Acquired |
Acquisition Date | | Net Sales Centers Acquired | |
Periods Excluded | Northeastern Swimming Pool Distributors, Inc. (1) | | September 2020 | | 3 | | September 2020 | Master Tile Network LLC (1) | | February 2020 | | 4 | | July - September 2020 | | | | | | | | | | | | | | |
Acquired
| |
Acquisition
Date
| | Net
Sales Centers
Acquired
| |
Periods
Excluded
| New Star Holdings Pty. Ltd. | | July 2017 | | 1 | | July - September 2017 | Lincoln Aquatics (1)
| | April 2017 | | 2 | | July - September 2017 |
| | (1)
| We acquired certain distribution assets of this company. | | | | | | | | | | | | |
(1)We acquired certain distribution assets of this company.
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 center count during the first nine months of 2017:2020:
| | | | | | December 31, 20162019 | 344373 |
| Acquired locations | 37 |
| New locationlocations | 13 |
| ClosedClosed/consolidated locations | (2(2) | ) | September 30, 20172020 | 346381 |
|
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Net sales | | $ | 1,139.2 | | | $ | 898.5 | | | $ | 240.7 | | | 27% |
| | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Net sales | | $ | 743.4 |
| | $ | 691.4 |
| | $ | 52.0 |
| | 8% |
Net sales and base business net sales increased 8%27% in the third quarter of 20172020 compared to the third quarter of 2016, with base business2019. Our sales up 6%benefited from continued elevated demand for the period. Severe weather events during the third quarter of this year, particularly Hurricanes Irma and Harvey, were the most disruptive impact to our sales growth. Sales in Texas largely recoveredresidential pool products, driven by home-centric trends influenced by the end of the quarter, but salesCOVID-19 pandemic, as working from home became routine and families created and enjoyed safe social and entertainment alternatives in Florida remain behind the growth levels experienced prior to Hurricane Irma. We estimate these recent weather events negatively impacted net sales by approximately $4.0 million. Our seasonal markets generated sales growth of 6% during the quarter.their own backyards.
The following factors positively impactedbenefited our sales growth (listed in order of estimated magnitude):
continued consumer investments in enhancing outdoor living spaces,•strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment, building materials and equipmentabove-ground pools and spas (see discussion below);
•increased demand for residential swimming pool maintenance supplies due to increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below); •market share gains;gains, including those in building materials (see discussion below); and pool and spa chemical sales, our largest product category at 14% of total net sales for the quarter, increased 2% over the third quarter of 2016 under less attractive weather conditions in 2017 and excluding the recent Lincoln Aquatics acquisition; and
•inflationary product cost increases (estimated at closeof approximately 1% to 1%)2%.
The following factors negatively impacted our sales growth (listed in order of estimated magnitude):
one less selling day in the third quarter of 2017 compared to the same period last year, affecting net sales growth approximately 1%; and
recent weather events (described above).
We believe that higher sales growth rates for certain product offerings, such as equipment, building materials and equipment,above-ground pools and spas evidence increased spending in traditionally discretionary areas, includingsuch as pool construction, and pool remodeling as well asand equipment upgrades. In the third quarter of 2017, the2020, sales growth rate for equipment, such aswhich includes swimming pool heaters, pumps, lights and filters, collectively, was similarincreased 36% compared to the 8% growth ratesame period last year. Equipment collectively represented approximately 28% of net sales for total netthe period. Sales of building materials, including sales from recently acquired Master Tile locations, grew 29% compared to the third quarter of 2016. This increase reflects both the ongoing recovery of replacement activity2019 and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, representrepresented approximately 10%11% of net sales forin the third quarter of 20172020. Sales of above-ground pools and grew by 9%spas increased 60% in the third quarter of 2020 compared to the third quarter of 2016.2019 and represented approximately 2% of net sales for the period.
Sales to customers who service large commercial installations and specialty retailers that sell swimming pool installations such as hotels, universities and community recreational facilitiessupplies are included in the appropriate existing product categories, and growth or decline in this area isthese areas are reflected in the numbers above. These salesSales to retail customers increased 28% in the third quarter of 2020 compared to the third quarter of 2019 and represented just over 4%approximately 14% of our consolidated net sales for the third quarter of 2017 and increased 12%2020. Sales to commercial customers declined 10% in the third quarter of 2020 compared to the third quarter of 2016, excluding2019, driven by COVID-19 related closures and the recent acquisition of Lincoln Aquatics. With Lincoln Aquatics,decline in both business and leisure travel. Sales to commercial sales representcustomers represented approximately 5%3% of our consolidated net sales and this acquisition furthers our efforts to increase not only our focus on the commercial market, but also the resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.
Gross Profit
| | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Gross profit | | $ | 216.6 |
| | $ | 199.6 |
| | $ | 17.0 |
| | 9% | Gross margin | | 29.1 | % | | 28.9 | % | | | | |
Gross margin for the third quarter of 20172020.
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Gross profit | | $ | 328.7 | | | $ | 257.9 | | | $ | 70.8 | | | 27% | Gross margin | | 28.9 | % | | 28.7 | % | | | | |
Gross margin increased approximately 20 basis points to 28.9% in the third quarter of 2020 compared to 28.7% in the third quarter of 2019, with increased purchase volumes driving improvements in supply chain management.
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Selling and administrative expenses | | $ | 180.5 | | | $ | 153.4 | | | $ | 27.1 | | | 18% | | | | | | | | | | Operating expenses as a % of net sales | | 15.8 | % | | 17.1 | % | | | | |
Operating expenses increased 18% in the third quarter of 2020 compared to the third quarter of 2016. This2019, reflecting an increase primarily reflects product mix and benefits from sourcing initiatives.
