LCI INDUSTRIES - FORM 10-Q - November 7, 2018

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - LCI INDUSTRIES	lcii-09302018xex322.htm
EX-32.1 - EXHIBIT 32.1 - LCI INDUSTRIES	lcii-09302018xex321.htm
EX-31.2 - EXHIBIT 31.2 - LCI INDUSTRIES	lcii-09302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - LCI INDUSTRIES	lcii-09302018xex311.htm

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: September 30, 2018



☐	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

(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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate 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 (October 31, 2018) was 25,217,620 shares of common stock.

LCI INDUSTRIES

TABLE OF CONTENTS



		Page
PART I –	FINANCIAL INFORMATION

	ITEM 1 – FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME	4

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5

	CONDENSED CONSOLIDATED BALANCE SHEETS	6

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	7

	CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY	8

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	9

	ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

	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

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

LCI INDUSTRIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
(In thousands, except per share amounts)

Net sales	$	604,244	$	554,814	$	1,939,191	$	1,600,633
Cost of sales	478,343		433,594		1,522,101		1,224,312
Gross profit	125,901		121,220		417,090		376,321
Selling, general and administrative expenses	80,548		73,293		247,829		206,225
Operating profit	45,353		47,927		169,261		170,096
Interest expense, net	1,720		311		4,481		1,162
Income before income taxes	43,633		47,616		164,780		168,934
Provision for income taxes	9,821		15,478		36,408		53,514
Net income	$	33,812	$	32,138	$	128,372	$	115,420

Net income per common share:
Basic	$	1.34	$	1.28	$	5.09	$	4.62
Diluted	$	1.33	$	1.26	$	5.03	$	4.56

Weighted average common shares outstanding:
Basic	25,235		25,060		25,208		24,993
Diluted	25,504		25,459		25,509		25,332

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LCI INDUSTRIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
(In thousands)

Net income	$	33,812		$	32,138	$	128,372		$	115,420
Other comprehensive (loss) income:
Net foreign currency translation adjustment	(305		)	1,662		(1,095		)	4,077
Total comprehensive income	$	33,507		$	33,800	$	127,277		$	119,497

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LCI INDUSTRIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30,						December 31,
	2018			2017			2017
(In thousands, except per share amount)

ASSETS
Current assets
Cash and cash equivalents	$	18,250		$	19,762		$	26,049
Accounts receivable, net of allowances of $2,866, $2,343, and $1,536 at September 30, 2018, September 30, 2017, and December 31, 2017, respectively	162,748			139,144			82,157
Inventories, net	325,819			229,763			274,748
Prepaid expenses and other current assets	49,887			45,384			34,125
Total current assets	556,704			434,053			417,079
Fixed assets, net	304,144			210,304			228,950
Goodwill	163,211			123,001			124,183
Other intangible assets, net	171,724			134,761			130,132
Deferred taxes	12,643			32,380			24,156
Other assets	25,793			21,277			21,358
Total assets	$	1,234,219		$	955,776		$	945,858

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade	$	80,859		$	88,148		$	79,164
Accrued expenses and other current liabilities	101,848			109,849			102,849
Total current liabilities	182,707			197,997			182,013
Long-term indebtedness	243,504			49,918			49,924
Other long-term liabilities	72,362			60,805			61,176
Total liabilities	498,573			308,720			293,113

Stockholders’ equity
Common stock, par value $.01 per share	279			276			277
Paid-in capital	204,748			201,814			203,990
Retained earnings	558,742			472,154			475,506
Accumulated other comprehensive income	1,344			2,279			2,439
Stockholders’ equity before treasury stock	765,113			676,523			682,212
Treasury stock, at cost	(29,467		)	(29,467		)	(29,467		)
Total stockholders’ equity	735,646			647,056			652,745
Total liabilities and stockholders’ equity	$	1,234,219		$	955,776		$	945,858

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LCI INDUSTRIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
(In thousands)
Cash flows from operating activities:
Net income	$	128,372		$	115,420
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation and amortization	49,739			39,856
Stock-based compensation expense	13,852			15,042
Other non-cash items	(959		)	3,655
Changes in assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net	(51,733		)	(69,720		)
Inventories, net	(16,475		)	(33,780		)
Prepaid expenses and other assets	(9,506		)	(18,662		)
Accounts payable, trade	(12,930		)	29,856
Accrued expenses and other liabilities	7,232			26,147
Net cash flows provided by operating activities	107,592			107,814
Cash flows from investing activities:
Capital expenditures	(92,522		)	(60,342		)
Acquisitions of businesses, net of cash acquired	(156,701		)	(67,876		)
Proceeds from note receivable	2,000			—
Other investing activities	(875		)	243
Net cash flows used in investing activities	(248,098		)	(127,975		)
Cash flows from financing activities:
Exercise of stock-based awards, net of shares tendered for payment of taxes	(14,114		)	(7,313		)
Proceeds from line of credit borrowings	928,601			9,715
Repayments under line of credit borrowings	(738,601		)	(9,715		)
Proceeds from other borrowings	4,509			—
Payment of dividends	(44,114		)	(37,346		)
Payment of contingent consideration related to acquisitions	(3,018		)	(1,529		)
Other financing activities	(556		)	(59		)
Net cash flows provided by (used in) financing activities	132,707			(46,247		)
Net decrease in cash and cash equivalents	(7,799		)	(66,408		)
Cash and cash equivalents at beginning of period	26,049			86,170
Cash and cash equivalents at end of period	$	18,250		$	19,762

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	4,244		$	1,291
Cash paid during the period for income taxes, net of refunds	$	33,844		$	48,181
Purchase of property and equipment in accrued expenses	$	467		$	1,205

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LCI INDUSTRIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)



	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total Stockholders’ Equity
(In thousands, except shares and per share amounts)
Balance - December 31, 2017	$	277	$	203,990		$	475,506		$	2,439		$	(29,467	)	$	652,745
Net income	—		—			128,372			—			—			128,372
Issuance of 228,146 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes	2		(14,116		)	—			—			—			(14,114		)
Stock-based compensation expense	—		13,852			—			—			—			13,852
Other comprehensive loss	—		—			—			(1,095		)	—			(1,095		)
Cash dividends ($1.75 per share)	—		—			(44,114		)	—			—			(44,114		)
Dividend equivalents on stock-based awards	—		1,022			(1,022		)	—			—			—
Balance - September 30, 2018	$	279	$	204,748		$	558,742		$	1,344		$	(29,467	)	$	735,646

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements include the accounts of LCI Industries and its wholly-owned subsidiaries (“LCII” and collectively with its subsidiaries, the “Company”). LCII has no unconsolidated subsidiaries. LCII, through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of engineered components for the leading original equipment manufacturers (“OEMs”) in the recreation and industrial product markets, consisting of recreational vehicles (“RVs”) and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; trains; manufactured homes; and modular housing. The Company also supplies engineered components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and service centers. At September 30, 2018, the Company operated over 65 manufacturing and distribution facilities located throughout the United States and in Canada, Ireland, Italy and the United Kingdom.

Most 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. Additionally, sales of components to the aftermarket channels of these industries tend to be counter-seasonal.

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 and product recall 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. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2017 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.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815, Derivatives and Hedging. This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which amends ASC 350, Intangibles - Goodwill and Other. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This ASU is effective for interim and annual reporting periods, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires, in most instances, a lessee to recognize on its balance sheet a liability to make lease payments (the lease liability) and also a right-of-use asset representing its right to use the underlying asset for the lease term. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company will adopt ASU 2016-02 on January 1, 2019 using the cumulative-effect adjustment transition method approved by the FASB in July 2018. The Company continues to execute on its implementation plan, including gathering lease data to derive the impact of adoption, implementing lease software, and updating processes and controls to meet the standard’s reporting and disclosure requirements. The most significant expected change relates to the recognition of the new right-of-use assets and lease liabilities on the consolidated balance sheet for real estate, machinery and equipment, and vehicle operating leases. The Company does not expect the adoption to have a material impact to its consolidated statements of income or cash flows.

Recently adopted accounting pronouncements

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. This ASU is effective for annual and interim periods beginning after December 15, 2017, and should be applied retrospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted this ASU effective January 1, 2018, with retrospective disclosure. As a result, the Company reclassified $1.0 million of cash outflow from financing activities to cash outflow from operations for the nine months ended September 30, 2017. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09 (Topic 606), Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The adoption did not result in a cumulative effect adjustment to beginning retained earnings. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be immaterial to net income on an ongoing basis. See Note 3 for further detail.

3. REVENUE

The Company recognizes revenue when performance obligations under the terms of contracts with customers are satisfied, which occurs with the transfer of control of the Company’s products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products to its customers. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items, such as training, customer service, instruction manuals and service requirements, are generally immaterial in the context of the contract and are recognized as expense.

For the majority of product sales, the Company transfers control and recognizes revenue when it ships the product from its facility to its customer. The amount of consideration the Company receives and the revenue recognized varies with sales discounts, volume rebate programs and indexed material pricing. When the Company offers customers retrospective volume rebates, it estimates the expected rebates based on an analysis of historical experience. The Company adjusts its estimate of revenue related to volume rebates at the earlier of when the most likely amount of consideration expected to receive changes or when the consideration becomes fixed. When the Company offers customers prompt pay sales discounts or agrees to variable pricing based on material indices, it estimates the expected discounts or pricing adjustments based on an analysis of historical experience. The Company adjusts its estimate of revenue related to sales discounts and indexed material pricing to the expected value of the consideration to which the Company will be entitled. The Company includes the variable consideration in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur when the volume, discount or indexed material price uncertainties are resolved.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company has elected to recognize shipping and handling costs as fulfillment costs when control over products has transferred to the customer, and records the expense within selling, general and administrative expense.

See Note 12 - Segment Reporting for the Company’s disclosures of disaggregated revenue.

4. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisitions During the Nine Months Ended September 30, 2018

ST.LA. S.r.l.

In June 2018, the Company acquired 100 percent of the equity interests of ST.LA. S.r.l., (“STLA”), a manufacturer of bed lifts and other RV components for the European caravan market, headquartered in Pontedera, Italy. The preliminary purchase price was $14.8 million, net of cash acquired, paid at closing, and is subject to potential post-closing adjustments related to net working capital. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):



Cash consideration, net of cash acquired	$	14,845

Customer relationships and other identifiable intangible assets	$	7,000
Net tangible assets	2,280
Total fair value of net assets acquired	$	9,280

Goodwill (not tax deductible)	$	5,565

The customer relationships intangible asset is being amortized over its estimated useful life of 15 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.

Hehr

In February 2018, the Company acquired substantially all of the business assets of Hehr International Inc. (“Hehr”), a manufacturer of windows and tempered and laminated glass for the RV, transit, specialty vehicle and other adjacent industries, headquartered in Los Angeles, California. The purchase price was $51.5 million paid at closing and subsequently for post-closing adjustments related to net working capital. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):



Cash consideration	$	51,460

Customer relationships and other identifiable intangible assets	$	21,500
Net tangible assets	13,020
Total fair value of net assets acquired	$	34,520

Goodwill (tax deductible)	$	16,940

The customer relationships intangible asset is being amortized over its estimated useful life of 13 years. The consideration given was greater than the fair value of the net assets acquired, resulting in goodwill, because the Company anticipates the attainment of synergies and an increase in the markets for the acquired products.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Taylor Made

In January 2018, the Company acquired 100 percent of the equity interests of Taylor Made Group, LLC (“Taylor Made”), a marine supplier to boat builders and the aftermarket, as well as a key supplier to a host of other industrial end markets, headquartered in Gloversville, New York. The purchase price was $90.4 million, net of cash acquired, paid at closing and subsequently for post-closing adjustments related to net working capital. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the Condensed Consolidated Statements of Income since the acquisition date. The Company is validating account balances and finalizing the valuation for the acquisition. The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):



Cash consideration, net of cash acquired	$	90,396

Customer relationships	$	25,000
Other identifiable intangible assets	7,000
Net tangible assets	42,133
Total fair value of net assets acquired	$	74,133

Goodwill (tax deductible)	$	16,263

Acquisitions During the Nine Months Ended September 30, 2017

Metallarte S.r.l.

In June 2017, the Company acquired 100 percent of the equity interests of Metallarte S.r.l. (“Metallarte”), a manufacturer of entry and compartment doors for the European caravan market located near Siena, Italy, and its subsidiary, RV Doors, S.r.l., a manufacturer of driver-side doors located near Venice, Italy. The purchase price was $14.1 million paid at closing, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the 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, net of cash acquired	$	13,501
Contingent consideration	2,366
Total fair value of consideration given	$	15,867

Customer relationships	$	7,311
Other identifiable intangible assets	1,942
Net other liabilities	(327		)
Total fair value of net assets acquired	$	8,926

Goodwill (not tax deductible)	$	6,941

Lexington

In May 2017, the Company acquired the business and certain assets of Lexington LLC (“Lexington”), a manufacturer of high quality seating solutions for the marine, RV, transportation, medical and office furniture industries located in Elkhart, Indiana.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The purchase price was $40.1 million paid at closing. The results of the acquired business have been included primarily in the Company’s OEM Segment and in the 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	$	40,062

Customer relationships	$	16,900
Other identifiable intangible assets	1,820
Net tangible assets	4,928
Total fair value of net assets acquired	$	23,648

Goodwill (tax deductible)	$	16,414

Sessa Klein S.p.A.

In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“Sessa Klein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $6.5 million paid at closing, net of cash acquired, plus contingent consideration based on future sales by this operation. The results of the acquired business have been included primarily in the Company’s OEM 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, net of cash acquired	$	6,502
Contingent consideration	3,838
Total fair value of consideration given	$	10,340

Identifiable intangible assets	$	2,286
Net tangible assets	364
Total fair value of net assets acquired	$	2,650

Goodwill (not tax deductible)	$	7,690

Goodwill

Goodwill by reportable segment was as follows:



(In thousands)	OEM Segment		Aftermarket Segment		Total
Net balance – December 31, 2017	$	109,641	$	14,542	$	124,183
Acquisitions – 2018	34,669		4,099		38,768
Other	260		—		260
Net balance – September 30, 2018	$	144,570	$	18,641	$	163,211

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.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table.

Other Intangible Assets

Other intangible assets consisted of the following at September 30, 2018:



(In thousands)	Gross Cost		Accumulated Amortization		Net Balance		Estimated Useful Life in Years
Customer relationships	$	187,804	$	52,204	$	135,600	6	to	16
Patents	55,858		38,451		17,407		3	to	19
Trade names	15,922		5,828		10,094		3	to	15
Non-compete agreements	7,650		3,890		3,760		3	to	6
Other	309		133		176		2	to	12
Purchased research and development	4,687		—		4,687		Indefinite
Other intangible assets	$	272,230	$	100,506	$	171,724

Other intangible assets consisted of the following at September 30, 2017:



(In thousands)	Gross Cost		Accumulated Amortization		Net Balance		Estimated Useful Life in Years
Customer relationships	$	138,941	$	39,792	$	99,149	6	to	16
Patents	57,416		37,277		20,139		3	to	19
Trade names	10,416		4,708		5,708		3	to	15
Non-compete agreements	8,479		3,609		4,870		3	to	6
Other	309		101		208		2	to	12
Purchased research and development	4,687		—		4,687		Indefinite
Other intangible assets	$	220,248	$	85,487	$	134,761

Other intangible assets consisted of the following at December 31, 2017:



(In thousands)	Gross Cost		Accumulated Amortization		Net Balance		Estimated Useful Life in Years
Customer relationships	$	138,687	$	42,276	$	96,411	6	to	16
Patents	57,576		38,764		18,812		3	to	19
Trade names	10,995		5,381		5,614		3	to	15
Non-compete agreements	8,536		4,128		4,408		3	to	6
Other	309		109		200		2	to	12
Purchased research and development	4,687		—		4,687		Indefinite
Other intangible assets	$	220,790	$	90,658	$	130,132

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. INVENTORIES

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



	September 30,				December 31,
(In thousands)	2018		2017		2017
Raw materials	$	283,267	$	191,680	$	233,187
Work in process	12,659		10,562		10,408
Finished goods	29,893		27,521		31,153
Inventories, net	$	325,819	$	229,763	$	274,748

6. FIXED ASSETS

Fixed assets consisted of the following at:



	September 30,				December 31,
(In thousands)	2018		2017		2017
Fixed assets, at cost	$	528,962	$	396,789	$	424,056
Less accumulated depreciation and amortization	224,818		186,485		195,106
Fixed assets, net	$	304,144	$	210,304	$	228,950

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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



	September 30,				December 31,
(In thousands)	2018		2017		2017
Employee compensation and benefits	$	34,908	$	42,646	$	39,365
Current portion of accrued warranty	27,351		23,558		23,055
Income taxes payable	3,116		5,613		3,561
Customer rebates	7,927		11,120		11,124
Other	28,546		26,912		25,744
Accrued expenses and other current liabilities	$	101,848	$	109,849	$	102,849

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 nine months ended September 30:



(In thousands)	2018			2017
Balance at beginning of period	$	38,502		$	32,393
Provision for warranty expense	23,512			18,570
Warranty liability from acquired businesses	782			150
Warranty costs paid	(17,466		)	(13,963		)
Balance at end of period	45,330			37,150
Less long-term portion	17,979			13,592
Current portion of accrued warranty	$	27,351		$	23,558

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. LONG-TERM INDEBTEDNESS

Long-term debt consisted of the following at:



	September 30,						December 31,
(In thousands)	2018			2017			2017
Line of Credit	$	190,000		$	—		$	—
Shelf Loan	50,000			50,000			50,000
Other	4,509			—			—
Unamortized deferred financing fees	(497		)	(82		)	(76		)
	244,012			49,918			49,924
Less current portion	(508		)	—			—
Long-term debt	$	243,504		$	49,918		$	49,924

On April 27, 2016, the Company refinanced its line of credit through an agreement with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and 1st Source Bank. The agreement amended and restated the existing line of credit and expires on April 27, 2021 (the “Amended Credit Agreement”). In connection with this amendment and restatement, the line of credit was increased from $100.0 million to $200.0 million, and contains a feature allowing the Company to draw up to $50.0 million in approved foreign currencies, including Australian dollars, Canadian dollars, pounds sterling and euros. In February 2018, the Company exercised its right to increase the maximum borrowings under the Amended Credit Agreement from $200 million to $325 million. The terms and conditions of this incremental amendment remain the same, although an additional LIBO Rate period of one week was added. Interest on borrowings under the line of credit is designated from time to time by the Company as either (i) the Alternate Base Rate (defined in the Amended Credit Agreement as the greatest of (a) the Prime Rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus 0.5 percent and (c) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for a one month interest period plus 1.0 percent), plus additional interest ranging from 0.0 percent to 0.625 percent (0.0 percent at September 30, 2018) depending on the Company’s performance and financial condition, or (ii) the Adjusted LIBO Rate for a period equal to one week and one, two, three, six or twelve months as selected by the Company, plus additional interest ranging from 1.0 percent to 1.625 percent (1.0 percent at September 30, 2018) depending on the Company’s performance and financial condition. At September 30, 2018, the line of credit had a weighted average interest rate of 3.0 percent. At September 30, 2018 and 2017, the Company had $2.2 million and $2.4 million, respectively, in issued, but undrawn, standby letters of credit under the line of credit. Availability under the Company’s line of credit was $132.8 million at September 30, 2018.

On February 24, 2014, the Company entered into a $150.0 million shelf-loan facility (the “Shelf-Loan” Facility) with Prudential Investment Management, Inc. and its affiliates (“Prudential”). On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes (“Series A 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 September 30, 2018.

On March 30, 2017, the Company amended its Shelf-Loan Facility to extend the term through March 30, 2020. In connection with this amendment, 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 (excluding the Company’s Series A Notes already outstanding). 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. Availability under the Company’s Shelf-Loan Facility was $150.0 million at September 30, 2018. However, the Amended Credit Agreement limits the aggregate indebtedness outstanding to Prudential from time to time to $150.0 million; therefore, currently the Company can only access an additional $100.0 million under the Shelf-Loan Facility.

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 the Company’s direct and indirect subsidiaries (including up to 65 percent of the equity interest of certain “controlled foreign corporations”).

Pursuant to the Amended Credit Agreement and Shelf-Loan Facility, the Company is required to maintain minimum interest and fixed charge coverages, and to meet certain other financial requirements. At September 30, 2018 and 2017, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Availability under both the Amended Credit Agreement and the Shelf-Loan Facility is subject to a maximum net leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA, as defined. This limitation did not impact the Company’s borrowing availability at September 30, 2018. The remaining availability under these facilities was $232.8 million at September 30, 2018. The Company believes the availability under the Amended Credit Agreement and Shelf-Loan Facility is adequate to finance the Company’s anticipated cash requirements for the next twelve months. At September 30, 2018, 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.

9. COMMITMENTS AND CONTINGENCIES

Contingent Consideration

In connection with several business acquisitions, if certain sales targets for the acquired products are achieved, the Company will be required to pay additional cash consideration. The Company has recorded a liability for the fair value of this contingent consideration at September 30, 2018 and 2017, based on the present value of the expected future cash flows using a market participant’s weighted average cost of capital of 12.4 percent and 13.6 percent, respectively.

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 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 nine months ended September 30:



(In thousands)	2018			2017
Balance at beginning of period	$	12,545		$	9,241
Acquisitions	—			7,288
Payments	(4,877		)	(2,574		)
Accretion ^(a)	769			1,227
Fair value adjustments^(a)	(1,169		)	1,204
Net foreign currency translation adjustment	(164		)	659
Balance at end of the period^(b)	7,104			17,045
Less current portion in accrued expenses and other current liabilities	(25		)	(6,649		)
Total long-term portion in other long-term liabilities	$	7,079		$	10,396


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

^(b)

Amounts represent the fair value of estimated remaining payments. The total estimated remaining payments as of September 30, 2018 are $9.1 million undiscounted. 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”), a Hong Kong based firm that designs, engineers and supplies premium electronics. 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 televisions, sound systems, navigation systems, wireless backup cameras, solar prep units, power solutions, fireplaces and kitchen appliances, primarily to the RV industry.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In connection with this agreement, the Company entered into minimum purchase obligations (“MPOs”), which Furrion and the Company agreed to review after the first year on an annual basis and adjust as necessary based upon current economic and industry conditions, the development and customer acceptance of new Furrion products, competition and other factors which impact demand for Furrion products.

Subject to agreed upon revisions to the MPOs, Furrion has the right to either terminate the distribution agreement with six months’ notice or remove exclusivity from the Company 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. If exclusivity is withdrawn, the Company at its election may 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.

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. As a result, the Company has incurred expenses associated with product recalls from time to time, and may incur expenditures for future investigations or product recalls.

Environmental

The Company’s operations are subject to certain Federal, state and local regulatory requirements relating to the use, storage, discharge and disposal of hazardous materials used during the manufacturing processes. Although the Company believes its operations have been consistent with prevailing industry standards, and are in substantial compliance with applicable environmental laws and regulations, one or more of the Company’s current or former operating sites, or adjacent sites owned by third parties, have been affected by releases of hazardous materials. As a result, the Company may incur expenditures for future investigation and remediation of these sites, including in conjunction with voluntary remediation programs or third-party claims.

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 that, after final disposition, including anticipated insurance recoveries in certain cases, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2018, would not be material to the Company’s financial position or annual results of operations.

10. STOCKHOLDERS’ EQUITY

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



	September 30,		December 31,
(In thousands)	2018	2017	2017
Common stock authorized	75,000	75,000	75,000
Common stock issued	27,902	27,625	27,674
Treasury stock	2,684	2,684	2,684

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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



	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands)	2018	2017	2018	2017
Weighted average shares outstanding for basic earnings per share	25,235	25,060	25,208	24,993
Common stock equivalents pertaining to stock-based awards	269	399	301	339
Weighted average shares outstanding for diluted earnings per share	25,504	25,459	25,509	25,332

Equity instruments excluded from diluted net earnings per share calculation as the effect would have been anti-dilutive	114	64	106	117

The table below summarizes the regular quarterly dividends declared and paid during the periods ended September 30, 2018 and December 31, 2017:



(In thousands, except per share data)	Per Share		Record Date	Payment Date	Total Paid
First Quarter 2017	$	0.50	03/06/17	03/17/17	$	12,442
Second Quarter 2017	0.50		05/19/17	06/02/17	12,445
Third Quarter 2017	0.50		08/18/17	09/01/17	12,459
Fourth Quarter 2017	0.55		11/17/17	12/01/17	13,711
Total 2017	$	2.05			$	51,057

First Quarter 2018	$	0.55	03/16/18	03/29/18	$	13,858
Second Quarter 2018	0.60		06/04/18	06/15/18	15,127
Third Quarter 2018	0.60		08/31/18	09/14/18	15,129
Total 2018	$	1.75			$	44,114

In February 2017, the Company issued 63,677 deferred stock units at the average price of $108.47, or $6.9 million, to executive officers in lieu of cash for a portion of their 2016 incentive compensation.

On October 31, 2018, the Company’s Board of Directors authorized a new stock repurchase program granting the Company authority to repurchase up to $150.0 million of the Company’s common stock over a three year period. The timing of stock repurchases and the number of shares will depend upon the market conditions and other factors. Share repurchases, if any, will be made in the open market and in privately negotiated transactions in accordance with applicable securities laws. The stock repurchase program may be modified, suspended or terminated at any time by the Board of Directors.

11. FAIR VALUE MEASUREMENTS

Recurring

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



	September 30, 2018								December 31, 2017
(In thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Derivative instruments	$	664	$	—	$	664	$	—	$	930	$	—	$	930	$	—
Liabilities
Contingent consideration	$	7,104	$	—	$	—	$	7,104	$	12,545	$	—	$	—	$	12,545

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 and future industry-specific economic and market conditions, and a market participant’s weighted average cost of capital. Over the next six years, the Company’s long-term sales growth forecasts for products subject to contingent consideration arrangements average approximately 14 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 9 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.

Derivative Instruments

At September 30, 2018, the Company had derivative instruments for 3.0 million pounds of steel in order to manage a portion of the exposure to movements associated with steel costs. These derivative instruments expire in December 2018, at an average steel price of $0.25 per pound. While these derivative instruments are considered to be economic hedges of the underlying movement in the price of steel, they are not designated or accounted for as a hedge. These derivative instruments were valued at fair value using a market approach based on the quoted market prices of similar instruments at the end of each reporting period, and the resulting net loss was recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. At September 30, 2018, the $0.7 million corresponding asset was recorded in other current assets as reflected in the Condensed Consolidated Balance Sheets. A net loss of $0.3 million was recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Income during the nine months ended September 30, 2018.

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 nine months ended September 30:



	2018		2017
(In thousands)	Carrying Value	Non-Recurring Losses/(Gains)	Carrying Value	Non-Recurring Losses/(Gains)
Assets
Net assets of acquired businesses	117,933	—	35,224	—

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 acquired or liability assumed, 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 assumed liabilities, see Note 4 of the Notes to Condensed Consolidated Financial Statements.

12. SEGMENT REPORTING

The Company has two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant.

The OEM Segment, which accounted for 91 percent and 92 percent of consolidated net sales for the nine months ended September 30, 2018 and 2017, respectively, manufactures or distributes a broad array of engineered components for the leading OEMs in the recreation and industrial product markets, consisting of RVs and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon boats; trains; manufactured homes; and modular housing.

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Approximately 65 percent of the Company’s OEM Segment net sales for the nine months ended September 30, 2018 were of components for travel trailer and fifth-wheel RVs.

The Aftermarket Segment, which accounted for nine percent and eight percent of consolidated net sales for the nine month periods ended September 30, 2018 and 2017, respectively, supplies engineered components to the related aftermarket channels of the recreation and industrial product markets, primarily to retail dealers, wholesale distributors and service centers. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims.

Decisions concerning the allocation of the Company’s resources are made by the Company’s chief operating decision maker (“CODM”), with oversight by the Board of Directors. The CODM 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 OEM and Aftermarket Segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The following table presents the Company’s revenues disaggregated by segment and geography based on the billing address of the Company’s customers:



	Three Months Ended September 30, 2018						Three Months Ended September 30, 2017
(In thousands)	U.S. ^(a)		Int’l ^(b)		Total		U.S. ^(a)		Int’l ^(b)		Total
OEM Segment:
RV OEMs:
Travel trailers and fifth-wheels	$	335,842	$	2,988	$	338,830	$	357,290	$	650	$	357,940
Motorhomes	32,929		10,315		43,244		35,766		5,829		41,595
Adjacent industries OEMs	147,016		10,888		157,904		102,954		3,432		106,386
Total OEM Segment net sales	515,787		24,191		539,978		496,010		9,911		505,921
Aftermarket Segment:
Total Aftermarket Segment net sales	61,736		2,530		64,266		46,344		2,549		48,893
Total net sales	$	577,523	$	26,721	$	604,244	$	542,354	$	12,460	$	554,814



	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017
(In thousands)	U.S. ^(a)		Int’l ^(b)		Total		U.S. ^(a)		Int’l ^(b)		Total
OEM Segment:
RV OEMs:
Travel trailers and fifth-wheels	$	1,137,095	$	6,156	$	1,143,251	$	1,043,297	$	2,168	$	1,045,465
Motorhomes	113,888		31,342		145,230		102,269		12,618		114,887
Adjacent industries OEMs	439,304		29,290		468,594		301,875		8,498		310,373
Total OEM Segment net sales	1,690,287		66,788		1,757,075		1,447,441		23,284		1,470,725
Aftermarket Segment:
Total Aftermarket Segment net sales	173,511		8,605		182,116		122,315		7,593		129,908
Total net sales	$	1,863,798	$	75,393	$	1,939,191	$	1,569,756	$	30,877	$	1,600,633

^(a)Net sales to customers in the United States of America

^(b)Net sales to customers in countries domiciled outside of the United States of America

LCI INDUSTRIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the Company’s operating profit by segment:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Operating profit:
OEM Segment	$	36,905	$	41,025	$	144,436	$	151,867
Aftermarket Segment	8,448		6,902		24,825		18,229
Total operating profit	$	45,353	$	47,927	$	169,261	$	170,096

The following table presents the Company’s revenue disaggregated by product:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
OEM Segment:
Chassis, chassis parts and slide-out mechanisms	$	214,272	$	228,809	$	714,786	$	687,274
Windows and doors	157,336		111,629		476,228		318,222
Furniture and mattresses	88,411		89,672		299,207		243,586
Axles and suspension solutions	30,148		30,542		96,901		95,082
Other	49,811		45,269		169,953		126,561
Total OEM Segment net sales	539,978		505,921		1,757,075		1,470,725
Total Aftermarket Segment net sales	64,266		48,893		182,116		129,908
Total net sales	$	604,244	$	554,814	$	1,939,191	$	1,600,633

LCI INDUSTRIES

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, 2017.

LCI Industries (“LCII”, and collectively with its subsidiaries, the “Company”), through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of engineered components for the leading original equipment manufacturers (“OEMs”) in the recreation and industrial product markets, consisting of recreational vehicles (“RVs”) and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; trains; manufactured homes; and modular housing. The Company also supplies engineered components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and service centers.

The Company has two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. At September 30, 2018, the Company operated over 65 manufacturing and distribution facilities located throughout the United States and in Canada, Ireland, Italy and the United Kingdom. See Note 12 of the Notes to the Condensed Consolidated Financial Statements.

The Company’s OEM Segment manufactures or distributes a broad array of components for the leading OEMs of leisure and mobile transportation industries. Approximately 66 percent of the Company’s OEM Segment net sales for the twelve months ended September 30, 2018 were of components for travel trailer and fifth-wheel RVs, including:



● Steel chassis and related components	● Furniture and mattresses
● Axles and suspension solutions	● Electric and manual entry steps
● Slide-out mechanisms and solutions	● Awnings and awning accessories
● Thermoformed bath, kitchen and other products	● Electronic components
● Vinyl, aluminum and frameless windows	● Appliances
● Manual, electric and hydraulic stabilizer and leveling systems	● Televisions, sound systems, navigation systems and backup cameras
● Entry, luggage, patio and ramp doors	● Other accessories

The Aftermarket Segment supplies many of these engineered components to the related aftermarket channels of the recreation and industrial product markets, primarily to retail dealers, wholesale distributors and service centers. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims.

INDUSTRY BACKGROUND

OEM Segment

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).

The annual sales cycle for the RV industry generally starts in October after the “Open House” in Elkhart, Indiana where many of the largest RV OEMs display product to RV retail dealers, and ends after the conclusion of the summer selling season in September in the following calendar year. Between October and March, industry-wide wholesale shipments of travel trailer and

LCI INDUSTRIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

fifth-wheel RVs have historically exceeded retail sales as dealers build inventories to support anticipated sales. 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. Although the current year has seen a disruption of wholesales shipments as dealers normalize their inventory levels, the Company expects to return to the normal wholesale cycle early in 2019.

According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailer and fifth-wheel RVs in the first nine months of 2018, the Company’s primary RV market, increased one percent to 324,500 units, compared to the same period of 2017, as a result of:


•	An estimated 19,400 unit increase in retail demand in the first nine months of 2018, or six percent, as compared to the same period of 2017. In addition, retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.


•	RV dealers seasonally increasing inventory levels by an estimated 27,800 units for the first nine months of 2018, higher than the increase in inventory levels of 11,600 units in the same period of 2017.

While the Company measures its OEM Segment 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 September 30, 2018	92,100	(11)%	122,300	1%	(30,200)
Quarter ended June 30, 2018	115,500	—%	148,700	7%	(33,200)
Quarter ended March 31, 2018	116,900	15%	81,300	11%	35,600
Quarter ended December 31, 2017	108,200	20%	68,100	17%	40,100
Twelve months ended September 30, 2018	432,700	5%	420,400	7%	12,300

Quarter ended September 30, 2017	103,900	26%	120,600	11%	(16,700)
Quarter ended June 30, 2017	115,900	17%	139,200	13%	(23,300)
Quarter ended March 31, 2017	101,500	12%	73,100	16%	28,400
Quarter ended December 31, 2016	90,300	20%	58,300	17%	32,000
Twelve months ended September 30, 2017	411,600	19%	391,200	14%	20,400

According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first nine months of 2018 decreased four percent to 45,400 units compared to the same period of 2017. Additionally, retail demand for motorhome RVs remained level in the first nine months of 2018, following a 14 percent increase in retail demand in 2017.

The RVIA has projected industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2018 to remain level and a two percent decrease in 2019. Several RV OEMs, however, are introducing new product lines and additional features. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence which was above historical averages in 2017 and remains strong through 2018. Additionally, retail sales of travel trailer and fifth-wheel RVs have increased in 103 of the last 105 months on a year-over-year basis. Industry resources report strong attendance and high consumer interest at recent RV shows around the United States and Canada.

Although future retail demand is inherently uncertain, RV industry fundamentals in the first nine months of 2018, including generally low unemployment, low fuel prices and available credit for dealers and RV consumers, were strong, as evidenced by the estimated six percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs in the first nine months of 2018. The Company believes the strong RV industry fundamentals, aided by product innovation, demographic tailwinds, industry promotion and the advent of stronger dealer networks, are positive signs for the remainder of 2018. The Company also remains

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(Continued)

confident in its ability to exceed industry growth rates through new product introductions, market share gains, aftermarket sales, 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. The RVIA reported much of the success of the RV industry has been driven by the Baby Boomer generation. The size of that generation is beginning to wane, and younger generations (Generation X and Millennials) are becoming more relevant to future industry growth. Generation X and Millennials are more diverse, requiring new and creative marketing approaches to attract them to the RV industry. The RVIA has an advertising campaign promoting the “RV Lifestyle” 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, are trends that could continue to motivate consumer demand for RVs. RVIA studies indicate 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.

Adjacent Industries

The Company’s portfolio of products can be used in many applications, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; trains; manufactured homes; and modular housing (collectively, “Adjacent Industries”). In many cases, OEM customers of the Adjacent Industries are affiliated with RV OEMs through related subsidiaries. The Company believes there are significant opportunities in these Adjacent Industries and, as a result, five of the last nine business acquisitions completed by the Company were focused in Adjacent Industries.

The estimated potential content per unit the Company may supply to the Adjacent Industries varies by OEM product and differs from RVs. As a means to understand the potential of each of these markets, management reviews the number of retail units sold. The following are key target markets for Adjacent Industries component sales:


•	Enclosed trailers. According to Statistical Surveys, Inc., approximately 210,000 and 192,000 enclosed trailers were sold in 2017 and 2016, respectively.


•	Pontoon boats. Statistical Surveys Inc., also reported approximately 50,200 and 49,000 pontoon boats were sold in 2017 and 2016, respectively.


•	School buses. According to Wards Communications and R.L. Polk & Co., there were approximately 36,800 and 36,200 school buses sold in 2017 and 2016, respectively.


•	Manufactured housing. According to the Institute for Building Technology and Safety, there were approximately 92,900 and 81,100 manufactured home wholesale shipments in 2017 and 2016, respectively.

Aftermarket Segment

Many of the Company’s OEM Segment products are also sold through various aftermarket channels, including dealerships, warehouse distributors and service centers, as well as direct to retail customers. The Company has teams dedicated to product training and marketing support for its Aftermarket customers. The Company also supports two call centers to provide quick responses to customers for both product delivery and technical support. This support is designed for a rapid response to critical repairs so customer downtime is minimized. The Aftermarket Segment also includes the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements are purchased outside the normal product selling seasons, thereby causing Aftermarket sales to be counter-seasonal.

According to the RVIA, estimated RV ownership has increased to over nine million units. Additionally, as a result of a vibrant secondary market, one-third of current owners purchased their RV new while the remaining two-thirds purchased a previously owned RV. This vibrant secondary market is a key driver for the aftermarket, as the Company anticipates owners of previously owned RVs will likely upgrade their units as well as replace parts and accessories which have been subjected to normal wear and tear.

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(Continued)

RESULTS OF OPERATIONS

Consolidated Highlights

•

Consolidated net sales in the third quarter of 2018 increased to $604 million, nine percent higher than consolidated net sales for the third quarter of 2017 of $555 million. Acquisitions completed by the Company over the twelve months ended September 30, 2018, added $56 million in net sales in the third quarter of 2018. Despite the short-term correction in industry wholesale shipments as dealers normalize their inventory levels, content per RV unit has increased, positively impacting net sales growth in the third quarter of 2018. Further, the Company organically increased sales to adjacent industries and the aftermarket.


•	Net income for the third quarter of 2018 increased to $33.8 million, or $1.33 per diluted share, up from net income of $32.1 million, or $1.26 per diluted share, compared to the third quarter of 2017.


•	Consolidated operating profits during the third quarter of 2018 decreased to $45.4 million from $47.9 million in the third quarter of 2017. Operating profit margin was eight percent in the third quarter of 2018 compared to nine percent in the third quarter of 2017 primarily due to cost pressures on raw materials.


•	The cost of aluminum and steel used in certain of the Company’s manufactured components continued to increase in the third quarter of 2018 primarily driven by new tariffs on these commodities. Raw material costs continue to fluctuate and are expected to remain volatile.


•	The Company seeks to continuously manage its labor cost, particularly indirect labor, while supporting the growth of the business. Lean manufacturing teams continue working to reduce cost and implement processes to better utilize manufacturing capacity. The Company has also reduced direct labor attrition, which improves efficiency and reduces other costs associated with workforce turnover.


•	Thus far in 2018, the Company completed three acquisitions:


◦	In June 2018, the Company acquired 100 percent of the equity interests of ST.LA. S.r.l., (“STLA”), a manufacturer of bed lifts and other RV components for the European caravan market, headquartered in Pontedera, Italy. The preliminary purchase price was $14.8 million, net of cash acquired, paid at closing, and is subject to potential post-closing adjustments related to net working capital.

◦


•	Integration activities for these and previously acquired businesses are underway and proceeding in line with established plans. The Company plans to grow sales and leverage its purchasing power, manufacturing capabilities, engineering expertise and design resources to improve the cost structure of the acquired operations.


•	The effective tax rate for the nine months ended September 30, 2018, was substantially lower than the comparable prior year period primarily due to the lower rates resulting from the Tax Cuts and Jobs Act (the “TCJA”), as discussed under “Income Taxes.”


•	In March, June and September 2018, the Company paid a quarterly dividend of $0.55, $0.60 and $0.60 per share, aggregating to $13.9 million, $15.1 million and $15.1 million, respectively.


•	On October 31, 2018, the Company’s Board of Directors authorized a new stock repurchase program granting the Company authority to repurchase up to $150.0 million of the Company’s common stock over a three year period.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

OEM Segment - Third Quarter

Net sales of the OEM Segment in the third quarter of 2018 increased seven percent, or $34 million, compared to the same period of 2017. Net sales of components to OEMs were to the following markets for the three months ended September 30:



(In thousands)	2018		2017		Change
RV OEMs:
Travel trailers and fifth-wheels	$	338,830	$	357,940	(5	)%
Motorhomes	43,244		41,595		4	%
Adjacent industries OEMs	157,904		106,386		48	%
Total OEM Segment net sales	$	539,978	$	505,921	7	%

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



	2018	2017	Change
Travel trailer and fifth-wheel RVs	92,100	103,900	(11	)%
Motorhomes	12,300	14,500	(15	)%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the third quarter of 2018 outperformed industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period, primarily due to market share gains as a result of price increases, new product introductions and customer penetration.

The Company’s net sales growth in components for motorhomes during the third quarter of 2018 outperformed industry-wide wholesale shipments of motorhomes during the same period, primarily due to acquisitions completed in 2018. 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.

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 domestic RV OEMs for the different types of RVs produced for the twelve months ended September 30, divided by the industry-wide wholesale shipments of the different product mix of RVs for the same period, was:



Content per:	2018		2017		Change
Travel trailer and fifth-wheel RV	$	3,456	$	3,172	9	%
Motorhome	$	2,480	$	2,152	15	%

The Company’s average product content per type of RV excludes international sales and 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.

The Company’s net OEM sales to Adjacent Industries increased during the third quarter of 2018 primarily due to acquisitions completed in 2018 and market share gains. The Company continues to believe there are significant opportunities in Adjacent Industries.

Operating profit of the OEM Segment was $36.9 million in the third quarter of 2018, a decrease of $4.1 million compared to the same period of 2017. The operating profit margin of the OEM Segment in the third quarter of 2018 was negatively impacted by:


•	Higher material costs for certain raw materials. Steel, aluminum and foam costs continued to increase in the third quarter of 2018 primarily driven by tariffs on steel and aluminum. Material costs are subject to global supply and demand forces and are expected to remain volatile.


•	Higher labor costs. While the Company seeks to continuously manage its labor cost, it has added staff to support the growth of the business. Additionally, competition for skilled workers has continued to tighten the labor market which has increased the cost of labor.

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(Continued)

•

The Company made significant investments over the past couple of years in manufacturing capacity, in both facilities and personnel, to prepare for the expected increase in net sales in 2018 and beyond. In addition to these investments, the Company has made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses, as well as amortization costs of intangible assets related to those businesses.

Partially offset by:


•	Better fixed cost absorption by spreading fixed costs over a sales base that increased by $34 million.


•	Increased sales to Adjacent Industries OEMs.


•	Pricing changes of targeted products.

•

Investments over the past several years to increase capacity and improve operating efficiencies. Further, the Company has implemented efficiency improvements, including lean manufacturing initiatives, increased use of automation and employee retention initiatives. The Company has also reduced direct labor attrition which improves efficiency and reduces other costs associated with workforce turnover.

OEM Segment – Year to Date

Net sales of the OEM Segment in the first nine months of 2018 increased 19 percent, or $286 million, compared to the first nine months of 2017. Net sales of components to OEMs were to the following markets for the nine months ended September 30:



(In thousands)	2018		2017		Change
RV OEMs:
Travel trailers and fifth-wheels	$	1,143,251	$	1,045,465	9	%
Motorhomes	145,230		114,887		26	%
Adjacent industries OEMs	468,594		310,373		51	%
Total OEM Segment net sales	$	1,757,075	$	1,470,725	19	%

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



	2018	2017	Change
Travel trailer and fifth-wheel RVs	324,500	321,300	1	%
Motorhomes	45,400	47,300	(4	)%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first nine months of 2018 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period primarily due to market share gains.

The Company’s net sales growth in components for motorhomes during the first nine months of 2018 outperformed the change in industry-wide wholesale shipments of motorhomes during the same period, primarily due to acquisitions completed in 2018 and 2017. 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.

The Company’s net sales to Adjacent Industries increased during the first nine months of 2018, primarily due to acquisitions completed in 2018 and 2017 and market share gains. The Company continues to believe there are significant opportunities in Adjacent Industries.

Operating profit of the OEM Segment was $144.4 million in the first nine months of 2018, a decrease of $7.4 million compared to the first nine months of 2017. The operating profit margin of the OEM Segment in the first nine months of 2018 was negatively impacted by:


•	Higher material costs for certain raw materials. Steel, aluminum and foam costs continued to increase in the first nine months of 2018 primarily driven by tariffs on steel and aluminum. Material costs are subject to global supply and demand forces and are expected to remain volatile.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

•


•	Higher labor costs. While the Company seeks to continuously manage its labor cost, it has added staff to support the growth of the business. Additionally, competition for skilled workers has continued to tighten the labor market which has increased the cost of labor.

Partially offset by:


•	Better fixed cost absorption by spreading fixed costs over a sales base that increased by $286 million.


•	Increased sales to Adjacent Industries OEMs.


•	Pricing changes of targeted products.

•

Aftermarket Segment - Third Quarter

Net sales of the Aftermarket Segment in the third quarter of 2018 increased 31 percent, or $15 million, compared to the same period of 2017. Net sales of components were as follows for the three months ended September 30:



(In thousands)	2018		2017		Change
Total Aftermarket Segment net sales	$	64,266	$	48,893	31	%

The Company’s net sales to the Aftermarket increased during the third quarter of 2018 primarily due to acquisitions and the Company’s focus on building out well qualified, customer-focused teams and infrastructure to service this market. With an estimated nine million households in North America owning an RV and the Company’s increasing content per unit, the Company continues to believe there are significant opportunities in the RV aftermarket as the components sold to OEMs are subject to normal wear and tear over time.

Operating profit of the Aftermarket Segment was $8.4 million in the third quarter of 2018, an increase of $1.5 million compared to the same period of 2017, and operating margin for the segment has decreased to 13 percent. As indicated, this business is still in a growth stage and the Company has added staff to support anticipated growth and anticipates further cost increases in this area as it builds up the capabilities of this business.

Aftermarket Segment – Year to Date

Net sales of the Aftermarket Segment in the first nine months of 2018 increased 40 percent, or $52 million, compared to the same period of 2017. Net sales of components were as follows for the nine months ended September 30:



(In thousands)	2018		2017		Change
Total Aftermarket Segment net sales	$	182,116	$	129,908	40	%

The Company’s net sales to the Aftermarket increased during the first nine months of 2018 primarily due to acquisitions and the Company’s focus on building out well qualified, customer-focused teams and infrastructure to service this market.

Operating profit of the Aftermarket Segment was $24.8 million in the first nine months of 2018, an increase of $6.6 million compared to the same period of 2017, and operating margin for the segment remained consistent at 14 percent.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

Income Taxes

The effective tax rates for the nine months ended September 30, 2018 and 2017 were 22.1 percent and 31.7 percent, respectively. The effective tax rate for the nine months ended September 30, 2018 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits as a component of the provision for income taxes attributable to the adoption of Accounting Standards Update (“ASU”) 2016-09, and Federal and Indiana research and development credits offset by state taxes, foreign taxes and non-deductible expenses. The decrease in effective tax rate for the nine months ended September 30, 2018 as compared to the same period in 2017 was due primarily to the TCJA reduction in the federal tax rate.

On December 22, 2017, the TCJA was signed into law making significant changes to the Internal Revenue Code. The TCJA changes included a reduction of the corporate income tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017, a provision that allows for full expensing of certain qualified property, repeal of the manufacturing deduction, and further limitations on the deductibility of certain executive compensation. The TCJA contains other provisions that are not expected to materially affect the Company, including a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, limitations on the deductibility of interest expense, and the creation of U.S. tax base erosion provisions.

In accordance with ASU 2018-05 and SAB 118, the Company recorded a one-time non-cash charge of $13.3 million related to the enactment of the TCJA which resulted in the re-measurement of certain deferred tax assets using the lower U.S. corporate income tax rate during the year ended December 31, 2017. As of September 30, 2018, we have not made any additional measurement-period adjustments. Such adjustments may be necessary in future periods due to, among other things, the significant complexity of the TCJA and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service (“IRS”), changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the TCJA. We are continuing to gather information to assess the application of the TCJA and expect to complete our analysis during the quarter ending December 31, 2018.

During the nine months ended September 30, 2018 and 2017, we recognized a reduction in our income tax expense of $3.3 million and $6.4 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards.

LIQUIDITY AND CAPITAL RESOURCES

The Condensed Consolidated Statements of Cash Flows reflect the following for the nine months ended September 30:



(In thousands)	2018			2017
Net cash flows provided by operating activities	$	107,592		$	107,814
Net cash flows used in investing activities	(248,098		)	(127,975		)
Net cash flows provided by (used in) financing activities	132,707			(46,247		)
Net decrease in cash and cash equivalents	$	(7,799	)	$	(66,408	)

Cash Flows from Operations

Net cash flows from operating activities in first nine months of 2018 were $0.2 million lower than the same period of 2017, primarily due to:


•	A $12.9 million decrease in accounts payable in the first nine months of 2018 compared to a $29.9 million increase in the same period of 2017, primarily due to timing of these payments.


•	A $7.2 million increase in accrued expenses and other liabilities in the first nine months of 2018 compared to an $26.1 million increase in the same period of 2017, primarily due to timing of these payments.

Partially offset by increases of:


•	A $13.0 million increase in net income in first nine months of 2018 compared to the same period of 2017.


•	A $16.5 million increase in inventory in the first nine months of 2018 compared to a $33.8 million increase in the same period of 2017 reflecting higher material costs. Inventory turnover for the twelve months ended September 30, 2018 decreased to 6.6 turns compared to 7.8 turns for the same period of 2017. The Company is

LCI INDUSTRIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

working to improve inventory turnover; however, inventory turns may trend lower due to growth in product categories such as imported furniture and Furrion electronics.


•	A $51.7 million increase in accounts receivable in the first nine months of 2018 compared to a $69.7 million increase in the same period of 2017, primarily due to the timing of payments by the Company’s customers. Overall, accounts receivable balances remain current with an increase in days sales outstanding to 26 at September 30, 2018, compared to 22 at September 30, 2017.

Over the long term, based on the Company’s collection and payment patterns, inventory turnover, changes to the sales mix and other emerging trends, the Company expects working capital to increase or decrease approximately 10 to 15 percent of the increase or decrease in net sales, respectively. However, there are many factors that can impact this relationship, especially in the short term.

Depreciation and amortization was $49.7 million in the first nine months of 2018, and is expected to be approximately $70 million to $75 million for fiscal year 2018. Non-cash stock-based compensation in the first nine months of 2018 was $13.9 million. Non-cash stock-based compensation is expected to be approximately $18 million to $20 million for fiscal year 2018.

Cash Flows from Investing Activities

Cash flows from investing activities of $248.1 million in the first nine months of 2018 were primarily comprised of $92.5 million for capital expenditures and $156.7 million for the acquisition of businesses. Cash flows from investing activities of $128.0 million in the first nine months of 2017 were primarily comprised of $60.3 million for capital expenditures and $67.9 million for the acquisition of businesses. Information detailing out the acquisitions in the first nine months of 2018 and 2017 are included in Note 4 of the Notes to the Condensed Consolidated Financial Statements.

The Company’s capital expenditures are primarily for automation, replacement and capacity expansion. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately two percent of net sales, while the expansion portion has averaged approximately 8 to 11 percent of the annual increase in net sales. However, there are many factors that can impact the actual spending compared to these historical averages. During 2018, the Company continues to focus capital investment in capacity expansion, automation and lean manufacturing initiatives.

The first nine months of 2018 capital expenditures and acquisitions were primarily funded by cash from periodic borrowings under the Company’s line of credit and cash from operations. Capital expenditures in 2018 are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under the Company’s line of credit.

Cash Flows from Financing Activities

Cash flows from financing activities in the first nine months of 2018 were primarily comprised of payments of dividends of $0.55, $0.60 and $0.60 per share, respectively, of the Company’s common stock, representing an aggregate of $13.9 million, $15.1 million and $15.1 million, respectively, paid to stockholders of record as of March 16, 2018, June 4, 2018 and August 31, 2018, respectively. The increase in debt was due to borrowings under the Company’s line of credit to fund acquisitions. In addition, the Company had $14.1 million of shares tendered for payment of taxes. Further, the Company paid $3.0 million in contingent consideration related to acquisitions.

Cash flows from financing activities in the first nine months of 2017 were primarily comprised of a payment of quarterly dividends of $0.50 per share of the Company’s common stock, representing an aggregate of $12.4 million, $12.4 million and $12.5 million, paid to stockholders of record as of March 6, 2017, May 19, 2017 and August 18, 2017, respectively. In addition, the Company had $7.3 million of shares tendered for payment of taxes. Further, the Company paid $1.5 million in contingent consideration related to acquisitions.

In connection with certain business acquisitions, if established sales targets for the acquired business are achieved, the Company will pay additional cash consideration. The Company has recorded a $7.1 million liability for the aggregate fair value of these expected contingent consideration liabilities at September 30, 2018. For further information, see Note 9 of the Notes to the Condensed Consolidated Financial Statements.

Stock Repurchase Program

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(Continued)

repurchases and the number of shares will depend upon the market conditions and other factors. Share repurchases, if any, will be made in the open market and in privately negotiated transactions in accordance with applicable securities laws. The stock repurchase program may be modified, suspended or terminated at any time by the Board of Directors. Repurchases under the stock repurchase program will be funded from the Company’s existing cash and cash equivalents, future cash flows and its existing line of credit.

Credit Facilities

See Note 8 in the Notes to Condensed Consolidated Financial Statements for a description of our credit facilities.

The Company believes the availability under the line of credit and shelf-loan facility (as defined in Note 8 in the Notes to Condensed Consolidated Financial Statements) is adequate to finance the Company’s anticipated cash requirements for the next twelve months.

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.lci1.com/investors) 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.lci1.com/investors).

CONTINGENCIES

Information required by this item is included in Note 9 of the Notes to the Condensed Consolidated Financial Statements 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, aluminum, and foam and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, including tariffs, 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.

NEW ACCOUNTING PRONOUNCEMENTS

Information required by this item is included in Note 2 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

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(Continued)

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 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 production facilities and labor, employee benefits, employee retention, realization and impact of expansion plans, efficiency improvements and cost reductions, the disruption of business resulting from natural disasters or other unforeseen events, the successful entry into new markets, the costs of compliance with environmental laws, laws of foreign jurisdictions in which we operate, and increased governmental regulation and oversight, information technology performance and security, the ability to protect intellectual property, warranty and product liability claims or product recalls, 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, 2017, 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.

LCI INDUSTRIES

ITEM 3 – QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in short-term interest rates on our variable rate debt. Depending on the interest rate option selected as fully described in Note 8 of the Notes to Condensed Consolidated Financial Statements, interest is charged based on an indexed rate plus an applicable margin. Assuming a hypothetical increase of 0.25 percent in the indexed interest rate (which approximates a ten percent increase of the weighted-average interest rate on our borrowings as of September 30, 2018), our results of operations would not be materially affected.

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 steel and aluminum prices. While these derivative instruments are subject to fluctuations in value, these fluctuations are generally offset by the changes in fair value of the underlying exposures. See Note 11 of the Notes to Condensed Consolidated Financial Statements for a more detailed discussion of derivative instruments.

The Company has historically been able to obtain sales price increases to partially 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 principal executive officer and principal 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 principal executive officer and the Company’s principal 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 principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective.


b)	Changes in Internal Control over Financial Reporting

The Company began implementation of a new enterprise resource planning (“ERP”) system in late 2013. To date, 28 locations have been put on this ERP system. The roll-out plan is continually evaluated in the context of priorities for the business and may change as needs of the business dictate. The Company anticipates enhancements to controls due to both the installation of the new ERP system and business process changes resulting therefrom.

During the nine months ended September 30, 2018, the Company completed the Taylor Made, Hehr and STLA acquisitions, which contributed $63.5 million of net sales for quarter ended September 30, 2018. Total assets from these acquisitions as of September 30, 2018 were $197.9 million. As the Taylor Made, Hehr and STLA acquisitions occurred in the first nine months of 2018, the scope of the Company’s evaluation of the effectiveness of internal control over financial reporting does not include Taylor Made, Hehr and STLA. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from the Company’s scope in the year of acquisition.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2018, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

LCI INDUSTRIES

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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 September 30, 2018, 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 February 28, 2018.

ITEM 6 – EXHIBITS

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


1)	31.1 Certification of Chief Executive Officer required by Rule 13a-14(a). Exhibit 31.1 is filed herewith.


2)	31.2 Certification of Chief Financial Officer required by Rule 13a-14(a). Exhibit 31.2 is filed herewith.


3)	32.1 Certification of Chief Executive Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.1 is filed herewith.


4)	32.2 Certification of Chief Financial Officer required by Rule 13a-14(b) and Section 1350 Chapter 63 of Title 18 of the United States Code. Exhibit 32.2 is filed herewith.


5)	101 Interactive Data Files.

LCI INDUSTRIES

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.



LCI INDUSTRIES
Registrant


By	/s/ Brian M. Hall
Brian M. Hall
Chief Financial Officer
November 7, 2018

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