Leslie's(LESL) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Leslie's, Inc.'s unaudited condensed consolidated financial statements, reflecting significant growth and a strengthened balance sheet post-IPO Condensed Consolidated Balance Sheets Total assets increased to $997.8 million, liabilities decreased, and stockholders' deficit improved to $(265.7) million as of July 3, 2021 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 3, 2021 | October 3, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $309,077 | $157,072 | | Inventories | $224,526 | $148,966 | | Total current assets | $610,066 | $372,133 | | Total assets | $997,794 | $746,438 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $354,119 | $258,196 | | Long-term debt, net | $787,731 | $1,179,550 | | Total liabilities | $1,263,520 | $1,573,437 | | Total stockholders' deficit | $(265,726) | $(826,999) | Condensed Consolidated Statements of Operations Sales for Q3 2021 grew 24.3% to $596.5 million, with net income increasing 65.2% to $118.8 million Key Performance Indicators (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Sales | $596,543 | $479,929 | $933,991 | $729,285 | | Gross Profit | $283,698 | $210,769 | $407,096 | $291,759 | | Operating Income | $166,434 | $111,604 | $141,969 | $76,826 | | Net Income | $118,802 | $71,934 | $82,093 | $15,921 | | Diluted EPS | $0.61 | $0.46 | $0.43 | $0.10 | Condensed Consolidated Statements of Stockholders' Deficit Stockholders' deficit improved from $(827.0) million to $(265.7) million, driven by IPO proceeds and net income - The company's stockholders' deficit decreased from $(827.0) million to $(265.7) million during the first nine months of fiscal 2021, primarily due to net proceeds from its IPO and net income earned during the period[20] Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $118.4 million, with a $152.0 million net increase in cash and cash equivalents Summary of Cash Flows (Nine Months Ended, in thousands) | Cash Flow Category | July 3, 2021 | June 27, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $118,376 | $85,921 | | Net cash used in investing activities | $(22,176) | $(21,664) | | Net cash provided by (used in) financing activities | $55,805 | $(6,255) | | Net increase in cash and cash equivalents | $152,005 | $58,002 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, the November 2020 IPO proceeds used for debt repayment, debt amendments, and the business's highly seasonal nature - In November 2020, the company completed an IPO of 30.0 million shares, raising net proceeds of $458.6 million. These proceeds were used to repay the entire $390.0 million of its Senior Unsecured Notes[27] - In March 2021, the company amended its term loan, resulting in an $810.0 million secured facility with a maturity date extended to March 2028 and decreased pricing by 75 basis points[50] - The company's business is highly seasonal, with the majority of sales and earnings occurring during the fiscal third and fourth quarters (April through September)[38] Management's Discussion and Analysis of Financial Condition and Results of Operations Strong performance driven by increased consumer demand and price inflation, with Q3 2021 sales up 24.3% and robust liquidity Financial Performance Summary (Q3 2021 vs Q3 2020) | Metric | Q3 2021 | Q3 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Sales | $596.5M | $479.9M | +24.3% | | Gross Profit | $283.7M | $210.8M | +34.6% | | Gross Margin | 47.6% | 43.9% | +364 bps | | Net Income | $118.8M | $71.9M | +65.2% | | Comparable Sales Growth | 23.9% | 19.4% | N/A | | Adjusted EBITDA | $179.3M | $119.8M | +49.7% | - Sales growth was driven by a 23.9% increase in comparable sales for the quarter, fueled by heightened consumer demand and retail price inflation in core product categories like sanitizers and equipment[111] - The company's liquidity position is robust, with cash and cash equivalents of $309.1 million and available borrowing capacity of $190.8 million under its ABL Credit Facility as of July 3, 2021[131][135] Reconciliation of Net Income to Adjusted EBITDA (Q3, in thousands) | Line Item | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net income | $118,802 | $71,934 | | Interest expense | 7,399 | 19,472 | | Income tax expense | 39,372 | 19,613 | | Depreciation and amortization | 6,347 | 6,374 | | Equity-based compensation | 6,480 | 597 | | Other adjustments | 863 | 1,810 | | Adjusted EBITDA | $179,346 | $119,800 | Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on $808.0 million variable-rate debt, with active management of inflation risk - The company is exposed to interest rate risk on its $808.0 million Term Loan. A 1% increase or decrease in the effective interest rate would impact annual interest cost by approximately $8.1 million[151] - The company's interest rate cap agreements, which previously hedged against rising rates on a notional amount of $750 million, expired in March 2021[151] - Management believes it can substantially mitigate the negative impacts of inflation through strong supplier relationships, negotiation, and strategic inventory investments[152] Controls and Procedures Disclosure controls and procedures were effective as of July 3, 2021, with no changes in internal control reported due to transition rules - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[153] - No changes in internal control over financial reporting were disclosed, consistent with the transition period rules for newly public companies[154] PART II. OTHER INFORMATION Legal Proceedings The company is subject to routine legal proceedings, not expected to materially impact financial position or operations - The company faces litigation and claims in the normal course of business but does not expect them to have a material adverse effect[157] Risk Factors A new risk factor identified is the potential stock price decline from future sales by existing stockholders post-lock-up expiration - A new risk factor has been identified concerning the potential for the stock price to decline if existing stockholders sell substantial amounts of common stock after lock-up agreements expire[159] - Key lock-up periods for various stockholder groups are set to expire on August 8, 2021, September 7, 2021, and October 18, 2022[159] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None[160] Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None[161] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[162] Other Information No other information to report for the period - None[163] Exhibits This section lists exhibits filed with Form 10-Q, including corporate documents, agreement amendments, and officer certifications - Exhibits filed include corporate governance documents, amendments to key agreements, and required officer certifications (Rule 13a-14(a) and 18 U.S.C. Section 1350)[164]