Operating Expenses
| | | | | | | | | | | | | | | | | | Three Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Operating expenses | | $ | 134.7 |
| | $ | 125.4 |
| | $ | 9.3 |
| | 7% | Operating expenses as a % of net sales | | 18.1 | % | | 18.1 | % | | | | |
Operating expenses increased 7%in performance-based compensation of $20.1 million in the third quarter of 2017 compared to the third quarter of 2016, with base business2020. Excluding performance-based compensation in both periods, operating expenses upincreased 5% compareddue to the same period last year. Increased growth-driven labor and freight expenses as well as higher performance-based and equity-based compensation costs comprised the majority of our operating expense growth. As a percentage of net sales, base business operating expenses declined to 17.9% for the third quarter versus 18.1% last year.greater facility-related costs.
Interest and Other Non-operatingNon-Operating Expenses, Net
Interest and other non-operating expenses, net increased $1.0for the third quarter of 2020 decreased $3.6 million compared to the third quarter of 2016, primarily due to higher2019. The decrease reflects lower average debt levels and lower average interest rates on our debt and an increase in borrowings.between periods. Our weighted average effective interest rate increaseddecreased to 2.7%1.9% for the third quarter of 20172020 from 2.0%3.4% for the third quarter of 20162019 on higherlower average outstanding debt of $535.5$331.5 million versus $426.7$568.3 million for the respective periods.
Income Taxes
Our effective income tax rate was 37.4%18.7% for the three months ended September 30, 2017 and 37.7%2020 compared to 19.8% for the three months ended September 30, 2016.2019. We recorded an $8.5 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2020 compared to a tax benefit of $4.5 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 24.5% for the third quarter of 2020 and 24.3% for the third quarter of 2019. Our third quarter effective income tax rate is typically lower compared to other quarters primarily due to the timing of our accounting for uncertain tax positions, including the expiration of statutes of limitations. The decline also reflects a $0.3 million tax benefit recorded in our provision for income taxes from the adoption of ASU 2016-09.
Net Income and Earnings Per Share
Net income attributableincreased 50% to Pool Corporation increased 10% to $48.8$119.1 million in the third quarter of 20172020 compared to the third quarter of 2016.2019. Earnings per diluted share increased 50% to $1.16 for$2.92 in the third quarter of 20172020 versus $1.03$1.95 per diluted share for the comparable period in 2016.2019 period. The adoption ofbenefit from ASU 2016-09 did not have an impact ourincreased diluted earnings per diluted share by $0.21 in the third quarter of 2017.2020 and $0.11 in the third quarter of 2019. Excluding tax benefits in both periods, earnings per diluted share increased 47% to $2.71 in the third quarter of 2020 compared to $1.84 in the third quarter of 2019.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019 The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | | Base Business | | Excluded | | Total | (in thousands) | | Nine Months Ended | | Nine Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | September 30, | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | Net sales | | $ | 3,078,463 | | | $ | 2,601,801 | | | $ | 18,899 | | | $ | 15,482 | | | $ | 3,097,362 | | | $ | 2,617,283 | | | | | | | | | | | | | | | Gross profit | | 885,002 | | | 759,858 | | | 6,805 | | | 3,017 | | | 891,807 | | | 762,875 | | Gross margin | | 28.7 | % | | 29.2 | % | | 36.0 | % | | 19.5 | % | | 28.8 | % | | 29.1 | % | | | | | | | | | | | | | | Operating expenses (1) | | 495,710 | | | 443,107 | | | 6,420 | | | 4,320 | | | 502,130 | | | 447,427 | | Expenses as a % of net sales | | 16.1 | % | | 17.0 | % | | 34.0 | % | | 27.9 | % | | 16.2 | % | | 17.1 | % | | | | | | | | | | | | | | Operating income (loss) (1) | | 389,292 | | | 316,751 | | | 385 | | | (1,303) | | | 389,677 | | | 315,448 | | Operating margin | | 12.6 | % | | 12.2 | % | | 2.0 | % | | (8.4) | % | | 12.6 | % | | 12.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | | Base Business | | Excluded | | Total | (in thousands) | | Nine Months Ended | | Nine Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | September 30, | | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | Net sales | | $ | 2,246,446 |
| | $ | 2,116,393 |
| | $ | 31,559 |
| | $ | 9,175 |
| | $ | 2,278,005 |
| | $ | 2,125,568 |
| | | | | | | | | | | | | | Gross profit | | 650,419 |
| | 610,454 |
| | 9,472 |
| | 2,856 |
| | 659,891 |
| | 613,310 |
| Gross margin | | 29.0 | % | | 28.8 | % | | 30.0 | % | | 31.1 | % | | 29.0 | % | | 28.9 | % | | | | | | | | | | | | | | Operating expenses | | 383,636 |
| | 365,287 |
| | 9,143 |
| | 1,907 |
| | 392,779 |
| | 367,194 |
| Expenses as a % of net sales | | 17.1 | % | | 17.3 | % | | 29.0 | % | | 20.8 | % | | 17.2 | % | | 17.3 | % | | | | | | | | | | | | | | Operating income | | 266,783 |
| | 245,167 |
| | 329 |
| | 949 |
| | 267,112 |
| | 246,116 |
| Operating margin | | 11.9 | % | | 11.6 | % | | 1.0 | % | | 10.3 | % | | 11.7 | % | | 11.6 | % |
(1)Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.
In our calculation of base business results, we have excluded the following acquisitions for the periods identified: | | | | | | | | | | | | | | | | | | | | |
Acquired |
Acquisition Date | | Net Sales Centers Acquired | |
Periods Excluded | Northeastern Swimming Pool Distributors, Inc. (1) | | September 2020 | | 3 | | September 2020 | Master Tile Network LLC (1) | | February 2020 | | 4 | | February - September 2020 | W.W. Adcock, Inc. (1) | | January 2019 | | 4 | | January - March 2020 and January - March 2019 | Turf & Garden, Inc. (1) | | November 2018 | | 4 | | January 2020 and January 2019 | | | | | | | | | | | | | | |
Acquired
| |
Acquisition
Date
| | Net
Sales Centers
Acquired
| |
Periods
Excluded
| New Star Holdings Pty. Ltd. | | July 2017 | | 1 | | July - September 2017 | Lincoln Aquatics (1)
| | April 2017 | | 2 | | May - September 2017 | Metro Irrigation Supply Company Ltd. (1)
| | April 2016 | | 8 | | January - June 2017 and
April - June 2016
| The Melton Corporation (1)
| | November 2015 | | 2 | | January 2017 and
January 2016
| Seaboard Industries, Inc. (1)
| | October 2015 | | 3 | | January 2017 and
January 2016
|
| | (1)
| We acquired certain distribution assets of each of these companies. |
(1)We acquired certain distribution assets of each of these companies.
For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2016,2019, please refer to the discussion under the heading Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 2016.2019.
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Net sales | | $ | 3,097.4 | | | $ | 2,617.3 | | | $ | 480.1 | | | 18% |
| | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Net sales | | $ | 2,278.0 |
| | $ | 2,125.6 |
| | $ | 152.4 |
| | 7% |
Net sales and base business net sales for the first nine months of 20172020 increased 7%18% compared to the same period last year,year. During the first quarter of 2020, sales benefited from earlier pool openings, as mild weather combined with muchschool closures drove greater early-season residential pool usage. As stay-at-home restrictions eased in late April through early May, families continued to search for safe, at-home leisure activities, resulting in broad sales gains across our product categories and geographies. In the third quarter of this growth resulting2020, our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the 6% improvementCOVID-19 pandemic. Sales were also favorably impacted approximately 1% by an additional selling day in base business sales.the first nine months of 2020.
The following factors contributed tobenefited our sales growth (listed in order of estimated magnitude):
continued improvement•strong demand for discretionary products, as evidenced by improvements in consumer discretionary expenditures, including market recovery in remodelingsales growth rates for product offerings such as equipment, building materials and replacement activityabove-ground pools and spas (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 growth, particularlygains, including those in building materials and commercial product categories;(see discussion below); pool and spa chemical sales, our largest product category at 13% of total net sales for the nine months ended September 30, 2017, increased 3% compared to the first nine months of 2016, excluding the recent Lincoln Aquatics acquisition; and
•inflationary (estimated at close to 1%) product cost increases.increases of approximately 1% to 2%.
We believe that sales growth rates for certain product offerings, such as equipment, building materials and equipment,above-ground pools and spas evidence increased spending in traditionally discretionary areas, includingsuch as pool construction, pool remodeling as well asand equipment upgrades. In the first nine months of 2017, the2020, sales growth rate for equipment, such aswhich includes swimming pool heaters, pumps, lights and filters, collectively, was similar to the 7% growth rate for total net salesincreased approximately 26% compared to the same period in 2016. This increase reflects both the ongoing recovery of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent approximately 11%last year. Equipment collectively represented 28% of net sales forin the first nine months of 2017 and2020. Sales of building materials, including sales from recently acquired Master Tile locations, grew by 12%18% compared to the first nine months of 2016.2019 and represented approximately 12% of net sales in the first nine months of 2020. Sales of above-ground pools and spas increased 53% in the first nine months of 2020 and represented approximately 2% of net sales in the first nine months of 2020.
Sales to customers who service large commercial installations such as hotels, universities and community recreational facilitiesspecialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth or decline in this area isthese areas are reflected in the numbers above. TheseIn the first nine months of 2020, sales to retail customers increased 22% and represented approximately 14% of our consolidated net sales. Sales to commercial customers declined 10% in the first nine months of 2020, driven by COVID-19 related closures and the decline in both business and leisure travel. Sales to commercial customers represented approximately 4% of our consolidated net sales forin the first nine months of 2017 and increased 12%2020.
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Gross profit | | $ | 891.8 | | | $ | 762.9 | | | $ | 128.9 | | | 17% | Gross margin | | 28.8 | % | | 29.1 | % | | | | |
Gross margin declined 30 basis points to 28.8% compared to 29.1% in the same period in 2016, excluding the recent acquisitionlast year, primarily due to sales of Lincoln Aquatics.
Gross Profit
| | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Gross profit | | $ | 659.9 |
| | $ | 613.3 |
| | $ | 46.6 |
| | 8% | Gross margin | | 29.0 | % | | 28.9 | % | | | | |
Grosslower margin, forbig-ticket items, such as in-ground and above-ground pools and pool equipment, which comprised a larger portion of our product mix in the nine months ended September 30, 2017 was in line with gross margin for the nine months ended September 30, 2016.
Operating Expenses
| | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2017 | | 2016 | | Change | Operating expenses | | $ | 392.8 |
| | $ | 367.2 |
| | $ | 25.6 |
| | 7% | Operating expenses as a % of net sales | | 17.2 | % | | 17.3 | % | | | | |
For2020 compared to the first nine months of 2017,2019.
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | September 30, | | | (in millions) | | 2020 | | 2019 | | Change | Selling and administrative expenses | | $ | 495.2 | | | $ | 447.4 | | | $ | 47.8 | | | 11% | Impairment of goodwill and other assets | | 6.9 | | | — | | | 6.9 | | | 100% | Operating expenses as a % of net sales | | 16.2 | % | | 17.1 | % | | | | |
Operating expenses for the nine months endedSeptember 30, 2020 increased 12% compared to the first nine months of 2019. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units. Excluding impairment charges, operating expenses were up 7% over the same period last year, with base business operating expenses up 5%. The11%, reflecting a $32.1 million increase in base business operating expenses was primarily dueperformance-based compensation, in addition to higher growth-driven labor and freight expenses as well asand greater employee-related health insurance costs, equity-based compensation, and technology spending as we continue to invest in our business. Operating expenses as a percentage of net sales was consistent for the first nine months of 2017 and 2016 and improved by 20 basis points on a base business basis.facility-related costs.
Interest and Other Non-operatingNon-Operating Expenses, Net
Interest and other non-operating expenses, net for the first nine months of 2017 increased $1.72020 decreased $9.2 million compared to the same period last year, primarily due to higheryear. The decrease reflects lower average debt levels and lower average interest rates on our debt and an increase in borrowings.between periods. Our weighted average effective interest rate increaseddecreased to 2.6%2.2% for the first nine months of 20172020 from 2.0%3.5% for the same period of 20162019 on higher average outstanding debt of $501.0$439.4 million versus $437.3$631.1 million for the respective periods.
Income Taxes
Our effective income tax rate was 35.2%19.2% for the nine months ended September 30, 20172020 compared to 38.2%18.0% for the nine months ended September 30, 2016. The decline2019. We recorded a $22.6 million, or $0.55 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2020compared to a $21.1 million, or $0.52 per diluted share, tax benefit in the same period of 2019. Excluding the benefits from ASU 2016-09, our effective income tax rate is primarily due towas 25.2% for the $7.7 million tax benefit recorded in our provisionnine months ended September 30, 2020 and 25.1% for income taxes, which reflects the impact of the adoption of ASU 2016-09.nine months ended September 30, 2019.
Net Income and Earnings Per Share
Net income increased 26% to $307.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Earnings per diluted share increased to $7.53 for the nine months ended September 30, 2020 versus $5.97 per diluted share for the nine months ended September 30, 2019. Adjusted net income for the first nine months of 2017, including a favorable $0.142020, excluding the $6.3 million, or $0.15 per diluted share, impact fromof non-cash impairments, net of tax, increased 29% to $313.9 million. Excluding the adoptionimpact of non-cash impairments, net of tax, and tax benefits from ASU 2016-09 in both periods, adjusted diluted EPS increased 31% to $3.89 per diluted share on Net income attributable to Pool Corporation of $166.0 million,$7.13 for the nine months ended September 30, 2020 compared to $3.39 per$5.45 for the nine months ended September 30, 2019. See the reconciliation of GAAP to non-GAAP measures below.
Reconciliation of Non-GAAP Financial Measures
Adjusted Income Statement Information We have included adjusted net income and adjusted diluted share on NetEPS, 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. We believe these measures should be considered in addition to, not as a substitute for, net income attributable to Pool Corporation of $146.3 millionand diluted EPS presented in accordance with GAAP, respectively, and in the comparable 2016 period.context of our other disclosures included within this Form 10-Q. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.
The table below presents a reconciliation of net income to adjusted net income.
| | | | | | | | (Unaudited) | Nine Months Ended | (in thousands) | September 30, | | 2020 | | | Net income | $ | 307,565 | | | | Impairment of goodwill and other assets | 6,944 | | | | Tax impact on impairment of long-term note (1) | (654) | | | | Adjusted net income | $ | 313,855 | | | | | | | | | | | |
(1)As described in our First Quarter 2020 Quarterly Report on Form 10-Q, our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.
The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.
| | | | | | | | | | | | (Unaudited) | Nine Months Ended | | September 30, | | 2020 | | 2019 | Diluted EPS | $ | 7.53 | | | $ | 5.97 | | After-tax non-cash impairment charges | 0.15 | | | — | | Adjusted diluted EPS excluding after-tax non-cash impairment charges | 7.68 | | | 5.97 | | | | | | Tax benefit | (0.55) | | | (0.52) | | | | | | Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit | $ | 7.13 | | | $ | 5.45 | | | | | | | | | |
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and irrigation and landscape maintenanceinstallations and installation.maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2016,2019, we generated approximately 63% of our net sales and 85%81% of our operating income in the second and third quarters of the year.
We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.
The following table presents certain unaudited quarterly data for the first, second and third quarters of 2017,2020, the four quarters of 20162019 and the fourth quarter of 2015.2018. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | | QUARTER | (in thousands) | | 2020 | | 2019 | | 2018 | | | Third | | Second | | First | | Fourth | | Third | | Second | | First | | Fourth | Statement of Income Data | | | | | | | | | | | | | | | | | Net sales | | $ | 1,139,229 | | | $ | 1,280,846 | | | $ | 677,288 | | | $ | 582,234 | | | $ | 898,500 | | | $ | 1,121,328 | | | $ | 597,456 | | | $ | 543,082 | | Gross profit | | 328,698 | | | 373,481 | | | 189,629 | | | 162,050 | | | 257,931 | | | 330,314 | | | 174,631 | | | 160,442 | | Operating income | | 148,233 | | | 205,857 | | | 35,588 | | | 25,798 | | | 104,540 | | | 172,523 | | | 38,386 | | | 25,970 | | Net income | | 119,098 | | | 157,555 | | | 30,912 | | | 18,024 | | | 79,525 | | | 131,390 | | | 32,637 | | | 16,811 | | | | | | | | | | | | | | | | | | | Balance Sheet Data | | | | | | | | | | | | | | | | | Total receivables, net | | $ | 366,412 | | | $ | 453,405 | | | $ | 345,915 | | | $ | 226,539 | | | $ | 307,798 | | | $ | 417,126 | | | $ | 313,127 | | | $ | 207,801 | | Product inventories, net | | 612,824 | | | 628,418 | | | 858,190 | | | 702,274 | | | 616,217 | | | 694,447 | | | 815,742 | | | 672,579 | | Accounts payable | | 268,412 | | | 346,272 | | | 517,620 | | | 261,963 | | | 214,309 | | | 342,335 | | | 472,487 | | | 237,835 | | Total debt | | 339,934 | | | 438,804 | | | 586,050 | | | 511,407 | | | 547,560 | | | 692,337 | | | 698,977 | | | 666,761 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | | QUARTER | (in thousands) | | 2017 | | 2016 | | 2015 | | | Third | | Second | | First | | Fourth | | Third | | Second | | First | | Fourth | Statement of Income Data | | | | | | | | | | | | | | | | | Net sales | | $ | 743,401 |
| | $ | 988,163 |
| | $ | 546,441 |
| | $ | 445,235 |
| | $ | 691,429 |
| | $ | 918,889 |
| | $ | 515,250 |
| | $ | 415,075 |
| Gross profit | | 216,606 |
| | 289,664 |
| | 153,621 |
| | 127,777 |
| | 199,551 |
| | 270,736 |
| | 143,023 |
| | 118,295 |
| Operating income | | 81,928 |
| | 154,186 |
| | 30,998 |
| | 9,743 |
| | 74,166 |
| | 142,420 |
| | 29,530 |
| | 5,979 |
| Net income | | 48,783 |
| | 94,620 |
| | 22,270 |
| | 2,572 |
| | 44,421 |
| | 85,247 |
| | 16,363 |
| | 2,579 |
| | | | | | | | | | | | | | | | | | Balance Sheet Data | | | | | | | | | | | | | | | | | Total receivables, net | | $ | 262,796 |
| | $ | 370,285 |
| | $ | 290,019 |
| | $ | 166,151 |
| | $ | 233,405 |
| | $ | 351,012 |
| | 283,758 |
| | $ | 156,756 |
| Product inventories, net | | 484,287 |
| | 542,805 |
| | 647,884 |
| | 486,116 |
| | 455,156 |
| | 493,254 |
| | 595,393 |
| | 474,275 |
| Accounts payable | | 209,062 |
| | 273,309 |
| | 465,928 |
| | 230,728 |
| | 199,922 |
| | 265,349 |
| | 438,705 |
| | 246,554 |
| Total debt | | 564,573 |
| | 553,480 |
| | 490,217 |
| | 438,042 |
| | 390,189 |
| | 500,606 |
| | 450,457 |
| | 328,045 |
|
We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the fourth quarter after the peak selling season ends.
Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects resulting from various weather conditions.
| | | | | | | | | Weather | | Possible Effects | Hot and dry | • | Increased purchases of chemicals and supplies for existing swimming pools
| | • | Increased purchases of above-ground pools and irrigation and lawn care products
| | | | Unseasonably cool weather or extraordinary amounts of rain | • | Fewer pool and irrigation and landscape installations | | • | Decreased purchases of chemicals and supplies | | • | Decreased purchases of impulse items such as above-ground pools and accessories
| | | | Unseasonably early warming trends in spring/late cooling trends in fall | • | A longer pool and landscape season, thus positively impacting our sales | (primarily in the northern half of the U.S. and Canada) | | | | | | Unseasonably late warming trends in spring/early cooling trends in fall | • | A shorter pool and landscape season, thus negatively impacting our sales | (primarily in the northern half of the U.S. and Canada) | | |
Weather Impacts on 20172020 and 20162019 Results
Severe stormsOverall, weather conditions in the third quarter of 2017,2020 were generally favorable, which benefited results. Much of the western United States experienced above-average temperatures, particularly Hurricanes Irma and Harvey, hindered our sales growth in Florida and Texas, although Texas largely recovered by the end of September. In the Central and Midwest, temperatures were normal for this time of year, contrastingCalifornia, which was also plagued with the most active wildfire year on record. Precipitation was below-average in most of the western half of the United States and normal to above-average temperaturesin the eastern half. Likewise, results in the third quarter of 2016. The West experienced record heat2019 were positively impacted by above-average temperatures and normal rainfall in the third quarter of 2017, similar to the above average heat in the same period last year.
Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter, while the weather impact overall for the quarter was fairly neutral. Temperatures andbelow-average precipitation throughout most areas other than those described above, were normal, with only Texas benefiting from drier weatherof the country.
Weather conditions in the second quarter of 2017 compared to2020 were varied across the above average rainfall experiencedcontiguous United States; however, results in the same periodsecond quarter of 2016.
Unseasonably2020 benefited from generally mild weather conditions. Much of the western United States benefited salesfrom warmer weather, while the southeastern United States experienced slightly below-average temperatures. Southern California and the southeastern United States, including Florida, experienced more precipitation than normal. In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.
In the first quarter of 2017. However, while2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States. These favorable weather trends early in the year normally have a seasonally larger impact, the comparison toconditions contrast from the first quarter of 2016 was especially tough given2019 when wetter and cooler-than-normal temperatures to begin the benefit of the warmer-than-normal weather across nearly all markets in the United States in the first quarter of 2016. For the first quarter of 2017, Texas and surrounding markets experienced record warm temperatures, which when coupled with below-average precipitation for that area, spurred higher sales growth. In two of the more seasonal regions where we operate, below-average temperatures in the North and above-average precipitation in the West negatively impacted our first quarter 2017year hindered sales growth.
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; acquisitions;•the quality of our receivables;
scheduled debt payments;•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 requirementsobligations and other general corporate purposes,initiatives, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.
We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, structure and returning moneycash to our shareholders.shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:
•capital expenditures primarily for maintenance and newgrowth of our sales center capital expenditures;structure, technology-related investments and fleet vehicles; •strategic acquisitions executed opportunistically; •payment of cash dividends as and when declared by our Board of Directors (Board); •repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and •repurchases of our common stock under our Board authorizedBoard-authorized share repurchase program.
For 2017, we project capitalCapital expenditures will be approximately 1.5%were 1.0% of net sales as we expandin 2019, 1.1% of net sales in 2018 and 1.4% of net sales in 2017. Our higher capital spending in 2017 related to expanding our facilities and purchasepurchasing delivery vehicles to address growth opportunities.growth. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. CapitalDue to the deferral of capital expenditures were 1.4%earlier in the year to address the COVID-19 pandemic, we expect capital expenditures in 2020 to approximate 65% of net sales in 2016, 1.0% of net sales in 20152019 capital expenditures and 0.8% of sales in 2014.range from $20.0 million to $25.0 million.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands): | | | | | | | | | | | | | | | | | Nine Months Ended | | | September 30, | | | 2020 | | 2019 | Operating activities | | $ | 388,914 | | | $ | 243,253 | | Investing activities | | (41,552) | | | (35,839) | | Financing activities | | (300,161) | | | (187,734) | |
| | | | | | | | | | | | Nine Months Ended | | | September 30, | | | 2017 | | 2016 | Operating activities | | $ | 112,020 |
| | $ | 143,170 |
| Investing activities | | (44,584 | ) | | (50,233 | ) | Financing activities | | (52,746 | ) | | (75,697 | ) |
Cash provided by operating activitiesoperations of $112.0$388.9 million decreased duringfor the first nine months of 20172020 increased $145.7 million compared to the first nine months of 2016 due to2019. The improvement in cash provided by operations primarily reflects an increase in net income, a combination of growth-related increasesdecline in inventoriesinventory balances between periods and receivables and the payment of our normal scheduled payment of our third quarter estimated taxes. These estimated payments for the third quarter of 2016 were deferred as allowed for areas affected by severe storms and floodingimprovements in Louisiana. working capital management.
Cash used in investing activities for the first nine months of 2017 decreased2020 increased compared to the first nine months of 2016. While2019 primarily due to the acquisitions of Master Tile Network LLC, which we made increased investmentscompleted in capital expenditures for vehicle additionsFebruary 2020, and Northeastern Swimming Pool Distributors, Inc., which we completed in the first nine months of 2017, ourSeptember 2020. The increase in cash used forin investing activities due to acquisitions was considerablypartially offset by lower in the current period.capital expenditures.
Cash used in financing activities decreasedwas $300.2 million for the first nine months of 20172020 compared to $187.7 million for the first nine months of 2016,2019, which reflects a $65.4$52.2 million increase in amounts provided by net borrowings, partially offset by a $23.7debt payments, additional share repurchases of $53.0 million and an increase in amounts used for share repurchases. Dividendsdividends paid to shareholders increased by $6.2 million in the first nine months of 2017 compared to the first nine months of 2016.$6.8 million.
Future Sources and Uses of Cash
Revolving Credit Facility On September 29, 2017, we amended and restated our existing seniorOur Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility (the Credit Facility) principally in the following ways:
extends the maturity date to September 29, 2022;
increases the borrowing capacity to $750.0 million from $465.0 million;
increasesand includes sublimits for the issuance of swingline loans;
decreases the pricingloans and standby letters of all loans; and
provides additional capacity under certain negative covenants related to indebtedness, liens, investments and dispositions of assets.
credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives. At September 30, 2017,2020, there was $415.3$40.9 million outstanding, a $4.2$4.8 million standby letter of credit outstanding and $330.5$704.3 million available for borrowing under the Credit Facility. We utilizepay 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 revolving borrowings under the Credit Facility. As of September 30, 2017, we have three interestFacility at a variable rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed ratesone month London Interbank Offered Rate (LIBOR), plus thean applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019. In July 2016 we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date at that time. This swap contract will convert the Credit Facility’s variable interest rate to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and terminates on November 20, 2020.
margin. The weighted average effective interest rate for the Credit Facility as of September 30, 20172020 was approximately 2.7%1.1%, excluding commitment fees. Term Facility Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. The Term Facility will be 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. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal payment, equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs. At September 30, 2020, there was $178.1 million outstanding under the Term Facility with a weighted average effective interest rate of 2.1%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.
Financial Covenants Financial covenants onof the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio.ratio, which are our most restrictive financial covenants. As of September 30, 2017,2020, the calculations of these two covenants are detailed below: •Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of September 30, 2017,2020, our average total leverage ratio equaled 1.601.01 (compared to 1.541.26 as of June 30, 2017)2020) and the TTM average total debt amount used in this calculation was $496.5$466.3 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 September 30, 2017,2020, our fixed charge ratio equaled 5.507.10 (compared to 5.526.27 as of June 30, 2017)2020) and TTM Rental Expense was $53.5$61.2 million.
The Credit Facility and the Term Facility also limitslimit the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s Net Income (as defined in the Credit Facility and the Term Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.
Under the Credit Facility and the 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 2.50 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 penalty payments, 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 FacilityFacility) offers us a lower cost form of financing, with a peak funding capacity of up to $220.0$295.0 million between May 1 and June 30,May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $65.0$120.0 million to $150.0$275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021.
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 partythird-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due. The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00. At September 30, 2017,2020, there was $142.3$110.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.0%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 September 30, 2017,2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million. Interest expense related to the notional amounts under this swap contract is based on the fixed rate plus the applicable margin on our variable rate borrowings. We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.
The following table provides details related to each of our forward-starting interest rate swap contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative | | Inception Date | | Effective Date | | Termination Date | | Notional Amount (in millions) | | Fixed Interest Rate | Forward-starting interest rate swap 1 | | May 7, 2019 | | November 20, 2020 | | September 29, 2022 | | $75.0 | | 2.0925% | Forward-starting interest rate swap 2 | | July 25, 2019 | | November 20, 2020 | | September 29, 2022 | | $75.0 | | 1.5500% | Forward-starting interest rate swap 3 | | February 5, 2020 | | February 26, 2021 | | February 28, 2025 | | $150.0 | | 1.3800% | Forward-starting interest rate swap 4 | | March 9, 2020 | | September 29, 2022 | | February 26, 2027 | | $150.0 | | 0.7400% | Forward-starting interest rate swap 5 | | March 9, 2020 | | February 28, 2025 | | February 26, 2027 | | $150.0 | | 0.8130% |
Compliance and Future Availability As of September 30, 2020, we believe 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 the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 20162019 Annual Report on Form 10-K.10-K and in Part I, Item 1 of this Form 10-Q. 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 October 26, 2017, $53.42020, $176.9 million of the current Board authorizedBoard-authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the creditCredit and receivables facilities.Receivables Facilities.
CRITICAL ACCOUNTING ESTIMATES We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as: •those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and •those for which changes in the estimateestimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.
Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 20162019 Annual Report on Form 10-K. See Allowance for Doubtful Accounts in Note 1 of Part I, Item 1 of this Form 10-Q for more information on our adoption of ASU 2016-13. We have not changed theseany other policies from those previously disclosed.
Recent Accounting Pronouncements In May 2014, theSee Note 1 of “Notes to Consolidated Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods beginning after December 15, 2017, which for us will beStatements,” included in the period beginning JanuaryPart I, Item 1 2018. We are continuing to perform our detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard.
Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products or services to our customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics. Since our individual sales transactions are very similar in nature, we anticipate applying the guidance to all transactions as a portfolio. We expect that the effects of applying this guidance to the portfolio would not differ materially from applying the guidance to individual performance obligations within that portfolio.
Our revenue recognition will be achieved upon delivery of products as there are no other promised services as part of our contracts with customers that are material in the context of the contract. Because our shipping and handling activities are performed before the customer obtains control of the goods, we do not consider these activities to be a promised service to the customer. Rather shipping and handling are activities to fulfill our promise to transfer the goods. Product warranties do not constitute a performance obligation for us, as products are warrantied directly by the manufacturer or the third party carrier.
To determine the amount of consideration to which we expect to be entitled in exchange for transferring promised goods, we have considered if variable consideration exists. We have reviewed our standard terms and conditions and our customary business practices to determine the transaction price. We have reviewed our pricing policies including marketing programs, coupons and free products for the purpose of determining whether we have any variable or non-cash consideration. We do not issue future-dated coupons or free product rebates. When we process manufacturer coupons, we record the customer sales price as revenue and receive reimbursement of the coupon value from the manufacturer. In addition, we reviewed our current accounting policies related to returns and price concessions for which no material changes in policy were noted. Volume rebates is a sales incentive program where we make a cash payment or apply credit to a customer account on a quarterly or annual basis, if the customer reaches a specified level of purchases. The volume rebates are accounted for as a reduction of the transaction price, and a liability is recorded until the related payment to the customer is made. We do not offer any volume discounts. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.
The majority of our sales transactions do not require any additional performance obligation after delivery, therefore we do not have multiple performance obligations for which we will have to allocate the transaction price. We do not offer customer loyalty programs.
We expect to recognize revenue when control of the product has been transferred to the customer upon delivery to the customer or the freight carrier, if delivered by a third party, as we believe our performance obligation will be satisfied at that point in time.
We expect to apply the guidance using the modified retrospective transition method. Based on our analysis performed to date, we do not expect the adoption of ASU 2014-09 will have a material impact on our financial position or results of operations, but we expect it will result in additional disclosures regarding our revenue recognition policies. We also do not expect the adoption will require material or significant changes to our internal controls over financial reporting. We have expanded our revenue recognition inquiries to additional departments and updated our questionnaires primarily to identify matters that would signal variable consideration implications under the new guidance. We are also in the process of drafting additional pricing policies to address potential revenue recognition implications.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheets as we will be recording a right-of-use asset and corresponding liability for our current operating leases. We are evaluating the effect that ASU 2016-02 will have on our results of operations and related disclosures. We are primarily focused on evaluating our internal controls over financial reporting, including information technology requirements, related to the adoption of this newForm 10-Q for discussion of recent accounting pronouncement.pronouncements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments, which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which may change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. Current guidance for these topics is principles-based, requiring judgment in application and creating diversity in practice. ASU 2016-15 will be effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted for all entities. We have not elected to early adopt this guidance. We are currently evaluating the effect that ASU 2016-15 will have on our financial position and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). ASU 2017-04 will be effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for annual and interim goodwill impairment tests beginning after January 1, 2017. We are currently evaluating the effect that ASU 2017-04 will have on our financial position, results of operations and related disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk There have been no material changes during the nine months ended September 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K. Currency Risk There have been no material changes during the nine months ended September 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K.
Item 4. Controls and Procedures The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2017,2020, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of September 30, 2017,2020, our disclosure controls and procedures were effective. We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Based on the most recent evaluation, we have concluded that no change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. While the outcome of any litigation is inherently unpredictable, based on currently available facts, we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors We are supplementing the risk factors previously disclosed in our Annual Report on Form 10-K with the below risk factor related to the COVID-19 pandemic. There have been no other material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K for10-K.
The outbreak of COVID-19 and associated responses could adversely impact our business and results of operations.
The COVID-19 pandemic has significantly impacted economic activity and markets throughout the year ended December 31, 2016.world. In response, governmental authorities have imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in temporary (and in some cases permanent) store closures, limitation of store hours, limitations on the number of people in stores or in warehouses, requirements on sanitation and social distancing practices and travel restrictions, among other effects. Our sales in March and April 2020 were adversely impacted by the COVID-19 pandemic. Additionally, in the first quarter of 2020, we recorded impairment charges of $6.9 million related to the pandemic. For additional information, see Goodwill and Intangibles Impairment in Note 1 of Part I, Item 1 of this Form 10-Q. Recently, there have been reports of increasing numbers of new COVID-19 cases in certain of our markets, including some of our larger markets, which could result in some governments extending or re-imposing restrictions. Accordingly, COVID-19 may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The table below summarizes the repurchases of our common stock in the third quarter of 2017:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (2) | July 1-31, 2020 | | 390 | | | $ | 313.96 | | | — | | | $ | 182,777,893 | | August 1-31, 2020 | | — | | | $ | — | | | — | | | $ | 182,777,893 | | September 1-30, 2020 | | 19,613 | | | $ | 299.17 | | | 19,613 | | | $ | 176,910,333 | | Total | | 20,003 | | | $ | 299.46 | | | 19,613 | | | |
(1)These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. In the third quarter of 2020, 390 shares were surrendered for this purpose. (2)As of October 26, 2020, $176.9 million of the authorized amount remained available under our current share repurchase program. Our Board of Directors may declare future dividends at their discretion, after considering various factors, including our earnings, capital requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions on dividends in our Credit Facility, Term Facility and Receivables Facility, see the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis in Part I, Item 2. We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.
| | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan (2) | | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (3) | July 1 - 31, 2017 | | 287,641 |
| | $ | 109.65 |
| | 287,641 |
| | $ | 159,133,234 |
| August 1 - 31, 2017 | | 871,775 |
| | $ | 107.25 |
| | 871,590 |
| | $ | 65,654,104 |
| September 1 - 30, 2017 | | 79,335 |
| | $ | 99.19 |
| | 79,335 |
| | $ | 57,785,144 |
| Total | | 1,238,751 |
| | $ | 107.29 |
| | 1,238,566 |
| | |
| | | These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were 185 shares surrendered for this purpose in the third quarter of 2017. |
| | (2)
| In May 2017, our Board authorized an additional $150.0 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions. |
| | (3)
| As of October 26, 2017, $53.4 million of the authorized amount remained available under our current share repurchase program.
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Item 6. Exhibits
Exhibits filed as part of this report are listed below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | No. | | Description | | FiledFiled/ Furnished with this
Form 10-Q
| | Form | | File No. | | Date Filed | | | Restated Certificate of Incorporation of the Company. | | | | 10-Q | | 000-26640 | | 8/9/2006 | | | Amended and Restated Composite Bylaws of the Company. | | | | 8-K | | 000-26640 | | 12/20/20122/8/2019 | | | Form of certificate representing shares of common stock of the Company. | | | | 8-K | | 000-26640 | | 5/19/2006 | | | Certification by Mark W. JoslinChief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | | | Certification by Manuel J. Perez de la MesaChief Executive Officer pursuant to Rule 13a-14(a) and 15d‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | | | Certification by Manuel J. Perez de la MesaChief Executive Officer and Mark W. JoslinChief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | X | | | | | | | 101.INS | + | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | 101.SCH | + | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | 101.CAL | + | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | 101.DEF | + | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | 101.LAB | + | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | 101.PRE | + | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | 104 | + | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | X | | | | | | |
+ Attached as Exhibit 101 to this report are the following items formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language): | | 1. | 1.Consolidated Statements of Income for the three and nine months ended September 30, 2017 and September 30, 2016; |
| | 2. | Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and September 30, 2016; |
| | 3. | Consolidated Balance Sheets at September 30, 2017, December 31, 2016 and September 30, 2016; |
| | 4. | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and |
September 30, 2016;2020 and | | 5. | Notes to Consolidated Financial Statements. |
September 30, 2019;
2.Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and September 30, 2019;
3.Consolidated Balance Sheets at September 30, 2020, December 31, 2019 and September 30, 2019;
4.Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019; 5.Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019; and
6.Notes to Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on October 31, 2017. | | | | | | | | | | | POOL CORPORATION | | | | | | | | | | | | | | By: | /s/ Mark W. Joslin | | | Mark W. Joslin | | | Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant |
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