What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-30 · 180 added, 260 removed, 208 unchanged (68% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2019 Annual Report on Form 10-K.

You should read the following discussion in conjunction with the accompanying interim Consolidated Financial Statements and notes, the Consolidated Financial Statements and accompanying notes in our 2020 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our 2020 Annual Report on Form 10-K.

For a discussion of our base business calculations, see the Results of Operations section below.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

Forward-Looking Statements

This report contains forward-looking information that involves risks and uncertainties.

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You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.

No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the 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, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2019 Annual Report on Form 10-K and in Part II, Item 1A.

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;

excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2020 Annual Report on Form 10-K and in Part II, Item 1A.

of this Form 10-Q.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Impact of COVID-19 Pandemic

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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.

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

We are designated as an essential business in almost all of our markets.

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

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

As a result, our supply chain 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 rare 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 to date has not been material to our operations.

In limited instances, we have had to close facilities as a result of government regulations, as well as COVID-19 testing results.

The direct impact of any closures to-date have not had 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, resulting in net sales of $1.28 billion for the second quarter of 2020.

In the third quarter of 2020, we realized net sales of $1.14 billion, as our sales continued to benefit from elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

As families spend more time at home, our sales have benefited from greater swimming pool demand and usage, resulting in broad sales gains across our product categories and geographies.

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

Throughout the remainder of 2020, 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, and these trends have continued in 2021 to-date.

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.

In addition, governmental restrictions in 2020 had a material impact on some of our customers, limiting their ability to operate in certain geographies for a short period of time.

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 remains 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 to date 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.

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.

We began taking steps in April to reduce both capital expenditures and operating costs.

Specifically, we reduced expenses for labor, fuel, utilities, advertising, meetings, travel and entertainment.

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

We continue to reevaluate previously deferred capital expenditures and currently expect capital expenditures in 2020 to approximate 65% of 2019 capital expenditures and range from $20.0 million to $25.0 million.

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.

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

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

Continued impacts from the COVID-19 pandemic, coupled with heightened demand, could adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied throughout the swimming pool season.

Given the uncertainties caused by the COVID-19 pandemic in 2020, we reduced capital expenditures and operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment.

Capital expenditures in 2020 were $21.7 million or approximately 65% of 2019 capital expenditures.

We expect capital expenditures in 2021 to approximate the historical average of 1.0% of net sales.

Our expense growth so far in 2021 continues to be offset by lower discretionary spending for advertising, meetings, travel and entertainment as business travel remains restricted due to the COVID-19 pandemic.

However, we believe that discretionary spending in the latter part of 2021 will increase depending on vaccination progress and the easing of travel restrictions in various locations, particularly when comparing these considerations to the same period of 2020.

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

We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain them.

We expect the impact of the pandemic on our business and financial results in 2021 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

In the third quarter of 2020, net sales increased 27% to $1.14 billion compared to $898.5 million in the third quarter of 2019.

Our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic, as working from home became routine and families created and enjoyed safe social and entertainment alternatives in their own backyards.

We realized broad sales gains across many product categories, as maintenance, replacement, refurbishment and construction activities across most geographies were strong.

Gross profit increased 27% to $328.7 million in the third quarter of 2020 from $257.9 million in the same period of 2019.

Gross margin increased 20 basis points to 28.9% in the third quarter of 2020 compared to 28.7% in the third quarter of 2019, with increased purchase volumes driving improvements in supply chain management.

Selling and administrative expenses (operating expenses) increased 18% to $180.5 million in the third quarter of 2020 compared to $153.4 million in the third quarter of 2019, primarily reflecting a $20.1 million increase in performance-based compensation.

Excluding performance-based compensation in both periods, operating expenses increased 5% due to growth-driven freight expenses and greater facility-related costs.

As a percentage of net sales, operating expenses decreased to 15.8% in the third quarter of 2020 compared to 17.1% in the same period of 2019, as we continued to realize benefits from discretionary spending controls implemented earlier in the year.

Operating income in the third quarter of 2020 increased 42% to $148.2 million compared to $104.5 million in the same period in 2019.

Operating margin was 13.0% in the third quarter of 2020 compared to 11.6% in the third quarter of 2019.

We recorded an $8.5 million, or $0.21 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended September 30, 2020, compared to a tax benefit of $4.5 million, or $0.11 per diluted share, realized in the same period of 2019.

Net income increased 50% to $119.1 million in the third quarter of 2020 compared to $79.5 million in the third quarter of 2019.

Earnings per share increased 50% to $2.92 per diluted share in the third quarter of 2020 compared to $1.95 in the same period of 2019.

Excluding the impact from ASU 2016-09 in both periods, earnings per diluted share increased 47% to $2.71 in the third quarter of 2020 compared to $1.84 in the third quarter of 2019.

In the first quarter of 2021, net sales increased 57% to $1.06 billion compared to $677.3 million in the first quarter of 2020, while base business sales grew 51%.

Our sales have continued to benefit from elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

Maintenance, replacement, refurbishment and construction activity remain strong as families create and expand home-based outdoor living and entertainment spaces, resulting in broad sales gains across nearly all product categories.

Gross profit increased 59% to $301.1 million in the first quarter of 2021 from $189.6 million in the same period of 2020.

Base business gross profit improved 54% over the first quarter of 2020.

Gross margin increased 40 basis points to 28.4% in the first quarter of 2021 compared to 28.0% in the first quarter of 2020 reflecting a combination of strong demand with higher volume-based purchasing incentives, a favorable customer sales mix and some inflation benefit year-over-year.

Selling and administrative expenses (operating expenses) increased 12% to $172.1 million in the first quarter of 2021 compared to $154.0 million in the first quarter of 2020, reflecting an increase of $11.5 million in performance-based compensation expense and increases in other growth-driven costs.

As a percentage of net sales, operating expenses decreased 650 basis points to 16.2% in the first quarter of 2021 compared to 22.7% in the same period of 2020 primarily due to strong expense control and our ability to leverage our existing network.

Excluding the prior year impact of non-cash impairments, operating expenses increased 17% in the first quarter of 2021 compared to the first quarter of 2020 and decreased 550 basis points as a percentage of net sales from 21.7% in the first quarter of 2020.

Operating income in the first quarter of 2021 increased 263% to $129.0 million compared to $35.6 million in the same period in 2020.

Operating margin was 12.2% in the first quarter of 2021 compared to 5.3% in the first quarter of 2020.

We recorded a $4.0 million, or $0.10 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended March 31, 2021, compared to a tax benefit of $8.0 million, or $0.19 per diluted share, realized in the same period of 2020.

Net income increased 219% to $98.7 million in the first quarter of 2021 compared to $30.9 million in the first quarter of 2020.

Earnings per diluted share increased 223% to $2.42 in the first quarter of 2021 compared to $0.75 in the same period of 2020.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.

Financial Position and Liquidity

As of September 30, 2020, total net receivables, including pledged receivables, increased 19% compared to September 30, 2019, driven by our September sales growth and partially offset by improved collections.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.6 days at September 30, 2020 and 29.0 days at September 30, 2019.

Our allowance for doubtful accounts balance was $5.3 million at September 30, 2020 and $6.2 million at September 30, 2019.

Net inventory levels decreased 1% compared to levels at September 30, 2019, reflecting the strong pace of sales in the third quarter of 2020.

The inventory reserve was $11.4 million at September 30, 2020 and $9.9 million at September 30, 2019.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.7 times at September 30, 2020 and 3.2 times at September 30, 2019.

Accrued expenses and other current liabilities increased 79% compared to September 30, 2019, primarily reflecting increases in accrued performance-based compensation and unrealized losses on interest rate swaps.

Total debt outstanding at September 30, 2020 was $339.9 million, down 38% compared to total debt at September 30, 2019, as we have utilized our operating cash flows to decrease debt balances.

As of March 31, 2021, total net receivables, including pledged receivables, increased 41% compared to March 31, 2020, driven by our March sales growth and partially offset by improved collections.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.6 days at March 31, 2021 and 29.2 days at March 31, 2020.

Our allowance for doubtful accounts balance was $4.7 million at March 31, 2021 and $6.9 million at March 31, 2020.

Net inventory levels increased 14% compared to levels at March 31, 2020, reflecting organic business growth and inventory from recently acquired businesses of $55.5 million.

The inventory reserve was $13.7 million at March 31, 2021 and $10.3 million at March 31, 2020.

Our inventory turns, as calculated on a trailing four quarters basis, were 4.0 times at March 31, 2021 and 3.2 times at March 31, 2020.

Accrued expenses and other current liabilities increased 115% compared to March 31, 2020, primarily reflecting growth-driven increases in accrued performance-based compensation and accrued tax payments.

Total debt outstanding at March 31, 2021 was $433.2 million, down 26% compared to total debt at March 31, 2020, as we continue to utilize operating cash flows to decrease debt balances.

We have used debt proceeds over the past 12 months primarily to fund business-driven working capital growth, acquisitions, payments of cash dividends and share repurchases.

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For a detailed discussion of trends through 2020, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.

Based on our results to date and expectations for the remainder of the year, we expect 2020 diluted EPS of $8.05 to $8.35, including the impact of year-to-date tax benefits of $0.55 and the $0.15 impact of non-cash impairments recorded in the first quarter of 2020.

Our previous 2020 earnings guidance range disclosed in our Second Quarter 2020 Quarterly Report on Form 10-Q was $6.90 to $7.30, including year-to-date tax benefits of $0.34 and the $0.15 impact of non-cash impairments.

We expect 2021 diluted EPS of $11.85 to $12.60, including the impact of year-to-date tax benefits of $0.10.

Our previous 2021 earnings guidance range disclosed in our 2020 Annual Report on Form 10-K was $9.12 to $9.62, including an estimated tax benefit of $0.11.

Our 2021 earnings guidance range assumes average weather conditions and no adverse impacts from a resurgence of COVID-19 and related government responses.

We expect net sales growth for 2020 to approximate 18% to 20%.

The majority of our business is driven by recurring revenue streams from the installed base of pools, and we believe that underlying demand for most discretionary products, including those serving the renovation and construction markets, remains strong.

In addition, we believe that our sales for the fourth quarter of 2020 will continue to benefit from delayed projects, subject to our customers’ building capacity, including the availability of labor and favorable weather.

At the same time, the impact of new stay-at-home orders or government mandates, as well as unfavorable economic conditions resulting from the COVID-19 pandemic and the resurgence of COVID-19 cases in some of our markets, could adversely impact our business, including an easing of demand for products dependent on discretionary spending.

We expect gross margin for the full year of 2020 to decline modestly compared to gross margin for the full year of 2019 given the decline in gross margin through the first nine months of 2020.

We expect gross margin for the fourth quarter of 2020 to be relatively flat compared to the fourth quarter of 2019.

We expect base business operating expenses for the remainder of the year to benefit from actions taken by management in the second quarter of 2020 to reduce costs and to vary ratably with changes in sales performance.

For the year, we expect operating expenses to increase 10% to 12% compared to 2019, primarily due to increases in performance-based compensation.

We expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2020 will approximate 25.5%, which is consistent with 2019.

Our effective tax rate is dependent on our results of operations and may change if actual results differ materially from our current expectations, particularly any significant changes in our geographic mix.

We project net sales growth for 2021 of 20% or more with continued strong growth in the second quarter of 2021, due to elevated demand trends and a solid backlog of customer projects.

We believe that we will face tougher year-over-year comparisons in the second half of the year and inherent industry capacity constraints, although we remain encouraged by positive industry outlooks.

We estimate that sales will be favorably impacted by inflationary product cost increases of 4% to 5% (above our historical average of 1% to 2%).

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

We expect gross margin for the full year of 2021 to be relatively flat or decline slightly (up to 20 basis points) compared to the full year of 2020 with gains or relatively neutral gross margin trends in the second quarter of 2021 and neutral or slight declines in the latter half of 2021.

We expect operating expenses to reflect inflationary increases and incremental costs to support our sales growth expectations, which we believe will enable us to exceed operating margin improvement of 100 basis points for the full year of 2021 compared to 2020.

We believe that discretionary spending for advertising, meetings, travel and entertainment in the latter part of 2021 will increase depending on vaccination progress and the easing of travel restrictions in various locations.

We project that our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2021 will approximate 25.0%, which is consistent with 2020.

Our effective tax rate is dependent on several variables, including our results of operations and may change if actual results differ materially from our current expectations, particularly any significant changes in our geographic mix of sales.

Due to ASU 2016-09, 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.

We recorded a $22.6 million, or $0.55 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 30, 2020.

We recorded a $4.0 million, or $0.10 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2021.

We may recognize additional tax benefits related to stock option exercises in 2021 from grants that expire in years after 2021.

We have not included any expected benefits in our guidance beyond what we have recognized as of September 30, 2020.

We expect cash provided by operations will remain strong in comparison to net income for the 2020 fiscal year.

We have not included any expected benefits in our guidance beyond what we have recognized as of March 31, 2021.

We believe that cash provided by operations will approximate net income for the 2021 fiscal year.

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 Board).

The following summarizes our current expectations for 2021:

• We expect sales growth in 2021 to be impacted by the following factors and assumptions:

◦ normal weather patterns;

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

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

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

◦ estimated 4% growth from acquisitions completed throughout 2020;

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

• We expect performance-based compensation for the full year of 2021 to normalize and decrease by $15.0 million to $20.0 million compared to the full year of 2020.

The forward-looking statements in the foregoing section are based on current market conditions, speak only as of the filing date of this report, and are subject to significant risks and uncertainties.

See “Cautionary Statement for Forward-Looking Statements.”

RESULTS OF OPERATIONS

As of September 30, 2020, we conducted operations through 381 sales centers in North America, Europe and Australia.

For the nine months ended September 30, 2020, approximately 94% of our net sales were from our operations in North America.

As of March 31, 2021, we conducted operations through 400 sales centers in North America, Europe and Australia.

For the three months ended March 31, 2021, approximately 93% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Three Months Ended

Net sales 100.0 % 100.0 %

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Income before income taxes and equity earnings 11.9 % 4.5 %

Due to rounding, percentages presented in the table above may not add to Operating income and Income before income taxes and equity earnings.

Due to rounding, percentages presented in the table above may not add to Income before income taxes and equity earnings.

We have included the results of operations from acquisitions in 2021 and 2020 in our consolidated results since the acquisition dates.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):

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(in thousands) Three Months Ended Three Months Ended Three Months Ended

September 30, September 30, September 30,

March 31, March 31, March 31,

2021 2020 2021 2020 2021 2020

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Operating expenses (1)

160,995 152,815 11,105 1,226 172,100 154,041

Expenses as a % of net sales 15.9 % 22.7 % 24.6 % 38.2 % 16.2 % 22.7 %

Operating income (loss) (1)

129,120 35,477 (89) 111 129,031 35,588

Operating margin 12.7 % 5.3 % (0.2) % 3.5 % 12.2 % 5.3 %

In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

(1) Base business and total for 2020 reflect $6.9 million of impairment from goodwill and other assets.

In our calculation of our base business results, we have excluded the following acquisitions for the periods identified:

Sales Centers

TWC Distributors, Inc.

December 2020 10 January - March 2021

Jet Line Products, Inc.

October 2020 9 January - March 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 3 September 2020

September 2020 2 January - March 2021

Master Tile Network LLC (1)

February 2020 4 July - September 2020

February 2020 4 January - March 2021 and February - March 2020

(1) We acquired certain distribution assets of this company.

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After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales center count during the first nine months of 2020:

The table below summarizes the changes in our sales center count during the first three months of 2021:

December 31, 2020 398

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New locations 3

Closed/consolidated locations (2)

September 30, 2020 381

Consolidated location (1)

March 31, 2021 400

Three Months Ended

September 30,

(in millions) 2021 2020 Change

Net sales $ 1,060.7 $ 677.3 $ 383.4 57%

Net sales and base business net sales increased 27% in the third quarter of 2020 compared to the third quarter of 2019.

Net sales increased 57% in the first quarter of 2021 compared to the first quarter of 2020, while base business net sales grew 51% over the same period.

Our sales have continued to benefit from elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

Maintenance, replacement, refurbishment and construction activity remain strong as families create and expand home-based outdoor living and entertainment spaces.

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

• 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 spas (see discussion below);

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

• increased demand for residential swimming pool maintenance supplies due to 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%.

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

In the third quarter of 2020, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased 36% compared to the same period last year.

Equipment collectively represented approximately 28% of net sales for the period.

Sales of building materials, including sales from recently acquired Master Tile locations, grew 29% compared to the third quarter of 2019 and represented approximately 11% of net sales in the third quarter of 2020.

Sales of above-ground pools and spas increased 60% in the third quarter of 2020 compared to the third quarter of 2019 and represented approximately 2% of net sales for the period.

• 6% sales growth from recent acquisitions;

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

• sales growth of approximately 1% to 2% (or $15.0 million to $20.0 million) from increased replacement activity in Texas due to the February 2021 winter storm.

Higher sales growth rates for certain product offerings, such as equipment and building materials, reflect increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In the first quarter of 2021, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased 61% compared to the same period last year, and collectively represented approximately 32% of net sales for the period.

Sales of building materials grew 34% compared to the first quarter of 2020 and represented approximately 12% of net sales in the first quarter of 2021.

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 28% in the third quarter of 2020 compared to the third quarter of 2019 and represented approximately 14% of our consolidated net sales for the third quarter of 2020.

Sales to commercial customers declined 10% in the third quarter of 2020 compared to the third quarter of 2019, driven by COVID-19 related closures and the decline in both business and leisure travel.

Sales to commercial customers represented approximately 3% of our consolidated net sales for the third quarter of 2020.

Sales to retail customers increased 43% in the first quarter of 2021 compared to the first quarter of 2020 and represented approximately 11% of our net sales for the first quarter of 2021.

Sales to commercial customers increased 3% in the first quarter of 2021 compared to the first quarter of 2020, as business and leisure travel resumed in 2021 following COVID-19 related closures in 2020.

Sales to commercial customers represented approximately 4% of our net sales for the first quarter of 2021.

Three Months Ended

September 30,

(in millions) 2021 2020 Change

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Gross margin 28.4 % 28.0 %

Gross margin increased 40 basis points to 28.4% in the first quarter of 2021 compared to 28.0% in the first quarter of 2020.

Gross margin was favorably impacted by improvements from supply chain initiatives and timing differences in customer early buy purchases year-over-year, which were partially offset by lower gross margin from recently acquired businesses and increased sales of lower margin, big-ticket items in the first quarter of 2021 compared to the first quarter of 2020.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2021 2020 Change

Selling and administrative expenses $ 172.1 $ 147.1 $ 25.0 17%

Operating expenses as a % of net sales 15.8 % 17.1 %

Operating expenses increased 18% in the third quarter of 2020 compared to the third quarter of 2019, reflecting an increase in performance-based compensation of $20.1 million in the third quarter of 2020.

Excluding performance-based compensation in both periods, operating expenses increased 5% due to growth-driven freight expenses and greater facility-related costs.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the third quarter of 2020 decreased $3.6 million compared to the third quarter of 2019.

The decrease reflects lower average debt levels and lower average interest rates between periods.

Our weighted average effective interest rate decreased to 1.9% for the third quarter of 2020 from 3.4% for the third quarter of 2019 on lower average outstanding debt of $331.5 million versus $568.3 million for the respective periods.

Our effective income tax rate was 18.7% for the three months ended September 30, 2020 compared to 19.8% for the three months ended September 30, 2019.

We recorded an $8.5 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2020 compared to a tax benefit of $4.5 million realized in the same period last year.

Excluding the benefits from ASU 2016-09, our effective tax rate was 24.5% for the third quarter of 2020 and 24.3% for the third quarter of 2019.

Our third quarter effective income tax rate is typically lower compared to other quarters due to the timing of our accounting for uncertain tax positions, including the expiration of statutes of limitations.

Net Income and Earnings Per Share

Net income increased 50% to $119.1 million in the third quarter of 2020 compared to the third quarter of 2019.

Earnings per diluted share increased 50% to $2.92 in the third quarter of 2020 versus $1.95 per diluted share for the comparable 2019 period.

The benefit from ASU 2016-09 increased diluted earnings per share by $0.21 in the third quarter of 2020 and $0.11 in the third quarter of 2019.

Excluding tax benefits in both periods, earnings per diluted share increased 47% to $2.71 in the third quarter of 2020 compared to $1.84 in the third quarter of 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):

(Unaudited) Base Business Excluded Total

(in thousands) Nine Months Ended Nine Months Ended Nine Months Ended

September 30, September 30, September 30,

2020 2019 2020 2019 2020 2019

Net sales $ 3,078,463 $ 2,601,801 $ 18,899 $ 15,482 $ 3,097,362 $ 2,617,283

Gross profit 885,002 759,858 6,805 3,017 891,807 762,875

Gross margin 28.7 % 29.2 % 36.0 % 19.5 % 28.8 % 29.1 %

Operating expenses (1)

495,710 443,107 6,420 4,320 502,130 447,427

Expenses as a % of net sales 16.1 % 17.0 % 34.0 % 27.9 % 16.2 % 17.1 %

Operating income (loss) (1)

389,292 316,751 385 (1,303) 389,677 315,448

Operating margin 12.6 % 12.2 % 2.0 % (8.4) % 12.6 % 12.1 %

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

In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

Sales Centers

Northeastern Swimming Pool Distributors, Inc.

September 2020 3 September 2020

Master Tile Network LLC (1)

February 2020 4 February - September 2020

January 2019 4 January - March 2020 and

January - March 2019

Turf & Garden, Inc.

November 2018 4 January 2020 and

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

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2019, please refer to the discussion under the heading Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019.

Nine Months Ended

September 30,

(in millions) 2020 2019 Change

Net sales $ 3,097.4 $ 2,617.3 $ 480.1 18%

Net sales and base business net sales for the first nine months of 2020 increased 18% compared to the same period last year.

During the first quarter of 2020, sales benefited from earlier pool openings, as mild weather combined with school closures drove greater early-season residential pool usage.

As stay-at-home restrictions eased in late April through early May, families continued to search for safe, at-home leisure activities, resulting in broad sales gains across our product categories and geographies.

In the third quarter of 2020, our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

Sales were also favorably impacted approximately 1% by an additional selling day in the first nine months of 2020.

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

• 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%.

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

In the first nine months of 2020, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 26% compared to the same period last year.

Equipment collectively represented 28% of net sales in the first nine months of 2020.

Sales of building materials, including sales from recently acquired Master Tile locations, grew 18% compared to the first nine months of 2019 and represented approximately 12% of net sales in the first nine months of 2020.

Sales of above-ground pools and spas increased 53% in the first nine months of 2020 and represented approximately 2% of net sales in the first nine months of 2020.

