LCI Industries 10Q 2005 Q2 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:JUNE 30, 2005

	OR

o	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 incorporation or organization)		(I.R.S. Employer Identification Number)

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

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

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

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 10,502,204 shares of common stock as of July 29, 2005.

DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005

(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	7-14

	Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15-24

	Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	25

	Item 4 - CONTROLS AND PROCEDURES	26

PART II -	OTHER INFORMATION

	Item 1 - LEGAL PROCEEDINGS	27-28

	Item 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	28-29

	Item 6 - EXHIBITS	29

SIGNATURES		30

EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION		31

EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION		32

EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION		33

EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION		34

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Six Months Ended June 30,				Three Months Ended June 30,

	2005		2004		2005		2004

*(In thousands, except per share amounts)*

Net sales	$	317,569	$	249,710	$	163,023	$	141,687
Cost of sales		246,750		192,271		125,222		109,127

Gross profit		70,819		57,439		37,801		32,560
Selling, general and administrative expenses		45,277		33,269		22,671		18,410
Other income		31		428		—		—

Operating profit		25,573		24,598		15,130		14,150
Interest expense, net		1,999		1,413		1,055		788

Income before income taxes		23,574		23,185		14,075		13,362
Provision for income taxes		9,097		9,042		5,414		5,211

Net income	$	14,477	$	14,143	$	8,661	$	8,151


Net income per common share:
Net income:
Basic	$	1.39	$	1.38	$	.83	$	.79

Diluted	$	1.35	$	1.34	$	.81	$	.77


Weighted average common shares outstanding:
Basic		10,403		10,258		10,443		10,271

Diluted		10,696		10,588		10,730		10,616

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

DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	June 30,
							December 31,
	2005			2004			2004

*(In thousands, except shares and per share amount)*

ASSETS
Current assets
Cash and cash equivalents	$	7,019		$	60		$	2,424
Accounts receivable, trade, less allowances		46,563			37,903			26,099
Inventories		72,273			75,036			72,332
Prepaid expenses and other current assets		10,280			6,916			10,552


Total current assets		136,135			119,915			111,407

Fixed assets, net		106,675			90,055			99,781
Goodwill		23,439			16,926			16,755
Other intangible assets		10,134			6,933			6,070
Other assets		7,755			2,915			4,040

Total assets	$	284,138		$	236,744		$	238,053


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable, including current maturities of long-term indebtedness	$	11,460		$	12,183		$	12,121
Accounts payable, trade		24,131			27,449			13,371
Accrued expenses and other current liabilities		35,764			27,751			28,711


Total current liabilities		71,355			67,383			54,203

Long-term indebtedness		69,170			57,496			59,303
Other long-term liabilities		1,984			2,363			2,503


Total liabilities		142,509			127,242			116,009


Commitments and Contingencies

Stockholders’ equity
Common stock, par value $.01 per share: authorized 30,000,000 shares; issued 12,650,329 shares at June 2005; 12,414,513 shares at June 2004 and 12,459,853 at December 2004		127			124			125
Paid-in capital		40,939			34,397			35,914
Retained earnings		119,890			94,448			105,413
Accumulated other comprehensive income		140			—			59

		161,096			128,969			141,511
Treasury stock, at cost - 2,149,325 shares		(19,467	)		(19,467	)		(19,467	)

Total stockholders’ equity		141,629			109,502			122,004

Total liabilities and stockholders’ equity	$	284,138		$	236,744		$	238,053

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

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


	Six Months Ended June 30,

	2005			2004

*(In thousands)*

Cash flows from operating activities:
Net income	$	14,477		$	14,143
Adjustments to reconcile net income to cash flows provided by (used for) operating activities:
Depreciation and amortization		5,451			4,497
Deferred taxes		(1,018	)		—
Loss on disposal of fixed assets		104			119
Stock-based compensation expense		628			537
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable, net		(20,464	)		(18,043	)
Inventories		987			(30,951	)
Prepaid expenses and other assets		1,233			1,614
Accounts payable, accrued expenses and other liabilities		16,722			20,562

Net cash flows provided by (used for) operating activities		18,120			(7,522	)


Cash flows from investing activities:
Capital expenditures		(9,605	)		(10,322	)
Acquisition of businesses		(17,793	)		(21,588	)
Proceeds from sales of fixed assets		643			148
Other Investments		(51	)		(289	)


Net cash flows used for investing activities		(26,806	)		(32,051	)


Cash flows from financing activities:
Proceeds from line of credit and other borrowings		121,925			115,330
Repayments under line of credit and other borrowings		(112,719	)		(85,647	)
Exercise of stock options		4,399			1,169
Other		(324	)		—


Net cash flows provided by financing activities		13,281			30,852


Net increase (decrease in cash)		4,595			(8,721	)

Cash and cash equivalents at beginning of period		2,424			8,781

Cash and cash equivalents at end of period	$	7,019		$	60


Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt	$	2,030		$	1,478
Income taxes, net of refunds	$	6,762		$	6,731

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

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


	Common Stock		Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock			Total Stockholders’ Equity

(In thousands, except shares)

Balance - December 31, 2004	$	125	$	35,914	$	105,413	$	59	$	(19,467	)	$	122,044

Net income for the six months ended June 30, 2005						14,477							14,477
Unrealized gain on interest rate swap, net of taxes								81					81

Comprehensive income													14,558
Issuance of 190,476 shares of common stock pursuant to stock option plan		2		2,428									2,430
Income tax benefit relating to issuance of common stock pursuant to stock option plan				1,969									1,969
Stock-based compensation expense				628									628


Balance - June 30, 2005	$	127	$	40,939	$	119,890	$	140	$	(19,467	)	$	141,629

The accompanying notes are an integral part of these condensed consolidated 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 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 marine and 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, 2004 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 six and three month periods ended June 30, 2005 and 2004. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include some information and notes necessary to conform with annual reporting requirements.

2. Segment Reporting

The Company has two reportable operating segments, the recreational vehicle products segment (the “RV segment”) and the manufactured housing products segment (the “MH segment”). The RV segment, which accounted for 68 percent and 67 percent of consolidated net sales for the six month periods ended June 30, 2005 and 2004, respectively, 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 Company has also recently introduced leveling devices, axles, steps and bath products for RVs. The RV segment also manufactures specialty trailers for equipment hauling, boats, personal watercraft and snowmobiles.

The MH segment, which accounted for 32 percent and 33 percent of consolidated net sales for each of the six month periods ended June 30, 2005 and 2004, respectively, 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 products.

Until the second quarter of 2004, the Company’s RV segment included only recreational vehicle products, however, with the Company’s acquisition of Zieman Manufacturing Company (“Zieman”), the specialty trailer business of Zieman has been added to the RV segment. Other than sales of specialty trailers, which aggregated approximately $17 million in the first half of 2005 and $17 million in all of 2004, sales to industries other than manufacturers of RVs and MHs are not significant. 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

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

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, 2004 Annual Report on Form 10-K.

Information relating to segments follows(in thousands):


	Six Months Ended June 30,						Three Months Ended June 30,

	2005			2004			2005			2004

Net sales:
RV segment	$	216,257		$	166,971		$	110,999		$	93,798
MH segment		101,312			82,739			52,024			47,889

Total	$	317,569		$	249,710		$	163,023		$	141,687


Operating profit:
RV segment	$	18,906		$	18,265		$	10,512		$	10,406
MH segment		10,463			9,057			6,593			5,445

Total segments operating profit	$	29,369		$	27,322		$	17,105		$	15,851
Amortization of intangibles		(645	)		(466	)		(360	)		(261	)
Corporate and other		(3,182	)		(2,686	)		(1,615	)		(1,440	)
Other income		31			428			—			—

Operating profit	$	25,573		$	24,598		$	15,130		$	14,150

3. Acquisitions

On May 20, 2005, Lippert acquired certain assets and the business of Elkhart, Indiana – based Venture Welding (“Venture”). Venture is a manufacturer of chassis and chassis parts for manufactured homes, modular homes and office units, and had annualized sales prior to the acquisition of approximately $18 million. The purchase price was approximately $18.5 million, excluding the existing accounts receivable of Venture, which were retained by the former owners. The purchase price was funded through the issuance of $20 million of five year Senior Promissory Notes at the fixed interest rate of 5.01 percent. Lippert also acquired two of Venture’s four factories and has consolidated production of certain of Venture’s products into Lippert’s existing factories. The acquisition also included certain patents, which will permit Lippert to manufacture chassis using a cold camber process, as well as the hot cambering process currently being used. Lippert anticipates expanding the cold camber technology throughout its other MH chassis factories. Additionally, Lippert acquired a patent governing the manufacture of chassis basement systems, which Lippert was previously using under license.

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


Net tangible assets acquired	$	6,110
Identifiable intangible assets		5,000
Goodwill		7,377

Total cash consideration	$	18,487

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):


	June 30,				December 31,

	2005		2004		2004

Finished goods	$	12,339	$	11,102	$	10,816
Work in process		2,512		1,889		2,112
Raw material		57,422		62,045		59,404

Total	$	72,273	$	75,036	$	72,332

5. Long-term Indebtedness

On February 11, 2005, the Company consummated the refinancing of its line of credit (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., Key Bank National Association and HSBC Bank USA, National Association (collectively, the “Lenders”). The maximum borrowings under the Credit Agreement were increased to $60 million and can be increased by an additional $30 million, upon approval of the Lenders. Interest on borrowings from the Credit Agreement is designated from time to time by the Company as either the Prime Rate, or LIBOR plus additional interest from 1 percent to 1.80 percent, currently 1.25 percent, depending on the Company’s performance and financial condition. The Credit Agreement expires June 30, 2009.

Simultaneous with the refinancing of the Company’s line of credit, the Company consummated a three-year “shelf-loan” facility with Prudential Investment Management, Inc. (“Prudential”), pursuant to which the Company can issue, and Prudential’s affiliates may, in their sole discretion, consider purchasing in one or a series of transactions, senior promissory notes (the “Senior Promissory Notes”) of the Company in the aggregate principal amount of up to $60 million, to mature no more than seven years after the date of original issue of each transaction. Prudential and its affiliates have no obligation to purchase the Senior Promissory Notes. Interest payable on the principal of the Senior Promissory Notes will be at rates determined within five business days after the Company gives Prudential a request for purchase of Senior Promissory Notes. On April 29, 2005, the Company issued $20 million of Senior Promissory Notes under the “shelf-loan” facility with Prudential for a term of five years, at a fixed interest rate of 5.01 percent per annum, payable at the rate of $1 million per quarter plus interest. These funds were used for the acquisition of Venture as further described in Footnote 3.

Pursuant to the Credit Agreement, and certain other loan agreements, the Company is required to maintain minimum net worth and interest and fixed charge coverages and to meet certain other financial requirements. At June 30, 2005, the Company was in compliance with all such requirements. Certain of the Company’s loan agreements contain prepayment penalties. Borrowings under the credit agreement are secured only by capital stock of the Company’s subsidiaries.

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

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


	June 30,
						December 31,
	2005			2004		2004


Senior Notes payable at the rate of $8,000 per annum on January 28, with interest payable semiannually at the rate of 6.95% per annum, final payment made on January 28, 2005	$	—		$	8,000	$	8,000
Senior Promissory Notes payable at the rate of $1,000 per quarter on April 29, July 29, October 29 and January 29, with interest payable quarterly at the rate of 5.01% per annum, final payment to be made on April 29, 2009		20,000	��		—		—
Notes payable pursuant to a Credit Agreement expiring June 30, 2009 consisting of a line of credit, not to exceed $60,000 at June 30, 2005, $54,000 at June 30, 2004 and $45,000 at December 31, 2004; interest at Prime Rate, or LIBOR plus a rate margin based upon the Company’s performance		34,650			39,150		34,725
Industrial Revenue Bonds, interest rates at June 30, 2005 of 4.20% to 6.28%, due 2008 through 2017; secured by certain real estate and equipment		10,063			7,615		10,917
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		3,795			4,265		4,035
Other loans primarily secured by certain real estate and equipment, due 2006 to 2011, with fixed rates of 5.18% to 7.75%		8,531			4,163		9,183
Other loans primarily secured by certain real estate and equipment, due 2006 to 2016, with variable rates of 6.25% to 7.00%		3,591			6,486		4,564

		80,630			69,679		71,424

Less current portion		11,460			12,183		12,121


Total long-term indebtedness	$	69,170		$	57,496	$	59,303

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

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):


	Six Months Ended June 30,				Three Months Ended June 30,

	2005		2004		2005		2004


Weighted average common shares outstanding – basic		10,403		10,258		10,443		10,271
Assumed issuance of common stock pertaining to stock options		293		330		287		345

Weighted average common shares outstanding – diluted		10,696		10,588		10,730		10,616

7. Stock Options

In 2002, the Company adopted the fair value method of accounting for stock options as 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 is utilizing the prospective method under SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosures.” All employee stock options granted after January 1, 2002 are being expensed on a straight line basis 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. Compensation expense related to stock options was $488,000 and $234,000 for the six and three months ended June 30, 2005, respectively, and $423,000 and $211,000 for the six and three months ended June 30, 2004, respectively.

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.

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

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(dollars in thousands):


	Six Months Ended June 30,						Three Months Ended June 30,

	2005			2004			2005			2004


Net income as reported	$	14,477		$	14,143		$	8,661		$	8,151
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		299			258			143			129
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect		(335	)		(396	)		(161	)		(195	)


Pro forma net income	$	14,441		$	14,005		$	8,643		$	8,085


Net income per common share:
Basic – as reported	$	1.39		$	1.38		$	.83		$	.79

Basic – pro forma	$	1.39		$	1.37		$	.83		$	.79


Diluted – as reported	$	1.35		$	1.34		$	.81		$	.77

Diluted – pro forma	$	1.35		$	1.32		$	.81		$	.76

8. Commitments and Contingencies

Lippert is a defendant in an action entitledSteelCo., Inc. vs. Lippert Components, Inc. and DOES 1 though 20, inclusive, commenced in Superior Court of the State of California, County of 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 injunction relief. However, on February 22, 2005, the court granted Lippert’s motion for partial summary judgment limiting plaintiff’s damages to those incurred prior to December 31, 2002, thereby reducing plaintiff’s damage claim from over $8 million (before trebling) to an amount which the Company believes could be less than $1 million based on counsel’s analysis of the testimony of plaintiff’s and Lippert’s damage experts, although there can be no assurance of the outcome. The court also granted Lippert’s motions for partial summary judgment as to all aspects of plaintiff’s unfair competition claim and plaintiff’s claim for an injunction. The court denied Lippert’s attempt to limit damages to those incurred prior to May 10, 2002, and certain other aspects of Lippert’s defense. Lippert’s $500,000 settlement offer to Plaintiff, which was recorded as a charge in the first quarter of 2005, was rejected. It is anticipated that a trial will be held in early 2006.

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

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

Lippert is a defendant in an action entitledMarlon Harris vs. Lippert Components, Inc.commenced in the Superior Court of the State of California, County of San Bernardino District. Plaintiff was injured on a press brake machine while working at Lippert’s Rialto, California division. The machine was purchased used and was not fitted with a guard. The claimant pursued a workers compensation claim and a third party action against Lippert and other defendants, including the manufacturer and the vendor of the subject machine. The third party suit involved allegations of willful and wanton actions and seeks compensatory and punitive damages. At trial, the jury found in favor of Plaintiff for compensatory and punitive damages.

The verdict was comprised of compensatory damages of $464,000, most of which had been previously paid or accrued by Lippert, and punitive damages of $4 million. Counsel for Lippert advised the Company that, under California law, the award for punitive damages would most likely be reduced to not in excess of four times the compensatory damages, or a maximum of $1.9 million. Accordingly, at December 31, 2004, the Company recorded a charge of $1.9 million ($945,000 after taxes and the direct impact on incentive compensation) related to the punitive damages awarded in this case. On March 17, 2005, the trial court denied Lippert’s motion to reduce the punitive damage award. Subsequent settlement discussions were unsuccessful. Accordingly, in the first quarter of 2005, the Company recorded a charge of $2.1 million ($1,050,000 after taxes and the direct impact on incentive compensation) related to the punitive damages awarded in this case. Lippert intends to appeal the verdict as well as the punitive damage award, as counsel for Lippert asserts that the verdict is unsupported by the evidence, and the punitive damage award exceeds the limit generally permitted in California. Lippert continues to accrue interest on the unpaid punitive damages award at 10% per annum. There can be no assurance of the outcome of the appeal.

On August 6, 2004, Keystone RV Company, Inc. filed a third-party petition against Lippert in an action entitledFeagins, et. al. v. D.A.R., Inc. d/b/a Fun Time RV, et. al.pending in the Probate Court, Denton County, State of Texas. Plaintiffs brought an action for wrongful death allegedly caused by an RV manufactured by defendant Keystone RV Company, Inc. (“Keystone”) seeking compensatory, future and exemplary damages. Keystone filed a third-party petition against Lippert for proportionate contribution from Lippert as the manufacturer, designer and supplier of certain components of the RV. Neither plaintiffs nor any of the other five defendants filed claims against Lippert. Lippert’s counsel has advised that, at this stage of the case, based on the current theories of plaintiff’s expert, Lippert did not commit any act or omission that contributed to or caused the accident; however, there can be no assurance that plaintiff’s or another defendant’s theories will not in the future focus on an alleged act or omission by Lippert. Plaintiffs seek compensatory damages in excess of $130 million and each of the five Plaintiffs seeks $25 million in exemplary damages from each defendant. Lippert maintains product liability insurance but certain of such insurance may not cover exemplary damages. The trial is in the discovery stage, and there has been no determination of liability. Lippert’s liability insurer has assigned counsel to defend Keystone’s claim against Lippert.

Lippert and Kinro sell products to Oakwood Homes, Inc. (“Oakwood”), which filed for relief under Chapter 11 of the United States Bankruptcy Code in November 2002. Proofs of claim filed by Lippert and Kinro are pending. Kinro has been advised that the OCH Liquidation Trust (the “Trust”) intends to file preference claims against Kinro with respect to payments made to Kinro by Oakwood prior to the bankruptcy filing, and Lippert has received such claims asserted by the Trust. The preference claims are in the aggregate amount of approximately $4 million. The Company believes that Lippert and Kinro have valid defenses to the preference claims and that there should be no material liability to the Trust. In this connection, the Trust has indicated that, as an alternative to

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

preference claims, the Trust might assert that payments by Oakwood constituted fraudulent transfers under sections 544 and 548 of the Bankruptcy Code. If the Trust pursues this claim, Lippert and Kinro, as well as several other creditors similarly situated, intend to vigorously defend against it.

In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of June 30, 2005, would not be material to the Company’s financial position or annual results of operations.

9. Other Income

In February 2004, the Company sold certain intellectual property rights relating to a process used to manufacture a new composite material. 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. In 2004, the Company received payments aggregating approximately $500,000, and recorded a pre-tax gain on sale of $428,000. In January 2005, the Company received the second payment under the note for $570,000, including interest, which had been previously fully reserved, and the Company therefore recorded a gain on the $570,000 recovery in the first quarter. The balance of the note is now $3 million, which continues to be fully reserved.

Simultaneously with the sale, the Company entered into an equipment lease and a license agreement with the buyer. In March 2005, the owner of the manufacturing process related to this intellectual property informed the Company that it may not be able to perfect the technology required for the Company to produce bath products using this new composite material. Therefore, the lease for the production equipment has not become effective. As a result, in the first quarter of 2005, the Company wrote-off related capitalized project costs which had a book value of approximately $500,000, largely offsetting the gain on the collection of the note.

10. New Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires the Company to expense grants made under the stock option plan. SFAS No. 123R is effective for the first annual period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed under SFAS No. 123 for grants prior to January 1, 2002 will be recorded in the consolidated income statement. The implementation of SFAS No. 123R is expected to have an impact on net income of less than $75,000 in 2006 for options granted prior to January 1, 2002, and no impact in 2007 and beyond.

11. Subsequent Event

On August 4, 2005, the Board of Directors approved a two-for-one split of the Company’s common stock to be effected in the form of a stock dividend. The Company will issue one new share of common stock on September 7, 2005 for each share held by stockholders of record as of August 19, 2005.

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 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. and its subsidiaries (“Kinro”) and Lippert Components, Inc. and its subsidiaries (“Lippert”) have operations in both the MH and RV segments. At June 30, 2005, the Company’s subsidiaries operated 50 plants in the United States and one in Canada.

The RV segment accounted for 68 percent of consolidated net sales for the six months ended June 30, 2005 and 65 percent of the annual consolidated net sales for calendar 2004. The RV segment manufactures a variety of products used primarily in the production of recreational vehicles, including windows, doors, chassis, chassis parts, slide-out mechanisms and related power units, and electric stabilizer jacks. The Company’s RV products are used primarily in travel trailers and fifth wheel RVs. Travel trailers and fifth wheel RVs accounted for 69 percent of all RVs shipped by the industry in 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 for motorhomes in the second quarter of 2004. The Company has also recently introduced leveling devices, axles, steps and bath products for RVs. 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, including trailers for equipment hauling, boats, personal watercraft and snowmobiles, has been added to the RV segment.

The MH segment, which accounted for 32 percent of consolidated net sales for the six months ended June 30, 2005 and 35 percent of the annual consolidated net sales for calendar 2004, 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 products.

Other than sales of specialty trailers, which aggregated approximately $17 million in the first half of 2005 and $17 million in all of 2004, sales to industries other than manufacturers of RVs and MHs are not significant.

BACKGROUND

Recreational Vehicle Industry

The Recreational Vehicle Industrial Association (“RVIA”) reported a 5 percent decrease in total industry wholesale shipments in the second quarter of 2005, compared to the second quarter of 2004. Shipments of travel trailers and fifth wheel RVs, the Company’s primary market, decreased 1 percent for the quarter, while motorhome sales declined more than 15 percent. The RVIA is projecting a 3.5 percent decline in wholesale shipments of all types of RVs in 2005, but is forecasting that shipments of travel trailers and fifth wheel RVs will be approximately the same as in 2004. In 2004, the RVIA reported an increase of 15 percent in total RV shipments to 370,100 units, including approximately 13,000 units to the Federal Emergency Management Agency, while shipments of travel trailers and fifth wheel RVs increased 19 percent for the year to 254,600 units, both the highest industry wholesale shipments in over 25 years.

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. According to U.S. Census Bureau projections, 10 years from now there will be in

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

excess of 20 million more people over the age of 50. 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. Industry growth also appears to continue to be bolstered by a preference for domestic vacations rather than foreign travel, and low interest rates.

Manufactured Housing Industry

As a result of (i) limited credit availability for purchases of manufactured homes, (ii) high interest rate spreads between conventional mortgages on site built homes and chattel loans for manufactured homes (chattel loans were used to finance approximately 30 percent of manufactured homes purchased in 2004), and (iii) unusually high repossessions of manufactured homes, industry production declined approximately 65 percent since 1998, to 131,000 homes in both 2003 and 2004, the lowest production levels in 40 years. However, based upon industry reports, retail sales of manufactured homes have declined much less severely than industry production in recent years. A significant portion of retail sales of manufactured homes in the last several years have apparently been filled by the resale of repossessed homes, as well as inventory reductions by dealers and manufacturers, 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 annual level of repossessions of manufactured homes declined to between 80,000 and 85,000 homes in 2004, with further reductions in repossessions expected in 2005.

The Manufactured Housing Institute (“MHI”) reported that for the second quarter of 2005, industry wholesale shipments of manufactured homes remained the same as in the comparable period of 2004, after increasing 7 percent in the first quarter of 2005. For the six months ended June 30, 2005, industry wholesale shipments were up 3 percent from the comparable period of 2004. The availability of financing for manufactured homes has apparently improved somewhat. In September 2003 Berkshire Hathaway Inc. acquired Clayton Homes and Oakwood Homes, two of the leading producers of manufactured homes, as well as 21st Mortgage. Since then, Berkshire has helped Clayton raise substantial funds for its mortgage operations. Further, the level of dealer inventory is low, and, as noted above, the level of repossessions of manufactured homes has reportedly declined this year. The Company believes that long-term prospects for manufactured housing are favorable because manufactured homes provide quality, affordable housing.

Raw Material 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 during 2004, the Company was notified by its steel suppliers of unprecedented steel cost increases. The cost of certain types of steel have moderated in the first half of 2005, although the prices the Company pays for steel, depending on the type of steel purchased, are currently approximately double the levels they were at the end of 2003. To offset the impact of higher steel costs, the Company implemented surcharges and sales price increases to its customers. The Company estimates that by early 2005 substantially all steel cost increases received through the second quarter of 2005 were passed on to customers, although essentially without markup. In 2004 and continuing into 2005, the Company has also received cost increases from suppliers of aluminum, vinyl, glass and ABS resin.

The Company does not expect to earn additional profit from the sales price increases implemented in response to rising raw material costs. 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 raw material costs

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

remain stable, the raw material cost increases experienced to date are not expected to have a significant effect on operating profit in 2005 because they have been substantially offset by the sales price increases which have been implemented. While the Company has historically been able to obtain sales price increases to offset raw material cost increases, there can be no assurance that future raw material cost increases can be passed on to customers in the form of sales price increases.

RESULTS OF OPERATIONS

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


	Six Months Ended June 30,						Three Months Ended June 30,

	2005			2004			2005			2004

Net sales:
RV segment	$	216,257		$	166,971		$	110,999		$	93,798
MH segment		101,312			82,739			52,024			47,889

Total	$	317,569		$	249,710		$	163,023		$	141,687


Operating profit:
RV segment	$	18,906		$	18,265		$	10,512		$	10,406
MH segment		10,463			9,057			6,593			5,445

Total segments operating profit	$	29,369		$	27,322		$	17,105		$	15,851
Amortization of intangibles		(645	)		(466	)		(360	)		(261	)
Corporate and other		(3,182	)		(2,686	)		(1,615	)		(1,440	)
Other income		31			428			—			—

Operating profit	$	25,573		$	24,598		$	15,130		$	14,150

Consolidated Highlights


	•	Net sales for the second quarter of 2005 increased 15 percent from the second quarter of 2004, or 5 percent excluding the impact of sales price increases and acquisitions.

	•	Net sales of the Company’s RV segment increased 18 percent for the quarter, or approximately 9 percent excluding the impact of sales price increases and acquisitions.

	•	Net sales of the Company’s MH segment increased 9 percent for the quarter. Excluding the impact of sales price increases and acquisitions, net sales of this segment were down approximately 3 percent compared to last year.

	•	Net income for the second quarter of 2005 increased 6 percent from the second quarter of 2004. Net income did not increase in proportion to net sales for several reasons, including:


			•	The operating profit margin declined because raw material cost increases experienced primarily in 2004 were passed on to customers largely without profit margin.

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


			•	The Company incurred start-up losses of approximately $850,000 ($400,000 after taxes and the direct impact on incentive compensation) related to new products and a recently opened facility in Arizona. The Company expects to incur further start-up costs during the next few quarters.

			•	The provision for bad debts for the second quarter this year was approximately $850,000 ($400,000 after taxes and the direct impact on incentive compensation) higher than in the second quarter of 2004. The Company has implemented new procedures to help improve collections of accounts receivable.

			•	Warranty expenses increased about $400,000 ($200,000 after taxes and the direct impact on incentive compensation) over the second quarter of 2004. To help control future warranty costs and maintain high customer satisfaction, the Company has increased its quality control efforts by adding dedicated quality control personnel at many of its larger manufacturing facilities.


	•	On May 20, 2005, the Company acquired the business and certain assets of Venture Welding (“Venture”) for approximately $18.5 million in cash. Venture Welding had annualized sales prior to the acquisition of approximately $18 million. Venture manufactures chassis and chassis parts for manufactured homes, modular homes and office units. Among the assets acquired is a patent that will enable the Company to build improved chassis for manufactured homes while also improving production efficiencies.

RV Segment

Net sales of the RV segment increased 18 percent to $111 million in the second quarter of 2005. Excluding the impact of the May 2004 acquisition of Zieman (approximately $4 million for the additional one month), and sales price increases of approximately $5 million, “organic” sales growth of this segment was approximately 9 percent, despite a 5 percent industry-wide decline in wholesale shipments of RVs this quarter. Industry-wide wholesale shipments of the travel trailer and fifth wheel segment of the RV industry, for which approximately 95 percent of the Company’s RV products are made, decreased 1% this quarter. The decline in industry-wide wholesale shipments was largely due to reduced production by RV manufacturers, primarily in response to dealers’ efforts to reduce inventories of 2005 models in advance of the introduction this summer of 2006 models. Some RV manufacturers also expanded their typical July 4^th holiday shutdown from one week to two weeks, including the last week of June.

For the first six months of 2005 net sales of the RV segment increased nearly 30 percent over the comparable period last year, including organic growth of 12 percent (excluding the impact of acquisitions of approximately $13 million and sales price increases of approximately $16 million), compared to flat industry-wide wholesale shipments and a 5 percent increase in industry wholesale shipments of travel trailers and fifth wheel RVs.

The organic sales growth of the RV segment exceeded industry-wide results partly because of an increase in sales of newly introduced products, including slide-out mechanisms and leveling devices for motorhomes, as well as axles, steps and bath products. Sales of all slide-out mechanisms increased 27 percent to $23 million in the second quarter of 2005, including nearly $4 million of slide-outs for motorhomes, which

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

the Company began selling in the second quarter of 2004. The Company has a 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.

RV segment results for the second quarter of 2005 included a full quarter of sales by Zieman, acquired in May 2004, compared to only two months of Zieman sales in the second quarter of 2004. Zieman’s RV segment manufactures and sells RV chassis and chassis parts, as well as specialty trailers. Operating results of the specialty trailer business are included in the RV segment. Zieman previously sold these specialty trailers only on the West Coast, however, earlier this year the Company opened a facility in Indiana to manufacture specialty trailers for sale in other regions of the country. Sales by this new specialty trailer operation in Indiana reached approximately $2.2 million during the second quarter of 2005. Start-up losses of approximately $650,000, related to the new specialty trailer operation and other newly-introduced products, were recorded in this segment during the second quarter of 2005. Over the next few quarters, the Company expects to incur additional start up losses at this facility, and in the production of other newly introduced products.

Operating profit of the RV segment increased 1 percent to $10.5 million in the second quarter of 2005, although the operating profit margin of this segment declined to 9.5 percent of sales in the second quarter of 2005 from 11.1 percent in the second quarter last year. The operating profit margin declined partially because of the start-up losses, and partially because raw material cost increases, experienced primarily in 2004, were passed on to customers largely without margins. In addition, the allowance for doubtful accounts was increased by approximately $600,000 in the segment.

For the first six months of 2005, the operating profit of the RV segment increased 4 percent to $18.9 million, or 8.7 percent of sales, compared to 10.9 percent of sales in the comparable period last year. In the first quarter of 2005, operating profit was impacted by $500,000 of charges related to legal proceedings (less the related reduction in incentive compensation expenses) related to a settlement offer made by the Company in the action entitledSteelCo., vs. Lippert Components, Inc. et al, described in Part II, Item 1 – Legal Proceedings.

Excluding the impact of the sales price increases described above, labor and manufacturing overhead costs as a percent of sales declined this quarter and for the first six months of 2005, as lower overtime costs and improved production efficiencies more than offset increases in warranty and quality control costs. The Company has augmented its quality control effort to help minimize future warranty costs and maintain high customer satisfaction. For the Company’s RV and MH segments combined, expenditures for quality control increased by more than $1.5 million and $0.7 million for the first six months and the second quarter this year, respectively, over the comparable periods in 2004.

MH Segment

Net sales of the MH segment increased 9 percent this quarter to $52 million. Excluding the impact of acquisitions (approximately $3 million), and sales price increases of approximately $3 million, net sales of this segment declined about 3 percent from the second quarter of 2004, compared to the flat industry-wide production of manufactured homes this quarter.

For the first six months of 2005, net sales by the MH segment increased 22 percent over the comparable period in 2004, including organic growth of 2 percent (excluding the impact of acquisitions of

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

approximately $8 million and sales price increases of approximately $8 million), compared to a 3 percent increase in industry-wide production of manufactured homes.

Operating profit of the MH segment increased 21 percent to $6.6 million in the second quarter of 2005. The operating profit margin of this segment increased to 12.7 percent of sales, from 11.4 percent in the second quarter of 2004, despite more than $200,000 of start-up costs related to a new window manufacturing plant in Arizona, and an increase in the provision for bad debts of nearly $300,000. The operating profit margin of this segment increased partially because material costs as a percent of sales declined approximately one percent compared to the comparable period last year, after rising about 5 percent in the second quarter of 2004. Steel and other raw material cost increases incurred by the Company last year were passed on to customers during 2004 and early 2005, although largely without profit margin; as a result, material costs as a percent of sales in the second quarter of 2005 were lower than in the second quarter of 2004, but were 4 percent higher than in the second quarter of 2003.

For the first six months of 2005, the operating profit of the MH segment increased 16 percent to $10.5 million, or 10.3 percent of sales, compared to $9.1 million, or 10.9 percent of sales in the comparable period last year. In the first quarter of 2005, operating profit was reduced by a $2.1 million charge related to legal proceedings (less the related reduction in incentive compensation) which resulted from an adverse ruling in the action entitledMarlon Harris vs. Lippert Components, Inc., described in Part II, Item 1 – Legal Proceedings. Excluding the impact of this charge, the operating profit margin of this segment would have been approximately 12.1 percent for the first six months of 2005.

Corporate and Other

Corporate and other expenses for the first six months of 2005 increased $500,000 compared to the same period in 2004; for the second quarter corporate and other expenses increased $200,000. The increase for the six month period was largely the result of increases in audit fees, personnel costs and other costs related to compliance with Section 404 of Sarbanes-Oxley.

Other Income

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

Taxes

The effective tax rate for the first six months of 2005 was 38.6 percent as compared to 39.0 percent for the first six months of 2004. The effective tax rate for the second quarter of 2005 was 38.5 percent as compared to 39.0 percent for the second quarter of 2004. The effective tax rate considers the provisions of the Jobs Creation Act of 2004 which gives a small federal tax break on manufacturing activities, which was partially offset by a change in the composition of pre-tax income for state tax purposes. The effective tax rate for the full year 2004 was 38.5 percent.

Interest Expense, Net

Interest expense, net, for the six months of 2005, increased $600,000 from the same period last year, while interest expense, net, for the second quarter of 2005, increased $300,000 from the second quarter of 2004. These increases are due to an increase in average debt levels, offset by savings resulting from a reduction in the average interest rate and $213,000 of interest costs capitalized in connection with capital projects. Interest expense is expected to continue to increase during the second half of 2005 as a result of the higher debt levels resulting largely from the acquisition of the business and certain assets of Venture Welding, the interest on the Marlon Harris legal matter and the completion of capital projects.

LIQUIDITY AND CAPITAL RESOURCES

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


	Six Months Ended June 30,

	2005			2004

Net cash flows provided by (used for) operating activities	$	18,120		$	(7,522	)
Net cash flows used for investment activities	$	(26,806	)	$	(32,051	)
Net cash flows provided by financing activities	$	13,281		$	30,852

Cash Flow from Operations

Net cash flows from operating activities increased approximately $25.6 million in the first six months of 2005 compared to the first six months of 2004 due to:


	a)	A reduction in inventories during the first six months of 2005 as compared to an increase in the prior year. The reduction in the current year resulted from a concerted effort by management to reduce the number of days of inventory on hand at all locations, partially offset by additional inventory requirements to meet increased sales volume due largely to seasonality and new product offerings. The increase in inventory in the prior year resulted from (i) additional inventory requirements to meet increased sales volume, and (ii) the Company’s strategic buying of steel in advance of the numerous price increases, so that the Company could postpone sales price increases to its customers for as long as possible. On both June 30, 2005 and 2004, there was less than a two week supply of finished goods on hand.

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


	b)	An offset to the reduction in inventory resulting from a smaller increase in accounts payable, accrued expenses and other current liabilities, compared to the prior year. The smaller increase in accounts payable, accrued expenses and other current liabilities in the current year is due the timing of payments. Trade payables are generally paid within the discount period.

	c)	An offset to the reduction in inventory resulting from a larger increase in accounts receivable for the first six months of 2005. The increase in accounts receivable was due largely to an increase in net sales, and, to a lesser extent, an increase in days sales outstanding to approximately 25 days from 22 days at June 30, 2004. The increase in days sales outstanding was primarily in the Company’s smaller customer accounts. The Company increased the allowance for doubtful accounts by $850,000, partly as a result of the increase in days sales outstanding.

Cash Flows from Investing Activities:

Cash flows used for investing activities of $26.8 million in the first six months of 2005 include $18.5 million for the acquisition of Venture. The balance of the cash flows from investing activities consisted primarily of capital expenditures. Capital expenditures for 2005 are anticipated to be approximately $14 - $16 million and are expected to be funded by cash flows from operations and a $2 million real estate mortgage obtained in the first half of 2005.

Cash flows used for investing activities of $32.1 million in the first six months of 2004 included $21.6 million for the cash portion of the acquisition purchase price for Zieman. The balance of cash flows from investing activities consisted primarily of $10.3 million of capital expenditures.

Cash Flows from Financing Activities

Cash flows provided by financing activities for the first six months of 2005 include a net increase in debt of $9.2 million, and $4.4 million received upon the exercise of employee stock options. The increase in debt was used primarily to fund the acquisition of Venture.

On February 11, 2005, the Company consummated the refinancing of its line of credit with JPMorgan Chase Bank, N.A., Key Bank National Association and HSBC Bank USA, National Association (the “Credit Agreement”) (collectively, the “Lenders”). The maximum borrowings under the Credit Agreement were increased to $60 million and can be increased by an additional $30 million, upon approval of the Lenders. Interest on borrowings from the Credit Agreement is designated from time to time by the Company as either the Prime Rate, or LIBOR plus additional interest from 1 percent to 1.80 percent, currently 1.25 percent, depending on the Company’s performance and financial condition. This Credit Agreement expires June 30, 2009.

Borrowings under the Company’s $60 million Credit Agreement at June 30, 2005 were $34.7 million. In addition, the Company had $6.1 million in outstanding letters of credit. Availability under the Company’s line of credit was $19.2 million at June 30, 2005. Such availability, along with anticipated cash flows from operations, is adequate to finance the Company’s working capital and anticipated capital expenditure requirements. 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.

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

SUBSEQUENT EVENT

CORPORATE GOVERNANCE

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

The Company received notification in May 2005 from Institutional Stockholders Services, Inc. (“ISS”), a Rockville, Maryland-based independent research firm that advises institutional investors, that Drew’s corporate governance policies outranked 99.9 percent of all companies listed in the Russell 3000 index. Drew has no business relationships with ISS.

CONTINGENCIES

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

INFLATION

The prices of 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 during 2004, the Company was notified by its steel suppliers of unprecedented steel cost increases. The cost of certain types of steel have moderated in the first half of 2005, although the prices the Company pays for steel, depending upon the type of steel purchased, are currently approximately double the levels they were at

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

the end of 2003. In 2004 and continuing into 2005, the Company has also received cost increases from suppliers of aluminum, vinyl, glass and ABS resin. The Company experienced modest increases in its labor costs in 2005 and 2004 related to inflation.

USE OF ESTIMATES

The preparation of these financial statements in conformity with US generally accepted accounting principles 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, inventory reserves, goodwill and other intangible assets, income taxes, warranty obligations, self insurance obligations, lease terminations, 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 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, plans and objectives of management, markets for Drew Industries Incorporated (“Drew” or the “Company”) 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 the Company’s future business prospects, revenues and income, wherever they occur in this Form 10-Q, are necessarily estimates reflecting the best judgment of the Company’s 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, the outcome of litigation, 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.

DREW INDUSTRIES INCORPORATED

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to changes in interest rates primarily as a result of its financing activities.

On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association (the “Interest Rate Swap”) with a notional amount of $20,000,000 from which it will receive periodic payments at the 3 month LIBOR rate (3.26813 percent at June 30, 2005 based upon the May 15, 2005 reset date) plus the Company’s applicable spread and make periodic payments at a fixed rate of 3.3525 percent 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. At June 30, 2005, the notional amount was $18,000,000. The fair value of the swap was zero at inception. At June 30, 2005 the fair value of the interest rate swap was $232,000. The Company has designated this swap as a cash flow hedge of certain borrowings under the Credit Agreement and recognized the effective portion of the change in fair value as part of other comprehensive income, with the ineffective portion recognized in earnings currently.

At June 30, 2005, the Company had $40.5 million of fixed rate debt plus $18 million outstanding under the Interest Rate Swap. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to June 30, 2005, 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 $585,000 lower per annum than if the fixed rate financing could be obtained at current market rates.

At June 30, 2005, the Company had $22.1 million of variable rate debt, excluding the $18 million outstanding under the Interest Rate Swap. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to June 30, 2005, and outstanding borrowings of $22.1 million, future cash flows would be affected by $221,000 per annum.

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.

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 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 included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its system of internal controls over financial reporting to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.

As of the end of the period covered by this Form 10-Q, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

b) Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2005, 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.

One of the Company’s subsidiaries is currently in the process of installing new computer software. While to date there have been no significant changes in the Company’s internal controls related to the new software, the Company anticipates that by the end of 2005, and continuing into 2006, certain advanced functionality of the new software will be implemented to further strengthen the Company’s internal controls.

DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

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

Item 4 – Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on May 18, 2005. Of the 10,361,064 shares of common stock entitled to vote at such meeting, holders of at least 8,854,000 shares were present in person or by proxy. At the meeting, stockholders elected to the Board of Directors Leigh J. Abrams, Edward W. Rose III, David L. Webster, James F. Gero, L. Douglas Lippert, Frederick B. Hegi, Jr., David A. Reed and Jack B. Lowe, Jr., each with a term expiring in 2006. Votes cast for and votes withheld in the election of Directors were as follows:

		VOTE
VOTE	FOR	WITHHELD

Edward W. Rose III	8,787,317	202,602
Leigh J. Abrams	8,896,728	93,191
David L. Webster	8,896,003	93,916
L. Douglas Lippert	8,895,353	94,566
James F. Gero	8,905,328	84,591
Frederick B. Hegi, Jr.	8,855,583	134,336
David A. Reed	8,922,203	67,716
John B. Lowe, Jr.	8,948,343	41,576

There were no abstentions or broker non-votes. The stockholders also ratified the appointment of KPMG LLP as independent auditors for the Company for 2005. Voting for the resolution ratifying the appointment were 8,935,490 shares. Voting against were 45,167 shares. Abstaining were 9,262 shares. There were no broker non-votes.


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.

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

August 9, 2005

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LCI Industries (LCII) 10-Q2005 Q2 Quarterly report

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