What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 141 added, 275 removed, 198 unchanged (68% of the section changed)

4 unchanged sentences

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

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

Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our strategic, operational and capital allocation plans and objectives, management's views on industry, economic, competitive, technological and regulatory conditions and other forecasts of trends and other matters.

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

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

No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the COVID-19 pandemic and the extent to which strong demand driven by home-centric trends will continue, accelerate or reverse;

the sensitivity of our business to weather conditions;

changes in the economy;

consumer discretionary spending;

the housing market or inflation rates;

changes in the economic conditions, consumer discretionary spending, the housing market, inflation or interest rates;

our ability to maintain favorable relationships with suppliers and manufacturers;

the extent to which home-centric trends associated with the pandemic will moderate or reverse;

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.

changes in the regulatory environment;

new or additional taxes, duties or tariffs;

excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2022 Annual Report on Form 10-K, as updated by our subsequent filings with the U.S.

Securities and Exchange Commission.

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.

Financial Results

Net sales increased 14% in the third quarter of 2022 to $1.6 billion compared to $1.4 billion in the third quarter of 2021.

Base business sales grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year.

Net sales benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather throughout much of the United States.

We estimate that these increases were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% from currency exchange rate fluctuations;

• 1% from one less selling day in Q3 2022 versus Q3 2021;

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

Gross profit increased 14% to $503.7 million in the third quarter of 2022 from $441.9 million in the same period of 2021.

Base business gross profit improved 7% over the third quarter of 2021.

Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to 31.3% in the third quarter of 2021.

Base business gross margin decreased 80 basis points.

Selling and administrative expenses (operating expenses) increased 17% to $239.8 million in the third quarter of 2022 compared to $204.6 million in the third quarter of 2021, including a 1% benefit from currency exchange rate fluctuations.

As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.

The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Operating income in the third quarter of 2022 increased 11% to $263.9 million compared to $237.3 million in the same period in 2021.

Operating margin was 16.3% in the third quarter of 2022 compared to 16.8% in the third quarter of 2021.

Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021, reflecting higher average debt levels and higher average interest rates.

We recorded a $0.6 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2022, compared to a tax benefit of $4.2 million realized in the same period of 2021.

This resulted in a $0.02 per diluted share tax benefit in the third quarter of 2022, down from a $0.10 per diluted share tax benefit realized in the same period of 2021.

Net income increased 3% to $190.1 million in the third quarter of 2022 compared to $184.7 million in the third quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits.

Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third quarter of 2021.

See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

In the first quarter of 2023, differing weather conditions contributed to variability in our results across geographies.

Our southern markets experienced more typical weather during the quarter and generated encouraging results.

However, higher precipitation and cooler temperatures suppressed results in our western markets, hampering new pool construction activities and sales of maintenance-related products.

These conditions continued into late March where we saw a considerable impact on our biggest sales month of the quarter.

Net sales decreased 15% in the first quarter of 2023 to $1.2 billion compared to $1.4 billion in the first quarter of 2022 following 33% net sales growth in the first quarter of 2022 and 57% growth in the first quarter of 2021.

Weather conditions were generally favorable in our southern markets, where Texas and Florida, our two largest markets in the South, realized combined base business sales in line with 2022.

In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., including California and Arizona, two of our largest markets, where base business sales were down a combined 21% from last year.

We estimate that sales were also negatively impacted 2% from lower customer early buy activity in the first quarter of 2023 versus the first quarter of 2022 and 1% from continued softness in our European markets.

Gross profit decreased 17% to $369.8 million in the first quarter of 2023 from $447.2 million in the same period of 2022.

Consistent with our expectations, gross margin decreased 110 basis points to 30.6% in the first quarter of 2023 compared to 31.7% in the first quarter of 2022.

Selling and administrative expenses (operating expenses) increased 6% to $224.0 million in the first quarter of 2023 compared to $211.5 million in the first quarter of 2022.

Our largest expense growth drivers during the quarter related to higher rent and facility costs, the return of in-person customer-facing retail events and investments in customer-focused projects.

As a percentage of net sales, operating expenses increased to 18.6% in the first quarter of 2023 compared to 15.0% in the same period of 2022.

Operating income in the first quarter of 2023 decreased 38% to $145.8 million from a tough comparison of $235.7 million in the same quarter last year but was 13% higher than operating income in the first quarter of 2021 of $129.0 million.

Operating margin was 12.1% in the first quarter of 2023 compared to 16.7% in the first quarter of 2022.

Interest and other non-operating expenses, net for the first quarter of 2023 increased $10.6 million compared to the first quarter of 2022, primarily reflecting higher average interest rates between periods.

We recorded a $4.8 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended March 31, 2023, compared to a tax benefit of $7.3 million realized in the same period of 2022.

This resulted in a $0.12 per diluted share tax benefit compared to an $0.18 per diluted share tax benefit realized in the same period of 2022.

Net income decreased 43% to $101.7 million in the first quarter of 2023 compared to $179.3 million in the first quarter of 2022.

Earnings per diluted share decreased 41% to $2.58 in the first quarter of 2023 compared to $4.41 in the same period of 2022.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 42% to $2.46 compared to $4.23 in the first quarter of 2022.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as this data 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.

The health, safety and security of our employees, customers and the communities in which we operate remain 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, 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.

This trend has had a positive impact on our financial performance over the past couple of years.

Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.

Our industry experienced substantial supply chain constraints beginning in 2021.

In response, we have proactively made significant investments in inventory in the last half of 2021 and early 2022 to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service.

While we continued to be challenged by supply chain constraints through the first part of 2022, we observed improvements in our supply chain dynamics in the second and third quarters of 2022.

We expect inventory balances to normalize with seasonal trends as 2023 progresses.

Financial Position and Liquidity

As of September 30, 2022, total net receivables, including pledged receivables, increased 15% compared to September 30, 2021, primarily driven by our sales growth and recent acquisitions.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.0 days at September 30, 2022 and 25.7 days at September 30, 2021.

Our allowance for doubtful accounts balance was $8.9 million at September 30, 2022 and $5.4 million at September 30, 2021.

Net inventory levels increased 48% compared to levels at September 30, 2021.

Our inventory balance reflects increased purchasing to ensure product availability and stock new locations, in addition to impacts from inflation and recent acquisitions.

Our inventory reserve was $23.4 million at September 30, 2022 and $15.7 million at September 30, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at September 30, 2022 and 3.8 times at September 30, 2021.

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

Total debt outstanding at September 30, 2022 was $1.5 billion compared to $362.8 million at September 30, 2021.

Our debt balance has increased between periods as we have utilized debt proceeds to fund recent acquisitions, share repurchases and investments in working capital.

As of March 31, 2023, total net receivables, including pledged receivables, decreased 17% compared to March 31, 2022, driven by our sales trends.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.5 days at March 31, 2023 and 26.4 days at March 31, 2022.

Our allowance for doubtful accounts balance was $9.0 million at March 31, 2023 and $6.0 million at March 31, 2022.

Net inventory levels increased 3% compared to levels at March 31, 2022, which compares to the 19% increase that we reported as of December 31, 2022 (compared to December 31, 2021).

We are pleased with the progress in utilizing our strategic inventory buys and believe that we are appropriately stocked to ensure product availability during the swimming pool season and to support our new locations.

Our inventory reserve was $24.5 million at March 31, 2023 and $19.8 million at March 31, 2022.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.5 times at March 31, 2023 and 3.1 times at March 31, 2022.

Total debt outstanding at March 31, 2023 was $1.4 billion compared to $1.5 billion at March 31, 2022 as we have used operating cash flows to make payments on our debt balances.

We have utilized debt proceeds over the past twelve months primarily to fund share repurchases and investments in working capital.

Current Trends and Outlook

For a detailed discussion of trends through 2022, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.

We expect 2022 diluted EPS of $18.50 to $19.05, including the impact of year-to-date tax benefits of $0.24.

Our previous earnings guidance range disclosed in our Second Quarter 2022 Report on Form 10-Q was $18.38 to $19.13.

Our earnings guidance range assumes average weather conditions.

We expect sales growth for the full year in the range of 17% to 19% as previously disclosed in our 2021 Annual Report on Form 10-K.

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

Recently, we've observed increased demand for higher value products and customizations for new pools and remodeling projects, even though the issuance of new pool permits year-to-date has moderated.

