What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 194 added, 114 removed, 274 unchanged (53% of the section changed)

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Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives and industry, general economic and other forecasts of trends, future dividend payments and share repurchases, and other matters.

Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to publicly update or revise such statements to reflect new circumstances or unanticipated events as they occur.

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 and the extent to which home-centric trends will continue, accelerate or reverse;

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 and the extent to which strong demand driven by home-centric trends will continue, accelerate or reverse;

the sensitivity of our business to weather conditions;

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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.

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

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.

We continue to monitor the effects of the COVID-19 pandemic, which began impacting our business and the global economy in the first quarter of 2020.

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

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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.

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

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.

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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.

Our expense growth in the first half of 2021 was partially offset by lower discretionary spending for advertising, meetings, travel and entertainment.

However, we believe that discretionary spending in the latter part of 2021 will increase depending on vaccination progress, additional outbreaks and the extent individuals return to travel, 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.

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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.

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, the possibility of additional subsequent outbreaks and changes in customer and supplier behavior in response to the pandemic.

Financial Results

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.

In the second quarter of 2021, net sales increased 40% to $1.79 billion compared to $1.28 billion in the second quarter of 2020, while base business sales grew 32%.

Households continued to invest in outdoor living spaces, contributing to the robust demand for our products.

We observed sales gains across nearly all product categories and geographies reflecting strong growth in maintenance, replacement, refurbishment and construction activity among our customers.

Gross profit increased 48% to $551.7 million in the second quarter of 2021 from $373.5 million in the same period of 2020.

Base business gross profit improved 41% over the second quarter of 2020.

Gross margin increased 170 basis points to 30.9% in the second quarter of 2021 compared to 29.2% in the second quarter of 2020 while base business gross margin increased 200 basis points, primarily driven by benefits from focused supply chain management initiatives.

Selling and administrative expenses (operating expenses) increased 27% to $213.1 million in the second quarter of 2021 compared to $167.6 million in the second quarter of 2020, while base business operating expenses grew 18%, primarily due to growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation expense.

As a percentage of net sales, operating expenses decreased to 11.9% in the second quarter of 2021 compared to 13.1% in the same period of 2020 as we continue to exercise strong expense control.

Operating income in the second quarter of 2021 increased 64% to $338.6 million compared to $205.9 million in the same period in 2020 with acquisitions contributing $11.0 million to operating income in the second quarter of 2021.

Operating margin was 18.9% in the second quarter of 2021 compared to 16.1% in the second quarter of 2020 while base business operating margin was 19.4%, up 330 basis points from the prior year period.

We recorded a $7.7 million, or $0.19 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended June 30, 2021, compared to a tax benefit of $6.2 million, or $0.15 per diluted share, realized in the same period of 2020.

Net income increased 65% to $259.7 million in the second quarter of 2021 compared to $157.6 million in the second quarter of 2020.

Earnings per diluted share increased 65% to $6.37 in the second quarter of 2021 compared to $3.87 in the same period of 2020.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 66% to $6.18 in the second quarter of 2021 compared to $3.72 in the second quarter 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 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.

As of June 30, 2021, total net receivables, including pledged receivables, increased 29% compared to June 30, 2020, driven by our sales growth and recent acquisitions and partially offset by improved collections.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 25.8 days at June 30, 2021 and 28.5 days at June 30, 2020.

Our allowance for doubtful accounts balance was $5.4 million at June 30, 2021 and $6.0 million at June 30, 2020.

Net inventory levels increased 42% compared to levels at June 30, 2020, reflecting our supply chain efforts to support organic business growth as well as inventory from recently acquired businesses.

The inventory reserve was $15.2 million at June 30, 2021 and $10.8 million at June 30, 2020.

Our inventory turns, as calculated on a trailing four quarters basis, were 4.1 times at June 30, 2021 and 3.5 times at June 30, 2020.

