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 SeptemberJune 30, 20222023
or | | | | | |
☐ | 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 | x | | Accelerated filer | ☐ |
| | | | |
Non-accelerated filer | o | | 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 OctoberJuly 24, 2022,2023, there were 39,050,61839,051,971 shares of common stock outstanding.
POOL CORPORATION
Form 10-Q
For the Quarter Ended SeptemberJune 30, 20222023
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POOL CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales | Net sales | $ | 1,615,339 | | | $ | 1,411,448 | | | $ | 5,083,807 | | | $ | 4,260,027 | | Net sales | $ | 1,857,363 | | | $ | 2,055,818 | | | $ | 3,064,138 | | | $ | 3,468,468 | |
Cost of sales | Cost of sales | 1,111,652 | | | 969,549 | | | 3,466,126 | | | 2,965,311 | | Cost of sales | 1,289,580 | | | 1,389,014 | | | 2,126,599 | | | 2,354,474 | |
Gross profit | Gross profit | 503,687 | | | 441,899 | | | 1,617,681 | | | 1,294,716 | | Gross profit | 567,783 | | | 666,804 | | | 937,539 | | | 1,113,994 | |
Selling and administrative expenses | Selling and administrative expenses | 239,810 | | | 204,623 | | | 699,192 | | | 589,823 | | Selling and administrative expenses | 240,774 | | | 247,916 | | | 464,758 | | | 459,382 | |
| Operating income | Operating income | 263,877 | | | 237,276 | | | 918,489 | | | 704,893 | | Operating income | 327,009 | | | 418,888 | | | 472,781 | | | 654,612 | |
Interest and other non-operating expenses, net | Interest and other non-operating expenses, net | 11,707 | | | 2,317 | | | 25,428 | | | 6,862 | | Interest and other non-operating expenses, net | 16,892 | | | 8,523 | | | 32,728 | | | 13,722 | |
Income before income taxes and equity in earnings | Income before income taxes and equity in earnings | 252,170 | | | 234,959 | | | 893,061 | | | 698,031 | | Income before income taxes and equity in earnings | 310,117 | | | 410,365 | | | 440,053 | | | 640,890 | |
Provision for income taxes | Provision for income taxes | 62,205 | | | 50,386 | | | 216,687 | | | 155,240 | | Provision for income taxes | 77,987 | | | 103,160 | | | 106,260 | | | 154,482 | |
Equity in earnings of unconsolidated investments, net | Equity in earnings of unconsolidated investments, net | 90 | | | 92 | | | 226 | | | 224 | | Equity in earnings of unconsolidated investments, net | 120 | | | 78 | | | 156 | | | 136 | |
| Net income | Net income | $ | 190,055 | | | $ | 184,665 | | | $ | 676,600 | | | $ | 543,015 | | Net income | $ | 232,250 | | | $ | 307,283 | | | $ | 333,949 | | | $ | 486,544 | |
| | Earnings per share attributable to common stockholders: | Earnings per share attributable to common stockholders: | | | | | Earnings per share attributable to common stockholders: | | | | |
Basic | Basic | $ | 4.82 | | | $ | 4.60 | | | $ | 16.99 | | | $ | 13.53 | | Basic | $ | 5.95 | | | $ | 7.71 | | | $ | 8.55 | | | $ | 12.16 | |
Diluted | Diluted | $ | 4.78 | | | $ | 4.54 | | | $ | 16.82 | | | $ | 13.32 | | Diluted | $ | 5.91 | | | $ | 7.63 | | | $ | 8.48 | | | $ | 12.03 | |
Weighted average common shares outstanding: | Weighted average common shares outstanding: | | | | | | | | Weighted average common shares outstanding: | | | | | | | |
Basic | Basic | 39,214 | | | 40,101 | | | 39,599 | | | 40,146 | | Basic | 38,837 | | | 39,660 | | | 38,857 | | | 39,795 | |
Diluted | Diluted | 39,580 | | | 40,691 | | | 40,012 | | | 40,766 | | Diluted | 39,115 | | | 40,064 | | | 39,155 | | | 40,231 | |
| Cash dividends declared per common share | Cash dividends declared per common share | $ | 1.00 | | | $ | 0.80 | | | $ | 2.80 | | | $ | 2.18 | | Cash dividends declared per common share | $ | 1.10 | | | $ | 1.00 | | | $ | 2.10 | | | $ | 1.80 | |
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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 190,055 | | | $ | 184,665 | | | $ | 676,600 | | | $ | 543,015 | |
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation losses | (11,152) | | | (3,555) | | | (18,491) | | | (3,522) | |
Change in unrealized gains on interest rate swaps, net of change in taxes of $(2,925), $(491), $(8,422), and $(2,818) | 8,776 | | | 1,473 | | | 25,267 | | | 8,453 | |
Total other comprehensive (loss) income | (2,376) | | | (2,082) | | | 6,776 | | | 4,931 | |
Comprehensive income | $ | 187,679 | | | $ | 182,583 | | | $ | 683,376 | | | $ | 547,946 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 232,250 | | | $ | 307,283 | | | $ | 333,949 | | | $ | 486,544 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation gain (loss) | 2,801 | | | (7,125) | | | 5,271 | | | (7,339) | |
Unrealized gains (losses) on interest rate swaps, net of the change in taxes of $(1,166), $(1,631), $104, and $(5,497) | 3,497 | | | 4,893 | | | (313) | | | 16,491 | |
Total other comprehensive income (loss) | 6,298 | | | (2,232) | | | 4,958 | | | 9,152 | |
Comprehensive income | $ | 238,548 | | | $ | 305,051 | | | $ | 338,907 | | | $ | 495,696 | |
| | | | | | | |
| | | | | | | |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)
| | | September 30, | | September 30, | | December 31, | | June 30, | | June 30, | | December 31, |
| | 2022 | | 2021 | | 2021 | | 2023 | | 2022 | | 2022 |
| | | (Unaudited) | | (Unaudited) | | (Audited) | | | (Unaudited) | | (Unaudited) | | (Audited) |
Assets | Assets | | | | | | | Assets | | | | | | |
Current assets: | Current assets: | | | | | | | Current assets: | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 49,079 | | | $ | 83,475 | | | $ | 24,321 | | Cash and cash equivalents | | $ | 53,225 | | | $ | 91,481 | | | $ | 45,591 | |
Receivables, net | Receivables, net | | 189,173 | | | 174,987 | | | 155,259 | | Receivables, net | | 203,459 | | | 239,639 | | | 128,247 | |
Receivables pledged under receivables facility | Receivables pledged under receivables facility | | 360,623 | | | 301,163 | | | 221,312 | | Receivables pledged under receivables facility | | 427,491 | | | 516,946 | | | 223,201 | |
Product inventories, net | Product inventories, net | | 1,539,572 | | | 1,043,407 | | | 1,339,100 | | Product inventories, net | | 1,392,886 | | | 1,579,101 | | | 1,591,060 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 61,032 | | | 23,368 | | | 29,093 | | Prepaid expenses and other current assets | | 19,994 | | | 43,317 | | | 30,892 | |
Total current assets | Total current assets | | 2,199,479 | | | 1,626,400 | | | 1,769,085 | | Total current assets | | 2,097,055 | | | 2,470,484 | | | 2,018,991 | |
| Property and equipment, net | Property and equipment, net | | 184,387 | | | 111,339 | | | 179,008 | | Property and equipment, net | | 209,541 | | | 183,480 | | | 193,709 | |
Goodwill | Goodwill | | 691,786 | | | 281,300 | | | 688,364 | | Goodwill | | 699,918 | | | 692,972 | | | 691,993 | |
Other intangible assets, net | Other intangible assets, net | | 307,389 | | | 12,067 | | | 312,814 | | Other intangible assets, net | | 302,444 | | | 309,375 | | | 305,450 | |
Equity interest investments | Equity interest investments | | 1,190 | | | 1,242 | | | 1,231 | | Equity interest investments | | 1,278 | | | 1,179 | | | 1,248 | |
Operating lease assets | Operating lease assets | | 255,611 | | | 221,007 | | | 241,662 | | Operating lease assets | | 279,468 | | | 259,571 | | | 269,608 | |
Other assets | Other assets | | 48,213 | | | 28,878 | | | 37,967 | | Other assets | | 90,875 | | | 45,044 | | | 84,438 | |
Total assets | Total assets | | $ | 3,688,055 | | | $ | 2,282,233 | | | $ | 3,230,131 | | Total assets | | $ | 3,680,579 | | | $ | 3,962,105 | | | $ | 3,565,437 | |
| Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | | | | | | Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | Current liabilities: | | | | | | | Current liabilities: | | | | | | |
Accounts payable | Accounts payable | | $ | 442,226 | | | $ | 414,156 | | | $ | 398,697 | | Accounts payable | | $ | 485,100 | | | $ | 604,225 | | | $ | 406,667 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | 210,448 | | | 231,794 | | | 264,877 | | Accrued expenses and other current liabilities | | 170,658 | | | 195,529 | | | 168,521 | |
Short-term borrowings and current portion of long-term debt | Short-term borrowings and current portion of long-term debt | | 12,208 | | | 10,744 | | | 11,772 | | Short-term borrowings and current portion of long-term debt | | 36,219 | | | 19,731 | | | 25,042 | |
Current operating lease liabilities | Current operating lease liabilities | | 72,378 | | | 65,442 | | | 69,070 | | Current operating lease liabilities | | 79,763 | | | 71,550 | | | 75,484 | |
Total current liabilities | Total current liabilities | | 737,260 | | | 722,136 | | | 744,416 | | Total current liabilities | | 771,740 | | | 891,035 | | | 675,714 | |
| Deferred income taxes | Deferred income taxes | | 45,247 | | | 30,275 | | | 35,840 | | Deferred income taxes | | 58,151 | | | 42,380 | | | 58,759 | |
Long-term debt, net | Long-term debt, net | | 1,500,337 | | | 352,075 | | | 1,171,578 | | Long-term debt, net | | 1,148,367 | | | 1,575,667 | | | 1,361,761 | |
Other long-term liabilities | Other long-term liabilities | | 26,744 | | | 34,176 | | | 31,545 | | Other long-term liabilities | | 39,236 | | | 32,109 | | | 35,471 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | | 187,589 | | | 158,359 | | | 175,359 | | Non-current operating lease liabilities | | 204,553 | | | 191,856 | | | 198,538 | |
Total liabilities | Total liabilities | | 2,497,177 | | | 1,297,021 | | | 2,158,738 | | Total liabilities | | 2,222,047 | | | 2,733,047 | | | 2,330,243 | |
| | Stockholders’ equity: | Stockholders’ equity: | | | | | | | Stockholders’ equity: | | | | | | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 39,054,302, 40,079,584 and 40,192,901 shares issued and outstanding at September 30, 2022, September 30, 2021 and December 31, 2021, respectively | | 39 | | | 40 | | | 40 | | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 39,048,604, 39,588,231 and 39,069,419 shares issued and outstanding at June 30, 2023, June 30, 2022 and December 31, 2022, respectively | | Common stock, $0.001 par value; 100,000,000 shares authorized; 39,048,604, 39,588,231 and 39,069,419 shares issued and outstanding at June 30, 2023, June 30, 2022 and December 31, 2022, respectively | | 39 | | | 40 | | | 39 | |
Additional paid-in capital | Additional paid-in capital | | 570,855 | | | 542,858 | | | 551,963 | | Additional paid-in capital | | 593,081 | | | 564,641 | | | 575,776 | |
Retained earnings | Retained earnings | | 620,692 | | | 451,401 | | | 526,874 | | Retained earnings | | 854,559 | | | 662,709 | | | 653,484 | |
Accumulated other comprehensive loss | | (708) | | | (9,087) | | | (7,484) | | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | | 10,853 | | | 1,668 | | | 5,895 | |
Total stockholders’ equity | Total stockholders’ equity | | 1,190,878 | | | 985,212 | | | 1,071,393 | | Total stockholders’ equity | | 1,458,532 | | | 1,229,058 | | | 1,235,194 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 3,688,055 | | | $ | 2,282,233 | | | $ | 3,230,131 | | Total liabilities and stockholders’ equity | | $ | 3,680,579 | | | $ | 3,962,105 | | | $ | 3,565,437 | |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | Nine Months Ended | | | Six Months Ended |
| | September 30, | | June 30, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
Operating activities | Operating activities | | | | | Operating activities | | | | |
Net income | Net income | | $ | 676,600 | | | $ | 543,015 | | Net income | | $ | 333,949 | | | $ | 486,544 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | Depreciation | | 23,172 | | | 21,027 | | Depreciation | | 15,292 | | | 15,376 | |
Amortization | Amortization | | 6,523 | | | 1,064 | | Amortization | | 4,237 | | | 4,358 | |
Share-based compensation | Share-based compensation | | 11,691 | | | 11,755 | | Share-based compensation | | 9,996 | | | 7,571 | |
| Equity in earnings of unconsolidated investments, net | Equity in earnings of unconsolidated investments, net | | (226) | | | (224) | | Equity in earnings of unconsolidated investments, net | | (156) | | | (136) | |
| Other | Other | | 12,644 | | | 5,256 | | Other | | 3,563 | | | 7,185 | |
Changes in operating assets and liabilities, net of effects of acquisitions: | Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | Changes in operating assets and liabilities, net of effects of acquisitions: | | | | |
Receivables | Receivables | | (181,775) | | | (186,772) | | Receivables | | (276,945) | | | (384,245) | |
Product inventories | Product inventories | | (223,268) | | | (267,341) | | Product inventories | | 201,380 | | | (251,090) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | (31,171) | | | (22,674) | | Prepaid expenses and other assets | | (4,423) | | | (20,573) | |
Accounts payable | Accounts payable | | 46,564 | | | 146,616 | | Accounts payable | | 76,140 | | | 208,017 | |
Accrued expenses and other current liabilities | | (33,284) | | | 107,343 | | |
Accrued expenses and other liabilities | | Accrued expenses and other liabilities | | 13,744 | | | (44,276) | |
Net cash provided by operating activities | Net cash provided by operating activities | | 307,470 | | | 359,065 | | Net cash provided by operating activities | | 376,777 | | | 28,731 | |
| Investing activities | Investing activities | | | | | Investing activities | | | | |
Acquisition of businesses, net of cash acquired | Acquisition of businesses, net of cash acquired | | (8,309) | | | (17,887) | | Acquisition of businesses, net of cash acquired | | (11,500) | | | (7,629) | |
Purchases of property and equipment, net of sale proceeds | Purchases of property and equipment, net of sale proceeds | | (27,965) | | | (24,223) | | Purchases of property and equipment, net of sale proceeds | | (30,191) | | | (19,802) | |
| | Other investments, net | Other investments, net | | 1,760 | | | — | | Other investments, net | | (169) | | | — | |
Net cash used in investing activities | Net cash used in investing activities | | (34,514) | | | (42,110) | | Net cash used in investing activities | | (41,860) | | | (27,431) | |
| Financing activities | Financing activities | | | | | Financing activities | | | | |
Proceeds from revolving line of credit | Proceeds from revolving line of credit | | 1,629,740 | | | 791,508 | | Proceeds from revolving line of credit | | 698,795 | | | 1,122,186 | |
Payments on revolving line of credit | Payments on revolving line of credit | | (1,629,688) | | | (730,277) | | Payments on revolving line of credit | | (1,001,399) | | | (1,128,902) | |
Proceeds from term loan under credit facility | Proceeds from term loan under credit facility | | 250,000 | | | — | | Proceeds from term loan under credit facility | | — | | | 250,000 | |
Proceeds from asset-backed financing | Proceeds from asset-backed financing | | 215,000 | | | 310,000 | | Proceeds from asset-backed financing | | 388,900 | | | 215,000 | |
Payments on asset-backed financing | Payments on asset-backed financing | | (130,000) | | | (415,000) | | Payments on asset-backed financing | | (240,200) | | | (50,000) | |
Payments on term facility | Payments on term facility | | (6,937) | | | (6,938) | | Payments on term facility | | (47,313) | | | (4,625) | |
Proceeds from short-term borrowings and current portion of long-term debt | Proceeds from short-term borrowings and current portion of long-term debt | | 27,396 | | | 7,880 | | Proceeds from short-term borrowings and current portion of long-term debt | | 17,859 | | | 24,767 | |
Payments on short-term borrowings and current portion of long-term debt | Payments on short-term borrowings and current portion of long-term debt | | (26,960) | | | (9,006) | | Payments on short-term borrowings and current portion of long-term debt | | (19,182) | | | (16,808) | |
Payments of deferred financing costs | | — | | | (1,610) | | |
| Payments of deferred and contingent acquisition consideration | Payments of deferred and contingent acquisition consideration | | (1,374) | | | (362) | | Payments of deferred and contingent acquisition consideration | | (551) | | | (1,374) | |
| Proceeds from stock issued under share-based compensation plans | Proceeds from stock issued under share-based compensation plans | | 7,201 | | | 11,524 | | Proceeds from stock issued under share-based compensation plans | | 7,309 | | | 5,107 | |
Payments of cash dividends | Payments of cash dividends | | (111,572) | | | (87,509) | | Payments of cash dividends | | (82,018) | | | (72,028) | |
Purchases of treasury stock | Purchases of treasury stock | | (471,210) | | | (137,975) | | Purchases of treasury stock | | (50,742) | | | (278,680) | |
Net cash used in financing activities | | (248,404) | | | (267,765) | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (328,542) | | | 64,643 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | 206 | | | 157 | | Effect of exchange rate changes on cash and cash equivalents | | 1,259 | | | 1,217 | |
Change in cash and cash equivalents | Change in cash and cash equivalents | | 24,758 | | | 49,347 | | Change in cash and cash equivalents | | 7,634 | | | 67,160 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 24,321 | | | 34,128 | | Cash and cash equivalents at beginning of period | | 45,591 | | | 24,321 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 49,079 | | | $ | 83,475 | | Cash and cash equivalents at end of period | | $ | 53,225 | | | $ | 91,481 | |
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 | | |
| | Shares | | Amount | | | | Capital | | Earnings | | (Loss) Income | | Total |
Balance at December 31, 2021 | | 40,193 | | | $ | 40 | | | | | $ | 551,963 | | | $ | 526,874 | | | $ | (7,484) | | | $ | 1,071,393 | |
Net income | | — | | | — | | | | | — | | | 179,261 | | | — | | | 179,261 | |
Foreign currency translation | | — | | | — | | | | | — | | | — | | | (214) | | | (214) | |
Interest rate swaps, net of the change in taxes of $(3,866) | | — | | | — | | | | | — | | | — | | | 11,598 | | | 11,598 | |
Repurchases of common stock, net of retirements | | (138) | | | — | | | | | — | | | (62,420) | | | — | | | (62,420) | |
Share-based compensation | | — | | | — | | | | | 3,657 | | | — | | | — | | | 3,657 | |
| | | | | | | | | | | | | | |
Issuance of stock under share-based compensation plans | | 55 | | | — | | | | | 3,135 | | | — | | | — | | | 3,135 | |
Declaration of cash dividends | | — | | | — | | | | | — | | | (32,132) | | | — | | | (32,132) | |
Balance at March 31, 2022 | | 40,110 | | 40 | | | | | 558,755 | | | 611,583 | | | 3,900 | | | 1,174,278 | |
Net income | | — | | | — | | | | | — | | | 307,283 | | | — | | | 307,283 | |
Foreign currency translation | | — | | | — | | | | | — | | | — | | | (7,125) | | | (7,125) | |
Interest rate swaps, net of the change in taxes of $(1,631) | | — | | | — | | | | | — | | | — | | | 4,893 | | | 4,893 | |
Repurchases of common stock, net of retirements | | (547) | | | — | | | | | — | | | (216,261) | | | — | | | (216,261) | |
Share-based compensation | | — | | | — | | | | | 3,914 | | | — | | | — | | | 3,914 | |
Issuance of stock under share-based compensation plans | | 25 | | | — | | | | | 1,972 | | | — | | | — | | | 1,972 | |
Declaration of cash dividends | | — | | | — | | | | | — | | | (39,896) | | | — | | | (39,896) | |
Balance at June 30, 2022 | | 39,588 | | 40 | | | | | 564,641 | | | 662,709 | | | 1,668 | | | 1,229,058 | |
Net income | | — | | | — | | | | | — | | | 190,055 | | | — | | | 190,055 | |
Foreign currency translation | | — | | | — | | | | | — | | | — | | | (11,152) | | | (11,152) | |
Interest rate swaps, net of the change in taxes of $(2,925) | | — | | | — | | | | | — | | | — | | | 8,776 | | | 8,776 | |
Repurchases of common stock, net of retirements | | (549) | | | (1) | | | | | — | | | (192,528) | | | — | | | (192,529) | |
Share-based compensation | | — | | | — | | | | | 4,120 | | | — | | | — | | | 4,120 | |
Issuance of stock under share-based compensation plans | | 15 | | | — | | | | | 2,094 | | | — | | | — | | | 2,094 | |
Declaration of cash dividends | | — | | | — | | | | | — | | | (39,544) | | | — | | | (39,544) | |
Balance at September 30, 2022 | | 39,054 | | $ | 39 | | | | | $ | 570,855 | | | $ | 620,692 | | | $ | (708) | | | $ | 1,190,878 | |
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| | Common Stock | | | | Additional Paid-In | | Retained | | Accumulated Other Comprehensive | | |
| | Shares | | Amount | | | | Capital | | Earnings | | Income | | Total |
Balance at December 31, 2022 | | 39,069 | | | $ | 39 | | | | | $ | 575,776 | | | $ | 653,484 | | | $ | 5,895 | | | $ | 1,235,194 | |
Net income | | — | | | — | | | | | — | | | 101,699 | | | — | | | 101,699 | |
Foreign currency translation | | — | | | — | | | | | — | | | — | | | 2,469 | | | 2,469 | |
Interest rate swaps, net of the change in taxes of $1,269 | | — | | | — | | | | | — | | | — | | | (3,809) | | | (3,809) | |
Repurchases of common stock, net of retirements | | (144) | | | — | | | | | — | | | (50,549) | | | — | | | (50,549) | |
Share-based compensation | | — | | | — | | | | | 4,923 | | | — | | | — | | | 4,923 | |
Issuance of stock under share-based compensation plans | | 108 | | | — | | | | | 5,896 | | | — | | | — | | | 5,896 | |
Declaration of cash dividends | | — | | | — | | | | | — | | | (39,073) | | | — | | | (39,073) | |
Balance at March 31, 2023 | | 39,033 | | $ | 39 | | | | | $ | 586,595 | | | $ | 665,561 | | | $ | 4,555 | | | $ | 1,256,750 | |
Net income | | — | | | — | | | | | — | | | 232,250 | | | — | | | 232,250 | |
Foreign currency translation | | — | | | — | | | | | — | | | — | | | 2,801 | | | 2,801 | |
Interest rate swaps, net of the change in taxes of $(1,166) | | — | | | — | | | | | — | | | — | | | 3,497 | | | 3,497 | |
Repurchases of common stock, net of retirements | | — | | | — | | | | | — | | | — | | | — | | | — | |
Share-based compensation | | — | | | — | | | | | 5,073 | | | — | | | — | | | 5,073 | |
Issuance of stock under share-based compensation plans | | 16 | | | — | | | | | 1,413 | | | — | | | — | | | 1,413 | |
Declaration of cash dividends | | — | | | — | | | | | — | | | (42,945) | | | — | | | (42,945) | |
Other | | — | | | — | | | | | — | | | (307) | | | — | | | (307) | |
Balance at June 30, 2023 | | 39,049 | | $ | 39 | | | | | $ | 593,081 | | | $ | 854,559 | | | $ | 10,853 | | | $ | 1,458,532 | |
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| | | 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 | | 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 | | — | | | — | | | | — | | | 98,655 | | | — | | | 98,655 | | Net income | | — | | | — | | | | — | | | 179,261 | | | — | | | 179,261 | |
