POOL CORP - Quarter Report: 2020 June (Form 10-Q)

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, 2020


☐			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 CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

36-3943363

(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	POOL	NASDAQ 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 filer

Accelerated filer

☐

Non-accelerated filer

Smaller 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 28, 2020, there were 40,075,874 shares of common stock outstanding.

POOL CORPORATION

Form 10-Q

For the Quarter Ended June 30, 2020

TABLE OF CONTENTS



			Page
PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements (Unaudited)

		Consolidated Statements of Income	1
		Consolidated Statements of Comprehensive Income	2
		Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Cash Flows	4
		Consolidated Statements of Changes in Stockholders’ Equity	5
		Notes to Consolidated Financial Statements	7

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			14

	Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

	Item 4. Controls and Procedures			31

PART II. OTHER INFORMATION

	Item 1. Legal Proceedings			32

	Item 1A. Risk Factors			32

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33

	Item 6. Exhibits			34

SIGNATURE					35

PART I. FINANCIAL INFORMATION

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,
	2020		2019		2020		2019
Net sales	$	1,280,846	$	1,121,328	$	1,958,134	$	1,718,784
Cost of sales	907,365		791,014		1,395,024		1,213,839
Gross profit	373,481		330,314		563,110		504,945
Selling and administrative expenses	167,624		157,791		314,721		294,036
Impairment of goodwill and other assets	—		—		6,944		—
Operating income	205,857		172,523		241,445		210,909
Interest and other non-operating expenses, net	2,643		6,424		7,432		13,040
Income before income taxes and equity earnings	203,214		166,099		234,013		197,869
Provision for income taxes	45,733		34,778		45,708		33,976
Equity earnings in unconsolidated investments, net	74		69		162		134


Net income	$	157,555	$	131,390	$	188,467	$	164,027


Earnings per share:
Basic	$	3.94	$	3.30	$	4.71	$	4.14
Diluted	$	3.87	$	3.22	$	4.62	$	4.02
Weighted average shares outstanding:
Basic	39,973		39,827		40,049		39,654
Diluted	40,715		40,848		40,837		40,773

Cash dividends declared per common share	$	0.58	$	0.55	$	1.13	$	1.00

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

POOL CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
Net income	$	157,555	$	131,390	$	188,467	$	164,027
Other comprehensive income (loss):
Foreign currency translation gains (losses)	2,134		1,208		(3,296)		1,422
Change in unrealized losses on interest rate swaps, net of change in taxes of $855, $413, $3,692 and $503	(2,567)		(1,240)		(11,077)		(1,509)
Total other comprehensive loss	(433)		(32)		(14,373)		(87)
Comprehensive income	$	157,122	$	131,358	$	174,094	$	163,940

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

POOL CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)


	June 30,		June 30,		December 31,
	2020		2019		2019 ⁽¹⁾
	(Unaudited)		(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	44,185	$	60,694	$	28,583
Receivables, net	144,842		127,260		76,648
Receivables pledged under receivables facility	308,563		289,866		149,891
Product inventories, net	628,418		694,447		702,274
Prepaid expenses and other current assets	11,139		10,922		16,172
Total current assets	1,137,147		1,183,189		973,568

Property and equipment, net	111,258		113,360		112,246
Goodwill	193,784		188,665		188,596
Other intangible assets, net	9,615		11,502		11,038
Equity interest investments	1,274		1,213		1,227
Operating lease assets	183,126		173,854		176,689
Other assets	18,593		18,799		19,902
Total assets	$	1,654,797	$	1,690,582	$	1,483,266

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	346,272	$	342,335	$	261,963
Accrued expenses and other current liabilities	139,661		81,626		60,813
Short-term borrowings and current portion of long-term debt	9,558		23,974		11,745
Current operating lease liabilities	56,625		55,692		56,325
Total current liabilities	552,116		503,627		390,846

Deferred income taxes	29,399		28,852		32,598
Long-term debt, net	429,246		668,363		499,662
Other long-term liabilities	29,008		27,191		27,970
Non-current operating lease liabilities	128,237		119,380		122,010
Total liabilities	1,168,006		1,347,413		1,073,086



Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 40,041,683, 39,897,898 and 40,074,160 shares issued and outstanding at June 30, 2020, June 30, 2019 and December 31, 2019, respectively	40		40		40
Additional paid-in capital	503,271		472,390		485,239
Retained earnings (deficit)	8,212		(118,177)		(64,740)
Accumulated other comprehensive loss	(24,732)		(11,084)		(10,359)
Total stockholders’ equity	486,791		343,169		410,180
Total liabilities and stockholders’ equity	$	1,654,797	$	1,690,582	$	1,483,266

⁽¹⁾ Derived from audited financial statements.

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

POOL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Six Months Ended
	June 30,
	2020		2019
Operating activities
Net income	$	188,467	$	164,027
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	13,993		13,558
Amortization	655		713
Share-based compensation	7,221		6,594

Equity earnings in unconsolidated investments, net	(162)		(134)
Impairment of goodwill and other assets	6,944		—
Other	3,171		2,558
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	(229,506)		(206,271)
Product inventories	75,199		(5,380)
Prepaid expenses and other assets	(677)		4,831
Accounts payable	84,190		97,232
Accrued expenses and other current liabilities	71,705		19,713
Net cash provided by operating activities	221,200		97,441

Investing activities
Acquisition of businesses, net of cash acquired	(13,711)		(9,345)
Purchases of property and equipment, net of sale proceeds	(13,031)		(19,193)



Net cash used in investing activities	(26,742)		(28,538)

Financing activities
Proceeds from revolving line of credit	318,155		545,834
Payments on revolving line of credit	(504,140)		(657,180)
Proceeds from asset-backed financing	191,700		176,100
Payments on asset-backed financing	(71,700)		(54,200)
Payments on term facility	(4,625)		—
Proceeds from short-term borrowings and current portion of long-term debt	10,731		22,687
Payments on short-term borrowings and current portion of long-term debt	(12,918)		(7,881)
Payments of deferred and contingent acquisition consideration	(281)		(311)
Payments of deferred financing costs	(12)		—


