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2021 FINANCIAL OVERVIEW
−Removed: Impact of the COVID-19 Pandemic
−Removed: 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.
−Removed: 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.
−Removed: Most of our North American operations are and have been continuously open for business as we are designated as an essential business in almost all of our markets.
−Removed: Our operations in Europe closed for a short period during the first half of 2020 in France, Spain and Italy, in order to comply with local authorities’ orders.
−Removed: Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water.
−Removed: We also supply products used in the prevention of runoff, flood, fire and other natural disasters.
−Removed: These products are essential to the health and safety of the general public.
−Removed: As a result, our supply chain generally remains intact, with our customers continuing to meet end-user needs.
−Removed: The health, safety and security of our employees has been, and remains, one of our highest priorities.
−Removed: 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).
−Removed: We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices.
−Removed: In limited instances, we have had to close facilities in whole or in part as a result of government regulations, as well as positive or presumed positive results from COVID-19 testing.
−Removed: The direct impact of any closures did not have a material impact on our operations.
−Removed: Beginning in the middle of March 2020, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets.
−Removed: However, as stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated.
−Removed: We experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, resulting in broad sales gains across nearly all of our product categories and geographies.
−Removed: 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.
−Removed: In addition, governmental restrictions have had a material impact on some of our customers, limiting their ability to operate in certain geographies from mid-March into mid-May.
−Removed: While these restrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our results.
−Removed: Our balance sheet is strong with low leverage and sufficient access to additional capital.
−Removed: Given the seasonality of our business, our warehouses were stocked with inventory in preparation for the upcoming peak season prior to the implementation of most stay-at-home orders.
−Removed: As a result, the limited vendor supply interruptions experienced in 2020 have had a minimal impact on our business.
−Removed: Supply disruptions have largely been limited to categories with the greatest demand, including heat-related equipment and above-ground swimming pools and have not been material to our business.
−Removed: We continue to work closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities.
−Removed: Given the uncertainties caused by the COVID-19 pandemic, we began taking steps in April to reduce both capital expenditures and operating costs.
−Removed: As a result, capital expenditures in 2020 were $21.7 million, which is approximately 65% of 2019 capital expenditures.
−Removed: We specifically reduced operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment.
−Removed: As our business outlook and market trends improved since the implementation of these cost-saving measures, we continue to assess our discretionary spending.
−Removed: The impact of the ongoing pandemic on our business and financial results will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict.
−Removed: These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken (or may be taken in the future) in response to the pandemic and changes in customer and supplier behavior in response to the pandemic.
Financial Results
Net sales increased 35% to $5.3 billion for the year ended December 31, 2021 compared to $3.9 billion in 2020, while base business sales increased 29%.
−Removed: We realized broad sales gains across nearly all product categories.
−Removed: Our sales benefited from greater swimming pool usage and high demand for residential pool products, which was driven by home-centric trends influenced by the COVID-19 pandemic and aided by warmer weather conditions during the year.
−Removed: Gross profit reached $1.1 billion for the year ended December 31, 2020, a 22% increase over gross profit of $924.9 million in 2019.
−Removed: Gross margin declined 20 basis points to 28.7% in 2020 compared to 28.9% in 2019.
−Removed: The decline in gross margin is primarily due to sales of lower margin, big-ticket items, such as pool equipment and in-ground and above-ground pools, which comprised a larger portion of our product mix in 2020 compared to 2019.
−Removed: Selling and administrative expenses (operating expenses) increased 14%, or $83.2 million, to $666.9 million in 2020, up from $583.7 million in 2019, with base business operating expenses up 12% over 2019.
−Removed: The increase in operating expenses primarily reflects a $43.9 million increase in performance-based compensation from $24.3 million in 2019 to $68.2 million in 2020 and expenses of $16.9 million from recently acquired businesses.
−Removed: Excluding $6.9 million of impairment charges we recorded in the first quarter of 2020 and performance-based compensation in both periods, adjusted operating expenses increased 6%, reflecting growth-driven labor and freight expenses and greater facility-related costs partially offset by lower discretionary spending.
+Added: Our sales were driven by strong customer demand for outdoor living products throughout the year and benefited from inflation and warmer weather trends across most of the United States.
+Added: Gross profit reached $1.6 billion for the year ended December 31, 2021, a 43% increase over gross profit of $1.1 billion in 2020.
+Added: Gross margin improved 180 basis points to 30.5% in 2021 compared to 28.7% in 2020, reflecting benefits from our actions to address inflation and manage supply chain disruptions, along with favorable impacts realized from increased purchase volumes.
+Added: Selling and administrative expenses (operating expenses), including a $2.5 million note recovery in 2021 and $6.9 million of impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, with base business operating expenses up 12% over 2020.
+Added: Our operating expenses have increased as we reward our employees through performance-based compensation, in addition to increases in growth-driven labor, facility and freight costs, and investments in technology.
+Added: As a percentage of net sales, operating expenses declined 210 basis points to 14.8% in 2021 compared to 16.9% in 2020.
Operating income for the year increased 79% to $832.8 million, up from $464.0 million in 2020.
Operating margin increased 390 basis points to 15.7% in 2021 compared to 11.8% in 2020.
−Removed: We recorded a $28.6 million, or $0.70 per diluted share, benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2020 compared to a benefit of $23.5 million, or $0.57 per diluted share, realized in 2019.
+Added: We recorded a $30.0 million, or $0.74 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2021 compared to a tax benefit of $28.6 million, or $0.70 per diluted share, realized in 2020.
Net income increased 77% to $650.6 million in 2021 compared to $366.7 million in 2020.
+Added: Adjusted net income, without the note recovery in 2021 and the prior year impact of impairments, both net of tax, increased 74% to $648.8 million.
Earnings per share increased 78% to a record $15.97 per diluted share compared to $8.97 per diluted share in 2020.
