POOL CORP 10-Q

Item 1. Financial Statements POOL CORPORATION Consolidated Statements of Income (Unaudited) (In thousands, except per share data) Three Months Ended March 31, 2021 2020 Net sales $ 1,060,745 $ 677,288 Cost of sales 759,614 487,659 Gross profit 301,131 189,629 Selling and administrative expenses 172,100 147,097 Impairment of goodwill and other assets — 6,944 Operating income 129,031 35,588 Interest and other non-operating expenses, net 2,582 4,789 Income before income taxes and equity earnings 126,449 30,799 Income tax provision (benefit) 27,869 ( 25 ) Equity earnings in unconsolidated investments, net 75 88 Net income $ 98,655 $ 30,912 Earnings per share: Basic $ 2.45 $ 0.77 Diluted $ 2.42 $ 0.75 Weighted average shares outstanding: Basic 40,215 40,125 Diluted 40,846 40,955 Cash dividends declared per common share $ 0.58 $ 0.55 The accompanying Notes are an integral part of the Consolidated Financial Statements. 1 POOL CORPORATION Consolidated Statements of Comprehensive Income (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Net income $ 98,655 $ 30,912 Other comprehensive income (loss): Foreign currency translation losses ( 1,268 ) ( 5,430 ) Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $( 3,046 ) and $ 2,837 9,137 ( 8,510 ) Total other comprehensive income (loss) 7,869 ( 13,940 ) Comprehensive income $ 106,524 $ 16,972 The accompanying Notes are an integral part of the Consolidated Financial Statements. 2 POOL CORPORATION Consolidated Balance Sheets (In thousands, except share data) March 31, March 31, December 31, 2021 2020 2020 (1) (Unaudited) (Unaudited) Assets Current assets: Cash and cash equivalents $ 27,078 $ 17,808 $ 34,128 Receivables, net 122,938 66,328 122,252 Receivables pledged under receivables facility 364,664 279,587 166,948 Product inventories, net 977,228 858,190 780,989 Prepaid expenses and other current assets 25,390 16,465 17,610 Total current assets 1,517,298 1,238,378 1,121,927 Property and equipment, net 109,830 113,987 108,241 Goodwill 267,914 193,380 268,167 Other intangible assets, net 11,854 9,832 12,181 Equity interest investments 1,305 1,260 1,292 Operating lease assets 209,036 174,653 205,875 Other assets 24,456 16,291 21,987 Total assets $ 2,141,693 $ 1,747,781 $ 1,739,670 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 634,998 $ 517,620 $ 266,753 Accrued expenses and other current liabilities 134,670 62,614 143,694 Short-term borrowings and current portion of long-term debt 12,409 16,353 11,869 Current operating lease liabilities 61,265 55,703 60,933 Total current liabilities 843,342 652,290 483,249 Deferred income taxes 31,134 30,464 27,653 Long-term debt, net 420,762 569,697 404,149 Other long-term liabilities 38,945 26,470 38,261 Non-current operating lease liabilities 149,582 120,462 146,888 Total liabilities 1,483,765 1,399,383 1,100,200 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 40,086,256 , 39,930,962 and 40,232,210 shares issued and outstanding at March 31, 2021, March 31, 2020 and December 31, 2020, respectively 40 40 40 Additional paid-in capital 526,328 495,251 519,579 Retained earnings (deficit) 137,710 ( 122,594 ) 133,870 Accumulated other comprehensive loss ( 6,150 ) ( 24,299 ) ( 14,019 ) Total stockholders’ equity 657,928 348,398 639,470 Total liabilities and stockholders’ equity $ 2,141,693 $ 1,747,781 $ 1,739,670 (1) Derived from audited financial statements. The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 POOL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Operating activities Net income $ 98,655 $ 30,912 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,884 7,001 Amortization 421 336 Share-based compensation 3,837 3,654 Equity earnings in unconsolidated investments, net ( 75 ) ( 88 ) Impairment of goodwill and other assets — 6,944 Other 2,723 3,715 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ( 199,672 ) ( 124,542 ) Product inventories ( 200,185 ) ( 156,856 ) Prepaid expenses and other assets ( 5,507 ) 4,633 Accounts payable 369,665 256,874 Accrued expenses and other current liabilities 367 ( 12,855 ) Net cash provided by operating activities 77,113 19,728 Investing activities Acquisition of businesses, net of cash acquired ( 683 ) ( 13,642 ) Purchases of property and equipment, net of sale proceeds ( 8,839 ) ( 8,340 ) Net cash used in investing activities ( 9,522 ) ( 21,982 ) Financing activities Proceeds from revolving line of credit 342,500 248,700 Payments on revolving line of credit ( 308,656 ) ( 256,543 ) Proceeds from asset-backed financing 110,000 97,400 Payments on asset-backed financing ( 125,000 ) ( 17,300 ) Payments on term facility ( 2,313 ) ( 2,313 ) Proceeds from short-term borrowings and current portion of long-term debt 4,280 6,479 Payments on short-term borrowings and current portion of long-term debt ( 3,740 ) ( 1,871 ) Payments of deferred financing costs — ( 12 ) Payments of deferred and contingent acquisition consideration ( 362 ) ( 281 ) Proceeds from stock issued under share-based compensation plans 2,912 6,358 Payments of cash dividends ( 23,299 ) ( 22,147 ) Purchases of treasury stock ( 71,516 ) ( 66,619 ) Net cash used in financing activities ( 75,194 ) ( 8,149 ) Effect of exchange rate changes on cash and cash equivalents 553 ( 372 ) Change in cash and cash equivalents ( 7,050 ) ( 10,775 ) Cash and cash equivalents at beginning of period 34,128 28,583 Cash and cash equivalents at end of period $ 27,078 $ 17,808 The accompanying Notes are an integral part of the Consolidated Financial Statements. 4 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 Total Balance at December 31, 2020 40,232 $ 40 $ 519,579 $ 133,870 $ ( 14,019 ) $ 639,470 Net income — — — 98,655 — 98,655 Foreign currency translation — — — — ( 1,268 ) ( 1,268 ) Interest rate swaps, net of the change in taxes of $( 3,046 ) — — — — 9,137 9,137 Repurchases of common stock, net of retirements ( 215 ) — — ( 71,516 ) — ( 71,516 ) Share-based compensation — — 3,837 — — 3,837 Issuance of stock under share-based compensation plans 69 — 2,912 — — 2,912 Declaration of cash dividends — — — ( 23,299 ) — ( 23,299 ) Balance at March 31, 2021 40,086 $ 40 $ 526,328 $ 137,710 $ ( 6,150 ) $ 657,928 Common Stock Additional Paid-In Retained Accumulated Other Comprehensive Shares Amount Capital Deficit Loss Total Balance at December 31, 2019 40,074 $ 40 $ 485,239 $ ( 64,740 ) $ ( 10,359 ) $ 410,180 Net income — — — 30,912 — 30,912 Foreign currency translation — — — — ( 5,430 ) ( 5,430 ) Interest rate swaps, net of the change in taxes of $ 2,837 — — — — ( 8,510 ) ( 8,510 ) Repurchases of common stock, net of retirements ( 362 ) — — ( 66,619 ) — ( 66,619 ) Share-based compensation — — 3,654 — — 3,654 Issuance of stock under share-based compensation plans 219 — 6,358 — — 6,358 Declaration of cash dividends — — — ( 22,147 ) — ( 22,147 ) Balance at March 31, 2020 39,931 $ 40 $ 495,251 $ ( 122,594 ) $ ( 24,299 ) $ 348,398 The accompanying Notes are an integral part of the Consolidated Financial Statements. 5 POOL CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1 – Summary of Significant Accounting Policies Pool Corporation (the Company , which may be referred to as we, us or our ) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements. The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated. A description of our significant accounting policies is included in our 2020 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our 2020 Annual Report on Form 10-K. The results for our three month period ended March 31, 2021 are not necessarily indicative of the expected results for our fiscal year ending December 31, 2021. Newly Adopted Accounting Pronouncements On January 1, 2021, we adopted Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes . This new standard simplified the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments were required to be applied on a prospective basis, while certain amendments were required to be applied on a retrospective or modified retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods. Income 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 awards lapse. We recorded excess tax benefits of $ 4.0 million in the first quarter of 2021 compared to $ 8.0 million in the first quarter of 2020. Retained Earnings We account for the retirement of treasury shares as a reduction of Retained earnings (deficit). As of March 31, 2021, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $ 1.6 billion and cumulative dividends of $ 694.1 million. Accumulated Other Comprehensive Loss The table below presents the components of our Accumulated other comprehensive loss balance (in thousands): March 31, December 31, 2021 2020 2020 Foreign currency translation adjustments $ ( 6,185 ) $ ( 15,557 ) $ ( 4,917 ) Unrealized gains (losses) on interest rate swaps, net of tax 35 ( 8,742 ) ( 9,102 ) Accumulated other comprehensive loss $ ( 6,150 ) $ ( 24,299 ) $ ( 14,019 ) 6 Recent Accounting Pronouncements Pending Adoption The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods: Standard Description Effective Date Effect on Financial Statements and Other Significant Matters ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities. The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. We are currently evaluating the effect these standards will have on our financial position, results of operations and related disclosures. Note 2 – Earnings Per Share We calculate basic earnings per share (EPS) by dividing Net income by the weighted average number of common shares outstanding. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. Stock options with exercise prices that are higher than the average market prices of our common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive. The table below presents the computation of EPS, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except EPS): Three Months Ended March 31, 2021 2020 Net income $ 98,655 $ 30,912 Weighted average shares outstanding: Basic 40,215 40,125 Effect of dilutive securities: Stock options and employee stock purchase plan 631 830 Diluted 40,846 40,955 Earnings per share: Basic $ 2.45 $ 0.77 Diluted $ 2.42 $ 0.75 Anti-dilutive stock options excluded from diluted earnings per share computations — 66 7 Note 3 – Acquisitions In December 2020, we acquired the distribution assets of TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding nine locations in Florida and one in Georgia. In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding three locations in New Jersey, three locations in New York, two locations in Texas and one location in Florida. In September 2020, we acquired the distribution assets of Northeastern Swimming Pool Distributors, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding two locations in Ontario, Canada. In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding two locations in Texas, one location in Nevada and one location in Oklahoma. We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate. Note 4 – Fair Value Measurements and Interest Rate Swaps Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; or • inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Recurring Fair Value Measurements The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands): Fair Value at March 31, 2021 2020 Level 2 Unrealized gains on interest rate swaps $ 8,180 $ — Unrealized losses on interest rate swaps 8,088 11,611 Level 3 Contingent consideration liabilities $ 993 $ 433 8 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. For determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. We recognize any differences between the variable interest rate in effect and the fixed interest rates per our swap contracts as an adjustment to interest expense over the life of the swaps. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We currently have three interest rate swap contracts in place, two of which became effective on November 20, 2020, and terminate on September 29, 2022, and a third that became effective on February 26, 2021, and terminates on February 28, 2025. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets. The following table provides additional details related to these swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Interest rate swap 1 May 7, 2019 November 20, 2020 September 29, 2022 $ 75.0 2.0925 % Interest rate swap 2 July 25, 2019 November 20, 2020 September 29, 2022 $ 75.0 1.5500 % Interest rate swap 3 February 5, 2020 February 26, 2021 February 28, 2025 $ 150.0 1.3800 % For the interest rate swap contracts in effect at March 31, 2021, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive loss on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the three month period ended March 31, 2021. We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Changes in the estimated fair value of these forward-starting interest rate swap contracts are recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets. The following table provides details related to each of our forward-starting interest rate swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Forward-starting interest rate swap 1 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.7400 % Forward-starting interest rate swap 2 March 9, 2020 February 28, 2025 February 26, 2027 $ 150.0 0.8130 % 9 Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position. Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts. Nonrecurring Fair Value Measurements In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwill and intangible assets, are recorded at fair value on a nonrecurring basis as a result of impairment charges. During the first quarter of 2021, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition. Other The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs). Note 5 – Debt The table below presents the components of our debt (in thousands): March 31, 2021 2020 Variable rate debt Short-term borrowings $ 2,216 $ 8,126 Current portion of long-term debt: Australian credit facility 10,193 8,227 Short-term borrowings and current portion of long-term debt 12,409 16,353 Long-term portion: Revolving credit facility 142,868 192,829 Term facility 173,438 182,688 Receivables securitization facility 105,000 195,100 Less: financing costs, net 544 920 Long-term debt, net 420,762 569,697 Total debt $ 433,171 $ 586,050 Our accounts receivable securitization facility (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. 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. 10