LESLIE'S, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which are subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K for the fiscal year endedOctober 1, 2022 . We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest toSeptember 30th . In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to fiscal 2022, 2021, and 2020 refer to the fiscal years endedOctober 1, 2022 ,October 2, 2021 , andOctober 3, 2020 , respectively. Fiscal 2022 and 2021 included 52 weeks of operations. Fiscal 2020 included 53 weeks of operations. Our Company We are the largest and most trusted direct-to-consumer brand in the$15 billion United States pool and spa care industry, serving residential and professional consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 990 branded locations and a robust digital platform. We offer an extensive assortment of professional-grade products, the majority of which are exclusive to Leslie's, as well as certified installation and repair services, all of which are essential to the ongoing maintenance of pools and spas. Our dedicated team of associates, pool and spa care experts, and experienced service technicians are passionate about empowering our consumers with the knowledge, products, and solutions necessary to confidently maintain and enjoy their pools and spas. The considerable scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continentalUnited States . We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 59 consecutive years of sales growth. Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators. Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value. Our water treatment expertise is powered by data and intelligence accumulated from the millions of water tests we have performed over the years, positioning us as the most trusted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including through the Great Recession and the ongoing COVID-19 pandemic. We have a legacy of leadership and disruptive innovation. Since our founding in 1963, we have been the leading innovator in our category and have provided our consumers with the most advanced pool and spa care available. As we have scaled, we have leveraged our competitive advantages to strategically reinvest in our business and intellectual property to develop new value-added capabilities. Over the course of our history, we have pioneered complimentary in-store water testing, offered complimentary in-store equipment repair services, introduced the industry's first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us. 32
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Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the
performance of our business. The key measures we use under United States
generally accepted accounting principles ("GAAP") are sales, gross profit and
gross margin, selling, general, and administrative expenses ("SG&A"), and
operating income (loss). The key non-GAAP measures and other operating measures
we use are comparable sales, comparable sales growth, Adjusted EBITDA, Adjusted
net income (loss), and Adjusted earnings per share.
Sales
We offer a broad range of products that consists of regularly purchased, non-discretionary pool and spa maintenance items such as chemicals, equipment, cleaning accessories and parts, as well as installation and repair services for pool and spa equipment. Our offering of proprietary, owned, and third-party brands across diverse product categories drives sales growth by attracting new consumers and encouraging repeat visits from our existing consumers. Revenue from merchandise sales at retail locations is recognized at the point of sale, revenue from services is recognized when the services are rendered, and revenue from e-commerce merchandise sales is generally recognized upon shipment of the merchandise. Revenue is recorded net of related discounts and sales tax. Payment from retail customers is generally at the point of sale and payment terms for professional pool operator customers are based on our credit requirements and generally have terms of less than 60 days. When we receive payment from a consumer before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue or as a customer deposit until the sale or service is complete. Sales are impacted by product mix and availability, as well as promotional and competitive activities and the spending habits of our consumers. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets.
Comparable Sales and Comparable Sales Growth
We measure comparable sales growth as the increase or decrease in sales recorded by the comparable base in any reporting period, compared to sales recorded by the comparable base in the prior reporting period. The comparable base includes sales through our locations and through our e-commerce websites and third-party marketplaces. Comparable sales growth is a key measure used by management and our board of directors to assess our financial performance. We consider a new or acquired location comparable in the first full month after it has completed one year of sales. Closed locations become non-comparable during their last partial month of operation. Locations that are relocated are considered comparable at the time the relocation is complete. Comparable sales is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location build-outs, fixtures, and equipment, which we amortize over time as well as cash required for inventory. As ofOctober 1, 2022 , we operated 990 retail locations in 39 states acrossthe United States . We owned 27 locations and leased the remainder of our locations. Our initial lease terms are typically five years with options to renew for multiple successive five-year periods. We evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, our existing locations, availability and cost of real estate, and distribution and operating costs of our locations. We review performance of our locations on a regular basis and evaluate opportunities to strategically close locations to improve our profitability. Our limited investment costs in individual locations and our ability to transfer sales to our extensive network of remaining locations and e-commerce websites allows us to improve profitability as a result of any strategic closures.
