LCI Industries (LCII) 10-Q 2004 Q3 Quarterly report

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, 2004

OR

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

For the transition period from _________________ to _________________

Commission File Number:   0-13646

DREW INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)

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

200 Mamaroneck Avenue, White Plains, N.Y. 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes |X|    No |_|

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 10,278,788 shares of common stock as of November 1, 2004.

DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004

(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	7–12
Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13–23
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE               ABOUT MARKET RISK	24
Item 4 – CONTROLS AND PROCEDURES	25
PART II – OTHER INFORMATION
Item 1 – LEGAL PROCEEDINGS	26
Item 6 – EXHIBITS	26
SIGNATURES	27
EXHIBIT 31.1 – SECTION 302 CEO CERTIFICATION	28
EXHIBIT 31.2 – SECTION 302 CFO CERTIFICATION	29
EXHIBIT 32.1 – SECTION 906 CEO CERTIFICATION	30
EXHIBIT 32.2 – SECTION 906 CFO CERTIFICATION	31

2

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Nine Months Ended September 30,				Three Months Ended September 30,
	2004		2003		2004		2003
(In thousands, except per share amounts)
Net sales	$	398,540	$	266,344	$	148,830	$	96,107
Cost of sales		308,199		200,041		115,928		70,637
Gross profit		90,341		66,303		32,902		25,470
Selling, general and administrative expenses		53,143		39,279		19,874		13,980
Other income		428		—		—		—
Operating profit		37,626		27,024		13,028		11,490
Interest expense, net		2,267		2,340		854		722
Income from continuing operations        before income taxes		35,359		24,684		12,174		10,768
Provision for income taxes		13,702		9,629		4,660		4,186
Income from continuing operations		21,657		15,055		7,514		6,582
Discontinued operations		—		138		—		—
Net income	$	21,657	$	15,193	$	7,514	$	6,582
Net income per common share:
Income from continuing operations:
Basic	$	2.11	$	1.50	$	.73	$	.65
Diluted	$	2.04	$	1.47	$	.71	$	.64
Discontinued operations:
Basic			$	.01
Diluted			$	.01
Net income:
Basic	$	2.11	$	1.51	$	.73	$	.65
Diluted	$	2.04	$	1.48	$	.71	$	.64
Weighted average common shares outstanding:
Basic		10,271		10,044		10,296		10,118
Diluted		10,599		10,256		10,621		10,337

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

3

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	September 30,						December 31,
	2004			2003			2003
(In thousands, except shares and per share amount)
ASSETS
Current assets
Cash and cash equivalents	$	2,780		$	9,433		8,781
Accounts receivable, trade, less allowances		39,140			22,775		14,844
Inventories		79,625			35,232		37,311
Prepaid expenses and other current assets		5,875			5,253		7,478
Total current assets		127,420			72,693		68,414
Fixed assets, net		96,503			72,816		72,211
Goodwill		17,397			10,219		12,333
Other intangible assets		6,424			4,456		4,953
Other assets		2,947			2,957		2,193
Total assets	$	250,691		$	163,141		160,104
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable, including current maturities of
long–term indebtedness	$	12,491		$	9,825		9,931
Accounts payable, trade		20,409			12,864		9,089
Accrued expenses and other current liabilities		35,837			24,232		19,694
Discontinued operations		—			69		—
Total current liabilities		68,737			46,990		38,714
Long–term indebtedness		62,266			25,363		24,825
Other long–term liabilities		2,082			2,997		2,912
Total liabilities		133,085			75,350		66,451
Commitments and Contingencies
Stockholders’ equity
Common stock, par value $.01 per share: authorized
30,000,000 shares; issued 12,428,113 shares at September 2004;
12,257,208 shares at September 2003 and 12,353,168 at
December 2003		124			123		124
Paid–in capital		34,987			31,060		32,691
Retained earnings		101,962			76,075		80,305
		137,073			107,258		113,120
Treasury stock, at cost – 2,149,325 shares		(19,467	)		(19,467	)	(19,467	)
Total stockholders’ equity		117,606			87,791		93,653
Total liabilities and stockholders’ equity	$	250,691		$	163,141		160,104

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

4

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2004			2003
(In thousands)
Cash flows from operating activities:
Net income	$	21,657		$	15,193
Adjustments to reconcile net income to cash flows provided by operating activities:
Discontinued operations, net of taxes		—			(138	)
Income from continuing operations		21,657			15,055
Depreciation and amortization		6,842			5,878
Loss on disposal of fixed assets		243			106
Stock based compensation expense		804			250
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable, net		(19,168	)		(9,592	)
Inventories		(35,740	)		2,247
Prepaid expenses and other assets		3,274			4,082
Accounts payable, accrued expenses and other liabilities		20,951			9,498
Net cash flows (used for) provided by continuing operating activities		(1,137	)		27,524
Income from discontinued operations		—			138
Changes in discontinued operations		—			771
Net cash flows (used for) provided by operating activities		(1,137	)		28,433
Cash flows from investing activities:
Capital expenditures		(19,781	)		(3,906	)
Acquisition of company’s business		(21,388	)		(3,752	)
Proceeds from sales of fixed assets		341			65
Other investments		(289	)		—
Net cash flows used for investing activities		(41,117	)		(7,593	)
Cash flows from financing activities:
Proceeds from line of credit and other borrowings		170,470			31,550
Repayments under line of credit and other borrowings		(135,709	)		(45,517	)
Exercise of stock options		1,492			2,244
Net cash flows provided by (used for) financing activities		36,253			(11,723	)
Net (decrease) increase in cash		(6,001	)		9,117
Cash and cash equivalents at beginning of period		8,781			316
Cash and cash equivalents at end of period	$	2,780		$	9,433
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt	$	2,289		$	2,717
Income taxes, net of refunds	$	7,105		$	5,935

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

5

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

	Common Stock		Paid–in Capital		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
(In thousands, except shares)
Balance – December 31, 2003	$	124	$	32,691	$	80,305	$	(19,467	)	$	93,653
Net income for nine months ended
September 30, 2004						21,657					21,657
Issuance of 74,945 shares of common
stock pursuant to stock option plan				849							849
Income tax benefit relating to issuance
of common stock pursuant to stock option plan				643							643
Stock based compensation expense				804							804
Balance – September 30, 2004	$	124	$	34,987	$	101,962	$	(19,467	)	$	117,606

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

6

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

1. Basis of Presentation

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

          The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2003 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report.

          In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations as of and for the nine and three month periods ended September 30, 2004 and 2003. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include some information and notes necessary to conform with annual reporting requirements.

2. Segment Reporting  

          The Company has two reportable operating segments, the recreational vehicle and leisure products segment (the “RV segment”) and the manufactured housing products segment (the “MH segment”). The RV segment, which accounted for 66 percent of consolidated net sales for the nine months ended September 30, 2004 and 62 percent of consolidated net sales for the nine months ended September 30, 2003, manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis, chassis parts, slide out mechanisms and related power units and electric stabilizer jacks. The RV segment also manufactures specialty trailers for equipment hauling, boats, personal watercraft and snowmobiles. The MH segment, which accounted for 34 percent of consolidated net sales for the nine months ended September 30, 2004 and 38 percent of consolidated net sales for the nine months ended September 30, 2003, manufactures a variety of products used in the construction of manufactured homes, and to a lesser extent, modular housing and office units, including vinyl and aluminum windows, chassis, chassis parts and thermo-formed bath and shower units. Intersegment sales are insignificant.

          Decisions concerning the allocation of the Company’s resources are made by the Company’s key executives. This group evaluates the performance of each segment based upon segment profit or loss, defined as income before interest, amortization of intangibles and income taxes. Management of debt is considered a corporate function. The accounting policies of the RV and MH segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements, of the Company’s December 31, 2003 Annual Report on Form 10-K.

7

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

          Information relating to segments follows(in thousands):

	Nine Months Ended September 30,						Three Months Ended September 30,
	2004			2003			2004			2003
Net sales:
RV segment	$	262,856		$	165,010		$	95,885		$	59,296
MH segment		135,684			101,334			52,945			36,811
Total	$	398,540		$	266,344		$	148,830		$	96,107
Operating profit:
RV segment	$	26,598		$	19,392		$	8,333		$	7,976
MH segment		15,498			11,219			6,441			4,740
Total segments operating profit	$	42,096		$	30,611		$	14,774		$	12,716
Amortization of intangibles		(753	)		(571	)		(287	)		(196	)
Corporate and other		(4,145	)		(3,016	)		(1,459	)		(1,030	)
Other income		428			—			—			—
Operating profit	$	37,626		$	27,024		$	13,028		$	11,490

3. Acquisitions

          On May 4, 2004, Lippert, the Company’s wholly-owned subsidiary, acquired California-based Zieman Manufacturing Company (“Zieman”). Zieman is a manufacturer of specialty trailers for equipment hauling, boats, personal watercraft and snowmobiles, and chassis and chassis parts for towable recreational vehicles and manufactured homes. The purchase price was $21.4 million, plus $5.2 million of Zieman’s debt which the Company assumed on closing. The purchase price was funded with borrowings under the Company’s line of credit. Zieman has 10 plants in 4 states in the western United States.

          The results of the acquired business have been included in the Company’s Consolidated Statement of Income beginning May 4, 2004. Zieman’s sales for its fiscal year ended December 31, 2003 were approximately $42 million. The operations of Zieman are being integrated with those of Lippert. The production processes and raw materials used by Zieman are substantially similar to those of Lippert, and it is expected that the operating margins achieved by this newly-acquired business will, over time, approximate those achieved by Lippert.

          Total consideration was allocated as follows(in thousands):

Net tangible assets acquired	$	18,964
Identifiable intangible assets		2,600
Goodwill		5,064
Total consideration		26,628
Less: Debt assumed		(5,240	)
Total cash consideration	$	21,388

8

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

4. Inventories

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

          Inventories consist of the following(in thousands):

	September 30,				December 31,
	2004		2003		2003
Finished goods	$	11,982	$	6,690	$	7,438
Work in process		2,189		1,359		1,165
Raw material		65,454		27,183		28,708
Total	$	79,625	$	35,232	$	37,311

5. Long Term Indebtedness

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

	September 30,				December 31,
	2004		2003		2003
Senior Notes payable at the rate of $8,000 per annum   on January 28, with interest payable semi-annually at the   rate of 6.95% per annum; final payment   due January 28, 2005	$	8,000	$	16,000	$	16,000
Notes payable pursuant to a primary credit agreement   expiring April 30, 2006 consisting of a line of credit, not   to exceed $55,000; interest at prime rate or LIBOR plus   a rate margin based upon the Company’s performance		44,445		—		—
Notes payable pursuant to a credit agreement expiring   October 29, 2004 consisting of a line of credit, not   to exceed $2,500; interest at prime rate or an offshore rate		2,000		—		—
Industrial Revenue Bonds, interest rates at September 30, 2004   of 1.75% to 6.28%, due 2008 through 2017; secured by   certain real estate and equipment		7,370		8,068		7,858
Real estate mortgage payable at the rate of $70 per month   with a balloon payment of $3,371 in May 2006,   interest at 9.03% per annum		4,151		4,590		4,484
Other loans primarily secured by certain real estate and   equipment, due 2005 to 2016, stated interest rates   of 3.75% to 9.31%		8,791		6,530		6,414
		74,757		35,188		34,756
Less current portion		12,491		9,825		9,931
Total long-term indebtedness	$	62,266	$	25,363	$	24,825

9

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

          In connection with the acquisition of Zieman, the Company assumed $5.2 million of Zieman’s debt. Included in Zieman’s debt was a line of credit for $2.5 million, which was repaid on October 29, 2004. The remaining debt of Zieman consists of Industrial Revenue Bonds, real estate mortgages and other loans with stated interest rates at the time of the acquisition ranging from 1.25% to 9.31%, due 2005 to 2012.

          On August 23, 2004, the Company’s credit agreement was increased to $55 million. The line of credit will automatically reduce to $50 million on October 31, 2004 and $45 million on November 30, 2004.

          Pursuant to the Senior Notes, the credit agreements, and certain of the other loan agreements, the Company is required to maintain minimum net worth and interest and fixed charge coverages and to meet certain other financial requirements. The Company is in compliance with all such requirements. Borrowings under the Senior Notes and the credit agreements are secured only by the capital stock of the Company’s subsidiaries.

          On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association with a notional amount of $20,000,000 from which it will receive periodic payments at the 3 month LIBOR rate plus the Company’s applicable spread and make periodic payments at a fixed rate of 3.3525% plus the Company’s applicable spread, with settlement and rate reset dates every November 15, February 15, May 15 and August 15. The notional amount of the interest rate swap decreases by $1,000,000 on each quarterly reset date beginning February 15, 2005. The fair value of the swap is zero at inception.

6. Weighted Average Common Shares Outstanding

          Net income per diluted common share reflects the dilution of the weighted average common shares by the assumed issuance of common stock pertaining to stock options. The numerator, which is equal to net income, is constant for both the basic and diluted earnings per share calculations. Weighted average common shares outstanding — diluted is calculated as follows(in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,
	2004		2003		2004		2003
Weighted average common shares      outstanding – basic		10,271		10,044		10,296		10,118
Assumed issuance of common stock      pertaining to stock options		328		212		325		219
Weighted average common shares      outstanding – diluted		10,599		10,256		10,621		10,337

7. Stock Options

          In 2002, the Company adopted the fair value method of accounting for stock options contained in Statement of Financial Standards No. 123 (“SFAS No. 123”) “Accounting for Stock-Based Compensation,” which is considered the preferable method of accounting for stock-based employee compensation. During the transition period, the Company will be utilizing the prospective method under SFAS No.148 “Accounting for Stock-Based Compensation – Transition and Disclosures.” All employee stock options granted subsequent to January 1, 2002 are being expensed over the stock option vesting period based on fair value, determined using the Black-Scholes option-pricing method, at the date the options were granted.

10

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

          Historically, the Company had applied the “disclosure only” option of SFAS No.123. Accordingly, no compensation cost has been recognized for stock options granted prior to January 1, 2002.

          Compensation expense related to stock options was $635,000 and $212,000 for the nine and three months ended September 30, 2004, respectively, and $90,000 and $30,000 for the nine and three months ended September 30, 2003, respectively. The following table illustrates the effect on net income and net income per common share as if the fair value method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts):

	Nine Months Ended September 30,						Three Months Ended September 30,
	2004			2003			2004			2003
Net income as reported	$	21,657		$	15,193		$	7,514		$	6,582
Add: Stock based employee compensation
expense included in reported net
income, net of related tax effects		389			55			131			18
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effect		(593	)		(266	)		(197	)		(89	)
Pro forma net income	$	21,453		$	14,982		$	7,448		$	6,511
Net income per common share:
Basic – as reported	$	2.11		$	1.51		$	.73		$	.65
Basic – pro forma	$	2.09		$	1.49		$	.72		$	.64
Diluted – as reported	$	2.04		$	1.48		$	.71		$	.64
Diluted – pro forma	$	2.02		$	1.46		$	.70		$	.63

8. Other Income

        In February 2004, the Company sold certain intellectual property rights relating to a process used to manufacture a new composite material. Simultaneously with the sale, the Company entered into an equipment lease and a license agreement with the buyer. The lease is still not effective since the equipment and tooling received by the Company from the lessor is not yet operational. The Company plans to use the new composite material in the production of certain bath products for the manufactured housing, modular housing, and recreational vehicle industries on an exclusive, royalty-free basis. This new composite material will enable the Company to better compete against fiberglass bath products in these industries. The Company will also have the right to use the new composite material on a royalty-free, non-exclusive basis to manufacture various other products for the manufactured housing, modular housing, and recreational vehicle industries. Sales of these new products, if any, are not expected to be significant in 2004.

        The sale price for the intellectual property rights was $4.0 million, consisting of cash of $100,000 at closing and a note of $3.9 million, payable over five years. The Company had a minimal basis in the intellectual property sold. In 2004, the Company has received the payments under the note of approximately $.5 million. The note bears interest at increasing annual interest rates, and is secured by a lien on the intellectual property rights sold, a right of offset against the lease, and a guaranty. The note is convertible at the Company’s option into an equity interest in the new venture that the buyer has formed to promote this process. A pre-tax gain on sale of $428,000 was recorded in the first quarter of 2004. Additional gains, if any, will be recorded as payments on the $3.5 million balance of the note are received.

11

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

9. Commitments

          On October 8, 2004, the Company entered into an agreement to purchase approximately 37 acres of land and several buildings consisting of approximately 468,000 sq. ft. of manufacturing and office space. The purchase price is $6.2 million, payable $0.5 million upon signing the agreement and $2.6 million upon the current tenant vacating the property. Both payments will be paid into escrow until the final payment of $3.1 million is made on or about January 2, 2006 when title will pass to the Company. Until the closing, which is subject to the completion of environmental due diligence and other conditions, the Company will lease such property from the owner as the current tenant vacates the property. The property is owned by a primary owner of a significant customer of the Company, which is the current tenant.

          This space will primarily be used to consolidate existing office space and manufacturing capacity from other leased facilities, as well as to provide manufacturing capacity for new product development.

12

DREW INDUSTRIES INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The Company has two reportable operating segments, the recreational vehicle and leisure products segment (the “RV segment”) and the manufactured housing products segment (the “MH segment”).

          The Company’s operations are conducted through its operating subsidiaries. Its two primary operating subsidiaries, Kinro, Inc. (“Kinro”) and Lippert Components, Inc. (“Lippert”) have operations in both the MH and RV segments. At September 30, 2004, the Company’s subsidiaries operated 51 plants in the United States and one in Canada.

          The RV segment accounted for 64 percent of consolidated net sales for the three months ended September 30, 2004 and 62 percent of the annual consolidated net sales for 2003. The RV segment manufactures a variety of products used in the production of recreational vehicles, including windows, doors, chassis, chassis parts, slide-out mechanisms and related power units, and electric stabilizer jacks. The RV segment also manufactures specialty trailers for equipment hauling, boats, personal watercraft and snowmobiles. The Company’s RV products are used primarily in travel trailers and fifth wheel RVs. Travel trailers and fifth wheel RVs accounted for 68 percent of all RVs shipped by the industry in the first nine months of 2004, up from 61 percent in 2001. In recent months, the Company has begun to focus its efforts on expanding its market share for products used in motorhomes, and began selling slide-out mechanisms and leveling devices for motorhomes in the second quarter of 2004.

          The MH segment, which accounted for 36 percent of consolidated net sales for the three months ended September 30, 2004 and 38 percent of the annual consolidated net sales for 2003, manufactures a variety of products used in the construction of manufactured homes, and to a lesser extent, modular housing and office units, including vinyl and aluminum windows and screens, chassis, chassis parts and thermo-formed bath and shower units.

          On May 4, 2004, Lippert acquired California-based Zieman Manufacturing Company (“Zieman”). Zieman is a manufacturer of specialty trailers for equipment hauling, boats, personal watercraft and snowmobiles, and chassis and chassis parts for towable recreational vehicles and manufactured homes. The purchase price was $21.4 million, plus $5.2 million of Zieman’s debt which the Company assumed on closing. The purchase price was funded with borrowings under the Company’s line of credit. Zieman has 10 plants in 4 states in the western United States.

          The results of the acquired business have been included in the Company’s Consolidated Statement of Income beginning May 4, 2004. Zieman’s sales for fiscal year ended December 31, 2003 were approximately $42 million. The operations of Zieman are being integrated with those of Lippert. The production processes and raw materials used by Zieman are substantially similar to those of Lippert, and it is expected that the operating margins achieved by this newly-acquired business will, over time, approximate those achieved by Lippert.

          Until the second quarter of 2004, the Company’s RV segment included only recreational vehicle products, however, with the Company’s acquisition of Zieman, the specialty trailer business of Zieman has been added to the RV segment.

          Intersegment sales and sales of other products are insignificant.

13

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

BACKGROUND

Recreational Vehicle Industry

          The Recreational Vehicle Industrial Association (“RVIA”) reported an 18 percent increase in total industry shipments in the first nine months of 2004, compared to the same period in 2003. Shipments of travel trailers and fifth wheel RVs, the Company’s primary market, increased 19 percent in the first nine months of 2004. In 2003, the RVIA reported an increase of 3 percent in total RV shipments to 320,800 units, while shipments of travel trailers and fifth wheel RVs increased more than nine percent in 2003 to 214,400 units. The RVIA is projecting an 8% decline in wholesale shipments of RVs in 2005, including a 6% decline in travel trailers and fifth wheel RVs. In the long-term, increasing industry RV sales are expected to continue to be driven by positive demographics, as demand for RVs is strongest from the over 50 age group, which is the fastest growing segment of the population. Industry growth also continues to be bolstered by the preference for domestic vacations, rather than foreign travel, and low interest rates. In recent years, the RVIA has employed an advertising campaign to attract customers in the 35 to 54 age group, and the number of RV’s owned by those 35 to 54 grew faster than all other age groups.

Manufactured Housing Industry

          As a result of limited credit availability for purchases of manufactured homes, high interest rate spreads between conventional mortgages on site built homes and chattel loans for manufactured homes (chattel loans have been used to finance approximately 30 percent of manufactured homes purchased this year), and unusually high repossessions of manufactured homes, industry production declined approximately 65 percent since 1998, to 131,000 homes in 2003, the lowest production level in 40 years. However, based upon industry reports, retail sales of manufactured homes have declined much less severely than industry production in recent years. Almost 50 percent of retail sales in the last several years have been filled by inventory reductions by dealers and manufacturers, and the resale of repossessed homes, rather than new production. It has been estimated that approximately 90,000 to 100,000 manufactured homes were repossessed in each of 2001, 2002 and 2003, far in excess of historical repossession levels. It has been reported that the level of repossessions of manufactured homes has declined this year.

          The Manufactured Housing Institute (“MHI”) reported that industry wholesale shipments of manufactured homes declined 3 percent in the first nine months of 2004, and 2 percent in the third quarter of 2004, from the comparable periods in 2003. Industry-wide wholesale shipments of manufactured homes increased over 7 percent in September 2004, apparently due to the shipment of 1,600 manufactured homes ordered by the Federal Emergency Management Agency (FEMA) to provide emergency housing to hurricane victims in the southeastern United States. Excluding these shipments to FEMA, industry-wide wholesale shipments were down about 6 percent for September and the third quarter. The availability of financing for manufactured homes has apparently improved somewhat in recent months, and is expected to improve further, as a result of Fannie Mae’s easing of financing requirements for manufactured homes, as well as the entry of several lenders into the market. In addition, in September 2003 Berkshire Hathaway Inc. acquired Clayton Homes and Oakwood Homes, two of the leading producers of manufactured homes, as well as 21^st Mortgage. Berkshire helped Clayton raise substantial funds for its mortgage operations. Further, it has been reported that the level of repossessions of manufactured homes has declined this year. Long-term prospects for manufactured housing are favorable because manufactured homes provide quality, affordable housing.

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

Steel Prices

          Steel is one of the Company’s primary raw materials in both segments, representing about 50 percent of the Company’s raw material costs. In mid December 2003 and continuing into 2004, the Company was notified by its steel suppliers of unprecedented steel cost increases. The prices the Company pays for steel, depending on the type of steel purchased, are currently double to triple the levels they were a year ago. To offset the impact of higher steel costs, the Company implemented surcharges and sales price increases to its customers. The Company estimates that 85 percent to 90 percent of steel cost increases were passed on to customers in the third quarter of 2004, and that unrecovered steel cost increases reduced net income by between $750,000 and $1.5 million. The Company has implemented additional sales price increases in an effort to offset the impact of steel costs increases not previously recovered through sales price increases. Steel costs may remain unstable, but at this time it is not anticipated that further cost increases from suppliers will be experienced in the fourth quarter of 2004.

          The Company does not expect to earn additional profit from these sales price increases. As a result, the Company’s material cost as a percent of sales has increased, particularly for products which are made primarily from steel. However, if steel costs remain stable, the steel cost increases are not expected to have a significant effect on operating profit in 2005 because they will be substantially offset by the sales price increases which have been implemented. The carrying amount of the Company’s inventories of steel have increased substantially because of the steel cost increases and higher quantities of steel on hand due to the increase in sales volume.

RESULTS OF OPERATIONS

          Information relating to segments follows(in thousands):

	Nine Months Ended September 30,						Three Months Ended September 30,
	2004			2003			2004			2003
Net sales:
RV segment	$	262,856		$	165,010		$	95,885		$	59,296
MH segment		135,684			101,334			52,945			36,811
Total	$	398,540		$	266,344		$	148,830		$	96,107
Operating profit:
RV segment	$	26,598		$	19,392		$	8,333		$	7,976
MH segment		15,498			11,219			6,441			4,740
Total segments operating profit	$	42,096		$	30,611		$	14,774		$	12,716
Amortization of intangibles		(753	)		(571	)		(287	)		(196	)
Corporate and other		(4,145	)		(3,016	)		(1,459	)		(1,030	)
Other income		428			—			—			—
Operating profit	$	37,626		$	27,024		$	13,028		$	11,490

15

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

Consolidated Highlights

• On May 4, 2004, the Company completed the acquisition of California-based Zieman Manufacturing Company (“Zieman”), a manufacturer of a variety of specialty trailers (trailers for equipment hauling, boats, personal watercraft and snowmobiles), and chassis for RVs and manufactured homes, with sales of approximately $42 million in 2003. The acquisition was immediately accretive to the Company’s earnings per share, adding approximately $.05 per share in the five months since it was acquired.

• Net sales for the third quarter of 2004 were up 55 percent compared to the third quarter of 2003, or approximately 40 percent excluding sales price increases.

• Net income for the current quarter, of $7.5 million, was 14 percent higher than in the third quarter last year. Net income did not increase as rapidly as net sales for several reasons, including:

• Steel prices continued to rise in the third quarter of 2004, and sales price increases did not fully offset such cost increases. Additional sales price increases have recently been implemented.

• The Company did not earn any additional profit from the sales price increases which have been implemented, which caused the profit margin to decline.

• Steel prices temporarily declined in the third quarter of 2003, which caused income to increase last year. This reduced the income growth reported in the current quarter.

• Net sales of the Company’s MH segment increased 44 percent in the current quarter, compared to the third quarter last year, after increasing 41 percent in the second quarter. Organic sales growth, excluding acquisitions and sales price increases was 14 percent in the third quarter, compared to the 2 percent decline in industry-wide wholesale shipments of manufactured homes in the current quarter.

RV Segment

          Net sales of the RV segment increased 62 percent to $96 million in the third quarter of 2004. Excluding net sales of newly-acquired Zieman and sales price increases, organic sales growth of this segment was approximately 31 percent compared to the third quarter of 2003, significantly greater than the 13 percent industry-wide increase in shipments of RVs this quarter. The organic sales growth of the RV segment included an increase of 74 percent ($8 million) in sales of slide-out mechanisms and related power units and an increase of approximately 22 percent in sales of RV chassis, which both exceeded industry-wide growth. For the first nine months of 2004, sales excluding acquisitions (approximately $28 million) and sales price increases (approximately $17 million) increased 32% over the comparable period in 2003. The Company now has a very substantial share of the market for slide-out mechanisms for towable RVs, and expects future growth in sales of its slide-out products to come largely from slide-out products for motorhomes, which the Company began selling in the second quarter of 2004.

          The RV segment results for the third quarter also included sales by newly-acquired Zieman of nearly $5 million of RV chassis and chassis parts and more than $6 million of specialty trailers. In calendar 2003, Zieman had approximately $12 million in sales of RV chassis and chassis parts, and approximately $19 million in sales of specialty trailers.

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

          Operating profit of the RV segment increased 37 percent to $26.6 million in the first nine months of 2004, but increased only 4 percent to $8.3 million in the third quarter, over the comparable periods in 2003. For the nine month period, the operating profit margin of this segment was 10.1 percent of sales, compared to 11.8 percent in the same period last year. For the third quarter of 2004, the operating profit margin was 8.7 percent, down from the 13.5 percent margin achieved in the third quarter last year. The decline in the operating profit margin of the RV segment resulted largely from continued increases in the price of steel, and, to a lesser extent aluminum, not all of which were passed on to customers, coupled with a temporary decline in the price of steel in the third quarter last year.

          The increase in raw material prices for the quarter aggregated approximately $11 million in the RV segment, or nearly 21 percent of material costs of sales for the quarter. In response to these cost increases, the Company raised its sales prices on certain of its products. For the Company’s RV segment, these sales price increases aggregated approximately $9 million in the third quarter of 2004. The Company recently implemented additional sales price increases to further offset the cost increases. Further, the current quarter operating profit margin of the RV segment was reduced by about $350,000 of start-up costs related to new products.

          Excluding the impact of the sales price increases described above, labor and manufacturing overhead costs for the current quarter declined by approximately 1.4 percent of sales, as compared to the third quarter last year, due largely to favorable production efficiencies in the RV segment, and the spreading of fixed production costs over a larger sales base. In addition, group medical insurance and overtime costs declined as a percent of sales.

MH Segment

          Net sales of the MH segment increased 44 percent to $52.9 million in the third quarter. Excluding net sales by newly-acquired Zieman (approximately $6 million) and sales price increases, organic sales growth of this segment was approximately 14 percent over the third quarter of 2003, compared to the 2 percent industry-wide decline in shipments of manufactured homes this quarter. For the first nine months of 2004, sales excluding net sales by Zieman (approximately $10 million) and sales price increases (approximately $7 million) increased 16% over the comparable period in 2003. Organic sales growth by this segment resulted primarily from market share gains.

          In response to the substantial increases in the cost of steel described above, and to a lesser extent, aluminum, the Company raised its sales prices on certain of its products. For the Company’s MH segment, these sales price increases aggregated approximately $5 million in the third quarter of 2004. The Company has now obtained price increases from its customers that are sufficient to offset the increases in the cost of the steel and aluminum used by this segment, and therefore, these cost increases to date are not expected to have a significant effect on the operating profit of this segment over the balance of 2004.

          Operating profit of the MH segment increased 38 percent to $15.5 million in the first nine months of 2004, and increased 36 percent to $6.4 million in the third quarter, over the comparable periods in 2003. For the nine month period, the operating profit margin of this segment was 11.4 percent of sales, compared to 11.1 percent in the same period last year. For the third quarter of 2004, the operating profit margin was 12.2 percent, compared to the 12.9 percent margin achieved in the third quarter last year. The operating profit margin of this segment in the third quarter was favorably impacted by the spreading of fixed costs over a larger sales base; however, this was offset by the inclusion of Zieman’s operations, which currently have lower margins than Drew’s other operations in the MH segment, as well as the fact that raw material cost increases were passed along to customers without full markup.

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

Corporate and Other

          Corporate and other expenses for the first nine months of 2004 increased $1.1 million compared to the same period in 2003; for the third quarter corporate and other expenses increased $0.4 million. The increase for the third quarter was largely the result of a $0.3 million increase in consulting and audit fees related to compliance with Section 404 of Sarbanes-Oxley, and, to a lesser extent, higher stock option expense. On a consolidated basis, stock option expense increased $0.5 million in the first nine months of 2004, most of which is included in segment results.

Other Income

          In February 2004, the Company sold certain intellectual property rights relating to a process used to manufacture a new composite material. Simultaneously with the sale, the Company entered into an equipment lease and a license agreement with the buyer. The lease is still not effective since the equipment and tooling received by the Company from the lessor is not yet operational. The Company plans to use the new composite material in the production of certain bath products for the manufactured housing, modular housing, and recreational vehicle industries on an exclusive, royalty-free basis. This new composite material will enable the Company to better compete against fiberglass bath products in these industries. The Company will also have the right to use the new composite material on a royalty-free, non-exclusive basis to manufacture various other products for the manufactured housing, modular housing, and recreational vehicle industries. Sales of these new products, if any, are not expected to be significant in 2004.

          The sale price for the intellectual property rights was $4.0 million, consisting of cash of $100,000 at closing and a note of $3.9 million, payable over five years. The Company had a minimal basis in the intellectual property sold. In 2004, the Company has received the payments under the note of approximately $.5 million. The note bears interest at increasing annual interest rates, and is secured by a lien on the intellectual property rights sold, a right of offset against the lease, and a guaranty. The note is convertible at the Company’s option into an equity interest in the new venture that the buyer has formed to promote this process. A pre-tax gain on sale of $428,000 was recorded in the first quarter of 2004. Additional gains, if any, will be recorded as payments on the $3.5 million balance of the note are received.

18

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

Taxes

          The effective tax rate for the first nine months of 2004 was 38.8 percent as compared to 39.0 percent for the first nine months of 2003. The effective tax rate for the full year 2003 was 38.0 percent. The increase in the effective tax rate in 2004 is due in part to a change in the composition of pre-tax income for state tax purposes.

Interest Expense, Net

          Interest expense, net, for the nine months of 2004 remained approximately the same as in the same period last year 2003, as lower debt levels early in the year were offset by higher debt resulting from the acquisition of Zieman on May 4, 2004, and higher working capital levels primarily for steel inventory and accounts receivable. Interest expense in the third quarter of 2004 increased approximately $.1 million over the third quarter last year, largely due to higher debt levels.

          On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association with a notional amount of $20,000,000 from which it will receive periodic payments at the 3 month LIBOR rate plus the Company’s applicable spread and make periodic payments at a fixed rate of 3.3525% plus the Company’s applicable spread, with settlement and rate reset dates every November 15, February 15, May 15 and August 15. The notional amount of the interest rate swap decreases by $1,000,000 on each quarterly reset date beginning February 15, 2005. The fair value of the swap is zero at inception.

LIQUIDITY AND CAPITAL RESOURCES

          The Statements of Cash Flows reflects the following(in thousands):

	Nine Months Ended September 30,
	2004			2003
Net cash flows (used for) provided by operating activities	$	(1,137	)	$	28,433
Net cash flows used for investment activities	$	(41,117	)	$	(7,593	)
Net cash flows provided by (used for) financing activities	$	36,253		$	(11,723	)

Cash Flow from Operations

          Despite a $6.6 million increase in income from continuing operations during the current nine month period, net cash flows from operating activities decreased $29.6 million compared to the same period in 2003 due to:

a) A larger increase in accounts receivable for the third quarter of 2004. The increase in accounts receivable this year was higher than the 2003 period, primarily because of the increase in net sales. Days sales outstanding in receivables remained fairly steady at approximately 23 days compared to 21 days in the prior year.

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

b) A $35.7 million increase in inventories during the first nine months of 2004, compared to a $2.2 million decrease in inventories during the same period last year. Inventories at September 30, 2004 were $44.4 million higher than at September 30, 2003. Approximately $14 to $18 million of this increase is due to the higher cost of steel, and $7 million resulted from the acquisition of Zieman. The balance of the increase in inventory was primarily due to increased inventory needs to service the 23 percent organic increase in sales this quarter. In order to obtain the best steel costs, the Company strategically purchased steel in larger quantities throughout the first nine months of 2004, also contributing to the increase. In the third quarter, a program was implemented to reduce inventory levels, and inventory declined approximately $8 million during the month of September 2004. Further reductions are expected in the fourth quarter. Despite the higher inventory levels, there was only approximately a 1 to 2 week supply of finished goods on hand at each of September 30, 2004 and 2003. The inventory decline in the first nine months of 2003 resulted from a concerted effort by management to reduce inventories at all locations, as well as strategic buying of certain raw materials at December 31, 2002.

c) The above items were partially offset by a $21.0 million increase in accounts payable, accrued expenses and other current liabilities, compared to an increase of $9.5 million in the prior year. Trade payables, which increased in proportion to the increase in inventories, are generally paid within the discount period.

Cash Flows for Investing Activities:

          Cash flows used for investing activities of $41.1 million in the first nine months of 2004 included $21.4 million for the cash portion of the acquisition purchase price for Zieman. The balance of cash flows from investing activities consists primarily of $19.8 million of capital expenditures. Capital expenditures for the full year are expected to be $22 to $25 million. The budgeted capital expenditures for 2004 will add a total of approximately 250,000 square feet of manufacturing space, expanding several existing facilities and adding several new facilities.  The expansion will significantly increase Drew’s capacity to efficiently produce vinyl windows for manufactured homes, to temper glass used in RV windows, to produce and paint RV chassis, to produce axles for towable RVs, to produce specialty trailers in the central United States, and to manufacture slide-out mechanisms for motorhomes and RV leveling devices.

          The acquisition of Zieman and the capital expenditures were financed primarily by borrowings under the Company’s line of credit. In addition, in October the Company borrowed $3.9 million pursuant to an Industrial Development Bond, and $4 million pursuant to a $10 million equipment line of credit. The Company expects to borrow an additional $2 million to $6 million in the fourth quarter of 2004, to finance capital projects.

          Cash flows used for investing activities for the full year 2003 were $12.4 million, consisting of capital expenditures ($5.1 million) and two acquisitions for a combined $7.4 million. Capital expenditures for the first nine months of 2003 were $3.9 million.

20

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

Cash Flows from Financing Activities

          Cash flows used for financing activities for the first nine months of 2004 include a net increase in debt of $34.8 million, and $1.5 million received from the exercise of employee stock options. The increase in debt was used primarily to fund the acquisition of Zieman, the increase in working capital, and capital expenditures.

          Availability under the Company’s $55 million line of credit was $7.8 million at September 30, 2004. Borrowings under the $55 million line of credit were $44.4 at September 30, 2004 and there were $2.8 million in outstanding letters of credit also under the line of credit. The maximum borrowing under this line of credit declines from $55 million to $50 million on October 31, 2004. Between September 30, 2004 and October 31, 2004, borrowing under this line of credit declined by more than $6 million. Availability under the Company’s line of credit, along with anticipated cash flows from operations, is adequate to finance the Company’s working capital needs. Certain of the Companies debt agreements contain a requirement that capital expenditures in excess of $11 million for 2004 must be funded with new debt. In order to meet this debt covenant, in October the Company borrowed $3.9 million pursuant to an Industrial Development Bond, and $4 million pursuant to a $10 million equipment line of credit. The Company expects to borrow an additional $2 million to $6 million in the fourth quarter of 2004, to finance capital projects. The Company is in compliance with all of its debt covenants and expects to remain in compliance for the next twelve months. Certain of the Company’s loan agreements contain prepayment penalties.

          At September 30, 2004, the Company had outstanding $8 million of 6.95 percent, seven year Senior Notes. The notes originally aggregated $40 million, and repayment of these notes is $8 million annually, of which the final payment is due in January 2005.

          The Company is currently seeking to increase its line of credit to $60 million. In addition, the new line of credit is expected to contain an “accordion” feature, which is an understanding that the banks, while not formally committed, are inclined to increase the $60 million line by up to $30 million upon the Company’s request. The Company is also negotiating with a lender for a $50 — $60 million “shelf” facility, which is an uncommitted line that the Company would seek to use to finance a significant acquisition, should the opportunity arise.

CORPORATE GOVERNANCE

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

          The Company received notification in November 2004 from Institutional Stockholders Services, Inc., (“ISS”) a Rockville, Maryland-based independent research firm that advises institutional investors, that the Company’s corporate governance policies outranked 98.5 percent of all companies listed in the Russell 3000 index. The Company has no business relationships with ISS.

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

COMMITMENTS

          On October 8, 2004, the Company entered into an agreement to purchase approximately 37 acres of land and several buildings consisting of approximately 468,000 sq. ft. of manufacturing and office space. The purchase price is $6.2 million, payable $0.5 million upon signing the agreement and $2.6 million upon the current tenant vacating the property. Both payments will be paid into escrow until the final payment of $3.1 million is made on or about January 2, 2006 when title will pass to the Company. Until the closing, which is subject to the completion of environmental due diligence and other conditions, the Company will lease such property from the owner as the current tenant vacates the property. The property is owned by a primary owner of a significant customer of the Company, which is the current tenant.

          This space will primarily be used to consolidate existing office space and manufacturing capacity from other leased facilities, as well as to provide manufacturing capacity for new product development.

CONTINGENCIES

          Lippert is a defendant in an action entitled SteelCo., Inc. vs. Lippert Components, Inc. and DOES 1 through 20, inclusive, commenced in Superior Court of the State of California, County of San Bernardino, San Bernardino District, on July 16, 2002. On motion of Lippert, the case was removed to the U.S. District Court, Central District of California, Riverside Division.

          Plaintiff alleges that Lippert violated certain provisions of the California Business and Professions Code (Sec. 17000 et. seq.) by allegedly selling chassis and component parts below Lippert’s costs, engaging in acts intended to destroy competition, wrongfully interfering with plaintiff’s economic advantage, and engaging in unfair competition. Plaintiff seeks compensatory damages of $8.2 million, treble damages, punitive damages, costs and expenses incurred in the proceeding, and injunctive relief.

          Management believes that the case has no merit, and Lippert is vigorously defending against the allegations in the complaint. In addition, Lippert has asserted counterclaims against Plaintiff.

          Court-ordered mediation did not result in settlement. Lippert has made a motion for partial summary judgment to limit plaintiff’s potential damages to less than approximately $100,000. Plaintiff has made a motion for summary judgment against Lippert’s counterclaims. To date the court has made no decision on either the Company’s or the Plaintiff’s motions.

INFLATION

          The prices of raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin are influenced by demand and other factors specific to these commodities rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. In mid December 2003 and continuing into the third quarter of 2004, the Company was notified by its steel suppliers of unprecedented steel cost increases. Depending upon the type of steel purchased, steel costs are currently double or triple the levels they were last year at this time. Steel costs appear to have stabilized and further cost increases are not projected for the balance of 2004. In 2004, the Company has also received cost increases from suppliers of aluminum. Since the third quarter of 2003, the Company experienced modest increases in its labor costs related to inflation.

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

USE OF ESTIMATES

          The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, doubtful accounts, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, insurance obligations, lease terminations and asset retirement obligations, long-lived assets, post-retirement benefits, and contingencies and litigation. The Company bases its estimates on historical experience 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 sources. 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, plans and objectives of management, markets for Drew Industries Incorporated 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 Exchange Act and Section 27A of the Securities Act. Forward-looking statements, including, without limitation, those relating to our future business prospects, revenues, costs and income, wherever 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.

        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 pricing pressures due to competition, raw material costs (particularly steel, vinyl, aluminum, glass, and ABS resin), availability of retail and wholesale financing for manufactured homes, availability and costs of labor, inventory levels of retailers and manufacturers, levels of repossessed manufactured homes, the financial condition of our customers, interest rates, oil prices, and adverse weather conditions impacting retail sales. In addition, national and regional economic conditions and consumer confidence may affect the retail sale of recreational vehicles and manufactured homes.

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DREW INDUSTRIES INCORPORATED

          Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          The Company is exposed to market risk in the normal course of its operations due to its purchases of certain commodities and its financing activities. Certain raw materials, particularly steel, aluminum, vinyl, glass and ABS resins are subject to price volatility. In mid-December 2003 and continuing into the third quarter of 2004, the Company was notified by its steel suppliers of unprecedented steel cost increases. Depending upon the type of steel purchased, steel costs are currently double or triple the levels they were last year at this time. Steel costs appear to have stabilized and further cost increases are not projected for the balance of 2004. In 2004, the Company has also received cost increases from suppliers of aluminum.

          The Company is exposed to changes in interest rates primarily as a result of its financing activities. At September 30, 2004, the Company had $21.3 million of fixed rate debt. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to September 30, 2004, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be approximately $213,000 lower per annum than if the fixed rate financing could be obtained at current market rates.

          At September 30, 2004, including borrowings of $44.4 million on its $55 million line of credit, the Company had $53.4 million of variable rate debt. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to September 30, 2004, and outstanding borrowings of $53.4 million, future cash flows would be affected by $534,000 per annum.

          On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association with a notional amount of $20,000,000 from which it will receive periodic payments at the 3 month LIBOR rate plus the Company’s applicable spread and make periodic payments at a fixed rate of 3.3525% plus the Company’s applicable spread, with settlement and rate reset dates every November 15, February 15, May 15 and August 15. The notional amount of the interest rate swap decreases by $1,000,000 on each reset date beginning February 15, 2005. The fair value of the swap is zero at inception.

          In addition, the Company is periodically exposed to changes in interest rates as a result of temporary investments in money market funds; however, such investing activity is not material to the Company’s financial position, results of operations, or cash flow.

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

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DREW INDUSTRIES INCORPORATED

          Item 4.  CONTROLS AND PROCEDURES

          a)   Evaluation of Disclosure Controls and Procedures

          The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act of 1934 (“The Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 – 14 (c) 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 considered in its evaluation the cost-benefit relationship of possible controls and procedures.

          As of the end of the period covered by this quarterly report, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

          b)   Changes in Internal Controls

          There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 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.

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DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

          Item 1 – Legal Proceedings

          Lippert is a defendant in an action entitled SteelCo., Inc. vs. Lippert Components, Inc. and DOES 1 through 20, inclusive, commenced in Superior Court of the State of California, County of San Bernardino, San Bernardino District, on July 16, 2002. On motion of Lippert, the case was removed to the U.S. District Court, Central District of California, Riverside Division.

          Plaintiff alleges that Lippert violated certain provisions of the California Business and Professions Code (Sec. 17000 et. seq.) by allegedly selling chassis and component parts below Lippert’s costs, engaging in acts intended to destroy competition, wrongfully interfering with plaintiff’s economic advantage, and engaging in unfair competition. Plaintiff seeks compensatory damages of $8.2 million, treble damages, punitive damages, costs and expenses incurred in the proceeding, and injunctive relief.

          Management believes that the case has no merit, and Lippert is vigorously defending against the allegations in the complaint. In addition, Lippert has asserted counterclaims against Plaintiff.

          Court-ordered mediation did not result in settlement. Lippert has made a motion for partial summary judgment to limit plaintiff’s potential damages to less than approximately $100,000. Plaintiff has made a motion for summary judgment against Lippert’s counterclaims.

          Item 6 – Exhibits

a) Exhibits as required by item 601 of Regulation 8-K:

1) 31.1 Certification of Chief Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.1 is filed herewith.

2) 31.2 Certification of Chief Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.2 is filed herewith.

3) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.1 is filed herewith.

4) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 is filed herewith.

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DREW INDUSTRIES INCORPORATED
SIGNATURES

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

DREW INDUSTRIES INCORPORATED
Registrant


By /s/ Fredric M. Zinn
      ——————————————
Fredric M. Zinn
Executive Vice President and
Chief Financial Officer

November 9, 2004

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