POOL CORP 10-Q

Item 1. Financial Statements POOL CORPORATION Consolidated Statements of Income (Unaudited) (In thousands, except per share data) Three Months Ended March 31, 2023 2022 Net sales $ 1,206,774 $ 1,412,650 Cost of sales 837,019 965,461 Gross profit 369,755 447,189 Selling and administrative expenses 223,984 211,466 Operating income 145,771 235,723 Interest and other non-operating expenses, net 15,835 5,198 Income before income taxes and equity in earnings 129,936 230,525 Provision for income taxes 28,273 51,322 Equity in earnings of unconsolidated investments, net 36 58 Net income $ 101,699 $ 179,261 Earnings per share attributable to common stockholders: Basic $ 2.60 $ 4.46 Diluted $ 2.58 $ 4.41 Weighted average common shares outstanding: Basic 38,877 39,932 Diluted 39,189 40,392 Cash dividends declared per common share $ 1.00 $ 0.80 The accompanying Notes are an integral part of the Consolidated Financial Statements. 1 POOL CORPORATION Consolidated Statements of Comprehensive Income (Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 Net income $ 101,699 $ 179,261 Other comprehensive (loss) income: Foreign currency translation gain (loss) 2,469 ( 214 ) Unrealized (loss) gain on interest rate swaps, net of the change in taxes of $ 1,269 and $( 3,866 ) ( 3,809 ) 11,598 Total other comprehensive (loss) income ( 1,340 ) 11,384 Comprehensive income $ 100,359 $ 190,645 The accompanying Notes are an integral part of the Consolidated Financial Statements. 2 POOL CORPORATION Consolidated Balance Sheets (In thousands, except share data) March 31, March 31, December 31, 2023 2022 2022 (Unaudited) (Unaudited) (Audited) Assets Current assets: Cash and cash equivalents $ 26,470 $ 35,365 $ 45,591 Receivables, net 163,048 195,951 128,247 Receivables pledged under receivables facility 401,123 483,976 223,201 Product inventories, net 1,686,683 1,641,155 1,591,060 Prepaid expenses and other current assets 27,875 42,310 30,892 Total current assets 2,305,199 2,398,757 2,018,991 Property and equipment, net 200,997 180,504 193,709 Goodwill 693,242 688,350 691,993 Other intangible assets, net 303,753 310,848 305,450 Equity interest investments 1,206 1,184 1,248 Operating lease assets 274,428 260,285 269,608 Other assets 84,004 42,213 84,438 Total assets $ 3,862,829 $ 3,882,141 $ 3,565,437 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 739,749 $ 685,946 $ 406,667 Accrued expenses and other current liabilities 126,093 179,552 168,521 Short-term borrowings and current portion of long-term debt 33,080 21,265 25,042 Current operating lease liabilities 78,498 71,685 75,484 Total current liabilities 977,420 958,448 675,714 Deferred income taxes 57,868 40,944 58,759 Long-term debt, net 1,332,670 1,483,808 1,361,761 Other long-term liabilities 37,623 32,940 35,471 Non-current operating lease liabilities 200,498 191,723 198,538 Total liabilities 2,606,079 2,707,863 2,330,243 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 39,032,631 , 40,110,126 and 39,069,419 shares issued and outstanding at March 31, 2023, March 31, 2022 and December 31, 2022, respectively 39 40 39 Additional paid-in capital 586,595 558,755 575,776 Retained earnings 665,561 611,583 653,484 Accumulated other comprehensive income 4,555 3,900 5,895 Total stockholders’ equity 1,256,750 1,174,278 1,235,194 Total liabilities and stockholders’ equity $ 3,862,829 $ 3,882,141 $ 3,565,437 The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 POOL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 Operating activities Net income $ 101,699 $ 179,261 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 7,632 7,663 Amortization 2,135 2,192 Share-based compensation 4,923 3,657 Equity in earnings of unconsolidated investments, net ( 36 ) ( 58 ) Other 2,732 5,777 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ( 211,015 ) ( 303,400 ) Product inventories ( 96,011 ) ( 306,582 ) Prepaid expenses and other assets ( 5,786 ) ( 23,330 ) Accounts payable 332,800 287,449 Accrued expenses and other liabilities ( 35,870 ) ( 60,738 ) Net cash provided by (used in) operating activities 103,203 ( 208,109 ) Investing activities Acquisition of businesses, net of cash acquired ( 1,760 ) — Purchases of property and equipment, net of sale proceeds ( 15,570 ) ( 9,159 ) Other investments, net ( 230 ) — Net cash used in investing activities ( 17,560 ) ( 9,159 ) Financing activities Proceeds from revolving line of credit 256,079 564,288 Payments on revolving line of credit ( 376,895 ) ( 604,960 ) Proceeds from term loan under credit facility — 250,000 Proceeds from asset-backed financing 151,200 155,000 Payments on asset-backed financing ( 51,100 ) ( 50,000 ) Payments on term facility ( 2,313 ) ( 2,313 ) Proceeds from short-term borrowings and current portion of long-term debt 3,011 10,277 Payments on short-term borrowings and current portion of long-term debt ( 1,223 ) ( 784 ) Payments of deferred and contingent acquisition consideration ( 551 ) ( 1,374 ) Proceeds from stock issued under share-based compensation plans 5,896 3,135 Payments of cash dividends ( 39,073 ) ( 32,132 ) Purchases of treasury stock ( 50,549 ) ( 62,420 ) Net cash (used in) provided by financing activities ( 105,518 ) 228,717 Effect of exchange rate changes on cash and cash equivalents 754 ( 405 ) Change in cash and cash equivalents ( 19,121 ) 11,044 Cash and cash equivalents at beginning of period 45,591 24,321 Cash and cash equivalents at end of period $ 26,470 $ 35,365 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 Income Total Balance at December 31, 2022 39,069 $ 39 $ 575,776 $ 653,484 $ 5,895 $ 1,235,194 Net income — — — 101,699 — 101,699 Foreign currency translation — — — — 2,469 2,469 Interest rate swaps, net of the change in taxes of $ 1,269 — — — — ( 3,809 ) ( 3,809 ) Repurchases of common stock, net of retirements ( 144 ) — — ( 50,549 ) — ( 50,549 ) Share-based compensation — — 4,923 — — 4,923 Issuance of stock under share-based compensation plans 108 — 5,896 — — 5,896 Declaration of cash dividends — — — ( 39,073 ) — ( 39,073 ) Balance at March 31, 2023 39,033 $ 39 $ 586,595 $ 665,561 $ 4,555 $ 1,256,750 Common Stock Additional Paid-In Retained Accumulated Other Comprehensive Shares Amount Capital Earnings 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 The accompanying Notes are an integral part of the Consolidated Financial Statements. 5 POOL CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1 – Summary of Significant Accounting Policies Pool Corporation (the Company , which may be referred to as we, us or our ) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements. The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated. A description of our significant accounting policies is included in our 2022 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 2022 Annual Report on Form 10-K. The results for our three-month period ended March 31, 2023, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2023. 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 $ 4.8 million in the first quarter of 2023 compared to $ 7.3 million in the first quarter of 2022. Retained Earnings We account for the retirement of treasury shares as a reduction of Retained earnings. As of March 31, 2023, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $ 2.2 billion and cumulative dividends of $ 980.1 million. Accumulated Other Comprehensive Income The table below presents the components of our Accumulated other comprehensive income balance (in thousands): March 31, December 31, 2023 2022 2022 Foreign currency translation adjustments $ ( 17,139 ) $ ( 9,794 ) $ ( 19,608 ) Unrealized gains on interest rate swaps, net of tax 21,694 13,694 25,503 Accumulated other comprehensive income $ 4,555 $ 3,900 $ 5,895 6 Recent Accounting Pronouncements Pending Adoption The following table summarizes 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 ASU 2021-01, Reference Rate Reform (Topic 848): Scope ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ASU 2020-04, Reference Rate Reform (Topic 848), provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The 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, which refined the scope of ASC 848 and clarified some of its guidance as it relates to recent rate reform activities. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the date for using optional expedients and exceptions to December 31, 2024. The provisions of these updates are available until December 31, 2024. In 2022, we adopted the hedge accounting expedient related to the probability of forecasted transactions to assert probability of the hedged interest regardless of any expected modification related to reference rate reform. We may apply other elections as applicable. We do not expect that there will be a material impact to the financial statements as a result of adopting any of the optional expedient or exceptions from these ASUs. 7 Note 2 – Earnings Per Share We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 213,000 for the three months ended March 31, 2023 and 239,000 for the three months ended March 31, 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 March 31, 2023 2022 Net income $ 101,699 $ 179,261 Amounts allocated to participating securities ( 548 ) ( 1,051 ) Net income attributable to common stockholders $ 101,151 $ 178,210 Weighted average common shares outstanding: Basic 38,877 39,932 Effect of dilutive securities: Stock options and employee stock purchase plan 312 460 Diluted 39,189 40,392 Earnings per share attributable to common stockholders: Basic $ 2.60 $ 4.46 Diluted $ 2.58 $ 4.41 Anti-dilutive stock options excluded from diluted earnings per share computations (1) 64 1 (1) Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share. Note 3 – Acquisitions In March 2023, we acquired the distribution assets of Pro-Water Irrigation & Landscape Supply, Inc., a wholesale distributor of irrigation and landscape supply products, adding two locations in Arizona. In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in West Virginia. 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. 8 Note 4 – Fair Value Measurements and Interest Rate Swaps Recurring Fair Value Measurements Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts, our deferred compensation plan asset and liability and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; or • inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The table below presents our assets and liabilities measured and recorded at fair value on a recurring basis (in thousands): Fair Value at March 31, Input Level Classification 2023 2022 Assets Unrealized gains on interest rate swaps Level 2 Other assets $ 28,970 $ 18,817 Deferred compensation plan asset Level 1 Other assets 14,014 18,338 Liabilities Contingent consideration liabilities Level 3 Accrued expenses and other current liabilities $ — $ 600 Unrealized losses on interest rate swaps Level 2 Accrued expenses and other current liabilities — 514 Deferred compensation plan liability Level 1 Other long-term liabilities 14,014 18,338 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. We use significant other observable market data or assumptions (Level 2 inputs) in determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contract that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We 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 on the Consolidated Balance Sheets. We currently have two swap contracts in place. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on a portion of our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive income on the Consolidated Balance Sheets. 9 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 February 5, 2020 February 26, 2021 February 28, 2025 $ 150.0 1.3800 % Interest rate swap 2 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.7400 % For the interest rate swap contracts in effect at March 31, 2023, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in the three-month periods ended March 31, 2023 or March 31, 2022. We have entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on a portion of our variable rate borrowings. The following table provides details related to our forward-starting interest rate swap contract: Derivative Inception Date Effective Date Termination Date Notional Amount (in millions) Fixed Interest Rate Forward-starting interest rate swap 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 contract are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts. Other Our deferred compensation plan asset represents investments in securities (primarily mutual funds) traded in an active market (Level 1 inputs) held for the benefit of certain employees as part our deferred compensation plan. We record an equal and offsetting deferred compensation plan liability, which represents our obligation to participating employees. Changes in the fair value of the plan asset and liability are reflected in Selling and administrative expenses in the Consolidated Statements of Income. The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of our long-term debt approximates its fair value. 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). 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 are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. In the three months ended March 31, 2023 and March 31, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition. 10 Note 5 – Debt The table below presents the components of our debt (in thousands): March 31, 2023 2022 Variable rate debt Short-term borrowings $ 3,011 $ 10,854 Current portion of long-term debt: Australian credit facility 11,319 10,411 Current portion of term loans under credit facility 18,750 — Short-term borrowings and current portion of long-term debt $ 33,080 $ 21,265 Long-term portion: Revolving credit facility 398,895 532,253 Term loan under credit facility 481,250 500,000 Term facility 154,938 164,188 Receivables securitization facility 299,600 290,000 Less: financing costs, net 2,013 2,633 Long-term debt, net 1,332,670 1,483,808 Total debt $ 1,365,750 $ 1,505,073 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. 11