Gross Profit and Gross Margin
Gross profit is equal to our sales less our cost of merchandise and services
sold. Cost of merchandise and services sold reflects the direct cost of
purchased merchandise, costs to package certain chemical products, including
direct materials and labor, costs to provide services, including labor and
materials, as well as distribution and occupancy costs. The direct cost of
purchased merchandise includes vendor rebates, which are generally treated as a
reduction of merchandise costs. We recognize such vendor rebates at the time the
obligations to purchase products or perform services have been completed, and
the related inventory has been sold. Distribution costs include warehousing and
transportation expenses, including costs associated with third-party fulfillment
centers used to ship merchandise to our e-commerce consumers. Occupancy costs
include the rent, common area maintenance, real estate taxes, and depreciation
and amortization costs of all retail locations. These costs are significant and
are expected to continue to increase proportionate to our growth.
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Gross margin is gross profit as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary. Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
Selling, General and Administrative Expenses
Our SG&A includes selling and operating expenses across our retail locations and digital platform, and our corporate-level general and administrative expenses. Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, supplies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and field support functions, equity-based compensation, marketing and advertising, insurance, utilities, occupancy costs related to our corporate office facilities, professional services, and depreciation and amortization for all assets, except those related to our retail locations and distribution operations, which are included in cost of merchandise and services sold. Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations but are expected to increase over time to support our growth and public company obligations. The components of our SG&A may not be comparable to the components of similar measures of other companies.
Operating Income (Loss)
Operating income (loss) is gross profit less SG&A. Operating income (loss) excludes interest expense, loss on debt extinguishment, income tax expense (benefit), and other (income) expenses, net. We use operating income (loss) as an indicator of the productivity of our business and our ability to manage expenses.
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest (including amortization
of debt issuance costs), taxes, depreciation and amortization, management fees,
equity-based compensation expense, loss on debt extinguishment, costs related to
equity offerings, strategic project costs, executive transition costs, loss
(gain) on disposition of assets, mark-to-market on interest rate cap and other
non-recurring, non-cash or discrete items. Adjusted EBITDA is a key measure used
by management and our board of directors to assess our financial performance.
Adjusted EBITDA is also frequently used by analysts, investors and other
interested parties to evaluate companies in our industry, when considered
alongside other GAAP measures. We use Adjusted EBITDA to supplement GAAP
measures of performance to evaluate the effectiveness of our business
strategies, to make budgeting decisions and to compare our performance against
that of other companies using similar measures.
Adjusted EBITDA is not a recognized measure of financial performance under GAAP
but is used by some investors to determine a company's ability to service or
incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all
companies, and accordingly, is not necessarily comparable to similarly titled
measures of other companies and may not be an appropriate measure for
performance relative to other companies. Adjusted EBITDA should not be construed
as an indicator of a company's operating performance in isolation from, or as a
substitute for, net income (loss), cash flows from operations or cash flow data,
all of which are prepared in accordance with GAAP. We have presented Adjusted
EBITDA solely as supplemental disclosure because we believe it allows for a more
complete analysis of results of operations. Adjusted EBITDA is not intended to
represent, and should not be considered more meaningful than, or as an
alternative to, measures of operating performance as determined in accordance
with GAAP. In the future, we may incur expenses or charges such as those added
back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should
not be construed as an inference that our future results will be unaffected by
these items.
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Adjusted Net Income (Loss) and Adjusted Earnings per Share
Adjusted net income (loss) and Adjusted earnings per share are additional key
measures used by management and our board of directors to assess our financial
performance. Adjusted net income (loss) and Adjusted earnings per share are also
frequently used by analysts, investors, and other interested parties to evaluate
companies in our industry, when considered alongside other GAAP measures.
Adjusted net income (loss) is defined as net income (loss) adjusted to exclude
management fees, equity-based compensation expense, loss on debt extinguishment,
costs related to equity offerings, strategic project costs, executive transition
costs, loss (gain) on disposition of assets, mark-to-market on interest rate
cap, and other non-recurring, non-cash or discrete items. Adjusted diluted
earnings per share is defined as Adjusted net income (loss) divided by the
diluted weighted average number of common shares outstanding.
Factors Affecting the Comparability of our Results of Operations
Our reported results have been affected by, among other events, the following
events, which must be understood in order to assess the comparability of our
period-to-period financial performance and condition.
Impact of Macroeconomic Events and Uncertainties
Our financial performance and condition may be impacted to varying extents from period to period by macroeconomic and geopolitical developments, including the ongoing COVID-19 pandemic, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation, and rising interest rates. The extent of the impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact, and any changes in consumer behaviors. While it is not possible to predict the likelihood, timing, or severity of future direct and indirect impacts of COVID-19 on our business, due to the non-discretionary nature of our products and services, our business has delivered strong growth and profitability thus far throughout the pandemic, despite restrictions on the operation of our locations and distribution facilities. Significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, could have a material impact on our sales and earnings.
Business Acquisitions
See Note 3-Business Combinations to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding our business acquisitions.
Incremental Public Company Expenses
As a newly public company we will incur significant expenses on an ongoing basis
that we did not incur as a private company. Those costs include additional
director compensation and director and officer liability insurance expenses, as
well as third-party and internal resources related to accounting, auditing,
Sarbanes-Oxley Act compliance, legal, and investor and public relations
expenses. These costs will generally be included in SG&A in our consolidated
statements of operations.
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Results of Operations
We derived our consolidated statements of operations for fiscal 2022, 2021, and
2020 from our consolidated financial statements. Our historical results are not
necessarily indicative of the results that may be expected in the future. The
following table summarizes key components of our results of operations for the
periods indicated, both in dollars and as a percentage of our sales (in
thousands, except per share amounts).
Year Ended
Statements of Operations data: October 1, 2022 October 2, 2021 October 3, 2020
Sales $ 1,562,120 $ 1,342,917 $ 1,112,229
Cost of merchandise and services sold 888,379 747,757 651,516
Gross profit 673,741 595,160 460,713
Selling, general and administrative expenses 434,987 386,075 314,338
Operating income 238,754 209,085 146,375
Other expense:
Interest expense 30,240 34,410 84,098
Loss on debt extinguishment - 9,169 -
Other expenses, net 397 2,377 1,089
Total other expense 30,637 45,956 85,187
Income before taxes 208,117 163,129 61,188
Income tax expense 49,088 36,495 2,627
Net income $ 159,029 $ 126,634 $ 58,561
Earnings per share
Basic $ 0.86 $ 0.68 $ 0.37
Diluted $ 0.85 $ 0.67 $ 0.37
Weighted average shares outstanding
Basic 184,347 185,412 156,500
Diluted 186,148 190,009 156,500
Percentage of Sales(1) (%) (%) (%)
Sales 100.0 100.0 100.0
Cost of merchandise and services sold 56.9 55.7 58.6
Gross margin 43.1 44.3 41.4
Selling, general and administrative expenses 27.8 28.7 28.3
Operating income 15.3 15.6 13.2
Other expense:
Interest expense 1.9 2.6 7.6
Loss on debt extinguishment - 0.7 -
Other expenses, net 0.1 0.2 0.1
Total other expense 2.0 3.4 7.7
Income before taxes 13.3 12.1 5.5
Income tax expense 3.1 2.7 0.2
Net income 10.2 9.4 5.3
Other Financial and Operations data:
Number of new and acquired locations, net 38 17 10
Number of locations open at end of period 990 952 936
Comparable sales growth(2) 10.6 % 21.5 % 18.0 %
Adjusted EBITDA(3) $ 292,276 $ 270,613 $ 182,770
Adjusted EBITDA as a percentage of sales(3) 18.7 % 20.2 % 16.4 %
Adjusted net income(3) $ 176,391 $ 161,478 $ 64,973
Adjusted diluted earnings per share $ 0.95 $ 0.85 $ 0.42
(1)
Components may not add to totals due to rounding.
(2)
See the section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Key Factors and Measures We Use to Evaluate
Our Business."
(3)
The tables below provide a reconciliation from our net income to Adjusted EBITDA
and net income to Adjusted net income for fiscal 2022, 2021, and 2020 (in
thousands).
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Year Ended
October 1, 2022 October 2, 2021 October 3, 2020
Net income $ 159,029 $ 126,634 $ 58,561
Interest expense 30,240 34,410 84,098
Income tax expense 49,088 36,495 2,627
Depreciation and amortization expense(1) 30,769 26,553 28,925
Management fees(2) - 382 4,900
Equity-based compensation expense(3) 11,922 25,621 1,785
Loss on debt extinguishment(4) - 9,169 -
Costs related to equity offerings(5) 550 10,444 -
Strategic project costs(6) 4,960 - -
Executive transition costs and other(7) 5,718 905 1,874
Adjusted EBITDA $ 292,276 $ 270,613 $ 182,770
Year Ended
October 1, 2022 October 2, 2021 October 3, 2020
Net income $ 159,029 $ 126,634 $ 58,561
Management fees(2) - 382 4,900
Equity-based compensation expense(3) 11,922 25,621 1,785
Loss on debt extinguishment(4) - 9,169 -
Costs related to equity offerings(5) 550 10,444 -
Strategic project costs(6) 4,960 - -
Executive transition costs and other(7) 5,718 905 1,874
Tax effects of these adjustments(8) (5,788 ) (11,677 ) (2,147 )
Adjusted net income $ 176,391 $ 161,478 $ 64,973
(1)Includes depreciation related to our distribution centers and locations, which is reported in cost of merchandise and services sold in our consolidated statements of operations.
(2)
Represents amounts paid or accrued in connection with our management services agreement, which was terminated upon the completion of our IPO inNovember 2020 and are reported in SG&A in our consolidated statements of operations. (3) Represents charges related to equity-based compensation and the related Company payroll tax expense, which are reported in SG&A in our consolidated statements of operations. (4) Represents non-cash expense due to the write-off of deferred financing costs related to the Term Loan modification and the repayment of our senior unsecured notes in fiscal 2021, which are reported in loss on debt extinguishment in our consolidated statements of operations. (5) Includes one-time payments of contractual amounts incurred in connection with our IPO that was completed inNovember 2020 , which are reported in SG&A, and costs incurred for follow on equity offerings, which are reported in other (income) expenses, net in our consolidated statements of operations. (6) Represents non-recurring costs, such as third-party consulting costs, which are not part of our ongoing operations and are incurred to execute differentiated, strategic projects, and are reported in SG&A in our consolidated statements of operations. (7) Includes executive transition costs, losses (gains) on disposition of fixed assets, merger and acquisition costs and other non-recurring, non-cash or discrete items as determined by management. Amounts are reported in SG&A and other (income) expenses, net in our consolidated statements of operations. (8) Represents the tax effect of the total adjustments based on our actual statutory tax rate. Amounts are reported in income tax expense in our consolidated statements of operations. 37
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Comparison of Fiscal 2022 and 2021
Sales
Sales increased to$1,562.1 million in fiscal 2022 from$1,342.9 million in fiscal 2021, an increase of$219.2 million or 16.3%. The increase was primarily driven by comparable sales growth of$143.1 million , or 10.6%, in the current fiscal year as well as non-comparable sales of$76.1 million , driven by acquisitions and new locations open for less than 52 weeks.
Gross Profit and Gross Margin
Gross profit increased to$673.7 million in fiscal 2022 from$595.2 million in fiscal 2021, an increase of$78.5 million or 13.2%. Gross margin decreased to 43.1% compared to 44.3% in fiscal 2021, a decrease of 120 basis points. The increase in gross profit was primarily due to increased sales. The decrease in gross margin was primarily due to shifts in business mix, decreased product margin related to promotions and higher product cost, partially offset by distribution and occupancy leverage.
Selling, General and Administrative Expenses
SG&A increased to$435.0 million in fiscal 2022 from$386.1 million in fiscal 2021, an increase of$48.9 million or 12.7%. This increase in SG&A was primarily related to a$57.0 million increase associated with higher sales, inflationary costs associated with payroll and digital marketing expenses and non-comparable SG&A associated with our acquisitions; a$5.0 million increase related to strategic project costs incurred during fiscal 2022; a$4.9 million increase associated with executive transition costs, losses (gains) on disposition of fixed assets, merger and acquisition costs and other non-recurring, non-cash or discrete items; and a$3.9 million increase associated with higher depreciation and amortization expense. These increases were offset by lower non-cash equity-based compensation expense of$13.7 million compared to fiscal 2021 and certain one-time payments of contractual amounts of$8.2 million made in fiscal 2021, both of which were primarily incurred in connection with our IPO.
Total Other Expense
Total other expenses decreased to$30.6 million in fiscal 2022 from$46.0 million in fiscal 2021, a decrease of$15.4 million . The decrease in other expenses was primarily related to a$9.2 million non-cash loss on debt extinguishment related to the refinancing of the Term Loan and repayment of our senior unsecured notes during fiscal 2021, a decrease in interest expense of$4.2 million in fiscal 2022 due to the repayment of our senior unsecured notes with the proceeds of our IPO and$2.0 million of follow-on offering costs incurred in fiscal 2021.
Income Taxes
Income tax expense increased to$49.1 million in fiscal 2022 from$36.5 million in fiscal 2021, an increase of$12.6 million . Our effective tax rate was 23.6% compared to 22.4% for fiscal 2022 and fiscal 2021, respectively, reflecting lower income tax benefits attributable to equity-based compensation awards and research and development credits.
Net Income and Earnings per Share
Net income increased to$159.0 million in fiscal 2022 from$126.6 million in fiscal 2021, an increase of$32.4 million . Diluted earnings per share increased to$0.85 in fiscal 2022 from$0.67 in fiscal 2021.
Adjusted net income increased to
Adjusted EBITDA
Adjusted EBITDA increased to
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Comparison of Fiscal 2021 and 2020
Impact of 53rd week
Fiscal 2020 included a 53rd week, which added approximately
Sales
Sales increased to$1,342.9 million in fiscal 2021 from$1,112.2 million in fiscal 2020, an increase of$230.7 million or 20.7%. The increase was primarily the result of an increase in comparable sales on a reported basis of 21.5% or$235.2 million , driven by an increase in consumer demand and elevated retail price inflation in the core sanitizer and equipment product categories. We believe that COVID-19 has accelerated secular trends in consumer behavior and has favorably impacted our sales. While the duration and effects of the ongoing COVID-19 pandemic are uncertain, we anticipate that the changes in consumer behavior will continue for the foreseeable future.
Gross Profit and Gross Margin
Gross profit increased to$595.2 million in fiscal 2021 from$460.7 million in fiscal 2020, an increase of$134.5 million or 29.2%. Gross margin increased to 44.3% compared to 41.4% in fiscal 2020, an increase of 290 basis points. The increase in gross profit was primarily due to increased sales and gross margin improvements. The increase in gross margin was primarily due to product margin improvements and occupancy leverage, partially offset by business mix.
Selling, General and Administrative Expenses
SG&A increased to$386.1 million in fiscal 2021 from$314.3 million in fiscal 2020, an increase of$71.8 million or 22.8%. The increase in SG&A was primarily due to$55.2 million attributable to the increase in overall sales and our continued investments to support Company growth,$23.8 million related to non-cash equity-based compensation charges for the conversion of performance-based equity units and other equity awards granted at the time of IPO, and$8.2 million of one-time contractual amounts incurred in connection with the IPO, partially offset by lower costs of$6.4 million associated with COVID-19, a reduction in sponsor management fees of$4.5 million due to the termination of our sponsor management agreement at the time of our IPO, lower physical location closure costs of$3.6 million related to the strategic consolidation of certain locations during the first quarter of fiscal 2020, and lower executive transition and other costs of$0.9 million .
Total Other Expense
Total other expense decreased to$46.0 million in fiscal 2021 from$85.2 million in fiscal 2020, a decrease of$39.2 million . This decrease was primarily due to lower interest expense of$49.7 million , due to a reduction in interest rates and the repayment of our senior unsecured notes with the proceeds of our IPO inNovember 2020 , partially offset by a$9.2 million non-cash loss on debt extinguishment related to the repayment of our senior unsecured notes and amendment to the Term Loan during fiscal 2021.
Income Taxes
Income tax expense increased to
Our effective tax rate was 22.4% in fiscal 2021 and reflects the reversal of a
valuation allowance for our interest limitation carryforward as a result of our
IPO and subsequent paydown of debt, as well as income tax benefits attributable
to equity-based compensation awards. Our effective tax rate was 4.3% in fiscal
2020, reflecting a decrease in the valuation allowance for our interest
limitation carryforward due to favorable provisions of the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act"), which increased the interest
limitation from 30% to 50% of adjusted taxable income and allowed for the
utilization of interest deduction carryforwards during fiscal 2020.
Net Income and Earnings per Share
Net income increased to
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Adjusted net income increased to
Adjusted EBITDA
Adjusted EBITDA increased to$270.6 million fiscal 2021 from$182.8 million in fiscal 2020, an increase of$87.8 million or 48.0%. This increase was due primarily to our increase in comparable sales, an improvement in gross margin, and cost leverage. Seasonality and Quarterly Fluctuations Our business is highly seasonal. Sales and earnings are highest during the third and fourth fiscal quarters, which include April through September, and represent the peak months of swimming pool use. In fiscal 2022, we generated approximately 75% of our sales and 95% of our Adjusted EBITDA in the third and fourth quarters of our fiscal year. Sales are substantially lower during our first and second fiscal quarters. We have a long track record of investing in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to new locations and other growth initiatives. While these investments drive performance during the primary selling season in our third and fourth fiscal quarters, they have a negative impact during our first and second fiscal quarters. We typically experience a build-up of inventory and accounts payable during the first and second fiscal quarters in anticipation of the peak swimming pool supply selling season. We negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March, and we pay for merchandise in April through July. The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other non-discretionary products as well as purchases of discretionary products and can drive increased purchases of installation and repair services. Unseasonably cool weather or significant amounts of rainfall during the peak sales season can reduce chemical consumption in pools and spas and decrease consumer purchases of our products and services. In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, therefore, our total sales and timing of our sales. We generally open new locations before our peak selling season begins and we close locations after our peak selling season ends. We expect that our quarterly results of operations will fluctuate depending on the timing and amount of sales contributed by new locations. Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and borrowing availability under our Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, debt service requirements, and repurchases of shares of our common stock with internally generated cash on hand and through our Revolving Credit Facility. Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled$112.3 million and$343.5 million as ofOctober 1, 2022 andOctober 2, 2021 , respectively. As ofOctober 1, 2022 andOctober 2, 2021 , we did not have any outstanding borrowings under our Revolving Credit Facility.
Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs, and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.
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Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, then we may need to obtain additional equity or debt financing. There can be no assurance that equity or debt financing will be available to us if we need it or, if available, whether the terms will be satisfactory to us. As ofOctober 1, 2022 , outstanding standby letters of credit totaled$10.0 million , and after considering borrowing base restrictions, we had$190.0 million of available borrowing capacity under the terms of the Revolving Credit Facility. As ofOctober 1, 2022 , we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements.
Summary of Cash Flows
A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands):
Year Ended
October 1, October 2,
2022 2021 October 3, 2020
Net cash provided by operating activities $ 66,644 $ 169,272 $ 102,138
Net cash used in investing activities (138,981 ) (35,355 ) (26,811 )
Net cash (used in) provided by financing
activities (158,868 ) 53,780 (10,425 )
Net (decrease) increase in cash and cash
equivalents $ (231,205 ) $ 187,697 $ 64,902
Cash Provided by Operating Activities
Net cash provided by operating activities decreased to$66.6 million in fiscal 2022 from$169.3 million in fiscal 2021, a decrease of$102.7 million . This decrease was primarily driven by changes in working capital related to business acquisitions and strategic investment in product inventories to meet heightened customer demand across product categories. Net cash provided by operating activities increased to$169.3 million in fiscal 2021 from$102.1 million in fiscal 2020, an increase of$67.2 million . This increase was primarily driven by the increase in net income related to our sales growth, partially offset by changes in working capital related to the strategic investment in product inventories to meet heightened customer demand across product categories.
Cash Used in Investing Activities
Net cash used in investing activities increased to$139.0 million in fiscal 2022 from$35.4 million in fiscal 2021, an increase of$103.6 million . This increase was primarily driven by higher investments for business acquisitions of$98.8 million and investments in property and equipment of$2.8 million , primarily related to new and existing retail locations and distribution centers, compared to fiscal 2021. Net cash used in investing activities increased to$35.4 million in fiscal 2021 from$26.8 million in fiscal 2020, an increase of$8.6 million . This increase was primarily driven by an increase in investments in information technology initiatives.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities in fiscal 2022 of$158.9 million was primarily related to the repurchase and retirement of common stock of$152.1 million and net repayment of debt of$8.1 million , partially offset by proceeds from option exercises of$1.4 million . Net cash provided by financing activities in fiscal 2021 of$53.8 million was primarily related to net proceeds raised during our IPO inNovember 2020 of$458.6 million , partially offset by a$396.1 million repayment of long-term debt. Net cash used in financing activities in fiscal 2020 of$10.4 million was related to the net paydown of long-term debt.
Share Repurchase Program
OnDecember 3, 2021 , the board of directors authorized a share repurchase program for up to an aggregate of$300 million of the Company's outstanding shares of common stock over a period of three years, expiringDecember 31, 2024 . As ofOctober 1, 2022 , approximately$148 million remained available for future purchases under our share repurchase program (see Note 16-Share Repurchase Program). 41
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Contractual Obligations and Other Commitments
The following table summarizes our contractual cash obligations as of October 1,
2022 (in thousands):
Payments Due By Period
Total 2023 2024 2025 2026 2027 Thereafter
Revolving Credit
Facility (1) $ - $ - $ - $ - $ - $ - $ -
Term Loan 797,850 8,100 6,075 10,125 8,100 8,100 757,350
Letters of credit 9,983 9,983 - - - - -
Purchase
commitments (2) 16,650 4,143 4,422 3,366
3,120 1,339 260 Operating lease obligations (3) 272,291 71,851 67,558 51,216 40,959 22,844 17,863 Total$ 1,096,774 $ 94,077 $ 78,055 $ 64,707 $ 52,179 $ 32,283 $ 775,473 (1) We are required to pay a commitment fee of 0.25% based on the unused portion of the Revolving Credit Facility. (2) Purchase obligations include all legally binding contracts and primarily relate to firm commitments for inventory purchases. Purchase orders that are not binding agreements are excluded from the table above.
(3)
Operating lease obligations relate to our locations, office, distribution, and
manufacturing facilities. We are obligated to make cash payments in connection
with various lease obligations and purchase commitments and all obligations
require cash payments to be made by us over varying periods of time. Certain
leases are renewable at our option typically for periods of five to more years
and are cancelable on short notice and others require payments upon early
termination.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
sales and expenses during the reported periods. The SEC has defined a company's
critical accounting policies as the ones that are most important to the
portrayal of a company's financial condition and results of operations, and
which require a company to make its most difficult and subjective judgements.
Based on this definition, we have identified the critical accounting policies
and judgements addressed below. We base these estimates on historical results
and various other assumptions we believe to be reasonable, all of which form the
basis for making estimates concerning the carrying values of assets and
liabilities that are not readily available from other sources. Actual results
may differ from these estimates.
Vendor Rebates
Many of our vendor arrangements provide for us to receive specified amounts of
consideration when we achieve various measures. These measures generally relate
to the volume level of purchases. We estimate the amount recorded, generally as
a reduction of the prices of the vendor's products and therefore a reduction of
inventory at the end of each period based on a detailed analysis of inventory
and of the facts and circumstances of various contractual agreements with
vendors. Once we sell the product we recognize such consideration as a reduction
of cost of merchandise and services sold in our consolidated statements of
operations. We do not believe there is a reasonable likelihood there will be a
material change in the future estimates or assumptions we use to calculate our
reduction of inventory.
Inventories
Inventories are stated at the lower of cost or market or net realizable value.
We value inventory using the weighted-average cost method. We evaluate inventory
for excess and obsolescence and record necessary reserves. We provide provisions
for losses related to inventories based on management's judgement regarding
historical purchase cost, selling price, margin, and current business trends. If
actual demand or market conditions are different than those projected by
management, future margins may be unfavorably or favorably affected by
adjustments to these estimates. When an inventory item is sold or disposed, the
associated reserve is released at that time. We do not believe there is a
reasonable likelihood that there will be a material change in the future
estimates or assumptions used to calculate our inventory reserve.
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Business Combinations
We account for business combinations using the acquisition method of accounting.
This method requires that the purchase price of the acquisition be allocated to
the assets acquired and liabilities assumed using the fair values determined by
management as of the acquisition date. The excess of the purchase price over the
amounts allocated to assets acquired and liabilities assumed is recorded as
goodwill.
The accounting for business combinations requires us to make estimates and
assumptions at the acquisition date with respect to the fair value of assets
acquired and liabilities assumed as well as the useful lives of those acquired
intangible assets. Critical estimates in valuing certain of the intangible
assets and goodwill we have acquired include but are not limited to; future
expected cash flows, historical and expected customer attribution rates and
royalty and discount rates. Unanticipated events and circumstances may occur
that may affect the accuracy or validity of such assumptions, estimates or
actual results.
In addition, the consideration for an acquisition may include future payments
that are contingent upon the occurrence of a particular event. We record a
contingent consideration at fair value on the acquisition date. We estimate the
fair values through valuation models that incorporate probability adjusted
assumptions related to the achievement of the milestones and the likelihood of
making related payments. The fair value is remeasured at the end of each period
and changes in fair value are recorded in within SG&A in the consolidated
statements of operations. Determining the fair value of the contingent
consideration requires management to make assumptions and judgements. We do not
believe there is a reasonable likelihood that there will be a material change in
the future estimates or assumptions used to calculate the values of our acquired
intangible assets contingent considerations liabilities.
Recent Accounting PronouncementsFor information regarding recent accounting pronouncements, see Note 2-Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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