−Removed: Excluding the impact of non-cash impairments, net of tax, in 2020 and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased 44% to $8.42 in 2020 compared to $5.83 in 2019.
−Removed: See the reconciliation of GAAP to non-GAAP measures included in RESULTS OF OPERATIONS below.
+Added: See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.
+Added: COVID-19 Pandemic
+Added: We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus.
+Added: The health, safety and security of our employees and the communities in which we operate remains our highest priority.
+Added: 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).
+Added: We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain them.
+Added: We are designated as an essential business in almost all of our markets.
+Added: Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water.
+Added: We also supply products used in the prevention of runoff, flood, fire and other natural disasters.
+Added: These products are essential to the health and safety of the general public.
+Added: In limited instances, we have had to close facilities as a result of government regulations, as well as COVID-19 cases.
+Added: The direct impact of any closures to date have not had a material impact on our operations or results.
+Added: Beginning in the second quarter of 2020 and through the end of 2021, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces.
+Added: While this trend has had a positive impact on our financial performance over the past couple of years, it is unclear what the long-term impact will be.
+Added: Our industry experienced constrained supply chain dynamics in 2021.
+Added: In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service into the 2022 season.
+Added: These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.
+Added: We expect the impact of the pandemic on our business and financial results in 2022 will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict.
+Added: 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 Position and Liquidity
−Removed: Cash provided by operations was $397.6 million in 2020, which helped fund the following initiatives:
−Removed: • payments of $124.6 million for acquisitions;
−Removed: • net debt repayments of $95.8 million;
−Removed: • quarterly cash dividend payments to shareholders, totaling $91.9 million for the year;
+Added: Cash provided by operations was $313.5 million in 2021.
+Added: Cash provided by operations throughout the year helped fund the following initiatives:
+Added: • net working capital outflows of $392.3 million;
• share repurchases, totaling $138.0 million for the year;
+Added: • quarterly cash dividend payments to shareholders, totaling $119.6 million for the year;
• net capital expenditures of $37.7 million.
−Removed: • growth in net working capital of $21.1 million.
−Removed: Total net receivables, including pledged receivables, increased 28% compared to December 31, 2019, reflecting December sales growth and partially offset by improved collections.
+Added: Total net receivables, including pledged receivables, increased 30% compared to December 31, 2020, primarily driven by our sales growth and 2021 acquisitions.
Our allowance for doubtful accounts was $5.9 million at December 31, 2021 and $4.8 million at December 31, 2020.
Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 25.6 days at December 31, 2021 and 26.5 days at December 31, 2020.
−Removed: Inventory levels grew 11% to $781.0 million at December 31, 2020 compared to $702.3 million at December 31, 2019, reflecting business growth and inventory from acquired businesses of $42.2 million.
+Added: Inventory levels grew 71% to $1.3 billion at December 31, 2021 compared to $781.0 million at December 31, 2020, reflecting significant investments in inventory throughout the year to support increased demand and help manage supply chain pressures, in addition to impacts from inflation and acquisitions.
Our reserve for inventory obsolescence was $15.2 million at December 31, 2021 compared to $11.4 million at December 31, 2020.
Our inventory turns, as calculated on a trailing four quarters basis, were 3.4 times at December 31, 2021 and 3.8 times at December 31, 2020.
−Removed: Accrued expenses and other current liabilities increased $82.9 million to $143.7 million in 2020, primarily reflecting increases in accrued performance-based compensation, unrealized losses on interest rate swaps and deferred payroll tax payments.
−Removed: Total debt outstanding of $416.0 million at December 31, 2020 decreased $95.4 million, or 19%, compared to December 31, 2019, as we have utilized our operating cash flows to decrease debt balances.
+Added: Our inventory turns at December 31, 2021 are consistent with average inventory turns over the past five years.
+Added: Accrued expenses and other current liabilities increased $121.2 million to $264.9 million in 2021, primarily reflecting an increase in deferred income tax payments of $79.5 million and a $16.4 million increase in accrued performance-based compensation.
+Added: As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third and fourth quarter estimated federal tax payments, which were paid in February 2022.
+Added: Total debt outstanding of $1.2 billion at December 31, 2021 increased $767.3 million compared to December 31, 2020.
+Added: We utilized debt proceeds to fund our 2021 acquisitions, including Porpoise Pool & Patio, Inc., which we purchased on December 16, 2021 for $788.7 million, net of cash acquired.
Current Trends and Outlook
−Removed: Due to the COVID-19 pandemic in 2020, families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, which resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.
−Removed: We believe that increased consumer spending on homes, including outdoor living spaces, will continue in 2021 and may have longer term benefits as work-from-home trends persist or increase.
−Removed: The market environment from June 2009, when the Great Recession ended, until 2020, when the COVID-19 pandemic-induced recession began, was characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation.
−Removed: However, in terms of homeowners investing in their existing homes, discretionary expenditures, including backyard renovations, have flourished over this time period with steady increases in home values and lack of affordable new homes prompting homeowners to stay in their homes longer and upgrade their home environments, including their backyards.
−Removed: We expect that new pool and irrigation construction levels will continue to grow incrementally, constrained by availability of construction labor, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate continued growth over the next several years.
−Removed: Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the market expansion and the inherent long term growth opportunities in our industry.
−Removed: Additionally, recent regulation passed by the U.S.
−Removed: Department of Energy mandates all new and replacement motors and pumps for swimming pools must meet certain compliance regulations by July 2021.
−Removed: This mandate, coupled with additional product developments and technological advancements, offers further growth opportunities over the next few years.
−Removed: In 2020, we benefited from strong pool construction trends as robust demand fueled by the COVID-19 pandemic led to increased home investment trends.
−Removed: While we estimate that new pool construction increased from approximately 80,000 units in 2019 to approximately 100,000 new units in 2020, construction levels are still down approximately 55% compared to peak historical levels and down approximately 40% from what we consider normal levels.
−Removed: Favorable weather plays a role in industry growth by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products.
+Added: Over the past two years, in response to the COVID-19 pandemic, families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces, which resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products.
+Added: We believe that increased consumer spending on homes, including outdoor living spaces, will have longer term benefits as work-from-home trends persist or increase.
+Added: Over the past decade, homeowners investing in their homes, including backyard renovations, have flourished.
+Added: Steady increases in home values and lack of affordable new homes have prompted homeowners to stay in their homes longer and upgrade their home environments, including their backyards.
+Added: We expect that new pool and irrigation system construction levels will continue to grow incrementally, constrained by availability of construction labor.
+Added: However, we believe that consumer investments in outdoor living spaces will generate continued growth over the next several years.
+Added: Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the near term market expansion and the inherent long term growth opportunities in our industry.
+Added: We have benefited from strong pool construction trends as robust demand fueled by the COVID-19 pandemic led to increased home investment trends.
+Added: We estimate that new pool construction increased to approximately 120,000 units in 2021 from 96,000 units in 2020, representing a 25% increase in new pool construction.
+Added: Favorable weather positively impacts industry growth by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products.
Conversely, unfavorable weather impedes growth.
In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.
−Removed: We established our initial outlook for 2021 based on reasonable expectations of organic market share growth, ongoing leverage of existing investments in our business and continuous process improvements.
−Removed: For 2021, we expect strong growth in the first half of the year, particularly the first quarter of 2021, due to continued elevated demand influenced by the ongoing COVID-19 pandemic.
−Removed: In the second half of the year, we expect to face tougher year-over-year comparisons and inherent industry capacity constraints, although we remain encouraged by positive industry outlooks.
−Removed: Impacts from the COVID-19 pandemic, coupled with heightened demand, could also adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied.
−Removed: We anticipate that we may face product shortages or elevated prices specifically related to Trichlor, a popular sanitizer for pools and hot tubs, as the industry faces constraints resulting from the loss of a major supplier due to a fire in the summer of 2020.
+Added: We established our initial outlook for 2022 based on reasonable expectations of organic industry and market share growth, ongoing leverage of existing investments in our business and continuous process improvements.
+Added: Impacts from the COVID-19 pandemic, coupled with heightened demand, could continue to adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied.
Although supply constraints did not have a material impact on our business in 2021, it is difficult to predict the extent to which this could impact our business in 2022.
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◦ normal weather patterns for 2022;
−Removed: ◦ continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic;
+Added: ◦ continued elevated demand for residential pool products, driven by home-centric trends;
◦ a benefit from construction backlogs depending on our customers’ building capacity, including the availability of labor, and weather;
−Removed: ◦ estimated 4% to 5% growth from acquisitions completed throughout 2020;
+Added: ◦ inflationary product cost increases, which generally pass through to customers, of approximately 9% to 10% (compared to 7% to 8% in 2021);
+Added: ◦ estimated 5% growth from acquisitions completed throughout 2021;
◦ market share gains.
−Removed: ◦ inflationary product cost increases of approximately 2% to 3% (compared to our historical average of 1% to 2%);
−Removed: ◦ estimated 2% growth in the installed base of pools.
−Removed: • We expect gross margin to decline 20 to 40 basis points for the full year of 2021 compared to the full year of 2020 with gains or relatively neutral gross margin trends in the first half of 2021 and declines in the latter half of 2021.
−Removed: • We expect operating expenses will grow at approximately 60% to 70% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations, with greater growth in the first half of the year and more modest growth in the back half.
−Removed: The main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets.
−Removed: However, we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal.
−Removed: We also expect performance-based compensation for the full year of 2021 to normalize and decrease by approximately $30.0 million compared to the full year of 2020.
−Removed: In 2021, we expect our effective tax rate will approximate 25.5%, excluding the impact of ASU 2016-09.
−Removed: Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectation.
+Added: • We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021 with modest improvements in the first half of 2022 and declines in the latter half of the year.
+Added: However, our gross margin trends are dependent on amounts and timing of inflationary price increases, sales growth expectations and product mix.
+Added: • We believe that tight labor and real estate markets will present challenges in managing expenses in 2022.
+Added: However, we project that operating expense growth in 2022 will be less than our gross profit growth.
+Added: We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in technology and expansion of our sales center network.
+Added: In 2022, we expect our effective tax rate will approximate 25.5%, without the impact of ASU 2016-09.
+Added: Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations.
Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse.
−Removed: Based on our December 31, 2020 stock price, we estimate that we have approximately $4.5 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2021.
+Added: We estimate that we have approximately $7.6 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2022.
We may recognize additional tax benefits related to stock option exercises in 2022 from grants that expire in years after 2022, for which we have not included any expected benefits in our guidance.
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We project that 2022 earnings will be in the range of $17.19 to $17.94 per diluted share, including an estimated $0.19 benefit from ASU 2016-09 during the first quarter of 2022.
−Removed: We expect cash provided by operations will approximate net income for fiscal year 2021.
−Removed: We expect to continue to use cash to fund opportunistic share repurchases over the next year.
−Removed: We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors.
−Removed: The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in Item 1A of this Form 10-K.
+Added: We expect to continue to use cash to fund opportunistic share repurchases over the next year and to use cash for the payment of cash dividends as and when declared by our Board of Directors.
+Added: The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, and the extent to which home-centric trends will continue, accelerate or reverse, the sensitivity of our business to weather conditions, changes in the economy, consumer discretionary spending or the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives or mass merchants and other risks detailed in Item 1A of this Form 10-K.
Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.
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We estimate future losses based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP).
−Removed: We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices.
+Added: We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family home prices.
During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote.
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Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.
−Removed: We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we not have realized any impacts since the enactment of U.S.
−Removed: tax reform enacted in December 2017.
