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Form 10-Q POOL CORP For: Jun 30

July 28, 2022 12:52 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission File Number: 0-26640

pool-20220630_g1.jpg 
POOL CORPORATION
(Exact name of registrant as specified in its charter)
  
Delaware36-3943363
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
  
109 Northpark Boulevard,
Covington,Louisiana 70433-5001
(Address of principal executive offices)(Zip Code)
(985) 892-5521
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per sharePOOLNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes x    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                        Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer
  
Non-accelerated filer  oSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes     No x

As of July 25, 2022, there were 39,590,630 shares of common stock outstanding.




POOL CORPORATION
Form 10-Q
For the Quarter Ended June 30, 2022

TABLE OF CONTENTS
Page
 
   
  
    
  
  
  
  
  
   
 
   
 
   
 
  
 
   
 
   
 
   
 
   
 
  





PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
POOL CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data) 

Three Months EndedSix Months Ended
June 30,June 30,
 2022202120222021
Net sales$2,055,818 $1,787,833 $3,468,468 $2,848,579 
Cost of sales1,389,014 1,236,148 2,354,474 1,995,762 
Gross profit666,804 551,685 1,113,994 852,817 
Selling and administrative expenses247,916 213,099 459,382 385,200 
Operating income418,888 338,586 654,612 467,617 
Interest and other non-operating expenses, net8,523 1,963 13,722 4,545 
Income before income taxes and equity in earnings410,365 336,623 640,890 463,072 
Provision for income taxes103,160 76,985 154,482 104,854 
Equity in earnings of unconsolidated investments, net78 57 136 132 
Net income$307,283 $259,695 $486,544 $358,350 
Earnings per share attributable to common stockholders:  
Basic$7.71 $6.47 $12.16 $8.92 
Diluted$7.63 $6.37 $12.03 $8.78 
Weighted average common shares outstanding:  
Basic39,660 40,125 39,795 40,169 
Diluted40,064 40,745 40,231 40,800 
Cash dividends declared per common share$1.00 $0.80 $1.80 $1.38 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
1


POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

Three Months EndedSix Months Ended
June 30,June 30,
  2022202120222021
Net income$307,283 $259,695 $486,544 $358,350 
Other comprehensive (loss) income:  
Foreign currency translation (losses) gains(7,125)1,302 (7,339)34 
Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $(1,631), $719, $(5,497), and $(2,327)
4,893 (2,157)16,491 6,980 
Total other comprehensive (loss) income (2,232)(855)9,152 7,014 
Comprehensive income$305,051 $258,840 $495,696 $365,364 

The accompanying Notes are an integral part of the Consolidated Financial Statements.









2


POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)

June 30,June 30,December 31,
202220212021
 (Unaudited)(Unaudited)(Audited)
Assets   
Current assets:   
Cash and cash equivalents$91,481 $58,465 $24,321 
Receivables, net239,639 210,318 155,259 
Receivables pledged under receivables facility516,946 375,248 221,312 
Product inventories, net1,579,101 894,654 1,339,100 
Prepaid expenses and other current assets43,317 18,716 29,093 
Total current assets2,470,484 1,557,401 1,769,085 
Property and equipment, net183,480 111,661 179,008 
Goodwill692,972 283,284 688,364 
Other intangible assets, net309,375 12,350 312,814 
Equity interest investments1,179 1,293 1,231 
Operating lease assets259,571 221,068 241,662 
Other assets45,044 26,978 37,967 
Total assets$3,962,105 $2,214,035 $3,230,131 
Liabilities and stockholders’ equity   
Current liabilities:   
Accounts payable$604,225 $439,453 $398,697 
Accrued expenses and other current liabilities195,529 184,437 264,877 
Short-term borrowings and current portion of long-term debt 19,731 10,058 11,772 
Current operating lease liabilities71,550 63,786 69,070 
Total current liabilities891,035 697,734 744,416 
Deferred income taxes42,380 30,440 35,840 
Long-term debt, net1,575,667 413,058 1,171,578 
Other long-term liabilities32,109 38,079 31,545 
Non-current operating lease liabilities191,856 159,976 175,359 
Total liabilities2,733,047 1,339,287 2,158,738 
Stockholders’ equity:   
Common stock, $0.001 par value; 100,000,000 shares authorized;
39,588,231, 40,131,570 and 40,192,901 shares issued and
outstanding at June 30, 2022, June 30, 2021 and
December 31, 2021, respectively
40 40 40 
Additional paid-in capital564,641 535,046 551,963 
Retained earnings 662,709 346,667 526,874 
Accumulated other comprehensive income (loss)1,668 (7,005)(7,484)
Total stockholders’ equity1,229,058 874,748 1,071,393 
Total liabilities and stockholders’ equity$3,962,105 $2,214,035 $3,230,131 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
3


POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 Six Months Ended
June 30,
 20222021
Operating activities  
Net income$486,544 $358,350 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation15,376 13,884 
Amortization4,358 723 
Share-based compensation7,571 7,549 
Equity in earnings of unconsolidated investments, net(136)(132)
Other7,185 4,812 
Changes in operating assets and liabilities, net of effects of acquisitions:  
Receivables(384,245)(295,342)
Product inventories(251,090)(114,792)
Prepaid expenses and other assets(20,573)(16,865)
Accounts payable208,017 170,368 
Accrued expenses and other current liabilities(44,276)58,673 
Net cash provided by operating activities28,731 187,228 
Investing activities  
Acquisition of businesses, net of cash acquired(7,629)(15,162)
Purchases of property and equipment, net of sale proceeds(19,802)(17,333)
Net cash used in investing activities(27,431)(32,495)
Financing activities  
Proceeds from revolving line of credit1,122,186 549,008 
Payments on revolving line of credit(1,128,902)(505,636)
Proceeds from term loan under credit facility250,000  
Proceeds from asset-backed financing215,000 260,000 
Payments on asset-backed financing(50,000)(290,000)
Payments on term facility(4,625)(4,625)
Proceeds from short-term borrowings and current portion of long-term debt24,767 4,466 
Payments on short-term borrowings and current portion of long-term debt (16,808)(6,277)
Payments of deferred and contingent acquisition consideration(1,374)(362)
Proceeds from stock issued under share-based compensation plans5,107 7,918 
Payments of cash dividends(72,028)(55,418)
Purchases of treasury stock(278,680)(90,135)
Net cash provided by (used in) financing activities64,643 (131,061)
Effect of exchange rate changes on cash and cash equivalents1,217 665 
Change in cash and cash equivalents67,160 24,337 
Cash and cash equivalents at beginning of period24,321 34,128 
Cash and cash equivalents at end of period$91,481 $58,465 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
4



POOL CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands)

Common StockAdditional
Paid-In
RetainedAccumulated
Other
Comprehensive
SharesAmountCapitalEarnings(Loss) IncomeTotal
Balance at December 31, 202140,193 $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, 202240,110$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, 202239,588$40 $564,641 $662,709 $1,668 $1,229,058 


5


Common StockAdditional
Paid-In
RetainedAccumulated
Other
Comprehensive
 SharesAmountCapitalEarningsLossTotal
Balance at December 31, 202040,232 $40 $519,579 $133,870 $(14,019)$639,470 
Net income
   98,655  98,655 
Foreign currency translation
    (1,268)(1,268)
Interest rate swaps, net of the change in taxes of $(3,046)
    9,137 9,137 
Repurchases of common stock, net of retirements
(215)  (71,516) (71,516)
Share-based compensation
  3,837   3,837 
Issuance of stock under share-based compensation plans
69  2,912   2,912 
Declaration of cash dividends
   (23,299) (23,299)
Balance at March 31, 202140,086 $40 $526,328 $137,710 $(6,150)$657,928 
Net income
   259,695  259,695 
Foreign currency translation
    1,302 1,302 
Interest rate swaps, net of the change in taxes of $719
    (2,157)(2,157)
Repurchases of common stock, net of retirements
(45)  (18,619) (18,619)
Share-based compensation
  3,712   3,712 
Issuance of stock under share-based compensation plans
90  5,006   5,006 
Declaration of cash dividends
   (32,119) (32,119)
Balance at June 30, 202140,131 $40 $535,046 $346,667 $(7,005)$874,748 


The accompanying Notes are an integral part of the Consolidated Financial Statements.
6


POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies

Pool Corporation (the Company, which may be referred to as we, us or our) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements. 

The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated.

A description of our significant accounting policies is included in our 2021 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our 2021 Annual Report on Form 10-K.  The results for our three and six-month periods ended June 30, 2022, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2022.

Income Taxes

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense on the Consolidated Statements of Income in the period in which stock options are exercised or restrictions on restricted stock awards lapse. We recorded excess tax benefits of $1.6 million in the second quarter of 2022 compared to $7.7 million in the second quarter of 2021 and $8.9 million in the six months ended June 30, 2022, compared to $11.7 million in the six months ended June 30, 2021.

Retained Earnings

We account for the retirement of treasury shares as a reduction of Retained earnings. As of June 30, 2022, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $1.9 billion and cumulative dividends of $862.4 million.

Accumulated Other Comprehensive Income (Loss)

The table below presents the components of our Accumulated other comprehensive income (loss) balance (in thousands):
June 30,December 31,
202220212021
Foreign currency translation adjustments$(16,919)$(4,882)$(9,580)
Unrealized gains (losses) on interest rate swaps, net of tax
18,587 (2,123)2,096 
Accumulated other comprehensive income (loss)$1,668 $(7,005)$(7,484)


7


Recent Accounting Pronouncements Pending Adoption
The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods:
StandardDescriptionEffective DateEffect on Financial Statements and Other Significant Matters
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope
Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities.
The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. Our exposure related to the expected cessation of LIBOR is limited to the interest expense and certain fees we incur on balances outstanding under our three major credit facilities. We do not expect that there will be a material impact to the financial statements as a result of adopting these ASUs.

8


Note 2 – Earnings Per Share

We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 218 thousand in the second quarter of 2022 and 229 thousand for the six months ended June 30, 2022.

The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):
 Three Months EndedSix Months Ended
June 30,June 30,
 2022202120222021
Net income$307,283 $259,695 $486,544 $358,350 
Amounts allocated to participating securities(1,680) (2,762) 
Net income attributable to common stockholders$305,603 $259,695 $483,782 $358,350 
Weighted average common shares outstanding:  
Basic39,660 40,125 39,795 40,169 
Effect of dilutive securities:  
Stock options and employee stock purchase plan404 620 436 631 
Diluted40,064 40,745 40,231 40,800 
Earnings per share attributable to common stockholders:  
Basic$7.71 $6.47 $12.16 $8.92 
Diluted$7.63 $6.37 $12.03 $8.78 
Anti-dilutive stock options excluded from diluted earnings per share computations (1)
33  1  
(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.

9


Note 3 – Acquisitions

In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in West Virginia.

On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $788.7 million, net of cash acquired. The acquisition was funded with borrowings on our amended and restated revolving credit facility (the “Credit Facility”). Porpoise’s primary operations, Sun Wholesale Supply, Inc., a wholesale distributor of swimming pool and outdoor-living products, added one distribution location in Florida. It also services Pinch A Penny, Inc., a franchisor of independently owned and operated pool and outdoor living-related specialty retail stores.

We preliminarily recognized goodwill of $403.5 million, other intangible assets of $301.0 million and tangible assets of $84.2 million, which included $57.4 million of acquired land and buildings. For additional discussion of goodwill and other intangible assets, see Note 3 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2021 Annual Report on Form 10-K. The final allocation of the fair value of the Porpoise acquisition, including the allocation of goodwill and intangible assets, is not complete but will be finalized within the allowable measurement period. We do not expect the future results of this acquisition to have a material impact on our financial position or results of operations.

In December 2021, we acquired the distribution assets of Wingate Supply, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding one location in Florida.

In June 2021, we acquired the distribution assets of Vak Pak Builders Supply, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Florida.

In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Tennessee.

Other than the Porpoise acquisition, we have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material.

Note 4 – Fair Value Measurements and Interest Rate Swaps

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:

Level 1    Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2     Inputs to the valuation methodology include:
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive markets;
inputs other than quoted prices that are observable for the asset or liability; or
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3    Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
10


Recurring Fair Value Measurements

The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):
 
Fair Value at June 30,
20222021
Level 2
Unrealized gains on interest rate swaps$24,828 $4,641 
Unrealized losses on interest rate swaps 7,425 
Level 3
Contingent consideration liabilities$582 $1,008 
Interest Rate Swaps

We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings. 

For determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk.  Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

We recognize any differences between the variable interest rate in effect and the fixed interest rates per our swap contracts as an adjustment to interest expense over the life of the swaps. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.

We currently have three interest rate swap contracts in place, two of which became effective on November 20, 2020, and terminate on September 29, 2022, and a third that became effective on February 26, 2021, and terminates on February 28, 2025. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.

The following table provides additional details related to these swap contracts:
DerivativeInception DateEffective DateTermination DateNotional Amount
(in millions)
Fixed Interest Rate
Interest rate swap 1May 7, 2019November 20, 2020September 29, 2022$75.02.0925%
Interest rate swap 2July 25, 2019November 20, 2020September 29, 2022$75.01.5500%
Interest rate swap 3February 5, 2020February 26, 2021February 28, 2025$150.01.3800%

For the interest rate swap contracts in effect at June 30, 2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the six-month period ended June 30, 2022.

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We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings. We record changes in the estimated fair value of these forward-starting interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.

The following table provides details related to each of our forward-starting interest rate swap contracts:
DerivativeInception DateEffective DateTermination DateNotional
Amount
(in millions)
Fixed
Interest
Rate
Forward-starting interest rate swap 1March 9, 2020September 29, 2022February 26, 2027$150.00.7400%
Forward-starting interest rate swap 2March 9, 2020February 28, 2025February 26, 2027$150.00.8130%

Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements.  Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we were in a net pay position.

Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.

Nonrecurring Fair Value Measurements

In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwill and intangible assets, are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. In the six months ended June 30, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.

Other

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value (Level 3 inputs).  Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
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Note 5 – Debt

The table below presents the components of our debt (in thousands):

 June 30,
 20222021
Variable rate debt
Short-term borrowings$10,152 $ 
Current portion of long-term debt:
Australian credit facility9,579 10,058 
Short-term borrowings and current portion of long-term debt 19,731 10,058 
Long-term portion:  
Revolving credit facility566,210 152,396 
Term loan under credit facility500,000  
Term facility161,875 171,125 
Receivables securitization facility350,000 90,000 
Less: financing costs, net2,418 463 
Long-term debt, net1,575,667 413,058 
Total debt $1,595,398 $423,116 

On January 4, 2022, we drew the $250.0 million incremental term loan available under our December 30, 2021 amendment to our Second Amended and Restated Credit Agreement (the “Credit Facility”) and used the net proceeds to reduce our revolving borrowings under the Credit Facility. At June 30, 2022, the $500.0 million of term loans available under the Credit Facility were fully drawn.

Our accounts receivable securitization facility (the “Receivables Facility”) provides for the sale of certain of our receivables to a wholly owned subsidiary (the “Securitization Subsidiary”). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.

We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire outstanding balance as Long-term debt, net on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the accompanying interim Consolidated Financial Statements and notes, the Consolidated Financial Statements and accompanying notes in our 2021 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our 2021 Annual Report on Form 10-K.  

For a discussion of our base business calculations, see the Results of Operations section below.

Forward-Looking Statements

This report contains forward-looking information that involves risks and uncertainties.  Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our strategic, operational and capital allocation plans and objectives and industry, general economic and other forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to publicly update or revise such statements to reflect new circumstances or unanticipated events as they occur.  You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.

No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the COVID-19 pandemic and the extent to which strong demand driven by home-centric trends will continue, accelerate or reverse; the sensitivity of our business to weather conditions; changes in the economy; consumer discretionary spending; the housing market or inflation rates; our ability to maintain favorable relationships with suppliers and manufacturers; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2021 Annual Report on Form 10-K.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

OVERVIEW

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.
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Net income increased 18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of 2021. Earnings per diluted share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of 2021. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.
On May 4, 2022, our Board of Directors (our Board) authorized an additional $196.2 million under our share repurchase program bringing its total authorization available to $600.0 million. Further, the Board announced a 25% increase over the previous quarterly dividend amount to $1.00 per share.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as this data is more readily available for analysis and represents the largest component of our operations.
COVID-19 Pandemic

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. The health, safety and security of our employees and the communities in which we operate 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.

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. 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.

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.  

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We are updating our annual earnings guidance range to include the $0.04 tax benefit from ASU 2016-09 recognized in the second quarter of 2022. We expect 2022 diluted EPS of $18.38 to $19.13, including the impact of year-to-date tax benefits of $0.22. Our previous earnings guidance range disclosed in our First Quarter 2022 Report on Form 10-Q was $18.34 to $19.09. Our earnings guidance range assumes average weather conditions.

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

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2022 will approximate 25.5%. We expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded a $8.9 million, or $0.22 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, 2022. We may recognize additional tax benefits related to stock option exercises in 2022 from grants that expire in future years. We have not included any expected tax benefits in our guidance beyond what we have recognized as of June 30, 2022.

We expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2022 and to use cash for the payment of cash dividends as and when declared by our Board.

The forward-looking statements in the foregoing section are based on current market conditions, speak only as of the filing date of this report, are based on several assumptions, and are subject to significant risks and uncertainties. See “Cautionary Statement for Forward-Looking Statements.”

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.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:
Three Months EndedSix Months Ended
June 30,June 30,
 2022202120222021
Net sales100.0 %100.0 %100.0 %100.0 %
Cost of sales67.6 69.1 67.9 70.1 
Gross profit32.4 30.9 32.1 29.9 
Selling and administrative expenses12.1 11.9 13.2 13.5 
Operating income20.4 18.9 18.9 16.4 
Interest and other non-operating expenses, net0.4 0.1 0.4 0.2 
Income before income taxes and equity in earnings20.0 %18.8 %18.5 %16.3 %

Note: Due to rounding, percentages presented in the table above may not add to Operating income or Income before income taxes and equity in earnings.

We have included the results of operations from acquisitions in 2022 and 2021 in our consolidated results since the acquisition dates.
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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited)Base BusinessExcludedTotal
(in thousands)Three Months EndedThree Months EndedThree Months Ended
 June 30,June 30,June 30,
 202220212022202120222021
Net sales$1,963,974 $1,782,894 $91,844 $4,939 $2,055,818 $1,787,833 
Gross profit625,843 550,509 40,961 1,176 666,804 551,685 
Gross margin31.9 %30.9 %44.6 %23.8 %32.4 %30.9 %
Operating expenses226,728 212,425 21,188 674 247,916 213,099 
Expenses as a % of net sales11.5 %11.9 %23.1 %13.6 %12.1 %11.9 %
Operating income399,115 338,084 19,773 502 418,888 338,586 
Operating margin20.3 %19.0 %21.5 %10.2 %20.4 %18.9 %

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


Acquired

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
Tri-State Pool DistributorsApril 20221May - June 2022
Porpoise Pool & Patio, Inc.December 20211April - June 2022
Wingate Supply, Inc.December 20211April - June 2022
Vak Pak Builders Supply, Inc. June 20211April - June 2022 and
June 2021
Pool Source, LLCApril 20211April - June 2022 and
April - June 2021

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales.  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:

December 31, 2021410 
Acquired locations
New locations
June 30, 2022416 

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Net Sales
 Three Months Ended 
June 30,
(in millions)20222021Change
Net sales$2,055.8 $1,787.8 $268.0 15%

Net sales increased 15% in the second quarter of 2022 on top of net sales of $1.8 billion and 40% growth in the second quarter of 2021. Base business net sales in the second quarter of 2022 grew 10% over the same period. Our growth was largely driven by inflationary product cost increases and strong demand that boosted sales by 16% in our year-round markets. Volume growth was challenged by unfavorable weather conditions in our seasonal markets and constrained conditions in Europe. Heavy rainfall and cooler temperatures, particularly in the month of April, limited sales in certain of our markets although we observed improvement through the latter half of the second quarter. We believe that our results reflect the positive impact of growth in the installed base of pools, robust demand and heightened consumer interest in enhanced pool customizations, and we remain confident in our expectation of 17% to 19% sales growth for the full year of 2022. For more discussion of our expectations for the remainder of the year, see “Current Trends and Outlook” above.

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

inflationary product cost increases of approximately 10 to 11%;
5% sales growth from recent acquisitions;
favorable trends for our products including:
strong demand for discretionary products, as evidenced by sales growth for product offerings such as equipment and building materials (see discussion below);
market share gains, including those in building materials (see discussion below);
increased demand for residential swimming pool maintenance supplies, as the installed base of pools continues to increase; and
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); and
unfavorable weather conditions and macroeconomic impacts in Europe (see discussion below).

Higher sales for certain product offerings, such as equipment and building materials, indicate continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the second quarter of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 7% compared to the same period last year, and collectively represented approximately 26% of net sales for the period. Equipment growth in the quarter was limited by supply chain constraints and customer early buys shifted into the first quarter of 2022. Sales of building materials grew 22% compared to the second quarter of 2021 and represented approximately 13% of net sales in the second quarter of 2022. Sales of chemicals, representing 12% of total net sales, increased 25% compared to the second quarter of 2021. The increase in chemical sales was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above. Sales to retail customers increased 7% in the second quarter of 2022 compared to the second quarter of 2021 and represented approximately 13% of our net sales for the second quarter of 2022. Certain of our retail customers were adversely impacted by unfavorable weather conditions in the quarter, hindering sales growth. Sales to commercial customers increased 23% in the second quarter of 2022 compared to the second quarter of 2021 and represented approximately 3% of our net sales for the second quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 50% of our total base business net sales in the second quarter of 2022, increased 9% compared to the second quarter of 2021. Comparatively, net sales in our year-round markets, representing 45% of our total base business net sales in the second quarter of 2022, increased 16% compared to the second quarter of 2021.

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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.

Gross Profit
 Three Months Ended 
June 30,
(in millions)20222021Change
Gross profit$666.8 $551.7 $115.1 21%
Gross margin32.4 %30.9 %  

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.

Operating Expenses
 Three Months Ended 
June 30,
(in millions)20222021Change
Selling and administrative expenses$247.9 $213.1 $34.8 16%
Operating expenses as a % of net sales12.1 %11.9 %  

Operating expenses increased 16% in the second quarter of 2022 compared to the second quarter of 2021, including a 1% benefit from currency exchange rate fluctuations. As a percentage of net sales, operating expenses increased to 12.1% in the second quarter of 2022 compared to 11.9% in the same period of 2021. Our operating expenses have increased to support our business growth, including recent acquisitions. Employee-related expenses increased as we expand our workforce and reward employees through performance-based compensation. Other incremental operating expense increases related to growth-driven facility and freight costs, and investments in our digital transformation initiatives.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the 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.

Income Taxes

Our effective income tax rate was 25.1% for the three months ended June 30, 2022 compared to 22.9% for the three months ended June 30, 2021. We recorded a $1.6 million tax benefit from ASU 2016-09 in the quarter ended June 30, 2022 compared to a tax benefit of $7.7 million realized in the same period last year. Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5% for the second quarter of 2022 and 25.2% for the second quarter of 2021.

Net Income and Earnings Per Share

Net income increased 18% to $307.3 million in the second quarter of 2022 compared to $259.7 million in the second quarter of 2021. Earnings per diluted share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $7.59 in the second quarter of 2022 compared to $6.18 in the second quarter of 2021. See the reconciliation of GAAP to non-GAAP measures below.

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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited)Base BusinessExcludedTotal
(in thousands)Six Months EndedSix Months EndedSix Months Ended
 June 30,June 30,June 30,
 202220212022202120222021
Net sales$3,292,100 $2,840,676