Accrued expenses and other current liabilities increased 32% compared to June 30, 2020, primarily reflecting growth-driven increases in accrued performance-based compensation and accrued tax payments.

Total debt outstanding at June 30, 2021 was $423.1 million, down 4% compared to total debt at June 30, 2020, as we continue to utilize operating cash flows to pay down 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.

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.

Upon reporting our results through the second quarter of 2021, we increased our 2021 diluted EPS guidance range to $13.75 to $14.25, including the impact of year-to-date tax benefits of $0.29.

Our previous 2021 earnings guidance range disclosed in our First Quarter 2021 Quarterly Report on Form 10-Q was $11.85 to $12.60, including first quarter tax benefits of $0.10.

We increased our range based on exceeding our second quarter expectations, along with expected gross margin improvement in the latter half of 2021.

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

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%).

We project net sales growth for 2021 to exceed 25% based on expectations of continued elevated demand trends, a solid backlog of customer projects and inflationary benefits.

We estimate that sales will be favorably impacted by inflationary product cost increases of 5% to 6% (above our historical average of 1% to 2%), of which we began to realize in the second quarter of 2021, but expect a greater impact in the latter half of the year.

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.

However we remain encouraged by positive industry outlooks, the visibility attained on demand throughout the second quarter and our ability to project and maintain appropriate stock levels.

Based on our supply chain management efforts implemented during the second quarter of 2021, coupled with the current inflationary environment, we believe gross margin for the full year of 2021 has the potential to increase 100 basis points compared to the full year of 2020, with greater improvement in the third quarter than in the fourth quarter given the 70 basis points improvement realized in the fourth quarter 2020.

We expect operating expenses to reflect inflationary increases and incremental costs to support our sales growth expectations, which we believe will enable us to achieve operating margin improvement of 250 to 300 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, additional outbreaks and the extent individuals return to travel.

We also expect slightly higher performance-based compensation expense for the full year 2021 than the full year of 2020 based on our results to date and our updated 2021 outlook.

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

We recorded an $11.7 million, or $0.29 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, 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 March 31, 2021.

We have not included any expected benefits in our guidance beyond what we have recognized as of June 30, 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 expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2021.

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

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RESULTS OF OPERATIONS

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.

As of June 30, 2021, we conducted operations through 408 sales centers in North America, Europe and Australia.

For the six months ended June 30, 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

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 2021 2020

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Income before income taxes and equity earnings 18.8 % 15.9 % 16.3 % 12.0 %

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

Due to rounding, percentages presented in the table above may not add to Operating income or 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 March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 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

March 31, March 31, March 31,

June 30, June 30, June 30,

2021 2020 2021 2020 2021 2020

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Operating expenses 196,764 167,131 16,335 493 213,099 167,624

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

Expenses as a % of net sales 11.7 % 13.1 % 16.3 % 34.8 % 11.9 % 13.1 %

Operating income (loss) (1)

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

Operating income 327,614 205,717 10,972 140 338,586 205,857

Operating margin 19.4 % 16.1 % 11.0 % 9.9 % 18.9 % 16.1 %

(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

Vak Pak Builders Supply, Inc.

June 2021 1 June 2021

Pool Source, LLC April 2021 1 April - June 2021

TWC Distributors, Inc.

December 2020 10 January - March 2021

December 2020 10 April - June 2021

Jet Line Products, Inc.

October 2020 9 January - March 2021

October 2020 9 April - June 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 January - March 2021

September 2020 2 April - June 2021

Master Tile Network LLC

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

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

February 2020 4 April - May 2021 and

April - May 2020

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months.

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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 three months of 2021:

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

December 31, 2020 398

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Consolidated location (1)

March 31, 2021 400

June 30, 2021 408

Three Months Ended

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Net sales $ 1,787.8 $ 1,280.8 $ 507.0 40%

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.

Net sales increased 40% in the second quarter of 2021 compared to the second quarter of 2020, while base business net sales grew 32% over the same period.

Households continued to invest in outdoor living spaces, contributing to the robust demand for our products.

We observed sales gains across nearly all product categories reflecting strong growth in maintenance, replacement, refurbishment and construction activity among our customers.

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

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• 8% 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.

• inflationary product cost increases of approximately 4% to 6% (compared to our historical average of 1% to 2%).

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.

In the second quarter of 2021, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 35% compared to the same period last year, and collectively represented approximately 27% of net sales for the period.

Sales of building materials grew 33% compared to the second quarter of 2020 and represented approximately 11% of net sales in the second 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 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.

Sales to retail customers increased 20% in the second quarter of 2021 compared to the second quarter of 2020 and represented approximately 14% of our net sales for the second quarter of 2021.

Sales to commercial customers increased 45% in the second quarter of 2021 compared to the second quarter of 2020, as business and leisure travel gained momentum in 2021 following COVID-19 related closures in 2020.

Sales to commercial customers represented approximately 3% of our net sales for the second quarter of 2021.

Three Months Ended

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Gross margin 30.9 % 29.2 %

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.

Gross margin increased 170 basis points to 30.9% in the second quarter of 2021 compared to 29.2% in the second quarter of 2020.

Gross margin was favorably impacted by benefits from focused supply chain management initiatives during this inflationary environment.

With our increased purchase volumes, improvements in rates earned under our vendor programs also benefited our gross margin compared to the second quarter of last year.

Lastly, we realized some gross margin benefit from product and customer mix changes in the second quarter of 2021.

In the second quarter of 2020, a larger portion of lower margin, bigger ticket items comprised our product mix, along with a comparatively larger contribution from internet retailers to our customer mix at the onset of the pandemic.

Operating Expenses

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Selling and administrative expenses $ 213.1 $ 167.6 $ 45.5 27%

Operating expenses as a % of net sales 11.9 % 13.1 %

Operating expenses increased 27% in the second quarter of 2021 compared to the second quarter of 2020, while base business operating expenses grew 18%.

The increase primarily relates to growth-driven labor, facility and freight costs along with increased investments in technology and higher performance-based compensation expense .

As a percentage of net sales, operating expenses decreased to 11.9% in the second quarter of 2021 compared to 13.1% in the same period of 2020 as we continue to leverage our network.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the second quarter of 2021 decreased $0.7 million compared to the second quarter of 2020.

Our weighted average effective interest rate increased to 2.7% for the second quarter of 2021 from 1.8% for the second quarter of 2020 on lower average outstanding debt of $376.8 million versus $493.4 million for the respective periods.

Our effective income tax rate was 22.9% for the three months ended June 30, 2021 compared to 22.5% for the three months ended June 30, 2020.

We recorded a $7.7 million tax benefit from ASU 2016-09 in the quarter ended June 30, 2021 compared to a tax benefit of $6.2 million realized in the same period last year.

Without the benefits from ASU 2016-09, our effective tax rate was 25.2% for the second quarter of 2021 and 25.6% for the second quarter of 2020.

Net Income and Earnings Per Share

Net income increased 65% to $259.7 million in the second quarter of 2021 compared to $157.6 million in the second quarter of 2020.

Earnings per diluted share increased 65% to $6.37 in the second quarter of 2021 compared to $3.87 in the same period of 2020.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 66% to $6.18 in the second quarter of 2021 compared to $3.72 in the second quarter of 2020.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

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) Six Months Ended Six Months Ended Six Months Ended

June 30, June 30, June 30,

2021 2020 2021 2020 2021 2020

Net sales $ 2,703,285 $ 1,954,323 $ 145,294 $ 3,811 $ 2,848,579 $ 1,958,134

Gross profit 814,490 561,354 38,327 1,756 852,817 563,110

Gross margin 30.1 % 28.7 % 26.4 % 46.1 % 29.9 % 28.8 %

Operating expenses (1)

357,852 320,206 27,348 1,459 385,200 321,665

Expenses as a % of net sales 13.2 % 16.4 % 18.8 % 38.3 % 13.5 % 16.4 %

Operating income (1)

456,638 241,148 10,979 297 467,617 241,445

Operating margin 16.9 % 12.3 % 7.6 % 7.8 % 16.4 % 12.3 %

(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

Vak Pak Builders Supply, Inc.