We expect a modest improvement in gross margin for the full year of 2022 compared to the full year of 2021 given the beneficial impact of price inflation in the first half of the year.

Historically, our first and fourth quarter gross margin is lower compared to our second and third quarters based on seasonality.

We expect gross margin in the fourth quarter of 2022 to decline 150 to 200 basis points compared to gross margin of 31.1% in the fourth quarter of 2021 (which is notably up versus 28.5% reported in the fourth quarter of 2020), primarily due to lower inflation from vendor price increases compared to last year and lower incentives earned under our volume-based vendor programs.

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 strategic initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network.

We also 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%.

Based on our results to-date and trends observed into the second quarter, we now expect sales for the full year of 2023 to be down in the mid-single digits compared to 2022 versus the flat to down 3% from our initial projections disclosed in our 2022 Annual Report on Form 10-K.

Our 2022 Annual Report on Form 10-K outlines the details of our initial projections.

Our overall expectations related to renovation and remodel activity, our Horizon business, and European business remain relatively unchanged.

However, we now believe that it is possible that new pool construction could decline up to 30% based on less available buildable days and current permit trends.

Maintenance revenue is also expected to see a 1% lower increase than previously expected, from the use of less consumables stemming from the unfavorable weather in the first quarter.

As previously disclosed in our 2022 Annual Report on Form 10-K, we project gross margin for the full year of 2023 to be in line with our long-term outlook of approximately 30.0% with higher gross margin in the first half of 2023 compared to the latter half of the year as we sell through inventory purchased prior to recent price increases.

We plan to leverage our existing infrastructure and manage discretionary spending to limit expense growth between plus or minus 2% compared to the full year of 2022.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2023 will approximate 25.3% to 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 $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 30, 2022.

We recorded a $4.8 million, or $0.12 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2023.

We may recognize additional tax benefits related to stock option exercises in 2023 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, 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.

We have not included any expected tax benefits in our guidance beyond what we have recognized as of March 31, 2023.

We expect 2023 diluted EPS in the range of $14.62 to $16.12, including the impact of year-to-date tax benefits of $0.12.

We expect to continue to use cash for the payment of cash dividends as and when declared by our Board and to fund opportunistic share repurchases through the remainder of 2023.

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.

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RESULTS OF OPERATIONS

As of September 30, 2022, we conducted operations through 417 sales centers in North America, Europe and Australia.

For the nine months ended September 30, 2022, approximately 95% of our net sales were from our operations in North America.

As of March 31, 2023, we conducted operations through 427 sales centers in North America, Europe and Australia.

For the three months ended March 31, 2023, approximately 95% 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,

2022 2021 2022 2021

Three Months Ended

Net sales 100.0 % 100.0 %

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We have included the results of operations from acquisitions in 2023 and 2022 in our consolidated results since the acquisition dates.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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,

2023 2022 2023 2022 2023 2022

8 unchanged sentences

Sales Centers

Tri-State Pool Distributors April 2022 1 July - September 2022

Pro-Water Irrigation & Landscape Supply, Inc.

March 2023 2 March 2023

Tri-State Pool Distributors April 2022 1 January - March 2023

Porpoise Pool & Patio, Inc.

December 2021 1 July - September 2022

December 2021 1 January - March 2023 and January - March 2022

Wingate Supply, Inc.

December 2021 1 July - September 2022

Vak Pak Builders Supply, Inc.

June 2021 1 July - August 2022 and

July - August 2021

December 2021 1 January - February 2023 and January - February 2022

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

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

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

The table below summarizes the changes in our sales center count during the first three months of 2023:

December 31, 2022 420

1 unchanged sentence

New locations 5

September 30, 2022 417

March 31, 2023 427

Three Months Ended

September 30,

(in millions) 2023 2022 Change

Net sales $ 1,206.8 $ 1,412.7 $ (205.9) (15)%

Net sales increased 14% in the third quarter of 2022 on top of net sales of $1.4 billion and 24% growth in the third quarter of 2021.

Base business net sales in the third quarter of 2022 grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year.