Proceeds from stock issued under share-based compensation plans	10,811		12,603
Payments of cash dividends	(45,312)		(39,753)
Purchases of treasury stock	(70,203)		(23,097)
Net cash used in financing activities	(177,794)		(25,198)
Effect of exchange rate changes on cash and cash equivalents	(1,062)		631
Change in cash and cash equivalents	15,602		44,336
Cash and cash equivalents at beginning of period	28,583		16,358
Cash and cash equivalents at end of period	$	44,185	$	60,694

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

POOL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In thousands)


	Common Stock					Additional Paid-In		Retained Earnings		Accumulated Other Comprehensive
	Shares	Amount		Capital		(Deficit)		Loss		Total
Balance at December 31, 2019	40,074	$	40	$	485,239	$	(64,740)	$	(10,359)	$	410,180
Net income	—	—		—		30,912		—		30,912
Foreign currency translation	—	—		—		—		(5,430)		(5,430)
Interest rate swaps, net of the change in taxes of $2,837	—	—		—		—		(8,510)		(8,510)
Repurchases of common stock, net of retirements	(362)	—		—		(66,619)		—		(66,619)
Share-based compensation	—	—		3,654		—		—		3,654

Issuance of stock under share-based compensation plans	219	—		6,358		—		—		6,358
Declaration of cash dividends	—	—		—		(22,147)		—		(22,147)
Balance at March 31, 2020	39,931	40		495,251		(122,594)		(24,299)		348,398
Net income	—	—		—		157,555		—		157,555
Foreign currency translation	—	—		—		—		2,134		2,134
Interest rate swaps, net of the change in taxes of $855	—	—		—		—		(2,567)		(2,567)
Repurchases of common stock, net of retirements	(19)	—		—		(3,584)		—		(3,584)
Share-based compensation	—	—		3,567		—		—		3,567
Issuance of stock under share-based compensation plans	130	—		4,453		—		—		4,453
Declaration of cash dividends	—	—		—		(23,165)		—		(23,165)
Balance at June 30, 2020	40,042	$	40	$	503,271	$	8,212	$	(24,732)	$	486,791


	Common Stock					Additional Paid-In		Retained		Accumulated Other Comprehensive
	Shares	Amount		Capital		Deficit		Loss		Total
Balance at December 31, 2018	39,506	$	40	$	453,193	$	(218,646)	$	(10,997)	$	223,590
Net income	—	—		—		32,637		—		32,637
Foreign currency translation	—	—		—		—		214		214
Interest rate swaps, net of the change in taxes of $90	—	—		—		—		(269)		(269)
Repurchases of common stock, net of retirements	(155)	(1)		—		(23,096)		—		(23,097)
Share-based compensation	—	—		3,259		—		—		3,259
Adoption of ASU 2016-02	—	—		—		(709)		—		(709)
Issuance of stock under share-based compensation plans	328	1		7,070		—		—		7,071
Declaration of cash dividends	—	—		—		(17,819)		—		(17,819)
Balance at March 31, 2019	39,679	40		463,522		(227,633)		(11,052)		224,877
Net income	—	—		—		131,390		—		131,390
Foreign currency translation	—	—		—		—		1,208		1,208
Interest rate swaps, net of the change in taxes of $413	—	—		—		—		(1,240)		(1,240)

Share-based compensation	—	—		3,335		—		—		3,335
Issuance of stock under share-based compensation plans	219	—		5,533		—		—		5,533
Declaration of cash dividends	—	—		—		(21,934)		—		(21,934)
Balance at June 30, 2019	39,898	$	40	$	472,390	$	(118,177)	$	(11,084)	$	343,169

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

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 2019 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 2019 Annual Report on Form 10-K. The results for our three and six month periods ended June 30, 2020 are not necessarily indicative of the expected results for our fiscal year ending December 31, 2020.

Newly Adopted Accounting Pronouncements

On January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related amendments, which are codified into Accounting Standards Codification (ASC) 326, using the cumulative-effect transition method related to our trade receivables. This new standard changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The adoption of this standard did not have a material impact on our financial position or results of operations, and we do not expect the adoption of this guidance to have a material effect on our results of operations in future periods. See Allowance for Doubtful Accounts within this note for more information.

We adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, for our interim impairment tests performed in the period ended March 31, 2020. This new standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the previous guidance). Rather, the measurement of a goodwill impairment charge is based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the previous guidance). The impact of the new standard is dependent on the specific facts and circumstances of individual impairments, if any. The adoption of this guidance did not impact our results of operations, statement of financial position or cash flows.

On January 1, 2020, we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on a prospective basis. This new standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The adoption of this guidance did not materially impact our results of operations, statement of financial position or cash flows.

Allowance for Doubtful Accounts

We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers, and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers.

Upon adoption of ASU 2016-13, we did not recognize an adjustment to the beginning balance of retained earnings as the impact from adoption was not material. Our estimate of future losses is made by management based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices. Our assessment of future losses in the first half of 2020 further considered the uncertainty of the impact of the COVID-19 pandemic on forecasted economic trends. At the end of each quarter, we also perform a reserve analysis of all accounts with balances greater than $20,000 that are more than 60 days past due. During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts.

The following table summarizes the changes in our allowance for doubtful accounts (in thousands):


	Six Months Ended
	June 30,
	2020		2019
Balance at beginning of period	$	5,472	$	6,182
Bad debt expense	1,996		1,646
Write-offs, net of recoveries	(1,510)		(1,413)
Balance at end of period	$	5,958	$	6,415

Goodwill and Intangibles Impairment

As discussed in Note 1 to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K, goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for impairment annually as of October 1st and at any other time when impairment indicators exist.

In the first quarter of 2020, we determined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows. We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values. In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million. We also considered the impact of the COVID-19 pandemic on the expected future operating cash flows of the remainder of our reporting units. Although we do not currently anticipate any long-term impacts for the overall business, we continue to monitor reporting units that we consider more at risk; this includes one reporting unit in Italy with a goodwill balance of $3.5 million at June 30, 2020, and three reporting units in Quebec, Canada, with an aggregate goodwill balance of $2.5 million at June 30, 2020.

The determination of our reporting units’ goodwill and intangibles fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of changes in market conditions, forecasted future operating results (including sales growth rates and operating margins) and discount rates (including our weighted-average cost of capital).

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 awards lapse. We recorded excess tax benefits of $6.2 million in the second quarter of 2020 compared to $7.8 million in the second quarter of 2019 and $14.2 million in the six months ended June 30, 2020 compared to $16.6 million in the six months ended June 30, 2019.

Retained Earnings

We account for the retirement of treasury shares as a reduction of retained earnings (deficit). As of June 30, 2020, 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 $1.5 billion and cumulative dividends of $624.2 million.

Accumulated Other Comprehensive Loss

The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):


	June 30,						December 31,
	2020		2019		2019
Foreign currency translation adjustments	$	(13,423)	$	(11,000)	$	(10,127)
Unrealized losses on interest rate swaps, net of tax	(11,309)		(84)		(232)
Accumulated other comprehensive loss	$	(24,732)	$	(11,084)	$	(10,359)

Recent Accounting Pronouncements Pending Adoption

The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods:


Standard	Description	Effective Date	Effect on Financial Statements and Other Significant Matters



ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes	Simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.	Annual periods beginning after December 15, 2020	We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting	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.	The provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.	We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures.

Note 2 – Earnings Per Share

We calculate basic earnings per share (EPS) by dividing Net income by the weighted average number of common shares outstanding. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued.

Stock options with exercise prices that are higher than the average market prices of our common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.

The table below presents the computation of EPS, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except EPS):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
Net income	$	157,555	$	131,390	$	188,467	$	164,027

Weighted average shares outstanding:
Basic	39,973		39,827		40,049		39,654
Effect of dilutive securities:
Stock options and employee stock purchase plan	742		1,021		788		1,119
Diluted	40,715		40,848		40,837		40,773


Earnings per share:
Basic	$	3.94	$	3.30	$	4.71	$	4.14
Diluted	$	3.87	$	3.22	$	4.62	$	4.02

Anti-dilutive stock options excluded from diluted earnings per share computations	—		50		—		50

Note 3 – Acquisitions

In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding two locations in Texas, one location in Nevada and one location in Oklahoma. We have completed our acquisition accounting for this acquisition, subject to adjustments for standard holdback provisions per the terms of the purchase agreement, which are not material.

In January 2019, we acquired the distribution assets of W.W. Adcock, Inc., a wholesale distributor of swimming pool products, equipment, parts and supplies, adding two locations in Pennsylvania, one location in North Carolina and one location in Virginia. We have completed our acquisition accounting for this acquisition.

These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.

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.

Recurring Fair Value Measurements

The table below presents the estimated fair values of our interest rate swap contract, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):


	Fair Value at June 30,
	2020		2019
Level 2
Unrealized gains on interest rate swaps	$	—	$	714
Unrealized losses on interest rate swaps	15,033		880

Level 3
Contingent consideration liabilities	$	442	$	851

Interest Rate Swaps

For determining the fair value of our interest rate swap 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. If determined to be effective cash flow hedges, we record the changes in the estimated fair value of the swaps to Accumulated other comprehensive loss on our Consolidated Balance Sheets. To the extent our interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value of our swaps in Interest and other non-operating expenses, net on our Consolidated Statements of Income.

We currently have one interest rate swap contract in place, which became effective on November 20, 2019, and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate to a fixed interest rate on our variable rate borrowings. For this interest rate swap, we have not recognized any gains or losses through income, nor has there been any effect on income from hedge ineffectiveness over the term of the swap contract.

The following table provides additional details related to this swap contract:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount
(in millions)

Fixed Interest Rate

Interest rate swap 1

July 6, 2016

November 20, 2019

November 20, 2020

$150.0

1.1425%

For the interest rate swap contract in effect at June 30, 2020, 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 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, 2020.

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.

The following table provides details related to each of our forward-starting interest rate swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional
Amount
(in millions)

Fixed
Interest
Rate

Forward-starting interest rate swap 1

May 7, 2019

November 20, 2020

September 29, 2022

$75.0

2.0925%

Forward-starting interest rate swap 2

July 25, 2019

November 20, 2020

September 29, 2022

$75.0

1.5500%

Forward-starting interest rate swap 3

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

Forward-starting interest rate swap 4

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

Forward-starting interest rate swap 5

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 continue to be in a net pay position.

Our interest rate swap 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 are recorded at fair value on a nonrecurring basis as a result of impairment charges.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units. See Goodwill and Intangibles Impairment within Note 1 for more information on goodwill and intangibles impairment recognized in the period ended March 31, 2020.

Other

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs). 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).

Note 5 – Debt

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


	June 30,
	2020		2019
Variable rate debt
Short-term borrowings	$	—	$	15,836
Current portion of long-term debt:
Australian credit facility	9,558		8,138
Short-term borrowings and current portion of long-term debt	9,558		23,974

Long-term portion:
Revolving credit facility	14,688		438,786
Term facility	180,375		—
Receivables securitization facility	235,000		230,400
Less: financing costs, net	817		823
Long-term debt, net	429,246		668,363
Total debt	$	438,804	$	692,337

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.

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

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2019 Annual Report on Form 10-K.

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

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

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 plans and objectives and industry, general economic and other forecasts of trends, future dividend payments and share repurchases, and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to 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, the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2019 Annual Report on Form 10-K and in Part II, Item 1A. of this Form 10-Q. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

OVERVIEW

Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. Most of our North American operations are and have been continuously open for business as we are designated as an essential business in almost all of our markets. In Europe, our operations closed for a short period in France, Spain and Italy, in order to comply with local authorities’ orders. Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water. We also supply products used in the prevention of runoff, flood, fire and other natural disasters. These products are essential to the health and safety of the general public. As a result, our supply chain remains intact, with our customers continuing to meet end-user needs.

The health, safety and security of our employees has been, and remains, one of our highest priorities. We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC). Where possible, office-based employees are working remotely or in scheduled, staggered shifts. At our sales centers, we’ve implemented enhanced hygiene and sanitation practices. In rare instances, we have had to close facilities in whole or in part as a result of government regulations, as well as positive or presumed positive results from COVID-19 testing. The direct impact of any closures to date has not been material to our operations.

Beginning in the middle of March, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets. However, as stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated, resulting in net sales of $1.28 billion for the second quarter of 2020. As families spend more time at home, our sales have benefited from greater swimming pool demand and usage, resulting in broad sales gains across our product categories and geographies. While the short-term impact of this trend has had a positive impact on our business, it is unclear what the long-term impact will be. In addition, governmental restrictions have had a material impact on some of our customers, limiting their ability to operate in certain geographies from mid-March into mid-May. While these restrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our results.

Our balance sheet remains strong with low leverage and sufficient access to additional capital. Given the seasonality of our business, our warehouses were stocked with inventory in preparation for the upcoming peak season prior to the implementation of most stay-at-home orders. As a result, the limited vendor supply interruptions experienced to date have had a minimal impact on our business. Supply disruptions have largely been limited to categories with the greatest demand, including heat-related equipment and above-ground swimming pools. We continue to work closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities.

In April, we began taking steps to reduce both capital expenditures and operating costs. In our First Quarter 2020 Quarterly Report on Form 10-Q, we communicated that we expected capital expenditures in 2020 to approximate half of the $33.4 million spent in 2019 as we deferred the opening of sales centers we previously planned to launch in 2020. Given our positive results in the second quarter of 2020, we now expect capital expenditures to approximate 65% of 2019 capital expenditures, or approximately $20.0 million to $25.0 million, as we continue to reevaluate deferred capital expenditures. Likewise, in the second quarter of 2020, we reduced expenses for labor, fuel, utilities, advertising, meetings, travel and entertainment. As our business outlook and market trends have improved, we continue to assess our discretionary spending.

The impact of the ongoing pandemic on our business and financial results will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken (or may be taken in the future) in response to the pandemic and changes in customer and supplier behavior in response to the pandemic.

Financial Results

In the second quarter of 2020, net sales increased 14% to $1.28 billion compared to $1.12 billion in the second quarter of 2019. As families are spending more time at home, our sales have benefited from greater swimming pool demand and usage, resulting in broad sales gains across our product categories and geographies.

Gross profit increased 13% to $373.5 million in the second quarter of 2020 from $330.3 million in the same period of 2019. Gross margin decreased 30 basis points to 29.2% in the second quarter of 2020 compared to 29.5% in the second quarter of 2019. Gross margin in the second quarter of 2019 reflected benefits from strategic inventory purchases ahead of vendor pricing increases. In addition, sales of some lower margin, big-ticket items, such as in-ground and above-ground pools and pool equipment, comprised a larger portion of our product mix in the second quarter of 2020 compared to the second quarter of 2019, which, combined with the difficult prior year comparison, resulted in a decline in gross margin between periods.

Selling and administrative expenses (operating expenses) increased 6% to $167.6 million in the second quarter of 2020 compared to $157.8 million in the second quarter of 2019, reflecting an increase of $13.0 million in performance-based compensation in the second quarter of 2020. Excluding performance-based compensation in both periods, operating expenses declined 2% due to control measures put in place over a number of discretionary spending categories at the start of the COVID-19 pandemic. As a percentage of net sales, operating expenses decreased to 13.1% in the second quarter of 2020 compared to 14.1% in the same period of 2019 as we continue to closely monitor discretionary operating expenses.

Operating income in the second quarter of 2020 increased 19% to $205.9 million compared to $172.5 million in the same period in 2019. Operating margin was 16.1% in the second quarter of 2020 compared to 15.4% in the second quarter of 2019.

We recorded a $6.2 million, or $0.15 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, 2020, compared to a tax benefit of $7.8 million, or $0.19 per diluted share, realized in the same period of 2019.

Net income increased 20% to $157.6 million in the second quarter of 2020 compared to $131.4 million in the second quarter of 2019. Earnings per share increased 20% to $3.87 per diluted share in the second quarter of 2020 compared to $3.22 in the same period of 2019. Excluding the impact from ASU 2016-09 in both periods, earnings per diluted share increased 23% to $3.72 in the second quarter of 2020 compared to $3.03 in the second quarter of 2019.

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

Financial Position and Liquidity

As of June 30, 2020, total net receivables, including pledged receivables, increased 9% compared to June 30, 2019, driven by our June sales growth. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 28.5 days at June 30, 2020 and 29.5 days at June 30, 2019. Our allowance for doubtful accounts balance was $6.0 million at June 30, 2020 and $6.4 million at June 30, 2019.

Net inventory levels decreased 10% compared to levels at June 30, 2019, reflecting the strong pace of sales in the second quarter of 2020 and the normalization of inventory levels following the sale of strategic inventory purchases included in our prior year inventory balance. The inventory reserve was $10.8 million at June 30, 2020 and $9.5 million at June 30, 2019. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at June 30, 2020 and 3.1 times at June 30, 2019.

Total debt outstanding at June 30, 2020 was $438.8 million, down 37% compared to total debt at June 30, 2019, as we have utilized our operating cash flows to decrease debt balances. We have used debt proceeds over the past 12 months primarily to fund business-driven working capital growth, acquisitions and share repurchases.

Current Trends and Outlook

For a detailed discussion of trends through 2019, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Based on our results to date and expectations for the remainder of the year, we expect 2020 diluted EPS of $6.90 to $7.30, including the impact of year-to-date tax benefits of $0.34 and the $0.15 impact of non-cash impairments recorded in the first quarter of 2020. Our previous 2020 earnings guidance range disclosed in our First Quarter 2020 Quarterly Report on Form 10-Q was $5.30 to $5.90, including first quarter tax benefits of $0.19 and the $0.15 impact of non-cash impairments. Our 2020 earnings guidance range assumes average weather conditions and no adverse impacts from a resurgence of COVID-19 and related government responses.

We expect net sales growth for 2020 to approximate 11% to 13%. The majority of our business is driven by recurring revenue streams from the installed base of pools, and we believe that underlying demand for most discretionary products, including those serving the renovation and construction markets, remains strong. In addition, we believe that our sales for the second half of 2020 will benefit from delayed projects, subject to our customers’ building capacity, including the availability of labor, and favorable weather. At the same time, the impact of new stay-at-home orders or government mandates, as well as unfavorable economic conditions resulting from the COVID-19 pandemic and the resurgence of COVID-19 cases in some of our markets, could have an adverse impact on our business, including an easing of demand for products dependent on discretionary spending.

We expect gross margin for the second half of 2020 to be relatively flat compared to the second half of 2019. Given the decline in gross margin through the first half of 2020, we expect gross margin for the full year of 2020 to decline moderately compared to gross margin for the full year of 2019.

We expect base business operating expenses for the remainder of the year to benefit from actions taken by management in the second quarter of 2020 to reduce costs and to vary in line with changes in sales performance. For the year, we expect operating expenses to increase 6% to 8% compared to 2019.

We expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2020 will approximate 25.5%, which is consistent with 2019. Our effective tax rate is dependent on our results of operations and may change if actual results differ materially from our current expectations, particularly any significant changes in our geographic mix. Due to ASU 2016-09, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded a $14.2 million, or $0.34 per diluted share, tax benefit from ASU 2016-09 for the six months ended June 30, 2020. We may recognize additional tax benefits related to stock option exercises in 2020 from grants that expire in years after 2020. We have not included any expected benefits in our guidance beyond what we have recognized as of June 30, 2020.

We expect cash provided by operations will remain strong in comparison to net income for the 2020 fiscal year. We expect to continue to use cash to fund opportunistic share repurchases over the next year. We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors (the Board).

RESULTS OF OPERATIONS

As of June 30, 2020, we conducted operations through 378 sales centers in North America, Europe and Australia. For the six months ended June 30, 2020, approximately 94% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	70.8		70.5		71.2		70.6
Gross profit	29.2		29.5		28.8		29.4
Selling and administrative expenses	13.1		14.1		16.1		17.1
Impairment of goodwill and other assets	—		—		0.4		—
Operating income	16.1		15.4		12.3		12.3
Interest and other non-operating expenses, net	0.2		0.6		0.4		0.8
Income before income taxes and equity earnings	15.9	%	14.8	%	12.0	%	11.5	%

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

We have included the results of operations from acquisitions in 2020 and 2019 in our consolidated results since the acquisition dates.

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):


(Unaudited)	Base Business									Excluded									Total
(in thousands)	Three Months Ended									Three Months Ended									Three Months Ended
	June 30,									June 30,									June 30,
	2020			2019			2020			2019			2020			2019
Net sales	$	1,276,551		$	1,117,922		$	4,295		$	3,406		$	1,280,846		$	1,121,328

Gross profit	371,500			329,725			1,981			589			373,481			330,314
Gross margin	29.1		%	29.5		%	46.1		%	17.3		%	29.2		%	29.5		%

Operating expenses	166,068			156,879			1,556			912			167,624			157,791
Expenses as a % of net sales	13.0		%	14.0		%	36.2		%	26.8		%	13.1		%	14.1		%

Operating income (loss)	205,432			172,846			425			(323)			205,857			172,523
Operating margin	16.1		%	15.5		%	9.9		%	(9.5)		%	16.1		%	15.4		%

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

Acquired

Acquisition

Date

Net
Sales Centers
Acquired

Periods

Excluded

Master Tile Network LLC⁽¹⁾

February 2020

April - June 2020

⁽¹⁾We acquired certain distribution assets of this company.

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 2020:


December 31, 2019			373
Acquired locations			4
New locations			3
Closed/consolidated locations			(2)
June 30, 2020			378

Net Sales


	Three Months Ended
	June 30,
(in millions)	2020		2019		Change
Net sales	$	1,280.8	$	1,121.3	$	159.5	14%

Net sales and base business net sales increased 14% in the second quarter of 2020 compared to the second quarter of 2019. As families are spending more time at home, our sales have benefited from greater swimming pool demand and usage, resulting in broad sales gains across our product categories and geographies.

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

•strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment, building materials and above-ground pools and spas (see discussion below);

•increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers;

•market share gains, including those in building materials (see discussion below); and

•inflationary product cost increases of approximately 1% to 2%.

We believe that higher sales growth rates for certain product offerings, such as equipment, building materials and above-ground pools and spas evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the second quarter of 2020, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased 22% compared to the same period last year. These products collectively represented approximately 27% of net sales for the period. Sales of building materials, including recently acquired Master Tile sales centers, grew 7% compared to the second quarter of 2019 and represented approximately 11% of net sales in the second quarter of 2020. Sales of above-ground pools and spas increased 55% in the second quarter of 2020 compared to the second quarter of 2019 and represented approximately 3% of net sales for the period.

Sales to both retail and commercial customers are included in the appropriate existing product categories, and growth or decline in these areas are reflected in the numbers above. Sales to retail customers increased 22% in the second quarter of 2020 compared to the second quarter of 2019 and represented approximately 16% of our consolidated net sales for the second quarter of 2020. Sales to commercial customers declined 21% in the second quarter of 2020 compared to the second quarter of 2019, driven by COVID-19 related closures and the decline in both business and leisure travel. Sales to commercial customers represented approximately 3% of our consolidated net sales for the second quarter of 2020.

Gross Profit


	Three Months Ended
	June 30,
(in millions)	2020			2019			Change
Gross profit	$	373.5		$	330.3		$	43.2	13%
Gross margin	29.2		%	29.5		%

Gross margin in the second quarter of 2019 reflected benefits from strategic inventory purchases ahead of vendor pricing increases. In addition, sales of some lower margin, big-ticket items, such as in-ground and above-ground pools and pool equipment, comprised a larger portion of our product mix in the second quarter of 2020 compared to the second quarter of 2019, which, combined with the difficult prior year comparison, resulted in a decline in gross margin between periods.

Operating Expenses


	Three Months Ended
	June 30,
(in millions)	2020			2019			Change
Selling and administrative expenses	$	167.6		$	157.8		$	9.8	6%

Operating expenses as a % of net sales	13.1		%	14.1		%

Operating expenses and base business operating expenses increased 6% in the second quarter of 2020 compared to the second quarter of 2019, reflecting an increase in performance-based compensation of $13.0 million in the second quarter of 2020. Excluding performance-based compensation in both periods, operating expenses declined 2% due to control measures put in place over a number of discretionary spending categories at the start of the pandemic and further supported by our capacity creation activities, including increased efforts to promote the use of digital order fulfillment tools. In the second quarter of 2020, we reduced expenses for labor, fuel, utilities, advertising, meetings, travel and entertainment.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the second quarter of 2020 decreased $3.8 million compared to the second quarter of 2019. The decrease reflects lower average debt levels and lower average interest rates between periods. Our weighted average effective interest rate decreased to 1.8% for the second quarter of 2020 from 3.5% for the second quarter of 2019 on lower average outstanding debt of $493.4 million versus $650.5 million for the respective periods.

Income Taxes

Our effective income tax rate was 22.5% for the three months ended June 30, 2020 compared to 20.9% for the three months ended June 30, 2019. We recorded a $6.2 million tax benefit from ASU 2016-09 in the quarter ended June 30, 2020 compared to a tax benefit of $7.8 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.6% for the second quarters of 2020 and 2019.

Net Income and Earnings Per Share

Net income increased 20% to $157.6 million in the second quarter of 2020 compared to the second quarter of 2019. Earnings per diluted share increased 20% to $3.87 in the second quarter of 2020 versus $3.22 per diluted share for the comparable 2019 period. The benefit from ASU 2016-09 increased diluted earnings per share by $0.15 in the second quarter of 2020 and $0.19 in the second quarter of 2019. Excluding tax benefits in both periods, earnings per diluted share increased 23% to $3.72 in the second quarter of 2020 compared to $3.03 in the second quarter of 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):


(Unaudited)	Base Business									Excluded									Total
(in thousands)	Six Months Ended									Six Months Ended									Six Months Ended
	June 30,									June 30,									June 30,

	2020			2019			2020			2019			2020			2019
Net sales	$	1,944,855		$	1,706,312		$	13,279		$	12,472		$	1,958,134		$	1,718,784

Gross profit	558,310			502,333			4,800			2,612			563,110			504,945
Gross margin	28.7		%	29.4		%	36.1		%	20.9		%	28.8		%	29.4		%

Operating expenses ⁽¹⁾	316,941			290,477			4,724			3,559			321,665			294,036
Expenses as a % of net sales	16.3		%	17.0		%	35.6		%	28.5		%	16.4		%	17.1		%

Operating income (loss) ⁽¹⁾	241,369			211,856			76			(947)			241,445			210,909
Operating margin	12.4		%	12.4		%	0.6		%	(7.6)		%	12.3		%	12.3		%

⁽¹⁾Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter 2020.

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

Acquired

Acquisition

Date

Net
Sales Centers
Acquired

Periods

Excluded

Master Tile Network LLC ⁽¹⁾

February 2020

February - June 2020

W.W. Adcock, Inc. ⁽¹⁾

January 2019

January - March 2020 and
January - March 2019

Turf & Garden, Inc. ⁽¹⁾

November 2018

January 2020 and
January 2019

⁽¹⁾We acquired certain distribution assets of each of these companies.

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2019, please refer to the discussion under the heading Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019.

Net Sales


	Six Months Ended
	June 30,
(in millions)	2020		2019		Change
Net sales	$	1,958.1	$	1,718.8	$	239.3	14%

Net sales and base business net sales for the first six months of 2020 increased 14% compared to the same period last year. During the first quarter of 2020, sales benefited from earlier pool openings, as mild weather combined with school closures, drove greater early-season residential pool usage. Additionally, sales were favorably impacted approximately 1% by an additional selling day in the first half of 2020. As stay-at-home restrictions eased in late April through early May, families continued to search for safe, at-home leisure activities, resulting in broad sales gains across our product categories and geographies.

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

•increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers;

•market share gains, including those in building materials (see discussion below);

•inflationary product cost increases of approximately 1% to 2%.

We believe that sales growth rates for certain product offerings, such as equipment, building materials and above-ground pool and spas evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first six months of 2020, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 20% compared to the same period last year. These products collectively represented 29% of net sales in the first six months of 2020. Sales of building materials, including recently acquired Master Tile sales centers, grew 12% compared to the first six months of 2019 and represented approximately 12% of net sales in the first six months of 2020. Sales of above-ground pools and spas increased 49% in the first six months of 2020 and represented approximately 2% of net sales in the first six months of 2020.

Sales to both retail and commercial customers are included in the appropriate existing product categories, and growth or decline in these areas are reflected in the numbers above. In the first six months of 2020, sales to retail customers increased 22% and represented approximately 15% of our consolidated net sales. Sales to commercial customers declined 10% in the first six months of 2020, driven by COVID-19 related closures and the decline in both business and leisure travel. Sales to commercial customers represented approximately 4% of our consolidated net sales in the first six months of 2020.

Gross Profit


	Six Months Ended
	June 30,
(in millions)	2020			2019			Change
Gross profit	$	563.1		$	504.9		$	58.2	12%
Gross margin	28.8		%	29.4		%

Gross margin declined 60 basis points to 28.8% compared to 29.4% in the same period last year, primarily due to differences in product mix and benefits from strategic inventory purchases recognized in the first half of 2019, resulting in a comparative decline between periods.

Operating Expenses


	Six Months Ended
	June 30,
(in millions)	2020			2019			Change
Selling and administrative expenses	$	314.7		$	294.0		$	20.7	7%
Impairment of goodwill and other assets	6.9			—			6.9		100%
Operating expenses as a % of net sales	16.4		%	17.1		%

Operating expenses for the six months ended June 30, 2020 increased 9% compared to the first six months of 2019. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units. Excluding impairment charges, operating expenses were up 7%, reflecting increases in performance-based compensation, growth-driven freight expenses and greater facility-related costs.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first six months of 2020 decreased $5.6 million compared to the same period last year. The decrease reflects lower average debt levels and lower average interest rates between periods. Our weighted average effective interest rate decreased to 2.2% for the first six months of 2020 from 3.6% for the same period of 2019 on average outstanding debt of $493.6 million versus $662.8 million for the respective periods.

Income Taxes

Our effective income tax rate was 19.5% for the six months ended June 30, 2020 compared to 17.2% for the six months ended June 30, 2019. We recorded a $14.2 million, or $0.34 per diluted share, tax benefit from ASU 2016-09 in the six months ended June 30, 2020 compared to a $16.6 million, or $0.40 per diluted share, tax benefit in the same period of 2019. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.6% for the six months ended June 30, 2020 and 25.5% for the six months ended June 30, 2019.

Net Income and Earnings Per Share

Net income increased 15% to $188.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Earnings per diluted share increased to $4.62 for the six months ended June 30, 2020 versus $4.02 per diluted share for the six months ended June 30, 2019. Adjusted net income for the first six months of 2020, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 19% to $194.8 million. Excluding the impact of non-cash impairments, net of tax, and tax benefits in both periods, adjusted diluted EPS increased 22% to $4.43 for the six months ended June 30, 2020 compared to $3.62 for the six months ended June 30, 2019. See the reconciliation of GAAP to non-GAAP measures below.

Reconciliation of Non-GAAP Financial Measures

Adjusted Income Statement Information

We have included adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures, as supplemental disclosures, because we believe these measures are useful to investors and others in assessing our year-over-year operating performance. We believe these measures should be considered in addition to, not as a substitute for, net income and diluted EPS presented in accordance with GAAP, respectively, and in the context of our other disclosures included within this Form 10-Q. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

The table below presents a reconciliation of net income to adjusted net income.


(Unaudited)	Six Months Ended
(in thousands)	June 30,
	2020
Net income	$	188,467
Impairment of goodwill and other assets	6,944
Tax impact on impairment of long-term note ⁽¹⁾	(654)
Adjusted net income	$	194,757

⁽¹⁾As described in our First Quarter 2020 Quarterly Report on Form 10-Q, our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-19 recorded in the first quarter of 2020, our effective tax rate was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.

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


(Unaudited)	Six Months Ended
	June 30,
	2020		2019
Diluted EPS	$	4.62	$	4.02
After-tax non-cash impairment charges	0.15		—
Adjusted diluted EPS excluding after-tax non-cash impairment charges	4.77		4.02

Tax benefit	(0.34)		(0.40)

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit	$	4.43	$	3.62

Seasonality and Quarterly Fluctuations

Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and irrigation and landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2019, we generated approximately 63% of our net sales and 81% of our operating income in the second and third quarters of the year.

We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

The following table presents certain unaudited quarterly data for the first and second quarters of 2020, the four quarters of 2019 and the third and fourth quarters of 2018. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.


(Unaudited)	QUARTER
(in thousands)	2020						2019										2018
	Second		First		Fourth		Third		Second		First		Fourth		Third
Statement of Income Data
Net sales	$	1,280,846	$	677,288	$	582,234	$	898,500	$	1,121,328	$	597,456	$	543,082	$	811,311
Gross profit	373,481		189,629		162,050		257,931		330,314		174,631		160,442		235,003
Operating income	205,857		35,588		25,798		104,540		172,523		38,386		25,970		92,337
Net income	157,555		30,912		18,024		79,525		131,390		32,637		16,811		69,261

Balance Sheet Data
Total receivables, net	$	453,405	$	345,915	$	226,539	$	307,798	$	417,126	$	313,127	$	207,801	$	287,773
Product inventories, net	628,418		858,190		702,274		616,217		694,447		815,742		672,579		609,983
Accounts payable	346,272		517,620		261,963		214,309		342,335		472,487		237,835		204,706
Total debt	438,804		586,050		511,407		547,560		692,337		698,977		666,761		580,703

We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the fourth quarter after the peak selling season ends.

Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects resulting from various weather conditions.


Weather		Possible Effects
Hot and dry	•	Increased purchases of chemicals and supplies for existing swimming pools
	•	Increased purchases of above-ground pools and irrigation and lawn care products
Unseasonably cool weather or extraordinary amounts of rain	•	Fewer pool and irrigation and landscape installations
	•	Decreased purchases of chemicals and supplies
	•	Decreased purchases of impulse items such as above-ground pools and accessories
Unseasonably early warming trends in spring/late cooling trends in fall	•	A longer pool and landscape season, thus positively impacting our sales
(primarily in the northern half of the U.S. and Canada)
Unseasonably late warming trends in spring/early cooling trends in fall	•	A shorter pool and landscape season, thus negatively impacting our sales
(primarily in the northern half of the U.S. and Canada)

Weather Impacts on 2020 and 2019 Results

Weather conditions in the second quarter of 2020 were varied across the contiguous United States; however, results in the second quarter of 2020 benefited from generally mild weather conditions. Much of the western United States benefited from warmer weather, while the southeastern United States experienced slightly below-average temperatures. Southern California and the southeastern United States, including Florida, experienced more precipitation than normal. In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.

In the first quarter of 2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States. These favorable weather conditions contrast from the first quarter of 2019 when wetter and cooler-than-normal temperatures to begin the year hindered sales growth.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:

•cash flows generated from operating activities;

•the adequacy of available bank lines of credit;

•the quality of our receivables;

•acquisitions;

•dividend payments;

•capital expenditures;

•changes in income tax laws and regulations;

•the timing and extent of share repurchases; and

•the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations and other general corporate initiatives, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

•capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;

•strategic acquisitions executed opportunistically;

•payment of cash dividends as and when declared by our Board of Directors (Board);

•repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and

•repurchases of our common stock under our Board-authorized share repurchase program.

Capital expenditures were 1.0% of net sales in 2019, 1.1% of net sales in 2018 and 1.4% of net sales in 2017. Our higher capital spending in 2017 related to expanding our facilities and purchasing delivery vehicles to address growth. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales.

In our First Quarter 2020 Quarterly Report on Form 10-Q, we communicated that we expected capital expenditures in 2020 to approximate half of the $33.4 million spent in 2019 as we deferred the opening of sales centers we previously planned to launch in 2020. Given our positive results in the second quarter of 2020, we now expect capital expenditures to approximate 65% of 2019 capital expenditures and range from $20.0 million to $25.0 million.

Sources and Uses of Cash

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


	Six Months Ended
	June 30,
	2020		2019
Operating activities	$	221,200	$	97,441
Investing activities	(26,742)		(28,538)
Financing activities	(177,794)		(25,198)

Cash provided by operations of $221.2 million for the first six months of 2020 increased $123.8 million compared to the first six months of 2019. The improvement in cash provided by operations primarily reflects an increase in net income, a decline in inventory balances between periods and an increase in accrued expenses and other current liabilities, primarily due to deferred tax payments of $18.2 million, of which we paid $14.7 million in the third quarter of 2020.

Cash used in investing activities for the first six months of 2020 decreased compared to the first six months of 2019 primarily due to lower capital expenditures, partially offset by the acquisition of Master Tile Network LLC, which we completed in February 2020.

Cash used in financing activities was $177.8 million for the first six months of 2020 compared to $25.2 million for the first six months of 2019, which reflects the following:

•net debt payments of $72.8 million in 2020 versus net debt proceeds of $25.4 million in 2019;

•additional share repurchases of $47.1 million; and

•an increase in dividends paid of $5.6 million.

Future Sources and Uses of Cash

Revolving Credit Facility

Our Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility and includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At June 30, 2020, there was $14.7 million outstanding, a $4.8 million standby letter of credit outstanding and $730.5 million available for borrowing under the Credit Facility. We pay interest on revolving borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin. The weighted average effective interest rate for the Credit Facility as of June 30, 2020 was approximately 1.0%, excluding commitment fees.

Term Facility

Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. The Term Facility will be repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal payment, equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At June 30, 2020, there was $180.4 million outstanding under the Term Facility with a weighted average effective interest rate of 2.1%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of June 30, 2020, the calculations of these two covenants are detailed below:

•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of June 30, 2020, our average total leverage ratio equaled 1.26 (compared to 1.49 as of March 31, 2020) and the TTM average total debt amount used in this calculation was $525.9 million.

•Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of June 30, 2020, our fixed charge ratio equaled 6.27 (compared to 5.56 as of March 31, 2020) and TTM Rental Expense was $60.8 million.

The Credit Facility and the Term Facility also limit the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s Net Income (as defined in the Credit Facility and the Term Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.

Under the Credit Facility and the Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak funding capacity of up to $295.0 million between May 1 and May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $120.0 million to $275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021.

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. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At June 30, 2020, there was $235.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 0.9%, excluding commitment fees.

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. Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.

As of June 30, 2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million. Interest expense related to the notional amounts under this swap contract is based on the fixed rate plus the applicable margin on our variable rate borrowings.

The following table provides details related to each of our forward-starting interest rate swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount (in millions)

Fixed Interest Rate

Forward-starting interest rate swap 1

May 7, 2019

November 20, 2020

September 29, 2022

$75.0

2.0925%

Forward-starting interest rate swap 2

July 25, 2019

November 20, 2020

September 29, 2022

$75.0

1.5500%

Forward-starting interest rate swap 3

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

Forward-starting interest rate swap 4

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

Forward-starting interest rate swap 5

March 9, 2020

February 28, 2025

February 26, 2027

$150.0

0.8130%

Compliance and Future Availability

As of June 30, 2020, we believe we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility. We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2019 Annual Report on Form 10-K and in Part I, Item 1 of this Form 10-Q.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.

As of July 28, 2020, $182.8 million of the current Board-authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the Credit and Receivables Facilities.

CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

•those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and

•those for which changes in the estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2019 Annual Report on Form 10-K. See Allowance for Doubtful Accounts in Note 1 of Part I, Item 1 of this Form 10-Q for more information on our adoption of ASU 2016-13. We have not changed any other policies from those previously disclosed.

Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

There have been no material changes during the six months ended June 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K.

Currency Risk

There have been no material changes during the six months ended June 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K.

Item 4. Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of June 30, 2020, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of June 30, 2020, our disclosure controls and procedures were effective.

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Based on the most recent evaluation, we have concluded that no change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. While the outcome of any litigation is inherently unpredictable, based on currently available facts, we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

We are supplementing the risk factors previously disclosed in our Annual Report on Form 10-K with the below risk factor related to the COVID-19 pandemic. There have been no other material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K.

The outbreak of COVID-19 and associated responses could adversely impact our business and results of operations.

The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world. In response, governmental authorities have imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in temporary (and in some cases permanent) store closures, limitation of store hours, limitations on the number of people in stores or in warehouses, requirements on sanitation and social distancing practices and travel restrictions, among other effects. Our sales in March and April 2020 were adversely impacted by the COVID-19 pandemic. Additionally, in the first quarter of 2020, we recorded impairment charges of $6.9 million related to the pandemic. For additional information, see Goodwill and Intangibles Impairment in Note 1 of Part I, Item 1 of this Form 10-Q. Beginning in mid-June and through late July 2020, there have been reports of increasing numbers of new COVID-19 cases in certain of our markets, including larger markets in Florida, Arizona, Texas and southern California, resulting in some governments extending or re-imposing restrictions. Accordingly, COVID-19 may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below summarizes the repurchases of our common stock in the second quarter of 2020:


Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan ⁽²⁾
April 1-30, 2020	19,400	$	184.76	19,400	$	182,777,893
May 1-31, 2020	—	$	—	—	$	182,777,893
June 1-30, 2020	—	$	—	—	$	182,777,893
Total	19,400	$	184.76	19,400

⁽¹⁾These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. No shares were surrendered for this purpose in the second quarter of 2020.

⁽²⁾As of July 28, 2020, $182.8 million of the authorized amount remained available under our current share repurchase program.

Our Board of Directors may declare future dividends at their discretion, after considering various factors, including our earnings, capital requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions on dividends in our Credit Facility, Term Facility and Receivables Facility, see the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis in Part I, Item 2. We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.

Item 6. Exhibits

Exhibits filed as part of this report are listed below.

Incorporated by Reference

No.

Description

Filed/ Furnished with this
Form 10-Q

Form

File No.

Date Filed

3.1

Restated Certificate of Incorporation of the Company.

10-Q

000-26640

8/9/2006

3.2

Amended and Restated Bylaws of the Company.

8-K

000-26640

2/8/2019

4.1

Form of certificate representing shares of common stock of the Company.

8-K

000-26640

5/19/2006

31.1

Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification by Chief Executive Officer and Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

+ Attached as Exhibit 101 to this report are the following items formatted in iXBRL (Inline Extensible Business Reporting Language):

1.Consolidated Statements of Income for the three and six months ended June 30, 2020 and June 30, 2019;

2.Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and June 30, 2019;

3.Consolidated Balance Sheets at June 30, 2020, December 31, 2019 and June 30, 2019;

4.Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019;

5.Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and June 30, 2019; and

6.Notes to Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on July 31, 2020.


						POOL CORPORATION




			By:			/s/ Mark W. Joslin
						Mark W. Joslin
						Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant