10-Q 1 pool-20220930.htm POOL Q3 2022 FORM 10-Q pool-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission File Number: 0-26640

pool-20220930_g1.jpg 
POOL CORPORATION
(Exact name of registrant as specified in its charter)
  
Delaware36-3943363
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per sharePOOLNasdaq 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 filerxAccelerated filer☐
  
Non-accelerated filer  oSmaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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



POOL CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2022

TABLE OF CONTENTS
Page
 
   
  
    
  
  
  
  
  
   
 
   
 
   
 
  
 
   
 
   
 
   
 
   
 
  




PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
POOL CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data) 

Three Months EndedNine Months Ended
September 30,September 30,
 2022202120222021
Net sales$1,615,339 $1,411,448 $5,083,807 $4,260,027 
Cost of sales1,111,652 969,549 3,466,126 2,965,311 
Gross profit503,687 441,899 1,617,681 1,294,716 
Selling and administrative expenses239,810 204,623 699,192 589,823 
Operating income263,877 237,276 918,489 704,893 
Interest and other non-operating expenses, net11,707 2,317 25,428 6,862 
Income before income taxes and equity in earnings252,170 234,959 893,061 698,031 
Provision for income taxes62,205 50,386 216,687 155,240 
Equity in earnings of unconsolidated investments, net90 92 226 224 
Net income$190,055 $184,665 $676,600 $543,015 
Earnings per share attributable to common stockholders:  
Basic$4.82 $4.60 $16.99 $13.53 
Diluted$4.78 $4.54 $16.82 $13.32 
Weighted average common shares outstanding:  
Basic39,214 40,101 39,599 40,146 
Diluted39,580 40,691 40,012 40,766 
Cash dividends declared per common share$1.00 $0.80 $2.80 $2.18 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
1

POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

Three Months EndedNine Months Ended
September 30,September 30,
  2022202120222021
Net income$190,055 $184,665 $676,600 $543,015 
Other comprehensive (loss) income:  
Foreign currency translation losses(11,152)(3,555)(18,491)(3,522)
Change in unrealized gains on interest rate swaps, net of change in taxes of $(2,925), $(491), $(8,422), and $(2,818)
8,776 1,473 25,267 8,453 
Total other comprehensive (loss) income (2,376)(2,082)6,776 4,931 
Comprehensive income$187,679 $182,583 $683,376 $547,946 

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









2

POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)

September 30,September 30,December 31,
202220212021
 (Unaudited)(Unaudited)(Audited)
Assets   
Current assets:   
Cash and cash equivalents$49,079 $83,475 $24,321 
Receivables, net189,173 174,987 155,259 
Receivables pledged under receivables facility360,623 301,163 221,312 
Product inventories, net1,539,572 1,043,407 1,339,100 
Prepaid expenses and other current assets61,032 23,368 29,093 
Total current assets2,199,479 1,626,400 1,769,085 
Property and equipment, net184,387 111,339 179,008 
Goodwill691,786 281,300 688,364 
Other intangible assets, net307,389 12,067 312,814 
Equity interest investments1,190 1,242 1,231 
Operating lease assets255,611 221,007 241,662 
Other assets48,213 28,878 37,967 
Total assets$3,688,055 $2,282,233 $3,230,131 
Liabilities and stockholders’ equity   
Current liabilities:   
Accounts payable$442,226 $414,156 $398,697 
Accrued expenses and other current liabilities210,448 231,794 264,877 
Short-term borrowings and current portion of long-term debt 12,208 10,744 11,772 
Current operating lease liabilities72,378 65,442 69,070 
Total current liabilities737,260 722,136 744,416 
Deferred income taxes45,247 30,275 35,840 
Long-term debt, net1,500,337 352,075 1,171,578 
Other long-term liabilities26,744 34,176 31,545 
Non-current operating lease liabilities187,589 158,359 175,359 
Total liabilities2,497,177 1,297,021 2,158,738 
Stockholders’ equity:   
Common stock, $0.001 par value; 100,000,000 shares authorized;
39,054,302, 40,079,584 and 40,192,901 shares issued and
outstanding at September 30, 2022, September 30, 2021 and
December 31, 2021, respectively
39 40 40 
Additional paid-in capital570,855 542,858 551,963 
Retained earnings 620,692 451,401 526,874 
Accumulated other comprehensive loss(708)(9,087)(7,484)
Total stockholders’ equity1,190,878 985,212 1,071,393 
Total liabilities and stockholders’ equity$3,688,055 $2,282,233 $3,230,131 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
3

POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 Nine Months Ended
September 30,
 20222021
Operating activities  
Net income$676,600 $543,015 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation23,172 21,027 
Amortization6,523 1,064 
Share-based compensation11,691 11,755 
Equity in earnings of unconsolidated investments, net(226)(224)
Other12,644 5,256 
Changes in operating assets and liabilities, net of effects of acquisitions:  
Receivables(181,775)(186,772)
Product inventories(223,268)(267,341)
Prepaid expenses and other assets(31,171)(22,674)
Accounts payable46,564 146,616 
Accrued expenses and other current liabilities(33,284)107,343 
Net cash provided by operating activities307,470 359,065 
Investing activities  
Acquisition of businesses, net of cash acquired(8,309)(17,887)
Purchases of property and equipment, net of sale proceeds(27,965)(24,223)
Other investments, net1,760 — 
Net cash used in investing activities(34,514)(42,110)
Financing activities  
Proceeds from revolving line of credit1,629,740 791,508 
Payments on revolving line of credit(1,629,688)(730,277)
Proceeds from term loan under credit facility250,000 — 
Proceeds from asset-backed financing215,000 310,000 
Payments on asset-backed financing(130,000)(415,000)
Payments on term facility(6,937)(6,938)
Proceeds from short-term borrowings and current portion of long-term debt27,396 7,880 
Payments on short-term borrowings and current portion of long-term debt (26,960)(9,006)
Payments of deferred financing costs — (1,610)
Payments of deferred and contingent acquisition consideration(1,374)(362)
Proceeds from stock issued under share-based compensation plans7,201 11,524 
Payments of cash dividends(111,572)(87,509)
Purchases of treasury stock(471,210)(137,975)
Net cash used in financing activities(248,404)(267,765)
Effect of exchange rate changes on cash and cash equivalents206 157 
Change in cash and cash equivalents24,758 49,347 
Cash and cash equivalents at beginning of period24,321 34,128 
Cash and cash equivalents at end of period$49,079 $83,475 

The accompanying Notes are an integral part of the Consolidated Financial Statements.
4


POOL CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands)

Common StockAdditional
Paid-In		RetainedAccumulated
Other
Comprehensive
SharesAmountCapitalEarnings(Loss) IncomeTotal
Balance at December 31, 202140,193 $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, 202240,11040 558,755 611,583 3,900 1,174,278 
Net income
— — — 307,283 — 307,283 
Foreign currency translation
— — — — (7,125)(7,125)
Interest rate swaps, net of the change in taxes of $(1,631)
— — — — 4,893 4,893 
Repurchases of common stock, net of retirements
(547)— — (216,261)— (216,261)
Share-based compensation
— — 3,914 — — 3,914 
Issuance of stock under share-based compensation plans
25 — 1,972 — — 1,972 
Declaration of cash dividends
— — — (39,896)— (39,896)
Balance at June 30, 202239,58840 564,641 662,709 1,668 1,229,058 
Net income
— — — 190,055 — 190,055 
Foreign currency translation
— — — — (11,152)(11,152)
Interest rate swaps, net of the change in taxes of $(2,925)
— — — — 8,776 8,776 
Repurchases of common stock, net of retirements
(549)(1)— (192,528)— (192,529)
Share-based compensation
— — 4,120 — — 4,120 
Issuance of stock under share-based compensation plans
15 — 2,094 — — 2,094 
Declaration of cash dividends
— — — (39,544)— (39,544)
Balance at September 30, 202239,054$39 $570,855 $620,692 $(708)$1,190,878 


5

Common StockAdditional
Paid-In		RetainedAccumulated
Other
Comprehensive
 SharesAmountCapitalEarningsLossTotal
Balance at December 31, 202040,232 $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, 202140,086 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, 202140,131 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, 202140,080 $40 $542,858 $451,401 $(9,087)$985,212 


The accompanying Notes are an integral part of the Consolidated Financial Statements.
6

POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies

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

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

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

Income Taxes

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

Retained Earnings

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

Accumulated Other Comprehensive Loss

The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
September 30,December 31,
202220212021
Foreign currency translation adjustments$(28,071)$(8,437)$(9,580)
Unrealized gains (losses) on interest rate swaps, net of tax
27,363 (650)2,096 
Accumulated other comprehensive loss$(708)$(9,087)$(7,484)


7

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

8

Note 2 – Earnings Per Share

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

The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):
 Three Months EndedNine Months Ended
September 30,September 30,
 2022202120222021
Net income$190,055 $184,665 $676,600 $543,015 
Amounts allocated to participating securities(1,019)— (3,764)— 
Net income attributable to common stockholders$189,036 $184,665 $672,836 $543,015 
Weighted average common shares outstanding:  
Basic39,214 40,101 39,599 40,146 
Effect of dilutive securities:  
Stock options and employee stock purchase plan366 590 413 620 
Diluted39,580 40,691 40,012 40,766 
Earnings per share attributable to common stockholders:  
Basic$4.82 $4.60 $16.99 $13.53 
Diluted$4.78 $4.54 $16.82 $13.32 
Anti-dilutive stock options excluded from diluted earnings per share computations (1)
33 — 33 — 
(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.

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Note 3 – Acquisitions

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

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

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

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

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

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

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

Note 4 – Fair Value Measurements and Interest Rate Swaps

The three levels of the fair value hierarchy under the accounting guidance are described below:

Level 1    Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2     Inputs to the valuation methodology include:
•quoted prices for similar assets or liabilities in active markets;
•quoted prices for identical or similar assets or liabilities in inactive markets;
•inputs other than quoted prices that are observable for the asset or liability; or
•inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3    Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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Recurring Fair Value Measurements

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contract and our contingent consideration liabilities (in thousands):
 
Fair Value at September 30,
20222021
Level 2
Unrealized gains on interest rate swaps$36,529 $5,488 
Unrealized losses on interest rate swaps— 6,308 
Level 3
Contingent consideration liabilities$546 $983 
Interest Rate Swaps

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

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

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

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

The following table provides additional details related to these former swap contracts:
DerivativeInception DateEffective DateTermination DateNotional Amount
(in millions)		Fixed Interest Rate
Interest rate swap 1May 7, 2019November 20, 2020September 29, 2022$75.02.0925%
Interest rate swap 2July 25, 2019November 20, 2020September 29, 2022$75.01.5500%

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

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The following table provides additional details related to these swap contracts:
DerivativeInception DateEffective DateTermination DateNotional Amount
(in millions)		Fixed Interest Rate
Interest rate swap 3February 5, 2020February 26, 2021February 28, 2025$150.01.3800%
Interest rate swap 4March 9, 2020September 29, 2022February 26, 2027$150.00.7400%

For the interest rate swap contracts in effect at September 30, 2022, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive loss on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. This amount was not material in the three- or nine-month periods ended September 30, 2022.

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

The following table provides details related to our forward-starting interest rate swap contract:
DerivativeInception DateEffective DateTermination DateNotional
Amount
(in millions)		Fixed
Interest
Rate
Forward-starting interest rate swapMarch 9, 2020February 28, 2025February 26, 2027$150.00.8130%

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

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

Nonrecurring Fair Value Measurements

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

Other

The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying value of our long-term debt approximates its fair value (Level 3 inputs).  Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
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Note 5 – Debt

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

 September 30,
 20222021
Variable rate debt
Current portion of long-term debt:
Australian credit facility$12,208 $10,744 
Short-term borrowings and current portion of long-term debt 12,208 10,744 
Long-term portion:  
Revolving credit facility572,978 170,255 
Term loan under credit facility500,000 — 
Term facility159,563 168,812 
Receivables securitization facility270,000 15,000 
Less: financing costs, net2,204 1,992 
Long-term debt, net1,500,337 352,075 
Total debt $1,512,545 $362,819 

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

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

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

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

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

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

Forward-Looking Statements

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

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

OVERVIEW

Financial Results

Net sales increased 14% in the third quarter of 2022 to $1.6 billion compared to $1.4 billion in the third quarter of 2021. Base business sales grew 10% strengthened by sales growth in our Sun Belt markets, while sales in our northern markets were limited by less favorable weather conditions compared to last year. Net sales benefited approximately 9% to 10% from inflationary product cost increases and were aided by healthy demand for our products and warmer weather throughout much of the United States. We estimate that these increases were partially offset by the following:
•1% impact from softness in our European markets, reflecting the impact of the macro-economic environment;
•1% from currency exchange rate fluctuations;
•1% from one less selling day in Q3 2022 versus Q3 2021; and
•anticipated net sales shift of $9.0 million from Q3 2022 to Q4 2022 due to Hurricane Ian.

Gross profit increased 14% to $503.7 million in the third quarter of 2022 from $441.9 million in the same period of 2021. Base business gross profit improved 7% over the third quarter of 2021. Gross margin decreased 10 basis points to 31.2% in the third quarter of 2022 compared to 31.3% in the third quarter of 2021. Base business gross margin decreased 80 basis points.
Selling and administrative expenses (operating expenses) increased 17% to $239.8 million in the third quarter of 2022 compared to $204.6 million in the third quarter of 2021, including a 1% benefit from currency exchange rate fluctuations. As a percentage of net sales, operating expenses increased to 14.8% in the third quarter of 2022 compared to 14.5% in the same period of 2021. The increase in operating expenses reflects inflationary increases and incremental costs to support our business growth, including recent acquisitions.
Operating income in the third quarter of 2022 increased 11% to $263.9 million compared to $237.3 million in the same period in 2021. Operating margin was 16.3% in the third quarter of 2022 compared to 16.8% in the third quarter of 2021.
Interest and other non-operating expenses, net for the third quarter of 2022 increased $9.4 million compared to the third quarter of 2021, reflecting higher average debt levels and higher average interest rates.
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We recorded a $0.6 million tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2022, compared to a tax benefit of $4.2 million realized in the same period of 2021. This resulted in a $0.02 per diluted share tax benefit in the third quarter of 2022, down from a $0.10 per diluted share tax benefit realized in the same period of 2021.
Net income increased 3% to $190.1 million in the third quarter of 2022 compared to $184.7 million in the third quarter of 2021 as operating income gains were partially offset by higher interest expense and lower tax benefits. Earnings per diluted share increased 5% to $4.78 in the third quarter of 2022 compared to $4.54 in the same period of 2021. Without the impact from ASU 2016-09 in both periods, earnings per diluted share increased 7% to $4.76 in the third quarter of 2022 compared to $4.44 in the third quarter of 2021. See RESULTS OF OPERATIONS below for definitions of our non-GAAP measures and reconciliations of our non-GAAP measures to GAAP measures.
References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as this data is more readily available for analysis and represents the largest component of our operations.
COVID-19 Pandemic

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

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

Financial Position and Liquidity

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

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

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

Current Trends and Outlook

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:
Three Months EndedNine Months Ended
September 30,September 30,
 2022202120222021
Net sales100.0 %100.0 %100.0 %100.0 %
Cost of sales68.8 68.7 68.2 69.6 
Gross profit31.2 31.3 31.8 30.4 
Selling and administrative expenses14.8 14.5 13.8 13.8 
Operating income16.3 16.8 18.1 16.5 
Interest and other non-operating expenses, net0.7 0.2 0.5 0.2 
Income before income taxes and equity in earnings15.6 %16.6 %17.6 %16.4 %

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

We have included the results of operations from acquisitions in 2022 and 2021 in our consolidated results since the acquisition dates.
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Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited)Base BusinessExcludedTotal
(in thousands)Three Months EndedThree Months EndedThree Months Ended
 September 30,September 30,September 30,
 202220212022202120222021
Net sales$1,552,211