June 2021 1 June 2021

Pool Source, LLC

April 2021 1 April - June 2021

TWC Distributors, Inc.

December 2020 10 January - June 2021

Jet Line Products, Inc.

October 2020 9 January - June 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 January - June 2021

Master Tile Network LLC

February 2020 4 January - May 2021 and February - May 2020

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, 2020, please refer to the discussion under the heading Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.

Six Months Ended

(in millions) 2021 2020 Change

Net sales $ 2,848.6 $ 1,958.1 $ 890.5 45%

Net sales for the first six months of 2021 increased 45% compared to the same period last year, while base business net sales increased 38%.

During the first half of 2021, maintenance, refurbishment and construction activity remained strong as families created and expanded home-based outdoor living spaces.

Through the second quarter of 2021, households continued to invest in outdoor living spaces, contributing to the robust demand for our products and yielding sales gains across nearly all categories.

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 and building materials(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 4% to 5% (compared to our historical average of 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 six months of 2021, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 45% compared to the same period last year.

Equipment collectively represented 29% of net sales in the first six months of 2021.

Sales of building materials grew 34% compared to the first six months of 2020 and represented approximately 11% of net sales in the first six months of 2021.

In the first six months of 2021, sales to retail customers increased 26% and represented approximately 13% of our consolidated net sales.

Sales to commercial customers increased 23% in the first six months of 2021, as business and leisure travel resumed in 2021 following COVID-19 related closures in 2020.

Sales to commercial customers represented approximately 3% of our consolidated net sales in the first six months of 2021.

Six Months Ended

(in millions) 2021 2020 Change

Gross profit $ 852.8 $ 563.1 $ 289.7 51%

Gross margin 29.9 % 28.8 %

Gross margin improved 110 basis points to 29.9% in the six months ended June 30, 2021 compared to 28.8% in the first six months of 2020.

This improvement primarily reflects focused supply chain management initiatives to address inflation, with most of the year-to-date benefits realized in the second quarter of 2021.

Also, with our increased purchase volumes, improvements in rates earned under our vendor programs benefited our gross margin compared to the same period in 2020.

Operating Expenses

Six Months Ended

(in millions) 2021 2020 Change

Selling and administrative expenses $ 385.2 $ 314.7 $ 70.5 22%

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

Operating expenses as a % of net sales 13.5 % 16.4 %

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 .

Operating expenses for the six months ended June 30, 2021 increased 20% compared to the first six months of 2020.

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.

Without the impact of impairment charges in the prior year, operating expenses were up 22%, primarily due to growth-driven labor, facility and freight costs along with increased investments in technology and higher performance-based compensation.

Interest and Other Non-Operating Expenses, Net

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 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.

Interest and other non-operating expenses, net for the first six months of 2021 decreased $2.9 million compared to the same period last year.

Our weighted average effective interest rate increased to 2.5% for the first six months of 2021 from 2.2% for the same period of 2020 on average outstanding debt of $387.1 million versus $493.6 million for the respective periods.

Our effective income tax rate was 22.6% for the six months ended June 30, 2021 compared to 19.5% for the six months ended June 30, 2020.

We recorded an $11.7 million, or $0.29 per diluted share, tax benefit from ASU 2016-09 in the six months ended June 30, 2021 compared to a $14.2 million, or $0.34 per diluted share, tax benefit in the same period of 2020.

Without the benefits from ASU 2016-09, our effective tax rate was 25.2% for the six months ended June 30, 2021 and 25.6% for the six months ended June 30, 2020.

Net Income and Earnings Per Share

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.

Net income increased 90% to $358.4 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Adjusted net income for the first six months of 2021, without the prior year impact of non-cash impairments, net of tax, increased 84%.

Earnings per diluted share increased to $8.78 for the six months ended June 30, 2021 versus $4.62 per diluted share for the six months ended June 30, 2020.

Excluding the impact of non-cash impairments, net of tax, and tax benefits from ASU 2016-09 in both periods, adjusted diluted EPS increased 92% to $8.49 for the six months ended June 30, 2021 compared to $4.43 for the six months ended June 30, 2020.

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

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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.

Adjusted net income and adjusted diluted EPS are key measures used by management to demonstrate the impact of our non-cash and non-recurring charges and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

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) Three Months Ended

(in thousands) March 31,

(Unaudited) Six Months Ended

(in thousands) June 30,

Net income $ 358,350 $ 188,467

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

(Unaudited) Three Months Ended

(Unaudited) Six Months Ended

Diluted EPS $ 8.78 $ 4.62

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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 quarter of 2021, the four quarters of 2020 and the fourth, third and second quarters of 2019.

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

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(in thousands) 2021 2020 2019

First Fourth Third Second First Fourth Third Second

Second First Fourth Third Second First Fourth Third

Statement of Income Data

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Weather Impacts on 2021 and 2020 Results

Overall, varied weather conditions in the second quarter of 2021 favorably impacted our sales growth.

While the southern states saw mild temperatures and above average precipitation, the western states, particularly California, experienced severely high temperatures and drought.

The average U.S.

temperature in June was the hottest on record in 127 years.

Comparatively, in the second quarter of 2020, we observed generally mild weather conditions with warmer weather throughout the western United States.

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.

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

CRITICAL ACCOUNTING ESTIMATES

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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.

As of June 30, 2021, our average total leverage ratio equaled 0.53 compared to 0.69 as of March 31, 2021.

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

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

Sources and Uses of Cash

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

Three Months Ended

Six Months Ended

Operating activities $ 187,228 $ 221,200

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Financing activities (131,061) (177,794)

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.

Net cash provided by operations of $187.2 million for the first six months of 2021 decreased $34.0 million compared to the first six months of 2020, reflecting our supply chain investments in inventory and higher income tax payments in 2021.

Net cash used in investing activities for the first six months of 2021 increased compared to the first six months of 2020 primarily due to increases in cash used for the acquisition of businesses and other capital expenditures following the delay in capital spending at this time last year due to the onset of the COVID-19 pandemic.

Net cash used in financing activities was $131.1 million for the first six months of 2021 compared to $177.8 million for the first six months of 2020, which reflects a $79.7 million decrease in net debt payments, additional share repurchases of $19.9 million and an increase in dividends paid of $10.1 million during the first six months of 2021.

Future Sources and Uses of Cash

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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.

At June 30, 2021, there was $152.4 million outstanding, a $4.8 million standby letter of credit outstanding and $592.8 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 March 31, 2021 was approximately 2.3%, excluding commitment fees.

The weighted average effective interest rate for the Credit Facility as of June 30, 2021 was approximately 2.2%, excluding commitment fees.

Term Facility

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

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

At June 30, 2021, there was $171.1 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 March 31, 2021, the calculations of these two covenants are detailed below:

As of June 30, 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 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.

As of June 30, 2021, our average total leverage ratio equaled 0.53 (compared to 0.69 as of March 31, 2021) and the TTM average total debt amount used in this calculation was $387.3 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 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.

As of June 30, 2021, our fixed charge ratio equaled 10.48 (compared to 9.00 as of March 31, 2021) and TTM Rental Expense was $67.8 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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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 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.

At June 30, 2021, there was $90.0 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 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.

As of June 30, 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.

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Compliance and Future Availability

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.

As of June 30, 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.

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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 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.

As of July 26, 2021, $528.3 million of the current Board-authorized amount under our share repurchase program remained available.

We expect to repurchase 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.

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