QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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. 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 25, 2022, there were 40,073,690 shares of common stock outstanding.
Equity in earnings of unconsolidated investments, net
58
75
Net income
$
179,261
$
98,655
Earnings per share attributable to common stockholders:
Basic
$
4.46
$
2.45
Diluted
$
4.41
$
2.42
Weighted average common shares outstanding:
Basic
39,932
40,215
Diluted
40,392
40,846
Cash dividends declared per common share
$
0.80
$
0.58
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,
2022
2021
Net income
$
179,261
$
98,655
Other comprehensive (loss) income:
Foreign currency translation losses
(214)
(1,268)
Change in unrealized gains on interest rate swaps, net of change in taxes of $(3,866) and $(3,046)
11,598
9,137
Total other comprehensive income
11,384
7,869
Comprehensive income
$
190,645
$
106,524
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,
2022
2021
2021 (1)
(Unaudited)
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
35,365
$
27,078
$
24,321
Receivables, net
195,951
122,938
155,259
Receivables pledged under receivables facility
483,976
364,664
221,312
Product inventories, net
1,641,155
977,228
1,339,100
Prepaid expenses and other current assets
42,310
25,390
29,093
Total current assets
2,398,757
1,517,298
1,769,085
Property and equipment, net
180,504
109,830
179,008
Goodwill
688,350
267,914
688,364
Other intangible assets, net
310,848
11,854
312,814
Equity interest investments
1,184
1,305
1,231
Operating lease assets
260,285
209,036
241,662
Other assets
42,213
24,456
37,967
Total assets
$
3,882,141
$
2,141,693
$
3,230,131
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
685,946
$
634,998
$
398,697
Accrued expenses and other current liabilities
179,552
134,670
264,877
Short-term borrowings and current portion of long-term debt
21,265
12,409
11,772
Current operating lease liabilities
71,685
61,265
69,070
Total current liabilities
958,448
843,342
744,416
Deferred income taxes
40,944
31,134
35,840
Long-term debt, net
1,483,808
420,762
1,171,578
Other long-term liabilities
32,940
38,945
31,545
Non-current operating lease liabilities
191,723
149,582
175,359
Total liabilities
2,707,863
1,483,765
2,158,738
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,110,126, 40,086,256and 40,192,901 shares issued and
outstanding at March 31, 2022, March 31, 2021 and
December 31, 2021, respectively
40
40
40
Additional paid-in capital
558,755
526,328
551,963
Retained earnings
611,583
137,710
526,874
Accumulated other comprehensive income (loss)
3,900
(6,150)
(7,484)
Total stockholders’ equity
1,174,278
657,928
1,071,393
Total liabilities and stockholders’ equity
$
3,882,141
$
2,141,693
$
3,230,131
(1) Derived from audited financial statements.
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,
2022
2021
Operating activities
Net income
$
179,261
$
98,655
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation
7,663
6,884
Amortization
2,192
421
Share-based compensation
3,657
3,837
Equity in earnings of unconsolidated investments, net
(58)
(75)
Other
5,777
2,723
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables
(303,400)
(199,672)
Product inventories
(306,582)
(200,185)
Prepaid expenses and other assets
(23,330)
(5,507)
Accounts payable
287,449
369,665
Accrued expenses and other current liabilities
(60,738)
367
Net cash (used in) provided by operating activities
(208,109)
77,113
Investing activities
Acquisition of businesses, net of cash acquired
—
(683)
Purchases of property and equipment, net of sale proceeds
(9,159)
(8,839)
Net cash used in investing activities
(9,159)
(9,522)
Financing activities
Proceeds from revolving line of credit
564,288
342,500
Payments on revolving line of credit
(604,960)
(308,656)
Proceeds from term loan under credit facility
250,000
—
Proceeds from asset-backed financing
155,000
110,000
Payments on asset-backed financing
(50,000)
(125,000)
Payments on term facility
(2,313)
(2,313)
Proceeds from short-term borrowings and current portion of long-term debt
10,277
4,280
Payments on short-term borrowings and current portion of long-term debt
(784)
(3,740)
Payments of deferred and contingent acquisition consideration
(1,374)
(362)
Proceeds from stock issued under share-based compensation plans
3,135
2,912
Payments of cash dividends
(32,132)
(23,299)
Purchases of treasury stock
(62,420)
(71,516)
Net cash provided by (used in) financing activities
228,717
(75,194)
Effect of exchange rate changes on cash and cash equivalents
(405)
553
Change in cash and cash equivalents
11,044
(7,050)
Cash and cash equivalents at beginning of period
24,321
34,128
Cash and cash equivalents at end of period
$
35,365
$
27,078
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, 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
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
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 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-month period ended March 31, 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 $7.3 million in the first quarter of 2022 compared to $4.0 million in the first quarter of 2021.
Retained Earnings
We account for the retirement of treasury shares as a reduction of Retained earnings. As of March 31, 2022, the Retained earnings on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $1.7 billion and cumulative dividends of $822.5 million.
Accumulated Other Comprehensive Income (Loss)
The table below presents the components of our Accumulated other comprehensive income (loss) balance (in thousands):
March 31,
December 31,
2022
2021
2021
Foreign currency translation adjustments
$
(9,794)
$
(6,185)
$
(9,580)
Unrealized gains on interest rate swaps, net of tax
13,694
35
2,096
Accumulated other comprehensive income (loss)
$
3,900
$
(6,150)
$
(7,484)
6
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 andASU 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.
We do not expect that there will be a material impact to the financial statements as a result of adopting these ASUs.
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 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,
2022
2021
Net income
$
179,261
$
98,655
Amounts allocated to participating securities
(1,051)
—
Net income attributable to common stockholders
$
178,210
$
98,655
Weighted average common shares outstanding:
Basic
39,932
40,215
Effect of dilutive securities:
Stock options and employee stock purchase plan
460
631
Diluted
40,392
40,846
Earnings per share attributable to common stockholders:
Basic
$
4.46
$
2.45
Diluted
$
4.41
$
2.42
Anti-dilutive stock options excluded from diluted earnings per share computations (1)
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.
7
Note 3 – Acquisitions
On December 16, 2021, we acquired Porpoise Pool & Patio, Inc. (“Porpoise”) for $788.7 million, net of cash acquired, subject to certain customary closing adjustments. The acquisition was funded with borrowings on our amended and restated revolving credit facility (the “Credit Facility”). Porpoise’s primary operations, Sun Wholesale Supply, Inc., a wholesale distributor of swimming pool and outdoor-living products, added one distribution location in Florida. It also services Pinch A Penny, Inc., a franchisor of independently owned and operated pool and outdoor living-related specialty retail stores.
We preliminarily recognized goodwill of $403.5 million, other intangible assets of $301.0 million and tangible assets of $84.2 million, which included $57.4 million of acquired land and buildings. For additional discussion of goodwill and other intangible assets, see Note 3 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2021 Annual Report on Form 10-K. The final allocation of the fair value of the Porpoise acquisition, including the allocation of goodwill and intangible assets, is not complete but will be finalized within the allowable measurement period. We do not expect the future results of this acquisition to have a material impact on our financial position or results of operations.
In December 2021, we acquired the distribution assets of Wingate Supply, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding one location in Florida.
In June 2021, we acquired the distribution assets of Vak Pak Builders Supply, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Florida.
In April 2021, we acquired Pool Source, LLC, a wholesale distributor of swimming pool equipment, chemicals and supplies, adding one location in Tennessee.
Other than the Porpoise acquisition, we have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material.
Note 4 – Fair Value Measurements and Interest Rate Swaps
Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology include:
•quoted prices for similar assets or liabilities in active markets;
•quoted prices for identical or similar assets or liabilities in inactive markets;
•inputs other than quoted prices that are observable for the asset or liability; or
•inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
8
Recurring Fair Value Measurements
The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):
Fair Value at March 31,
2022
2021
Level 2
Unrealized gains on interest rate swaps
$
18,817
$
8,180
Unrealized losses on interest rate swaps
514
8,088
Level 3
Contingent consideration liabilities
$
600
$
993
Interest Rate Swaps
We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings.
For determining the fair value of our interest rate swap contracts and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
We recognize any differences between the variable interest rate in effect and the fixed interest rates per our swap contracts as an adjustment to interest expense over the life of the swaps. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
We currently have three interest rate swap contracts in place, two of which became effective on November 20, 2020, and terminate on September 29, 2022, and a third that became effective on February 26, 2021, and terminates on February 28, 2025. These swap contracts were previously forward-starting and convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair value of these interest rate swap contracts are recorded to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
The following table provides additional details related to these swap contracts:
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%
Interest rate swap 3
February 5, 2020
February 26, 2021
February 28, 2025
$150.0
1.3800%
For the interest rate swap contracts in effect at March 31, 2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the three-month period ended March 31, 2022.
9
We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings. Changes in the estimated fair value of these forward-starting interest rate swap contracts are recorded to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
The following table provides details related to each of our forward-starting interest rate swap contracts:
Derivative
Inception Date
Effective Date
Termination Date
Notional Amount (in millions)
Fixed Interest Rate
Forward-starting interest rate swap 1
March 9, 2020
September 29, 2022
February 26, 2027
$150.0
0.7400%
Forward-starting interest rate swap 2
March 9, 2020
February 28, 2025
February 26, 2027
$150.0
0.8130%
Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position.
Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.
Nonrecurring Fair Value Measurements
In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets, including long-lived assets, goodwill and intangible assets, are recorded at fair value on a nonrecurring basis as a result of impairment charges or business combinations. In the three months ended March 31, 2022, we did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.
Other
The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
10
Note 5 – Debt
The table below presents the components of our debt (in thousands):
March 31,
2022
2021
Variable rate debt
Short-term borrowings
$
10,854
$
2,216
Current portion of long-term debt:
Australian credit facility
10,411
10,193
Short-term borrowings and current portion of long-term debt
21,265
12,409
Long-term portion:
Revolving credit facility
532,253
142,868
Term loan under credit facility
500,000
—
Term facility
164,188
173,438
Receivables securitization facility
290,000
105,000
Less: financing costs, net
2,633
544
Long-term debt, net
1,483,808
420,762
Total debt
$
1,505,073
$
433,171
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 March 31, 2022, $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.
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 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 plans and objectives and industry, general economic and other forecasts of trends, future dividend payments and share repurchases, and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to 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 33% in the first quarter of 2022 to $1.4 billion compared to $1.1 billion in the first quarter of 2021. Base business sales grew 26%. The increase in our sales reflects continued strong demand for outdoor living products in addition to elevated price inflation of approximately 10% to 12%. Sales also benefited approximately 5% from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.
Gross profit increased 49% to $447.2 million in the first quarter of 2022 from $301.1 million in the same period of 2021. Base business gross profit improved 38% over the first quarter of 2021. Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021, while base business gross margin increased 270 basis points. Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022.
Selling and administrative expenses (operating expenses) increased 23% to $211.5 million in the first quarter of 2022 compared to $172.1 million in the first quarter of 2021. Our operating expenses have increased as we expand our workforce and reward our employees through performance-based compensation. Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives. As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.
Operating income in the first quarter of 2022 increased 83% to $235.7 million compared to $129.0 million in the same period in 2021. Operating margin was 16.7% in the first quarter of 2022 compared to 12.2% in the first quarter of 2021. Base business operating margin was 16.5%, up 430 basis points from the prior year period.
We recorded a $7.3 million, or $0.18 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended March 31, 2022, compared to a tax benefit of $4.0 million, or $0.10 per diluted share, realized in the same period of 2021.
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Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021. Earnings per diluted share increased 82% to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share was $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.
References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.
COVID-19 Pandemic
We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. The health, safety and security of our employees and the communities in which we operate remains 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 and through the first quarter of 2022, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand home-based outdoor living and entertainment spaces. While this trend has had a positive impact on our financial performance over the past couple of years, it is unclear what the long-term impact will be.
Our industry experienced constrained supply chain dynamics in 2021, which has continued in the first quarter of 2022. In response, we have been proactive in making significant investments in inventory to enable us to continue to meet strong customer demand and position ourselves to provide exceptional customer service into the 2022 swimming pool season. These trends, caused in large part from global disruptions related to the COVID-19 pandemic, may persist in the near-term.
We expect the impact of the pandemic on our business and financial results in 2022 will continue to vary by location and depend on numerous evolving factors that we are unable to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the possible re-institution of governmental restrictions on the activities of our customers, vendors or employees, the possibility of additional subsequent outbreaks, the sustainability of current home-centric trends and other changes in customer and supplier behavior in response to the pandemic.
Financial Position and Liquidity
As of March 31, 2022, total net receivables, including pledged receivables, increased 39% compared to March 31, 2021, primarily driven by our sales growth and recent acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 26.4 days at March 31, 2022 and 26.6 days at March 31, 2021. Our allowance for doubtful accounts balance was $6.0 million at March 31, 2022 and $4.7 million at March 31, 2021.
Net inventory levels increased 68% compared to levels at March 31, 2021. We increased our purchasing beginning in the second half of 2021 to alleviate the impact of longer lead times from our vendors and ensure product availability for our customers. Our inventory balance also reflects impacts from inflation and recent acquisitions. Our inventory reserve was $19.8 million at March 31, 2022 and $13.7 million at March 31, 2021. Our inventory turns, as calculated on a trailing four quarters basis, were 3.1 times at March 31, 2022 and 4.0 times at March 31, 2021. Our inventory turns have averaged 3.4 times over the past five years.
Total debt outstanding at March 31, 2022 was $1.5 billion, up $1.1 billion compared to total debt at March 31, 2021. We utilized debt proceeds to fund investments in working capital and our 2021 acquisitions.
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 $18.34 to $19.09, including the impact of year-to-date tax benefits of $0.18. Our previous earnings guidance range disclosed in our 2021 Annual Report on Form 10-K was $17.19 to $17.94, including an estimated $0.19 tax benefit. Our earnings guidance range assumes average weather conditions.
We expect sales growth at the higher end of the 17% to 19% range previously disclosed in our 2021 Annual Report on Form 10-K. We project 2022 inflationary product cost increases of approximately 10% to 11% (compared to 7% to 8% in 2021).
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Our gross margin trends depend on the amounts and timing of inflationary price increases, sales growth expectations and product mix. We expect relatively neutral gross margin trends for the full year of 2022 compared to the full year of 2021. Compared to 2021 periods, we project a modest improvement in the second quarter of 2022 and declines in the latter half of the year.
We project our operating expense growth rate in 2022 will be less than our gross profit growth rate. We expect that our operating expense growth will reflect inflationary increases and incremental costs to support our investment initiatives, including increased investments in our digital transformation initiatives and expansion of our sales center network. We 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 $7.3 million, or $0.18 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 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 March 31, 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 of Directors (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 March 31, 2022, we conducted operations through 414 sales centers in North America, Europe and Australia. For the three months ended March 31, 2022, approximately 94% of our net sales were from our operations in North America.
The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:
Three Months Ended
March 31,
2022
2021
Net sales
100.0
%
100.0
%
Cost of sales
68.3
71.6
Gross profit
31.7
28.4
Selling and administrative expenses
15.0
16.2
Operating income
16.7
12.2
Interest and other non-operating expenses, net
0.4
0.2
Income before income taxes and equity in earnings
16.3
%
11.9
%
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 March 31, 2022 Compared to Three Months Ended March 31, 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
March 31,
March 31,
March 31,
2022
2021
2022
2021
2022
2021
Net sales
$
1,328,126
$
1,057,782
$
84,524
$
2,963
$
1,412,650
$
1,060,745
Gross profit
413,278
300,439
33,911
692
447,189
301,131
Gross margin
31.1
%
28.4
%
40.1
%
23.4
%
31.7
%
28.4
%
Operating expenses
193,927
171,285
17,539
815
211,466
172,100
Expenses as a % of net sales
14.6
%
16.2
%
20.8
%
27.5
%
15.0
%
16.2
%
Operating income (loss)
219,351
129,154
16,372
(123)
235,723
129,031
Operating margin
16.5
%
12.2
%
19.4
%
(4.2)
%
16.7
%
12.2
%
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
Porpoise Pool & Patio, Inc.
December 2021
1
January - March 2022
Wingate Supply, Inc.
December 2021
1
January - March 2022
Vak Pak Builders Supply, Inc.
June 2021
1
January - March 2022
Pool Source, LLC
April 2021
1
January - March 2022
TWC Distributors, Inc.
December 2020
10
January - February 2022 and January - February 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 three months of 2022:
December 31, 2021
410
New locations
4
March 31, 2022
414
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Net Sales
Three Months Ended
March 31,
(in millions)
2022
2021
Change
Net sales
$
1,412.7
$
1,060.7
$
352.0
33%
Net sales increased 33% in the first quarter of 2022 compared to the first quarter of 2021, while base business net sales grew 26% over the same period. The following factors benefited our sales (listed in order of estimated magnitude):
•strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment and building materials (see discussion below);
•market share gains, including those in building materials (see discussion below);
•increased demand for residential swimming pool maintenance supplies due to increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);
•inflationary product cost increases of approximately 10 to 12%;
•7% sales growth from recent acquisitions; and
•5% sales growth from both accelerated customer early buys and an extra selling day in the first quarter of 2022 compared to the first quarter of 2021.
Higher sales growth rates for certain product offerings, such as equipment and building materials, reflect continued strong demand in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first quarter of 2022, sales for equipment, which includes swimming pool heaters, pumps, lights, filters and automation, increased 18% compared to the same period last year, and collectively represented approximately 29% of net sales for the period. Sales of building materials grew 29% compared to the first quarter of 2021 and represented approximately 14% of net sales in the first quarter of 2022.
In the first quarter of 2022, sales for chemicals, representing 9% of total net sales, increased 58% compared to the first quarter of 2021. The increase in chemicals was driven by inflation, improved supply and strong demand for non-discretionary maintenance products.
Sales to customers who service large commercial installations and specialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth in these areas is reflected in the numbers in the paragraphs above. Sales to retail customers increased 27% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 10% of our net sales for the first quarter of 2022. Sales to commercial customers increased 34% in the first quarter of 2022 compared to the first quarter of 2021 and represented approximately 4% of our net sales for the first quarter of 2022.
Gross Profit
Three Months Ended
March 31,
(in millions)
2022
2021
Change
Gross profit
$
447.2
$
301.1
$
146.1
49%
Gross margin
31.7
%
28.4
%
Gross margin increased 330 basis points to 31.7% in the first quarter of 2022 compared to 28.4% in the first quarter of 2021. Base business gross margin increased 270 basis points. Our prior year strategic initiative to build inventory benefited our gross margin in the first quarter of 2022. Product mix and continued positive impacts from our ongoing pricing efforts also favorably impacted our gross margin.
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Operating Expenses
Three Months Ended
March 31,
(in millions)
2022
2021
Change
Selling and administrative expenses
$
211.5
$
172.1
$
39.4
23%
Operating expenses as a % of net sales
15.0
%
16.2
%
Operating expenses increased 23% in the first quarter of 2022 compared to the first quarter of 2021. Our compensation expense has increased as we expand our workforce and reward our employees through performance-based compensation. Other incremental operating expense increases relate to recent acquisitions, growth-driven facility and freight costs and increased investments in our digital transformation initiatives. As a percentage of net sales, operating expenses decreased to 15.0% in the first quarter of 2022 compared to 16.2% in the same period of 2021.
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the first quarter of 2022 increased $2.6 million compared to the first quarter of 2021, primarily due to higher average debt levels between periods. Our average outstanding debt was $1.3 billion in the first quarter of 2022 versus $397.3 million for the first quarter of 2021. Our weighted average effective interest rate decreased to 1.5% from 2.2% for the respective periods.
Income Taxes
Our effective income tax rate was 22.3% for the three months ended March 31, 2022 compared to 22.0% for the three months ended March 31, 2021. We recorded a $7.3 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2022 compared to a tax benefit of $4.0 million realized in the same period last year. Without the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.4% for the first quarter of 2022 and 25.2% for the first quarter of 2021.
Net Income and Earnings Per Share
Net income increased 82% to $179.3 million in the first quarter of 2022 compared to $98.7 million in the first quarter of 2021. Earnings per diluted share increased to $4.41 in the first quarter of 2022 compared to $2.42 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 82% to $4.23 in the first quarter of 2022 compared to $2.32 in the first quarter of 2021.
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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 quarter of 2022, the four quarters of 2021 and the fourth, third and second quarters 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
First
Fourth
Third
Second
First
Fourth
Third
Second
Statement of Income Data
Net sales
$
1,412,650
$
1,035,557
$
1,411,448
$
1,787,833
$
1,060,745
$
839,261
$
1,139,229
$
1,280,846
Gross profit
447,189
322,376
441,899
551,685
301,131
239,095
328,698
373,481
Operating income
235,723
127,891
237,276
338,586
129,031
74,351
148,233
205,857
Net income
179,261
107,609
184,665
259,695
98,655
59,174
119,098
157,555
Balance Sheet Data
Total receivables, net
$
679,927
$
376,571
$
476,150
$
585,566
$
487,602
$
289,200
$
366,412
$
453,405
Product inventories, net
1,641,155
1,339,100
1,043,407
894,654
977,228
780,989
612,824
628,418
Accounts payable
685,946
398,697
414,156
439,453
634,998
266,753
268,412
346,272
Total debt
1,505,073
1,183,350
362,819
423,116
433,171
416,018
339,934
438,804
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
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 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.
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.
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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;
•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 will approximate our historical average of 1.0% of net sales. 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.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
Three Months Ended
March 31,
2022
2021
Operating activities
$
(208,109)
$
77,113
Investing activities
(9,159)
(9,522)
Financing activities
228,717
(75,194)
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Net cash used in operations was $208.1 million for the first three months of 2022 compared to net cash provided by operations of $77.1 million for the first three months of 2021. The decrease in our operating cash flows was driven by incremental net working capital outflows, which reflect increased inventory purchases and other working capital changes due to our sales growth and recent acquisitions. In addition, our operating cash flows were impacted by federal tax payments of $79.5 million in the first quarter of 2022, which were allowed to be deferred and included in accrued expenses and other liabilities at December 31, 2021.
Net cash used in investing activities for the first three months of 2022 decreased slightly compared to the first three months of 2021 due to a decrease in cash used for the acquisition of businesses of $0.7 million, offset by an increase in capital expenditures of $0.3 million.
Net cash provided by financing activities increased $303.9 million to $228.7 million for the first three months of 2022 compared to net cash used in financing activities of $75.2 million for the first three months of 2021. The increase in cash provided by financing activities reflects a $304.4 million increase in net debt proceeds and a $9.1 million decrease in share repurchases, partially offset by an increase in dividends paid of $8.8 million.
Future Sources and Uses of Cash
Credit Facility
Our Credit Facility, as amended through 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 March 31, 2022, there was $532.3 million of revolving borrowings outstanding, a $500.0 million term loan, a $4.8 million standby letter of credit outstanding and $212.9 million available for borrowing under the Credit Facility. Currently, we pay interest on revolving borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin. The weighted average effective interest rate for the Credit Facility as of March 31, 2022 was approximately 1.7%, 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 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, 2022, there was $164.2 million outstanding under the Term Facility with a weighted average effective interest rate of 1.6%. 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.
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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 March 31, 2022, there was $290.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.2%, 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 March 31, 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 March 31, 2022, our average total leverage ratio equaled 1.06 (compared to 0.77 as of December 31, 2021) and the TTM average total indebtedness amount used in this calculation was $1.1 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, 2022, our fixed charge ratio equaled 12.38 (compared to 11.76 as of December 31, 2021) and TTM Rental Expense was $73.2 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, 2022, we had three interest rate swap contracts in place and two forward-starting interest rate swap contracts, each of which has the effect of converting our exposure to variable interest rates on 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.
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Compliance and Future Availability
As of March 31, 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 April 25, 2022, $427.1 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, 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 three months ended March 31, 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 March 31, 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 March 31, 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 first 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)
January 1-31, 2022
21,343
$
499.71
15,191
$
487,443,561
February 1-28, 2022
52,236
$
435.37
45,891
$
467,548,308
March 1-31, 2022
64,589
$
449.18
55,401
$
442,785,865
Total
138,168
$
451.76
116,483
(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. 21,685 shares were surrendered for this purpose in the first quarter of 2022.
(2)As of April 25, 2022, $427.1 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)
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 months ended March 31, 2022 and March 31, 2021;
2.Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and March 31, 2021;
3.Consolidated Balance Sheets at March 31, 2022, December 31, 2021 and March 31, 2021;
4.Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and March 31, 2021;
5.Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and March 31, 2021; 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 28, 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
