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 September 30, 2022

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-26640

 

POOL 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

x

Accelerated filer

☐

Non-accelerated filer

o

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 October 24, 2022, there were 39,050,618 shares of common stock outstanding.

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POOL CORPORATION

Form 10-Q

For the Quarter Ended September 30, 2022

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						30
			Item 4.  Controls and Procedures						30
PART II.  OTHER INFORMATION
			Item 1.  Legal Proceedings						31
			Item 1A.  Risk Factors						31
			Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds						31
			Item 6.  Exhibits						32
SIGNATURE									33

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

POOL CORPORATION

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data) 

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2022						2021						2022						2021
Net sales			$	1,615,339					$	1,411,448					$	5,083,807					$	4,260,027
Cost of sales			1,111,652						969,549						3,466,126						2,965,311
Gross profit			503,687						441,899						1,617,681						1,294,716
Selling and administrative expenses			239,810						204,623						699,192						589,823
Operating income			263,877						237,276						918,489						704,893
Interest and other non-operating expenses, net			11,707						2,317						25,428						6,862
Income before income taxes and equity in earnings			252,170						234,959						893,061						698,031
Provision for income taxes			62,205						50,386						216,687						155,240
Equity in earnings of unconsolidated investments, net			90						92						226						224
Net income			$	190,055					$	184,665					$	676,600					$	543,015
Earnings per share attributable to common stockholders:
Basic			$	4.82					$	4.60					$	16.99					$	13.53
Diluted			$	4.78					$	4.54					$	16.82					$	13.32
Weighted average common shares outstanding:
Basic			39,214						40,101						39,599						40,146
Diluted			39,580						40,691						40,012						40,766
Cash dividends declared per common share			$	1.00					$	0.80					$	2.80					$	2.18

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

1

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POOL CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2022						2021						2022						2021
Net income			$	190,055					$	184,665					$	676,600					$	543,015
Other comprehensive (loss) income:
Foreign currency translation losses			(11,152)						(3,555)						(18,491)						(3,522)
Change in unrealized gains on interest rate swaps, net of change in taxes of $(2,925), $(491), $(8,422), and $(2,818)			8,776						1,473						25,267						8,453
Total other comprehensive (loss) income			(2,376)						(2,082)						6,776						4,931
Comprehensive income			$	187,679					$	182,583					$	683,376					$	547,946

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

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POOL CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)

						September 30,						September 30,						December 31,
						2022						2021						2021
						(Unaudited)						(Unaudited)						(Audited)
Assets
Current assets:
Cash and cash equivalents						$	49,079					$	83,475					$	24,321
Receivables, net						189,173						174,987						155,259
Receivables pledged under receivables facility						360,623						301,163						221,312
Product inventories, net						1,539,572						1,043,407						1,339,100
Prepaid expenses and other current assets						61,032						23,368						29,093
Total current assets						2,199,479						1,626,400						1,769,085
Property and equipment, net						184,387						111,339						179,008
Goodwill						691,786						281,300						688,364
Other intangible assets, net						307,389						12,067						312,814
Equity interest investments						1,190						1,242						1,231
Operating lease assets						255,611						221,007						241,662
Other assets						48,213						28,878						37,967
Total assets						$	3,688,055					$	2,282,233					$	3,230,131
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable						$	442,226					$	414,156					$	398,697
Accrued expenses and other current liabilities						210,448						231,794						264,877
Short-term borrowings and current portion of long-term debt						12,208						10,744						11,772
Current operating lease liabilities						72,378						65,442						69,070
Total current liabilities						737,260						722,136						744,416
Deferred income taxes						45,247						30,275						35,840
Long-term debt, net						1,500,337						352,075						1,171,578
Other long-term liabilities						26,744						34,176						31,545
Non-current operating lease liabilities						187,589						158,359						175,359
Total liabilities						2,497,177						1,297,021						2,158,738
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 39,054,302, 40,079,584 and 40,192,901 shares issued and outstanding at September 30, 2022, September 30, 2021 and December 31, 2021, respectively						39						40						40
Additional paid-in capital						570,855						542,858						551,963
Retained earnings						620,692						451,401						526,874
Accumulated other comprehensive loss						(708)						(9,087)						(7,484)
Total stockholders’ equity						1,190,878						985,212						1,071,393
Total liabilities and stockholders’ equity						$	3,688,055					$	2,282,233					$	3,230,131

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

3

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POOL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

						Nine Months Ended
						September 30,
						2022						2021
Operating activities
Net income						$	676,600					$	543,015
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation						23,172						21,027
Amortization						6,523						1,064
Share-based compensation						11,691						11,755
Equity in earnings of unconsolidated investments, net						(226)						(224)
Other						12,644						5,256
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables						(181,775)						(186,772)
Product inventories						(223,268)						(267,341)
Prepaid expenses and other assets						(31,171)						(22,674)
Accounts payable						46,564						146,616
Accrued expenses and other current liabilities						(33,284)						107,343
Net cash provided by operating activities						307,470						359,065
Investing activities
Acquisition of businesses, net of cash acquired						(8,309)						(17,887)
Purchases of property and equipment, net of sale proceeds						(27,965)						(24,223)
Other investments, net						1,760						—
Net cash used in investing activities						(34,514)						(42,110)
Financing activities
Proceeds from revolving line of credit						1,629,740						791,508
Payments on revolving line of credit						(1,629,688)						(730,277)
Proceeds from term loan under credit facility						250,000						—
Proceeds from asset-backed financing						215,000						310,000
Payments on asset-backed financing						(130,000)						(415,000)
Payments on term facility						(6,937)						(6,938)
Proceeds from short-term borrowings and current portion of long-term debt						27,396						7,880
Payments on short-term borrowings and current portion of long-term debt						(26,960)						(9,006)
Payments of deferred financing costs						—						(1,610)
Payments of deferred and contingent acquisition consideration						(1,374)						(362)
Proceeds from stock issued under share-based compensation plans						7,201						11,524
Payments of cash dividends						(111,572)						(87,509)
Purchases of treasury stock						(471,210)						(137,975)
Net cash used in financing activities						(248,404)						(267,765)
Effect of exchange rate changes on cash and cash equivalents						206						157
Change in cash and cash equivalents						24,758						49,347
Cash and cash equivalents at beginning of period						24,321						34,128
Cash and cash equivalents at end of period						$	49,079					$	83,475

