   11%
Total Floors Produced  23,100   20,800   11%
  2012  2011  
Change
 
Total Homes Produced  12,800   9,700   32%
Total Floors Produced  19,400   15,100   28%

The Company’s net sales growth in components for new manufactured homes was less than the increase in industry-wide wholesale shipments of manufactured homes, primarily because of a reduction in the average size of the home produced. The Company has less content in smaller homes. Net sales to manufactured housing OEMs in the firstsecond quarter of 2012 included $1 million from acquisitions.

Net sales to adjacent industries increased due to acquisitions and market share gains. The Company believes there are opportunities in these adjacent industries, as well as in the manufactured housing aftermarket, and expects growth to accelerate due to the increased focus provided by the Company’s new sales teams added in 2011.

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 to manufactured housing OEMs for newly produced manufactured homes for the twelve months ended March 31,June 30, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:
 
  2012  2011  Change 
Content per Home Produced $1,476  $1,414   4%
Content per Floor Produced $976  $898   9%
  2012  2011  Change 
Content per Home Produced $1,480  $1,388   7%
Content per Floor Produced $978  $869   13%

The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket, and sales to adjacent 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. In the first quarter of 2012, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to adjacent industries. There was no change in total reported net sales for the MH Segment, and all prior periods have also been refined for consistency.
 
 
2629
 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
(Continued)
Operating profit of the MH Segment was $3.1$4.0 million in the firstsecond quarter of 2012, an increase of $0.9$1.1 million compared to the firstsecond quarter of 2011, primarily due to the $5$4 million increase in net sales. This increase in MH Segment operating profit was 17higher than the Company’s target 20 percent incremental margin for its established products, primarily due to improved production efficiencies. Further, the Company has available capacity to increase production in its MH Segment without requiring extensive capital expenditures.

MH Segment – Year to Date

Net sales of the MH Segment in the first six months of 2012 increased 18 percent compared to the same period of 2011. Net sales of components were to the following markets (in thousands):

  2012  2011  Change 
Manufactured Housing OEMs $40,490  $34,625   17%
Manufactured Housing Aftermarket  8,740   8,439   4%
Adjacent Industries  11,350   8,389   35%
Total MH Segment net sales $60,580  $51,453   18%

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

  2012  2011  Change 
Total Homes Produced  27,700   23,200   20%
Total Floors Produced  42,400   36,000   18%

The Company’s net sales growth in components for new manufactured homes was less than the increase in industry-wide wholesale shipments of manufactured homes, primarily because of a reduction in the average size of the home produced.  The Company has less content in smaller homes. Net sales to manufactured housing OEMs in the first six months of 2012 included $2 million from acquisitions.

Net sales to adjacent industries increased due to acquisitions and market share gains. The Company believes there are opportunities in these adjacent industries, as well as in the manufactured housing aftermarket, and expects growth to accelerate due to the increased focus provided by the Company’s new sales teams added in 2011.
Operating profit of the MH Segment was $7.2 million in the first six months of 2012, an increase of $2.0 million compared to the first six months of 2011, primarily due to the $9 million increase in net sales,sales. This increase in MH Segment operating profit was consistent with the Company’s target 20 percent incremental margin for its established products.

Corporate

Corporate expenses for the first quartersix months of 2012 increased $0.2$0.5 million compared to the first quartersix months of 2011, primarilylargely due to higher professional fees.

30
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other Non-Segment Items

Selling, general and administrative expenses include the following other non-segment items for the three months ended March 31, (in thousands):

  2012  2011 
Contingent consideration fair value adjustments(1)
 $266  $581 
Other expense, net  (16)  8 
Total other non-segment items – income (expense) $250  $589 
  
 Six Months Ended
June 30,
  
Three Months Ended
June 30, 
 
  2012  2011  2012  2011 
             
Contingent consideration fair value adjustments(1)
 $109  $656  $(157) $75 
Other income (expense), net  251   (13)  260   (22)
Total other non-segment items $360  $643  $103  $53 

 (1)InThe Company is required to measure on a quarterly basis the fair value of the liability for estimated contingent consideration payments in connection with certain of the acquisitions completed over the last few years, on a quarterly basis the Company is required to measure the fair value of the liability for estimated contingent consideration payments based upon the projected timing and extent of future sales, as well as the weighted average cost of capital. Depending upon the weighted average cost of capital and future sales of the products which are subject to contingent consideration, the Company could record adjustments in future periods.

Income Taxes

The income tax rate for the first six months of 2012 first quarter of 35.737.0 percent was lower than the 201138.9 percent income tax rate for the first quarter ratesix months of 39.4 percent2011 due primarily to the expiration of certain federal and state tax statute of limitations. The income tax rate for the second quarter of 2012 of 38.1 percent was lower than the 38.6 percent income tax rate for the second quarter of 2011 due primarily to the expiration of certain state tax statute of limitations. The Company expects the effective income tax rate for the full year 2012 to be approximately 38 percent.

LIQUIDITY AND CAPITAL RESOURCES

The Statements of Cash Flows reflect the following for the threesix months ended March 31,June 30, (in thousands):
 
  2012  2011 
Net cash flows provided by operating activities $3,160  $3,083 
Net cash flows used for investing activities  (6,823)  (5,434)
Net cash flows provided by financing activities  620   199 
Net decrease in cash $(3,043) $(2,152)
27
DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  2012  2011 
Net cash flows provided by operating activities $48,561  $10,406 
Net cash flows used for investing activities  (12,552)  (12,651)
Net cash flows (used for) provided by financing activities  (79)  139 
Net increase (decrease) in cash $35,930  $(2,106)
 
Cash Flows from Operations

Net cash flows from operating activities in the first threesix months of 2012 were consistent with$38.2 million higher than the first threesix months of 2011. Significant changes in the components of cash flows from operations were a result of:2011 primarily due to:

 ·A $10.6$17.9 million larger increase in accounts payable and accrued expenses and other liabilities in the first six months of 2012 compared to the first six months of 2011, primarily due to the timing of payments for inventory. In addition, accrued expenses and other liabilities increased in the first six months of 2012 due to the increase in sales, production and earnings.
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DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
·A $13.9 million improvement in inventories due to a decrease in inventories of $3.9$1.2 million in the first threesix months of 2012 compared to a $6.7$12.6 million increase in inventories in the first threesix months of 2011. The reduction in the first threesix months of 2012 was primarily due to the higher than expected surge in sales in the first threesix months of 2012, while the first threesix months of 2011 saw a more typical seasonal increase in inventory, as well as an increase in raw material costs. The inventory reduction in the first quartersix months of 2012 of $3.9$1.2 million follows a reduction of $5.7 million in the fourth quarter of 2011. Inventory turnover for the twelve months ended March 31,June 30, 2012 improved to 6.57.1 turns from 6.26.3 turns for the full year 2011, and 6.46.2 turns for the twelve months ended March 31,June 30, 2011. Based on current RV and manufactured housing industry demand, the Company believes the present inventory levels can be reduced relative to sales, and theThe Company is working to improve inventory turns on a sustainable basis.
·A $2.9 million lower seasonal increase in accounts receivable in the first six months of 2012 compared to the first six months of 2011 due to the timing of collections. Accounts receivable balances remain current, with only 19 days sales outstanding at June 30, 2012.
 ·A $1.7$2.5 million increase in net income in the first threesix months of 2012 compared to the first threesix months of 2011.
 
Partially offset by:
·An increase in accounts payable and accrued expenses and other liabilities in the first three months ofAt June 30, 2012, which was $9.7 million less than the increase in the first three months of 2011, primarily due to the timing of payments for inventory. In addition, accrued expenses and other liabilities increased in the first quarter of 2012 due to the increase in sales, production and earnings.
·A seasonal increase in accounts receivable in the first three months of 2012, which was $4.6 million more than the seasonable increase in the first three months of 2011, due to higher sales in the month of March 2012 as compared to March 2011. Accounts receivable balances remain current, with only 21 days sales outstanding at March 31, 2012.

In September 2011, the Company entered intohad derivative instruments for 38.1 million pounds of aluminum, approximately 1025 percent of the Company’s anticipated annual aluminum purchases, in 2012, in order to manage a portion of the exposure to movements associated with aluminum costs. During the first quarterThese derivative instruments expire between July 2012 and September 2013, at an average mid-west aluminum price of $1.03 per pound. At June 30, 2012, the first three of such derivative instruments, or 750,000 pounds, were settled at a loss of $0.1 million.mid-west aluminum price was $0.96 per pound. While the remainingthese derivative instruments are considered to be economic hedges of the underlying movement in the price of aluminum, they are not designated or accounted for as a hedge. The remainingThese derivative instruments will bewere valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net loss was recorded in cost of sales in the Condensed Consolidated Statements of Income, with the corresponding liability recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet. During the first six months of 2012, derivative instruments for 1.5 million pounds were settled onat a monthly basis throughout 2012.loss of $0.2 million.

Depreciation and amortization was $6.4$12.4 million in the first threesix months of 2012, and is expected to aggregate $23$24 million to $25 million for the full year 2012. Non-cash stock-based compensation was $1.5$3.2 million in the first threesix months of 2012, including $0.2 million for 2011 incentive compensation in lieu of cash, and is expected to be $6 million to $7 million for the full year 2012.

Cash Flows from Investing Activities

Cash flows used for investing activities for the first threesix months of 2012 included capital expenditures of $5.7$13.2 million. Over the past year,eighteen months, in order to better serve its customers, the Company has invested heavily in both capacity expansion and cost reduction opportunities, adding nearly 600,000more than 700,000 square feet of production space. Estimates for the full year 2012 are that capital expenditures will be $18$23 million to $20$25 million, including $5 million forthe addition of a second glass tempering operation, expansion of one of its RV chassis facilities, the purchase of a larger facility to consolidate all of its furniture operations, and the completion of the aluminum extrusion operation, started in the fourth quarter of 2011, of which $2.6 million was incurred in the first quarter of 2012.addition to routine maintenance capital expenditures. The 2012 capital expenditures are expected to be funded by cash flows from operations. Additional capital expenditures may be required in 2012 depending on the extent of sales growth and other initiatives by the Company.
 
 
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DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
(Continued)
On February 21, 2012, the Company acquired the business and certain assets of the United States RV entry door operation of Euramax International, Inc. The acquired business had annualized sales of approximately $6 million. The purchase price was $1.7 million, of which $1.2 million was paid at closing, with the balance to be paid over the next three years.

Cash flows used for investing activities of $5.4$12.7 million in the first threesix months of 2011 included the acquisition of Home-Style for $7.3 million and capital expenditures of $3.1$10.5 million, partially offset by $5.0 million received from the maturity of U.S. Treasury Bills classified as short-term investments.

Cash Flows from Financing Activities

There were no significant cash flows from financing activities for the threesix months ended March 31,June 30, 2012 and 2011. At March 31,June 30, 2012 the Company had no outstanding debt and $3.5$42.5 million of cash. However, due to the seasonal increase in working capital, the Company had to borrow from time to time under its line of credit, with such borrowings reaching a high of $16.2 million during the first three months of 2012. Due to the seasonal nature of the business, the Company may need to borrow from time to time during the balancequarter of 2012.

In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay contingent consideration to the sellers.additional cash consideration. The Company has recorded a $14.4$13.9 million liability for the aggregate fair value of these expected contingent consideration liabilities at March 31,June 30, 2012. During the first quartersix months of 2012, the Company paid $0.4$1.6 million related to these contingent consideration liabilities.liabilities, and expects to pay $5.0 million over the next twelve months. For further information see Note 10 of the Notes to Condensed Consolidated Financial Statements.

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”). The maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the 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 March 31,June 30, 2012 and 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at March 31,June 30, 2012 and 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At March 31,June 30, 2012, the Company had $3.3$3.0 million in outstanding letters of credit under the line of credit. Availability under the Company’s line of credit was $46.7$47.0 million at March 31,June 30, 2012.

Simultaneously, the Company entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”). The 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 March 31,June 30, 2012 there were no Senior Promissory Notes outstanding. This facility expires on February 24, 2014.
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DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

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,This limitation did not impact the Company’s borrowing availability at June 30, 2012. The remaining availability under these facilities was $193.5$197.0 million at March 31,June 30, 2012. The Company believes this availability, together with the $3.5$42.5 million in cash at March 31,June 30, 2012, is more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements for 2012.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)
Pursuant to the Credit Agreement and “shelf-loan” facility, at March 31,June 30, 2012 the Company was required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At March 31,June 30, 2012, the Company was in compliance with all such requirements, and expects to remain in compliance duringfor the next twelve months.

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

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, 535,135 shares were repurchased prior to 2012 at an average price of $18.64 per share, or $10.0 million. No shares have been purchased in 2012. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price and other factors.

CORPORATE GOVERNANCE

The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. The Company’s governance documents and committee charters and key practices have been posted to the Company’s website (www.drewindustries.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company has also established a toll-free hotline (877-373-9123) to report complaints about the Company’s accounting, internal controls, auditing matters or other concerns.

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 and aluminum, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. The Company did not experience any significant increase in its labor costs in the first threesix months of 2012 related to inflation.
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DREW INDUSTRIES INCORPORATED
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance expands required disclosures, including the reasons for and amounts of all transfers in and out of Levels 1 and 2 fair value measurements, and for Level 3 fair value measurements adds (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes used, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and the interrelationships between those inputs. This guidance was effective for interim or annual periods beginning after December 15, 2011. The adoption of thethis guidance had no impact on the Company’s financial statements other than additional disclosures.

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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 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of thethis 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, contingent consideration, 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.

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”).
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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, 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 (“SEC”).

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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, steel-based components and aluminum) and other components, availability of credit for financing the retail and wholesale purchase of products for which we sell our components, 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 industries to which we sell our products, the financial condition of our customers, the financial condition of retail dealers of products for which we sell our components, 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 products for which we sell our components.
 
 
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DREW INDUSTRIES INCORPORATED

ItemITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has historically been exposed to changes in interest rates primarily as a result of its financing activities. At March 31,June 30, 2012, the Company had no outstanding borrowings.

The Company is also exposed to changes in the prices of raw materials, specifically steel and aluminum. In the third quarter of 2011, theThe Company has entered into derivative instruments for the purpose of managing a portion of the exposures associated with fluctuations in aluminum costs. While these derivative instruments are 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 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.

ItemITEM 4 – CONTROLS AND PROCEDURES

a)   Evaluation of Disclosure 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
b)Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31,June 30, 2012 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.  However, overOver the nextlast few quarters, the Company plans to converthas converted the systems used by recently acquired businesses to its existing ERP software and business processes.processes, except one which is planned to be converted in early 2013. Further, the Company has selected a new ERP system, and is in preliminary stages of designing and implementing that system. The full implementation is expected to take several years. No significant changes to internal controls are expected during 2012.
 
 
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DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

ItemITEM 1 – LEGAL PROCEEDINGS

See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2011. There were no material developments during2011 for discussion of a case pending against Kinro, Inc. On June 7, 2012, the first three monthsUnited States Court of 2012 in connection withAppeals for the identified legal proceeding pending at December 31, 2011.Ninth Circuit unanimously affirmed the decision of the United States District Court, Central District of California, which had granted Kinro’s motion for summary judgment dismissing all claims against Kinro asserted by Plaintiffs.  Consequently, the litigation is terminated.

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 March 31,June 30, 2012, would not be material to the Company’s financial position or annual results of operations.

ItemITEM 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 14, 2012, except as noted below.

The loss of any of our key operating management could reduce our ability to execute our business strategy and could have a material adverse effect on our business and results of operations.
 
We are dependent to a significant extent upon the efforts of our key operating management. The loss of the services of one or more of our key operating management could impair our ability to execute our business strategy, which would have a material adverse effect on our business, financial condition and results of operations. In February and April 2012, we entered into employment and compensation agreements with four key executives for 2012 - 2014, which replaced recently expired arrangements.

ItemWe were involved in certain litigation, which, if decided against us, could have had a material effect on our financial condition.

At December 31, 2011 a case was pending against Kinro, purporting to be a class action, in which it was alleged that certain bathtubs manufactured by Kinro for use in manufactured homes failed to comply with certain safety standards relating to flame spread. Kinro denied the allegations, vigorously defended against the claims and, based on extensive investigation, believes that the bathtubs were in compliance with applicable regulations. The named plaintiffs asserted seven claims against Kinro, all of which were dismissed by the United States District Court, Central District of California during the course of the proceedings. The named plaintiffs appealed to the Ninth Circuit Court of Appeals. On June 7, 2012, Court of Appeals unanimously affirmed the decision of the District Court dismissing all claims against Kinro.  Consequently, the litigation is terminated.
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DREW INDUSTRIES INCORPORATED
PART II – OTHER INFORMATION (Continued)

ITEM 6 – EXHIBITS

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

 5)101.INS XBRL Instance Document
 
 6)101.SCH XBRL Taxonomy Extension Schema Document
 
 7)101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
 8)101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 
 9)101. LAB XBRL Taxonomy Extension Label Linkbase Document

 10)101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 
 
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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 
 RegistrantRegistrant 
   
    
 ByBy: /s//s/ Joseph S. Giordano III 
 Joseph S. Giordano III 
 Chief Financial Officer and Treasurer 
 May 9,August 8, 2012 

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