UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-26640


POOL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware		36-3943363
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

109 Northpark Boulevard,
Covington,	Louisiana	70433-5001
(Address of principal executive offices)		(Zip Code)

(985) 892-5521

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	POOL	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of July ~~26, 2021,~~25, 2022, there were ~~40,100,826~~39,590,630 shares of common stock outstanding.

POOL CORPORATION

Form 10-Q

For the Quarter Ended June 30, ~~2021~~2022

TABLE OF CONTENTS



			Page
PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements (Unaudited)

		Consolidated Statements of Income	1
		Consolidated Statements of Comprehensive Income	2
		Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Cash Flows	4
		Consolidated Statements of Changes in Stockholders’ Equity	5
		Notes to Consolidated Financial Statements	7

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		1314

	Item 3. Quantitative and Qualitative Disclosures about Market Risk		30

	Item 4. Controls and Procedures		30

PART II. OTHER INFORMATION

	Item 1. Legal Proceedings		31

	Item 1A. Risk Factors		31

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

	Item 6. Exhibits		32

SIGNATURE			33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POOL CORPORATION

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net sales $ 1,787,833 $ 1,280,846 $ 2,848,579 $ 1,958,134
Cost of sales 1,236,148 907,365 1,995,762 1,395,024
Gross profit 551,685 373,481 852,817 563,110
Selling and administrative expenses 213,099 167,624 385,200 314,721
Impairment of goodwill and other assets 0 0 0 6,944
Operating income 338,586 205,857 467,617 241,445
Interest and other non-operating expenses, net 1,963 2,643 4,545 7,432
Income before income taxes and equity earnings 336,623 203,214 463,072 234,013
Provision for income taxes 76,985 45,733 104,854 45,708
Equity earnings in unconsolidated investments, net 57 74 132 162
Net income $ 259,695 $ 157,555 $ 358,350 $ 188,467
Earnings per share:
Basic $ 6.47 $ 3.94 $ 8.92 $ 4.71
Diluted $ 6.37 $ 3.87 $ 8.78 $ 4.62
Weighted average shares outstanding:
Basic 40,125 39,973 40,169 40,049
Diluted 40,745 40,715 40,800 40,837
Cash dividends declared per common share $ 0.80 $ 0.58 $ 1.38 $ 1.13


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net sales	$	2,055,818	$	1,787,833	$	3,468,468	$	2,848,579
Cost of sales	1,389,014		1,236,148		2,354,474		1,995,762
Gross profit	666,804		551,685		1,113,994		852,817
Selling and administrative expenses	247,916		213,099		459,382		385,200

Operating income	418,888		338,586		654,612		467,617
Interest and other non-operating expenses, net	8,523		1,963		13,722		4,545
Income before income taxes and equity in earnings	410,365		336,623		640,890		463,072
Provision for income taxes	103,160		76,985		154,482		104,854
Equity in earnings of unconsolidated investments, net	78		57		136		132


Net income	$	307,283	$	259,695	$	486,544	$	358,350


Earnings per share attributable to common stockholders:
Basic	$	7.71	$	6.47	$	12.16	$	8.92
Diluted	$	7.63	$	6.37	$	12.03	$	8.78
Weighted average common shares outstanding:
Basic	39,660		40,125		39,795		40,169
Diluted	40,064		40,745		40,231		40,800

Cash dividends declared per common share	$	1.00	$	0.80	$	1.80	$	1.38

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income $ 259,695 $ 157,555 $ 358,350 $ 188,467
Other comprehensive income (loss):
Foreign currency translation gains (losses) 1,302 2,134 34 (3,296)
Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $719, $855, $(2,327), and $3,692 (2,157) (2,567) 6,980 (11,077)
Total other comprehensive income (loss) (855) (433) 7,014 (14,373)
Comprehensive income $ 258,840 $ 157,122 $ 365,364 $ 174,094


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	307,283	$	259,695	$	486,544	$	358,350
Other comprehensive (loss) income:
Foreign currency translation (losses) gains	(7,125)		1,302		(7,339)		34
Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $(1,631), $719, $(5,497), and $(2,327)	4,893		(2,157)		16,491		6,980
Total other comprehensive (loss) income	(2,232)		(855)		9,152		7,014
Comprehensive income	$	305,051	$	258,840	$	495,696	$	365,364

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)

June 30, June 30, December 31,
2021 2020
2020 (1)
(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 58,465 $ 44,185 $ 34,128
Receivables, net 210,318 144,842 122,252
Receivables pledged under receivables facility 375,248 308,563 166,948
Product inventories, net 894,654 628,418 780,989
Prepaid expenses and other current assets 18,716 11,139 17,610
Total current assets 1,557,401 1,137,147 1,121,927
Property and equipment, net 111,661 111,258 108,241
Goodwill 283,284 193,784 268,167
Other intangible assets, net 12,350 9,615 12,181
Equity interest investments 1,293 1,274 1,292
Operating lease assets 221,068 183,126 205,875
Other assets 26,978 18,593 21,987
Total assets $ 2,214,035 $ 1,654,797 $ 1,739,670
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 439,453 $ 346,272 $ 266,753
Accrued expenses and other current liabilities 184,437 139,661 143,694
Short-term borrowings and current portion of long-term debt 10,058 9,558 11,869
Current operating lease liabilities 63,786 56,625 60,933
Total current liabilities 697,734 552,116 483,249
Deferred income taxes 30,440 29,399 27,653
Long-term debt, net 413,058 429,246 404,149
Other long-term liabilities 38,079 29,008 38,261
Non-current operating lease liabilities 159,976 128,237 146,888
Total liabilities 1,339,287 1,168,006 1,100,200
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,131,570, 40,041,683 and 40,232,210 shares issued and
outstanding at June 30, 2021, June 30, 2020 and
December 31, 2020, respectively
40 40 40
Additional paid-in capital 535,046 503,271 519,579
Retained earnings 346,667 8,212 133,870
Accumulated other comprehensive loss (7,005) (24,732) (14,019)
Total stockholders’ equity 874,748 486,791 639,470
Total liabilities and stockholders’ equity $ 2,214,035 $ 1,654,797 $ 1,739,670


	June 30,		June 30,		December 31,
	2022		2021		2021
	(Unaudited)		(Unaudited)		(Audited)
Assets
Current assets:
Cash and cash equivalents	$	91,481	$	58,465	$	24,321
Receivables, net	239,639		210,318		155,259
Receivables pledged under receivables facility	516,946		375,248		221,312
Product inventories, net	1,579,101		894,654		1,339,100
Prepaid expenses and other current assets	43,317		18,716		29,093
Total current assets	2,470,484		1,557,401		1,769,085

Property and equipment, net	183,480		111,661		179,008
Goodwill	692,972		283,284		688,364
Other intangible assets, net	309,375		12,350		312,814
Equity interest investments	1,179		1,293		1,231
Operating lease assets	259,571		221,068		241,662
Other assets	45,044		26,978		37,967
Total assets	$	3,962,105	$	2,214,035	$	3,230,131

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	604,225	$	439,453	$	398,697
Accrued expenses and other current liabilities	195,529		184,437		264,877
Short-term borrowings and current portion of long-term debt	19,731		10,058		11,772
Current operating lease liabilities	71,550		63,786		69,070
Total current liabilities	891,035		697,734		744,416

Deferred income taxes	42,380		30,440		35,840
Long-term debt, net	1,575,667		413,058		1,171,578
Other long-term liabilities	32,109		38,079		31,545
Non-current operating lease liabilities	191,856		159,976		175,359
Total liabilities	2,733,047		1,339,287		2,158,738



Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 39,588,231, 40,131,570 and 40,192,901 shares issued and outstanding at June 30, 2022, June 30, 2021 and December 31, 2021, respectively	40		40		40
Additional paid-in capital	564,641		535,046		551,963
Retained earnings	662,709		346,667		526,874
Accumulated other comprehensive income (loss)	1,668		(7,005)		(7,484)
Total stockholders’ equity	1,229,058		874,748		1,071,393
Total liabilities and stockholders’ equity	$	3,962,105	$	2,214,035	$	3,230,131

~~(1)~~ ~~Derived from audited financial statements.~~

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Six Months Ended
June 30,
2021 2020
Operating activities
Net income $ 358,350 $ 188,467
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 13,884 13,993
Amortization 723 655
Share-based compensation 7,549 7,221
Equity earnings in unconsolidated investments, net (132) (162)
Impairment of goodwill and other assets 0 6,944
Other 4,812 3,171
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables (295,342) (229,506)
Product inventories (114,792) 75,199
Prepaid expenses and other assets (16,865) (677)
Accounts payable 170,368 84,190
Accrued expenses and other current liabilities 58,673 71,705
Net cash provided by operating activities 187,228 221,200
Investing activities
Acquisition of businesses, net of cash acquired (15,162) (13,711)
Purchases of property and equipment, net of sale proceeds (17,333) (13,031)
Net cash used in investing activities (32,495) (26,742)
Financing activities
Proceeds from revolving line of credit 549,008 318,155
Payments on revolving line of credit (505,636) (504,140)
Proceeds from asset-backed financing 260,000 191,700
Payments on asset-backed financing (290,000) (71,700)
Payments on term facility (4,625) (4,625)
Proceeds from short-term borrowings and current portion of long-term debt 4,466 10,731
Payments on short-term borrowings and current portion of long-term debt (6,277) (12,918)
Payments of deferred financing costs 0 (12)
Payments of deferred and contingent acquisition consideration (362) (281)
Proceeds from stock issued under share-based compensation plans 7,918 10,811
Payments of cash dividends (55,418) (45,312)
Purchases of treasury stock (90,135) (70,203)
Net cash used in financing activities (131,061) (177,794)
Effect of exchange rate changes on cash and cash equivalents 665 (1,062)
Change in cash and cash equivalents 24,337 15,602
Cash and cash equivalents at beginning of period 34,128 28,583
Cash and cash equivalents at end of period $ 58,465 $ 44,185


	Six Months Ended
	June 30,
	2022		2021
Operating activities
Net income	$	486,544	$	358,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	15,376		13,884
Amortization	4,358		723
Share-based compensation	7,571		7,549

Equity in earnings of unconsolidated investments, net	(136)		(132)

Other	7,185		4,812
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	(384,245)		(295,342)
Product inventories	(251,090)		(114,792)
Prepaid expenses and other assets	(20,573)		(16,865)
Accounts payable	208,017		170,368
Accrued expenses and other current liabilities	(44,276)		58,673
Net cash provided by operating activities	28,731		187,228

Investing activities
Acquisition of businesses, net of cash acquired	(7,629)		(15,162)
Purchases of property and equipment, net of sale proceeds	(19,802)		(17,333)



Net cash used in investing activities	(27,431)		(32,495)