+Added: We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the December 2017 enactment of U.S.
As of December 31, 2021, U.S.
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Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate.
−Removed: Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to valuation allowances recorded for certain of our international subsidiaries with tax losses.
+Added: Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to changes in valuation allowances recorded for certain of our international subsidiaries with tax losses and excess tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards.
Performance-Based Compensation Accrual
−Removed: The Compensation Committee of our Board (Compensation Committee) annually reviews our compensation structure to oversee management’s implementation of maintaining a program that attracts, retains, develops and motivates employees without leading to unnecessary risk taking.
−Removed: Our compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility.
−Removed: The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria.
−Removed: We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income and diluted earnings per share (EPS).
+Added: The Compensation Committee of our Board (Compensation Committee) and our management have designed compensation programs intended to create a performance culture.
+Added: The primary objectives of our compensation programs are to attract, motivate, reward and retain our employees without leading to unnecessary risk taking.
+Added: Our compensation packages include bonus plans that are specific to groups of eligible participants and their levels and areas of responsibility.
+Added: The majority of our bonus plans consist of annual cash payments that are based primarily on objective performance criteria.
+Added: We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income.
We use an annual cash performance award (annual bonus) to focus corporate behavior on short-term goals for growth, financial performance and other specific financial and business improvement metrics.
16 unchanged sentences
Based on our hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.
+Added: Business Combinations - Goodwill and Intangible Asset Valuation
+Added: In December 2021, we acquired Porpoise Pool & Patio, Inc.
+Added: (“Porpoise”) for $788.7 million, net of cash acquired.
+Added: Based on our preliminary purchase price allocation, we recognized tangible assets of $84.2 million, identifiable intangible assets of $301.0 million and resulting goodwill of $403.5 million.
+Added: We used the acquisition method of accounting for this business combination.
+Added: Our financial statements reflect the operations of an acquired business starting from the closing date of the acquisition.
+Added: The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition.
+Added: Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
+Added: Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets.
+Added: The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of market participants.
+Added: Significant assumptions include expected revenue growth rates, earnings metrics and discount rates.
+Added: Unanticipated market or macroeconomic events and circumstances may occur, which could affect the underlying estimates and assumptions.
+Added: We ran sensitivity analyses on the significant assumptions to evaluate our valuations and determined each to be within a range of acceptable estimates.
+Added: Determining the useful lives of intangible assets also requires judgment.
+Added: Our Pinch A Penny brand name is expected to have an indefinite life as it corresponds with the period of expected future cash flows of the intangible asset.
+Added: We considered the competitive market position, historical results, macroeconomic environment, our operating plans and expected future use of the brand in our network expansion.
+Added: Our estimates of the useful lives of definite-lived intangible assets are based on the same criteria and correspond with the expected future cash flows.
+Added: The costs of definite-lived intangibles are amortized to expense over their estimated life.
+Added: We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below.
+Added: We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount.
+Added: We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.
+Added: Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions.
+Added: For additional details, see Note 3 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
+Added: While we believe those estimates and assumptions are reasonable, they are inherently uncertain.
+Added: Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets
8 unchanged sentences
The most significant goodwill balance for a reporting unit was $12.1 million and the average goodwill balance was $1.1 million.
−Removed: In October of 2020, 2019 and 2018, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.
−Removed: In the first quarter of 2020, we determined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows.
−Removed: We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values.
−Removed: In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million.
−Removed: We estimate the fair value of our reporting units based on an income approach that incorporates our assumptions for determining the present value of future cash flows.
−Removed: We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and earnings multiples.
+Added: As of December 31, 2021, our most significant goodwill balance for a reporting unit was related to our acquisition of Porpoise as discussed above.
+Added: In October 2021, 2020 and 2019, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level.
+Added: In the first quarter of 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million.
+Added: To estimate the fair value of our reporting units, we project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and earnings multiples.
These estimates can significantly affect the outcome of our impairment test.
4 unchanged sentences
To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate.
−Removed: Our sensitivity analysis generated a fair value estimate below our market capitalization and resulted in the identification of no additional at-risk locations.
−Removed: Based on our 2020 goodwill impairment analysis, we consider one of our Horizon reporting units in California as most at risk for goodwill impairment due to marginal results in recent years.
−Removed: The most sensitive assumptions related to our fair value for this location relates to future projected operating results and management’s ability to effectively manage costs.
−Removed: As of December 31, 2020, our aggregate goodwill balance for this reporting unit was $1.4 million.
−Removed: If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods, especially related to the reporting unit discussed above.
+Added: Our sensitivity analysis generated a fair value estimate below our market capitalization and did not result in the identification of additional at-risk locations.
+Added: If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods.
Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.
11 unchanged sentences
Interest and other non-operating expenses, net 0.2 0.3 0.7
−Removed: Income before income taxes and equity earnings 11.5 % 9.9 % 9.8 %
−Removed: Due to rounding, percentages may not add to operating income or income before income taxes and equity earnings.
+Added: Income before income taxes and equity in earnings 15.6 % 11.5 % 9.9 %
+Added: Due to rounding, percentages may not add to operating income or income before income taxes and equity in earnings.
Our discussion of consolidated operating results includes the operating results from acquisitions in 2021, 2020 and 2019.
15 unchanged sentences
Operating margin 16.1 % 11.9 % 8.4 % (5.2) % 15.7 % 11.8 %
−Removed: (1) Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.
+Added: (1) Base business and total reflect a $2.5 million note recovery in 2021 and $6.9 million of impairment from goodwill and other assets recorded in 2020.
We have excluded the following acquisitions from base business for the periods identified:
Sales Centers
−Removed: TWC Distributors, Inc.
+Added: Porpoise Pool & Patio, Inc.
December 2021 1 December 2021
+Added: Wingate Supply, Inc.
+Added: December 2021 1 December 2021
+Added: Vak Pak Builders Supply, Inc.
+Added: June 2021 1 June - December 2021
+Added: Pool Source, LLC April 2021 1 April - December 2021
+Added: TWC Distributors, Inc.
+Added: December 2020 10 January - December 2021 and December 2020
Jet Line Products, Inc.
−Removed: October 2020 9 October - December 2020
+Added: October 2020 9 January - December 2021 and October - December 2020
Northeastern Swimming Pool Distributors, Inc.
−Removed: September 2020 2 September - December 2020
−Removed: Master Tile Network LLC (1)
−Removed: February 2020 4 February - December 2020
−Removed: January 2019 4 January - March 2020 and January - March 2019
−Removed: Turf & Garden, Inc.
−Removed: November 2018 4 January 2020 and
−Removed: (1) We acquired certain distribution assets of each of these companies.
+Added: September 2020 2 January - November 2021 and September - November 2020
+Added: Master Tile Network LLC February 2020 4 January - May 2021 and February - 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.
13 unchanged sentences
Net sales increased 35% compared to 2020, with 29% of this increase resulting from base business sales growth.
−Removed: As the pandemic forced families to spend more time at home in 2020, they sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces.
−Removed: This created unprecedented demand throughout our markets, and we realized broad sales gains across nearly all product categories.
−Removed: Our sales benefited from greater swimming pool usage, high demand for residential pool products and warmer weather conditions during the year.
+Added: Maintenance, refurbishment and construction activity remained strong in 2021 as households continued to create and expand home-based outdoor living spaces.
+Added: Our sales were driven by robust customer demand for outdoor living products throughout the year and were aided by inflationary benefits and warmer weather trends across most of the United States.
The following factors benefited our sales growth (listed in order of estimated magnitude):
−Removed: • strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment, building materials and above-ground pools and hot tubs (see discussion below);
+Added: • 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);
−Removed: • inflationary product cost increases of approximately 1% to 2%;
+Added: • inflationary product cost increases of approximately 7% to 8% (compared to our historical average of 1% to 2%);
• 6% sales growth from recent acquisitions.
−Removed: • 1% sales growth from an additional selling day in 2020 compared to 2019.
−Removed: We believe that sales growth rates for certain product offerings, such as equipment, building materials and above-ground pools and hot tubs evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.
+Added: We believe that sales growth rates for certain product offerings, such as equipment and building materials evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.
In 2021, sales for equipment, such as swimming pool heaters, pumps, lights and filters, increased 35% compared to 2020, and collectively represented approximately 29% of net sales.
This increase reflects both the growth of replacement activity and continued demand for higher-priced, more energy-efficient products.
−Removed: Sales of building materials, which includes tile and sales from recently acquired Master Tile locations, grew 23% compared to 2019 and represented approximately 12% of net sales in 2020.
−Removed: Sales of above-ground pools increased 57% in 2020 compared to 2019 and represented approximately 1% of net sales in 2020.
−Removed: 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.
+Added: Sales of building materials grew 28% compared to 2020 and represented approximately 12% of net sales in 2021.
+Added: 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 20% compared to 2020 and represented approximately 12% of our net sales in 2021.
−Removed: Sales to commercial customers declined 10% in 2020, driven by COVID-19 related closures and the decline in both business and leisure travel.
+Added: Sales to commercial customers increased 24% in 2021, as business and leisure travel improved in 2021 following COVID-19 related closures in 2020 and demand from commercial customers began to return to normalized pre-pandemic levels.
Sales to commercial customers represented approximately 3% of our net sales in 2021.
2021 Quarterly Sales Performance Compared to 2020 Quarterly Sales Performance
−Removed: • Strong demand for discretionary products during the first quarter of 2020 led to net sales and base business sales growth of 13%.
−Removed: Sales were also favorably impacted by an additional selling day in the first quarter of 2020 compared to the first quarter of 2019.
−Removed: • Net sales and base business sales increased 14% in the second quarter of 2020 as stay-at-home restrictions eased in late April through early May, and sales benefited from greater swimming pool demand and usage, resulting in broad sales gains across many product categories and geographies.
−Removed: • In the third quarter of 2020, net sales and base business sales increased 27% and benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.
−Removed: • Net sales in the fourth quarter of 2020 increased 44%, while base business sales increased 39%.
−Removed: Sales benefited from continued stay-at-home trends combined with favorable weather nationwide and acquisitions, which added 4% to sales growth.
+Added: In each quarter of 2021, sales benefited from continued elevated demand for swimming pool and outdoor living products, driven by home-centric and work-from-home trends.
+Added: Households continued to invest in their backyards and outdoor living spaces, resulting in broad sales gains across many product categories and geographies.
+Added: First Second Third Fourth
+Added: Net Sales Growth 57% 40% 24% 23%
+Added: Base Business Net Sales Growth 51% 32% 19% 22%
In addition to the sales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.
3 unchanged sentences
Gross margin 30.5 % 28.7 %
−Removed: Gross margin declined 20 basis points to 28.7% in 2020 compared to 28.9% in 2019, primarily due to sales of lower margin, big-ticket items, such as pool equipment and in-ground and above-ground pools, which comprised a larger portion of our product mix in 2020 compared to 2019.
+Added: Gross margin improved 180 basis points to 30.5% in 2021 compared to 28.7% in 2020, reflecting benefits from our actions to address inflation and manage supply chain disruptions, along with favorable impacts from incentives realized from increased purchase volumes.
Operating Expenses
2 unchanged sentences
Selling and administrative expenses $ 786.8 $ 659.9 $ 126.9 19%
−Removed: Impairment of goodwill and other assets 6.9 — 6.9 100%
+Added: (Recovery) impairment of goodwill and other assets (2.5) 6.9 (9.4) (136)%
Operating expenses as a percentage of net sales 14.8 % 16.9 %
−Removed: Operating expenses increased 14%, or $83.2 million, to $666.9 million in 2020, up from $583.7 million in 2019, while base business operating expenses grew 12%.
−Removed: The increase in operating expenses primarily reflects a $43.9 million increase in performance-based compensation from $24.3 million in 2019 to $68.2 million in 2020 and expenses of $16.9 million from recently acquired businesses.
−Removed: In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units, and $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic.
−Removed: Excluding impairment charges and performance-based compensation in both periods, adjusted operating expenses were up 6%, reflecting growth-driven labor and freight expenses and greater facility-related costs partially offset by lower discretionary spending.
−Removed: As a result of strong expense control and our ability to leverage our existing network, operating expenses as a percentage of net sales declined 130 basis points, contributing to the 110 basis point expansion in our operating margin for the year.
+Added: Operating expenses, including a note recovery in 2021 and impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, up from $666.9 million in 2020.
+Added: The majority of the increase in our operating expenses is due to higher compensation costs as we reward our employees through performance-based compensation and increase wages to support stronger demand.
+Added: Other incremental operating expense increases relate to increases in growth-driven facility and freight costs, in addition to investments in technology.
+Added: In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a note and a goodwill and intangibles impairment charge of $4.4 million.
+Added: In 2021, we recovered the $2.5 million from the previously impaired note.
+Added: Operating expenses as a percentage of net sales declined 210 basis points, contributing to the 390 basis point expansion in our operating margin for the year driven by a combination of higher year-over-year sales and improved operating leverage as we utilize our existing network to manage incremental costs for new sales center openings and acquisitions.
Interest and Other Non-operating Expenses, net
−Removed: Interest and other non-operating expenses, net decreased $11.4 million compared to 2019, reflecting lower average debt levels and lower average interest rates between periods.
−Removed: Average outstanding debt was $422.2 million in 2020 versus $599.6 million in 2019.
−Removed: Our 2020 average outstanding debt balance has decreased as we utilized operating cash flows to pay off debt balances.
−Removed: Our weighted average effective interest rate decreased to 2.1% in 2020 compared to 3.4% in 2019.
+Added: Interest and other non-operating expenses, net decreased $3.7 million compared to 2020, primarily due to the impact of foreign currency losses, with a loss of $0.3 million recognized in 2021 compared to a loss of $1.7 million recognized in 2020, in addition to interest income from a note of $1.5 million in 2021.
+Added: Interest expense related to borrowings increased approximately $1.2 million, primarily due to higher average interest rates between periods.
+Added: Our weighted average effective interest rate increased to 2.5% in 2021 from 2.1% in 2020 on consistent average outstanding debt balances.
Our effective income tax rate was 21.1% at December 31, 2021 and 18.9% at December 31, 2020.
We recorded a $30.0 million, or $0.74 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2021 compared to a benefit of $28.6 million, or $0.70 per diluted share, realized in the same period in 2020.
−Removed: Excluding the benefits from ASU 2016-09, our effective tax rate was 25.2% and 25.1% for the years ended 2020 and 2019, respectively.
+Added: Without the benefits from ASU 2016-09, our effective tax rate was 24.7% and 25.2% for the years ended 2021 and 2020, respectively.
Net Income and Earnings Per Share
Net income increased 77% to $650.6 million in 2021 compared to $366.7 million in 2020.
−Removed: Adjusted net income, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 43% to $373.0 million.
Earnings per share increased 78% to $15.97 per diluted share compared to $8.97 per diluted share in 2020.
−Removed: Excluding the impact of non-cash impairments, net of tax, and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased 44% to $8.42 in 2020 compared to $5.83 in 2019.
−Removed: See the reconciliation of GAAP to non-GAAP measures below.
Reconciliation of Non-GAAP Financial Measures
+Added: The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-K.
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.
−Removed: 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.
+Added: Adjusted net income and adjusted diluted EPS are key measures used by management to eliminate 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.
+Added: 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.
Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.
3 unchanged sentences
Net income $ 650,624 $ 366,738
−Removed: Impairment of goodwill and other assets 6,944
−Removed: Tax impact on impairment of long-term note (1)
+Added: (Recovery) impairment of goodwill and other assets (2,500) 6,944
+Added: Tax impact on note (1)
Adjusted net income $ 648,754 $ 373,028
−Removed: (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.
−Removed: 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.
+Added: (1) Our effective tax rate at March 31, 2020 was a 0.1% benefit.
+Added: Without 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 note impairment.
The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.
1 unchanged sentence
Diluted EPS $ 15.97 $ 8.97
−Removed: After-tax non-cash impairment charges 0.15 —
−Removed: Adjusted diluted EPS excluding after-tax non-cash impairment charges 9.12 6.40
ASU 2016-09 tax benefit (0.74) (0.70)
−Removed: Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit $ 8.42 $ 5.83
+Added: Adjusted diluted EPS without ASU 2016-09 tax benefit 15.23 8.27
+Added: After-tax (recovery) impairment charges (0.05) 0.15
+Added: Adjusted diluted EPS without ASU 2016-19 tax benefit and after-tax (recovery) impairment charges $ 15.18 $ 8.42
Fiscal Year 2020 compared to Fiscal Year 2019
27 unchanged sentences
Weather Impacts on Fiscal Year 2021 to Fiscal Year 2020 Comparisons
−Removed: In the first quarter of 2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States.
−Removed: These favorable weather conditions contrast from the first quarter of 2019 when wetter and cooler-than-normal temperatures to begin the year hindered sales growth.
−Removed: Weather conditions in the second quarter of 2020 were varied across the contiguous United States;
−Removed: however, results in the second quarter of 2020 benefited from generally mild weather conditions.
−Removed: Much of the western United States benefited from warmer weather, while the southeastern United States experienced slightly below-average temperatures.
−Removed: Southern California and the southeastern United States, including Florida, experienced more precipitation than normal.
−Removed: In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.
−Removed: Overall, weather conditions in the third quarter of 2020 were generally favorable, which benefited results.
−Removed: Much of the western United States experienced above-average temperatures, particularly in California, which was also plagued with the most active wildfire year on record.
+Added: Sales in the first quarter of 2021 benefited from generally mild weather conditions throughout the contiguous United States.
+Added: 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.
+Added: 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.
+Added: Overall, varied weather conditions in the second quarter of 2021 favorably impacted our sales growth.
+Added: While the southern states saw mild temperatures and above-average precipitation, the western states, particularly California, experienced severely high temperatures and drought.
+Added: The average U.S.
+Added: temperature in June was the hottest on record in 127 years.
+Added: Comparatively, in the second quarter of 2020, we observed generally mild weather conditions with warmer weather throughout the western United States.
+Added: Generally favorable weather conditions benefited sales in the third quarter of 2021.
+Added: 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.
−Removed: Likewise, results in the third quarter of 2019 were positively impacted by above-average temperatures and below-average precipitation throughout most of the country.
−Removed: Sales in the fourth quarter of 2020 benefited from above-average temperatures and below-average precipitation, particularly in the month of November, which was the fourth warmest on record in a 126-year period for the contiguous United States.
−Removed: Similarly, in the fourth quarter of 2019, sales benefited from above average temperatures, primarily in the southern and southeastern United States.
+Added: Likewise, results in the third quarter of 2020 were favorably impacted by above-average temperatures and below-average precipitation.
+Added: In the fourth quarter of 2021, sales benefited from above-average temperatures throughout much of the contiguous United States, particularly in the month of December, which was the fifth warmest on record in a 127-year period.
+Added: Precipitation levels varied, with the southern states experiencing levels much below average and the northern states seeing above-average levels.
+Added: Similarly, sales in the fourth quarter of 2020 benefited from above-average temperatures and below-average precipitation.
Weather Impacts on Fiscal Year 2020 to Fiscal Year 2019 Comparisons
21 unchanged sentences
Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions.
−Removed: The same principle applies to funds used for capital expenditures and share repurchases.
+Added: We have funded our capital expenditures and share repurchases in substantially the same manner.
We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases.
Our specific priorities for the use of cash are as follows:
−Removed: • capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;
+Added: • capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles;
+Added: • inventory and other operating expenses;
• strategic acquisitions executed opportunistically;
−Removed: • payment of cash dividends as and when declared by our Board of Directors (Board);
−Removed: • repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0;
+Added: • payment of cash dividends as and when declared by our Board;
+Added: • repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0;
• repurchases of our common stock under our Board authorized share repurchase program.
−Removed: Capital expenditures were 0.6% of net sales in 2020, 1.0% of net sales in 2019 and 1.1% of net sales in 2018.
−Removed: Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.
−Removed: Over the last five years, capital expenditures have averaged roughly 1.0% of net sales.
Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology.
We focus our capital expenditure plans on the needs of our sales centers.
−Removed: For 2021, based on management’s current plans, we project capital expenditures will continue to approximate the historical average.
−Removed: As of December 31, 2020, our average total leverage ratio was 0.86, which was below our target range of between 1.5 and 2.0 and below our average total leverage ratio of 1.61 as of December 31, 2019.
−Removed: Our strong operating results and cash flow from operations enabled us to reduce our debt balances in 2020.
−Removed: We expect our average total leverage ratio through the first half of 2021 will continue to be below our target range.
+Added: Capital expenditures were 0.7% of net sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019.
+Added: Although our capital spending increased by $16.0 million in 2021, capital expenditures as a percentage of net sales were lower than our historical average of 1.0% of net sales due to our significant sales growth.
+Added: Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.
+Added: Based on management’s current plans, we project capital expenditures for 2022 will continue to approximate the historical average of 1% of net sales.
+Added: We also plan to increase our investment in technology and automation enabling us to operate more efficiently.
+Added: We have initiated a multiyear project to transform our legacy enterprise systems and capabilities to improve customer and team member experiences.
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.
10 unchanged sentences
Financing activities 526,131 (244,371)
−Removed: Cash provided by operations of $397.6 million for 2020 increased $98.8 million compared to 2019, primarily reflecting the $105.2 million improvement in net income.
−Removed: Cash used in investing activities increased in 2020 due to an increase of $115.7 million in payments for acquisitions compared to 2019, which was partially offset by an $11.7 million decrease in net capital expenditures between years.
−Removed: Cash used in financing activities was $244.4 million in 2020, consistent with $244.5 million in 2019, which primarily reflects a $59.6 million decrease in net debt payments, offset by additional share repurchases of $53.0 million and an increase in dividends paid of $8.2 million.
+Added: Cash provided by operations of $313.5 million for 2021 decreased $84.1 million compared to 2020.
+Added: The decrease in cash provided by operations is driven by an incremental cash outflow of $371.3 million stemming from changes to our net working capital, primarily reflecting an increase in inventory, partially offset by increases in accounts payable and net income.
+Added: Cash used in investing activities increased $703.3 million in 2021 due to an increase of $687.4 million in payments for acquisitions compared to 2020 and a $16.0 million increase in net capital expenditures between years.
+Added: Cash provided by financing activities increased $770.5 million to $526.1 million in 2021, compared to cash used in financing activities of $244.4 million in 2020.
+Added: The increase in cash provided by financing activities primarily reflects a $865.3 million increase in net debt proceeds, offset by additional share repurchases of $61.8 million and an increase in dividends paid of $27.7 million.
For a discussion of our sources and uses of cash in 2019, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.
1 unchanged sentence
To supplement cash from operations as our primary source of working capital, we will continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility).
−Removed: For additional details regarding these facilities, see Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
−Removed: Revolving Credit Facility
−Removed: 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.
−Removed: 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.
−Removed: The Credit Facility matures on September 29, 2022.
−Removed: We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
+Added: For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
+Added: Credit Facility
+Added: Our Credit Facility, as amended through December 30, 2021, provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility, which includes a $250.0 million delayed-draw term loan facility and an additional $250.0 million incremental term loan facility.
+Added: We drew the $250.0 million delayed-draw term loan on December 15, 2021 and used the proceeds to fund our acquisition of Porpoise Pool & Patio, Inc.
+Added: Subsequent to December 31, 2021, we drew the $250.0 million incremental term loan on January 4, 2022 and used the same amount to reduce our revolving borrowings.
+Added: The term loans 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 the Credit Facility maturity date of September 25, 2026.
+Added: The credit facility continues to include a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.
+Added: We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At December 31, 2021, there was $822.9 million outstanding, a $4.8 million standby letter of credit outstanding and $422.3 million available for borrowing under the Credit Facility.
2 unchanged sentences
Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026.
−Removed: 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.
+Added: Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding borrowing capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.
The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020.
9 unchanged sentences
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).
−Removed: As of December 31, 2020, our average total leverage ratio equaled 0.86 (compared to 1.61 as of December 31, 2019) and the TTM average total debt amount used in this calculation was $439.3 million.
+Added: As of December 31, 2021, our average total leverage ratio equaled 0.77 (compared to 0.86 as of December 31, 2020) and the TTM average total indebtedness amount used in this calculation was $680.3 million.
• Minimum Fixed Charge Coverage Ratio .
2 unchanged sentences
As of December 31, 2021, our fixed charge ratio equaled 11.76 (compared to 7.81 as of December 31, 2020) and TTM Rental Expense was $80.8 million.
−Removed: 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.
−Removed: 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.
−Removed: Further, dividends must be declared and paid in a manner consistent with our past practice.
−Removed: 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.
+Added: 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.
+Added: 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.
+Added: 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.
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Receivables Securitization Facility
−Removed: Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing, with a peak funding capacity of up to $295.0 million between May 1 and May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31.
−Removed: Other funding capacities range from $120.0 million to $275.0 million throughout the remaining months of the year.
+Added: Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing.
+Added: Under this facility, we can borrow up to $350.0 million between April through June and from $175.0 million to $315.0 million during the remaining months of the year.
The Receivables Facility matures on November 1, 2023.
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Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.
−Removed: The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type.
−Removed: 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 December 31, 2021, there was $185.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.
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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.
−Removed: In 2020, we had one interest rate swap in place, which became effective on November 20, 2019 and terminated on November 20, 2020.
−Removed: This swap contract was previously forward-looking and converted the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million.
−Removed: As of December 31, 2020, we had two interest rate swap contracts in place, which became effective on November 20, 2020 and terminate on September 29, 2022.
−Removed: These swap contracts were previously forward-starting and convert the variable interest rates on our variable rate borrowings to fixed interest rates of 2.0925% and 1.5500%, respectively, on notional amounts of $75.0 million each.
−Removed: We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings.
−Removed: These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.
−Removed: The following table provides details related to each of our forward-starting interest rate swap contracts:
−Removed: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate
−Removed: Forward-starting interest rate swap 1 February 5, 2020 February 26, 2021 February 28, 2025 $150.0 1.3800%
−Removed: Forward-starting interest rate swap 2 March 9, 2020 September 29, 2022 February 26, 2027 $150.0 0.7400%
−Removed: Forward-starting interest rate swap 3 March 9, 2020 February 28, 2025 February 26, 2027 $150.0 0.8130%
+Added: As of December 31, 2021, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on our variable rate borrowings to fixed interest rates.
+Added: For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.
Compliance and Future Availability
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For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
−Removed: Contractual Obligations
−Removed: At December 31, 2020, our contractual obligations for long-term debt, operating leases and purchase obligations were as follows (in thousands):
+Added: Future Obligations
+Added: We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes.
+Added: Changes in our business needs, fluctuating interest rates and other factors may result in actual payments differing from our estimates.
+Added: We cannot provide certainty regarding the timing and amounts of these payments.
+Added: The following table summarizes our obligations as of December 31, 2021 that are expected to impact liquidity and cash flow in future periods.
+Added: We believe we will be able to fund these obligations through our existing cash, cash expected to be generated from operations and borrowings on our facilities.
Payments Due by Period
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$ 1,501,101 $ 128,427 $ 336,132 $ 1,003,572 $ 32,970
−Removed: $ 746,715 $ 233,931 $ 289,915 $ 65,621 $ 157,248
+Added: The significant assumptions used in our determination of amounts presented in the above table are as follows:
+Added: • Long-term debt amounts represent the future principal payments on our debt as of December 31, 2021.
+Added: For additional information regarding our debt arrangements, see Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
+Added: • Operating lease amounts include future rental payments for our operating leases.
+Added: The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases.
+Added: For additional information regarding our operating leases, see Note 9 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
• Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases and software commitments.
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therefore, they are excluded from the table above.
+Added: For certain of our future obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time.
+Added: As such, we have excluded unrecognized tax benefits from the table above.
+Added: See Note 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our unrecognized tax benefits.
+Added: The table also excludes various other liabilities that are not contractual in nature, including contingent liabilities, litigation accruals, and contract termination fees.
The table below contains estimated interest payments (in thousands) related to our long-term debt obligations presented in the table above.
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To project the estimated interest expense to coincide with the time periods used in the table above, we projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility, the Term Facility and the Receivables Facility.
−Removed: For certain of our contractual obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time.
−Removed: As such, we have excluded unrecognized tax benefits from our contractual obligations table.
−Removed: See Notes 5 and 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our debt and more information related to our unrecognized tax benefits.
+Added: Our actual interest payments could vary substantially from the amounts projected.
Estimated Interest Payments Due by Period
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.