Foreign currency translation | Foreign currency translation | | — | | | — | | | | — | | | — | | | (1,268) | | | (1,268) | | Foreign currency translation | | — | | | — | | | | — | | | — | | | (214) | | | (214) | |
Interest rate swaps, net of the change in taxes of $(3,046) | | — | | | — | | | | — | | | — | | | 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) | | | — | | | | — | | | (71,516) | | | — | | | (71,516) | | Repurchases of common stock, net of retirements | | (547) | | | — | | | | — | | | (216,261) | | | — | | | (216,261) | |
Share-based compensation | Share-based compensation | | — | | | — | | | | 3,837 | | | — | | | — | | | 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 | | | — | | | | 2,912 | | | — | | | — | | | 2,912 | | Issuance of stock under share-based compensation plans | | 25 | | | — | | | | 1,972 | | | — | | | — | | | 1,972 | |
Declaration of cash dividends | Declaration of cash dividends | | — | | | — | | | | — | | | (23,299) | | | — | | | (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 | | — | | | — | | | | — | | | 259,695 | | | — | | | 259,695 | | |
Foreign currency translation | | — | | | — | | | | — | | | — | | | 1,302 | | | 1,302 | | |
Interest rate swaps, net of the change in taxes of $719 | | — | | | — | | | | — | | | — | | | (2,157) | | | (2,157) | | |
Repurchases of common stock, net of retirements | | (45) | | | — | | | | — | | | (18,619) | | | — | | | (18,619) | | |
Share-based compensation | | — | | | — | | | | 3,712 | | | — | | | — | | | 3,712 | | |
Issuance of stock under share-based compensation plans | | 90 | | | — | | | | 5,006 | | | — | | | — | | | 5,006 | | |
Declaration of cash dividends | | — | | | — | | | | — | | | (32,119) | | | — | | | (32,119) | | |
Balance at June 30, 2021 | | 40,131 | | | 40 | | | | 535,046 | | | 346,667 | | | (7,005) | | | 874,748 | | |
Net income | | — | | | — | | | | — | | | 184,665 | | | — | | | 184,665 | | |
Foreign currency translation | | — | | | — | | | | — | | | — | | | (3,555) | | | (3,555) | | |
Interest rate swaps, net of the change in taxes of $(491) | | — | | | — | | | | — | | | — | | | 1,473 | | | 1,473 | | |
Repurchases of common stock, net of retirements | | (100) | | | — | | | | — | | | (47,840) | | | — | | | (47,840) | | |
Share-based compensation | | — | | | — | | | | 4,206 | | | — | | | — | | | 4,206 | | |
Issuance of stock under share-based compensation plans | | 49 | | | — | | | | 3,606 | | | — | | | — | | | 3,606 | | |
Declaration of cash dividends | | — | | | — | | | | — | | | (32,091) | | | — | | | (32,091) | | |
Balance at September 30, 2021 | | 40,080 | | | $ | 40 | | | | $ | 542,858 | | | $ | 451,401 | | | $ | (9,087) | | | $ | 985,212 | | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | | 39,588 | | $ | 40 | | | | $ | 564,641 | | | $ | 662,709 | | | $ | 1,668 | | | $ | 1,229,058 | |
|
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 20212022 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 20212022 Annual Report on Form 10-K. The results for our three and nine-monthsix-month periods ended SeptemberJune 30, 2022,2023, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2022.2023.
Newly Adopted Accounting Pronouncements
As of June 30, 2023, we adopted Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and all related amendments, which are codified into Accounting Standards Codification (ASC) 848. This new standard provides optional expedients and exceptions for applying GAAP 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. 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 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 $0.6 million in the thirdsecond quarter of 2023 compared to $1.6 million in the second quarter of 2022 compared to $4.2and $5.4 million in the third quarter of 2021 and $9.5six months ended June 30, 2023, compared to $8.9 million in the ninesix months ended SeptemberJune 30, 2022, compared to $15.9 million in the nine months ended September 30, 2021.2022.
Retained Earnings
We account for the retirement of treasury shares as a reduction of Retained earnings. As of SeptemberJune 30, 2022,2023, 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 $2.1$2.2 billion and cumulative dividends of $902.0 million.$1.0 billion.
Accumulated Other Comprehensive LossIncome
The table below presents the components of our Accumulated other comprehensive lossincome balance (in thousands):
| | | | | | | | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 | | 2021 |
Foreign currency translation adjustments | $ | (28,071) | | | $ | (8,437) | | | $ | (9,580) | |
Unrealized gains (losses) on interest rate swaps, net of tax | 27,363 | | | (650) | | | 2,096 | |
Accumulated other comprehensive loss | $ | (708) | | | $ | (9,087) | | | $ | (7,484) | |
| | | | | | | | | | | | | | | | | |
| June 30, | | December 31, |
| 2023 | | 2022 | | 2022 |
Foreign currency translation adjustments | $ | (14,338) | | | $ | (16,919) | | | $ | (19,608) | |
Unrealized gains on interest rate swaps, net of tax | 25,191 | | | 18,587 | | | 25,503 | |
Accumulated other comprehensive income | $ | 10,853 | | | $ | 1,668 | | | $ | 5,895 | |
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 andASU 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 do not expect that there will be a material impact to the financial statements as a result of adopting these ASUs. |
Note 2 – Earnings Per Share
We calculate basic and diluted earnings per share 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 common shares outstanding were 213 thousand in205,000 for the third quarter ofthree months ended June 30, 2023 and 218,000 for the three months ended June 30, 2022, and 223 thousand209,000 for the ninesix months ended SeptemberJune 30, 2023 and 229,000 for the six months ended June 30, 2022.
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 | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
Net income | Net income | | $ | 190,055 | | | $ | 184,665 | | | $ | 676,600 | | | $ | 543,015 | | Net income | | $ | 232,250 | | | $ | 307,283 | | | $ | 333,949 | | | $ | 486,544 | |
Amounts allocated to participating securities | Amounts allocated to participating securities | | (1,019) | | | — | | | (3,764) | | | — | | Amounts allocated to participating securities | | (1,219) | | | (1,680) | | | (1,779) | | | (2,762) | |
Net income attributable to common stockholders | Net income attributable to common stockholders | | $ | 189,036 | | | $ | 184,665 | | | $ | 672,836 | | | $ | 543,015 | | Net income attributable to common stockholders | | $ | 231,031 | | | $ | 305,603 | | | $ | 332,170 | | | $ | 483,782 | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | | | | | Weighted average common shares outstanding: | | | | | |
Basic | Basic | | 39,214 | | | 40,101 | | | 39,599 | | | 40,146 | | Basic | | 38,837 | | | 39,660 | | | 38,857 | | | 39,795 | |
Effect of dilutive securities: | Effect of dilutive securities: | | | | | | Effect of dilutive securities: | | | | | |
Stock options and employee stock purchase plan | Stock options and employee stock purchase plan | | 366 | | | 590 | | | 413 | | | 620 | | Stock options and employee stock purchase plan | | 278 | | | 404 | | | 298 | | | 436 | |
Diluted | Diluted | | 39,580 | | | 40,691 | | | 40,012 | | | 40,766 | | Diluted | | 39,115 | | | 40,064 | | | 39,155 | | | 40,231 | |
| Earnings per share attributable to common stockholders: | Earnings per share attributable to common stockholders: | | | | | | Earnings per share attributable to common stockholders: | | | | | |
Basic | Basic | | $ | 4.82 | | | $ | 4.60 | | | $ | 16.99 | | | $ | 13.53 | | Basic | | $ | 5.95 | | | $ | 7.71 | | | $ | 8.55 | | | $ | 12.16 | |
Diluted | Diluted | | $ | 4.78 | | | $ | 4.54 | | | $ | 16.82 | | | $ | 13.32 | | Diluted | | $ | 5.91 | | | $ | 7.63 | | | $ | 8.48 | | | $ | 12.03 | |
| Anti-dilutive stock options excluded from diluted earnings per share computations (1) | Anti-dilutive stock options excluded from diluted earnings per share computations (1) | | 33 | | | — | | | 33 | | | — | | Anti-dilutive stock options excluded from diluted earnings per share computations (1) | | 64 | | | 33 | | | 65 | | | 1 | |
(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.
Note 3 – Acquisitions
In June 2023, we acquired the distribution assets of Pioneer Pool Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Alabama.
In May 2023, we acquired the distribution assets of Recreation Supply Company, a wholesale distributor of commercial swimming pool products, adding one location in North Dakota.
In March 2023, we acquired the distribution assets of Pro-Water Irrigation & Landscape Supply, Inc., a wholesale distributor of irrigation and landscape supply products, adding two locations in Arizona.
In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one 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 one 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 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 one 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 one location in Florida.
In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Tennessee.
Other than the Porpoise acquisition, 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.
Note 4 – Fair Value Measurements and Interest Rate Swaps
Recurring Fair Value Measurements
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, our deferred compensation plan asset and liability 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
OurThe table below presents our assets and liabilities that are measured and recorded 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 table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contract and our contingent consideration liabilities (in thousands):
| | | | | | | | | | | | | | |
| | Fair Value at September 30, |
| | 2022 | | 2021 |
Level 2 | | | | |
Unrealized gains on interest rate swaps | | $ | 36,529 | | | $ | 5,488 | |
Unrealized losses on interest rate swaps | | — | | | 6,308 | |
| | | | |
Level 3 | | | | |
Contingent consideration liabilities | | $ | 546 | | | $ | 983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value at June 30, |
| | Input Level | | Classification | | 2023 | | 2022 |
Assets | | | | | | | | |
Unrealized gains on interest rate swaps | | Level 2 | | Other assets | | $ | 33,632 | | | $ | 24,828 | |
Deferred compensation plan asset | | Level 1 | | Other assets | | 14,633 | | | 16,306 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Contingent consideration liabilities | | Level 3 | | Accrued expenses and other current liabilities | | $ | — | | | $ | 582 | |
| | | | | | | | |
Deferred compensation plan liability | | Level 1 | | Other long-term liabilities | | 14,633 | | | 16,306 | |
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.
ForWe use significant other observable market data or assumptions (Level 2 inputs) in 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)contract 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 lossincome on the Consolidated Balance Sheets.
In the third quarter of 2022, two of our interest rate swap contracts terminated on September 29, 2022. These former swap contracts were previously forward-starting and converted the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts was based on the fixed rates plus the applicable margin on our variable rate borrowings.
The following table provides additional details related to these former swap contracts:
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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% |
We currently have two swap contracts in place. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on a portion of 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 a portion of our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive lossincome 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 3 | | February 5, 2020 | | February 26, 2021 | | February 28, 2025 | | $150.0 | | 1.3800% |
Interest rate swap 4 | | March 9, 2020 | | September 29, 2022 | | February 26, 2027 | | $150.0 | | 0.7400% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative | | Inception Date | | Effective Date | | Termination Date | | Notional Amount (in millions) | | Fixed Interest Rate |
Interest rate swap 1 | | February 5, 2020 | | February 26, 2021 | | February 28, 2025 | | $150.0 | | 1.3260% |
Interest rate swap 2 | | March 9, 2020 | | September 29, 2022 | | February 26, 2027 | | $150.0 | | 0.6690% |
For the interest rate swap contracts in effect at SeptemberJune 30, 2022,2023, 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 lossincome on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount wasThese amounts were not material in the three- or nine-monththree and six-month periods ended SeptemberJune 30, 2023 or June 30, 2022.
We also have entered intoin place a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our variable rate borrowings. This swap contract will convert the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. We record changes in the estimated fair value of this forward-starting interest rate swap contract to Accumulated other comprehensive loss on the Consolidated Balance Sheets.
The following table provides details related to our forward-starting interest rate swap contract: | Derivative | Derivative | | Inception Date | | Effective Date | | Termination Date | | Notional Amount (in millions) | | Fixed Interest Rate | Derivative | | Inception Date | | Effective Date | | Termination Date | | Notional Amount (in millions) | | Fixed Interest Rate |
Forward-starting interest rate swap | Forward-starting interest rate swap | | March 9, 2020 | | February 28, 2025 | | February 26, 2027 | | $150.0 | | 0.8130% | Forward-starting interest rate swap | | March 9, 2020 | | February 28, 2025 | | February 26, 2027 | | $150.0 | | 0.7630% |
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 were in a net pay position.
We amended the floating rate option for our interest rate swap contracts and forward-starting interest rate swap contract, effective June 30, 2023, to reflect the change in the reference rate in our debt agreements from the one month London Interbank Offered Rate Market Index Rate (LIBOR) to the one month Term Secured Overnight Financing Rate Index Rate (Term SOFR). As permitted by ASC 848, a change in rate only does not qualify as a hedge modification, and we have accounted for and presented our interest rate swaps contracts and forward-starting interest rate swap contract in the same manner as prior to the amendments.
Our interest rate swap contracts and forward-starting interest rate swap contract 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 MeasurementsOther
In additionOur deferred compensation plan asset represents investments in securities (primarily mutual funds) traded in an active market (Level 1 inputs) held for the benefit of certain employees as part of our deferred compensation plan. We record an equal and offsetting deferred compensation plan liability, which represents our obligation to our assets and liabilities that we measure atparticipating employees. Changes in the fair value on a recurring basis, our assetsof the plan asset and liabilitiesliability are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwillreflected in Selling and intangible assets, are recorded at fair value on a nonrecurring basis as a resultadministrative expenses in the Consolidated Statements of impairment charges or business combinations. In the three- or nine months ended September 30, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.
OtherIncome.
The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of our long-term debt approximates its fair value (Level 3 inputs).value. 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):
| | | | September 30, | | | June 30, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
Variable rate debt | Variable rate debt | | | | | Variable rate debt | | | | |
| Short-term borrowings | | 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 | | $ | 12,208 | | | $ | 10,744 | | Australian credit facility | | 11,219 | | | 9,579 | |
Current portion of term loans under credit facility | | Current portion of term loans under credit facility | | 25,000 | | | — | |
Short-term borrowings and current portion of long-term debt | Short-term borrowings and current portion of long-term debt | | 12,208 | | | 10,744 | | Short-term borrowings and current portion of long-term debt | | $ | 36,219 | | | $ | 19,731 | |
| Long-term portion: | Long-term portion: | | | | | Long-term portion: | | | | |
Revolving credit facility | Revolving credit facility | | 572,978 | | | 170,255 | | Revolving credit facility | | 217,106 | | | 566,210 | |
Term loan under credit facility | Term loan under credit facility | | 500,000 | | | — | | Term loan under credit facility | | 475,000 | | | 500,000 | |
Term facility | Term facility | | 159,563 | | | 168,812 | | Term facility | | 109,938 | | | 161,875 | |
Receivables securitization facility | Receivables securitization facility | | 270,000 | | | 15,000 | | Receivables securitization facility | | 348,200 | | | 350,000 | |
Less: financing costs, net | Less: financing costs, net | | 2,204 | | | 1,992 | | Less: financing costs, net | | 1,877 | | | 2,418 | |
Long-term debt, net | Long-term debt, net | | 1,500,337 | | | 352,075 | | Long-term debt, net | | 1,148,367 | | | 1,575,667 | |
Total debt | Total debt | | $ | 1,512,545 | | | $ | 362,819 | | Total debt | | $ | 1,184,586 | | | $ | 1,595,398 | |
On January 4, 2022,June 30, 2023, we drewentered into the $250.0 million incremental term loan available under our December 30, 2021 amendmentSecond Amendment to ourthe Second Amended and Restated Credit Agreement (the “Credit Facility”)Credit Facility Amendment) among us as U.S. Borrower, SCP Distributors Canada Inc. as Canadian Borrower, SCP International, Inc. as Euro Borrower, the Subsidiary Guarantors party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and certain other lenders party thereto. The Credit Facility Amendment updated the index used for the net proceeds to reduce our revolving borrowings under the Credit Facility. At September 30, 2022, the $500.0 million of term loans available underBase Rate (as further defined within the Credit Facility were fully drawn.Amendment) from LIBOR to Term SOFR. The Credit Facility Amendment also increased the maximum amount for the Accounts Securitization (as further defined within the Credit Facility Amendment) from $350.0 million to $500.0 million and increased the Canadian Dollar Commitment, Euro Commitment and Swingline Commitment (all as further defined within the Credit Facility Amendment) to $50.0 million each.
We also entered into the Second Amendment to Credit Agreement (the Term Facility Amendment) on June 30, 2023, among us, as Borrower, the Guarantors party thereto and Bank of America, N.A. as Lender. The Term Facility Amendment updated the index used for the Base Rate (as further defined within the Term Facility Amendment) from LIBOR to SOFR.
Our accounts receivable securitization facility (the “Receivables Facility”)Receivables Facility) provides for the sale of certain of our receivables to a wholly ownedwholly-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.
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 20212022 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our 20212022 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, management's views on industry, economic, competitive, technological and industry, general economicregulatory conditions and other forecasts of trends 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;economic conditions, consumer discretionary spending;spending, the housing market, inflation or inflationinterest rates; our ability to maintain favorable relationships with suppliers and manufacturers; the extent to which home-centric trends associated with the pandemic will moderate or reverse; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; changes in the regulatory environment; new or additional taxes, duties or tariffs; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 20212022 Annual Report on Form 10-K.10-K, as updated by our subsequent filings with the U.S. Securities and Exchange Commission. 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
Financial Results
NetA slow start to the swimming pool season combined with cautious consumer sentiment resulted in net sales increased 14%of $1.9 billion in the thirdsecond quarter of 2023, a decrease of 10% compared to $2.1 billion in the second quarter of 2022. This decrease in net sales follows 15% net sales growth in the second quarter of 2022 to $1.6 billion compared to $1.4 billionand 40% net sales growth in the thirdsecond quarter of 2021. Base businessFrom 2019 to 2023, our second quarter net sales grew 10% strengthened by salesat a compound annual growth rate (“CAGR”) of 13%. Our results in our Sun Belt markets, while sales in our northern markets were limited by less favorablethe second quarter of 2023 reflect challenging macro trends and negative impacts from cooler weather conditions compared to last year. Net sales benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather throughout muchat the beginning of the United States. We estimate that these increases were partially offset by the following:
•1% impact from softness inquarter across many of our European markets, reflecting the impact of the macro-economic environment;
•1% from currency exchange rate fluctuations;
•1% from one less selling day in Q3 2022 versus Q3 2021;markets. These conditions led to slower maintenance activity than anticipated, reduced outdoor living construction activity and
•anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.
deferred discretionary replacement activity.
Gross profit increased 14%decreased 15% to $503.7$567.8 million in the thirdsecond quarter of 20222023 from $441.9$666.8 million in the same period of 2021. Base business2022. Our gross profit improved 7% overincreased at a 15% CAGR from the thirdsecond quarter of 2021. Gross2019 to the second quarter of 2023. Consistent with our expectations, gross margin decreased 10180 basis points to 31.2%30.6% in the thirdsecond quarter of 20222023 compared to 31.3%32.4% in the thirdsecond quarter of 2021. Base business gross margin decreased 80 basis points.2022.
Selling and administrative expenses (operating expenses) increased 17%decreased 3% to $239.8$240.8 million in the thirdsecond quarter of 2023 compared to $247.9 million in the second quarter of 2022 compared to $204.6 million in the third quarter of 2021, including a 1% benefit from currency exchange rate fluctuations.as we managed variable expenses with reduced sales volumes. As a percentage of net sales, operating expenses increased to 14.8%13.0% in the thirdsecond quarter of 20222023 compared to 14.5%12.1% in the same period of 2021. The increase in2022.
While operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.
Operating income in the thirdsecond quarter of 2023 decreased 22% to $327.0 million from a record high of $418.9 million in the second quarter of 2022, operating income increased 11%at a 17% CAGR from the second quarter of 2019 to $263.9 million compared to $237.3 million in the same period in 2021.second quarter of 2023. Operating margin was 16.3%17.6% in the thirdsecond quarter of 20222023 compared to 16.8%20.4% in the thirdsecond quarter of 2021.2022.
Interest and other non-operating expenses, net for the thirdsecond quarter of 20222023 increased $9.4$8.4 million compared to the thirdsecond quarter of 2021,2022, primarily reflecting higher average debt levels and higher average interest rates.
We recorded a $0.6 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended SeptemberJune 30, 2022,2023, compared to a tax benefit of $4.2$1.6 million realized in the same period of 2021.2022. This resulted in a $0.02 per diluted share tax benefit in the thirdsecond quarter of 2022, down from2023 compared to a $0.10$0.04 per
diluted share tax benefit realized in the same period of 2021.2022.
Net income increased 3%decreased 24% to $190.1$232.3 million in the thirdsecond quarter of 20222023 compared to $184.7$307.3 million in the thirdsecond quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits.2022. Earnings per diluted share increased 5%decreased 23% to $4.78$5.91 in the thirdsecond quarter of 20222023 compared to $4.54$7.63 in the same period of 2021.2022. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7%decreased 22% to $4.76$5.89 compared to $7.59 in the thirdsecond quarter of 2022 compared to $4.44 in2022. Our earnings per diluted share increased at a 16% CAGR from the thirdsecond quarter of 2021.2019 to the second quarter of 2023 and an 18% CAGR without the impact of ASU 2016-19 over the same period. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.
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 ongoing impact of the COVID-19 pandemic. The health, safety and security of our employees, customers and the communities in which we operate remain our highest 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 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. This trend has had a positive impact on our financial performance over the past couple of years. Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.
Our industry experienced substantial supply chain constraints beginning in 2021. In response, we have proactively made significant investments in inventory in the last half of 2021 and early 2022 to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service. While we continued to be challenged by supply chain constraints through the first part of 2022, we observed improvements in our supply chain dynamics in the second and third quarters of 2022. We expect inventory balances to normalize with seasonal trends as 2023 progresses.
Financial Position and Liquidity
As of SeptemberJune 30, 2022,2023, total net receivables, including pledged receivables, increased 15%decreased 17% compared to SeptemberJune 30, 2021,2022, primarily driven by our sales growth and recent acquisitions.due to lower sales. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.026.2 days at SeptemberJune 30, 20222023 and 25.727.2 days at SeptemberJune 30, 2021.2022. Our allowance for doubtful accounts balance was $8.9$10.1 million at SeptemberJune 30, 20222023 and $5.4$6.5 million at SeptemberJune 30, 2021.2022.
Net inventory levels increased 48%of $1.4 billion decreased $186.2 million, or 12%, compared to levels at SeptemberJune 30, 2021. Our2022. This decrease also compares to our March 31, 2023 net inventory balance of $1.7 billion, which was 3% higher than March 31, 2022. This ongoing improvement reflects increased purchasingprogress toward reducing our inventory balance following prior year strategic purchases made to ensure product availability and stock new locations, in addition to impacts from inflation and recent acquisitions.mitigate supply chain challenges. Our inventory reserve was $23.4$25.4 million at SeptemberJune 30, 20222023 and $15.7$20.9 million at SeptemberJune 30, 2021.2022. Our inventory turns, as calculated on a trailing four quarters basis, were 2.72.5 times at SeptemberJune 30, 20222023 and 3.82.8 times at SeptemberJune 30, 2021. Our inventory turns have averaged 3.4 times over the past five years.2022.
Total debt outstanding at SeptemberJune 30, 20222023 was $1.5$1.2 billion compared to $362.8$1.6 billion at June 30, 2022 down $410.8 million at Septemberfrom June 30, 2021. Our debt balance has increased between periods2022 and $202.2 million lower than December 31, 2022, as we have utilizedused operating cash flows to reduce our debt. Our debt proceeds over the past twelve months have been utilized primarily to fund recent acquisitions, share repurchases, dividends, capital expenditures and investments in working capital.acquisitions.
Current Trends and Outlook
For a detailed discussion of trends impacting us through 2021,2022, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 20212022 Annual Report on Form 10-K.
WeBased on our results to date and trends observed through the first half of 2023, we now expect sales for the full year of 2023 to be down in the range of around 10% compared to 2022 diluted EPSversus our expectation of $18.50 to $19.05, including the impact of year-to-date tax benefits of $0.24. Our previous earnings guidance rangea mid-single digit decline disclosed in our SecondFirst Quarter 20222023 Report on Form 10-Q. Considering the slower than expected start to the pool season and greater visibility as the season progresses, we believe the possible trends outlined in our First Quarter 2023 Report on Form 10-Q was $18.38for new pool construction and repair and remodel will fall to $19.13. Our earnings guidance range assumes average weather conditions.the lower end of the sales ranges. Further, the slower start resulted in reduced revenues for maintenance needs, such as chemicals, further leading us to reduce our sales expectations for the full year.
We expect sales growth for the full year in the range of 17% to 19% asAs previously disclosed in our 20212022 Annual Report on Form 10-K. We10-K, we project 2022 inflationary product cost increases of approximately 10% (compared to 7% to 8% in 2021). Recently, we've observed increased demand for higher value products and customizations for new pools and remodeling projects, even though the issuance of new pool permits year-to-date has moderated.
We expect a modest improvement in gross margin for the full year of 20222023 to be in line with our long-term outlook of approximately 30.0% with higher gross margin in the first half of 2023 compared to the latter half of the year as we sold through most of our prior year strategic inventory purchases in the first half of the year.
We plan to leverage our existing infrastructure and manage discretionary spending to limit operating expense growth to 1% compared to the full year of 2021 given the beneficial impact of price inflation2022, not considering any acquisitions that may arise in the firstsecond half of the year. Historically, our first and fourth quarter gross margin is lower compared to our second and third quarters based on seasonality. We expect gross margin in the fourth quarter of 2022 to decline 150 to 200 basis points compared to gross margin of 31.1% in the fourth quarter of 2021 (which is notably up versus 28.5% reported in the fourth quarter of 2020), primarily due to lower inflation from vendor price increases compared to last year and lower incentives earned under our volume-based vendor programs.
We project our operating expense growth rate in 2022 will be less than our gross profit growth rate. We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our strategic initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network. We also expect increased expenses from tight labor and real estate markets in 2022, which are heightened focus areas in our expense management.
We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 20222023 will approximate 25.5%our 2022 annual tax rate of 25.2%. 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 a $9.5$5.4 million, or $0.24$0.14 per diluted share, tax benefit from ASU 2016-09 for the ninesix months ended SeptemberJune 30, 2022.2023. We may recognize additional tax benefits related to stock option exercises in 20222023 from grants that expire in future years. We have not included any expected tax benefits in our guidance beyond what we have recognized as of SeptemberJune 30, 2022.2023.
We expect 2023 diluted EPS in the range of $13.14 to $14.14, including the impact of year-to-date tax benefits of $0.14. We
expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2022 and to use cash for the payment of cash dividends as and when declared by our Board.Board of Directors (Board) and to fund opportunistic share repurchases through the remainder of 2023.
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 SeptemberJune 30, 2022,2023, we conducted operations through 417432 sales centers in North America, Europe and Australia. For the ninesix months ended SeptemberJune 30, 2022,2023, approximately 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 | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
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 | | 68.8 | | | 68.7 | | | 68.2 | | | 69.6 | | Cost of sales | | 69.4 | | | 67.6 | | | 69.4 | | | 67.9 | |
Gross profit | Gross profit | | 31.2 | | | 31.3 | | | 31.8 | | | 30.4 | | Gross profit | | 30.6 | | | 32.4 | | | 30.6 | | | 32.1 | |
Selling and administrative expenses | Selling and administrative expenses | | 14.8 | | | 14.5 | | | 13.8 | | | 13.8 | | Selling and administrative expenses | | 13.0 | | | 12.1 | | | 15.2 | | | 13.2 | |
| Operating income | Operating income | | 16.3 | | | 16.8 | | | 18.1 | | | 16.5 | | Operating income | | 17.6 | | | 20.4 | | | 15.4 | | | 18.9 | |
Interest and other non-operating expenses, net | Interest and other non-operating expenses, net | | 0.7 | | | 0.2 | | | 0.5 | | | 0.2 | | Interest and other non-operating expenses, net | | 0.9 | | | 0.4 | | | 1.1 | | | 0.4 | |
Income before income taxes and equity in earnings | Income before income taxes and equity in earnings | | 15.6 | % | | 16.6 | % | | 17.6 | % | | 16.4 | % | Income before income taxes and equity in earnings | | 16.7 | % | | 20.0 | % | | 14.4 | % | | 18.5 | % |
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 20222023 and 20212022 in our consolidated results since the acquisition dates.
Three Months Ended SeptemberJune 30, 20222023 Compared to Three Months Ended SeptemberJune 30, 20212022
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) | | Three Months Ended | | Three Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | | $ | 1,552,211 | | | $ | 1,409,867 | | | $ | 63,128 | | | $ | 1,581 | | | $ | 1,615,339 | | | $ | 1,411,448 | |
| | | | | | | | | | | | |
Gross profit | | 472,873 | | | 441,521 | | | 30,814 | | | 378 | | | 503,687 | | | 441,899 | |
Gross margin | | 30.5 | % | | 31.3 | % | | 48.8 | % | | 23.9 | % | | 31.2 | % | | 31.3 | % |
| | | | | | | | | | | | |
Operating expenses | | 220,239 | | | 204,277 | | | 19,571 | | | 346 | | | 239,810 | | | 204,623 | |
Expenses as a % of net sales | | 14.2 | % | | 14.5 | % | | 31.0 | % | | 21.9 | % | | 14.8 | % | | 14.5 | % |
| | | | | | | | | | | | |
Operating income | | 252,634 | | | 237,244 | | | 11,243 | | | 32 | | | 263,877 | | | 237,276 | |
Operating margin | | 16.3 | % | | 16.8 | % | | 17.8 | % | | 2.0 | % | | 16.3 | % | | 16.8 | % |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | June 30, | | |
(in millions) | | 2023 | | 2022 | | Change |
Net sales | | $ | 1,857.4 | | | $ | 2,055.8 | | | $ | (198.4) | | | (10)% |
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 | | 1 | | July - September 2022 |
Porpoise Pool & Patio, Inc. | | December 2021 | | 1 | | July - September 2022 |
Wingate Supply, Inc. | | December 2021 | | 1 | | July - September 2022 |
Vak Pak Builders Supply, Inc. | | June 2021 | | 1 | | July - August 2022 and July - August 2021 |
| | | | | | |
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 theirFollowing 15% net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centersgrowth in the base business calculation including the comparative prior year period.
The table below summarizes the changes in our sales center count during the first nine months of 2022:
| | | | | |
December 31, 2021 | 410 | |
Acquired locations | 1 | |
New locations | 6 | |
| |
September 30, 2022 | 417 | |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
(in millions) | | 2022 | | 2021 | | Change |
Net sales | | $ | 1,615.3 | | | $ | 1,411.4 | | | $ | 203.9 | | | 14% |
Net sales increased 14% in the thirdsecond quarter of 2022 on topand 40% net sales growth in the second quarter of 2021 (in both cases compared to the prior year quarter), net sales of $1.4$1.9 billion and 24% growth in the thirdsecond quarter of 2021. Base business2023 were down 10% compared to the second quarter of 2022. From 2019 to 2023, our second quarter net sales grew at a CAGR of 13%. Our results in the thirdcurrent quarter reflect challenging macro trends and negative impacts from cooler weather at the beginning of 2022 grew 10% strengthened by sales growth inthe quarter across many of our Sun Belt markets, while sales in our northern markets were limited by less favorable weathermarkets. These conditions comparedled to last year.
slower maintenance activity than anticipated, reduced outdoor living construction activity and deferred discretionary replacement activity. The following factors benefitedalso impacted our sales (listedduring the quarter and are listed in order of estimated magnitude):magnitude.
•Net sales benefited approximately 3% to 4% from inflationary product cost increases, which compares to a benefit of approximately 910% to 10%;11% in the second quarter of 2022.
•4%We estimate that unfavorable weather conditions in the second quarter negatively impacted sales growth from recent acquisitions;by approximately $30.0 million.
•favorable trends for our products including:
◦consistent demand for discretionary products, as evidenced by sales growth for product offerings such as equipment and building materials (see discussion below);
◦market share gains, including thoseSales were also negatively impacted 1% from lower customer early buy activity in building materials (see discussion below); and
◦sustained demand for residential swimming pool maintenance supplies, as the installed basesecond quarter of pools continues to increase.2023 versus the second quarter of 2022.
We estimate thatRelated to our product sales, following a period of significant growth over the benefits discussed above were partially offset by the following:
•1% impact from softnesspast three years, we observed a period-over-period decline in our European markets, reflecting the impactvolumes of the macro-economic environment;
•1% unfavorable impact from currency exchange rate fluctuations;
•1% from one less selling day in Q3 2022 versus Q3 2021; and
•anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.
Higher sales for certain product offerings, suchdiscretionary products sold as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as poolnew construction pool remodeling and equipment upgrades.activities moderated. In the thirdsecond quarter of 2022,2023, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 9%decreased 8% compared to the same period last year, and collectively represented approximately 27% of net sales for the period. Supply chain issues continue to persist and constrain sales of certain equipment products. Sales of building materials grew 14%decreased 8% compared to the thirdsecond quarter of 20212022 and represented approximately 14%12% of net sales in the thirdsecond quarter of 2022. Sales of chemicals, representing 13% of total net sales, increased 32% compared to the third quarter of 2021. The increase in chemical sales was driven by price inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.2023.
Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growthsales trends in these areas isare reflected in the discussion above. Sales to base business retail customers increased 4%decreased 11% in the thirdsecond quarter of 2023 compared to the second quarter of 2022 and represented approximately 15% of our total net sales. As consumers take advantage of travel opportunities, sales to commercial swimming pool customers increased 8% in the second quarter of 2023 compared to the thirdsecond quarter of 20212022 and represented approximately 11%4% of our net sales for the thirdsecond quarter of 2022. Sales2023.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | June 30, | | |
(in millions) | | 2023 | | 2022 | | Change |
Gross profit | | $ | 567.8 | | | $ | 666.8 | | | $ | (99.0) | | | (15)% |
Gross margin | | 30.6 | % | | 32.4 | % | | | | |
Gross margin decreased 180 basis points to commercial customers increased 28%30.6% in the thirdsecond quarter of 2023 compared to the second quarter of 2022 comparedwhen gross margin increased 150 basis points (over the same period in 2021) to 32.4%. Our prior year gross margin benefited from higher levels of inflation and price increases, while gross margin in the thirdsecond quarter of 2021 and represented approximately 3%2023 began to trend more in line with our longer-term annual gross margin outlook of our net sales30.0%. Gross margin in the second quarter of 2023 reflects a seasonal benefit that is typical for the third quarter of 2022.
second quarter.
Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the third quarter of 2022, increased 8% compared to the third quarter of 2021. Comparatively, net sales in our year-round markets, representing 51% of our total base business net sales in the third quarter of 2022, increased 15% compared to the third quarter of 2021.
Net sales in Europe, representing 3% of our total net sales in the third quarter of 2022, declined 11% in local currency compared to the third 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 the volume of sales driven by macroeconomic uncertainty from the war in Ukraine and increased fuel prices.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
(in millions) | | 2022 | | 2021 | | Change |
Gross profit | | $ | 503.7 | | | $ | 441.9 | | | $ | 61.8 | | | 14% |
Gross margin | | 31.2 | % | | 31.3 | % | | | | |
Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to the third quarter of 2021 when gross margin increased 240 basis points to 31.3% (over the same period in 2020). Our gross margin in the third quarter of 2022 benefited from focused pricing efforts, our supply chain initiatives and recent acquisitions, which mostly offset some headwinds from our vendor incentive programs.
Operating Expenses
| | | | Three Months Ended | | | | | Three Months Ended | | |
| | September 30, | | | | June 30, | | |
(in millions) | (in millions) | | 2022 | | 2021 | | Change | (in millions) | | 2023 | | 2022 | | Change |
Selling and administrative expenses | Selling and administrative expenses | | $ | 239.8 | | | $ | 204.6 | | | $ | 35.2 | | | 17% | Selling and administrative expenses | | $ | 240.8 | | | $ | 247.9 | | | $ | (7.1) | | | (3)% |
| Operating expenses as a % of net sales | Operating expenses as a % of net sales | | 14.8 | % | | 14.5 | % | | | | | Operating expenses as a % of net sales | | 13.0 | % | | 12.1 | % | | | | |
Operating expenses increased 17%decreased 3% in the thirdsecond quarter of 2023 compared to the second quarter of 2022. During the second quarter, we were able to better offset inflationary expense increases with productivity actions. Our operating expenses reflect lower employee-related costs, variable and discretionary expenses and reduced delivery and vehicle operating costs. Employee-related expenses were down 10% from the second quarter of 2022, comparedprimarily reflecting lower performance-based compensation expense and controlled overtime and temporary employee pay with lower sales volumes. Freight related costs declined due to the third quarter of 2021 (including a 1% benefit from currency exchange rate fluctuations), reflecting inflationary increaseslower fuel costs and incrementallower sales. These expense decreases were partially offset by higher building and insurance costs to support our business growth, including recent acquisitions. Incremental operating expense increasesbetween periods related to growth-driven labor, facilityinflation and freight costs, and investments inthe expansion of our digital transformation initiatives. As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.network.
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the thirdsecond quarter of 20222023 increased $9.4$8.4 million compared to the thirdsecond quarter of 2021.2022, primarily due to higher average interest rates between periods. Our weighted average effective interest rate increased to 3.2%5.2% in the thirdsecond quarter of 20222023 from 2.8%2.0% in the thirdsecond quarter of 20212022 on average outstanding debt of $1.5$1.3 billion versus $354.3 millionand $1.6 billion for the respective periods.
Income Taxes
Our effective income tax rate was 24.7%25.1% for both the three months ended SeptemberJune 30, 2022 compared to 21.4% for2023, and the three months ended SeptemberJune 30, 2021.2022. We recorded a $0.6 million tax benefit from ASU 2016-09 in the quarter ended SeptemberJune 30, 20222023, compared to a tax benefit of $4.2$1.6 million realized in the same period last year. Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 24.9%25.4% for the thirdsecond quarter of 20222023 and 23.2%25.5% for the thirdsecond quarter of 2021. Our third quarter effective income tax rate is typically lower compared to other quarters due to the annual expiration of statutes of limitations in the various jurisdictions where we have recorded uncertain tax positions.2022.
Net Income and Earnings Per Share
Net income increased 3%decreased 24% to $190.1$232.3 million in the thirdsecond quarter of 20222023 compared to $184.7$307.3 million in the thirdsecond quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits.2022. Earnings per diluted share increased 5%decreased 23% to $4.78$5.91 in the thirdsecond quarter of 20222023 compared to $4.54$7.63 in the same period of 2021.2022. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7%decreased 22% to $4.76$5.89 in the thirdsecond quarter of 20222023 compared to $4.44$7.59 in the thirdsecond quarter of 2021.2022. See the reconciliation of GAAP to non-GAAP measures below.
NineSix Months Ended SeptemberJune 30, 20222023 Compared to NineSix Months Ended SeptemberJune 30, 20212022
The following table breaks out our
We have not provided separate base business income statements within this Form 10-Q as base business results approximated consolidated results,
into the base business component and
the excluded component (salesacquisitions and sales centers excluded from base
business): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Unaudited) | | Base Business | | Excluded | | Total |
(in thousands) | | Nine Months Ended | | Nine Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, |
| | | | | | | | | | | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | | $ | 4,844,310 | | | $ | 4,250,543 | | | $ | 239,497 | | | $ | 9,484 | | | $ | 5,083,807 | | | $ | 4,260,027 | |
| | | | | | | | | | | | |
Gross profit | | 1,511,996 | | | 1,292,470 | | | 105,685 | | | 2,246 | | | 1,617,681 | | | 1,294,716 | |
Gross margin | | 31.2 | % | | 30.4 | % | | 44.1 | % | | 23.7 | % | | 31.8 | % | | 30.4 | % |
| | | | | | | | | | | | |
Operating expenses | | 640,907 | | | 587,989 | | | 58,285 | | | 1,834 | | | 699,192 | | | 589,823 | |
Expenses as a % of net sales | | 13.2 | % | | 13.8 | % | | 24.3 | % | | 19.3 | % | | 13.8 | % | | 13.8 | % |
| | | | | | | | | | | | |
Operating income | | 871,089 | | | 704,481 | | | 47,400 | | | 412 | | | 918,489 | | | 704,893 | |
Operating margin | | 18.0 | % | | 16.6 | % | | 19.8 | % | | 4.3 | % | | 18.1 | % | | 16.5 | % |
business impacted net sales growth less than 1% in the second quarter of 2023. The table below summarizes the changes in our sales center count during the first six months of 2023:
In our calculation of base business results, we have excluded the following acquisitions for the periods identified: | | | | | | | | | | | | | | | | | | | | |
December 31, 2022
Acquired
| |
Acquisition
Date
| | Net Sales Centers Acquired420 | |
Periods
Excluded
|
Tri-State Pool DistributorsAcquired locations | | April 20224 | | 1 | | May - September 2022 |
Porpoise Pool & Patio, Inc.New locations | | December 20218 | | 1 | | January - September 2022 |
Wingate Supply, Inc. | | December 2021 | | 1 | | January - September 2022 |
Vak Pak Builders Supply, Inc. | | June 2021 | | 1 | | January - August 2022 and June - August 2021 |
Pool Source, LLC | | April 2021 | | 1 | | January - June 2022 and April - June 2021 |
TWC Distributors, Inc. | | December 2020 | | 10 | | January - February 2022 and January - February 2021 |
| | | | | | |
| | | | | | |
June 30, 2023 | | | | | 432 | |
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, 2021, please refer to the discussion under the heading Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021.
Net Sales
| | | | Nine Months Ended | | | | | Six Months Ended | | |
| | September 30, | | | | June 30, | | |
(in millions) | (in millions) | | 2022 | | 2021 | | Change | (in millions) | | 2023 | | 2022 | | Change |
Net sales | Net sales | | $ | 5,083.8 | | | $ | 4,260.0 | | | $ | 823.8 | | | 19% | Net sales | | $ | 3,064.1 | | | $ | 3,468.5 | | | $ | (404.4) | | | (12)% |
Net sales for the first ninesix months of 2022 increased 19%2023 decreased 12% compared to the same period last year. Base business net sales increased 14%. OurDiffering weather conditions throughout the first half of 2023 contributed to variability in our results across our geographic markets. While our southern markets experienced more typical weather during the first quarter of 2023 and generated encouraging results, higher precipitation and cooler temperatures suppressed results in our western markets, including two of our largest markets, California and Arizona. In the first nine monthssecond quarter of 2023, cautious consumer sentiment combined with a slow start to the year were driven by continued strong demand for outdoor-living products and elevated price inflation. Sales growth in our seasonally significant quarters (second and third quarters) have been limited by industry capacity, including labor and supply chain constraints. However, we have observed improvements in our supply chain dynamicsswimming pool season after unfavorable weather early in the second quarter led to slower maintenance activity than anticipated, reduced outdoor living construction activity and third quarters of 2022 following the challenges in the second half of 2021 through early 2022.deferred discretionary replacement activity.
The following factors benefitedimpacted our sales (listedand are listed in order of estimated magnitude):magnitude.
•Net sales benefited approximately 4% from inflationary product cost increases, which compares to a benefit of approximately 9%10% to 10%;11% in the first half of 2022.
•5%We estimate that unfavorable weather conditions in the first half of 2023 negatively impacted sales growth from recent acquisitions;by approximately 3%.
•favorable trends for our products including:
◦consistent demand for discretionary products, as evidenced by sales growth for product offerings such as equipment and building materials (see discussion below);
◦market share gains, including thoseSales were also negatively impacted 2% from lower customer early buy activity in building materials (see discussion below); and
◦sustained demand for residential swimming pool maintenance supplies, as the installed basefirst half of pools continues to grow.2023 versus the first half of 2022.
FollowingThe impact of differing weather patterns contributed to variability in the results of our robust 33% sales growthmarkets in the first quarterhalf of the year. Net sales in our North American seasonal markets, representing 44% of our net sales in the first six months of 2023, decreased 15% compared to the first six months of 2022 resultsas these markets are more sensitive to weather conditions, particularly in the shoulders of the season when unfavorable weather delays the openings of swimming pools. Comparatively, net sales in our second and third quarters were limited by several factors. We estimate thatyear-round markets, representing 51% of our net sales in the benefits discussed above were partially offset by the following:
•1% impact from softness in our European markets, reflecting the impactfirst six months of the macro-economic environment;
•1% unfavorable impact from currency exchange rate fluctuations;
•less favorable weather conditions2023, decreased 9% compared to last year throughout the second and third quarters, particularly in our seasonal markets (see discussion below); and
•anticipated net sales shiftfirst six months of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.2022.
HigherRelated to our product sales, for certain product offerings, suchfollowing a period of significant growth over the past three years, we observed a year-over-year decline in volumes of discretionary products sold as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as poolnew construction pool remodeling and equipment upgrades.activities moderated. In the first ninesix months of 2022,2023, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increaseddecreased approximately 11%10% compared to the same period last year. Equipment growth for certain products was limited by supply chain constraints. Equipmentyear and collectively represented 27%29% of net sales in the first ninesix months of 2022.2023. Sales of building materials grew 22%decreased 8% compared to the first ninesix months of 20212022 and represented approximately 13% of net sales in the first ninesix months of 2022. Sales of chemicals, representing 12% of total net sales, increased 34% compared to the first nine months of 2021. The increase in chemical sales was driven by inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.2023.
Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growthsales trends in these areas isare reflected in the discussion above. InSales to retail customers decreased 12% in the first ninesix months of 2022, sales to base business retail customers increased 10%2023 compared to the first ninesix months of 20212022 and represented approximately 12%15% of our consolidated net sales. Sales to certainAs consumers take advantage of our retail customers have been hindered by less favorable weather conditions in the second and third quarters compared to the prior year. Salestravel opportunities, sales to commercial customers increased 27%10% in the first ninesix months of 20222023 compared to the first ninesix months of 20212022 and represented approximately 3%4% of our consolidated net sales in the first ninesix months of 2022.2023.
Net salesGross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | |
| | June 30, | | |
(in millions) | | 2023 | | 2022 | | Change |
Gross profit | | $ | 937.5 | | | $ | 1,114.0 | | | $ | (176.5) | | | (16)% |
Gross margin | | 30.6 | % | | 32.1 | % | | | | |
Gross margin declined 150 basis points to 30.6% in our seasonal markets (not considering Europe), representing 46% of our total base business net salesthe six months ended June 30, 2023, compared to 32.1% in the first ninesix months of 2022, increased 13% compared to the first nine months2022. Our prior year gross margin benefited from higher levels of 2021. Comparatively, net salesinflation and price increases, while gross margin in our year-round markets, representing 49% of our total base business net sales in the first nine months of 2022, increased 18% compared to the first half of 2021.
Net sales2023 began to trend more in Europe, representing 4%line with our longer-term annual gross margin outlook of our total net sales30.0%. Our gross margin in the first nine monthshalf of 2022, declined 3%2023 reflected benefits from sales of strategic lower cost inventory purchases ahead of vendor price increases, which was more impactful in local currency. While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, beginningthe first quarter of 2023 when a higher portion of lower-priced inventory was sold. Gross margin in the second quarter of 2022, our results were negatively impacted by2023 reflected a decline inseasonal benefit that is typical for the volume of sales driven by macroeconomic uncertainty.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | |
| | September 30, | | |
(in millions) | | 2022 | | 2021 | | Change |
Gross profit | | $ | 1,617.7 | | | $ | 1,294.7 | | | $ | 323.0 | | | 25% |
Gross margin | | 31.8 | % | | 30.4 | % | | | | |
Gross margin improved 140 basis points to 31.8% in the nine months ended September 30, 2022 compared to 30.4% in the first nine months of 2021. This improvement reflects focused supply chain management initiatives to address inflation, increased pricing and benefits from our recent acquisitions.
Operating Expenses
| | | | Nine Months Ended | | | | | Six Months Ended | | |
| | September 30, | | | | June 30, | | |
(in millions) | (in millions) | | 2022 | | 2021 | | Change | (in millions) | | 2023 | | 2022 | | Change |
Selling and administrative expenses | Selling and administrative expenses | | $ | 699.2 | | | $ | 589.8 | | | $ | 109.4 | | | 19% | Selling and administrative expenses | | $ | 464.8 | | | $ | 459.4 | | | $ | 5.4 | | | 1% |
| Operating expenses as a % of net sales | Operating expenses as a % of net sales | | 13.8 | % | | 13.8 | % | | | | | Operating expenses as a % of net sales | | 15.2 | % | | 13.2 | % | | | | |
Operating expenses for the ninesix months ended SeptemberJune 30, 2022 increased 19% compared2023, moderated to a 1% increase over the prior year period following the 6% increase realized in the first nine monthsquarter of 2021, including a 1% benefit from currency exchange rate fluctuations. The increase in operating expenses reflects2023. During the second quarter, we were able to better offset inflationary expense increases and incremental costs to support our business growth, including recent acquisitions.with productivity actions. Our largest expense growth reflects increases in growth-driven labor,drivers related to higher rent and facility costs, increased insurance and freighthealthcare-related costs, along with increasedthe return of in-person customer-facing retail events and investments in technologycustomer-focused projects. These increases were largely offset by lower employee-related costs, variable and higher performance-based compensation expense.discretionary expenses and reduced delivery and vehicle operating costs.
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the first ninesix months of 20222023 increased $18.6$19.0 million compared to the same period last year, primarily due to higher average debt levelsinterest rates between periods. Our average outstanding debt was $1.5 billion for the first nine months of 2022 versus $376.2 million for the same period of 2021. Our weighted average effective interest rate decreasedincreased to 2.3%5.0% from 2.6%1.8% for the respective periods.periods on average outstanding debt of $1.3 billion for the first six months of 2023 versus $1.4 billion for the same period of 2022.
Income Taxes
Our effective income tax rate was 24.3%24.1% for both the ninesix months ended SeptemberJune 30, 2022 compared to 22.2% for2023, and the ninesix months ended SeptemberJune 30, 2021.2022. We recorded a $9.5$5.4 million, or $0.24$0.14 per diluted share, tax benefit from ASU 2016-09 in the ninesix months ended SeptemberJune 30, 20222023, compared to a $15.9an $8.9 million, or $0.39$0.22 per diluted share, tax benefit in the same period of 2021.2022. Without the benefits from ASU 2016-09, our effective tax rate was 25.3%25.4% for the ninesix months ended SeptemberJune 30, 20222023, and 24.5%25.5% for the ninesix months ended SeptemberJune 30, 2021.2022.
Net Income and Earnings Per Share
Net income increased 25%decreased 31% to $676.6$333.9 million for the ninesix months ended SeptemberJune 30, 20222023, compared to the ninesix months ended SeptemberJune 30, 2021.2022. Earnings per diluted share increased 26%decreased 30% to $16.82$8.48 for the ninesix months ended SeptemberJune 30, 20222023, versus $13.32$12.03 per diluted share for the ninesix months ended SeptemberJune 30, 2021.2022. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 28%decreased 29% to $16.58$8.34 for the ninesix months ended SeptemberJune 30, 20222023, compared to $12.93$11.81 for the ninesix months ended SeptemberJune 30, 2021.2022. See the reconciliation of GAAP to non-GAAP measures below.
Reconciliation of Non-GAAP Financial Measures
The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-Q.
Adjusted Diluted EPS
We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to management, investors and others in assessing our period-to-period operating performance.
Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.
We believe this measure should be considered in addition to, not as a substitute for, diluted EPS presented in accordance with GAAP, and in the context of our other disclosures within this Form 10-Q. Other companies may calculate this non-GAAP financial measure differently than we do, which may limit its usefulness as a comparative measure.
The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Unaudited) | | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | |
Diluted EPS | | $ | 4.78 | | | $ | 4.54 | | | $ | 16.82 | | | $ | 13.32 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
ASU 2016-09 tax benefit | | (0.02) | | | (0.10) | | | (0.24) | | | (0.39) | | |
| | | | | | | | | |
Adjusted diluted EPS | | $ | 4.76 | | | $ | 4.44 | | | $ | 16.58 | | | $ | 12.93 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Unaudited) | | Three Months Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | |
Diluted EPS | | $ | 5.91 | | | $ | 7.63 | | | $ | 8.48 | | | $ | 12.03 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
ASU 2016-09 tax benefit | | (0.02) | | | (0.04) | | | (0.14) | | | (0.22) | | |
| | | | | | | | | |
Adjusted diluted EPS | | $ | 5.89 | | | $ | 7.59 | | | $ | 8.34 | | | $ | 11.81 | | |
| | | | | | | | | |
| | | | | | | | | |
Seasonality and Quarterly Fluctuations
Our business is 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 lower during the first and fourth quarters. In 2021,2022, we generated approximately 60%59% of our net sales and 69%67% of our operating income in the second and third quarters of the year.
We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.
The following table presents certain unaudited quarterly data for the first, second and third quarters of 2022, the four quarters of 2021 and the fourth quarter of 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,We believe this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. 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 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) | | 2022 | | 2021 | | 2020 | (in thousands) | | 2023 | | 2022 | | 2021 | |
| | | Third | | Second | | First | | Fourth | | Third | | Second | | First | | Fourth | | | | Second | | First | | Fourth | | Third | | Second | | First | | Fourth | | Third | | |
Statement of Income Data | Statement of Income Data | | | | | | | | | | | | | | | | | | Statement of Income Data | | | | | | | | | | | | | | | | | | |
Net sales | Net sales | | $ | 1,615,339 | | | $ | 2,055,818 | | | $ | 1,412,650 | | | $ | 1,035,557 | | | $ | 1,411,448 | | | $ | 1,787,833 | | | $ | 1,060,745 | | | $ | 839,261 | | | Net sales | | $ | 1,857,363 | | | $ | 1,206,774 | | | $ | 1,095,920 | | | $ | 1,615,339 | | | $ | 2,055,818 | | | $ | 1,412,650 | | | $ | 1,035,557 | | | $ | 1,411,448 | | | |
Gross profit | Gross profit | | 503,687 | | | 666,804 | | | 447,189 | | | 322,376 | | | 441,899 | | | 551,685 | | | 301,131 | | | 239,095 | | | Gross profit | | 567,783 | | | 369,755 | | | 315,731 | | | 503,687 | | | 666,804 | | | 447,189 | | | 322,376 | | | 441,899 | | | |
Operating income | Operating income | | 263,877 | | | 418,888 | | | 235,723 | | | 127,891 | | | 237,276 | | | 338,586 | | | 129,031 | | | 74,351 | | | Operating income | | 327,009 | | | 145,771 | | | 107,295 | | | 263,877 | | | 418,888 | | | 235,723 | | | 127,891 | | | 237,276 | | | |
Net income | Net income | | 190,055 | | | 307,283 | | | 179,261 | | | 107,609 | | | 184,665 | | | 259,695 | | | 98,655 | | | 59,174 | | | Net income | | 232,250 | | | 101,699 | | | 71,863 | | | 190,055 | | | 307,283 | | | 179,261 | | | 107,609 | | | 184,665 | | | |
| Balance Sheet Data | Balance Sheet Data | | | | | | | Balance Sheet Data | | | |
Total receivables, net | Total receivables, net | | $ | 549,796 | | | $ | 756,585 | | | $ | 679,927 | | | $ | 376,571 | | | $ | 476,150 | | | $ | 585,566 | | | $ | 487,602 | | | $ | 289,200 | | | Total receivables, net | | $ | 630,950 | | | $ | 564,171 | | | $ | 351,448 | | | $ | 549,796 | | | $ | 756,585 | | | $ | 679,927 | | | $ | 376,571 | | | $ | 476,150 | | | |
Product inventories, net | Product inventories, net | | 1,539,572 | | | 1,579,101 | | | 1,641,155 | | | 1,339,100 | | | 1,043,407 | | | 894,654 | | | 977,228 | | | 780,989 | | | Product inventories, net | | 1,392,886 | | | 1,686,683 | | | 1,591,060 | | | 1,539,572 | | | 1,579,101 | | | 1,641,155 | | | 1,339,100 | | | 1,043,407 | | | |
Accounts payable | Accounts payable | | 442,226 | | | 604,225 | | | 685,946 | | | 398,697 | | | 414,156 | | | 439,453 | | | 634,998 | | | 266,753 | | | Accounts payable | | 485,100 | | | 739,749 | | | 406,667 | | | 442,226 | | | 604,225 | | | 685,946 | | | 398,697 | | | 414,156 | | | |
Total debt | Total debt | | 1,512,545 | | | 1,595,398 | | | 1,505,073 | | | 1,183,350 | | | 362,819 | | | 423,116 | | | 433,171 | | | 416,018 | | | Total debt | | 1,184,586 | | | 1,365,750 | | | 1,386,803 | | | 1,512,545 | | | 1,595,398 | | | 1,505,073 | | | 1,183,350 | | | 362,819 | | | |
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 20222023 and 20212022 Results
SalesOverall, weather conditions unfavorably impacted sales in the thirdsecond quarter of 2023, particularly at the beginning of the second quarter. The first week of April through Easter weekend was much cooler across the West versus both average temperatures and prior year. The last week of April was also significantly cooler than normal from Texas through the mid-Atlantic region, excluding the coastal Southeast. While the Northeast had warmer than average weather the first few weeks of April, temperatures cooled dramatically through the first week of May and smoke from wildfires in Canada unfavorably impacted sales in early June. Weather in Florida was more normal and consistent with prior year, while favorable weather conditions compared to the second quarter of 2022 were generally aided by above-average temperatures throughout much oflimited to the contiguous United States. However, sales in Florida were negatively impacted by closures due to Hurricane Ian at the end of the quarter, which we expect to recover in the fourth quarter of 2022. Compared to last year, weather conditions in CanadaPacific Northwest and the northern states were less favorable. Generally favorable weather conditions benefited sales in the third quarter of 2021 with most of the United States experiencing above-average temperatures and below-average precipitation.