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

• inflationary product cost increases of approximately 9 to 10%;

• 4% sales growth from recent acquisitions;

• favorable trends for our products including:

◦ consistent demand for discretionary products, as evidenced by sales growth for product offerings such as equipment and building materials (see discussion below);

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

◦ sustained demand for residential swimming pool maintenance supplies, as the installed base of pools continues to increase.

We estimate that the benefits discussed above were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% unfavorable impact from currency exchange rate fluctuations;

• 1% from one less selling day in Q3 2022 versus Q3 2021;

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

Higher sales for certain product offerings, such as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In the third quarter of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 9% compared to the same period last year, and collectively represented approximately 27% of net sales for the period.

Supply chain issues continue to persist and constrain sales of certain equipment products.

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

Sales of chemicals, representing 13% of total net sales, increased 32% compared to the third quarter of 2021.

The increase in chemical sales was driven by price inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above.

Sales to base business retail customers increased 4% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 11% of our net sales for the third quarter of 2022.

Sales to commercial customers increased 28% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 3% of our net sales for the third quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the third quarter of 2022, increased 8% compared to the third quarter of 2021.

Comparatively, net sales in our year-round markets, representing 51% of our total base business net sales in the third quarter of 2022, increased 15% compared to the third quarter of 2021.

Net sales in Europe, representing 3% of our total net sales in the third quarter of 2022, declined 11% in local currency compared to the third quarter of 2021.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty from the war in Ukraine and increased fuel prices.

Net sales and base business net sales decreased 15% in the first quarter of 2023 compared to the first quarter of 2022 following 33% net sales growth in the first quarter of 2022 and 57% growth in the first quarter of 2021.

In the first quarter of 2023, differing weather conditions contributed to variability in our results across geographies.

Our southern markets experienced more typical weather during the quarter and generated encouraging results.

However, higher precipitation and cooler temperatures suppressed results in our western markets, including California and Arizona, two of our largest markets, hampering new pool construction activities and sales of maintenance-related products.

We faced several challenges during the quarter, with unfavorable weather being the most significant.

The following factors impacted our sales during the quarter and are listed in order of estimated magnitude.

• We estimate that unfavorable weather conditions in the first quarter negatively impacted sales by approximately 5%.

• Net sales benefited approximately 4% to 5% from inflationary product cost increases, which compares to a benefit of 10% to 12% in the first quarter of 2022.

• Sales were also negatively impacted 2% from lower customer early buy activity in the first quarter of 2023 versus the first quarter of 2022 and 1% from continued softness in our European markets.

Net sales in our North American seasonal markets, representing 38% of our total base business net sales in the first quarter of 2023, decreased 23% compared to the first quarter of 2022 as these markets are more sensitive to weather conditions, particularly in the shoulders of the season when unfavorable weather delays the openings of swimming pools.

Comparatively, net sales in our year-round markets, representing 57% of our total base business net sales in the first quarter of 2023, decreased 9% compared to the first quarter of 2022 as differing weather conditions led to varied results across our four largest markets.

Weather conditions were generally favorable in our southern markets, where Texas and Florida realized combined base business sales in line with 2022.

In contrast, results were negatively impacted by unusually wet and cold weather in the western U.S., including California and Arizona, where base business sales were down a combined 21% from last year.

Related to our product sales, following a period of significant growth over the past three years, we observed a decline in volumes of discretionary products sold as new construction activities moderated and were further impacted by unfavorable weather conditions and macroeconomic impacts.

This is evidenced by lower sales for product offerings such as equipment and building materials.

In the first quarter of 2023, base business sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, decreased 14% compared to the same period last year, and collectively represented approximately 30% of net sales for the period.

Sales of building materials decreased 7% compared to the first quarter of 2022 and represented approximately 14% of net sales in the first quarter of 2023.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and sales trends in these areas are reflected in the discussion above.

Base business sales to retail customers decreased 16% in the first quarter of 2023 compared to the first quarter of 2022 and represented approximately 10% of our net sales for the first quarter of 2023.

Including the impact of our December 2021 acquisition of Porpoise Pool & Patio, sales to retail customers decreased 12% and represented approximately 14% of our net sales.

Sales to commercial swimming pool customers increased 12% in the first quarter of 2023 compared to the first quarter of 2022 and represented approximately 5% of our net sales for the first quarter of 2023.

