LCI Industries(LCII) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1 – FINANCIAL STATEMENTS This section presents the company's unaudited condensed consolidated financial statements for the periods ended June 30, 2021 and 2020 Condensed Consolidated Statements of Income Three Months Ended June 30, 2021 vs 2020 (In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $1,093,720 | $525,765 | 108.0% | | Gross profit | $257,611 | $128,742 | 100.1% | | Operating profit | $93,982 | $20,782 | 352.2% | | Net income | $67,889 | $13,186 | 414.9% | | Basic EPS | $2.69 | $0.52 | 417.3% | | Diluted EPS | $2.67 | $0.52 | 413.5% | Six Months Ended June 30, 2021 vs 2020 (In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $2,093,978 | $1,185,435 | 76.6% | | Gross profit | $499,388 | $287,347 | 73.8% | | Operating profit | $195,413 | $65,048 | 200.4% | | Net income | $142,009 | $41,400 | 242.9% | | Basic EPS | $5.63 | $1.65 | 241.2% | | Diluted EPS | $5.60 | $1.64 | 241.5% | Condensed Consolidated Statements of Comprehensive Income Three Months Ended June 30, 2021 vs 2020 (In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net income | $67,889 | $13,186 | 414.9% | | Net foreign currency translation adjustment | $1,507 | $1,239 | 21.6% | | Actuarial gain on pension plans | $933 | $6,299 | -85.2% | | Unrealized gain on fair value of derivative instruments | $— | $442 | -100.0% | | Total comprehensive income | $70,329 | $21,166 | 232.3% | Six Months Ended June 30, 2021 vs 2020 (In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net income | $142,009 | $41,400 | 242.9% | | Net foreign currency translation adjustment | $(2,082) | $(3,501) | -40.6% | | Actuarial gain on pension plans | $933 | $6,299 | -85.2% | | Unrealized gain on fair value of derivative instruments | $— | $1,642 | -100.0% | | Total comprehensive income | $140,860 | $45,840 | 207.3% | Condensed Consolidated Balance Sheets As of June 30, 2021 vs December 31, 2020 (In thousands) | Metric | June 30, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $97,961 | $51,821 | 89.0% | | Total current assets | $1,215,975 | $869,801 | 39.8% | | Total assets | $2,776,178 | $2,298,031 | 20.8% | | Total current liabilities | $550,590 | $416,394 | 32.2% | | Long-term indebtedness | $941,824 | $720,418 | 30.7% | | Total liabilities | $1,790,002 | $1,389,705 | 28.8% | | Total stockholders' equity | $986,176 | $908,326 | 8.6% | Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2021 vs 2020 (In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net cash flows provided by operating activities | $23,859 | $102,101 | -76.6% | | Net cash flows used in investing activities | $(146,429) | $(105,166) | 39.2% | | Net cash flows provided by financing activities | $168,802 | $32,093 | 426.0% | | Net increase in cash and cash equivalents | $46,140 | $26,913 | 71.4% | | Cash and cash equivalents at end of period | $97,961 | $62,272 | 57.3% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Changes (In thousands) | Metric | Balance - Dec 31, 2020 | Net Income | Stock-based compensation expense | Cash dividends | Balance - Jun 30, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $908,326 | $142,009 | $13,859 | $(41,678) | $986,176 | Note: This table simplifies the full statement by focusing on major changes, Other comprehensive income/loss, issuance/forfeiture of stock awards, and convertible note/warrant transactions also impacted equity Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The company supplies engineered components to recreation and transportation OEMs, with seasonal sales patterns impacted by COVID-19 - LCII supplies engineered components to OEMs in recreation and transportation markets (RVs, buses, trailers, boats, etc) and their related aftermarkets, operating over 100 facilities globally[23] - Historically, sales and profits are highest in Q2 and lowest in Q4 due to seasonality, but COVID-19 has caused fluctuations and may alter future trends[24] - The COVID-19 pandemic adversely affected financial results in H1 2020 due to plant shutdowns but activity improved in H2 2020 and continued into H1 2021, particularly in RV and marine OEM markets and the Aftermarket Segment[28][29] 2. Summary of Significant Accounting Policies The company's accounting policies include the early adoption of ASU 2020-06, simplifying accounting for convertible instruments - The company early adopted ASU 2020-06 in 2021, simplifying accounting for convertible instruments and impacting the recognition and disclosure of convertible debt issued in May 2021[32] 3. Earnings Per Share The company calculates basic and diluted EPS, with Convertible Notes and Warrants being antidilutive for the period Weighted Average Common Shares Outstanding (In thousands) | Metric | Three Months Ended Jun 30, 2021 | Three Months Ended Jun 30, 2020 | Six Months Ended Jun 30, 2021 | Six Months Ended Jun 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic | 25,275 | 25,150 | 25,230 | 25,108 | | Diluted | 25,385 | 25,219 | 25,351 | 25,177 | - Convertible Notes and Warrants were antidilutive for the three and six months ended June 30, 2021, as the average common stock price was below their respective conversion/strike prices[33][34][35] 4. Acquisitions, Goodwill and Other Intangible Assets The company completed several acquisitions in H1 2021, increasing goodwill to $496.4 million and other intangible assets to $437.4 million - In August 2021, the Company entered into a definitive agreement to acquire Furrion Holdings Limited, a leading distributor of appliances and products for RV and specialty vehicle markets, expected to close in Q3 2021[36] Acquisitions Completed During Six Months Ended June 30, 2021 (In thousands) | Acquisition | Purchase Price (Cash) | Goodwill | Primary Segment | | :--- | :--- | :--- | :--- | | Schaudt | $29,383 | $16,319 | OEM | | Ranch Hand | $56,709 | $9,537 | Aftermarket | | Other Acquisitions | $17,800 | $8,800 | N/A | | Total | $103,892 | $34,656 | | Goodwill by Segment (In thousands) | Metric | OEM Segment | Aftermarket Segment | Total | | :--- | :--- | :--- | :--- | | Net balance – Dec 31, 2020 | $305,953 | $148,775 | $454,728 | | Acquisitions – 2021 | $24,448 | $10,190 | $34,638 | | Measurement period adjustments | $9,456 | $(23) | $9,433 | | Foreign currency translation | $(2,528) | $151 | $(2,377) | | Net balance – Jun 30, 2021 | $337,329 | $159,093 | $496,422 | 5. Inventories Total net inventories increased to $620.2 million as of June 30, 2021, driven by a significant increase in raw materials Inventories, Net (In thousands) | Category | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Raw materials | $450,035 | $356,921 | | Work in process | $35,948 | $24,189 | | Finished goods | $134,200 | $112,789 | | Total Inventories, net | $620,183 | $493,899 | 6. Fixed Assets Net fixed assets increased to $408.7 million at June 30, 2021, from $387.2 million at December 31, 2020 Fixed Assets (In thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Fixed assets, at cost | $801,003 | $750,138 | | Less accumulated depreciation and amortization | $392,310 | $362,920 | | Fixed assets, net | $408,693 | $387,218 | 7. Accrued Expenses and Other Current Liabilities Total accrued expenses increased to $200.4 million at June 30, 2021, primarily due to higher employee compensation and benefits Accrued Expenses and Other Current Liabilities (In thousands) | Category | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Employee compensation and benefits | $81,906 | $62,555 | | Current portion of accrued warranty | $25,370 | $32,451 | | Customer rebates | $12,531 | $23,670 | | Other | $80,581 | $69,524 | | Total | $200,388 | $188,200 | Accrued Warranty Activity (Six Months Ended June 30, In thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Balance at beginning of period | $47,091 | $47,167 | | Provision for warranty expense | $12,304 | $8,358 | | Warranty costs paid | $(15,360) | $(10,916) | | Balance at end of period | $44,160 | $44,609 | | Current portion at end of period | $25,370 | $28,328 | 8. Pension Plans The company assumed two defined benefit pension plans in the Netherlands, with a net periodic pension cost of $(2.5) million for H1 2021 - The company assumed two partially-funded defined benefit pension plans in the Netherlands (Dutch pension plans) through the Polyplastic acquisition in January 2020[55] Net Periodic Pension Cost (In thousands) | Metric | Three Months Ended Jun 30, 2021 | Three Months Ended Jun 30, 2020 | Six Months Ended Jun 30, 2021 | Six Months Ended Jun 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net service cost | $(1,107) | $(1,355) | $(2,216) | $(1,625) | | Interest cost | $(166) | $(405) | $(332) | $(486) | | Expected return on plan assets | $109 | $252 | $217 | $302 | | Administrative charges | $(72) | $(108) | $(143) | $(130) | | Net periodic pension cost | $(1,236) | $(1,616) | $(2,474) | $(1,939) | 9. Long-Term Indebtedness Total long-term debt increased to $941.8 million due to the issuance of $460.0 million in convertible senior notes Long-Term Indebtedness (In thousands) | Category | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Convertible Notes | $460,000 | $— | | Term Loan | $277,500 | $285,000 | | Revolving Credit Loan | $224,482 | $394,888 | | Shelf-Loan Facility | $50,000 | $50,000 | | Other | $8,191 | $9,652 | | Unamortized deferred financing fees | $(12,469) | $(1,291) | | Total Long-term indebtedness | $941,824 | $720,418 | - On May 13, 2021, the Company issued $460.0 million in 1.125% convertible senior notes due 2026, with net proceeds of approximately $448.2 million[64] - The Convertible Notes have an initial conversion rate of 6.0369 shares per $1,000 principal amount (conversion price ~$165.65/share) and are convertible under specific conditions prior to January 15, 2026, and freely convertible thereafter[66][67] - The Company was in compliance with all financial covenants under its Amended Credit Agreement and Shelf-Loan Facility at June 30, 2021, with $372.6 million available under the revolving credit facility[73][74] 10. Leases Total lease costs increased to $23.7 million for H1 2021, primarily due to capacity expansions and leases from recent acquisitions Components of Lease Cost (In thousands) | Metric | Three Months Ended Jun 30, 2021 | Three Months Ended Jun 30, 2020 | Six Months Ended Jun 30, 2021 | Six Months Ended Jun 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $11,317 | $8,154 | $20,415 | $15,976 | | Short-term lease cost | $986 | $391 | $1,875 | $1,269 | | Variable lease cost | $742 | $526 | $1,431 | $1,147 | | Total lease cost | $13,045 | $9,071 | $23,721 | $18,392 | 11. Commitments and Contingencies The company has a $9.5 million contingent consideration liability and a $36.7 million receivable from Furrion at June 30, 2021 Contingent Consideration Liability (In thousands) | Metric | Amount | | :--- | :--- | | Balance at beginning of period | $4,609 | | Acquisitions | $5,000 | | Payments | $(9) | | Accretion | $113 | | Fair value adjustments | $(23) | | Net foreign currency translation adjustment | $(141) | | Balance at end of the period | $9,549 | | Less current portion | $(7,986) | | Total long-term portion | $1,563 | - The company has a receivable from Furrion of $36.7 million at June 30, 2021, for inventory purchases, with the payment schedule adjusted through July 2022 due to COVID-19 impacts[80] - Management believes that any monetary liability or financial impact from product recalls, environmental matters, or litigation, beyond amounts already provided, would not be material to the company's financial position or results of operations[81][82][83] 12. Stockholders' Equity The company declared $41.7 million in dividends in H1 2021 and entered into hedge transactions related to its Convertible Notes Common Stock Information (In thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Common stock authorized | 75,000 | 75,000 | | Common stock issued | 28,356 | 28,243 | | Treasury stock | 3,087 | 3,087 | | Common stock outstanding | 25,269 | 25,156 | Quarterly Dividends Declared and Paid (In thousands, except per share data) | Period | Per Share | Total Paid | | :--- | :--- | :--- | | First Quarter 2021 | $0.75 | $18,939 | | Second Quarter 2021 | $0.90 | $22,739 | | Total 2021 | $1.65 | $41,678 | | Total 2020 | $2.80 | $70,401 | - The company entered into Convertible Note Hedge Transactions (cost $100.1 million) and Warrant Transactions (proceeds $48.5 million) in May 2021, both classified within Stockholders' Equity and not revalued after issuance, to manage the potential dilutive effect of Convertible Notes[88][90] 13. Fair Value Measurements The company measures pension plan assets and contingent consideration liabilities at fair value on a recurring basis Assets and Liabilities Measured at Fair Value (In thousands) | Category | June 30, 2021 (Total) | December 31, 2020 (Total) | | :--- | :--- | :--- | | Pension plan assets (Level 3) | $53,558 | $61,936 | | Contingent consideration (Level 3) | $9,549 | $4,609 | - Contingent consideration liabilities are estimated using Level 3 inputs, including management's long-term sales forecasts (averaging ~13% annual growth) and a market participant's weighted average cost of capital (13.3%)[76][93] 14. Segment Reporting The company operates two segments, OEM and Aftermarket, with the OEM segment accounting for 80% of H1 2021 consolidated net sales - The OEM Segment accounted for 80% of consolidated net sales for the six months ended June 30, 2021, primarily serving RVs (61% from travel trailer and fifth-wheel RVs) and adjacent industries[96] - The Aftermarket Segment accounted for 20% of consolidated net sales for the six months ended June 30, 2021, supplying engineered components to retail dealers, wholesale distributors, and service centers[97] Net Sales by Segment and Geography (Six Months Ended June 30, In thousands) | Segment | U.S. (2021) | Int'l (2021) | Total (2021) | U.S. (2020) | Int'l (2020) | Total (2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | OEM Segment | $1,518,722 | $162,182 | $1,680,904 | $804,233 | $95,936 | $900,169 | | Aftermarket Segment | $381,407 | $31,667 | $413,074 | $276,289 | $8,977 | $285,266 | | Total Net Sales | $1,900,129 | $193,849 | $2,093,978 | $1,080,522 | $104,913 | $1,185,435 | Operating Profit by Segment (Six Months Ended June 30, In thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | OEM Segment | $142,621 | $44,952 | | Aftermarket Segment | $52,792 | $20,096 | | Total Operating Profit | $195,413 | $65,048 | ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes financial performance, covering industry trends, segment results, liquidity, and capital resources for H1 2021 Company Overview - LCI Industries (LCII) supplies engineered components to leading OEMs in recreation and transportation markets (RVs, buses, trailers, boats, etc) and their related aftermarkets, operating over 100 facilities globally[104][105] - The OEM Segment's net sales for the twelve months ended June 30, 2021, were approximately 62% from components for travel trailer and fifth-wheel RVs[106] - Sales and profits are historically highest in Q2 and lowest in Q4 due to seasonality, but COVID-19 has impacted these trends, and aftermarket sales tend to be counter-seasonal[107] COVID-19 Update - The COVID-19 pandemic negatively impacted H1 2020 financial results due to plant shutdowns, but activity improved in H2 2020 and continued into H1 2021, especially in RV and marine OEM markets and the Aftermarket Segment[108][109] - The industry faced challenges in H1 2021 with supply chain constraints, rising material costs, and a tightened labor market, leading the company to strategically manage working capital, build inventory, and invest in production capacity[111] - The company maintained rigorous health and safety protocols, provided rapid COVID-19 testing, and partnered with a local hospital for vaccination days for team members and their families[112] Furrion Update - At June 30, 2021, the company had a $36.7 million receivable from Furrion for inventory stock purchases following the termination of a distribution agreement, with the payment schedule adjusted through July 2022 due to COVID-19 impacts[114] Industry Background North American Recreational Vehicle Industry The RV industry saw a 71% increase in H1 2021 wholesale shipments, driven by record retail demand and dealer inventory rebuilding - Industry-wide wholesale shipments of travel trailer and fifth-wheel RVs in H1 2021 increased 71% to 265,000 units, driven by increased retail demand (up 42%) and dealer inventory rebuilding[117] Travel Trailer and Fifth-Wheel RVs (Units) | Period | Wholesale Units (Change) | Retail Units (Change) | Estimated Unit Impact on Dealer Inventories | | :--- | :--- | :--- | :--- | | Quarter ended June 30, 2021 | 133,800 (100%) | 179,400 (36%) | (45,600) | | Twelve months ended June 30, 2021 | 490,300 (54%) | 540,300 (39%) | (50,000) | | Twelve months ended June 30, 2020 | 318,700 (-14%) | 388,100 (-5%) | (69,400) | - Industry-wide wholesale shipments of motorhome RVs in H1 2021 increased 71% to 29,100 units, with retail demand up 20% year-over-year[120] Adjacent Industries The company's RV product portfolio is also utilized in other applications, representing significant growth opportunities - The company's products are used in 'Adjacent Industries' such as buses, various trailers, trucks, boats, trains, and manufactured/modular housing, representing significant growth opportunities[121] Aftermarket Segment The Aftermarket Segment serves a vibrant market of over 11 million RV-owning households in the US - The Aftermarket Segment sells discretionary accessories and replacement parts through various channels, supported by dedicated teams for technical and marketing support[122] - Estimated RV ownership in the U.S. exceeded 11 million households in 2020, driving aftermarket sales for upgrades and part replacements[123] Results of Operations Consolidated Highlights Consolidated net sales grew 108% to $1.1 billion in Q2 2021, with net income rising 415% to $67.9 million - Consolidated net sales in Q2 2021 were $1.1 billion, up 108% from Q2 2020, driven by record RV retail demand and strong Aftermarket Segment sales growth, with acquisitions contributing $53.7 million[124][125] - Net income for Q2 2021 was $67.9 million ($2.67 diluted EPS), compared to $13.2 million ($0.52 diluted EPS) in Q2 2020[128] - Consolidated operating profit in Q2 2021 was $94.0 million (8.6% margin), up from $20.8 million (4.0% margin) in Q2 2020, primarily due to fixed cost leveraging over a larger sales base and the negative impact of COVID-19 shutdowns in 2020[128] - The effective tax rate for H1 2021 was 25.0%, lower than 26.3% in H1 2020, due to reduced rate impact of permanent tax differences and increased excess tax benefits from equity-based compensation[128] OEM Segment - Second Quarter The OEM Segment's Q2 2021 net sales grew 135% to $864.7 million, with operating margin improving to 7.3% from 0.5% OEM Segment Net Sales by Market (Three Months Ended June 30, In thousands) | Market | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Travel trailers and fifth-wheels | $527,614 | $212,518 | 148% | | Motorhomes | $67,253 | $24,713 | 172% | | Adjacent Industries OEMs | $269,787 | $130,581 | 107% | | Total OEM Segment net sales | $864,654 | $367,812 | 135% | Average Product Content per RV (Twelve Months Ended June 30) | Content per: | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Travel trailer and fifth-wheel RV | $3,621 | $3,371 | 7% | | Motorhome | $2,644 | $2,308 | 15% | - OEM Segment operating profit increased by $61.6 million to $63.3 million in Q2 2021, with margin improving to 7.3% from 0.5%, driven by fixed cost leveraging ($53.7M SG&A, $27.9M overhead) and pricing changes ($19.6M targeted, $19.1M commodity-indexed), partially offset by increased material costs ($45.0M) and direct labor costs ($12.6M)[132] OEM Segment – Year to Date The OEM Segment's H1 2021 net sales grew 87% to $1.68 billion, with operating margin improving to 8.5% from 5.0% OEM Segment Net Sales by Market (Six Months Ended June 30, In thousands) | Market | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Travel trailers and fifth-wheels | $1,030,630 | $519,626 | 98% | | Motorhomes | $129,846 | $62,800 | 107% | | Adjacent Industries OEMs | $520,428 | $317,743 | 64% | | Total OEM Segment net sales | $1,680,904 | $900,169 | 87% | - OEM Segment operating profit increased by $97.7 million to $142.6 million in H1 2021, with margin improving to 8.5% from 5.0%, driven by fixed cost leveraging ($66.1M SG&A, $34.3M overhead) and pricing changes ($25.1M targeted, $17.4M commodity-indexed), partially offset by increased material costs ($62.9M) and direct labor costs ($18.3M)[135] Aftermarket Segment - Second Quarter The Aftermarket Segment's Q2 2021 net sales grew 45% to $229.1 million, with operating margin improving to 13.4% from 12.0% Aftermarket Segment Net Sales (Three Months Ended June 30, In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Aftermarket Segment net sales | $229,066 | $157,953 | 45% | - Aftermarket Segment operating profit increased by $11.6 million to $30.6 million in Q2 2021, with margin improving to 13.4% from 12.0%, driven by fixed cost leveraging ($6.9M SG&A, $4.7M overhead) and pricing changes ($7.7M), partially offset by increased transportation costs ($7.7M), material costs ($5.2M), and acquisition-related cost of sales ($0.6M)[138] Aftermarket Segment – Year to Date The Aftermarket Segment's H1 2021 net sales grew 45% to $413.1 million, with operating margin improving to 12.8% from 7.0% Aftermarket Segment Net Sales (Six Months Ended June 30, In thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Aftermarket Segment net sales | $413,074 | $285,266 | 45% | - Aftermarket Segment operating profit increased by $32.7 million to $52.8 million in H1 2021, with margin improving to 12.8% from 7.0%, driven by fixed cost leveraging ($16.4M SG&A, $9.6M overhead) and pricing changes ($11.6M), partially offset by increased transportation costs ($10.2M) and material costs ($8.9M)[141] Income Taxes The effective tax rate for H1 2021 was 25.0%, down from 26.3% in the prior year due to higher pre-tax income and tax benefits Liquidity and Capital Resources Cash Flows The company had $98.0 million in cash and $372.6 million available under its revolving credit facility at June 30, 2021 - At June 30, 2021, the company had $98.0 million in cash and cash equivalents and $372.6 million of availability under its revolving credit facility[142] - The company believes its availability under the revolving credit facility and cash flows from operations are adequate to finance anticipated cash requirements for the next twelve months[146] Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30, In thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $23,859 | $102,101 | | Net cash flows used in investing activities | $(146,429) | $(105,166) | | Net cash flows provided by financing activities | $168,802 | $32,093 | | Net increase in cash and cash equivalents | $46,140 | $26,913 | Cash Flows from Operations Net cash from operations decreased to $23.9 million in H1 2021 due to strategic working capital investments - Net cash flows provided by operating activities decreased to $23.9 million in H1 2021 from $102.1 million in H1 2020, primarily due to a $191.5 million decrease from changes in net assets and liabilities[148] - The decrease was driven by strategic working capital management, including building inventory and increasing receivables, to address supply chain constraints and rising material costs[148] - Depreciation and amortization was $51.3 million in H1 2021 (expected $100-$110 million for full year 2021), and non-cash stock-based compensation expense was $13.9 million (expected $20-$30 million for full year 2021)[150] Cash Flows from Investing Activities Cash used in investing increased to $146.4 million in H1 2021, driven by acquisitions and capital expenditures - Cash flows used in investing activities were $146.4 million in H1 2021, primarily for $103.9 million in business acquisitions and $42.0 million in capital expenditures[151] - Full year 2021 capital expenditures are estimated at $130-$150 million, including capacity expansions, to be funded by cash flows from operations or revolving credit facility borrowings[152][155] Cash Flows from Financing Activities Cash from financing increased to $168.8 million in H1 2021, driven by net proceeds from Convertible Notes and Warrants - Cash flows provided by financing activities were $168.8 million in H1 2021, primarily from $396.5 million in net proceeds from Convertible Notes and Warrants (after hedge costs)[156] - These proceeds were partially offset by $165.1 million in net payments under the revolving credit facility, $41.7 million in quarterly dividends, and $8.7 million in other debt repayments[156] - The company has a $9.5 million liability for contingent consideration related to business acquisitions, and was in compliance with all debt covenants at June 30, 2021[159][160] Corporate Governance - The company is in compliance with SEC and NYSE corporate governance requirements, with governance documents, committee charters, and key practices available on its website[162] Contingencies - Information on contingencies is incorporated by reference from Note 11 of the Notes to Condensed Consolidated Financial Statements[164] Inflation - Prices of key raw materials (steel and aluminum) are influenced by demand and commodity-specific factors, not directly by inflation, and have been volatile, The company has historically offset cost increases with sales price increases[165][176] New Accounting Pronouncements - Information on new accounting pronouncements is incorporated by reference from Note 2 of the Notes to Condensed Consolidated Financial Statements[166] Use of Estimates - The preparation of financial statements requires management to make estimates and judgments, which are continuously evaluated based on historical experience and other reasonable assumptions[167] Forward-Looking Statements - The report contains forward-looking statements subject to risks and uncertainties, including impacts of COVID-19, pricing pressures, raw material costs, seasonality, customer financial condition, acquisitions, and regulatory changes[168][169] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks from changes in interest rates on variable debt and fluctuations in raw material prices - The company is exposed to market risk from changes in short-term interest rates on variable rate debt; a hypothetical 0.25% increase would not materially affect results[174] - The company is exposed to changes in steel and aluminum prices, historically offsetting increases with sales price adjustments, but future ability to do so is not assured[175][176] - The company had no outstanding derivative instruments on commodities at June 30, 2021[175] ITEM 4 – CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[180] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2021[180] - The company is continuing the implementation of a new enterprise resource planning (ERP) system, which is anticipated to lead to enhancements in controls and business processes[181] PART II – OTHER INFORMATION ITEM 1 – LEGAL PROCEEDINGS The company is subject to various legal proceedings, which management believes will not have a material financial impact - The company is subject to various legal proceedings, lawsuits, and regulatory inquiries in the normal course of business[184] - Management believes that any monetary liability or financial impact beyond current provisions would not be material to the company's financial position or results of operations[184] ITEM 1A – RISK FACTORS This section updates risk factors, adding new risks related to the Convertible Notes, including potential dilution and debt servicing - Conversion of the Convertible Notes may dilute stockholders' ownership interests or depress the common stock price, especially if settled in shares[186] - Servicing the company's substantial debt, including Convertible Notes, requires significant cash flow, and there's a risk that future operations may not generate sufficient cash[187] - The conditional conversion feature of the Convertible Notes, if triggered, could require cash settlement of principal, adversely affecting liquidity, or reclassification of debt to current liability, reducing net working capital[188] - Provisions in the Convertible Notes Indenture, such as repurchase requirements upon a fundamental change, may delay or prevent beneficial takeover attempts[189] ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company issued $460.0 million in Convertible Notes and sold Warrants for $48.5 million in private placements - No shares were repurchased under the stock repurchase program during the six months ended June 30, 2021, with $121.3 million remaining in authorization[190] - On May 13, 2021, the company issued $460.0 million in Convertible Notes and sold Warrants for $48.5 million in private placements, exempt from registration under the Securities Act[191][193][194] - Approximately $51.6 million of the net proceeds from the Convertible Notes offering was used to pay for the Convertible Note Hedge Transactions[195] ITEM 6 – EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance and debt agreement documents - The exhibits include corporate governance documents, debt agreements (Indenture, Credit Agreement amendments), and transaction confirmations for Convertible Note Hedge and Warrant transactions[198][199] - CEO and CFO certifications (Sections 302 and 906) are filed, along with Inline XBRL formatted financial information[200] SIGNATURES This section contains the signature of the registrant, confirming the due authorization and filing of the report - The report is signed by Brian M Hall, Chief Financial Officer of LCI Industries, on August 4, 2021, confirming its due authorization and filing[202]