What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-28 · 159 added, 312 removed, 180 unchanged (72% of the section changed)

9 unchanged sentences

the sensitivity of our business to weather conditions;

changes in the economy and the housing market;

changes in the economy;

consumer discretionary spending;

the housing market or inflation rates;

our ability to maintain favorable relationships with suppliers and manufacturers;

competition from other leisure product alternatives and mass merchants;

competition from other leisure product alternatives or mass merchants;

our ability to continue to execute our growth strategies;

excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2021 Annual Report on Form 10-K.

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

Impact of the COVID-19 Pandemic

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

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

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

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

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

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.

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.

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

Throughout the remainder of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, and these trends have continued in 2021 to date.

While 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.

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 had a material impact on our net sales.

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.

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.

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.

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).

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

We expect the impact of the pandemic on our business and financial results in 2021 will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict.

These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, 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 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.

Net sales increased 33% in the first quarter of 2022 to $1.4 billion compared to $1.1 billion in the first quarter of 2021.

Base business sales grew 26%.

The increase in our sales reflects continued strong demand for outdoor living products in addition to elevated price inflation of approximately 10% to 12%.

Sales also benefited approximately 5% from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.

Gross profit increased 49% to $447.2 million in the first quarter of 2022 from $301.1 million in the same period of 2021.

Base business gross profit improved 38% over the first quarter of 2021.

Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021, while base business gross margin increased 270 basis points.

Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022.

Selling and administrative expenses (operating expenses) increased 23% to $211.5 million in the first quarter of 2022 compared to $172.1 million in the first quarter of 2021.

Our operating expenses have increased as we expand our workforce and reward our employees through performance-based compensation.

Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives.

As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.

Operating income in the first quarter of 2022 increased 83% to $235.7 million compared to $129.0 million in the same period in 2021.

Operating margin was 16.7% in the first quarter of 2022 compared to 12.2% in the first quarter of 2021.

Base business operating margin was 16.5%, up 430 basis points from the prior year period.

We recorded a $7.3 million, or $0.18 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended March 31, 2022, compared to a tax benefit of $4.0 million, or $0.10 per diluted share, realized in the same period of 2021.

Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021.

Earnings per diluted share increased 82% to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share was $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.

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.

COVID-19 Pandemic

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus.

The health, safety and security of our employees and the communities in which we operate remains our highest priority.

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 where necessary.

Beginning in the second quarter of 2020 and through the first quarter of 2022, 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.

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.

Our industry experienced constrained supply chain dynamics in 2021, which has continued in the first quarter of 2022.

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 swimming pool season.

These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.

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 unable to accurately predict.

These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the possible re-institution of governmental restrictions on 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

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.

As of March 31, 2022, total net receivables, including pledged receivables, increased 39% compared to March 31, 2021, primarily driven by our sales growth and recent acquisitions.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.4 days at March 31, 2022 and 26.6 days at March 31, 2021.

Our allowance for doubtful accounts balance was $6.0 million at March 31, 2022 and $4.7 million at March 31, 2021.

Net inventory levels increased 68% compared to levels at March 31, 2021.

We increased our purchasing beginning in the second half of 2021 to alleviate the impact of longer lead times from our vendors and ensure product availability for our customers.

Our inventory balance also reflects impacts from inflation and recent acquisitions.

Our inventory reserve was $19.8 million at March 31, 2022 and $13.7 million at March 31, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.1 times at March 31, 2022 and 4.0 times at March 31, 2021.

Our inventory turns have averaged 3.4 times over the past five years.

Total debt outstanding at March 31, 2022 was $1.5 billion, up $1.1 billion compared to total debt at March 31, 2021.

We utilized debt proceeds to fund investments in working capital and our 2021 acquisitions.

Current Trends and Outlook

For a detailed discussion of trends through 2021, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2021 Annual Report on Form 10-K.

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 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.

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.

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 more than 170 basis points compared to the full year of 2020.

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 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 expect 2022 diluted EPS of $18.34 to $19.09, including the impact of year-to-date tax benefits of $0.18.

Our previous earnings guidance range disclosed in our 2021 Annual Report on Form 10-K was $17.19 to $17.94, including an estimated $0.19 tax benefit.

Our earnings guidance range assumes average weather conditions.

We expect sales growth at the higher end of the 17% to 19% range previously disclosed in our 2021 Annual Report on Form 10-K.

We project 2022 inflationary product cost increases of approximately 10% to 11% (compared to 7% to 8% in 2021).

Our gross margin trends depend on the amounts and timing of inflationary price increases, sales growth expectations and product mix.

We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021.

Compared to 2021 periods, we project a modest improvement in the second quarter of 2022 and declines in the latter half of the year.

We project our operating expense growth rate in 2022 will be less than our gross profit growth rate.

We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network.

We expect increased expenses from tight labor and real estate markets in 2022, which are heightened focus areas in our expense management.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2022 will approximate 25.5%.

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

We recorded a $7.3 million, or $0.18 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2022.

We may recognize additional tax benefits related to stock option exercises in 2022 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, as based on several assumptions, and are subject to significant risks and uncertainties.

We have not included any expected tax benefits in our guidance beyond what we have recognized as of March 31, 2022.

We expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2022 and to use cash for the payment of cash dividends as and when declared by our Board of Directors (our 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, are based on several assumptions, and are subject to significant risks and uncertainties.

See “Cautionary Statement for Forward-Looking Statements.”

RESULTS OF OPERATIONS

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.

As of March 31, 2022, we conducted operations through 414 sales centers in North America, Europe and Australia.

For the three months ended March 31, 2022, 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 Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Net sales 100.0 % 100.0 %

2 unchanged sentences

Selling and administrative expenses 15.0 16.2

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

Operating income 16.7 12.2

Interest and other non-operating expenses, net 0.4 0.2

Income before income taxes and equity earnings 16.6 % 12.8 % 16.4 % 12.3 %

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

Income before income taxes and equity in earnings 16.3 % 11.9 %

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

We have included the results of operations from acquisitions in 2022 and 2021 in our consolidated results since the acquisition dates.

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

September 30, September 30, September 30,

March 31, March 31, March 31,

2022 2021 2022 2021 2022 2021

3 unchanged sentences

Operating expenses 193,927 171,285 17,539 815 211,466 172,100

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

Expenses as a % of net sales 14.6 % 16.2 % 20.8 % 27.5 % 15.0 % 16.2 %

Operating income (1)

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

Operating income (loss) 219,351 129,154 16,372 (123) 235,723 129,031

Operating margin 16.5 % 12.2 % 19.4 % (4.2) % 16.7 % 12.2 %

(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:

Sales Centers

Porpoise Pool & Patio, Inc.

December 2021 1 January - March 2022

Wingate Supply, Inc.

December 2021 1 January - March 2022

Vak Pak Builders Supply, Inc.

June 2021 1 July - September 2021

Pool Source, LLC April 2021 1 July - September 2021

June 2021 1 January - March 2022

Pool Source, LLC April 2021 1 January - March 2022

TWC Distributors, Inc.

December 2020 10 July - September 2021

Jet Line Products, Inc.

October 2020 9 July - September 2021

Northeastern Swimming Pool Distributors, Inc.

September 2020 2 July - September 2021 and September 2020

December 2020 10 January - February 2022 and January - February 2021

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 nine months of 2021:

The table below summarizes the changes in our sales center count during the first three months of 2022:

December 31, 2021 410

Acquired locations 2

New locations 4

Consolidated location (1)

September 30, 2021 409

March 31, 2022 414

Three Months Ended

September 30,

(in millions) 2022 2021 Change

Net sales $ 1,412.7 $ 1,060.7 $ 352.0 33%

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.

Net sales increased 33% in the first quarter of 2022 compared to the first quarter of 2021, while base business net sales grew 26% over the same period.

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

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

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

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

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

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

• inflationary product cost increases of approximately 10 to 12%;

• 7% sales growth from recent acquisitions;

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 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.

• 5% sales growth from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.

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

In the first quarter of 2022, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 18% compared to the same period last year, and collectively represented approximately 29% of net sales for the period.

Sales of building materials grew 29% compared to the first quarter of 2021 and represented approximately 14% of net sales in the first quarter of 2022.

In the first quarter of 2022, sales for chemicals, representing 9% of total net sales, increased 58% compared to the first quarter of 2021.

The increase in chemicals was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to retail customers increased 27% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 10% of our net sales for the first quarter of 2022.

Sales to commercial customers increased 34% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 4% of our net sales for the first quarter of 2022.

Three Months Ended

September 30,

(in millions) 2022 2021 Change

1 unchanged sentence

Gross margin 31.7 % 28.4 %

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.

Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021.

Base business gross margin increased 270 basis points.

Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022.

Product mix and continued positive impacts from our ongoing pricing efforts also favorably impacted our gross margin.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2022 2021 Change

Selling and administrative expenses $ 211.5 $ 172.1 $ 39.4 23%

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

Operating expenses as a % of net sales 15.0 % 16.2 %

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 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 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) Nine Months Ended Nine Months Ended Nine Months Ended

September 30, September 30, September 30,

2021 2020 2021 2020 2021 2020

Net sales $ 4,052,044 $ 3,091,270 $ 207,983 $ 6,092 $ 4,260,027 $ 3,097,362

Gross profit 1,237,728 889,494 56,988 2,313 1,294,716 891,807

Gross margin 30.5 % 28.8 % 27.4 % 38.0 % 30.4 % 28.8 %

Operating expenses (1)

549,913 500,196 39,910 1,934 589,823 502,130

Expenses as a % of net sales 13.6 % 16.2 % 19.2 % 31.7 % 13.8 % 16.2 %

Operating income (1)

687,815 389,298 17,078 379 704,893 389,677

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

(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:

Sales Centers

Vak Pak Builders Supply, Inc.

June 2021 1 June - September 2021

Pool Source, LLC

April 2021 1 April - September 2021

TWC Distributors, Inc.

December 2020 10 January - September 2021

Jet Line Products, Inc.

October 2020 9 January - September 2021

Northeastern Swimming Pool Distributors, Inc.

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 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 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):

• 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);

• 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 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.

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

Gross profit $ 1,294.7 $ 891.8 $ 402.9 45%

Gross margin 30.4 % 28.8 %

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

Nine Months Ended

September 30,

(in millions) 2021 2020 Change

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

(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, 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.

Operating expenses increased 23% in the first quarter of 2022 compared to the first quarter of 2021.

Our compensation expense has increased as we expand our workforce and reward our employees through performance-based compensation.

Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives.

As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.

Interest and Other Non-Operating Expenses, Net

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.

Interest and other non-operating expenses, net for the first quarter of 2022 increased $2.6 million compared to the first quarter of 2021, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.3 billion in the first quarter of 2022 versus $397.3 million for the first quarter of 2021.

Our weighted average effective interest rate decreased to 1.5% from 2.2% for the respective periods.

Our effective income tax rate was 22.3% for the three months ended March 31, 2022 compared to 22.0% for the three months ended March 31, 2021.

We recorded a $7.3 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2022 compared to a tax benefit of $4.0 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.4% for the first quarter of 2022 and 25.2% for the first quarter of 2021.

Net Income and Earnings Per Share

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.

Reconciliation of Non-GAAP Financial Measures

Adjusted Income Statement Information

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

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 within this Form 10-Q.

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

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

(Unaudited) Nine Months Ended

(in thousands) September 30,

Net income $ 543,015 $ 307,565

(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 note impairment.

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

(Unaudited) Nine Months Ended

September 30,

Diluted EPS $ 13.32 $ 7.53

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 (recovery) impairment charges and tax benefit $ 12.90 $ 7.13

Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021.

Earnings per diluted share increased to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 82% to $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.

Seasonality and Quarterly Fluctuations

Our business is highly seasonal.

Our business is seasonal.

In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and irrigation and landscape installations and maintenance.

Sales are substantially lower during the first and fourth quarters, when we may incur net losses.

Sales are lower during the first and fourth quarters.

In 2021, we generated approximately 60% of our net sales and 69% of our operating income in the second and third quarters of the year.

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

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

The following table presents certain unaudited quarterly data for the first quarter of 2022, the four quarters of 2021 and the fourth, third and second quarters of 2020.

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

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

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

The results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing future trends for a variety of reasons, including the seasonal nature of our business, the recent pandemic-driven increased demand for our products and the impact of new and acquired sales centers.

(Unaudited) QUARTER

(in thousands) 2022 2021 2020

Third Second First Fourth Third Second First Fourth

First Fourth Third Second First Fourth Third Second

Statement of Income Data

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Weather Impacts on 2022 and 2021 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.

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

The average U.S.

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

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

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

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

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

Overall, weather conditions in the first quarter of 2022 were less favorable than weather conditions in the first quarter of 2021.

Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.

In addition, some seasonal markets had unfavorable weather compared to first quarter of 2021 when construction activity started earlier than normal.

Similarly, results in Europe were hindered by unfavorable weather conditions.

In the first quarter of 2021, sales benefited from favorable and generally mild weather conditions throughout the contiguous United States.

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

CRITICAL ACCOUNTING ESTIMATES

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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.

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

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

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• strategic acquisitions executed opportunistically;

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

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

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

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

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

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

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 focus our capital expenditure plans principally on the needs of our sales centers, and in recent years have increased our spending on information technology.

We project capital expenditures in 2022 will approximate our historical average of 1.0% of net sales.

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 and have averaged roughly 1.0% of net sales over the past five years.

Sources and Uses of Cash

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

Nine Months Ended

September 30,

Three Months Ended

Operating activities $ (208,109) $ 77,113

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Financing activities 228,717 (75,194)

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.

Net cash used in operations was $208.1 million for the first three months of 2022 compared to net cash provided by operations of $77.1 million for the first three months of 2021.

The decrease in our operating cash flows was driven by incremental net working capital outflows, which reflect increased inventory purchases and other working capital changes due to our sales growth and recent acquisitions.

In addition, our operating cash flows were impacted by federal tax payments of $79.5 million in the first quarter of 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.

Net cash used in investing activities for the first three months of 2022 decreased slightly compared to the first three months of 2021 due to a decrease in cash used for the acquisition of businesses of $0.7 million, offset by an increase in capital expenditures of $0.3 million.

Net cash provided by financing activities increased $303.9 million to $228.7 million for the first three months of 2022 compared to net cash used in financing activities of $75.2 million for the first three months of 2021.

The increase in cash provided by financing activities reflects a $304.4 million increase in net debt proceeds and a $9.1 million decrease in share repurchases, partially offset by an increase in dividends paid of $8.8 million.

Future Sources and Uses of Cash

Revolving Credit Facility

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.

Credit Facility

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.

The Credit Facility includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.

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.

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

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.

At March 31, 2022, there was $532.3 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $212.9 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.

The weighted average effective interest rate for the Credit Facility as of March 31, 2022 was approximately 1.7%, excluding commitment fees.

Term Facility

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.

Our Term Facility, as amended on October 12, 2021, 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 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.

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

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

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

At September 30, 2021, there was $168.8 million outstanding under the Term Facility with a weighted average effective interest rate of 2.9%.

At March 31, 2022, there was $164.2 million outstanding under the Term Facility with a weighted average effective interest rate of 1.6%.

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

Receivables Securitization Facility

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

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

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing.

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.

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.

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

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

At March 31, 2022, there was $290.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.2%, 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:

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

As of March 31, 2022, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

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

As of September 30, 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.

As of March 31, 2022, our average total leverage ratio equaled 1.06 (compared to 0.77 as of December 31, 2021) and the TTM average total indebtedness amount used in this calculation was $1.1 billion.

• Minimum Fixed Charge Coverage Ratio .

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

As of September 30, 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.

As of March 31, 2022, our fixed charge ratio equaled 12.38 (compared to 11.76 as of December 31, 2021) and TTM Rental Expense was $73.2 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.

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 of 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.

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.

Other covenants in each of our credit facilities 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 our credit facilities could result in, among other things, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Interest Rate Swaps

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

As of September 30, 2021, we had three interest rate swap contracts in place, two of which became effective on November 20, 2020, and terminate on September 29, 2022.

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

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

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

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

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

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

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

Derivative Inception Date Effective Date Termination Date Notional

(in millions) Fixed

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

Forward-starting interest rate swap 2 March 9, 2020 February 28, 2025 February 26, 2027 $150.0 0.8130%

As of March 31, 2022, 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.

For more information, see Note 4 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Compliance and Future Availability

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.

As of March 31, 2022, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

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

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If suitable acquisition opportunities arise that would require financing, we believe that we 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.

As of April 25, 2022, $427.1 million of the current Board-authorized amount under our share repurchase program remained available.

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

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

We plan to fund these repurchases with cash provided by operations and borrowings under the above-described credit facilities.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis