LCI Industries 10Q 2011 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, 2011

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

For the transition period from _________________ to _________________

Commission File Number: 0-13646

DREW INDUSTRIES INCORPORATED

(Exact name of registrant as specified in its charter)

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

200 Mamaroneck Avenue, White Plains, NY 10601

(Address of principal executive offices) (Zip Code)

(914) 428-9098

(Registrant’s telephone number, including area code)

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

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

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

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

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

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

DREW INDUSTRIES INCORPORATED

INDEX TO FINANCIAL STATEMENTS FILED WITH

QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2011

(UNAUDITED)

		Page
PART I –	FINANCIAL INFORMATION

	Item 1 – FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME	3

	CONDENSED CONSOLIDATED BALANCE SHEETS	4

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5

	CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY	6

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7 – 19

	Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20 – 38

	Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

	Item 4 – CONTROLS AND PROCEDURES	40

PART II –	OTHER INFORMATION

	Item 1 – LEGAL PROCEEDINGS	41

	Item 1A – RISK FACTORS	41

	Item 6 – EXHIBITS	41

SIGNATURES		42

EXHIBIT 31.1 – SECTION 302 CEO CERTIFICATION		43

EXHIBIT 31.2 – SECTION 302 CFO CERTIFICATION		44

EXHIBIT 32.1 – SECTION 906 CEO CERTIFICATION		45

EXHIBIT 32.2 – SECTION 906 CFO CERTIFICATION		46

DREW INDUSTRIES INCORPORATED

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
(In thousands, except per share amounts)

Net sales	$	521,570		$	466,552		$	166,689		$	146,833
Cost of sales		409,631			363,467			134,688			114,965
Gross profit		111,939			103,085			32,001			31,868
Selling, general and administrative expenses		69,362			62,337			22,877			19,248
Other (income)		(79	)		(79	)		(79	)		(79	)
Operating profit		42,656			40,827			9,203			12,699
Interest expense, net		197			168			78			28
Income before income taxes		42,459			40,659			9,125			12,671
Provision for income taxes		16,488			15,757			3,506			4,689
Net income	$	25,971		$	24,902		$	5,619		$	7,982

Net income per common share:
Basic	$	1.17		$	1.13		$	0.25		$	0.36
Diluted	$	1.16		$	1.12		$	0.25		$	0.36

Weighted average common shares outstanding:
Basic		22,254			22,118			22,273			22,129
Diluted		22,427			22,262			22,447			22,262

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

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,						December 31,
	2011			2010			2010
(In thousands, except per share amount)

ASSETS
Current assets
Cash and cash equivalents	$	1,472		$	41,213		$	38,880
Short-term investments		-			15,993			4,999
Accounts receivable, trade, less allowances		41,965			31,329			12,890
Inventories		97,765			74,121			69,328
Deferred taxes		12,142			9,879			12,142
Prepaid expenses and other current assets		6,960			6,151			4,626
Total current assets		160,304			178,686			142,865
Fixed assets, net		90,884			80,215			79,848
Goodwill		20,137			7,497			7,497
Other intangible assets, net		80,746			59,171			57,419
Deferred taxes		15,744			16,532			15,770
Other assets		3,544			3,456			3,382
Total assets	$	371,359		$	345,557		$	306,781

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade	$	30,106		$	20,715		$	11,351
Accrued expenses and other current liabilities		39,413			36,743			33,723
Total current liabilities		69,519			57,458			45,074
Long-term indebtedness		8,075			-			-
Other long-term liabilities		20,005			16,569			18,248
Total liabilities		97,599			74,027			63,322

Stockholders’ equity
Common stock, par value $.01 per share		247			246			247
Paid-in capital		84,942			77,216			79,986
Retained earnings		218,038			222,332			192,067
Stockholders’ equity before treasury stock		303,227			299,794			272,300
Treasury stock, at cost		(29,467	)		(28,264	)		(28,841	)
Total stockholders’ equity		273,760			271,530			243,459
Total liabilities and stockholders’ equity	$	371,359		$	345,557		$	306,781

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,
	2011			2010
(In thousands)

Cash flows from operating activities:
Net income	$	25,971		$	24,902
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation and amortization		15,069			12,726
Stock-based compensation expense		3,352			2,787
Deferred taxes		26			-
Other non-cash items		751			(971	)
Changes in assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net		(24,440	)		(18,780	)
Inventories		(20,581	)		(16,650	)
Prepaid expenses and other assets		(1,996	)		(2,431	)
Accounts payable, accrued expenses and other liabilities		18,127			18,835
Net cash flows provided by operating activities		16,279			20,418

Cash flows from investing activities:
Capital expenditures		(17,721	)		(7,706	)
Acquisitions of businesses		(49,340	)		(21,900	)
Purchase of short-term investments		-			(20,985	)
Proceeds from maturity of short-term investments		5,000			18,000
Other investing activities		810			1,300
Net cash flows used for investing activities		(61,251	)		(31,291	)

Cash flows from financing activities:
Exercise of stock options and deferred stock units		504			190
Purchase of treasury stock		(626	)		(464	)
Proceeds from line of credit borrowings		48,675			-
Repayments under line of credit		(40,600	)		-
Other financing activities		(389	)		(5	)
Net cash flows provided by (used for) financing activities		7,564			(279	)

Net decrease in cash		(37,408	)		(11,152	)

Cash and cash equivalents at beginning of period		38,880			52,365
Cash and cash equivalents at end of period	$	1,472		$	41,213

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	263		$	239
Income taxes, net of refunds	$	17,101		$	18,010

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, 2010	$	247	$	79,986	$	192,067	$	(28,841	)	$	243,459
Net income for the nine months ended September 30, 2011		-		-		25,971		-			25,971
Issuance of 63,290 shares of common stock pursuant to stock options and deferred stock units		-		416		-		-			416
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units		-		88		-		-			88
Stock-based compensation expense		-		3,352		-		-			3,352
Issuance of 47,506 deferred stock units relating to 2010 compensation		-		1,100		-		-			1,100
Purchase of 33,856 shares of treasury stock		-		-		-		(626	)		(626	)
Balance - September 30, 2011	$	247	$	84,942	$	218,038	$	(29,467	)	$	273,760

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 Lippert and Kinro, manufactures a broad array of components for recreational vehicles (“RVs”) and manufactured homes, and to a lesser extent manufactures components for modular housing, truck caps and buses, as well as for trailers used to haul boats, livestock, equipment and other cargo.

Because of the seasonality of the RV and manufactured housing industries, historically the Company’s operating results in the first and fourth quarters have been the weakest, while the second and third quarters are traditionally stronger. However, because of fluctuations in RV dealer inventories and volatile economic conditions, current seasonal industry trends may be different than in prior years.

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2010 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.

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

2.	Segment Reporting

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

The RV Segment, which accounted for 84 percent of consolidated net sales for the nine month periods ended September 30, 2011 and 2010, respectively, manufactures a variety of products used primarily in the production of RVs, including:

●	Towable steel chassis	●	Aluminum windows and screens
●	Towable axles and suspension solutions	●	Chassis components
●	Slide-out mechanisms and solutions	●	Furniture and mattresses
●	Thermoformed bath, kitchen and other products	●	Entry and baggage doors
●	Toy hauler ramp doors	●	Entry steps
●	Patio doors	●	Other accessories
●	Manual, electric and hydraulic stabilizer
	and leveling systems

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The MH Segment, which accounted for 16 percent of consolidated net sales for the nine month periods ended September 30, 2011 and 2010, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

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

The Company also supplies windows, doors and thermoformed bath products as replacement parts to the manufactured housing aftermarket. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes. As a result, the Company is not always able to determine in which type of home its products are installed.

Decisions concerning the allocation of the Company's resources are made by the Company's key executives. This group evaluates the performance of each segment based upon segment operating profit or loss, defined as income or loss before interest, corporate expenses, goodwill impairment, other non-segment items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of operating assets. Management of debt is a corporate function. The accounting policies of the RV and MH Segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 2010 Annual Report on Form 10-K.

Information relating to segments follows (in thousands):

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Net sales:
RV Segment	$	439,656		$	390,678		$	136,228		$	122,052
MH Segment		81,914			75,874			30,461			24,781
Total net sales	$	521,570		$	466,552		$	166,689		$	146,833

Operating profit:
RV Segment	$	40,370		$	37,997		$	7,745		$	11,104
MH Segment		8,963			8,241			3,786			2,939
Total segment operating profit		49,333			46,238			11,531			14,043
Corporate		(5,846	)		(5,814	)		(1,803	)		(1,870	)
Other non-segment items		(831	)		403			(525	)		526
Total operating profit	$	42,656		$	40,827		$	9,203		$	12,699

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

Starquest Products, LLC

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

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

Cash consideration	$	22,600
Contingent consideration		40
Total fair value of consideration given	$	22,640

Customer relationships	$	12,540
Other identifiable intangible assets		1,884
Net tangible assets		2,871
Total fair value of net assets acquired	$	17,295

Goodwill (tax deductible)	$	5,345

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

EA Technologies, LLC

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

Cash consideration	$	13,500

Customer relationships	$	7,060
Net tangible assets		2,340
Total fair value of net assets acquired	$	9,400

Goodwill (tax deductible)	$	4,100

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

M-Tec Corporation

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

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

Cash consideration	$	5,990
Contingent consideration		450
Total fair value of consideration given	$	6,440

Customer relationships	$	2,310
Other identifiable intangible assets		315
Net tangible assets		1,723
Total fair value of net assets acquired	$	4,348

Goodwill (tax deductible)	$	2,092

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Home-Style Industries

On January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style had annual sales of approximately $12 million comprised primarily of a full line of upholstered furniture and mattresses primarily for towable RVs, in the Northwest U.S. market. The purchase price was $7.3 million paid at closing from available cash, plus contingent consideration based on future sales of existing products in specific geographic regions. The results of the acquired business have been included in the Company’s RV Segment and in the Condensed Consolidated Statement of Income since the acquisition date.

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

Cash consideration	$	7,250
Contingent consideration		150
Total fair value of consideration given	$	7,400

Customer relationships	$	3,350
Other identifiable intangible assets		365
Net tangible assets		2,582
Total fair value of net assets acquired	$	6,297

Goodwill (tax deductible)	$	1,103

The customer relationships intangible asset will be amortized over its estimated useful life of 12 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing experience and purchasing power with respect to these product lines.

Goodwill

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

	MH Segment			RV Segment			Total

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

Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist, and is based on fair value, determined using discounted cash flows, appraised values or management’s estimates. No impairment tests were required or performed during the nine months ended September 30, 2011.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Other Intangible Assets

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

	Gross		Accumulated		Net		Estimated Useful
	Cost		Amortization		Balance		Life in Years

Customer relationships	$	50,415	$	13,445	$	36,970	3 to 16
Patents		46,008		10,170		35,838	2 to 19
Tradenames		8,069		3,137		4,932	3 to 15
Non-compete agreements		4,136		1,130		3,006	3 to 7
Other intangible assets	$	108,628	$	27,882	$	80,746

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

4. Cash and Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The U.S. Treasury Bills are recorded at cost which approximates fair value. Effective January 1, 2011, cash in banks is fully FDIC insured.

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

	September 30,				December 31,
	2011		2010		2010

Cash in banks	$	1,472	$	8,164	$	11,664
Money Market – Wells Fargo		-		14,031		9,039
Money Market – JPMorgan Chase		-		12,018		4,177
U.S. Treasury Bills – cash equivalents		-		7,000		14,000
Cash and cash equivalents		1,472		41,213		38,880
U.S. Treasury Bills – short-term investments		-		15,993		4,999
Cash and investments	$	1,472	$	57,206	$	43,879

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Inventories

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

Inventories consisted of the following at (in thousands):

	September 30,				December 31,
	2011		2010		2010

Raw material	$	84,294	$	65,432	$	59,204
Work in process		2,335		1,792		1,683
Finished goods		11,136		6,897		8,441
Inventories	$	97,765	$	74,121	$	69,328

6. Fixed Assets

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

	September 30,				December 31,
	2011		2010		2010

Fixed assets, at cost	$	183,906	$	168,566	$	166,125
Less accumulated depreciation and amortization		93,022		88,351		86,277
Fixed assets, net	$	90,884	$	80,215	$	79,848

7. Accrued Expenses and Other Current Liabilities

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

	September 30,				December 31,
	2011		2010		2010

Employee compensation and benefits	$	16,180	$	17,392	$	16,643
Warranty		5,665		5,885		4,005
Other		17,568		13,466		13,075
Accrued expenses and other current liabilities	$	39,413	$	36,743	$	33,723

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	September 30,
	2011			2010

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

8. Long-Term Indebtedness

The Company had $8.1 million outstanding at September 30, 2011 under its line of credit at a weighted average interest rate of 2.5 percent. The Company had no debt outstanding at September 30, 2010 and December 31, 2010.

On February 24, 2011, the Company entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (collectively, the “Lenders”), amending the Company’s previous $50.0 million line of credit that was scheduled to expire in December 2011. The maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the line of credit is designated from time to time by the Company as either (i) the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2011), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2011) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At September 30, 2011, the Company had availability of $38.3 million, as there was $8.1 million of borrowing and $3.6 million in outstanding letters of credit under the line of credit.

Simultaneously, the Company entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”), amending and increasing the Company’s previous $125.0 million “shelf-loan” facility with Prudential. The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. At September 30, 2011 and 2010, as well as December 31, 2010, there were no Senior Promissory Notes outstanding. This facility expires on February 24, 2014.

Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined. As a result, the remaining availability under these facilities was $176.5 million at September 30, 2011. The Company believes this availability is more than adequate to finance the Company’s anticipated working capital and capital expenditure requirements for the next twelve months.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

9. Stockholders’ Equity

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

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Weighted average shares outstanding for basic earnings per share		22,254		22,118		22,273		22,129
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units		173		144		174		133
Weighted average shares outstanding for diluted earnings per share		22,427		22,262		22,447		22,262

The weighted average diluted shares outstanding for the nine months ended September 30, 2011 and 2010 excludes the effect of 1,361,007 and 1,172,223 shares of common stock subject to stock options, respectively, and the three months ended September 30, 2011 and 2010 excludes the effect of 1,413,340 and 1,116,390 stock options, respectively, because including such shares in the calculation of total diluted shares would have been anti-dilutive.

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

In 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions, or in block trades. Of this authorization, 501,279 shares were repurchased prior to 2011 at an average price of $18.65 per share, or $9.3 million in total. During the third quarter of 2011, an additional 33,856 shares were repurchased at an average cost of $18.44 per share, or $0.6 million. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

	September 30,				December 31,
	2011		2010		2010

Common stock authorized		30,000		30,000		30,000
Common stock issued		24,738		24,595		24,675
Treasury stock		2,684		2,621		2,651

10. Commitments and Contingencies

Litigation

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

In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2011, would not be material to the Company’s financial position or annual results of operations.

Contingent Consideration

The following table summarizes the expected earn-outs as of September 30, 2011 (in thousands):

				Fair Value
	Estimated			of Estimated
Acquisition	Payments			Payments
Schwintek products	$	14,728	(a)	$	11,124
Level-UpTM six-point leveling system		2,209	(b)		1,480
Other acquired products		1,700	(c)		869
Total	$	18,637		$	13,473

(a)

Earn-out payments for three of the four products expire in March 2014. Earn-out payments for the remaining product will cease five years after the product is first sold to customers. Two of the four products acquired have a combined remaining maximum earn-out payment of $12.7 million, of which the Company estimates $12.2 million will be paid. Other than expiration of the earn-out period, the remaining products have no maximum on earn-out payments.

(b)

Other than expiration of the earn-out period in February 2016, these products have no maximum on earn-out payments.

(c)

Earn-out payments expire at various dates through October 2025. One of these products has a maximum of $2.5 million, while the remaining products have no maximum on earn-out payments.

As required, the liability for these estimated earn-out payments is re-evaluated quarterly, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending upon the weighted average cost of capital and future sales of the products which are subject to earn-outs, the Company could record adjustments in future periods.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

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

Environmental Liabilities

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against potentially responsible third parties, are adjusted periodically as assessment and remediation efforts progress or additional technical or legal information becomes available. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies and remedial activities, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and the Company’s ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs. It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably against the Company.

Use of Estimates

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, earn-out payments, environmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results and events could differ significantly from management estimates.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. Fair Value Measurements and Derivative Instruments

Recurring

Fair value is determined using a hierarchy that has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	September 30, 2011								September 30, 2010
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	-	$	-	$	-	$	-	$	26,049	$	26,049	$	-	$	-
U.S. Treasury Bills		-		-		-		-		22,993		22,993		-		-
Total assets	$	-	$	-	$	-	$	-	$	49,042	$	49,042	$	-	$	-

Liabilities
Contingent consideration	$	13,473	$	-	$	-	$	13,473	$	11,776	$	-	$	-	$	11,776
Unrealized loss on derivative instrument		208		208		-		-		-		-		-		-
Total liabilities	$	13,681	$	208	$	-	$	13,473	$	11,776	$	-	$	-	$	11,776

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

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

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

Non-recurring

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

Liabilities
Vacant leased facilities	$	583	$	203	$	932	$	308
Total liabilities	$	583	$	203	$	932	$	308

At September 30, 2011, the Company owned six facilities which it is attempting to sell. In addition to the owned facilities which the Company is attempting to sell, the Company is attempting to sublease four vacant facilities which it leases. The determination of fair value is based on the best information available, using Level 3 inputs, including internal cash flow estimates discounted at an appropriate interest rate, market prices for similar assets, broker quotes and independent appraisals, as appropriate.

Assets acquired and liabilities assumed in a business combination were recorded at fair value as of the acquisition date. Depending upon the type of asset acquired, the Company used different valuation techniques in determining the fair value of each asset. Those techniques included comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, weighted average cost of capital, as well as other techniques as circumstances required. For further information on acquired assets, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

12. New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance requires new disclosures, including the reasons for and amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and separate presentation of purchases, sales, issuances and settlements in the reconciliation of activity for Level 3 fair value measurements. It also clarifies guidance related to determining the appropriate classes of assets and liabilities and the information to be provided for valuation techniques used to measure fair value. This guidance with respect to significant transfers in and out of Levels 1 and 2 was effective for interim or annual periods beginning after December 15, 2009, and with respect to Level 3 fair value measurements was effective for interim or annual periods beginning after December 15, 2010. The adoption of the guidance had no significant impact on the Company’s financial statements.

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

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

The RV Segment accounted for 84 percent of consolidated net sales for the nine months ended September 30, 2011 and 83 percent of the annual consolidated net sales for 2010. The RV Segment manufactures a variety of products used primarily in the production of RVs, including:

·	Towable steel chassis	·	Aluminum windows and screens
·	Towable axles and suspension solutions	·	Chassis components
·	Slide-out mechanisms and solutions	·	Furniture and mattresses
·	Thermoformed bath, kitchen and other products	·	Entry and baggage doors
·	Toy hauler ramp doors	·	Entry steps
·	Patio doors	·	Other accessories
·	Manual, electric and hydraulic stabilizer and leveling systems

The MH Segment, which accounted for 16 percent of consolidated net sales for the nine months ended September 30, 2011 and 17 percent of the annual consolidated net sales for 2010, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and office units, including:

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

The Company also supplies windows, doors, and thermoformed bath products as replacement parts to the manufactured housing aftermarket. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

INDUSTRY BACKGROUND

Recreational Vehicle Industry

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

According to the Recreation Vehicle Industry Association (“RVIA”), through May 2011, industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 9 percent, or 8,400 units, as compared to the same period of 2010. Retail sales of travel trailer and fifth-wheel RVs during the same period of 2011 were up 8 percent. Because wholesale shipments outpaced retail sales, dealer inventories grew by 15,300 units in the first five months of 2011.

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

While the Company measures its RV sales against industry-wide wholesale shipment statistics, it believes the underlying health of the RV industry is determined by retail demand. To date, retail sales in 2011, while below earlier expectations, increased despite high gas prices, negative news regarding domestic and international economic conditions, and low consumer confidence.

A comparison of the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., as well as the resulting increase or (decrease) in dealer inventories, is as follows:

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 September 30, 2011		(2	)%	3		% (est.)	(11,300		) (est.)
Quarter ended June 30, 2011		6	%		7	%		(8,400	)
Quarter ended March 31, 2011		10	%		7	%		20,800

Year ended December 31, 2010		44	%		13	%		13,200
Year ended December 31, 2009		(25	)%		(27	)%		(26,000	)
Year ended December 31, 2008		(29	)%		(19	)%		(41,300	)

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

Industry-wide retail sales, and therefore production levels of RVs will depend to a significant extent on the course of the economy and consumer confidence. Over the last few months, forecasts for U.S. economic growth in 2012 have been mixed. The Company continues to be optimistic about its RV industry growth prospects for 2012 and beyond, and remains confident in its ability to exceed industry growth rates, through new products, market share gains, acquisitions and ongoing investment in customer service.

In the long-term, the Company expects RV industry sales to be aided by positive demographics, and the continued popularity of the “RV Lifestyle”. Every day, 11,000 Americans turn 50, according to U.S. Census figures, and one-in-ten vehicle-owning households between 50 and 64 own at least one RV.

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

Manufactured Housing Industry

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

The Institute for Building Technology and Safety (“IBTS”) reported that industry-wide wholesale shipments of manufactured homes were 23,200 units in the first 6 months of 2011, a decline of 12 percent from the comparable period of 2010. Industry-wide wholesale shipments of manufactured homes during the first six months of 2010 were positively impacted by a Federal tax credit for first time home buyers, the benefits of which expired in the first half of 2010. In the third quarter of 2011, there were 13,900 industry-wide wholesale shipments of manufactured homes, an increase of 2 percent compared to the same period of 2010. The manufactured housing industry benefitted from approximately 300 homes produced for FEMA during the third quarter of 2011, and it is expected that an additional 1,200 to 1,500 homes will be manufactured for FEMA in the fourth quarter of 2011.

Manufactured housing has been negatively impacted by the continued weakness in the entire housing market and limited credit availability, as well as the high credit standards applied to purchases of manufactured homes, high down payment requirements, and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes.

The Company believes the manufactured housing industry may begin to experience a modest recovery when the economy improves and home buyers begin to look for affordable housing. However, because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, fluctuating consumer confidence, high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes, and the current retail and wholesale credit markets, the Company expects industry-wide wholesale shipments of manufactured homes to remain low until these conditions improve.

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

Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. During the first nine months of 2011, multi-section homes were 53 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, respectively. During the first nine months of 2011, industry-wide shipments of single-section homes increased 7 percent, while multi-section homes declined 17 percent, both compared to the same period last year. Multi-section manufactured homes contain more of the Company’s products than single-section manufactured homes. The decline in multi-section homes over the past few years may be partly due to the weak site-built housing market, as a result of which many retirees have not been able to sell their primary residence, or may have been unwilling to sell at currently depressed prices, and purchase a more affordable manufactured home as many had done historically.

RESULTS OF OPERATIONS

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

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Net sales:
RV Segment	$	439,656		$	390,678		$	136,228		$	122,052
MH Segment		81,914			75,874			30,461			24,781
Total net sales	$	521,570		$	466,552		$	166,689		$	146,833

Operating profit:
RV Segment	$	40,370		$	37,997		$	7,745		$	11,104
MH Segment		8,963			8,241			3,786			2,939
Total segment operating profit		49,333			46,238			11,531			14,043
Corporate		(5,846	)		(5,814	)		(1,803	)		(1,870	)
Other non-segment items		(831	)		403			(525	)		526
Total operating profit	$	42,656		$	40,827		$	9,203		$	12,699

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Consolidated Highlights

Net sales in the 2011 third quarter increased 14 percent to $167 million, from $147 million in the third quarter of 2010, the result of a 12 percent increase in the Company’s RV Segment sales, and a 23 percent increase in the Company’s Manufactured Housing Segment sales. Industry-wide wholesale shipments of travel trailer and fifth-wheel RVs decreased 2 percent in the 2011 third quarter, while industry-wide production of manufactured homes increased 2 percent. The Company’s sales growth outperformed industry-wide wholesale shipments of RVs and manufactured homes during the third quarter of 2011 primarily because the Company increased its average product content per unit produced as a result of acquisitions, market share gains, and new products, as well as increased sales of components to other industries, such as buses, modular housing, mobile office units, truck caps, and trailers used to haul boats, livestock, equipment and other cargo. Further, the Company implemented sales price increases in 2011 due to higher raw material costs.

The Company’s net sales for the month of October 2011 were $62 million, more than a 55 percent increase from the month of October 2010. Excluding the impact of sales price increases and acquisitions, sales for October 2011 were up more than 30 percent, exceeding the estimated growth in industry-wide production of RVs and manufactured homes.

For the third quarter of 2011, the Company reported net income of $5.6 million ($0.25 per diluted share), a 30 percent decrease from the net income of $8.0 million ($0.36 per diluted share) reported in the third quarter of 2010, largely due to:

Higher raw material costs as a percent of sales, which reduced net income by about $1 million. Raw material costs, in particular steel and aluminum, increased during the first half of 2011, negatively impacting the operating results in the third quarter of 2011 as the sales price increases implemented by the Company did not fully offset the peak raw material costs.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

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

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

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

During the third quarter of 2011, the Company completed three acquisitions as follows:

a manufacturer of components for RVs and mobile office units, with annual sales of approximately $12 million, which expands the Company’s product offerings,

a manufacturer of towable RV chassis and slide-out mechanisms with annual sales of more than $40 million. These acquired operations have been consolidated into the Company’s existing facilities, which is expected to minimize fixed costs and improve production efficiencies, and

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

These three acquisitions add an aggregate of more than $75 million to the Company’s annual sales, of which $9 million occurred in the 2011 third quarter. Further, the Company plans to use its purchasing power and manufacturing capabilities to reduce the cost structure of the acquired operations.

During the third quarter of 2011, the Company continued to invest in a new aluminum extrusion operation. In early October 2011, the Company began production on the first press of this operation and, as a result, expects to realize lower aluminum costs beginning in early 2012. The Company expects to bring two additional presses on-line over the next several months.

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

RV Segment – Third Quarter

Net sales of the RV Segment in the third quarter of 2011 increased 12 percent compared to the third quarter of 2010. Net sales of components were to the following markets (in thousands):

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

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

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

The Company outperformed the industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to the four acquisitions completed in 2011 and sales price increases, which added $9 million and $4 million, respectively, in net sales during the third quarter of 2011.

Sales of components to motorhome OEMs declined less than the decrease in industry-wide wholesale production of motorhomes, due to acquisitions, which added $1 million in net sales during the third quarter of 2011. In the past year, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration.

Sales to other related industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains and acquisitions which added $2 million in net sales during the third quarter of 2011. The Company believes there are significant opportunities in these adjacent markets. The acquisition of Starquest during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team added earlier in 2011, is expected to accelerate the Company’s growth in these adjacent markets.

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

Operating profit of the RV Segment was $7.7 million in the third quarter of 2011, a decrease of $3.4 million compared to the third quarter of 2010, despite the $14 million increase in RV Segment net sales.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

The operating margin of the RV Segment in the third quarter of 2011 was negatively impacted by:

Higher raw material costs. Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011, negatively impacting the operating results in the third quarter of 2011 as the sales price increases implemented did not fully offset the peak raw material costs. Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.

Start-up and integration costs associated with the three acquisitions completed during the third quarter of 2011, as well as the new aluminum extrusion operation and the new RV awning product line. Additional start-up and integration costs are expected in the fourth quarter of 2011, although the impact is expected to be less than in the third quarter of 2011.

Higher than usual production costs for one product line, in part related to increased demand. The Company has taken corrective action to help ensure that these production costs improve over the next few quarters.

An increase in annualized fixed costs of $2 million to $3 million, which have been added over the past year to expand capacity and meet the increase in sales demand, plus additional depreciation and amortization due to recent acquisitions and capital expenditures.

Partially offset by:

Lower incentive compensation.

The spreading of fixed manufacturing and selling, general and administrative costs over a $14 million larger sales base.

RV Segment – Year to Date

Net sales of the RV Segment in the first nine months of 2011 increased 13 percent compared to the same period of 2010. Net sales of components were to the following markets (in thousands):

	2011		2010		Change
RV Original Equipment Manufacturers:
Travel Trailer and
Fifth-Wheels	$	395,645	$	354,317		12	%
Motorhomes		13,101		13,710		(4	)%
RV Aftermarket		9,793		9,816		0	%
Other		21,117		12,835		65	%
Total	$	439,656	$	390,678		13	%

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

	2011		2010		Change
Travel Trailer and
Fifth-Wheel RVs		167,700		160,200		5	%
Motorhomes		20,000		19,700		2	%

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

Sales of components to motorhome OEMs declined 4 percent, compared to a 2 percent increase in industry-wide wholesale production of motorhomes. Excluding the impact of acquisitions, which added $1 million in sales during the first nine months of 2011, the Company’s sales of components for motorhomes declined 9 percent, primarily because of the loss of market share by certain of the Company’s motorhome customers. However, in the past year, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration.

Sales to other related industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains and acquisitions which added $2 million in net sales during the first nine months of 2011. The Company believes there are significant opportunities in these adjacent markets. The acquisition of Starquest during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team added earlier in 2011, is expected to accelerate the Company’s growth in these adjacent markets.

Operating profit of the RV Segment was $40.4 million in the first nine months of 2011, an improvement of $2.4 million compared to the same period of 2010. This increase in RV Segment operating profit was 5 percent of the $49 million increase in net sales, less than the Company’s expected 20 percent incremental margin.

The operating margin of the RV Segment in the first nine months of 2011 was negatively impacted by:

Higher raw material costs. Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011, negatively impacting the operating results as the sales price increases implemented did not fully offset the peak raw material costs. Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.

Increased promotional costs due to new products being offered by the Company.

Partially offset by:

Lower overtime due to improved labor efficiencies in certain operations.

Lower workers’ compensation costs due to improved claims experience.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

MH Segment – Third Quarter

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

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

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

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

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

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

	2011		2010		Change
Content per Home Produced	$	1,527	$	1,370		11	%
Content per Floor Produced	$	980	$	846		16	%

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Operating profit of the MH Segment was $3.8 million in the third quarter of 2011, an increase of $0.8 million compared to the same period in 2010, largely due to the $6 million increase in net sales. This increase in MH Segment operating profit was 15 percent of the increase in net sales, less than the Company’s expected 20 percent incremental margin, primarily due to higher raw material costs, partially offset by improved operating efficiencies. Raw material costs, in particular steel and aluminum, increased monthly during the first half of 2011, negatively impacting the operating results in the third quarter of 2011 as the sales price increases implemented did not fully offset the peak raw material costs. Beginning in June 2011, the cost of steel began to decline, and more recently, aluminum has also declined. As a result, the Company expects the impact of high raw material costs to decline over the coming months, as the Company begins to use the lower cost raw materials.

MH Segment – Year to Date

Net sales of the MH Segment for the first nine months of 2011 increased 8 percent compared to the same period of 2010. Net sales of components were to the following markets (in thousands):

	2011		2010		Change
Manufactured Housing Original
Equipment Manufacturers	$	58,623	$	55,406		6	%
Manufactured Housing Aftermarket		12,693		13,000		(2	)%
Other		10,598		7,468		42	%
Total	$	81,914	$	75,874		8	%

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

	2011		2010		Change
Total Homes Produced		37,100		40,000		(7	)%
Total Floors Produced		57,400		64,500		(11	)%

Operating profit of the MH Segment was $9.0 million in the first nine months of 2011, an increase of $0.7 million compared to the same period in 2010, largely due to the $6 million increase in net sales. This increase in MH Segment operating profit was 12 percent of the increase in net sales, less than the Company’s expected 20 percent incremental margin.

The operating margin of the MH Segment in the first nine months of 2011 was negatively impacted by:

Partially offset by:

Improved operating efficiencies.

The spreading of fixed manufacturing and selling, general and administrative costs over a $6 million larger sales base

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Other Non-Segment Items

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

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Net gain (loss) on sale or write-down to fair value of vacant facilities	$	122		$	(446	)	$	122		$	(280	)
Acquisition related earn-outs:
Fair value adjustment		441			1,040			(215	)		934
Accretion (1)		(1,394	)		(1,118	)		(445	)		(598	)
Net gain on insurance claim		-			859			-			457
Other		-			68			13			13
Total other non-segment items	$	(831	)	$	403		$	(525	)	$	526

(1)

In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a liability for the fair value of these expected earn-out payments at September 30, 2011, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 15.5 percent. Each period, an expense, similar to interest, will be recorded in selling, general and administrative expenses over the term of the earn-out due to the accretion of the present value of the liability for the estimated earn-out payments.

Income Taxes

The effective tax rate for the first nine months of 2011 and 2010 was 38.8 percent. The effective tax rate of 38.4 percent for the third quarter of 2011 was higher than the effective tax rate of 37.0 percent in the 2010 third quarter. The 2010 tax rate in the third quarter was lower than normal due primarily to the expiration of certain state and federal tax statute of limitations. The full year 2011 effective tax rate is expected to be approximately 38.5 percent to 39 percent.

In May 2011, Indiana lowered its corporate income tax rate from 8.5 percent currently, to 6.5 percent over 4 years, beginning in 2012. When fully implemented, this tax rate reduction will annually save the Company about $150,000 in state taxes for every $10 million of consolidated pre-tax income. As a result of this lower state tax rate in Indiana, and additional state tax credits received in connection with the Company’s recent acquisitions and new projects, the full year effective 2012 tax rate is expected to decline to approximately 38 to 38.5 percent.

LIQUIDITY AND CAPITAL RESOURCES

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Cash Flows from Operations

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

A $5.7 million larger increase in accounts receivable in the first nine months of 2011, compared to the first nine months of 2010, due primarily to 22 percent higher net sales in September 2011 as compared to September 2010. Accounts receivable balances remain current, with only 23 days sales outstanding at September 30, 2011.

A $3.9 million larger increase in inventories in the first nine months of 2011, compared to the first nine months of 2010, due to both higher raw material costs and increased inventory quantities. The increased inventory quantities were in part to ensure uninterrupted supply during the integration of the acquired operations. However, based on current RV and manufactured housing industry demand, the present inventory levels are higher than needed on an on-going basis, and the Company is working to improve inventory turns on a sustainable basis. Inventory turnover for the twelve months ended September 30, 2011 was 6.0 turns, lower than the 6.5 turns for the full year 2010 and the 6.8 turns for the twelve months ended September 30, 2010.

Partially offset by:

A $2.3 million increase in depreciation and amortization, primarily due to capital expenditures and acquisitions.

In September 2011, the Company entered into a derivative instrument for 3 million pounds of aluminum to manage a portion of the exposure to movements associated with aluminum costs in 2012, representing approximately 10 percent of the Company’s anticipated aluminum purchases in 2012. While this derivative instrument is considered to be an economic hedge of the underlying movement in the price of aluminum, it is not designated or accounted for as a hedge. This derivative instrument will be settled on a monthly basis throughout 2012.

Depreciation and amortization was $15.1 million in the first nine months of 2011, and is expected to aggregate $20 million for the full year 2011. Further, the Company estimates that depreciation and amortization will be $22 million in 2012.

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

Cash Flows from Investing Activities

Cash flows used for investing activities of $61.3 million in the first nine months of 2011 included four acquisitions for $49.3 million and capital expenditures of $17.7 million. These were funded from available cash, including $5.0 million received from the maturity of U.S. Treasury Bills classified as short-term investments, plus borrowings pursuant to the Company’s $50 million line of credit.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

On January 28, 2011, the Company acquired the operating assets and business of Home-Style Industries, and its affiliated companies. Home-Style had annual sales of approximately $12 million comprised primarily of a full line of upholstered furniture and mattresses primarily for towable RVs, in the Northwest U.S. market. The purchase price was $7.3 million paid at closing from available cash, plus contingent consideration based on future sales of existing products in specified geographic regions. At the date of acquisition, the Company estimated the aggregate earn-out payments would be $0.2 million.

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

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

Estimates for 2011 are that capital expenditures will be $25 million for the full year, including $4 million for four new facilities the Company has purchased, three of which the Company had previously been leasing, and $11 million for the Company’s new aluminum extrusion operation. Further, the Company estimates that capital expenditures will be $14 to $16 million in 2012.

At September 30, 2011, the Company was attempting to sell six owned facilities with an aggregate carrying value of $10.1 million, which are not being used in production. The Company has leased to third parties four of these owned facilities with a combined carrying value of $8.5 million, for one to five year terms, for a combined rental income of $0.1 million per month. Each of these four leases also contains an option for the lessee to purchase the facility at an amount in excess of carrying value. In addition to these six owned facilities, the Company is attempting to sublease four vacant facilities which it leases.

Cash flows used for investing activities of $31.3 million in the first nine months of 2010 consisted of the acquisition of certain assets and business of Schwintek, Inc. for $20.0 million, the acquisition of the patent-pending design for a six-point leveling system for fifth-wheel RVs for $1.4 million, and the acquisition of the operating assets of Sellers Mfg., Inc. for $0.5 million, as well as $7.7 million of capital expenditures, all of which were financed from available cash.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Cash Flows from Financing Activities

Cash flows provided by financing activities for the first nine months of 2011 of $7.6 million were primarily due to a net increase in indebtedness of $8.1 million, at a weighted average interest rate of 2.5 percent. During the 2011 third quarter, the Company’s borrowings on its line of credit reached a high of $15.8 million. During 2011, the Company has invested $67.1 million in acquisitions and capital expenditures, utilizing its available cash and necessitating borrowing under its line of credit. Due to the seasonal nature of the business, the Company expects the indebtedness to decline over the balance of the year.

In connection with several acquisitions since 2009, if certain sales targets for the acquired products are achieved, the Company would pay earn-outs to the sellers. The Company has recorded a $13.5 million liability for the aggregate fair value of these expected earn-out payments at September 30, 2011. For further information see Note 10 of the Notes to Condensed Consolidated Financial Statements.

Simultaneously, the Company entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”), amending and increasing the Company’s previous $125.0 million “shelf-loan” facility with Prudential. The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. At September 30, 2011 and 2010, there were no Senior Promissory Notes outstanding. This facility expires on February 24, 2014.

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

CORPORATE GOVERNANCE

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

CONTINGENCIES

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

INFLATION

The prices of key raw materials, consisting primarily of steel and aluminum, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and after rising significantly during the first part of 2011, have recently moderated. The Company did not experience any significant increase in its labor costs in the first nine months of 2011 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, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, earn-outs payments, environmental liabilities, contingencies and litigation. The Company bases its estimates on historical experience, other available information and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates under different assumptions or conditions.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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

DREW INDUSTRIES INCORPORATED

Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates as a result of its financing activities. At September 30, 2011, the Company had $8.1 million of variable rate debt outstanding. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to September 30, 2011, future cash flows would be reduced by less than $0.1 million per annum.

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

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

The Company has historically been able to obtain sales price increases to offset the majority of raw material cost increases, however there can be no assurance that future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such increases will match the raw material cost increases.

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

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

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, 2011 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

Item 1A - RISK FACTORS

There have been no material changes to the matters discussed in Part I, Item 1A - Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 11, 2011, except as noted below.

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

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

Item 6 – EXHIBITS

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, 2011

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LCI Industries (LCII) 10-Q2011 Q3 Quarterly report

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