LCI INDUSTRIES - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended: JUNE 30, 2015



☐	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: 001-13646

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 Number)

3501 County Road 6 East	46514
Elkhart, Indiana	(Zip Code)
(Address of principal executive offices)

(574) 535-1125

(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 ☒ 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 (§ 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 ☒ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐

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 ☒

The number of shares outstanding of the registrant's common stock, as of the latest practicable date (July 31, 2015) was 24,142,526 shares of common stock.

DREW INDUSTRIES INCORPORATED

TABLE OF CONTENTS



		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

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

	ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34

	ITEM 4 – CONTROLS AND PROCEDURES	34

PART II –	OTHER INFORMATION

	ITEM 1 – LEGAL PROCEEDINGS	35

	ITEM 1A – RISK FACTORS	35

	ITEM 6 – EXHIBITS	35

SIGNATURES		36

EXHIBIT 31.1 - SECTION 302 CEO CERTIFICATION

EXHIBIT 31.2 - SECTION 302 CFO CERTIFICATION

EXHIBIT 32.1 - SECTION 906 CEO CERTIFICATION

EXHIBIT 32.2 - SECTION 906 CFO CERTIFICATION

DREW INDUSTRIES INCORPORATED

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DREW INDUSTRIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Six Months Ended June 30,				Three Months Ended June 30,
	2015		2014		2015		2014
(In thousands, except per share amounts)

Net sales	$	723,542	$	607,160	$	362,085	$	321,783
Cost of sales	565,079		471,948		280,025		249,771
Gross profit	158,463		135,212		82,060		72,012
Selling, general and administrative expenses	92,991		78,063		48,426		40,909
Sale of extrusion assets	—		1,954		—		1,954
Operating profit	65,472		55,195		33,634		29,149
Interest expense, net	804		194		615		74
Income before income taxes	64,668		55,001		33,019		29,075
Provision for income taxes	23,726		20,219		12,150		10,457
Net income	$	40,942	$	34,782	$	20,869	$	18,618

Net income per common share:
Basic	$	1.69	$	1.46	$	0.86	$	0.78
Diluted	$	1.67	$	1.43	$	0.85	$	0.77

Weighted average common shares outstanding:
Basic	24,247		23,842		24,279		23,931
Diluted	24,578		24,298		24,615		24,303

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,
	2015			2014			2014
(In thousands, except per share amount)

ASSETS
Current assets
Cash and cash equivalents	$	11,782		$	4		$	4
Accounts receivable, net	72,902			71,954			37,987
Inventories, net	163,448			108,357			132,492
Deferred taxes	18,709			12,557			18,709
Prepaid expenses and other current assets	17,340			15,307			18,444
Total current assets	284,181			208,179			207,636
Fixed assets, net	148,639			126,523			146,788
Goodwill	72,922			61,930			66,521
Other intangible assets, net	102,862			92,654			96,959
Other assets	25,029			26,346			25,937
Total assets	$	633,633		$	515,632		$	543,841

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade	$	52,505		$	50,379		$	49,534
Accrued expenses and other current liabilities	77,752			58,376			57,651
Total current liabilities	130,257			108,755			107,185
Long-term indebtedness	80,000			22,288			15,650
Other long-term liabilities	27,336			25,506			26,108
Total liabilities	237,593			156,549			148,943

Stockholders’ equity
Common stock, par value $.01 per share	268			263			265
Paid-in capital	157,436			138,857			147,186
Retained earnings	267,803			249,430			276,914
Stockholders’ equity before treasury stock	425,507			388,550			424,365
Treasury stock, at cost	(29,467		)	(29,467		)	(29,467		)
Total stockholders’ equity	396,040			359,083			394,898
Total liabilities and stockholders’ equity	$	633,633		$	515,632		$	543,841

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,
	2015			2014
(In thousands)
Cash flows from operating activities:
Net income	$	40,942		$	34,782
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation and amortization	19,855			14,920
Stock-based compensation expense	7,069			5,277
Other non-cash items	162			3,203
Changes in assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net	(30,536		)	(36,920		)
Inventories, net	(24,361		)	(1,227		)
Prepaid expenses and other assets	2,333			(687		)
Accounts payable, trade	1,250			23,095
Accrued expenses and other liabilities	19,645			13,352
Net cash flows provided by operating activities	36,359			55,795

Cash flows from investing activities:
Capital expenditures	(14,668		)	(17,912		)
Acquisitions of businesses	(25,058		)	(82,157		)
Proceeds from note receivable	—			750
Proceeds from sales of fixed assets	1,958			1,999
Other investing activities	(213		)	(49		)
Net cash flows used for investing activities	(37,981		)	(97,369		)

Cash flows from financing activities:
Exercise of stock-based awards, net of shares tendered for payment of taxes	(688		)	3,425
Proceeds from line of credit borrowings	390,870			182,315
Repayments under line of credit borrowings	(376,520		)	(160,027		)
Proceeds from shelf-loan borrowing	50,000			—
Payment of special dividend	(48,227		)	(46,706		)
Payment of contingent consideration related to acquisitions	(1,874		)	(3,513		)
Other financing activities	(161		)	(196		)
Net cash flows provided by (used for) financing activities	13,400			(24,702		)

Net increase (decrease) in cash	11,778			(66,276		)

Cash and cash equivalents at beginning of period	4			66,280
Cash and cash equivalents at end of period	$	11,782		$	4

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	788		$	204
Income taxes, net of refunds	$	8,613		$	13,297

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			Treasury Stock			Total Stockholders’ Equity
(In thousands, except shares and per share amounts)
Balance - December 31, 2014	$	265	$	147,186		$	276,914		$	(29,467	)	$	394,898
Net income	—		—			40,942			—			40,942
Issuance of 292,430 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes	3		(7,011		)	—			—			(7,008		)
Income tax benefit relating to issuance of common stock pursuant to stock-based awards	—		6,320			—			—			6,320
Stock-based compensation expense	—		7,069			—			—			7,069
Issuance of 36,579 deferred stock units relating to prior year compensation	—		2,046			—			—			2,046
Special cash dividend ($2.00 per share)	—		—			(48,227		)	—			(48,227		)
Dividend equivalents on stock-based awards	—		1,826			(1,826		)	—			—
Balance - June 30, 2015	$	268	$	157,436		$	267,803		$	(29,467	)	$	396,040

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 wholly-owned subsidiaries (“Drew” and collectively with its subsidiaries, the “Company”). Drew has no unconsolidated subsidiaries. Drew operates through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components”). Drew, through Lippert Components, supplies a broad array of components in the United States and abroad for the leading manufacturers of recreational vehicles (“RVs”) and manufactured homes and for the related aftermarkets of those industries, and to a lesser extent supplies components for adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; modular housing; and factory-built mobile office units. At June 30, 2015, the Company operated 40 manufacturing facilities in the United States and Canada.

The RV and manufactured housing industries, as well as other industries where the Company sells products or where its products are used, historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, the Company’s sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, because of fluctuations in dealer inventories, the impact of international, national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, the timing of dealer orders, and the impact of severe weather conditions on the timing of industry-wide shipments from time to time, 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, 2014 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.

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, sales and purchase rebates, accounts receivable, inventories, goodwill and other intangible assets, net assets of acquired businesses, 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 various other assumptions 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 not readily apparent from other resources. Actual results and events could differ significantly from management estimates.

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 for the interim periods presented. 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 RV Segment, which accounted for 92 percent and 90 percent of consolidated net sales for the six month periods ended June 30, 2015 and 2014, respectively, manufactures or distributes a variety of products used in the production of RVs, including:



●Steel chassis for towable RVs	●Chassis components
●Axles and suspension solutions for towable RVs	●Furniture and mattresses
●Slide-out mechanisms and solutions	●Entry, luggage, patio and ramp doors
●Thermoformed bath, kitchen and other products	●Electric and manual entry steps

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



●Windows	●Awnings and slide toppers
●Manual, electric and hydraulic stabilizer and leveling systems	●Other accessories and electronic components
●LED televisions and sound systems, navigation systems and wireless backup cameras

The Company also supplies certain of these products to the RV aftermarket and to adjacent industries, including buses and trailers used to haul boats, livestock, equipment and other cargo. Approximately 76 percent of the Company’s RV Segment net sales for the twelve months ended June 30, 2015 were of products to original equipment manufacturers (“OEMs”) of travel trailer and fifth-wheel RVs.

The MH Segment, which accounted for 8 percent and 10 percent of consolidated net sales for the six month periods ended June 30, 2015 and 2014, respectively, manufactures or distributes a variety of products used in the production of manufactured homes, including:



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

The Company also supplies certain of these products to the manufactured housing aftermarket and to adjacent industries, including modular housing and mobile office units. 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, generally defined as income or loss before interest 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 the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.



Information relating to segments follows for the:
	Six Months Ended June 30,				Three Months Ended June 30,
(In thousands)	2015		2014		2015		2014
Net sales:
RV Segment:
RV OEMs:
Travel trailers and fifth-wheels	$	506,064	$	447,416	$	245,707	$	235,286
Motorhomes	40,546		30,057		18,899		15,673
RV aftermarket	38,693		16,762		21,484		9,668
Adjacent industries	80,874		54,627		45,516		29,199
Total RV Segment net sales	666,177		548,862		331,606		289,826

MH Segment:
Manufactured housing OEMs	38,358		37,281		20,535		20,764
Manufactured housing aftermarket	8,130		7,172		4,301		3,705
Adjacent industries	10,877		13,845		5,643		7,488
Total MH Segment net sales	57,365		58,298		30,479		31,957
Total net sales	$	723,542	$	607,160	$	362,085	$	321,783

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	Six Months Ended June 30,					Three Months Ended June 30,
(In thousands)	2015		2014			2015		2014
Operating profit:
RV Segment	$	59,241	$	51,761		$	30,108	$	28,032
MH Segment	6,231		5,388			3,526		3,071
Total segment operating profit	65,472		57,149			33,634		31,103
Sale of extrusion assets	—		(1,954		)	—		(1,954		)
Total operating profit	$	65,472	$	55,195		$	33,634	$	29,149

Potential Future Changes to Reporting Segments

Over the past several years, largely due to the growth the Company has experienced in its RV Segment, the MH Segment is now a smaller part of the Company. MH Segment net sales were 8 percent of consolidated net sales for the first six months of 2015. In addition, the Company has recently increased its focus on the significant opportunities in the RV aftermarket, which is currently included in the RV Segment. While there were no changes to the Company's segment reporting through June 30, 2015, the Company will continue to evaluate the information provided to its Chief Operating Decision Maker (“CODM”), and assess the impact of any changes to its reporting structures that will reflect how its CODM will assess the performance of the Company's operating segments and make decisions about resource allocations which impact the operating segments the Company reports.

3. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisitions During the Six Months Ended June 30, 2015

Spectal Industries

In April 2015, the Company acquired the business and certain assets of Industries Spectal, Inc. (“Spectal”), a Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. Sales of Spectal for 2014 were $25 million. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included in the Company's RV Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):



Cash consideration	$	22,335
Contingent consideration	1,093
Total fair value of consideration given	$	23,428

Customer relationships	$	12,000
Net other assets	5,027
Total fair value of net assets acquired	$	17,027

Goodwill (tax deductible)	$	6,401

The customer relationships intangible asset is being amortized over its preliminary estimated useful life of 12 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 experience and manufacturing capacity with respect to these product lines, and also believes the diversified customer base will further its expansion into adjacent industries.

EA Technologies

In January 2015, the Company acquired the business and certain assets of EA Technologies, LLC (“EA Technologies”), a manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications. Sales of EA Technologies for 2014 were $17 million. The purchase price was $9.2 million, of which $6.6 million was paid in the fourth quarter of 2014, with the balance paid at closing. The results of the acquired business have been included in the Company's RV Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):



Cash consideration	$	9,248

Customer relationships	$	400
Other identifiable intangible assets	80
Net tangible assets	8,868
Total fair value of net assets acquired	$	9,348

Gain on bargain purchase	$	100

Acquisitions During the Six Months Ended June 30, 2014

Power Gear and Kwikee Brands

In June 2014, the Company acquired the RV business of Actuant Corporation, which manufactured leveling systems, slideout mechanisms and steps, primarily for motorhome RVs, under the Power Gear and Kwikee brands. Sales of the acquired business for the twelve months ended May 2014 were $28 million, consisting of sales to OEMs and the aftermarket. The purchase price was $35.5 million, paid at closing. The results of the acquired business have been included in the Company's RV Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):



Cash consideration	$	35,500

Customer relationships	$	12,300
Patents	5,300
Other identifiable intangible assets	2,130
Net tangible assets	2,227
Total fair value of net assets acquired	$	21,957

Goodwill (tax deductible)	$	13,543

The customer relationships intangible asset is being amortized over its estimated useful life of 14 years and the patents are being amortized over their estimated useful life of 8 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.

Star Design

In March 2014, the Company acquired the business and certain assets of Star Design, LLC (“Star Design”). Star Design had annual sales of $10 million in 2013, comprised primarily of thermoformed sheet plastic products for the RV, bus and specialty vehicle industries. The purchase price was $12.2 million paid at closing. The results of the acquired business have been included in the Company's RV Segment and in the Condensed Consolidated Statements of Income since the acquisition date.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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



Cash consideration	$	12,232

Customer relationships	$	4,400
Other identifiable intangible assets	610
Net tangible assets	2,108
Total fair value of net assets acquired	$	7,118

Goodwill (tax deductible)	$	5,114

The customer relationships intangible asset is being amortized over its estimated useful life of 14 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 experience and manufacturing capacity with respect to these product lines, and also believes the diversified customer base will further its expansion into adjacent industries.

Innovative Design Solutions

In February 2014, the Company acquired Innovative Design Solutions, Inc. (“IDS”), a designer, developer and manufacturer of electronic systems encompassing a wide variety of RV applications. IDS also manufactures electronic systems for automotive, medical and industrial applications. IDS had annual sales of $19 million in 2013, of which $15 million were to the Company. The purchase price was $35.9 million, of which $34.2 million was paid at closing, with the balance to be paid out annually over the subsequent three years, plus contingent consideration based on future sales of this operation. The results of the acquired business have been included in the Company's RV Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The acquisition of this business was recorded on the acquisition date as follows (in thousands):



Cash consideration	$	34,175
Present value of future payments	1,739
Contingent consideration	710
Total fair value of consideration given	$	36,624

Patents	$	6,000
Customer relationships	4,000
Other identifiable intangible assets	3,180
Net tangible assets	1,894
Total fair value of net assets acquired	$	15,074

Goodwill (tax deductible)	$	21,550

The patents are being amortized over their estimated useful life of 10 years and the customer relationships intangible asset is being amortized over its estimated useful life of 12 years. The consideration given was greater than the fair value of the assets acquired, resulting in goodwill, because the Company anticipates an increase in the markets for the acquired products, market share growth in both existing and new markets, as well as attainment of synergies.

Sale of Extrusion Assets

In April 2014, the Company entered into a six-year aluminum extrusion supply agreement, and concurrently sold certain aluminum extrusion assets. The Company recorded a pre-tax loss of $2.0 million in the second quarter of 2014 on the sale of the aluminum extrusion-related assets. In connection with the sale, the Company received $0.3 million at closing and a $7.2 million note receivable payable over the next four years, recorded at its present value of $6.4 million on the date of closing. During 2014,

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

the Company received installments of $1.8 million under the note. At June 30, 2015, the present value of the remaining amount due under the note receivable was $5.0 million.

In July 2015, the Company agreed to terminate this supply agreement, and as consideration the Company received a $2.0 million note receivable payable in 2019 and 2020. The Company recorded this note receivable at its present value of $1.6 million and a corresponding gain of $1.6 million in the 2015 third quarter.

Goodwill

Goodwill by reportable segment was as follows:



(In thousands)	RV Segment			MH Segment			Total
Accumulated cost – December 31, 2014	$	107,023		$	10,025		$	117,048
Accumulated impairment – December 31, 2014	(41,276		)	(9,251		)	(50,527		)
Net balance – December 31, 2014	65,747			774			66,521
Acquisitions – 2015	6,401			—			6,401
Net balance – June 30, 2015	$	72,148		$	774		$	72,922

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. No impairment tests were required or performed during the six months ended June 30, 2015.

Other Intangible Assets

Other intangible assets consisted of the following at June 30, 2015:



(In thousands)	Gross Cost		Accumulated Amortization		Net Balance		Estimated Useful Life in Years
Customer relationships	$	90,760	$	28,278	$	62,482	6	to	16
Patents	54,358		25,391		28,967		3	to	19
Tradenames	8,635		4,011		4,624		3	to	15
Purchased research and development	4,687		—		4,687		Indefinite
Non-compete agreements	4,048		2,283		1,765		3	to	6
Other	510		173		337		1	to	12
Other intangible assets	$	162,998	$	60,136	$	102,862

Other intangible assets consisted of the following at December 31, 2014:



(In thousands)	Gross Cost		Accumulated Amortization		Net Balance		Estimated Useful Life in Years
Customer relationships	$	81,260	$	27,553	$	53,707	6	to	16
Patents	54,333		22,389		31,944		3	to	19
Tradenames	9,173		4,525		4,648		3	to	15
Purchased research and development	4,687		—		4,687		Indefinite
Non-compete agreements	3,948		2,233		1,715		3	to	6
Other	360		102		258		2	to	12
Other intangible assets	$	153,761	$	56,802	$	96,959

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVENTORIES

Inventories, valued at the lower of cost (first-in, first-out (FIFO) method) or market, consisted of the following at:



	June 30,				December 31,
(In thousands)	2015		2014		2014
Raw materials	$	145,154	$	90,941	$	111,366
Work in process	3,666		3,010		2,624
Finished goods	14,628		14,406		18,502
Inventories, net	$	163,448	$	108,357	$	132,492

5. FIXED ASSETS

Fixed assets consisted of the following at:



	June 30,				December 31,
(In thousands)	2015		2014		2014
Fixed assets, at cost	$	284,660	$	245,257	$	272,177
Less accumulated depreciation and amortization	136,021		118,734		125,389
Fixed assets, net	$	148,639	$	126,523	$	146,788

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following at:



	June 30,				December 31,
(In thousands)	2015		2014		2014
Employee compensation and benefits	$	27,750	$	23,417	$	21,273
Current portion of accrued warranty	15,985		13,548		14,516
Sales rebates	7,561		6,600		5,515
Taxes payable	8,228		1,015		756
Other	18,228		13,796		15,591
Accrued expenses and other current liabilities	$	77,752	$	58,376	$	57,651

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) current trends, (iii) product mix, and (iv) 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 six months ended June 30:



(In thousands)	2015			2014
Balance at beginning of period	$	21,641		$	17,325
Provision for warranty expense	8,367			6,439
Warranty liability from acquired businesses	165			608
Warranty costs paid	(5,789		)	(4,216		)
Balance at end of period	24,384			20,156
Less long-term portion	8,399			6,608
Current portion of accrued warranty	$	15,985		$	13,548

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. LONG-TERM INDEBTEDNESS

At June 30, 2015 and 2014, and December 31, 2014, the Company had $30.0 million, $22.3 million and $15.7 million, respectively, of outstanding borrowings on its line of credit. At June 30, 2015, the Company's outstanding borrowings on its line of credit were at a weighted average interest rate of 1.9 percent.

On February 24, 2014, the Company entered into a $75.0 million line of credit (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. On March 3, 2015, in accordance with the terms of the Credit Agreement, the Company increased its line of credit by $25.0 million to $100.0 million. Interest on borrowings under the line of credit is designated from time to time by the Company as either (i) the Prime Rate, minus a rate ranging from 0.75 percent to 1.0 percent (minus 1.0 percent at June 30, 2015), but not less than 1.5 percent, or (ii) LIBOR, plus additional interest ranging from 1.75 percent to 2.0 percent (plus 1.75 percent at June 30, 2015) depending on the Company’s performance and financial condition. The Credit Agreement expires on January 1, 2019. At June 30, 2015, the Company had $2.7 million in outstanding letters of credit under the line of credit. Availability under the Company’s line of credit was $67.3 million at June 30, 2015.

On February 24, 2014, the Company also 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. This facility expires February 24, 2017.

On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes to Prudential for a term of five years, at a fixed interest rate of 3.35 percent per annum, payable quarterly in arrears, of which the entire amount was outstanding at June 30, 2015. Availability under the Company's “shelf-loan” facility, subject to the approval of Prudential, was $100.0 million at June 30, 2015. At June 30, 2015, the fair value of the Company’s long-term debt approximates the carrying value, as estimated using quoted market prices and discounted future cash flows based on similar borrowing arrangements.

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.

Pursuant to the Credit Agreement and “shelf-loan” facility, at June 30, 2015, the Company was required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At June 30, 2015, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.

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 June 30, 2015. The remaining availability under these facilities was $167.3 million at June 30, 2015. The Company believes the availability under the line of credit and “shelf-loan” facility is more than adequate to finance the Company’s anticipated cash requirements for the next twelve months.

The Company is currently negotiating a one-year extension of its line of credit and “shelf-loan” facility as well as an increase in its line of credit to $125.0 million. The Company is extending these arrangements now to meet the anticipated growth of the Company and to add the ability to borrow in international locations and currencies.

8. COMMITMENTS AND CONTINGENCIES

Contingent Consideration

In connection with several business 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 June 30, 2015, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 15.0 percent.

As required, the liability for this contingent consideration is measured at fair value quarterly, considering actual sales of the acquired products, updated sales projections, and the updated market participant weighted average cost of capital. Depending

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

The following table provides a reconciliation of the Company’s contingent consideration liability for the six months ended June 30:



(In thousands)	2015			2014
Balance at beginning of period	$	8,129		$	7,414
Acquisitions	1,093			1,455
Payments	(1,874		)	(3,513		)
Accretion ^(a)	559			533
Fair value adjustments^(a)	90			828
Balance at end of the period^(b)	7,997			6,717
Less current portion in accrued expenses and other current liabilities	(4,264		)	(1,964		)
Total long-term portion in other long-term liabilities	$	3,733		$	4,753


(a)	Recorded in selling, general and administrative expense in the Condensed Consolidated Statements of Income.

(b)

Amounts represent the fair value of estimated remaining payments. The total estimated remaining payments as of June 30, 2015 are $11.4 million. The liability for contingent consideration expires at various dates through September 2029. Certain of the contingent consideration arrangements are subject to a maximum payment amount, while the remaining arrangements have no maximum contingent consideration.

Furrion Distribution and Supply Agreement

In July 2015, the Company entered into a six year exclusive distribution and supply agreement with Furrion Limited (“Furrion”). This agreement provides the Company with the rights to distribute Furrion’s complete line of products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions and sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry. Furrion’s sales were approximately $35 million in 2014.

In connection with this agreement, the Company acquired Furrion’s current inventory, as well as Furrion’s deposits on inventory scheduled for delivery, for approximately $11 million. In addition, the Company entered into the following minimum purchase obligations (“MPOs”):



	July 2015 - June 2016	$ 60 million
	July 2016 - June 2017	$ 90 million
	July 2017 - June 2018	$127 million
	July 2018 - June 2019	$172 million

If the Company misses an MPO in any given year by more than ten percent, after taking into account excess purchases from the previous year, Furrion has the right to either terminate the distribution agreement with six months’ notice or remove exclusivity from the Company. If exclusivity is withdrawn, the Company at its election can terminate the distribution agreement with six months’ notice. Upon termination of the agreement, Furrion has agreed to purchase from the Company any non-obsolete stocks of Furrion products at the cost paid by the Company. After the first year, Furrion and the Company have agreed to review these MPOs on an annual basis and adjust the MPOs as necessary based upon the current economic and industry conditions, the development and customer acceptance of new Furrion products, competition and other factors which impact demand for Furrion products.

Product Recalls

From time to time, the Company cooperates with and assists its customers on their product recalls and inquiries, and occasionally receives inquiries directly from the National Highway Traffic Safety Administration (“NHTSA”) regarding reported incidents involving the Company’s products. In February 2015, NHTSA opened a Preliminary Evaluation as a result of four Vehicle

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Owner Questionnaires (VOQs) alleging failure of the Company’s electrically powered step (“Coach Step”), which was primarily supplied for motorhome RVs between model years 2008 and 2014. In March 2015, NHTSA sent a formal request for information, data and supporting documentation from the Company regarding the Coach Step, which the Company provided in April 2015. The Company is continuing to review and test, internally and through a third-party engineering firm, the design and operation of its Coach Step in an attempt to recreate the alleged failures, and will supply the additional data and information to NHTSA for their review. At the current stage of the evaluation, the Company cannot predict the outcome of the inquiry, nor can it predict the scope or determine an estimate, or range of estimates, of the potential costs of a recall, or whether such costs would be material to the Company’s financial position or annual results of operations, in the event a recall were to be voluntarily initiated by the Company or required by NHTSA.

Litigation

In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries 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 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 June 30, 2015, excluding the NHTSA inquiry previously noted, would not be material to the Company’s financial position or annual results of operations.

9. STOCKHOLDERS' EQUITY

The following table summarizes information about shares of the Company’s common stock at:



	June 30,		December 31,
(In thousands)	2015	2014	2014
Common stock authorized	75,000	30,000	30,000
Common stock issued	26,826	26,319	26,534
Treasury stock	2,684	2,684	2,684

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



	Six Months Ended June 30,		Three Months Ended June 30,
(In thousands)	2015	2014	2015	2014
Weighted average shares outstanding for basic earnings per share	24,247	23,842	24,279	23,931
Common stock equivalents pertaining to stock options and deferred stock units	331	456	336	372
Weighted average shares outstanding for diluted earnings per share	24,578	24,298	24,615	24,303

The weighted average diluted shares outstanding for the six months ended June 30, 2015 and 2014 exclude the effect of 308,634 and 322,542 shares of common stock, respectively, subject to stock-based awards. The weighted average diluted shares outstanding for the three months ended June 30, 2015 and 2014 exclude the effect of 313,944 and 322,542 shares of common stock, respectively, subject to stock-based awards. Such shares were excluded from total diluted shares because they were anti-dilutive or the specified performance conditions that those shares were subject to were not yet achieved.

On April 10, 2015, a special dividend of $2.00 per share of the Company’s common stock, representing an aggregate of $48.2 million, was paid to stockholders of record as of March 27, 2015. In connection with this special dividend, holders of stock-based awards were credited with deferred stock units, restricted stock or stock equal to $2.00 per stock-based award, representing $1.8 million in total for this special dividend. In connection with this special cash dividend, the exercise price of all outstanding stock options was reduced by $2.00 per share. These reductions in exercise price were made pursuant to the terms of the outstanding awards, resulting in no incremental stock-based compensation expense.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

On January 6, 2014, a special dividend of $2.00 per share of the Company’s common stock, representing an aggregate of $46.7 million, was paid to stockholders of record as of December 20, 2013. In connection with this special dividend, holders of stock-based awards were credited with deferred stock units, restricted stock or stock equal to $2.00 per stock-based award, representing $1.8 million in total for this special dividend. In connection with this special cash dividend, the exercise price of all outstanding stock options was reduced by $2.00 per share. These reductions in exercise price were made pursuant to the terms of the outstanding awards, resulting in no incremental stock-based compensation expense.

In February 2015, the Company issued 36,579 deferred stock units at the average price of $55.95, or $2.0 million, to executive officers in lieu of cash for a portion of their 2014 incentive compensation. In February 2014, the Company issued 43,188 deferred stock units at $45.98, or $2.0 million, to executive officers in lieu of cash for a portion of their 2013 incentive compensation.

10. FAIR VALUE MEASUREMENTS

Recurring

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at:



	June 30, 2015								December 31, 2014
(In thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Deferred compensation	$	8,180	$	8,180	$	—	$	—	$	7,388	$	7,388	$	—	$	—
Total assets	$	8,180	$	8,180	$	—	$	—	$	7,388	$	7,388	$	—	$	—

Liabilities
Contingent consideration	$	7,997	$	—	$	—	$	7,997	$	8,129	$	—	$	—	$	8,129
Deferred compensation	12,273		12,273		—		—		11,478		11,478		—		—
Total liabilities	$	20,270	$	12,273	$	—	$	7,997	$	19,607	$	11,478	$	—	$	8,129

Deferred Compensation

The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). The amounts deferred under the Plan are credited with earnings or losses based upon changes in values of the notional investments elected by the Plan participants. The Company invests approximately 65 percent of the amounts deferred by the Plan participants in life insurance contracts, matching the 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 fair valued using management’s projections for long-term sales forecasts, including assumptions regarding market share gains, foreign currency rates and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next three years, the Company’s long-term sales growth forecasts for products subject to contingent consideration arrangements average approximately 30 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 8 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.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 or (gains) recognized during the six months ended June 30:



	2015				2014
(In thousands)	Carrying Value		Non-Recurring Losses / (Gains)		Carrying Value		Non-Recurring Losses / (Gains)
Vacant owned facilities	$	3,725	$	—	$	2,715	$	—
Net assets of acquired businesses	17,836		—		44,044		—
Total assets	$	21,561	$	—	$	46,759	$	—

Vacant Owned Facilities

During the first six months of 2015, the Company reviewed the recoverability of the carrying value of three vacant owned facilities, of which one of these facilities was sold. At June 30, 2015, the Company had two vacant owned facilities, with an estimated combined fair value of $4.0 million and a combined carrying value of $3.7 million, classified in fixed assets in the Condensed Consolidated Balance Sheets.

During the first six months of 2014, the Company reviewed the recoverability of the carrying value of three vacant owned facilities, of which one of these facilities was sold. At June 30, 2014, the Company had two vacant owned facilities, with an estimated combined fair value of $3.1 million and a combined carrying value of $2.7 million, classified in fixed assets in the Condensed Consolidated Balance Sheets.

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.

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.

11. NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is for annual periods, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted for years beginning after December 15, 2016, to be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's results of operations, cash flows or financial position.

DREW INDUSTRIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs be presented on the balance sheet as a direct reduction from the related debt liability rather than as an asset. Amortization of the costs would be reported as interest expense. The amendments in this ASU are to be applied retrospectively and are effective for interim and annual reporting periods beginning after December 15, 2015. This new accounting guidance is not expected to have a material impact on the Company's results of operations, cash flows or financial position.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This ASU applies to inventory measured using the first-in, first-out ("FIFO") or average cost methods. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.

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 Part 1 of this Report, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Drew Industries Incorporated (“Drew”, and collectively with its subsidiaries, the “Company”) conducts its operations through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components”). Drew, through Lippert Components, supplies a broad array of components in the United States and abroad for the leading manufacturers of recreational vehicles (“RVs”) and manufactured homes and for the related aftermarkets of those industries, and to a lesser extent supplies components for adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; modular housing; and factory-built mobile office units. Drew has no unconsolidated subsidiaries.

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. At June 30, 2015, the Company operated 40 manufacturing facilities in the United States and Canada.

Net sales and operating profit were as follows for the:



	Six Months Ended					Three Months Ended
	June 30,					June 30,
(In thousands)	2015		2014			2015		2014
Net sales:
RV Segment:
RV OEMs:
Travel trailers and fifth-wheels	$	506,064	$	447,416		$	245,707	$	235,286
Motorhomes	40,546		30,057			18,899		15,673
RV aftermarket	38,693		16,762			21,484		9,668
Adjacent industries	80,874		54,627			45,516		29,199
Total RV Segment net sales	666,177		548,862			331,606		289,826
MH Segment:
Manufactured housing OEMs	38,358		37,281			20,535		20,764
Manufactured housing aftermarket	8,130		7,172			4,301		3,705
Adjacent industries	10,877		13,845			5,643		7,488
Total MH Segment net sales	57,365		58,298			30,479		31,957
Total net sales	$	723,542	$	607,160		$	362,085	$	321,783

Operating profit:
RV Segment	$	59,241	$	51,761		$	30,108	$	28,032
MH Segment	6,231		5,388			3,526		3,071
Total segment operating profit	65,472		57,149			33,634		31,103
Sale of extrusion assets	—		(1,954		)	—		(1,954		)
Total operating profit	$	65,472	$	55,195		$	33,634	$	29,149

The Company’s RV Segment manufactures or distributes a variety of products used in the production of RVs, including:



●Steel chassis for towable RVs	●Chassis components
●Axles and suspension solutions for towable RVs	●Furniture and mattresses
●Slide-out mechanisms and solutions	●Entry, luggage, patio and ramp doors
●Thermoformed bath, kitchen and other products	●Electric and manual entry steps

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)



●Windows	●Awnings and slide toppers
●Manual, electric and hydraulic stabilizer and leveling systems	●Other accessories and electronic components
●LED televisions and sound systems, navigation systems and wireless backup cameras

The Company’s MH Segment manufactures or distributes a variety of products used in the production of manufactured homes, including:



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

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 trailer and fifth-wheel RVs, the Company’s primary RV markets, increased 6 percent in the first six months of 2015 to 170,700 units, compared to the first six months of 2014, as a result of:


•	An estimated 17,700 unit increase in retail demand in the first six months of 2015, or 12 percent, as compared to the same period of 2014. In addition, retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)


•	Offset by RV dealers seasonally increasing inventory levels by an estimated 6,700 units in the first six months of 2015, lower than the increase in inventory levels of 14,800 units in the first six months of 2014.

The annual sales cycle for the RV industry has historically started in October after the “Open House” in Elkhart, Indiana where RV OEMs display product to RV retail dealers, and ended after the conclusion of the Summer selling season in September. Between October and March, industry-wide wholesale shipments of travel trailer and fifth-wheel RVs have historically exceeded retail sales, and between April and September, the Spring and Summer selling seasons, retail sales of travel trailer and fifth-wheel RVs have historically exceeded industry-wide wholesale shipments. Based on dealer surveys and information from wholesale finance companies, most industry analysts report dealer inventories of travel trailers and fifth-wheel RVs are in-line with anticipated retail demand in the upcoming Summer 2015 selling season.

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 estimated change in dealer inventories, for both the United States and Canada, is as follows:



							Estimated
	Wholesale			Retail			Unit Impact on
	Units	Change		Units	Change		Dealer Inventories
Quarter ended June 30, 2015⁽¹⁾	88,900	4	%	110,000	10	%	(21,100)
Quarter ended March 31, 2015	81,800	8	%	54,000	17	%	27,800
Quarter ended December 31, 2014	72,300	20	%	42,800	18	%	29,500
Quarter ended September 30, 2014	65,500	7	%	87,900	12	%	(22,400)
Twelve months ended June 30, 2015⁽¹⁾	308,500	9	%	294,700	13	%	13,800

Quarter ended June 30, 2014	85,700	7	%	100,200	7	%	(14,500)
Quarter ended March 31, 2014	75,400	13	%	46,100	9	%	29,300
Quarter ended December 31, 2013	60,100	10	%	36,400	12	%	23,700
Quarter ended September 30, 2013	61,300	8	%	78,700	17	%	(17,400)
Twelve months ended June 30, 2014	282,500	9	%	261,400	11	%	21,100


⁽¹⁾	Retail sales data for June 2015 has not been published; therefore retail and dealer inventory data includes an estimate for retail units sold.

According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first six months of 2015 increased 6 percent to 24,700 units compared to the same period of 2014. The Company estimates retail demand for motorhome RVs increased 9 percent in the first six months of 2015. Based on dealer surveys and information from wholesale finance companies, most industry analysts report dealer inventories of motorhome RVs are slightly high compared to anticipated retail demand in the upcoming Summer 2015 selling season.

At the end of 2014 and the beginning of 2015, the RV industry experienced a pull forward in production as dealers ordered product earlier in the seasonal cycle, reportedly to avoid potential shipping delays similar to those experienced in the prior year. As a result, certain industry-wide wholesale production which normally occurs in the Company’s second quarter was produced earlier in the season.

In June 2015, the RVIA projected a 7 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2015, to 319,500 units. Further, the RVIA also projected a 4 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2016, to 331,700 units. In response to the estimated increase in wholesale RV production, several RV OEM customers are introducing new product lines and adding production capacity. However, unless retail demand matches these increased production levels, dealers could reduce the pace of their orders, and our customers, the OEMs, would need to adjust their production levels in future months. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence. Consumer confidence, after reaching a multi-year high earlier in 2015, has fluctuated in recent months. Retail sales of travel trailer and fifth-wheel RVs have increased in 66 of the last 68 months on a year-over-year

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

basis, corresponding with the overall improvement in consumer confidence. Several industry analysts also report the RV industry may continue to benefit from the growing popularity of the RV Lifestyle and the addition of new 'entry-level' RV units.

Although future retail demand is inherently uncertain, RV industry fundamentals in early 2015 were strong, as evidenced by the 12 percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs in the first five months of 2015. In addition, based on the strength of retail sales to date and projected economic conditions, most industry analysts are reporting that RV dealer inventory of travel-trailer and fifth-wheel RVs is in line with anticipated retail demand. The Company believes the strong RV industry fundamentals, aided by demographic tailwinds, are positive signs for the balance of 2015 and early 2016. Retail sales in the traditionally strong Summer selling season will be a key indicator of consumer demand in 2015. The Company also remains confident in its ability to exceed industry growth rates through new product introductions, market share gains, acquisitions and ongoing investments in research and development, engineering, quality and customer service.

Over the long term, the Company expects RV industry sales to be aided by positive demographics and the continued popularity of the “RV Lifestyle”. The number of consumers between the ages of 55 and 70 are projected to total 56 million by 2020, 27 percent higher than in 2010, according to U.S. Census figures, and one in ten vehicle-owning households between the ages of 50 and 64 own at least one RV. Further, the RVIA has an 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. In addition, the RV OEMs have developed more entry level units, specifically targeting younger families, in both towables and motorhomes. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented domestic vacations, and using RVs as second homes, will all hopefully continue to motivate consumer demand for RVs. RVIA studies indicate that RV vacations cost significantly less than other forms of vacation travel, even when factoring in fuel prices and the cost of RV ownership. More details can be found at www.RVIA.org.

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.

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, the first six months of 2015, multi-section homes were 54 percent of the total manufactured homes produced, consistent with 2012 - 2014. Multi-section homes averaged 64 percent of the total manufactured homes produced between 2007 and 2010. Multi-section manufactured homes contain more of the Company’s products than single-section manufactured homes.

The Institute for Building Technology and Safety (“IBTS”) reported that, for the first six months of 2015, industry-wide wholesale shipments of manufactured homes were 33,300 units, an increase of 9 percent compared to the first six months of 2014.

For the 20 years prior to the sub-prime boom in home financing, manufactured housing industry-wide wholesale shipments represented 20 percent or more of single-family housing starts. During the sub-prime years of 2003 to 2007, when extremely low cost loans were available for financing purchases of site-built homes, many traditional buyers of manufactured homes were able to purchase site-built homes instead of manufactured homes, and manufactured housing’s share of the single-family market dropped precipitously, to below 10 percent. Since the sub-prime “bubble” burst in 2007 and 2008, this market share has averaged about 11 percent, despite interest rates for manufactured home loans remaining historically high relative to interest rates for site-built home loans. Accordingly, the Company believes the manufactured housing industry may experience a modest recovery as the economy continues to improve and home buyers look at affordable housing options. However, because of the current real estate, credit and economic environment, including the availability of site built homes at stable prices and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes, the Company expects industry-wide wholesale shipments of manufactured homes to remain low until these conditions improve.

In addition, certain provisions of the Dodd-Frank Act, which regulate financial transactions, have made certain types of mortgages, including chattel loans, more difficult or more expensive to obtain – in particular those historically used to finance the

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

purchase of manufactured homes. Although the Consumer Financial Protection Bureau has been reviewing this matter and legislation has been passed by the U.S. House of Representatives to address this matter, there can be no assurance of the outcome.

Nevertheless, the Company believes long-term growth prospects for manufactured housing remain 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 could potentially purchase a manufactured home, but have been unable or unwilling to sell their primary residence while market prices were recovering from recession levels.

RESULTS OF OPERATIONS

Consolidated Highlights

▪

Consolidated net sales in the second quarter of 2015 increased to $362 million, 13 percent higher than the 2014 second quarter. This growth in consolidated net sales primarily resulted from a 14 percent increase in net sales of the Company’s RV Segment for the 2015 second quarter compared to the 2014 second quarter, despite an acceleration in the wholesale production of RVs in late 2014 and early 2015. The Company's RV Segment accounted for 92 percent of consolidated net sales in the 2015 second quarter. The acquisitions completed by the Company in 2014 and the first half of 2015 added $21 million in net sales in the second quarter of 2015, all of which related to the Company’s RV Segment. RV Segment net sales growth in the 2015 second quarter was also due to a 4 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary RV market, as well as organic growth in sales to adjacent industries and the aftermarket.

The Company’s content per travel trailer and fifth-wheel RV for the twelve months ended June 30, 2015, increased by $154, or 6 percent, to $2,926, which was primarily organic growth through new product introductions, product enhancements and market share gains. The Company’s content per motorhome RV for the twelve months ended June 30, 2015, increased by $419, or 32 percent, to $1,728, reflecting market share gains through both organic growth and acquisitions completed in 2014.


▪	In July 2015, the Company's consolidated net sales reached approximately $112 million, 11 percent higher than July 2014. Excluding the impact of acquisitions, the Company’s consolidated net sales for July 2015 were up 5 percent.

▪

The Company reported net income of $20.9 million, or $0.85 per diluted share, for the second quarter ended June 30, 2015, compared to net income of $18.6 million, or $0.77 per diluted share, for the second quarter ended June 30, 2014. In connection with the sale of its aluminum extrusion-related assets in April 2014, the Company recorded an after-tax charge of $1.2 million for the second quarter of 2014. Excluding this charge, net income in the second quarter of 2014 would have been $19.8 million, or $0.82 per diluted share.

▪

Operating profits during the second quarter of 2015 increased to $33.6 million, compared with $29.1 million in the second quarter of 2014. Operating profit margins in the second quarter of 2015 were 9.3 percent compared to 9.7 percent in the second quarter of 2014, excluding the 2014 loss on sale of the aluminum extrusion-related assets. The Company’s year-over-year incremental margin in the 2015 second quarter was lower than its target incremental margin, largely as a result of investments in fixed costs for capacity expansion, partially offset by improved operating efficiencies. In addition, the seasonal shift in industry-wide production of RVs experienced over the past few quarters had a negative impact on the Company’s capacity planning efforts in the 2015 second quarter.

Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected significant increase in net sales in 2015 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company made improvements in marketing, human resources, engineering, customer service and other critical departments for the long-term success of the Company. While certain capacity expansion plans had a negative impact on margins in the most recent quarters, the Company believes these investments are largely completed, and the Company expects to leverage these expansions as net sales increases.

▪


▪	In July 2015, the Company entered into a six-year exclusive distribution and supply agreement with Furrion Limited (“Furrion”). This agreement provides the Company with the rights to distribute Furrion’s complete line of products to

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions and sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry, with a potential content per towable and motorhome RV of approximately $500 per unit. Furrion’s sales were approximately $35 million in 2014, representing an existing market share of approximately 20 percent, providing the Company with the opportunity for significant sales growth and profit potential.


▪	In April 2015, the Company paid a special dividend of $2.00 per share, aggregating $48.2 million, paid to stockholders of record as of March 27, 2015.

RV Segment – Second Quarter

Net sales of the RV Segment in the second quarter of 2015 increased 14 percent compared to the second quarter of 2014. Net sales of components were to the following markets for the three months ended June 30:



(In thousands)	2015		2014		Change
RV OEMs:
Travel trailers and fifth-wheels	$	245,707	$	235,286	4	%
Motorhomes	18,899		15,673		21	%
RV aftermarket	21,484		9,668		122	%
Adjacent industries	45,516		29,199		56	%
Total RV Segment net sales	$	331,606	$	289,826	14	%

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



	2015	2014	Change
Travel trailer and fifth-wheel RV's	88,900	85,700	4	%
Motorhomes	12,800	12,200	5	%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the second quarter of 2015 was consistent with the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs. Acquisitions completed in the first half of 2015 and 2014 added $1 million in net sales during the second quarter of 2015.

The Company's net sales growth in components for motorhomes during the second quarter of 2015 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period primarily due to acquisitions completed in 2014, which added $4 million in net sales during the second quarter of 2015. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.

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 June 30, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:



Content per:	2015		2014		Change
Travel trailer and fifth-wheel RV	$	2,926	$	2,772	6	%
Motorhome	$	1,728	$	1,309	32	%

The Company’s average product content per type of RV excludes sales to the aftermarket and adjacent industries. Content per RV is impacted by market share gains, acquisitions, new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of RVs produced industry-wide.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

The Company's net sales to the RV aftermarket increased during the second quarter of 2015 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $9 million in net sales during the second quarter of 2015. With an estimated 10 million households in North America owning an RV, the Company continues to believe there are significant opportunities in the RV aftermarket.

The Company’s net sales to adjacent industries, including components for buses and trailers used to haul boats, livestock, equipment and other cargo, increased during the second quarter of 2015 primarily due to market share gains and acquisitions completed in the first half of 2015, which acquisitions added $7 million in net sales during the second quarter of 2015. The Company continues to believe there are significant opportunities in adjacent industries.

Operating profit of the RV Segment was $30.1 million in the second quarter of 2015, an improvement of $2.1 million compared to the second quarter of 2014. This increase in RV Segment operating profit was less than the Company’s target 15 to 20 percent incremental margin. The operating profit margin of the RV Segment in the second quarter of 2015 was impacted by:

•

Fixed costs, were approximately $4 million to $5 million higher than in the second quarter of 2014. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected significant increase in net sales in 2015 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company made improvements in marketing, human resources, engineering, customer service and other critical departments for the long-term success of the Company. In addition to the new employees hired in preparation for future growth and investment opportunities, the Company also added the teams that were acquired through acquisitions.

In addition, the seasonal shift in industry-wide production of RVs experienced over the past few quarters had a negative impact on the Company’s capacity planning efforts in the 2015 second quarter. While certain capacity expansion plans had a negative impact on margins in the most recent quarters, the Company believes these investments are largely completed, and the Company expects to leverage these expansions as net sales increases.


•	An increase in stock-based compensation of approximately $1.4 million due to the implementation of the new 2015 compensation program for management.

Partially offset by:

▪

Investments over the past several years to increase capacity and improve operating efficiencies, which are continuing to benefit bottom-line results. The Company added capacity ahead of projected demand, which enabled it to efficiently fulfill customer orders as demand increased. Further, the Company has implemented additional efficiency improvements, including lean, automation and employee retention initiatives which should improve operating efficiencies going forward.


▪	The spreading of costs over a $42 million larger sales base.

RV Segment – Year to Date

Net sales of the RV Segment in the first six months of 2015 increased 21 percent compared to the first six months of 2014. Net sales of components were to the following markets for the six months ended June 30:



(In thousands)	2015		2014		Change
RV OEMs:
Travel trailers and fifth-wheels	$	506,064	$	447,416	13	%
Motorhomes	40,546		30,057		35	%
RV aftermarket	38,693		16,762		131	%
Adjacent industries	80,874		54,627		48	%
Total RV Segment net sales	$	666,177	$	548,862	21	%

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 six months ended June 30, were:



	2015	2014	Change
Travel trailer and fifth-wheel RV's	170,700	161,100	6	%
Motorhomes	24,700	23,300	6	%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first six months of 2015 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs primarily due to market share gains. Additionally, acquisitions completed in 2014 and the first half of 2015 added $4 million in net sales during the first six months of 2015.

The Company's net sales growth in components for motorhomes during the first six months of 2015 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period primarily due to acquisitions completed in 2014, which added $8 million in net sales during the first six months of 2015. Over the past few years, the Company has been expanding its product line of components for motorhomes in order to increase its customer base and market penetration, and further growth is expected.

The Company's net sales to the RV aftermarket increased during the first six months of 2015 primarily due to market share gains and acquisitions completed in 2014, which acquisitions added $16 million in net sales during the first six months of 2015. With an estimated 10 million households in North America owning an RV, the Company continues to believe there are significant opportunities in the RV aftermarket.

The Company’s net sales to adjacent industries, including components for buses, trailers used to haul boats, livestock, equipment and other cargo, increased during the first six months of 2015 primarily due to market share gains and acquisitions completed in 2014 and the first half of 2015, which acquisitions added $13 million in net sales during the first six months of 2015. The Company continues to believe there are significant opportunities in adjacent industries.

Over the past several years, the Company has been gradually growing sales overseas, primarily in Europe and Australia, and export sales represented approximately 1 percent of consolidated net sales in the first six months of 2015. The Company continues to focus on developing products tailored for international markets. In early September 2014, the Company participated in the largest RV show in Europe and received positive feedback on its products. As a result, the Company believes it will see additional orders from European OEMs, which would be shipped from its facilities in the United States. The Company’s Director of International Business Development will continue to spend time in Australia, Europe and other international markets, assessing the dynamics of the local marketplace, building relationships with OEMs and helping the Company introduce its existing products and develop new products for those markets, with the goal of identifying long-term growth opportunities. The Company plans to participate in the largest RV show in Europe in September 2015.

Operating profit of the RV Segment was $59.2 million in the first six months of 2015, an improvement of $7.5 million compared to the first six months of 2014. This increase in RV Segment operating profit was less than the Company’s expected 15 to 20 percent incremental margin. The operating profit margin of the RV Segment in the first six months of 2015 was impacted by:

•

Higher material costs during the beginning of 2015. Aluminum rose nearly 20 percent during the second half of 2014, which had a negative impact on operating profit margins in the first quarter of 2015, compared to the same period of 2014. The Company’s operating profit in the second half of 2014 was negatively impacted by higher raw materials costs, which based on current market prices, is not expected to recur in the second half of 2015. Further, material costs remain volatile, in particular steel and aluminum, which have recently reached multi-year lows, which should benefit the Company’s RV Segment operating profit in the second half of 2015.

•

Fixed costs, which were approximately $8 million higher than in the first six months of 2014. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected significant increase in net sales in 2015 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company made improvements in marketing, human resources, engineering, customer service and other critical departments for the long-term success of the Company. In addition to the new employees hired in preparation for future growth and investment opportunities, the Company also added the teams that were acquired through acquisitions.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)


•	An increase in stock-based compensation of approximately $1.8 million due to the implementation of the new 2015 compensation program for management.

Partially offset by:

▪


•	The spreading of fixed costs over a $117 million larger sales base.

MH Segment – Second Quarter

Net sales of the MH Segment in the second quarter of 2015 decreased 5 percent compared to the same period of 2014. Net sales of components were to the following markets for the three months ended June 30:



(In thousands)	2015		2014		Change
Manufactured housing OEMs	$	20,535	$	20,764	(1	)%
Manufactured housing aftermarket	4,301		3,705		16	%
Adjacent industries	5,643		7,488		(25	)%
Total MH Segment net sales	$	30,479	$	31,957	(5	)%

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



	2015	2014	Change
Total homes produced	17,900	17,000	5	%
Total floors produced	28,000	26,400	6	%

Industry-wide wholesale shipments of manufactured homes increased 5 percent during the second quarter of 2015 when compared to the same period of the prior year, while the Company’s net sales of components for new manufactured homes declined 1 percent during the same period of 2015, primarily due to customer mix, as the Company’s content per unit varies between customers.

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 month periods ended June 30, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the same period, was:



Content per:	2015		2014		Change
Home produced	$	1,172	$	1,249	(6	)%
Floor produced	$	764	$	836	(9	)%

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

The Company’s average product content per 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 changes, acquisitions and new product introductions, and changes in selling prices for the Company’s products, as well as changes in the types of floors produced industry-wide.

Operating profit of the MH Segment was $3.5 million in the second quarter of 2015, an increase of $0.5 million compared to the second quarter of 2014 in part due to a decrease in workers' compensation claims, as well as a favorable change in product mix.

MH Segment – Year to Date

Net sales of the MH Segment in the first six months of 2015 decreased 2 percent compared to the same period of 2014. Net sales of components were to the following markets for the six months ended June 30:



(In thousands)	2015		2014		Change
Manufactured housing OEMs	$	38,358	$	37,281	3	%
Manufactured housing aftermarket	8,130		7,172		13	%
Adjacent industries	10,877		13,845		(21	)%
Total MH Segment net sales	$	57,365	$	58,298	(2	)%

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



	2015	2014	Change
Total homes produced	33,300	30,700	9	%
Total floors produced	51,500	47,600	8	%

The Company’s net sales of components for new manufactured homes increased 3 percent during the first six months of 2015, lower than the 9 percent increase in industry-wide wholesale shipments of manufactured homes during the same period, primarily due to customer mix, as the Company’s content per unit varies between customers.

Operating profit of the MH Segment was $6.2 million in the first six months of 2015, an increase of $0.8 million compared to the first six months of 2014 largely due to lower raw material costs, as well as a favorable change in product mix.

Income Taxes

The effective tax rate for the first six months of 2015 of 36.7 percent was consistent with the effective tax rate for the first six months of 2014 of 36.8 percent. The Company estimates the 2015 full year effective tax rate to be approximately 37 percent.

LIQUIDITY AND CAPITAL RESOURCES

The Condensed Consolidated Statements of Cash Flows reflect the following for the six months ended June 30:



(In thousands)	2015			2014
Net cash flows provided by operating activities	$	36,359		$	55,795
Net cash flows used for investing activities	(37,981		)	(97,369		)
Net cash flows provided by (used for) financing activities	13,400			(24,702		)
Net increase (decrease) in cash	$	11,778		$	(66,276	)

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Cash Flows from Operations

Net cash flows from operating activities in the first six months of 2015 were $19.4 million lower than the same period of 2014, primarily due to:

•

A larger increase in inventories of $23.1 million in the first six months of 2015 compared to the first six months of 2014. The increase in inventories in the first six months of 2015 was primarily due to an acceleration in purchases, primarily due to purchases of imported components made prior to the resolution of the West Coast port issues, as well as an increase in steel inventory on hand due to the favorable market conditions. Inventory turnover for the twelve months ended June 30, 2015 decreased to 7.6 turns compared to the full year 2014 at 8.2 turns. The Company is working to improve inventory turnover over the coming quarters.


•	A $21.8 million smaller increase in accounts payable in the first six months of 2015 compared to the first six months of 2014, primarily due to the timing of purchases and payments.

Partially offset by:


•	A $6.2 million increase in net income in the first six months of 2015 compared to the first six months of 2014.


•	A $6.3 million larger increase in accrued expenses and other liabilities in the first six months of 2015 compared to the first six months of 2014, primarily due to the timing of payroll and related costs and the payment of income taxes, as well as an increase in the warranty accrual due to an increase in claims experience.


•	A $6.4 million smaller seasonal increase in accounts receivable in the first six months of 2015 compared to the first six months of 2014. This smaller increase was primarily due to the timing of payments by the Company’s customers, partially offset by increased net sales. Accounts receivable balances remain current, with only 19 days sales outstanding at June 30, 2015.


•	A $4.9 million increase in depreciation and amortization due to the investments in acquisitions and capital expenditures over the last few years.

Over the long term, based on the Company’s historical collection and payment patterns, as well as inventory turnover, the Company expects working capital to increase or decrease equivalent to approximately 10 percent of the increase or decrease, respectively, in net sales. However, there are many factors that can impact this relationship, especially in the short term.

Depreciation and amortization was $19.9 million in the first six months of 2015, and is expected to aggregate $39 million to $41 million for the full year 2015. Non-cash stock-based compensation in the first six months of 2015 was $7.1 million, and is expected to be approximately $15 million to $16 million for the full year 2015.

Cash Flows from Investing Activities

Cash flows used for investing activities of $38.0 million in the first six months of 2015 were primarily comprised of $14.7 million for capital expenditures and $25.1 million for the acquisition of businesses. Cash flows used for investing activities of $97.4 million in the first six months of 2014 were primarily comprised of $82.2 million for the acquisition of businesses and $17.9 million for capital expenditures.

In January 2015, the Company acquired the business and certain assets of EA Technologies, a manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications. The purchase price was $9.2 million, of which $6.6 million was paid in the fourth quarter of 2014, with the balance paid at closing.

In April 2015, the Company acquired the business and certain assets of Spectal, a Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation.

In July 2015, the Company entered into a six-year exclusive distribution and supply agreement with Furrion. This agreement provides the Company with the rights to distribute Furrion’s complete line of products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus and school bus industries throughout the United States and Canada. Furrion currently supplies a premium line of LED televisions and sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions and kitchen appliances, primarily to the RV industry. In connection with this agreement, the Company acquired Furrion’s current inventory, as well as Furrion’s deposits on inventory scheduled for

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

delivery, for approximately $11 million. In addition, the Company entered into the following minimum purchase obligations (“MPOs”):



	July 2015 - June 2016	$ 60 million
	July 2016 - June 2017	$ 90 million
	July 2017 - June 2018	$127 million
	July 2018 - June 2019	$172 million

The Company’s capital expenditures are primarily for replacement and growth. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately 2 percent of net sales, while the growth portion has averaged approximately 10 percent to 12 percent of the annual increase in net sales. However, there are many factors that can impact this relationship, such as new initiatives by the Company, especially in the short term. In 2014, the Company's capital expenditures were $42.5 million, higher than its historical averages. As such, the Company believes it is well positioned to meet the increased demands expected for 2015 and into 2016.

The Company estimates capital expenditures will be $28 million to $32 million in 2015, including $14 million to $16 million of “replacement” capital expenditures and $14 million to $16 million of “growth” capital expenditures. Additional capital expenditures may be required in 2015 depending on the extent of the sales growth and other initiatives by the Company.

The capital expenditures and acquisitions during the first six months of 2015 were funded from periodic borrowings under the Company’s line of credit and $50 million of Senior Promissory Notes issued under the “shelf-loan” facility with Prudential. The capital expenditures for the balance of 2015 are expected to be funded from cash generated from operations, as well as periodic borrowings under the Company's line of credit.

Cash Flows from Financing Activities

Cash flows provided by financing activities in the first six months of 2015 are primarily comprised of a net increase in indebtedness of $64.4 million partially offset by the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $48.2 million, paid to stockholders of record as of March 27, 2015. The increase in indebtedness includes new debt comprised of $50.0 million of Senior Promissory Notes, as well as a net increase of $14.4 million in outstanding borrowings under the Company’s line of credit. Borrowings under the Company’s line of credit reached a high of $71.6 million during the first six months of 2015. In addition, in the first six months of 2015, the Company received $6.3 million in cash and the related tax benefits from the exercise of stock-based compensation, which was more than offset by $7.0 million of shares tendered for payment of taxes. Further, the Company made $1.9 million in payments for contingent consideration related to acquisitions.

Cash flows used for financing activities in the first six months of 2014 included the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $46.7 million, paid to stockholders of record as of December 20, 2013, partially offset by a net increase in debt of $22.3 million. The increase in debt was due to borrowings under the Company's line of credit. In addition, in the first six months of 2014, the Company received $3.4 million in cash and the related tax benefits from the exercise of stock-based compensation, offset by $3.5 million in payments for contingent consideration related to acquisitions.

In connection with several business acquisitions, if certain sales targets for the acquired products are achieved, the Company would pay additional cash consideration. The Company has recorded a $8.0 million liability for the aggregate fair value of these expected contingent consideration liabilities at June 30, 2015, including $4.3 million recorded as a current liability. For further information, see Note 8 of the Notes to the Condensed Consolidated Financial Statements.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Additional information on the Company's Credit Agreement and “shelf-loan” facility is included in Note 7 of the Notes to the Condensed Consolidated Financial Statements.

CORPORATE GOVERNANCE

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

CONTINGENCIES

Information required by this item is included in Note 8 of the Notes to the Condensed Consolidated Financial Statements and under Item 1 of Part I of this Quarterly Report on Form 10-Q.

INFLATION

The prices of key raw materials, consisting primarily of steel and aluminum, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. The Company did not experience any significant increases in its labor costs in the first six months of 2015 related to inflation.

DREW INDUSTRIES INCORPORATED

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

NEW ACCOUNTING PRONOUNCEMENTS

Information required by this item is included in Note 11 of the Notes to the Condensed Consolidated Financial Statements.

USE OF ESTIMATES

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain “forward-looking statements” with respect to the Company's financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, acquisitions, plans and objectives of management, markets for the Company’s Common Stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and involve a number of risks and uncertainties.

Forward-looking statements, including, without limitation, those relating to the Company's future business prospects, net sales, expenses and income (loss), cash flow, and financial condition, whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of the Company's senior management at the time such statements were made. There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel, steel based components and aluminum) and other components, seasonality and cyclicality in the industries to which the Company sells its products, availability of credit for financing the retail and wholesale purchase of products for which the Company sells its components, inventory levels of retail dealers and manufacturers, availability of transportation for products for which the Company sells its components, the financial condition of the Company's customers, the financial condition of retail dealers of products for which the Company sells its components, retention and concentration of significant customers, the costs, pace of and successful integration of acquisitions and other growth initiatives, availability and costs of labor, employee benefits, employee retention, realization of efficiency improvements, the successful entry into new markets, the costs of compliance with environmental laws and increased governmental regulation and oversight, information technology performance and security, the ability to protect intellectual property, interest rates, oil and gasoline prices, the impact of international, national and regional economic conditions and consumer confidence on the retail sale of products for which the Company sells its components, and other risks and uncertainties discussed more fully under the caption “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, and in the Company's subsequent filings with the Securities and Exchange Commission. The Company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.

DREW INDUSTRIES INCORPORATED

ITEM 3 – QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

At June 30, 2015, the Company had $30.0 million of variable rate debt outstanding. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to June 30, 2015, and outstanding borrowings of $30.0 million, future cash flows would be reduced by $0.3 million per annum.

At June 30, 2015, the Company had $50.0 million of fixed rate debt outstanding. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to June 30, 2015, 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 $0.5 million lower per annum than if the fixed rate financing could be obtained at current market rates.

The Company is also exposed to changes in the prices of raw materials, specifically steel and aluminum. The Company has, from time to time, entered into derivative instruments for the purpose of managing a portion of the exposures associated with fluctuations in aluminum prices. At June 30, 2015, the Company had no derivative instruments outstanding.

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

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

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 Exchange Act reports is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its disclosure controls and procedures to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.

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


b)	Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2015, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company has selected a new enterprise resource planning (“ERP”) system, and has begun implementing that system. Although to date there have been no significant changes in the Company’s internal controls, the Company anticipates internal controls will be strengthened incrementally due both to the installation of the new ERP software and business process changes. The full implementation is expected to take several years.

DREW INDUSTRIES INCORPORATED

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

We have included information about product recalls and inquiries from the National Highway Traffic Safety Administration (“NHTSA”) in Note 8 of the Notes to Condensed Consolidated Financial Statements in this report. This information is incorporated herein by reference.

In the normal course of business, the Company is subject to proceedings, lawsuits, regulatory agency inquiries 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 Sheets as of June 30, 2015, excluding the NHTSA inquiry previously noted, would not be material to the Company’s financial position or annual results of operations.

ITEM 1A – RISK FACTORS

There have been no material changes to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 2, 2015.

ITEM 6 – EXHIBITS

a) Exhibits as required by item 601 of Regulation S-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.


5)	101.INS XBRL Instance Document


6)	101.SCH XBRL Taxonomy Extension Schema Document


7)	101.CAL XBRL Taxonomy Extension Calculation Linkbase Document


8)	101.DEF XBRL Taxonomy Extension Definition Linkbase Document


9)	101.LAB XBRL Taxonomy Extension Label Linkbase Document


10)	101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

DREW INDUSTRIES INCORPORATED

SIGNATURES

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



DREW INDUSTRIES INCORPORATED
Registrant


By	/s/ Joseph S. Giordano III
Joseph S. Giordano III
Chief Financial Officer and Treasurer
August 7, 2015