10-Q 1 lcii-03312018x10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended: March 31, 2018
or

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

For the transition period from _________________ to _________________
Commission File Number: 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐
1

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 (April 30, 2018) was 25,213,242 shares of common stock.
2

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 | 21
| ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 30
| ITEM 4 – CONTROLS AND PROCEDURES | 30
PART II – | OTHER INFORMATION |
| ITEM 1 – LEGAL PROCEEDINGS | 31
| ITEM 1A – RISK FACTORS | 31
| ITEM 6 – EXHIBITS | 31
SIGNATURES | 32
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 |

3

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

| Three Months Ended March 31,
| 2018 |  | 2017
(In thousands, except per share amounts) |  |  |
Net sales | $ | 650,492 |  |  | $ | 498,336 |
Cost of sales | 509,759 |  |  | 374,322 |
Gross profit | 140,733 |  |  | 124,014 |
Selling, general and administrative expenses | 80,913 |  |  | 64,885 |
Operating profit | 59,820 |  |  | 59,129 |
Interest expense, net | 1,101 |  |  | 437 |
Income before income taxes | 58,719 |  |  | 58,692 |
Provision for income taxes | 11,383 |  |  | 15,547 |
Net income | $ | 47,336 |  |  | $ | 43,145 |
Net income per common share: |  |  |
Basic | $ | 1.88 |  |  | $ | 1.73 |
Diluted | $ | 1.86 |  |  | $ | 1.71 |
Weighted average common shares outstanding: |  |  |
Basic | 25,149 |  |  | 24,906 |
Diluted | 25,465 |  |  | 25,255 |

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4

LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

| Three Months Ended March 31,
| 2018 |  | 2017
(In thousands) |  |  |
Consolidated net income | $ | 47,336 |  |  | $ | 43,145 |
Other comprehensive income: |  |  |
Net foreign currency translation adjustment | 1,110 |  |  | 349 |
Total comprehensive income | $ | 48,446 |  |  | $ | 43,494 |

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5

LCI INDUSTRIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

| March 31, |  | December 31,
| 2018 |  | 2017 |  | 2017
(In thousands, except per share amount) |  |  |  |  |
ASSETS |  |  |  |  |
Current assets |  |  |  |  |
Cash and cash equivalents | $ | 4,993 |  |  | $ | 64,381 |  |  | $ | 26,049 |
Accounts receivable, net of allowances of $2,470, $2,054, and $1,536 at March 31, 2018, March 31, 2017, and December 31, 2017, respectively | 178,337 |  |  | 131,108 |  |  | 82,157 |
Inventories, net | 323,945 |  |  | 189,020 |  |  | 274,748 |
Prepaid expenses and other current assets | 37,802 |  |  | 37,456 |  |  | 34,125 |
Total current assets | 545,077 |  |  | 421,965 |  |  | 417,079 |
Fixed assets, net | 266,596 |  |  | 178,922 |  |  | 228,950 |
Goodwill | 147,291 |  |  | 98,105 |  |  | 124,183 |
Other intangible assets, net | 180,691 |  |  | 114,311 |  |  | 130,132 |
Deferred taxes | 17,115 |  |  | 26,882 |  |  | 24,156 |
Other assets | 22,120 |  |  | 12,616 |  |  | 21,358 |
Total assets | $ | 1,178,890 |  |  | $ | 852,801 |  |  | $ | 945,858 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |
Current liabilities |  |  |  |  |
Accounts payable, trade | $ | 97,606 |  |  | $ | 70,225 |  |  | $ | 79,164 |
Accrued expenses and other current liabilities | 109,818 |  |  | 101,020 |  |  | 102,849 |
Total current liabilities | 207,424 |  |  | 171,245 |  |  | 182,013 |
Long-term indebtedness | 226,242 |  |  | 49,905 |  |  | 49,924 |
Other long-term liabilities | 66,433 |  |  | 47,171 |  |  | 61,176 |
Total liabilities | 500,099 |  |  | 268,321 |  |  | 293,113 |
Stockholders’ equity |  |  |  |  |
Common stock, par value $.01 per share | 279 |  |  | 276 |  |  | 277 |
Paid-in capital | 195,765 |  |  | 189,536 |  |  | 203,990 |
Retained earnings | 508,665 |  |  | 425,584 |  |  | 475,506 |
Accumulated other comprehensive income (loss) | 3,549 |  |  | (1,449 | ) |  | 2,439 |
Stockholders’ equity before treasury stock | 708,258 |  |  | 613,947 |  |  | 682,212 |
Treasury stock, at cost | (29,467 | ) |  | (29,467 | ) |  | (29,467 | )
Total stockholders’ equity | 678,791 |  |  | 584,480 |  |  | 652,745 |
Total liabilities and stockholders’ equity | $ | 1,178,890 |  |  | $ | 852,801 |  |  | $ | 945,858 |

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6

LCI INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

| Three Months Ended March 31,
| 2018 |  | 2017
(In thousands) |  |  |
Cash flows from operating activities: |  |  |
Net income | $ | 47,336 |  |  | $ | 43,145 |
Adjustments to reconcile net income to cash flows provided by (used in) operating activities: |  |  |
Depreciation and amortization | 15,275 |  |  | 12,241 |
Stock-based compensation expense | 5,543 |  |  | 3,902 |
Other non-cash items | (1,127 | ) |  | 1,139 |
Changes in assets and liabilities, net of acquisitions of businesses: |  |  |
Accounts receivable, net | (71,073 | ) |  | (71,155 | )
Inventories, net | (17,232 | ) |  | 1,847 |
Prepaid expenses and other assets | (3,185 | ) |  | (2,181 | )
Accounts payable, trade | 8,114 |  |  | 18,146 |
Accrued expenses and other liabilities | 11,246 |  |  | 14,627 |
Net cash flows provided by (used in) operating activities | (5,103 | ) |  | 21,711 |
Cash flows from investing activities: |  |  |
Capital expenditures | (26,004 | ) |  | (12,020 | )
Acquisitions of businesses, net of cash acquired | (138,570 | ) |  | (10,689 | )
Proceeds from sales of fixed assets | 155 |  |  | 119 |
Other investing activities | (35 | ) |  | 80 |
Net cash flows used in investing activities | (164,454 | ) |  | (22,510 | )
Cash flows from financing activities: |  |  |
Exercise of stock-based awards, net of shares tendered for payment of taxes | (14,085 | ) |  | (7,650 | )
Proceeds from line of credit borrowings | 474,000 |  |  | — |
Repayments under line of credit borrowings | (297,000 | ) |  | — |
Payment of dividends | (13,858 | ) |  | (12,442 | )
Payment of contingent consideration related to acquisitions | — |  |  | (839 | )
Other financing activities | (556 | ) |  | (59 | )
Net cash flows provided by (used in) financing activities | 148,501 |  |  | (20,990 | )
Net decrease in cash and cash equivalents | (21,056 | ) |  | (21,789 | )
Cash and cash equivalents at beginning of period | 26,049 |  |  | 86,170 |
Cash and cash equivalents at end of period | $ | 4,993 |  |  | $ | 64,381 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid during the period for interest | $ | 1,012 |  |  | $ | 483 |
Cash paid during the period for income taxes, net of refunds | $ | (11 | ) |  | $ | 2,072 |
Purchase of property and equipment in accrued expenses | $ | 3,711 |  |  | $ | 2,212 |

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7

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 | — |  | — |  | 47,336 |  | — |  | — |  | 47,336 |
Issuance of 223,768 shares of common stock pursuant to stock-based awards, net of shares tendered for payment of taxes | 2 |  | (14,087 | ) | — |  | — |  | — |  | (14,085 | )
Stock-based compensation expense | — |  | 5,543 |  | — |  | — |  | — |  | 5,543 |
Other comprehensive income | — |  | — |  | — |  | 1,110 |  | — |  | 1,110 |
Cash dividends ($0.55 per share) | — |  | — |  | (13,858 | ) | — |  | — |  | (13,858 | )
Dividend equivalents on stock-based awards | — |  | 319 |  | (319 | ) | — |  | — |  | — |
Balance - March 31, 2018 | $ | 279 |  | $ | 195,765 |  | $ | 508,665 |  | $ | 3,549 |  | $ | (29,467 | ) | $ | 678,791 |

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8

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”) of leisure and mobile transportation, 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 components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and service centers. At March 31, 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.
9

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 amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a modified retrospective approach with early adoption permitted.
The Company will adopt ASU 2016-02 on January 1, 2019 using the modified retrospective approach, and the adoption is expected to have a material effect on the Company's consolidated financial statements. While the Company continues to assess the effect of adoption, the most significant expected change relates to the recognition of new right-of-use assets and lease liabilities on the consolidated balance sheet for real estate, machinery and equipment, and vehicle operating leases.
Recently adopted accounting pronouncements
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption was permitted. The Company adopted this ASU effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which amends ASC 805, Business Combinations. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition (or disposals) of assets or businesses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.
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 quarter ended March 31, 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.
10

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the majority of product sales, the Company transfers control and recognizes revenue when it ships the product from its manufacturing 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.
The Company has elected to recognize shipping and handling costs as fulfillment costs when control over products have 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 Three Months Ended March 31, 2018
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 preliminary purchase price was $50.1 million 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 | $ | 50,125 |
Customer relationships and other identifiable intangible assets | $ | 25,500 |
Net tangible assets | 17,955 |
Total fair value of net assets acquired | $ | 43,455 |
Goodwill (tax deductible) | $ | 6,670 |

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.
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 preliminary purchase price was $88.4 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.
11

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The acquisition of this business was preliminarily recorded on the acquisition date as follows (in thousands):

Cash consideration, net of cash acquired | $ | 88,445 |
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) | $ | 14,312 |

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.
Acquisitions During the Three Months Ended March 31, 2017
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 $8.5 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 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 | 17,785 |  |  | 3,197 |  |  | 20,982 |
Other | 2,126 |  |  | — |  |  | 2,126 |
Net balance – March 31, 2018 | $ | 129,552 |  |  | $ | 17,739 |  |  | $ | 147,291 |

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.
12

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Changes in goodwill resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table. Sessa Klein accounted for $1.4 million of the change in goodwill for the three months ended March 31, 2018.
Other Intangible Assets
Other intangible assets consisted of the following at March 31, 2018:

(In thousands) | Gross Cost |  | Accumulated Amortization |  | Net Balance |  | Estimated Useful Life in Years
Customer relationships | $ | 187,229 |  |  | $ | 45,393 |  |  | $ | 141,836 |  |  | 6 | to | 16
Patents | 59,415 |  |  | 40,130 |  |  | 19,285 |  |  | 3 | to | 19
Trade names | 14,833 |  |  | 5,607 |  |  | 9,226 |  |  | 3 | to | 15
Non-compete agreements | 10,154 |  |  | 4,689 |  |  | 5,465 |  |  | 3 | to | 6
Other | 309 |  |  | 117 |  |  | 192 |  |  | 2 | to | 12
Purchased research and development | 4,687 |  |  | — |  |  | 4,687 |  |  | Indefinite
Other intangible assets | $ | 276,627 |  |  | $ | 95,936 |  |  | $ | 180,691 |  |  |  |  |

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

(In thousands) | Gross Cost |  | Accumulated Amortization |  | Net Balance |  | Estimated Useful Life in Years
Customer relationships | $ | 113,513 |  |  | $ | 34,704 |  |  | $ | 78,809 |  |  | 6 | to | 16
Patents | 57,347 |  |  | 34,850 |  |  | 22,497 |  |  | 3 | to | 19
Trade names | 9,741 |  |  | 4,494 |  |  | 5,247 |  |  | 3 | to | 15
Non-compete agreements | 6,076 |  |  | 3,230 |  |  | 2,846 |  |  | 3 | to | 6
Other | 309 |  |  | 84 |  |  | 225 |  |  | 2 | to | 12
Purchased research and development | 4,687 |  |  | — |  |  | 4,687 |  |  | Indefinite
Other intangible assets | $ | 191,673 |  |  | $ | 77,362 |  |  | $ | 114,311 |  |  |  |  |

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 |  |  |  |  |

13

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:

| March 31, |  | December 31,
(In thousands) | 2018 |  | 2017 |  | 2017
Raw materials | $ | 268,054 |  |  | $ | 156,363 |  |  | $ | 233,187 |
Work in process | 22,144 |  |  | 9,004 |  |  | 10,408 |
Finished goods | 33,747 |  |  | 23,653 |  |  | 31,153 |
Inventories, net | $ | 323,945 |  |  | $ | 189,020 |  |  | $ | 274,748 |

6. FIXED ASSETS
Fixed assets consisted of the following at:

| March 31, |  | December 31,
(In thousands) | 2018 |  | 2017 |  | 2017
Fixed assets, at cost | $ | 470,638 |  |  | $ | 350,081 |  |  | $ | 424,056 |
Less accumulated depreciation and amortization | 204,042 |  |  | 171,159 |  |  | 195,106 |
Fixed assets, net | $ | 266,596 |  |  | $ | 178,922 |  |  | $ | 228,950 |

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at:

| March 31, |  | December 31,
(In thousands) | 2018 |  | 2017 |  | 2017
Employee compensation and benefits | $ | 26,673 |  |  | $ | 31,202 |  |  | $ | 39,365 |
Current portion of accrued warranty | 24,813 |  |  | 20,397 |  |  | 23,055 |
Taxes payable | 8,916 |  |  | 14,624 |  |  | 3,561 |
Customer rebates | 11,589 |  |  | 10,440 |  |  | 11,124 |
Other | 37,827 |  |  | 24,357 |  |  | 25,744 |
Accrued expenses and other current liabilities | $ | 109,818 |  |  | $ | 101,020 |  |  | $ | 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 three months ended March 31:

(In thousands) | 2018 |  | 2017 |  |
Balance at beginning of period | $ | 38,502 |  |  | $ | 32,393 |  |  |
Provision for warranty expense | 7,475 |  |  | 5,306 |  |  |
Warranty costs paid | (5,717 | ) |  | (4,590 | ) |  |
Balance at end of period | 40,260 |  |  | 33,109 |  |  |
Less long-term portion | 15,447 |  |  | 12,712 |  |  |
Current portion of accrued warranty | $ | 24,813 |  |  | $ | 20,397 |  |  |

14

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. LONG-TERM INDEBTEDNESS
At March 31, 2018 the Company had $177.0 million of outstanding borrowings on its line of credit with a weighted average interest rate of 3.0 percent. At March 31, 2017 and December 31, 2017, the Company had no outstanding borrowings on its line of credit.
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 March 31, 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 March 31, 2018) depending on the Company’s performance and financial condition. At March 31, 2018 and 2017, the Company had $2.4 million and $2.5 million, respectively, in issued, but undrawn, standby letters of credit under the line of credit. Availability under the Company’s line of credit was $145.6 million at March 31, 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 March 31, 2018. At March 31, 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.
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 March 31, 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 March 31, 2018 and 2017, the Company was in compliance with all such requirements, and expects to remain in compliance for the next twelve months.
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 March 31, 2018. The remaining availability under these facilities was $245.6 million at March 31, 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.
15

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 March 31, 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 13.6 percent and 13.7 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 three months ended March 31:

(In thousands) | 2018 |  | 2017
Balance at beginning of period | $ | 12,545 |  |  | $ | 9,241 |
Acquisitions | — |  |  | 4,922 |
Payments | (1,160 | ) |  | (1,884 | )
Accretion (a) | 337 |  |  | 292 |
Fair value adjustments (a) | (1,248 | ) |  | 815 |
Net foreign currency translation adjustment | (151 | ) |  | — |
Balance at end of the period (b) | 10,323 |  |  | 13,386 |
Less current portion in accrued expenses and other current liabilities | (3,785 | ) |  | (5,797 | )
Total long-term portion in other long-term liabilities | $ | 6,538 |  |  | $ | 7,589 |

(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 March 31, 2018 are $12.4 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.
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.
16

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 March 31, 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:

| March 31, |  | December 31,
(In thousands) | 2018 |  | 2017 |  | 2017
Common stock authorized | 75,000 |  |  | 75,000 |  |  | 75,000 |
Common stock issued | 27,898 |  |  | 27,590 |  |  | 27,674 |
Treasury stock | 2,684 |  |  | 2,684 |  |  | 2,684 |

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

| Three Months Ended March 31,
(In thousands) | 2018 |  | 2017
Weighted average shares outstanding for basic earnings per share | 25,149 |  |  | 24,906 |
Common stock equivalents pertaining to stock-based awards | 316 |  |  | 349 |
Weighted average shares outstanding for diluted earnings per share | 25,465 |  |  | 25,255 |

The weighted average diluted shares outstanding for the three months ended March 31, 2018 and 2017, exclude the effect of 447,625 and 143,270 shares of common stock, respectively, subject to stock-based awards. Such shares were excluded from total diluted shares because they were anti-dilutive or the specified performance conditions those shares were subject to were not yet achieved.
17

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The table below summarizes the regular quarterly dividends declared and paid during the periods ended March 31, 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 |

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.
11. FAIR VALUE MEASUREMENTS
Recurring
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at:

| March 31, 2018 |  | December 31, 2017
(In thousands) | Total | Level 1 | Level 2 | Level 3 |  | Total | Level 1 | Level 2 | Level 3
Assets |  |  |  |  |  |  |  |  |
Unrealized gain on derivative instruments | $ | 1,478 |  | $ | — |  | $ | 1,478 |  | $ | — |  |  | $ | 930 |  | $ | — |  | $ | 930 |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |
Contingent consideration | $ | 10,323 |  | $ | — |  | $ | — |  | $ | 10,323 |  |  | $ | 12,545 |  | $ | — |  | $ | — |  | $ | 12,545 |

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 12 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 March 31, 2018, the Company had derivative instruments for 9.0 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 March 31, 2018, the $1.5 million corresponding asset was recorded in other current assets as reflected in the Condensed
18

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Consolidated Balance Sheets. A net gain of $0.5 million was recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Income during the three months ended March 31, 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 three months ended March 31:

| 2018 |  | 2017
(In thousands) | Carrying Value |  | Non-Recurring Losses/(Gains) |  | Carrying Value |  | Non-Recurring Losses/(Gains)
Assets |  |  |  |  |  |  |
Net assets of acquired businesses | 117,588 |  |  | — |  |  | 2,650 |  |  | — |

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 92 percent of consolidated net sales for each of the three months ended March 31, 2018 and 2017, manufactures or distributes a broad array of engineered components for the leading OEMs of leisure and mobile transportation, 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. Approximately 67 percent of the Company’s OEM Segment net sales for the three months ended March 31, 2018 were of components for travel trailer and fifth-wheel RVs.
The Aftermarket Segment, which accounted for eight percent of consolidated net sales for each of the three month periods ended March 31, 2018 and 2017, supplies components to the related aftermarket channels of the leisure and mobile transportation industries, 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.
19

LCI INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 March 31, 2018 |  | Three Months Ended March 31, 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 | $ | 403,742 |  |  | $ | 1,215 |  |  | $ | 404,957 |  |  | $ | 329,318 |  |  | $ | 956 |  |  | $ | 330,274 |
Motorhomes | 43,406 |  |  | 9,509 |  |  | 52,915 |  |  | 33,762 |  |  | 3,282 |  |  | 37,044 |
Adjacent industries OEMs | 133,408 |  |  | 8,899 |  |  | 142,307 |  |  | 92,531 |  |  | 2,180 |  |  | 94,711 |
Total OEM Segment net sales | 580,556 |  |  | 19,623 |  |  | 600,179 |  |  | 455,611 |  |  | 6,418 |  |  | 462,029 |
Aftermarket Segment: |  |  |  |  |  |  |  |  |  |  |
Total Aftermarket Segment net sales | 47,346 |  |  | 2,967 |  |  | 50,313 |  |  | 33,963 |  |  | 2,344 |  |  | 36,307 |
Total net sales | $ | 627,902 |  |  | $ | 22,590 |  |  | $ | 650,492 |  |  | $ | 489,574 |  |  | $ | 8,762 |  |  | $ | 498,336 |

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

| Three Months Ended March 31,
(In thousands) | 2018 |  | 2017
Operating profit: |  |  |
OEM Segment | $ | 53,940 |  |  | $ | 54,397 |
Aftermarket Segment | 5,880 |  |  | 4,732 |
Total operating profit | $ | 59,820 |  |  | $ | 59,129 |

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

| Three Months Ended March 31,
(In thousands) | 2018 |  | 2017
OEM Segment: |  |  |
Chassis, chassis parts and slide-out mechanisms | $ | 252,702 |  |  | $ | 222,949 |
Windows and doors | 149,520 |  |  | 97,200 |
Furniture and mattresses | 105,518 |  |  | 71,174 |
Axles and suspension solutions | 33,605 |  |  | 32,181 |
Other | 58,834 |  |  | 38,525 |
Total OEM Segment net sales | 600,179 |  |  | 462,029 |
Total Aftermarket Segment net sales | 50,313 |  |  | 36,307 |
Total net sales | $ | 650,492 |  |  | $ | 498,336 |

20

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”) of leisure and mobile transportation, 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 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 March 31, 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 70 percent of the Company’s OEM Segment net sales for the twelve months ended March 31, 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 components to the related aftermarket channels of the leisure and mobile transportation industries, 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.
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.
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
21

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. Based on the strength of retail sales and the current outlook from several RV OEMs and their dealer networks, most industry analysts continue to report that RV dealer inventory is in line with anticipated retail demand.
According to the Recreation Vehicle Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailer and fifth-wheel RVs in the first three months of 2018, the Company’s primary RV market, increased 15 percent to 116,900 units, compared to the same period of 2017, as a result of:

• | An estimated 6,500 unit increase in retail demand in the first three months of 2018, or nine 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 37,400 units for the first three months of 2018, higher than the increase in inventory levels of 28,500 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 March 31, 2018 | 116,900 |  |  | 15% |  | 79,500 |  |  | 9% |  | 37,400
Quarter ended December 31, 2017 | 108,200 |  |  | 20% |  | 67,100 |  |  | 15% |  | 41,100
Quarter ended September 30, 2017 | 103,900 |  |  | 26% |  | 118,700 |  |  | 9% |  | (14,800)
Quarter ended June 30, 2017 | 115,900 |  |  | 17% |  | 138,500 |  |  | 13% |  | (22,600)
Twelve months ended March 31, 2018 | 444,900 |  |  | 19% |  | 403,800 |  |  | 11% |  | 41,100
Quarter ended March 31, 2017 | 101,500 |  |  | 12% |  | 73,000 |  |  | 16% |  | 28,500
Quarter ended December 31, 2016 | 90,300 |  |  | 20% |  | 58,300 |  |  | 17% |  | 32,000
Quarter ended September 30, 2016 | 82,400 |  |  | 20% |  | 108,700 |  |  | 9% |  | (26,300)
Quarter ended June 30, 2016 | 99,200 |  |  | 12% |  | 122,800 |  |  | 9% |  | (23,600)
Twelve months ended March 31, 2017 | 373,400 |  |  | 16% |  | 362,800 |  |  | 12% |  | 10,600

According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first three months of 2018 increased seven percent to 17,500 units compared to the same period of 2017. Additionally, retail demand for motorhome RVs increased three percent in the first three months of 2018, following an 17 percent increase in retail demand in 2017.
The RVIA has projected a seven percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2018. Several RV OEMs, however, are introducing new product lines, additional features and adding production capacity. 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. Additionally, retail sales of travel trailer and fifth-wheel RVs have increased in 97 of the last 99 months on a year-over-year basis. Industry resources report strong attendance and high consumer interest at RV shows around the United States and Canada in late 2017 and early 2018.
Although future retail demand is inherently uncertain, RV industry fundamentals in the first three months of 2018, including generally low unemployment, low fuel prices and available credit for dealers and RV consumers, were strong, as evidenced by the nine percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs in the first three 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 confident in
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LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 eight 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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LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
Consolidated Highlights

• | Consolidated net sales in the first quarter of 2018 increased to $650 million, 31 percent higher than consolidated net sales for the first quarter of 2017 of $498 million. Acquisitions completed by the Company over the twelve months ended March 31, 2018, added $53 million in net sales in the first quarter of 2018. The 15 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, LCI’s primary OEM market, as well as increased content per RV unit, positively impacted net sales growth in the first quarter of 2018. Further, the Company organically increased sales to adjacent industries and the aftermarket.

• | Net income for the first quarter of 2018 increased to $47.3 million, or $1.86 per diluted share, up from net income of $43.1 million, or $1.71 per diluted share, compared to the first quarter of 2017.

• | Consolidated operating profits during the first quarter of 2018 increased to $59.8 million from $59.1 million in the first quarter of 2017. Operating profit margin was nine percent in the first quarter of 2018 compared to 12 percent in the first quarter of 2017.

• | The cost of aluminum and steel used in certain of the Company’s manufactured components continued to increase in the first 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 available floorspace. 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 two acquisitions:

◦ | 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 preliminary purchase price was $50.1 million paid at closing, and is subject to potential post-closing adjustments related to net working capital.

◦ | 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 preliminary purchase price was $88.4 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 three months ended March 31, 2018, was substantially lower than the comparable prior year period primarily due to the excess tax benefits related to equity-based compensation and the lower rates resulting from the Tax Cuts and Jobs Act (the “TCJA”), as discussed under “Income Taxes.”

• | In March 2018, the Company paid a quarterly dividend of $0.55 per share, aggregating to $13.9 million.

OEM Segment - First Quarter
Net sales of the OEM Segment in the first quarter of 2018 increased 30 percent, or $138 million, compared to the same period of 2017. Net sales of components to OEMs were to the following markets for the three months ended March 31:

(In thousands) | 2018 |  | 2017 |  | Change
RV OEMs: |  |  |  |  |
Travel trailers and fifth-wheels | $ | 404,957 |  |  | $ | 330,274 |  |  | 23 | %
Motorhomes | 52,915 |  |  | 37,044 |  |  | 43 | %
Adjacent industries OEMs | 142,307 |  |  | 94,711 |  |  | 50 | %
Total OEM Segment net sales | $ | 600,179 |  |  | $ | 462,029 |  |  | 30 | %

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LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
According to the RVIA, industry-wide wholesale unit shipments for the three months ended March 31 were:

| 2018 |  | 2017 |  | Change
Travel trailer and fifth-wheel RVs | 116,900 |  |  | 101,500 |  |  | 15 | %
Motorhomes | 17,500 |  |  | 16,300 |  |  | 7 | %

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during the first quarter 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 quarter of 2018 exceeded the increase 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, and further growth is expected.
The trend in the Company’s average product content per RV produced is an indicator of the Company’s overall market share of components for new RVs. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components to RV OEMs for the different types of RVs produced for the twelve months ended March 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:

Content per: | 2018 |  | 2017 |  | Change
Travel trailer and fifth-wheel RV | $ | 3,317 |  |  | $ | 3,058 |  |  | 8 | %
Motorhome | $ | 2,328 |  |  | $ | 2,022 |  |  | 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 first quarter 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 $53.9 million in the first quarter of 2018, a decrease of $0.5 million compared to the same period of 2017. The operating profit margin of the OEM Segment in the first quarter of 2018 was positively impacted by:

• | Better fixed cost absorption by spreading fixed costs over a sales base that increased by $138 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.

Offset by:

• | Higher material costs for certain raw materials. Steel, aluminum and foam costs continued to increase in the first quarter of 2018 primarily driven by new 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. The results also reflect variable compensation increases based on achieving profitability targets. Additionally, competition for skilled workers has continued to tighten the labor market which has increased the cost of labor.

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

• | Fixed costs, which were approximately $2 million to $3 million higher than in the first quarter of 2017. Over the past couple of years, the Company made significant investments in manufacturing capacity, both facilities and personnel, to prepare for the expected increase in net sales in 2018 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, 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.

Aftermarket Segment - First Quarter
Net sales of the Aftermarket Segment in the first quarter of 2018 increased 39 percent, or $14 million, compared to the same period of 2017. Net sales of components were as follows for the three months ended March 31:

(In thousands) | 2018 |  | 2017 |  | Change
Total Aftermarket Segment net sales | $ | 50,313 |  |  | $ | 36,307 |  |  | 39 | %

The Company’s net sales to the Aftermarket increased during the first 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 $5.9 million in the first quarter of 2018, an increase of $1.1 million compared to the same period of 2017; however, operating margin has decreased primarily due to the increase in net sales to wholesale distributors with lower margins traditionally experienced in aftermarket channels. As indicated, this business is still in an early 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.
Income Taxes
The effective tax rates for the three months ended March 31, 2018 and 2017 were 19.4 percent and 26.5 percent, respectively. The effective tax rate for the three months ended March 31, 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 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 three months ended March 31, 2018 as compared to the same period in 2017 was due primarily to the TCJA reduction in the federal tax rate.
TCJA - 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 $13.2 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 March 31, 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 with the filing of our 2017 income tax returns.
Equity-Based Compensation - During the three months ended March 31, 2018 and 2017, we recognized a reduction in our income tax expense of $3.3 million and $5.2 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards.
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LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Generally, calendar years 2015 - 2017 remain open for federal and state income tax purposes.
The net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events which could impact our determination of unrecognized tax benefits. Although the ultimate timing for resolution of the disputed tax issues is uncertain, we may resolve certain tax matters within the next twelve months and pay amounts for other unresolved tax matters in order to limit the potential impact of interest charges. The resolution of these audits are not expected to be material to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Condensed Consolidated Statements of Cash Flows reflect the following for the three months ended March 31:

(In thousands) | 2018 |  | 2017
Net cash flows provided by (used in) operating activities | $ | (5,103 | ) |  | $ | 21,711 |
Net cash flows used in investing activities | (164,454 | ) |  | (22,510 | )
Net cash flows provided by (used in) financing activities | 148,501 |  |  | (20,990 | )
Net decrease in cash and cash equivalents | $ | (21,056 | ) |  | $ | (21,789 | )

Cash Flows from Operations
Net cash flows from operating activities in first three months of 2018 were $26.8 million lower than the same period of 2017, primarily due to:

• | A $17.2 million increase in inventory in the first three months of 2018 compared to a $1.8 million decrease in the same period of 2017 reflecting higher material costs. Inventory turnover for the twelve months ended March 31, 2018 decreased to 7.4 turns compared to 7.7 turns for the same period of 2017. The Company is 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 $11.2 million increase in accounts payable in the first three months of 2018 compared to a $14.6 million increase in the same period of 2017, primarily due to timing of these payments.

Partially offset by:

• | A $4.2 million increase in net income in first three months of 2018 compared to the same period of 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 $15.3 million in the first three months of 2018, and is expected to be approximately $65 million to $70 million for fiscal year 2018. Non-cash stock-based compensation in the first three months of 2018 was $5.5 million. Non-cash stock-based compensation is expected to be approximately $22 million to $24 million for fiscal year 2018.
Cash Flows from Investing Activities
Cash flows from investing activities of $164.5 million in the first three months of 2018 were primarily comprised of $26.0 million for capital expenditures and $138.6 million for the acquisition of businesses. Cash flows from investing activities of $22.5 million in the first three months of 2017 were primarily comprised of $12.0 million for capital expenditures and $10.7 million for the acquisition of businesses. Information detailing out the acquisitions in the first three 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 growth. 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 growth portion has averaged approximately 8 to 11 percent of the annual increase in net sales. However, there are many
27

LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
factors that can impact the actual spending compared to these historical averages. During 2018, the Company continues to focus capital investment in growth, automation and lean manufacturing initiatives.
The first three months of 2018 capital expenditures and acquisitions were primarily funded by cash from periodic borrowings under the Company’s line of credit. 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 three months of 2018 were primarily comprised of payments of dividends of $0.55 per share of the Company’s common stock, representing an aggregate of $13.9 million, paid to stockholders of record as of March 16, 2018. The increase in debt was due to borrowings under the Company’s line of credit. In addition, the Company had $14.1 million of shares tendered for payment of taxes.
Cash flows from financing activities in the first three months of 2017 were primarily comprised of a payment of dividends of $0.50 per share of the Company’s common stock, representing an aggregate of $12.4 million, paid to stockholders of record as of March 6, 2017. In addition, the Company had $7.7 million of shares tendered for payment of taxes. Further, the Company paid $0.8 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 $10.3 million liability for the aggregate fair value of these expected contingent consideration liabilities at March 31, 2018, including $3.8 million recorded as a current liability. For further information, see Note 9 of the Notes to the Condensed Consolidated Financial Statements.
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. The Company is currently discussing a proposed amendment to the Amended Credit Agreement with JPMorgan Chase Bank N.A. and the other lenders to address the limitation on aggregate indebtedness outstanding to Prudential under the shelf-loan facility.
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, 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.
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LCI INDUSTRIES
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
NEW ACCOUNTING PRONOUNCEMENTS
Information required by this item is included in Note 2 of the Notes to the Condensed Consolidated Financial Statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, 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's estimates.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain “forward-looking statements” with respect to the Company’s financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, acquisitions, plans and objectives of management, markets for the Company’s common stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and involve a number of risks and uncertainties.
Forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, net sales, expenses and income (loss), cash flow, and financial condition, whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of the Company’s senior management at the time such statements were made. There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel 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.
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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 March 31, 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 has selected a new enterprise resource planning (“ERP”) system. Implementation of the new ERP software began in late 2013. To date, 23 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 quarter ended March 31, 2018, the Company completed the Taylor Made and Hehr acquisitions, which contributed $36.1 million of net sales for quarter ended March 31, 2018. Total assets from these acquisitions as of March 31, 2018 were $162.4 million. As the Taylor Made and Hehr acquisitions occurred in the first quarter of 2018, the scope of the Company’s evaluation of the effectiveness of internal control over financial reporting does not include Taylor Made and Hehr. 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 March 31, 2018, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 March 31, 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.

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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
May 10, 2018