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

4

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POOL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In thousands)

						Common Stock																		Additional Paid-In						Retained						Accumulated Other Comprehensive
						Shares						Amount												Capital						Earnings						(Loss) Income						Total
Balance at December 31, 2021						40,193						$	40											$	551,963					$	526,874					$	(7,484)					$	1,071,393
Net income						—						—												—						179,261						—						179,261
Foreign currency translation						—						—												—						—						(214)						(214)
Interest rate swaps, net of the change in taxes of $(3,866)						—						—												—						—						11,598						11,598
Repurchases of common stock, net of retirements						(138)						—												—						(62,420)						—						(62,420)
Share-based compensation						—						—												3,657						—						—						3,657
Issuance of stock under share-based compensation plans						55						—												3,135						—						—						3,135
Declaration of cash dividends						—						—												—						(32,132)						—						(32,132)
Balance at March 31, 2022						40,110						40												558,755						611,583						3,900						1,174,278
Net income						—						—												—						307,283						—						307,283
Foreign currency translation						—						—												—						—						(7,125)						(7,125)
Interest rate swaps, net of the change in taxes of $(1,631)						—						—												—						—						4,893						4,893
Repurchases of common stock, net of retirements						(547)						—												—						(216,261)						—						(216,261)
Share-based compensation						—						—												3,914						—						—						3,914
Issuance of stock under share-based compensation plans						25						—												1,972						—						—						1,972
Declaration of cash dividends						—						—												—						(39,896)						—						(39,896)
Balance at June 30, 2022						39,588						40												564,641						662,709						1,668						1,229,058
Net income						—						—												—						190,055						—						190,055
Foreign currency translation						—						—												—						—						(11,152)						(11,152)
Interest rate swaps, net of the change in taxes of $(2,925)						—						—												—						—						8,776						8,776
Repurchases of common stock, net of retirements						(549)						(1)												—						(192,528)						—						(192,529)
Share-based compensation						—						—												4,120						—						—						4,120
Issuance of stock under share-based compensation plans						15						—												2,094						—						—						2,094
Declaration of cash dividends						—						—												—						(39,544)						—						(39,544)
Balance at September 30, 2022						39,054						$	39											$	570,855					$	620,692					$	(708)					$	1,190,878

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						Common Stock																		Additional Paid-In						Retained						Accumulated Other Comprehensive
						Shares						Amount												Capital						Earnings						Loss						Total
Balance at December 31, 2020						40,232						$	40											$	519,579					$	133,870					$	(14,019)					$	639,470
Net income						—						—												—						98,655						—						98,655
Foreign currency translation						—						—												—						—						(1,268)						(1,268)
Interest rate swaps, net of the change in taxes of $(3,046)						—						—												—						—						9,137						9,137
Repurchases of common stock, net of retirements						(215)						—												—						(71,516)						—						(71,516)
Share-based compensation						—						—												3,837						—						—						3,837
Issuance of stock under share-based compensation plans						69						—												2,912						—						—						2,912
Declaration of cash dividends						—						—												—						(23,299)						—						(23,299)
Balance at March 31, 2021						40,086						40												526,328						137,710						(6,150)						657,928
Net income						—						—												—						259,695						—						259,695
Foreign currency translation						—						—												—						—						1,302						1,302
Interest rate swaps, net of the change in taxes of $719						—						—												—						—						(2,157)						(2,157)
Repurchases of common stock, net of retirements						(45)						—												—						(18,619)						—						(18,619)
Share-based compensation						—						—												3,712						—						—						3,712
Issuance of stock under share-based compensation plans						90						—												5,006						—						—						5,006
Declaration of cash dividends						—						—												—						(32,119)						—						(32,119)
Balance at June 30, 2021						40,131						40												535,046						346,667						(7,005)						874,748
Net income						—						—												—						184,665						—						184,665
Foreign currency translation						—						—												—						—						(3,555)						(3,555)
Interest rate swaps, net of the change in taxes of $(491)						—						—												—						—						1,473						1,473
Repurchases of common stock, net of retirements						(100)						—												—						(47,840)						—						(47,840)
Share-based compensation						—						—												4,206						—						—						4,206
Issuance of stock under share-based compensation plans						49						—												3,606						—						—						3,606
Declaration of cash dividends						—						—												—						(32,091)						—						(32,091)
Balance at September 30, 2021						40,080						$	40											$	542,858					$	451,401					$	(9,087)					$	985,212

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

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POOL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Significant Accounting Policies

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

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

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

Income Taxes

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense on the Consolidated Statements of Income in the period in which stock options are exercised or restrictions on restricted stock awards lapse. We recorded excess tax benefits of $0.6 million in the third quarter of 2022 compared to $4.2 million in the third quarter of 2021 and $9.5 million in the nine months ended September 30, 2022, compared to $15.9 million in the nine months ended September 30, 2021.

Retained Earnings

We account for the retirement of treasury shares as a reduction of Retained earnings. As of September 30, 2022, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $2.1 billion and cumulative dividends of $902.0 million.

Accumulated Other Comprehensive Loss

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

			September 30,												December 31,
			2022						2021						2021
Foreign currency translation adjustments			$	(28,071)					$	(8,437)					$	(9,580)
Unrealized gains (losses) on interest rate swaps, net of tax			27,363						(650)						2,096
Accumulated other comprehensive loss			$	(708)					$	(9,087)					$	(7,484)

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

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Note 2 – Earnings Per Share

We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 213 thousand in the third quarter of 2022 and 223 thousand for the nine months ended September 30, 2022.

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

						Three Months Ended												Nine Months Ended
						September 30,												September 30,
						2022						2021						2022						2021
Net income						$	190,055					$	184,665					$	676,600					$	543,015
Amounts allocated to participating securities						(1,019)						—						(3,764)						—
Net income attributable to common stockholders						$	189,036					$	184,665					$	672,836					$	543,015
Weighted average common shares outstanding:
Basic						39,214						40,101						39,599						40,146
Effect of dilutive securities:
Stock options and employee stock purchase plan						366						590						413						620
Diluted						39,580						40,691						40,012						40,766
Earnings per share attributable to common stockholders:
Basic						$	4.82					$	4.60					$	16.99					$	13.53
Diluted						$	4.78					$	4.54					$	16.82					$	13.32
Anti-dilutive stock options excluded from diluted earnings per share computations (1)						33						—						33						—

(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.

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Note 3 – Acquisitions

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

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

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

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

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

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

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

Note 4 – Fair Value Measurements and Interest Rate Swaps

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.

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Recurring Fair Value Measurements

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contract and our contingent consideration liabilities (in thousands):

						Fair Value at September 30,
						2022						2021
Level 2
Unrealized gains on interest rate swaps						$	36,529					$	5,488
Unrealized losses on interest rate swaps						—						6,308
Level 3
Contingent consideration liabilities						$	546					$	983

Interest Rate Swaps

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

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

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

In the third quarter of 2022, two of our interest rate swap contracts terminated on September 29, 2022. These former swap contracts were previously forward-starting and converted the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts was based on the fixed rates plus the applicable margin on our variable rate borrowings.

The following table provides additional details related to these former swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount (in millions)

Fixed Interest Rate

Interest rate swap 1

May 7, 2019

November 20, 2020

September 29, 2022

$75.0

2.0925%

Interest rate swap 2

July 25, 2019

November 20, 2020

September 29, 2022

$75.0

1.5500%

We currently have two swap contracts in place. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on a portion of our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets.

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The following table provides additional details related to these swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount (in millions)

Fixed Interest Rate

Interest rate swap 3

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

Interest rate swap 4

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

For the interest rate swap contracts in effect at September 30, 2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive 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 three- or nine-month periods ended September 30, 2022.

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

The following table provides details related to our forward-starting interest rate swap contract:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount (in millions)

Fixed Interest Rate

Forward-starting interest rate swap

March 9, 2020

February 28, 2025

February 26, 2027

$150.0

0.8130%

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

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

Nonrecurring Fair Value Measurements

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

Other

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

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Note 5 – Debt

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

						September 30,
						2022						2021
Variable rate debt
Current portion of long-term debt:
Australian credit facility						$	12,208					$	10,744
Short-term borrowings and current portion of long-term debt						12,208						10,744
Long-term portion:
Revolving credit facility						572,978						170,255
Term loan under credit facility						500,000						—
Term facility						159,563						168,812
Receivables securitization facility						270,000						15,000
Less: financing costs, net						2,204						1,992
Long-term debt, net						1,500,337						352,075
Total debt						$	1,512,545					$	362,819

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

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

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

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

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

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

Forward-Looking Statements

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

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

OVERVIEW

Financial Results

Net sales increased 14% in the third quarter of 2022 to $1.6 billion compared to $1.4 billion in the third quarter of 2021. Base business sales grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year. Net sales benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather throughout much of the United States. We estimate that these increases were partially offset by the following:

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

•1% from currency exchange rate fluctuations;

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

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

Gross profit increased 14% to $503.7 million in the third quarter of 2022 from $441.9 million in the same period of 2021. Base business gross profit improved 7% over the third quarter of 2021. Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to 31.3% in the third quarter of 2021. Base business gross margin decreased 80 basis points.

Selling and administrative expenses (operating expenses) increased 17% to $239.8 million in the third quarter of 2022 compared to $204.6 million in the third quarter of 2021, including a 1% benefit from currency exchange rate fluctuations. As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021. The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.

Operating income in the third quarter of 2022 increased 11% to $263.9 million compared to $237.3 million in the same period in 2021. Operating margin was 16.3% in the third quarter of 2022 compared to 16.8% in the third quarter of 2021.

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

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We recorded a $0.6 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2022, compared to a tax benefit of $4.2 million realized in the same period of 2021. This resulted in a $0.02 per diluted share tax benefit in the third quarter of 2022, down from a $0.10 per diluted share tax benefit realized in the same period of 2021.

Net income increased 3% to $190.1 million in the third quarter of 2022 compared to $184.7 million in the third quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits. Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third quarter of 2021. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.

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

COVID-19 Pandemic

We continue to monitor the ongoing impact of the COVID-19 pandemic. The health, safety and security of our employees, customers and the communities in which we operate remain our highest priority. We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices in 2020, and we continue to evaluate and maintain them where necessary. Beginning in the second quarter of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces. This trend has had a positive impact on our financial performance over the past couple of years. Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating.

Our industry experienced substantial supply chain constraints beginning in 2021. In response, we have proactively made significant investments in inventory in the last half of 2021 and early 2022 to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service. While we continued to be challenged by supply chain constraints through the first part of 2022, we observed improvements in our supply chain dynamics in the second and third quarters of 2022. We expect inventory balances to normalize with seasonal trends as 2023 progresses.

Financial Position and Liquidity

As of September 30, 2022, total net receivables, including pledged receivables, increased 15% compared to September 30, 2021, primarily driven by our sales growth and recent acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 27.0 days at September 30, 2022 and 25.7 days at September 30, 2021. Our allowance for doubtful accounts balance was $8.9 million at September 30, 2022 and $5.4 million at September 30, 2021.

Net inventory levels increased 48% compared to levels at September 30, 2021. Our inventory balance reflects increased purchasing to ensure product availability and stock new locations, in addition to impacts from inflation and recent acquisitions. Our inventory reserve was $23.4 million at September 30, 2022 and $15.7 million at September 30, 2021. Our inventory turns, as calculated on a trailing four quarters basis, were 2.7 times at September 30, 2022 and 3.8 times at September 30, 2021. Our inventory turns have averaged 3.4 times over the past five years.

Total debt outstanding at September 30, 2022 was $1.5 billion compared to $362.8 million at September 30, 2021. Our debt balance has increased between periods as we have utilized debt proceeds to fund recent acquisitions, share repurchases and investments in working capital.

Current Trends and Outlook

For a detailed discussion of trends through 2021, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2021 Annual Report on Form 10-K.  

We expect 2022 diluted EPS of $18.50 to $19.05, including the impact of year-to-date tax benefits of $0.24. Our previous earnings guidance range disclosed in our Second Quarter 2022 Report on Form 10-Q was $18.38 to $19.13. Our earnings guidance range assumes average weather conditions.

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We expect sales growth for the full year in the range of 17% to 19% as previously disclosed in our 2021 Annual Report on Form 10-K. We project 2022 inflationary product cost increases of approximately 10% (compared to 7% to 8% in 2021). Recently, we've observed increased demand for higher value products and customizations for new pools and remodeling projects, even though the issuance of new pool permits year-to-date has moderated.

We expect a modest improvement in gross margin for the full year of 2022 compared to the full year of 2021 given the beneficial impact of price inflation in the first half of the year. Historically, our first and fourth quarter gross margin is lower compared to our second and third quarters based on seasonality. We expect gross margin in the fourth quarter of 2022 to decline 150 to 200 basis points compared to gross margin of 31.1% in the fourth quarter of 2021 (which is notably up versus 28.5% reported in the fourth quarter of 2020), primarily due to lower inflation from vendor price increases compared to last year and lower incentives earned under our volume-based vendor programs.

We project our operating expense growth rate in 2022 will be less than our gross profit growth rate. We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our strategic initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network. We also expect increased expenses from tight labor and real estate markets in 2022, which are heightened focus areas in our expense management.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2022 will approximate 25.5%. We expect our effective tax rate will fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded a $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 30, 2022. We may recognize additional tax benefits related to stock option exercises in 2022 from grants that expire in future years. We have not included any expected tax benefits in our guidance beyond what we have recognized as of September 30, 2022.

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

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

RESULTS OF OPERATIONS

As of September 30, 2022, we conducted operations through 417 sales centers in North America, Europe and Australia. For the nine months ended September 30, 2022, approximately 95% of our net sales were from our operations in North America.

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

						Three Months Ended												Nine Months Ended
						September 30,												September 30,
						2022						2021						2022						2021
Net sales						100.0		%				100.0		%				100.0		%				100.0		%
Cost of sales						68.8						68.7						68.2						69.6
Gross profit						31.2						31.3						31.8						30.4
Selling and administrative expenses						14.8						14.5						13.8						13.8
Operating income						16.3						16.8						18.1						16.5
Interest and other non-operating expenses, net						0.7						0.2						0.5						0.2
Income before income taxes and equity in earnings						15.6		%				16.6		%				17.6		%				16.4		%

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

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

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

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

(Unaudited)						Base Business												Excluded												Total
(in thousands)						Three Months Ended												Three Months Ended												Three Months Ended
						September 30,												September 30,												September 30,
						2022						2021						2022						2021						2022						2021
Net sales						$	1,552,211					$	1,409,867					$	63,128					$	1,581					$	1,615,339					$	1,411,448
Gross profit						472,873						441,521						30,814						378						503,687						441,899
Gross margin						30.5		%				31.3		%				48.8		%				23.9		%				31.2		%				31.3		%
Operating expenses						220,239						204,277						19,571						346						239,810						204,623
Expenses as a % of net sales						14.2		%				14.5		%				31.0		%				21.9		%				14.8		%				14.5		%
Operating income						252,634						237,244						11,243						32						263,877						237,276
Operating margin						16.3		%				16.8		%				17.8		%				2.0		%				16.3		%				16.8		%

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

Acquired

Acquisition Date

Net Sales Centers Acquired

Periods Excluded

Tri-State Pool Distributors

April 2022

1

July - September 2022

Porpoise Pool & Patio, Inc.

December 2021

1

July - September 2022

Wingate Supply, Inc.

December 2021

1

July - September 2022

Vak Pak Builders Supply, Inc.

June 2021

1

July - August 2022 and July - August 2021

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months. 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 nine months of 2022:

December 31, 2021			410
Acquired locations			1
New locations			6
September 30, 2022			417

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Net Sales

						Three Months Ended
						September 30,
(in millions)						2022						2021						Change
Net sales						$	1,615.3					$	1,411.4					$	203.9					14%

Net sales increased 14% in the third quarter of 2022 on top of net sales of $1.4 billion and 24% growth in the third quarter of 2021. Base business net sales in the third quarter of 2022 grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year.

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

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

•4% sales growth from recent acquisitions;

•favorable trends for our products including:

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

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

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

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

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

•1% unfavorable impact from currency exchange rate fluctuations;

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

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

Higher sales for certain product offerings, such as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the third quarter of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 9% compared to the same period last year, and collectively represented approximately 27% of net sales for the period. Supply chain issues continue to persist and constrain sales of certain equipment products. Sales of building materials grew 14% compared to the third quarter of 2021 and represented approximately 14% of net sales in the third quarter of 2022. Sales of chemicals, representing 13% of total net sales, increased 32% compared to the third quarter of 2021. The increase in chemical sales was driven by price inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above. Sales to base business retail customers increased 4% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 11% of our net sales for the third quarter of 2022. Sales to commercial customers increased 28% in the third quarter of 2022 compared to the third quarter of 2021 and represented approximately 3% of our net sales for the third quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the third quarter of 2022, increased 8% compared to the third quarter of 2021. Comparatively, net sales in our year-round markets, representing 51% of our total base business net sales in the third quarter of 2022, increased 15% compared to the third quarter of 2021.

Net sales in Europe, representing 3% of our total net sales in the third quarter of 2022, declined 11% in local currency compared to the third quarter of 2021. While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty from the war in Ukraine and increased fuel prices.

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Gross Profit

						Three Months Ended
						September 30,
(in millions)						2022						2021						Change
Gross profit						$	503.7					$	441.9					$	61.8					14%
Gross margin						31.2		%				31.3		%

Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to the third quarter of 2021 when gross margin increased 240 basis points to 31.3% (over the same period in 2020). Our gross margin in the third quarter of 2022 benefited from focused pricing efforts, our supply chain initiatives and recent acquisitions, which mostly offset some headwinds from our vendor incentive programs.

Operating Expenses

						Three Months Ended
						September 30,
(in millions)						2022						2021						Change
Selling and administrative expenses						$	239.8					$	204.6					$	35.2					17%
Operating expenses as a % of net sales						14.8		%				14.5		%

Operating expenses increased 17% in the third quarter of 2022 compared to the third quarter of 2021 (including a 1% benefit from currency exchange rate fluctuations), reflecting inflationary increases and incremental costs to support our business growth, including recent acquisitions. Incremental operating expense increases related to growth-driven labor, facility and freight costs, and investments in our digital transformation initiatives. As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021. Our weighted average effective interest rate increased to 3.2% in the third quarter of 2022 from 2.8% in the third quarter of 2021 on average outstanding debt of $1.5 billion versus $354.3 million for the respective periods.

Income Taxes

Our effective income tax rate was 24.7% for the three months ended September 30, 2022 compared to 21.4% for the three months ended September 30, 2021. We recorded a $0.6 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2022 compared to a tax benefit of $4.2 million realized in the same period last year. Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 24.9% for the third quarter of 2022 and 23.2% for the third quarter of 2021. Our third quarter effective income tax rate is typically lower compared to other quarters due to the annual expiration of statutes of limitations in the various jurisdictions where we have recorded uncertain tax positions.

Net Income and Earnings Per Share

Net income increased 3% to $190.1 million in the third quarter of 2022 compared to $184.7 million in the third quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits. Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third quarter of 2021. See the reconciliation of GAAP to non-GAAP measures below.

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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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

(Unaudited)						Base Business												Excluded												Total
(in thousands)						Nine Months Ended												Nine Months Ended												Nine Months Ended
						September 30,												September 30,												September 30,
						2022						2021						2022						2021						2022						2021
Net sales						$	4,844,310					$	4,250,543					$	239,497					$	9,484					$	5,083,807					$	4,260,027
Gross profit						1,511,996						1,292,470						105,685						2,246						1,617,681						1,294,716
Gross margin						31.2		%				30.4		%				44.1		%				23.7		%				31.8		%				30.4		%
Operating expenses						640,907						587,989						58,285						1,834						699,192						589,823
Expenses as a % of net sales						13.2		%				13.8		%				24.3		%				19.3		%				13.8		%				13.8		%
Operating income						871,089						704,481						47,400						412						918,489						704,893
Operating margin						18.0		%				16.6		%				19.8		%				4.3		%				18.1		%				16.5		%

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

Tri-State Pool Distributors

April 2022

1

May - September 2022

Porpoise Pool & Patio, Inc.

December 2021

1

January - September 2022

Wingate Supply, Inc.

December 2021

1

January - September 2022

Vak Pak Builders Supply, Inc.

June 2021

1

January - August 2022 and June - August 2021

Pool Source, LLC

April 2021

1

January - June 2022 and April - June 2021

TWC Distributors, Inc.

December 2020

10

January - February 2022 and January - February 2021

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

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Net Sales

						Nine Months Ended
						September 30,
(in millions)						2022						2021						Change
Net sales						$	5,083.8					$	4,260.0					$	823.8					19%

Net sales for the first nine months of 2022 increased 19% compared to the same period last year. Base business net sales increased 14%. Our results in the first nine months of the year were driven by continued strong demand for outdoor-living products and elevated price inflation. Sales growth in our seasonally significant quarters (second and third quarters) have been limited by industry capacity, including labor and supply chain constraints. However, we have observed improvements in our supply chain dynamics in the second and third quarters of 2022 following the challenges in the second half of 2021 through early 2022.

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

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

•5% sales growth from recent acquisitions;

•favorable trends for our products including:

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

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

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

Following our robust 33% sales growth in the first quarter of 2022, results in our second and third quarters were limited by several factors. We estimate that the benefits discussed above were partially offset by the following:

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

•1% unfavorable impact from currency exchange rate fluctuations;

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

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

Higher sales for certain product offerings, such as equipment and building materials, indicate consistent demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first nine months of 2022, sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased approximately 11% compared to the same period last year. Equipment growth for certain products was limited by supply chain constraints. Equipment collectively represented 27% of net sales in the first nine months of 2022. Sales of building materials grew 22% compared to the first nine months of 2021 and represented approximately 13% of net sales in the first nine months of 2022. Sales of chemicals, representing 12% of total net sales, increased 34% compared to the first nine months of 2021. The increase in chemical sales was driven by inflation, improved supply over last year, and strong demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who service large commercial installations are included in the appropriate existing product categories, and growth in these areas is reflected in the discussion above. In the first nine months of 2022, sales to base business retail customers increased 10% compared to the first nine months of 2021 and represented approximately 12% of our consolidated net sales. Sales to certain of our retail customers have been hindered by less favorable weather conditions in the second and third quarters compared to the prior year. Sales to commercial customers increased 27% in the first nine months of 2022 compared to the first nine months of 2021 and represented approximately 3% of our consolidated net sales in the first nine months of 2022.

Net sales in our seasonal markets (not considering Europe), representing 46% of our total base business net sales in the first nine months of 2022, increased 13% compared to the first nine months of 2021. Comparatively, net sales in our year-round markets, representing 49% of our total base business net sales in the first nine months of 2022, increased 18% compared to the first half of 2021.

Net sales in Europe, representing 4% of our total net sales in the first nine months of 2022, declined 3% in local currency. While we estimate that net sales in Europe benefited 10% from inflationary product cost increases, beginning in the second quarter of 2022, our results were negatively impacted by a decline in the volume of sales driven by macroeconomic uncertainty.

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Gross Profit

						Nine Months Ended
						September 30,
(in millions)						2022						2021						Change
Gross profit						$	1,617.7					$	1,294.7					$	323.0					25%
Gross margin						31.8		%				30.4		%

Gross margin improved 140 basis points to 31.8% in the nine months ended September 30, 2022 compared to 30.4% in the first nine months of 2021. This improvement reflects focused supply chain management initiatives to address inflation, increased pricing and benefits from our recent acquisitions.

Operating Expenses

						Nine Months Ended
						September 30,
(in millions)						2022						2021						Change
Selling and administrative expenses						$	699.2					$	589.8					$	109.4					19%
Operating expenses as a % of net sales						13.8		%				13.8		%

Operating expenses for the nine months ended September 30, 2022 increased 19% compared to the first nine months of 2021, including a 1% benefit from currency exchange rate fluctuations. The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions. Our expense growth reflects increases in growth-driven labor, facility and freight costs, along with increased investments in technology and higher performance-based compensation expense.

Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first nine months of 2022 increased $18.6 million compared to the same period last year, primarily due to higher average debt levels between periods. Our average outstanding debt was $1.5 billion for the first nine months of 2022 versus $376.2 million for the same period of 2021. Our weighted average effective interest rate decreased to 2.3% from 2.6% for the respective periods.

Income Taxes

Our effective income tax rate was 24.3% for the nine months ended September 30, 2022 compared to 22.2% for the nine months ended September 30, 2021. We recorded a $9.5 million, or $0.24 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2022 compared to a $15.9 million, or $0.39 per diluted share, tax benefit in the same period of 2021. Without the benefits from ASU 2016-09, our effective tax rate was 25.3% for the nine months ended September 30, 2022 and 24.5% for the nine months ended September 30, 2021.

Net Income and Earnings Per Share

Net income increased 25% to $676.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Earnings per diluted share increased 26% to $16.82 for the nine months ended September 30, 2022 versus $13.32 per diluted share for the nine months ended September 30, 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 28% to $16.58 for the nine months ended September 30, 2022 compared to $12.93 for the nine months ended September 30, 2021. See the reconciliation of GAAP to non-GAAP measures below.

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Reconciliation of Non-GAAP Financial Measures

Adjusted Diluted EPS

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to investors and others in assessing our period-to-period operating performance.

Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.

We believe this measure should be considered in addition to, not as a substitute for, diluted EPS presented in accordance with GAAP, and in the context of our other disclosures within this Form 10-Q. Other companies may calculate this non-GAAP financial measure differently than we do, which may limit its usefulness as a comparative measure.

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

(Unaudited)						Three Months Ended												Nine Months Ended
						September 30,												September 30,
						2022						2021						2022						2021
Diluted EPS						$	4.78					$	4.54					$	16.82					$	13.32
ASU 2016-09 tax benefit						(0.02)						(0.10)						(0.24)						(0.39)
Adjusted diluted EPS						$	4.76					$	4.44					$	16.58					$	12.93

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Seasonality and Quarterly Fluctuations

Our business is 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 lower during the first and fourth quarters. In 2021, we generated approximately 60% of our net sales and 69% 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, second and third quarters of 2022, the four quarters of 2021 and the fourth quarter of 2020.  We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts.  In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data.  The results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing future trends for a variety of reasons, including the seasonal nature of our business, the recent pandemic-driven increased demand for our products and the impact of new and acquired sales centers.

(Unaudited)						QUARTER
(in thousands)						2022																		2021																								2020
						Third						Second						First						Fourth						Third						Second						First						Fourth
Statement of Income Data
Net sales						$	1,615,339					$	2,055,818					$	1,412,650					$	1,035,557					$	1,411,448					$	1,787,833					$	1,060,745					$	839,261
Gross profit						503,687						666,804						447,189						322,376						441,899						551,685						301,131						239,095
Operating income						263,877						418,888						235,723						127,891						237,276						338,586						129,031						74,351
Net income						190,055						307,283						179,261						107,609						184,665						259,695						98,655						59,174
Balance Sheet Data
Total receivables, net						$	549,796					$	756,585					$	679,927					$	376,571					$	476,150					$	585,566					$	487,602					$	289,200
Product inventories, net						1,539,572						1,579,101						1,641,155						1,339,100						1,043,407						894,654						977,228						780,989
Accounts payable						442,226						604,225						685,946						398,697						414,156						439,453						634,998						266,753
Total debt						1,512,545						1,595,398						1,505,073						1,183,350						362,819						423,116						433,171						416,018

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.

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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			•			Fewer pool and irrigation and landscape
of rain						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			•			A longer pool and landscape season, thus positively
trends in fall						impacting our sales
(primarily in the northern half of the U.S. and Canada)
Unseasonably late warming trends in spring/early cooling			•			A shorter pool and landscape season, thus negatively
trends in fall						impacting our sales
(primarily in the northern half of the U.S. and Canada)

Weather Impacts on 2022 and 2021 Results

Sales in the third quarter of 2022 were generally aided by above-average temperatures throughout much of the contiguous United States. However, sales in Florida were negatively impacted by closures due to Hurricane Ian at the end of the quarter, which we expect to recover in the fourth quarter of 2022. Compared to last year, weather conditions in Canada and the northern states were less favorable. Generally favorable weather conditions benefited sales in the third quarter of 2021 with most of the United States experiencing above-average temperatures and below-average precipitation.

We observed unfavorable weather conditions in certain markets throughout the second quarter of 2022. Heavy rainfall and cooler temperatures throughout the northeastern United States and Canada resulted in slower sales activity and limited sales growth in the second quarter of 2022. Additionally, results in Europe continued to be impacted by unfavorable weather conditions. In contrast, our southern markets benefited from above-average temperatures, particularly in Texas. In the second quarter of 2021, overall weather conditions favorably impacted sales growth with the average U.S. temperature in June 2021 being the hottest on record in 127 years.

Overall, weather conditions in the first quarter of 2022 were less favorable than weather conditions in the first quarter of 2021. Sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures. In addition, some seasonal markets had unfavorable weather compared to the first quarter of 2021 when construction activity started earlier than normal. Similarly, results in Europe were hindered by unfavorable weather conditions. In the first quarter of 2021, sales benefited from favorable and generally mild weather conditions throughout the contiguous United States. In February 2021, Texas experienced the most costly winter storm event on record for the United States, which damaged many swimming pools and added to already strong replacement activity.

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.

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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 2021 Annual Report on Form 10-K.  We have not changed any of these policies from those previously disclosed in that report.

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.

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, debt repayment obligations and other general corporate initiatives, including acquisitions, opening new sales centers, dividend payments and share repurchases. Our primary working capital obligations are for the purchase of inventory, payroll, rent, other facility costs and selling and administrative expenses. Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. We have funded our capital expenditures and share repurchases in substantially the same manner.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure 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 network, technology-related investments and fleet vehicles;

•investing in inventory and funding other operating expenses;

•strategic acquisitions executed opportunistically;

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

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

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

We focus our capital expenditure plans principally on the needs of our sales centers, and in recent years have increased our spending on information technology. We project capital expenditures in 2022 as a percentage of net sales will be consistent with our results in 2021. Capital expenditures were 0.7% of net sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019 and have averaged roughly 1.0% of net sales over the past five years.

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Sources and Uses of Cash

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

						Nine Months Ended
						September 30,
						2022						2021
Operating activities						$	307,470					$	359,065
Investing activities						(34,514)						(42,110)
Financing activities						(248,404)						(267,765)

Net cash provided by operations was $307.5 million for the first nine months of 2022 compared to $359.1 million for the first nine months of 2021. The decrease in our operating cash flows was driven by federal tax payments of $79.5 million in 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021. Additional impacts relate to growth-driven working capital outflows, including increased inventory purchases, which were more than offset by an increase in net income.

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

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

Future Sources and Uses of Cash

Credit Facility

Our Credit Facility, as amended on December 30, 2021, provides for $1.25 billion in borrowing capacity consisting of a $750.0 million five-year unsecured revolving credit facility and a $500.0 million term loan facility. The Credit Facility includes a $750.0 million revolving credit facility and sublimits for the issuance of swingline loans and standby letters of credit. The term loans require quarterly amortization payments aggregating to 20% of the original principal amount of the loan during the third, fourth and fifth years of the loan, with all remaining principal due on the Credit Facility maturity date of September 25, 2026. We intend to continue to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At September 30, 2022, there was $573.0 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $172.2 million available for borrowing under the Credit Facility.  Currently, we pay interest on revolving and term loan borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin. The weighted average effective interest rate for the Credit Facility as of September 30, 2022 was approximately 3.5%, excluding commitment fees.

Term Facility

Our Term Facility, as amended on October 12, 2021, provides for $185.0 million in borrowing capacity and matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Credit Facility in December 2019, adding borrowing capacity for future share repurchases, acquisitions and growth-oriented working capital expansion. The Term Facility is 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. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. The total of the quarterly payments through maturity will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

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At September 30, 2022, there was $159.6 million outstanding under the Term Facility with a weighted average effective interest rate of 4.2%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower-cost form of financing. Under this facility, we can borrow up to $350.0 million between April through June and from $175.0 million to $315.0 million during the remaining months of the year. The Receivables Facility matures on November 1, 2023. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

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

Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants.  As of September 30, 2022, 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 September 30, 2022, our average total leverage ratio equaled 1.25 (compared to 1.15 as of June 30, 2022) and the TTM average total indebtedness amount used in this calculation was $1.4 billion.

•Minimum Fixed Charge Coverage Ratio. 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 September 30, 2022, our fixed charge ratio equaled 11.14 (compared to 12.22 as of June 30, 2022) and TTM Rental Expense was $77.9 million.

The Credit Facility and Term Facility limit the declaration and payment of dividends on our common stock to a manner consistent with past practice, provided no default or event of default has occurred and is continuing, or would result from the payment of dividends.  We may declare and pay quarterly dividends so long as (i) the amount per share of such dividends is not greater than the most recently publicly announced amount of dividends per share and (ii) our Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before and after giving pro forma effect to such dividends. Under the Credit Facility and 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 3.25 to 1.00.  

Other covenants in each of our credit facilities 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 our credit facilities could result in, among other things, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

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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 September 30, 2022, we had in place two interest rate swap contracts and one forward-starting interest rate swap contract, each of which has the effect of converting our exposure to variable interest rates on a portion of our variable rate borrowings to fixed interest rates. For more information, see Note 4 of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.

Compliance and Future Availability

As of September 30, 2022, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.  We believe we will remain in compliance with all material covenants and financial ratio requirements throughout the next twelve months.  For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2021 Annual Report on Form 10-K, as updated by Note 5 of “Notes to Consolidated Financial Statements,” included 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 would have the ability to finance any such transactions.

As of October 24, 2022, $230.2 million of the current Board-authorized amount under our share repurchase program remained available.  We expect to repurchase shares on the open market from time to time depending on market conditions.  We plan to fund these repurchases with cash provided by operations and borrowings under the above-described credit facilities.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

There have been no material changes during the nine months ended September 30, 2022 from what we reported in our 2021 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 2021 Annual Report on Form 10-K.

Currency Risk

There have been no material changes during the nine months ended September 30, 2022 from what we reported in our 2021 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 2021 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 September 30, 2022, management, including our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, management, including our CEO and CFO, concluded that as of September 30, 2022, 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.

The effectiveness of our system of disclosure controls and procedures or internal control over financial reporting is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating such systems, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our control systems will detect all errors or fraud. By their nature, our system can provide only reasonable assurance regarding management's control objectives.

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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 and our current insurance coverages, 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

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.

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

The table below summarizes the repurchases of our common stock in the third quarter of 2022:

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)
July 1-31, 2022						2,953						$	359.18					2,900						$	421,711,552
August 1-31, 2022						216,796						$	366.54					216,796						$	342,246,503
September 1-30, 2022						329,043						$	340.39					329,043						$	230,242,715
Total						548,792						$	350.82					548,739

(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. There were 53 shares surrendered for this purpose in the third quarter of 2022.

(2)In May 2022, our Board authorized an additional $196.2 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices. As of October 24, 2022, $230.2 million of the authorized amount remained available under our current share repurchase program.

Our Board 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 of this Form 10-Q. 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.

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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.

X

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.

X

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.

X

101.INS

+

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

X

101.SCH

+

Inline XBRL Taxonomy Extension Schema Document

X

101.CAL

+

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

+

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

+

Inline XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

+

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

104

+

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

X

+ 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 nine months ended September 30, 2022 and September 30, 2021;

2.Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and September 30, 2021;

3.Consolidated Balance Sheets at September 30, 2022, December 31, 2021 and September 30, 2021;

4.Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and September 30, 2021;

5.Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and September 30, 2021; and

6.Notes to Consolidated Financial Statements.

32

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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 October 27, 2022.

						POOL CORPORATION
			By:			/s/ Melanie Housey Hart
						Melanie Housey Hart
						Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant

33