What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-04-28 · 237 added, 107 removed, 232 unchanged (60% of the section changed)

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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 plans and objectives and industry, general economic and other forecasts of trends, future dividend payments and share repurchases, and other matters.

Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our strategic, operational and capital allocation plans and objectives and industry, general economic and other forecasts of trends 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.

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Financial Results

Net sales increased 33% in the first quarter of 2022 to $1.4 billion compared to $1.1 billion in the first quarter of 2021.

Net sales increased 15% in the second quarter of 2022 to $2.1 billion compared to $1.8 billion in the second quarter of 2021.

Base business sales grew 10%.

The increase in our sales reflects continued strong demand for outdoor living products in addition to elevated price inflation of approximately 10% to 12%.

Sales also benefited approximately 5% from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.

Gross profit increased 49% to $447.2 million in the first quarter of 2022 from $301.1 million in the same period of 2021.

Base business gross profit improved 38% over the first quarter of 2021.

Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021, while base business gross margin increased 270 basis points.

Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022.

Selling and administrative expenses (operating expenses) increased 23% to $211.5 million in the first quarter of 2022 compared to $172.1 million in the first quarter of 2021.

Our operating expenses have increased as we expand our workforce and reward our employees through performance-based compensation.

Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives.

As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.

Operating income in the first quarter of 2022 increased 83% to $235.7 million compared to $129.0 million in the same period in 2021.

Operating margin was 16.7% in the first quarter of 2022 compared to 12.2% in the first quarter of 2021.

Our results are indicative of healthy demand for our products as maintenance, replacement, refurbishment and construction activity remained strong.

Net sales benefited approximately 10% to 11% from elevated price inflation, but were unfavorably impacted 1% from currency exchange rate fluctuations.

Gross profit increased 21% to $666.8 million in the second quarter of 2022 from $551.7 million in the same period of 2021.

Base business gross profit improved 14% over the second quarter of 2021.

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

Base business gross margin increased 100 basis points.

Selling and administrative expenses (operating expenses) increased 16% to $247.9 million in the second quarter of 2022 compared to $213.1 million in the second quarter of 2021, including a 1% benefit from currency exchange rate fluctuations.

As a percentage of net sales, operating expenses increased to 12.1% in the second quarter of 2022 compared to 11.9% in the same period of 2021.

Our operating expenses have increased to support our business growth, including recent acquisitions.

Operating income in the second quarter of 2022 increased 24% to $418.9 million compared to $338.6 million in the same period of 2021.

Operating margin was 20.4% in the second quarter of 2022 compared to 18.9% in the second quarter of 2021.

Base business operating margin was 20.3%, up 130 basis points from the prior year period.

We recorded a $7.3 million, or $0.18 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , in the quarter ended March 31, 2022, compared to a tax benefit of $4.0 million, or $0.10 per diluted share, realized in the same period of 2021.

Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021.

Earnings per diluted share increased 82% to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share was $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.

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

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

Net income increased 18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of 2021.

Earnings per diluted share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of 2021.

See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

On May 4, 2022, our Board of Directors (our Board) authorized an additional $196.2 million under our share repurchase program bringing its total authorization available to $600.0 million.

Further, the Board announced a 25% increase over the previous quarterly dividend amount to $1.00 per share.

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

COVID-19 Pandemic

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus.

The health, safety and security of our employees and the communities in which we operate remains our highest priority.

The health, safety and security of our employees 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 and through the first quarter of 2022, 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.

Beginning in the second quarter of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces.

While this trend has had a positive impact on our financial performance over the past couple of years, it is unclear what the long-term impact will be.

Our industry experienced constrained supply chain dynamics in 2021, which has continued in the first quarter of 2022.

In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service into the 2022 swimming pool season.

Our industry experienced supply chain constraints in 2021.

While we were challenged by supply chain constraints through the first half of 2022, we have observed improvements in our supply chain dynamics beginning in the second quarter of 2022.

These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.

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Financial Position and Liquidity

As of March 31, 2022, total net receivables, including pledged receivables, increased 39% compared to March 31, 2021, primarily driven by our sales growth and recent acquisitions.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.4 days at March 31, 2022 and 26.6 days at March 31, 2021.

Our allowance for doubtful accounts balance was $6.0 million at March 31, 2022 and $4.7 million at March 31, 2021.

Net inventory levels increased 68% compared to levels at March 31, 2021.

We increased our purchasing beginning in the second half of 2021 to alleviate the impact of longer lead times from our vendors and ensure product availability for our customers.