Net sales in Europe, representing 4% of our total net sales in the first quarter of 2023, declined 25% compared to the first quarter of 2022, impacted by continued macroeconomic uncertainty from the war in Ukraine and increased fuel prices.

Three Months Ended

September 30,

(in millions) 2023 2022 Change

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Gross margin 30.6 % 31.7 %

Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to the third quarter of 2021 when gross margin increased 240 basis points to 31.3% (over the same period in 2020).

Our gross margin in the third quarter of 2022 benefited from focused pricing efforts, our supply chain initiatives and recent acquisitions, which mostly offset some headwinds from our vendor incentive programs.

Gross margin decreased 110 basis points to 30.6% in the first quarter of 2023 compared to the first quarter of 2022 when gross margin increased 330 basis points to 31.7% (over the same period in 2021).

Our prior year gross margin benefited from higher levels of inflation and price increases, while gross margin in the first quarter of 2023 began to trend more in line with our longer-term annual gross margin outlook of 30.0%.

Gross margin in the first quarter of 2023 also reflected continued benefits from sales of strategic lower cost inventory purchases ahead of recent vendor price increases.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2023 2022 Change

1 unchanged sentence

Operating expenses as a % of net sales 18.6 % 15.0 %

Operating expenses increased 17% in the third quarter of 2022 compared to the third quarter of 2021 (including a 1% benefit from currency exchange rate fluctuations), reflecting inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Incremental operating expense increases related to growth-driven labor, facility and freight costs, and investments in our digital transformation initiatives.

As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021.

Our weighted average effective interest rate increased to 3.2% in the third quarter of 2022 from 2.8% in the third quarter of 2021 on average outstanding debt of $1.5 billion versus $354.3 million for the respective periods.

Our effective income tax rate was 24.7% for the three months ended September 30, 2022 compared to 21.4% for the three months ended September 30, 2021.

We recorded a $0.6 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2022 compared to a tax benefit of $4.2 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 24.9% for the third quarter of 2022 and 23.2% for the third quarter of 2021.

Our third quarter effective income tax rate is typically lower compared to other quarters due to the annual expiration of statutes of limitations in the various jurisdictions where we have recorded uncertain tax positions.

Net Income and Earnings Per Share

Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third quarter of 2021.

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

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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,

2022 2021 2022 2021 2022 2021

Net sales $ 4,844,310 $ 4,250,543 $ 239,497 $ 9,484 $ 5,083,807 $ 4,260,027

Gross profit 1,511,996 1,292,470 105,685 2,246 1,617,681 1,294,716

Gross margin 31.2 % 30.4 % 44.1 % 23.7 % 31.8 % 30.4 %

Operating expenses 640,907 587,989 58,285 1,834 699,192 589,823

Expenses as a % of net sales 13.2 % 13.8 % 24.3 % 19.3 % 13.8 % 13.8 %

Operating income 871,089 704,481 47,400 412 918,489 704,893

Operating margin 18.0 % 16.6 % 19.8 % 4.3 % 18.1 % 16.5 %

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

Sales Centers

Tri-State Pool Distributors April 2022 1 May - September 2022

Porpoise Pool & Patio, Inc.

December 2021 1 January - September 2022

Wingate Supply, Inc.

December 2021 1 January - September 2022

Vak Pak Builders Supply, Inc.

June 2021 1 January - August 2022 and June - August 2021

Pool Source, LLC

April 2021 1 January - June 2022 and April - June 2021

TWC Distributors, Inc.

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

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, 2021, please refer to the discussion under the heading Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021.

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

Net sales $ 5,083.8 $ 4,260.0 $ 823.8 19%

Net sales for the first nine months of 2022 increased 19% compared to the same period last year.

Base business net sales increased 14%.

Our results in the first nine months of the year were driven by continued strong demand for outdoor-living products and elevated price inflation.

Sales growth in our seasonally significant quarters (second and third quarters) have been limited by industry capacity, including labor and supply chain constraints.

However, we have observed improvements in our supply chain dynamics in the second and third quarters of 2022 following the challenges in the second half of 2021 through early 2022.

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

• inflationary product cost increases of approximately 9% to 10%;

• 5% sales growth from recent acquisitions;

• favorable trends for our products including:

◦ consistent demand for discretionary products, as evidenced by sales growth for product offerings such as equipment and building materials (see discussion below);

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

◦ sustained demand for residential swimming pool maintenance supplies, as the installed base of pools continues to grow.

Following our robust 33% sales growth in the first quarter of 2022, results in our second and third quarters were limited by several factors.

We estimate that the benefits discussed above were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% unfavorable impact from currency exchange rate fluctuations;

• less favorable weather conditions compared to last year throughout the second and third quarters, particularly in our seasonal markets (see discussion below);

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

In the first nine months of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 11% compared to the same period last year.

Equipment growth for certain products was limited by supply chain constraints.

Equipment collectively represented 27% of net sales in the first nine months of 2022.

Sales of building materials grew 22% compared to the first nine months of 2021 and represented approximately 13% of net sales in the first nine months of 2022.

Sales of chemicals, representing 12% of total net sales, increased 34% compared to the first nine months of 2021.

The increase in chemical sales was driven by inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.

In the first nine months of 2022, sales to base business retail customers increased 10% compared to the first nine months of 2021 and represented approximately 12% of our consolidated net sales.

Sales to certain of our retail customers have been hindered by less favorable weather conditions in the second and third quarters compared to the prior year.

Sales to commercial customers increased 27% in the first nine months of 2022 compared to the first nine months of 2021 and represented approximately 3% of our consolidated net sales in the first nine months of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the first nine months of 2022, increased 13% compared to the first nine months of 2021.

Comparatively, net sales in our year-round markets, representing 49% of our total base business net sales in the first nine months of 2022, increased 18% compared to the first half of 2021.

Net sales in Europe, representing 4% of our total net sales in the first nine months of 2022, declined 3% in local currency.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, beginning in the second quarter of 2022, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty.

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

Gross profit $ 1,617.7 $ 1,294.7 $ 323.0 25%

Gross margin 31.8 % 30.4 %

Gross margin improved 140 basis points to 31.8% in the nine months ended September 30, 2022 compared to 30.4% in the first nine months of 2021.

This improvement reflects focused supply chain management initiatives to address inflation, increased pricing and benefits from our recent acquisitions.

Operating Expenses

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

Selling and administrative expenses $ 699.2 $ 589.8 $ 109.4 19%

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

Operating expenses for the nine months ended September 30, 2022 increased 19% compared to the first nine months of 2021, including a 1% benefit from currency exchange rate fluctuations.

The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Our expense growth reflects increases in growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation expense.

Operating expenses increased 6% in the first quarter of 2023 compared to the first quarter of 2022.

Our largest expense growth drivers during the quarter related to higher rent and facility costs, increased labor costs, the return of in-person customer-facing retail events and investments in customer-focused projects.

These increases were partially offset by lower performance-based compensation expense.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first nine months of 2022 increased $18.6 million compared to the same period last year, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.5 billion for the first nine months of 2022 versus $376.2 million for the same period of 2021.

Our weighted average effective interest rate decreased to 2.3% from 2.6% for the respective periods.

Our effective income tax rate was 24.3% for the nine months ended September 30, 2022 compared to 22.2% for the nine months ended September 30, 2021.

We recorded a $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2022 compared to a $15.9 million, or $0.39 per diluted share, tax benefit in the same period of 2021.

Without the benefits from ASU 2016-09, our effective tax rate was 25.3% for the nine months ended September 30, 2022 and 24.5% for the nine months ended September 30, 2021.

Interest and other non-operating expenses, net for the first quarter of 2023 increased $10.6 million compared to the first quarter of 2022.

Our weighted average effective interest rate increased to 4.8% in the first quarter of 2023 from 1.5% in the first quarter of 2022 on average outstanding debt of $1.3 billion in both periods.

Our effective income tax rate was 21.8% for the three months ended March 31, 2023 compared to 22.3% for the three months ended March 31, 2022.

We recorded a $4.8 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2023 compared to a tax benefit of $7.3 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5% for the first quarter of 2023 and 25.4% for the first quarter of 2022.

Net Income and Earnings Per Share

Net income increased 25% to $676.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Earnings per diluted share increased 26% to $16.82 for the nine months ended September 30, 2022 versus $13.32 per diluted share for the nine months ended September 30, 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 28% to $16.58 for the nine months ended September 30, 2022 compared to $12.93 for the nine months ended September 30, 2021.

Net income decreased 43% to $101.7 million in the first quarter of 2023 compared to $179.3 million in the first quarter of 2022.

Earnings per diluted share decreased 41% to $2.58 in the first quarter of 2023 compared to $4.41 in the same period of 2022.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 42% to $2.46 in the first quarter of 2023 compared to $4.23 in the first quarter of 2022.

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

Reconciliation of Non-GAAP Financial Measures

The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-Q.

Adjusted Diluted EPS

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to investors and others in assessing our period-to-period operating performance.

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to management, investors and others in assessing our period-to-period operating performance.

Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

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

(Unaudited) Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

(Unaudited) Three Months Ended

Diluted EPS $ 2.58 $ 4.41

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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 2022, the four quarters of 2021 and the fourth quarter of 2020.

The following table presents certain unaudited quarterly data for the first quarter of 2023, the four quarters of 2022 and the fourth, third and second quarters of 2021.

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.

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) 2023 2022 2021

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 2023 and 2022 Results

Sales in the third quarter of 2022 were generally aided by above-average temperatures throughout much of the contiguous United States.

However, sales in Florida were negatively impacted by closures due to Hurricane Ian at the end of the quarter, which we expect to recover in the fourth quarter of 2022.

Compared to last year, weather conditions in Canada and the northern states were less favorable.

Generally favorable weather conditions benefited sales in the third quarter of 2021 with most of the United States experiencing above-average temperatures and below-average precipitation.

We observed unfavorable weather conditions in certain markets throughout the second quarter of 2022.

Heavy rainfall and cooler temperatures throughout the northeastern United States and Canada resulted in slower sales activity and limited sales growth in the second quarter of 2022.

Additionally, results in Europe continued to be impacted by unfavorable weather conditions.

In contrast, our southern markets benefited from above-average temperatures, particularly in Texas.

In the second quarter of 2021, overall weather conditions favorably impacted sales growth with the average U.S.

temperature in June 2021 being the hottest on record in 127 years.

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 the 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 .

Weather conditions varied across the contiguous United States throughout the first quarter of 2023.

Conditions were generally favorable in our southern markets, where sales benefited from warmer weather and below-average precipitation.

In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., particularly in California and Arizona, which are two of our largest markets.

Comparatively, in the first quarter of 2022, overall weather conditions were generally favorable, and sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.

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 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, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases.

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

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

• investing in inventory and funding other operating expenses;

• inventory and other operating expenses;

• strategic acquisitions executed opportunistically;

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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 as a percentage of net sales will be consistent with our results in 2021.

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.

Historically, our capital expenditures have averaged roughly 1.0% of net sales.

Capital expenditures were 0.7% of net sales in 2022 and 2021 and 0.6% of net sales in 2020.

Since 2020, our capital expenditures as a percentage of net sales were lower than our historical average primarily due to our significant sales growth.

Based on management’s current plans, we project capital expenditures in 2023 will approximate 1.0% of net sales.

Sources and Uses of Cash

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

Nine Months Ended

September 30,

Three Months Ended

Operating activities $ 103,203 $ (208,109)

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Financing activities (105,518) 228,717

Net cash provided by operations was $307.5 million for the first nine months of 2022 compared to $359.1 million for the first nine months of 2021.

The decrease in our operating cash flows was driven by federal tax payments of $79.5 million in 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.

Additional impacts relate to growth-driven working capital outflows, including increased inventory purchases, which were more than offset by an increase in net income.

Net cash used in investing activities for the first nine months of 2022 decreased compared to the first nine months of 2021 primarily due to a decrease in cash used for the acquisition of businesses of $9.6 million, offset by an increase in capital expenditures of $3.7 million.

Net cash used in financing activities decreased $19.4 million to $248.4 million for the first nine months of 2022 compared to $267.8 million for the first nine months of 2021, reflecting a $333.2 million increase in share repurchases and an increase in dividends paid of $24.1 million, partially offset by $380.4 million increase in net debt proceeds

Net cash provided by operations improved to $103.2 million for the first three months of 2023 from net cash used in operations of $208.1 million for the first three months of 2022, primarily driven by positive changes in working capital, particularly as we sell through our prior year strategic inventory purchases, partially offset by lower net income.

Net cash used in investing activities for the first three months of 2023 increased compared to the first three months of 2022, primarily due to a $6.4 million increase in capital expenditures and $1.8 million of cash used for the acquisition of a business in the first quarter of 2023.

Net cash used in financing activities was $105.5 million for the first three months of 2023 compared to net cash provided by financing activities of $228.7 million for the first three months of 2022, primarily reflecting $21.2 million of net debt payments in the first three months of 2023 versus $321.5 million of net debt proceeds in the first three months of 2022 and an increase in dividends paid of $6.9 million, partially offset by an $11.9 million decrease in share repurchases between periods.

Future Sources and Uses of Cash

To supplement cash from operations as our primary source of working capital, we plan to 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).

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 Part II, Item 8 in our 2022 Annual Report on Form 10-K and Note 5 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Credit Facility

Our Credit Facility, as amended on 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.

Our Credit Facility 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 also includes sublimits for the issuance of swingline loans and standby letters of credit.

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

The term loan requires quarterly amortization payments beginning in September 2023 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, 2022, there was $573.0 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $172.2 million available for borrowing under the Credit Facility.

Currently, we pay interest on revolving and term loan 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, 2022 was approximately 3.5%, excluding commitment fees.

At March 31, 2023, there was $398.9 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $346.3 million available for borrowing under the Credit Facility.

The weighted average effective interest rate for the Credit Facility as of March 31, 2023 was approximately 4.6%, excluding commitment fees.

Term Facility

Our Term Facility, as amended on October 12, 2021, provides for $185.0 million in borrowing capacity and matures on December 30, 2026.

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

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

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

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.

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

At September 30, 2022, there was $159.6 million outstanding under the Term Facility with a weighted average effective interest rate of 4.2%.

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

At March 31, 2023, there was $154.9 million outstanding under the Term Facility with a weighted average effective interest rate of 6.0%.

Receivables Securitization Facility

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.

Under this facility, we can borrow up to $350.0 million between April through August and from $210.0 million to $340.0 million during the remaining months of the year.

The Receivables Facility matures on November 1, 2024.

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The Receivables Facility provides for the sale of certain of our receivables to a wholly-owned subsidiary (the Securitization Subsidiary).

The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.

The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights

to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.

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.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type.

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, 2022, there was $270.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 3.9%, excluding commitment fees.

At March 31, 2023, there was $299.6 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.7%, excluding commitment fees.

Financial Covenants

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

As of September 30, 2022, the calculations of these two covenants are detailed below:

Financial covenants of the Credit Facility, Term Facility and 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 March 31, 2023, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

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

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

As of September 30, 2022, our average total leverage ratio equaled 1.25 (compared to 1.15 as of June 30, 2022) and the TTM average total indebtedness amount used in this calculation was $1.4 billion.

Average Total Leverage Ratio is the ratio of the sum of (i) Total Non-Revolving Funded Indebtedness as of such date, (ii) the trailing twelve months (TTM) Average Total Revolving Funded Indebtedness and (iii) the TTM Average Accounts Securitization Proceeds divided by TTM EBITDA (as those terms are defined in the Credit Facility).

As of March 31, 2023, our average total leverage ratio equaled 1.48 (compared to 1.37 as of December 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.5 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, 2022, our fixed charge ratio equaled 11.14 (compared to 12.22 as of June 30, 2022) and TTM Rental Expense was $77.9 million.

As of March 31, 2023, our fixed charge ratio equaled 7.96 (compared to 9.57 as of December 31, 2022) and TTM Rental Expense was $83.2 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.

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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, 2022, we had in place two interest rate swap contracts and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.

As of March 31, 2023, we had two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of 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, 2022, 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, 2023, 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 24, 2022, $230.2 million of the current Board-authorized amount under our share repurchase program remained available.

As of April 24, 2023, $186.4 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.

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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.

What changed 10-Q

Item 2. Management’s Discussion and Analysis