QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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. Yesx 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). Yesx 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 April 24, 2023, there were 39,038,250 shares of common stock outstanding.
Equity in earnings of unconsolidated investments, net
36
58
Net income
$
101,699
$
179,261
Earnings per share attributable to common stockholders:
Basic
$
2.60
$
4.46
Diluted
$
2.58
$
4.41
Weighted average common shares outstanding:
Basic
38,877
39,932
Diluted
39,189
40,392
Cash dividends declared per common share
$
1.00
$
0.80
The accompanying Notes are an integral part of the Consolidated Financial Statements.
1
POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2023
2022
Net income
$
101,699
$
179,261
Other comprehensive (loss) income:
Foreign currency translation gain (loss)
2,469
(214)
Unrealized (loss) gain on interest rate swaps, net of the change in taxes of $1,269 and $(3,866)
(3,809)
11,598
Total other comprehensive (loss) income
(1,340)
11,384
Comprehensive income
$
100,359
$
190,645
The accompanying Notes are an integral part of the Consolidated Financial Statements.
2
POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)
March 31,
March 31,
December 31,
2023
2022
2022
(Unaudited)
(Unaudited)
(Audited)
Assets
Current assets:
Cash and cash equivalents
$
26,470
$
35,365
$
45,591
Receivables, net
163,048
195,951
128,247
Receivables pledged under receivables facility
401,123
483,976
223,201
Product inventories, net
1,686,683
1,641,155
1,591,060
Prepaid expenses and other current assets
27,875
42,310
30,892
Total current assets
2,305,199
2,398,757
2,018,991
Property and equipment, net
200,997
180,504
193,709
Goodwill
693,242
688,350
691,993
Other intangible assets, net
303,753
310,848
305,450
Equity interest investments
1,206
1,184
1,248
Operating lease assets
274,428
260,285
269,608
Other assets
84,004
42,213
84,438
Total assets
$
3,862,829
$
3,882,141
$
3,565,437
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
739,749
$
685,946
$
406,667
Accrued expenses and other current liabilities
126,093
179,552
168,521
Short-term borrowings and current portion of long-term debt
33,080
21,265
25,042
Current operating lease liabilities
78,498
71,685
75,484
Total current liabilities
977,420
958,448
675,714
Deferred income taxes
57,868
40,944
58,759
Long-term debt, net
1,332,670
1,483,808
1,361,761
Other long-term liabilities
37,623
32,940
35,471
Non-current operating lease liabilities
200,498
191,723
198,538
Total liabilities
2,606,079
2,707,863
2,330,243
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized;
39,032,631, 40,110,126and 39,069,419 shares issued and
outstanding at March 31, 2023, March 31, 2022 and
December 31, 2022, respectively
39
40
39
Additional paid-in capital
586,595
558,755
575,776
Retained earnings
665,561
611,583
653,484
Accumulated other comprehensive income
4,555
3,900
5,895
Total stockholders’ equity
1,256,750
1,174,278
1,235,194
Total liabilities and stockholders’ equity
$
3,862,829
$
3,882,141
$
3,565,437
The accompanying Notes are an integral part of the Consolidated Financial Statements.
3
POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2023
2022
Operating activities
Net income
$
101,699
$
179,261
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
7,632
7,663
Amortization
2,135
2,192
Share-based compensation
4,923
3,657
Equity in earnings of unconsolidated investments, net
(36)
(58)
Other
2,732
5,777
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables
(211,015)
(303,400)
Product inventories
(96,011)
(306,582)
Prepaid expenses and other assets
(5,786)
(23,330)
Accounts payable
332,800
287,449
Accrued expenses and other liabilities
(35,870)
(60,738)
Net cash provided by (used in) operating activities
103,203
(208,109)
Investing activities
Acquisition of businesses, net of cash acquired
(1,760)
—
Purchases of property and equipment, net of sale proceeds
(15,570)
(9,159)
Other investments, net
(230)
—
Net cash used in investing activities
(17,560)
(9,159)
Financing activities
Proceeds from revolving line of credit
256,079
564,288
Payments on revolving line of credit
(376,895)
(604,960)
Proceeds from term loan under credit facility
—
250,000
Proceeds from asset-backed financing
151,200
155,000
Payments on asset-backed financing
(51,100)
(50,000)
Payments on term facility
(2,313)
(2,313)
Proceeds from short-term borrowings and current portion of long-term debt
3,011
10,277
Payments on short-term borrowings and current portion of long-term debt
(1,223)
(784)
Payments of deferred and contingent acquisition consideration
(551)
(1,374)
Proceeds from stock issued under share-based compensation plans
5,896
3,135
Payments of cash dividends
(39,073)
(32,132)
Purchases of treasury stock
(50,549)
(62,420)
Net cash (used in) provided by financing activities
(105,518)
228,717
Effect of exchange rate changes on cash and cash equivalents
754
(405)
Change in cash and cash equivalents
(19,121)
11,044
Cash and cash equivalents at beginning of period
45,591
24,321
Cash and cash equivalents at end of period
$
26,470
$
35,365
The accompanying Notes are an integral part of the Consolidated Financial Statements.
4
POOL CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands)
Common Stock
Additional Paid-In
Retained
Accumulated Other Comprehensive
Shares
Amount
Capital
Earnings
Income
Total
Balance at December 31, 2022
39,069
$
39
$
575,776
$
653,484
$
5,895
$
1,235,194
Net income
—
—
—
101,699
—
101,699
Foreign currency translation
—
—
—
—
2,469
2,469
Interest rate swaps, net of the change in taxes of $1,269
—
—
—
—
(3,809)
(3,809)
Repurchases of common stock, net of retirements
(144)
—
—
(50,549)
—
(50,549)
Share-based compensation
—
—
4,923
—
—
4,923
Issuance of stock under share-based compensation plans
108
—
5,896
—
—
5,896
Declaration of cash dividends
—
—
—
(39,073)
—
(39,073)
Balance at March 31, 2023
39,033
$
39
$
586,595
$
665,561
$
4,555
$
1,256,750
Common Stock
Additional Paid-In
Retained
Accumulated Other Comprehensive
Shares
Amount
Capital
Earnings
Income
Total
Balance at December 31, 2021
40,193
$
40
$
551,963
$
526,874
$
(7,484)
$
1,071,393
Net income
—
—
—
179,261
—
179,261
Foreign currency translation
—
—
—
—
(214)
(214)
Interest rate swaps, net of the change in taxes of $(3,866)
—
—
—
—
11,598
11,598
Repurchases of common stock, net of retirements
(138)
—
—
(62,420)
—
(62,420)
Share-based compensation
—
—
3,657
—
—
3,657
Issuance of stock under share-based compensation plans
55
—
3,135
—
—
3,135
Declaration of cash dividends
—
—
—
(32,132)
—
(32,132)
Balance at March 31, 2022
40,110
$
40
$
558,755
$
611,583
$
3,900
$
1,174,278
The accompanying Notes are an integral part of the Consolidated Financial Statements.
5
POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies
Pool Corporation (the Company, which may be referred to as we, us or our) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements.
The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated.
A description of our significant accounting policies is included in our 2022 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our 2022 Annual Report on Form 10-K. The results for our three-month period ended March 31, 2023, are not necessarily indicative of the expected results for our fiscal year ending December 31, 2023.
Income Taxes
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense on the Consolidated Statements of Income in the period in which stock options are exercised or restrictions on restricted stock awards lapse. We recorded excess tax benefits of $4.8 million in the first quarter of 2023 compared to $7.3 million in the first quarter of 2022.
Retained Earnings
We account for the retirement of treasury shares as a reduction of Retained earnings. As of March 31, 2023, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $2.2 billion and cumulative dividends of $980.1 million.
Accumulated Other Comprehensive Income
The table below presents the components of our Accumulated other comprehensive income balance (in thousands):
March 31,
December 31,
2023
2022
2022
Foreign currency translation adjustments
$
(17,139)
$
(9,794)
$
(19,608)
Unrealized gains on interest rate swaps, net of tax
21,694
13,694
25,503
Accumulated other comprehensive income
$
4,555
$
3,900
$
5,895
6
Recent Accounting Pronouncements Pending Adoption
The following table summarizes recent accounting pronouncements that we plan to adopt in future periods:
Standard
Description
Effective Date
Effect on Financial Statements and Other Significant Matters
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting ASU 2021-01, Reference Rate Reform (Topic 848): Scope ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
ASU 2020-04, Reference Rate Reform (Topic 848), provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refined the scope of ASC 848 and clarified some of its guidance as it relates to recent rate reform activities. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the date for using optional expedients and exceptions to December 31, 2024.
The provisions of these updates are available until December 31, 2024.
In 2022, we adopted the hedge accounting expedient related to the probability of forecasted transactions to assert probability of the hedged interest regardless of any expected modification related to reference rate reform. We may apply other elections as applicable. We do not expect that there will be a material impact to the financial statements as a result of adopting any of the optional expedient or exceptions from these ASUs.
7
Note 2 – Earnings Per Share
We calculate basic and diluted earnings per share using the two-class method. Earnings per share under the two-class method is calculated using net income attributable to common stockholders, which is net income reduced by the earnings allocated to participating securities. Our participating securities include share-based payment awards that contain a non-forfeitable right to receive dividends and are considered to participate in undistributed earnings with common shareholders. Participating securities excluded from weighted average common shares outstanding were 213,000 for the three months ended March 31, 2023 and 239,000 for the three months ended March 31, 2022.
The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):
Three Months Ended
March 31,
2023
2022
Net income
$
101,699
$
179,261
Amounts allocated to participating securities
(548)
(1,051)
Net income attributable to common stockholders
$
101,151
$
178,210
Weighted average common shares outstanding:
Basic
38,877
39,932
Effect of dilutive securities:
Stock options and employee stock purchase plan
312
460
Diluted
39,189
40,392
Earnings per share attributable to common stockholders:
Basic
$
2.60
$
4.46
Diluted
$
2.58
$
4.41
Anti-dilutive stock options excluded from diluted earnings per share computations (1)
64
1
(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.
Note 3 – Acquisitions
In March 2023, we acquired the distribution assets of Pro-Water Irrigation & Landscape Supply, Inc., a wholesale distributor of irrigation and landscape supply products, adding two locations in Arizona.
In April 2022, we acquired the distribution assets of Tri-State Pool Distributors, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in West Virginia.
We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material.
8
Note 4 – Fair Value Measurements and Interest Rate Swaps
Recurring Fair Value Measurements
Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts, our deferred compensation plan asset and liability and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology include:
•quoted prices for similar assets or liabilities in active markets;
•quoted prices for identical or similar assets or liabilities in inactive markets;
•inputs other than quoted prices that are observable for the asset or liability; or
•inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The table below presents our assets and liabilities measured and recorded at fair value on a recurring basis (in thousands):
Fair Value at March 31,
Input Level
Classification
2023
2022
Assets
Unrealized gains on interest rate swaps
Level 2
Other assets
$
28,970
$
18,817
Deferred compensation plan asset
Level 1
Other assets
14,014
18,338
Liabilities
Contingent consideration liabilities
Level 3
Accrued expenses and other current liabilities
$
—
$
600
Unrealized losses on interest rate swaps
Level 2
Accrued expenses and other current liabilities
—
514
Deferred compensation plan liability
Level 1
Other long-term liabilities
14,014
18,338
Interest Rate Swaps
We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings.
We use significant other observable market data or assumptions (Level 2 inputs) in determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contract that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.
We recognize any differences between the variable interest rate in effect and the fixed interest rates per our swap contracts as an adjustment to interest expense over the life of the swaps. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income on the Consolidated Balance Sheets.
We currently have two swap contracts in place. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on a portion of our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on a portion of our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive income on the Consolidated Balance Sheets.
9
The following table provides additional details related to these swap contracts:
Derivative
Inception Date
Effective Date
Termination Date
Notional Amount (in millions)
Fixed Interest Rate
Interest rate swap 1
February 5, 2020
February 26, 2021
February 28, 2025
$150.0
1.3800%
Interest rate swap 2
March 9, 2020
September 29, 2022
February 26, 2027
$150.0
0.7400%
For the interest rate swap contracts in effect at March 31, 2023, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in the three-month periods ended March 31, 2023 or March 31, 2022.
We have entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on a portion of our variable rate borrowings. The following table provides details related to our forward-starting interest rate swap contract:
Derivative
Inception Date
Effective Date
Termination Date
Notional Amount (in millions)
Fixed Interest Rate
Forward-starting interest rate swap
March 9, 2020
February 28, 2025
February 26, 2027
$150.0
0.8130%
Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we were in a net pay position.
Our interest rate swap contracts and forward-starting interest rate swap contract are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.
Other
Our deferred compensation plan asset represents investments in securities (primarily mutual funds) traded in an active market (Level 1 inputs) held for the benefit of certain employees as part our deferred compensation plan. We record an equal and offsetting deferred compensation plan liability, which represents our obligation to participating employees. Changes in the fair value of the plan asset and liability are reflected in Selling and administrative expenses in the Consolidated Statements of Income.
The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of our long-term debt approximates its fair value. Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
Nonrecurring Fair Value Measurements
In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. In the three months ended March 31, 2023 and March 31, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.
10
Note 5 – Debt
The table below presents the components of our debt (in thousands):
March 31,
2023
2022
Variable rate debt
Short-term borrowings
$
3,011
$
10,854
Current portion of long-term debt:
Australian credit facility
11,319
10,411
Current portion of term loans under credit facility
18,750
—
Short-term borrowings and current portion of long-term debt
$
33,080
$
21,265
Long-term portion:
Revolving credit facility
398,895
532,253
Term loan under credit facility
481,250
500,000
Term facility
154,938
164,188
Receivables securitization facility
299,600
290,000
Less: financing costs, net
2,013
2,633
Long-term debt, net
1,332,670
1,483,808
Total debt
$
1,365,750
$
1,505,073
Our accounts receivable securitization facility (the “Receivables Facility”) provides for the sale of certain of our receivables to a wholly-owned subsidiary (the “Securitization Subsidiary”). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.
We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire outstanding balance as Long-term debt, net on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets.
11
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 2022 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our 2022 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, management's views on industry, economic, competitive, technological and regulatory conditions 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 the sensitivity of our business to weather conditions; changes in the economic conditions, consumer discretionary spending, the housing market, inflation or interest rates; our ability to maintain favorable relationships with suppliers and manufacturers; the extent to which home-centric trends associated with the pandemic will moderate or reverse; competition from other leisure product alternatives or mass merchants; our ability to continue to execute our growth strategies; changes in the regulatory environment; new or additional taxes, duties or tariffs; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2022 Annual Report on Form 10-K, as updated by our subsequent filings with the U.S. Securities and Exchange Commission. 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
In the first quarter of 2023, differing weather conditions contributed to variability in our results across geographies. Our southern markets experienced more typical weather during the quarter and generated encouraging results. However, higher precipitation and cooler temperatures suppressed results in our western markets, hampering new pool construction activities and sales of maintenance-related products. These conditions continued into late March where we saw a considerable impact on our biggest sales month of the quarter.
Net sales decreased 15% in the first quarter of 2023 to $1.2 billion compared to $1.4 billion in the first quarter of 2022 following 33% net sales growth in the first quarter of 2022 and 57% growth in the first quarter of 2021. Weather conditions were generally favorable in our southern markets, where Texas and Florida, our two largest markets in the South, realized combined base business sales in line with 2022. In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., including California and Arizona, two of our largest markets, where base business sales were down a combined 21% from last year. We estimate that sales were also negatively impacted 2% from lower customer early buy activity in the first quarter of 2023 versus the first quarter of 2022 and 1% from continued softness in our European markets.
Gross profit decreased 17% to $369.8 million in the first quarter of 2023 from $447.2 million in the same period of 2022. Consistent with our expectations, gross margin decreased 110 basis points to 30.6% in the first quarter of 2023 compared to 31.7% in the first quarter of 2022.
Selling and administrative expenses (operating expenses) increased 6% to $224.0 million in the first quarter of 2023 compared to $211.5 million in the first quarter of 2022. Our largest expense growth drivers during the quarter related to higher rent and facility costs, the return of in-person customer-facing retail events and investments in customer-focused projects. As a percentage of net sales, operating expenses increased to 18.6% in the first quarter of 2023 compared to 15.0% in the same period of 2022.
12
Operating income in the first quarter of 2023 decreased 38% to $145.8 million from a tough comparison of $235.7 million in the same quarter last year but was 13% higher than operating income in the first quarter of 2021 of $129.0 million. Operating margin was 12.1% in the first quarter of 2023 compared to 16.7% in the first quarter of 2022.
Interest and other non-operating expenses, net for the first quarter of 2023 increased $10.6 million compared to the first quarter of 2022, primarily reflecting higher average interest rates between periods.
We recorded a $4.8 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended March 31, 2023, compared to a tax benefit of $7.3 million realized in the same period of 2022. This resulted in a $0.12 per diluted share tax benefit compared to an $0.18 per diluted share tax benefit realized in the same period of 2022.
Net income decreased 43% to $101.7 million in the first quarter of 2023 compared to $179.3 million in the first quarter of 2022. Earnings per diluted share decreased 41% to $2.58 in the first quarter of 2023 compared to $4.41 in the same period of 2022. Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 42% to $2.46 compared to $4.23 in the first quarter of 2022.
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.
Financial Position and Liquidity
As of March 31, 2023, total net receivables, including pledged receivables, decreased 17% compared to March 31, 2022, driven by our sales trends. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.5 days at March 31, 2023 and 26.4 days at March 31, 2022. Our allowance for doubtful accounts balance was $9.0 million at March 31, 2023 and $6.0 million at March 31, 2022.
Net inventory levels increased 3% compared to levels at March 31, 2022, which compares to the 19% increase that we reported as of December 31, 2022 (compared to December 31, 2021). We are pleased with the progress in utilizing our strategic inventory buys and believe that we are appropriately stocked to ensure product availability during the swimming pool season and to support our new locations. Our inventory reserve was $24.5 million at March 31, 2023 and $19.8 million at March 31, 2022. Our inventory turns, as calculated on a trailing four quarters basis, were 2.5 times at March 31, 2023 and 3.1 times at March 31, 2022.
Total debt outstanding at March 31, 2023 was $1.4 billion compared to $1.5 billion at March 31, 2022 as we have used operating cash flows to make payments on our debt balances. We have utilized debt proceeds over the past twelve months primarily to fund share repurchases and investments in working capital.
Current Trends and Outlook
For a detailed discussion of trends through 2022, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.
Based on our results to-date and trends observed into the second quarter, we now expect sales for the full year of 2023 to be down in the mid-single digits compared to 2022 versus the flat to down 3% from our initial projections disclosed in our 2022 Annual Report on Form 10-K. Our 2022 Annual Report on Form 10-K outlines the details of our initial projections. Our overall expectations related to renovation and remodel activity, our Horizon business, and European business remain relatively unchanged. However, we now believe that it is possible that new pool construction could decline up to 30% based on less available buildable days and current permit trends. Maintenance revenue is also expected to see a 1% lower increase than previously expected, from the use of less consumables stemming from the unfavorable weather in the first quarter.
As previously disclosed in our 2022 Annual Report on Form 10-K, we project gross margin for the full year of 2023 to be in line with our long-term outlook of approximately 30.0% with higher gross margin in the first half of 2023 compared to the latter half of the year as we sell through inventory purchased prior to recent price increases.
We plan to leverage our existing infrastructure and manage discretionary spending to limit expense growth between plus or minus 2% compared to the full year of 2022.
13
We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2023 will approximate 25.3% to 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 $4.8 million, or $0.12 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2023. We may recognize additional tax benefits related to stock option exercises in 2023 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 March 31, 2023.
We expect 2023 diluted EPS in the range of $14.62 to $16.12, including the impact of year-to-date tax benefits of $0.12. We expect to continue to use cash for the payment of cash dividends as and when declared by our Board and to fund opportunistic share repurchases through the remainder of 2023.
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 March 31, 2023, we conducted operations through 427 sales centers in North America, Europe and Australia. For the three months ended March 31, 2023, 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
March 31,
2023
2022
Net sales
100.0
%
100.0
%
Cost of sales
69.4
68.3
Gross profit
30.6
31.7
Selling and administrative expenses
18.6
15.0
Operating income
12.1
16.7
Interest and other non-operating expenses, net
1.3
0.4
Income before income taxes and equity in earnings
10.8
%
16.3
%
Note: Due to rounding, percentages presented in the table above may not add to Operating income or Income before income taxes and equity in earnings.
We have included the results of operations from acquisitions in 2023 and 2022 in our consolidated results since the acquisition dates.
14
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
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
March 31,
March 31,
March 31,
2023
2022
2023
2022
2023
2022
Net sales
$
1,130,353
$
1,337,685
$
76,421
$
74,965
$
1,206,774
$
1,412,650
Gross profit
339,597
416,167
30,158
31,022
369,755
447,189
Gross margin
30.0
%
31.1
%
39.5
%
41.4
%
30.6
%
31.7
%
Operating expenses
204,922
195,909
19,062
15,557
223,984
211,466
Expenses as a % of net sales
18.1
%
14.6
%
24.9
%
20.8
%
18.6
%
15.0
%
Operating income
134,675
220,258
11,096
15,465
145,771
235,723
Operating margin
11.9
%
16.5
%
14.5
%
20.6
%
12.1
%
16.7
%
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
Pro-Water Irrigation & Landscape Supply, Inc.
March 2023
2
March 2023
Tri-State Pool Distributors
April 2022
1
January - March 2023
Porpoise Pool & Patio, Inc.
December 2021
1
January - March 2023 and January - March 2022
Wingate Supply, Inc.
December 2021
1
January - February 2023 and January - February 2022
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 three months of 2023:
December 31, 2022
420
Acquired locations
2
New locations
5
March 31, 2023
427
15
Net Sales
Three Months Ended
March 31,
(in millions)
2023
2022
Change
Net sales
$
1,206.8
$
1,412.7
$
(205.9)
(15)%
Net sales and base business net sales decreased 15% in the first quarter of 2023 compared to the first quarter of 2022 following 33% net sales growth in the first quarter of 2022 and 57% growth in the first quarter of 2021. In the first quarter of 2023, differing weather conditions contributed to variability in our results across geographies. Our southern markets experienced more typical weather during the quarter and generated encouraging results. However, higher precipitation and cooler temperatures suppressed results in our western markets, including California and Arizona, two of our largest markets, hampering new pool construction activities and sales of maintenance-related products.
We faced several challenges during the quarter, with unfavorable weather being the most significant. The following factors impacted our sales during the quarter and are listed in order of estimated magnitude.
•We estimate that unfavorable weather conditions in the first quarter negatively impacted sales by approximately 5%.
•Net sales benefited approximately 4% to 5% from inflationary product cost increases, which compares to a benefit of 10% to 12% in the first quarter of 2022.
•Sales were also negatively impacted 2% from lower customer early buy activity in the first quarter of 2023 versus the first quarter of 2022 and 1% from continued softness in our European markets.
Net sales in our North American seasonal markets, representing 38% of our total base business net sales in the first quarter of 2023, decreased 23% compared to the first quarter of 2022 as these markets are more sensitive to weather conditions, particularly in the shoulders of the season when unfavorable weather delays the openings of swimming pools. Comparatively, net sales in our year-round markets, representing 57% of our total base business net sales in the first quarter of 2023, decreased 9% compared to the first quarter of 2022 as differing weather conditions led to varied results across our four largest markets. Weather conditions were generally favorable in our southern markets, where Texas and Florida realized combined base business sales in line with 2022. In contrast, results were negatively impacted by unusually wet and cold weather in the western U.S., including California and Arizona, where base business sales were down a combined 21% from last year.
Related to our product sales, following a period of significant growth over the past three years, we observed a decline in volumes of discretionary products sold as new construction activities moderated and were further impacted by unfavorable weather conditions and macroeconomic impacts. This is evidenced by lower sales for product offerings such as equipment and building materials. In the first quarter of 2023, base business sales of equipment, which includes swimming pool heaters, pumps, lights, filters and automation, decreased 14% compared to the same period last year, and collectively represented approximately 30% of net sales for the period. Sales of building materials decreased 7% compared to the first quarter of 2022 and represented approximately 14% of net sales in the first quarter of 2023.
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 sales trends in these areas are reflected in the discussion above. Base business sales to retail customers decreased 16% in the first quarter of 2023 compared to the first quarter of 2022 and represented approximately 10% of our net sales for the first quarter of 2023. Including the impact of our December 2021 acquisition of Porpoise Pool & Patio, sales to retail customers decreased 12% and represented approximately 14% of our net sales. Sales to commercial swimming pool customers increased 12% in the first quarter of 2023 compared to the first quarter of 2022 and represented approximately 5% of our net sales for the first quarter of 2023.
Net sales in Europe, representing 4% of our total net sales in the first quarter of 2023, declined 25% compared to the first quarter of 2022, impacted by continued macroeconomic uncertainty from the war in Ukraine and increased fuel prices.
16
Gross Profit
Three Months Ended
March 31,
(in millions)
2023
2022
Change
Gross profit
$
369.8
$
447.2
$
(77.4)
(17)%
Gross margin
30.6
%
31.7
%
Gross margin decreased 110 basis points to 30.6% in the first quarter of 2023 compared to the first quarter of 2022 when gross margin increased 330 basis points to 31.7% (over the same period in 2021). Our prior year gross margin benefited from higher levels of inflation and price increases, while gross margin in the first quarter of 2023 began to trend more in line with our longer-term annual gross margin outlook of 30.0%. Gross margin in the first quarter of 2023 also reflected continued benefits from sales of strategic lower cost inventory purchases ahead of recent vendor price increases.
Operating Expenses
Three Months Ended
March 31,
(in millions)
2023
2022
Change
Selling and administrative expenses
$
224.0
$
211.5
$
12.5
6%
Operating expenses as a % of net sales
18.6
%
15.0
%
Operating expenses increased 6% in the first quarter of 2023 compared to the first quarter of 2022. Our largest expense growth drivers during the quarter related to higher rent and facility costs, increased labor costs, the return of in-person customer-facing retail events and investments in customer-focused projects. These increases were partially offset by lower performance-based compensation expense.
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the first quarter of 2023 increased $10.6 million compared to the first quarter of 2022. Our weighted average effective interest rate increased to 4.8% in the first quarter of 2023 from 1.5% in the first quarter of 2022 on average outstanding debt of $1.3 billion in both periods.
Income Taxes
Our effective income tax rate was 21.8% for the three months ended March 31, 2023 compared to 22.3% for the three months ended March 31, 2022. We recorded a $4.8 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2023 compared to a tax benefit of $7.3 million realized in the same period last year. Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5% for the first quarter of 2023 and 25.4% for the first quarter of 2022.
Net Income and Earnings Per Share
Net income decreased 43% to $101.7 million in the first quarter of 2023 compared to $179.3 million in the first quarter of 2022. Earnings per diluted share decreased 41%to $2.58 in the first quarter of 2023 compared to $4.41 in the same period of 2022. Without the impact from ASU 2016-09 in both periods, earnings per diluted share decreased 42% to $2.46 in the first quarter of 2023 compared to $4.23 in the first quarter of 2022. See the reconciliation of GAAP to non-GAAP measures below.
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Reconciliation of Non-GAAP Financial Measures
The non-GAAP measures described below should be considered in the context of all of our other disclosures in this Form 10-Q.
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 management, 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
March 31,
2023
2022
Diluted EPS
$
2.58
$
4.41
ASU 2016-09 tax benefit
(0.12)
(0.18)
Adjusted diluted EPS
$
2.46
$
4.23
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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 2022, we generated approximately 59% of our net sales and 67% 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 quarter of 2023, the four quarters of 2022 and the fourth, third and second quarters of 2021. 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 and the impact of new and acquired sales centers.
(Unaudited)
QUARTER
(in thousands)
2023
2022
2021
First
Fourth
Third
Second
First
Fourth
Third
Second
Statement of Income Data
Net sales
$
1,206,774
$
1,095,920
$
1,615,339
$
2,055,818
$
1,412,650
$
1,035,557
$
1,411,448
$
1,787,833
Gross profit
369,755
315,731
503,687
666,804
447,189
322,376
441,899
551,685
Operating income
145,771
107,295
263,877
418,888
235,723
127,891
237,276
338,586
Net income
101,699
71,863
190,055
307,283
179,261
107,609
184,665
259,695
Balance Sheet Data
Total receivables, net
$
564,171
$
351,448
$
549,796
$
756,585
$
679,927
$
376,571
$
476,150
$
585,566
Product inventories, net
1,686,683
1,591,060
1,539,572
1,579,101
1,641,155
1,339,100
1,043,407
894,654
Accounts payable
739,749
406,667
442,226
604,225
685,946
398,697
414,156
439,453
Total debt
1,365,750
1,386,803
1,512,545
1,595,398
1,505,073
1,183,350
362,819
423,116
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.
19
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 2023 and 2022 Results
Weather conditions varied across the contiguous United States throughout the first quarter of 2023. Conditions were generally favorable in our southern markets, where sales benefited from warmer weather and below-average precipitation. In contrast, results were unfavorably impacted by unusually wet and cold weather in the western U.S., particularly in California and Arizona, which are two of our largest markets. Comparatively, in the first quarter of 2022, overall weather conditions were generally favorable, and sales benefited from above-average temperatures along much of the west and the east coast, although Texas experienced cooler-than-normal temperatures.
CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:
•those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and
•those for which changes in the estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.
Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2022 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.
20
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, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:
•capital expenditures primarily for maintenance and growth of our sales center network, technology-related investments and fleet vehicles;
•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. Historically, our capital expenditures have averaged roughly 1.0% of net sales. Capital expenditures were 0.7% of net sales in 2022 and 2021 and 0.6% of net sales in 2020. Since 2020, our capital expenditures as a percentage of net sales were lower than our historical average primarily due to our significant sales growth. Based on management’s current plans, we project capital expenditures in 2023 will approximate 1.0% of net sales.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
Three Months Ended
March 31,
2023
2022
Operating activities
$
103,203
$
(208,109)
Investing activities
(17,560)
(9,159)
Financing activities
(105,518)
228,717
Net cash provided by operations improved to $103.2 million for the first three months of 2023 from net cash used in operations of $208.1 million for the first three months of 2022, primarily driven by positive changes in working capital, particularly as we sell through our prior year strategic inventory purchases, partially offset by lower net income.
21
Net cash used in investing activities for the first three months of 2023 increased compared to the first three months of 2022, primarily due to a $6.4 million increase in capital expenditures and $1.8 million of cash used for the acquisition of a business in the first quarter of 2023.
Net cash used in financing activities was $105.5 million for the first three months of 2023 compared to net cash provided by financing activities of $228.7 million for the first three months of 2022, primarily reflecting $21.2 million of net debt payments in the first three months of 2023 versus $321.5 million of net debt proceeds in the first three months of 2022 and an increase in dividends paid of $6.9 million, partially offset by an $11.9 million decrease in share repurchases between periods.
Future Sources and Uses of Cash
To supplement cash from operations as our primary source of working capital, we plan to continue to utilize our three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility). For additional details regarding these facilities, see the summary descriptions below and more complete descriptions in Note 5 of our "Notes to Consolidated Financial Statements,” included in Part II, Item 8 in our 2022 Annual Report on Form 10-K and Note 5of “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Form 10-Q.
Credit Facility
Our Credit Facility 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 also includes sublimits for the issuance of swingline loans and standby letters of credit. 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 term loan requires quarterly amortization payments beginning in September 2023 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 March 31, 2023, there was $398.9 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $346.3 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of March 31, 2023 was approximately 4.6%, excluding commitment fees.
Term Facility
Our Term Facility 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. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin. 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.
At March 31, 2023, there was $154.9 million outstanding under the Term Facility with a weighted average effective interest rate of 6.0%.
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 August and from $210.0 million to $340.0 million during the remaining months of the year. The Receivables Facility matures on November 1, 2024. 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
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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.
At March 31, 2023, there was $299.6 million outstanding under the Receivables Facility at a weighted average effective interest rate of 5.7%, excluding commitment fees.
Financial Covenants
Financial covenants of the Credit Facility, Term Facility and Receivables 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 March 31, 2023, 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 sum of (i) Total Non-Revolving Funded Indebtedness as of such date, (ii) the trailing twelve months (TTM) Average Total Revolving Funded Indebtedness and (iii) the TTM Average Accounts Securitization Proceeds divided by TTM EBITDA (as those terms are defined in the Credit Facility). As of March 31, 2023, our average total leverage ratio equaled 1.48 (compared to 1.37 as of December 31, 2022) and the TTM average total indebtedness amount used in this calculation was $1.5 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 March 31, 2023, our fixed charge ratio equaled 7.96 (compared to 9.57 as of December 31, 2022) and TTM Rental Expense was $83.2 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.
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 March 31, 2023, we had two interest rate swap contracts in place 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 March 31, 2023, 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 2022 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.
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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 April 24, 2023, $186.4 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 three months ended March 31, 2023 from what we reported in our 2022 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 2022 Annual Report on Form 10-K.
Currency Risk
There have been no material changes during the three months ended March 31, 2023 from what we reported in our 2022 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 2022 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 March 31, 2023, 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 March 31, 2023, 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
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. We urge you to carefully consider (i) the other information set forth in this report and (ii) the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarizes the repurchases of our common stock in the first quarter of 2023:
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)
January 1-31, 2023
—
$
—
—
$
230,242,715
February 1-28, 2023
34,851
$
356.99
16,792
$
224,242,921
March 1-31, 2023
109,154
$
350.18
108,134
$
186,382,518
Total
144,005
$
351.83
124,926
(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 19,079 shares surrendered for this purpose in the first quarter of 2023.
(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 bringing the total authorization available under the program to $600.0 million. As of April 24, 2023, $186.4 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.
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.
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.
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.
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
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+ 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 months ended March 31, 2023 and March 31, 2022;
2.Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and March 31, 2022;
3.Consolidated Balance Sheets at March 31, 2023, December 31, 2022 and March 31, 2022;
4.Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and March 31, 2022;
5.Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and March 31, 2022; and
6.Notes to Consolidated Financial Statements.
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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 April 27, 2023.
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