As of June 30, 2022, total net receivables, including pledged receivables, increased 29% compared to June 30, 2021, primarily driven by our sales growth and recent acquisitions.

Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.2 days at June 30, 2022 and 25.8 days at June 30, 2021.

Our allowance for doubtful accounts balance was $6.5 million at June 30, 2022 and $5.4 million at June 30, 2021.

Net inventory levels increased 77% compared to levels at June 30, 2021.

We increased our purchasing beginning in the second half of 2021 to improve our customer experience and minimize the impact of longer lead times from our vendors.

Our inventory balance also reflects impacts from inflation and recent acquisitions.

Our inventory reserve was $19.8 million at March 31, 2022 and $13.7 million at March 31, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 3.1 times at March 31, 2022 and 4.0 times at March 31, 2021.

Our inventory reserve was $20.9 million at June 30, 2022 and $15.2 million at June 30, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.8 times at June 30, 2022 and 4.1 times at June 30, 2021.

Our inventory turns have averaged 3.4 times over the past five years.

Total debt outstanding at March 31, 2022 was $1.5 billion, up $1.1 billion compared to total debt at March 31, 2021.

We utilized debt proceeds to fund investments in working capital and our 2021 acquisitions.

Total debt outstanding at June 30, 2022 was $1.6 billion compared to $423.1 million at June 30, 2021.

Our debt balance has increased between periods as we have utilized debt proceeds to fund investments in working capital, recent acquisitions and share repurchases.

Current Trends and Outlook

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

We are updating our annual earnings guidance range to include the $0.04 tax benefit from ASU 2016-09 recognized in the second quarter of 2022.

We expect 2022 diluted EPS of $18.38 to $19.13, including the impact of year-to-date tax benefits of $0.22.

Our previous earnings guidance range disclosed in our 2021 Annual Report on Form 10-K was $17.19 to $17.94, including an estimated $0.19 tax benefit.

Our previous earnings guidance range disclosed in our First Quarter 2022 Report on Form 10-Q was $18.34 to $19.09.

Our earnings guidance range assumes average weather conditions.

We expect sales growth at the higher end of the 17% to 19% range previously disclosed in our 2021 Annual Report on Form 10-K.

We expect sales growth for the full year in the range of 17% to 19% as previously disclosed in our 2021 Annual Report on Form 10-K.

We project 2022 inflationary product cost increases of approximately 10% to 11% (compared to 7% to 8% in 2021).

Our gross margin trends depend on the amounts and timing of inflationary price increases, sales growth expectations and product mix.

We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021.

Compared to 2021 periods, we project a modest improvement in the second quarter of 2022 and declines in the latter half of the year.

Our gross margin trends depend on the amounts and timing of inflationary product cost increases, sales growth expectations and product mix.

We expect a slight improvement in gross margin for the full year of 2022 compared to the full year of 2021 given the impact of inflation in the first half of the year.

Compared to 2021 periods, we project declines in the latter half of the year.

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 investment initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network.

We expect increased expenses from tight labor and real estate markets in 2022, which are heightened focus areas in our expense management.

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 2022 will approximate 25.5%.

We expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse.

We recorded a $7.3 million, or $0.18 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2022.

We recorded a $8.9 million, or $0.22 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, 2022.

We may recognize additional tax benefits related to stock option exercises in 2022 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 March 31, 2022.

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 of Directors (our Board).

We have not included any expected tax benefits in our guidance beyond what we have recognized as of June 30, 2022.

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.

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.

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RESULTS OF OPERATIONS

As of March 31, 2022, we conducted operations through 414 sales centers in North America, Europe and Australia.

For the three months ended March 31, 2022, approximately 94% of our net sales were from our operations in North America.

As of June 30, 2022, we conducted operations through 416 sales centers in North America, Europe and Australia.

For the six months ended June 30, 2022, 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

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

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

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(in thousands) Three Months Ended Three Months Ended Three Months Ended

March 31, March 31, March 31,

June 30, June 30, June 30,

2022 2021 2022 2021 2022 2021

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Expenses as a % of net sales 11.5 % 11.9 % 23.1 % 13.6 % 12.1 % 11.9 %

Operating income (loss) 219,351 129,154 16,372 (123) 235,723 129,031

Operating income 399,115 338,084 19,773 502 418,888 338,586

Operating margin 20.3 % 19.0 % 21.5 % 10.2 % 20.4 % 18.9 %

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Sales Centers

Tri-State Pool Distributors April 2022 1 May - June 2022

Porpoise Pool & Patio, Inc.

