LCI Industries (LCII) 10-Q 2007 Q1 Quarterly report

(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 Number)

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

(914) 428-9098

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer o Accelerated Filer x Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 21,759,360 shares of common stock as of April 30, 2007.

DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS FILED WITH

QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2007

(UNAUDITED)

	Page
PART I - FINANCIAL INFORMATION

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		7-15

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16-27

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28

Item 4 - CONTROLS AND PROCEDURES		29

PART II - OTHER INFORMATION

Item 1 - LEGAL PROCEEDINGS		30-31

Item 1A - RISK FACTORS		31

Item 6 - EXHIBITS		31

SIGNATURES		32

EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION		33

EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION		34

EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION		35

EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION		36

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended March 31,
	2007		2006
(In thousands, except per share amounts)
Net sales	$	172,944	$	208,461
Cost of sales		133,772		164,760
Gross profit		39,172		43,701
Selling, general and administrative expenses		23,274		26,573
Other income		656		574
Operating profit		16,554		17,702
Interest expense, net		912		1,119
Income before income taxes		15,642		16,583
Provision for income taxes		6,053		6,378
Net income	$	9,589	$	10,205

Net income per common share:
Basic	$	.44	$	.47
Diluted	$	.44	$	.47

Weighted average common shares outstanding:
Basic		21,781		21,567
Diluted		21,958		21,898

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	March 31,						December 31,
	2007			2006			2006
(In thousands, except shares and per share amount)

ASSETS
Current assets
Cash and cash equivalents	$	12,024		$	9,174		$	6,785
Accounts receivable, trade, less allowances		40,331			46,406			17,828
Inventories		83,882			102,245			83,076
Prepaid expenses and other current assets		9,688			9,977			13,351

Total current assets		145,925			167,802			121,040

Fixed assets, net		121,211			123,465			124,558
Goodwill		36,250			24,713			34,344
Other intangible assets		26,977			10,769			24,801
Other assets		6,573			6,724			6,533
Total assets	$	336,936		$	333,473		$	311,276

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable, including current maturities of
long-term indebtedness	$	9,971		$	10,948		$	9,714
Accounts payable, trade		25,236			31,999			12,027
Accrued expenses and other current liabilities		39,520			38,683			37,320

Total current liabilities		74,727			81,630			59,061

Long-term indebtedness		42,510			69,750			45,966
Other long-term liabilities		3,654			2,444			1,361

Total liabilities		120,891			153,824			106,388

Stockholders’ equity
Common stock, par value $.01 per share: authorized
30,000,000 shares; issued 23,900,885 shares at March 2007;
23,675,761 shares at March 2006 and 23,833,045 at
December 2006		239			237			238
Paid-in capital		55,604			49,349			53,973
Retained earnings		179,627			149,220			170,038
Accumulated other comprehensive income		42			310			106
		235,512			199,116			224,355
Treasury stock, at cost - 2,149,325 shares		(19,467	)		(19,467	)		(19,467	)
Total stockholders’ equity		216,045			179,649			204,888

Total liabilities and stockholders’ equity	$	336,936		$	333,473		$	311,276

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

	Three Months Ended March 31,
	2007			2006
(In thousands)

Cash flows from operating activities:
Net income	$	9,589		$	10,205
Adjustments to reconcile net income to cash flows provided by
operating activities:
Depreciation and amortization		4,465			3,531
Deferred taxes		(262	)		1,050
Loss on disposal of fixed assets		684			246
Stock-based compensation expense		625			656
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable, net		(22,195	)		(12,386	)
Inventories		(200	)		(988	)
Prepaid expenses and other assets		901			1,182
Accounts payable, accrued expenses and other liabilities		17,926			6,023
Net cash flows provided by operating activities		11,533			9,519

Cash flows from investing activities:
Capital expenditures		(2,555	)		(9,674	)
Acquisition of businesses		(3,472	)		(4,264	)
Proceeds from sales of fixed assets		1,936			14
Other investments		(11	)		-
Net cash flows used for investing activities		(4,102	)		(13,924	)

Cash flows from financing activities:
Proceeds from line of credit and other borrowings		22,613			61,425
Repayments under line of credit and other borrowings		(25,812	)		(53,960	)
Exercise of stock options		1,007			1,039
Other		-			(10	)
Net cash flows (used for) provided by financing activities		(2,192	)		8,494

Net increase in cash		5,239			4,089

Cash and cash equivalents at beginning of period		6,785			5,085
Cash and cash equivalents at end of period	$	12,024		$	9,174

Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt	$	870		$	1,010
Income taxes, net of refunds	$	282		$	126

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

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

										Accumulated
										Other			Total
	Common		Paid-in		Retained		Comprehensive			Treasury			Stockholders’
	Stock		Capital		Earnings		Income			Stock			Equity
(In thousands, except shares)

Balance - December 31, 2006	$	238	$	53,973	$	170,038	$	106		$	(19,467	)	$	204,888
Net income for the three months
ended March 31, 2007						9,589								9,589
Unrealized loss on interest rate
swap, net of taxes								(64	)					(64	)
Comprehensive income														9,525
Issuance of 67,840 shares of
common stock pursuant to stock
options exercised		1		477										478
Income tax benefit relating to
issuance of common stock
pursuant to stock options exercised				529										529
Stock-based compensation expense				625										625

Balance - March 31, 2007	$	239	$	55,604	$	179,627	$	42		$	(19,467	)	$	216,045

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Condensed Consolidated Financial Statements include the accounts of Drew Industries Incorporated and its subsidiaries (“Drew” or the “Company”). Drew has no unconsolidated subsidiaries. Drew’s wholly-owned active subsidiaries are Kinro, Inc. and its subsidiaries (collectively “Kinro”), and Lippert Components, Inc. and its subsidiaries (collectively “Lippert”). Drew, through its wholly-owned subsidiaries, manufactures a broad array of components for recreational vehicles (“RVs”) and manufactured homes, and to a lesser extent manufactures specialty trailers and related axles. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.

1. Basis of Presentation

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2006 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report.

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 three month periods ended March 31, 2007 and 2006. 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 and notes necessary to conform with annual reporting requirements.

2. Segment Reporting

The Company has two reportable operating segments, the recreational vehicle products segment (the "RV Segment") and the manufactured housing products segment (the "MH Segment"). The RV Segment, which accounted for 75 percent and 72 percent of consolidated net sales for the three month periods ended March 31, 2007 and 2006, respectively, manufactures a variety of products used in the production of RVs, including windows, doors, chassis, chassis parts, slide-out mechanisms and related power units and electric stabilizer jacks. During the last few years, the Company has also introduced leveling devices, axles, steps, bedlifts, suspension systems, and thermoformed bath and kitchen products for RVs. Approximately 90 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth wheel RVs. The balance represents sales of components for motorhomes, as well as specialty trailers for hauling equipment, boats, personal watercraft and snowmobiles, and axles for specialty trailers.

The MH Segment, which accounted for 25 percent and 28 percent of consolidated net sales for the three month periods ended March 31, 2007 and 2006, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including vinyl and aluminum windows and screens, chassis, chassis parts, axles, tires and thermoformed bath and kitchen products.

Other than sales of specialty trailers, which aggregated approximately $3.8 million and $6.9 million in the first quarter of 2007 and 2006, respectively, and $25.0 million in all of 2006, sales other than to manufacturers of RVs and manufactured homes are not considered significant. However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes, thus the Company is not always able to determine in which type of home its products are installed. Intersegment sales are insignificant.

Decisions concerning the allocation of the Company's resources are made by the Company's key executives. This group evaluates the performance of each segment based upon segment operating profit or loss, defined as income before interest, amortization of intangibles and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of operating assets. Management of debt is considered a corporate function. The accounting policies of the RV and MH segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 2006 Annual Report on Form 10-K.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	2007			2006
Net sales:
RV Segment	$	129,132		$	149,416
MH Segment		43,812			59,045
Total	$	172,944		$	208,461

Operating profit:
RV Segment	$	15,866		$	13,544
MH Segment		2,800			5,921
Total segment operating profit		18,666			19,465
Amortization of intangibles		(881	)		(430	)
Corporate and other		(1,887	)		(1,907	)
Other income		656			574
Operating profit	$	16,554		$	17,702

3. Acquisitions

On January 2, 2007, Lippert acquired Trailair, Inc. (“Trailair”) and certain assets and the business of Equa-Flex, Inc. (“Equa-Flex”), two affiliated companies, which manufacture several patented products, including innovative suspension systems used primarily for towable RVs. The minimum aggregate purchase price was $5.5 million, of which $3.3 million was paid at closing and the balance will be paid annually over the next five years. The aggregate purchase price, including non-compete agreements, could increase to a maximum of $8.1 million if certain sales targets for these products are achieved by Lippert over the next five years. The annual payments to be made over the next five years bear interest at the stated rate of 3 percent per annum from the date of the acquisition. In addition, the Company paid $0.2 million for increases in working capital through the date of closing. The results of the acquired Trailair and Equa-Flex businesses have been included in the Company’s Consolidated Statement of Income beginning January 2, 2007. The acquisition was financed with borrowings under the Company's existing line of credit. The Company has integrated Trailair and Equa-Flex’s business into existing Lippert facilities.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Total consideration was allocated on an estimated basis, pending the final valuations for certain intangible assets, as follows (in thousands):

Net tangible assets acquired	$	545
Identifiable intangible assets		3,000
Goodwill		1,906
Total consideration		5,451
Less: Present value of future minimum payments		(1,979	)
Total cash consideration	$	3,472

4. Inventories

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

Inventories consist of the following (in thousands):

	March 31,				December 31,
	2007		2006		2006
Finished goods	$	12,308	$	17,763	$	13,513
Work in process		3,607		3,662		3,868
Raw material		67,967		80,820		65,695
Total	$	83,882	$	102,245	$	83,076

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-term indebtedness consists of the following (dollars in thousands):

5. Long-term Indebtedness

	March 31,				December 31,
	2007		2006		2006
Senior Promissory Notes payable at the rate of $1,000 per
quarter on January 29, April 29, July 29 and October 29,
with interest payable quarterly at the rate of 5.01 percent per
annum, final payment to be made on April 29, 2010	$	13,000	$	17,000	$	14,000

Senior Promissory Notes payable at the rate of $536 per
quarter on the last business day of March, June, September,
and December, with interest payable at the rate of LIBOR
plus 1.65 percent per annum, final payment to be
made on June 28, 2013		13,393		-		13,929

Notes payable pursuant to a Credit Agreement expiring
June 30, 2009 consisting of a line of credit, not to exceed
$70,000, with interest at prime rate or LIBOR plus a rate
margin based upon the Company’s performance		11,000		41,000		12,000

Industrial Revenue Bonds, interest rates at March 31, 2007
of 4.68% to 6.28%, due 2008 through 2017; secured by
certain real estate and equipment		7,733		9,087		8,077

Other loans primarily secured by certain real estate and
equipment, due 2008 to 2011, with fixed interest rates
of 5.18% to 6.63%		5,507		9,814		5,780

Other loans primarily secured by certain real estate and
equipment, due 2011 to 2016, with variable interest rates
of 7.00% to 8.50%		1,848		3,797		1,894
		52,481		80,698		55,680
Less current portion		9,971		10,948		9,714

Total long-term indebtedness	$	42,510	$	69,750	$	45,966

The weighted average interest rate for the Company’s indebtedness was approximately 5.61 percent at March 31, 2007.

On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association with an initial notional amount of $20.0 million from which it will receive periodic payments at the 3 month LIBOR rate (5.36 percent at March 31, 2007 based upon the February 15, 2007 reset date), and make periodic payments at a fixed rate of 3.35 percent, with settlement and rate reset dates every November 15, February 15, May 15 and August 15. The notional amount of the interest rate swap decreases by $1.0 million on each quarterly reset date. At March 31, 2007, the notional amount was $11.0 million. The fair value of the swap was zero at inception, and $0.3 million at March 31, 2007. The Company has designated this swap as a cash flow hedge of certain borrowings under the line of credit and recognized the effective portion of the change in fair value as part of other comprehensive income, with the ineffective portion, which was insignificant, recognized in earnings currently.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On June 13, 2006, the Company entered into a seven-year interest rate swap with HSBC Bank USA, NA with an initial notional amount of $15.0 million from which it will receive periodic payments at the 3 month LIBOR rate (5.35 percent at March 31, 2007 based upon the March 28, 2007 reset date) and make periodic payments at a fixed rate of 5.39 percent, with settlement and rate reset dates on the last business day of every March, June, September and December. The notional amount of the interest rate swap decreases by $0.5 million on each quarterly reset date beginning September 29, 2006. At March 31, 2007, the notional amount was $13.4 million. The fair value of the swap was zero at inception, and ($0.2 million) at March 31, 2007. The Company has designated this swap as a cash flow hedge of the Senior Promissory Notes issued on June 13, 2006, and recognized the effective portion of the change in fair value as part of other comprehensive income, with the ineffective portion, which was insignificant, recognized in earnings currently.

Pursuant to the Senior Promissory Notes, Credit Agreement, and certain other loan agreements, the Company is required to maintain minimum net worth and interest and fixed charge coverages and to meet certain other financial requirements. At March 31, 2007, the Company was in compliance with all such requirements. Certain of the Company’s loan agreements contain prepayment penalties. The Senior Promissory Notes and the line of credit are secured by first priority liens on the capital stock (or other equity interests) of each of the Company’s direct and indirect subsidiaries.

The maximum borrowings under the line of credit can be increased by an additional $20 million, upon approval of the lenders.

The Company has a “shelf-loan” facility with Prudential Investment Management, Inc. (“Prudential”) under which the Company had borrowed $35.0 million, of which $26.4 million was outstanding at March 31, 2007. Pursuant to the terms of the shelf loan facility, the Company can issue, and Prudential’s affiliates may, in their sole discretion, consider purchasing in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of an additional $25.0 million, to mature no more than seven years after the date of original issue of each transaction. Prudential and its affiliates have no obligation to purchase the Senior Promissory Notes.

6. Weighted Average Common Shares Outstanding

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):

	2007		2006
Weighted average shares outstanding for basic earnings per share		21,781		21,567
Common stock equivalents pertaining to
stock options		177		331
Total for diluted shares		21,958		21,898

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On or about October 11, 2005 and October 12, 2005, two actions were commenced in the Superior Court of the State of California, County of Sacramento, entitled Arlen Williams, Jr. vs. Weekend Warrior Trailers, Inc., Zieman Manufacturing Company, et. al. (Case No. CV027691), and Joseph Giordano and Dennis Gish, vs. Weekend Warrior Trailers, Inc, and Zieman Manufacturing Company, et. al. (Case No. 05AS04523). Each case purports to be a class action on behalf of the named plaintiffs and all others similarly situated. The complaints in both cases are substantially identical and the cases were consolidated. Defendant Zieman Manufacturing Company (“Zieman”) is a subsidiary of Lippert.

7. Commitments and Contingencies

Litigation

Plaintiffs allege that defendant Weekend Warrior sold certain toy hauler trailers during the model years 1999 - 2005 equipped with frames manufactured by Zieman that are defective in design and manufacture. Plaintiffs allege that the defects cause the trailer to place excessive weight on the trailer coach tongue and the towing vehicle’s trailer hitch, causing damage to the trailers and the towing vehicles, and that the tires on the trailers do not support the advertised maximum towing capacity of the trailers. Plaintiffs seek to certify a class of residents of California who purchased such new or used models. Plaintiffs seek monetary damages in an unspecified amount (including compensatory, incidental and consequential damages), punitive damages, restitution, declaratory and injunctive relief, attorney’s fees and costs.

Zieman is vigorously defending against the allegations made by plaintiffs, as well as plaintiffs’ ability to pursue the claims as a class action. Zieman and Lippert’s liability insurers have agreed to defend Zieman, subject to reservation of the insurers’ rights. Mandatory mediation is continuing and, although it appears that progress has been made towards settlement, it is not possible to predict the outcome at this time.

On or about January 3, 2007, an action was commenced in the United States District Court, Central District of California entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc. Kinro Texas Limited Partnership d/b/a Better Bath Components, Skyline Corporation, Skylines Homes, Inc. (Case No. CV06-08233). The case purports to be a class action on behalf of the named plaintiff and all others similarly situated.

Plaintiffs allege that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of Kinro, Inc., and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety standards relating to fire spread control established by the United States Department of Housing and Urban Development (“HUD”). Plaintiff alleges that sale of these products is in violation of various provisions of the California Consumers Legal Remedies Act (Sec. 1770 et seq.), the Magnuson-Moss Warranty Act (Sec. 2301 et seq.), and the California Song-Beverly Consumer Warranty Act (Sec. 1790 et seq.).

Plaintiffs seek to require defendants to notify members of the class of the allegations in the proceeding and the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair, replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to pay actual and punitive damages and plaintiffs’ attorneys fees.

Defendant Kinro has undertaken an investigation of all aspects of the allegations made in connection with the claims, including the HUD safety standards, prior and current test results, and issues relating to labels on the products. At this point, the results of Kinro’s investigation are incomplete and, therefore, inconclusive. As a result, the Company is not able to assess the extent of Kinro’s liability, if any, or the nature and extent of Kinro’s obligation, if any, to provide the relief sought by plaintiff.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

If, as a result of Kinro’s investigation, the Company believes that plaintiff’s claims are without merit, defendants intend to vigorously defend against the claims as well as plaintiff’s ability to pursue the claims as a class action. If plaintiff nevertheless pursues its claims, this matter could result in protracted litigation, and the outcome cannot be predicted. On the other hand, if certain of plaintiff’s claims have merit, Kinro’s obligation and liability could be material.

Moreover, if certain of plaintiff’s claims have merit, Kinro may be required by HUD to take remedial actions. Whether or not remedial actions will be necessary, the nature and extent of such actions, if any, and the expense associated with such actions, if any, cannot be assessed or estimated at this time.

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, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of March 31, 2007, would not be material to the Company’s financial position or annual results of operations.

Income Taxes

The Company periodically undergoes examinations by the IRS, as well as various state jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and positions reported by the Company on its income tax returns. During the third quarter of 2006, the IRS completed an audit of the Company’s 2003 federal tax return, and found no changes. For federal income tax purposes, the tax years 2004 through 2006 remain subject to examination.

In connection with a tax audit by the Indiana Department of Revenue pertaining to calendar years 1998 to 2000, the Company received an initial examination report asserting, in the aggregate, approximately $1.2 million of proposed tax adjustments, including interest and penalties. After two hearings with the Indiana Department of Revenue, the audit findings were upheld. The Company believes that it has properly reported its income and paid taxes in Indiana in accordance with applicable laws, and filed an appeal in December 2006 with the Indiana Tax Court. A trial date has been set for February 2008. In Indiana, all tax years subsequent to 2000 also remain open to examination.

The Company has assessed its risks associated with the above matter, as well as all other tax return positions, and believes that its tax reserve estimates reflect its best estimate of the deductions and positions that it will be able to sustain, or that it may be willing to concede as part of a settlement. The Company expects that the ultimate resolution of income tax related matters will not have a material adverse effect on the Company’s consolidated balance sheet or annual results of operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In February 2004, the Company sold certain intellectual property rights for $4.0 million, consisting of cash of $0.1 million at closing and a note of $3.9 million, payable over five years. The note was initially recorded net of a reserve of $3.4 million. In January 2007 and 2006, the Company received payments aggregating approximately $0.8 million and $0.7 million, respectively, including interest, which had been previously fully reserved, and the Company therefore recorded a gain. The balance of the note is $1.7 million at March 31, 2007, which is fully reserved.

Other Income

Sale-Leaseback

On July 3, 2006, the Company entered into a sale-leaseback transaction for one of its facilities in California. Under the sale-leaseback, the facility, with a net book value of approximately $2.7 million, was sold for approximately $5.7 million and leased-back under a 14 month operating lease at $15,000 per month. In connection with the sale, the Company received approximately $1.8 million in cash and a $3.9 million purchase money mortgage bearing interest at 5 percent per annum payable monthly. The mortgage is due and payable in September 2007, and is secured only by the facility sold. The gain on this transaction, approximately $2.8 million after direct costs incurred on the transaction, was deferred, and will be recognized upon the payment of the mortgage. The Company intends to combine the operations conducted at this facility with its other West Coast operations.

Facilities Consolidation

Beginning in the fourth quarter of 2006 and continuing into the first quarter of 2007, the Company consolidated 6 facilities into other existing facilities, and plans have been made to consolidate at least an additional 5 facilities over the balance of 2007. Three facilities were sold during the first quarter of 2007. In connection with the determination to close facilities, the Company recorded a net charge of $0.7 million ($0.6 million after the direct impact on incentive compensation) to reflect the gain or loss on sold facilities and the estimated current market value of closed, and to be closed, facilities. In addition, the Company eliminated more than 70 salaried positions. The severance costs incurred by the Company were not significant.

8. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in tax positions and requires that a company recognize in its financial statements the impact of a tax position, only if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.

As of January 1, 2007, the total amount of unrecognized tax benefits is $3.8 million, which, if recognized, would impact the Company’s annual effective tax rate. The amount of unrecognized tax benefit as of March 31, 2007 did not change significantly from the amount as of the adoption of FIN 48.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s policy regarding the classification of interest and penalties recognized in accordance with FIN 48 is to classify them as income tax expense in its financial statements. On January 1, 2007, the total amount of accrued interest and penalties is $0.9 million.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting this standard.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates, and report unrealized gains and losses on items for which the fair value option has been elected in earnings. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting this standard.

The Company has two reportable operating segments, the recreational vehicle products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). The Company’s operations are conducted through its operating subsidiaries, Kinro, Inc. and its subsidiaries (collectively, “Kinro”) and Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”). Each have operations in both the RV and MH segments. At March 31, 2007, the Company’s subsidiaries operated 42 plants in the United States and one in Canada.

The RV Segment accounted for 75 percent of consolidated net sales for the three months ended March 31, 2007 and 70 percent of the annual consolidated net sales for 2006. The RV Segment manufactures a variety of products used primarily in the production of recreational vehicles, including windows, doors, chassis, chassis parts, slide-out mechanisms and related power units, and electric stabilizer jacks. During the last few years, the Company has also introduced leveling devices, axles, steps, bedlifts, suspension systems and thermoformed bath and kitchen products for RVs. Approximately 90 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth wheel RVs. The balance represents sales of components for motorhomes, as well as specialty trailers for hauling equipment, boats, personal watercraft and snowmobiles, and axles for specialty trailers. Travel trailers and fifth wheel RVs accounted for 75 percent of all RVs shipped by the industry in 2006, up from 61 percent in 2001.

The MH Segment, which accounted for 25 percent of consolidated net sales for the three months ended March 31, 2007 and 30 percent of the annual consolidated net sales for 2006, manufactures a variety of products used in the production of manufactured homes, and to a lesser extent, modular housing and office units, including vinyl and aluminum windows and screens, chassis, chassis parts, axles, tires and thermoformed bath and kitchen products.

Other than sales of specialty trailers and related axles, which aggregated approximately $3.8 million and $6.9 million in the first quarter of 2007 and 2006, respectively, and $25.0 million in all of 2006, sales of products other than components for RVs and manufactured homes are not considered significant. However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes. As a result, the Company is not always able to determine in which type of home its products are installed. Intersegment sales are insignificant.

BACKGROUND

Recreational Vehicle Industry

In the first half of 2006, wholesale shipments to RV dealers exceeded retail sales, resulting in increased dealer inventories. Further, retail sales of towable RVs began to decline in the summer of 2006, caused by a combination of factors, including rapidly increasing fuel prices, higher interest rates and continued conflict in the Middle East which threatened fuel supplies. In response to reduced retail demand and the resulting high dealer inventory levels, dealers reduced their orders for new RVs.

Since August 2006, retail sales, while below prior year levels, have significantly exceeded wholesale shipments to dealers, an indication that there has been a reduction in dealer inventories. Retail shipments of travel trailers and fifth wheel RVs declined approximately 8 percent for January and February 2007, the last month for which information is available, compared to an 18 percent decline in wholesale shipments of travel trailers and fifth wheel RVs in the 2007 first quarter.

Recent dealer surveys indicate inventories of towable RVs, although still higher than dealers prefer, have declined. With fewer towable RVs on their lots, dealers should be in a better position to increase their orders in response to any improvement in retail demand.

The Recreational Vehicle Industrial Association (“RVIA”) reported a 16 percent decrease in industry wholesale shipments of RVs during the first quarter of 2007, while industry shipments of travel trailers and fifth wheel RVs, the Company’s primary market, decreased 18 percent to 69,200 in the first quarter of 2007 from 84,600 in the first quarter of 2006. Industry wholesale shipments for the first quarter of 2006 include an estimated 9,000 travel trailers related to the 2005 Gulf Coast hurricanes.

During the first quarter of 2006 the Federal Emergency Management Agency (“FEMA”) also purchased 29,300 emergency living units (“ELUs”) from RV manufacturers, which are not classified as RVs by the RVIA. The travel trailers and ELUs ordered by FEMA included fewer features and amenities, such as slide-out mechanisms, than the travel trailers typically produced by the industry. As a result, the Company’s average content for the units purchased by FEMA was substantially less than the Company’s average content in typical travel trailers. Subsequent to March 2006, there was no significant hurricane related activity.

The RVIA is projecting a 12 percent decline in wholesale shipments of all types of RVs in 2007, which includes a 16 percent decline in shipments of travel trailers and fifth wheel RVs. These declines partially reflect the shipments in early 2006 resulting from the 2005 Gulf Coast hurricanes, which are not expected to recur in 2007.

In the long-term, increasing industry RV sales are expected to be driven by positive demographics, as demand for RVs is strongest from the over 50 age group, which is the fastest growing segment of the population. According to U.S. Census Bureau projections in March 2004, there will be in excess of 20 million more people over the age of 50 by 2014. Since 1997, the RVIA has employed an advertising campaign to attract customers in the 30 to 54 age group, and the number of RV’s owned by those 35 to 54 has grown faster than all other age groups. Further, the popularity of traveling to NASCAR and college sporting events also appears to be a motivation for consumers to purchase RVs.

Manufactured Housing Industry

As a result of (i) limited credit availability for typical purchasers of manufactured homes, and (ii) high interest rate spreads between conventional mortgages on site built homes and chattel loans for manufactured homes (chattel loans are loans secured only by the home which is sited on leased land), industry production declined approximately 69 percent since 1998, to 117,400 homes in 2006.

The Manufactured Housing Institute (“MHI”) reported that for the quarter ended March 31, 2007, industry wholesale shipments of manufactured homes decreased 36 percent over the prior year’s first quarter, due partly to an estimated 3,000 homes shipped in early 2006 resulting from the 2005 Gulf Coast hurricanes, as well as a slowdown in the real estate market for site-built homes, which may be delaying retirees from selling their primary residence and purchasing a manufactured home.

Industry analysts anticipate that sales of manufactured homes could be aided in 2007 by the permanent rebuilding of Gulf Coast hurricane-stricken areas which might create demand for manufactured homes, including the larger multi-section homes. New home construction in the Gulf Coast was apparently delayed during 2006 because of the extensive cleanup that was required after the 2005 Gulf Coast hurricanes and the delay in settling insurance claims by homeowners.

Also, the recent significant contraction in the sub-prime mortgage market for site-built homes is considered by some industry analysts as an opportunity to increase the consumer base for the manufactured housing industry. Possibly as a result, there have been recent reports of increased mortgage applications at manufactured housing lenders.

The Company believes that long-term prospects for manufactured housing are positive because of favorable demographic trends, including increased numbers of retirees, who have been a significant market for manufactured homes. In addition, manufactured homes provide quality, affordable housing.

Raw Material Prices

The prices the Company pays for steel, which represents about half of the Company’s raw material costs, and other key raw materials have increased significantly since the beginning of 2004. During 2006, except for a temporary decline during the fourth quarter of 2006 for certain raw materials, the Company received further cost increases from its suppliers of key raw materials. To offset the impact of higher raw material costs, the Company implemented sales price increases to its customers. The Company estimates that substantially all raw material cost increases received through 2006 were passed on to customers, although material costs as a percent of sales has increased, particularly for products which are made primarily from steel.

The Company also experienced increases in the cost of certain raw materials, particularly steel and aluminum, during the first four months of 2007, which will impact cost of sales beginning in the second quarter of 2007. Additional sales price increases are being sought to offset these recent raw material cost increases. While the Company has historically been able to obtain sales price increases to offset raw material cost increases, there can be no assurance that future cost increases can be passed on to customers in the form of sales price increases.

Net sales and operating profit are as follows for the three months ended March 31, (in thousands):

RESULTS OF OPERATIONS

	2007			2006
Net sales:
RV Segment	$	129,132		$	149,416
MH Segment		43,812			59,045
Total	$	172,944		$	208,461

Operating profit:
RV Segment	$	15,866		$	13,544
MH Segment		2,800			5,921
Total segment operating profit		18,666			19,465
Amortization of intangibles		(881	)		(430	)
Corporate and other		(1,887	)		(1,907	)
Other income		656			574
Operating profit	$	16,554		$	17,702

Consolidated Highlights

Net sales for the first quarter of 2007 decreased $36 million (17 percent) from the first quarter of 2006. The decrease in net sales this quarter consisted of a decline in hurricane-related sales of approximately $20 million, and an organic sales decline of about $31 million (approximately 15 percent) due to the weakness in both the RV and manufactured housing industries, partially offset by sales price increases of $10 million and sales growth of about $6 million due to acquisitions.

·	Net income for the first quarter of 2007 decreased 6 percent from the first quarter of 2006, less than the 17 percent decrease in net sales due to:

·	Losses in 2006 reduced operating profit by approximately $0.8 million ($0.5 million after taxes) related to the Indiana specialty trailer operation which was closed during the third quarter of 2006.

In response to the slowdowns in both the RV and manufactured housing industries, the Company closed several facilities and consolidated those operations into other existing facilities, and reduced fixed overhead where prudent, including reducing staff levels by more than 70 salaried employees. These facility consolidations and fixed overhead reductions increased operating profit in the first quarter of 2007 by approximately $1.0 million ($0.6 million after taxes). These cost cutting measures, along with others planned for the balance of 2007, are expected to improve operating profit by more than $5 million in 2007 (before taxes).

·	Improved production and procurement efficiencies.

These favorable factors were partially offset by the negative impact on the first quarter of 2007 of spreading fixed costs over a smaller sales base.

·	A temporary decline in certain raw materials costs purchased during the fourth quarter of 2006, which favorably impacted cost of sales during the first quarter of 2007.

·	Increased profit margins on certain of the Company’s newer product lines which had been underperforming.

·	Lower workers compensation costs which improved operating profit by approximately $1.1 million ($0.7 million after taxes).

During the last few years, the Company introduced several new products for the RV and specialty trailer markets, including products for the motorhome market, a relatively new RV category for the Company. New products include slide-out mechanisms and leveling devices for motorhomes, axles for towable RVs and specialty trailers, entry steps and suspension systems for towable RVs, and bed lifts, thermoformed bath and kitchen products, and exterior parts for both towable RVs and motorhomes. The Company estimates that the market potential of these products is over $700 million. In the first quarter of 2007, the Company’s sales of these products were running at an annualized rate of approximately $110 million, as compared to an annualized rate of approximately $85 million in the first quarter of 2006, an increase of more than 25 percent.

RV Segment

Net sales of the RV Segment in the first quarter of 2007 decreased 14 percent, or $20 million, as compared to the first quarter of 2006 due to:

·	A decline of approximately $17 million in hurricane-related sales as compared to the first quarter of 2006.

·	A 2007 organic sales decline of approximately $11 million, or 9 percent, of RV related products.

·	A decline of approximately $3 million in sales of specialty trailers partly due to the closure of the Indiana specialty trailer operation.

Partially offset by:

·	Sales price increases of approximately $5 million.

·	The impact of sales from acquisitions of approximately $6 million.

The 9 percent organic sales decline in the Company’s RV related products approximated the 8 percent decrease in industry shipments of travel trailers and fifth wheel RVs, which industry shipments exclude both the ELUs purchased by FEMA and the estimated 9,000 travel trailers purchased by dealers related to the 2005 Gulf Coast hurricanes during the first quarter of 2006. The Company’s average content for the RVs and ELUs purchased by FEMA was substantially less than the Company’s average content in typical travel trailers.

The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components for the different types of RVs, excluding ELUs, for the twelve months ended March 31, divided by the wholesale shipments of the different types of RVs by the industry, excluding ELUs, for the twelve months ended March 31, are as follows:

	2007		2006		Percent Change
Content per Travel Trailer and
Fifth Wheel RVs	$	1,620	$	1,420		14	%
Content per Motorhomes	$	275	$	269		2	%
Content per all RVs	$	1,244	$	1,098		13	%

According to the RVIA, industry production for the twelve months ended March 31, are as follows:

	2007		2006		Percent Change
Travel Trailer and Fifth
Wheel RVs		277,000		297,300		(7	)%
Motorhomes		55,800		59,400		(6	)%
All RVs		373,200		399,000		(6	)%

ELUs		2,100		68,200		(97	)%

Operating profit of the RV Segment in the first quarter of 2007 increased 17 percent to $15.9 million due to an increase in the operating profit margin to 12.3 percent of net sales in the first quarter of 2007, compared to 9.1 percent of net sales in the first quarter of 2006, partially offset by the decline in sales.

The operating profit margin in the first quarter of 2007 was favorably impacted by:

·	The elimination of the losses incurred in the Company’s Indiana specialty trailer operation of $0.8 million in the first quarter of 2006.

·	Cost-cutting measures implemented.

·	Improved production and procurement efficiencies.

·	A temporary decline in certain raw materials costs purchased during the fourth quarter of 2006 which favorably impacted cost of sales during the first quarter of 2007.

·	Increased profit margins on certain of the Company’s newer product lines which had been underperforming.

·	Lower workers compensation costs.

Net sales of the MH Segment in the first quarter of 2007 decreased 26 percent, or $15 million, as compared to the first quarter of 2006. Excluding the impact of sales price increases (approximately $5 million), organic sales of the MH Segment decreased approximately $20 million, or 34 percent, compared to a 36 percent decrease in industry-wide production of manufactured homes. This decline in industry-wide production of manufactured homes from 2006 to 2007 is partly a result of the units purchased by FEMA during the first three months of 2006, which did not recur in 2007. The Company estimates that its FEMA related sales in the first three months of 2006 was approximately $3 million. The purchases by FEMA in early 2006 were primarily single-section homes, in which the Company has substantially less product content per home than multi-section homes, which have represented 73 percent of industry sales since 1999.

Partially offset by:

·	The negative impact on the first quarter of 2007 of spreading fixed manufacturing costs over a smaller sales base.

·	Higher health insurance costs.

·	An increase in selling, general and administrative expenses to 11.2 percent of net sales in the first quarter of 2007 from 10.8 percent of net sales in the first quarter of 2006 due to the spreading of fixed costs over a smaller sales base and higher incentive compensation.

MH Segment

The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components for manufactured homes for the twelve months ended March 31, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the twelve months ended March 31, are as follows:

	2007		2006		Percent Change
Content per Homes Produced	$	1,854	$	1,547		20	%
Content per Floors Produced	$	1,054	$	927		14	%

According to the MHI, industry production for the twelve months ended March 31, are as follows:

	2007		2006		Percent Change
Total Homes Produced		105,100		149,600		(30	)%
Total Floors Produced		184,900		249,600		(26	)%

Operating profit of the MH Segment in the first quarter of 2007 decreased 53 percent to $2.8 million due to the decrease in net sales, and a decrease in the operating profit margin to 6.4 percent of net sales in the first quarter of 2007, compared to 10.0 percent of sales in the first quarter of 2006. The operating profit margin of the MH Segment in the first quarter of 2007 was negatively impacted by (i) increases in material costs as a percent of sales, (ii) the spreading of fixed manufacturing costs over a smaller sales base, (iii) higher health insurance costs, and (iv) an increase in selling, general and administrative expenses as a percent of net sales, partially offset by lower workers compensation costs.

Selling, general and administrative expenses of this segment increased to 14.5 percent as a percent of net sales in the first quarter of 2007, from 13.8 percent in the first quarter of 2006. This increase was due to the spreading of fixed costs over a smaller sales base, partially offset by lower incentive compensation.

The Company has remained profitable in this segment despite the 69 percent decline in manufactured housing industry production since 1998. The Company continues to monitor the goodwill and other intangible assets related to this segment for potential impairment. A further significant downturn in this industry could result in an impairment of the goodwill or other intangible assets of this segment.

Corporate and Other

Corporate and other expenses for the first quarter of 2007 were consistent with the first quarter of 2006.

Other Income

Taxes

The effective tax rate for the first quarter of 2007 was approximately 38.7 percent, compared to 38.5 percent in the first quarter of 2006. The effective tax rate for the full year 2006 was 38.8 percent. The increase in the effective tax rate for 2007 is due to a change in the composition of pre-tax income for state tax purposes, partially offset by the Jobs Creation Act of 2004 which reduced the effective Federal tax rate on manufacturing activities by approximately 1 percent in 2006, and doubled to approximately 2 percent in 2007.

Interest Expense, Net

The decrease of approximately $0.2 million in interest expense, net, for the first quarter of 2007 as compared to the prior year, was due to a decrease in the average debt levels as a result of strong operating cash flows during the latter half of 2006 and the first quarter of 2007, which more than offset the $37 million the Company has invested in acquisitions since early 2006.

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

LIQUIDITY AND CAPITAL RESOURCES

	2007			2006
Net cash flows provided by operating activities	$	11,533		$	9,519
Net cash flows used for investment activities	$	(4,102	)	$	(13,924	)
Net cash flows (used for) provided by financing activities	$	(2,192	)	$	8,494

Cash Flows from Operations

Net cash flows from operating activities in the first quarter of 2007 was consistent with the same period in 2006. The 2007 period was impacted by a concerted effort by management to reduce inventory on hand, while the 2006 period was impacted by higher working capital at the beginning of the period due to the unusually high sales levels resulting from hurricane-related business during the fourth quarter of 2005.

Cash Flows from Investing Activities:

Cash flows used for investing activities of $4.1 million in 2007 include approximately $3.5 million for the acquisition of businesses and $2.6 million for capital expenditures, offset by proceeds of $1.9 million received from the sale of fixed assets. Capital expenditures and the acquisition were financed with borrowings under the Company’s line of credit and cash flow from operations. Capital expenditures for 2007 are anticipated to be approximately $15 million and are expected to be funded by cash flow from operations.

Cash flows used for investing activities of $13.9 million in the first quarter of 2006 include $9.7 million in capital expenditures. The balance of the cash flows from investing activities consisted primarily of $4.3 million for the acquisition of businesses. Capital expenditures and the acquisition were financed with borrowings under the Company’s credit agreement and cash flow from operations.

Cash Flows from Financing Activities

Cash flows used for financing activities for the first quarter of 2007 of $2.2 million included a net decrease in debt of $3.2 million, and cash flows provided by the exercise of employee stock options of $1.0 million, which includes the related tax benefits. The decrease in debt is primarily due to debt payments of $3.4 million.

Cash flows provided by financing activities for the first quarter of 2006 of $8.5 million included a net increase in debt of $7.5 million, and cash flows provided by the exercise of employee stock options of $1.0 million, which includes the related tax benefits. The increase in debt includes a net increase in the amount borrowed under the Company’s Credit Agreement of $9.6 million, offset by debt payments of $2.1 million.

At March 31, 2007 and 2006, the Company had $11.5 million and $4.5 million, respectively, of cash invested in short-term investments.

Borrowings under the Company’s $70.0 million line of credit at March 31, 2007 were $11.0 million. The Company’s excess cash was not used to pay down these borrowings under the line of credit, as these borrowings are associated with an interest rate swap which results in a favorable fixed interest rate of 4.4 percent. The Company also had $2.7 million in outstanding letters of credit under the line of credit. Availability under the Company’s line of credit was $56.3 million at March 31, 2007. Such availability, along with anticipated cash flows from operations, is adequate to finance the Company’s working capital and anticipated capital expenditure requirements. The maximum borrowings under the line of credit can be increased by an additional $20.0 million, upon approval of the lenders.

At March 31, 2007, the Company is in compliance with all of its debt covenants and expects to remain in compliance for the next twelve months. Certain of the Company’s loan agreements contain prepayment penalties.

CORPORATE GOVERNANCE

The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission and the New York Stock Exchange. The Company’s governance documents and committee charters and key practices have been posted to the Company’s website (www.drewindustries.com) and are updated periodically. The website also contains, or 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.

In May 2007, the Company received notification from Institutional Stockholders Services, Inc., (“ISS”) a Rockville, Maryland-based independent research firm that advises institutional investors, that the Company’s corporate governance policies outranked 96.1 percent of all companies listed in the Russell 3000 index. The Company has no business relationships with ISS.

CONTINGENCIES

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

INFLATION

The prices of key raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. The prices the Company paid for key raw materials remained volatile during 2006 and 2005. After a temporary decline in the fourth quarter of 2006, the Company received further cost increases for certain key raw materials, particularly steel and aluminum, during the first four months of 2007. The Company did not experience any significant increase in its labor costs in the first quarter of 2007 related to inflation.