What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 181 added, 177 removed, 292 unchanged (55% of the section changed)

18 unchanged sentences

Financial Results

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

Base business sales grew 10%.

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

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

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

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

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

Base business gross margin increased 100 basis points.

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

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

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

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

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

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

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

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

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

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

Net sales increased 14% in the third quarter of 2022 to $1.6 billion compared to $1.4 billion in the third quarter of 2021.

Base business sales grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year.

Net sales benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather throughout much of the United States.

We estimate that these increases were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% from currency exchange rate fluctuations;

• 1% from one less selling day in Q3 2022 versus Q3 2021;

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

Gross profit increased 14% to $503.7 million in the third quarter of 2022 from $441.9 million in the same period of 2021.

Base business gross profit improved 7% over the third quarter of 2021.

Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to 31.3% in the third quarter of 2021.

Base business gross margin decreased 80 basis points.

Selling and administrative expenses (operating expenses) increased 17% to $239.8 million in the third quarter of 2022 compared to $204.6 million in the third quarter of 2021, including a 1% benefit from currency exchange rate fluctuations.

As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.

The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Operating income in the third quarter of 2022 increased 11% to $263.9 million compared to $237.3 million in the same period in 2021.

Operating margin was 16.3% in the third quarter of 2022 compared to 16.8% in the third quarter of 2021.

Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021, reflecting higher average debt levels and higher average interest rates.

We recorded a $0.6 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2022, compared to a tax benefit of $4.2 million realized in the same period of 2021.

This resulted in a $0.02 per diluted share tax benefit in the third quarter of 2022, down from a $0.10 per diluted share tax benefit realized in the same period of 2021.

Net income increased 3% to $190.1 million in the third quarter of 2022 compared to $184.7 million in the third quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits.

Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third 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 remain our highest priority.

We continue to monitor the ongoing impact of the COVID-19 pandemic.

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

We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain them where necessary.

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

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

Our industry experienced supply chain constraints in 2021.

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

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

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

We expect the impact of the pandemic on our business and financial results in 2022 will continue to vary by location and depend on numerous evolving factors that we are unable to accurately predict.

These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the possible re-institution of governmental restrictions on the activities of our customers, vendors or employees, the possibility of additional subsequent outbreaks, the sustainability of current home-centric trends and other changes in customer and supplier behavior in response to the pandemic.

This trend has had a positive impact on our financial performance over the past couple of years.

Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.

Our industry experienced substantial supply chain constraints beginning in 2021.

In response, we have proactively made significant investments in inventory in the last half of 2021 and early 2022 to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service.

While we continued to be challenged by supply chain constraints through the first part of 2022, we observed improvements in our supply chain dynamics in the second and third quarters of 2022.

We expect inventory balances to normalize with seasonal trends as 2023 progresses.

Financial Position and Liquidity

As of 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 $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.

As of September 30, 2022, total net receivables, including pledged receivables, increased 15% compared to September 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 27.0 days at September 30, 2022 and 25.7 days at September 30, 2021.

Our allowance for doubtful accounts balance was $8.9 million at September 30, 2022 and $5.4 million at September 30, 2021.

Net inventory levels increased 48% compared to levels at September 30, 2021.

Our inventory balance reflects increased purchasing to ensure product availability and stock new locations, in addition to impacts from inflation and recent acquisitions.

Our inventory reserve was $23.4 million at September 30, 2022 and $15.7 million at September 30, 2021.

Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at September 30, 2022 and 3.8 times at September 30, 2021.

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

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.

Total debt outstanding at September 30, 2022 was $1.5 billion compared to $362.8 million at September 30, 2021.

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

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 $18.50 to $19.05, including the impact of year-to-date tax benefits of $0.24.

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

Our previous earnings guidance range disclosed in our Second Quarter 2022 Report on Form 10-Q was $18.38 to $19.13.

Our earnings guidance range assumes average weather conditions.

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

Recently, we've observed increased demand for higher value products and customizations for new pools and remodeling projects, even though the issuance of new pool permits year-to-date has moderated.

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

Historically, our first and fourth quarter gross margin is lower compared to our second and third quarters based on seasonality.

We expect gross margin in the fourth quarter of 2022 to decline 150 to 200 basis points compared to gross margin of 31.1% in the fourth quarter of 2021 (which is notably up versus 28.5% reported in the fourth quarter of 2020), primarily due to lower inflation from vendor price increases compared to last year and lower incentives earned under our volume-based vendor programs.

We project our operating expense growth rate in 2022 will be less than our gross profit growth rate.

We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network.

We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our strategic initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network.

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

1 unchanged sentence

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

We recorded a $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 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 June 30, 2022.

We have not included any expected tax benefits in our guidance beyond what we have recognized as of September 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.

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RESULTS OF OPERATIONS

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.

As of September 30, 2022, we conducted operations through 417 sales centers in North America, Europe and Australia.

For the nine months ended September 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 Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

8 unchanged sentences

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

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

Three Months Ended September 30, 2022 Compared to Three Months Ended September 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):

1 unchanged sentence

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

June 30, June 30, June 30,

September 30, September 30, September 30,

2022 2021 2022 2021 2022 2021

8 unchanged sentences

Sales Centers

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

Tri-State Pool Distributors April 2022 1 July - September 2022

Porpoise Pool & Patio, Inc.

December 2021 1 April - June 2022

December 2021 1 July - September 2022

Wingate Supply, Inc.

December 2021 1 April - June 2022

December 2021 1 July - September 2022

Vak Pak Builders Supply, Inc.

June 2021 1 April - June 2022 and

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

April - June 2021

June 2021 1 July - August 2022 and

July - August 2021

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months.

2 unchanged sentences

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

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

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

December 31, 2021 410

1 unchanged sentence

New locations 6

June 30, 2022 416

September 30, 2022 417

Three Months Ended

September 30,

(in millions) 2022 2021 Change

Net sales $ 1,615.3 $ 1,411.4 $ 203.9 14%

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):

Net sales increased 14% in the third quarter of 2022 on top of net sales of $1.4 billion and 24% growth in the third quarter of 2021.

Base business net sales in the third quarter of 2022 grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year.

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

• inflationary product cost increases of approximately 9 to 10%;

1 unchanged sentence

• 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);

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

◦ market share gains, including 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.

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

We estimate that the benefits discussed above were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 1% unfavorable impact from currency exchange rate fluctuations;

• 1% from one less selling day in Q3 2022 versus Q3 2021;

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

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

In the third quarter of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 9% compared to the same period last year, and collectively represented approximately 27% of net sales for the period.

Supply chain issues continue to persist and constrain sales of certain equipment products.

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

Sales of chemicals, representing 13% of total net sales, increased 32% compared to the third quarter of 2021.

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

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.

Sales to base business retail customers increased 4% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 11% of our net sales for the third quarter of 2022.

Sales to commercial customers increased 28% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 3% of our net sales for the third quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the third quarter of 2022, increased 8% compared to the third quarter of 2021.

Comparatively, net sales in our year-round markets, representing 51% of our total base business net sales in the third quarter of 2022, increased 15% compared to the third quarter of 2021.

Net sales in Europe, representing 3% of our total net sales in the third quarter of 2022, declined 11% in local currency compared to the third quarter of 2021.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty from the war in Ukraine and increased fuel prices.

Three Months Ended

September 30,

(in millions) 2022 2021 Change

1 unchanged sentence

Gross margin 31.2 % 31.3 %

Base business gross margin increased 100 basis points.

Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to the third quarter of 2021 when gross margin increased 240 basis points to 31.3% (over the same period in 2020).

Our gross margin in the third quarter of 2022 benefited from focused pricing efforts, our supply chain initiatives and recent acquisitions, which mostly offset some headwinds from our vendor incentive programs.

Operating Expenses

Three Months Ended

September 30,

(in millions) 2022 2021 Change

1 unchanged sentence

Operating expenses as a % of net sales 14.8 % 14.5 %

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.

Operating expenses increased 17% in the third quarter of 2022 compared to the third quarter of 2021 (including a 1% benefit from currency exchange rate fluctuations), reflecting inflationary increases and incremental costs to support our business growth, including recent acquisitions.

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

As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.

Interest and Other Non-Operating Expenses, Net

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 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.

Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021.

Our weighted average effective interest rate increased to 3.2% in the third quarter of 2022 from 2.8% in the third quarter of 2021 on average outstanding debt of $1.5 billion versus $354.3 million for the respective periods.

Our effective income tax rate was 24.7% for the three months ended September 30, 2022 compared to 21.4% for the three months ended September 30, 2021.

We recorded a $0.6 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2022 compared to a tax benefit of $4.2 million realized in the same period last year.

Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 24.9% for the third quarter of 2022 and 23.2% for the third quarter of 2021.

Our third quarter effective income tax rate is typically lower compared to other quarters due to the annual expiration of statutes of limitations in the various jurisdictions where we have recorded uncertain tax positions.

Net Income and Earnings Per Share

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.

Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third 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

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 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,

(in thousands) Nine Months Ended Nine Months Ended Nine Months Ended

September 30, September 30, September 30,

2022 2021 2022 2021 2022 2021

8 unchanged sentences

Sales Centers

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

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

Porpoise Pool & Patio, Inc.

December 2021 1 January - June 2022

December 2021 1 January - September 2022

Wingate Supply, Inc.

December 2021 1 January - June 2022

December 2021 1 January - September 2022

Vak Pak Builders Supply, Inc.

June 2021 1 January - June 2022 and June 2021

June 2021 1 January - August 2022 and June - August 2021

Pool Source, LLC

2 unchanged sentences

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

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2021, please refer to the discussion under the heading Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021.

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

Net sales $ 5,083.8 $ 4,260.0 $ 823.8 19%

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

Net sales for the first nine months of 2022 increased 19% compared to the same period last year.

Base business net sales increased 14%.

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%);

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

Sales growth in our seasonally significant quarters (second and third quarters) have been limited by industry capacity, including labor and supply chain constraints.

However, we have observed improvements in our supply chain dynamics in the second and third quarters of 2022 following the challenges in the second half of 2021 through early 2022.

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

• inflationary product cost increases of approximately 9% to 10%;

• 5% sales growth from recent acquisitions;

• 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);

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

◦ market share gains, including 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:

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

Following our robust 33% sales growth in the first quarter of 2022, results in our second and third quarters were limited by several factors.

We estimate that the benefits discussed above were partially offset by the following:

• 1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;

• 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.

• less favorable weather conditions compared to last year throughout the second and third quarters, particularly in our seasonal markets (see discussion below);

• anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

In the first nine months of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 11% compared to the same period last year.

Equipment growth for certain products was limited by supply chain constraints.

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

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

Sales of chemicals, representing 12% of total net sales, increased 34% compared to the first nine months of 2021.

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

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 the first nine months of 2022, sales to base business retail customers increased 10% compared to the first nine months of 2021 and represented approximately 12% of our consolidated net sales.

Sales to certain of our retail customers have been hindered by less favorable weather conditions in the second and third quarters compared to the prior year.

Sales to commercial customers increased 27% in the first nine months of 2022 compared to the first nine months of 2021 and represented approximately 3% of our consolidated net sales in the first nine months of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the first nine months of 2022, increased 13% compared to the first nine months of 2021.

Comparatively, net sales in our year-round markets, representing 49% of our total base business net sales in the first nine months of 2022, increased 18% compared to the first half of 2021.

Net sales in Europe, representing 4% of our total net sales in the first nine months of 2022, declined 3% in local currency.

While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, beginning in the second quarter of 2022, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty.

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

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Gross margin 31.8 % 30.4 %

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.

Gross margin improved 140 basis points to 31.8% in the nine months ended September 30, 2022 compared to 30.4% in the first nine months of 2021.

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

Operating Expenses

Six Months Ended

Nine Months Ended

September 30,

(in millions) 2022 2021 Change

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Operating expenses as a % of net sales 13.8 % 13.8 %

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.

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

The increase in operating expenses reflects inflationary increases and incremental costs 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 expense.

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.

Interest and other non-operating expenses, net for the first nine months of 2022 increased $18.6 million compared to the same period last year, primarily due to higher average debt levels between periods.

Our average outstanding debt was $1.5 billion for the first nine months of 2022 versus $376.2 million for the same period of 2021.

Our weighted average effective interest rate decreased to 2.3% from 2.6% 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.

Our effective income tax rate was 24.3% for the nine months ended September 30, 2022 compared to 22.2% for the nine months ended September 30, 2021.

We recorded a $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2022 compared to a $15.9 million, or $0.39 per diluted share, tax benefit in the same period of 2021.

Without the benefits from ASU 2016-09, our effective tax rate was 25.3% for the nine months ended September 30, 2022 and 24.5% for the nine months ended September 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.

Net income increased 25% to $676.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Earnings per diluted share increased 26% to $16.82 for the nine months ended September 30, 2022 versus $13.32 per diluted share for the nine months ended September 30, 2021.

Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 28% to $16.58 for the nine months ended September 30, 2022 compared to $12.93 for the nine months ended September 30, 2021.

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

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

(Unaudited) Three Months Ended Six Months Ended

June 30, June 30,

(Unaudited) Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

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

The following table presents certain unaudited quarterly data for the first, second and third quarters of 2022, the four quarters of 2021 and the fourth quarter of 2020.

We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts.

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(in thousands) 2022 2021 2020

Second First Fourth Third Second First Fourth Third

Third Second First Fourth Third Second First Fourth

Statement of Income Data

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Weather Impacts on 2022 and 2021 Results

Sales in the third quarter of 2022 were generally aided by above-average temperatures throughout much of the contiguous United States.

However, sales in Florida were negatively impacted by closures due to Hurricane Ian at the end of the quarter, which we expect to recover in the fourth quarter of 2022.

Compared to last year, weather conditions in Canada and the northern states were less favorable.

Generally favorable weather conditions benefited sales in the third quarter of 2021 with most of the United States experiencing above-average temperatures and below-average precipitation.

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

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We focus our capital expenditure plans principally on the needs of our sales centers, and in recent years have increased our spending on information technology.

We project capital expenditures in 2022 will approximate our historical average of 1.0% of net sales.

We project capital expenditures in 2022 as a percentage of net sales will be consistent with our results in 2021.

Capital expenditures were 0.7% of net sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019 and have averaged roughly 1.0% of net sales over the past five years.

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

Six Months Ended

Nine Months Ended

September 30,

Operating activities $ 307,470 $ 359,065

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Financing activities (248,404) (267,765)

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.

Net cash provided by operations was $307.5 million for the first nine months of 2022 compared to $359.1 million for the first nine 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.

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

Net cash used in investing activities for the first nine months of 2022 decreased compared to the first nine months of 2021 primarily due to a decrease in cash used for the acquisition of businesses of $9.6 million, offset by an increase in capital expenditures of $3.7 million.

Net cash used in financing activities decreased $19.4 million to $248.4 million for the first nine months of 2022 compared to $267.8 million for the first nine months of 2021, reflecting a $333.2 million increase in share repurchases and an increase in dividends paid of $24.1 million, partially offset by $380.4 million increase in net debt proceeds

Future Sources and Uses of Cash

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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 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.

At September 30, 2022, there was $573.0 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $172.2 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.

The weighted average effective interest rate for the Credit Facility as of September 30, 2022 was approximately 3.5%, excluding commitment fees.

Term Facility

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We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date.

The total of the quarterly payments through maturity will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date.

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

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

At September 30, 2022, there was $159.6 million outstanding under the Term Facility with a weighted average effective interest rate of 4.2%.

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 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.

At September 30, 2022, there was $270.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 3.9%, excluding commitment fees.

Financial Covenants

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

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

As of September 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 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.

As of September 30, 2022, our average total leverage ratio equaled 1.25 (compared to 1.15 as of June 30, 2022) and the TTM average total indebtedness amount used in this calculation was $1.4 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 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.

As of September 30, 2022, our fixed charge ratio equaled 11.14 (compared to 12.22 as of June 30, 2022) and TTM Rental Expense was $77.9 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 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.

As of September 30, 2022, we had in place two interest rate swap contracts and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates.

For more information, see Note 4 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Compliance and Future Availability

As of 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.

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

As of October 24, 2022, $230.2 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