# POOL CORP (POOL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from POOL CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/945841/000094584122000023/pool-20211231.htm
Accession: 0000945841-22-000023
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/POOL/
All MD&A years: /company/POOL/mda/
Next year: /company/POOL/mda/fy2022/ (FY 2022)

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.

2021 FINANCIAL OVERVIEW

Financial Results

Net sales increased 35% to $5.3 billion for the year ended December 31, 2021 compared to $3.9 billion in 2020, while base business sales increased 29%. Our sales were driven by strong customer demand for outdoor living products throughout the year and benefited from inflation and warmer weather trends across most of the United States.

Gross profit reached $1.6 billion for the year ended December 31, 2021, a 43% increase over gross profit of $1.1 billion in 2020. Gross margin improved 180 basis points to 30.5% in 2021 compared to 28.7% in 2020, reflecting benefits from our actions to address inflation and manage supply chain disruptions, along with favorable impacts realized from increased purchase volumes.

Selling and administrative expenses (operating expenses), including a $2.5 million note recovery in 2021 and $6.9 million of impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, with base business operating expenses up 12% over 2020. Our operating expenses have increased as we reward our employees through performance-based compensation, in addition to increases in growth-driven labor, facility and freight costs, and investments in technology. As a percentage of net sales, operating expenses declined 210 basis points to 14.8% in 2021 compared to 16.9% in 2020.

Operating income for the year increased 79% to $832.8 million, up from $464.0 million in 2020. Operating margin increased 390 basis points to 15.7% in 2021 compared to 11.8% in 2020.

We recorded a $30.0 million, or $0.74 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, for the year ended December 31, 2021 compared to a tax benefit of $28.6 million, or $0.70 per diluted share, realized in 2020.

Net income increased 77% to $650.6 million in 2021 compared to $366.7 million in 2020. Adjusted net income, without the note recovery in 2021 and the prior year impact of impairments, both net of tax, increased 74% to $648.8 million. Earnings per share increased 78% to a record $15.97 per diluted share compared to $8.97 per diluted share in 2020. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

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 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 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 or results.

Beginning in the second quarter of 2020 and through the end of 2021, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces. 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.

26

Our industry experienced constrained supply chain dynamics in 2021. In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service into the 2022 season. 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 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 Position and Liquidity

Cash provided by operations was $313.5 million in 2021. Cash provided by operations throughout the year helped fund the following initiatives:

•net working capital outflows of $392.3 million;

•share repurchases, totaling $138.0 million for the year;

•quarterly cash dividend payments to shareholders, totaling $119.6 million for the year; and

•net capital expenditures of $37.7 million.

Total net receivables, including pledged receivables, increased 30% compared to December 31, 2020, primarily driven by our sales growth and 2021 acquisitions. Our allowance for doubtful accounts was $5.9 million at December 31, 2021 and $4.8 million at December 31, 2020. Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 25.6 days at December 31, 2021 and 26.5 days at December 31, 2020.

Inventory levels grew 71% to $1.3 billion at December 31, 2021 compared to $781.0 million at December 31, 2020, reflecting significant investments in inventory throughout the year to support increased demand and help manage supply chain pressures, in addition to impacts from inflation and acquisitions. Our reserve for inventory obsolescence was $15.2 million at December 31, 2021 compared to $11.4 million at December 31, 2020. Our inventory turns, as calculated on a trailing four quarters basis, were 3.4 times at December 31, 2021 and 3.8 times at December 31, 2020. Our inventory turns at December 31, 2021 are consistent with average inventory turns over the past five years.

Accrued expenses and other current liabilities increased $121.2 million to $264.9 million in 2021, primarily reflecting an increase in deferred income tax payments of $79.5 million and a $16.4 million increase in accrued performance-based compensation. As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third and fourth quarter estimated federal tax payments, which were paid in February 2022.

Total debt outstanding of $1.2 billion at December 31, 2021 increased $767.3 million compared to December 31, 2020. We utilized debt proceeds to fund our 2021 acquisitions, including Porpoise Pool & Patio, Inc., which we purchased on December 16, 2021 for $788.7 million, net of cash acquired.

Current Trends and Outlook

Over the past two years, in response to the COVID-19 pandemic, families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces, which resulted in an increase in new pool construction and greater expenditures for maintenance and remodeling products. We believe that increased consumer spending on homes, including outdoor living spaces, will have longer term benefits as work-from-home trends persist or increase.

Over the past decade, homeowners investing in their homes, including backyard renovations, have flourished. Steady increases in home values and lack of affordable new homes have prompted homeowners to stay in their homes longer and upgrade their home environments, including their backyards. We expect that new pool and irrigation system construction levels will continue to grow incrementally, constrained by availability of construction labor. However, we believe that consumer investments in outdoor living spaces will generate continued growth over the next several years. Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the near term market expansion and the inherent long term growth opportunities in our industry.

27

We have benefited from strong pool construction trends as robust demand fueled by the COVID-19 pandemic led to increased home investment trends. We estimate that new pool construction increased to approximately 120,000 units in 2021 from 96,000 units in 2020, representing a 25% increase in new pool construction. Favorable weather positively impacts industry growth by accelerating growth in any given year, expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products. Conversely, unfavorable weather impedes growth. In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance. 

We established our initial outlook for 2022 based on reasonable expectations of organic industry and market share growth, ongoing leverage of existing investments in our business and continuous process improvements. Impacts from the COVID-19 pandemic, coupled with heightened demand, could continue to adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied. Although supply constraints did not have a material impact on our business in 2021, it is difficult to predict the extent to which this could impact our business in 2022.

We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets. We also plan to broaden our geographic presence by opening 8 to 10 new sales centers in 2022 and by making selective acquisitions when appropriate opportunities arise.

The following summarizes our outlook for 2022:

•We expect sales growth of 17% to 19%, impacted by the following factors and assumptions:

◦normal weather patterns for 2022;

◦continued elevated demand for residential pool products, driven by home-centric trends;

◦a benefit from construction backlogs depending on our customers’ building capacity, including the availability of labor, and weather;

◦inflationary product cost increases, which generally pass through to customers, of approximately 9% to 10% (compared to 7% to 8% in 2021);

◦estimated 5% growth from acquisitions completed throughout 2021; and

◦market share gains.

•We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021 with modest improvements in the first half of 2022 and declines in the latter half of the year. However, our gross margin trends are dependent on amounts and timing of inflationary price increases, sales growth expectations and product mix.

•We believe that tight labor and real estate markets will present challenges in managing expenses in 2022. However, we project that operating expense growth in 2022 will be less than our gross profit growth. We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in technology and expansion of our sales center network.

In 2022, we expect our effective tax rate will approximate 25.5%, without the impact of ASU 2016-09. Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations. Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We estimate that we have approximately $7.6 million in unrealized excess tax benefits related to stock options that expire and restricted awards that vest in the first quarter of 2022. We may recognize additional tax benefits related to stock option exercises in 2022 from grants that expire in years after 2022, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a $30.0 million benefit in our provision for income taxes for the year ended December 31, 2021 related to ASU 2016-09.

We project that 2022 earnings will be in the range of $17.19 to $17.94 per diluted share, including an estimated $0.19 benefit from ASU 2016-09 during the first quarter of 2022. We expect to continue to use cash to fund opportunistic share repurchases over the next year and to use cash for the payment of cash dividends as and when declared by our Board of Directors.

28

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, and the extent to which home-centric trends will continue, accelerate or reverse, the sensitivity of our business to weather conditions, changes in the economy, consumer discretionary spending or the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives or mass merchants and other risks detailed in Item 1A of this Form 10-K. Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. Our critical accounting estimates are discussed below, including, to the extent material and reasonably available, the impact such estimates have had, or are reasonably likely to have, on our financial condition or results of operations.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts based on an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. The extended terms usually require payments in equal installments in April, May and June or May and June, depending on geographic location. Credit losses have generally been within or better than our expectations.

Similar to our business, our customers’ businesses are seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on our accounts receivable aging. These reserves range from 0.05% for amounts currently due to up to 100% for specific accounts more than 60 days past due.

At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts. We estimate future losses based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family home prices.

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.08% of net sales annually.  Write-offs as a percentage of net sales approximated 0.06% in 2021, 0.09% in 2020 and 0.12% in 2019. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2022.

At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2021, pretax income would change by approximately $1.2 million and earnings per share would change by approximately $0.02 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2021).

29

Inventory Obsolescence

Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volumes. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently turn at slower rates.

We classify products at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage. Below is a description of these inventory classifications:

•new products with less than 12 months usage;

•highest sales velocity items, which represent approximately 80% of net sales at the sales center;

•lower sales velocity items, which we keep in stock to provide a high level of customer service;

•products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer; and

•non-stock special order items.

There is little risk of obsolescence for our highest sales velocity items, which represent approximately 80% of net sales at the sales center, because these products generally turn quickly. We establish our reserve for inventory obsolescence based on inventory with lower sales velocity and inventory with no sales for the past 12 months, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory at net realizable value. We provide a reserve of 5% for inventory with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess lower sales velocity inventory and an additional 45% reserve for excess inventory with no sales for the past 12 months. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis. We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the past 12 months. We have not changed our methodology from prior years.

In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors, including:

•the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center level and on a company-wide basis;

•changes in customer preferences or regulatory requirements;

•seasonal fluctuations in inventory levels;

•geographic location; and

•superseded products and new product offerings.

We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end obsolescence reserve balance to (i) current year inventory write-offs and (ii) the value of products with no sales for the past 12 months that remain in inventory. Based on our hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our estimation methodology is appropriate.

If the balance of our inventory reserve increased or decreased by 20% at December 31, 2021, pretax income would change by approximately $3.0 million and earnings per share would change by approximately $0.06 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2021).

Vendor Programs

Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve any of a number of measures.  These measures generally relate to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements.  We account for vendor programs as a reduction of the prices of the vendor’s products and therefore a reduction of inventory until we sell the product, at which time we recognize such consideration as a reduction of cost of sales in our income statement.

30

Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward the attainment of various levels within certain vendor programs. We accrue vendor program benefits on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for annual purchases, future inventory levels and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including changes in economic conditions and weather.  Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume of purchases from specific vendors.

We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods. We update our estimates for these arrangements at year end to reflect actual annual purchase or sales levels. In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances. Based on our hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.

If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our cost for products purchased and sold in future periods.

Income Taxes

We record deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse.  Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

We record Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the December 2017 enactment of U.S. tax reform.

As of December 31, 2021, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. We determined not to change our indefinite reinvestment assertion in light of U.S. tax reform.

We operate in 39 states, 1 United States territory and 11 foreign countries. We are subject to regular audits by federal, state and foreign tax authorities, and the amount of income taxes we pay is subject to adjustment by the applicable tax authorities.  We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.  These adjustments may include changes in valuation allowances that we have established.  As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

Each year, we prepare a return to provision analysis upon filing our income tax returns. Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate. Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to changes in valuation allowances recorded for certain of our international subsidiaries with tax losses and excess tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards.

31

Performance-Based Compensation Accrual

The Compensation Committee of our Board (Compensation Committee) and our management have designed compensation programs intended to create a performance culture. The primary objectives of our compensation programs are to attract, motivate, reward and retain our employees without leading to unnecessary risk taking. Our compensation packages include bonus plans that are specific to groups of eligible participants and their levels and areas of responsibility. The majority of our bonus plans consist of annual cash payments that are based primarily on objective performance criteria. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income.

We use an annual cash performance award (annual bonus) to focus corporate behavior on short-term goals for growth, financial performance and other specific financial and business improvement metrics. Management sets the company’s annual bonus objectives at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. Management also establishes specific business improvement objectives for both our operating units and corporate employees. The Compensation Committee approves objectives for annual bonus plans involving executive management.

We also utilize our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives. Payouts through the SPIP are based on three-year compound annual growth rates (CAGRs) of our diluted EPS.

We record annual performance-based compensation accruals based on operating income achieved in a quarter as a percentage of total expected operating income for the year. We estimate total expected operating income for the current plan year using management’s estimate of the total overall incentives earned per the stated bonus plan objectives. Starting in June, and continuing each quarter through our fiscal year end, we adjust our estimated performance-based compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific objectives and management’s estimates related to the discretionary components of the bonus plans, if any.

We record SPIP accruals based on our total expected EPS for the current fiscal year and earnings growth estimates for the succeeding two years. We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation and we base our forward-looking estimates on historical growth trends and our projections for the remainder of the three-year performance periods.

Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following:

•differences between estimated and actual performance;

•our projections related to achievement of multiple-year performance objectives for our SPIP; and

•the discretionary components of the bonus plans.

We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we compare the actual bonus payouts to amounts accrued at the previous year’s end to determine the accuracy of our performance-based compensation estimates. Based on our hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.

Business Combinations - Goodwill and Intangible Asset Valuation

In December 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $788.7 million, net of cash acquired. Based on our preliminary purchase price allocation, we recognized tangible assets of $84.2 million, identifiable intangible assets of $301.0 million and resulting goodwill of $403.5 million.