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 limitedEurope. Similarly, sales growth in the second quarter of 2022. Additionally, results in Europe continued to be impacted2022 was challenged by unfavorable weather conditions. In contrast,conditions when compared to the second quarter of 2021 in our seasonal markets and Europe; however, our southern markets benefited from above-average temperatures, particularly in Texas. In the second quarter of 2021, overall weather conditions favorably impacted sales growth with the average U.S. temperature in June 2021 being the hottest on record in 127 years.
Overall,Weather conditions varied across the contiguous United States throughout the first quarter of 2023. Conditions were generally favorable in our southern markets, where sales benefited from warmer weather conditionsand below-average precipitation. In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., particularly in California and Arizona, which are two of our largest markets. Comparatively, in the first quarter of 2022, were less favorable thanoverall weather conditions in the first quarter of 2021. Saleswere generally favorable, and 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 already strong replacement 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 20212022 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;
•repayment of debt to maintain an average total target leverage ratio (as defined below) between 1.5 and 2.0; and
•discretionary 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 projectHistorically, our capital expenditures in 2022 as a percentagehave averaged roughly 1.0% of net sales will be consistent with our results in 2021.sales. Capital expenditures were 0.7% of net sales in 2022 and 2021 and 0.6% of net sales in 2020. From 2020 to 2022, our capital expenditures as a percentage of net sales were lower than our historical average primarily due to our significant sales growth. Based on management’s current plans and our spending through June 30, 2023, we project capital expenditures in 2023 will approximate 1.0% of net sales in 2019 and have averaged roughly 1.0% of net sales over the past five years.sales.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2022 | | 2021 |
Operating activities | | $ | 307,470 | | | $ | 359,065 | |
Investing activities | | (34,514) | | | (42,110) | |
Financing activities | | (248,404) | | | (267,765) | |
| | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2023 | | 2022 |
Operating activities | | $ | 376,777 | | | $ | 28,731 | |
Investing activities | | (41,860) | | | (27,431) | |
Financing activities | | (328,542) | | | 64,643 | |
Net cash provided by operations was $307.5improved to $376.8 million for the first ninesix months of 2022 compared to $359.12023 from $28.7 million for the first ninesix months of 2021. The decrease in our operating cash flows was2022, primarily driven by federal tax payments of $79.5 millionpositive changes 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 increasedparticularly as we sell through our prior year strategic inventory purchases, which were more thanpartially offset by an increase inlower net income.
Net cash used in investing activities for the first ninesix months of 2022 decreased2023 increased $14.4 million compared to the first ninesix months of 20212022, primarily due to a decrease$10.4 million increase in capital expenditures and a $3.9 million increase in cash used for the acquisition of businesses of $9.6 million, offset by an increase in capital expenditures of $3.7 million.acquisitions.
Net cash used in financing activities decreased $19.4 million to $248.4was $328.5 million for the first ninesix months of 20222023 compared to $267.8net cash provided by financing activities of $64.6 million for the first ninesix months of 2021,2022, primarily reflecting a $333.2$202.5 million increaseof net debt payments in share repurchasesthe first six months of 2023 versus $411.6 million of net debt proceeds in the first six months of 2022 and an increase in dividends paid of $24.1$10.0 million, partially offset by $380.4a $227.9 million increasedecrease in net debt proceedsshare repurchases between periods.
Future Sources and Uses of Cash
To supplement cash from operations as our primary source of working capital, we plan to continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility). Effective June 30, 2023, we amended the index rate used to pay interest on our Credit Facility and Term Facility, from the one month London Interbank Offer Rate (LIBOR) to the one month Term Secured Overnight Financing Rate Index Rate (Term SOFR). For additional details regarding these facilities, including recent amendments, see the summary descriptions below and more complete descriptions in Note 5 of our “Notes to Consolidated Financial Statements,” included in Part II, Item 8 in our 2022 Annual Report on Form 10-K and Note 5of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.
Credit Facility
Our Credit Facility as amended on December 30, 2021, provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility. The Credit Facility also includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit. We pay interest on revolving and term loan borrowings under the Credit Facility at a variable rate based on one month Term SOFR, plus an applicable margin. The term loans requireloan requires quarterly amortization payments during the third, fourth and fifth years of the loan, beginning in September 2023 aggregating to 20% of the original principal amount of the loan during the third, fourth and fifth years of the loan, with all remaining principal due on the Credit Facility maturity date of September 25, 2026. We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At SeptemberJune 30, 2022,2023, there was $573.0$217.1 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8$14.3 million standby letter of credit outstanding and $172.2$518.6 million available for borrowing under the Credit Facility. Currently, 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 SeptemberJune 30, 20222023, was approximately 3.5%4.5%, 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. We pay interest on borrowings under the Term Facility at a variable rate based on one month Term SOFR, plus an applicable margin. The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. The total of the quarterly payments through maturity will be equal to 33.75% of the Term Facility2020 with the final principal repayment equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.
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.
At SeptemberJune 30, 2022,2023, there was $159.6$109.9 million outstanding under the Term Facility with a weighted average effective interest rate of 4.2%6.3%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.
Receivables Securitization Facility
Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing. Under this facility, we can borrow up to $350.0 million between April through JuneAugust and from $175.0$210.0 million to $315.0$340.0 million during the remaining months of the year. The Receivables Facility matures on November 1, 2023.2024. 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 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 SeptemberJune 30, 2022,2023, there was $270.0$348.2 million outstanding under the Receivables Facility at a weighted average effective interest rate of 3.9%6.0%, excluding commitment fees.
Financial Covenants
Financial covenants of the Credit Facility, Term Facility and the TermReceivables 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 SeptemberJune 30, 2022,2023, 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 sum of (i) Total Non-Revolving Funded Indebtedness as of such date, (ii) the trailing twelve months (TTM) Average Total Revolving Funded Indebtedness plusand (iii) the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of SeptemberJune 30, 2022,2023, our average total leverage ratio equaled 1.251.48 (compared to 1.151.48 as of June 30, 2022)March 31, 2023) and the TTM average total indebtedness amount used in this calculation was $1.4$1.3 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 SeptemberJune 30, 2022,2023, our fixed charge ratio equaled 11.146.74 (compared to 12.227.96 as of June 30, 2022)March 31, 2023) and TTM Rental Expense was $77.9$85.7 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 SeptemberJune 30, 2022,2023, we had in place two interest rate swap contracts in place and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates. For more information, see Note 4 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.
Compliance and Future Availability
As of SeptemberJune 30, 2022,2023, 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 20212022 Annual Report on Form 10-K, 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 OctoberJuly 24, 2022, $230.22023, $600.0 million remained available to purchase shares of the current Board-authorized amountour common stock under our current Board-approved share repurchase program remained available.program. We expect to repurchase shares on the open market from time to time depending onsubject to market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the above-described credit facilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
There have been no material changes during the ninesix months ended SeptemberJune 30, 20222023, from what we reported in our 20212022 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 20212022 Annual Report on Form 10-K.
Currency Risk
There have been no material changes during the ninesix months ended SeptemberJune 30, 20222023, from what we reported in our 20212022 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 20212022 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 SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 2022,2023, 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
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. We urge you to carefully consider (i) the other information set forth in this report and (ii) the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes fromto the risk factors disclosed in Part I, Item 1A “Risk Factors” inof our 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarizes the repurchases of our common stock in the thirdsecond quarter of 2022:2023: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (2) |
July 1-31, 2022 | | 2,953 | | | $ | 359.18 | | | 2,900 | | | $ | 421,711,552 | |
August 1-31, 2022 | | 216,796 | | | $ | 366.54 | | | 216,796 | | | $ | 342,246,503 | |
September 1-30, 2022 | | 329,043 | | | $ | 340.39 | | | 329,043 | | | $ | 230,242,715 | |
Total | | 548,792 | | | $ | 350.82 | | | 548,739 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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, 2023 | | 6 | | | $ | 351.32 | | | — | | | $ | 186,382,518 | |
May 1-31, 2023 | | — | | | $ | — | | | — | | | $ | 600,000,000 | |
June 1-30, 2023 | | — | | | $ | — | | | — | | | $ | 600,000,000 | |
Total | | 6 | | | $ | 351.32 | | | — | | | |
(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. There were 536 shares surrendered for this purpose in the thirdsecond quarter of 2022.2023.
(2)In May 2022,2023, our Board authorized an additional $196.2$413.6 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices.prices bringing the total authorization available under the program to $600.0 million. As of OctoberJuly 24, 2022, $230.22023, $600.0 million of the authorized amount remained available for use 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 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 | | |
| | Restated Certificate of Incorporation of the Company. | | | | 10-Q | | 000-26640 | | 8/9/2006 | | |
| | Amended and Restated Bylaws of the Company. | | | | 8-K | | 000-26640 | | 2/8/2019 | | |
| | Form of certificate representing shares of common stock of the Company. | | | | 8-K | | 000-26640 | | 5/19/2006 | | |
| | Second Amendment to the Second Amended and Restated Credit Agreement, dated June 30, 2023, among Pool Corporation as U.S. Borrower, SCP Distributors Canada Inc. as Canadian Borrower, SCP International, Inc. as Euro Borrower, the Subsidiary Guarantors party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and certain other lenders party thereto. | | | | 8-K | | 000-26640 | | 7/5/2023 | | |
| | Second Amendment to Credit Agreement, dated June 30, 2023, among Pool Corporation as Borrower, the Guarantors party thereto and Bank of America, N.A. as Lender. | | | | 8-K | | 000-26640 | | 7/5/2023 | | |
| | 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. | | X | | | | | | | | |
| | 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. | | X | | | | | | | | |
| | 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. | | X | | | | | | | | |
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101.DEF | + | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | | |
101.LAB | + | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | |
101.PRE | + | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | |
104 | + | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | X | | | | | | | | |
+ Attached as Exhibit 101 to this report are the following items formatted in iXBRL (Inline Extensible Business Reporting Language):
1.Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021;2022;
2.Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021;2022;
3.Consolidated Balance Sheets at SeptemberJune 30, 2022,2023, December 31, 20212022 and SeptemberJune 30, 2021;2022;
4.Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021;2022;
5.Consolidated Statements of Changes in Stockholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20222023 and SeptemberJune 30, 2021;2022; 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 OctoberJuly 27, 2022.2023.
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| | POOL CORPORATION |
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| By: | /s/ Melanie Housey Hart |
| | Melanie Housey Hart |
| | Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant |