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, 2023 2022 2023 2022 Net sales $ 1,857,363 $ 2,055,818 $ 3,064,138 $ 3,468,468 Cost of sales 1,289,580 1,389,014 2,126,599 2,354,474 Gross profit 567,783 666,804 937,539 1,113,994 Selling and administrative expenses 240,774 247,916 464,758 459,382 Operating income 327,009 418,888 472,781 654,612 Interest and other non-operating expenses, net 16,892 8,523 32,728 13,722 Income before income taxes and equity in earnings 310,117 410,365 440,053 640,890 Provision for income taxes 77,987 103,160 106,260 154,482 Equity in earnings of unconsolidated investments, net 120 78 156 136 Net income $ 232,250 $ 307,283 $ 333,949 $ 486,544 Earnings per share attributable to common stockholders: Basic $ 5.95 $ 7.71 $ 8.55 $ 12.16 Diluted $ 5.91 $ 7.63 $ 8.48 $ 12.03 Weighted average common shares outstanding: Basic 38,837 39,660 38,857 39,795 Diluted 39,115 40,064 39,155 40,231 Cash dividends declared per common share $ 1.10 $ 1.00 $ 2.10 $ 1.80 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 Six Months Ended June 30, June 30, 2023 2022 2023 2022 Net income $ 232,250 $ 307,283 $ 333,949 $ 486,544 Other comprehensive income (loss): Foreign currency translation gain (loss) 2,801 ( 7,125 ) 5,271 ( 7,339 ) Unrealized gains (losses) on interest rate swaps, net of the change in taxes of $( 1,166 ), $( 1,631 ), $ 104 , and $( 5,497 ) 3,497 4,893 ( 313 ) 16,491 Total other comprehensive income (loss) 6,298 ( 2,232 ) 4,958 9,152 Comprehensive income $ 238,548 $ 305,051 $ 338,907 $ 495,696 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, 2023 2022 2022 (Unaudited) (Unaudited) (Audited) Assets Current assets: Cash and cash equivalents $ 53,225 $ 91,481 $ 45,591 Receivables, net 203,459 239,639 128,247 Receivables pledged under receivables facility 427,491 516,946 223,201 Product inventories, net 1,392,886 1,579,101 1,591,060 Prepaid expenses and other current assets 19,994 43,317 30,892 Total current assets 2,097,055 2,470,484 2,018,991 Property and equipment, net 209,541 183,480 193,709 Goodwill 699,918 692,972 691,993 Other intangible assets, net 302,444 309,375 305,450 Equity interest investments 1,278 1,179 1,248 Operating lease assets 279,468 259,571 269,608 Other assets 90,875 45,044 84,438 Total assets $ 3,680,579 $ 3,962,105 $ 3,565,437 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 485,100 $ 604,225 $ 406,667 Accrued expenses and other current liabilities 170,658 195,529 168,521 Short-term borrowings and current portion of long-term debt 36,219 19,731 25,042 Current operating lease liabilities 79,763 71,550 75,484 Total current liabilities 771,740 891,035 675,714 Deferred income taxes 58,151 42,380 58,759 Long-term debt, net 1,148,367 1,575,667 1,361,761 Other long-term liabilities 39,236 32,109 35,471 Non-current operating lease liabilities 204,553 191,856 198,538 Total liabilities 2,222,047 2,733,047 2,330,243 Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 39,048,604 , 39,588,231 and 39,069,419 shares issued and outstanding at June 30, 2023, June 30, 2022 and December 31, 2022, respectively 39 40 39 Additional paid-in capital 593,081 564,641 575,776 Retained earnings 854,559 662,709 653,484 Accumulated other comprehensive income 10,853 1,668 5,895 Total stockholders’ equity 1,458,532 1,229,058 1,235,194 Total liabilities and stockholders’ equity $ 3,680,579 $ 3,962,105 $ 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) Six Months Ended June 30, 2023 2022 Operating activities Net income $ 333,949 $ 486,544 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 15,292 15,376 Amortization 4,237 4,358 Share-based compensation 9,996 7,571 Equity in earnings of unconsolidated investments, net ( 156 ) ( 136 ) Other 3,563 7,185 Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ( 276,945 ) ( 384,245 ) Product inventories 201,380 ( 251,090 ) Prepaid expenses and other assets ( 4,423 ) ( 20,573 ) Accounts payable 76,140 208,017 Accrued expenses and other liabilities 13,744 ( 44,276 ) Net cash provided by operating activities 376,777 28,731 Investing activities Acquisition of businesses, net of cash acquired ( 11,500 ) ( 7,629 ) Purchases of property and equipment, net of sale proceeds ( 30,191 ) ( 19,802 ) Other investments, net ( 169 ) — Net cash used in investing activities ( 41,860 ) ( 27,431 ) Financing activities Proceeds from revolving line of credit 698,795 1,122,186 Payments on revolving line of credit ( 1,001,399 ) ( 1,128,902 ) Proceeds from term loan under credit facility — 250,000 Proceeds from asset-backed financing 388,900 215,000 Payments on asset-backed financing ( 240,200 ) ( 50,000 ) Payments on term facility ( 47,313 ) ( 4,625 ) Proceeds from short-term borrowings and current portion of long-term debt 17,859 24,767 Payments on short-term borrowings and current portion of long-term debt ( 19,182 ) ( 16,808 ) Payments of deferred and contingent acquisition consideration ( 551 ) ( 1,374 ) Proceeds from stock issued under share-based compensation plans 7,309 5,107 Payments of cash dividends ( 82,018 ) ( 72,028 ) Purchases of treasury stock ( 50,742 ) ( 278,680 ) Net cash (used in) provided by financing activities ( 328,542 ) 64,643 Effect of exchange rate changes on cash and cash equivalents 1,259 1,217 Change in cash and cash equivalents 7,634 67,160 Cash and cash equivalents at beginning of period 45,591 24,321 Cash and cash equivalents at end of period $ 53,225 $ 91,481 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 Net income — — — 232,250 — 232,250 Foreign currency translation — — — — 2,801 2,801 Interest rate swaps, net of the change in taxes of $( 1,166 ) — — — — 3,497 3,497 Repurchases of common stock, net of retirements — — — — — — Share-based compensation — — 5,073 — — 5,073 Issuance of stock under share-based compensation plans 16 — 1,413 — — 1,413 Declaration of cash dividends — — — ( 42,945 ) — ( 42,945 ) Other — — — ( 307 ) — ( 307 ) Balance at June 30, 2023 39,049 $ 39 $ 593,081 $ 854,559 $ 10,853 $ 1,458,532 5 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 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 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 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 and six-month periods ended June 30, 2023, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2023. Newly Adopted Accounting Pronouncements As of June 30, 2023, we adopted Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and all related amendments, which are codified into Accounting Standards Codification (ASC) 848 . This new standard provides optional expedients and exceptions for applying GAAP 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. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods . Income Taxes We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense on the Consolidated Statements of Income in the period in which stock options are exercised or restrictions on restricted stock awards lapse. We recorded excess tax benefits of $ 0.6 million in the second quarter of 2023 compared to $ 1.6 million in the second quarter of 2022 and $ 5.4 million in the six months ended June 30, 2023, compared to $ 8.9 million in the six months ended June 30, 2022. Retained Earnings We account for the retirement of treasury shares as a reduction of Retained earnings. As of June 30, 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 $ 1.0 billion. Accumulated Other Comprehensive Income The table below presents the components of our Accumulated other comprehensive income balance (in thousands): June 30, December 31, 2023 2022 2022 Foreign currency translation adjustments $ ( 14,338 ) $ ( 16,919 ) $ ( 19,608 ) Unrealized gains on interest rate swaps, net of tax 25,191 18,587 25,503 Accumulated other comprehensive income $ 10,853 $ 1,668 $ 5,895 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 205,000 for the three months ended June 30, 2023 and 218,000 for the three months ended June 30, 2022, and 209,000 for the six months ended June 30, 2023 and 229,000 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, 2023 2022 2023 2022 Net income $ 232,250 $ 307,283 $ 333,949 $ 486,544 Amounts allocated to participating securities ( 1,219 ) ( 1,680 ) ( 1,779 ) ( 2,762 ) Net income attributable to common stockholders $ 231,031 $ 305,603 $ 332,170 $ 483,782 Weighted average common shares outstanding: Basic 38,837 39,660 38,857 39,795 Effect of dilutive securities: Stock options and employee stock purchase plan 278 404 298 436 Diluted 39,115 40,064 39,155 40,231 Earnings per share attributable to common stockholders: Basic $ 5.95 $ 7.71 $ 8.55 $ 12.16 Diluted $ 5.91 $ 7.63 $ 8.48 $ 12.03 Anti-dilutive stock options excluded from diluted earnings per share computations (1) 64 33 65 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 June 2023, we acquired the distribution assets of Pioneer Pool Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Alabama. In May 2023, we acquired the distribution assets of Recreation Supply Company, a wholesale distributor of commercial swimming pool products, adding one location in North Dakota. 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 June 30, Input Level Classification 2023 2022 Assets Unrealized gains on interest rate swaps Level 2 Other assets $ 33,632 $ 24,828 Deferred compensation plan asset Level 1 Other assets 14,633 16,306 Liabilities Contingent consideration liabilities Level 3 Accrued expenses and other current liabilities $ — $ 582 Deferred compensation plan liability Level 1 Other long-term liabilities 14,633 16,306 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 1.3260 % Interest rate swap 2 March 9, 2020 September 29, 2022 February 26, 2027 $ 150.0 0.6690 % For the interest rate swap contracts in effect at June 30, 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 and six-month periods ended June 30, 2023 or June 30, 2022. We also have in place 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 0.7630 % 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. We amended the floating rate option for our interest rate swap contracts and forward-starting interest rate swap contract, effective June 30, 2023, to reflect the change in the reference rate in our debt agreements from the one month London Interbank Offered Rate Market Index Rate (LIBOR) to the one month Term Secured Overnight Financing Rate Index Rate (Term SOFR). As permitted by ASC 848, a change in rate only does not qualify as a hedge modification, and we have accounted for and presented our interest rate swaps contracts and forward-starting interest rate swap contract in the same manner as prior to the amendments. 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 of 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). 10 Note 5 – Debt The table below presents the components of our debt (in thousands): June 30, 2023 2022 Variable rate debt Short-term borrowings $ — $ 10,152 Current portion of long-term debt: Australian credit facility 11,219 9,579 Current portion of term loans under credit facility 25,000 — Short-term borrowings and current portion of long-term debt $ 36,219 $ 19,731 Long-term portion: Revolving credit facility 217,106 566,210 Term loan under credit facility 475,000 500,000 Term facility 109,938 161,875 Receivables securitization facility 348,200 350,000 Less: financing costs, net 1,877 2,418 Long-term debt, net 1,148,367 1,575,667 Total debt $ 1,184,586 $ 1,595,398 On June 30, 2023, we entered into the Second Amendment to the Second Amended and Restated Credit Agreement (the Credit Facility Amendment) among us as U.S. Borrower, SCP Distributors Canada Inc. as Canadian Borrower, SCP International, Inc. as Euro Borrower, the Subsidiary Guarantors party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and certain other lenders party thereto. The Credit Facility Amendment updated the index used for the Base Rate (as further defined within the Credit Facility Amendment) from LIBOR to Term SOFR. The Credit Facility Amendment also increased the maximum amount for the Accounts Securitization (as further defined within the Credit Facility Amendment) from $ 350.0 million to $ 500.0 million and increased the Canadian Dollar Commitment, Euro Commitment and Swingline Commitment (all as further defined within the Credit Facility Amendment) to $ 50.0 million each. We also entered into the Second Amendment to Credit Agreement (the Term Facility Amendment) on June 30, 2023, among us, as Borrower, the Guarantors party thereto and Bank of America, N.A. as Lender. The Term Facility Amendment updated the index used for the Base Rate (as further defined within the Term Facility Amendment) from LIBOR to SOFR. 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