LCI Industries: Form 10-Q for the period ended Sep 30, 2023

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of Part I of this report, as well as the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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

We have two reportable segments, the OEM Segment and the Aftermarket Segment. Intersegment sales are insignificant. At September 30, 2023, we operated 120 manufacturing and distribution facilities located throughout North America and Europe. See Note 12 of the Notes to Condensed Consolidated Financial Statements for further information regarding our segments.

Our OEM Segment manufactures or distributes a broad array of engineered components for the leading OEMs of RVs and adjacent industries, including boats; buses; trailers used to haul boats, livestock, equipment, and other cargo; trucks; trains; manufactured homes; and modular housing. Approximately 47 percent of our OEM Segment net sales for the twelve months ended September 30, 2023 were of components for travel trailer and fifth-wheel RVs, including:

The Aftermarket Segment supplies many of these engineered components to the related aftermarket channels of the recreation, transportation products, and housing markets, primarily to retail dealers, wholesale distributors, and service centers, as well as direct to retail customers via the Internet. The Aftermarket Segment also includes biminis, covers, buoys, fenders to the marine industry, towing products, truck accessories, appliances, air conditioners, televisions, sound systems, tankless water heaters, and the sale of replacement glass and awnings to fulfill insurance claims.

Most industries where we sell products or where our products are used historically have been seasonal and are generally at the highest levels when the weather is moderate. Accordingly, our sales and profits have generally been the highest in the second quarter and lowest in the fourth quarter. However, current and future seasonal industry trends have been, and may in the future be, different than in prior years due to various factors, including fluctuations in dealer inventories and the timing of dealer orders, 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 impact of severe weather conditions on the timing of industry-wide shipments from time to time, as well other factors such as a global health crisis or natural disaster. Additionally, many of the optional upgrades and non-critical replacement parts for RVs are purchased outside the normal product selling season, thereby causing certain Aftermarket Segment sales to be counter-seasonal.

Negative conditions in the general economy in the United States or abroad, including conditions resulting from financial and credit market fluctuations, increased inflation and interest rates, changes in economic policy, trade uncertainty, including changes in tariffs, sanctions, international treaties, and other trade restrictions, geopolitical tensions, armed conflicts, natural disasters, or global public health crises, have negatively impacted, and could continue to negatively impact, the Company’s business, liquidity, financial condition and results of operations.

INDUSTRY BACKGROUND

OEM Segment

North American 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.

According to the Recreation Vehicle Industry Association ("RVIA"), industry-wide wholesale shipments from the United States of travel trailer and fifth-wheel RVs, our primary RV market, decreased 46 percent to 195,700 units in the first nine months of 2023, compared to the first nine months of 2022, primarily due to decreased retail demand. Retail demand for travel trailer and fifth-wheel RVs decreased 18 percent in the first nine months of 2023 compared to the same period in 2022. Retail demand has declined from recent elevated levels, partially driven by rising interest rates impacting retail consumers. Retail demand is typically revised upward in subsequent months, primarily due to delayed RV registrations.

While we measure our 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:

According to the RVIA, industry-wide wholesale shipments of motorhome RVs in the first nine months of 2023 decreased 22 percent to 35,800 units compared to the first nine months of 2022. Retail demand for motorhome RVs decreased seven percent year-over-year in the first nine months of 2023, compared to an 11 percent year-over-year decrease in retail demand in the same period of 2022. We believe the decline in retail demand has been partially driven by inflation and rising interest rates impacting retail consumers.

Our current estimate for full-year 2023 industry-wide wholesale shipments from the United States of travel trailer, fifth-wheel, and motorhome RVs is approximately 295,000 to 305,000 units. This estimate is based on the current RVIA forecast and suggests a decrease of 40 to 38 percent compared to actual wholesale shipments in 2022. This projected decline is being driven by current dealer inventory levels, inflation, and rising interest rates impacting retail consumers.

Adjacent Industries

Our portfolio of products used in RVs can also be used in other applications, including boats; buses; trailers used to haul boats, livestock, equipment, and other cargo; trucks; 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. We believe there are significant opportunities in these Adjacent Industries.

We currently expect global economic uncertainty to negatively impact consumer discretionary purchases such as trailers and boats for the remainder of 2023; however, we currently anticipate that production of manufactured homes, buses, and trains should remain at or near current run rates through the remainder of 2023.

Aftermarket Segment

Many of our OEM Segment products are also sold through various aftermarket channels of the recreation, transportation products, and housing markets, primarily to retail dealers, wholesale distributors, and service centers, as well as direct to retail customers via the Internet. This includes discretionary accessories and replacement service parts. We have teams dedicated to product, technical, and installation training as well as marketing support for our Aftermarket Segment customers. We also support multiple call centers to provide responses to customers for product, delivery, and technical support. This support is designed for a rapid response to critical repairs, so customer downtime is minimal. The Aftermarket Segment also includes biminis, covers, buoys, fenders to the marine industry, towing products, truck accessories, appliances, air conditioners, televisions, sound systems, tankless water heaters, and the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacement parts for RVs are purchased outside the normal product selling season, thereby causing certain Aftermarket Segment sales to be counter-seasonal.

According to Go RVing, estimated RV ownership in the United States as of 2020 had increased to over 11 million households. This vibrant market is a key driver for aftermarket sales, as we anticipate owners will likely upgrade their units as well as replace parts and accessories which have been subjected to normal wear and tear.

We currently expect to see a slight increase in aftermarket sales over prior year levels in the remainder of 2023 as distribution channel inventories stabilize. We expect these gains will be tempered by the impact of inflation and rising interest rates on consumers' discretionary spending.

RESULTS OF OPERATIONS

Consolidated Highlights

• Consolidated net sales in the third quarter of 2023 were $1.0 billion, 15 percent lower than consolidated net sales for the same period of 2022 of $1.1 billion. The decrease was primarily driven by a nearly 21 percent decrease in North American RV wholesale shipments, decreased selling prices which are indexed to select commodities, and lower North American marine production levels, partially offset by acquisitions. Net sales from acquisitions completed in the twelve months ended September 30, 2023 contributed approximately $16.9 million in the third quarter of 2023.
• Net income for the third quarter of 2023 was $25.9 million, or $1.02 per diluted share, compared to net income of $61.4 million, or $2.40 per diluted share, for the same period of 2022.
• Consolidated operating profit during the third quarter of 2023 was $45.6 million, compared to $87.6 million in the same period of 2022. Operating profit margin was 4.8 percent in the third quarter of 2023 compared to 7.7 percent in the same period of 2022. The decrease was primarily due to decreased selling prices which are indexed to select commodities and the impact of fixed costs on reduced sales, partially offset by decreases in material commodity costs.
• The cost of steel and aluminum consumed in certain of our manufactured components decreased in the third quarter of 2023 compared to the same period of 2022. Raw material costs are subject to continued fluctuation and impact certain contractual selling prices which are indexed to select commodities.
• In September 2023, we paid a quarterly dividend of $1.05 per share, aggregating to $26.6 million.
• We made net repayments of indebtedness of $211.4 million year-to-date through September 30, 2023.

OEM Segment - Third Quarter

Net sales of the OEM Segment in the third quarter of 2023 decreased by $184.0 million, compared to the same period of 2022. Net sales of components to OEMs were to the following markets for the three months ended September 30:

(In thousands)

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

The trend in our average product content per RV produced is an indicator of our overall market share of components for new RVs. Our average product content per type of RV, calculated based upon our net sales of components to domestic RV OEMs for the different types of RVs produced for the twelve months ended September 30, divided by the industry-wide wholesale shipments of the different product mix of RVs for the same period, was:

Our average product content per type of RV excludes international sales and sales to the Aftermarket Segment and Adjacent Industries. Content per RV is impacted by changes in selling prices for our products, market share gains, and acquisitions. For the twelve months ended September 30, 2023, travel trailer and fifth-wheel RV content declined year-over-year primarily due to pricing decreases indexed to commodity and freight indices, as well as wholesale shipments outpacing OEM production levels, partially offset by organic market share growth.

Our decrease in net sales to RV OEMs during the third quarter of 2023 was driven by a 21 percent reduction in North American wholesale shipments during the third quarter of 2023, primarily due to current dealer inventory levels, inflation, and rising interest rates impacting retail consumers.

Our decrease in net sales to OEMs in Adjacent Industries during the third quarter of 2023 was primarily due to lower sales to North American marine OEMs, driven by inflation and rising interest rates impacting retail consumers.

Operating profit of the OEM Segment was $11.2 million in the third quarter of 2023, a decrease of $54.0 million compared to operating profit of the OEM Segment of $65.2 million in the same period of 2022. The operating profit margin of the OEM Segment in the third quarter of 2023 decreased to 1.5 percent compared to the operating profit margin of 7.1 percent for the same period of 2022 and was negatively impacted by:

• Selling prices contractually tied to indices of select commodities decreased, resulting in a decrease in operating profit of $38.9 million compared to the same period of 2022.
• The impact of fixed costs on reduced sales, which decreased operating profit by $14.5 million related to fixed selling, general, and administrative costs and $13.2 million related to fixed production overhead costs.
• Sales mix increase of lower margin products, which negatively impacted operating profit by $3.6 million.

Partially offset by:

• Decreases in material commodity costs, which positively impacted operating profit by $29.3 million, primarily related to decreased steel and aluminum costs.
• Price increases to targeted products, resulting in an increase in operating profit of $3.6 million compared to the same period of 2022.
• A reduction in general and administrative costs resulting in an increase in operating profit of $3.1 million compared to the same period of 2022.

Amortization expense on intangible assets for the OEM Segment was $10.6 million in the third quarter of 2023, compared to $10.5 million in the same period in 2022. Depreciation expense on fixed assets for the OEM Segment was $14.8 million in the third quarter of 2023, compared to $14.2 million in the same period of 2022.

OEM Segment – Year to Date

Net sales of the OEM Segment in the first nine months of 2023 decreased by $1.3 billion, compared to the same period of 2022. Net sales of components to OEMs were to the following markets for the nine months ended September 30:

(In thousands)

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

Our decrease in net sales to RV OEMs during the first nine months of 2023 was driven by a 43 percent reduction in North American wholesale shipments during the first nine months of 2023, driven by current dealer inventory levels, inflation, and rising interest rates impacting retail consumers.

Our decrease in net sales to OEMs in Adjacent Industries during the first nine months of 2023 was primarily due to lower sales to North American marine OEMs and in manufactured housing, driven by current dealer inventory levels, inflation, and rising interest rates impacting retail consumers.

Operating profit of the OEM Segment was $29.1 million in the first nine months of 2023, a decrease of $472.1 million compared to the same period of 2022. The operating profit margin of the OEM Segment in the first nine months of 2023 decreased to 1.3 percent, compared to 14.0 percent for the same period of 2022, and was negatively impacted by:

• Selling prices contractually tied to indices of select commodities decreased, resulting in a decrease in operating profit of $179.6 million compared to the same period of 2022.
• The impact of fixed costs on reduced sales, which decreased operating profit by $80.7 million related to fixed selling, general, and administrative costs and $68.8 million related to fixed production overhead costs.
• Incremental costs incurred due to volatile OEM schedules resulting in a decrease in operating profit of $20.2 million compared to the same period of 2022.
• Sales mix increase of lower margin products from recent acquisitions and related integration costs, which negatively impacted operating profit by $15.4 million.

Partially offset by:

• Decreases in material commodity costs, which positively impacted operating profit by $80.9 million, primarily related to decreased steel and aluminum costs.
• A reduction in general and administrative costs resulting in an increase in operating profit of $7.9 million compared to the same period of 2022.
• Pricing changes to targeted products, resulting in an increase in operating profit of $6.9 million compared to the same period of 2022.

Amortization expense on intangible assets for the OEM Segment was $31.2 million in the first nine months of 2023, compared to $30.7 million in the same period of 2022. Depreciation expense on fixed assets for the OEM Segment was $43.8 million in the first nine months of 2023, compared to $43.1 million in the same period of 2022.

Aftermarket Segment - Third Quarter

Net sales of the Aftermarket Segment in the third quarter of 2023 increased by $11.2 million, compared to the same period of 2022. Net sales of components in the Aftermarket Segment were as follows for the three months ended September 30:

(In thousands)

Net sales of the Aftermarket Segment for the third quarter of 2023 were slightly higher than the same period in 2022, as distribution channel inventories stabilized.

Operating profit of the Aftermarket Segment was $34.4 million in the third quarter of 2023, an increase of $12.0 million compared to the same period of 2022. The operating profit margin of the Aftermarket Segment was 14.9 percent in the third quarter of 2023, compared to 10.2 percent in the same period in 2022, and was positively impacted by:

• Decreases in material commodity costs, which positively impacted operating profit by $9.9 million, primarily related to decreased steel and aluminum costs.
• Leveraging of fixed costs over larger sales and production volume, which increased operating profit by $3.1 million related to fixed production overhead costs and $1.6 million related to fixed selling, general, and administrative costs.

Partially offset by:

• Increases in transportation costs due to changes in customer mix, which reduced operating profit by $3.2 million.

Amortization expense on intangible assets for the Aftermarket Segment was $3.9 million in the third quarter of 2023, compared to $3.8 million in the same period of 2022. Depreciation expense on fixed assets for the Aftermarket Segment was $4.0 million in the third quarter of 2023, compared to $3.8 million in the same period of 2022.

Aftermarket Segment – Year to Date

Net sales of the Aftermarket Segment in the first nine months of 2023 decreased by $25.9 million, compared to the same period of 2022. Net sales of components in the Aftermarket Segment were as follows for the nine months ended September 30:

(In thousands)

Net sales of the Aftermarket Segment decreased during the first nine months of 2023 primarily driven by lower volumes within the truck and marine markets due to fully stocked distribution channels and the impacts of inflation and rising interest rates on consumers' discretionary spending.

Operating profit of the Aftermarket Segment was $91.7 million in the first nine months of 2023, an increase of $16.8 million compared to the same period of 2022. The operating profit margin of the Aftermarket Segment was 13.1 percent in the first nine months of 2023, compared to 10.3 percent in the same period in 2022, and was positively impacted by:

• Decreases in material commodity costs, which positively impacted operating profit by $27.4 million, primarily related to decreased steel and aluminum costs.
• Pricing changes to targeted products, resulting in an increase in operating profit of $4.9 million compared to the same period of 2022.

Partially offset by:

• The impact of fixed costs due to reduced volumes, which decreased operating profit by $5.1 million related to fixed selling, general, and administrative costs and $1.9 million related to fixed overhead costs.
• Increases in transportation costs due to changes in customer mix, which reduced operating profit by $3.2 million.
• Higher production facility costs in the current period resulting from investments to expand capacity over the past year, which reduced operating profit by $2.6 million in the current period.

Amortization expense on intangible assets for the Aftermarket Segment was $11.6 million in the first nine months of 2023, compared to $11.3 million in the same period of 2022. Depreciation expense on fixed assets for the Aftermarket Segment was $12.1 million in the first nine months of 2023, compared to $10.9 million in the same period of 2022.

Interest Expense

Interest expense, net was $31.0 million for the nine months ended September 30, 2023, compared to $19.4 million in the same period of 2022. The increase in interest expense was primarily due to higher global interest rates on our adjustable rate Term Loan (as defined in Note 8 of the Notes to Condensed Consolidated Financial Statements) and revolving credit facility, partially offset by principal payments on the Term Loan, net repayments on our revolving credit facility, and the payoff of the shelf loan balance in March 2022. We prepaid $30.0 million of principal on the Term Loan during the three months ended September 30, 2023. This prepayment was applied to pay in full the scheduled principal amortization payments due through September 30, 2024, and is projected to save us approximately $1.3 million in annual interest expense based on interest rates in effect at September 30, 2023. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a description of our credit facilities.

Income Taxes

The effective tax rates for the nine months ended September 30, 2023 and 2022 were 25.9 percent and 26.0 percent, respectively. The effective tax rate for the nine months ended September 30, 2023 differed from the Federal statutory rate primarily due to state taxes, foreign taxes, and non-deductible expenses, partially offset by the recognition of excess tax benefits on stock-based compensation as a component of the provision for income taxes, and Federal and Indiana research and development credits. The decrease in the effective tax rate for the nine months ended September 30, 2023 as compared to the same period in 2022 was primarily due to an increased benefit from life insurance contract assets related to our deferred compensation plan.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

We maintain a level of liquidity sufficient to allow us to meet our cash needs in the short term. Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial condition, and maintain flexibility for our future strategic investments. We continuously assess our capital requirements, working capital needs, debt and leverage levels, debt and lease maturity schedules, capital expenditure requirements, dividends, future investments or acquisitions, and potential share repurchases. We believe our operating cash flows, credit facilities, as well as any potential future borrowings, will be sufficient to fund our future payments and long-term initiatives.

As of September 30, 2023, we had $31.2 million in cash and cash equivalents, and $178.5 million of availability under our revolving credit facility under the Credit Agreement (as defined in Note 8 of the Notes to Condensed Consolidated Financial Statements). We also have the ability to request an increase to the revolving and/or incremental term loan facilities by up to an additional $400.0 million in the aggregate upon approval of the lenders providing any such increase and the satisfaction of certain other conditions. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a description of our credit facilities.

We believe the availability under the revolving credit facility under the Credit Agreement, along with our cash flows from operations, are adequate to finance our anticipated cash requirements for the next twelve months.

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

(In thousands)

Cash Flows from Operations

Net cash flows provided by operating activities were $389.3 million in the first nine months of 2023, compared to $485.5 million in the first nine months of 2022. The decrease in net cash flows provided by operating activities was primarily due to a decrease in net income of $345.5 million. The decrease in net income was partially offset by the net change in assets and liabilities, net of acquired businesses, as it generated $247.1 million more cash in the first nine months of 2023 compared to the same period in 2022. The primary provider of cash generated from net assets in the first nine months of 2023 was the decrease in inventory of $246.2 million, due to decreasing material commodity costs and initiatives to reduce inventory as RV production demand has slowed from record levels seen during the first half of 2022. The primary use of cash in net assets was the increase of $121.9 million in accounts receivable due to seasonally higher sales in the first nine months of 2023.

Depreciation and amortization was $98.8 million in the first nine months of 2023, and is expected to be approximately $130 to $135 million for the full year 2023. Non-cash stock-based compensation expense in the first nine months of 2023 was $14.0 million. Non-cash stock-based compensation expense is expected to be approximately $18 to $20 million for the full year 2023.

Cash Flows from Investing Activities

Cash flows used in investing activities of $71.6 million in the first nine months of 2023 were primarily comprised of $50.1 million for capital expenditures and $25.9 million for the acquisitions of businesses. Cash flows used in investing activities of $157.3 million in the first nine months of 2022 were primarily comprised of $103.7 million for capital expenditures and $55.7 million for the acquisitions of businesses, net of cash acquired.

Our capital expenditures are primarily for replacement and growth. Over the long term, based on our historical capital expenditures, the replacement portion has averaged approximately one to two percent of net sales, while the growth portion has averaged approximately two to three percent of net sales. However, there are many factors that can impact the actual spending compared to these historical averages. We estimate full year 2023 capital expenditures of $55 to $60 million, including investments in automation and lean projects.

Capital expenditures and acquisitions in the first nine months of 2023 were funded by cash generated from operations and borrowings under our Credit Agreement. Capital expenditures and acquisitions in the remainder of fiscal year 2023 are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under our revolving credit facility as needed.

Cash Flows from Financing Activities

Cash flows used in financing activities of $333.4 million in the first nine months of 2023 were primarily comprised of $165.7 million in net repayments under our revolving credit facility, payments of quarterly dividends of $79.7 million, $45.8 million in repayments under our Term Loan and other borrowings, $31.9 million related to payments of contingent consideration and holdbacks related to acquisitions, and cash outflows of $9.6 million related to vesting of stock-based awards, net of shares tendered for payment of taxes. Included in the repayments under our Term Loan was a $30.0 million of principal prepayment during the three months ended September 30, 2023. This prepayment was applied to pay in full the scheduled principal amortization payments due through September 30, 2024.

Cash flows used in financing activities of $364.9 million in the first nine months of 2022 were primarily comprised of $156.1 million in net repayments under our revolving credit facility, payments of quarterly dividends of $76.3 million, $65.9 million in repayments under our shelf loan, Term Loan, and other borrowings, $57.3 million related to payment of contingent consideration and holdbacks related to acquisitions, and cash outflows of $10.8 million related to vesting of stock-based awards, net of shares tendered for payment of taxes.

The Credit Agreement includes both financial and non-financial covenants. The covenants dictate that we shall not permit our net leverage ratio to exceed certain limits, shall maintain a minimum debt service coverage ratio, and must meet certain other financial requirements. On May 23, 2023, we entered into an amendment to the Credit Agreement that, among other things, provided for adjustments to certain of the financial covenants by increasing the maximum total net leverage ratio and decreasing the minimum debt service coverage ratio, in each case for the two fiscal quarters ending June 30, 2023 and September 30, 2023. At September 30, 2023, we were in compliance with all financial covenants. The amendment to the Credit Agreement also provided for the transition from LIBOR to term SOFR as the benchmark rate for purposes of calculating interest on certain outstanding borrowings.

We have paid regular quarterly dividends since 2016. Future dividend policy with respect to our common stock will be determined by our Board of Directors considering our prevailing financial needs, earnings, and other relevant factors, including any limitations in our debt agreements, such as maintenance of certain financial ratios.

CORPORATE GOVERNANCE

We are in compliance with the corporate governance requirements of the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange. Our governance documents and committee charters and key practices have been posted to the “Investors” section of our website (www.lci1.com (http://www.lci1.com)) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. We have also established a Whistleblower Policy, which includes a toll-free hotline (800-461-9330) to report complaints about our accounting, internal controls, auditing matters or other concerns. The Whistleblower Policy and procedure for complaints can be found on our website (www.lci1.com (http://www.lci1.com)).

CONTINGENCIES

Information required by this item is included in Note 10 of the Notes to Condensed Consolidated Financial Statements and is incorporated herein by reference.

RAW MATERIALS INFLATION

The prices of key raw materials, consisting primarily of steel and aluminum, and components used by us which are made from these raw materials, are influenced by demand and other factors specific to these commodities, as well as by inflationary pressures. We experienced reduced prices of these commodities in the first nine months of 2023, but prices of these commodities have historically been volatile. As a result, while we currently expect commodity prices for the remainder of the year to remain generally consistent with the third quarter of 2023, there can be no assurance that raw material costs will not increase. Please see "Results of Operations" above for additional information regarding the impact of raw material costs on our results of operations for the first nine months of 2023.

NEW ACCOUNTING PRONOUNCEMENTS

Information required by this item is included in Note 2 of the Notes to Condensed Consolidated Financial Statements.

USE OF ESTIMATES

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q 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, the impact of legal proceedings, and other matters. Statements in this Form 10-Q that are not historical facts are "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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), capital expenditures, tax rate, cash flow, financial condition, liquidity, covenant compliance, retail and wholesale demand, integration of acquisitions, R&D investments, commodity prices and industry trends, whenever they occur in this Form 10-Q, are necessarily estimates reflecting the best judgment of the Company's senior management at the time such statements were made. There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, the impacts other future pandemics, geopolitical tensions, armed conflicts, or natural disasters, on the Company's customers, suppliers, employees, business and cash flows, pricing pressures due to domestic and foreign competition, costs and availability of, and tariffs on, 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 and successful integration of acquisitions and other growth initiatives, availability and costs of production facilities and labor, team member benefits, team member 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, other operational and financial risks related to conducting business internationally, 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, and availability, 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and in the Company's subsequent filings with the SEC, including the Company's Quarterly Reports on Form 10-Q. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. 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.

DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in short-term interest rates on our variable rate debt. Depending on the interest rate option selected as more fully described in Note 8 of the Notes to Condensed Consolidated Financial Statements, interest is charged based on an indexed rate plus an applicable margin. Assuming a hypothetical increase of 0.25 percent in the indexed interest rate (which approximates a six percent increase of the weighted-average interest rate on our borrowings as of September 30, 2023), our results of operations would not be materially affected.

We are also exposed to changes in the prices of raw materials, specifically steel and aluminum. We have, 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. We had no outstanding derivative instruments on commodities at September 30, 2023 and December 31, 2022.

We have historically been able to obtain sales price increases to partially offset most raw material cost increases. However, there can be no assurance that 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 "Raw Materials Inflation" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report.

a. Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of "disclosure controls and procedures" in Rule 13a-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. We continually evaluate our disclosure controls and procedures to determine if changes are appropriate based upon changes in our operations or the business environment in which we operate.

As of the end of the period covered by this Form 10-Q, we performed an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

b. Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the SEC on February 24, 2023.