Financing activities
Proceeds from revolving line of credit	1,122,186		549,008
Payments on revolving line of credit	(1,128,902)		(505,636)
Proceeds from term loan under credit facility	250,000		—
Proceeds from asset-backed financing	215,000		260,000
Payments on asset-backed financing	(50,000)		(290,000)
Payments on term facility	(4,625)		(4,625)
Proceeds from short-term borrowings and current portion of long-term debt	24,767		4,466
Payments on short-term borrowings and current portion of long-term debt	(16,808)		(6,277)

Payments of deferred and contingent acquisition consideration	(1,374)		(362)


Proceeds from stock issued under share-based compensation plans	5,107		7,918
Payments of cash dividends	(72,028)		(55,418)
Purchases of treasury stock	(278,680)		(90,135)
Net cash provided by (used in) financing activities	64,643		(131,061)
Effect of exchange rate changes on cash and cash equivalents	1,217		665
Change in cash and cash equivalents	67,160		24,337
Cash and cash equivalents at beginning of period	24,321		34,128
Cash and cash equivalents at end of period	$	91,481	$	58,465

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In thousands)


		Common Stock			Additional Paid-In		Retained		Accumulated Other Comprehensive					Common Stock			Additional Paid-In		Retained		Accumulated Other Comprehensive
		Shares	Amount		Capital		Earnings		Loss		Total			Shares	Amount		Capital		Earnings		(Loss) Income		Total
Balance at December 31, 2020		40,232	$	40	$	519,579	$	133,870	$	(14,019)	$	639,470
Balance at December 31, 2021													Balance at December 31, 2021	40,193	$	40	$	551,963	$	526,874	$	(7,484)	$	1,071,393
Net income	Net income	0	0		0		98,655		0		98,655		Net income	—	—		—		179,261		—		179,261
Foreign currency translation	Foreign currency translation	0	0		0		0		(1,268)		(1,268)		Foreign currency translation	—	—		—		—		(214)		(214)
Interest rate swaps, net of the change in taxes of $(3,046)		0	0		0		0		9,137		9,137
Interest rate swaps, net of the change in taxes of $(3,866)													Interest rate swaps, net of the change in taxes of $(3,866)	—	—		—		—		11,598		11,598
Repurchases of common stock, net of retirements													Repurchases of common stock, net of retirements	(138)	—		—		(62,420)		—		(62,420)
Share-based compensation													Share-based compensation	—	—		3,657		—		—		3,657

Issuance of stock under share-based compensation plans													Issuance of stock under share-based compensation plans	55	—		3,135		—		—		3,135
Declaration of cash dividends													Declaration of cash dividends	—	—		—		(32,132)		—		(32,132)
Balance at March 31, 2022													Balance at March 31, 2022	40,110	$	40	$	558,755	$	611,583	$	3,900	$	1,174,278
Net income													Net income	—	—		—		307,283		—		307,283
Foreign currency translation													Foreign currency translation	—	—		—		—		(7,125)		(7,125)
Interest rate swaps, net of the change in taxes of $(1,631)													Interest rate swaps, net of the change in taxes of $(1,631)	—	—		—		—		4,893		4,893
Repurchases of common stock, net of retirements	Repurchases of common stock, net of retirements	(215)	0		0		(71,516)		0		(71,516)		Repurchases of common stock, net of retirements	(547)	—		—		(216,261)		—		(216,261)
Share-based compensation	Share-based compensation	0	0		3,837		0		0		3,837		Share-based compensation	—	—		3,914		—		—		3,914
Issuance of stock under share-based compensation plans	Issuance of stock under share-based compensation plans	69	0		2,912		0		0		2,912		Issuance of stock under share-based compensation plans	25	—		1,972		—		—		1,972
Declaration of cash dividends	Declaration of cash dividends	0	0		0		(23,299)		0		(23,299)		Declaration of cash dividends	—	—		—		(39,896)		—		(39,896)
Balance at March 31, 2021		40,086	$	40	$	526,328	$	137,710	$	(6,150)	$	657,928
Net income		0	0		0		259,695		0		259,695
Foreign currency translation		0	0		0		0		1,302		1,302
Interest rate swaps, net of the change in taxes of $719		0	0		0		0		(2,157)		(2,157)
Repurchases of common stock, net of retirements		(45)	0		0		(18,619)		0		(18,619)
Share-based compensation		0	0		3,712		0		0		3,712
Issuance of stock under share-based compensation plans		90	0		5,006		0		0		5,006
Declaration of cash dividends		0	0		0		(32,119)		0		(32,119)
Balance at June 30, 2021		40,131	$	40	$	535,046	$	346,667	$	(7,005)	$	874,748
Balance at June 30, 2022													Balance at June 30, 2022	39,588	$	40	$	564,641	$	662,709	$	1,668	$	1,229,058


		Common Stock			Additional Paid-In		Retained Earnings		Accumulated Other Comprehensive					Common Stock			Additional Paid-In		Retained		Accumulated Other Comprehensive
		Shares	Amount		Capital		(Deficit)		Loss		Total			Shares	Amount		Capital		Earnings		Loss		Total
Balance at December 31, 2019		40,074	$	40	$	485,239	$	(64,740)	$	(10,359)	$	410,180
Balance at December 31, 2020													Balance at December 31, 2020	40,232	$	40	$	519,579	$	133,870	$	(14,019)	$	639,470
Net income	Net income	0	0		0		30,912		0		30,912		Net income	—	—		—		98,655		—		98,655
Foreign currency translation	Foreign currency translation	0	0		0		0		(5,430)		(5,430)		Foreign currency translation	—	—		—		—		(1,268)		(1,268)
Interest rate swaps, net of the change in taxes of $2,837		0	0		0		0		(8,510)		(8,510)
Repurchases of common stock, net of retirements		(362)	0		0		(66,619)		0		(66,619)
Share-based compensation		0	0		3,654		0		0		3,654

Issuance of stock under share-based compensation plans		219	0		6,358		0		0		6,358
Declaration of cash dividends		0	0		0		(22,147)		0		(22,147)
Balance at March 31, 2020		39,931	$	40	$	495,251	$	(122,594)	$	(24,299)	$	348,398
Net income		0	0		0		157,555		0		157,555
Foreign currency translation		0	0		0		0		2,134		2,134
Interest rate swaps, net of the change in taxes of $855		0	0		0		0		(2,567)		(2,567)
Interest rate swaps, net of the change in taxes of $(3,046)													Interest rate swaps, net of the change in taxes of $(3,046)	—	—		—		—		9,137		9,137
Repurchases of common stock, net of retirements	Repurchases of common stock, net of retirements	(19)	0		0		(3,584)		0		(3,584)		Repurchases of common stock, net of retirements	(215)	—		—		(71,516)		—		(71,516)
Share-based compensation	Share-based compensation	0	0		3,567		0		0		3,567		Share-based compensation	—	—		3,837		—		—		3,837
Issuance of stock under share-based compensation plans	Issuance of stock under share-based compensation plans	130	0		4,453		0		0		4,453		Issuance of stock under share-based compensation plans	69	—		2,912		—		—		2,912
Declaration of cash dividends	Declaration of cash dividends	0	0		0		(23,165)		0		(23,165)		Declaration of cash dividends	—	—		—		(23,299)		—		(23,299)
Balance at June 30, 2020		40,042	$	40	$	503,271	$	8,212	$	(24,732)	$	486,791
Balance at March 31, 2021													Balance at March 31, 2021	40,086	$	40	$	526,328	$	137,710	$	(6,150)	$	657,928
Net income													Net income	—	—		—		259,695		—		259,695
Foreign currency translation													Foreign currency translation	—	—		—		—		1,302		1,302
Interest rate swaps, net of the change in taxes of $719													Interest rate swaps, net of the change in taxes of $719	—	—		—		—		(2,157)		(2,157)
Repurchases of common stock, net of retirements													Repurchases of common stock, net of retirements	(45)	—		—		(18,619)		—		(18,619)
Share-based compensation													Share-based compensation	—	—		3,712		—		—		3,712
Issuance of stock under share-based compensation plans													Issuance of stock under share-based compensation plans	90	—		5,006		—		—		5,006
Declaration of cash dividends													Declaration of cash dividends	—	—		—		(32,119)		—		(32,119)
Balance at June 30, 2021													Balance at June 30, 2021	40,131	$	40	$	535,046	$	346,667	$	(7,005)	$	874,748

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Significant Accounting Policies

Pool Corporation (the Company, which may be referred to as we, us or our) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements.

The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated.

A description of our significant accounting policies is included in our ~~2020~~2021 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our ~~2020~~2021 Annual Report on Form 10-K. The results for our three and ~~six month~~six-month periods ended June 30, ~~2021~~2022, are not necessarily indicative of the expected results for our fiscal year ending December 31, ~~2021.~~2022.

~~Newly Adopted Accounting Pronouncements~~

~~On January 1, 2021, we adopted Accounting Standards Update (ASU) 2019-12,~~ ~~Income Taxes (Topic 740),Simplifying the Accounting for Income Taxes~~. This new standard simplified the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments were required to be applied on a prospective basis, while certain amendments were required to be applied on a retrospective or modified retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods.

~~Income~~0Income Taxes

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense on the Consolidated Statements of Income in the period in which stock options are exercised or restrictions on restricted stock awards lapse. We recorded excess tax benefits of $1.6 million in the second quarter of 2022 compared to $7.7 million in the second quarter of 2021 ~~compared to $6.2~~and $8.9 million in the ~~second quarter of 2020 and~~six months ended June 30, 2022, compared to $11.7 million in the six months ended June 30, ~~2021 compared to $14.2 million in the six months ended June 30, 2020.~~2021.

Retained Earnings

We account for the retirement of treasury shares as a reduction of Retained earnings. As of June 30, ~~2021,~~2022, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of ~~$1.6~~$1.9 billion and cumulative dividends of ~~$726.2~~$862.4 million.

Accumulated Other Comprehensive ~~Loss~~Income (Loss)

The table below presents the components of our Accumulated other comprehensive ~~loss~~income (loss) balance (in thousands):

June 30, December 31,
2021 2020 2020
Foreign currency translation adjustments $ (4,882) $ (13,423) $ (4,917)
Unrealized losses on interest rate swaps, net of tax (2,123) (11,309) (9,102)
Accumulated other comprehensive loss $ (7,005) $ (24,732) $ (14,019)


	June 30,				December 31,
	2022		2021		2021
Foreign currency translation adjustments	$	(16,919)	$	(4,882)	$	(9,580)
Unrealized gains (losses) on interest rate swaps, net of tax	18,587		(2,123)		2,096
Accumulated other comprehensive income (loss)	$	1,668	$	(7,005)	$	(7,484)

Recent Accounting Pronouncements Pending Adoption

The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods:


Standard	Description	Effective Date	Effect on Financial Statements and Other Significant Matters
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope	Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities.	The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.	Our exposure related to the expected cessation of LIBOR is limited to the interest expense and certain fees we incur on balances outstanding under our three major credit facilities. We ~~are currently evaluating~~do not expect that there will be a material impact to the ~~effect~~financial statements as a result of adopting these ~~standards will have on our financial position, results of operations and related disclosures.~~ASUs.

Note 2 – Earnings Per Share

We calculate basic and diluted earnings per share ~~(EPS) by dividing Net~~using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average ~~number of~~ common shares ~~outstanding. Diluted EPS reflects~~outstanding were 218 thousand in the ~~dilutive effects~~second quarter of ~~potentially dilutive securities, which include in-the-money outstanding stock options~~2022 and ~~shares to be purchased under our employee stock purchase plan. Using~~229 thousand for the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued.six months ended June 30, 2022.

~~Stock~~The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	307,283	$	259,695	$	486,544	$	358,350
Amounts allocated to participating securities	(1,680)		—		(2,762)		—
Net income attributable to common stockholders	$	305,603	$	259,695	$	483,782	$	358,350

Weighted average common shares outstanding:
Basic	39,660		40,125		39,795		40,169
Effect of dilutive securities:
Stock options and employee stock purchase plan	404		620		436		631
Diluted	40,064		40,745		40,231		40,800

Earnings per share attributable to common stockholders:
Basic	$	7.71	$	6.47	$	12.16	$	8.92
Diluted	$	7.63	$	6.37	$	12.03	$	8.78

Anti-dilutive stock options excluded from diluted earnings per share computations (1)	33		—		1		—

(1)Since these options ~~with~~have exercise prices that are higher than the average market prices of our common stock, ~~for~~including them in the ~~periods presented are excluded from the diluted EPS~~ calculation ~~because the~~would have an anti-dilutive effect ~~is anti-dilutive.~~on earnings per share.

~~The table below presents the computation of EPS, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except EPS):~~

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income $ 259,695 $ 157,555 $ 358,350 $ 188,467
Weighted average shares outstanding:
Basic 40,125 39,973 40,169 40,049
Effect of dilutive securities:
Stock options and employee stock purchase plan 620 742 631 788
Diluted 40,745 40,715 40,800 40,837
Earnings per share:
Basic $ 6.47 $ 3.94 $ 8.92 $ 4.71
Diluted $ 6.37 $ 3.87 $ 8.78 $ 4.62
Anti-dilutive stock options excluded from diluted earnings per share computations 0 0 0 0
Note 3 – Acquisitions

In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 1 location in West Virginia.

On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $788.7 million, net of cash acquired. The acquisition was funded with borrowings on our amended and restated revolving credit facility (the “Credit Facility”). Porpoise’s primary operations, Sun Wholesale Supply, Inc., a wholesale distributor of swimming pool and outdoor-living products, added 1 distribution location in Florida. It also services Pinch A Penny, Inc., a franchisor of independently owned and operated pool and outdoor living-related specialty retail stores.

We preliminarily recognized goodwill of $403.5 million, other intangible assets of $301.0 million and tangible assets of $84.2 million, which included $57.4 million of acquired land and buildings. For additional discussion of goodwill and other intangible assets, see Note 3 ~~– Acquisitions~~of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2021 Annual Report on Form 10-K. The final allocation of the fair value of the Porpoise acquisition, including the allocation of goodwill and intangible assets, is not complete but will be finalized within the allowable measurement period. We do not expect the future results of this acquisition to have a material impact on our financial position or results of operations.

In December 2021, we acquired the distribution assets of Wingate Supply, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding 1 location in Florida.

In June 2021, we acquired the distribution assets of Vak Pak Builders Supply, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 1 location in Florida.

In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 1 location in Tennessee.

~~In December 2020,~~Other than the Porpoise acquisition, we ~~acquired the distribution assets of TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding 9 locations in Florida and 1 in Georgia.~~

In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 3 locations in New Jersey, 3 locations in New York, 2 locations in Texas and 1 location in Florida.

In September 2020, we acquired the distribution assets of Northeastern Swimming Pool Distributors, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 2 locations in Ontario, Canada.

In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding 2 locations in Texas, 1 location in Nevada and 1 location in Oklahoma.

We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material.

~~These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.~~

Note 4 – Fair Value Measurements and Interest Rate Swaps

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:

Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs to the valuation methodology include:

•quoted prices for similar assets or liabilities in active markets;

•quoted prices for identical or similar assets or liabilities in inactive markets;

•inputs other than quoted prices that are observable for the asset or liability; or

•inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Recurring Fair Value Measurements

The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):

Fair Value at June 30,
2021 2020
Level 2
Unrealized gains on interest rate swaps $ 4,641 $ 0
Unrealized losses on interest rate swaps 7,425 15,033
Level 3
Contingent consideration liabilities $ 1,008 $ 442


	Fair Value at June 30,
	2022		2021
Level 2
Unrealized gains on interest rate swaps	$	24,828	$	4,641
Unrealized losses on interest rate swaps	—		7,425

Level 3
Contingent consideration liabilities	$	582	$	1,008

Interest Rate Swaps

For determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

We recognize any differences between the variable interest rate in effect and the fixed interest rates per our swap contracts as an adjustment to interest expense over the life of the swaps. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive ~~loss~~income (loss) on the Consolidated Balance Sheets.

We currently have three interest rate swap contracts in place, two of which became effective on November 20, 2020, and terminate on September 29, 2022, and a third that became effective on February 26, 2021, and terminates on February 28, 2025. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive ~~loss~~income (loss) on the Consolidated Balance Sheets.

The following table provides additional details related to these swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount
(in millions)

Fixed Interest Rate

Interest rate swap 1

May 7, 2019

November 20, 2020

September 29, 2022

$75.0

2.0925%

Interest rate swap 2

July 25, 2019

November 20, 2020

September 29, 2022

$75.0

1.5500%

Interest rate swap 3

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

For the interest rate swap contracts in effect at June 30, ~~2021,~~2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive ~~loss~~income (loss) on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the six-month period ended June 30, ~~2021.~~2022.

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. ~~Changes~~We record changes in the estimated fair value of these forward-starting interest rate swap contracts ~~are recorded~~ to Accumulated other comprehensive ~~loss~~income (loss) on the Consolidated Balance Sheets.

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

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

Forward-starting interest rate swap 2

March 9, 2020

February 28, 2025

February 26, 2027

$150.0

0.8130%

Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we ~~continue to be~~were in a net pay position.

Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.

Nonrecurring Fair Value Measurements

In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwill and intangible assets, are recorded at fair value on a nonrecurring basis as a result of impairment ~~charges.~~charges or business combinations. In the six months ended June 30, ~~2021,~~2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.

Other

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).

Note 5 – Debt

The table below presents the components of our debt (in thousands):


		June 30,					June 30,
		2021		2020			2022		2021
Variable rate debt	Variable rate debt					Variable rate debt
Short-term borrowings	Short-term borrowings	$	0	$	0	Short-term borrowings	$	10,152	$	—
Current portion of long-term debt:	Current portion of long-term debt:					Current portion of long-term debt:
Australian credit facility	Australian credit facility	10,058		9,558		Australian credit facility	9,579		10,058
Short-term borrowings and current portion of long-term debt	Short-term borrowings and current portion of long-term debt	10,058		9,558		Short-term borrowings and current portion of long-term debt	19,731		10,058

Long-term portion:	Long-term portion:					Long-term portion:
Revolving credit facility	Revolving credit facility	152,396		14,688		Revolving credit facility	566,210		152,396
Term loan under credit facility						Term loan under credit facility	500,000		—
Term facility	Term facility	171,125		180,375		Term facility	161,875		171,125
Receivables securitization facility	Receivables securitization facility	90,000		235,000		Receivables securitization facility	350,000		90,000
Less: financing costs, net	Less: financing costs, net	463		817		Less: financing costs, net	2,418		463
Long-term debt, net	Long-term debt, net	413,058		429,246		Long-term debt, net	1,575,667		413,058
Total debt	Total debt	$	423,116	$	438,804	Total debt	$	1,595,398	$	423,116

On January 4, 2022, we drew the $250.0 million incremental term loan available under our December 30, 2021 amendment to our Second Amended and Restated Credit Agreement (the “Credit Facility”) and used the net proceeds to reduce our revolving borrowings under the Credit Facility. At June 30, 2022, the $500.0 million of term loans available under the Credit Facility were fully drawn.

Our accounts receivable securitization facility (the ~~Receivables Facility)~~“Receivables Facility”) provides for the sale of certain of our receivables to a wholly owned subsidiary (the ~~Securitization Subsidiary)~~“Securitization Subsidiary”). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.

We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire outstanding balance as Long-term debt, net on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets.

1213

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the accompanying interim Consolidated Financial Statements and notes, the Consolidated Financial Statements and accompanying notes in our ~~2020~~2021 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our ~~2020~~2021 Annual Report on Form 10-K.

For a discussion of our base business calculations, see the Results of Operations section below.

Forward-Looking Statements

This report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our strategic, operational and capital allocation plans and objectives and industry, general economic and other forecasts of trends ~~future dividend payments and share repurchases,~~ and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to publicly update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.

No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the COVID-19 pandemic and the extent to which strong demand driven by home-centric trends will continue, accelerate or reverse; the sensitivity of our business to weather conditions; changes in the ~~economy and~~economy; consumer discretionary spending; the housing ~~market;~~market or inflation rates; our ability to maintain favorable relationships with suppliers and manufacturers; competition from other leisure product alternatives ~~and~~or mass merchants; our ability to continue to execute our growth strategies; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our ~~2020~~2021 Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

OVERVIEW

~~Impact~~Financial Results

Net sales increased 15% in the second quarter of 2022 to $2.1 billion compared to $1.8 billion in the second quarter of 2021. Base business sales grew 10%. Our results are indicative of healthy demand for our products as maintenance, replacement, refurbishment and construction activity remained strong. Net sales benefited approximately 10% to 11% from elevated price inflation, but were unfavorably impacted 1% from currency exchange rate fluctuations.

Gross profit increased 21% to $666.8 million in the second quarter of 2022 from $551.7 million in the same period of 2021. Base business gross profit improved 14% over the second quarter of 2021. Gross margin increased 150 basis points to 32.4% in the second quarter of 2022 compared to 30.9% in the second quarter of 2021, reflecting benefits from our supply chain initiatives, increased pricing and recent acquisitions. Base business gross margin increased 100 basis points.

Selling and administrative expenses (operating expenses) increased 16% to $247.9 million in the second quarter of 2022 compared to $213.1 million in the second quarter of 2021, including a 1% benefit from currency exchange rate fluctuations. As a percentage of net sales, operating expenses increased to 12.1% in the second quarter of 2022 compared to 11.9% in the same period of 2021. Our operating expenses have increased to support our business growth, including recent acquisitions.

Operating income in the second quarter of 2022 increased 24% to $418.9 million compared to $338.6 million in the same period of 2021. Operating margin was 20.4% in the second quarter of 2022 compared to 18.9% in the second quarter of 2021. Base business operating margin was 20.3%, up 130 basis points from the prior year period.

We recorded a $1.6 million, or $0.04 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended June 30, 2022, compared to a tax benefit of $7.7 million, or $0.19 per diluted share, realized in the same period of 2021.

Net income increased 18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of 2021. Earnings per diluted share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of 2021. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

On May 4, 2022, our Board of Directors (our Board) authorized an additional $196.2 million under our share repurchase program bringing its total authorization available to $600.0 million. Further, the Board announced a 25% increase over the previous quarterly dividend amount to $1.00 per share.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as this data is more readily available for analysis and represents the largest component of our operations.

COVID-19 Pandemic

We continue to monitor the ~~effects~~ongoing impact of the COVID-19 pandemic, ~~which began impacting our business and~~including the ~~global economy in the first quarter~~effects of ~~2020.~~

We are designated as an essential business in almost all of our markets. Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water. We also supply products used in the prevention of runoff, flood, fire and other natural disasters. These products are essential to the health and safetyrecent notable variants of the general public. In limited instances, we have had to close facilities as a result of government regulations, as well as COVID-19 testing results. The direct impact of any closures to date have not had a material impact on our operations.

Beginning in the middle of March 2020, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets. As stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated. Throughout the remainder of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, and these trends have continued in 2021 to date. While the short-term impact of this trend has had a positive impact on our business to date, it is unclear what the long-term impact will be. In addition, governmental restrictions in 2020 had a material impact on some of our customers, limiting their ability to operate in certain geographies for a short period of time. While these restrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our results.

Our balance sheet is strong with low leverage and sufficient access to additional capital. Supply disruptions have largely been limited to categories with the greatest demand (including heat-related equipment, chemicals, in-ground swimming pools and above-ground swimming pools) and have not been material to our business. Continued impacts from the COVID-19 pandemic, coupled with heightened demand, could adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied throughout the swimming pool season.

Given the uncertainties caused by the COVID-19 pandemic in 2020, we reduced capital expenditures and operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment. Capital expenditures in 2020 were $21.7 million or approximately 65% of 2019 capital expenditures. We expect capital expenditures in 2021 to approximate the historical average of 1.0% of net sales. Our expense growth in the first half of 2021 was partially offset by lower discretionary spending for advertising, meetings, travel and entertainment. However, we believe that discretionary spending in the latter part of 2021 will increase depending on vaccination progress, additional outbreaks and the extent individuals return to travel, particularly when comparing these considerations to the same period of 2020.

virus. The health, safety and security of our employees ~~has been,~~ and ~~remains, one of~~the communities in which we operate remain our highest priorities. We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC).priority. We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain ~~them.~~them where necessary.

Beginning in the second quarter of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces. While this trend has had a positive impact on our financial performance over the past couple of years, it is unclear what the long-term impact will be.

Our industry experienced supply chain constraints in 2021. In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service through the 2022 swimming pool season. While we were challenged by supply chain constraints through the first half of 2022, we have observed improvements in our supply chain dynamics beginning in the second quarter of 2022. These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.

We expect the impact of the pandemic on our business and financial results in ~~2021~~2022 will continue to vary by location and depend on numerous evolving factors that we are ~~not able~~unable to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the possible re-institution of governmental ~~actions that have been taken (or may be taken in~~restrictions on the ~~future) in response to the pandemic,~~activities of our customers, vendors or employees, the possibility of additional subsequent outbreaks, the sustainability of current home-centric trends and other changes in customer and supplier behavior in response to the pandemic.

Financial ~~Results~~

In the second quarter of 2021, net sales increased 40% to $1.79 billion compared to $1.28 billion in the second quarter of 2020, while base business sales grew 32%. Households continued to invest in outdoor living spaces, contributing to the robust demand for our products. We observed sales gains across nearly all product categories and geographies reflecting strong growth in maintenance, replacement, refurbishment and construction activity among our customers.

Gross profit increased 48% to $551.7 million in the second quarter of 2021 from $373.5 million in the same period of 2020. Base business gross profit improved 41% over the second quarter of 2020. Gross margin increased 170 basis points to 30.9% in the second quarter of 2021 compared to 29.2% in the second quarter of 2020 while base business gross margin increased 200 basis points, primarily driven by benefits from focused supply chain management initiatives.

Selling and administrative expenses (operating expenses) increased 27% to $213.1 million in the second quarter of 2021 compared to $167.6 million in the second quarter of 2020, while base business operating expenses grew 18%, primarily due to growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation expense. As a percentage of net sales, operating expenses decreased to 11.9% in the second quarter of 2021 compared to 13.1% in the same period of 2020 as we continue to exercise strong expense control.

Operating income in the second quarter of 2021 increased 64% to $338.6 million compared to $205.9 million in the same period in 2020 with acquisitions contributing $11.0 million to operating income in the second quarter of 2021. Operating margin was 18.9% in the second quarter of 2021 compared to 16.1% in the second quarter of 2020 while base business operating margin was 19.4%, up 330 basis points from the prior year period.

~~We recorded a $7.7 million, or $0.19 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting, in the quarter ended June 30, 2021, compared to a tax benefit of $6.2 million, or $0.15 per diluted share, realized in the same period of 2020.~~

Net income increased 65% to $259.7 million in the second quarter of 2021 compared to $157.6 million in the second quarter of 2020. Earnings per diluted share increased 65% to $6.37 in the second quarter of 2021 compared to $3.87 in the same period of 2020. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 66% to $6.18 in the second quarter of 2021 compared to $3.72 in the second quarter of 2020.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.

~~Financial~~ Position and Liquidity

As of June 30, ~~2021,~~2022, total net receivables, including pledged receivables, increased 29% compared to June 30, ~~2020,~~2021, primarily driven by our sales growth and recent ~~acquisitions and partially offset by improved collections.~~acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.2 days at June 30, 2022 and 25.8 days at June 30, ~~2021 and 28.5 days at June 30, 2020.~~2021. Our allowance for doubtful accounts balance was $6.5 million at June 30, 2022 and $5.4 million at June 30, ~~2021 and $6.0 million at June 30, 2020.~~2021.

Net inventory levels increased ~~42%~~77% compared to levels at June 30, ~~2020, reflecting~~2021. We increased our ~~supply chain efforts~~purchasing beginning in the second half of 2021 to ~~support organic business growth as well as~~improve our customer experience and minimize the impact of longer lead times from our vendors. Our inventory balance also reflects impacts from ~~recently acquired businesses. The~~inflation and recent acquisitions. Our inventory reserve was $20.9 million at June 30, 2022 and $15.2 million at June 30, ~~2021 and $10.8 million at June 30, 2020.~~2021. Our inventory turns, as calculated on a trailing four quarters basis, were 2.8 times at June 30, 2022 and 4.1 times at June 30, ~~2021 and 3.5~~2021. Our inventory turns have averaged 3.4 times ~~at June 30, 2020.~~

Accrued expenses and other current liabilities increased 32% compared to June 30, 2020, primarily reflecting growth-driven increases in accrued performance-based compensation and accrued tax payments.over the past five years.

Total debt outstanding at June 30, ~~2021~~2022 was ~~$423.1 million, down 4%~~$1.6 billion compared to ~~total debt~~$423.1 million at June 30, ~~2020,~~2021. Our debt balance has increased between periods as we ~~continue to utilize operating cash flows to pay down debt balances. We~~ have ~~used~~utilized debt proceeds ~~over the past 12 months primarily~~ to fund ~~business-driven~~investments in working capital, ~~growth,~~recent acquisitions ~~payments of cash dividends~~ and share repurchases.

Current Trends and Outlook

For a detailed discussion of trends through ~~2020,~~2021, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our ~~2020~~2021 Annual Report on Form 10-K.

~~Upon reporting~~

We are updating our ~~results through~~annual earnings guidance range to include the $0.04 tax benefit from ASU 2016-09 recognized in the second quarter of ~~2021, we increased our 2021~~2022. We expect 2022 diluted EPS ~~guidance range~~of $18.38 to ~~$13.75 to $14.25,~~$19.13, including the impact of year-to-date tax benefits of ~~$0.29.~~$0.22. Our previous ~~2021~~ earnings guidance range disclosed in our First Quarter ~~2021 Quarterly~~2022 Report on Form 10-Q was ~~$11.85~~$18.34 to $12.60, including first quarter tax benefits of $0.10. We increased our range based on exceeding our second quarter expectations, along with expected gross margin improvement in the latter half of 2021.$19.09. Our ~~2021~~ earnings guidance range assumes average weather ~~conditions and no adverse impacts from a resurgence of COVID-19 and related government responses.~~conditions.

We ~~project net~~expect sales growth for the full year in the range of 17% to 19% as previously disclosed in our 2021 ~~to exceed 25% based~~Annual Report on ~~expectations of continued elevated demand trends, a solid backlog of customer projects and inflationary benefits.~~Form 10-K. We ~~estimate that sales will be favorably impacted by~~project 2022 inflationary product cost increases of 5%approximately 10% to ~~6% (above our historical average of 1%~~11% (compared to ~~2%), of which we began~~7% to ~~realize~~8% in the second quarter of 2021, but expect a greater impact in the latter half of the year. Impacts from the COVID-19 pandemic, coupled with heightened demand, could adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied. However we remain encouraged by positive industry outlooks, the visibility attained on demand throughout the second quarter and our ability to project and maintain appropriate stock levels.2021).

~~Based~~Our gross margin trends depend on ~~our supply chain management efforts implemented during~~ the ~~second quarter~~amounts and timing of ~~2021, coupled with the current~~ inflationary ~~environment, we believe~~product cost increases, sales growth expectations and product mix. We expect a slight improvement in gross margin for the full year of ~~2021 has the potential to increase 100 basis points~~2022 compared to the full year of ~~2020, with greater improvement~~2021 given the impact of inflation in the ~~third quarter than~~first half of the year. Compared to 2021 periods, we project declines in the ~~fourth quarter given~~latter half of the ~~70 basis points improvement realized in the fourth quarter 2020.~~year.

We project our operating expense growth rate in 2022 will be less than our gross profit growth rate. We expect that our operating ~~expenses to~~expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in our digital transformation initiatives and expansion of our sales growth expectations, which we believe will enable us to achieve operating margin improvement of 250 to 300 basis points for the full year of 2021 compared to 2020. We believe that discretionary spending for advertising, meetings, travel and entertainment in the latter part of 2021 will increase depending on vaccination progress, additional outbreaks and the extent individuals return to travel.center network. We also expect ~~slightly higher performance-based compensation~~increased expenses from tight labor and real estate markets in 2022, which are heightened focus areas in our expense ~~for the full year 2021 than the full year of 2020 based on our results to date and our updated 2021 outlook.~~management.

We project that our annual effective tax rate ~~(excluding~~(without the benefit from ASU 2016-09) for ~~2021~~2022 will approximate ~~25.0%, which is consistent with 2020. Due to ASU 2016-09, we~~25.5%. We expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded ~~an $11.7~~a $8.9 million, or ~~$0.29~~$0.22 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, ~~2021.~~2022. We may recognize additional tax benefits related to stock option exercises in ~~2021~~2022 from grants that expire in ~~years after 2021.~~future years. We have not included any expected tax benefits in our guidance beyond what we have recognized as of June 30, ~~2021.~~2022.

~~We believe that cash provided by operations will approximate net income for the 2021 fiscal year.~~ We expect to continue to use cash to fund opportunistic share repurchases through the remainder of ~~2021. We also expect~~2022 and to use cash for the payment of cash dividends as and when declared by our ~~Board of Directors (the Board).~~Board.

The forward-looking statements in the foregoing section are based on current market conditions, speak only as of the filing date of this report, are based on several assumptions, and are subject to significant risks and uncertainties. See “Cautionary Statement for Forward-Looking Statements.”

RESULTS OF OPERATIONS

As of June 30, ~~2021,~~2022, we conducted operations through ~~408~~416 sales centers in North America, Europe and Australia. For the six months ended June 30, ~~2021,~~2022, approximately ~~93%~~95% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		June 30,				June 30,					June 30,				June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Net sales	Net sales	100.0	%	100.0	%	100.0	%	100.0	%	Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	Cost of sales	69.1		70.8		70.1		71.2		Cost of sales	67.6		69.1		67.9		70.1
Gross profit	Gross profit	30.9		29.2		29.9		28.8		Gross profit	32.4		30.9		32.1		29.9
Selling and administrative expenses	Selling and administrative expenses	11.9		13.1		13.5		16.1		Selling and administrative expenses	12.1		11.9		13.2		13.5
Impairment of goodwill and other assets		—		—		—		0.4

Operating income	Operating income	18.9		16.1		16.4		12.3		Operating income	20.4		18.9		18.9		16.4
Interest and other non-operating expenses, net	Interest and other non-operating expenses, net	0.1		0.2		0.2		0.4		Interest and other non-operating expenses, net	0.4		0.1		0.4		0.2
Income before income taxes and equity earnings		18.8	%	15.9	%	16.3	%	12.0	%
Income before income taxes and equity in earnings										Income before income taxes and equity in earnings	20.0	%	18.8	%	18.5	%	16.3	%

Note: Due to rounding, percentages presented in the table above may not add to Operating income or Income before income taxes and equity in earnings.

We have included the results of operations from acquisitions in ~~2021~~2022 and ~~2020~~2021 in our consolidated results since the acquisition dates.

Three Months Ended June 30, ~~2021~~2022 Compared to Three Months Ended June 30, ~~2020~~2021

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


(Unaudited)	(Unaudited)	Base Business						Excluded						Total						(Unaudited)	Base Business						Excluded						Total
(in thousands)	(in thousands)	Three Months Ended						Three Months Ended						Three Months Ended						(in thousands)	Three Months Ended						Three Months Ended						Three Months Ended
		June 30,						June 30,						June 30,							June 30,						June 30,						June 30,
		2021			2020			2021			2020			2021			2020				2022			2021			2022			2021			2022			2021
Net sales	Net sales	$	1,687,651		$	1,279,429		$	100,182		$	1,417		$	1,787,833		$	1,280,846		Net sales	$	1,963,974		$	1,782,894		$	91,844		$	4,939		$	2,055,818		$	1,787,833

Gross profit	Gross profit	524,378			372,848			27,307			633			551,685			373,481			Gross profit	625,843			550,509			40,961			1,176			666,804			551,685
Gross margin	Gross margin	31.1		%	29.1		%	27.3		%	44.7		%	30.9		%	29.2		%	Gross margin	31.9		%	30.9		%	44.6		%	23.8		%	32.4		%	30.9		%

Operating expenses	Operating expenses	196,764			167,131			16,335			493			213,099			167,624			Operating expenses	226,728			212,425			21,188			674			247,916			213,099
Expenses as a % of net sales	Expenses as a % of net sales	11.7		%	13.1		%	16.3		%	34.8		%	11.9		%	13.1		%	Expenses as a % of net sales	11.5		%	11.9		%	23.1		%	13.6		%	12.1		%	11.9		%

Operating income	Operating income	327,614			205,717			10,972			140			338,586			205,857			Operating income	399,115			338,084			19,773			502			418,888			338,586
Operating margin	Operating margin	19.4		%	16.1		%	11.0		%	9.9		%	18.9		%	16.1		%	Operating margin	20.3		%	19.0		%	21.5		%	10.2		%	20.4		%	18.9		%

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

Acquired

Acquisition

Date

Net
Sales Centers
Acquired

Periods

Excluded

Tri-State Pool Distributors

April 2022

May - June 2022

Porpoise Pool & Patio, Inc.

December 2021

April - June 2022

Wingate Supply, Inc.

December 2021

April - June 2022

Vak Pak Builders Supply, Inc.

June 2021

April - June 2022 and
June 2021

Pool Source, LLC

April 2021

April - June ~~2021~~

~~TWC Distributors, Inc.~~

~~December 2020~~

2022 and
April - June 2021

~~Jet Line Products, Inc.~~

~~October 2020~~

~~April - June 2021~~

~~Northeastern Swimming Pool Distributors, Inc.~~

~~September 2020~~

~~April - June 2021~~

~~Master Tile Network LLC~~

~~February 2020~~

April - May 2021 and
April - May 2020

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 six months of ~~2021:~~2022:


December 31, ~~2020~~2021			~~398~~410
Acquired locations			21
New locations			95
~~Consolidated location~~			~~(1)~~
June 30, ~~2021~~2022			~~408~~416

Net Sales


		Three Months Ended								Three Months Ended
		June 30,								June 30,
(in millions)	(in millions)	2021		2020		Change			(in millions)	2022		2021		Change
Net sales	Net sales	$	1,787.8	$	1,280.8	$	507.0	40%	Net sales	$	2,055.8	$	1,787.8	$	268.0	15%

Net sales increased ~~40%~~15% in the second quarter of ~~2021 compared to~~2022 on top of net sales of $1.8 billion and 40% growth in the second quarter of ~~2020, while base~~2021. Base business net sales in the second quarter of 2022 grew ~~32%~~10% over the same period. ~~Households continued to invest~~Our growth was largely driven by inflationary product cost increases and strong demand that boosted sales by 16% in ~~outdoor living spaces, contributing to~~our year-round markets. Volume growth was challenged by unfavorable weather conditions in our seasonal markets and constrained conditions in Europe. Heavy rainfall and cooler temperatures, particularly in the month of April, limited sales in certain of our markets although we observed improvement through the latter half of the second quarter. We believe that our results reflect the positive impact of growth in the installed base of pools, robust demand and heightened consumer interest in enhanced pool customizations, and we remain confident in our expectation of 17% to 19% sales growth for the full year of 2022. For more discussion of our ~~products. We observed sales gains across nearly all product categories reflecting strong growth in maintenance, replacement, refurbishment~~expectations for the remainder of the year, see “Current Trends and ~~construction activity among our customers.~~Outlook” above.

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

•inflationary product cost increases of approximately 10 to 11%;

•5% sales growth from recent acquisitions;

•favorable trends for our products including:

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

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

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

•◦~~8% sales growth from recent acquisitions;~~increased demand for residential swimming pool maintenance supplies, as the installed base of pools continues to increase; and

•~~inflationary product cost increases~~challenges presented in the second quarter including:

◦2% unfavorable impact from currency exchange rate fluctuations and customer early buys shifted into the first quarter of ~~approximately 4% to 6% (compared to~~2022;

◦cooler, wet weather conditions in our ~~historical average of 1% to 2%)~~seasonal markets (see discussion below); and

◦unfavorable weather conditions and macroeconomic impacts in Europe (see discussion below).

Higher sales ~~growth rates~~ for certain product offerings, such as equipment and building materials, ~~reflect increased spending~~indicate continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the second quarter of ~~2021,~~2022, sales ~~for~~of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased ~~35%~~7% compared to the same period last year, and collectively represented approximately ~~27%~~26% of net sales for the period. Equipment growth in the quarter was limited by supply chain constraints and customer early buys shifted into the first quarter of 2022. Sales of building materials grew ~~33%~~22% compared to the second quarter of ~~2020~~2021 and represented approximately ~~11%~~13% of net sales in the second quarter of 2022. Sales of chemicals, representing 12% of total net sales, increased 25% compared to the second quarter of 2021. The increase in chemical sales was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to ~~customers who service large commercial installations and~~ specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth ~~or decline~~ in these areas ~~are~~is reflected in the ~~numbers~~discussion above. Sales to retail customers increased ~~20%~~7% in the second quarter of ~~2021~~2022 compared to the second quarter of ~~2020~~2021 and represented approximately ~~14%~~13% of our net sales for the second quarter of ~~2021.~~2022. Certain of our retail customers were adversely impacted by unfavorable weather conditions in the quarter, hindering sales growth. Sales to commercial customers increased ~~45%~~23% in the second quarter of ~~2021~~2022 compared to the second quarter of ~~2020, as business~~2021 and ~~leisure travel gained momentum in 2021 following COVID-19 related closures in 2020. Sales to commercial customers~~ represented approximately 3% of our net sales for the second quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 50% of our total base business net sales in the second quarter of 2022, increased 9% compared to the second quarter of 2021. Comparatively, net sales in our year-round markets, representing 45% of our total base business net sales in the second quarter of 2022, increased 16% compared to the second quarter of 2021.

Net sales in Europe, representing 5% of our total net sales in the second quarter of 2022, declined 8% in local currency compared to 31% growth in the second quarter of 2021. While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in volume growth driven by macroeconomic uncertainty and poor weather.

Gross Profit


		Three Months Ended										Three Months Ended
		June 30,										June 30,
(in millions)	(in millions)	2021			2020			Change			(in millions)	2022			2021			Change
Gross profit	Gross profit	$	551.7		$	373.5		$	178.2	48%	Gross profit	$	666.8		$	551.7		$	115.1	21%
Gross margin	Gross margin	30.9		%	29.2		%				Gross margin	32.4		%	30.9		%

Gross margin increased ~~170~~150 basis points to 32.4% in the second quarter of 2022 compared to 30.9% in the second quarter of 2021, ~~compared to 29.2%~~reflecting benefits from our supply chain initiatives, increased pricing and recent acquisitions. Base business gross margin increased 100 basis points.

Operating Expenses


	Three Months Ended
	June 30,
(in millions)	2022			2021			Change
Selling and administrative expenses	$	247.9		$	213.1		$	34.8	16%

Operating expenses as a % of net sales	12.1		%	11.9		%

Operating expenses increased 16% in the second quarter of 2020. Gross margin was favorably impacted by benefits from focused supply chain management initiatives during this inflationary environment. With our increased purchase volumes, improvements in rates earned under our vendor programs also benefited our gross margin2022 compared to the second quarter of ~~last year. Lastly, we realized some gross margin~~2021, including a 1% benefit from product and customer mix changes in the second quarter of 2021. In the second quarter of 2020, a larger portion of lower margin, bigger ticket items comprised our product mix, along with a comparatively larger contribution from internet retailers to our customer mix at the onset of the pandemic.

~~Operating Expenses~~

Three Months Ended
June 30,
(in millions) 2021 2020 Change
Selling and administrative expenses $ 213.1 $ 167.6 $ 45.5 27%
Operating expenses as a % of net sales 11.9 % 13.1 %

Operating expenses increased 27% in the second quarter of 2021 compared to the second quarter of 2020, while base business operating expenses grew 18%. The increase primarily relates to growth-driven labor, facility and freight costs along with increased investments in technology and higher performance-based compensation expense.currency exchange rate fluctuations. As a percentage of net sales, operating expenses ~~decreased~~increased to ~~11.9%~~12.1% in the second quarter of ~~2021~~2022 compared to ~~13.1%~~11.9% in the same period of ~~2020~~2021. Our operating expenses have increased to support our business growth, including recent acquisitions. Employee-related expenses increased as we ~~continue~~expand our workforce and reward employees through performance-based compensation. Other incremental operating expense increases related to ~~leverage~~growth-driven facility and freight costs, and investments in our ~~network.~~digital transformation initiatives.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the second quarter of ~~2021 decreased $0.7~~2022 increased $6.6 million compared to the second quarter of ~~2020.~~2021, primarily due to higher average debt levels between periods. Our average outstanding debt was $1.6 billion in the second quarter of 2022 versus $376.8 million for the second quarter of 2021. Our weighted average effective interest rate ~~increased~~decreased to ~~2.7% for the second quarter of 2021~~2.0% from ~~1.8% for the second quarter of 2020 on lower average outstanding debt of $376.8 million versus $493.4 million~~2.7% for the respective periods.

Income Taxes

Our effective income tax rate was 25.1% for the three months ended June 30, 2022 compared to 22.9% for the three months ended June 30, ~~2021 compared to 22.5% for the three months ended June 30, 2020.~~2021. We recorded a ~~$7.7~~$1.6 million tax benefit from ASU 2016-09 in the quarter ended June 30, ~~2021~~2022 compared to a tax benefit of ~~$6.2~~$7.7 million realized in the same period last year. Without the ~~benefits~~benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5% for the second quarter of 2022 and 25.2% for the second quarter of ~~2021 and 25.6% for the second quarter of 2020.~~2021.

Net Income and Earnings Per Share

Net income increased ~~65%~~18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of ~~2021 compared~~ 2021. Earnings per diluted share increased 20%to ~~$157.6 million~~$7.63 in the second quarter of ~~2020. Earnings per diluted share increased 65%~~2022 compared to $6.37 ~~in the second quarter of 2021 compared to $3.87~~ in the same period of ~~2020.~~2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased ~~66%~~23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of ~~2021 compared~~2021. See the reconciliation of GAAP to ~~$3.72 in the second quarter of 2020.~~non-GAAP measures below.

Six Months Ended June 30, ~~2021~~2022 Compared to Six Months Ended June 30, ~~2020~~2021

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited) Base Business Excluded Total
(in thousands) Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
2021 2020 2021 2020 2021 2020
Net sales $ 2,703,285 $ 1,954,323 $ 145,294 $ 3,811 $ 2,848,579 $ 1,958,134
Gross profit 814,490 561,354 38,327 1,756 852,817 563,110
Gross margin 30.1 % 28.7 % 26.4 % 46.1 % 29.9 % 28.8 %
Operating expenses (1)
357,852 320,206 27,348 1,459 385,200 321,665
Expenses as a % of net sales 13.2 % 16.4 % 18.8 % 38.3 % 13.5 % 16.4 %
Operating income (1)
456,638 241,148 10,979 297 467,617 241,445
Operating margin 16.9 % 12.3 % 7.6 % 7.8 % 16.4 % 12.3 %

~~(1)Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.~~


(Unaudited)	Base Business						Excluded						Total
(in thousands)	Six Months Ended						Six Months Ended						Six Months Ended
	June 30,						June 30,						June 30,

	2022			2021			2022			2021			2022			2021
Net sales	$	3,292,100		$	2,840,676		$	176,368		$	7,903		$	3,468,468		$	2,848,579

Gross profit	1,039,122			850,948			74,872			1,869			1,113,994			852,817
Gross margin	31.6		%	30.0		%	42.5		%	23.6		%	32.1		%	29.9		%

Operating expenses	420,655			383,710			38,727			1,490			459,382			385,200
Expenses as a % of net sales	12.8		%	13.5		%	22.0		%	18.9		%	13.2		%	13.5		%

Operating income	618,467			467,238			36,145			379			654,612			467,617
Operating margin	18.8		%	16.4		%	20.5		%	4.8		%	18.9		%	16.4		%

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

Tri-State Pool Distributors

April 2022

May - June 2022

Porpoise Pool & Patio, Inc.

December 2021

January - June 2022

Wingate Supply, Inc.

December 2021

January - June 2022

Vak Pak Builders Supply, Inc.

June 2021

January - June 2022 and June 2021

Pool Source, LLC

April 2021

January - June 2022 and April - June 2021

TWC Distributors, Inc.

December 2020

January - ~~June 2021~~

~~Jet Line Products, Inc.~~

~~October 2020~~

February 2022 and January - ~~June~~February 2021

~~Northeastern Swimming Pool Distributors, Inc.~~

~~September 2020~~

~~January - June 2021~~

~~Master Tile Network LLC~~

~~February 2020~~

~~January - May 2021 and February - May 2020~~

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, ~~2020,~~2021, please refer to the discussion under the heading Three Months Ended June 30, ~~2021~~2022 Compared to Three Months Ended June 30, ~~2020.~~2021.

Net Sales


		Six Months Ended								Six Months Ended
		June 30,								June 30,
(in millions)	(in millions)	2021		2020		Change			(in millions)	2022		2021		Change
Net sales	Net sales	$	2,848.6	$	1,958.1	$	890.5	45%	Net sales	$	3,468.5	$	2,848.6	$	619.9	22%

Net sales for the first six months of ~~2021~~2022 increased ~~45%~~22% compared to the same period last ~~year, while base~~year. Base business net sales increased ~~38%~~16%. ~~During~~Our results in the first half of ~~2021, maintenance, refurbishment and construction activity remained~~the year were driven by continued strong ~~as families created and expanded home-based~~demand for outdoor living ~~spaces. Through~~products and elevated price inflation. While we have been challenged by supply chain and labor constraints, we have observed improvements in our supply chain dynamics beginning in the second quarter of ~~2021, households continued~~2022. Following our astounding 33% sales growth in the first quarter of 2022, results in our seasonally significant second quarter were dampened by unfavorable weather conditions in certain markets. We expect that our results will continue to ~~invest~~benefit from favorable industry trends in ~~outdoor living spaces, contributing to~~ the long-term, including growth in the installed base of pools, robust demand ~~for our products~~ and ~~yielding sales gains across nearly all categories.~~heightened consumer interest in enhanced pool customizations.

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

•inflationary product cost increases of approximately 10% to 11% (compared to our historical average of 1% to 2%);

•favorable trends for our products including:

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

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

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

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

•6% sales growth from recent acquisitions;

•1% sales growth from an extra selling day in the first half of 2022 compared to the first half of 2021; and

•~~inflationary product cost increases of approximately 4% to 5% (compared to~~challenges presented in 2022 including:

◦1% unfavorable impact from currency exchange rate fluctuations;

◦cooler, wet weather conditions in our ~~historical average of 1% to 2%)~~seasonal markets (see discussion below); and

◦unfavorable weather conditions and macroeconomic impacts in Europe (see discussion below).

~~We believe that~~Higher sales ~~growth rates~~ for certain product offerings, such as equipment and building materials, ~~and above-ground pools and spas evidence increased spending~~indicate continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first six months of ~~2021,~~2022, sales ~~for~~of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately ~~45%~~12% compared to the same period last year. Equipment collectively represented ~~29%~~27% of net sales in the first six months of ~~2021.~~2022. Sales of building materials grew ~~34%~~25% compared to the first six months of ~~2020~~2021 and represented approximately ~~11%~~13% of net sales in the first six months of 2022. Sales of chemicals, representing 11% of total net sales, increased 35% compared to the first six months of 2021. The increase in chemical sales was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to ~~customers who service large commercial installations and~~ specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth ~~or decline~~ in these areas ~~are~~is reflected in the ~~numbers~~discussion above. In the first six months of ~~2021,~~2022, sales to retail customers increased ~~26%~~13% compared to the first six months of 2021 and represented approximately ~~13%~~12% of our consolidated net sales. Certain of our retail customers were adversely impacted by unfavorable weather conditions in the second quarter, hindering sales growth. Sales to commercial customers increased ~~23%~~27% in the first six months of 2022 compared to the first six months of 2021 ~~as business~~ and ~~leisure travel resumed in 2021 following COVID-19 related closures in 2020. Sales to commercial customers~~ represented approximately 3%4% of our consolidated net sales in the first six months of 2022.

Net sales in our seasonal markets (not considering Europe), representing 47% of our total base business net sales in the first half of 2022, increased 16% compared to the first half of 2021. Comparatively, net sales in our year-round markets, representing 48% of our total base business net sales in the first half of 2022, increased 20% compared to the first half of 2021.

Net sales in Europe, representing 5% of our total net sales in the first half of 2022, were flat in local currency compared to 49% growth in the first half of 2021. While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in volume growth driven by macroeconomic uncertainty and poor weather.

Gross Profit


		Six Months Ended										Six Months Ended
		June 30,										June 30,
(in millions)	(in millions)	2021			2020			Change			(in millions)	2022			2021			Change
Gross profit	Gross profit	$	852.8		$	563.1		$	289.7	51%	Gross profit	$	1,114.0		$	852.8		$	261.2	31%
Gross margin	Gross margin	29.9		%	28.8		%				Gross margin	32.1		%	29.9		%

Gross margin improved ~~110~~220 basis points to ~~29.9%~~32.1% in the six months ended June 30, ~~2021~~2022 compared to ~~28.8%~~29.9% in the first six months of ~~2020.~~2021. This improvement ~~primarily~~ reflects focused supply chain management initiatives to address inflation, ~~with most of~~increased pricing and benefits from our recent acquisitions.

Operating Expenses


	Six Months Ended
	June 30,
(in millions)	2022			2021			Change
Selling and administrative expenses	$	459.4		$	385.2		$	74.2	19%

Operating expenses as a % of net sales	13.2		%	13.5		%

Operating expenses for the ~~year-to-date benefits realized in the second quarter of 2021. Also, with our~~six months ended June 30, 2022 increased ~~purchase volumes, improvements in rates earned under our vendor programs benefited our gross margin~~19% compared to the ~~same period in 2020.~~

~~Operating Expenses~~

Six Months Ended
June 30,
(in millions) 2021 2020 Change
Selling and administrative expenses $ 385.2 $ 314.7 $ 70.5 22%
Impairment of goodwill and other assets — 6.9 (6.9) (100)%
Operating expenses as a % of net sales 13.5 % 16.4 %

~~Operating expenses for the~~first six months ~~endedJune 30,~~of 2021, ~~increased 20%~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2020. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million~~including a 1% benefit 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. Without the impact of impairment charges in the prior year,currency exchange rate fluctuations. Our operating expenses ~~were up 22%, primarily due~~have increased to support our business growth, including recent acquisitions. Our expense growth reflects increases in growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first six months of ~~2021 decreased $2.9~~2022 increased $9.2 million compared to the same period last ~~year.~~year, primarily due to higher average debt levels between periods. Our average outstanding debt was $1.4 billion for the first six months of 2022 versus $387.1 million for the same period of 2021. Our weighted average effective interest rate ~~increased~~decreased to ~~2.5% for the first six months of 2021~~1.8% from ~~2.2% for the same period of 2020 on average outstanding debt of $387.1 million versus $493.6 million~~2.5% for the respective periods.

Income Taxes

Our effective income tax rate was 24.1% for the six months ended June 30, 2022 compared to 22.6% for the six months ended June 30, ~~2021 compared to 19.5% for the six months ended June 30, 2020.~~2021. We recorded ~~an $11.7~~a $8.9 million, or ~~$0.29~~$0.22 per diluted share, tax benefit from ASU 2016-09 in the six months ended June 30, ~~2021~~2022 compared to a ~~$14.2~~$11.7 million, or ~~$0.34~~$0.29 per diluted share, tax benefit in the same period of ~~2020.~~2021. Without the benefits from ASU 2016-09, our effective tax rate was 25.5% for the six months ended June 30, 2022 and 25.2% for the six months ended June 30, ~~2021 and 25.6% for the six months ended June 30, 2020.~~2021.

Net Income and Earnings Per Share

Net income increased ~~90%~~36% to ~~$358.4~~$486.5 million for the six months ended June 30, ~~2021~~2022 compared to the six months ended June 30, ~~2020. Adjusted net income for the first six months of 2021, without the prior year impact of non-cash impairments, net of tax, increased 84%.~~2021. Earnings per diluted share increased 37% to ~~$8.78~~$12.03 for the six months ended June 30, ~~2021~~2022 versus ~~$4.62~~$8.78 per diluted share for the six months ended June 30, ~~2020. Excluding~~2021. Without the impact ~~of non-cash impairments, net of tax, and tax benefits~~ from ASU 2016-09 in both periods, ~~adjusted~~earnings per diluted ~~EPS~~share increased ~~92%~~39% to $11.81 for the six months ended June 30, 2022 compared to $8.49 for the six months ended June 30, ~~2021 compared to $4.43 for the six months ended June 30, 2020.~~2021. See the reconciliation of GAAP to non-GAAP measures below.

Reconciliation of Non-GAAP Financial Measures

Adjusted ~~Income Statement Information~~Diluted EPS

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

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

We believe ~~these measures~~this measure should be considered in addition to, not as a substitute for, ~~net income and~~ diluted EPS presented in accordance with GAAP, ~~respectively,~~ and in the context of our other disclosures within this Form 10-Q. Other companies may calculate ~~these~~this non-GAAP financial ~~measures~~measure differently than we do, which may limit ~~their~~its usefulness as a comparative ~~measures.~~

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

(Unaudited) Six Months Ended
(in thousands) June 30,
2021 2020
Net income $ 358,350 $ 188,467
Impairment of goodwill and other assets — 6,944
Tax impact on impairment of long-term note (1)
— (654)
Adjusted net income $ 358,350 $ 194,757

~~(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.

measure.

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


(Unaudited)	(Unaudited)	Six Months Ended				(Unaudited)	Three Months Ended				Six Months Ended
		June 30,					June 30,				June 30,
		2021		2020			2022		2021		2022		2021
Diluted EPS	Diluted EPS	$	8.78	$	4.62	Diluted EPS	$	7.63	$	6.37	$	12.03	$	8.78
After-tax non-cash impairment charges		—		0.15
Adjusted diluted EPS excluding after-tax non-cash impairment charges		8.78		4.77

ASU 2016-09 tax benefit	ASU 2016-09 tax benefit	(0.29)		(0.34)		ASU 2016-09 tax benefit	(0.04)		(0.19)		(0.22)		(0.29)

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit		$	8.49	$	4.43
Adjusted diluted EPS						Adjusted diluted EPS	$	7.59	$	6.18	$	11.81	$	8.49

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 installations and maintenance. Sales are ~~substantially~~ lower during the first and fourth ~~quarters, when we may incur net losses.~~quarters. In ~~2020,~~2021, we generated approximately ~~61%~~60% of our net sales and ~~76%~~69% 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 and second quarters of ~~2021,~~2022, the four quarters of ~~2020~~2021 and the third and fourth quarters of ~~2019.~~2020. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. ~~Due to the seasonal nature of our industry (and recent pandemic-driven increased demand for our products), the~~The results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing future ~~trends.~~trends for a variety of reasons, including the seasonal nature of our business, the recent pandemic-driven increased demand for our products and the impact of new and acquired sales centers.


(Unaudited)	(Unaudited)	QUARTER																	(Unaudited)	QUARTER
(in thousands)	(in thousands)	2021					2020								2019				(in thousands)	2022				2021								2020
			Second		First		Fourth		Third		Second		First		Fourth		Third			Second		First		Fourth		Third		Second		First		Fourth		Third
Statement of Income Data	Statement of Income Data																		Statement of Income Data
Net sales	Net sales		$	1,787,833	$	1,060,745	$	839,261	$	1,139,229	$	1,280,846	$	677,288	$	582,234	$	898,500	Net sales	$	2,055,818	$	1,412,650	$	1,035,557	$	1,411,448	$	1,787,833	$	1,060,745	$	839,261	$	1,139,229
Gross profit	Gross profit		551,685		301,131		239,095		328,698		373,481		189,629		162,050		257,931		Gross profit	666,804		447,189		322,376		441,899		551,685		301,131		239,095		328,698
Operating income	Operating income		338,586		129,031		74,351		148,233		205,857		35,588		25,798		104,540		Operating income	418,888		235,723		127,891		237,276		338,586		129,031		74,351		148,233
Net income	Net income		259,695		98,655		59,174		119,098		157,555		30,912		18,024		79,525		Net income	307,283		179,261		107,609		184,665		259,695		98,655		59,174		119,098

Balance Sheet Data	Balance Sheet Data																		Balance Sheet Data
Total receivables, net	Total receivables, net		$	585,566	$	487,602	$	289,200	$	366,412	$	453,405	$	345,915	$	226,539	$	307,798	Total receivables, net	$	756,585	$	679,927	$	376,571	$	476,150	$	585,566	$	487,602	$	289,200	$	366,412
Product inventories, net	Product inventories, net		894,654		977,228		780,989		612,824		628,418		858,190		702,274		616,217		Product inventories, net	1,579,101		1,641,155		1,339,100		1,043,407		894,654		977,228		780,989		612,824
Accounts payable	Accounts payable		439,453		634,998		266,753		268,412		346,272		517,620		261,963		214,309		Accounts payable	604,225		685,946		398,697		414,156		439,453		634,998		266,753		268,412
Total debt	Total debt		423,116		433,171		416,018		339,934		438,804		586,050		511,407		547,560		Total debt	1,595,398		1,505,073		1,183,350		362,819		423,116		433,171		416,018		339,934

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	•	Fewer pool and irrigation and landscape
of rain		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	•	A longer pool and landscape season, thus positively
trends in fall		impacting our sales
(primarily in the northern half of the U.S. and Canada)

Unseasonably late warming trends in spring/early cooling	•	A shorter pool and landscape season, thus negatively
trends in fall		impacting our sales
(primarily in the northern half of the U.S. and Canada)

Weather Impacts on ~~2021~~2022 and ~~2020~~2021 Results

~~Overall, varied~~We observed unfavorable weather conditions in certain markets throughout the second quarter of 2022. Heavy rainfall and cooler temperatures throughout the northeastern United States and Canada resulted in slower sales activity and limited sales growth in the second quarter of 2022. Additionally, results in Europe continued to be impacted by unfavorable weather conditions. In contrast, our southern markets benefited from above-average temperatures, particularly in Texas. In the second quarter of 2021, overall weather conditions favorably impacted ~~our~~ sales ~~growth. While~~growth with the ~~southern states saw mild temperatures and above average precipitation, the western states, particularly California, experienced severely high temperatures and drought. The~~ average U.S. temperature in June ~~was~~2021 being the hottest on record in 127 years. ~~Comparatively, in the second quarter of 2020, we observed generally mild weather conditions with warmer weather throughout the western United States.~~

~~Sales~~Overall, weather conditions in the first quarter of ~~2021~~2022 were less favorable than weather conditions in the first quarter of 2021. Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures. In addition, some seasonal markets had unfavorable weather compared to the first quarter of 2021 when construction activity started earlier than normal. Similarly, results in Europe were hindered by unfavorable weather conditions. In the first quarter of 2021, sales benefited from favorable and generally mild weather conditions throughout the contiguous United States. In February 2021, Texas experienced the most costly winter storm event on record for the United States, which damaged many swimming pools and added to ~~the existing,~~already strong replacement ~~opportunity in that market. In contrast, sales in the first quarter of 2020 benefited from much above-average temperatures throughout the United States, particularly in the southern United States.~~activity.

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 estimates 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 ~~2020~~2021 Annual Report on Form 10-K. We have not changed any of these policies from those previously disclosed in that report.

Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

LIQUIDITY AND CAPITAL RESOURCES

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

•cash flows generated from operating activities;

•the adequacy of available bank lines of credit;

•the quality of our receivables;

•acquisitions;

•dividend payments;

•capital expenditures;

•changes in income tax laws and regulations;

•the timing and extent of share repurchases; and

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

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

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

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

•investing in inventory and funding other operating expenses;

•strategic acquisitions executed opportunistically;

•payment of cash dividends as and when declared by our ~~Board of Directors (Board);~~Board;

•repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0; and

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

We focus our capital expenditure plans principally on the needs of our sales centers, and in recent years have increased our spending on information technology. We project capital expenditures in 2022 will approximate our historical average of 1.0% of net sales. Capital expenditures were 0.7% of net sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019 and ~~1.1% of net sales in 2018. Over the last five years, capital expenditures~~ have averaged roughly 1.0% of net ~~sales. Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at~~sales over the ~~beginning of the COVID-19 pandemic. We project capital expenditures in 2021 will continue to approximate the historical average.~~

As of June 30, 2021, our average total leverage ratio equaled 0.53 compared to 0.69 as of March 31, 2021. Our strong operating results and cash flow from operations in 2020 and through the second quarter of 2021 enabled us to reduce our debt balances. We expect our average total leverage ratio through the third quarter of 2021 will continue to be below our above-mentioned target range.past five years.

Sources and Uses of Cash

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


		Six Months Ended					Six Months Ended
		June 30,					June 30,
		2021		2020			2022		2021
Operating activities	Operating activities	$	187,228	$	221,200	Operating activities	$	28,731	$	187,228
Investing activities	Investing activities	(32,495)		(26,742)		Investing activities	(27,431)		(32,495)
Financing activities	Financing activities	(131,061)		(177,794)		Financing activities	64,643		(131,061)

Net cash provided by operations was $28.7 million for the first six months of 2022 compared to $187.2 million for the first six months of ~~2021 decreased $34.0 million compared to the first six months of 2020, reflecting~~2021. The decrease in our ~~supply chain investments in inventory and higher income~~operating cash flows was driven by federal tax payments of $79.5 million in 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021. Additional impacts relate to growth-driven working capital outflows, including increased inventory purchases, which were largely offset by an increase in net income.

Net cash used in investing activities for the first six months of ~~2021 increased~~2022 decreased compared to the first six months of ~~2020 primarily~~2021 due to ~~increases~~a decrease in cash used for the acquisition of businesses ~~and other~~of $7.5 million, offset by an increase in capital expenditures ~~following~~of $2.5 million.

Net cash provided by financing activities increased $195.7 million to $64.6 million for the ~~delay in capital spending at this time last year due~~first six months of 2022 compared to ~~the onset of the COVID-19 pandemic.~~

~~Net~~net cash used in financing activities ~~was~~of $131.1 million for the first six months of ~~2021 compared to $177.8 million for the first six months of 2020, which~~2021. The increase in cash provided by financing activities reflects a ~~$79.7~~$404.7 million ~~decrease~~increase in net debt ~~payments, additional~~proceeds, partially offset by a $188.5 million increase in share repurchases ~~of $19.9 million~~ and an increase in dividends paid of ~~$10.1 million during the first six months of 2021.~~$16.6 million.

Future Sources and Uses of Cash

~~Revolving~~ Credit Facility

Our Credit Facility, as amended on December 30, 2021, provides for ~~$750.0 million~~$1.25 billion in borrowing capacity ~~under~~consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility. The Credit Facility includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit. ~~Pursuant~~The term loans require quarterly amortization payments aggregating to ~~an accordion feature,~~20% of the ~~aggregate maximum~~original principal amount of the ~~commitments under~~loan during the third, fourth and fifth years of the loan, with all remaining principal due on the Credit Facility ~~may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total~~maturity date of ~~$825.0 million. The Credit Facility matures on~~ September ~~29, 2022.~~25, 2026. We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At June 30, ~~2021,~~2022, there was ~~$152.4~~$566.2 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and ~~$592.8~~$179.0 million available for borrowing under the Credit Facility. WeCurrently, we pay interest on revolving and term loan borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin. The weighted average effective interest rate for the Credit Facility as of June 30, ~~2021~~2022 was approximately ~~2.2%~~2.6%, excluding commitment fees.

Term Facility

Our Term Facility, as amended on October 12, 2021, provides for $185.0 million in borrowing capacity and matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding borrowing capacity for future share repurchases, acquisitions and growth-oriented working capital expansion. The Term Facility is repaid in quarterly installments of 1.250% of the ~~facility's debt balance~~Term Facility on the last business day of each quarter beginning in the first quarter of 2020. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. The total of the quarterly payments ~~over the life of the facility~~ will be equal to 33.75% of the Term Facility with the final principal ~~payment,~~repayment, equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At June 30, ~~2021,~~2022, there was ~~$171.1~~$161.9 million outstanding under the Term Facility with a weighted average effective interest rate of ~~2.9%~~2.8%. 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 of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of June 30, 2021, the calculations of these two covenants are detailed below:

•~~Maximum Average Total Leverage Ratio~~. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of June 30, 2021, our average total leverage ratio equaled 0.53 (compared to 0.69 as of March 31, 2021) and the TTM average total debt amount used in this calculation was $387.3 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 June 30, 2021, our fixed charge ratio equaled 10.48 (compared to 9.00 as of March 31, 2021) and TTM Rental Expense was $67.8 million.

The Credit Facility and the Term Facility also limit 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 higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a ~~lower cost~~lower-cost form of ~~financing, with a peak funding capacity of~~financing. Under this facility, we can borrow up to ~~$295.0~~$350.0 million between ~~May 1~~April through June and ~~May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range~~ from ~~$120.0~~$175.0 million to ~~$275.0~~$315.0 million ~~throughout~~during the remaining months of the year. The Receivables Facility matures on November 1, ~~2021.~~2023. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

The Receivables Facility provides for the sale of certain of our receivables to a ~~wholly owned~~wholly-owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

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 June 30, ~~2021,~~2022, there was ~~$90.0~~$350.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of ~~0.9%~~2.5%, excluding commitment fees.

Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of June 30, 2022, 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 June 30, 2022, our average total leverage ratio equaled 1.15 (compared to 1.06 as of March 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.2 billion.

•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 June 30, 2022, our fixed charge ratio equaled 12.22 (compared to 12.38 as of March 31, 2022) and TTM Rental Expense was $75.4 million.

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

Other covenants in each of our credit facilities 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 our credit facilities could result in, among other things, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

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 June 30, ~~2021,~~2022, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which ~~became effective on November 20, 2020, and terminate on September 29, 2022. These swap contracts were previously forward-starting and convert~~has the effect of converting our exposure to variable interest rates on our variable rate borrowings to fixed interest ~~rates~~rates. For more information, see Note 4 of ~~2.0925% and 1.5500% on notional amounts~~“Notes to Consolidated Financial Statements” included in Part I, Item 1 of $75.0 million each. The third interest rate swap contract currently in place became effective on February 26, 2021, and terminates on February 28, 2025. This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.3800% on a notional amount of $150.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rate plus the applicable margin 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 March 9, 2020 September 29, 2022 February 26, 2027 $150.0 0.7400%
Forward-starting interest rate swap 2 March 9, 2020 February 28, 2025 February 26, 2027 $150.0 0.8130%

Compliance and Future Availability

As of June 30, ~~2021, we believe~~2022, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility. We believe we will remain in compliance with all material covenants and financial ratio requirements throughout the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our ~~2020~~2021 Annual Report on Form 10-K, ~~and~~as updated by Note 5 of “Notes to Consolidated Financial Statements,” included 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 would have the ability to finance any such transactions.

As of July ~~26, 2021, $528.3~~25, 2022, $422.8 million of the current Board-authorized amount under our share repurchase program remained available. We expect to repurchase shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the ~~Credit and Receivables Facilities.~~above-described credit facilities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

There have been no material changes during the six months ended June 30, ~~2021~~2022 from what we reported in our ~~2020~~2021 Annual Report on Form 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 ~~2020~~2021 Annual Report on Form 10-K.

Currency Risk

There have been no material changes during the six months ended June 30, ~~2021~~2022 from what we reported in our ~~2020~~2021 Annual Report on Form 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 ~~2020~~2021 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 June 30, ~~2021,~~2022, management, including our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including our CEO and CFO, concluded that as of June 30, ~~2021,~~2022, 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.

The effectiveness of our system of disclosure controls and procedures or internal control over financial reporting is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating such systems, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our control systems will detect all errors or fraud. By their nature, our system can provide only reasonable assurance regarding management's control objectives.

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 and our current insurance coverages, 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

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our ~~2020~~2021 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below summarizes the repurchases of our common stock in the second quarter of ~~2021:~~2022:
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)
April 1-30, 2021 10,634 $ 340.53 10,634 $ 107,378,609
May 1-31, 2020 — $ — — $ 557,378,609
June 1-30, 2021 33,929 $ 442.02 33,929 $ 542,381,348
Total 44,563 $ 417.80 44,563


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)
April 1-30, 2022	68,974	$	420.64	68,974	$	413,772,800
May 1-31, 2022	306,365	$	399.26	306,361	$	487,683,064
June 1-30, 2022	171,431	$	378.75	171,431	$	422,753,395
Total	546,770	$	395.53	546,766

(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. NoThere were 4 shares ~~were~~ surrendered for this purpose in the second quarter of ~~2021.~~2022.

(2)In May ~~2021,~~2022, our Board authorized an additional ~~$450.0~~$196.2 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices. As of July ~~26, 2021, $528.3~~25, 2022, $422.8 million of the authorized amount remained available under our current share repurchase program.

Our Board 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 2.2 of this Form 10-Q. 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.

Item 6. Exhibits

Exhibits filed as part of this report are listed below.

Incorporated by Reference

No.

Description

Filed/ Furnished with this
Form 10-Q

Form

File No.

Date Filed

3.1

Restated Certificate of Incorporation of the Company.

10-Q

000-26640

8/9/2006

3.2

Amended and Restated Bylaws of the Company.

8-K

000-26640

2/8/2019

4.1

Form of certificate representing shares of common stock of the Company.

8-K

000-26640

5/19/2006

31.1

Certification by Chief 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.

31.2

Certification by Chief 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.

32.1

Certification by Chief Executive Officer and Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

+ Attached as Exhibit 101 to this report are the following items formatted in iXBRL (Inline Extensible Business Reporting Language):

1.Consolidated Statements of Income for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020;~~2021;

2.Consolidated Statements of Comprehensive Income for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020;~~2021;

3.Consolidated Balance Sheets at June 30, ~~2021,~~2022, December 31, ~~2020~~2021 and June 30, ~~2020;~~2021;

4.Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2021~~2022 and June 30, ~~2020;~~2021;

5.Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020;~~2021; 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 July ~~29, 2021.~~28, 2022.


						POOL CORPORATION




			By:			/s/ ~~Mark W. Joslin~~Melanie Housey Hart
						~~Mark W. Joslin~~Melanie Housey Hart
						~~Senior~~ Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant