10-K 1 lcii-12312016x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-K
 
  (Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2016
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
 
lciindustriesvectorlogoverti.jpg
 
(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)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
  
Name of each exchange
    on which registered    
Common Stock, $.01 par value
  
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
 
 

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229-405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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 ☐

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

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,940,584,601. The registrant has no non-voting common equity.

The number of shares outstanding of the registrant’s common stock, as of the latest practicable date (February 15, 2017) was 24,756,229 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement with respect to the 2017 Annual Meeting of Stockholders to be held on May 25, 2017 is incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” with respect to our 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-K 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-K 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-K, 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 we sell our products, availability of credit for financing the retail and wholesale purchase of products for which we sell our components, inventory levels of retail dealers and manufacturers, availability of transportation for products for which we sell our components, the financial condition of our customers, the financial condition of retail dealers of products for which we sell our 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 we sell our components, and other risks and uncertainties discussed more fully under the caption “Risk Factors” in this Annual Report on Form 10-K, and in our 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

TABLE OF CONTENTS



 
 
Page
PART I  
 
 
 
 
 
 
ITEM 1 - BUSINESS
 6
 
 
 
 
ITEM 1A - RISK FACTORS
 
 
 
 
ITEM 1B - UNRESOLVED STAFF COMMENTS
 
 
 
 
ITEM 2 - PROPERTIES
 
 
 
 
ITEM 3 - LEGAL PROCEEDINGS
 
 
 
 
ITEM 4 - MINE SAFETY DISCLOSURES
 
 
 
PART II
 
 
 
 
 
 
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
 
ITEM 6 - SELECTED FINANCIAL DATA
 
 
 
 
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
 
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
 
 
ITEM 9A - CONTROLS AND PROCEDURES
 
 
 
 
ITEM 9B - OTHER INFORMATION
 
 
 
PART III
 
 
 
 
 
 
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
 
 
ITEM 11 - EXECUTIVE COMPENSATION
 
 
 

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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
 
 
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 
 
 
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
 
PART IV
 
 
 
 
 
 
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 
 
 
ITEM 16 - FORM 10-K SUMMARY
 
 
 
 
 
EXHIBIT 23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
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
 
 
 
 

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PART I

Item 1.    BUSINESS.

Summary
LCI Industries (“LCII” and collectively with its subsidiaries, the “Company” or the “Registrant”), through its wholly-owned subsidiary, Lippert Components, Inc. and its subsidiaries (collectively, “Lippert Components” or “LCI”), supplies, domestically and internationally, a broad array of components for the leading original equipment manufacturers (“OEMs”) of recreational vehicles (“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. The Company also supplies components to the related aftermarkets of these industries, primarily by selling to retail dealers, wholesale distributors and service centers.

LCI’s products include steel chassis and related components; axles and suspension solutions; slide-out mechanisms and solutions; thermoformed bath, kitchen and other products; vinyl, aluminum and frameless windows; manual, electric and hydraulic stabilizer and leveling systems; furniture and mattresses; entry, luggage, patio and ramp doors; electric and manual entry steps; awnings and awning accessories; electronic components; televisions and sound systems; navigation systems; backup cameras; appliances; and other accessories.
The Company has two reportable segments: the original equipment manufacturers segment (the “OEM Segment”) and the aftermarket segment (the “Aftermarket Segment”). The OEM Segment accounted for 92 percent of consolidated net sales for 2016, and the Aftermarket Segment accounted for 8 percent of consolidated net sales for 2016. Approximately 71 percent of the Company’s OEM Segment net sales in 2016 were of products sold to manufacturers of travel trailer and fifth-wheel RVs.
The Company is focused on profitable growth in its industries, both organic and through acquisitions. In order to support this growth, over the past several years the Company has expanded its geographic market and product lines, consolidated manufacturing facilities, and integrated manufacturing, distribution and administrative functions. At December 31, 2016, the Company operated 48 manufacturing and distribution facilities located throughout the United States and in Canada and Italy, and reported consolidated net sales of $1.7 billion for the year ended December 31, 2016.
The Company was incorporated under the laws of Delaware on March 20, 1984, and is the successor to Drew National Corporation, which was incorporated under the laws of Delaware in 1962. The Company’s principal executive and administrative offices are located at 3501 County Road 6 East, Elkhart, Indiana 46514; telephone number (574) 535-1125; website www.lci1.com; e-mail LCII@lci1.com. The Company makes available free of charge on its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and amendments to those reports) filed with the SEC as soon as reasonably practicable after such materials are electronically filed.

Recent Developments

Sales and Profits
Consolidated net sales for the year ended December 31, 2016 increased to a record $1.7 billion, 20 percent higher than the consolidated net sales for the year ended December 31, 2015 of $1.4 billion. Acquisitions completed by the Company in 2016 added $64 million in net sales. A 15 percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary OEM market, as well as increased content per RV unit, positively impacted net sales growth. Further, the Company organically increased sales to adjacent industries and the aftermarket. Net income for the full-year 2016 increased to $129.7 million, or $5.20 per diluted share, up from net income of $74.3 million, or $3.02 per diluted share, in 2015.
In Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company describes in detail the increase in its sales and profits during 2016.

Acquisitions

During 2016 and early 2017, the Company completed six acquisitions:

In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. The purchase price was $10.0 million paid at closing.


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In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a manufacturer of RV furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing.

In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation.

In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing.

In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.

In February 2017, the Company acquired 100 percent of the outstanding shares of Sessa Klein S.p.A. (“SessaKlein”), 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.

Other Developments

In March 2016, the Company initiated a regular quarterly dividend of $0.30 per share, which was increased later in the year to $0.50 per share. During 2016, total dividends of $1.40 per share of common stock, representing an aggregate of $34.4 million, were paid to stockholders.

In December 2016, the Company announced a change of the Company’s corporate name to LCI Industries from Drew Industries Incorporated. Lippert Components’ business has grown considerably over the past decade, and the new corporate name was selected to better align the investment community with the strength of the LCI brand in the industries it serves.

OEM Segment

Through its wholly-owned subsidiaries, the Company manufactures or distributes a broad array of components for the leading OEMs 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.

In 2016, the OEM Segment represented 92 percent of the Company’s consolidated net sales and 90 percent of consolidated segment operating profit. Approximately 71 percent of the Company’s OEM Segment net sales in 2016 were of products to manufacturers of travel trailer and fifth-wheel RVs. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers).

Raw materials used by the Company’s OEM Segment, consisting primarily of steel (coil, sheet, tube and I-beam), extruded aluminum, glass, wood, fabric and foam are available from a number of sources, both domestic and foreign.

Operations of the Company’s OEM Segment consist primarily of fabricating, welding, thermoforming, painting, sewing and assembling components into finished products. The Company’s OEM Segment operations are conducted at 48 manufacturing and warehouse facilities throughout the United States, and in Canada and Italy, strategically located in proximity to the customers they serve. See Item 2. “Properties.”

The Company’s OEM Segment products are sold primarily to major manufacturers of RVs such as Thor Industries (symbol: THO), Forest River (a Berkshire Hathaway company, symbol: BRKA), Winnebago (symbol: WGO) and other RV OEMs, and to manufacturers in adjacent industries.

The RV industry is highly competitive, both among manufacturers of RVs and the suppliers of RV components, generally with low barriers to entry other than compliance with industry standards, codes and safety requirements, and the initial capital investment required to establish manufacturing operations. The Company competes with several other component suppliers on a regional and national basis with respect to a broad array of components for both towable and motorized RVs. The Company’s operations compete on the basis of product quality and reliability, product innovation, price, customer service and customer satisfaction. Although definitive information is not readily available, the Company believes with respect to its principal RV products (i) it is the leading supplier of windows and doors for towable RVs; (ii) it is the leading supplier of chassis and slide-out mechanisms

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for towable RVs; (iii) the leading suppliers of axles for towable RVs are the Company and Dexter Axle Company; (iv) it is the leading supplier of furniture for towable RVs, and the Company competes with several other manufacturers; (v) the Company is the leading supplier of leveling systems for towable RVs; and (vi) the leading suppliers of awnings for towable RVs are the Company, Carefree of Colorado and Dometic Corporation.

The Company’s share of the market for its products in adjacent industries cannot be readily determined; however, OEM Segment net sales to adjacent industries increased from $275 million in 2015 to $332 million in 2016, 21 percent of total OEM Segment net sales. The Company has made investments in people, technology and equipment to increase its share of the market in adjacent industries and is committed to continue these expansion efforts.

Detailed narrative information about the results of operations of the OEM Segment is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Financial information relating to the Company’s business segments is included in Note 14 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

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 Recreation Vehicle Industry Association (“RVIA”), current estimated RV ownership had increased to nearly 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.

Aftermarket net sales increased from $103 million in 2015 to $131 million in 2016. The Company continues to make investments in people and technology to grow the Aftermarket Segment and is committed to continue these expansion efforts.

Detailed narrative information about the results of operations of the Aftermarket Segment is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Financial information relating to the Company’s business segments is included in Note 14 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

Sales and Marketing

The Company’s sales activities are related to developing new customer relationships and maintaining existing customer relationships, primarily through the quality and reliability of its products, innovation, price, customer service and customer satisfaction. As a result of the Company’s strategic decision to increase its sales to the aftermarket and adjacent industries, as well as expand into international markets, the Company has increased its annual marketing and advertising expenditures over the past few years, which were approximately $3 million in 2016.

The Company has several supply agreements or other arrangements with certain of its customers that provide for prices of various products to be fixed for periods generally not in excess of eighteen months; however, in certain cases the Company has the right to renegotiate the prices on sixty-days’ notice. Both the OEM Segment and the Aftermarket Segment typically ship products on average within one to two weeks of receipt of orders from their customers and, as a result, neither segment has any significant backlog.

Capacity

In 2016, the Company’s facilities operated at an average of approximately 55 percent of their practical capacity, assuming at least two shifts of production at all facilities. However, while certain facilities could add a second shift of production in the short term, the Company has found this to be inefficient over the long term. Capacity varies significantly based on seasonal demand, as well as by facility, product line and geographic region, with certain facilities at times operating below 50 percent utilization, and other facilities at times operating above 90 percent utilization.


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At December 31, 2016, the Company operated 48 manufacturing and distribution facilities, and for most products has the ability to fill demand in excess of capacity at individual facilities by shifting production to other facilities, but the Company would incur additional freight costs. Capital expenditures for 2016 were $45 million, and included approximately $25 million of “replacement” capital expenditures and approximately $20 million of “growth” capital expenditures. The ability to expand capacity in certain product areas, if necessary, as well as the potential to reallocate existing resources, is monitored regularly by management to help ensure the Company can maintain a high level of production efficiencies throughout its operations.

Seasonality

Most industries where the Company sells products or where its products are used, historically have been seasonal and 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, as well as 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.

International

Over the past several years, the Company has been gradually growing international sales, primarily in Europe and Australia, and export sales represented approximately 2 percent, 1 percent and 1 percent of consolidated net sales in 2016, 2015 and 2014, respectively. The Company continues to focus on developing products tailored for international RV markets. The Company participates in the largest RV shows in Europe and has been receiving positive feedback on its products, especially its proprietary slide-out products. The Company has spent more than two years developing three slide-out systems suited to the needs of the European market, which were recently featured on new RV models. As a result, the Company believes it will see additional orders from European RV OEMs. The Company’s Director of International Business Development spends time in Australia, Europe and other international markets, assessing the dynamics of the local marketplace, building relationships with OEMs and helping the Company introduce its existing products and develop new products for those markets, with the goal of identifying long-term growth opportunities. The Company estimates the addressable market for annual net sales of its products outside of North America to be $750 million.

In May 2016, the Company acquired Project 2000 S.r.l., a manufacturer of motorized entry steps, bed lifts and RV accessories located near Florence, Italy, as a foundation for LCI in the European RV market. In February 2017, the Company also acquired Sessa Klein S.p.A., a manufacturer of highly engineered side window systems for both high speed and commuter trains located near Varese, Italy. The acquisition of Sessa Klein introduces the Company to a new adjacent industry for the European and U.S. train markets, and, the Company believes, will accelerate the opportunities to expand LCI's product offerings for the European RV market.

Intellectual Property

The Company holds over 200 United States and foreign patents and has nearly 60 patent applications pending that relate to various products sold by the Company. The Company has also granted certain licenses that permit third parties to manufacture and sell products in consideration for royalty payments.

From time to time, the Company has received notices or claims it may be infringing certain patent or other intellectual property rights of others, and the Company has given notices to, or asserted claims against, others that they may be infringing certain patent or other intellectual property rights of the Company. The Company believes its patents are valuable and vigorously protects its patents when appropriate.

Research and Development

The Company strives to be an industry leader in product innovation and is focused on developing new products, as well as improving existing products. Research and development expenditures are expensed as they are incurred. Research and development expenses were approximately $9 million, $8 million and $5 million in 2016, 2015 and 2014, respectively.

Regulatory Matters

We are subject to numerous federal, state and local regulations governing the manufacture and sale of our products. Sales and manufacturing operations in foreign countries may be subject to similar regulations.

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Rules promulgated under the Transportation Recall Enhancement, Accountability and Documentation Act (the “Tread Act”) require manufacturers of motor vehicles and certain motor vehicle related equipment to regularly make reports and submit documents and certain historical data to the National Highway Traffic Safety Administration (“NHTSA”) of the United States Department of Transportation (“DOT”) to enhance motor vehicle safety, and to respond to requests for information relating to specific complaints or incidents.

Trailers produced by the Company for hauling boats, personal watercraft, snowmobiles and equipment must comply with Federal Motor Vehicle Safety Standards (“FMVSS”) promulgated by NHTSA relating to lighting, braking, wheels, tires and other vehicle systems.

Windows and doors produced by the Company for the RV industry must comply with regulations promulgated by NHTSA governing safety glass performance, egress ability, door hinge and lock systems, egress window retention hardware, and baggage door ventilation. Windows produced by the Company for buses also must comply with FMVSS promulgated by NHTSA.

Upholstered products and mattresses produced by the Company for RVs and buses must comply with FMVSS promulgated by NHTSA regarding flammability. In addition, upholstered products and mattresses produced by the Company for RVs must comply with regulations promulgated by the Consumer Products Safety Commission regarding flammability, as well as standards for toxic chemical levels and labeling requirements promulgated by the California Office of Environmental Health Hazard Assessment. Plywood, particleboard and fiberboard used in RV products are required to comply with standards for formaldehyde emission levels promulgated by the California Air Resources Board and adopted by the RVIA.

Windows and entry doors produced by the Company for manufactured homes must comply with performance and construction regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”) and by the American Architectural Manufacturers Association relating to air and water infiltration, structural integrity, thermal performance, emergency exit conformance, and hurricane resistance. Certain of the Company’s products must also comply with the International Code Council standards, such as the IRC (International Residential Code), the IBC (International Building Code), and the IECC (International Energy Conservation Code) as well as state and local building codes. Thermoformed bath products manufactured by the Company for manufactured homes must comply with performance and construction regulations promulgated by HUD.

The Company believes it is currently operating in compliance, in all material respects, with applicable laws and regulations and has made reports and submitted information as required. The Company does not believe the expense of compliance with these laws and regulations, as currently in effect, will have a material effect on the Company's operations, financial condition or competitive position; however, there can be no assurance this trend will continue as health and safety laws, regulations or other pertinent requirements evolve.

Environmental

The Company’s operations are subject to certain federal, state and local regulatory requirements relating to the use, storage, discharge, transport 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. In the past, environmental compliance costs have not had, and are not expected in the future to have, a material effect on the Company’s operations or financial condition; however, there can be no assurance that this trend will continue.

Employees

The number of persons employed full-time by the Company at December 31, 2016 was 7,654, compared to 6,576 and 6,187 at December 31, 2015 and 2014, respectively. The total at December 31, 2016 included 6,295 in manufacturing, 337 in transportation, 103 in sales, 230 in customer support and servicing, and 689 in administration. None of the employees of the Company are subject to collective bargaining agreements. The Company believes that relations with its employees are good.


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Executive Officers

The following table sets forth our executive officers as of December 31, 2016:
Name
Position
 
 
Jason D. Lippert
Chief Executive Officer and Director
Scott T. Mereness
President
Brian M. Hall
Chief Financial Officer
Robert A. Kuhns
Vice President – Chief Legal Officer and Secretary
Jamie M. Schnur
Chief Administrative Officer
Nick C. Fletcher
Chief Human Resources Officer

Officers are elected annually by the Board of Directors. There are no family relationships between or among any of the executive officers or Directors of the Company. Additional information with respect to the Company’s Directors is included in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017.

JASON D. LIPPERT (age 44) became Chief Executive Officer of the Company effective May 10, 2013, and has been Chief Executive Officer of Lippert Components since February 2003. Mr. Lippert has over 20 years of experience with LCII and its subsidiaries, and has served in a wide range of leadership positions.

SCOTT T. MERENESS (age 45) became President of the Company effective May 10, 2013, and has been President of Lippert Components since July 2010. Mr. Mereness has over 20 years of experience with LCII and its subsidiaries, and has served in a wide range of leadership positions.

BRIAN M. HALL (age 42) joined the Company in March 2013, and has served as Corporate Controller since June 2013, and Chief Financial Officer of the Company since November 2016. Prior to joining the Company, he spent more than 16 years in public accounting.

ROBERT A. KUHNS (age 51) joined the Company in March 2013, and has been Vice President – Chief Legal Officer and Secretary since July 2013. Prior to joining the Company, he was a partner in the Minneapolis office of Dorsey & Whitney LLP, a full-service global law firm.

JAMIE M. SCHNUR (age 45) became Chief Administrative Officer of the Company effective May 2013. Mr. Schnur has over 20 years of experience with the Company, and has served in a wide range of leadership positions with Lippert Components.

NICK C. FLETCHER (age 56) joined the Company in February 2013 as Vice President of Human Resources. Since January 2015, he has been Chief Human Resources Officer. Prior to joining the Company, Mr. Fletcher provided consulting services and held roles in senior level positions at American Commercial Lines, Continental Tire, Wabash National, Siemens and TRW.

Item 1A. RISK FACTORS.

The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face, but represent the most significant risk factors that we believe may adversely affect the RV and other industries we supply our products to, as well as our business, operations or financial position. The risks and uncertainties discussed in this report are not exclusive and other risk factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.

Industry Risk Factors

Economic and business factors beyond our control, including cyclicality and seasonality in the industries where we sell our products, could lead to fluctuations in our operating results.

The RV, recreational boat and other markets where we sell many of our products or where our products are used, have been characterized by cycles of growth and contraction in consumer demand, often because the purchase of such products are viewed as a consumer discretionary purchase. Periods of economic recession have adversely affected, and could again adversely affect, our operating results. Companies in these industries are subject to volatility in production levels, shipments, sales and operating results due to changes in external factors such as general economic conditions, including credit availability, consumer

11


confidence, employment rates, prevailing interest rates, inflation, fuel prices and other economic conditions affecting consumer demand and discretionary consumer spending, as well as demographic and political changes, all of which are beyond our control. Consequently, our operating results for any prior period may not be indicative of results for any future period.

Additionally, manufacturing operations in most of the industries where we sell our products or where our products are used, historically have been seasonal. However, because of fluctuations in dealer inventories, the impact of international, national and regional economic conditions and consumer confidence on retail sales of products which include our components, and other factors, current and future seasonal industry trends may be different than in prior years. Unusually severe weather conditions in some geographic areas may also, from time to time, impact the timing of industry-wide shipments from one period to another.

Reductions in the availability of wholesale financing limits the inventories carried by retail dealers of RVs and other products which use our components, which would cause reduced production by our customers, and therefore reduced demand for our products.

Retail dealers of RVs and other products which use our components generally finance their purchases of inventory with financing known as floor-plan financing provided by lending institutions. A dealer’s ability to obtain financing is significantly affected by the number of lending institutions offering floor planning, and by an institution’s lending limits, which are beyond our control. Reduction in the availability of floor-plan financing has in the past caused, and would likely cause, many dealers to reduce inventories, which would result in reduced production by OEMs, and consequently resulting in reduced demand for our products. Moreover, dealers which are unable to obtain adequate financing could cease operations. Their remaining inventories would likely be sold at discounts, disrupting the market. Such sales have historically caused a decline in orders for new inventory, which reduced demand for our products.

Conditions in the credit market could limit the ability of consumers to obtain retail financing for RVs and other products which use our components, resulting in reduced demand for our products.

Retail consumers who purchase RVs and other products which use our components generally obtain retail financing from third party lenders. The availability, terms and cost of retail financing depend on the lending practices of financial institutions, governmental policies and economic and other conditions, all of which are beyond our control. Restrictions on the availability of consumer financing and increases in the costs of such financing have in the past limited, and could again limit, the ability of consumers to purchase such discretionary products, which would result in reduced production of such products by our customers, and therefore reduce demand for our products.

Excess inventories at dealers and manufacturers can cause a decline in the demand for our products.

Dealers and manufacturers could accumulate unsold inventory. High levels of unsold inventory have in the past caused, and would cause, a reduction in orders, which would likely cause a decline in demand for our products.

Gasoline shortages, or high prices for gasoline, could lead to reduced demand for our products.

Fuel shortages, and substantial increases in the price of fuel, have had an adverse effect on the RV industry as a whole in the past, and could again in the future. Travel trailer and fifth-wheel RVs, components for which represented approximately 71 percent of our OEM Segment net sales in 2016, are usually towed by light trucks or SUVs. Generally, these vehicles use more fuel than automobiles, particularly while towing RVs or other trailers. High prices for gasoline, or anticipation of potential fuel shortages, can affect consumer use and purchase of light trucks and SUVs, which could result in reduced demand for travel trailer and fifth-wheel RVs, and therefore reduced demand for our products.

Company-Specific Risk Factors

A significant percentage of our sales are concentrated in the RV industry, and declines in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs could reduce demand for our products and adversely impact our operating results and financial condition.

In 2016, the OEM Segment represented 92 percent of our consolidated net sales, and 90 percent of consolidated segment operating profit. Approximately 71 percent of our OEM Segment net sales in 2016 were of products to manufacturers of travel trailer and fifth-wheel RVs. While we measure our OEM Segment sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. Retail sales of RVs historically have been closely tied to general economic conditions, as well as consumer confidence which was above historical averages in 2016. Declines in industry-

12


wide wholesale shipments of travel trailer and fifth-wheel RVs could reduce demand for our products and adversely affect our operating results and financial condition.

Although we have a large number of customers, the loss of any customer accounting for more than 10 percent of our consolidated net sales could have a material adverse impact on our operating results.

Two customers of both the OEM Segment and the Aftermarket Segment accounted for 63 percent of our consolidated net sales in 2016. The loss of either of these customers would have a material adverse impact on our operating results and financial condition. In addition, we generally do not have long-term agreements with our customers and cannot predict that we will maintain our current relationships with these customers or that we will continue to supply them at current levels.

Volatile raw material costs could adversely impact our financial condition and operating results.

The prices we pay for steel and aluminum represented approximately 45 percent and 15 percent, respectively, of our raw material costs in 2016. These, and other key raw materials, have historically been volatile and can fluctuate dramatically with changes in the global demand and supply for such products.

Because competition and business conditions may limit the amount or timing of increases in raw material costs that can be passed through to our customers in the form of sales price increases, future increases in raw material costs could adversely impact our financial condition and operating results. Conversely, as raw material costs decline, we may not be able to maintain selling prices consistent with higher cost raw materials in our inventory, which could adversely affect our operating results.

Inadequate supply of raw materials or components used to make our products could adversely impact our financial condition and operating results.

Our business depends on our ability to source raw materials, such as steel, aluminum, glass, fabric and foam, and certain components, such as electric motors, televisions and appliances, in a timely and cost efficient manner. Most materials and components are readily available from a variety of sources. However, a few key components are currently produced by only a small group of quality suppliers that have the capacity to supply large quantities. If raw materials or components that are used in manufacturing our products or for which we act as a distributor, particularly those which we import, become unavailable, or if the supply of these raw materials and components is interrupted or delayed, our manufacturing and distribution operations could be adversely affected. We currently import, or purchase from suppliers who import, approximately 25 percent of our raw materials and components. Additionally, we have the exclusive right to distribute Furrion’s complete line of electronics and appliance 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, which products are imported from China. Consequently, we rely on the free flow of goods through open and operational ports and on a consistent basis for a significant portion of our raw materials and components. Adverse political conditions, trade embargoes, increased tariffs or import duties, inclement weather, natural disasters, war, terrorism or labor disputes at various ports or otherwise adversely impacting our suppliers create significant risks for our business, particularly if these conditions or disputes result in work slowdowns, lockouts, strikes or other disruptions, and could have an adverse impact on our operating results if we are unable to fulfill customer orders or required to accumulate excess inventory or find alternate sources of supply, if available, at higher costs.

We import a portion of our raw materials and the components we sell and the effect of foreign exchange rates could adversely affect our operating results.

We negotiate for the purchase of a significant portion of raw materials and semi-finished components with suppliers that are not located in the United States. As such, the prices we pay in part are dependent upon the rate of exchange for US Dollars versus the currency of the local supplier. A dramatic weakening of the US Dollar could increase our cost of goods sold and such cost increases may not be offset through price increases for our products, adversely impacting our margins.

Changes in consumer preferences relating to our products, or the inability to develop innovative new products, could cause reduced sales.

Changes in consumer preferences for RV, manufactured housing and recreational boat models, and for the components we make for such products, occur over time. Our inability to anticipate changes in consumer preferences for such products, or delays in responding to such changes, could reduce demand for our products and adversely affect our net sales and operating results. Similarly, we believe our ability to remain competitive also depends on our ability to develop innovative new products or enhanced features of existing products. Delays in the introduction or market acceptance of new products or product features could have an adverse effect on our net sales and operating results.

13



Competitive pressures could reduce demand for our products or impact our sales prices.

The industries in which we are engaged are highly competitive and generally characterized by low barriers to entry, and we have numerous existing and potential competitors. Competition is based upon product quality and reliability, product innovation, price, customer service and customer satisfaction. Competitive pressures have, from time to time, resulted in a reduction of our profit margins and/or reduction in our market share. Domestic and foreign competitors may lower prices on products which currently compete with our products, or develop product improvements, which could reduce demand for our products or cause us to reduce prices for our products. Sustained increases in these competitive pressures could have a material adverse effect on our results of operations. In addition, the manufacture by our customers themselves of products supplied by us could reduce demand for our products and adversely affect our operating results and financial condition.

Increases in demand could result in difficulty obtaining additional skilled labor, and available capacity may initially not be utilized efficiently.

In certain geographic regions in which we have a larger concentration of manufacturing facilities we have experienced, and could again experience, shortages of qualified employees. Competition for skilled workers, especially during improving economic times, may increase the cost of our labor and create employee retention and recruitment challenges, as employees with knowledge and experience have the ability to change employers relatively easily. If such conditions become extreme, we may not be able to increase production to timely satisfy demand, and may initially incur higher labor and production costs, which could adversely impact our operating results and financial condition.

We may incur unexpected expenses, or face unanticipated delays, in connection with expansion plans or investments we make in our business, which could adversely impact our operating results.

It may take longer than initially anticipated for us to realize expected results from investments in research and development or acquired businesses, as well as initiatives we have implemented to increase capacity and improve production efficiencies, automation, customer service and other aspects of our business, or we may incur unexpected expenses in connection with these matters. Expansion plans may involve the acquisition of existing manufacturing facilities that require upgrades and improvements or the need to build new manufacturing facilities. Such activities may be delayed or incur unanticipated costs which could have an adverse effect on our operating results. Similarly, competition for desirable production facilities, especially during times of increasing production, may increase the cost of acquiring production facilities or limit the availability of obtaining such facilities. In addition, the start-up of operations in new facilities may incur unanticipated costs and inefficiencies which may adversely affect our profitability during the ramp up of production in those facilities. Delays in the construction, re-configuration or relocation of facilities could result in an adverse impact to our operating results or a loss of market share.

Natural disasters, whether or not caused by climate change, unusual weather conditions, epidemic outbreaks, terrorist acts and political events could disrupt business and result in lower sales and otherwise adversely affect our financial performance.

Our facilities may be affected by natural disasters, such as tornadoes, hurricanes, fires, floods, earthquakes, and unusual weather conditions, as well as other external events such as epidemic outbreaks, terrorist attacks or disruptive political events, any one of which could adversely affect our business and result in lower sales. In the event that one of our manufacturing or distribution facilities was affected by a disaster or other event, we could be forced to shift production to one of our other facilities or to cease operations. Although we maintain insurance for damage to our property and disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing or distribution facilities or customer service centers could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.

We have recently entered new markets in order to enhance our growth potential. Uncertainties with respect to these new markets could impact our operating results.

We are a leading supplier of components for RVs and currently have a significant share of the market for certain of our products, which limits our ability to expand our market share for those products. We have made investments in order to expand the sale of our products in adjacent industries, such as buses, trucks, pontoon boats and trains, where we may have less familiarity with OEM or consumer preferences and could encounter difficulties in attracting customers due to a reduced level of familiarity with our brands. We have also made investments to expand the sale of our products in the aftermarket of our industries, and are

14


exploring opportunities to increase export sales of our products to international markets. Limited operating experience or limited brand recognition in new markets may limit our business expansion strategy. Lack of demand for our products in these markets or competitive pressures requiring us to lower prices for our products could adversely impact our business growth in these markets and our results of operations.

As we grow, we will face the risk that our existing resources and systems, including management resources, accounting and finance personnel and operating systems, may be inadequate to support our growth. We cannot assure you that we will be able to retain the personnel or make the changes in our systems that may be required to support our growth. Failure to secure these resources and implement these systems on a timely basis could have an adverse effect on our results of operations. In addition, hiring additional personnel and implementing changes and enhancements to our systems will require capital expenditures and other increased costs that could also have an adverse impact on our results of operations.

If acquired businesses are not successfully integrated into our operations, our financial condition and operating results could be adversely impacted.

We have completed several business acquisitions and may continue to engage in acquisitions or similar activities, such as joint ventures and other business transactions. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions, our ability to compete effectively for acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Such acquisitions, joint ventures and other business transactions involve potential risks, including:
the failure to successfully integrate departments and systems, including IT and accounting systems, technologies, books and records and procedures,
the need for additional investments post-acquisition that could be greater than anticipated,
the assumption of liabilities of the acquired businesses that could be greater than anticipated,
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect our operating results, and
the potential loss of key employees or existing customers or adverse effects on existing business relationships with suppliers and customers.
Integrating acquired operations is a significant challenge and there is no assurance that we will be able to manage the integrations successfully. If we are unable to efficiently integrate these businesses, the attention of our management could be diverted from our existing operations and the ability of the management teams at these business units to meet operational and financial expectations could be adversely impacted, which could impair our ability to execute our business plans. Failure to successfully integrate acquired operations or to realize the expected benefits of such acquisitions may have an adverse impact on our results of operations and financial condition.

As we expand our business internationally, we will be subject to new operational and financial risks.

We have been gradually growing sales overseas, primarily in Europe and Australia, and export sales represented approximately 2 percent, 1 percent and 1 percent of consolidated net sales in 2016, 2015 and 2014, respectively. We plan to continue pursuing international opportunities. In May 2016, we acquired Project 2000 S.r.l., a manufacturer of motorized entry steps, bed lifts and RV accessories, located near Florence, Italy, as a foundation for LCI in the European RV market. In February 2017, we also acquired Sessa Klein S.p.A., a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The acquisition of Sessa Klein introduces us to a new adjacent industry for the European and U.S. train markets, and, we believe, will accelerate the opportunities to expand our product offerings for the European RV market.

Business outside of the United States is subject to various risks, many of which are beyond our control, including: adverse political and economic conditions; changes in tariffs, trade restrictions, trade agreements, and taxation; difficulties in managing or overseeing foreign operations and agents; differences in regulatory environments, labor practices and market practices; cultural and linguistic differences; foreign currency fluctuations and limitations on the repatriation of funds because of foreign exchange controls; different liability standards; and intellectual property laws of countries which do not protect our rights in our intellectual property to the same extent as the laws of the United States. The occurrence or consequences of any of these factors may have an adverse impact on our operating results and financial condition, as well as impact our ability to operate in international markets.

The loss of key management could reduce our ability to execute our business strategy and could adversely affect our business and results of operations.


15


We are dependent on the knowledge, experience and skill of our leadership team. The loss of the services of one or more key managers or the failure to attract or retain qualified managerial, technical, sales and marketing, operations and customer service staff could impair our ability to conduct and manage our business and execute our business strategy, which would have an adverse effect on our business, financial condition and results of operations.

Our business is subject to numerous international, federal, state and local regulations, and increased costs of compliance, failure in our compliance efforts or events beyond our control could result in damages, expenses or liabilities that could adversely impact our financial condition and operating results.
We are subject to numerous federal, state and local regulations governing the manufacture and sale of our products, including regulations and standards promulgated by the National Highway Traffic Safety Administration (“NHTSA”) of the United States Department of Transportation (“DOT”), the Consumer Products Safety Commission, the United States Department of Housing and Urban Development (“HUD”), and consumer safety standards promulgated by state regulatory agencies and industry associations. The failure to comply with present or future regulations and standards could subject us to lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls of our products. Sales and manufacturing operations in foreign countries may be subject to similar regulations. Any major recalls of our products, voluntary or involuntary, could adversely impact our reputation, net sales, financial condition and operating results. Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected. In addition, our failure to comply with present or future regulations could result in fines being imposed on us, potential civil and criminal liability, suspension of sales or production or cessation of operations.

Further, certain U.S. and foreign laws and regulations affect our activities. Areas of our business affected by such laws and regulations include, but are not limited to, labor, advertising, consumer protection, quality of services, warranty, product liability, real estate, intellectual property, tax, import and export duties, tariffs, competition, environmental, and health and safety. We are also subject to compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”), and other anti-corruption and anti-bribery laws applicable to our operations. Compliance with these laws and others may be onerous and costly, at times, and may be inconsistent from jurisdiction to jurisdiction, which further complicates compliance efforts. Violations of these laws and regulations could lead to significant penalties, including restraints on our export or import privileges, monetary fines, criminal proceedings and regulatory or other actions that could adversely affect our results of operations. We have instituted various policies and procedures to ensure compliance. However, we cannot assure you that employees, contractors, vendors or our agents will not violate such laws and regulations or our policies and procedures.

In addition, potentially significant expenditures could be required in order to comply with evolving healthcare, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future by governmental authorities. Our operating profit margin in 2016 was impacted by higher health insurance costs, largely due to increased employee participation, which we believe is largely due to the new healthcare requirements, and operating profit will likely continue to be impacted in future periods.

Our risk management policies and procedures may not be fully effective in achieving their purposes.

Our policies, procedures, controls and oversight to monitor and manage our enterprise risks may not be fully effective in achieving their purpose and may leave exposure to identified or unidentified risks. Past or future misconduct by our employees or vendors could result in violations of law by us, regulatory sanctions and/or serious reputational harm or financial harm. We monitor our policies, procedures and controls; however, we cannot assure you that our policies, procedures and controls will be sufficient to prevent all forms of misconduct. We review our compensation policies and practices as part of our overall enterprise risk management program, but it is possible that our compensation policies could incentivize inappropriate risk taking or misconduct. If such inappropriate risks or misconduct occurs, it is possible that it could have an adverse effect on our results of operations and/or our financial condition.

Our operations are subject to certain environmental laws and regulations, and costs of compliance, investigation or remediation of environmental conditions could have an adverse effect on our business and results of operations.

Our operations are also subject to certain complex federal, state and local environmental laws and regulations relating to air, water, noise pollution and the use, storage, discharge and disposal of hazardous materials used during the manufacturing processes. Under certain of these laws, namely the Comprehensive Environmental Response, Compensation, and Liability Act and its state counterparts, liability for investigation and remediation of hazardous substance contamination at currently or formerly owned or operated facilities or at third-party waste disposal sites is joint and several. Our failure to comply with these regulations could cause us to become subject to fines and penalties or otherwise have an adverse impact on our business. Although we believe that our operations and facilities have been and are being operated in compliance, in all material respects, with such laws and

16


regulations, one or more of our current or former operating sites, or adjacent sites owned by third-parties, have been affected by releases of hazardous materials. As a result, we may incur expenditures for future investigation and remediation, including in conjunction with voluntary remediation programs or third party claims. If other potentially responsible persons (“PRPs”) are unable or otherwise not obligated to contribute to remediation costs, we could be held responsible for their portion of the remediation costs, and those costs could be material. The operation of our manufacturing facilities entails risks, and we cannot assure that our costs in relation to these environmental matters or compliance with environmental laws in general will not have an adverse effect on our business and results of operations.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on certain trademarks and patents, including contractual rights with third parties. Our success depends, in part, on our ability to protect our intellectual property against dilution, infringement, and competitive pressure by defending our intellectual property rights. To protect our property rights, we rely on intellectual property laws of the U.S., European Union, Canada, and other countries, as well as contractual and other legal rights. However, we cannot assure you that these measures will be successful in any given instance, particularly in countries outside the U.S. We endeavor to protect our rights; however, third parties may infringe upon our intellectual property rights. We may be forced to take steps to protect our rights, including through litigation. This could result in a diversion of resources. The inability to protect our intellectual property rights could result in competitors manufacturing and marketing similar products which could adversely affect our market share and results of operations. Competitors may challenge, invalidate or avoid the application of our existing or future intellectual property rights that we receive or license. We may also be subject to claims by third parties, seeking to enforce their claimed intellectual property rights. The loss of protection for our intellectual property could reduce the market value of our products and services, lower our profits, and could otherwise have an adverse effect on our business, financial condition or results of operation.

Compliance with conflict mineral disclosure requirements will create additional compliance cost and may create reputational challenges.

The SEC adopted rules pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act setting forth new disclosure requirements concerning the use or potential use of certain minerals, deemed conflict minerals (tantalum, tin, gold and tungsten), that are mined from the Democratic Republic of Congo and adjoining countries. These requirements necessitate due diligence efforts on our part to assess whether such minerals are used in our products in order to make the relevant required annual disclosures that began in May 2014. We have incurred costs and diverted internal resources to comply with these disclosure requirements, including for diligence to determine the sources of those minerals that may be used or necessary to the production of our products. Compliance costs are expected to continue in future periods, subject to any regulatory changes implemented by the new administration in Washington, D.C. Further action or clarification from the SEC or a court regarding required disclosures could result in reputational challenges that could impact future sales if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products and are required to make such disclosures.

If our information technology systems fail to perform adequately or are breached, our operations could be disrupted and could adversely affect our business, reputation and results of operation.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, inventory, supply chain, order entry and fulfillment, manufacturing, distribution, warranty administration, invoicing, collection of payments, and other business processes. We use information systems to report and support the audit of our operational and financial results. Additionally, we rely upon information systems in our sales, marketing, human resources and communication efforts. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, security breaches, telecommunications failures, computer viruses, hackers, and other manipulation or improper use of our systems. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could adversely affect our business. Due to our reliance on our information systems, we have established various levels of security, backup and disaster recovery procedures. Further, we have selected and have begun implementing a new enterprise resource planning (“ERP”) system, the full implementation of which is expected to take several years; however, there may be other challenges and risks as we upgrade and standardize our ERP system on a company-wide basis.
Additionally, because we accept debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (the “PCI Standard”), issued by the Payment Card Industry Security Standards Council. The PCI Standard contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing and

17


transmission of cardholder data. Complying with the PCI Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology such as those necessary to maintain compliance with the PCI Standard or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our payment-related systems could have an adverse effect on our business, financial condition and results of operations.

We could incur warranty claims in excess of reserves.

We receive warranty claims from our customers in the ordinary course of our business. Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A significant increase in warranty claims exceeding our current warranty expense levels could have an adverse effect on our results of operations and financial condition.

In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.

We may be subject to product liability claims if people or property are harmed by the products we sell.

Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage, and may require product recalls or other actions. Although we maintain liability and product recall insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that our products caused property damage or personal injury could damage our brand identity and our reputation with existing and potential consumers and have an adverse effect on our business, financial condition and results of operations.

We could incur asset impairment charges for goodwill, intangible assets or other long-lived assets.

A portion of our total assets as of December 31, 2016 are comprised of goodwill, intangible assets and other long-lived assets. At least annually, we review goodwill for impairment. Long-lived assets, identifiable intangible assets and goodwill are also reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable from future cash flows. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Our determination of future cash flows, future recoverability and fair value of our long-lived assets includes significant estimates and assumptions. Changes in those estimates or assumptions or lower than anticipated future financial performance may result in the identification of an impaired asset and a non-cash impairment charge, which could be material. Any such charge could adversely affect our operating results and financial condition.

Our stock price may be volatile.

The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our control. These factors include: the perceived prospects of our business and our industries as a whole; differences between our actual financial and operating results and those expected by investors and analysts; changes in analysts’ recommendations or projections; changes affecting the availability of financing in the wholesale and consumer lending markets; actions or announcements by competitors; changes in the regulatory environment in which we operate; significant sales of shares by a principal stockholder; actions taken by stockholders that may be contrary to Board of Director recommendations; and changes in general economic or market conditions. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our common stock for reasons unrelated to our performance.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.


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Item 2.    PROPERTIES.

The Company’s manufacturing operations are conducted at facilities that are used for both manufacturing and warehousing. Many of the properties listed manufacture and warehouse products sold through both the OEM Segment and Aftermarket Segment. Square footage is not allocated across the segments. In addition, the Company maintains administrative facilities used for corporate and administrative functions. The Company’s primary administrative offices are located in Elkhart and Goshen, Indiana. Total administrative space company-wide aggregates approximately 251,000 square feet. At December 31, 2016, the Company’s properties were as follows:
City
 
State/Province
 
Square Feet
 
Owned
 
Leased
Double Springs
 
Alabama
 
109,000

 
 
 
 
 
Gilbert
 
Arizona
 
11,600

 
 
 
 
 
Rialto
 
California
 
62,700

 
 
 
 
 
Lakeland
 
Florida
 
15,000

 
 
 
 
 
Kissimmee
 
Florida
 
4,246

 
 
 
 
 
Fitzgerald
 
Georgia
 
79,000

 
 
 
 
 
Nampa
 
Idaho
 
125,000

 
 
 
 
 
Nampa
 
Idaho
 
83,500

 
 
 
 
 
Nampa
 
Idaho
 
22,000

 
 
 
 
 
Twin Falls
 
Idaho
 
16,060

 
 
 
 
 
Goshen
 
Indiana
 
410,000

 
 
 
 
 
South Bend
 
Indiana
 
379,902

 
 
 
 
 
Goshen
 
Indiana
 
355,960

 
 
 
 
 
Goshen
 
Indiana
 
341,000

 
 
 
 
 
Elkhart
 
Indiana
 
308,864

 
 
 
 
 
Elkhart
 
Indiana
 
250,000

 
 
 
 
 
Elkhart
 
Indiana
 
160,000

 
 
 
 
 
Goshen
 
Indiana
 
153,200

 
 
 
 
 
Goshen
 
Indiana
 
144,500

 
 
 
 
 
Fort Wayne
 
Indiana
 
140,000

 
 
 
 
 
Middlebury
 
Indiana
 
122,226

 
 
 
 
 
Auburn
 
Indiana
 
119,000

 
 
 
 
 
Goshen
 
Indiana
 
118,125

 
 
 
 
 
Goshen
 
Indiana
 
110,000

 
 
 
 
 
Elkhart
 
Indiana
 
102,900

 
 
 
 
 
Middlebury
 
Indiana
 
101,776

 
 
 
 
 
Goshen
 
Indiana
 
95,960

 
 
 
 
 
Elkhart
 
Indiana
 
92,000

 
 
 
 
 
Goshen
 
Indiana
 
87,800

 
 
 
 
 
Elkhart
 
Indiana
 
87,000

 
 
 
 
 
Goshen
 
Indiana
 
74,200

 
 
 
 
 
Howe
 
Indiana
 
60,000

 
 
 
 
 
Goshen
 
Indiana
 
53,500

 
 
 
 
 
Elkhart
 
Indiana
 
28,000

 
 
 
 
 
Goshen
 
Indiana
 
22,000

 
 
 
 
 
Elkhart
 
Indiana
 
18,000

 
 
 
 
 
Millersburg
 
Indiana
 
10,000

 
 
 
 
 
Calenzano
 
Italy
 
15,000

 
 
 
 
 
Sterling Heights
 
Michigan
 
37,018

 
 
 
 
 

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City
 
State/Province
 
Square Feet
 
Owned
 
Leased
Jackson Center
 
Ohio
 
12,000

 
 
 
 
 
Pendleton
 
Oregon
 
56,800

 
 
 
 
 
McMinnville
 
Oregon
 
35,700

 
 
 
 
 
Denver
 
Pennsylvania
 
40,200

 
 
 
 
 
Granby
 
Quebec
 
65,000

 
 
 
 
 
Chester
 
South Carolina
 
108,600

 
 
 
 
 
Gaffney
 
South Carolina
 
55,000

 
 
 
 
 
Myrtle Beach
 
South Carolina
 
9,800

 
 
 
 
 
Springfield
 
Tennessee
 
60,000

 
 
 
 
 
Waxahachie
 
Texas
 
195,000

 
 
 
 
 
Kaysville
 
Utah
 
70,000

 
 
 
 
 
 
 
 
 
5,234,137

 
(1) 
 
 
 
 
____________________________
(1)
At December 31, 2015, the Company used an aggregate of 4,791,182 square feet for manufacturing and warehousing.

At December 31, 2016, the Company maintained the following facilities, or partial facilities, not currently used in production. The Elkhart property lease expires in May 2017 and the remaining properties are currently leased to third parties.
City
 
State/Province
 
Square Feet
 
Owned
 
Leased
Phoenix
 
Arizona
 
61,000

 
 
 
 
 
Mishawaka
 
Indiana
 
332,356

 
 
 
 
 
Elkhart
 
Indiana
 
144,000

 
 
 
 
 
South Bend
 
Indiana
 
134,235

 
 
 
 
 
Mishawaka
 
Indiana
 
107,600

 
 
 
 
 
 
 
 
 
779,191

 
 
 
 
 
 

Item 3.    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 for in the Consolidated Balance Sheet as of December 31, 2016, would not be material to the Company’s financial position or annual results of operations.

Item 4.    MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

As of January 31, 2017, there were 343 holders of the Company’s common stock, in addition to beneficial owners of shares held in broker and nominee names. The Company’s common stock trades on the New York Stock Exchange under the symbol “LCII”.

Information concerning the high and low closing prices of the Company’s common stock for each quarter during 2016 and 2015 is set forth in Note 16 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

Equity Compensation Plan Information as of December 31, 2016:
Plan category
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
 
 
Weighted average
exercise price of outstanding options, warrants and rights
 
 
 
 
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
Equity compensation plans approved by security holders
765,949
$0.60
1,049,752
Equity compensation plans not approved by security holders
N/A
N/A
N/A
Total
765,949
$0.60
1,049,752

Pursuant to the LCI Industries Equity Award and Incentive Plan, As Amended and Restated (the “Plan”), which was approved by stockholders in May 2011, the Company may grant to its directors, employees, and consultants equity-based awards, such as stock options, restricted stock and deferred stock units. The number of shares available for granting awards under the Plan was 1,049,752 at December 31, 2016, and 1,305,440 at December 31, 2015. The Plan is the Company’s only equity compensation plan.

In each of 2014 and 2015, the Company paid a special cash dividend of $2.00 per share to holders of record of its common stock. In 2016, the Company initiated a regular quarterly dividend of $0.30 per share, which was increased later in the year to $0.50 per share. During 2016, total dividends of $1.40 per share of common stock, representing an aggregate of $34.4 million, were paid to stockholders.

Future dividend policy with respect to the common stock will be determined by the Board of Directors of the Company in light of prevailing financial needs and earnings of the Company and other relevant factors. The Company’s dividend policy is not subject to specific restrictions in its financing agreements, but rather is limited by certain of the debt covenant calculations.


21



Item 6.    SELECTED FINANCIAL DATA.

The following table summarizes certain selected historical financial and operating information of the Company and is derived from the Company’s Consolidated Financial Statements. Historical financial data may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included in Item 7 and Item 8 of this Report, respectively.
 
 
Year Ended December 31,
(In thousands, except per share amounts)
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Operating Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,678,898

 
$
1,403,066

 
$
1,190,782

 
$
1,015,576

 
$
901,123

Severance
 
$

 
$
3,716

 
$

 
$

 
$

Sale of extrusion assets
 
$

 
$

 
$
1,954

 
$

 
$

Executive succession
 
$

 
$

 
$

 
$
1,876

 
$
1,456

Operating profit
 
$
200,850

 
$
116,254

 
$
95,487

 
$
78,298

 
$
58,132

Income before income taxes
 
$
199,172

 
$
114,369

 
$
95,057

 
$
77,947

 
$
57,802

Provision for income taxes
 
$
69,501

 
$
40,024

 
$
32,791

 
$
27,828

 
$
20,462

Net income
 
$
129,671

 
$
74,345

 
$
62,266

 
$
50,119

 
$
37,340

 
 
 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
5.26

 
$
3.06

 
$
2.60

 
$
2.15

 
$
1.66

Diluted
 
$
5.20

 
$
3.02

 
$
2.56

 
$
2.11

 
$
1.64

 
 
 
 
 
 
 
 
 
 
 
Cash dividends per common share
 
$
1.40

 
$
2.00

 
$
2.00

 
$

 
$
2.00

 
 
 
 
 
 
 
 
 
 
 
Financial Data:
 
 
 
 
 
 
 
 
 
 
Net working capital
 
$
218,043

 
$
146,964

 
$
100,451

 
$
107,339

 
$
84,243

Total assets
 
$
786,904

 
$
622,856

 
$
543,841

 
$
453,184

 
$
373,868

Long-term obligations
 
$
87,284

 
$
85,419

 
$
41,758

 
$
21,380

 
$
19,843

Stockholders’ equity
 
$
550,269

 
$
438,575

 
$
394,898

 
$
313,613

 
$
284,245


Item 7.    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 Consolidated Financial Statements and Notes thereto included in Item 8 of this Report.

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 components for the leading original equipment manufacturers (“OEMs”) of recreational vehicles (“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. 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 previously had two reportable segments, the recreational vehicle products segment (the “RV Segment”) and the manufactured housing products segment (the “MH Segment”). The Company has recently increased its focus on the significant opportunities in the aftermarket for its products, primarily sales to retail dealers, wholesale distributors and service centers. Additionally, over the past several years, sales of components for manufactured homes have become a smaller part of the Company’s business, largely due to the growth the Company has experienced with respect to its components sold to customers for traditional recreational vehicles as well as the expanded use of its components in other non-RV applications, which we refer to as adjacent industries. Unit growth for MH Segment products has also been lower over the last decade, primarily due to the real estate, credit and economic environment, including the availability of site built homes at stable prices and high interest rate spreads between conventional mortgages for site-built homes and loans for manufactured homes. In response to these changes in

22



the Company’s business, subsequent to March 31, 2016, the Company modified its internal reporting structure, reflecting a change in how its chief operating decision maker (“CODM”) assesses the performance of the Company’s operating results and makes decisions about resource allocations. The Company’s new reportable segments are the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. At December 31, 2016, the Company operated 48 manufacturing and distribution facilities located throughout the United States and in Canada and Italy.

Net sales and operating profit were as follows for the years ended December 31:
(In thousands)
2016
 
2015
 
2014
Net sales:
 
 
 
 
 
OEM Segment:
 
 
 
 
 
RV OEMs:
 
 
 
 
 
Travel trailers and fifth-wheels
$
1,099,882

 
$
938,787

 
$
841,497

Motorhomes
116,191

 
86,513

 
70,332

Adjacent industries OEMs
332,018

 
274,760

 
215,197

Total OEM Segment net sales
1,548,091

 
1,300,060

 
1,127,026

Aftermarket Segment:
 
 
 
 
 
Total Aftermarket Segment net sales
130,807

 
103,006

 
63,756

Total net sales
$
1,678,898

 
$
1,403,066

 
$
1,190,782

 
 
 
 
 
 
Operating profit:
 
 
 
 
 
OEM Segment
$
180,850

 
$
105,224

 
$
88,744

Aftermarket Segment
20,000

 
14,746

 
8,697

Total segment operating profit
200,850

 
119,970

 
97,441

Severance

 
(3,716
)
 

Sale of extrusion assets

 

 
(1,954
)
Total operating profit
$
200,850

 
$
116,254

 
$
95,487


Corporate expenses are allocated between the segments based upon net sales. Accretion related to contingent consideration is included in the segment to which it relates.

Net sales and operating profit by segment, as a percent of the total, were as follows for the years ended December 31:
 
2016
 
2015
 
2014
Net sales:
 
 
 
 
 
OEM Segment
92%
 
93%
 
95%
Aftermarket Segment
8%
 
7%
 
5%
Total net sales
100%
 
100%
 
100%
 
 
 
 
 
 
Operating Profit:
 
 
 
 
 
OEM Segment
90%
 
88%
 
91%
Aftermarket Segment
10%
 
12%
 
9%
Total segment operating profit
100%
 
100%
 
100%

Operating profit margin by segment was as follows for the years ended December 31:
 
2016
 
2015
 
2014
OEM Segment
11.7%
 
8.1%
 
7.9%
Aftermarket Segment
15.3%
 
14.3%
 
13.6%

The Company’s OEM Segment manufactures or distributes a broad array of components for the leading OEMs 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 71 percent of the Company’s OEM Segment net sales for the year ended December 31, 2016 were of components for travel trailer and fifth-wheel RVs, including:

23



● 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 RV and adjacent 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 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 2016, the Company’s primary RV market, increased 15 percent to 362,700 units, compared to 2015, as a result of:
An estimated 33,300 unit increase in retail demand in 2016, or 11 percent, as compared to 2015. In addition, retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.
RV dealers increasing inventory levels by an estimated 12,300 units in 2016, compared to the decrease in inventory levels of 2,700 units in 2015.

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:

24



 
Wholesale
 
Retail
 
Estimated Unit
Impact on
Dealer
 
Units
 
Change
 
Units
 
Change
 
Inventories
Year ended December 31, 2016
362,700

 
15%
 
350,400
 
11%
 
12,300
Year ended December 31, 2015
314,400

 
5%
 
317,100
 
14%
 
(2,700)
Year ended December 31, 2014
298,900

 
12%
 
277,300
 
11%
 
21,600

According to the RVIA, industry-wide wholesale shipments of motorhome RVs in 2016 increased 16 percent to 54,800 units compared to 2015. Retail demand for motorhome RVs also increased 11 percent in 2016, following a 15 percent increase in retail demand in 2015.
The RVIA has projected a modest increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs for 2017. Several RV OEMs, however, are introducing new product lines and 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 2016. Additionally, retail sales of travel trailer and fifth-wheel RVs have increased in 84 of the last 86 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 2016 and into early 2017.
Although future retail demand is inherently uncertain, RV industry fundamentals in 2016, including generally low unemployment, low fuel prices and available credit for dealers and RV consumers, were strong, as evidenced by the estimated 11 percent increase in industry-wide retail sales of travel trailer and fifth-wheel RVs. 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 2017. The Company also remains confident in its ability to exceed industry growth rates through new product introductions, market share gains, aftermarket sales, acquisitions and ongoing investments in research and development, engineering, quality and customer service.
Over the long term, the Company expects RV industry sales to be aided by positive demographics and the continued popularity of the “RV Lifestyle”. The number of consumers between the ages of 55 and 70 are projected to total 56 million by 2020, 27 percent higher than in 2010, according to U.S. Census figures, and one in ten vehicle-owning households between the ages of 50 and 64 own at least one RV. The RVIA reported much of the success of the RV industry has been driven by the Baby Boomer generation. The size of that generation is beginning to wane, and younger generations, Generation X and Millennials are becoming more relevant to future industry growth. Generation X and Millennials are more diverse, requiring new and creative marketing approaches to attract them to the RV industry. The RVIA has an advertising campaign promoting the “RV Lifestyle” targeted at both parents aged 30 - 49 with children at home, as well as couples aged 50 - 64 with no children at home. In addition, the RV OEMs have developed more entry level units, specifically targeting younger families, in both towables and motorhomes. The popularity of traveling in RVs to NASCAR and other sporting events, more family-oriented domestic vacations, and using RVs as second homes, are trends that could continue to motivate consumer demand for RVs. RVIA studies indicate RV vacations cost significantly less than other forms of vacation travel, even when factoring in fuel prices and the cost of RV ownership. More details can be found at www.RVIA.org.

Adjacent Industries

The Company’s portfolio of products used in RVs can also be used in other applications, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; pontoon 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, four of the last six 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, approximately 176,000, 184,000 and 174,000 enclosed trailers were sold in 2016, 2015 and 2014, respectively.
Pontoon boats. Statistical Surveys also reported approximately 44,800, 41,300 and 38,500 pontoon boats were sold in 2016, 2015 and 2014, respectively.

25



School buses. According to Wards Communications and R.L. Polk & Co., there were approximately 32,800, 29,600 and 28,200 school buses sold in 2016, 2015 and 2014, respectively.
Manufactured housing. According to the Institute for Building Technology and Safety, there were approximately 81,100, 70,500 and 64,300 manufactured home wholesale shipments in 2016, 2015 and 2014, 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, current estimated RV ownership had increased to nearly 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.

RESULTS OF OPERATIONS

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Consolidated Highlights

Consolidated net sales for the year ended December 31, 2016 increased to a record $1.7 billion, 20 percent higher than consolidated net sales for the year ended December 31, 2015 of $1.4 billion. Acquisitions completed by the Company in 2016 added $64 million in net sales. 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 2016. Further, the Company organically increased sales to adjacent industries and the aftermarket.
Net income for the full-year 2016 increased to $129.7 million, or $5.20 per diluted share, up from net income of $74.3 million, or $3.02 per diluted share, in 2015.
Consolidated operating profits during 2016 increased 73 percent, to $200.9 million from $116.3 million in 2015. Operating profit margin increased to 12.0 percent in 2016 from 8.3 percent in 2015.
The Company continues to take actions to improve its cost structure. 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.
The cost of aluminum and steel used in certain of the Company’s manufactured components declined during the second half of 2015 and continued into 2016; however, certain commodities have experienced cost increases in the second half of 2016 from market low points. Raw material costs continue to fluctuate and are expected to remain volatile.
During 2016, the Company completed five acquisitions, all of which have been accretive to earnings:
Camping Connection -- A Myrtle Beach, South Carolina and Kissimmee, Florida RV repair and service provider, with estimated annual sales of $2 million, completed November 2016;
Atwood Seating and Chassis Components -- An Elkhart, Indiana-based seating and chassis components business of Atwood Mobile Products, a subsidiary of Dometic Group, with estimated annual sales of $30 million, completed November 2016;
Project 2000 S.r.l. -- An Italian manufacturer of innovative, space-saving bed lifts and retractable steps, with estimated annual sales of $14 million, completed May 2016;
Flair Interiors -- A Goshen, Indiana-based manufacturer of RV furniture, with estimated annual sales of $25 million, completed February 2016; and

26



Highwater Marine Furniture -- An Elkhart, Indiana-based marine furniture operation providing furniture solutions for Highwater Marine, LLC, a manufacturer of pontoon boats. Estimated annual sales for the marine furniture operation were $20 million, completed January 2016.
Integration activities for these 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.
Return on equity for 2016, which is calculated by taking net income over equity, improved to 26.0 percent, from the 18.4 percent return on equity in 2015.
In April, June and September 2016, the Company paid a quarterly dividend of $0.30 per share, aggregating $7.3 million, $7.4 million and $7.4 million, respectively. In December 2016, the Company paid a quarterly dividend of $0.50 per share, aggregating $12.4 million.

OEM Segment

Net sales of the OEM Segment in 2016 increased 19 percent, or $248 million, compared to 2015. Net sales of components to OEMs were to the following markets for the years ending December 31:
(In thousands)
2016
 
2015
 
Change
RV OEMs:
 
 
 
 
 
Travel trailers and fifth-wheels
$
1,099,882

 
$
938,787

 
17%
Motorhomes
116,191

 
86,513

 
34%
Adjacent industries OEMs
332,018

 
274,760

 
21%
Total OEM Segment net sales
$
1,548,091

 
$
1,300,060

 
19%

According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were:
 
2016
 
2015
 
Change
Travel trailer and fifth-wheel RVs
362,700

 
314,400

 
15%
Motorhomes
54,800

 
47,300

 
16%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during 2016 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period primarily due to acquisitions completed in 2016.

The Company’s net sales growth in components for motorhomes during 2016 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period primarily due to market share gains and acquisitions completed in 2016. 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 years ended December 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
Content per:
2016
 
2015
 
Change
Travel trailer and fifth-wheel RV
$
3,022

 
$
2,987

 
1%
Motorhome
$
2,011

 
$
1,810

 
11%
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 2016 primarily due to market share gains and acquisitions completed in 2016 and 2015. The Company continues to believe there are significant opportunities in Adjacent Industries.


27



Operating profit of the OEM Segment was $180.9 million in 2016, an improvement of $75.6 million compared to 2015. The operating profit margin of the OEM Segment in 2016 was impacted by:
Better fixed cost absorption by spreading fixed costs over a $248 million larger sales base.
Increasing sales to Adjacent Industries OEMs.
Lower material costs for certain raw materials. Steel and aluminum costs declined in the second half of 2015 and continued into 2016. Costs for these commodities experienced some increases in the second and third quarters of 2016. Material costs, which are subject to global supply and demand forces, are expected to remain volatile.
Sales mix and pricing changes of products, including increased sales of fifth-wheel products which has a higher margin.
Indirect labor cost savings initiated in the fourth quarter of 2015 to reduce such costs on an annualized basis.
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.
Lower group health and workers’ compensation claims. The Company actively works to manage and reduce these costs, however, these costs remain subject to fluctuation.
Partially offset by:
Fixed costs which were approximately $6 million to $7 million higher than in 2015. 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 2016 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.
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.

Aftermarket Segment

Net sales of the Aftermarket Segment in 2016 increased 27 percent, or $28 million, compared to the same period of 2015. Net sales of components were as follows for the years ended December 31:
(In thousands)
 
2016
 
2015
 
Change
Total Aftermarket Segment net sales
 
$
130,807

 
$
103,006

 
27%

The Company’s net sales to the Aftermarket increased during 2016 primarily due to 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 $20.0 million in 2016, an increase of $5.3 million compared to 2015, primarily due to the increase in net sales and the higher 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.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Consolidated Highlights

Consolidated net sales for the year ended December 31, 2015 increased to $1.4 billion, 18 percent higher than the year ended December 31, 2014. Acquisitions completed by the Company in 2015, as well as the Furrion Limited (“Furrion”) distribution and supply agreement for premium electronics (the “Furrion Agreement”), added $52 million in net sales in 2015. The five percent increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs, the Company’s primary OEM market, as well as increased content per unit through market share gains, positively impacted net sales growth in 2015. Further, the Company organically increased sales to adjacent industries and the aftermarket.

28



For the full-year 2015, the Company’s net income increased to $74.3 million, or $3.02 per diluted share, up from net income of $62.3 million, or $2.56 per diluted share, in 2014.
Consolidated operating profits during 2015 increased 22 percent, to $116.3 million from $95.5 million in 2014. Operating profit margin increased to 8.3 percent in 2015 from 8.0 percent in 2014.
Raw material costs continued to fluctuate. In particular, aluminum rose nearly 20 percent during the second half of 2014, and dropped during the second half of 2015. Similarly, the cost of steel used in certain of the Company’s manufactured components dropped during the course of 2015.
During 2015, the Company completed three acquisitions:
Signature Seating -- A Ft. Wayne, Indiana-based manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats, with annual sales of approximately $16 million;
Spectal Industries -- A Quebec, Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs, with annual sales of $25 million; and
EA Technologies -- An Elkhart, Indiana-based manufacturer of custom steel and aluminum parts and provider of electro-deposition (‘e-coat’) and powder coating services for RV, bus, medium-duty truck, automotive, recreational marine, specialty and utility trailer, and military applications, with annual sales of $17 million.
For 2015, the Company achieved an 18.4 percent return on equity, an improvement from the 17.5 percent return on equity in 2014.
In April 2015, the Company paid a special dividend of $2.00 per share, aggregating $48.2 million.

OEM Segment

Net sales of the OEM Segment in 2015 increased 15 percent, or $173 million, compared to 2014. Net sales of components to OEMs were to the following markets for the years ending December 31:
(In thousands)
 
2015
 
2014
 
Change
RV OEMs:
 
 
 
 
 
 
Travel trailers and fifth-wheels
 
$
938,787

 
$
841,497

 
12%
Motorhomes
 
86,513

 
70,332

 
23%
Adjacent industries
 
274,760

 
215,197

 
28%
Total OEM Segment net sales
 
$
1,300,060

 
$
1,127,026

 
15%

According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were:
 
 
2015
 
2014
 
Change
Travel trailer and fifth-wheel RVs
 
314,400

 
298,900

 
5%
Motorhomes
 
47,300

 
43,900

 
8%

The Company’s net sales growth in components for travel trailer and fifth-wheel RVs during 2015 exceeded the increase in industry-wide wholesale shipments of travel trailer and fifth-wheel RVs during the same period primarily due market shares gains and acquisitions completed in 2015.

The Company’s net sales growth in components for motorhomes during 2015 exceeded the increase in industry-wide wholesale shipments of motorhomes during the same period primarily due to market share gains and an acquisition completed in 2014. 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 years ended December 31, divided by the industry-wide wholesale shipments of the different types of RVs for the same period, was:
Content per:
 
2015
 
2014
 
Change
Travel trailer and fifth-wheel RV
 
$
2,987

 
$
2,816

 
6%
Motorhome
 
$
1,810

 
$
1,602

 
13%

29




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

The Company’s net OEM sales to Adjacent Industries increased during 2015 primarily due to market share gains and acquisitions completed in 2015.

Operating profit of the OEM Segment was $105.2 million in 2015, an improvement of $16.5 million compared to 2014. The operating profit margin of the OEM Segment in 2015 was impacted by:
Fixed costs which were approximately $15 to $20 million higher than in 2014. 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 2015 and beyond. In addition to investments in fixed costs to expand manufacturing capacity, the Company made improvements in marketing, human resources, engineering, customer service and other critical departments. The Company also added the teams from acquired businesses as well as related amortization of intangible assets. As industry-wide wholesale shipments growth slowed from multi-year double-digit rates to mid-single-digit rates, the Company evaluated its expenses and in the fourth quarter of 2015 initiated a focused program to reduce indirect labor costs to improve operating leverage. Annual cost savings of approximately $8 to $10 million were identified and implemented late in 2015 and came from aligning staff levels more closely to anticipated growth.
An increase in stock-based compensation of approximately $3.2 million due to the implementation of the new 2015 compensation program for management.
Sales mix changes of its products, including lower sales of fifth-wheel products.
A charge of $1.5 million related to environmental costs.
A voluntary safety recall of the Company’s double and triple Coach Steps, for which the Company recorded a reserve of $1.1 million for the contingent obligation in selling, general and administrative expenses.
Partially offset by:
Investments over the past several years to increase capacity and improve operating efficiencies, which benefit operating results. The Company added capacity ahead of projected demand, which enabled it to efficiently fulfill customer orders as demand increased. Further, the Company implemented additional efficiency improvements, including lean, automation and employee retention initiatives to improve operating efficiencies going forward.
Lower material costs for certain raw material inputs. After increasing in the latter part of 2014, steel and aluminum costs declined over the course of 2015.
Better fixed costs absorption by spreading fixed costs over a $173 million larger sales base.

Aftermarket Segment

Net sales of the Aftermarket Segment in 2015 increased 62 percent, or $39 million, compared to the same period of 2014. Net sales of components were as follows for the years ended December 31:
(In thousands)
 
2015
 
2014
 
Change
Total Aftermarket Segment net sales
 
$
103,006

 
$
63,756

 
62%

The Company’s net sales to the Aftermarket increased during 2015 primarily due to the Company’s focus on building out well qualified, customer-focused teams and infrastructure to service this market.

Operating profit of the Aftermarket Segment was $15 million in 2015, an increase of $6 million compared to 2014, primarily due to the increase in net sales and the higher margins traditionally experienced in aftermarket channels. As indicated, this business is still in an early growth stage and the Company added staff to support anticipated growth.

Sale of Extrusion Assets

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

30



2016 - 2014, the Company received installments of $5.8 million under the note. At December 31, 2016, the present value of the remaining amount due under the note receivable was $1.4 million.

In July 2015, the Company agreed to terminate the supply agreement, and as consideration the Company received a $2.0 million note receivable collectible in 2019 and 2020. The Company recorded this note receivable at its present value of $1.6 million and a corresponding gain of $1.6 million in the 2015 third quarter. At December 31, 2016, the present value of the remaining amount due under the note receivable was $1.7 million.

Severance

In 2015, the Company initiated a focused program to reduce indirect labor costs. In connection with this cost reduction program and certain changes at the executive level, the Company incurred severance charges of $3.7 million.

Provision for Income Taxes

The effective income tax rate for 2016 was 34.9 percent compared to 35.0 percent in 2015. Both 2016 and 2015 benefited from federal and state tax credits, as well as the reversal of federal and state tax reserves, due to the closure of the statutes of limitation of federal and state tax years, with a larger benefit in 2016. The Company estimates the 2017 effective income tax rate to be approximately 34 percent to 36 percent.

The effective income tax rate for 2015 was 35.0 percent compared to 34.5 percent in 2014.

LIQUIDITY AND CAPITAL RESOURCES

The Consolidated Statements of Cash Flows reflect the following for the years ended December 31:
(In thousands)
 
2016
 
2015
 
2014
Net cash flows provided by operating activities
 
$
203,407

 
$
95,018

 
$
107,020

Net cash flows used for investing activities
 
(91,707
)
 
(66,116
)
 
(144,074
)
Net cash flows used for financing activities
 
(37,835
)
 
(16,601
)
 
(29,222
)
Net increase (decrease) in cash and cash equivalents
 
$
73,865

 
$
12,301

 
$
(66,276
)

Cash Flows from Operations

Net cash flows from operating activities in 2016 were $108.4 million higher than in 2015, primarily due to:
A $56.5 million increase in the change for accounts payable and accrued expenses and other liabilities in 2016 compared to a $37.1 million decrease in 2015, primarily due to the increases in sales, production and earnings, as well as the timing of these payments.
A $55.3 million increase in net income in 2016 compared to 2015.
A smaller increase in the change for inventories of $23.4 million in 2016 compared to 2015. The increase in inventories in 2016 was primarily due to increases in sourced products and acquisitions completed in 2016. Inventory turnover for 2016 increased to 7.5 turns compared to 6.9 turns for 2015. 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.
Increases in non-cash charges against net income in 2016 including:
A $4.5 million increase in depreciation and amortization primarily due to investments in acquisitions and capital expenditures.
A $1.4 million increase in stock-based compensation in 2016 compared to 2015.
Partially offset by:
A $13.9 million increase in accounts receivable in 2016 compared to a $2.1 million decrease in 2015, primarily due to an increase in days sales outstanding to 16 at December 31, 2016, compared to 14 at December 31, 2015.
A higher increase in the change for prepaid expense and other assets of $13.3 million in 2016 compared to 2015. The increase in 2016 was primarily due to a $4.5 million higher tax receivable at December 31, 2016, as well as an increase in short-term deposits related to 2017 capital expenditures and inventory.

31



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

Depreciation and amortization was $46.2 million in 2016, and is expected to be approximately $50 million to $55 million for fiscal year 2017. Non-cash stock-based compensation in 2016 was $15.7 million, including $0.3 million of deferred stock units issued to certain executive officers in lieu of cash for a portion of their 2015 incentive compensation in accordance with their compensation arrangements. Non-cash stock-based compensation is expected to be approximately $17 million to $19 million in 2017.
Net cash flows from operating activities in 2015 were $12.0 million lower than in 2014, primarily due to:
A larger increase in the change for inventories of $9.3 million in 2015 compared to 2014. The increase in inventories in 2015 was primarily due to increases in sourced products, including inventory to support the Furrion Agreement (discussed immediately below) and acquisitions completed in 2015. A portion of the increase in inventory was also due to strategic positions to take advantage of favorable market conditions and included the strategic onboarding of a new supplier. Inventory turnover for 2015 decreased to 6.9 turns compared to 8.2 turns for 2014.
In July 2015, the Company entered into a 6-year exclusive distribution and supply agreement with Furrion Limited (“Furrion”), a Hong Kong based firm that designs, engineers and manufactures premium electronics. In connection with this agreement, the Company acquired Furrion’s current inventory, as well as Furrion’s deposits on inventory scheduled for delivery, for approximately $11 million.
A $5.9 million decrease in accounts payable and accrued expenses and other liabilities in 2015 compared to a $31.2 million increase in 2014, primarily due to increased imports and other prepaid inventories, efforts to increase consignments, as well as the timing of purchases.
Partially offset by:
A $12.1 million increase in net income in 2015 compared to 2014.
Increases in non-cash charges against net income in 2015 including:
A $9.0 million increase in depreciation and amortization primarily due to investments in acquisitions and capital expenditures.
A $3.2 million increase in stock-based compensation in 2015 compared to 2014.
An increase in deferred taxes of $1.1 million in 2015 compared to a $5.5 million decrease in 2014 due to an increase in certain expenses currently not deductible for tax purposes in 2015.
Net cash flows from operating activities in 2014 were $24.3 million higher than in 2013, primarily due to:
A $12.1 million increase in net income in 2014 compared to 2013.
A $24.0 million larger increase in the change for accounts payable and accrued expenses and other liabilities in 2014 compared to 2013, primarily due to the increases in sales, production and earnings, as well as the timing of these payments.
An $8.5 million smaller increase in the change for accounts receivable in 2014 compared to 2013, primarily due to a decrease in days sales outstanding to 15 at December 31, 2014, compared to 17 at December 31, 2013.
A $5.1 million increase in depreciation and amortization primarily due to the acquisitions completed during 2014 and capital expenditures over the last couple years.
Partially offset by:
An $18.5 million larger increase in the change for inventories in 2014 as compared to 2013. The larger increase in inventories in 2014 was primarily to support the 41 percent increase in net sales in January 2015. Higher raw material costs and increased lead time on imports also contributed to the increase in inventory. Inventory turnover for 2014 improved to 8.2 turns compared to 7.9 turns for 2013.
An increase in deferred taxes of $5.5 million in 2014 compared to a $0.3 million decrease in 2013 due to an increase in certain expenses not currently deductible for tax purposes in 2014.
Cash Flows from Investing Activities
Cash flows used for investing activities of $91.7 million in 2016 were primarily comprised of $48.7 million for the acquisition of businesses and $44.7 million for capital expenditures.

32



In January 2016, the Company acquired the business and certain assets of the pontoon furniture manufacturing operation of Highwater Marine, LLC (“Highwater”), a leading manufacturer of pontoon and other recreational boats located in Elkhart, Indiana. The purchase price was $10.0 million paid at closing.
In February 2016, the Company acquired the business and certain assets of Flair Interiors, Inc. (“Flair”), a manufacturer of RV furniture located in Goshen, Indiana. The purchase price was $8.1 million paid at closing.
In May 2016, the Company acquired 100 percent of the equity interest of Project 2000 S.r.l. (“Project 2000”), a manufacturer of innovative, space-saving bed lifts and retractable steps, located near Florence, Italy. The purchase price was $18.8 million paid at closing, plus contingent consideration based on future sales by this operation.
In November 2016, the Company acquired the business, manufacturing facility and certain assets of the seating and chassis components business of Atwood Mobile Products, LLC (“Atwood”), a subsidiary of Dometic Group, located in Elkhart, Indiana. The purchase price was $12.5 million paid at closing.
In November 2016, the Company acquired the service centers and related business of Camping Connection, Inc., an RV repair and service provider located in Myrtle Beach, South Carolina and Kissimmee, Florida. The purchase price was $2.0 million paid at closing.
The Company’s capital expenditures are primarily for replacement and growth. Over the long term, based on the Company’s historical capital expenditures, the replacement portion has averaged approximately 2 percent of net sales, while the growth portion has averaged approximately 8 to 11 percent of the annual increase in net sales. However, there are many factors that can impact the actual spending compared to these historical averages. In 2016 and 2015 capital expenditures of $44.7 million and $29.0 million, respectively, were in line with historical averages.
The 2016 capital expenditures and acquisitions were funded by cash from operations and periodic borrowings under the Company’s line of credit and $50 million of Senior Promissory Notes issued under the “shelf-loan” facility with Prudential. Capital expenditures in 2017 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 used for investing activities of $66.1 million in 2015 were primarily comprised of $29.0 million for capital expenditures and $41.1 million for the acquisition of businesses.

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

In April 2015, the Company acquired the business and certain assets of Industries Spectal, Inc. (“Spectal”), a Quebec, Canada-based manufacturer of windows and doors primarily for school buses, as well as commercial buses, emergency vehicles, trucks, agricultural equipment and RVs. The purchase price was $22.3 million paid at closing, plus contingent consideration based on future sales of this operation.
In August 2015, the Company acquired the business and certain assets of Roehm Marine, LLC, also known as Signature Seating (“Signature”), a manufacturer of furniture solutions for fresh water boat manufacturers, primarily pontoon boats. The purchase price was $16.0 million paid at closing, plus contingent consideration based on future sales of this operation.
Cash flows used for investing activities of $144.1 million in 2014 were primarily comprised of $42.5 million for capital expenditures and $106.8 million for the acquisition of businesses.
In February 2014, the Company acquired IDS, a designer, developer and manufacturer of electronic systems encompassing a wide variety of RV applications. IDS also manufactures electronic systems for automotive, medical and industrial applications. The purchase price was $35.9 million, of which $34.2 million was paid at closing, with the balance to be paid out annually over the subsequent three years, plus contingent consideration based on future sales of this operation.
In March 2014, the Company acquired the business and certain assets of Star Design, LLC, which manufactures thermoformed sheet plastic products for the RV, bus and specialty vehicle industries. The purchase price was $12.2 million paid at closing.
In June 2014, the Company acquired the RV business of Actuant Corporation, which manufactures leveling systems, slide-out mechanisms and steps, primarily for motorhome RVs, under the Power Gear and Kwikee brands. The purchase price was $35.5 million, paid at closing.

33



In August 2014, the Company acquired the business and certain assets of Duncan Systems, Inc., an aftermarket distributor of replacement motorhome windshields, awnings, and RV, heavy truck and specialty vehicle glass and windows, primarily to fulfill insurance claims. The purchase price was $18.0 million paid at closing, plus contingent consideration based on future sales of this operation.

Cash Flows from Financing Activities

Cash flows used for financing activities in 2016 primarily included the payment of dividends of $34.4 million paid to stockholders. The Company had no outstanding borrowings under the line of credit as of December 31, 2016, but borrowings reached a high of $33.0 million during 2016. In addition, the Company made $4.9 million in payments for contingent consideration related to acquisitions.
Cash flows used for financing activities in 2015 included the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $48.2 million, paid to stockholders of record as of March 27, 2015, partially offset by a net increase in indebtedness of $34.4 million. The increase in indebtedness included new debt comprised of $50.0 million of Senior Promissory Notes drawn in March 2015 under the Prudential Investment Management, Inc. “shelf-loan” facility, partially offset by a $15.7 million decrease in debt due to paying down the Company’s line of credit. The Company had no outstanding borrowings under the line of credit as of December 31, 2015, but borrowings reached a high of $71.6 million during 2015. In addition, in 2015, the Company made $4.0 million in payments for contingent consideration related to acquisitions.
Cash flows used for financing activities in 2014 included the payment of a special dividend of $2.00 per share of the Company’s Common Stock, representing an aggregate of $46.7 million, paid to stockholders of record as of December 20, 2013, partially offset by a net increase in indebtedness of $15.7 million. The increase in indebtedness was due to borrowings under the Company’s line of credit. In addition, in 2014, the Company received $5.8 million in cash and the related tax benefits from the exercise of stock-based compensation, offset by $3.7 million in payments for contingent consideration related to acquisitions.
In connection with certain business acquisitions, if established sales targets for the acquired products are achieved, the Company is contractually obligated to pay additional cash consideration. The Company has recorded a $9.2 million liability for the aggregate fair value of these expected contingent consideration liabilities at December 31, 2016, including $5.8 million recorded as a current liability. For further information, see Note 11 of the Notes to the Consolidated Financial Statements.
On February 24, 2014, the Company entered into a $75.0 million line of credit (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. On March 3, 2015, in accordance with the terms of the Credit Agreement, the Company increased its line of credit by $25.0 million to $100.0 million. Interest on borrowings under the line of credit was designated from time to time by the Company as either (i) the Prime Rate, minus a rate ranging from 0.75 to 1.0 percent (minus 1.0 percent at December 31, 2015), but not less than 1.5 percent, or (ii) LIBOR, plus additional interest ranging from 1.75 to 2.0 percent (plus 1.75 percent at December 31, 2015) depending on the Company’s performance and financial condition.
On April 27, 2016, the Company announced the refinancing of 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 amends and restates the existing line of credit, which was scheduled to expire on January 1, 2019, and now 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, pound sterling and euros. The maximum borrowings under the line of credit can be further increased by $125.0 million, subject to certain conditions. At December 31, 2016 and 2015, the Company had $2.5 million and $2.7 million, respectively, in outstanding, but undrawn, standby letters of credit under the line of credit. Availability under the Company’s line of credit was $197.5 million at December 31, 2016.
On February 24, 2014, the Company also entered into a $150.0 million “shelf-loan” facility with Prudential Investment Management, Inc. and its affiliates (“Prudential”). The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $150.0 million, to mature no more than 12 years after the date of original issue of each Senior Promissory Note. On March 20, 2015, the Company issued $50.0 million of Senior Promissory Notes to Prudential for a term of five years, at a fixed interest rate of 3.35 percent per annum, payable quarterly in arrears, of which the entire amount was outstanding at December 31, 2016. At December 31, 2016, 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 April 27, 2016, the Company also amended and restated its “shelf-loan” facility with Prudential to conform certain covenants and other terms to the Amended Credit Agreement. 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

34



the Company issues a request to Prudential. Availability under the Company’s “shelf-loan” facility, subject to the approval of Prudential, was $100.0 million at December 31, 2016.
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 December 31, 2016 and 2015, 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 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 December 31, 2016. The remaining availability under these facilities was $297.5 million at December 31, 2016. The undrawn “shelf-loan” facility expired February 24, 2017, and the Company and Prudential are currently discussing renewal terms. The Company believes the availability under the Amended Credit Agreement is adequate to finance the Company’s anticipated cash requirements for the next twelve months.
Additional information on the Company’s Credit Agreement and “shelf-loan” facility is included in Note 9 of the Notes to the Consolidated Financial Statements.
Future minimum commitments relating to the Company’s contractual obligations at December 31, 2016 were as follows:
 
Payments due by period
 
 
 
Less than
 
 
 
 
 
More than
 
 
(In thousands)
Total
 
1 year
 
1-3 years
 
3-5 years
 
5 years
 
Other
Total indebtedness
$
50,000

 
$

 
$

 
$
50,000

 
$

 
$

Interest on fixed rate
indebtedness (a)
5,388

 
1,675

 
3,350

 
363

 

 

Operating leases
40,503

 
9,388

 
14,046

 
9,052

 
8,017

 

Employment contracts (b)
7,441

 
7,070

 
221

 
150

 

 

Deferred compensation (c)
13,574

 
160

 
609

 
3,486

 
5,380

 
3,939

Royalty agreements and contingent consideration payments (d)
11,639

 
6,252

 
2,275

 
1,560

 
1,552

 

Purchase obligations (e)
539,891

 
300,741

 
238,280

 
870

 

 

Taxes (f)
3,100

 
3,100

 

 

 

 

Total
$
671,536

 
$
328,386

 
$
258,781

 
$
65,481

 
$
14,949

 
$
3,939


(a)
The Company has used the contractual payment dates and the fixed interest rates in effect as of December 31, 2016, to determine the estimated future interest payments for fixed rate indebtedness.
(b)
Includes amounts payable under employment contracts and arrangements, and retirement and severance agreements.
(c)
Includes amounts payable under deferred compensation arrangements. The Other column represents the liability for deferred compensation for employees that have elected to receive payment upon separation from service from the Company.
(d)
Comprised of estimated future contingent consideration payments for which a liability has been recorded in connection with business acquisitions.
(e)
Primarily comprised of (i) purchase orders issued in the normal course of business and (ii) long term purchase commitments, for which the Company has estimated the expected future obligation based on current prices and usage.
(f)
Represents unrecognized tax benefits, as well as related interest and penalties.

These commitments are described more fully in the Notes to Consolidated Financial Statements.

CORPORATE GOVERNANCE

The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. The Company’s governance documents and committee charters and key practices have been posted to the Company’s website (www.lci1.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company has also established a Whistleblower Policy, which includes a toll-free hotline (877-373-9123) to report complaints about the Company’s accounting, internal controls, auditing matters or other concerns. The Whistleblower Policy and procedure for complaints can be found on the Company’s website (www.lci1.com).

35




CONTINGENCIES

Additional information required by this item is included under Item 3 of Part I of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

The Company’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America which requires certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes. Actual results could differ from these estimates and assumptions. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s Consolidated Financial Statements. Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to the critical accounting policies.

Inventories

Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). The Company estimates an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand and market conditions. To the extent actual demand or market conditions in the future differ from original estimates, adjustments to recorded inventory reserves may be required.

Self-Insurance

The Company is self-insured for certain health and workers’ compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical lag information and other data provided by third-party claims administrators. This estimation process is subjective, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required.

Warranty

The Company provides warranty terms based upon the type of product sold. The Company estimates the warranty accrual based upon various factors, including (i) historical warranty costs, (ii) current trends, (iii) product mix, and (iv) sales. The accounting for warranty accruals requires the Company to make assumptions and judgments, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required.

Income Taxes

The Company’s tax provision is based on pre-tax income, statutory tax rates, federal and state tax credits, and tax planning strategies. Significant management judgment is required in determining the tax provision and in evaluating the Company’s tax position. The Company establishes additional provisions for income taxes when, despite the belief the tax positions are fully supportable, there remain certain tax positions that are likely to be challenged and may or may not be sustained on review by tax authorities. The Company adjusts these tax accruals in light of changing facts and circumstances. The effective tax rate in a given financial statement period may be materially impacted by changes in the expected outcome of tax audits. The Company’s accompanying Consolidated Balance Sheets also include deferred tax assets resulting from deductible temporary differences, which are expected to reduce future taxable income. These assets are based on management’s estimate of realizability, which is reassessed each quarter based upon the Company’s forecast of future taxable income. Failure to achieve forecasted taxable income could affect the ultimate realization of certain deferred tax assets, and may result in the recognition of a valuation reserve. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.

Fair Value of Net Assets of Acquired Businesses

The Company values the assets and liabilities associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of asset or liability acquired, the Company uses different valuation techniques in determining the fair value. Those techniques include 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. By their nature, these assumptions require judgment, and if management had

36



chosen different assumptions, the fair value of net assets of acquired businesses would have been different. For further information on acquired assets and liabilities, see Notes 2 and 13 of the Notes to Consolidated Financial Statements.

Impairment of Long-Lived Assets, including Other Intangible Assets and Goodwill

The Company performs recoverability and impairment tests of noncurrent assets in accordance with accounting principles generally accepted in the United States. For certain assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. When such events or circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value would be recorded.

For other assets, impairment tests are required at least annually, or more frequently, if events or circumstances indicate that an asset may be impaired. The impairment test for other assets consists of an assessment of qualitative factors. If such qualitative factors do not support that the fair value of the reporting unit is greater than the carrying amount, the Company then uses a discounted cash flow model to estimate the fair value of the reporting unit.

The Company’s assessment of the recoverability and impairment tests of noncurrent assets involve critical accounting estimates. These estimates require significant management judgment, include inherent uncertainties and are often interdependent; therefore, they do not change in isolation. Factors that management must estimate include, among others, the economic life of the asset, sales volume, pricing, cost of raw materials, delivery costs, inflation, cost of capital, tax rates, capital spending and proceeds from the sale of assets. These factors are even more difficult to predict when financial markets are highly volatile. The estimates management uses when assessing the recoverability of noncurrent assets are consistent with those management uses in its internal planning. When performing impairment tests, management estimates the fair values of the assets using management’s best assumptions, which is believed to be consistent with what a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus accounting estimates may change from period to period. If other assumptions and estimates had been used when these tests were performed, impairment charges could have resulted. As mentioned above, these factors do not change in isolation and, therefore, the Company does not believe it is practicable or meaningful to present the impact of changing a single factor. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future impairment charges could result.

Contingent Consideration Payments

In connection with several acquisitions, in addition to the cash paid at closing, additional payments could be required depending upon the level of sales generated from certain of the acquired products. The fair value of the aggregate estimated contingent consideration payments has been recorded as a liability in the Consolidated Balance Sheets. Each quarter, the Company is required to re-evaluate the fair value of the liability for the estimated contingent consideration payments for such acquisitions. The fair value of the contingent consideration payments is estimated using a discounted cash flow model. This model involves the use of estimates and significant judgments that are based on a number of factors including sales of certain products, future business plans, economic projections, weighted average cost of capital, and market data. Actual results may differ from forecasted results.

Other Estimates

The Company makes a number of other estimates and judgments in the ordinary course of business including, but not limited to, those related to product returns, sales and purchase rebates, accounts receivable, lease terminations, asset retirement obligations, long-lived assets, executive succession, post-retirement benefits, stock-based compensation, segment allocations, environmental liabilities, contingencies and litigation. Establishing reserves for these matters requires management’s estimate and judgment with regard to risk and ultimate liability or realization. As a result, these estimates are based on management’s current understanding of the underlying facts and circumstances and may also be developed in conjunction with outside advisors, as appropriate. Due to uncertainties related to the ultimate outcome of these issues or the possibilities of changes in the underlying facts and circumstances, actual results and events could differ significantly from management estimates.

New Accounting Pronouncements

Information required by this item is included in Note 15 of the Notes to the Consolidated Financial Statements.


37



INFLATION

The prices of key raw materials, consisting primarily of steel and aluminum, and components used by the Company which are made from these raw materials, are influenced by demand and other factors specific to these commodities, rather than being directly affected by inflationary pressures. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. The Company did not experience any significant increases in its labor costs in 2016 related to inflation.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At December 31, 2016, the Company had $49.9 million of fixed rate debt outstanding. Assuming there is an decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to December 31, 2016, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be approximately $0.3 million lower per annum than if the fixed rate financing could be obtained at current market rates.

The Company is also exposed to changes in the prices of raw materials, specifically steel and aluminum. The Company has, from time to time, entered into derivative instruments for the purpose of managing a portion of the exposures associated with fluctuations in 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 13 of the Notes to 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.

38



Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
LCI Industries:

We have audited the accompanying consolidated balance sheets of LCI Industries and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LCI Industries and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP

Chicago, Illinois
February 28, 2017


39




LCI INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME


 
Year ended December 31,
 
2016
 
2015
 
2014
(In thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,678,898

 
$
1,403,066

 
$
1,190,782

Cost of sales
1,249,995

 
1,097,064

 
935,859

Gross profit
428,903

 
306,002

 
254,923

Selling, general and administrative expenses
228,053

 
186,032

 
157,482

Severance

 
3,716

 

Sale of extrusion assets

 

 
1,954

Operating profit
200,850

 
116,254

 
95,487

Interest expense, net
1,678

 
1,885

 
430

Income before income taxes
199,172

 
114,369

 
95,057

Provision for income taxes
69,501

 
40,024

 
32,791

Net income
$
129,671

 
$
74,345

 
$
62,266

 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
Basic
$
5.26

 
$
3.06

 
$
2.60

Diluted
$
5.20

 
$
3.02

 
$
2.56

 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
Basic
24,631

 
24,295

 
23,911

Diluted
24,933

 
24,650

 
24,334



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

40



LCI INDUSTRIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Year Ended December 31,
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income
$
129,671

 
$
74,345

 
$
62,266

Other comprehensive loss:
 
 
 
 
 
Net foreign currency translation adjustment
(1,798
)
 

 

Total comprehensive income
$
127,873

 
$
74,345

 
$
62,266


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


41



LCI INDUSTRIES
CONSOLIDATED BALANCE SHEETS


 
December 31,
 
2016
 
2015
(In thousands, except per share amount)
 
 
 
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
86,170

 
$
12,305

Accounts receivable, net
57,374

 
41,509

Inventories, net
188,743

 
170,834

Prepaid expenses and other current assets
35,107

 
21,178

Total current assets
367,394

 
245,826

Fixed assets, net
172,748

 
150,600

Goodwill
89,198

 
83,619

Other intangible assets, net
112,943

 
100,935

Deferred taxes
31,989

 
29,391

Other assets
12,632

 
12,485

Total assets
$
786,904

 
$
622,856

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable, trade
$
50,616

 
$
29,700

Accrued expenses and other current liabilities
98,735

 
69,162

Total current liabilities
149,351

 
98,862

Long-term indebtedness
49,949

 
49,910

Other long-term liabilities
37,335

 
35,509

Total liabilities
236,635

 
184,281

 
 
 
 
Stockholders’ equity
 
 
 
Common stock, par value $.01 per share: authorized
 
 
 
75,000 shares; issued 27,434 shares at December 31, 2016
 
 
 
and 27,039 shares at December 31, 2015
274

 
270

Paid-in capital
185,981

 
166,566

Retained earnings
395,279

 
301,206

Accumulated other comprehensive loss
(1,798
)
 

Stockholders’ equity before treasury stock
579,736

 
468,042

Treasury stock, at cost, 2,684 shares at December 31, 2016
 
 
 
and December 31, 2015
(29,467
)
 
(29,467
)
Total stockholders’ equity
550,269

 
438,575

Total liabilities and stockholders’ equity
$
786,904

 
$
622,856



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

42



LCI INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Year Ended December 31,
 
2016
 
2015
 
2014
(In thousands)
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net income
$
129,671

 
$
74,345

 
$
62,266

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
 
 
Depreciation and amortization
46,167

 
41,624

 
32,596

Stock-based compensation expense
15,420

 
14,043

 
10,817

Deferred taxes
(2,598
)
 
1,062

 
(5,493
)
Other non-cash items
1,540

 
1,335

 
2,796

Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
 
 
Accounts receivable, net
(13,899
)
 
2,082

 
(606
)
Inventories, net
(7,856
)
 
(31,276
)
 
(21,940
)
Prepaid expenses and other assets
(15,553
)
 
(2,249
)
 
(4,610
)
Accounts payable, trade
18,800

 
(21,783
)
 
21,269

Accrued expenses and other liabilities
31,715

 
15,835

 
9,925

Net cash flows provided by operating activities
203,407

 
95,018

 
107,020

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(44,671
)
 
(28,989
)
 
(42,458
)
Acquisitions of businesses, net of cash acquired
(48,725
)
 
(41,058
)
 
(106,782
)
Proceeds from note receivable
2,000

 
2,000

 
1,750

Proceeds from sales of fixed assets
698

 
2,337

 
3,587

Other investing activities
(1,009
)
 
(406
)
 
(171
)
Net cash flows used for investing activities
(91,707
)
 
(66,116
)
 
(144,074
)
Cash flows from financing activities:
 
 
 
 
 
Exercise of stock-based awards, net of shares tendered for
payment of taxes
2,574

 
1,470

 
5,769

Proceeds from line of credit borrowings
81,458

 
614,629

 
425,330

Repayments under line of credit borrowings
(81,458
)
 
(630,279
)
 
(409,680
)
Payment of dividends
(34,437
)
 
(48,227
)