In the first nine months of 2020, sales to retail customers increased 22% and represented approximately 14% of our consolidated net sales.

Sales to commercial customers declined 10% in the first nine months of 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 consolidated net sales in the first nine months of 2020.

Nine Months Ended

September 30,

(in millions) 2020 2019 Change

Gross profit $ 891.8 $ 762.9 $ 128.9 17%

Gross margin 28.8 % 29.1 %

Gross margin declined 30 basis points to 28.8% compared to 29.1% in the same period last year, primarily due to sales of lower margin, big-ticket items, such as in-ground and above-ground pools and pool equipment, which comprised a larger portion of our product mix in the nine months ended September 30, 2020 compared to the first nine months of 2019.

Operating Expenses

Nine Months Ended

September 30,

(in millions) 2020 2019 Change

Selling and administrative expenses $ 495.2 $ 447.4 $ 47.8 11%

Impairment of goodwill and other assets — 6.9 (6.9) (100)%

Operating expenses as a % of net sales 16.2 % 22.7 %

Operating expenses for the nine months ended September 30, 2020 increased 12% compared to the first nine months of 2019.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and 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.

Excluding impairment charges, operating expenses were up 11%, reflecting a $32.1 million increase in performance-based compensation, in addition to growth-driven freight expenses and greater facility-related costs.

Operating expenses increased 12% in the first quarter of 2021 compared to the first quarter of 2020, reflecting an increase of $11.5 million in performance-based compensation expense and increases in other growth-driven costs.

Our expense growth was partially offset by lower discretionary spending, which we expect to increase as the year progresses .

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first nine months of 2020 decreased $9.2 million compared to the same period last year.

Interest and other non-operating expenses, net for the first quarter of 2021 decreased $2.2 million compared to the first quarter of 2020.

The decrease reflects lower average debt levels and lower average interest rates between periods.

Our weighted average effective interest rate decreased to 2.2% for the first nine months of 2020 from 3.5% for the same period of 2019 on average outstanding debt of $439.4 million versus $631.1 million for the respective periods.

Our effective income tax rate was 19.2% for the nine months ended September 30, 2020 compared to 18.0% for the nine months ended September 30, 2019.

We recorded a $22.6 million, or $0.55 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2020 compared to a $21.1 million, or $0.52 per diluted share, tax benefit in the same period of 2019.

Excluding the benefits from ASU 2016-09, our effective tax rate was 25.2% for the nine months ended September 30, 2020 and 25.1% for the nine months ended September 30, 2019.

Our weighted average effective interest rate decreased to 2.2% for the first quarter of 2021 from 2.7% for the first quarter of 2020 on lower average outstanding debt of $397.3 million versus $493.7 million for the respective periods.

Our effective income tax rate was 22.0% for the three months ended March 31, 2021 compared to a 0.1% benefit for the three months ended March 31, 2020.

We recorded a $4.0 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2021 compared to a tax benefit of $8.0 million realized in the same period last year.

In the period ended March 31, 2020, we recorded a goodwill and intangibles impairment charge of $4.4 million, which was non-deductible for tax purposes and increased our effective tax rate by 0.4%.

Excluding the benefits from ASU 2016-09 and prior year impact of the goodwill and intangibles impairment charge, our effective tax rate was 25.2% for the first quarter of 2021 and 25.4% for the first quarter of 2020.

Net Income and Earnings Per Share

Net income increased 26% to $307.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Earnings per diluted share increased to $7.53 for the nine months ended September 30, 2020 versus $5.97 per diluted share for the nine months ended September 30, 2019.

Adjusted net income for the first nine months of 2020, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 29% to $313.9 million.

Excluding the impact of non-cash impairments, net of tax, and tax benefits from ASU 2016-09 in both periods, adjusted diluted EPS increased 31% to $7.13 for the nine months ended September 30, 2020 compared to $5.45 for the nine months ended September 30, 2019.

Net income increased 219% to $98.7 million in the first quarter of 2021 compared to $30.9 million in the first quarter of 2020.

Adjusted net income, excluding the prior year impact of non-cash impairments, net of tax, increased 165% in the first quarter of 2021 compared to the prior year period.

Earnings per diluted share increased 223% to $2.42 in the first quarter of 2021 compared to $0.75 in the same period of 2020.

Excluding the impact from ASU 2016-09 in both periods and the impact of non-cash impairments, net of tax, in 2020, adjusted earnings per diluted share increased 227% to $2.32 in the first quarter of 2021 compared to $0.71 in the first quarter of 2020.

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

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

(Unaudited) Nine Months Ended

(in thousands) September 30,

(Unaudited) Three Months Ended

(in thousands) March 31,

Net income $ 98,655 $ 30,912

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

(Unaudited) Nine Months Ended

September 30,

(Unaudited) Three Months Ended

Diluted EPS $ 2.42 $ 0.75

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Adjusted diluted EPS excluding after-tax non-cash impairment charges 2.42 0.90

Tax benefit (0.55) (0.52)

ASU 2016-09 tax benefit (0.10) (0.19)

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit $ 2.32 $ 0.71

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Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

The following table presents certain unaudited quarterly data for the first, second and third quarters of 2020, the four quarters of 2019 and the fourth quarter of 2018.

The following table presents certain unaudited quarterly data for the first quarter of 2021, the four quarters of 2020 and the fourth, third and second quarters of 2019.

We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts.

In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data.

Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

Due to the seasonal nature of our industry (and recent pandemic-driven increased demand for our products), the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing future trends.

(Unaudited) QUARTER

(in thousands) 2021 2020 2019

Third Second First Fourth Third Second First Fourth

First Fourth Third Second First Fourth Third Second

Statement of Income Data

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irrigation and lawn care products

Unseasonably cool weather or extraordinary amounts of rain • Fewer pool and irrigation and landscape installations

Unseasonably cool weather or extraordinary amounts • Fewer pool and irrigation and landscape

of rain installations

• Decreased purchases of chemicals and supplies

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above-ground pools and accessories

Unseasonably early warming trends in spring/late cooling trends in fall • A longer pool and landscape season, thus positively impacting our sales

Unseasonably early warming trends in spring/late cooling • A longer pool and landscape season, thus positively

trends in fall impacting our sales

(primarily in the northern half of the U.S.

Unseasonably late warming trends in spring/early cooling trends in fall • A shorter pool and landscape season, thus negatively impacting our sales

Unseasonably late warming trends in spring/early cooling • A shorter pool and landscape season, thus negatively

trends in fall impacting our sales

(primarily in the northern half of the U.S.

Weather Impacts on 2021 and 2020 Results

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.

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.

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.

Sales in the first quarter of 2021 benefited from generally mild weather conditions throughout the contiguous United States.

In February 2021, Texas experienced the most costly winter storm event on record for the United States, which damaged many swimming pools and added to the existing, strong replacement opportunity in that market.

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

CRITICAL ACCOUNTING ESTIMATES

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

generally accepted accounting principles (GAAP), which require 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.

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

For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2020 Annual Report on Form 10-K.

We have not changed any of these policies from those previously disclosed in that report.

Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

LIQUIDITY AND CAPITAL RESOURCES

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

The same principle applies to funds used for capital expenditures 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.

We have funded our capital expenditures and share repurchases in substantially the same manner.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases.

Our specific priorities for the use of cash are as follows:

• capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;

• capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles;

• strategic acquisitions executed opportunistically;

• payment of cash dividends as and when declared by our Board of Directors (Board);

• repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0;

• repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0;

• repurchases of our common stock under our Board-authorized share repurchase program.

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.

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

Due to the deferral of capital expenditures earlier in the year to address the COVID-19 pandemic, we expect capital expenditures in 2020 to approximate 65% of 2019 capital expenditures and range from $20.0 million to $25.0 million.

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

We project capital expenditures in 2021 will continue to approximate the historical average.

As of March 31, 2021, our average total leverage ratio equaled 0.69 compared to 0.86 as of December 31, 2020.

Our strong operating results and cash flow from operations in 2020 and through the first quarter of 2021 enabled us to reduce our debt balances.

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

Sources and Uses of Cash

The following table summarizes our cash flows (in thousands):

Nine Months Ended

September 30,

Three Months Ended

Operating activities $ 77,113 $ 19,728

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Financing activities (75,194) (8,149)

Cash provided by operations of $388.9 million for the first nine months of 2020 increased $145.7 million compared to the first nine months of 2019.

The improvement in cash provided by operations primarily reflects an increase in net income, a decline in inventory balances between periods and improvements in working capital management.

Cash used in investing activities for the first nine months of 2020 increased compared to the first nine months of 2019 primarily due to the acquisitions of Master Tile Network LLC, which we completed in February 2020, and Northeastern Swimming Pool Distributors, Inc., which we completed in September 2020.

The increase in cash used in investing activities due to acquisitions was partially offset by lower capital expenditures.

Cash used in financing activities was $300.2 million for the first nine months of 2020 compared to $187.7 million for the first nine months of 2019, which reflects a $52.2 million increase in net debt payments, additional share repurchases of $53.0 million and an increase in dividends paid of $6.8 million.

Net cash provided by operations of $77.1 million for the first three months of 2021 increased $57.4 million compared to the first three months of 2020.

The improvement in cash provided by operations primarily reflects an increase in net income between periods.

Net cash used in investing activities for the first three months of 2021 decreased compared to the first three months of 2020 primarily due to a $13.0 million decrease in cash used for the acquisition of businesses.

Net cash used in financing activities was $75.2 million for the first three months of 2021 compared to $8.1 million for the first three months of 2020, which reflects a $57.5 million increase in debt payments net of borrowings, additional share repurchases of $4.9 million and an increase in dividends paid of $1.2 million.

Future Sources and Uses of Cash

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The Credit Facility matures on September 29, 2022.

We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At September 30, 2020, there was $40.9 million outstanding, a $4.8 million standby letter of credit outstanding and $704.3 million available for borrowing under the Credit Facility.

We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At March 31, 2021, there was $142.9 million outstanding, a $4.8 million standby letter of credit outstanding and $602.3 million available for borrowing under the Credit Facility.

We pay interest on revolving borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin.

The weighted average effective interest rate for the Credit Facility as of September 30, 2020 was approximately 1.1%, excluding commitment fees.

The weighted average effective interest rate for the Credit Facility as of March 31, 2021 was approximately 2.3%, excluding commitment fees.

Term Facility

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 in the first quarter of 2020.

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

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 facility's debt balance 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 quarterly payments over the life of the facility will be equal to 33.75% of the Term Facility with the final principal payment, 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 September 30, 2020, there was $178.1 million outstanding under the Term Facility with a weighted average effective interest rate of 2.1%.

At March 31, 2021, there was $173.4 million outstanding under the Term Facility with a weighted average effective interest rate of 2.9%.

We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

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Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants.

As of September 30, 2020, the calculations of these two covenants are detailed below:

As of March 31, 2021, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

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Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility).

As of September 30, 2020, our average total leverage ratio equaled 1.01 (compared to 1.26 as of June 30, 2020) and the TTM average total debt amount used in this calculation was $466.3 million.

As of March 31, 2021, our average total leverage ratio equaled 0.69 (compared to 0.86 as of December 31, 2020) and the TTM average total debt amount used in this calculation was $411.7 million.

• Minimum Fixed Charge Coverage Ratio .

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Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility).

As of September 30, 2020, our fixed charge ratio equaled 7.10 (compared to 6.27 as of June 30, 2020) and TTM Rental Expense was $61.2 million.

As of March 31, 2021, our fixed charge ratio equaled 9.00 (compared to 7.81 as of December 31, 2020) and TTM Rental Expense was $64.9 million.

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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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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Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At September 30, 2020, there was $110.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

At March 31, 2021, there was $105.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

Interest Rate Swaps

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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.

As of September 30, 2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminates on November 20, 2020.

As of March 31, 2021, we had three interest rate swap contracts in place, two of 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% on notional amounts of $75.0 million each.

The third interest rate swap contract currently in place became effective on February 26, 2021, and terminates on February 28, 2025.

This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.3800% on a notional amount of $150.0 million.

Interest expense related to the notional amounts under this swap contract is based on the fixed rate plus the applicable margin on our variable rate borrowings.

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

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

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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 May 7, 2019 November 20, 2020 September 29, 2022 $75.0 2.0925%

Forward-starting interest rate swap 2 July 25, 2019 November 20, 2020 September 29, 2022 $75.0 1.5500%

Forward-starting interest rate swap 3 February 5, 2020 February 26, 2021 February 28, 2025 $150.0 1.3800%

Derivative Inception Date Effective Date Termination Date Notional

(in millions) Fixed

Forward-starting interest rate swap 1 March 9, 2020 September 29, 2022 February 26, 2027 $150.0 0.7400%

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Compliance and Future Availability

As of September 30, 2020, we believe we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months.

As of March 31, 2021, we believe we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

We believe we will remain in compliance with all material covenants and financial ratio requirements throughout the next twelve months.

For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2020 Annual Report on Form 10-K and in Part I, Item 1 of this Form 10-Q.

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If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.

As of October 26, 2020, $176.9 million of the current Board-authorized amount under our share repurchase program remained available.

As of April 26, 2021, $107.4 million of the current Board-authorized amount under our share repurchase program remained available.

We expect to repurchase additional shares on the open market from time to time depending on market conditions.

We plan to fund these repurchases with cash provided by operations and borrowings under the Credit and Receivables Facilities.

CRITICAL ACCOUNTING ESTIMATES

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

generally accepted accounting principles (GAAP), which require 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;

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

For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2019 Annual Report on Form 10-K.

See Allowance for Doubtful Accounts in Note 1 of Part I, Item 1 of this Form 10-Q for more information on our adoption of ASU 2016-13.

We have not changed any other policies from those previously disclosed.

Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

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-Q

Item 2. Management’s Discussion and Analysis