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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: SEPTEMBER 30, 2012

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     13-3250533
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)    Identification No.)
 
200 Mamaroneck Avenue, White Plains, NY 10601
(Address of principal executive offices)  (Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No___

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 22,388,319 shares of common stock as of October 31, 2012.

 
1

 

DREW INDUSTRIES INCORPORATED

INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2012

(UNAUDITED)
 


   
Page
PART I
FINANCIAL INFORMATION
   
       
 
Item 1 FINANCIAL STATEMENTS
   
       
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
3
 
       
 
CONDENSED CONSOLIDATED BALANCE SHEETS
4
 
       
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
5
 
       
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
6
 
       
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7 19
 
       
 
Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20 38
 
       
 
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
39
 
       
 
Item 4 CONTROLS AND PROCEDURES
39
 
       
PART II
OTHER INFORMATION
   
       
 
Item 1 LEGAL PROCEEDINGS
40
 
       
 
Item 1A RISK FACTORS
40
 
       
 
Item 6 EXHIBITS
40
 
       
SIGNATURES
41
 
       
EXHIBIT 31.1 SECTION 302 CEO CERTIFICATION
42
 
       
EXHIBIT 31.2 SECTION 302 CFO CERTIFICATION
43
 
       
EXHIBIT 32.1 SECTION 906 CEO CERTIFICATION
44
 
       
EXHIBIT 32.2 SECTION 906 CFO CERTIFICATION
45
 
 
 
2

 
 
DREW INDUSTRIES INCORPORATED
 
PART I –  FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
 

 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
(In thousands, except per share amounts)
                       
                         
Net sales
  $ 700,889     $ 521,570     $ 226,323     $ 166,689  
Cost of sales
    568,101       409,631       184,781       134,688  
Gross profit
    132,788       111,939       41,542       32,001  
Selling, general and administrative expenses
    81,499       69,283       26,594       22,798  
Operating profit
    51,289       42,656       14,948       9,203  
Interest expense, net
    246       197       116       78  
Income before income taxes
    51,043       42,459       14,832       9,125  
Provision for income taxes
    18,448       16,488       5,061       3,506  
Net income
  $ 32,595     $ 25,971     $ 9,771     $ 5,619  
                                 
Net income per common share:
                               
Basic
  $ 1.45     $ 1.17     $ 0.43     $ 0.25  
Diluted
  $ 1.43     $ 1.16     $ 0.43     $ 0.25  
                                 
Weighted average common shares outstanding:
                               
Basic
    22,507       22,254       22,563       22,273  
Diluted
    22,724       22,427       22,800       22,447  
 
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
September 30,
   
December 31,
 
   
2012
   
2011
   
2011
 
(In thousands, except per share amount)
                 
                   
ASSETS
                 
Current assets
                 
Cash and cash equivalents
  $ 32,584     $ 1,472     $ 6,584  
Accounts receivable, net
    50,421       41,965       22,620  
Inventories
    98,393       97,765       92,052  
Deferred taxes
    10,125       12,142       10,125  
Prepaid expenses and other current assets
    11,165       6,960       6,187  
Total current assets
    202,688       160,304       137,568  
Fixed assets, net
    101,931       90,884       95,050  
Goodwill
    21,177       20,137       20,499  
Other intangible assets, net
    71,755       80,746       79,059  
Deferred taxes
    14,496       15,744       14,496  
Other assets
    6,422       3,544       4,411  
Total assets
  $ 418,469     $ 371,359     $ 351,083  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities
                       
Accounts payable, trade
  $ 33,392     $ 30,106     $ 15,742  
Accrued expenses and other current liabilities
    47,074       39,413       36,169  
Total current liabilities
    80,466       69,519       51,911  
Long-term indebtedness
    -       8,075       -  
Other long-term liabilities
    20,369       20,005       21,876  
Total liabilities
    100,835       97,599       73,787  
                         
Stockholders’ equity
                       
Common stock, par value $.01 per share
    250       247       248  
Paid-in capital
    92,130       84,942       84,389  
Retained earnings
    254,721       218,038       222,126  
Stockholders’ equity before treasury stock
    347,101       303,227       306,763  
Treasury stock, at cost
    (29,467 )     (29,467 )     (29,467 )
Total stockholders’ equity
    317,634       273,760       277,296  
Total liabilities and stockholders’ equity
  $ 418,469     $ 371,359     $ 351,083  
 
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
DREW INDUSTRIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
September 30,
 
   
2012
   
2011
 
(In thousands)
           
             
Cash flows from operating activities:
           
Net income
  $ 32,595     $ 25,971  
Adjustments to reconcile net income to cash flows provided by operating activities:
               
Depreciation and amortization
    19,211       15,069  
Stock-based compensation expense
    4,703       3,352  
Deferred taxes
    -       26  
Other non-cash items
    889       751  
Changes in assets and liabilities, net of acquisitions of businesses:
               
Accounts receivable, net
    (27,801 )     (24,440 )
Inventories
    (5,753 )     (20,581 )
Prepaid expenses and other assets
    (6,993 )     (1,996 )
Accounts payable
    17,650       18,755  
Accrued expenses and other liabilities
    10,086       (628 )
Net cash flows provided by operating activities
    44,587       16,279  
                 
Cash flows from investing activities:
               
Capital expenditures
    (22,010 )     (17,721 )
Acquisitions of businesses
    (1,473 )     (49,340 )
Proceeds from maturity of short-term investments
    -       5,000  
Proceeds from sales of fixed assets
    5,397       1,248  
Other investing activities
    (88 )     (438 )
Net cash flows used for investing activities
    (18,174 )     (61,251 )
                 
Cash flows from financing activities:
               
Exercise of stock options and deferred stock units
    2,840       504  
Proceeds from line of credit borrowings
    37,702       48,675  
Repayments under line of credit borrowings
    (37,702 )     (40,600 )
Payment of contingent consideration related to acquisitions
    (3,253 )     (226 )
Purchase of treasury stock
    -       (626 )
Other financing activities
    -       (163 )
Net cash flows (used for) provided by financing activities
    (413 )     7,564  
                 
Net increase (decrease) in cash
    26,000       (37,408 )
                 
Cash and cash equivalents at beginning of period
    6,584       38,880  
Cash and cash equivalents at end of period
  $ 32,584     $ 1,472  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 289     $ 263  
Income taxes, net of refunds
  $ 16,121     $ 17,101  
 

The accompanying notes are an integral part of these 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, 2011
  $ 248     $ 84,389     $ 222,126     $ (29,467 )   $ 277,296  
Net income
    -       -       32,595       -       32,595  
Issuance of 243,848 shares of common stock pursuant to stock options and deferred stock units
    2       2,732       -       -       2,734  
Income tax benefit relating to issuance of common stock pursuant to stock options and deferred stock units
    -       106       -       -       106  
Stock-based compensation expense
    -       4,703       -       -       4,703  
Issuance of 7,548 deferred stock units relating to prior year compensation
    -       200       -       -       200  
Balance - September 30, 2012
  $ 250     $ 92,130     $ 254,721     $ (29,467 )   $ 317,634  
 
 
The accompanying notes are an integral part of these 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 wholly-owned subsidiaries (collectively, “Drew” or the “Company”). Drew has no unconsolidated subsidiaries. Drew’s wholly-owned active subsidiaries are Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”), and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Drew, through Lippert and Kinro, manufactures a broad array of components for recreational vehicles (“RVs”) and manufactured homes, and to a lesser extent manufactures components for modular housing, truck caps and buses, as well as for trailers used to haul boats, livestock, equipment and other cargo.

Because of fluctuations in dealer inventories, and volatile economic conditions, current and future seasonal industry trends may be different than in prior years.

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2011 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report. All significant intercompany balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.

In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations as of and for the nine and three month periods ended September 30, 2012 and 2011. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include some information necessary to conform to annual reporting requirements.

2.     Segment Reporting

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

The RV Segment, which accounted for 87 percent and 84 percent of consolidated net sales for the nine month periods ended September 30, 2012 and 2011, respectively, manufactures a variety of products used primarily in the production of RVs, including:
 
Steel chassis for towable RVs
Aluminum windows and screens
Axles and suspension solutions for towable RVs
Chassis components
Slide-out mechanisms and solutions
Furniture and mattresses
Thermoformed bath, kitchen and other products
Entry, baggage, patio and ramp doors
Entry steps
Awnings
Manual, electric and hydraulic stabilizer and leveling systems
Other accessories
 
The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo. Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs.
 
 
7

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
The MH Segment, which accounted for 13 percent and 16 percent of consolidated net sales for the nine month periods ended September 30, 2012 and 2011, respectively, manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile office units, including:
 
Vinyl and aluminum windows and screens
Steel chassis
Thermoformed bath and kitchen products
Steel chassis parts
Steel and fiberglass entry doors
Axles
Aluminum and vinyl patio doors
 
 
The Company also supplies windows, doors and thermoformed bath products as replacement parts to the manufactured housing aftermarket. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

Decisions concerning the allocation of the Company's resources are made by the Company's key executives, with oversight by the Board of Directors. This group evaluates the performance of each segment based upon segment operating profit or loss, defined as income or loss before interest, corporate expenses, goodwill impairment, accretion, other non-segment items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s utilization of assets. Management of debt is a corporate function. The accounting policies of the RV and MH Segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements of the Company’s December 31, 2011 Annual Report on Form 10-K.

Information relating to segments follows (in thousands):
 
   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net sales:
                       
RV Segment:
                       
RV OEMs:
                       
Travel Trailers and Fifth-Wheels
  $ 514,653     $ 387,746     $ 162,719     $ 117,946  
Motorhomes
    22,568       12,244       8,376       3,304  
RV Aftermarket
    14,714       12,169       5,355       4,108  
Adjacent Industries
    57,008       27,497       18,507       10,870  
Total RV Segment net sales
    608,943       439,656       194,957       136,228  
                                 
MH Segment:
                               
Manufactured Housing OEMs
    61,678       56,112       21,188       21,487  
Manufactured Housing Aftermarket
    12,730       12,693       3,990       4,254  
Adjacent Industries
    17,538       13,109       6,188       4,720  
Total MH Segment net sales
    91,946       81,914       31,366       30,461  
                                 
Total net sales
  $ 700,889     $ 521,570     $ 226,323     $ 166,689  
                                 
Operating profit:
                               
RV Segment
  $ 47,209     $ 40,370     $ 12,945     $ 7,745  
MH Segment
    10,942       8,963       3,781       3,786  
Total segment operating profit
    58,151       49,333       16,726       11,531  
Corporate
    (6,513 )     (5,846 )     (1,989 )     (1,803 )
Accretion related to contingent consideration
    (1,350 )     (1,394 )     (430 )     (445 )
Other non-segment items
    1,001       563       641       (80 )
Total operating profit
  $ 51,289     $ 42,656     $ 14,948     $ 9,203  
 
 
8

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

 
3.           Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

RV Entry Door Operation

On February 21, 2012, the Company acquired the business and certain assets of the United States RV entry door operation of Euramax International, Inc. The acquired business had annualized sales of approximately $6 million. The purchase price was $1.7 million, of which $1.2 million was paid at closing, with the balance to be paid over the next three years. The results of the acquired business have been included in the Company’s RV Segment and in the Condensed Consolidated Statement of Income since the acquisition date.

The acquisition of this business was recorded on the acquisition date as follows (in thousands):
 
Cash consideration   $ 1,164  
Present value of future payments
    482  
Total fair value of consideration given
  $ 1,646  
         
Customer relationships
  $ 270  
Other identifiable intangible assets
    40  
Net tangible assets
    785  
Total fair value of net assets acquired
  $ 1,095  
         
Goodwill (tax deductible)
  $ 551  
 
The customer relationships are being amortized over their estimated useful life of 7 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates leveraging its existing manufacturing capacity and purchasing power to reduce costs in this product line.

 
9

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

Goodwill by reportable segment was as follows (in thousands):
 
   
MH Segment
   
RV Segment
   
Total
 
                   
Accumulated cost – December 31, 2011
  $ 10,025     $ 61,001     $ 71,026  
Accumulated impairment – December 31, 2011
    (9,251 )     (41,276 )     (50,527 )
Net balance – December 31, 2011
    774       19,725       20,499  
Acquisitions – 2012
    -       678       678  
Net balance – September 30, 2012
  $ 774     $ 20,403     $ 21,177  
 
Goodwill represents the excess of the total consideration given in an acquisition of a business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested at the reporting unit level for impairment annually in November, or more frequently if certain circumstances indicate a possible impairment may exist. The impairment tests are based on fair value, determined using discounted cash flows, appraised values or management’s estimates. No impairment tests were required or performed during the nine months ended September 30, 2012.

Other Intangible Assets

Other intangible assets consisted of the following at September 30, 2012 (in thousands):
 
   
Gross
Cost
   
Accumulated
Amortization
   
Net
Balance
 
Estimated Useful
Life in Years
                         
Customer relationships
  $ 50,105     $ 16,782     $ 33,323  
3
to 16
Patents
    45,934       13,994       31,940  
2
to 19
Tradenames
    7,959       4,243       3,716  
5
to 15
Non-compete agreements
    4,988       2,212       2,776  
1
to 7
Other intangible assets
  $ 108,986     $ 37,231     $ 71,755        
 
Other intangible assets consisted of the following at December 31, 2011 (in thousands):
 
   
Gross
Cost
   
Accumulated
Amortization
   
Net
Balance
 
Estimated Useful
Life in Years
                         
Customer relationships
  $ 50,645     $ 14,483     $ 36,162  
3
to 16
Patents
    46,139       10,651       35,488  
2
to 19
Tradenames
    8,069       3,408       4,661  
5
to 15
Non-compete agreements
    4,136       1,388       2,748  
3
to 7
Other intangible assets
  $ 108,989     $ 29,930     $ 79,059        
 
At September 30, 2012, other intangible assets included $2.0 million related to the Company’s marine and leisure operation, which sells trailers and related axles primarily for hauling small and medium-sized boats. Compared to historical averages, industry shipments of small and medium-sized boats have declined significantly over the past few years. From time to time, throughout this period, the Company conducted impairment analyses on these operations, and the estimated fair value of these operations continued to exceed the corresponding carrying values, thus no impairment has been recorded. A further downturn in industry shipments of small and medium-sized boats, or in the profitability of the Company’s operations, could result in a future non-cash impairment charge for the related other intangible assets.
 
 
10

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
4.           Cash and Investments

Cash and investments consisted of the following at (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
   
2011
 
                   
Cash in banks
  $ 32,584     $ 1,472     $ 6,584  
Cash and investments
  $ 32,584     $ 1,472     $ 6,584  
 
5.           Inventories

Inventories consisted of the following at (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
   
2011
 
                   
Raw materials
  $ 79,117     $ 84,294     $ 77,066  
Work in process
    4,802       2,335       3,224  
Finished goods
    14,474       11,136       11,762  
Inventories
  $ 98,393     $ 97,765     $ 92,052  
 
6.           Fixed Assets

Fixed assets consisted of the following at (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
   
2011
 
                   
Fixed assets, at cost
  $ 201,665     $ 183,906     $ 189,084  
Less accumulated depreciation and amortization
    99,734       93,022       94,034  
Fixed assets, net
  $ 101,931     $ 90,884     $ 95,050  
 
 
11

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
7.            Accrued Expenses and Other Current Liabilities

 
Accrued expenses and other current liabilities consisted of the following at (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
   
2011
 
                   
Employee compensation and benefits
  $ 16,613     $ 16,180     $ 14,258  
Warranty
    8,013       5,665       5,882  
Sales rebates
    4,866       3,369       3,337  
Contingent consideration related to acquisitions
    5,667       3,188       3,292  
Other
    11,915       11,011       9,400  
Accrued expenses and other current liabilities
  $ 47,074     $ 39,413     $ 36,169  
 
Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various factors, including the Company’s (i) historical warranty costs, (ii) product mix, and (iii) sales. The following table provides a reconciliation of the activity related to the Company’s accrued warranty, including both the current and long-term portions, for the nine months ended (in thousands):
 
   
September 30,
 
   
2012
   
2011
 
             
Balance at beginning of period
  $ 8,640     $ 5,892  
Provision for warranty expense
    8,548       5,291  
Warranty liability from acquired businesses
    12       527  
Warranty costs paid
    (5,813 )     (3,467 )
Total accrued warranty
    11,387       8,243  
Less long-term portion
    3,374       2,578  
Current accrued warranty
  $ 8,013     $ 5,665  
 
8.            Long-Term Indebtedness

The Company had no debt outstanding at September 30, 2012 or December 31, 2011. The Company had $8.1 million outstanding at September 30, 2011 under its line of credit at a weighted average interest rate of 2.5 percent.

On February 24, 2011, the Company entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (collectively, the “Lenders”). The maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the line of credit is designated from time to time by the Company as either (i) the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at September 30, 2012), or (ii) LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30, 2012) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2016. At September 30, 2012, the Company had $3.0 million in outstanding letters of credit under the line of credit. Availability under the Company’s line of credit was $47.0 million at September 30, 2012.
 
 
12

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

Simultaneously, the Company entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”). The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. At September 30, 2012, there were no Senior Promissory Notes outstanding. This facility expires on February 24, 2014.

Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined. This limitation did not impact the Company’s borrowing availability at September 30, 2012. The remaining availability under these facilities was $196.6 million at September 30, 2012. The Company believes this availability, together with the $32.6 million in cash at September 30, 2012, is more than adequate to finance the Company’s anticipated cash requirements for the next twelve months.
 
Pursuant to the Credit Agreement and “shelf-loan” facility at September 30, 2012, the Company was required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At September 30, 2012, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.

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

9.           Stockholders’ Equity

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

   
September 30,
    December 31,  
    2012     2011     2011  
Common stock authorized
    30,000       30,000       30,000  
Common stock issued
    25,070       24,738       24,826  
Treasury stock
    2,684       2,684       2,684  
 
 
13

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

The following reconciliation details the denominator used in the computation of basic and diluted earnings per share (in thousands):
 
   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
      2012     2011       2012     2011  
                             
Weighted average shares outstanding for basic earnings per share
    22,507       22,254       22,563       22,273  
Common stock equivalents pertaining to stock options and contingently issuable deferred stock units
    217       173       237       174  
Weighted average shares outstanding for diluted earnings per share
    22,724       22,427       22,800       22,447  
 
The weighted average diluted shares outstanding for the nine months ended September 30, 2012 and 2011 excludes the effect of 797,038 and 1,467,393 shares of common stock, respectively, subject to stock options and deferred stock units. The weighted average diluted shares outstanding for the three months ended September 30, 2012 and 2011 excludes the effect of 592,038 and 1,519,726 shares of common stock, respectively, subject to stock options and deferred stock units. Such shares were excluded from total diluted shares because they were anti-dilutive or the specified performance conditions those shares were subject to were not yet achieved.

In 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions, or in block trades. Of this authorization, 535,135 shares were repurchased prior to 2012 at an average price of $18.64 per share, or $10.0 million. No shares have been purchased in 2012. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors.

10.           Commitments and Contingencies

Litigation

See Item 3. “Legal Proceedings” in the Annual Report on Form 10-K for the year ended December 31, 2011. On June 7, 2012, the United States Court of Appeals for the Ninth Circuit unanimously affirmed the decision of the United States District Court, Central District of California, which had granted Kinro’s motion for summary judgment dismissing all claims against Kinro asserted by Plaintiffs.  Consequently, the litigation was terminated.

In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2012, would not be material to the Company’s financial position or annual results of operations.
 
 
14

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
Contingent Consideration Related to Acquisitions

In connection with several acquisitions, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a liability for the fair value of this contingent consideration at September 30, 2012, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 14.9 percent.

The following table summarizes the contingent consideration liability as of September 30, 2012 (in thousands):
 
         
Fair Value
 
   
Estimated
   
of Estimated
 
   
Remaining
   
Remaining
 
Acquisition
 
Payments
   
Payments
 
Schwintek products
  $ 11,616 (a)   $ 9,605  
Level-UpTM six-point leveling system
    3,135 (b)     2,359  
Other acquired products
    806 (c)     672  
Total
  $ 15,557     $ 12,636  
 
(a)
Contingent consideration for three of the four products expires in March 2014. Contingent consideration for the remaining product will cease five years after the product is first sold to customers. Two of the four products acquired have a combined remaining maximum contingent consideration of $9.7 million, of which the Company estimates $8.5 million will be paid. Other than expiration of the contingent consideration period, the remaining products have no maximum contingent consideration.

(b)
Other than expiration of the contingent consideration period in February 2016, these products have no maximum contingent consideration.

(c)
Contingent consideration expires at various dates through October 2025. Certain of these products have a combined remaining maximum of $3.4 million, while the remaining products have no maximum contingent consideration.

As required, the liability for this contingent consideration is measured quarterly, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending upon the weighted average costs of capital and future sales of the products which are subject to contingent consideration, the Company could record adjustments in future periods.

In the first nine months of 2012 and 2011, the net impact of the quarterly fair value adjustments and accretion of the liability was an expense recorded in selling, general, and administrative expenses in the Condensed Consolidated Statements of Income of $1.3 million and $1.0 million, respectively.
 
 
15

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
The following table provides a reconciliation of the Company’s contingent consideration liability for the nine months ended September 30, 2012 (in thousands):
 
Balance at December 31, 2011
  $ 14,561  
Acquisitions
    67  
Payments
    (3,253 )
Accretion
    1,324  
Fair value adjustments
    (63 )
Balance at September 30, 2012
    12,636  
Less current portion in accrued expenses and other current liabilities
    5,667  
Total long-term portion in other long-term liabilities
  $ 6,969  
 
Use of Estimates

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

11.           Fair Value Measurements

The carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated their fair value due to the short-term nature of these instruments.
 
 
16

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

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at (in thousands):
 
    September 30, 2012     December 31, 2011  
   
Total
   
Level 1
   
Level 2
    Level 3    
Total
   
Level 1
    Level 2    
Level 3
 
Assets
                                               
Deferred compensation
  $ 4,248     $ 4,248     $ -     $ -     $ 2,564     $ 2,564     $ -     $ -  
Unrealized gain on derivative instruments
    362       -       362       -       -       -       -       -  
Total assets
  $ 4,610     $ 4,248     $ 362     $ -     $ 2,564     $ 2,564     $ -     $ -  
Liabilities
                                                               
Contingent consideration related to acquisitions
  $ 12,636     $ -     $ -     $ 12,636     $ 14,561     $ -     $ -     $ 14,561  
Deferred compensation
    6,607       6,607       -       -       4,468       4,468       -       -  
Unrealized loss on derivative instruments
    -       -       -       -       436       -       436       -  
Total liabilities
  $ 19,243     $ 6,607     $ -     $ 12,636     $ 19,465     $ 4,468     $ 436     $ 14,561  
 
Deferred Compensation
The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). The amounts deferred under this Plan are credited with earnings or losses based upon changes in values of the notional investments elected by the Plan participants. Deferred compensation assets and liabilities were valued using a market approach based on the quoted market prices of identical instruments.

Contingent Consideration Related to Acquisitions
Liabilities for contingent consideration related to acquisitions were valued using management’s projections for long-term sales forecasts, including assumptions regarding market share gains and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next five years, the Company’s long-term sales growth forecasts for products subject to contingent consideration arrangements average approximately 40 percent per year. For further information on the inputs used in determining the fair value, and a roll-forward of the contingent consideration liability, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

Changes in either of the inputs in isolation would result in a change in the fair value measurement. A change in the assumptions used for sales forecasts would result in a directionally similar change in the fair value liability, while a change in the weighted average cost of capital would result in a directionally opposite change in the fair value liability. If there is an increase in the fair value liability, the Company would record a charge to selling, general and administrative expenses, and if there is a decrease in the fair value liability, the Company would record a benefit in selling, general and administrative expenses.
 
 
17

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
Derivative Instruments
At September 30, 2012, the Company had derivative instruments for 7.1 million pounds of aluminum, approximately 20 percent of the Company’s anticipated annual aluminum purchases, in order to manage a portion of the exposure to movements associated with aluminum costs. These derivative instruments expire between October 2012 and September 2013, at an average mid-west aluminum price of $1.02 per pound. While these derivative instruments are considered to be economic hedges of the underlying movement in the price of aluminum, they are not designated or accounted for as a hedge. These derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net gain or loss was recorded in cost of sales in the Condensed Consolidated Statements of Income. At September 30, 2012 the corresponding asset was recorded in prepaid expenses and other current assets, and at December 31, 2011 the corresponding liability was recorded in accrued expenses and other current liabilities, both as reflected in the Condensed Consolidated Balance Sheet. During the first nine months of 2012, derivative instruments for 2.5 million pounds were settled at a loss of $0.3 million.
 
 Non-recurring

The following table presents the carrying value on the measurement date of any assets and liabilities which were measured at fair value and recorded at the lower of cost or fair value, on a non-recurring basis, using significant unobservable inputs (Level 3), and the corresponding non-recurring losses recognized during the nine months ended (in thousands):
 
   
September 30, 2012
   
September 30, 2011
 
   
Carrying
Value
   
Non-Recurring
Losses
   
Carrying
Value
   
Non-Recurring
Losses
 
Assets
                       
Vacant owned facilities
  $ 5,794     $ 486     $ 10,123     $ -  
Other intangible assets
    -       1,228       -       -  
Net assets of acquired businesses
    1,345       -       37,340       -  
Total assets
  $ 7,139     $ 1,714     $ 47,463     $ -  
Liabilities
                               
Vacant leased facilities
  $ -     $ 10     $ 583     $ 203  
Total liabilities
  $ -     $ 10     $ 583     $ 203  
 
Vacant Owned Facilities
During the first nine months of 2012, the Company reviewed the recoverability of the carrying value of eight vacant owned facilities. The determination of fair value was based on the best information available, including internal cash flow estimates, market prices for similar assets, broker quotes and independent appraisals, as appropriate. During the first nine months of 2012, the carrying value of three of these vacant owned facilities exceeded their fair value, therefore an impairment charge of $0.5 million was recorded in selling, general, and administrative expenses in the Condensed Consolidated Statements of Income. During the first nine months of 2012, the Company sold at carrying value two of the facilities previously recorded as a vacant facility and reopened another. At September 30, 2012, the Company had five vacant owned facilities, with an estimated combined fair value of $5.8 million, classified in fixed assets in the Condensed Consolidated Balance Sheets.  The Company has leased to third parties two of these owned facilities with a combined carrying value of $3.8 million, both for five year terms, for a combined rental income of $0.4 million annually. Both of these leases also contain an option for the lessee to purchase the facility at an amount in excess of carrying value.

During the first nine months of 2011, the fair value of vacant owned facilities exceeded their carrying value, therefore no impairment charges were recorded.
 
 
18

 
 
DREW INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
Other Intangible Assets
During the first nine months of 2012, the Company reviewed the recoverability of amortizable intangible assets associated with an acquired patent. Based on the analyses, the $1.2 million carrying value of these intangible assets exceeded the undiscounted cash flows expected to be generated. As a result, the Company was required to determine the fair value of these intangible assets. Fair value was determined based on the present value of internal cash flow estimates. The resulting fair value of these intangible assets was nominal, therefore the Company recorded a non-cash impairment charge of $1.2 million, of which $1.0 million was recorded in cost of sales in the Condensed Consolidated Statements of Income.

Net Assets of Acquired Businesses
The Company valued the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company used different valuation techniques in determining the fair value. Those techniques included comparable market prices, long-term sales, profitability and cash flow forecasts, assumptions regarding future industry-specific economic and market conditions, a market participant’s weighted average cost of capital, as well as other techniques as circumstances required. For further information on acquired assets and liabilities, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

Vacant Leased Facilities
The Company recorded a charge of less than $0.1 million in selling, general and administrative expenses in the Condensed Consolidated Statements of Income in the first nine months of 2012 due to the early termination of leases of vacant facilities by the lessor. In the first nine months of 2011, the Company recorded a charge of $0.2 million in selling, general and administrative expenses in the Condensed Consolidated Statements of Income related to the exit from leased facilities.

12.           New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated standards related to additional requirements and guidance regarding disclosures of fair value measurements. The guidance expanded required disclosures, including the reasons for and amounts of all transfers in and out of Levels 1 and 2 fair value measurements, and for Level 3 fair value measurements added (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes used, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and the interrelationships between those inputs. This guidance was effective for interim or annual periods beginning after December 15, 2011. The adoption of this guidance had no impact on the Company’s financial statements other than additional disclosures.
 
In August 2011, the FASB issued updated standards intended to simplify how an entity tests goodwill for impairment. Under the new guidance, an entity is no longer required to perform the two-step quantitative goodwill impairment test unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 
19

 
 
DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report.

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

The Company’s operations are conducted through its wholly-owned operating subsidiaries, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”) and Kinro, Inc. and its subsidiaries (collectively, “Kinro”). Each has operations in both the RV and MH Segments. At September 30, 2012, the Company operated 31 plants in the United States.

Net sales and operating profit are as follows (in thousands):
 
   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
    2012    
2011
      2012     2011  
Net sales:
                         
RV Segment:                                
RV OEMs:                                
Travel Trailers and Fifth-Wheels
  $ 514,653     $ 387,746     $ 162,719     $ 117,946  
Motorhomes
    22,568       12,244       8,376       3,304  
RV Aftermarket
    14,714       12,169       5,355       4,108  
Adjacent Industries
    57,008       27,497       18,507       10,870  
Total RV Segment net sales
    608,943       439,656       194,957       136,228  
MH Segment
                               
Manufactured Housing OEMs
    61,678       56,112       21,188       21,487  
Manufactured Housing Aftermarket
    12,730       12,693       3,990       4,254  
Adjacent Industries
    17,538       13,109       6,188       4,720  
Total MH Segment net sales
    91,946       81,914       31,366       30,461  
Total net sales
  $ 700,889     $ 521,570     $ 226,323     $ 166,689  
Operating profit:
                               
RV Segment
  $ 47,209     $ 40,370     $ 12,945     $ 7,745  
MH Segment
    10,942       8,963       3,781       3,786  
Total segment operating profit
    58,151       49,333       16,726       11,531  
Corporate
    (6,513 )     (5,846 )     (1,989 )     (1,803 )
Accretion related to contingent consideration
    (1,350 )     (1,394 )     (430 )     (445 )
Other non-segment items
    1,001       563       641       (80 )
Total operating profit
  $ 51,289     $ 42,656     $ 14,948     $ 9,203  

Because of fluctuations in dealer inventories, and volatile economic conditions, current and future seasonal industry trends may be different than in prior years.

 
20

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
The Company’s RV Segment manufactures a variety of products used primarily in the production of RVs, including:
 
Steel chassis for towable RVs  Aluminum windows and screens
Axles and suspension solutions for towable RVs Chassis components
Slide-out mechanisms and solutions  Furniture and mattresses
Thermoformed bath, kitchen and other products  Entry, baggage, patio and ramp doors
● Entry steps  Awnings
Manual, electric and hydraulic stabilizerand leveling systems  Other accessories

The Company also supplies certain of these products as replacement parts to the RV aftermarket. In addition, the Company manufactures components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo (“Adjacent Industries”). Approximately 85 percent of the Company’s RV Segment net sales are components to manufacturers of travel trailer and fifth-wheel RVs. Travel trailer and fifth-wheel RVs accounted for 84 percent of all RVs shipped by the industry in 2011.

The Company’s MH Segment manufactures a variety of products used in the production of manufactured homes and to a lesser extent, modular housing and mobile office units, including:
 
 Vinyl and aluminum windows and screens  Steel chassis
 Thermoformed bath and kitchen products  Steel chassis parts
 Steel and fiberglass entry doors  Axles
Aluminum and vinyl patio doors  
 
The Company also supplies windows, doors and thermoformed bath products as replacement parts to the manufactured housing aftermarket. Certain of the Company’s MH Segment customers manufacture both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both types of homes. As a result, the Company is not always able to determine in which type of home its products are installed.

INDUSTRY BACKGROUND

Recreational Vehicle Industry

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

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV markets, increased 12 percent in the first nine months of 2012 to 188,200 units compared to the first nine months of 2011, as a result of:

 
·
An estimated 8 percent increase in retail demand in the first nine months of 2012 to 180,900 units, as compared to the same period of 2011, despite continued concerns about high unemployment and slower economic growth in the U.S.
 
·
RV dealers increasing inventory levels by an estimated 7,500 more units in the first nine months of 2012 than in the comparable period of 2011.

 
21

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
The Company estimates that dealer inventories of travel trailer and fifth-wheel RVs across the U.S and Canada increased by about 23,000 units during the twelve months ended September 2012, compared to a 14,100 unit increase in retail sales for the same period. Industry surveys indicate that RV dealers are cautious, but generally comfortable with their level of towable RV inventory in relation to the increases they anticipate in retail sales.

While the Company measures its RV sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. A comparison of the number of units and the year-over-year percentage change in industry-wide wholesale shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., as well as the resulting increase or (decrease) in dealer inventories, for both the United States and Canada, is as follows:

 
    Wholesale     Retail    
Estimated
Unit Impact on
 
   
Units
   
Change
   
Units
   
Change
   
Dealer Inventories
 
Quarter ended September 30, 2012(1)
    56,700       19 %     62,900       6 %     (6,200 )
Quarter ended June 30, 2012
    71,100       8 %     79,300       6 %     (8,200 )
Quarter ended March 31, 2012
    60,400       11 %     38,700       16 %     21,700  
Quarter ended December 31, 2011
    45,200       16 %     29,500       4 %     15,700  
Twelve months ended September 30, 2012
    233,400       13 %     210,400       7 %     23,000  
Quarter ended September 30, 2011
    47,500       -2 %     59,400       4 %     (11,900 )
Quarter ended June 30, 2011
    66,000       6 %     75,100       8 %     (9,100 )
Quarter ended March 31, 2011
    54,200       10 %     33,500       7 %     20,700  
Quarter ended December 31, 2010
    39,000       4 %     28,300       12 %     10,700  
Twelve months ended September 30, 2011
    206,700       5 %     196,300       7 %     10,400  

(1)  Retail sales data for September 2012 has not been published, therefore retail and dealer inventory data include an estimate for retail units sold.

While production over the last twelve months was strong, unless retail demand matches these production levels, dealers could reduce the pace of their orders for additional units, and our customers, the original equipment manufacturers (“OEMs”), would need to adjust their production levels in future months.

Ultimately, industry-wide retail sales, and therefore production levels of RVs will depend to a significant extent on the course of the economy. Further, retail sales of RVs have historically been closely tied to consumer confidence, which according to one measure reached a five-year high this October. The Company is encouraged that several key customers have expressed their long-term optimism by expanding production capacity. The Company also remains confident in its ability to exceed industry growth rates through new products, market share gains, acquisitions and ongoing investments in quality and in customer service.
 
The RVIA has a generic advertising campaign promoting the “RV lifestyle”. The current campaign is targeted at both parents aged 30-49 with children at home, as well as couples aged 50-64 with no children at home. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented domestic vacations, and using RVs as second homes, also appear to motivate consumer demand for RVs. RVIA studies indicate that RV vacations cost significantly less than other forms of vacation. In the long-term, the Company expects RV industry sales to be aided by positive demographics, and the continued popularity of the “RV Lifestyle”.

 
22

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
Manufactured Housing Industry

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

The Institute for Building Technology and Safety (“IBTS”) reported that for the first nine months of 2012, industry-wide wholesale shipments of manufactured homes were 41,900 units, an increase of 13 percent compared to the first nine months of 2011. In the third quarter of 2012, there were 14,200 industry-wide wholesale shipments of manufactured homes, a more moderate increase of 2 percent compared to the same period of 2011. Industry-wide wholesale shipments of manufactured homes in the month of September 2012 declined 13 percent, and the Company estimates that industry-wide shipments declined 5 percent to 10 percent in October 2012. These comparative declines resulted primarily from an increase in production last September and October in response to orders by FEMA, which did not recur in 2012.

Industry-wide wholesale shipments by the manufactured housing industry declined from 1999 to 2011 for a variety of reasons. Because of the current real estate and economic environment, including the availability of foreclosed site built homes at abnormally low prices, high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes, and the current retail and wholesale credit markets, industry-wide wholesale shipments of manufactured homes may remain low until these conditions improve. In addition, certain provisions of the recently enacted Dodd-Frank Act which regulate financial transactions could make certain types of mortgages historically used to finance the purchase of manufactured homes more difficult to obtain. If this law remains unchanged, industry sales of manufactured homes could decline significantly, although legislation has recently been introduced to reduce regulatory burdens which impede access to affordable manufactured housing financing.

Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. A typical section may range in size from 800 to 1,200 square feet. During 2011, multi-section homes were 51 percent of the total manufactured homes produced, down from 59 percent and 63 percent in 2010 and 2009, respectively. However, in recent months, multi-section homes have increased as a percent of the total manufactured homes produced, but there can be no assurance that this trend will continue. Multi-section manufactured homes contain more of the Company’s products than single-section manufactured homes. The decline in multi-section homes prior to 2012 may have been partly due to the weak site-built housing market, as a result of which many retirees have not been able to sell their primary residence, or may have been unwilling to sell at currently depressed prices, and purchase a more affordable multi-section manufactured home as many had done historically.

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

 
23

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
RESULTS OF OPERATIONS

Consolidated Highlights

 
§
Net sales in the 2012 third quarter increased to $226 million, 36 percent higher than in the 2011 third quarter. This sales growth was primarily the result of a 43 percent sales increase by Drew’s RV Segment, which accounted for 86 percent of Drew’s consolidated net sales in the 2012 third quarter. RV Segment sales growth was primarily due to a 19 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, Drew’s primary RV market, as well as acquisitions, market share gains, and increased sales to adjacent markets. Excluding the impact of acquisitions, consolidated net sales increased 27 percent.

Sales for the twelve months ended September 2012 exceeded $860 million, a Company record for any twelve month period.

 
§
In October 2012, consolidated net sales reached approximately $85 million, an increase of 35 percent from October 2011 sales, as a result of strong growth in the Company’s RV Segment. Acquisitions did not have a significant impact on sales growth in October 2012, as most acquisitions were completed more than a year ago. It is estimated that industry-wide shipments of travel trailer and fifth-wheel RVs increased 30 percent in October 2012. This increase in industry-wide RV production was apparently in response to very strong initial orders following the 2012 annual RV open house in Elkhart, Indiana in late September. On the other hand, it is estimated that industry-wide production of manufactured homes declined 5 percent to 10 percent in October. This comparative decline resulted from an increase in production last October in response to orders by FEMA, which did not recur in 2012.

 
§
For the third quarter of 2012, the Company reported net income of $9.8 million ($0.43 per diluted share), a 74 percent increase over net income of $5.6 million ($0.25 per diluted share) in the third quarter of 2011.

Sales in the 2012 third quarter increased nearly $60 million compared to the year-earlier quarter, on which the Company achieved incremental operating profit of $5.7 million. This is an improvement from the year-over-year incremental margin the Company achieved in the second quarter of 2012, and in the first quarter of 2012.

The Company’s operating profits continue to be impacted by higher labor and related costs because of lower operating efficiencies resulting from greater than expected demand, as well as costs related to facility realignment, process changes and lean manufacturing initiatives. Further, the Company continues to incur greater than normal outsourcing costs on tempered glass due to capacity constraints.

Over the past several months, the Company has developed and implemented action plans to increase efficiencies and improve customer service. In certain product lines, the Company has begun to realize the benefits of these initiatives, including overtime declining significantly from the second quarter of 2012 to the third quarter of 2012. However, implementing these plans to improve production efficiencies has taken longer than expected because it is very difficult to re-organize production flow while still operating near capacity at several key facilities. The full impact of these plans will take time to realize, but the Company expects production efficiencies to further improve before the 2013 selling season.

 
24

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Material cost as a percent of sales was lower than in the prior year third quarter. After rising briefly at the beginning of 2012, steel and aluminum costs have declined over the past two quarters, which benefitted operating results in the third quarter of 2012. However, steel and aluminum costs remain volatile.

The effective tax rate for the 2012 third quarter was lower than in the prior year as a result of declines in tax reserve requirements, primarily due to the expiration of certain federal and state tax statute of limitations, as well as higher federal and state tax credits.

 
§
After investing $53 million for seven acquisitions and $46 million in capital expenditures since the beginning of 2011, at September 30, 2012 the Company was debt-free and had $33 million in cash, along with significant borrowing capacity. The Company remains well-positioned to continue to take advantage of investment opportunities to further improve results.

RV Segment – Third Quarter

Net sales of the RV Segment in the third quarter of 2012 increased 43 percent compared to the third quarter of 2011. Net sales of components were to the following markets (in thousands):
 
   
2012
   
2011
   
Change
 
RV OEMs:                  
Travel Trailers and Fifth-Wheels
  $ 162,719     $ 117,946       38 %
Motorhomes
    8,376       3,304       154 %
RV Aftermarket
    5,355       4,108       30 %
Adjacent Industries
    18,507       10,870       70 %
Total RV Segment net sales
  $ 194,957     $ 136,228       43 %
 
According to the RVIA, industry-wide wholesale shipments for the three months ended September 30, were:
 
   
2012
   
2011
   
Change
 
Travel Trailer and Fifth-Wheel RVs
    56,700       47,500       19 %
Motorhomes
    6,800       5,300       28 %
 
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the third quarter of 2012 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to market share gains of $13 million and net sales from acquisitions completed during the last twelve months which added $9 million in net sales during the third quarter of 2012.

The Company’s net sales growth in components for motorhomes exceeded the increase in industry-wide wholesale shipments of motorhomes primarily due to market share gains of $3 million, and acquisitions which added $1 million in net sales during the third quarter of 2012. In the past year, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration.

 
25

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Net sales to adjacent industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains of $4 million and acquisitions which added $4 million in net sales during the third quarter of 2012. The Company believes there are significant opportunities in these adjacent industries. Customer relationships gained through an acquisition completed by the Company during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team which was added earlier in 2011, are expected to continue to aid the Company’s growth in these adjacent industries.

The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the twelve months ended September 30, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
 
Content per:
 
2012
   
2011
   
Change
 
Travel Trailer and Fifth-Wheel RV
  $ 2,685     $ 2,244       20 %
Motorhome
  $ 1,002     $ 617       62 %
 
The Company’s average product content per type of RV excludes sales of replacement parts to the aftermarket and sales to adjacent industries. Content per RV is impacted by market share gains, acquisitions and new product introductions, as well as changes in selling prices for the Company’s products. In the first quarter of 2012, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to adjacent industries. There was no change in total reported net sales for the RV Segment, and all prior periods have also been refined for consistency.

Operating profit of the RV Segment was $12.9 million in the third quarter of 2012, an increase of $5.2 million compared to the third quarter of 2011. This increase in RV Segment operating profit was less than the Company’s expected 15 - 20 percent incremental margin.

The operating margin of the RV Segment in the third quarter of 2012 was negatively impacted by:
 
 
·
Excess labor and related costs due to greater than expected demand, as well as start-up costs associated with the new aluminum extrusion operation and the RV awning product line. Further, due to capacity constraints, the Company outsourced a portion of its tempered glass requirements, which added $0.8 million to cost of goods sold.

Over the past several months, the Company has developed and implemented action plans to increase efficiencies and improve customer service. In particular, among other initiatives, the Company (i) has hired a Vice President of Customer Service and increased its customer service capabilities, (ii) has purchased additional glass tempering equipment, which should be operational by the second quarter of 2013, (iii) is expanding its RV chassis production capacity, (iv) is implementing lean manufacturing principles, and (v) is consolidating its furniture operation. In certain product lines, the Company has begun to realize the benefits of these initiatives, including overtime declining significantly from the second quarter of 2012 to the third quarter of 2012. However, implementing these plans to improve production efficiencies has taken longer than expected because it is very difficult to re-organize production flow while still operating near capacity at several key facilities. The full impact of these plans will take time to realize, but the Company expects production efficiencies to further improve before the 2013 selling season. In the fourth quarter of 2012, the Company also expects to incur costs related to facility re-alignment, and process improvement, as it did in the third quarter.

 
26

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Further, in the seasonally slower months ahead, the Company plans to retain more production employees than typical in the slow winter season in order to level out production by building to stock certain high volume products. Retaining employees will also enable the Company to minimize hiring and training costs when demand ramps up in early 2013.

 
·
Fixed costs were approximately $2 million higher than in the third quarter of 2011, primarily due to additional staff and facilities, as well as higher amortization, largely related to acquisitions and other investments.

 
·
Higher warranty and workers compensation insurance costs, primarily due to higher claims experience, as well as higher supplies expense.
 
Partially offset by:
 
 
·
Lower material costs. After rising briefly at the beginning of 2012, steel and aluminum costs have declined over the past two quarters, which benefitted operating results in the third quarter of 2012. However, steel and aluminum costs remain volatile. As a result of rising aluminum costs at the end of the 2012 third quarter, the Company recorded a positive adjustment from its aluminum hedge of $0.7 million. In addition, employee training and lean manufacturing initiatives enabled the Company to reduce scrap costs in the 2012 third quarter by $0.9 million as compared to the 2012 second quarter.

 
·
The spreading of fixed manufacturing and selling, general and administrative costs over a $59 million larger sales base.

RV Segment – Year to Date

Net sales of the RV Segment in the first nine months of 2012 increased 39 percent compared to the first nine months of 2011. Net sales of components were to the following markets (in thousands):
 
   
2012
   
2011
   
Change
 
RV OEMs:                  
Travel Trailers and Fifth-Wheels
  $ 514,653     $ 387,746       33 %
Motorhomes
    22,568       12,244       84 %
RV Aftermarket
    14,714       12,169       21 %
Adjacent Industries
    57,008       27,497       107 %
Total RV Segment net sales
  $ 608,943     $ 439,656       39 %
 
 
27

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
According to the RVIA, industry-wide wholesale shipments for the nine months ended September 30, were:
 
   
2012
   
2011
   
Change
 
Travel Trailer and Fifth-Wheel RVs
    188,200       167,700       12 %
Motorhomes
    21,300       20,000       7 %
 
The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first nine months of 2012 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to the acquisitions completed during the twelve months ended September 30, 2012, which added $39 million in net sales during the first nine months of 2012, market share gains of $31 million, as well as sales price increases of $8 million.

The Company’s net sales growth in components for motorhomes exceeded the increase in industry-wide wholesale shipments of motorhomes primarily due to market share gains of $6 million, as well as acquisitions which added $4 million in net sales during the first nine months of 2012. In the past year, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration.

Net sales to adjacent industries, including components for truck caps, buses, and trailers used to haul boats, livestock, equipment and other cargo, increased due to market share gains of $16 million and acquisitions which added $13 million in net sales during the first nine months of 2012. The Company believes there are significant opportunities in these adjacent industries. Customer relationships gained through an acquisition completed by the Company during the third quarter of 2011, along with increased focus provided by the Company’s specialty markets sales team which was added earlier in 2011, are expected to aid the Company’s growth in these adjacent industries.

Operating profit of the RV Segment was $47.2 million in the first nine months of 2012, an increase of $6.8 million compared to the first nine months of 2011. This increase in RV Segment operating profit was less than the Company’s expected 15 - 20 percent incremental margin.

The operating margin of the RV Segment in the first nine months of 2012 was negatively impacted by:

 
·
Excess labor, overtime and related costs due to greater than expected demand, as well as start-up and integration costs associated with the acquisitions completed in 2011 and the new aluminum extrusion operation and the RV awning product line. Further, due to capacity constraints, the Company outsourced a portion of its tempered glass requirements, which added over $1.5 million to cost of goods sold.

Over the past several months, the Company has developed and implemented action plans to increase efficiencies and improve customer service. In particular, among other initiatives, the Company (i) has hired a new Vice President of Customer Service and increased customer service capabilities, (ii) has purchased additional glass tempering equipment, which should be operational by the second quarter of 2013, (iii) is expanding its RV chassis production capacity, (iv) is implementing lean manufacturing principles, and (v) is consolidating its furniture operation. In certain product lines, the Company has begun to realize the benefits of these initiatives, including overtime declining significantly from the second quarter of 2012 to the third quarter of 2012. However, implementing these plans to improve production efficiencies has taken longer than expected because it is very difficult to re-organize production flow while still operating near capacity at several key facilities. The full impact of these plans will take time to realize, but the Company expects production efficiencies to further improve before the 2013 selling season. In the fourth quarter of 2012, the Company also expects to incur costs related to facility re-alignment, and process improvement, as it did in the third quarter.

 
28

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Further, in the seasonally slower months ahead, the Company plans to retain more production employees than typical in the slow winter season in order to level out production by building to stock certain high volume products. Retaining employees will also enable the Company to minimize hiring and training costs when demand ramps up in early 2013.

 
·
Fixed costs were approximately $5 million to $6 million higher than in the first nine months of 2011, primarily due to additional staff and facilities, as well as higher amortization, largely related to acquisitions and other investments.

 
·
Higher warranty, health insurance and workers compensation insurance costs, primarily due to higher claims experience, as well as higher supplies expense.
 
Partially offset by:
 
 
·
Lower material costs. After rising briefly at the beginning of 2012, steel and aluminum costs have declined over the past two quarters, which benefitted operating results in the third quarter of 2012. However, steel and aluminum costs remain volatile. Further, employee training and lean manufacturing initiatives enabled the Company to reduce scrap costs in the 2012 third quarter by $0.9 million as compared to the 2012 second quarter.

 
·
The spreading of fixed manufacturing and selling, general and administrative costs over a $169 million larger sales base. In addition, incentive compensation, which is based on profits, did not change proportionately with net sales.

MH Segment – Third Quarter

Net sales of the MH Segment in the third quarter of 2012 increased 3 percent compared to the same period of 2011. Net sales of components were to the following markets (in thousands):
 
   
2012
   
2011
   
Change
 
Manufactured Housing OEMs
  $ 21,188     $ 21,487       (1 %)
Manufactured Housing Aftermarket
    3,990       4,254       (6 %)
Adjacent Industries
    6,188       4,720       31 %
Total MH Segment net sales
  $ 31,366     $ 30,461       3 %

 
29

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
According to the IBTS, industry-wide wholesale shipments for the three months ended September 30, were:
 
   
2012
   
2011
   
Change
 
Total Homes Produced
    14,200       13,900       2 %
Total Floors Produced
    22,300       21,300       4 %
 
The change in the Company’s net sales of components for new manufactured homes was less than the increase in industry-wide wholesale shipments of manufactured homes, primarily because the timing of shipments to the Company’s customers is often different from when those customers ship the finished manufactured home, and customer mix as the Company’s content per unit varies between customers.

Net sales to adjacent industries increased due to market share gains. The Company believes there are opportunities in these adjacent industries, as well as in the manufactured housing aftermarket, and expects growth to accelerate due to the increased focus provided by the Company’s new sales teams added in 2011.

The trend in the Company’s average product content per manufactured home produced is an indicator of the Company’s overall market share of components for new manufactured homes. Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. The larger homes typically contain more of the Company’s products. The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components to manufactured housing OEMs for newly produced manufactured homes for the twelve months ended September 30, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:
 
   
2012
   
2011
   
Change
 
Content per Home Produced
  $ 1,464     $ 1,472       (1 %)
Content per Floor Produced
  $ 962     $ 946       2 %

The Company’s average product content per manufactured home excludes sales of replacement parts to the aftermarket and sales to adjacent industries. Content per manufactured home and content per floor are impacted by market share gains, acquisitions and new product introductions, as well as changes in selling prices for the Company’s products. In the first quarter of 2012, the Company refined the calculation of content per unit to better identify aftermarket sales, as well as sales to adjacent industries. There was no change in total reported net sales for the MH Segment, and all prior periods have also been refined for consistency.

Based upon relatively consistent sales, operating profit of the MH Segment of $3.8 million in the third quarter of 2012 was consistent with the third quarter of 2011.

 
30

 
 
DREW INDUSTRIES INCORPORATED
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
MH Segment – Year to Date

Net sales of the MH Segment in the first nine months of 2012 increased 12 percent compared to the same period of 2011. Net sales of components were to the following markets (in thousands):
 
   
2012
   
2011
   
Change
 
Manufactured Housing OEMs
  $ 61,678     $ 56,112       10 %
Manufactured Housing Aftermarket
    12,730