What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 207 added, 183 removed, 285 unchanged (58% of the section changed)

20 unchanged sentences

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

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

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

The direct impact of any closures to date have not had a material impact on our operations.

2 unchanged sentences

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 to date, it is unclear what the long-term impact will be.

While this trend has had a positive impact on our financial performance over the past year and a half, 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.

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

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

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.

Beginning in the second quarter of 2021 and continuing through the third quarter, we have made significant investments in inventory to support increased demand and help manage potential supply chain disruptions that could negatively impact customer service.

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 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.

Although we have increased our capital spending in 2021, we expect our capital expenditures for the year to be lower than our historical average of 1.0% of net sales due to our significant sales growth.

Our expense growth through the third quarter of 2021 was partially offset by lower discretionary spending for advertising, meetings, travel and entertainment, which we expect to continue through the end of the year as business travel activity lagged in the third quarter of 2021 with the onset of the Delta variant.

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

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).

1 unchanged sentence

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, the possibility of additional subsequent outbreaks 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, the re-institution of governmental actions that could restrict the activities of our customers, vendors or employees, the possibility of additional subsequent outbreaks, the sustainability of current home-centric trends and other changes in customer and supplier behavior in response to the pandemic.

Financial Results

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.

In the third quarter of 2021, net sales increased 24% to $1.4 billion compared to $1.1 billion in the third quarter of 2020, while base business sales grew 19%.

This growth is on top of 27% growth in the third quarter of last year, bringing our year-to-date net sales growth to $1.2 billion.

Our sales continued to benefit from elevated demand for outdoor living products along with favorable weather conditions.

Our rigorous commitment to operating efficiency and capacity creation, along with our strategic focus on inventory purchases to serve demand has allowed us to fulfill our customers' high volumes.

Gross profit increased 34% to $441.9 million in the third quarter of 2021 from $328.7 million in the same period of 2020.

Base business gross profit improved 29% over the third quarter of 2020.

Gross margin increased 240 basis points to 31.3% in the third quarter of 2021 compared to 28.9% in the third quarter of 2020, while base business gross margin increased 250 basis points, primarily reflecting benefits from our supply chain management initiatives.

Selling and administrative expenses (operating expenses), including the recovery of goodwill and other assets, increased 13% to $204.6 million in the third quarter of 2021 compared to $180.5 million in the third quarter of 2020, while base business operating expenses grew 7%, primarily due to growth-driven labor, facility and freight costs, along with increased investments in technology.

In the third quarter of 2021, we recovered $1.4 million of a $2.5 million note impairment recorded in the first quarter of 2020.

As a percentage of net sales, operating expenses decreased to 14.5% in the third quarter of 2021 compared to 15.8% in the same period of 2020, reflecting continued strong expense control.

Operating income in the third quarter of 2021 increased 60% to $237.3 million compared to $148.2 million in the same period in 2020.

Operating margin was 16.8% in the third quarter of 2021 compared to 13.0% in the third quarter of 2020 while base business operating margin was 17.1%, up 410 basis points from the prior year period.

We recorded a $4.2 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 September 30, 2021, compared to a tax benefit of $8.5 million, or $0.21 per diluted share, realized in the same period of 2020.

Net income increased 55% to $184.7 million in the third quarter of 2021 compared to $119.1 million in the third quarter of 2020.

Earnings per diluted share increased 55% to $4.54 in the third quarter of 2021 compared to $2.92 in the same period of 2020.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 64% to $4.44 in the third quarter of 2021 compared to $2.71 in the third 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 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.

As of September 30, 2021, total net receivables, including pledged receivables, increased 30% compared to September 30, 2020, primarily driven by our sales growth and recent acquisitions.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 25.7 days at September 30, 2021 and 27.6 days at September 30, 2020.

Our allowance for doubtful accounts balance was $5.4 million at September 30, 2021 and $5.3 million at September 30, 2020.

Net inventory levels increased 70% compared to levels at September 30, 2020.

