What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 228 added, 160 removed, 359 unchanged (52% of the section changed)

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2020 FINANCIAL OVERVIEW

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency.

States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings.

Most of our North American operations are and have been continuously open for business as we are designated as an essential business in almost all of our markets.

Our operations in Europe closed for a short period during the first half of 2020 in France, Spain and Italy, in order to comply with local authorities’ orders.

Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water.

We also supply products used in the prevention of runoff, flood, fire and other natural disasters.

These products are essential to the health and safety of the general public.

As a result, our supply chain generally remains intact, with our customers continuing to meet end-user needs.

The health, safety and security of our employees has been, and remains, one of our highest priorities.

We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC).

We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices.

In limited instances, we have had to close facilities in whole or in part as a result of government regulations, as well as positive or presumed positive results from COVID-19 testing.

The direct impact of any closures did not have a material impact on our operations.

Beginning in the middle of March 2020, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets.

However, as stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated.

We experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, resulting in broad sales gains across nearly all of our product categories and geographies.

While the short-term impact of this trend has had a positive impact on our business, it is unclear what the long-term impact will be.

In addition, governmental restrictions have had a material impact on some of our customers, limiting their ability to operate in certain geographies from mid-March into mid-May.

While these restrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our results.

Our balance sheet is strong with low leverage and sufficient access to additional capital.

Given the seasonality of our business, our warehouses were stocked with inventory in preparation for the upcoming peak season prior to the implementation of most stay-at-home orders.

As a result, the limited vendor supply interruptions experienced in 2020 have had a minimal impact on our business.

Supply disruptions have largely been limited to categories with the greatest demand, including heat-related equipment and above-ground swimming pools and have not been material to our business.

We continue to work closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities.

Given the uncertainties caused by the COVID-19 pandemic, we began taking steps in April to reduce both capital expenditures and operating costs.

As a result, capital expenditures in 2020 were $21.7 million, which is approximately 65% of 2019 capital expenditures.

We specifically reduced operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment.

As our business outlook and market trends improved since the implementation of these cost-saving measures, we continue to assess our discretionary spending.

The impact of the ongoing pandemic on our business and financial results will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict.

These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken (or may be taken in the future) in response to the pandemic and changes in customer and supplier behavior in response to the pandemic.

Financial Results

We achieved favorable results in 2019 despite inclement weather throughout much of the first half of the year.

Our focus on market share gains and capacity creation allowed us to capitalize on our competitive advantages and deliver solid results.

Net sales increased 7% to a record high of $3.2 billion for the year ended December 31, 2019 compared to $3.0 billion in 2018.

Base business sales increased 5%, driven by our continued expansion in commercial and building material products as well as healthy demand for discretionary products, such as construction materials and products used in the remodel and replacement of in-ground pools.

Gross profit reached a record $924.9 million for the year ended December 31, 2019, a 6% increase over gross profit of $870.2 million in 2018.

Gross margin was relatively flat year-over-year at 28.9% in 2019 compared to 29.0% in 2018, with base business gross margin at 29.0% in both years.

Selling and administrative expenses (operating expenses) increased 5% to $583.7 million in 2019, up from $556.3 million in 2018, with base business operating expenses up 3% over 2018.

The increase in base business operating expenses was primarily attributable to higher growth-driven labor and freight expenses, as well as greater facility-related costs.

Net sales increased 23% to $3.9 billion for the year ended December 31, 2020 compared to $3.2 billion in 2019, while base business sales increased 22%.

We realized broad sales gains across nearly all product categories.

Our sales benefited from greater swimming pool usage and high demand for residential pool products, which was driven by home-centric trends influenced by the COVID-19 pandemic and aided by warmer weather conditions during the year.

Gross profit reached $1.1 billion for the year ended December 31, 2020, a 22% increase over gross profit of $924.9 million in 2019.

Gross margin declined 20 basis points to 28.7% in 2020 compared to 28.9% in 2019.

The decline in gross margin is primarily due to sales of lower margin, big-ticket items, such as pool equipment and in-ground and above-ground pools, which comprised a larger portion of our product mix in 2020 compared to 2019.

Selling and administrative expenses (operating expenses) increased 14%, or $83.2 million, to $666.9 million in 2020, up from $583.7 million in 2019, with base business operating expenses up 12% over 2019.

The increase in operating expenses primarily reflects a $43.9 million increase in performance-based compensation from $24.3 million in 2019 to $68.2 million in 2020 and expenses of $16.9 million from recently acquired businesses.

Excluding $6.9 million of impairment charges we recorded in the first quarter of 2020 and performance-based compensation in both periods, adjusted operating expenses increased 6%, reflecting growth-driven labor and freight expenses and greater facility-related costs partially offset by lower discretionary spending.

Operating income for the year increased 36% to $464.0 million, up from $341.2 million in 2019.

Operating margin increased to 10.7% in 2019 compared to 10.5% in 2018, while base business operating margin improved 40 basis points to 10.9% in 2019.

Operating margin increased 110 basis points to 11.8% in 2020 compared to 10.7% in 2019.

We recorded a $28.6 million, or $0.70 per diluted share, benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2020 compared to a benefit of $23.5 million, or $0.57 per diluted share, realized in 2019.

Net income increased 12% to a record $261.6 million in 2019 compared to $234.5 million in 2018.

Net income increased 40% to $366.7 million in 2020 compared to $261.6 million in 2019.

Earnings per share increased 40% to a record $8.97 per diluted share compared to $6.40 per diluted share in 2019.

Excluding the impact from ASU 2016-09 in both periods, earnings per diluted share increased 11% to $5.83 in 2019 compared to $5.26 in 2018.

Excluding the impact of non-cash impairments, net of tax, in 2020 and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased 44% to $8.42 in 2020 compared to $5.83 in 2019.

See the reconciliation of GAAP to non-GAAP measures included in RESULTS OF OPERATIONS below.

Financial Position and Liquidity

Cash provided by operations was $397.6 million in 2020, which helped fund the following initiatives:

• payments of $124.6 million for acquisitions;

• net debt repayments of $95.8 million;

• quarterly cash dividend payments to shareholders, totaling $91.9 million for the year;

• net capital expenditures of $33.4 million;

• share repurchases, totaling $76.2 million for the year;

• net capital expenditures of $21.7 million;

• growth in net working capital of $21.1 million.

• payments of $8.9 million for acquisitions.

Total net receivables, including pledged receivables, increased 9% compared to December 31, 2018, reflective of December sales growth.

Total net receivables, including pledged receivables, increased 28% compared to December 31, 2019, reflecting December sales growth and partially offset by improved collections.

Our allowance for doubtful accounts was $4.8 million at December 31, 2020 and $5.5 million at December 31, 2019.

Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 26.5 days at December 31, 2020 and 29.0 days at December 31, 2019.

Inventory levels grew 4% to $702.3 million at December 31, 2019 compared to $672.6 million at December 31, 2018, reflecting normal business growth and inventory from acquired businesses of $10.3 million.

Inventory levels grew 11% to $781.0 million at December 31, 2020 compared to $702.3 million at December 31, 2019, reflecting business growth and inventory from acquired businesses of $42.2 million.

Our reserve for inventory obsolescence was $11.4 million at December 31, 2020 compared to $9.0 million at December 31, 2019.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.2 times at both December 31, 2019 and December 31, 2018.

Total debt outstanding of $511.4 million at December 31, 2019 decreased $155.4 million, or 23%, compared to December 31, 2018.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.8 times at December 31, 2020 and 3.2 times at December 31, 2019.

Accrued expenses and other current liabilities increased $82.9 million to $143.7 million in 2020, primarily reflecting increases in accrued performance-based compensation, unrealized losses on interest rate swaps and deferred payroll tax payments.

Total debt outstanding of $416.0 million at December 31, 2020 decreased $95.4 million, or 19%, compared to December 31, 2019, as we have utilized our operating cash flows to decrease debt balances.

Current Trends and Outlook

Market conditions were generally favorable in 2019 tempered by unfavorable weather, which weighed on our results in the first half of 2019.

We expect similar favorable market conditions to persist into 2020 and beyond, buoyed by a number of factors.

The post-recession market environment from 2010 to 2019 has been characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation.

However, in terms of homeowners investing in their existing homes, discretionary expenditures, including backyard renovations, have flourished over this time period with steady increases in home values and lack of affordable new homes prompting homeowners to stay in their homes longer and upgrade their home environments, including their backyard.

Due to the COVID-19 pandemic in 2020, families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, which resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.

We believe that increased consumer spending on homes, including outdoor living spaces, will continue in 2021 and may have longer term benefits as work-from-home trends persist or increase.

The market environment from June 2009, when the Great Recession ended, until 2020, when the COVID-19 pandemic-induced recession began, was characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation.

We expect that new pool and irrigation construction levels will continue to grow incrementally, constrained by availability of construction labor, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate continued growth over the next several years.

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Additionally, recent regulation passed by the U.S.

Department of Energy mandates all new and replacement motors and pumps for swimming pools must be variable speed by July 2021.

Department of Energy mandates all new and replacement motors and pumps for swimming pools must meet certain compliance regulations by July 2021.

This mandate, coupled with additional product developments and technological advancements, offers further growth opportunities over the next few years.

While we estimate that new pool construction was approximately 80,000 new units in 2019, construction levels are still down approximately 65% compared to peak historical levels and down approximately 50% from what we consider normal levels.

In 2020, we benefited from strong pool construction trends as robust demand fueled by the COVID-19 pandemic led to increased home investment trends.

While we estimate that new pool construction increased from approximately 80,000 units in 2019 to approximately 100,000 new units in 2020, construction levels are still down approximately 55% compared to peak historical levels and down approximately 40% from what we consider normal levels.

Favorable weather plays a role in industry growth by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products.

Conversely, unfavorable weather impedes growth.

Wetter and cooler-than-normal temperatures throughout the first half of 2019 delayed pool openings and led to lower construction and remodeling activity, although the latter half of the year benefited from relatively normalized weather patterns.

In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.

We established our initial outlook for 2021 based on reasonable expectations of organic market share growth, ongoing leverage of existing investments in our business and continuous process improvements.

For 2020, we expect the macroeconomic environment in the United States will be quite similar to 2019.

For 2021, we expect strong growth in the first half of the year, particularly the first quarter of 2021, due to continued elevated demand influenced by the ongoing COVID-19 pandemic.

In the second half of the year, we expect to face tougher year-over-year comparisons and inherent industry capacity constraints, although we remain encouraged by positive industry outlooks.

Impacts from the COVID-19 pandemic, coupled with heightened demand, could also adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied.

We anticipate that we may face product shortages or elevated prices specifically related to Trichlor, a popular sanitizer for pools and hot tubs, as the industry faces constraints resulting from the loss of a major supplier due to a fire in the summer of 2020.

Although supply constraints did not have a material impact on our business in 2020, it is difficult to predict the extent to which this could impact our business in 2021.

We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets.

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• We expect sales growth of 8% to 12%, impacted by the following factors and assumptions:

◦ normal weather patterns for 2020, which would result in greater sales growth in the first half of the year than in the second half;

◦ continued growth from replacement, remodeling and construction activity and market expansion through newer product and service offerings such as hardscapes and commercial pools;

◦ inflationary product cost increases of approximately 1% to 2%;

◦ normal weather patterns for 2021;

◦ continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic;

◦ a benefit from construction backlogs depending on our customers’ building capacity, including the availability of labor, and weather;

◦ estimated 4% to 5% growth from acquisitions completed throughout 2020;

◦ market share gains;

• We expect relatively neutral gross margin trends for the full year with lower gross margin growth in the first half of 2020 compared to 2019, which benefited from strategic inventory purchases we made in the latter half of 2018, and modestly positive gross margin growth in the second half of the year.

• We expect operating expenses will grow at approximately 60% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations, with greater growth in the first half of the year and more modest growth in the back half.

◦ inflationary product cost increases of approximately 2% to 3% (compared to our historical average of 1% to 2%);

◦ estimated 2% growth in the installed base of pools.

• We expect gross margin to decline 20 to 40 basis points for the full year of 2021 compared to the full year of 2020 with gains or relatively neutral gross margin trends in the first half of 2021 and declines in the latter half of 2021.

• We expect operating expenses will grow at approximately 60% to 70% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations, with greater growth in the first half of the year and more modest growth in the back half.

The main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets.

However, we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal.

We also expect performance-based compensation for the full year of 2021 to normalize and decrease by approximately $30.0 million compared to the full year of 2020.

In 2021, we expect our effective tax rate will approximate 25.5%, excluding the impact of ASU 2016-09.

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Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse.

Based on our December 31, 2019 stock price, we estimate that we have approximately $2.3 million in unrealized excess tax benefits related to stock options that expire and restricted awards that will vest in the first quarter of 2020.

Based on our December 31, 2020 stock price, we estimate that we have approximately $4.5 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2021.

We may recognize additional tax benefits related to stock option exercises in 2021 from grants that expire in years after 2021, for which we have not included any expected benefits in our guidance.

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We project that 2021 earnings will be in the range of $9.12 to $9.62 per diluted share, including an estimated $0.11 benefit from ASU 2016-09 during the first quarter of 2021.

We expect cash provided by operations will approximate net income for fiscal 2020, and we anticipate that we will use $150.0 million to $200.0 million in cash for share repurchases.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in Item 1A of this Form 10-K.

We expect cash provided by operations will approximate net income for fiscal year 2021.

We expect to continue to use cash to fund opportunistic share repurchases over the next year.

We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in Item 1A of this Form 10-K.

Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.

CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in accordance with U.S.

generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and related disclosures.

Management identifies critical accounting estimates as:

• those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made;

• those for which changes in the estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Critical accounting estimates are those estimates made in accordance with U.S.

generally accepted accounting principles that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board.

We believe the following critical accounting estimates require us to make the most difficult, subjective or complex judgments.

Our critical accounting estimates are discussed below, including, to the extent material and reasonably available, the impact such estimates have had, or are reasonably likely to have, on our financial condition or results of operations.

Allowance for Doubtful Accounts

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Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts.

As we review these past due accounts, we evaluate collectability based on a combination of factors, including:

• aging statistics and trends;

• customer payment history;

• independent credit reports;

• discussions with customers.

We estimate future losses based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP).

We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices.

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote.

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At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently turn at slower rates.

We classify products into 13 classes at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products.

All inventory is included in these classes, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage.

The table below presents a description of these inventory classes:

Class 0 new products with less than 12 months usage

Classes 1-4 highest sales value items, which represent approximately 80% of net sales at the sales center

Classes 5-12 lower sales value items, which we keep in stock to provide a high level of customer service

Class 13 products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer

Null class non-stock special order items

There is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly.

We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months.

We classify products at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage.

Below is a description of these inventory classifications:

• new products with less than 12 months usage;

• highest sales velocity items, which represent approximately 80% of net sales at the sales center;

• lower sales velocity items, which we keep in stock to provide a high level of customer service;

• products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer;

• non-stock special order items.

There is little risk of obsolescence for our highest sales velocity items, which represent approximately 80% of net sales at the sales center, because these products generally turn quickly.

We establish our reserve for inventory obsolescence based on inventory with lower sales velocity and inventory with no sales for the past 12 months, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months.

The reserve is intended to reflect the value of inventory at net realizable value.

We provide a reserve of 5% for inventory in classes 5-13 and non-stock inventory as determined at the sales center level.

We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for excess inventory in class 13.

We provide a reserve of 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level.

We also provide an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months.

We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis.

We also evaluate whether the calculated reserve provides sufficient coverage of the total class 13 inventory.

We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the past 12 months.

We have not changed our methodology from prior years.

In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors, including:

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These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods.

We update our estimates for these arrangements at year end to reflect actual annual purchase levels.

We update our estimates for these arrangements at year end to reflect actual annual purchase or sales levels.

In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances.

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Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

In December 2017, the Tax Cuts and Jobs Act (the TJCA or the Act) enactment significantly changed U.S.

The Act reduced the overall corporate income tax rate to 21%, created a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate capital expensing of certain qualified property.

Due to the complexities presented by the Act, particularly for companies with multi-national operations, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 (SAB 118) to provide guidance to allow companies to record provisional amounts based on reasonable estimates.

As a result of this guidance, we recorded a provisional net benefit to our income tax provision in the fourth quarter of 2017.

As of December 31, 2018, we completed our accounting for the tax effects of the Act, which did not result in a material adjustment to our provisional amount.

For the Global Intangible Low Tax Income (GILTI) provisions of the Act, we have elected an accounting policy to record GILTI as period costs if and when incurred.

We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we not have realized any impacts since the enactment of U.S.

tax reform enacted in December 2017.

As of December 31, 2020, U.S.

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We perform a goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in circumstances occur that indicate potential impairment.

If the estimated fair value of any of our reporting units falls below its carrying value, we compare the estimated fair value of the reporting unit’s goodwill to its carrying value.

If the carrying value of a reporting unit’s goodwill exceeds its estimated fair value, we perform a calculation to measure impairment, which includes valuing the tangible and intangible assets.

To the extent the carrying value of a reporting unit is greater than its estimated fair value, we record a goodwill impairment charge for the difference, up to the carrying value of the goodwill.

We recognize any impairment loss in operating income.

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In October of 2020, 2019 and 2018, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.

In the first quarter of 2020, we determined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows.

We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values.

In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million.

We estimate the fair value of our reporting units based on an income approach that incorporates our assumptions for determining the present value of future cash flows.

We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples.

We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and earnings multiples.

These estimates can significantly affect the outcome of our impairment test.

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Our sensitivity analysis generated a fair value estimate below our market capitalization and resulted in the identification of no additional at-risk locations.

Based on our 2019 goodwill impairment analysis, we consider our reporting units in Australia as most at risk for goodwill impairment.

We entered Australia in July 2014 with the acquisition of a controlling interest in Pool Systems Pty.

The previous owner of PSL provided executive oversight until our purchase of the non-controlling interest in June 2017.

Since 2014, we have continued to expand our operations in Australia via one sales center opening and the acquisitions of Newline Pool Products in July 2017 and Pool Power in January 2018.

The most sensitive assumptions related to our fair values for these locations relate to future projected operating results and management’s ability to effectively leverage our operating structure and manage costs as we expand our presence.

As of December 31, 2019, our aggregate goodwill balance for our five reporting units in Australia was $4.0 million.

If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods, especially related to the reporting units discussed above.

Based on our 2020 goodwill impairment analysis, we consider one of our Horizon reporting units in California as most at risk for goodwill impairment due to marginal results in recent years.

The most sensitive assumptions related to our fair value for this location relates to future projected operating results and management’s ability to effectively manage costs.

As of December 31, 2020, our aggregate goodwill balance for this reporting unit was $1.4 million.

Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.

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Operating expenses (1)

650,020 579,068 16,855 4,611 666,875 583,679

Expenses as a % of net sales 16.7 % 18.2 % 33.3 % 29.6 % 16.9 % 18.2 %

Operating income (loss) (1)

467,283 343,125 (3,256) (1,879) 464,027 341,246

Operating margin 12.0 % 10.8 % (6.4) % (12.1) % 11.8 % 10.7 %

(1) Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.

We have excluded the following acquisitions from base business for the periods identified:

Sales Centers

January 2019 4 January - December 2019

TWC Distributors, Inc.

December 2020 10 December 2020

Jet Line Products, Inc.

October 2020 9 October - December 2020

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 September - December 2020

Master Tile Network LLC (1)

February 2020 4 February - December 2020

January 2019 4 January - March 2020 and January - March 2019

Turf & Garden, Inc.

November 2018 4 January - December 2019 and

November - December 2018

(Pool Power) (1)

January 2018 1 January - April 2019 and

January - April 2018

Chem Quip, Inc.

December 2017 5 January - March 2019 and January - March 2018

Intermark December 2017 1 January - February 2019 and January - February 2018

November 2018 4 January 2020 and

(1) We acquired certain distribution assets of each of these companies.

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Net sales increased 23% compared to 2019, with 22% of this increase resulting from base business sales growth.

Unfavorable weather impacts throughout much of the first half of 2019, including record rainfall in May, led to delayed pool openings and lower construction and remodeling activity.

Despite some weather events in the third quarter, including Hurricane Dorian in Florida and Tropical Storm Imelda in southeast Texas, above average temperatures and below average precipitation throughout most of the country benefited overall swimming pool industry growth and allowed us to serve the pent-up demand from earlier in the year.

Favorable weather conditions continued in the fourth quarter of 2019, as much of the southern and southeastern United States, particularly Florida, experienced above average temperatures, although some of our seasonal markets experienced weather challenges early in the quarter.

These conditions supported our 2019 sales growth and are contrasted from the fourth quarter of 2018, when most of the United States experienced cooler than normal temperatures and higher than average precipitation.

Despite the negative impacts resulting from the inclement weather in the first half of the year, with disciplined execution by our teams and improved weather conditions in the latter half of the year, we produced 7% sales growth in 2019 on top of sales growth of 8% in 2018.

As the pandemic forced families to spend more time at home in 2020, they sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces.

This created unprecedented demand throughout our markets, and we realized broad sales gains across nearly all product categories.

Our sales benefited from greater swimming pool usage, high demand for residential pool products and warmer weather conditions during the year.

The following factors benefited our sales growth (listed in order of estimated magnitude):

• continued improvement in consumer discretionary expenditures, including continued growth in remodeling and replacement activity (see discussion below);

• market share growth, particularly in building materials and commercial product categories (see discussion below);

• 4% sales growth in chemicals, our largest product category at 12% of total net sales for 2019, compared to 2018;

• inflation driven (estimated at approximately 2% above our historical average of 1% to 2%) product selling price increases;

• strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment, building materials and above-ground pools and hot tubs (see discussion below);

• increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);

• market share gains, including those in building materials (see discussion below);

• inflationary product cost increases of approximately 1% to 2%;

• 1% sales growth from recent acquisitions;

We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas including pool construction and pool remodeling, as well as equipment upgrades.

• 1% sales growth from an additional selling day in 2020 compared to 2019.

We believe that sales growth rates for certain product offerings, such as equipment, building materials and above-ground pools and hot tubs evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In 2020, sales for equipment, such as swimming pool heaters, pumps, lights and filters, increased 31% compared to 2019, and collectively represented approximately 29% of net sales.

This increase reflects both the growth of replacement activity and continued demand for higher-priced, more energy-efficient products.

Sales of building materials, which includes tile, grew 9% compared to 2018 and represented approximately 12% of net sales in 2019.

Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above.

Sales to these customers increased 8% in 2019 on top of sales growth of 11% in 2018 and represented approximately 5% of net sales in 2019.

Sales of building materials, which includes tile and sales from recently acquired Master Tile locations, grew 23% compared to 2019 and represented approximately 12% of net sales in 2020.

Sales of above-ground pools increased 57% in 2020 compared to 2019 and represented approximately 1% of net sales in 2020.

Sales to customers who service large commercial installations and specialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth or decline in these areas are reflected in the numbers above.

Sales to retail customers increased 24% compared to 2019 and represented approximately 13% of our net sales in 2020.

Sales to commercial customers declined 10% in 2020, driven by COVID-19 related closures and the decline in both business and leisure travel.

Sales to commercial customers represented approximately 4% of our net sales in 2020.

2020 Quarterly Sales Performance Compared to 2019 Quarterly Sales Performance

• Net sales increased 2% in the first quarter of 2019, while base business sales grew 1%.

Sales in the first quarter were largely impacted by cool, wet weather, particularly in the western United States, and by a later Easter holiday than in 2018.

• Favorable weather conditions in the southeastern United States led to net sales growth of 6% and base business sales growth of 4% in the second quarter of 2019.

Sales in the second quarter were hindered by record rainfall and cooler temperatures in three of our four largest markets, California, Texas and Arizona.

• In the third quarter of 2019, net sales increased 11%, while base business sales increased 9%.

Sales in the third quarter benefited from favorable weather conditions and strong demand throughout our industry.

• For our seasonally slowest fourth quarter, both net sales and base business sales increased 7% in 2019 as weather challenges early in the quarter brought an abrupt end to business in some of our seasonal markets.

• Strong demand for discretionary products during the first quarter of 2020 led to net sales and base business sales growth of 13%.

Sales were also favorably impacted by an additional selling day in the first quarter of 2020 compared to the first quarter of 2019.

• Net sales and base business sales increased 14% in the second quarter of 2020 as stay-at-home restrictions eased in late April through early May, and sales benefited from greater swimming pool demand and usage, resulting in broad sales gains across many product categories and geographies.

• In the third quarter of 2020, net sales and base business sales increased 27% and benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

• Net sales in the fourth quarter of 2020 increased 44%, while base business sales increased 39%.

Sales benefited from continued stay-at-home trends combined with favorable weather nationwide and acquisitions, which added 4% to sales growth.

In addition to the sales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.

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Gross margin 28.7 % 28.9 %

Gross margin was relatively flat year-over-year at 28.9% in 2019 compared to 29.0% in 2018, with base business gross margin at 29.0% in both years.

Gross margin declined 20 basis points to 28.7% in 2020 compared to 28.9% in 2019, primarily due to sales of lower margin, big-ticket items, such as pool equipment and in-ground and above-ground pools, which comprised a larger portion of our product mix in 2020 compared to 2019.

Operating Expenses

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2020 2019 Change

Operating expenses $ 583.7 $ 556.3 $ 27.4 5%

Selling and administrative expenses $ 659.9 $ 583.7 $ 76.2 13%

Impairment of goodwill and other assets 6.9 — 6.9 100%

Operating expenses as a percentage of net sales 16.9 % 18.2 %

Operating expenses increased 5% to $583.7 million in 2019, up from $556.3 million in 2018, while base business operating expenses grew 3%.

In addition to incremental costs incurred related to recent acquisitions and sales center openings, the increase in operating expenses was primarily attributable to higher growth-driven labor and freight expenses, as well as greater facility-related costs.

Operating expenses as a percentage of net sales declined 40 basis points, contributing to the 20 basis point expansion in our operating margin for the year and 40 points of base business operating margin expansion.

Operating expenses increased 14%, or $83.2 million, to $666.9 million in 2020, up from $583.7 million in 2019, while base business operating expenses grew 12%.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units, and $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic.

Excluding impairment charges and performance-based compensation in both periods, adjusted operating expenses were up 6%, reflecting growth-driven labor and freight expenses and greater facility-related costs partially offset by lower discretionary spending.

As a result of strong expense control and our ability to leverage our existing network, operating expenses as a percentage of net sales declined 130 basis points, contributing to the 110 basis point expansion in our operating margin for the year.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net increased $2.9 million compared to 2018.

The increase reflects higher average debt levels and higher average interest rates between periods.

Interest and other non-operating expenses, net decreased $11.4 million compared to 2019, reflecting lower average debt levels and lower average interest rates between periods.

Average outstanding debt was $422.2 million in 2020 versus $599.6 million in 2019.

Our 2019 average outstanding debt balance reflects greater borrowings made in the first half of the year, primarily to fund working capital growth, although debt levels declined later in the year and finished at 77% of our 2018 balance at December 31, 2019.

Our weighted average effective interest rate increased to 3.4% in 2019 compared to 3.3% in 2018.

Our 2020 average outstanding debt balance has decreased as we utilized operating cash flows to pay off debt balances.

Our weighted average effective interest rate decreased to 2.1% in 2020 compared to 3.4% in 2019.

Our effective income tax rate was 18.9% at December 31, 2020 and 17.7% at December 31, 2019.

We recorded a $23.5 million benefit from ASU 2016-09 for the year ended December 31, 2019 compared to a benefit of $15.3 million realized in the same period in 2018.

We recorded a $28.6 million, or $0.70 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2020 compared to a benefit of $23.5 million, or $0.57 per diluted share, realized in the same period in 2019.

Excluding the benefits from ASU 2016-09, our effective tax rate was 25.2% and 25.1% for the years ended 2020 and 2019, respectively.

Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 12% to $261.6 million in 2019 compared to $234.5 million in 2018.

Net income increased 40% to $366.7 million in 2020 compared to $261.6 million in 2019.

Adjusted net income, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 43% to $373.0 million.

Earnings per share increased 40% to $8.97 per diluted share compared to $6.40 per diluted share in 2019.

Excluding the $0.57 per diluted share impact of ASU 2016-09 in 2019 and $0.36 in 2018, diluted earnings per share increased 11% over last year.

Excluding the impact of non-cash impairments, net of tax, and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased 44% to $8.42 in 2020 compared to $5.83 in 2019.

See the reconciliation of GAAP to non-GAAP measures below.

Reconciliation of Non-GAAP Financial Measures

Adjusted Income Statement Information

We have included adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures, as supplemental disclosures, because we believe these measures are useful to investors and others in assessing our year-over-year operating performance.

We believe these measures should be considered in addition to, not as a substitute for, net income and diluted EPS presented in accordance with GAAP, respectively, and in the context of our other disclosures included within this Form 10-Q.

Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

The table below presents a reconciliation of net income to adjusted net income.

(Unaudited) Year Ended

(in thousands) December 31,

Net income $ 366,738

Impairment of goodwill and other assets 6,944

Tax impact on impairment of long-term note (1)

Adjusted net income $ 373,028

(1) As described in our First Quarter 2020 Quarterly Report on Form 10-Q, our effective tax rate at March 31, 2020 was a 0.1% benefit.

Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.

The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.

(Unaudited) Year Ended

Diluted EPS $ 8.97 $ 6.40

After-tax non-cash impairment charges 0.15 —

Adjusted diluted EPS excluding after-tax non-cash impairment charges 9.12 6.40

ASU 2016-09 tax benefit 0.70 0.57

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit $ 8.42 $ 5.83

Fiscal Year 2019 compared to Fiscal Year 2018

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Weather Impacts on Fiscal Year 2020 to Fiscal Year 2019 Comparisons

Wetter and cooler than normal temperatures to begin the year hindered our first quarter of 2019 sales growth.

Much of the western United States, particularly California and Arizona, experienced cold to record cold temperatures in January and February.

The latter half of March benefited from warmer weather throughout most of the country and provided some relief from the slow start earlier in the year.

The first quarter of 2018 experienced similar, though less significant, unfavorable weather in certain markets, leading to more adverse conditions in 2019 compared to 2018.

Results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.

In the southeastern United States, favorable weather conditions, including above average temperatures, delivered strong sales growth in these markets.

In contrast, in the second quarter of 2018, results in the last two months of the quarter benefited from warm weather throughout the country and helped relieve the effects of a slow start from earlier in 2018.

Above average temperatures and below average precipitation throughout most of the country in the third quarter of 2019 positively impacted results for the quarter.

In the contiguous United States, September tied with 2015 as the second warmest on record.

Throughout the quarter, the southern United States and the Ohio Valley benefited from dry conditions.

Despite some weather events, including Hurricane Dorian in Florida and Tropical Storm Imelda in southeast Texas, these markets delivered favorable results in the third quarter of 2019.

Conversely, bouts of severe weather, including Hurricane Florence, elevated rainfall in Texas, and wildfires in California, adversely impacted results for the third quarter of 2018.

In the fourth quarter of 2019, much of the southern and southeastern United States, particularly Florida, experienced above average temperatures, which led to increased sales growth compared to the fourth quarter of 2018 when most of the United States experienced below average temperatures and higher than average precipitation.

In the first quarter of 2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States.

These favorable weather conditions contrast from the first quarter of 2019 when wetter and cooler-than-normal temperatures to begin the year hindered sales growth.

Weather conditions in the second quarter of 2020 were varied across the contiguous United States;

however, results in the second quarter of 2020 benefited from generally mild weather conditions.

Much of the western United States benefited from warmer weather, while the southeastern United States experienced slightly below-average temperatures.

Southern California and the southeastern United States, including Florida, experienced more precipitation than normal.

In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.

Overall, weather conditions in the third quarter of 2020 were generally favorable, which benefited results.

Much of the western United States experienced above-average temperatures, particularly in California, which was also plagued with the most active wildfire year on record.

Precipitation was below-average in most of the western half of the United States and normal to above-average in the eastern half.

Likewise, results in the third quarter of 2019 were positively impacted by above-average temperatures and below-average precipitation throughout most of the country.

Sales in the fourth quarter of 2020 benefited from above-average temperatures and below-average precipitation, particularly in the month of November, which was the fourth warmest on record in a 126-year period for the contiguous United States.

Similarly, in the fourth quarter of 2019, sales benefited from above average temperatures, primarily in the southern and southeastern United States.

Weather Impacts on Fiscal Year 2019 to Fiscal Year 2018 Comparisons

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• the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations and other general corporate initiatives, including acquisitions, dividend payments and share repurchases.

Our primary capital needs are seasonal working capital obligations, debt repayment obligations and other general corporate initiatives, including acquisitions, opening new sales centers, dividend payments and share repurchases.

Our primary working capital obligations are for the purchase of inventory, payroll, rent, other facility costs and selling and administrative expenses.

Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.

Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions.

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Capital expenditures were 0.6% of net sales in 2020, 1.0% of net sales in 2019 and 1.1% of net sales in 2018.

Our higher capital spending in 2017 related to expanding our facilities and purchasing delivery vehicles to address growth.

Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.

Over the last five years, capital expenditures have averaged roughly 1.0% of net sales.

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We focus our capital expenditure plans on the needs of our sales centers.

In 2018, we performed an evaluation of our enterprise resource planning system.

Although we do not anticipate a complete replacement of our enterprise resource planning system, we do plan to migrate our current system to a new environment over a number of years.

This plan requires modest, incremental capital investments over that time frame rather than a significant, one-time investment.

For 2021, based on management’s current plans, we project capital expenditures will continue to approximate the historical average.

As of December 31, 2020, our average total leverage ratio was 0.86, which was below our target range of between 1.5 and 2.0 and below our average total leverage ratio of 1.61 as of December 31, 2019.

Our strong operating results and cash flow from operations enabled us to reduce our debt balances in 2020.

We expect our average total leverage ratio through the first half of 2021 will continue to be below our target range.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise.

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Financing activities (244,371) (244,486)

Cash provided by operations of $298.8 million for 2019 increased $180.1 million compared to 2018.

The strategic inventory purchases that we made in the latter half of 2018 negatively impacted our 2018 cash flows due to timing differences that reversed in 2019.

Cash used in investing activities increased in 2019 due to an increase of $6.3 million in payments for acquisitions compared to 2018 and a $1.8 million increase in net capital expenditures between years.

Cash used in financing activities increased in 2019, which primarily reflects increased payments on our revolving line of credit.

We had $155.4 million of net payments on our debt arrangements in 2019 compared to net proceeds of $146.5 million in 2018.

We repurchased $23.2 million of shares in 2019 compared to $187.5 million in 2018.

Cash provided by operations of $397.6 million for 2020 increased $98.8 million compared to 2019, primarily reflecting the $105.2 million improvement in net income.

Cash used in investing activities increased in 2020 due to an increase of $115.7 million in payments for acquisitions compared to 2019, which was partially offset by an $11.7 million decrease in net capital expenditures between years.

Cash used in financing activities was $244.4 million in 2020, consistent with $244.5 million in 2019, which primarily reflects a $59.6 million decrease in net debt payments, offset by additional share repurchases of $53.0 million and an increase in dividends paid of $8.2 million.

For a discussion of our sources and uses of cash in 2018, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

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Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026.

The Term Facility will be repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning with the first quarter of 2020.

Proceeds from the Term Facility were used to pay down the Credit Facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020.

We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date.

We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At December 31, 2019, the Term Facility was fully drawn with an outstanding balance of $185.0 million at a weighted average effective interest rate of 2.5%.

Proceeds from the Term Facility were used to pay down the Credit Facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

At December 31, 2020, the Term Facility had an outstanding balance of $175.8 million at a weighted average effective interest rate of 2.7%.

Financial Covenants

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As of December 31, 2020, our fixed charge ratio equaled 7.81 (compared to 5.38 as of December 31, 2019) and TTM Rental Expense was $63.2 million.

On January 1, 2019, we adopted ASU 2016-02, Leases , which requires that we record most of our leases on our balance sheets.

Our Credit Facility and Term Facility agreements require that we calculate our financial covenants by excluding the effects of the new standard.

The adoption of ASU 2016-02 did not have a material impact on our financial covenant calculations.

For additional details regarding our adoption of this new accounting pronouncement, see Note 1 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

The Credit Facility and the Term Facility also limit the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s Net Income (as defined in the Credit Facility and the Term Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends.

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Receivables Securitization Facility

As amended on November 1, 2019, our two-year Receivables Facility offers us a lower-cost form of financing, with a peak funding capacity of up to $295.0 million between May 1 and May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31.

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing, with a peak funding capacity of up to $295.0 million between May 1 and May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31.

Other funding capacities range from $120.0 million to $275.0 million throughout the remaining months of the year.

The Receivables Facility matures on November 1, 2021.

We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

The Receivables Facility provides for the sale of certain of our receivables to a wholly-owned subsidiary (the Securitization Subsidiary).

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We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings.

In 2019, we had three interest rate swap contracts in place that became effective on October 19, 2016.

These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility.

These interest rate swap contracts terminated on November 20, 2019.

These amended swap contracts converted variable interest rates on our variable rate borrowings to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million.

Interest expense related to the notional amounts under these swap contracts was based on the fixed rates plus the applicable margin on our variable rate borrowings.

As of December 31, 2019, we had one interest rate swap in place, which became effective on November 20, 2019.

This swap contract was previously forward-looking and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million.

The contract terminates on November 20, 2020.

In May and July 2019, we entered into additional forward-starting interest rate swap contracts, which will convert the variable interest rate on our variable rate borrowings to fixed interest rates of 2.0925% and 1.5500%, respectively, on notional amounts of $75.0 million each.

These contracts become effective on November 20, 2020 and terminate on September 29, 2022.

On February 5, 2020, we entered into a forward-starting interest rate swap contract with a fixed interest rate of 1.3800% on a notional amount of $150.0 million.

This contract becomes effective on February 26, 2021 and terminates on February 28, 2025.

Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.

In 2020, we had one interest rate swap in place, which became effective on November 20, 2019 and terminated on November 20, 2020.

This swap contract was previously forward-looking and converted the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million.

As of December 31, 2020, we had two interest rate swap contracts in place, which became effective on November 20, 2020 and terminate on September 29, 2022.

These swap contracts were previously forward-starting and convert the variable interest rates on our variable rate borrowings to fixed interest rates of 2.0925% and 1.5500%, respectively, on notional amounts of $75.0 million each.

We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings.

These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.

The following table provides details related to each of our forward-starting interest rate swap contracts:

Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate

Forward-starting interest rate swap 1 February 5, 2020 February 26, 2021 February 28, 2025 $150.0 1.3800%

Forward-starting interest rate swap 2 March 9, 2020 September 29, 2022 February 26, 2027 $150.0 0.7400%

Forward-starting interest rate swap 3 March 9, 2020 February 28, 2025 February 26, 2027 $150.0 0.8130%

Compliance and Future Availability

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Contractual Obligations

At December 31, 2019, our contractual obligations for long-term debt and operating leases were as follows (in thousands):

At December 31, 2020, our contractual obligations for long-term debt, operating leases and purchase obligations were as follows (in thousands):

Payments Due by Period

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Operating leases 223,715 56,443 92,403 47,121 27,748

Purchase obligations (1)

106,357 36,369 69,988 — —

$ 746,715 $ 233,931 $ 289,915 $ 65,621 $ 157,248

(1) Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases and software commitments.

We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms.

We do not consider purchase orders to be firm inventory commitments;

therefore, they are excluded from the table above.

The table below contains estimated interest payments (in thousands) related to our long-term debt obligations presented in the table above.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis