POOL CORP [POOL] Filings

10-Q 1 pool-20210930.htm POOL 3Q 2021 FORM 10-Q pool-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2021


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

For the transition period from to

Commission File Number: 0-26640


POOL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware		36-3943363
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

109 Northpark Boulevard,
Covington,	Louisiana	70433-5001
(Address of principal executive offices)		(Zip Code)

(985) 892-5521

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	POOL	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of October 25, 2021, there were 40,087,971 shares of common stock outstanding.

POOL CORPORATION

Form 10-Q

For the Quarter Ended September 30, 2021

TABLE OF CONTENTS



			Page
PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements (Unaudited)

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

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		15

	Item 3. Quantitative and Qualitative Disclosures about Market Risk		32

	Item 4. Controls and Procedures		32

PART II. OTHER INFORMATION

	Item 1. Legal Proceedings		33

	Item 1A. Risk Factors		33

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

	Item 6. Exhibits		34

SIGNATURE			36

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POOL CORPORATION

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net sales	$	1,411,448	$	1,139,229	$	4,260,027	$	3,097,362
Cost of sales	969,549		810,531		2,965,311		2,205,555
Gross profit	441,899		328,698		1,294,716		891,807
Selling and administrative expenses	206,023		180,465		591,223		495,186
(Recovery) impairment of goodwill and other assets	(1,400)		—		(1,400)		6,944
Operating income	237,276		148,233		704,893		389,677
Interest and other non-operating expenses, net	2,317		1,861		6,862		9,292
Income before income taxes and equity earnings	234,959		146,372		698,031		380,385
Provision for income taxes	50,386		27,360		155,240		73,068
Equity earnings in unconsolidated investments, net	92		86		224		248


Net income	$	184,665	$	119,098	$	543,015	$	307,565


Earnings per share:
Basic	$	4.60	$	2.97	$	13.53	$	7.68
Diluted	$	4.54	$	2.92	$	13.32	$	7.53
Weighted average shares outstanding:
Basic	40,101		40,123		40,146		40,073
Diluted	40,691		40,839		40,766		40,849

Cash dividends declared per common share	$	0.80	$	0.58	$	2.18	$	1.71

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

POOL CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income	$	184,665	$	119,098	$	543,015	$	307,565
Other comprehensive (loss) income:
Foreign currency translation (losses) gains	(3,555)		2,976		(3,522)		(320)
Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $(491), $(51), $(2,818), and $3,641	1,473		154		8,453		(10,923)
Total other comprehensive (loss) income	(2,082)		3,130		4,931		(11,243)
Comprehensive income	$	182,583	$	122,228	$	547,946	$	296,322

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

POOL CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)


	September 30,		September 30,		December 31,
	2021		2020		2020 (1)
	(Unaudited)		(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	83,475	$	74,749	$	34,128
Receivables, net	174,987		135,555		122,252
Receivables pledged under receivables facility	301,163		230,857		166,948
Product inventories, net	1,043,407		612,824		780,989
Prepaid expenses and other current assets	23,368		12,696		17,610
Total current assets	1,626,400		1,066,681		1,121,927

Property and equipment, net	111,339		109,086		108,241
Goodwill	281,300		199,360		268,167
Other intangible assets, net	12,067		10,522		12,181
Equity interest investments	1,242		1,314		1,292
Operating lease assets	221,007		180,230		205,875
Other assets	28,878		20,396		21,987
Total assets	$	2,282,233	$	1,587,589	$	1,739,670

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	414,156	$	268,412	$	266,753
Accrued expenses and other current liabilities	231,794		145,420		143,694
Short-term borrowings and current portion of long-term debt	10,744		11,709		11,869
Current operating lease liabilities	65,442		56,977		60,933
Total current liabilities	722,136		482,518		483,249

Deferred income taxes	30,275		29,476		27,653
Long-term debt, net	352,075		328,225		404,149
Other long-term liabilities	34,176		32,846		38,261
Non-current operating lease liabilities	158,359		125,023		146,888
Total liabilities	1,297,021		998,088		1,100,200



Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 40,079,584, 40,153,287 and 40,232,210 shares issued and outstanding at September 30, 2021, September 30, 2020 and December 31, 2020, respectively	40		40		40
Additional paid-in capital	542,858		513,030		519,579
Retained earnings	451,401		98,033		133,870
Accumulated other comprehensive loss	(9,087)		(21,602)		(14,019)
Total stockholders’ equity	985,212		589,501		639,470
Total liabilities and stockholders’ equity	$	2,282,233	$	1,587,589	$	1,739,670

(1) Derived from audited financial statements.

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

POOL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2021		2020
Operating activities
Net income	$	543,015	$	307,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	21,027		20,979
Amortization	1,064		975
Share-based compensation	11,755		11,095

Equity earnings in unconsolidated investments, net	(224)		(248)
Impairment of goodwill and other assets	—		6,944
Other	5,256		1,092
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	(186,772)		(135,129)
Product inventories	(267,341)		99,767
Prepaid expenses and other assets	(22,674)		311
Accounts payable	146,616		3,385
Accrued expenses and other current liabilities	107,343		72,178
Net cash provided by operating activities	359,065		388,914

Investing activities
Acquisition of businesses, net of cash acquired	(17,887)		(24,655)
Purchases of property and equipment, net of sale proceeds	(24,223)		(16,897)



Net cash used in investing activities	(42,110)		(41,552)

Financing activities
Proceeds from revolving line of credit	791,508		749,840
Payments on revolving line of credit	(730,277)		(909,637)
Proceeds from asset-backed financing	310,000		261,700
Payments on asset-backed financing	(415,000)		(266,700)
Payments on term facility	(6,938)		(6,938)
Proceeds from short-term borrowings and current portion of long-term debt	7,880		13,255
Payments on short-term borrowings and current portion of long-term debt	(9,006)		(13,291)
Payments of deferred financing costs	(1,610)		(12)
Payments of deferred and contingent acquisition consideration	(362)		(281)


Proceeds from stock issued under share-based compensation plans	11,524		16,696
Payments of cash dividends	(87,509)		(68,599)
Purchases of treasury stock	(137,975)		(76,194)
Net cash used in financing activities	(267,765)		(300,161)
Effect of exchange rate changes on cash and cash equivalents	157		(1,035)
Change in cash and cash equivalents	49,347		46,166
Cash and cash equivalents at beginning of period	34,128		28,583
Cash and cash equivalents at end of period	$	83,475	$	74,749

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

POOL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In thousands)


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


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

Issuance of stock under share-based compensation plans	219	—		6,358		—		—		6,358
Declaration of cash dividends	—	—		—		(22,147)		—		(22,147)
Balance at March 31, 2020	39,931	40		495,251		(122,594)		(24,299)		348,398
Net income	—	—		—		157,555		—		157,555
Foreign currency translation	—	—		—		—		2,134		2,134
Interest rate swaps, net of the change in taxes of $855	—	—		—		—		(2,567)		(2,567)
Repurchases of common stock, net of retirements	(19)	—		—		(3,584)		—		(3,584)
Share-based compensation	—	—		3,567		—		—		3,567
Issuance of stock under share-based compensation plans	130	—		4,453		—		—		4,453
Declaration of cash dividends	—	—		—		(23,165)		—		(23,165)
Balance at June 30, 2020	40,042	40		503,271		8,212		(24,732)		486,791
Net income	—	—		—		119,098		—		119,098
Foreign currency translation	—	—		—		—		2,976		2,976
Interest rate swaps, net of the change in taxes of $(51)	—	—		—		—		154		154
Repurchases of common stock, net of retirements	(20)	—		—		(5,990)		—		(5,990)
Share-based compensation	—	—		3,874		—		—		3,874
Issuance of stock under share-based compensation plans	131	—		5,885		—		—		5,885
Declaration of cash dividends	—	—		—		(23,287)		—		(23,287)
Balance at September 30, 2020	40,153	$	40	$	513,030	$	98,033	$	(21,602)	$	589,501

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

POOL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Significant Accounting Policies

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

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

A description of our significant accounting policies is included in our 2020 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 2020 Annual Report on Form 10-K. The results for our three and nine month periods ended September 30, 2021 are not necessarily indicative of the expected results for our fiscal year ending December 31, 2021.

Newly Adopted Accounting Pronouncements

On January 1, 2021, we adopted Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This new standard simplified the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments were required to be applied on a prospective basis, while certain amendments were required to be applied on a retrospective or modified retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures, and we do not expect a material impact in future periods.

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 $4.2 million in the third quarter of 2021 compared to $8.5 million in the third quarter of 2020 and $15.9 million in the nine months ended September 30, 2021 compared to $22.6 million in the nine months ended September 30, 2020.

Retained Earnings

We account for the retirement of treasury shares as a reduction of Retained earnings. As of September 30, 2021, 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 $758.3 million.

Accumulated Other Comprehensive Loss

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


	September 30,				December 31,
	2021		2020		2020
Foreign currency translation adjustments	$	(8,437)	$	(10,447)	$	(4,917)
Unrealized losses on interest rate swaps, net of tax	(650)		(11,155)		(9,102)
Accumulated other comprehensive loss	$	(9,087)	$	(21,602)	$	(14,019)

Recent Accounting Pronouncements Pending Adoption

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


Standard	Description	Effective Date	Effect on Financial Statements and Other Significant Matters
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope	Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this ASU refine the scope of ASC 848 and clarify some of its guidance as it relates to recent rate reform activities.	The provisions of these updates are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.	We are currently evaluating the effect these standards will have on our financial position, results of operations and related disclosures.

Note 2 – Earnings Per Share

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

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income	$	184,665	$	119,098	$	543,015	$	307,565

Weighted average shares outstanding:
Basic	40,101		40,123		40,146		40,073
Effect of dilutive securities:
Stock options and employee stock purchase plan	590		716		620		776
Diluted	40,691		40,839		40,766		40,849


Earnings per share:
Basic	$	4.60	$	2.97	$	13.53	$	7.68
Diluted	$	4.54	$	2.92	$	13.32	$	7.53

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

Note 3 – Acquisitions

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.

In December 2020, we acquired the distribution assets of TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding nine locations in Florida and one in Georgia.

In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding three locations in New Jersey, three locations in New York, two locations in Texas and one location in Florida.

In September 2020, we acquired the distribution assets of Northeastern Swimming Pool Distributors, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding two locations in Ontario, Canada.

In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding two locations in Texas, one location in Nevada and one location in Oklahoma.

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

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

Note 4 – Fair Value Measurements and Interest Rate Swaps

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

Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs to the valuation methodology include:

•quoted prices for similar assets or liabilities in active markets;

•quoted prices for identical or similar assets or liabilities in inactive markets;

•inputs other than quoted prices that are observable for the asset or liability; or

•inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Recurring Fair Value Measurements

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


	Fair Value at September 30,
	2021		2020
Level 2
Unrealized gains on interest rate swaps	$	5,488	$	—
Unrealized losses on interest rate swaps	6,308		14,828

Level 3
Contingent consideration liabilities	$	983	$	869

Interest Rate Swaps

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

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

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

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 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 September 30, 2021, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive loss on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the nine-month period ended September 30, 2021.

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 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 nine months ended September 30, 2021, 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).

Note 5 – Debt

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


	September 30,
	2021		2020
Variable rate debt
Short-term borrowings	$	—	$	—
Current portion of long-term debt:
Australian credit facility	10,744		11,709
Short-term borrowings and current portion of long-term debt	10,744		11,709

Long-term portion:
Revolving credit facility	170,255		40,876
Term facility	168,812		178,062
Receivables securitization facility	15,000		110,000
Less: financing costs, net	1,992		713
Long-term debt, net	352,075		328,225
Total debt	$	362,819	$	339,934

Revolving Credit Facility

On September 27, 2021, we entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) among us, as U.S. Borrower, SCP Distributors Canada Inc., as Canadian Borrower, SCP International, Inc., as Euro Borrower, Wells Fargo Bank, National Association, as Administrative Agent (the “Agent”), and certain other lenders party thereto. The Credit Agreement amended and restated the predecessor senior credit facility (as amended, the “Credit Facility”) principally by increasing the total borrowing capacity from $750.0 million to $1.0 billion through the addition of a delayed-draw term loan facility of $250.0 million. Under this term loan facility, we may draw term loans at any time prior to March 25, 2022. Any such term loans would 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 September 25, 2026. All other terms of any such term loans would be substantially similar to those governing revolving credit loans under the Credit Agreement.

In addition, the Credit Agreement further amended and restated the Credit Facility in the following ways:

•extending the maturity of the Credit Facility from September 29, 2022 to September 25, 2026;

•making available lower interest rates;

•increasing the amount of incremental facility commitments that we can request from $75.0 million to $250.0 million; and

•providing additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends.

All obligations under the Credit Agreement continue to be guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Credit Agreement also continues to contain various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Credit Agreement.

Revolving borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:

a.a base rate, which is the highest of (i) the Agent's prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) (a) prior to the USD LIBOR Transition Date, the Adjusted Eurocurrency Rate for Dollars for a one-month term in effect on such day plus 1.00% and (b) on and after the USD LIBOR Transition Date, Daily Simple RFR for Dollars in effect on such day plus 1.00%; or

b.(i) prior to the USD LIBOR Transition Date, the Eurocurrency Rate and (ii) on or after the USD LIBOR Transition Date or a Benchmark Transition Event, the applicable Benchmark Replacement.

Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin:

a.a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the Canadian Dealer Offered Rate (“CDOR”) plus 1.00%; or

b.CDOR.

Borrowings by the Euro Borrower bear interest at the Eurocurrency rate plus an applicable margin.

Borrowings under any swingline loans under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:

a.the LIBOR Market Index Rate; or

b.a base rate, which is the highest of (i) the Agent's prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) (a) prior to the USD LIBOR Transition Date, the Adjusted Eurocurrency Rate for Dollars for a one-month term in effect on such day plus 1.00% and (b) on and after the USD LIBOR Transition Date, Daily Simple RFR for Dollars in effect on such day plus 1.00%.

The interest rate margins on borrowings and letters of credit issued under the Credit Agreement are based on our leverage ratio and will range from 0.000% to 0.425% on Base Rate and Canadian Base Rate loans and from 0.910% to 1.425% on CDOR, LIBOR and swingline loans (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Credit Agreement). We are also required to pay an annual facility fee with respect to the lenders' aggregate revolving credit commitment, the amount of which is based on our leverage ratio.

Term Facility

On October 12, 2021, we entered into the First Amendment to the Credit Agreement (as amended, the “Term Facility Agreement”) among us, as Borrower and Bank of America, N.A., as the Lender. Among other items, the amendment provides additional capacity under certain negative covenants related to indebtedness, liens, investments, acquisitions, share repurchases and dividends.

All obligations under the Term Facility Agreement, which matures on December 30, 2026, continue to be guaranteed on an unsecured basis by substantially all of our existing and future domestic subsidiaries. The Term Facility Agreement also continues to contain various customary affirmative and negative covenants and events of default. The occurrence of any of these events of default would permit the lenders to, among other things, require immediate payment of all amounts outstanding under the Term Facility Agreement.

Borrowings under the term loan facility (the “Term Facility”) available under the Term Facility Agreement bear interest, at our option, at either of the following and, in each case, plus an applicable margin:

a.a base rate, which is the greatest of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus 0.50%, (ii) Bank of America's prime rate, or (iii) the Eurodollar Rate (defined below) plus 1.00%; or

b.the Eurodollar Rate, which is the greater of (i) the rate per annum equal to the USD LIBOR as administered by the ICE Benchmark Administration, or a comparable or successor administrator approved by the Lender or (ii) a floor rate specified in the Term Facility Agreement.

The interest rate margins on the borrowings under the Term Facility Agreement are based on our leverage ratio and will range from 0.000% to 0.625% on Base Rate borrowings and 1.000% to 1.625% on Eurodollar Rate borrowings (with all such rates being calculated in accordance with the terms and by reference to the definitions specified in the Term Facility Agreement).

Receivables Securitization Facility

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.

Financial Covenants

Following their recent amendments, the Credit Facility and Term Facility continue to require us to maintain a maximum average total leverage ratio and a minimum fixed charge coverage ratio consistent with the terms in effect prior to the amendment.

As amended, 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 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 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 any of our debt facilities could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

As of September 30, 2021, we were in compliance with all material covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.

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 2020 Annual Report on Form 10-K and with Management’s Discussion and Analysis in our 2020 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 and the housing market; our ability to maintain favorable relationships with suppliers and manufacturers; competition from other leisure product alternatives and mass merchants; excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2020 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

Impact of the COVID-19 Pandemic

We continue to monitor the effects of the COVID-19 pandemic, which began impacting our business and the global economy in the first quarter of 2020.

We are designated as an essential business in almost all of our markets. Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water. We also supply products used in the prevention of runoff, flood, fire and other natural disasters. These products are essential to the health and safety of the general public. In limited instances, we have had to close facilities as a result of government regulations, as well as COVID-19 cases. The direct impact of any closures to date have not had a material impact on our operations.

Beginning in the middle of March 2020, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets. As stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated. Throughout the remainder of 2020, we experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, and these trends have continued in 2021 to date. While this trend has had a positive impact on our financial performance over the past year and a half, it is unclear what the long-term impact will be. In addition, governmental restrictions in 2020 had a material impact on some of our customers, limiting their ability to operate in certain geographies for a short period of time.

Our balance sheet is strong with low leverage and sufficient access to additional capital. Supply disruptions have largely been limited to categories with the greatest demand (including heat-related equipment, chemicals, in-ground swimming pools and above-ground swimming pools) and have not had a material impact on our net sales. Beginning in the second quarter of 2021 and continuing through the third quarter, we have made significant investments in inventory to support increased demand and help manage potential supply chain disruptions that could negatively impact customer service. Continued impacts from the COVID-19 pandemic, coupled with heightened demand, could adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied.

Given the uncertainties caused by the COVID-19 pandemic in 2020, we reduced capital expenditures and operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment. Capital expenditures in 2020 were $21.7 million or approximately 65% of 2019 capital expenditures. Although we have increased our capital spending in 2021, we expect our capital expenditures for the year to be lower than our historical average of 1.0% of net sales due to our significant sales growth. Our expense growth through the third quarter of 2021 was partially offset by lower discretionary spending for advertising, meetings, travel and entertainment, which we expect to continue through the end of the year as business travel activity lagged in the third quarter of 2021 with the onset of the Delta variant.

The health, safety and security of our employees has been, and remains, our highest priority. We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC). 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.

We expect the impact of the pandemic on our business and financial results in 2021 will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, the re-institution of governmental actions that could restrict 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 Results

In the third quarter of 2021, net sales increased 24% to $1.4 billion compared to $1.1 billion in the third quarter of 2020, while base business sales grew 19%. This growth is on top of 27% growth in the third quarter of last year, bringing our year-to-date net sales growth to $1.2 billion. Our sales continued to benefit from elevated demand for outdoor living products along with favorable weather conditions. Our rigorous commitment to operating efficiency and capacity creation, along with our strategic focus on inventory purchases to serve demand has allowed us to fulfill our customers' high volumes.

Gross profit increased 34% to $441.9 million in the third quarter of 2021 from $328.7 million in the same period of 2020. Base business gross profit improved 29% over the third quarter of 2020. Gross margin increased 240 basis points to 31.3% in the third quarter of 2021 compared to 28.9% in the third quarter of 2020, while base business gross margin increased 250 basis points, primarily reflecting benefits from our supply chain management initiatives.

Selling and administrative expenses (operating expenses), including the recovery of goodwill and other assets, increased 13% to $204.6 million in the third quarter of 2021 compared to $180.5 million in the third quarter of 2020, while base business operating expenses grew 7%, primarily due to growth-driven labor, facility and freight costs, along with increased investments in technology. In the third quarter of 2021, we recovered $1.4 million of a $2.5 million note impairment recorded in the first quarter of 2020. As a percentage of net sales, operating expenses decreased to 14.5% in the third quarter of 2021 compared to 15.8% in the same period of 2020, reflecting continued strong expense control.

Operating income in the third quarter of 2021 increased 60% to $237.3 million compared to $148.2 million in the same period in 2020. Operating margin was 16.8% in the third quarter of 2021 compared to 13.0% in the third quarter of 2020 while base business operating margin was 17.1%, up 410 basis points from the prior year period.

We recorded a $4.2 million, or $0.10 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2021, compared to a tax benefit of $8.5 million, or $0.21 per diluted share, realized in the same period of 2020.

Net income increased 55% to $184.7 million in the third quarter of 2021 compared to $119.1 million in the third quarter of 2020. Earnings per diluted share increased 55% to $4.54 in the third quarter of 2021 compared to $2.92 in the same period of 2020. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 64% to $4.44 in the third quarter of 2021 compared to $2.71 in the third quarter of 2020.

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

Financial Position and Liquidity

As of September 30, 2021, total net receivables, including pledged receivables, increased 30% compared to September 30, 2020, primarily driven by our sales growth and recent acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 25.7 days at September 30, 2021 and 27.6 days at September 30, 2020. Our allowance for doubtful accounts balance was $5.4 million at September 30, 2021 and $5.3 million at September 30, 2020.

Net inventory levels increased 70% compared to levels at September 30, 2020. Our inventory balance has increased as we have made significant investments in inventory throughout the year to support elevated demand and help manage potential supply chain disruptions that could negatively impact customer service. Our inventory reserve was $15.7 million at September 30, 2021 and $11.4 million at September 30, 2020. Our inventory turns, as calculated on a trailing four quarters basis, were 3.8 times at September 30, 2021 and 3.7 times at September 30, 2020.

Accrued expenses and other current liabilities increased 59% compared to September 30, 2020, primarily due to higher income tax payables. As allowed for companies impacted by Hurricane Ida, we deferred our 2021 third quarter estimated federal tax payment of $56.0 million, which will be paid in January 2022.

Total debt outstanding at September 30, 2021 was $362.8 million, up 7% compared to total debt at September 30, 2020. We have used debt proceeds over the past 12 months primarily to fund business-driven working capital growth, acquisitions, payments of cash dividends and share repurchases.

Current Trends and Outlook

For a detailed discussion of trends through 2020, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.

Upon reporting our results through the third quarter of 2021, we increased our 2021 diluted EPS guidance range to $14.85 to $15.35, including the impact of year-to-date tax benefits of $0.39. Our previous 2021 earnings guidance range disclosed in our Second Quarter 2021 Quarterly Report on Form 10-Q was $13.75 to $14.25, including tax benefits of $0.29 for the first six months of 2021. We increased our range based on exceeding our third quarter expectations, along with expected continued gross margin improvement through the end of 2021. Our 2021 earnings guidance range assumes average weather conditions and no adverse impacts from a resurgence of COVID-19 and related government responses.

We project net sales growth for 2021 to exceed 30% based on expectations of continued elevated demand trends, a solid backlog of customer projects and inflationary benefits. We estimate that sales will be favorably impacted by inflationary product cost increases of 6% to 7% (above our historical average of 1% to 2%), which we began to realize in the second quarter of 2021. Inflationary product costs had a greater impact in the third quarter of 2021, and we expect this to continue through the end of the year. Impacts from the COVID-19 pandemic, coupled with heightened demand, could adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied. To address known and anticipated supply chain constraints, beginning in the second quarter of 2021 and into the third quarter, we have made significant investments in inventory in product areas where we forecasted continued high demand. Our strong inventory position has allowed us to gain share and to continue to provide exceptional service in a high demand and tight supply chain environment.

Based on our supply chain management efforts implemented during the second quarter of 2021, coupled with the current inflationary environment, we believe gross margin for the full year of 2021 has the potential to increase more than 170 basis points compared to the full year of 2020.

We expect operating expenses to reflect inflationary increases and incremental costs to support our sales growth expectations. Combined with purposeful expense management, we believe this will drive operating margin improvement of 350 basis points for the full year of 2021 compared to 2020. We expect performance-based compensation for the full year of 2021 to increase approximately $15 million from 2020 due to our projected 2021 net sales growth with most of this increase recognized through the third quarter of 2021 based on year-to-date results.

We project that our annual effective tax rate (without the benefit from ASU 2016-09) for 2021 will approximate 25.0%, which is consistent with 2020. Due to ASU 2016-09, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded a $15.9 million, or $0.39 per diluted share, tax benefit from ASU 2016-09 for the nine months ended September 30, 2021. We may recognize additional tax benefits related to stock option exercises in 2021 from grants that expire in future years. We have not included any expected tax benefits in our guidance beyond what we have recognized as of September 30, 2021.

We have made significant investments in inventory throughout the year to support increased demand and help manage potential supply chain disruptions that could negatively impact customer service. While these investments will negatively impact our cash provided by operations in 2021, we believe that our investments in inventory will provide benefits to our customers and favorably impact our gross margin through the end of this year and into at least the first quarter of next year. We expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2021. We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors (the 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, as based on several assumptions, and are subject to significant risks and uncertainties. See “Cautionary Statement for Forward-Looking Statements.”

RESULTS OF OPERATIONS

As of September 30, 2021, we conducted operations through 409 sales centers in North America, Europe and Australia. For the nine months ended September 30, 2021, 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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	68.7		71.1		69.6		71.2
Gross profit	31.3		28.9		30.4		28.8
Selling and administrative expenses	14.6		15.8		13.9		16.0
(Recovery) impairment of goodwill and other assets	(0.1)		—		—		0.2
Operating income	16.8		13.0		16.5		12.6
Interest and other non-operating expenses, net	0.2		0.2		0.2		0.3
Income before income taxes and equity earnings	16.6	%	12.8	%	16.4	%	12.3	%

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

We have included the results of operations from acquisitions in 2021 and 2020 in our consolidated results since the acquisition dates.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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