December 2021 1 January - March 2022

December 2021 1 April - June 2022

Wingate Supply, Inc.

December 2021 1 January - March 2022

December 2021 1 April - June 2022

Vak Pak Builders Supply, Inc.

June 2021 1 January - March 2022

Pool Source, LLC April 2021 1 January - March 2022

TWC Distributors, Inc.

December 2020 10 January - February 2022 and January - February 2021

June 2021 1 April - June 2022 and

Pool Source, LLC April 2021 1 April - June 2022 and

April - June 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.

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After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales center count during the first three months of 2022:

The table below summarizes the changes in our sales center count during the first six months of 2022:

December 31, 2021 410

Acquired locations 1

New locations 5

March 31, 2022 414

June 30, 2022 416

Three Months Ended

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Net sales $ 2,055.8 $ 1,787.8 $ 268.0 15%

Net sales increased 33% in the first quarter of 2022 compared to the first quarter of 2021, while base business net sales grew 26% over the same period.

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

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

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

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

Net sales increased 15% in the second quarter of 2022 on top of net sales of $1.8 billion and 40% growth in the second quarter of 2021.

Base business net sales in the second quarter of 2022 grew 10% over the same period.

Our growth was largely driven by inflationary product cost increases and strong demand that boosted sales by 16% in our year-round markets.

Volume growth was challenged by unfavorable weather conditions in our seasonal markets and constrained conditions in Europe.

Heavy rainfall and cooler temperatures, particularly in the month of April, limited sales in certain of our markets although we observed improvement through the latter half of the second quarter.

We believe that our results reflect the positive impact of growth in the installed base of pools, robust demand and heightened consumer interest in enhanced pool customizations, and we remain confident in our expectation of 17% to 19% sales growth for the full year of 2022.

For more discussion of our expectations for the remainder of the year, see “Current Trends and Outlook” above.

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

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

• 5% sales growth from recent acquisitions;

• 5% sales growth from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.

Higher sales growth rates for certain product offerings, such as equipment and building materials, reflect continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In the first quarter of 2022, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 18% compared to the same period last year, and collectively represented approximately 29% of net sales for the period.

Sales of building materials grew 29% compared to the first quarter of 2021 and represented approximately 14% of net sales in the first quarter of 2022.

In the first quarter of 2022, sales for chemicals, representing 9% of total net sales, increased 58% compared to the first quarter of 2021.

The increase in chemicals was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to customers who service large commercial installations and specialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth in these areas is reflected in the numbers in the paragraphs above.

Sales to retail customers increased 27% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 10% of our net sales for the first quarter of 2022.

Sales to commercial customers increased 34% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 4% of our net sales for the first quarter of 2022.

• favorable trends for our products including:

◦ strong 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 those in building materials (see discussion below);

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

• challenges presented in the second quarter including:

◦ 2% unfavorable impact from currency exchange rate fluctuations and customer early buys shifted into the first quarter of 2022;

◦ cooler, wet weather conditions in our seasonal markets (see discussion below);

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

Higher sales for certain product offerings, such as equipment and building materials, indicate continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades.

In the second quarter of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 7% compared to the same period last year, and collectively represented approximately 26% of net sales for the period.

Equipment growth in the quarter was limited by supply chain constraints and customer early buys shifted into the first quarter of 2022.

Sales of building materials grew 22% compared to the second quarter of 2021 and represented approximately 13% of net sales in the second quarter of 2022.

Sales of chemicals, representing 12% of total net sales, increased 25% compared to the second quarter of 2021.

The increase in chemical sales was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above.

Sales to retail customers increased 7% in the second quarter of 2022 compared to the second quarter of 2021 and represented approximately 13% of our net sales for the second quarter of 2022.

Certain of our retail customers were adversely impacted by unfavorable weather conditions in the quarter, hindering sales growth.

Sales to commercial customers increased 23% in the second quarter of 2022 compared to the second quarter of 2021 and represented approximately 3% of our net sales for the second quarter of 2022.

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

Comparatively, net sales in our year-round markets, representing 45% of our total base business net sales in the second quarter of 2022, increased 16% compared to the second quarter of 2021.

Net sales in Europe, representing 5% of our total net sales in the second quarter of 2022, declined 8% in local currency compared to 31% growth in the second quarter of 2021.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in volume growth driven by macroeconomic uncertainty and poor weather.

Three Months Ended

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Gross margin 32.4 % 30.9 %

Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021.

Base business gross margin increased 100 basis points.

Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022.

Product mix and continued positive impacts from our ongoing pricing efforts also favorably impacted our gross margin.

Operating Expenses

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

Operating expenses increased 23% in the first quarter of 2022 compared to the first quarter of 2021.

Our compensation expense has increased as we expand our workforce and reward our employees through performance-based compensation.

Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives.

As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.

Operating expenses increased 16% in the second quarter of 2022 compared to the second quarter of 2021, including a 1% benefit from currency exchange rate fluctuations.

As a percentage of net sales, operating expenses increased to 12.1% in the second quarter of 2022 compared to 11.9% in the same period of 2021.

Our operating expenses have increased to support our business growth, including recent acquisitions.

Employee-related expenses increased as we expand our workforce and reward employees through performance-based compensation.

Other incremental operating expense increases related to growth-driven facility and freight costs, and investments in our digital transformation initiatives.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first quarter of 2022 increased $2.6 million compared to the first quarter of 2021, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.3 billion in the first quarter of 2022 versus $397.3 million for the first quarter of 2021.

Interest and other non-operating expenses, net for the second quarter of 2022 increased $6.6 million compared to the second quarter of 2021, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.6 billion in the second quarter of 2022 versus $376.8 million for the second quarter of 2021.

Our weighted average effective interest rate decreased to 2.0% from 2.7% for the respective periods.

Our effective income tax rate was 22.3% for the three months ended March 31, 2022 compared to 22.0% for the three months ended March 31, 2021.

We recorded a $7.3 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2022 compared to a tax benefit of $4.0 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.4% for the first quarter of 2022 and 25.2% for the first quarter of 2021.

Our effective income tax rate was 25.1% for the three months ended June 30, 2022 compared to 22.9% for the three months ended June 30, 2021.

We recorded a $1.6 million tax benefit from ASU 2016-09 in the quarter ended June 30, 2022 compared to a tax benefit of $7.7 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5% for the second quarter of 2022 and 25.2% for the second quarter of 2021.

Net Income and Earnings Per Share

Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021.

Earnings per diluted share increased to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 82% to $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.

Net income increased 18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of 2021.

Earnings per diluted share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of 2021.

See the reconciliation of GAAP to non-GAAP measures below.

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

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

(Unaudited) Base Business Excluded Total

(in thousands) Six Months Ended Six Months Ended Six Months Ended

June 30, June 30, June 30,

2022 2021 2022 2021 2022 2021

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

Gross profit 1,039,122 850,948 74,872 1,869 1,113,994 852,817

Gross margin 31.6 % 30.0 % 42.5 % 23.6 % 32.1 % 29.9 %

Operating expenses 420,655 383,710 38,727 1,490 459,382 385,200

Expenses as a % of net sales 12.8 % 13.5 % 22.0 % 18.9 % 13.2 % 13.5 %

Operating income 618,467 467,238 36,145 379 654,612 467,617

Operating margin 18.8 % 16.4 % 20.5 % 4.8 % 18.9 % 16.4 %

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

Sales Centers

Tri-State Pool Distributors April 2022 1 May - June 2022

Porpoise Pool & Patio, Inc.

December 2021 1 January - June 2022

Wingate Supply, Inc.

December 2021 1 January - June 2022

Vak Pak Builders Supply, Inc.

June 2021 1 January - June 2022 and June 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

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 June 30, 2022 Compared to Three Months Ended June 30, 2021.

Six Months Ended

(in millions) 2022 2021 Change

Net sales $ 3,468.5 $ 2,848.6 $ 619.9 22%

Net sales for the first six months of 2022 increased 22% compared to the same period last year.

Base business net sales increased 16%.

Our results in the first half of the year were driven by continued strong demand for outdoor living products and elevated price inflation.

While we have been challenged by supply chain and labor constraints, we have observed improvements in our supply chain dynamics beginning in the second quarter of 2022.

Following our astounding 33% sales growth in the first quarter of 2022, results in our seasonally significant second quarter were dampened by unfavorable weather conditions in certain markets.

We expect that our results will continue to benefit from favorable industry trends in the long-term, including growth in the installed base of pools, robust demand and heightened consumer interest in enhanced pool customizations.

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

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

• favorable trends for our products including:

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

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

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

• 6% sales growth from recent acquisitions;

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

• challenges presented in 2022 including:

◦ 1% unfavorable impact from currency exchange rate fluctuations;

◦ cooler, wet weather conditions in our seasonal markets (see discussion below);

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

In the first six months of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 12% compared to the same period last year.

Equipment collectively represented 27% of net sales in the first six months of 2022.

Sales of building materials grew 25% compared to the first six months of 2021 and represented approximately 13% of net sales in the first six months of 2022.

Sales of chemicals, representing 11% of total net sales, increased 35% compared to the first six months of 2021.

The increase in chemical sales was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

In the first six months of 2022, sales to retail customers increased 13% compared to the first six months of 2021 and represented approximately 12% of our consolidated net sales.

Certain of our retail customers were adversely impacted by unfavorable weather conditions in the second quarter, hindering sales growth.

Sales to commercial customers increased 27% in the first six months of 2022 compared to the first six months of 2021 and represented approximately 4% of our consolidated net sales in the first six months of 2022.

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

Comparatively, net sales in our year-round markets, representing 48% of our total base business net sales in the first half of 2022, increased 20% compared to the first half of 2021.

Net sales in Europe, representing 5% of our total net sales in the first half of 2022, were flat in local currency compared to 49% growth in the first half of 2021.

Six Months Ended

(in millions) 2022 2021 Change

Gross profit $ 1,114.0 $ 852.8 $ 261.2 31%

Gross margin 32.1 % 29.9 %

Gross margin improved 220 basis points to 32.1% in the six months ended June 30, 2022 compared to 29.9% in the first six months of 2021.

This improvement reflects focused supply chain management initiatives to address inflation, increased pricing and benefits from our recent acquisitions.

Operating Expenses

Six Months Ended

(in millions) 2022 2021 Change

Selling and administrative expenses $ 459.4 $ 385.2 $ 74.2 19%

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

Operating expenses for the six months ended June 30, 2022 increased 19% compared to the first six months of 2021, including a 1% benefit from currency exchange rate fluctuations.

Our operating expenses have increased to support our business growth, including recent acquisitions.

Our expense growth reflects increases in growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first six months of 2022 increased $9.2 million compared to the same period last year, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.4 billion for the first six months of 2022 versus $387.1 million for the same period of 2021.

Our weighted average effective interest rate decreased to 1.8% from 2.5% for the respective periods.

Our effective income tax rate was 24.1% for the six months ended June 30, 2022 compared to 22.6% for the six months ended June 30, 2021.

We recorded a $8.9 million, or $0.22 per diluted share, tax benefit from ASU 2016-09 in the six months ended June 30, 2022 compared to a $11.7 million, or $0.29 per diluted share, tax benefit in the same period of 2021.

Without the benefits from ASU 2016-09, our effective tax rate was 25.5% for the six months ended June 30, 2022 and 25.2% for the six months ended June 30, 2021.

Net Income and Earnings Per Share

Net income increased 36% to $486.5 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Earnings per diluted share increased 37% to $12.03 for the six months ended June 30, 2022 versus $8.78 per diluted share for the six months ended June 30, 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 39% to $11.81 for the six months ended June 30, 2022 compared to $8.49 for the six months ended June 30, 2021.

See the reconciliation of GAAP to non-GAAP measures below.

Reconciliation of Non-GAAP Financial Measures

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 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 Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Diluted EPS $ 7.63 $ 6.37 $ 12.03 $ 8.78

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

Adjusted diluted EPS $ 7.59 $ 6.18 $ 11.81 $ 8.49

Seasonality and Quarterly Fluctuations

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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 quarter of 2022, the four quarters of 2021 and the fourth, third and second quarters of 2020.

The following table presents certain unaudited quarterly data for the first and second quarters of 2022, the four quarters of 2021 and the third and fourth quarters 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.

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(in thousands) 2022 2021 2020

First Fourth Third Second First Fourth Third Second

Second First Fourth Third Second First Fourth Third

Statement of Income Data

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Weather Impacts on 2022 and 2021 Results

We observed unfavorable weather conditions in certain markets throughout the second quarter of 2022.

Heavy rainfall and cooler temperatures throughout the northeastern United States and Canada resulted in slower sales activity and limited sales growth in the second quarter of 2022.

Additionally, results in Europe continued to be impacted by unfavorable weather conditions.

In contrast, our southern markets benefited from above-average temperatures, particularly in Texas.

In the second quarter of 2021, overall weather conditions favorably impacted sales growth with the average U.S.

temperature in June 2021 being the hottest on record in 127 years.

Overall, weather conditions in the first quarter of 2022 were less favorable than weather conditions in the first quarter of 2021.

Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.

In addition, some seasonal markets had unfavorable weather compared to first quarter of 2021 when construction activity started earlier than normal.

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.

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

• inventory and other operating expenses;

• investing in inventory and funding other operating expenses;

• strategic acquisitions executed opportunistically;

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

Three Months Ended

Six Months Ended

Operating activities $ 28,731 $ 187,228

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Financing activities 64,643 (131,061)

Net cash used in operations was $208.1 million for the first three months of 2022 compared to net cash provided by operations of $77.1 million for the first three months of 2021.

The decrease in our operating cash flows was driven by incremental net working capital outflows, which reflect increased inventory purchases and other working capital changes due to our sales growth and recent acquisitions.

In addition, our operating cash flows were impacted by federal tax payments of $79.5 million in the first quarter of 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.

Net cash used in investing activities for the first three months of 2022 decreased slightly compared to the first three months of 2021 due to a decrease in cash used for the acquisition of businesses of $0.7 million, offset by an increase in capital expenditures of $0.3 million.

Net cash provided by financing activities increased $303.9 million to $228.7 million for the first three months of 2022 compared to net cash used in financing activities of $75.2 million for the first three months of 2021.

The increase in cash provided by financing activities reflects a $304.4 million increase in net debt proceeds and a $9.1 million decrease in share repurchases, partially offset by an increase in dividends paid of $8.8 million.

Net cash provided by operations was $28.7 million for the first six months of 2022 compared to $187.2 million for the first six months of 2021.

The decrease in our operating cash flows was driven by federal tax payments of $79.5 million in 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.

Additional impacts relate to growth-driven working capital outflows, including increased inventory purchases, which were largely offset by an increase in net income.

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

Net cash provided by financing activities increased $195.7 million to $64.6 million for the first six months of 2022 compared to net cash used in financing activities of $131.1 million for the first six months of 2021.

The increase in cash provided by financing activities reflects a $404.7 million increase in net debt proceeds, partially offset by a $188.5 million increase in share repurchases and an increase in dividends paid of $16.6 million.

Future Sources and Uses of Cash

Credit Facility

Our Credit Facility, as amended through 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.

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 includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit.

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We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At March 31, 2022, there was $532.3 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $212.9 million available for borrowing under the Credit Facility.

Currently, we pay interest on revolving 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 March 31, 2022 was approximately 1.7%, excluding commitment fees.

At June 30, 2022, there was $566.2 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $179.0 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 June 30, 2022 was approximately 2.6%, excluding commitment fees.

Term Facility

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We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At March 31, 2022, there was $164.2 million outstanding under the Term Facility with a weighted average effective interest rate of 1.6%.

At June 30, 2022, there was $161.9 million outstanding under the Term Facility with a weighted average effective interest rate of 2.8%.

We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

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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 March 31, 2022, there was $290.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.2%, excluding commitment fees.

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

Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants.

As of March 31, 2022, the calculations of these two covenants are detailed below:

As of June 30, 2022, the calculations of these two covenants are detailed below:

• Maximum Average Total Leverage Ratio .

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Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility).

As of March 31, 2022, our average total leverage ratio equaled 1.06 (compared to 0.77 as of December 31, 2021) and the TTM average total indebtedness amount used in this calculation was $1.1 billion.

As of June 30, 2022, our average total leverage ratio equaled 1.15 (compared to 1.06 as of March 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.2 billion.

• Minimum Fixed Charge Coverage Ratio .

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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 March 31, 2022, our fixed charge ratio equaled 12.38 (compared to 11.76 as of December 31, 2021) and TTM Rental Expense was $73.2 million.

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

The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of dividends.

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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 March 31, 2022, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on our variable rate borrowings to fixed interest rates.

As of June 30, 2022, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on 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 March 31, 2022, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

As of June 30, 2022, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

We believe we will remain in compliance with all material covenants and financial ratio requirements throughout the next twelve months.

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If suitable acquisition opportunities arise that would require financing, we believe that we would have the ability to finance any such transactions.

As of April 25, 2022, $427.1 million of the current Board-authorized amount under our share repurchase program remained available.

As of July 25, 2022, $422.8 million of the current Board-authorized amount under our share repurchase program remained available.

We expect to repurchase shares on the open market from time to time depending on market conditions.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis