LCI Industries 10Q 2010 Q3 Quarterly report

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: SEPTEMBER 30, 2010

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

For the transition period from _________________ to _________________

Commission File Number: 0-13646

DREW INDUSTRIES INCORPORATED

(Exact name of registrant as specified in its charter)

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

200 Mamaroneck Avenue, White Plains, NY 10601

(Address of principal executive offices) (Zip Code)

(914) 428-9098

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer 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. 21,974,427 shares of common stock as of October 29, 2010.

DREW INDUSTRIES INCORPORATED

INDEX TO FINANCIAL STATEMENTS FILED WITH

QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

(UNAUDITED)

		Page
PART I – FINANCIAL INFORMATION

Item 1 –	FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	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 – 20

Item 2 –	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21 – 38

Item 3 –	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

Item 4 –	CONTROLS AND PROCEDURES	39

PART II – OTHER INFORMATION

Item 1 –	LEGAL PROCEEDINGS	40

Item 1A –	RISK FACTORS	40

Item 2 –	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41

Item 6 –	EXHIBITS	42

SIGNATURES		43

EXHIBIT 31.1 –	SECTION 302 CEO CERTIFICATION	44

EXHIBIT 31.2 –	SECTION 302 CFO CERTIFICATION	45

EXHIBIT 32.1 –	SECTION 906 CEO CERTIFICATION	46

EXHIBIT 32.2 –	SECTION 906 CFO CERTIFICATION	47

DREW INDUSTRIES INCORPORATED

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

(In thousands, except per share amounts)

Net sales	$	466,552		$	293,248		$	146,833		$	121,666
Cost of sales		363,467			238,895			114,965			93,692
Gross profit		103,085			54,353			31,868			27,974
Selling, general and administrative expenses		62,337			50,331			19,248			16,721
Goodwill impairment		-			45,040			-			-
Other (income)		(79	)		(260	)		(79	)		(60	)
Operating profit (loss)		40,827			(40,758	)		12,699			11,313
Interest expense, net		168			614			28			179
Income (loss) before income taxes		40,659			(41,372	)		12,671			11,134
Provision (benefit) for income taxes		15,757			(14,415	)		4,689			3,945
Net income (loss)	$	24,902		$	(26,957	)	$	7,982		$	7,189

Net income (loss) per common share:
Basic	$	1.13		$	(1.24	)	$	0.36		$	0.33
Diluted	$	1.12		$	(1.24	)	$	0.36		$	0.33

Weighted average common shares outstanding:
Basic		22,118			21,724			22,129			21,847
Diluted		22,262			21,724			22,262			21,994

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

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,						December 31,
	2010			2009			2009
(In thousands, except shares and per share amount)

ASSETS
Current assets
Cash and cash equivalents	$	41,213		$	44,932		$	52,365
Short-term investments		15,993			1,999			12,995
Accounts receivable, trade, less allowances		31,329			27,728			12,541
Inventories		74,121			57,184			57,757
Prepaid expenses and other current assets		16,030			15,647			13,793
Total current assets		178,686			147,490			149,451
Fixed assets, less accumulated depreciation of $88,351 at September 2010, $81,239 at September 2009 and $82,053 at December 2009		80,215			83,263			80,276
Goodwill		7,497			-			-
Other intangible assets, net		59,171			40,518			39,171
Deferred taxes		16,532			14,922			16,532
Other assets		3,456			3,072			2,635
Total assets	$	345,557		$	289,265		$	288,065

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade	$	20,715		$	11,761		$	7,513
Accrued expenses and other current liabilities		36,743			29,327			28,194
Total current liabilities		57,458			41,088			35,707
Other long-term liabilities		16,569			8,659			8,243
Total liabilities		74,027			49,747			43,950

Stockholders’ equity
Common stock, par value $.01 per share: authorized 30,000,000 shares; issued 24,594,533 shares at September 2010, 24,497,558 shares at September 2009 and 24,561,358 at December 2009		246			245			246
Paid-in capital		77,216			72,547			74,239
Retained earnings		222,332			194,526			197,430
		299,794			267,318			271,915
Treasury stock, at cost – 2,621,106 shares		(28,264	)		(27,800	)		(27,800	)
Total stockholders’ equity		271,530			239,518			244,115
Total liabilities and stockholders’ equity	$	345,557		$	289,265		$	288,065

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

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2010			2009
(In thousands)

Cash flows from operating activities:
Net income (loss)	$	24,902		$	(26,957	)
Adjustments to reconcile net income (loss) to cash flows provided by operating activities:
Depreciation and amortization		12,726			14,337
Deferred taxes		-			(15,660	)
(Gain) loss on disposal of fixed assets and other non-cash items		(971	)		1,549
Stock-based compensation expense		2,787			3,043
Goodwill impairment		-			45,040
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable, net		(18,780	)		(19,815	)
Inventories		(16,650	)		38,108
Prepaid expenses and other assets		(2,431	)		1,830
Accounts payable, accrued expenses and other liabilities		18,835			3,600
Net cash flows provided by operating activities		20,418			45,075

Cash flows from investing activities:
Capital expenditures		(7,706	)		(1,915	)
Acquisitions of businesses		(21,900	)		(1,709	)
Proceeds from sales of fixed assets		1,593			959
Purchases of short-term investments		(20,985	)		(1,999	)
Proceeds from maturities of short-term investments		18,000			-
Other investing activities		(293	)		(25	)
Net cash flows used for investing activities		(31,291	)		(4,689	)

Cash flows from financing activities:
Proceeds from line of credit and other borrowings		-			5,775
Repayments under line of credit and other borrowings		-			(14,458	)
Exercise of stock options and deferred stock units		190			4,554
Purchase of treasury stock		(464	)		-
Other financing activities		(5	)		(17	)
Net cash flows used for financing activities		(279	)		(4,146	)

Net (decrease) increase in cash		(11,152	)		36,240

Cash and cash equivalents at beginning of period		52,365			8,692
Cash and cash equivalents at end of period	$	41,213		$	44,932

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	239		$	412
Income taxes, net of refunds	$	18,010		$	3,729

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

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

Balance – December 31, 2009	$	246	$	74,239		$	197,430	$	(27,800	)	$	244,115
Net income for the nine months ended September 30, 2010		-		-			24,902		-			24,902
Issuance of 33,175 shares of common stock pursuant to stock options and deferred stock units		-		355			-		-			355
Income tax impact of issuance of common stock pursuant to stock options and deferred stock units exercised		-		(165	)		-		-			(165	)
Stock-based compensation expense		-		2,787			-		-			2,787
Purchase of 24,381 shares of treasury stock		-		-			-		(464	)		(464	)
Balance – September 30, 2010	$	246	$	77,216		$	222,332	$	(28,264	)	$	271,530

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation

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

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

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2009 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.

In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations as of and for the nine and three month periods ended September 30, 2010 and 2009. 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 84 percent and 78 percent of consolidated net sales for the nine-month periods ended September 30, 2010 and 2009, respectively, manufactures a variety of products used primarily in the production of RVs, including:

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

The MH Segment, which accounted for 16 percent and 22 percent of consolidated net sales for the nine- month periods ended September 30, 2010 and 2009, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

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

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

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

Decisions concerning the allocation of the Company's resources are made by the Company's key executives. This group evaluates the performance of each segment based upon segment operating profit or loss, defined as income or loss before interest, corporate expenses, goodwill impairment, other items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of operating assets. Management of debt is a corporate function. The accounting policies of the RV and MH segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 2009 Annual Report on Form 10-K.

Information relating to segments follows (in thousands):

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net sales:
RV Segment	$	390,678		$	228,114		$	122,052		$	96,953
MH Segment		75,874			65,134			24,781			24,713
Total net sales	$	466,552		$	293,248		$	146,833		$	121,666

Operating profit (loss):
RV Segment	$	37,997		$	9,490		$	11,104		$	10,205
MH Segment		8,241			1,809			2,939			2,397
Total segment operating profit		46,238			11,299			14,043			12,602
Corporate		(5,814	)		(4,930	)		(1,870	)		(1,752	)
Goodwill impairment		-			(45,040	)		-			-
Other items		403			(2,087	)		526			463
Total operating profit (loss)	$	40,827		$	(40,758	)	$	12,699		$	11,313

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

3.	Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

Level-UpTM System

On February 18, 2010, the Company acquired the patent-pending design for a six-point leveling system for fifth-wheel RVs. The purchase price was $1.4 million, paid at closing from available cash, plus an earn-out. The results of the acquired business have been included in the Company’s Condensed Consolidated Statement of Operations beginning February 18, 2010.

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

Cash consideration	$	1,400
Contingent consideration		404
Total fair value of consideration given	$	1,804

Patents	$	1,157
Other identifiable intangible assets		180
Total fair value of assets acquired	$	1,337

Goodwill (tax deductible)	$	467

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

The patents will be amortized over their estimated useful life of 13 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates an increase in the markets for the acquired product.

Wall Slide and Other RV Products

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

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

Cash consideration	$	20,000
Contingent consideration		9,929
Total fair value of consideration given	$	29,929

Patents	$	16,840
In-process research and development		4,457
Other identifiable intangible assets		1,603
Identifiable tangible assets acquired		410
Total fair value of assets acquired	$	23,310

Goodwill (tax deductible)	$	6,619

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Chassis Modification and Suspension Enhancement

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

Goodwill and Other Intangible Assets

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

	MH Segment			RV Segment			Total
Goodwill at cost – December 31, 2009	$	9,251		$	41,276		$	50,527
Accumulated Impairment – December 31, 2009		(9,251	)		(41,276	)		(50,527	)
Net Balance – December 31, 2009		-			-			-
Acquisitions		-			7,497			7,497
Net Balance – September 30, 2010	$	-		$	7,497		$	7,497

Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are 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, depending upon the nature of the assets. No impairment tests were performed during the nine months ended September 30, 2010.

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

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

At March 31, 2009, the discount rate used in the discounted cash flow model prepared for the goodwill impairment analysis was 16.5 percent, derived by applying the weighted average cost of capital model which weights the cost of debt and equity financing. The Company also considered the relationship of debt to equity of other companies similar to the respective reporting units, as well as the risks and uncertainty inherent in the markets generally and in the Company’s internally developed forecasts.

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

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

Other intangible assets consist of the following at September 30, 2010 (in thousands):

			Accumulated				Estimated Useful
	Gross		Amortization		Net		Life in Years

Non-compete agreements	$	3,153	$	1,347	$	1,806	3 to 7
Customer relationships		25,155		10,635		14,520	3 to 16
Tradenames		7,269		3,050		4,219	5 to 15
Patents		45,590		6,964		38,626	5 to 19
Other intangible assets	$	81,167	$	21,996	$	59,171

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

4.	Cash and Investments

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

	September 30,				December 31,
	2010		2009		2009

Cash in bank	$	8,164	$	44,932	$	49,365
Money Market – Wells Fargo		14,031		-		-
Money Market – JPMorgan Chase		12,018		-		-
Treasury bills – cash equivalents		7,000		-		3,000
Total cash and cash equivalents		41,213		44,932		52,365
Treasury bills – short-term investments		15,993		1,999		12,995
Total cash and investments	$	57,206	$	46,931	$	65,360

5.	Inventories

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

Inventories consisted of the following at (in thousands):

	September 30,				December 31,
	2010		2009		2009

Finished goods	$	6,897	$	7,261	$	9,264
Work in process		1,792		2,016		1,576
Raw material		65,432		47,907		46,917
Total inventories	$	74,121	$	57,184	$	57,757

6.	Accrued Expenses and Other Current Liabilities

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

	September 30,				December 31,
	2010		2009		2009

Accrued employee compensation and benefits	$	17,392	$	14,287	$	11,815
Accrued warranty		5,885		3,832		3,340
Other accrued expenses and current liabilities		13,466		11,208		13,039
Total	$	36,743	$	29,327	$	28,194

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, at (in thousands):

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	September 30,						December 31,
	2010			2009			2009
Balance at beginning of period	$	4,686		$	5,419		$	5,419
Provision for warranty expense		4,006			2,357			2,279
Warranty costs paid		(2,172	)		(2,390	)		(3,012	)
Total accrued warranty		6,520			5,386			4,686
Less long-term portion		635			1,554			1,346
Current accrued warranty	$	5,885		$	3,832		$	3,340

7.	Long-Term Indebtedness

The Company had no debt at September 30, 2010 and 2009, respectively.

On November 25, 2008, 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 the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2010 and 2009), or LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2010 and 2009) depending on the Company’s performance and financial condition. The Credit Agreement expires December 1, 2011. At September 30, 2010, the Company had availability of $44.5 million, as there were $5.5 million in outstanding letters of credit under the line of credit.

Simultaneously, the Company entered into a $125.0 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 $125.0 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. The facility expires November 25, 2011. In June 2009, the Company paid in full the remaining outstanding Senior Promissory Notes before their scheduled maturity date.

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

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

8.	Stockholders’ Equity

On November 29, 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions, or in block trades. Of this authorization, 447,400 shares were repurchased in 2008 at an average price of $18.58 per share, or $8.3 million in total. An additional 24,381 shares at an average cost of $19.00 per share, or $0.5 million, were repurchased during the third quarter of 2010. The aggregate cost of repurchases was funded from the Company’s available cash. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

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

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Weighted average shares outstanding for basic earnings per share		22,118		21,724		22,129		21,847
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units		144		-		133		147
Total for diluted shares		22,262		21,724		22,262		21,994

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9.	Commitments and Contingencies

Litigation

On or about January 3, 2007, an action was commenced in the United States District Court, Central District of California, entitled, as amended, Gonzalez and Royalty vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath Components; Skyline Corporation, and Skyline Homes Inc. (Case No. CV06-08233). See Note 10 of the Notes to Consolidated Financial Statements contained in the Annual Report on Form 10-K for the year ended December 31, 2009.

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

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

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

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

In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2010, would not be material to the Company’s financial position or annual results of operations.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Contingent Consideration

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

In connection with the 2009 acquisitions of the QuickBiteTM coupler and the slide-out storage box for pick-up trucks, as well as the 2010 acquisitions of the Level-UpTM six-point leveling system, and certain intellectual property and other assets from Schwintek, Inc., the Company could pay earn-outs if certain sales targets for the acquired products are achieved. The Company has recorded a liability for the present value of these estimated earn-out payments at September 30, 2010 using a weighted average cost of capital of 16.3 percent. The following is as of September 30, 2010 (in thousands):

					Present Value
	Expiration of	Estimated			of Estimated
Acquisition	Earn-out	Earn-out Payments			Earn-out Payments
Schwintek products	March 2014(1)	$	14,090	(2)	$	9,742
Level-Up™ six-point leveling system	February 2016		2,371	(3)		1,399
QuickBite™ coupler	October 2025		2,500	(4)		635
Slide-out storage box for pick-up trucks	September 2015		-	(3)		-
Total		$	18,961		$	11,776

(1) Earn-out payments for three of the four products expire in March 2014. Earn-out payments for the remaining product expire five years after the product is first sold to customers.

(2) Two of the four products acquired have a combined maximum earn-out payment of $12.7 million, which the Company has assumed will be achieved. Other than expiration of the earn-out period, the remaining products have no cap on earn-out payments.

(3) Other than expiration of the earn-out period, these products have no cap on earn-out payments.

(4) This product has a maximum earn-out payment of $2.5 million.

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

Balance at December 31, 2009	$	1,370
Acquisitions		10,333
Payments		(5	)
Accretion		1,118
Fair value adjustments		(1,040	)
Balance at September 30, 2010		11,776
Less current portion in accrued expenses and other current liabilities		(1,361	)
Total long-term portion in other long-term liabilities	$	10,415

Vacant Facilities

At September 30, 2010, the Company was attempting to sell four owned facilities and vacant land with an aggregate carrying value of $3.1 million, which were not being used in production. Additionally, the Company has leased to third parties four owned facilities with a combined carrying amount of $8.8 million, for one to five year terms, for a combined rental income of $78,000 per month. Each of these four leases also contains an option for the lessee to purchase the facility at an amount in excess of carrying value. As of September 30, 2010, all of these owned facilities are classified in fixed assets in the Condensed Consolidated Balance Sheet since it is not probable that these assets will be sold within one year due to uncertainty in the real estate markets. In addition to the owned facilities, the Company is attempting to sublease four vacant facilities which it leases.

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

Use of Estimates

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10.	Fair Value Measurements

Accounting guidance establishes a framework that requires fair value to be determined based on the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Accounting guidance requires the following fair value hierarchy:

Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets that the Company has the ability to access at the measurement date.

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

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

Long-lived assets, including goodwill and other intangible assets, may be measured at fair value if such assets are held for sale or if there is a determination that the asset is impaired. The determination of fair value is based on the best information available; including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets, broker quotes and independent appraisals, as appropriate.

During the first nine months of 2010, the Company completed three business combinations by which it acquired $32.3 million of assets, paid $21.9 million in cash, and agreed to potential future earn-out payments, originally estimated to be $10.3 million. The Company also completed two business combinations in 2009 with potential future earn-out payments. The Company used Level 3 inputs to value the assets and liabilities associated with these business combinations, as well as to update the fair value of the potential future earn-out payments. See Notes 3 and 9 of the Notes to Condensed Consolidated Financial Statements.

During the first nine months of 2010 and 2009, the Company reviewed the recoverability of vacant facilities and land using broker quotes and management’s estimates, which are Level 3 inputs. As a result, impairment charges of $0.4 million and $2.1 million were recorded during the nine months ended September 30, 2010 and 2009, respectively, on such properties, including $0.3 million and ($0.1) million during the three months ended September 30, 2010 and 2009, respectively. The carrying value of these properties was $11.9 million at September 30, 2010. See Note 9 of the Notes to Condensed Consolidated Financial Statements.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the first quarter of 2009, the Company used Level 3 inputs to conduct an impairment analysis of the goodwill of each of its reporting units, resulting in the impairment and non-cash write-off of the entire $45.0 million of goodwill at March 31, 2009. See Note 3 of the Notes to Condensed Consolidated Financial Statements.

11.	New Accounting Pronouncements

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report.

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

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

The RV Segment accounted for 84 percent of consolidated net sales for the nine months ended September 30, 2010 and 79 percent of the annual consolidated net sales for 2009. The RV Segment manufactures a variety of products used primarily in the production of RVs, including:

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

The Company also supplies certain of these products as replacement parts to the aftermarket. More than 90 percent of the Company’s RV Segment net sales are components for travel trailer and fifth-wheel RVs, with the balance primarily comprising components for motorhomes and mid-size buses, as well as sales of specialty trailers and related axles. Travel trailers and fifth-wheel RVs accounted for 83 percent of all RVs shipped by the industry in the first nine months of 2010, up from 61 percent in 2001.

The MH Segment, which accounted for 16 percent of consolidated net sales for the nine months ended September 30, 2010 and 21 percent of the annual consolidated net sales for 2009, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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 59 percent to 160,200 units for the first nine months of 2010 compared to the same period of 2009. The increase in industry-wide wholesale production in the first nine months of 2010 was a result of the following:

In the first nine months of 2009, because of severe economic conditions, including low consumer confidence, limited credit availability for both dealers and consumers, and continued weakness in the real estate and mortgage markets, dealers reduced inventory levels by 38,000 units.

Retail demand increased by 14,000 units, or 11 percent, in the first eight months of 2010, as compared to the same period in 2009.

RV dealers increased inventory levels by 7,000 units in the first eight months of 2010.

As a result, in order to meet the retail demand, additional wholesale production was required in 2010.

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

While the Company measures its RV sales against industry-wide wholesale shipment statistics, it believes the underlying health of the RV industry is determined by retail demand. A comparison of the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., for both the United States and Canada, is as follows:

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

Year ended December 31, 2009		(25)%		(27)%		(25,899)
Year ended December 31, 2008		(29)%		(19)%		(41,287)

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

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

Manufactured Housing Industry

Manufactured homes are built entirely in a factory on permanent steel undercarriages or chassis, 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, 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 full year 2009, industry-wide wholesale shipments of manufactured homes were 49,700 units, a decline of 39 percent compared to the full year 2008. However, estimates are that in 2009, manufactured housing dealers reduced inventory by approximately 10,000 units, implying that retail demand in 2009 was higher than industry-wide wholesale shipments. For the first nine months of 2010, industry-wide wholesale shipments of manufactured homes were 40,000 units, an increase of 6 percent compared to the first nine months of 2009. This increase was apparently partially due to the tax credit available to first-time home buyers during the first six months of 2010, while industry-wide wholesale shipments of manufactured homes during the third quarter of 2010, when the tax credit expired, were consistent with the same period of 2009.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Since 1998, industry-wide wholesale shipments of manufactured homes have declined 86 percent. This decade-plus decline was primarily the result of limited credit availability because of high credit standards applied to purchases of manufactured homes, high down payment requirements, and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes. In addition, in the several years leading up to 2008, many traditional buyers of manufactured homes were able to purchase site-built homes instead of manufactured homes, as subprime mortgages were readily available at unrealistic terms.

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

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

RESULTS OF OPERATIONS

Net sales and operating profit (loss) are as follows (in thousands):

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net sales:
RV Segment	$	390,678		$	228,114		$	122,052		$	96,953
MH Segment		75,874			65,134			24,781			24,713
Total net sales	$	466,552		$	293,248		$	146,833		$	121,666

Operating profit (loss):
RV Segment	$	37,997		$	9,490		$	11,104		$	10,205
MH Segment		8,241			1,809			2,939			2,397
Total segment operating profit		46,238			11,299			14,043			12,602
Corporate		(5,814	)		(4,930	)		(1,870	)		(1,752	)
Goodwill impairment		-			(45,040	)		-			-
Other items		403			(2,087	)		526			463
Total operating profit (loss)	$	40,827		$	(40,758	)	$	12,699		$	11,313

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

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

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

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

Consolidated Highlights

Net sales in the third quarter of 2010 reached $147 million, 21 percent higher than the $122 million of net sales in the third quarter of 2009. This sales increase was largely the result of a 17 percent increase in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary market. The RV Segment represented 83 percent of consolidated net sales in the 2010 third quarter. In addition, primarily as a result of new products, market share gains, and recent acquisitions, the Company’s product content for RVs increased 9 percent for the 12 months ended September 30, 2010, compared to the year-earlier period. Industry-wide production of manufactured homes in the third quarter of 2010 increased one percent from the third quarter of 2009.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

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

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

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

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

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

Raw material costs as a percent of sales in the third quarter of 2010 were consistent with the second quarter of 2010. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.

While the Company has historically been able to obtain sales price increases to offset the majority of raw material cost increases, there can be no assurance that future cost increases, if any, can be partially or fully passed on to customers. The Company also continues to explore improved product design, efficiency improvements, and alternative sources of raw materials and components, both domestic and imported.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

During the first nine months of 2010, the Company completed the acquisition of three businesses, for aggregate cash consideration of $21.9 million paid at closing, and licensed the rights to use a patent for $0.3 million. In addition, contingent earn-out could be paid over approximately the next 6 years depending upon the level of sales generated from certain of the acquired products. These acquisitions included a series of new patent-pending RV products, including an innovative wall slide-out mechanism, new leveling devices, a new power roof lift for tent campers, and an advanced remote locking system for entry doors, as well as an operation with the capability to customize standard chassis for motorhomes, transit buses and specialized commercial trucks.

RV Segment – Third Quarter

RV Segment net sales in the third quarter of 2010 increased 26 percent compared to the 2009 third quarter. Drew’s sales growth exceeded the 17 percent increase in industry-wide wholesale production of travel trailers and fifth-wheel RVs, largely due to the Company’s market share gains and new product introductions, as well as growth in aftermarket sales.

The Company’s RV Segment sales of replacement parts in the aftermarket for existing RVs were approximately $11 million for the twelve months ended September 30, 2010, an increase of 23 percent from the twelve months ended September 30, 2009. The Company is increasing its efforts to gain market share in sales of replacement parts in the aftermarket.

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

	2010		2009		Change
Content per Travel Trailer and Fifth-Wheel RV	$	2,196	$	2,023		9	%
Content per Motorhome	$	540	$	532		2	%
Content per Travel Trailer, Fifth-Wheel and Motorhome	$	2,017	$	1,889		7	%

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

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

RV Segment operating profit in the third quarter of 2010 increased $0.9 million compared to the same period in 2009. This operating profit increase was 4 percent of the increase in net sales, significantly less than the Company’s expected 20 percent incremental margin.

The operating margin of the RV Segment in the third quarter of 2010 was negatively impacted by:

	·	Volatile raw material costs. Raw material costs as a percent of sales were two percent higher than during the third quarter of 2009, when raw material costs were unusually low. Raw material costs remained low during the fourth quarter of 2009. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.

	·	Approximately $1 million of excess production costs incurred as a result of greater than anticipated increases in demand in certain product lines. Significant steps to control these costs have been implemented, including adding production capacity, and improving production flow and material usage.

	·	Higher incentive compensation compared to the third quarter of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.

Higher than average warranty costs as a percent of sales in the third quarter of 2010, as compared to lower than average warranty costs as a percent of sales in the third quarter of 2009.

Partially offset by:

	·	The spreading of fixed manufacturing and selling, general and administrative costs over a $25 million larger sales base.

	·	Lower overtime.

In the third quarter of 2009, the Company had $0.9 million of “extra” expenses related primarily to equipment write-downs, largely due to the unprecedented conditions in the manufactured housing industry at that time.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

RV Segment – Year to Date

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

Operating profit of the RV Segment was $38.0 million in the first nine months of 2010, an improvement of $28.5 million compared to the same period of 2009, largely due to the $163 million increase in sales. The Company incurred $4.0 million of “extra” expenses in the first nine months of 2009 related to plant closings, staff reductions, increased bad debts, equipment write-downs, and obsolete inventory and tooling, largely due to the unprecedented conditions in the RV industry at that time. Excluding these “extra” expenses, the Company’s RV Segment operating profit increased $24.5 million from the same period last year. This adjusted increase in RV Segment operating profit was 15 percent of the increase in net sales, less than the Company’s expected 20 percent incremental margin.

The operating margin of the RV Segment in the first nine months of 2010 was negatively impacted by:

	·	Approximately $3 million of excess production costs incurred as a result of greater than anticipated increases in demand in certain product lines. Significant steps to control these costs have been implemented, including adding production capacity, and improving production flow and material usage.

	·	Higher incentive compensation compared to the first nine months of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.

Higher severance costs.

Partially offset by:

	·	The spreading of fixed manufacturing and selling, general and administrative costs over a $163 million larger sales base.

	·	Lower health insurance costs and bad debt expense.

	·	Improved operating efficiencies in certain product lines due to the increase in sales, partially offset by higher overtime costs.

Volatile raw material costs. Raw material costs during the nine months ended September 30, 2010 were lower than during the first nine months of 2009, although such costs were higher than during the second half of 2009, when raw material costs were unusually low. After increasing as much as 50 percent during the first part of 2010, steel, aluminum and ABS resin prices began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company anticipates that raw material costs as a percent of sales during the fourth quarter of 2010 will be consistent with the third quarter of 2010.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

MH Segment – Third Quarter

Net sales of the MH Segment in the third quarter of 2010 were consistent with the third quarter of 2009. While industry-wide shipments of manufactured homes in the third quarter of 2010 increased one percent compared to the same period last year, industry-wide shipments of larger, multi-section homes, in which the Company has more content, declined eight percent, while smaller single-section homes increased 18 percent. The impact of this industry-wide shipments decline in multi-section homes on MH Segment sales was largely offset by increased sales of replacement parts in the aftermarket.

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

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

	2010		2009		Change
Content per Home Produced	$	1,391	$	1,397		0	%
Content per Floor Produced	$	857	$	854		0	%

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

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

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

MH Segment – Year to Date

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

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

The operating margin of the MH Segment in the first nine months of 2010 was positively impacted by:

	·	Lower health insurance costs and bad debt expense.

	·	The spreading of fixed manufacturing and selling, general and administrative costs over an $11 million larger sales base.

	·	Improved operating efficiencies due to the increase in sales.

	·	Implementation of cost-cutting measures.

Partially offset by:

	·	Higher incentive compensation compared to the first nine months of 2009, when incentive compensation was lower than normal because 2009 year-to-date operating profit for certain operations was below the pro-rata portion of previously established annual incentive compensation hurdles.

	·	Higher severance costs.

Higher transportation costs.

Corporate

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Goodwill Impairment

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

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

Other Non-Segment Items

Other non-segment items include the following (in thousands):

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Selling, general and administrative expenses:
Legal	$	(131	)	$	(376	)	$	(64	)	$	(31	)
Net loss on sold facilities and write-downs to estimated current fair value of facilities to be sold		(446	)		(2,241	)		(280	)		(114	)
Other		205			157			18			435
Net gain on insurance claim		859			-			457			-
Incentive compensation impact of other non-segment items		(85	)		113			(20	)		113
Earn-outs fair value adjustment		1,040			-			934			-
Earn-outs accretion		(1,118	)		-			(598	)		-
Other income from the collection of a previously reserved note		79			260			79			60
	$	403		$	(2,087	)	$	526		$	463

Taxes

The tax rate for the first nine months of 2010 was 38.8 percent, consistent with the 38.5 percent rate for all of 2009, excluding the impact of the goodwill impairment charge. The tax rate for the third quarter of 2010 was 37.0 percent, lower than the 39.5 percent for the first six months of 2010 due primarily to the expiration of certain state and federal tax statute of limitations. The full year 2010 effective tax rate is expected to be approximately 38 percent to 39 percent.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Interest Expense, Net

Interest expense for the first nine months of 2010 was $0.2 million, primarily consisting of commitment and letter of credit fees under the line of credit. Interest expense is partially offset by interest income. Interest income in 2010 on the Company’s $57.2 million of cash and investments is not significant, due to low interest rates and the Company’s policy of investing in only extremely safe investments.

LIQUIDITY AND CAPITAL RESOURCES

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

	2010			2009
Net cash flows provided by operating activities	$	20,418		$	45,075
Net cash flows used for investing activities		(31,291	)		(4,689	)
Net cash flows used for financing activities		(279	)		(4,146	)
Net (decrease) increase in cash	$	(11,152	)	$	36,240

Cash Flows from Operating Activities

Net cash flows from operating activities in the first nine months of 2010 of $20.4 million were $24.7 million lower than the $45.1 million in the first nine months of 2009 as a result of:

A $16.7 million increase in inventories in the first nine months of 2010, compared to a $38.1 million decrease in the first nine months of 2009. During 2009, the Company reduced inventory through consumption of higher priced inventory on hand, and reduced inventory purchases. As a result of the 59 percent increase in net sales for the first nine months of 2010, the Company increased inventory balances by $16.7 million during the same period. Inventory turnover reached approximately seven turns at September 30, 2010, compared to four turns at September 30, 2009.

Partially offset by:

An increase in after-tax operating results in the first nine months of 2010.

An $18.8 million increase in accounts payable, accrued expenses and other liabilities in the first nine months of 2010, compared to an increase of $3.6 million in the first nine months of 2009, due largely to the timing of payments for inventory purchases. Accounts payable at September 30, 2009 was lower than at September 30, 2010, primarily due to significantly reduced purchases during the third quarter of 2009 in an effort to decrease inventories. In addition, accrued liabilities and taxes payable increased in 2010 due to the increase in sales, production and earnings.

Depreciation and amortization was $12.7 million in the first nine months of 2010, and is expected to aggregate $17 million for the full year 2010 and approximately $16 million in 2011. Non-cash stock-based compensation was $2.7 million in the first nine months of 2010, and is expected to be approximately $4 million for the full year.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Cash Flows from Investing Activities

Cash flows used for investing activities of $31.3 million in the first nine months of 2010 included acquisitions of businesses of $21.9 million and capital expenditures of $7.7 million, both of which were paid from available cash. The Company estimates that capital expenditures will be $11 million to $13 million in 2010, and are expected to be funded by cash flows from operations. Further, the Company estimates that capital expenditures will be $10 million to $12 million in 2011. However, certain capital projects included in the 2010 capital expenditure forecast may not be completed until next year, which would cause the estimate for 2011 to increase. Additional capital expenditures may be required in 2011 depending on the extent of sales growth and other initiatives by the Company.

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

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

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

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

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

Cash Flows from Financing Activities

Cash flows used for financing activities for the first nine months of 2010 were not significant. At September 30, 2010, the Company had no debt outstanding.

Cash flows used for financing activities for the first nine months of 2009 of $4.1 million were primarily due to net debt payments of $8.7 million offset by $4.6 million received from the exercise of stock options.

On November 25, 2008, 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 the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2010), or LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2010) depending on the Company’s performance and financial condition. The Credit Agreement expires December 1, 2011. At September 30, 2010, the Company had availability of $44.5 million as there were $5.5 million in outstanding letters of credit under the line of credit.

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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, 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, and after rising significantly during the first part of 2010, began to level off in the latter part of the second quarter of 2010. During the third quarter of 2010, steel prices generally remained constant, however the cost of aluminum and certain other raw materials increased. The Company did not experience any significant increase in its labor costs in the first nine months of 2010 related to inflation.

NEW ACCOUNTING PRONOUNCEMENTS

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

USE OF ESTIMATES

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, earn-outs payments, 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, plans and objectives of management, markets for the Company’s Common Stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933 (the “Securities Act”).

Forward-looking statements, including, without limitation, those relating to our future business prospects, revenues, 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.

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

DREW INDUSTRIES INCORPORATED

Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Item 4 – CONTROLS AND PROCEDURES

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.

Changes in Internal Controls

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

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

DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

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

Item 1A – RISK FACTORS

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

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

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

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

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

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Issuer Purchases of Equity Securities

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

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Item 6 – EXHIBITS

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

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.

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.

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

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

DREW INDUSTRIES INCORPORATED

SIGNATURES

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

DREW INDUSTRIES INCORPORATED
Registrant

By	/s/ Joseph S. Giordano III
Joseph S. Giordano III
Chief Financial Officer and Treasurer
November 8, 2010

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LCI Industries (LCII) 10-Q2010 Q3 Quarterly report

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