# LCI INDUSTRIES (LCII) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from LCI INDUSTRIES's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/763744/000076374422000016/lcii-20211231.htm Accession: 0000763744-22-000016 Filing date: 2022-02-25 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/LCII/ All MD&A years: /company/LCII/mda/ Next year: /company/LCII/mda/fy2022/ (FY 2022) 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 our Consolidated Financial Statements and Notes thereto included in Part II, Item 8 of this Report. This Management's Discussion and Analysis of Financial Condition and Results of Operations generally discusses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020. A detailed discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021. The Company, through its wholly-owned subsidiary, LCI, supplies, domestically and internationally, a broad array of engineered components for the leading OEMs in the recreation and transportation product markets, consisting of RVs and adjacent industries including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; 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. We have two reportable segments, the OEM Segment and the Aftermarket Segment. At December 31, 2021, we operated over 120 manufacturing and distribution facilities located throughout North America and Europe. 24 Net sales and operating profit were as follows for the years ended December 31: [[GREPCENT_TABLE]] [["(In thousands)","2021","","2020","","2019"],["Net sales:"],["OEM Segment:"],["RV OEMs:"],["Travel trailers and fifth-wheels","$","2,295,612","","","$","1,321,567","","","$","1,276,718"],["Motorhomes","258,995","","","158,096","","","155,623"],["Adjacent Industries OEMs","1,089,005","","","688,248","","","659,560"],["Total OEM Segment net sales","3,643,612","","","2,167,911","","","2,091,901"],["Aftermarket Segment:"],["Total Aftermarket Segment net sales","829,085","","","628,255","","","279,581"],["Total net sales","$","4,472,697","","","$","2,796,166","","","$","2,371,482"],["Operating profit:"],["OEM Segment","$","304,676","","","$","156,092","","","$","165,290"],["Aftermarket Segment","93,734","","","66,842","","","34,920"],["Total operating profit","$","398,410","","","$","222,934","","","$","200,210"]] [[/GREPCENT_TABLE]] Corporate expenses are allocated between the segments based upon net sales. Net sales and operating profit by segment, as a percent of the total, were as follows for the years ended December 31: [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["Net sales:"],["OEM Segment","81%","","78%","","88%"],["Aftermarket Segment","19%","","22%","","12%"],["Total net sales","100%","","100%","","100%"],["Operating Profit:"],["OEM Segment","76%","","70%","","83%"],["Aftermarket Segment","24%","","30%","","17%"],["Total segment operating profit","100%","","100%","","100%"]] [[/GREPCENT_TABLE]] Operating profit margin by segment was as follows for the years ended December 31: [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["OEM Segment","8.4%","","7.2%","","7.9%"],["Aftermarket Segment","11.3%","","10.6%","","12.5%"]] [[/GREPCENT_TABLE]] Operating profit margins in 2020 were negatively impacted by government-mandated shutdowns related to the COVID-19 pandemic from late March through early May 2020, that caused a significant reduction in net sales while still incurring certain employee salary and wages, healthcare and safety expenses, and other fixed costs. Our OEM Segment manufactures and distributes a broad array of engineered components for the leading OEMs of RVs and adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; trucks; boats; 25 trains; manufactured homes; and modular housing. Approximately 63 percent of our OEM Segment net sales for the year ended December 31, 2021 were of components for travel trailer and fifth-wheel RVs, including: [[GREPCENT_TABLE]] [["\u25cf Steel chassis and related components","\u25cf Electric and manual entry steps"],["\u25cf Axles and suspension solutions","\u25cf Awnings and awning accessories"],["\u25cf Slide-out mechanisms and solutions","\u25cf Electronic components"],["\u25cf Thermoformed bath, kitchen and other products","\u25cf Appliances"],["\u25cf Vinyl, aluminum and frameless windows","\u25cf Air conditioners"],["\u25cf Manual, electric and hydraulic stabilizer and leveling systems","\u25cf Televisions and sound systems"],["\u25cf Entry, luggage, patio and ramp doors","\u25cf Other accessories"],["\u25cf Furniture and mattresses"]] [[/GREPCENT_TABLE]] The Aftermarket Segment supplies many of these engineered components to the related aftermarket channels of the recreation and transportation product 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, and the sale of replacement glass and awnings to fulfill insurance claims. Diversification Strategy We are executing a strategic initiative to diversify the markets we serve away from the historical concentration within the North American RV OEM industry. Approximately 47 percent of net sales for the year ended December 31, 2021 were generated outside of the North American RV OEM market compared to 50 percent in 2020. The percentage of net sales generated outside of the North American RV OEM market in 2021 declined compared to the 2020 percentage due to record demand in the North American RV OEM market, which more than offset our diversification efforts. Over the past three years, most of our acquisitions have contributed to net sales growth outside of the North American RV OEM industry. Impact of COVID-19 The COVID-19 pandemic has caused significant uncertainty and disruption in the global economy and financial markets. The COVID-19 pandemic had an adverse effect on our financial results during the first half of 2020 due to government-mandated plant shutdowns. We took a variety of actions during 2020 to help mitigate the adverse impacts, including temporary cost savings measures and delays and reductions in capital expenditures. Activity in most of the end markets we serve sequentially improved as 2020 progressed, and this trend continued through 2021, especially in the RV and marine OEM markets and our Aftermarket Segment. With RV retail demand at record levels throughout 2021, the industry faced challenges with supply chain constraints, rising material costs, increased transportation costs, primarily for third party freight, and increases in direct labor costs due to higher production volumes and a tightened labor market, especially in northern Indiana. To address these challenges, we strategically managed working capital, including intentionally building up levels of certain inventory items to avoid future shortages. We continue to focus on our culture and leadership development programs to focus on team member retention and regularly hold hiring events, with COVID-19 safety measures, to fill open positions. As we build inventory levels and invest in additional production capacity, we also closely monitor our liquidity, and may need to seek additional financing, though such additional financing may not be available on terms favorable to us, or at all. See "Liquidity and Capital Resources" below for further discussion. The health and safety of our team members have remained our top priority. We continue to maintain rigorous health and safety protocols. We leased a location to provide drive-thru rapid COVID-19 tests for our team members in northern Indiana. We have encouraged team members to seek vaccination when eligible and partnered with a local hospital to host private vaccination days for our eligible northern Indiana team members and their families. We continue to closely monitor the impact of COVID-19 on all aspects of our business. For risks relating to the COVID-19 pandemic, see Item 1A. "Risk Factors" in Part I of this Report. 26 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. Due to the COVID-19 pandemic, the 2021 and 2020 Open Houses were canceled. The seasonality of the RV industry has been, and will likely continue to be, impacted by the COVID-19 pandemic, and the timing of a return to historical seasonality is not possible to predict at this time. According to the RVIA, industry-wide wholesale shipments from the United States of travel trailer and fifth-wheel RVs, the Company's primary RV market, increased 40 percent to 531,200 units in 2021, compared to 2020, primarily due to increased retail demand and dealers rebuilding inventory levels. Retail demand for travel trailer and fifth-wheel RVs increased 10 percent in 2021 compared to 2020. 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: [[GREPCENT_TABLE]] [["","Wholesale","","Retail","","Estimated UnitImpact onDealer Inventories"],["","Units","","Change","","Units","","Change"],["Year ended December 31, 2021","531,200","","","40%","","500,200","","10%","","31,000"],["Year ended December 31, 2020","380,100","","","9%","","456,100","","15%","","(76,000)"],["Year ended December 31, 2019","349,700","","","(16)%","","397,800","","(6)%","","(48,100)"]] [[/GREPCENT_TABLE]] According to the RVIA, industry-wide wholesale shipments of motorhome RVs in 2021 increased 38 percent to 56,200 units compared to 2020, primarily due to OEM plant shutdowns in response to COVID-19 in 2020. Retail demand for motorhome RVs increased 4 percent in 2021, compared to a 2 percent decrease in retail demand in 2020. Adjacent Industries Our 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; 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. We believe there are significant opportunities in these Adjacent Industries. The estimated potential content per unit we 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 233,100, 231,100, and 220,400 enclosed trailers were sold in 2021, 2020, and 2019, respectively. •Traditional power boats. Statistical Surveys also reported approximately 214,200, 231,400, and 202,500 traditional power boats were sold in 2021, 2020, and 2019, respectively. Traditional power boats include bass, deck, jet, pontoon, ski-wake, and other boats. Included in this total, Statistical Surveys reported approximately 64,400, 67,500, and 55,200 pontoon boats were sold in 2021, 2020, and 2019, respectively. 27 •School buses. According to School Bus Fleet, there were approximately 30,600, 36,000, and 44,400 school buses sold in 2021, 2020, and 2019, respectively. •Manufactured housing. According to the Institute for Building Technology and Safety, there were approximately 105,800, 94,400, and 94,600 manufactured home wholesale shipments in 2021, 2020, and 2019, respectively. Aftermarket Segment Many of our OEM Segment products are also sold through various aftermarket channels of the recreation and transportation product 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 both 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, and the sale of replacement glass and awnings to fulfill insurance claims. Many of the optional upgrades and non-critical replacements for RVs are purchased outside the normal product selling seasons, thereby causing certain Aftermarket Segment sales to be counter-seasonal, but this has been, and may in the future be, different as a result of the COVID-19 pandemic and related impacts. 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. In December 2019, we acquired CURT, a leading manufacturer and distributor of branded towing products and truck accessories for the aftermarket. Our CURT products are sold to the automotive and truck aftermarket, as well as the RV, marine, and trailer markets, all of which require towing products, which we believe compliments the OEM markets we serve. Sales from CURT products accounted for approximately half of our Aftermarket Segment net sales in each of 2021 and 2020. CURT sold 1.2 million hitches in both 2021 and 2020. Additionally, with the acquisition of Ranch Hand in April 2021, we continued to expand our product offering to include custom bumpers, grill guards, and steps for the automotive aftermarket. RESULTS OF OPERATIONS Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Consolidated Summary •Consolidated net sales for the full-year 2021 were $4.5 billion, 60 percent higher than consolidated net sales for the full-year 2020 of $2.8 billion. The increase in year-over-year net sales was primarily driven by record RV retail demand and strong Aftermarket Segment sales growth. Net sales from acquisitions completed in 2020 and 2021, primarily Furrion, Veada Industries, Inc., and Challenger Door LLC, contributed approximately $269.9 million in 2021. •Net income for the full-year 2021 increased 81.6 percent to $287.7 million, or $11.32 per diluted share, compared to net income of $158.4 million, or $6.27 per diluted share, for full-year 2020. •Consolidated operating profit during 2021 was $398.4 million compared to $222.9 million in 2020. Operating profit margin was 8.9 percent in 2021 compared to 8.0 percent in 2020, primarily due to leveraging fixed costs over higher sales volumes, partially offset by increased raw material, labor, and freight costs. •The cost of aluminum and steel used in certain of the Company's manufactured components increased in 2021 compared to 2020. Raw material costs are subject to continued fluctuation and are being offset, in part, by contractual selling prices that are indexed to select commodities. •The increase in selling, general and administrative costs of $161.5 million in 2021 was primarily driven by increases in transportation costs of $60.5 million, due to higher volumes and rising freight costs, increases in personnel costs of $39.5 million, incremental costs from recent acquisitions of $25.9 million, and incremental amortization of intangible assets from acquired businesses of $12.5 million in 2021 compared to 2020. •The effective tax rate of 24.7 percent for the full-year 2021 was higher than the prior year, primarily due to an increase in non-deductible expenses, as discussed below under "Provision for Income Taxes." •In 2021, we paid quarterly dividends aggregating $3.45 per share, or $87.2 million. 28 OEM Segment Net sales of the OEM Segment in 2021 increased 68 percent, or $1.5 billion, compared to 2020. Net sales of components to OEMs were to the following markets for the years ended December 31: [[GREPCENT_TABLE]] [["(In thousands)","2021","","2020","","Change"],["RV OEMs:"],["Travel trailers and fifth-wheels","$","2,295,612","","","$","1,321,567","","","74%"],["Motorhomes","258,995","","","158,096","","","64%"],["Adjacent Industries OEMs","1,089,005","","","688,248","","","58%"],["Total OEM Segment net sales","$","3,643,612","","","$","2,167,911","","","68%"]] [[/GREPCENT_TABLE]] According to the RVIA, industry-wide wholesale shipments for the years ended December 31 were: [[GREPCENT_TABLE]] [["","2021","","2020","","Change"],["Travel trailer and fifth-wheel RVs","531,200","","","380,100","","","40%"],["Motorhomes","56,200","","","40,700","","","38%"]] [[/GREPCENT_TABLE]] The trend in our average product content per RV produced is an indicator of our overall market share of components for new RVs. Our average product content per type of RV, calculated based upon our net sales of components to domestic RV OEMs for the different types of RVs produced for the twelve months ended December 31, divided by the industry-wide wholesale shipments of the different product mix of RVs for the same period, was: [[GREPCENT_TABLE]] [["Content per:","2021","","2020","","Change"],["Travel trailer and fifth-wheel RV","$","4,198","","","$","3,390","","","24%"],["Motorhome","$","2,856","","","$","2,479","","","15%"]] [[/GREPCENT_TABLE]] 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 market share gains, acquisitions, new product introductions, and changes in selling prices for our products, as well as changes in the types of RVs produced industry-wide. Our increase in net sales to RV OEMs of travel trailers, fifth-wheel, and motorhome components during 2021 was primarily driven by a recovery in RV retail demand beginning later in the second quarter of 2020 and continuing through 2021. The net sales increase further benefited from content gains and price increases during 2021. Our increase in net sales to OEMs in Adjacent Industries during 2021 was primarily driven by acquisitions and a recovery in retail demand for the marine industry and other adjacent markets beginning later in the second quarter of 2020 and continuing through 2021. Operating profit of the OEM Segment was $304.7 million in 2021, an increase of $148.6 million compared to 2020, of which $106.3 million was driven by volume increases. The operating profit margin of the OEM Segment increased to 8.4 percent in 2021 compared to 7.2 percent in 2020 and was positively impacted by: •Selling prices contractually tied to indexes of select commodities increased, resulting in an increase in operating profit of $207.7 million compared to 2020. •Pricing changes to targeted products, resulting in an increase in operating profit of $128.9 million compared to 2020. •Leveraging of fixed costs over an increased sales base in 2021, which increased operating profit by $71.7 million related to fixed selling, general and administrative costs and $28.4 million related to fixed overhead costs. Partially offset by: •Increases in material commodity pricing, which negatively impacted operating profit by $306.2 million, primarily related to increased steel and aluminum costs. •Increases in direct labor costs due to higher production volumes and a tight labor market, which reduced operating profit by $36.1 million. •Increases in transportation costs, primarily for third party freight, which reduced operating profit by $17.5 million. •Additional amortization related to intangible assets from acquisitions completed in 2021 and 2020, which reduced operating profit by $9.8 million. 29 Aftermarket Segment Net sales of the Aftermarket Segment in 2021 increased 32 percent, or $200.8 million, compared to 2020. Net sales of components in the Aftermarket Segment were as follows for the years ended December 31: [[GREPCENT_TABLE]] [["(In thousands)","2021","","2020","","Change"],["Total Aftermarket Segment net sales","$","829,085","","","$","628,255","","","32%"]] [[/GREPCENT_TABLE]] Our net sales to the Aftermarket Segment increased during 2021 primarily due to organic growth of $149.0 million and net sales from acquisitions completed in 2021 and 2020, which contributed approximately $51.8 million. Operating profit of the Aftermarket Segment was $93.7 million in 2021, an increase of $26.9 million compared to 2020, of which $21.3 million was due to the growth in sales primarily driven by sales from organic growth and the impact of COVID-19 in 2020. The operating profit margin of the Aftermarket Segment was 11.3 percent in 2021, compared to 10.6 percent in 2020, and was positively impacted by: •Pricing changes to targeted products, resulting in an increase in operating profit of $31.7 million compared to 2020. •Leveraging of fixed costs over an increased sales base in 2021, which increased operating profit by $16.1 million related to fixed selling, general and administrative costs and $9.9 million related to fixed overhead costs. •The recognition of higher cost of sales during 2020, due to the inventory fair value step-up for CURT of $7.3 million. Partially offset by: •Increases in material commodity pricing and production supplies, which negatively impacted operating profit by $31.1 million, primarily related to increased steel and aluminum costs. •Increases in transportation costs, primarily for third party freight, which reduced operating profit by $15.4 million. •Increases in direct labor costs due to higher production volumes and a tight labor market, which reduced operating profit by $7.6 million. Provision for Income Taxes The effective income tax rate for 2021 was 24.7 percent compared to 24.4 percent in 2020. The effective tax rate of 24.7 percent for the full-year 2021 was higher than the prior year, primarily due to a year-over-year increase in non-deductible items related to executive compensation limitations, partially offset by discrete adjustments. We estimate the 2022 effective income tax rate to be approximately 24 to 26 percent. 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, and future investments or acquisitions. 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 December 31, 2021, we had $62.9 million in cash and cash equivalents, and $168.3 million of availability on our revolving credit facility. Additionally, we have the ability to request up to $150.0 million in additional Senior Promissory Notes be purchased by Prudential under our Shelf-Loan Facility (each as defined in Note 9 of the Notes to Consolidated Financial Statements), subject to Prudential's approval. We also have the ability to request an increase to the revolving and/or incremental term loan facility by up to an additional $400.0 million in the aggregate upon approval of the lenders and certain other consents. See Note 9 of the Notes to Consolidated Financial Statements for a description of our credit facilities. We believe the availability under the revolving credit facility under the Amended Credit Agreement (as defined in Note 9 of the Notes to Consolidated Financial Statements), along with our cash flows from operations, are adequate to finance our anticipated cash requirements for the next twelve months. 30 The Consolidated Statements of Cash Flows reflect the following for the years ended December 31: [[GREPCENT_TABLE]] [["(In thousands)","","2021","","2020","","2019"],["Net cash flows (used in) provided by operating activities","","$","(111,573)","","","$","231,400","","","$","269,525"],["Net cash flows used in investing activities","","(281,218)","","","(232,301)","","","(503,834)"],["Net cash flows provided by financing activities","","404,563","","","14,048","","","254,971"],["Effect of exchange rate changes on cash and cash equivalents","","(697)","","","3,315","","","(231)"],["Net increase in cash and cash equivalents","","$","11,075","","","$","16,462","","","$","20,431"]] [[/GREPCENT_TABLE]] Discussion - Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Cash Flows from Operations Net cash flows used in operating activities were $111.6 million in 2021, compared to cash provided by operating activities of $231.4 million in 2020. This change was primarily due to changes in net assets and liabilities, net of acquisitions of businesses, which used $498.7 million more cash than in 2020. During 2021, in an effort to address challenges with supply chain constraints, rising material costs, and a tightened labor market, we strategically managed working capital, including intentionally building up levels of certain inventory items and expanding production capacity. As a result, increases in inventory of $516.7 million and in receivables related to increased wholesale RV demand of $58.8 million were the primary uses of cash generated from net assets. The decrease was partially offset by a $155.8 million increase in net income, adjusted for depreciation and amortization, stock-based compensation expense, deferred taxes, and other non-cash items. Over the long term, based on our historical collection and payment patterns, as well as inventory turnover, and also giving consideration to emerging trends and changes to the sales mix, we expect 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 $112.3 million and $98.0 million in 2021 and 2020, respectively, and is expected to be approximately $140 to $150 million in 2022. Non-cash stock-based compensation expense was $27.2 million and $18.5 million in 2021 and 2020, respectively, and is expected to be approximately $25 to $30 million in 2022. Cash Flows from Investing Activities Cash flows used in investing activities of $281.2 million in 2021 were primarily comprised of $194.1 million for the acquisition of businesses and $98.5 million for capital expenditures. Cash flows used in investing activities of $232.3 million in 2020 were primarily comprised of $182.1 million for the acquisition of businesses and $57.3 million for capital expenditures. This increase in capital expenditures was primarily due to increased maintenance and replacement investments of $25.8 million as well as increased investments in automation projects of $15.4 million. 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 2022 capital expenditures of $130 to $150 million, including capacity expansions to meet elevated demand, which we expect to fund with cash flows from operations or periodic borrowings under the revolving credit facility as needed. The 2021 capital expenditures and acquisitions were funded by cash borrowings under our credit agreement, and net proceeds from the issuance of our 1.125 percent convertible senior notes due 2026 (the "Convertible Notes"). Capital expenditures and acquisitions in 2022 are expected to be funded primarily from cash generated from operations, as well as periodic borrowings under our revolving credit facility. Cash Flows from Financing Activities Cash flows provided by financing activities in 2021 were primarily comprised of: •proceeds from the issuance of the Convertible Notes and warrants to purchase 2.8 million shares of the Company's common stock (the "Warrants"), net of debt issuance costs, and from the privately negotiated call option contracts on the Company's common stock (the "Convertible Note Hedge Transactions") of $396.6 million. •$124.2 million in borrowings under the term loan. 31 •$22.0 million in net borrowings under our revolving credit facility. Partially offset by: •payments of quarterly dividends of $87.2 million; •$22.8 million in payments of contingent consideration and holdbacks related to acquisitions; •$21.5 million in repayments under the term loan and other borrowings; and •cash outflows of $8.3 million related to vesting of stock-based awards, net of shares tendered for payment of taxes. On May 13, 2021, we issued $460.0 million in aggregate principal amount of the Convertible Notes in a private placement to certain qualified institutional buyers, resulting in net proceeds to us of approximately $447.8 million after deducting initial purchasers' discounts and offering expenses payable by us on the Convertible Notes. In connection with the issuance of the Convertible Notes, we entered into the Convertible Note Hedge Transactions and transactions related to the issuance of warrants (the "Warrant Transactions"). We used approximately $51.6 million of the net proceeds of the offering of the Convertible Notes to pay the $100.1 million cost of the Convertible Note Hedge Transactions (after such cost was partially offset by the $48.5 million of proceeds from the Warrant Transactions). The remainder of the net proceeds from the Convertible Notes were used to repay outstanding borrowings under our revolving credit facility, and for general corporate purposes. See Note 3 and Note 9 to the Notes to Consolidated Financial Statements for further description of these transactions. Cash flows provided by financing activities in 2020 primarily included net borrowings on the revolving credit facility of $113.6 million, partially offset by the payment of dividends to stockholders of $70.4 million, and repayments under our term loan and other borrowings of $22.4 million. The Amended Credit Agreement and Shelf-Loan Facility include both financial and non-financial covenants. The covenants dictate that we shall not permit our net leverage ratio to exceed certain limits, shall maintain a minimum debt service coverage ratio, and must meet certain other financial requirements. At December 31, 2021, we were in compliance with all such requirements, and we expect to remain in compliance for the next twelve months. We have paid regular quarterly dividends since 2016. Future dividend policy with respect to our common stock will be determined by our Board of Directors in light of our prevailing financial needs, earnings, and other relevant factors, including any limitations in our debt agreements, such as maintenance of certain financial ratios. In October 2018, our Board of Directors authorized a stock repurchase program which expired in October 2021. No shares were repurchased during the years ended December 31, 2021 and 2020. See Note 13 of the Notes to Consolidated Financial Statements for additional information related to our dividend and share repurchase programs. Future Cash Requirements The following table summarizes our material estimated future cash requirements under our contractual obligations for indebtedness and operating leases at December 31, 2021, in total and disaggregated into current (payable in 2022) and long-term (payable after 2022) obligations. [[GREPCENT_TABLE]] [["(In thousands)","","Total","","Current","","Long-Term"],["Total indebtedness (a)","","$","1,314,950","","","$","71,382","","","$","1,243,568"],["Interest on indebtedness (a)","","77,913","","","17,276","","","60,637"],["Operating leases (b)","","210,426","","","36,416","","","174,010"],["Total","","$","1,603,289","","","$","125,074","","","$","1,478,215"]] [[/GREPCENT_TABLE]] a.See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the maturities of debt principal. Interest payments on our indebtedness are calculated using the outstanding balances and interest rates in effect on December 31, 2021. b.See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding the maturity of our lease obligations under operating leases. Our finance leases were not material at December 31, 2021. Retirement and Other Benefit Plans We consider various factors when making funding decisions, such as regulatory requirements, actuarially determined minimum contribution requirements, and contributions required to avoid benefit restrictions for defined benefit pension plans. For the year ended December 31, 2021, we contributed $1.4 million to our Dutch pension plans assumed with the acquisition of 32 Polyplastic Group B.V., and made discretionary matching contributions of $11.6 million to our defined contribution 401(k) profit sharing plan. We anticipate making minimum required contributions of $1.4 million to our Dutch pension plans in 2022. We also expect to make matching contributions to our defined contribution 401(k) profit sharing plan in 2022 at a level similar to 2021; however, these contributions are discretionary and subject to change. See Note 8 of the Notes to Consolidated Financial Statements for further information related to our retirement and other benefit plans. Holdback Payments and Contingent Consideration With certain business acquisitions, we hold back purchase consideration for the purposes of working capital adjustments, indemnity claims, and other items, as defined in each respective purchase agreement. At December 31, 2021, we had current holdback payments accrued of $34.0 million and long-term holdback payments accrued of $31.0 million related to certain acquisitions completed in 2021 and 2020. The ultimate cash settlement amounts of these holdback accruals are subject to change based on various factors defined in the respective purchase agreements. In connection with certain business acquisitions, we agree that if certain sales targets for the acquired products are achieved, we will pay additional cash consideration. We record a liability for the fair value of this contingent consideration based on the present value of the expected future cash flows using a market participant's weighted average cost of capital. At December 31, 2021, we had current contingent consideration accrued of $5.0 million and long-term contingent consideration accrued of $1.9 million. The ultimate cash settlement amounts of these contingent consideration arrangements are subject to change based on the level of attainment of the performance targets in the respective agreements. See Note 4 and Note 12 of the Notes to Consolidated Financial Statements for further information related to these holdback payments and contingent consideration. Deferred Social Security Payments Under the CARES Act In 2020, we elected to defer employer-side Social Security payments under provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We deferred $18 million of payments in 2020 under the CARES Act and paid $9 million of deferred Social Security taxes in 2021 and will pay $9 million in 2022. CORPORATE GOVERNANCE We are in compliance with the corporate governance requirements of the SEC and the New York Stock Exchange. Our governance documents and committee charters and key practices have been posted to our 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. We have also established a Whistleblower Policy, which includes a toll-free hotline (800-461-9330) 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 our website (www.lci1.com). 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 ESTIMATES Our 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 to 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. While our significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements, the following discussion addresses our most critical accounting estimates, which are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. Management has discussed the development and selection of its critical accounting estimates 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 estimates. Warranty We provide warranty terms based upon the type of product sold. We estimate the warranty accrual based upon various factors, including historical warranty costs, warranty claim lag, and sales. The accounting for warranty accruals requires us to 33 make assumptions and judgments, and to the extent actual results differ from original estimates, adjustments to recorded accruals may be required. In 2021, we experienced an increase in claims paid year-over-year, but at a much lower rate than the growth in net sales. We believe the favorable trend in relation to net sales is the result of concentrated efforts related to product quality and customer service. Additionally, the increase in RV retail demand has shortened our warranty claim lag time, which favorably impacts our warranty reserves. For further information on our warranty accrual, including a roll-forward of changes in the accrual, see Note 7 of the Notes to Consolidated Financial Statements. Fair Value of Intangible Assets of Acquired Businesses We value the intangible assets associated with the acquisitions of businesses on the respective acquisition dates. Depending upon the type of intangible asset acquired, we use 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 and a market participant’s weighted average cost of capital, as well as other techniques as circumstances require. By their nature, these assumptions require judgment, and if management had chosen different assumptions, the fair value of intangible assets of acquired businesses would have been different. For further information on acquired intangible assets, see Note 4 of the Notes to Consolidated Financial Statements. New Accounting Pronouncements Information required by this item is included in Note 2 of the Notes to Consolidated Financial Statements. 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 elevated prices of these commodities in 2021, and we expect commodity prices to remain elevated in 2022. Prices of these commodities have historically been volatile, and over the past few months prices have continued to fluctuate. Please see "Results of Operations" above for additional information regarding the impact of raw material costs on our results of operations for the year ended December 31, 2021. As a result of the competitive labor market and strong demand for our products, we experienced increased labor costs in 2021 attributable to higher wages and increased overtime and additional shifts for our team members, and we expect labor costs to remain elevated in 2022. Please see "Results of Operations" above for additional information regarding the impact of labor costs on our results of operations for the year ended December 31, 2021.