32

We used the acquisition method of accounting for this business combination. Our financial statements reflect the operations of an acquired business starting from the closing date of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of market participants. Significant assumptions include expected revenue growth rates, earnings metrics and discount rates. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the underlying estimates and assumptions. We ran sensitivity analyses on the significant assumptions to evaluate our valuations and determined each to be within a range of acceptable estimates.

Determining the useful lives of intangible assets also requires judgment. Our Pinch A Penny brand name is expected to have an indefinite life as it corresponds with the period of expected future cash flows of the intangible asset. We considered the competitive market position, historical results, macroeconomic environment, our operating plans and expected future use of the brand in our network expansion. Our estimates of the useful lives of definite-lived intangible assets are based on the same criteria and correspond with the expected future cash flows. The costs of definite-lived intangibles are amortized to expense over their estimated life. We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.

Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. For additional details, see Note 3 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. While we believe those estimates and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill is our largest intangible asset. At December 31, 2021, our goodwill balance was $688.4 million, representing approximately 21% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.

We perform a goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in circumstances occur that indicate potential impairment.  To the extent the carrying value of a reporting unit is greater than its estimated fair value, we record a goodwill impairment charge for the difference, up to the carrying value of the goodwill. We recognize any impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, we define a reporting unit as an individual sales center.  As of October 1, 2021, we had 247 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $12.1 million and the average goodwill balance was $1.1 million. As of December 31, 2021, our most significant goodwill balance for a reporting unit was related to our acquisition of Porpoise as discussed above.

In October 2021, 2020 and 2019, we performed our annual goodwill impairment test and did not recognize any goodwill impairment at the reporting unit level. In the first quarter of 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million.

To estimate the fair value of our reporting units, we project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and earnings multiples. These estimates can significantly affect the outcome of our impairment test.  We also review for potential impairment indicators at the reporting unit level based on an evaluation of recent historical operating trends, current and projected local market conditions and other relevant factors as appropriate.

33

To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for the purpose of our goodwill impairment test. To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate to reflect more conservative discounted cash flow assumptions, the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate. Our sensitivity analysis generated a fair value estimate below our market capitalization and did not result in the identification of additional at-risk locations.

If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur impairment charges in future periods.  Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.  

Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for details.

34

RESULTS OF OPERATIONS

The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2020","","2019"],["Net sales","","100.0","%","","100.0","%","","100.0","%"],["Cost of sales","","69.5","","","71.3","","","71.1"],["Gross profit","","30.5","","","28.7","","","28.9"],["Operating expenses","","14.8","","","16.9","","","18.2"],["Operating income","","15.7","","","11.8","","","10.7"],["Interest and other non-operating expenses, net","","0.2","","","0.3","","","0.7"],["Income before income taxes and equity in earnings","","15.6","%","","11.5","%","","9.9","%"]]
[[/GREPCENT_TABLE]]

Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity in earnings.

Our discussion of consolidated operating results includes the operating results from acquisitions in 2021, 2020 and 2019.  We have included the results of operations in our consolidated results since the respective acquisition dates.

Fiscal Year 2021 compared to Fiscal Year 2020

The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):

[[GREPCENT_TABLE]]
[["(Unaudited)","","Base Business","","Excluded","","Total"],["(in thousands)","","Year Ended","","Year Ended","","Year Ended"],["","","December 31,","","December 31,","","December 31,"],["","","2021","","2020","","2021","","2020","","2021","","2020"],["Net sales","","$","5,038,256","","","$","3,900,973","","","$","257,328","","","$","35,650","","","$","5,295,584","","","$","3,936,623"],["Gross profit","","1,547,820","","","1,122,843","","","69,272","","","8,059","","","1,617,092","","","1,130,902"],["Gross margin","","30.7","%","","28.8","%","","26.9","%","","22.6","%","","30.5","%","","28.7","%"],["Operating expenses (1)","","736,707","","","656,968","","","47,601","","","9,907","","","784,308","","","666,875"],["Expenses as a % of net sales","","14.6","%","","16.8","%","","18.5","%","","27.8","%","","14.8","%","","16.9","%"],["Operating income (loss) (1)","","811,113","","","465,875","","","21,671","","","(1,848)","","","832,784","","","464,027"],["Operating margin","","16.1","%","","11.9","%","","8.4","%","","(5.2)","%","","15.7","%","","11.8","%"]]
[[/GREPCENT_TABLE]]

(1)Base business and total reflect a $2.5 million note recovery in 2021 and $6.9 million of impairment from goodwill and other assets recorded in 2020.

35

We have excluded the following acquisitions from base business for the periods identified:

[[GREPCENT_TABLE]]
[["Acquired","","AcquisitionDate","","Net Sales Centers Acquired","","PeriodsExcluded"],["Porpoise Pool & Patio, Inc.","","December 2021","","1","","December 2021"],["Wingate Supply, Inc.","","December 2021","","1","","December 2021"],["Vak Pak Builders Supply, Inc.","","June 2021","","1","","June - December 2021"],["Pool Source, LLC","","April 2021","","1","","April - December 2021"],["TWC Distributors, Inc.","","December 2020","","10","","January - December 2021 and December 2020"],["Jet Line Products, Inc.","","October 2020","","9","","January - December 2021 and October - December 2020"],["Northeastern Swimming Pool Distributors, Inc.","","September 2020","","2","","January - November 2021 and September - November 2020"],["Master Tile Network LLC","","February 2020","","4","","January - May 2021 and February - May 2020"]]
[[/GREPCENT_TABLE]]

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. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales.  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 centers during 2021:

[[GREPCENT_TABLE]]
[["December 31, 2020","398"],["Acquired locations","4"],["New locations","10"],["Closed/consolidated locations","(2)"],["December 31, 2021","410"]]
[[/GREPCENT_TABLE]]

For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

36

Net Sales

[[GREPCENT_TABLE]]
[["(in millions)","","Year Ended December 31,"],["","","2021","","2020","","Change"],["Net sales","","$","5,295.6","","","$","3,936.6","","","$","1,359.0","","","35%"]]
[[/GREPCENT_TABLE]]

Net sales increased 35% compared to 2020, with 29% of this increase resulting from base business sales growth. Maintenance, refurbishment and construction activity remained strong in 2021 as households continued to create and expand home-based outdoor living spaces. Our sales were driven by robust customer demand for outdoor living products throughout the year and were aided by inflationary benefits and warmer weather trends across most of the United States.

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

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

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

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

•inflationary product cost increases of approximately 7% to 8% (compared to our historical average of 1% to 2%); and

•6% sales growth from recent acquisitions.

We believe that sales growth rates for certain product offerings, such as equipment and building materials evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In 2021, sales for equipment, such as swimming pool heaters, pumps, lights and filters, increased 35% compared to 2020, and collectively represented approximately 29% of net sales. This increase reflects both the growth of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials grew 28% compared to 2020 and represented approximately 12% of net sales in 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 20% compared to 2020 and represented approximately 12% of our net sales in 2021. Sales to commercial customers increased 24% in 2021, as business and leisure travel improved in 2021 following COVID-19 related closures in 2020 and demand from commercial customers began to return to normalized pre-pandemic levels. Sales to commercial customers represented approximately 3% of our net sales in 2021.

2021 Quarterly Sales Performance Compared to 2020 Quarterly Sales Performance

In each quarter of 2021, sales benefited from continued elevated demand for swimming pool and outdoor living products, driven by home-centric and work-from-home trends. Households continued to invest in their backyards and outdoor living spaces, resulting in broad sales gains across many product categories and geographies.

[[GREPCENT_TABLE]]
[["","Quarter"],["","2021"],["","First","Second","Third","Fourth"],["Net Sales Growth","57%","40%","24%","23%"],["Base Business Net Sales Growth","51%","32%","19%","22%"]]
[[/GREPCENT_TABLE]]

In addition to the sales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.

37

Gross Profit

[[GREPCENT_TABLE]]
[["(in millions)","","Year Ended December 31,"],["","","2021","","2020","","Change"],["Gross profit","","$","1,617.1","","","$","1,130.9","","","$","486.2","","","43%"],["Gross margin","","30.5","%","","28.7","%"]]
[[/GREPCENT_TABLE]]

Gross margin improved 180 basis points to 30.5% in 2021 compared to 28.7% in 2020, reflecting benefits from our actions to address inflation and manage supply chain disruptions, along with favorable impacts from incentives realized from increased purchase volumes.

Operating Expenses

[[GREPCENT_TABLE]]
[["(in millions)","","Year Ended December 31,"],["","","2021","","2020","","Change"],["Selling and administrative expenses","","$","786.8","","","$","659.9","","","$","126.9","","","19%"],["(Recovery) impairment of goodwill and other assets","","(2.5)","","","6.9","","","(9.4)","","","(136)%"],["Operating expenses as a percentage of net sales","","14.8","%","","16.9","%"]]
[[/GREPCENT_TABLE]]

Operating expenses, including a note recovery in 2021 and impairment charges in 2020, increased 18%, or $117.4 million, to $784.3 million in 2021, up from $666.9 million in 2020. The majority of the increase in our operating expenses is due to higher compensation costs as we reward our employees through performance-based compensation and increase wages to support stronger demand. Other incremental operating expense increases relate to increases in growth-driven facility and freight costs, in addition to investments in technology.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a note and a goodwill and intangibles impairment charge of $4.4 million. In 2021, we recovered the $2.5 million from the previously impaired note.

Operating expenses as a percentage of net sales declined 210 basis points, contributing to the 390 basis point expansion in our operating margin for the year driven by a combination of higher year-over-year sales and improved operating leverage as we utilize our existing network to manage incremental costs for new sales center openings and acquisitions.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net decreased $3.7 million compared to 2020, primarily due to the impact of foreign currency losses, with a loss of $0.3 million recognized in 2021 compared to a loss of $1.7 million recognized in 2020, in addition to interest income from a note of $1.5 million in 2021. Interest expense related to borrowings increased approximately $1.2 million, primarily due to higher average interest rates between periods. Our weighted average effective interest rate increased to 2.5% in 2021 from 2.1% in 2020 on consistent average outstanding debt balances.

Income Taxes

Our effective income tax rate was 21.1% at December 31, 2021 and 18.9% at December 31, 2020. We recorded a $30.0 million, or $0.74 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2021 compared to a benefit of $28.6 million, or $0.70 per diluted share, realized in the same period in 2020. Without the benefits from ASU 2016-09, our effective tax rate was 24.7% and 25.2% for the years ended 2021 and 2020, respectively.

Net Income and Earnings Per Share

Net income increased 77% to $650.6 million in 2021 compared to $366.7 million in 2020. Earnings per share increased 78% to $15.97 per diluted share compared to $8.97 per diluted share in 2020.

38

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-K.

Adjusted Income Statement Information

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

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

We believe these measures should be considered in addition to, not as a substitute for, net income and diluted EPS presented in accordance with GAAP. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

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

[[GREPCENT_TABLE]]
[["(Unaudited)","Year Ended"],["(in thousands)","December 31,"],["","2021","","2020"],["Net income","$","650,624","","","$","366,738"],["(Recovery) impairment of goodwill and other assets","(2,500)","","","6,944"],["Tax impact on note (1)","630","","","(654)"],["Adjusted net income","$","648,754","","","$","373,028"]]
[[/GREPCENT_TABLE]]

(1)Our effective tax rate at March 31, 2020 was a 0.1% benefit. Without impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million note impairment.

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

[[GREPCENT_TABLE]]
[["(Unaudited)","Year Ended"],["","December 31,"],["","2021","","2020"],["Diluted EPS","$","15.97","","","$","8.97"],["ASU 2016-09 tax benefit","(0.74)","","","(0.70)"],["Adjusted diluted EPS without ASU 2016-09 tax benefit","15.23","","","8.27"],["After-tax (recovery) impairment charges","(0.05)","","","0.15"],["Adjusted diluted EPS without ASU 2016-19 tax benefit and after-tax (recovery) impairment charges","$","15.18","","","$","8.42"]]
[[/GREPCENT_TABLE]]

Fiscal Year 2020 compared to Fiscal Year 2019

For a detailed discussion of the Results of Operations in Fiscal Year 2020 compared to Fiscal Year 2019, see the Results of Operations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.  

39

Seasonality and Quarterly Fluctuations

For discussion regarding the effects seasonality and weather have on our business, see Item 1, “Business,” of this Form 10-K.

The following table presents certain unaudited quarterly data for 2021 and 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, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

[[GREPCENT_TABLE]]
[["(Unaudited)","","QUARTER"],["(in thousands)","","2021","","2020"],["","","First","","Second","","Third","","Fourth","","First","","Second","","Third","","Fourth"],["Statement of Income Data"],["Net sales","","$","1,060,745","","","$","1,787,833","","","$","1,411,448","","","$","1,035,557","","","$","677,288","","","$","1,280,846","","","$","1,139,229","","","$","839,261"],["Gross profit","","301,131","","","551,685","","","441,899","","","322,376","","","189,629","","","373,481","","","328,698","","","239,095"],["Operating income","","129,031","","","338,586","","","237,276","","","127,891","","","35,588","","","205,857","","","148,233","","","74,351"],["Net income","","98,655","","","259,695","","","184,665","","","107,609","","","30,912","","","157,555","","","119,098","","","59,174"],["Net sales as a % of annual net sales","","20","%","","34","%","","27","%","","20","%","","17","%","","33","%","","29","%","","21","%"],["Gross profit as a % of annual gross profit","","19","%","","34","%","","27","%","","20","%","","17","%","","33","%","","29","%","","21","%"],["Operating income as a % of annual operating income","","15","%","","41","%","","28","%","","15","%","","8","%","","44","%","","32","%","","16","%"],["Balance Sheet Data"],["Total receivables, net","","$","487,602","","","$","585,566","","","$","476,150","","","$","376,571","","","$","345,915","","","$","453,405","","","$","366,412","","","$","289,200"],["Product inventories, net","","977,228","","","894,654","","","1,043,407","","","1,339,100","","","858,190","","","628,418","","","612,824","","","780,989"],["Accounts payable","","634,998","","","439,453","","","414,156","","","398,697","","","517,620","","","346,272","","","268,412","","","266,753"],["Total debt","","433,171","","","423,116","","","362,819","","","1,183,350","","","586,050","","","438,804","","","339,934","","","416,018"]]
[[/GREPCENT_TABLE]]

Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.

40

Weather Impacts on Fiscal Year 2021 to Fiscal Year 2020 Comparisons

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, 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.

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.

In the fourth quarter of 2021, sales benefited from above-average temperatures throughout much of the contiguous United States, particularly in the month of December, which was the fifth warmest on record in a 127-year period. Precipitation levels varied, with the southern states experiencing levels much below average and the northern states seeing above-average levels. Similarly, sales in the fourth quarter of 2020 benefited from above-average temperatures and below-average precipitation.

Weather Impacts on Fiscal Year 2020 to Fiscal Year 2019 Comparisons

For a detailed discussion of Weather Impacts on Fiscal Year 2020 compared to Fiscal Year 2019, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.  

Geographic Areas

Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. For additional details, see Note 1 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

For a breakdown of net sales and property, plant and equipment between our United States and international operations, see Item 1, “Business,” of this Form 10-K.

41

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:

•cash flows generated from operating activities;

•the adequacy of available bank lines of credit;

•the quality of our receivables;

•acquisitions;

•dividend payments;

•capital expenditures;

•changes in income tax laws and regulations;

•the timing and extent of share repurchases; and

•the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations, debt repayment obligations and other general corporate initiatives, including acquisitions, opening new sales centers, dividend payments and share repurchases. Our primary working capital obligations are for the purchase of inventory, payroll, rent, other facility costs and selling and administrative expenses. Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. We have funded our capital expenditures and share repurchases in substantially the same manner.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

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

•inventory and other operating expenses;

•strategic acquisitions executed opportunistically;

•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; and

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

Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We focus our capital expenditure plans on the needs of our sales centers. 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. Although our capital spending increased by $16.0 million in 2021, capital expenditures as a percentage of net sales were lower than our historical average of 1.0% of net sales due to our significant sales growth. Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic.

Based on management’s current plans, we project capital expenditures for 2022 will continue to approximate the historical average of 1% of net sales. We also plan to increase our investment in technology and automation enabling us to operate more efficiently. We have initiated a multiyear project to transform our legacy enterprise systems and capabilities to improve customer and team member experiences.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise.  We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.

As of February 18, 2022, $482.4 million of the current Board authorized amount under our authorized share repurchase plan remained available. We expect to repurchase additional shares in 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.

42

Sources and Uses of Cash

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2020"],["Operating activities","","$","313,490","","","$","397,581"],["Investing activities","","(849,614)","","","(146,289)"],["Financing activities","","526,131","","","(244,371)"]]
[[/GREPCENT_TABLE]]

Cash provided by operations of $313.5 million for 2021 decreased $84.1 million compared to 2020. The decrease in cash provided by operations is driven by an incremental cash outflow of $371.3 million stemming from changes to our net working capital, primarily reflecting an increase in inventory, partially offset by increases in accounts payable and net income.

Cash used in investing activities increased $703.3 million in 2021 due to an increase of $687.4 million in payments for acquisitions compared to 2020 and a $16.0 million increase in net capital expenditures between years.

Cash provided by financing activities increased $770.5 million to $526.1 million in 2021, compared to cash used in financing activities of $244.4 million in 2020. The increase in cash provided by financing activities primarily reflects a $865.3 million increase in net debt proceeds, offset by additional share repurchases of $61.8 million and an increase in dividends paid of $27.7 million.

For a discussion of our sources and uses of cash in 2019, see the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.

Future Sources and Uses of Cash

To supplement cash from operations as our primary source of working capital, we will continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility). For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

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, which includes a $250.0 million delayed-draw term loan facility and an additional $250.0 million incremental term loan facility. We drew the $250.0 million delayed-draw term loan on December 15, 2021 and used the proceeds to fund our acquisition of Porpoise Pool & Patio, Inc. Subsequent to December 31, 2021, we drew the $250.0 million incremental term loan on January 4, 2022 and used the same amount to reduce our revolving borrowings. 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.

The credit facility continues to include a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit. We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At December 31, 2021, there was $822.9 million outstanding, a $4.8 million standby letter of credit outstanding and $422.3 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of December 31, 2021 was approximately 1.2%, excluding commitment fees.

43

Term Facility

Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Credit Facility 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 December 31, 2021, the Term Facility had an outstanding balance of $166.5 million at a weighted average effective interest rate of 2.9%.

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 December 31, 2021, the calculations of these two covenants are detailed below:

•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.  Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility).  As of December 31, 2021, our average total leverage ratio equaled 0.77 (compared to 0.86 as of December 31, 2020) and the TTM average total indebtedness amount used in this calculation was $680.3 million.

•Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility).  As of December 31, 2021, our fixed charge ratio equaled 11.76 (compared to 7.81 as of December 31, 2020) and TTM Rental Expense was $80.8 million.

The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced amount dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends. Under the Credit Facility and Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 3.25 to 1.00.

Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

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 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.

44

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. 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.

At December 31, 2021, there was $185.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

Interest Rate Swaps

We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings. 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 December 31, 2021, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on our variable rate borrowings to fixed interest rates. For more information, see Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

Compliance and Future Availability

As of December 31, 2021, we were in compliance with all 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 covenants and financial ratio requirements throughout 2022.  For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Future Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, fluctuating interest rates and other factors may result in actual payments differing from our estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 2021 that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through our existing cash, cash expected to be generated from operations and borrowings on our facilities.

[[GREPCENT_TABLE]]
[["","","","","Payments Due by Period"],["","","Total","","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years"],["Long-term debt","","$","1,186,198","","","$","21,022","","","$","222,250","","","$","942,926","","","$","\u2014"],["Operating leases","","257,753","","","64,337","","","102,843","","","57,603","","","32,970"],["Purchase obligations","","57,150","","","43,068","","","11,039","","","3,043","","","\u2014"],["","","$","1,501,101","","","$","128,427","","","$","336,132","","","$","1,003,572","","","$","32,970"]]
[[/GREPCENT_TABLE]]

The significant assumptions used in our determination of amounts presented in the above table are as follows:

•Long-term debt amounts represent the future principal payments on our debt as of December 31, 2021. For additional information regarding our debt arrangements, see Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

•Operating lease amounts include future rental payments for our operating leases. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases. For additional information regarding our operating leases, see Note 9 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

•Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases and software commitments. We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above.

45

For certain of our future obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time. As such, we have excluded unrecognized tax benefits from the table above. See Note 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our unrecognized tax benefits. The table also excludes various other liabilities that are not contractual in nature, including contingent liabilities, litigation accruals, and contract termination fees.

The table below contains estimated interest payments (in thousands) related to our long-term debt obligations presented in the table above.  We calculated estimates of future interest payments based on the December 31, 2021 outstanding debt balances, using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective interest rates as of December 31, 2021 for the remaining outstanding balances not covered by our swap contracts.  To project the estimated interest expense to coincide with the time periods used in the table above, we projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility, the Term Facility and the Receivables Facility. Our actual interest payments could vary substantially from the amounts projected.

[[GREPCENT_TABLE]]
[["","","","","Estimated Interest Payments Due by Period"],["","","Total","","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years"],["Interest","","$","66,731","","","$","16,153","","","$","27,419","","","$","22,771","","","$","388"]]
[[/GREPCENT_TABLE]]