Our inventory balance has increased as we have made significant investments in inventory throughout the year to support elevated demand and help manage potential supply chain disruptions that could negatively impact customer service.

Our inventory reserve was $15.7 million at September 30, 2021 and $11.4 million at September 30, 2020.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.8 times at September 30, 2021 and 3.7 times at September 30, 2020.

Accrued expenses and other current liabilities increased 59% compared to September 30, 2020, primarily due to higher income tax payables.

As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third quarter estimated federal tax payment of $56.0 million, which will be paid in January 2022.

Total debt outstanding at September 30, 2021 was $362.8 million, up 7% compared to total debt at September 30, 2020.

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.

1 unchanged sentence

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.

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.

Upon reporting our results through the third quarter of 2021, we increased our 2021 diluted EPS guidance range to $14.85 to $15.35, including the impact of year-to-date tax benefits of $0.39.

Our previous 2021 earnings guidance range disclosed in our Second Quarter 2021 Quarterly Report on Form 10-Q was $13.75 to $14.25, including tax benefits of $0.29 for the first six months of 2021.

We increased our range based on exceeding our third quarter expectations, along with expected continued gross margin improvement through the end 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 to exceed 30% 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.

We estimate that sales will be favorably impacted by inflationary product cost increases of 6% to 7% (above our historical average of 1% to 2%), which we began to realize in the second quarter of 2021.

Inflationary product costs had a greater impact in the third quarter of 2021, and we expect this to continue through the end 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.

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.

To address known and anticipated supply chain constraints, beginning in the second quarter of 2021 and into the third quarter, we have made significant investments in inventory in product areas where we forecasted continued high demand.

Our strong inventory position has allowed us to gain share and to continue to provide exceptional service in a high demand and tight supply chain environment.

We expect operating expenses to reflect inflationary increases and incremental costs to support our sales growth expectations.

Combined with purposeful expense management, we believe this will drive operating margin improvement of 350 basis points for the full year of 2021 compared to 2020.

We expect performance-based compensation for the full year of 2021 to increase approximately $15 million from 2020 due to our projected 2021 net sales growth with most of this increase recognized through the third quarter of 2021 based on year-to-date results.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2021 will approximate 25.0%, which is consistent with 2020.

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 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 June 30, 2021.

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

We recorded a $15.9 million, or $0.39 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 30, 2021.

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

We have not included any expected tax benefits in our guidance beyond what we have recognized as of September 30, 2021.

We have made significant investments in inventory throughout the year to support increased demand and help manage potential supply chain disruptions that could negatively impact customer service.

While these investments will negatively impact our cash provided by operations in 2021, we believe that our investments in inventory will provide benefits to our customers and favorably impact our gross margin through the end of this year and into at least the first quarter of 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).

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.

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

See “Cautionary Statement for Forward-Looking Statements.”

RESULTS OF OPERATIONS

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.

As of September 30, 2021, we conducted operations through 409 sales centers in North America, Europe and Australia.

For the nine months ended September 30, 2021, approximately 94% 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 Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

3 unchanged sentences

Selling and administrative expenses 14.6 15.8 13.9 16.0

Impairment of goodwill and other assets — — — 0.4

(Recovery) impairment of goodwill and other assets (0.1) — — 0.2

Operating income 16.8 13.0 16.5 12.6

3 unchanged sentences

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

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

Three Months Ended September 30, 2021 Compared to Three Months Ended September 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):

1 unchanged sentence

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

June 30, June 30, June 30,

September 30, September 30, September 30,

2021 2020 2021 2020 2021 2020

3 unchanged sentences

Operating expenses (1)

192,061 179,990 12,562 475 204,623 180,465

Expenses as a % of net sales 14.2 % 15.8 % 20.0 % 20.8 % 14.5 % 15.8 %

Operating income (1)

231,177 148,150 6,099 83 237,276 148,233

Operating margin 17.1 % 13.0 % 9.7 % 3.6 % 16.8 % 13.0 %

(1) Base business and total reflect a $1.4 million recovery of goodwill and other assets in 2021.

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

1 unchanged sentence

Vak Pak Builders Supply, Inc.

June 2021 1 June 2021

Pool Source, LLC April 2021 1 April - June 2021

June 2021 1 July - September 2021

Pool Source, LLC April 2021 1 July - September 2021

TWC Distributors, Inc.

December 2020 10 April - June 2021

December 2020 10 July - September 2021

Jet Line Products, Inc.

October 2020 9 April - June 2021

October 2020 9 July - September 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 April - June 2021

Master Tile Network LLC

February 2020 4 April - May 2021 and

April - May 2020

September 2020 2 July - September 2021 and September 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.

2 unchanged sentences

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 six months of 2021:

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

December 31, 2020 398

2 unchanged sentences

Consolidated location (1)

June 30, 2021 408

September 30, 2021 409

Three Months Ended

September 30,

(in millions) 2021 2020 Change

Net sales $ 1,411.4 $ 1,139.2 $ 272.2 24%

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.

Net sales increased 24% in the third quarter of 2021 compared to the third quarter of 2020, while base business net sales grew 19% over the same period.

Our sales in the third quarter of 2021 continued to benefit from elevated demand for our outdoor living products along with favorable weather conditions.

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

2 unchanged sentences

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

• inflationary product cost increases of approximately 7% (compared to our historical average of 1% to 2%);

• 5% sales growth from recent acquisitions.

• 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 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 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.

In the third quarter of 2021, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 23% compared to the same period last year, and collectively represented approximately 28% of net sales for the period.

Sales of building materials grew 24% compared to the third quarter of 2020 and represented approximately 12% of net sales in the third 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 in these areas is reflected in the numbers in the paragraph above.

Sales to retail customers increased 16% in the third quarter of 2021 compared to the third quarter of 2020 and represented approximately 11% of our net sales for the third quarter of 2021.

Sales to commercial customers increased 25% in the third quarter of 2021 compared to the third quarter of 2020, as business and leisure travel improved in 2021 as public facilities reopened following COVID-19 related closures in 2020.

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

Three Months Ended

September 30,

(in millions) 2021 2020 Change

1 unchanged sentence

Gross margin 31.3 % 28.9 %

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.

Gross margin increased 240 basis points to 31.3% in the third quarter of 2021 compared to 28.9% in the third quarter of 2020.

Gross margin was favorably impacted by benefits from focused supply chain management initiatives during this inflationary environment and improvements in rates earned under our vendor programs due to increased inventory purchases.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2021 2020 Change

Selling and administrative expenses $ 206.0 $ 180.5 $ 25.5 14%

Recovery of goodwill and other assets (1.4) — (1.4) (100)%

Operating expenses as a % of net sales 14.5 % 15.8 %

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.

Operating expenses, including the recovery of goodwill and other assets, increased 13% in the third quarter of 2021 compared to the third quarter of 2020, while base business operating expenses grew 7%, primarily due to growth-driven labor, facility and freight costs along with increased investments in technology.

In the third quarter of 2021, we recovered $1.4 million of a $2.5 million note impairment recorded in the first quarter of 2020.

As a percentage of net sales, operating expenses decreased to 14.5% in the third quarter of 2021 compared to 15.8% in the same period of 2020, reflecting continued strong expense control.

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.

Interest and other non-operating expenses, net for the third quarter of 2021 increased $0.5 million compared to the third quarter of 2020.

Our weighted average effective interest rate increased to 2.8% for the third quarter of 2021 from 1.9% for the third quarter of 2020 on average outstanding debt of $354.3 million versus $331.5 million for the respective periods.

Our effective income tax rate was 21.4% for the three months ended September 30, 2021 compared to 18.7% for the three months ended September 30, 2020.

We recorded a $4.2 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2021 compared to a tax benefit of $8.5 million realized in the same period last year.

Without the benefits from ASU 2016-09, our effective tax rate was 23.2% for the third quarter of 2021 and 24.5% for the third quarter of 2020.

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 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

Net income increased 55% to $184.7 million in the third quarter of 2021 compared to $119.1 million in the third quarter of 2020.

Earnings per diluted share increased 55% to $4.54 in the third quarter of 2021 compared to $2.92 in the same period of 2020.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 64% to $4.44 in the third quarter of 2021 compared to $2.71 in the third quarter of 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 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,

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

September 30, September 30, September 30,

2021 2020 2021 2020 2021 2020

8 unchanged sentences

Operating margin 17.0 % 12.6 % 8.2 % 6.2 % 16.5 % 12.6 %

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

(1) Base business and total reflect a $1.4 million recovery of goodwill and other assets in 2021 and $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:

1 unchanged sentence

Vak Pak Builders Supply, Inc.

June 2021 1 June 2021

June 2021 1 June - September 2021

Pool Source, LLC

April 2021 1 April - June 2021

April 2021 1 April - September 2021

TWC Distributors, Inc.

December 2020 10 January - June 2021

December 2020 10 January - September 2021

Jet Line Products, Inc.

October 2020 9 January - June 2021

October 2020 9 January - September 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 January - June 2021

September 2020 2 January - September 2021 and September 2020

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

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 September 30, 2021 Compared to Three Months Ended September 30, 2020.

Nine Months Ended

September 30,

(in millions) 2021 2020 Change

Net sales $ 4,260.0 $ 3,097.4 $ 1,162.6 38%

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.

Net sales for the first nine months of 2021 increased 38% compared to the same period last year, while base business net sales increased 31%.

During the first nine months of 2021, maintenance, refurbishment and construction activity remained strong as families continued to create and expand home-based outdoor living spaces.

Through the third 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):

2 unchanged sentences

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

• 7% sales growth from recent acquisitions;

• inflationary product cost increases of approximately 6% to 7% (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 the first nine months of 2021, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 39% compared to the same period last year.

Equipment collectively represented 28% of net sales in the first nine months of 2021.

Sales of building materials grew 30% compared to the first nine months of 2020 and represented approximately 11% of net sales in the first nine months 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 in these areas is reflected in the numbers in the paragraph above.

In the first nine months of 2021, sales to retail customers increased 21% and represented approximately 13% of our consolidated net sales.

Sales to commercial customers increased 24% in the first nine months of 2021, as business and leisure travel improved in 2021 as public facilities reopened following COVID-19 related closures in 2020.

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

Nine Months Ended

September 30,

(in millions) 2021 2020 Change

1 unchanged sentence

Gross margin 30.4 % 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.

Gross margin improved 160 basis points to 30.4% in the nine months ended September 30, 2021 compared to 28.8% in the first nine 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 and third quarters 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

Nine Months Ended

September 30,

(in millions) 2021 2020 Change

Selling and administrative expenses $ 591.2 $ 495.2 $ 96.0 19%

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

(Recovery) impairment of goodwill and other assets (1.4) 6.9 (8.3) (120)%

Operating expenses as a % of net sales 13.8 % 16.2 %

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.

Operating expenses, including the recovery of goodwill and other assets in 2021 and impairment in 2020, for the nine months ended September 30, 2021 increased 17% compared to the first nine months of 2020.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a note and non-cash goodwill and intangibles impairment charges of $4.4 million.

In the third quarter of 2021, we recovered $1.4 million of the previously impaired note.

Without the impact of the recovery in 2021 and the prior year impairment charges, operating expenses were up 19%, primarily due to growth-driven labor, performance-based compensation, facility and freight costs along with increased investments in technology.

Interest and Other Non-Operating Expenses, Net

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.

Interest and other non-operating expenses, net for the first nine months of 2021 decreased $2.4 million compared to the same period last year.

Our weighted average effective interest rate increased to 2.6% for the first nine months of 2021 from 2.2% for the same period of 2020 on average outstanding debt of $376.2 million versus $439.4 million for the respective periods.

Our effective income tax rate was 22.2% for the nine months ended September 30, 2021 compared to 19.2% for the nine months ended September 30, 2020.

We recorded a $15.9 million, or $0.39 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2021 compared to a $22.6 million, or $0.55 per diluted share, tax benefit in the same period of 2020.

Without the benefits from ASU 2016-09, our effective tax rate was 24.5% for the nine months ended September 30, 2021 and 25.2% for the nine months ended September 30, 2020.

Net Income and Earnings Per Share

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.

Net income increased 77% to $543.0 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Adjusted net income for the first nine months of 2021, without the note recovery in 2021 and the prior year impact of non-cash impairments, both net of tax, increased 73%.

Earnings per diluted share increased to $13.32 for the nine months ended September 30, 2021 versus $7.53 per diluted share for the nine months ended September 30, 2020.

Adjusted diluted EPS (as calculated in the reconciliation below) increased 81% to $12.90 for the nine months ended September 30, 2021 compared to $7.13 for the nine months ended September 30, 2020.

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

1 unchanged sentence

Adjusted Income Statement Information

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

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.

2 unchanged sentences

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

(Unaudited) Six Months Ended

(in thousands) June 30,

(Unaudited) Nine Months Ended

(in thousands) September 30,

Net income $ 543,015 $ 307,565

Impairment of goodwill and other assets — 6,944

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

(Recovery) impairment of goodwill and other assets (1,400) 6,944

Tax impact on (recovery) impairment of note (1)

Adjusted net income $ 541,966 $ 313,855

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

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

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

(Unaudited) Six Months Ended

(Unaudited) Nine Months Ended

September 30,

Diluted EPS $ 13.32 $ 7.53

After-tax non-cash impairment charges — 0.15

Adjusted diluted EPS excluding after-tax non-cash impairment charges 8.78 4.77

After-tax non-cash (recovery) impairment charges (0.03) 0.15

Adjusted diluted EPS excluding after-tax (recovery) impairment charges 13.29 7.68

ASU 2016-09 tax benefit (0.39) (0.55)

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit $ 8.49 $ 4.43

Adjusted diluted EPS excluding after-tax (recovery) impairment charges and tax benefit $ 12.90 $ 7.13

Seasonality and Quarterly Fluctuations

5 unchanged sentences

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

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

3 unchanged sentences

(in thousands) 2021 2020 2019

Second First Fourth Third Second First Fourth Third

Third Second First Fourth Third Second First Fourth

Statement of Income Data

29 unchanged sentences

Weather Impacts on 2021 and 2020 Results

Generally favorable weather conditions benefited sales in the third quarter of 2021.

Temperatures ranged from above-average to substantially above-average throughout most of the contiguous United States with September being the fifth warmest 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 2020 were favorably impacted by above-average temperatures and below-average precipitation.

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

38 unchanged sentences

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

• inventory and other operating expenses;

• strategic acquisitions executed opportunistically;

5 unchanged sentences

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 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):

Six Months Ended

Nine Months Ended

September 30,

Operating activities $ 359,065 $ 388,914

1 unchanged sentence

Financing activities (267,765) (300,161)

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.

Net cash provided by operations of $359.1 million for the first nine months of 2021 decreased $29.8 million compared to the first nine months of 2020, primarily reflecting our supply chain investments in inventory to enable us to continue to meet strong customer demand.

Net cash used in investing activities for the first nine months of 2021 increased slightly compared to the first nine months of 2020.

Capital expenditures increased $7.3 million year-over year following the delay in capital spending last year due to the onset of the COVID-19 pandemic, while cash used for the acquisition of businesses decreased $6.8 million in the first nine months of 2021 compared to the first nine months of 2020.

Net cash used in financing activities was $267.8 million for the first nine months of 2021 compared to $300.2 million for the first nine months of 2020, which reflects a $119.9 million decrease in net debt payments, additional share repurchases of $61.8 million and an increase in dividends paid of $18.9 million during the first nine months of 2021.

Future Sources and Uses of Cash

Revolving Credit Facility

Our Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility and includes sublimits for the issuance of swingline loans and standby letters of credit.

Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million.

The Credit Facility matures on September 29, 2022.

On September 27, 2021, we amended and restated our 2017 credit agreement (as amended, the “Credit Agreement”) to extend its maturity date from September 29, 2022 to September 25, 2026, and to increase our borrowing capacity from $750.0 million to $1.0 billion through the addition of a delayed-draw term loan facility of $250.0 million.

Under this term loan facility, we may draw term loans at any time prior to March 25, 2022.

Any such term loans would require quarterly amortization payments aggregating to 20% of the original principal amount of the loan during the third, fourth and fifth years of the loan, with all remaining principal due on September 25, 2026.

All other terms of any such term loans would be substantially similar to those governing revolving credit loans under the Credit Agreement.

Under the Credit Agreement, we continue to have access to a $750 million unsecured revolving credit facility (the “Credit Facility”) on substantially the same terms and subject to the same sublimits for swingline loans and standby letters of credit as in the past, other than the amendments described below.

The Credit Agreement further amended and restated the Credit Facility in the following ways:

• making available lower interest rates;

• increasing the amount of incremental facility commitments that we can request from $75.0 million to $250.0 million;

• providing additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends.

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

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 June 30, 2021 was approximately 2.2%, excluding commitment fees.

At September 30, 2021, there was $170.3 million outstanding, a $4.8 million standby letter of credit outstanding and $574.9 million available for borrowing under the Credit Facility.

Currently, 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, 2021 was approximately 2.0%, excluding commitment fees.

Term Facility

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

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.

On October 12, 2021, we amended our 2019 credit agreement (as amended, the “Term Facility Agreement”) among us, as Borrower, and Bank of America, N.A., as the Lender.

Among other items, the amendment provides additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends to match the recent changes to the covenants in the Credit Agreement.

The term facility available under this Agreement (the “Term Facility”) provides for $185.0 million in borrowing capacity and matures on December 30, 2026.

Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

The Term Facility is repaid in quarterly amortization installments of 1.250% of the facility's debt balance.

The total of quarterly amortization 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 June 30, 2021, there was $171.1 million outstanding under the Term Facility with a weighted average effective interest rate of 2.9%.

At September 30, 2021, there was $168.8 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.

Financial Covenants

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 June 30, 2021, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.

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 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 .

On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00.

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 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.

Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends.

Further, dividends must be declared and paid in a manner consistent with our past practice.

Under the Credit Facility and the Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 2.50 to 1.00.

Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets.

Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

2 unchanged sentences

The Receivables Facility matures on November 1, 2021.

We intend to amend the Receivables Facility on or ahead of its maturity date.

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.

4 unchanged sentences

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 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.

At September 30, 2021, there was $15.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.8%, excluding commitment fees.

Financial Covenants

Financial covenants of the Credit Facility and the Term Facility (each as recently revised) and the Receivables 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, 2021, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.

As of September 30, 2021, our average total leverage ratio equaled 0.48 (compared to 0.53 as of June 30, 2021) and the TTM average total debt amount used in this calculation was $397.6 million.

• Minimum Fixed Charge Coverage Ratio .

On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00.

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, 2021, our fixed charge ratio equaled 11.31 (compared to 10.48 as of June 30, 2021) and TTM Rental Expense was $70.1 million.

The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of dividends.

We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced amount dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends.

Under the Credit Facility and Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 3.25 to 1.00.

Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets.

Interest Rate Swaps

1 unchanged sentence

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 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.

As of September 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.

10 unchanged sentences

Compliance and Future Availability

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.

As of September 30, 2021, 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.

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

We continually evaluate potential acquisitions and hold discussions with acquisition candidates.

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

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

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

As of October 25, 2021, $494.7 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.

1 unchanged sentence

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