POOL CORP 10-Q

Item 1. Financial Statements POOL CORPORATION Consolidated Statements of Income (Unaudited) (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net sales $ 2,055,818 $ 1,787,833 $ 3,468,468 $ 2,848,579 Cost of sales 1,389,014 1,236,148 2,354,474 1,995,762 Gross profit 666,804 551,685 1,113,994 852,817 Selling and administrative expenses 247,916 213,099 459,382 385,200 Operating income 418,888 338,586 654,612 467,617 Interest and other non-operating expenses, net 8,523 1,963 13,722 4,545 Income before income taxes and equity in earnings 410,365 336,623 640,890 463,072 Provision for income taxes 103,160 76,985 154,482 104,854 Equity in earnings of unconsolidated investments, net 78 57 136 132 Net income $ 307,283 $ 259,695 $ 486,544 $ 358,350 Earnings per share attributable to common stockholders: Basic $ 7.71 $ 6.47 $ 12.16 $ 8.92 Diluted $ 7.63 $ 6.37 $ 12.03 $ 8.78 Weighted average common shares outstanding: Basic 39,660 40,125 39,795 40,169 Diluted 40,064 40,745 40,231 40,800 Cash dividends declared per common share $ 1.00 $ 0.80 $ 1.80 $ 1.38 The accompanying Notes are an integral part of the Consolidated Financial Statements. 1 POOL CORPORATION Consolidated Statements of Comprehensive Income (Unaudited) (In thousands) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income $ 307,283 $ 259,695 $ 486,544 $ 358,350 Other comprehensive (loss) income: Foreign currency translation (losses) gains ( 7,125 ) 1,302 ( 7,339 ) 34 Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $( 1,631 ), $ 719 , $( 5,497 ), and $( 2,327 ) 4,893 ( 2,157 ) 16,491 6,980 Total other comprehensive (loss) income ( 2,232 ) ( 855 ) 9,152 7,014 Comprehensive income $ 305,051 $ 258,840 $ 495,696 $ 365,364 The accompanying Notes are an integral part of the Consolidated Financial Statements. 2 POOL CORPORATION Consolidated Balance Sheets (In thousands, except share data) June 30, June 30, December 31, 2022 2021 2021 (Unaudited) (Unaudited) (Audited) Assets Current assets: Cash and cash equivalents $ 91,481 $ 58,465 $ 24,321 Receivables, net 239,639 210,318 155,259 Receivables pledged under receivables facility 516,946 375,248 221,312 Product inventories, net 1,579,101 894,654 1,339,100 Prepaid expenses and other current assets 43,317 18,716 29,093 Total current assets 2,470,484 1,557,401 1,769,085 Property and equipment, net 183,480 111,661 179,008 Goodwill 692,972 283,284 688,364 Other intangible assets, net 309,375 12,350 312,814 Equity interest investments 1,179 1,293 1,231 Operating lease assets 259,571 221,068 241,662 Other assets 45,044 26,978 37,967 Total assets $ 3,962,105 $ 2,214,035 $ 3,230,131 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 604,225 $ 439,453 $ 398,697 Accrued expenses and other current liabilities 195,529 184,437 264,877 Short-term borrowings and current portion of long-term debt 19,731 10,058 11,772 Current operating lease liabilities 71,550 63,786 69,070 Total current liabilities 891,035 697,734 744,416 Deferred income taxes 42,380 30,440 35,840 Long-term debt, net 1,575,667 413,058 1,171,578 Other long-term liabilities 32,109 38,079 31,545 Non-current operating lease liabilities 191,856 159,976 175,359 Total liabilities 2,733,047 1,339,287 2,158,738 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 39,588,231 , 40,131,570 and 40,192,901 shares issued and outstanding at June 30, 2022, June 30, 2021 and December 31, 2021, respectively 40 40 40 Additional paid-in capital 564,641 535,046 551,963 Retained earnings 662,709 346,667 526,874 Accumulated other comprehensive income (loss) 1,668 ( 7,005 ) ( 7,484 ) Total stockholders’ equity 1,229,058 874,748 1,071,393 Total liabilities and stockholders’ equity $ 3,962,105 $ 2,214,035 $ 3,230,131 The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 POOL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2022 2021 Operating activities Net income $ 486,544 $ 358,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 15,376 13,884 Amortization 4,358 723 Share-based compensation 7,571 7,549 Equity in earnings of unconsolidated investments, net ( 136 ) ( 132 ) Other 7,185 4,812 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ( 384,245 ) ( 295,342 ) Product inventories ( 251,090 ) ( 114,792 ) Prepaid expenses and other assets ( 20,573 ) ( 16,865 ) Accounts payable 208,017 170,368 Accrued expenses and other current liabilities ( 44,276 ) 58,673 Net cash provided by operating activities 28,731 187,228 Investing activities Acquisition of businesses, net of cash acquired ( 7,629 ) ( 15,162 ) Purchases of property and equipment, net of sale proceeds ( 19,802 ) ( 17,333 ) Net cash used in investing activities ( 27,431 ) ( 32,495 ) Financing activities Proceeds from revolving line of credit 1,122,186 549,008 Payments on revolving line of credit ( 1,128,902 ) ( 505,636 ) Proceeds from term loan under credit facility 250,000 — Proceeds from asset-backed financing 215,000 260,000 Payments on asset-backed financing ( 50,000 ) ( 290,000 ) Payments on term facility ( 4,625 ) ( 4,625 ) Proceeds from short-term borrowings and current portion of long-term debt 24,767 4,466 Payments on short-term borrowings and current portion of long-term debt ( 16,808 ) ( 6,277 ) Payments of deferred and contingent acquisition consideration ( 1,374 ) ( 362 ) Proceeds from stock issued under share-based compensation plans 5,107 7,918 Payments of cash dividends ( 72,028 ) ( 55,418 ) Purchases of treasury stock ( 278,680 ) ( 90,135 ) Net cash provided by (used in) financing activities 64,643 ( 131,061 ) Effect of exchange rate changes on cash and cash equivalents 1,217 665 Change in cash and cash equivalents 67,160 24,337 Cash and cash equivalents at beginning of period 24,321 34,128 Cash and cash equivalents at end of period $ 91,481 $ 58,465 The accompanying Notes are an integral part of the Consolidated Financial Statements. 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) 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 5 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 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 The accompanying Notes are an integral part of the Consolidated Financial Statements. 6 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 2021 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our 2021 Annual Report on Form 10-K. The results for our three and six-month periods ended June 30, 2022, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2022. 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 $ 1.6 million in the second quarter of 2022 compared to $ 7.7 million in the second quarter of 2021 and $ 8.9 million in the six months ended June 30, 2022, compared to $ 11.7 million in the six months ended June 30, 2021. Retained Earnings We account for the retirement of treasury shares as a reduction of Retained earnings. As of June 30, 2022, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $ 1.9 billion and cumulative dividends of $ 862.4 million. Accumulated Other Comprehensive Income (Loss) The table below presents the components of our Accumulated other comprehensive income (loss) balance (in thousands): June 30, December 31, 2022 2021 2021 Foreign currency translation adjustments $ ( 16,919 ) $ ( 4,882 ) $ ( 9,580 ) Unrealized gains (losses) on interest rate swaps, net of tax 18,587 ( 2,123 ) 2,096 Accumulated other comprehensive income (loss) $ 1,668 $ ( 7,005 ) $ ( 7,484 ) 7 Recent Accounting Pronouncements Pending Adoption The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods: Standard Description Effective Date Effect on Financial Statements and Other Significant Matters ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities. The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. Our exposure related to the expected cessation of LIBOR is limited to the interest expense and certain fees we incur on balances outstanding under our three major credit facilities. We do not expect that there will be a material impact to the financial statements as a result of adopting these ASUs. 8 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 218 thousand in the second quarter of 2022 and 229 thousand 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 Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income $ 307,283 $ 259,695 $ 486,544 $ 358,350 Amounts allocated to participating securities ( 1,680 ) — ( 2,762 ) — Net income attributable to common stockholders $ 305,603 $ 259,695 $ 483,782 $ 358,350 Weighted average common shares outstanding: Basic 39,660 40,125 39,795 40,169 Effect of dilutive securities: Stock options and employee stock purchase plan 404 620 436 631 Diluted 40,064 40,745 40,231 40,800 Earnings per share attributable to common stockholders: Basic $ 7.71 $ 6.47 $ 12.16 $ 8.92 Diluted $ 7.63 $ 6.37 $ 12.03 $ 8.78 Anti-dilutive stock options excluded from diluted earnings per share computations (1) 33 — 1 — (1) Since these options 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. 9 Note 3 – Acquisitions In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 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 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. 10 Recurring Fair Value Measurements The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands): Fair Value at June 30, 2022 2021 Level 2 Unrealized gains on interest rate swaps $ 24,828 $ 4,641 Unrealized losses on interest rate swaps — 7,425 Level 3 Contingent consideration liabilities $ 582 $ 1,008 Interest Rate Swaps 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 income (loss) on the Consolidated Balance Sheets. The following table provides additional details related to these swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Interest rate swap 1 May 7, 2019 November 20, 2020 September 29, 2022 $ 75.0 2.0925 % Interest rate swap 2 July 25, 2019 November 20, 2020 September 29, 2022 $ 75.0 1.5500 % Interest rate swap 3 February 5, 2020 February 26, 2021 February 28, 2025 $ 150.0 1.3800 % For the interest rate swap contracts in effect at June 30, 2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the six-month period ended June 30, 2022. 11 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. We record changes in the estimated fair value of these forward-starting interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The following table provides details related to each of our forward-starting interest rate swap contracts: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Forward-starting interest rate swap 1 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.7400 % Forward-starting interest rate swap 2 March 9, 2020 February 28, 2025 February 26, 2027 $ 150.0 0.8130 % Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we were in a net pay position. Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts. Nonrecurring Fair Value Measurements In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwill and intangible assets, are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. In the six months ended June 30, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition. Other The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs). 12 Note 5 – Debt The table below presents the components of our debt (in thousands): June 30, 2022 2021 Variable rate debt Short-term borrowings $ 10,152 $ — Current portion of long-term debt: Australian credit facility 9,579 10,058 Short-term borrowings and current portion of long-term debt 19,731 10,058 Long-term portion: Revolving credit facility 566,210 152,396 Term loan under credit facility 500,000 — Term facility 161,875 171,125 Receivables securitization facility 350,000 90,000 Less: financing costs, net 2,418 463 Long-term debt, net 1,575,667 413,058 Total debt $ 1,595,398 $ 423,116 On January 4, 2022, we drew the $ 250.0 million incremental term loan available under our December 30, 2021 amendment to our Second Amended and Restated Credit Agreement (the “Credit Facility”) and used the net proceeds to reduce our revolving borrowings under the Credit Facility. At June 30, 2022, the $ 500.0 million of term loans available under the Credit Facility were fully drawn. Our accounts receivable securitization facility (the “Receivables Facility”) 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. 13