Pool Corporation (NASDAQ:POOL) Q1 2023 Earnings Conference Call April 20, 2023 11:00 AM ET Company Participants Melanie Hart - Vice President, Chief Financial Officer and Treasurer Peter Arvan - President and Chief Executive Officer Conference Call Participants Ryan Merkel - William Blair Susan Maklari - Goldman Sachs David Manthey - Baird Joe Ahlersmeyer - Deutsche Bank Andrew Carter - Stifel Scott Schneeberger - Oppenheimer Trey Grooms - Stephens Garik Shmois - Loop Capital Stephen Volkmann - Jefferies Sh ...

PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) Pool Corporation is the world's largest wholesale distributor of swimming pool supplies, equipment, and related leisure products [General Business Description](index=4&type=section&id=General) The company is the world's largest wholesale distributor of pool supplies, equipment, and related leisure products - Pool Corporation is the world's largest wholesale distributor of swimming pool supplies, equipment, and related leisure products, and a leading distributor of irrigation and landscape products in the United States[13](index=13&type=chunk) - The company adds value by purchasing from numerous manufacturers and distributing products to a highly fragmented customer base on favorable terms[14](index=14&type=chunk) - As of December 31, 2022, the company operated **420 sales centers** in North America, Europe, and Australia through five distribution networks: SCP Distributors, Superior Pool Products, Horizon Distributors, National Pool Tile, and Sun Wholesale Supply, Inc[14](index=14&type=chunk)[16](index=16&type=chunk) [Industry Overview](index=4&type=section&id=Our%20Industry) The swimming pool and landscape industries are driven by new construction, remodeling, and non-discretionary maintenance spending - The swimming pool industry is expected to grow with increased penetration of new pools, remodel/replacement activities due to aging pools, technological advancements, and demand for environmentally sustainable products[14](index=14&type=chunk) - Favorable demographic and socioeconomic trends, such as population migration to warmer U.S. regions and increased homeowner spending on outdoor living spaces, positively impact the industry[15](index=15&type=chunk)[17](index=17&type=chunk) - About **60% of consumer spending** in the pool industry is for maintenance and minor repair, creating non-discretionary demand[15](index=15&type=chunk) - The swimming pool remodel, renovation, and upgrade market accounts for **21% to 23% of consumer spending**, driven by aging pools and enhanced feature products[18](index=18&type=chunk) - New swimming pool construction comprises **17% to 18% of consumer spending**, influenced by perceived benefits of pool ownership and competition with other discretionary purchases[19](index=19&type=chunk) - The irrigation and landscape industry shares similar long-term growth rates, with **30-35% of spending on irrigation** and **65-70% on landscape maintenance**, power equipment, hardscapes, and specialty outdoor products[20](index=20&type=chunk) [Economic Environment and Trends](index=5&type=section&id=Economic%20Environment) Industry performance is influenced by housing trends and economic conditions, with recent inflationary pressures expected to moderate - Housing market trends, consumer credit availability, and general economic conditions (GDP) significantly affect the industry, particularly new construction and major refurbishment projects[21](index=21&type=chunk) - New pool construction **decreased 16% in 2022** to approximately 98,000 units, down from 117,000 units in 2021, after a 22% increase in 2021 over 2020[23](index=23&type=chunk) - The company expects continued investment in outdoor living spaces, benefiting from population migration, strong housing demand, and product advancements[23](index=23&type=chunk) - Inflationary product cost increases were approximately **10% in 2022** (compared to 7-8% in 2021) and are projected to moderate to about **4% in 2023**[24](index=24&type=chunk) [Business Strategy and Growth Strategy](index=6&type=section&id=Business%20Strategy%20and%20Growth%20Strategy) The company's strategy focuses on industry promotion, customer support, operational efficiency, and expansion through acquisitions and new locations - The company's mission is to provide exceptional value to customers and suppliers, return to shareholders, and opportunities to employees[25](index=25&type=chunk) - Core strategies include promoting industry growth (e.g., digital advertising, websites like swimmingpool.com), fostering customer business growth (e.g., marketing support, training, showrooms), and continuously improving operational effectiveness (capacity creation)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk) - Ongoing investments in digital transformation and technology (e.g., Pool360, Horizon 24/7, BlueStreak mobile app) aim to enhance customer experience and operational efficiency[27](index=27&type=chunk)[28](index=28&type=chunk) - Growth is pursued through new sales center openings, acquisitions, expansion of existing centers, and increasing market share with Pool Corporation-branded and exclusive products[29](index=29&type=chunk)[30](index=30&type=chunk) [Customers and Products](index=7&type=section&id=Customers%20and%20Products) The company serves a diverse customer base of small businesses with a broad product portfolio, with maintenance products comprising the majority of sales - The company serves approximately **125,000 customers**, primarily small, family-owned businesses like pool remodelers, builders, specialty retailers, repair/service businesses, and irrigation/landscape contractors[31](index=31&type=chunk)[33](index=33&type=chunk) - **No single customer accounted for 10% or more of sales** in 2022[31](index=31&type=chunk) - Primary markets (California, Texas, Florida, Arizona) represented approximately **53% of 2022 net sales**[33](index=33&type=chunk) - The company offers over **200,000 manufacturer and Pool Corporation-branded products** across more than 600 product lines and 50 categories[36](index=36&type=chunk) Product Category Sales as % of Total Net Sales | Product Category | 2022 | 2021 | 2020 | | :----------------- | :--- | :--- | :--- | | Pool and hot tub chemicals | 13% | 9% | 10% | - The increase in chemical sales percentage from 2021 to 2022 was due to inflation, improved supply, strong demand for non-discretionary maintenance products, and the acquisition of Porpoise Pool & Patio, Inc[36](index=36&type=chunk) - New product technology, such as energy-efficient products (variable speed pumps, LED lights) and smart home integration, presents significant growth opportunities[38](index=38&type=chunk) - The commercial swimming pool market is a key growth opportunity, with sales accelerating in 2021 and sustained in 2022 after a decline in 2020 due to COVID-19[39](index=39&type=chunk)[40](index=40&type=chunk) - In 2022, maintenance and minor repair products (non-discretionary) accounted for approximately **60% of sales and gross profits**, while remodel, renovation, upgrade, construction, and installation (partially discretionary) accounted for approximately **40%**[41](index=41&type=chunk) [Operating Strategy and Distribution](index=10&type=section&id=Operating%20Strategy) The company utilizes distinct distribution networks and strategically located sales centers to provide diverse products and services efficiently - The company operates distinct distribution networks (SCP, Superior, Horizon, NPT, Sun Wholesale) to offer diverse product selections and services[43](index=43&type=chunk) - The NPT network distributes swimming pool tile, decking materials, and interior pool surfacing products, leveraging consumer showrooms and virtual tools (NPT® Backyard mobile app) for design and selection[44](index=44&type=chunk) - The acquisition of Sun Wholesale Supply, Inc. in December 2021 expanded operations to service Pinch A Penny franchise locations and included a chemical packaging plant[45](index=45&type=chunk) - Sales centers are located near customer concentrations, offering product pickup or delivery. Four centralized shipping locations (CSLs) redistribute bulk-purchased products[47](index=47&type=chunk)[49](index=49&type=chunk) [Purchasing and Suppliers](index=11&type=section&id=Purchasing%20and%20Suppliers) The company maintains strong supplier relationships, with a significant portion of products sourced from three key vendors - The company maintains good relationships with suppliers, benefiting from competitive pricing, return policies, and promotional allowances[50](index=50&type=chunk) - Early buy purchases, offering modest discounts for off-season delivery and later payment, were re-established in 2022 after being unavailable in 2020-2021 due to supply constraints[50](index=50&type=chunk) - A preferred vendor program encourages stocking products from fewer vendors to optimize profitability and shareholder return[51](index=51&type=chunk) - Largest suppliers in 2022 were **Pentair plc (18%)**, **Hayward Pool Products, Inc. (11%)**, and **Zodiac Pool Systems, Inc. (9%)** of the cost of products sold[52](index=52&type=chunk) [Competition](index=11&type=section&id=Competition) The company leads its industry but faces intense competition from various distributors and retailers in a market with low entry barriers - The company is the largest wholesale distributor in its industry but faces intense competition from regional and local distributors, three national irrigation/landscape distributors, mass market retailers, and large pool supply retailers[53](index=53&type=chunk) - Principal competitive factors include product breadth and availability, customer service quality, sales and marketing programs, business relationship consistency, competitive pricing, and geographic proximity[54](index=54&type=chunk)[55](index=55&type=chunk) - **Barriers to entry in the industry are relatively low**[54](index=54&type=chunk) [Environmental, Social and Governance (ESG)](index=11&type=section&id=Environmental%2C%20Social%20and%20Governance%20(ESG)) The company is committed to ESG principles, focusing on sustainable practices, human capital management, safety, and diversity - The company is committed to sustainable business practices, offering eco-friendly products, monitoring sourcing, and reducing its carbon footprint through energy-efficient systems[54](index=54&type=chunk)[57](index=57&type=chunk) - Human Capital Management focuses on employee engagement, development, retention, and well-being, including competitive pay, benefits, training, and professional development[59](index=59&type=chunk) - The company aims for **zero serious injuries** through safety programs, training, and risk identification[60](index=60&type=chunk) - Diversity, Equity, and Inclusion (DEI) efforts focus on expanding workforce diversity, reviewing policies for equal opportunity, and creating an inclusive environment through programs like the Women's Interactive Network (WIN)[61](index=61&type=chunk)[62](index=62&type=chunk)[64](index=64&type=chunk) - The Board of Directors oversees risk management, including strategic, financial, cybersecurity, regulatory, and operational risks[70](index=70&type=chunk) [Seasonality and Weather](index=15&type=section&id=Seasonality%20and%20Weather) The business is highly seasonal, with sales and income peaking in the second and third quarters, and is significantly influenced by weather conditions - The business is seasonal, with sales and operating income highest in the second and third quarters (peak swimming pool use, installation, and remodeling)[71](index=71&type=chunk) - In 2022, approximately **59% of net sales** and **67% of operating income** were generated in Q2 and Q3[71](index=71&type=chunk) - Weather is a principal external factor; hot and dry conditions increase demand, while unseasonably cool weather or heavy rain decrease it[74](index=74&type=chunk)[75](index=75&type=chunk) [Government Regulations](index=16&type=section&id=Government%20Regulations) The company's operations are subject to extensive regulations governing the handling and sale of chemicals and fertilizers - The business is subject to local, federal, state, and international environmental, health, and safety regulations governing packaging, labeling, handling, transportation, storage, and sale of chemicals and fertilizers[76](index=76&type=chunk) - Algaecides and pest control products are regulated as pesticides under federal and state laws[76](index=76&type=chunk) [Intellectual Property](index=16&type=section&id=Intellectual%20Property) The company protects its brand and products through registered trademarks, patents, and internet domain names - The company maintains domestic and foreign registered trademarks and patents, primarily for its Pool Corporation and affiliate branded products, and owns numerous internet domain names[77](index=77&type=chunk) [Geographic Areas](index=17&type=section&id=Geographic%20Areas) The majority of the company's sales and assets are concentrated in the United States and North America Net Sales by Geographic Region (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | United States | $5,674,909 | $4,749,459 | $3,579,990 | | International | $504,818 | $546,125 | $356,633 | | Total | $6,179,727 | $5,295,584 | $3,936,623 | Net Property and Equipment by Geographic Region (in thousands) | December 31, | 2022 | 2021 | 2020 | | :------------- | :--- | :--- | :--- | | United States | $185,117 | $171,408 | $100,857 | | International | $8,592 | $7,600 | $7,384 | | Total | $193,709 | $179,008 | $108,241 | - In 2022, approximately **96% of sales were generated in North America** (including Canada and Mexico), 4% in Europe, and less than 1% in Australia[33](index=33&type=chunk) [Website Access and Available Information](index=17&type=section&id=Website%20Access%20and%20Available%20Information) The company provides public access to its SEC filings through its corporate website - The company's website (www.poolcorp.com) provides access to periodic reports (10-K, 10-Q, 8-K) filed with the SEC[81](index=81&type=chunk) - The company regularly evaluates potential acquisitions but generally does not announce them until completed[82](index=82&type=chunk) [Item 1A. Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from macroeconomic conditions, industry competition, supply chain dependencies, cybersecurity, and regulatory changes - Demand for products is highly susceptible to unfavorable economic conditions, changes in consumer discretionary spending, and access to credit, particularly for new pool construction and major refurbishment[89](index=89&type=chunk)[90](index=90&type=chunk) - The COVID-19 pandemic initially boosted demand but later caused supply chain disruptions and is now leading to moderating growth as home-centric trends ease[94](index=94&type=chunk) - Adverse weather conditions, potentially intensified by climate change, significantly impact sales, especially during peak seasons, and can lead to water use restrictions[95](index=95&type=chunk)[96](index=96&type=chunk) - Maintaining favorable relationships with key suppliers (Pentair, Hayward, Zodiac) is critical, as disruptions or direct sales by manufacturers could adversely affect the business[98](index=98&type=chunk)[99](index=99&type=chunk) - The company faces intense competition from regional/local distributors, mass market retailers, and internet retailers, with **low barriers to entry**[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) - Reliance on information technology systems means significant disturbances, breaches, or cyberattacks could disrupt operations and impact financial performance[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) - Increases in interest rates would raise debt servicing costs, and the transition away from LIBOR to SOFR could affect the cost of capital[133](index=133&type=chunk)[134](index=134&type=chunk) - International operations expose the company to risks such as political/economic conditions, currency fluctuations, and trade restrictions[127](index=127&type=chunk)[128](index=128&type=chunk) [Item 1B. Unresolved Staff Comments](index=27&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report - No unresolved staff comments[139](index=139&type=chunk) [Item 2. Properties](index=28&type=section&id=Item%202.%20Properties) The company operates 420 sales centers, primarily through leased properties, with key owned facilities in Louisiana and Florida - The company leases its corporate offices (60,000 sq ft) in Covington, Louisiana, and owns 14 sales center facilities across several states[141](index=141&type=chunk) - The acquisition of Porpoise Pool & Patio, Inc. in December 2021 included the corporate headquarters, Sun Wholesale Supply, Inc. facilities (200,000 sq ft), and a chemical packaging plant (105,000 sq ft) in Florida[142](index=142&type=chunk) - Most other properties are leased, with terms typically ranging from three to seven years, and 28 leases extending beyond seven years[143](index=143&type=chunk) Sales Centers by Network and Location (December 31, 2022) | Location | SCP | Superior | Horizon | NPT | Total | | :--------- | :--- | :------- | :------ | :-- | :---- | | United States | 196 | 73 | 88 | 19 | 376 | | International | 44 | — | — | — | 44 | | Total | 240 | 73 | 88 | 19 | 420 | Changes in Sales Centers (Year Ended December 31, 2022) | Category | Count | | :--------- | :---- | | December 31, 2021 | 410 | | Acquired location | 1 | | New locations | 10 | | Closed location | (1) | | December 31, 2022 | 420 | [Item 3. Legal Proceedings](index=31&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course litigation that is not expected to have a material adverse financial impact - The company is subject to various claims and litigation in the ordinary course of business[150](index=150&type=chunk) - Management does not believe the ultimate resolution of these matters will have a **material adverse impact** on financial condition, results of operations, or cash flows[150](index=150&type=chunk) [Item 4. Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[151](index=151&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=32&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on Nasdaq (POOL), with a history of quarterly dividends and discretionary share repurchases - Common stock is traded on the Nasdaq Global Select Market under the symbol 'POOL'[154](index=154&type=chunk) - As of February 17, 2023, there were approximately **740 holders of record** of common stock[154](index=154&type=chunk) - Quarterly dividend payments began in Q2 2004 and have been increased seventeen times, including annually from 2011-2022[155](index=155&type=chunk) Cash Dividends Declared Per Common Share | Year | Amount | | :--- | :----- | | 2022 | $3.80 | | 2021 | $2.98 | | 2020 | $2.29 | Stock Performance Graph (Indexed Returns Years Ending December 31) | Company / Index | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | | :---------------- | :------- | :------- | :------- | :------- | :------- | :------- | | Pool Corporation | $100.00 | $115.97 | $167.58 | $296.54 | $453.64 | $244.81 | | S&P 500 Index | $100.00 | $95.62 | $125.72 | $148.85 | $191.58 | $156.88 | | Nasdaq Index | $100.00 | $97.16 | $132.81 | $192.47 | $235.15 | $158.65 | Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan | | :------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | | October 1 – October 31, 2022 | 60 | $318.77 | $230,242,715 | | November 1 – November 30, 2022 | — | — | $230,242,715 | | December 1 – December 31, 2022 | — | — | $230,242,715 | | Total | 60 | $318.77 | | - As of February 17, 2023, **$230.2 million remained available** under the share repurchase program[161](index=161&type=chunk) [Item 6. [Reserved]](index=34&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and not applicable - Not applicable[162](index=162&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) MD&A details strong 2022 performance driven by inflation and demand, a solid liquidity position, and a moderating outlook for 2023 [2022 Financial Overview](index=35&type=section&id=2022%20FINANCIAL%20OVERVIEW) The company achieved significant growth in 2022 with a 17% increase in net sales and a 15% rise in net income 2022 Financial Results (Year Ended December 31) | Metric | 2022 (in millions) | 2021 (in millions) | Change (%) | | :-------------------- | :----------------- | :----------------- | :--------- | | Net sales | $6,179.7 | $5,295.6 | 17% | | Gross profit | $1,933.4 | $1,617.1 | 20% | | Gross margin | 31.3% | 30.5% | +80 bps | | Operating expenses | $907.6 | $784.3 | 16% | | Operating margin | 16.6% | 15.7% | +90 bps | | Net income | $748.5 | $650.6 | 15% | | Diluted EPS | $18.70 | $15.97 | 17% | | Adjusted Diluted EPS (excl. ASU 2016-09) | $18.43 | $15.23 | 21% | - Net sales benefited approximately **10% from inflationary product cost increases** in 2022[165](index=165&type=chunk) - Gross margin improved due to acquisitions, increased pricing, and supply chain management, partially offset by **$13.0 million in increased duties and tariffs** for imported chemicals[166](index=166&type=chunk) - Cash provided by operations was **$484.9 million** in 2022, funding share repurchases ($471.2M), net working capital outflows ($342.4M), dividends ($150.6M), and capital expenditures ($43.6M)[171](index=171&type=chunk)[273](index=273&type=chunk) - Inventory levels grew **19% to $1.6 billion** at December 31, 2022, reflecting increased purchasing and inflation[172](index=172&type=chunk) - Total debt outstanding increased **$203.5 million to $1.4 billion** at December 31, 2022, used to fund share repurchases, dividends, and working capital[174](index=174&type=chunk) [Current Trends and Outlook](index=36&type=section&id=Current%20Trends%20and%20Outlook) The company anticipates moderating sales in 2023 due to a decline in new pool construction, though maintenance demand remains strong - New pool construction decreased 16% in 2022 to 98,000 units and is projected to **decline 15-20% in 2023**, returning to 2019 levels (estimated 80,000 units)[175](index=175&type=chunk)[179](index=179&type=chunk) - The company expects 2023 sales to be **flat to down 3%** compared to 2022, with a 4% benefit from inflationary product cost increases[179](index=179&type=chunk) - Non-discretionary maintenance product sales (**60% of business**) are expected to remain strong, while discretionary product volumes for construction and remodeling are projected to decline[176](index=176&type=chunk)[179](index=179&type=chunk) - Horizon sales centers (8% of 2022 net sales) may decline 5-10% in 2023 due to new home construction sensitivity. European sales (4% of 2022 net sales) are projected to decline 10-20%[186](index=186&type=chunk) - 2023 gross margin is projected to be around **30.0%**, in line with long-term outlook, with higher margins in H1 due to selling through pre-price increase inventory[186](index=186&type=chunk) - 2023 operating margin is projected at approximately **15.0%** through infrastructure leverage and expense management[186](index=186&type=chunk) - Projected 2023 diluted EPS is **$16.03 to $17.03**, including an estimated $0.03 benefit from ASU 2016-09 in Q1[182](index=182&type=chunk) - The company plans to open about **10 new sales centers** in 2023 and make selective acquisitions[177](index=177&type=chunk) [COVID-19 Pandemic and Other Economic Trends](index=38&type=section&id=COVID-19%20Pandemic%20and%20Other%20Economic%20Trends) The pandemic initially boosted demand, but recent trends show a moderation in construction as home-centric activities ease - The pandemic initially drove unprecedented demand for home-based outdoor living products, positively impacting financial performance[184](index=184&type=chunk) - Recent trends show moderating new construction activities as home-centric trends ease[184](index=184&type=chunk) - Supply chain constraints in 2021-early 2022 led to significant inventory investments, with improvements observed in Q2 2022[185](index=185&type=chunk) [Critical Accounting Estimates](index=40&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) The company's financial reporting relies on significant estimates for accounts receivable, inventory, vendor programs, and goodwill [Allowance for Doubtful Accounts](index=40&type=section&id=Allowance%20for%20Doubtful%20Accounts) The allowance for doubtful accounts is based on historical data, customer financial health, and economic trends - An allowance for doubtful accounts is maintained based on estimated losses from uncollectible customer payments, with reserves ranging from **0.05% for current amounts to 100% for specific accounts over 60 days past due**[190](index=190&type=chunk)[191](index=191&type=chunk) - Estimates consider historical bad debts, receivable aging, customer financial conditions, and economic trends (housing market, consumer credit, GDP)[192](index=192&type=chunk) - Annual write-offs averaged approximately **0.08% of net sales** over the past five years, with 0.08% in 2022, 0.06% in 2021, and 0.09% in 2020. Expected range for 2023 is 0.05% to 0.10%[193](index=193&type=chunk) - A 20% change in the reserve at December 31, 2022, would impact pretax income by approximately **$1.9 million** and diluted EPS by **$0.04**[195](index=195&type=chunk) [Inventory Obsolescence](index=40&type=section&id=Inventory%20Obsolescence) The inventory obsolescence reserve is calculated based on sales velocity to ensure inventory is valued at net realizable value - The reserve for inventory obsolescence is based on inventory with lower sales velocity and no sales for the past 12 months, aiming to reflect net realizable value[197](index=197&type=chunk) - Reserves are **5% for lower sales velocity/no sales inventory** and an additional 5% for excess lower sales velocity inventory, and **45% for excess no-sales inventory**[197](index=197&type=chunk) - Factors considered include inventory levels relative to historical sales, customer preferences, regulatory changes, seasonal fluctuations, geographic location, and new product offerings[198](index=198&type=chunk) - A 20% change in the inventory reserve at December 31, 2022, would impact pretax income by approximately **$4.2 million** and diluted EPS by **$0.08**[199](index=199&type=chunk) [Vendor Programs](index=41&type=section&id=Vendor%20Programs) Benefits from vendor programs are accrued monthly and recognized as a reduction to cost of sales when products are sold - Vendor programs, offering consideration for achieving purchase volume or net cost measures, are accounted for as a reduction of product prices and inventory, then cost of sales upon product sale[200](index=200&type=chunk) - Benefits are accrued monthly based on estimated annual purchases and progress toward program attainment, with estimates revised throughout the year[201](index=201&type=chunk)[205](index=205&type=chunk) - Adjustments tend to have a greater impact on gross margin in the fourth quarter due to seasonality and calendar-year vendor arrangements[205](index=205&type=chunk) [Income Taxes](index=43&type=section&id=Income%20Taxes) Deferred taxes are recorded based on enacted rates, with foreign earnings expected to be indefinitely reinvested - Deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis, using enacted rates[207](index=207&type=chunk) - Global Intangible Low Tax Income (GILTI) on foreign earnings is recorded as period costs if incurred[208](index=208&type=chunk) - U.S. income taxes are not provided on undistributed foreign subsidiary earnings, as they are expected to be indefinitely reinvested[209](index=209&type=chunk) - Benefits from uncertain tax positions are recognized only if it's more likely than not they will withstand examination[210](index=210&type=chunk) [Performance-Based Compensation Accrual](index=43&type=section&id=Performance-Based%20Compensation%20Accrual) Compensation accruals are based on achieving performance criteria like operating income and are adjusted quarterly - Compensation programs are designed to attract, motivate, reward, and retain employees, with bonuses based on objective performance criteria like operating income[212](index=212&type=chunk) - Annual cash performance awards focus on short-term goals, while the three-year Strategic Plan Incentive Program (SPIP) rewards senior management based on diluted EPS growth[213](index=213&type=chunk)[214](index=214&type=chunk) - Accruals are based on operating income achieved relative to expected annual operating income, with adjustments made quarterly[215](index=215&type=chunk) [Impairment of Goodwill and Other Indefinite-Lived Intangible Assets](index=44&type=section&id=Impairment%20of%20Goodwill%20and%20Other%20Indefinite-Lived%20Intangible%20Assets) Goodwill is tested for impairment annually using discounted cash flow models, with a minor impairment recorded in 2022 - Goodwill, at **$692.0 million (19% of total assets)** at December 31, 2022, is tested for impairment annually (October 1st) or more frequently if indicators arise[218](index=218&type=chunk)[219](index=219&type=chunk) - A goodwill impairment charge of **$0.6 million** was recorded in 2022 related to the closure of a Horizon reporting unit[221](index=221&type=chunk) - Fair value estimates for impairment tests use discounted cash flow models, relying on significant unobservable inputs like sales growth rates, operating margins, and discount rates[222](index=222&type=chunk)[223](index=223&type=chunk) - One Horizon reporting unit in Texas, with **$0.5 million goodwill**, is considered most at risk for impairment due to marginal results[225](index=225&type=chunk) [Results of Operations](index=46&type=section&id=RESULTS%20OF%20OPERATIONS) The company's financial performance is analyzed through consolidated statements and a comparison of base business versus excluded components [Fiscal Year 2022 compared to Fiscal Year 2021](index=46&type=section&id=Fiscal%20Year%202022%20compared%20to%20Fiscal%20Year%202021) In 2022, net sales grew 17% and operating income rose 23%, driven by price inflation and sustained demand Consolidated Statements of Income (as % of Net Sales) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | 100.0% | | Cost of sales | 68.7% | 69.5% | 71.3% | | Gross profit | 31.3% | 30.5% | 28.7% | | Operating expenses | 14.7% | 14.8% | 16.9% | | Operating income | 16.6% | 15.7% | 11.8% | | Interest and other non-operating expenses, net | 0.7% | 0.2% | 0.3% | | Income before income taxes and equity in earnings | 15.9% | 15.6% | 11.5% | Consolidated Results: Base Business vs. Excluded Components (in thousands) | Metric (Year Ended Dec 31) | Base Business 2022 | Base Business 2021 | Excluded 2022 | Excluded 2021 | Total 2022 | Total 2021 | | :-------------------------- | :----------------- | :----------------- | :------------ | :------------ | :--------- | :--------- | | Net sales | $5,889,497 | $5,281,773 | $290,230 | $13,811 | $6,179,727 | $5,295,584 | | Gross profit | $1,804,744 | $1,613,252 | $128,668 | $3,840 | $1,933,412 | $1,617,092 | | Gross margin | 30.6% | 30.5% | 44.3% | 27.8% | 31.3% | 30.5% | | Operating expenses | $830,525 | $779,897 | $77,104 | $4,411 | $907,629 | $784,308 | | Operating income (loss) | $974,219 | $833,355 | $51,564 | $(571) | $1,025,783 | $832,784 | | Operating margin | 16.5% | 15.8% | 17.8% | (4.1)% | 16.6% | 15.7% | - Net sales increased **17% (12% from base business)** in 2022, driven by elevated price inflation (approx. 10%) and sustained demand for outdoor-living products[236](index=236&type=chunk)[237](index=237&type=chunk) - Sales growth was partially offset by **1% impact from European market softness**, 1% unfavorable currency exchange, and less favorable weather[237](index=237&type=chunk) - Equipment sales for base business increased **9%** (28% of net sales), building materials grew **18%** (13% of net sales), and chemical sales for base business increased **32%** (11% of net sales)[237](index=237&type=chunk) - Gross margin improved **80 basis points to 31.3%** in 2022, benefiting from acquisitions, pricing, and supply chain management, despite lower vendor incentives and $13.0 million in increased duties/tariffs[244](index=244&type=chunk) - Operating expenses increased **16% to $907.6 million**, reflecting inflationary increases and costs to support business growth, but declined as a percentage of net sales (14.7% vs 14.8%)[167](index=167&type=chunk)[245](index=245&type=chunk) - Operating income increased **23% to $1.0 billion**, with operating margin rising **90 basis points to 16.6%**[168](index=168&type=chunk) - Interest and other non-operating expenses increased **$32.3 million** due to higher average debt levels and interest rates (weighted average effective interest rate increased to 2.8% in 2022 from 2.5% in 2021)[168](index=168&type=chunk)[246](index=246&type=chunk) - Effective income tax rate was **24.0% in 2022** (21.1% in 2021), including a $10.8 million tax benefit from ASU 2016-09[169](index=169&type=chunk)[247](index=247&type=chunk) [Fiscal Year 2021 compared to Fiscal Year 2020](index=50&type=section&id=Fiscal%20Year%202021%20compared%20to%20Fiscal%20Year%202020) A detailed comparison of 2021 and 2020 results is available in the prior year's annual report - For a detailed discussion of 2021 vs 2020 results, refer to the 2021 Annual Report on Form 10-K[255](index=255&type=chunk) [Seasonality and Quarterly Fluctuations](index=51&type=section&id=Seasonality%20and%20Quarterly%20Fluctuations) Quarterly sales growth decelerated through 2022, influenced by strong early buys, weather impacts, and moderating demand - The business is seasonal, with Q2 and Q3 typically having the highest sales and net income due to peak swimming pool use and related activities[256](index=256&type=chunk)[335](index=335&type=chunk) Quarterly Net Sales Growth (YoY) | Quarter | 2022 Net Sales Growth | 2022 Base Business Net Sales Growth | | :-------- | :-------------------- | :---------------------------------- | | First | 33% | 26% | | Second | 15% | 10% | | Third | 14% | 10% | | Fourth | 6% | 1% | - Q1 2022 sales benefited from strong demand and elevated price inflation (10-12%), plus accelerated customer early buys and an extra selling day[245](index=245&type=chunk) - Q2 2022 sales were impacted by unfavorable weather (heavy rainfall, cooler temperatures) in the Northeast U.S. and Canada, and currency fluctuations, despite healthy demand[260](index=260&type=chunk) - Q3 2022 sales were aided by above-average temperatures but negatively impacted by Hurricane Ian closures in Florida, with some sales shifting to Q4[245](index=245&type=chunk)[261](index=261&type=chunk) - Q4 2022 sales benefited from inflationary product cost increases (8%) but were significantly impacted by unfavorable weather, particularly an Arctic blast in December[245](index=245&type=chunk)[263](index=263&type=chunk) [Geographic Areas](index=53&type=section&id=Geographic%20Areas_2) All sales centers are aggregated into a single reportable segment due to operational and economic similarities - All sales centers are aggregated into a single reportable segment due to similar operations and economic characteristics[265](index=265&type=chunk)[333](index=333&type=chunk) - Sales by product lines and categories are not tracked on a consolidated basis due to the number of product lines and ongoing classification changes[334](index=334&type=chunk) [Liquidity and Capital Resources](index=53&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company maintains liquidity through cash from operations and credit facilities to fund working capital, acquisitions, and shareholder returns [Sources and Uses of Cash](index=54&type=section&id=Sources%20and%20Uses%20of%20Cash) In 2022, increased cash from operations was driven by higher net income, while investing activities decreased due to fewer acquisitions Cash Flows (in thousands) | Year Ended December 31, | 2022 | 2021 | | :------------------------ | :--- | :--- | | Operating activities | $484,854 | $313,490 | | Investing activities | $(50,870) | $(849,614) | | Financing activities | $(411,658) | $526,131 | - Cash provided by operations increased **$171.4 million to $484.9 million** in 2022, driven by higher net income and changes in working capital[273](index=273&type=chunk) - Cash used in investing activities decreased **$798.7 million to $50.9 million** in 2022, primarily due to a decrease in acquisition payments ($802.7 million less than 2021)[274](index=274&type=chunk) - Cash used in financing activities was **$411.7 million** in 2022 (vs. $526.1 million provided in 2021), reflecting increased net debt payments ($566.7 million), share repurchases ($333.2 million), and dividends ($31.0 million)[275](index=275&type=chunk) [Future Sources and Uses of Cash](index=54&type=section&id=Future%20Sources%20and%20Uses%20of%20Cash) The company relies on three major credit facilities with a combined capacity exceeding $1.7 billion to fund future working capital needs - Future working capital will be sourced from operations and three major credit facilities: the Amended and Restated Revolving Credit Facility (**$1.25 billion capacity**), the Term Facility (**$185.0 million capacity**), and the Receivables Securitization Facility (up to **$350.0 million capacity**)[277](index=277&type=chunk)[278](index=278&type=chunk)[280](index=280&type=chunk)[282](index=282&type=chunk) - As of December 31, 2022, the Credit Facility had **$1.0 billion outstanding** (weighted average effective interest rate 4.4%), the Term Facility had **$157.3 million outstanding** (5.5%), and the Receivables Facility had **$199.5 million outstanding** (5.2%)[279](index=279&type=chunk)[281](index=281&type=chunk)[284](index=284&type=chunk) [Financial Covenants](index=55&type=section&id=Financial%20Covenants) The company maintains compliance with its credit facility covenants, including leverage and fixed charge coverage ratios - Credit and Term Facilities include restrictive financial covenants: a maximum average total leverage ratio (less than 3.25 to 1.00) and a minimum fixed charge coverage ratio (greater than or equal to 2.25 to 1.00)[285](index=285&type=chunk)[286](index=286&type=chunk) - As of December 31, 2022, the average total leverage ratio was **1.37** (vs. 0.77 in 2021), and the fixed charge ratio was **9.57** (vs. 11.76 in 2021)[285](index=285&type=chunk)[286](index=286&type=chunk) - Dividends and share repurchases are permitted provided no default exists and the leverage ratio remains below 3.25 to 1.00[286](index=286&type=chunk) [Interest Rate Swaps](index=57&type=section&id=Interest%20Rate%20Swaps) The company utilizes interest rate swaps to convert variable-rate debt to fixed rates, mitigating interest rate risk - The company uses interest rate swap contracts and forward-starting interest rate swap contracts to convert variable interest rates on borrowings to fixed rates, reducing exposure to fluctuations[288](index=288&type=chunk) - As of December 31, 2022, two interest rate swap contracts and one forward-starting swap were in place[289](index=289&type=chunk) [Compliance and Future Availability](index=57&type=section&id=Compliance%20and%20Future%20Availability) The company was in compliance with all debt covenants as of year-end 2022 and expects to remain so in 2023 - As of December 31, 2022, the company was in compliance with all covenants and financial ratio requirements under its credit facilities and expects to remain so throughout 2023[290](index=290&type=chunk) [Future Obligations](index=57&type=section&id=Future%20Obligations) The company has total contractual obligations of $1.7 billion, primarily consisting of long-term debt and operating leases Summary of Contractual Obligations and Commitments (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :----------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt | $1,389,003 | $34,292 | $280,500 | $1,074,211 | — | | Operating leases | $299,587 | $76,764 | $120,427 | $69,952 | $32,444 | | Purchase obligations | $11,720 | $4,304 | $4,764 | $2,652 | — | | Total | $1,700,310 | $115,360 | $405,691 | $1,146,815 | $32,444 | Estimated Interest Payments Due by Period (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Interest | $168,974 | $52,022 | $85,761 | $31,191 | — | - Unrecognized tax benefits and other non-contractual liabilities are excluded from the table due to uncertainties in timing and amount[293](index=293&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=58&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is primarily exposed to market risks from interest rate fluctuations and foreign currency exchange rates [Interest Rate Risk](index=58&type=section&id=Interest%20Rate%20Risk) The company's earnings are exposed to variable interest rate changes, a risk partially mitigated by interest rate swaps - Earnings are exposed to changes in short-term interest rates due to variable rate debt, mitigated by interest rate swap contracts[297](index=297&type=chunk) - A sensitivity analysis assuming a **1.0% increase in variable interest rates** for uncovered debt would decrease pretax income by approximately **$12.5 million** and diluted EPS by **$0.23** in 2022[298](index=298&type=chunk) - Failure of swap counterparties would result in the loss of potential benefits and continued obligation for variable interest payments[300](index=300&type=chunk) [Currency Risk](index=59&type=section&id=Currency%20Risk) Foreign currency fluctuations may impact financial results, though the effect has not been material historically - Changes in exchange rates for functional currencies of international subsidiaries (e.g., Canadian Dollar, British Pound, Euro, Mexican Peso, Australian Dollar) may impact sales, operating expenses, and earnings[301](index=301&type=chunk)[302](index=302&type=chunk) - Historically, currency fluctuations have not materially affected operating results, but could become material if changes are significant or international operations grow[301](index=301&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=60&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements and the independent auditor's report [Report of Independent Registered Public Accounting Firm](index=61&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, identifying goodwill valuation as a critical audit matter - Ernst & Young LLP audited the consolidated financial statements for the period ended December 31, 2022, and expressed an **unqualified opinion**[307](index=307&type=chunk) - The firm also issued an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[308](index=308&type=chunk) - The critical audit matter identified was the **valuation of goodwill ($692.0 million at Dec 31, 2022)**, due to the complexity and judgment involved in estimating reporting unit fair values, particularly assumptions like weighted average cost of capital, revenue growth, operating margin, and terminal growth rate[313](index=313&type=chunk) [Consolidated Statements of Income](index=63&type=section&id=Consolidated%20Statements%20of%20Income) The company reported net sales of $6.2 billion and net income of $748.5 million for the year ended December 31, 2022 Consolidated Statements of Income (in thousands, except per share data) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net sales | $6,179,727 | $5,295,584 | $3,936,623 | | Gross profit | $1,933,412 | $1,617,092 | $1,130,902 | | Operating income | $1,025,783 | $832,784 | $464,027 | | Net income | $748,462 | $650,624 | $366,738 | | Diluted EPS | $18.70 | $15.97 | $8.97 | | Cash dividends declared per common share | $3.80 | $2.98 | $2.29 | [Consolidated Statements of Comprehensive Income](index=64&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for 2022 was $761.8 million, including net income and other comprehensive income adjustments Consolidated Statements of Comprehensive Income (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net income | $748,462 | $650,624 | $366,738 | | Foreign currency translation adjustments | $(10,028) | $(4,663) | $5,210 | | Change in unrealized gains (losses) on interest rate swaps, net of tax | $23,407 | $11,198 | $(8,870) | | Total other comprehensive income (loss) | $13,379 | $6,535 | $(3,660) | | Comprehensive income | $761,841 | $657,159 | $363,078 | [Consolidated Balance Sheets](index=65&type=section&id=Consolidated%20Balance%20Sheets) Total assets grew to $3.6 billion as of December 31, 2022, with stockholders' equity increasing to $1.2 billion Consolidated Balance Sheets (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total current assets | $2,018,991 | $1,769,085 | | Property and equipment, net | $193,709 | $179,008 | | Goodwill | $691,993 | $688,364 | | Other intangible assets, net | $305,450 | $312,814 | | Total assets | $3,565,437 | $3,230,131 | | Total current liabilities | $675,714 | $744,416 | | Long-term debt, net | $1,361,761 | $1,171,578 | | Total liabilities | $2,330,243 | $2,158,738 | | Total stockholders' equity | $1,235,194 | $1,071,393 | [Consolidated Statements of Cash Flows](index=66&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities was $484.9 million in 2022, while financing activities used $411.7 million Consolidated Statements of Cash Flows (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net cash provided by operating activities | $484,854 | $313,490 | $397,581 | | Net cash used in investing activities | $(50,870) | $(849,614) | $(146,289) | | Net cash (used in) provided by financing activities | $(411,658) | $526,131 | $(244,371) | | Change in cash and cash equivalents | $21,270 | $(9,807) | $5,545 | | Cash and cash equivalents at end of year | $45,591 | $24,321 | $34,128 | [Consolidated Statements of Changes in Stockholders' Equity](index=67&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity increased by $163.8 million in 2022, driven by net income offset by share repurchases and dividends - Stockholders' equity increased from **$1,071,393 thousand in 2021 to $1,235,194 thousand in 2022**, driven by net income, partially offset by share repurchases and cash dividends[326](index=326&type=chunk) - Repurchases of common stock, net of retirements, totaled **$(471,229) thousand** in 2022[326](index=326&type=chunk) - Cash dividends declared totaled **$(150,624) thousand** in 2022[326](index=326&type=chunk) [Notes to Consolidated Financial Statements](index=68&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the accounting policies and financial data presented in the consolidated statements [Note 1 - Organization and Summary of Significant Accounting Policies](index=68&type=section&id=Note%201%20-%20Organization%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's business operations and the significant accounting policies used in preparing the financial statements - The company operates 420 sales centers across North America, Europe, and Australia, distributing swimming pool, irrigation, landscape, and hardscape products[329](index=329&type=chunk) - Key accounting estimates include allowance for doubtful accounts, inventory obsolescence, vendor programs, income taxes, performance-based compensation, and goodwill impairment[331](index=331&type=chunk) - The company aggregates all sales centers into a **single reportable segment** due to similar operations and economic characteristics[333](index=333&type=chunk) - Revenue is recognized when customers obtain control of products, with shipping and handling fees billed to customers included in net sales[336](index=336&type=chunk)[337](index=337&type=chunk) - Vendor program benefits are recognized as a reduction of inventory cost until products are sold, then as a reduction of cost of sales[341](index=341&type=chunk) - Advertising costs were **$28.8 million in 2022**, significantly up from $9.4 million in 2021, primarily due to the Porpoise Pool & Patio, Inc. acquisition[346](index=346&type=chunk)[347](index=347&type=chunk) - The Inflation Reduction Act of 2022 (IRA) implemented a corporate alternative minimum tax and an excise tax on stock repurchases, effective after December 31, 2022, but is **not expected to materially impact results**[350](index=350&type=chunk) - The company uses interest rate swap contracts as cash flow hedges to reduce exposure to variable interest rates[363](index=363&type=chunk) Allowance for Doubtful Accounts (in thousands) | Year | Balance at beginning of year | Bad debt expense | Write-offs, net of recoveries | Balance at end of year | | :--- | :--------------------------- | :--------------- | :-------------------------- | :--------------------- | | 2022 | $5,942 | $7,449 | $(3,869) | $9,522 | | 2021 | $4,808 | $3,377 | $(2,243) | $5,942 | | 2020 | $5,472 | $1,900 | $(2,564) | $4,808 | Reserve for Inventory Obsolescence (in thousands) | Year | Balance at beginning of year | Provision for inventory write-downs | Deduction for inventory write-offs | Balance at end of year | | :--- | :--------------------------- | :-------------------------------- | :------------------------------- | :--------------------- | | 2022 | $15,196 | $11,989 | $(5,977) | $21,208 | | 2021 | $11,398 | $7,781 | $(3,983) | $15,196 | | 2020 | $9,036 | $6,181 | $(3,819) | $11,398 | Depreciation Expense (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $30,381 | | 2021 | $28,287 | | 2020 | $27,967 | Accumulated Other Comprehensive Income (Loss) (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Foreign currency translation adjustments | $(19,608) | $(9,580) | | Unrealized gains on interest rate swaps, net of tax | $25,503 | $2,096 | | Total | $5,895 | $(7,484) | Cash Paid for Interest and Income Taxes (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Interest | $39,759 | $10,023 | $8,257 | | Income taxes, net of refunds | $314,714 | $83,953 | $81,792 | [Note 2 - Acquisitions](index=76&type=section&id=Note%202%20-%20Acquisitions) This note details the company's acquisition activities, including the significant purchase of Porpoise Pool & Patio, Inc. in 2021 - In April 2022, the company acquired Tri-State Pool Distributors, adding one location in West Virginia[391](index=391&type=chunk) - In December 2021, the company acquired Porpoise Pool & Patio, Inc. for **$788.7 million**, recognizing **$403.5 million in goodwill** and **$301.0 million in other intangible assets**[392](index=392&type=chunk) - Other 2021 acquisitions included Wingate Supply, Inc. (irrigation/landscape products) and Vak Pak Builders Supply, Inc. and Pool Source, LLC (swimming pool products), each adding one location in Florida or Tennessee[393](index=393&type=chunk)[394](index=394&type=chunk) - 2020 acquisitions included Master Tile Network LLC (tile/hardscape), Northeastern Swimming Pool Distributors, Inc. (Canada), Jet Line Products, Inc. (multiple locations), and TWC Distributors, Inc. (Florida/Georgia)[395](index=395&type=chunk)[396](index=396&type=chunk)[397](index=397&type=chunk) [Note 3 - Goodwill and Other Intangible Assets](index=77&type=section&id=Note%203%20-%20Goodwill%20and%20Other%20Intangible%20Assets) This note provides details on the carrying amounts of goodwill and other intangible assets, including impairment charges Changes in Goodwill Carrying Amount (in thousands) | Goodwill (gross) at December 31, 2021 | $701,753 | | :------------------------------------ | :------- | | Acquired goodwill | $5,500 | | Foreign currency translation and other adjustments | $(1,266) | | Goodwill (gross) at December 31, 2022 | $705,987 | | Accumulated impairment losses at December 31, 2021 | $(13,389) | | Goodwill impairment | $(605) | | Accumulated impairment losses at December 31, 2022 | $(13,994) | | Goodwill (net) at December 31, 2022 | $691,993 | - The acquisition of Porpoise Pool & Patio, Inc. in 2021 resulted in **$403.5 million in goodwill** and **$301.0 million in other intangible assets**, including the indefinite-lived Pinch A Penny brand name ($169.0 million)[399](index=399&type=chunk)[400](index=400&type=chunk) - Goodwill impairment of **$0.6 million** was recorded in October 2022 due to the closure of a Horizon reporting unit[402](index=402&type=chunk) - In 2020, impairment of **$3.5 million goodwill** and **$0.9 million intangibles** was recorded for Australian reporting units due to COVID-19 impacts[404](index=404&type=chunk) Other Intangible Assets (in thousands) | Intangible Asset | 2022 Gross | 2022 Accumulated Amortization | 2022 Net | 2021 Gross | 2021 Accumulated Amortization | 2021 Net | Weighted Average Useful Life (Years) | | :----------------- | :--------- | :---------------------------- | :------- | :--------- | :---------------------------- | :------- | :--------------------------------- | | Horizon tradename | $8,400 | — | $8,400 | $8,400 | — | $8,400 | Indefinite | | Pinch A Penny brand name | $169,000 | — | $169,000 | $169,000 | — | $169,000 | Indefinite | | NPT tradename | $1,500 | $(1,112) | $388 | $1,500 | $(1,037) | $463 | 20 | | Non-compete agreements | $6,022 | $(2,533) | $3,489 | $8,096 | $(3,891) | $4,205 | 4.58 | | Customer relationships | $109,000 | $(5,677) | $103,323 | $109,000 | $(214) | $108,786 | 20 | | Franchise agreements | $22,000 | $(1,150) | $20,850 | $22,000 | $(40) | $21,960 | 20 | | Total other intangibles | $315,922 | $(10,472) | $305,450 | $317,996 | $(5,182) | $312,814 | | Estimated Amortization Expense for Other Intangible Assets (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $7,908 | | 2024 | $7,602 | | 2025 | $7,441 | | 2026 | $7,013 | | 2027 | $6,660 | [Note 4 - Details of Certain Balance Sheet Accounts](index=79&type=section&id=Note%204%20-%20Details%20of%20Certain%20Balance%20Sheet%20Accounts) This note provides a detailed breakdown of receivables, property and equipment, and accrued expenses Receivables, net (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Trade accounts | $32,793 | $27,724 | | Vendor programs | $101,554 | $129,072 | | Other, net | $3,422 | $4,405 | | Total receivables | $137,769 | $161,201 | | Less: Allowance for doubtful accounts | $(9,522) | $(5,942) | | Receivables, net | $128,247 | $155,259 | Property and Equipment, net (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total property and equipment | $405,222 | $370,251 | | Less: Accumulated depreciation | $(211,513) | $(191,243) | | Property and equipment, net | $193,709 | $179,008 | Accrued Expenses and Other Current Liabilities (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Salaries and payroll deductions | $22,318 | $25,882 | | Performance-based compensation | $70,609 | $76,255 | | Taxes payable | $16,479 | $106,894 | | Other current liabilities | $59,115 | $55,846 | | Total | $168,521 | $264,877 | [Note 5 - Debt](index=80&type=section&id=Note%205%20-%20Debt) This note details the components of the company's $1.4 billion in total debt and its various credit facilities Components of Debt (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Short-term borrowings and current portion of long-term debt | $25,042 | $11,772 | | Long-term debt, net | $1,361,761 | $1,171,578 | | Total debt | $1,386,803 | $1,183,350 | - The Credit Facility's total borrowing capacity increased to **$1.25 billion** in December 2021, including a $750.0 million revolving credit facility and a $500.0 million term loan facility, maturing September 25, 2026[413](index=413&type=chunk)[415](index=415&type=chunk) - As of December 31, 2022, **$1.0 billion was outstanding** under the Credit Facility, with $225.5 million available for borrowing[417](index=417&type=chunk) - The Term Facility provides **$185.0 million in borrowing capacity**, maturing December 30, 2026, with $157.3 million outstanding at December 31, 2022[420](index=420&type=chunk)[423](index=423&type=chunk) - The Receivables Securitization Facility allows borrowing up to **$350.0 million** (April-August) and $210.0-$340.0 million (other months), maturing November 1, 2024, with $199.5 million outstanding at December 31, 2022[425](index=425&type=chunk)[428](index=428&type=chunk) Maturities of Long-Term Debt (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $34,292 | | 2024 | $233,750 | | 2025 | $46,750 | | 2026 | $1,074,211 | | 2027 | — | - The company had two interest rate swap contracts in place as of December 31, 2022, and one forward-starting interest rate swap contract, converting variable interest rates to fixed rates[433](index=433&type=chunk) - As of December 31, 2022, the company was in **compliance with all financial covenants**[438](index=438&type=chunk) [Note 6 - Share-Based Compensation](index=84&type=section&id=Note%206%20-%20Share-Based%20Compensation) This note describes the company's share-based compensation plans, including stock options, restricted stock, and an employee stock purchase plan - The Amended 2007 Long-Term Incentive Plan (LTIP) authorizes non-qualified stock options and restricted stock awards, with **4,015,569 shares available for future issuance** as of December 31, 2022[440](index=440&type=chunk) - Stock options and restricted stock awards generally vest over three to five years, with restricted stock awards also having performance-based criteria[441](index=441&type=chunk)[442](index=442&type=chunk) Stock Option Activity (Year Ended December 31, 2022) | Metric | Shares | Weighted Average Exercise Price | | :-------------------------- | :------- | :------------------------------ | | Balance at December 31, 2021 | 651,617 | $123.98 | | Granted | 75,202 | $371.80 | | Exercised | 71,737 | $87.09 | | Forfeited | 12,157 | $260.53 | | Balance at December 31, 2022 | 642,925 | $154.57 | Stock Option Grant Date Fair Value Assumptions (Weighted Average) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Expected volatility | 28.9% | 27.0% | 20.7% | | Expected term (years) | 7.1 | 6.9 | 6.8 | | Risk-free interest rate | 2.92% | 1.00% | 1.22% | | Expected dividend yield | 1.15% | 1.15% | 1.30% | | Grant date fair value | $116.56 | $83.05 | $42.52 | Share-Based Compensation Expense for Stock Option Awards (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $3,413 | | 2021 | $2,846 | | 2020 | $2,842 | Restricted Stock Award Activity (Year Ended December 31, 2022) | Metric | Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :------- | :------------------------------------- | | Balance unvested at Dec 31, 2021 | 260,738 | $190.26 | | Granted | 53,926 | $393.64 | | Vested | 78,931 | $137.60 | | Forfeited | 23,016 | $273.55 | | Balance unvested at Dec 31, 2022 | 212,717 | $256.97 | Share-Based Compensation Expense for Restricted Stock Awards (in thousands) | Year | Amount | | :--- | :----- | | 2022 | $11,024 | | 2021 | $11,543 | | 2020 | $10,965 | - Under the Employee Stock Purchase Plan (ESPP), employees can purchase stock at **85% of the lower of the closing price** at period end or the average of beginning and ending closing prices[450](index=450&type=chunk)[453](index=453&type=chunk) - ESPP share-based compensation expense was **$0.5 million in 2022**, $0.8 million in 2021, and $0.7 million in 2020[451](index=451&type=chunk) [Note 7 - Income Taxes](index=87&type=section&id=Note%207%20-%20Income%20Taxes) This note details the components of the income tax provision and reconciles the statutory federal rate to the effective tax rate Income Before Income Taxes and Equity in Earnings by Jurisdiction (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | United States | $919,461 | $752,957 | $428,857 | | Foreign | $65,411 | $71,188 | $22,817 | | Total | $984,872 | $824,145 | $451,674 | Provision for Income Taxes (in thousands) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Total current provision for income taxes | $221,594 | $169,162 | $87,773 | | Total deferred provision for income taxes | $15,169 | $4,650 | $(2,542) | | Provision for income taxes | $236,763 | $173,812 | $85,231 | Reconciliation of U.S. Federal Statutory Tax Rate to Effective Tax Rate | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Federal statutory rate | 21.00% | 21.00% | 21.00% | | Stock-based compensation | (1.09)% | (3.67)% | (6.34)% | | Other, primarily state income tax rate | 4.15% | 3.87% | 4.43% | | Total effective tax rate | 24.04% | 21.09% | 18.87% | - Excess tax benefits from stock-based compensation were **$10.8 million in 2022**, $30.0 million in 2021, and $28.6 million in 2020[454](index=454&type=chunk) Deferred Tax Assets and Liabilities (in thousands) | December 31, | 2022 | 2021 | | :------------- | :--- | :--- | | Total deferred tax assets | $978 | $1,096 | | Total deferred tax liabilities | $58,759 | $35,840 | | Net deferred tax liability | $57,781 | $34,744 | - Unrecognized tax benefits that would decrease the effective tax rate were **$12.2 million** at December 31, 2022, and **$10.5 million** at December 31, 2021[458](index=458&type=chunk) [Note 8 - Earnings Per Share](index=90&type=section&id=Note%208%20-%20Earnings%20Per%20Share) This note provides the computation of basic and diluted earnings per share using the two-class method - Basic and diluted earnings per share are calculated using the **two-class method**, with share-based payment awards considered participating securities[463](index=463&type=chunk) Computation of Earnings Per Share (in thousands, except per share data) | Year Ended December 31, | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net income attributable to common stockholders | $744,311 | $646,303 | $366,738 | | Basic weighted average common shares outstanding | 39,409 | 39,876 | 40,106 | | Diluted weighted average common shares outstanding | 39,806 | 40,480 | 40,865 | | Basic EPS | $18.89 | $16.21 | $9.14 | | Diluted EPS | $18.70 | $15.97 | $8.97 | [Note 9 - Commitments and Contingencies](index=90&type=section&id=Note%209%20-%20Commitments%20and%20Contingencies) This note outlines the company's operating lease commitments and states that current litigation is not expected to be material - The company leases facilities under operating leases expiring through 2036, with renewal options generally n

Financial Data and Key Metrics Changes - The company achieved net revenue of $6.2 billion in 2022, a 17% increase from 2021, and operating income exceeded $1 billion, marking a tripling compared to 2019 levels [17][34][51] - Gross profit margin for the fourth quarter was 28.8%, down 230 basis points from the previous year, but still 30 basis points higher than 2020 [49][72] - Operating margin for the full year reached a record 16.6%, benefiting from higher sales and gross margins [53][73] Business Line Data and Key Metrics Changes - The base business grew by 15% in year-round markets and 8% in seasonal markets, driven by industry resilience and inflation [18][51] - Chemical sales increased by 19% in the fourth quarter and 32% for the year, reflecting share gains and inflation [38] - Renovation and remodeling activities are expected to see modest declines in 2023, while new pool construction is projected to decrease by 15% to 20% [112] Market Data and Key Metrics Changes - California sales grew by 14%, Florida by 24%, Arizona by 18%, and Texas by 8% for the full year [65] - European market sales declined by 22.5% in the fourth quarter and 15% for the full year, impacted by unfavorable weather and economic conditions [70] - The company opened 10 new locations in 2022, expanding its footprint in the market [63] Company Strategy and Development Direction - The company focuses on enhancing customer experience and expanding its sales center network, which has been a key driver of growth [5][35] - The management team is confident in long-term growth opportunities, particularly in the maintenance and remodeling segments, despite anticipated declines in new construction [44][45] - The company plans to continue investing in technology and capacity creation to improve customer service and operational efficiency [74][115] Management's Comments on Operating Environment and Future Outlook - Management expects 2023 to be challenging, with potential flat to slightly lower sales, but remains optimistic about cash flow exceeding net income [56][88] - The company anticipates a gross margin decline to around 30% due to price cost give-backs, but expects to maintain strong operating cash flows [122][113] - Management highlighted the importance of the aging installed base of pools, which will drive maintenance demand [142] Other Important Information - The company repurchased 1.2 million shares for $461 million and increased its quarterly dividend by 25%, returning 82% of net income to shareholders [111] - The estimated tax rate for 2023 is expected to be between 25.3% and 25.5%, excluding ASU [116] Q&A Session Summary Question: What is the volume assumption for 2023? - Management expects top line volume to be flat to negative 3%, with maintenance business remaining relatively flat due to inflationary price increases [120] Question: What is the expected gross margin for 2023? - The expected gross margin is around 30%, with a decline of about 100 basis points primarily due to price cost give-backs [122] Question: How does the pre-buy level in 2022 compare to normal levels? - The pre-buy level in 2022 was higher than normal, as dealers anticipated supply chain disruptions [124] Question: What is the outlook for new pool construction? - New pool construction is expected to be down approximately 15% to 20%, with the company believing it has gained market share despite overall industry declines [125] Question: How is the company managing inflationary pressures? - The company is actively evaluating expenses to offset inflationary increases and expects to maintain strong cash flow despite economic uncertainties [88][136]

& POOLCORP® Where Outdoor Living Comes to Life® Forward-Looking Statements This presentation may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date of this presentation and are subject to change. POOLCORP undertakes no obligation to update or revise forward-looking statements to reflect new circumstances or unanticipated events as they occur. Actual results may differ mat ...

PART I. FINANCIAL INFORMATION This part presents the company's unaudited interim financial statements and management's discussion and analysis for the specified periods [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited interim financial statements and accompanying notes for the three and nine months ended September 30, 2022 [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) This statement details the company's revenues, costs, and profits, showing growth in net sales, gross profit, operating income, net income, and diluted EPS Three Months Ended September 30, 2022 vs 2021 | Metric | 2022 (USD thousands) | 2021 (USD thousands) | Change (%) | | :--------------------------------- | :------------------- | :------------------- | :--------- | | Net sales | $1,615,339 | $1,411,448 | 14.4% | | Gross profit | $503,687 | $441,899 | 14.0% | | Operating income | $263,877 | $237,276 | 11.2% | | Net income | $190,055 | $184,665 | 2.9% | | Diluted EPS | $4.78 | $4.54 | 5.3% | Nine Months Ended September 30, 2022 vs 2021 | Metric | 2022 (USD thousands) | 2021 (USD thousands) | Change (%) | | :--------------------------------- | :------------------- | :------------------- | :--------- | | Net sales | $5,083,807 | $4,260,027 | 19.3% | | Gross profit | $1,617,681 | $1,294,716 | 24.9% | | Operating income | $918,489 | $704,893 | 30.3% | | Net income | $676,600 | $543,015 | 24.6% | | Diluted EPS | $16.82 | $13.32 | 26.3% | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This statement details comprehensive income components, including net income and other comprehensive income/loss items like foreign currency adjustments Three Months Ended September 30, 2022 vs 2021 | Metric | 2022 (USD thousands) | 2021 (USD thousands) | | :--------------------------------- | :------------------- | :------------------- | | Net income | $190,055 | $184,665 | | Foreign currency translation losses | $(11,152) | $(3,555) | | Change in unrealized gains on interest rate swaps, net of tax | $8,776 | $1,473 | | Total other comprehensive (loss) income | $(2,376) | $(2,082) | | Comprehensive income | $187,679 | $182,583 | Nine Months Ended September 30, 2022 vs 2021 | Metric | 2022 (USD thousands) | 2021 (USD thousands) | | :--------------------------------- | :------------------- | :------------------- | | Net income | $676,600 | $543,015 | | Foreign currency translation losses | $(18,491) | $(3,522) | | Change in unrealized gains on interest rate swaps, net of tax | $25,267 | $8,453 | | Total other comprehensive (loss) income | $6,776 | $4,931 | | Comprehensive income | $683,376 | $547,946 | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) This statement presents the company's assets, liabilities, and equity, highlighting significant increases in inventories, goodwill, intangibles, and long-term debt Balance Sheet Highlights (September 30, 2022 vs. September 30, 2021) | Metric | Sep 30, 2022 (USD thousands) | Sep 30, 2021 (USD thousands) | Change (%) | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Total current assets | $2,199,479 | $1,626,400 | 35.2% | | Product inventories, net | $1,539,572 | $1,043,407 | 47.6% | | Goodwill | $691,786 | $281,300 | 145.9% | | Other intangible assets, net | $307,389 | $12,067 | 2447.3% | | Total assets | $3,688,055 | $2,282,233 | 61.6% | | Total current liabilities | $737,260 | $722,136 | 2.1% | | Long-term debt, net | $1,500,337 | $352,075 | 326.1% | | Total liabilities | $2,497,177 | $1,297,021 | 92.5% | | Total stockholders' equity | $1,190,878 | $985,212 | 20.9% | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement outlines cash flows from operating, investing, and financing activities, noting decreased operating cash and changes in investing and financing Cash Flows (Nine Months Ended September 30, in thousands) | Activity | 2022 (USD thousands) | 2021 (USD thousands) | | :--------------------------------- | :------------------- | :------------------- | | Operating activities | $307,470 | $359,065 | | Investing activities | $(34,514) | $(42,110) | | Financing activities | $(248,404) | $(267,765) | - The decrease in operating cash flows was driven by federal tax payments of **$79.5 million** in 2022 (deferred from 2021) and growth-driven working capital outflows, partially offset by an increase in net income[121](index=121&type=chunk) - Net cash used in investing activities decreased primarily due to a **$9.6 million** decrease in cash used for the acquisition of businesses[122](index=122&type=chunk) - Financing activities saw a **$333.2 million** increase in share repurchases and a **$24.1 million** increase in dividends paid, partially offset by a **$380.4 million** increase in net debt proceeds[123](index=123&type=chunk) [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement details changes in stockholders' equity, including impacts from net income, currency translation, swaps, share repurchases, and dividends Stockholders' Equity at September 30, 2022 | Component | Amount (USD thousands) | | :--------------------------------- | :--------------------- | | Common Stock | $39 | | Additional Paid-In Capital | $570,855 | | Retained Earnings | $620,692 | | Accumulated Other Comprehensive Loss | $(708) | | **Total Stockholders' Equity** | **$1,190,878** | - Repurchases of common stock, net of retirements, amounted to **$(192,528) thousand** in the third quarter of 2022[19](index=19&type=chunk) - Declaration of cash dividends amounted to **$(39,544) thousand** in the third quarter of 2022[19](index=19&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide additional context for financial statements, covering accounting policies, EPS, acquisitions, fair value, interest rate swaps, and debt structure [Note 1 – Summary of Significant Accounting Policies](index=9&type=section&id=Note%201%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines significant accounting policies, including interim financial statement presentation, income tax, retained earnings, and comprehensive loss components - Excess tax benefits from share-based compensation were **$0.6 million** in Q3 2022 (vs **$4.2 million** in Q3 2021) and **$9.5 million** for the nine months ended September 30, 2022 (vs **$15.9 million** in 2021)[24](index=24&type=chunk) - Retained earnings reflect cumulative net income, accounting adjustments, **$2.1 billion** in treasury share retirements, and **$902.0 million** in cumulative dividends as of September 30, 2022[25](index=25&type=chunk) Accumulated Other Comprehensive Loss Components (USD thousands) | Component | September 30, 2022 | December 31, 2021 | | :--------------------------------- | :------------------- | :------------------ | | Foreign currency translation adjustments | $(28,071) | $(9,580) | | Unrealized gains (losses) on interest rate swaps, net of tax | $27,363 | $2,096 | | **Accumulated other comprehensive loss** | **$(708)** | **$(7,484)** | - The company does not expect a material impact on its financial statements from adopting ASU 2020-04 and ASU 2021-01 related to LIBOR reform[27](index=27&type=chunk) [Note 2 – Earnings Per Share](index=11&type=section&id=Note%202%20%E2%80%93%20Earnings%20Per%20Share) This note explains the calculation of basic and diluted earnings per share using the two-class method for participating securities Diluted EPS (Three Months Ended September 30) | Year | Diluted EPS | | :--- | :---------- | | 2022 | $4.78 | | 2021 | $4.54 | Diluted EPS (Nine Months Ended September 30) | Year | Diluted EPS | | :--- | :---------- | | 2022 | $16.82 | | 2021 | $13.32 | - 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[28](index=28&type=chunk) [Note 3 – Acquisitions](index=12&type=section&id=Note%203%20%E2%80%93%20Acquisitions) This note details recent acquisitions, including Tri-State Pool Distributors and Porpoise Pool & Patio, highlighting impacts on goodwill and intangibles - Acquired the distribution assets of Tri-State Pool Distributors in April 2022, adding one location in West Virginia[30](index=30&type=chunk) - Acquired Porpoise Pool & Patio, Inc. for **$788.7 million** (net of cash) in December 2021, adding one distribution location in Florida and servicing Pinch A Penny, Inc[31](index=31&type=chunk) - Preliminary recognition of goodwill from the Porpoise acquisition was **$403.5 million**, and other intangible assets were **$301.0 million**[32](index=32&type=chunk) - Other acquisitions in 2021 included Wingate Supply, Inc., Vak Pak Builders Supply, Inc., and Pool Source, LLC, adding locations in Florida and Tennessee[33](index=33&type=chunk)[34](index=34&type=chunk) [Note 4 – Fair Value Measurements and Interest Rate Swaps](index=12&type=section&id=Note%204%20%E2%80%93%20Fair%20Value%20Measurements%20and%20Interest%20Rate%20Swaps) This note explains fair value hierarchy use for financial instruments and details interest rate swap contracts to manage variable interest rate exposure Fair Value at September 30, 2022 (USD thousands) | Item | Fair Value | Level | | :--------------------------------- | :--------- | :---- | | Unrealized gains on interest rate swaps | $36,529 | Level 2 | | Unrealized losses on interest rate swaps | $0 | Level 2 | | Contingent consideration liabilities | $546 | Level 3 | - Two interest rate swap contracts (notional amount **$75.0 million** each, fixed rates **2.0925%** and **1.5500%**) terminated on September 29, 2022[41](index=41&type=chunk)[42](index=42&type=chunk) - Currently, two interest rate swap contracts are in place: **$150.0 million** at **1.3800%** (effective Feb 2021, terminates Feb 2025) and **$150.0 million** at **0.7400%** (effective Sep 2022, terminates Feb 2027)[43](index=43&type=chunk) - One forward-starting interest rate swap contract is in place: **$150.0 million** at **0.8130%** (effective Feb 2025, terminates Feb 2027)[45](index=45&type=chunk) [Note 5 – Debt](index=15&type=section&id=Note%205%20%E2%80%93%20Debt) This note details the company's debt, including variable rate facilities, and explains the significant increase in total debt outstanding Total Debt Outstanding (USD thousands) | Date | Amount | | :---------------- | :--------- | | September 30, 2022 | $1,512,545 | | September 30, 2021 | $362,819 | - Long-term debt, net, increased from **$352.1 million** at September 30, 2021, to **$1,500.3 million** at September 30, 2022[49](index=49&type=chunk) - The **$250.0 million** incremental term loan available under the Credit Facility was fully drawn in January 2022, bringing total term loans to **$500.0 million**[49](index=49&type=chunk) - The receivables securitization facility balance was **$270.0 million** at September 30, 2022, up from **$15.0 million** at September 30, 2021[49](index=49&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial performance, condition, and outlook, covering sales, profits, COVID-19 impact, liquidity, and accounting estimates [Forward-Looking Statements](index=16&type=section&id=Forward-Looking%20Statements) This cautionary statement highlights that the report contains forward-looking information subject to risks like COVID-19, weather, economic changes, and competition - Forward-looking statements are identified by words such as "anticipate," "estimate," "expect," "intend," "believe," "will likely result," "outlook," "project," "may," "can," "plan," "target," "potential," "should"[54](index=54&type=chunk) - Actual results may differ materially due to factors including impacts from the COVID-19 pandemic, sensitivity to weather conditions, changes in the economy, consumer discretionary spending, the housing market or inflation rates, supplier relationships, competition, and the ability to execute growth strategies[55](index=55&type=chunk) [OVERVIEW](index=16&type=section&id=OVERVIEW) This overview summarizes Q3 2022 financial performance, noting sales growth, moderating new pool construction, inventory investments, and increased debt [Financial Results](index=16&type=section&id=Financial%20Results) Q3 2022 net sales increased 14% due to base business and inflation, despite headwinds, with gross profit and operating income also growing - Net sales increased **14%** to **$1.6 billion** in the third quarter of 2022 compared to **$1.4 billion** in the third quarter of 2021, with base business sales growing **10%**[56](index=56&type=chunk) - Net sales benefited approximately **9% to 10%** from inflationary product cost increases[56](index=56&type=chunk) - Sales were partially offset by a **1%** impact from softness in European markets, **1%** from currency exchange rate fluctuations, **1%** from one less selling day, and an anticipated net sales shift of **$9.0 million** from Q3 2022 to Q4 2022 due to Hurricane Ian[58](index=58&type=chunk) - Gross profit increased **14%** to **$503.7 million** in Q3 2022, but gross margin decreased **10 basis points** to **31.2%**[56](index=56&type=chunk) - Operating income increased **11%** to **$263.9 million**, with operating margin at **16.3%** (compared to **16.8%** in Q3 2021)[58](index=58&type=chunk) - Net income increased **3%** to **$190.1 million**, and diluted earnings per share increased **5%** to **$4.78**[60](index=60&type=chunk) [COVID-19 Pandemic](index=17&type=section&id=COVID-19%20Pandemic) The company monitors the COVID-19 pandemic's impact, noting moderating new pool construction, proactive inventory investments, and improving supply chains - Experienced unprecedented demand beginning in Q2 2020 as families spent more time at home and sought outdoor living spaces[62](index=62&type=chunk) - Recent trends, including a lower number of permits issued for new pools, suggest that new construction activities are moderating[62](index=62&type=chunk) - Made significant investments in inventory in late 2021 and early 2022 to meet strong customer demand and address supply chain constraints[63](index=63&type=chunk) - Observed improvements in supply chain dynamics in the second and third quarters of 2022, with inventory balances expected to normalize as 2023 progresses[63](index=63&type=chunk) [Financial Position and Liquidity](index=17&type=section&id=Financial%20Position%20and%20Liquidity) Net receivables increased 15%, inventory levels rose 48%, and total debt outstanding significantly increased to $1.5 billion for strategic funding - Total net receivables, including pledged receivables, increased **15%** compared to September 30, 2021[64](index=64&type=chunk) - Days sales outstanding (DSO) was **27.0 days** at September 30, 2022, compared to **25.7 days** at September 30, 2021[64](index=64&type=chunk) - Net inventory levels increased **48%** compared to September 30, 2021, driven by increased purchasing, inflation, and recent acquisitions[65](index=65&type=chunk) - Inventory turns were **2.7 times** at September 30, 2022, compared to **3.8 times** at September 30, 2021[65](index=65&type=chunk) - Total debt outstanding at September 30, 2022, was **$1.5 billion**, a significant increase from **$362.8 million** at September 30, 2021, used to fund acquisitions, share repurchases, and working capital[66](index=66&type=chunk) [Current Trends and Outlook](index=17&type=section&id=Current%20Trends%20and%20Outlook) The company projects 2022 diluted EPS of $18.50-$19.05, 17-19% sales growth, 10% inflation, and modest full-year gross margin improvement - Expected 2022 diluted EPS is **$18.50 to $19.05**, including year-to-date tax benefits of **$0.24**[68](index=68&type=chunk) - Expected sales growth for the full year is in the range of **17% to 19%**[69](index=69&type=chunk) - Projected 2022 inflationary product cost increases are approximately **10%**[69](index=69&type=chunk) - Expects a modest improvement in gross margin for the full year of 2022 compared to 2021, but a decline of **150 to 200 basis points** in Q4 2022 due to lower inflation and vendor incentives[70](index=70&type=chunk) - Operating expense growth rate in 2022 is projected to be less than gross profit growth rate, reflecting inflationary increases and incremental costs for strategic initiatives like digital transformation and sales center expansion[71](index=71&type=chunk) - The annual effective tax rate (without ASU 2016-09 benefit) for 2022 is projected to approximate **25.5%**[72](index=72&type=chunk) [RESULTS OF OPERATIONS](index=18&type=section&id=RESULTS%20OF%20OPERATIONS) This section details the company's financial performance for the three and nine months ended September 30, 2022, analyzing key income statement components [Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021](index=19&type=section&id=Three%20Months%20Ended%20September%2030%2C%202022%20Compared%20to%20Three%20Months%20Ended%20September%2030%2C%202021) Q3 2022 net sales increased 14% due to base business and inflation, with gross margin slightly down and operating expenses up 17% - The company operated through **417 sales centers** as of September 30, 2022, an increase from **410** at December 31, 2021, including 1 acquired location and 6 new locations[79](index=79&type=chunk) Factors Affecting Net Sales (Q3 YoY) | Component | Estimated Impact | | :--------------------------------- | :--------------- | | Inflationary product cost increases | 9-10% | | Sales growth from recent acquisitions | 4% | | European market softness | (1%) | | Unfavorable currency exchange rate fluctuations | (1%) | | One less selling day | (1%) | | Anticipated net sales shift due to Hurricane Ian | $(9.0) million | | **Base business net sales growth** | **10%** | - Equipment sales increased **9%** (**27%** of net sales), building materials grew **14%** (**14%** of net sales), and chemical sales increased **32%** (**13%** of net sales)[81](index=81&type=chunk) - Net sales in year-round markets increased **15%**, while seasonal markets increased **8%**, and European net sales declined **11%** in local currency[83](index=83&type=chunk)[84](index=84&type=chunk) - Gross margin decreased **10 basis points** to **31.2%** in Q3 2022 (vs **31.3%** in Q3 2021)[85](index=85&type=chunk) - Operating expenses increased **17%** to **$239.8 million**, rising to **14.8%** of net sales (vs **14.5%** in Q3 2021)[86](index=86&type=chunk) - Interest and other non-operating expenses, net, increased **$9.4 million** due to higher average debt levels and interest rates (weighted average effective interest rate **3.2%** in Q3 2022 vs **2.8%** in Q3 2021)[87](index=87&type=chunk) - The effective income tax rate was **24.7%** for Q3 2022 (vs **21.4%** for Q3 2021), with a lower tax benefit from ASU 2016-09 (**$0.6 million** vs **$4.2 million**)[88](index=88&type=chunk) - Net income increased **3%** to **$190.1 million**, and diluted EPS increased **5%** to **$4.78**[89](index=89&type=chunk) [Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021](index=22&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202022%20Compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202021) Nine-month net sales increased 19%, with base business up 14%, gross margin improving 140 basis points, and net income rising 25% Factors Affecting Net Sales (9 Months YoY) | Component | Estimated Impact | | :--------------------------------- | :--------------- | | Inflationary product cost increases | 9-10% | | Sales growth from recent acquisitions | 5% | | European market softness | (1%) | | Unfavorable currency exchange rate fluctuations | (1%) | | Less favorable weather conditions | Negative impact | | Anticipated net sales shift due to Hurricane Ian | $(9.0) million | | **Base business net sales growth** | **14%** | - Equipment sales increased approximately **11%** (**27%** of net sales), building materials grew **22%** (**13%** of net sales), and chemical sales increased **34%** (**12%** of net sales)[92](index=92&type=chunk) - Net sales in year-round markets increased **18%**, while seasonal markets increased **13%**, and European net sales declined **3%** in local currency[94](index=94&type=chunk)[95](index=95&type=chunk) - Gross margin improved **140 basis points** to **31.8%** in the nine months ended September 30, 2022 (vs **30.4%** in 9M 2021)[96](index=96&type=chunk) - Operating expenses increased **19%** to **$699.2 million**, remaining at **13.8%** of net sales[97](index=97&type=chunk) - Interest and other non-operating expenses, net, increased **$18.6 million** due to higher average debt levels (**$1.5 billion** in 9M 2022 vs **$376.2 million** in 9M 2021), with the weighted average effective interest rate decreasing to **2.3%** (vs **2.6%**)[98](index=98&type=chunk) - The effective income tax rate was **24.3%** for 9M 2022 (vs **22.2%** for 9M 2021), with a lower tax benefit from ASU 2016-09 (**$9.5 million** vs **$15.9 million**)[99](index=99&type=chunk) - Net income increased **25%** to **$676.6 million**, and diluted EPS increased **26%** to **$16.82**[100](index=100&type=chunk) [Reconciliation of Non-GAAP Financial Measures](index=25&type=section&id=Reconciliation%20of%20Non-GAAP%20Financial%20Measures) This section reconciles diluted EPS to adjusted diluted EPS, a non-GAAP measure, by excluding ASU 2016-09 tax benefits Adjusted Diluted EPS (excluding ASU 2016-09 tax benefit) | Period | Diluted EPS | ASU 2016-09 Tax Benefit | Adjusted Diluted EPS | | :--------------------------------- | :---------- | :---------------------- | :------------------- | | Three Months Ended Sep 30, 2022 | $4.78 | $(0.02) | $4.76 | | Three Months Ended Sep 30, 2021 | $4.54 | $(0.10) | $4.44 | | Nine Months Ended Sep 30, 2022 | $16.82 | $(0.24) | $16.58 | | Nine Months Ended Sep 30, 2021 | $13.32 | $(0.39) | $12.93 | [Seasonality and Quarterly Fluctuations](index=26&type=section&id=Seasonality%20and%20Quarterly%20Fluctuations) The company's business is seasonal, with sales and operating income peaking in Q2 and Q3, influencing inventory and cash flows - Sales and operating income are highest during the second and third quarters, representing the peak months of swimming pool use and installation, and irrigation and landscape installations and maintenance[105](index=105&type=chunk) - The company typically experiences a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season[106](index=106&type=chunk) - Peak borrowing usually occurs during the second quarter, while peak accounts receivable collections typically occur in June, July, and August[106](index=106&type=chunk) [Weather Impacts on 2022 and 2021 Results](index=27&type=section&id=Weather%20Impacts%20on%202022%20and%202021%20Results) Weather significantly impacts business, with hot, dry conditions boosting sales and cool, wet weather or hurricanes negatively affecting them - Hot and dry weather increases purchases of chemicals and supplies for existing swimming pools, and above-ground pools and irrigation products[111](index=111&type=chunk) - Unseasonably cool weather or extraordinary amounts of rain lead to fewer pool and irrigation installations and decreased purchases of chemicals and impulse items[111](index=111&type=chunk) - Sales in Q3 2022 were generally aided by above-average temperatures but negatively impacted by Hurricane Ian in Florida, with recovery expected in Q4 2022[112](index=112&type=chunk) - Q2 2022 sales were limited by heavy rainfall and cooler temperatures in the northeastern United States and Canada, and unfavorable weather in Europe[113](index=113&type=chunk) [CRITICAL ACCOUNTING ESTIMATES](index=27&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) Critical accounting estimates involve significant uncertainty, and no changes have been made to previously disclosed policies from the 2021 Annual Report - Critical accounting estimates require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made[115](index=115&type=chunk) - Changes in estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on consolidated results of operations or financial condition[115](index=115&type=chunk) - No changes have been made to the critical accounting policies from those previously disclosed in the 2021 Annual Report on Form 10-K[116](index=116&type=chunk) [Recent Accounting Pronouncements](index=28&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 1 of the financial statements for a discussion of recent accounting pronouncements and their expected effects - For a discussion of recent accounting pronouncements, refer to Note 1 of "Notes to Consolidated Financial Statements" included in Part I, Item 1 of this Form 10-Q[117](index=117&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=28&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's liquidity, sources and uses of cash, credit facilities, and compliance with financial covenants [Sources and Uses of Cash](index=29&type=section&id=Sources%20and%20Uses%20of%20Cash) Operating cash decreased due to tax payments and working capital, while investing cash decreased and financing cash decreased due to debt proceeds Cash Flows (Nine Months Ended September 30, in thousands) | Activity | 2022 (USD thousands) | 2021 (USD thousands) | | :--------------------------------- | :------------------- | :------------------- | | Operating activities | $307,470 | $359,065 | | Investing activities | $(34,514) | $(42,110) | | Financing activities | $(248,404) | $(267,765) | - The decrease in operating cash flows was driven by federal tax payments of **$79.5 million** in 2022 (deferred from 2021) and growth-driven working capital outflows, partially offset by an increase in net income[121](index=121&type=chunk) - Net cash used in investing activities decreased primarily due to a **$9.6 million** decrease in cash used for the acquisition of businesses[122](index=122&type=chunk) - Net cash used in financing activities decreased, reflecting a **$333.2 million** increase in share repurchases and a **$24.1 million** increase in dividends paid, partially offset by a **$380.4 million** increase in net debt proceeds[123](index=123&type=chunk) [Future Sources and Uses of Cash](index=29&type=section&id=Future%20Sources%20and%20Uses%20of%20Cash) The company's Credit Facility, Term Facility, and Receivables Securitization Facility provide substantial borrowing capacity for future needs - The Credit Facility provides **$1.25 billion** in borrowing capacity, consisting of a **$750.0 million** five-year unsecured revolving credit facility and a **$500.0 million** term loan facility, maturing on September 25, 2026[123](index=123&type=chunk) - At September 30, 2022, **$573.0 million** of revolving borrowings and a **$500.0 million** term loan were outstanding under the Credit Facility, with **$172.2 million** available for borrowing[124](index=124&type=chunk) - The Term Facility provides **$185.0 million** in borrowing capacity and matures on December 30, 2026, with **$159.6 million** outstanding at September 30, 2022[125](index=125&type=chunk)[126](index=126&type=chunk) - The Receivables Securitization Facility allows borrowing up to **$350.0 million** (seasonally adjusted) and matures on November 1, 2023, with **$270.0 million** outstanding at September 30, 2022[127](index=127&type=chunk)[130](index=130&type=chunk) [Financial Covenants](index=30&type=section&id=Financial%20Covenants) Credit facilities include restrictive financial covenants, such as maximum leverage and minimum fixed charge coverage ratios, and dividend restrictions - The maximum average total leverage ratio must be less than **3.25 to 1.00**; as of September 30, 2022, it equaled **1.25**[132](index=132&type=chunk) - The minimum fixed charge coverage ratio must be greater than or equal to **2.25 to 1.00**; as of September 30, 2022, it equaled **11.14**[132](index=132&type=chunk) - The Credit Facility and Term Facility limit the declaration and payment of dividends and share repurchases, requiring no default and an average total leverage ratio less than **3.25 to 1.00**[131](index=131&type=chunk) [Interest Rate Swaps](index=31&type=section&id=Interest%20Rate%20Swaps) The company uses interest rate swaps to manage exposure to variable interest rates on borrowings, converting a portion to fixed rates - The company utilizes interest rate swap contracts and forward-starting interest rate swap contracts to reduce exposure to fluctuations in variable interest rates for future interest payments on variable rate borrowings[133](index=133&type=chunk) - As of September 30, 2022, two interest rate swap contracts and one forward-starting interest rate swap contract were in place, converting variable interest rates to fixed rates on a portion of variable rate borrowings[134](index=134&type=chunk) [Compliance and Future Availability](index=31&type=section&id=Compliance%20and%20Future%20Availability) The company is in compliance with all credit facility covenants and has adequate capital for operations, working capital, and future acquisitions - As of September 30, 2022, the company was in compliance with all material covenants and financial ratio requirements under its Credit Facility, Term Facility, and Receivables Facility, and expects to remain in compliance[135](index=135&type=chunk) - The company believes it has adequate availability of capital to fund present operations and the current capacity to finance any working capital needs and potential future acquisitions[136](index=136&type=chunk) - As of October 24, 2022, **$230.2 million** of the current Board-authorized amount under the share repurchase program remained available[137](index=137&type=chunk)[149](index=149&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes occurred in the company's interest rate or currency risk exposure during the nine months ended September 30, 2022 [Interest Rate Risk](index=32&type=section&id=Interest%20Rate%20Risk) No material changes in interest rate risk occurred during the nine months ended September 30, 2022 - No material changes in interest rate risk during the nine months ended September 30, 2022[139](index=139&type=chunk) [Currency Risk](index=32&type=section&id=Currency%20Risk) No material changes in currency risk occurred during the nine months ended September 30, 2022 - No material changes in currency risk during the nine months ended September 30, 2022[140](index=140&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, with no material changes in internal control over financial reporting during the last quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[141](index=141&type=chunk) - No change in internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[142](index=142&type=chunk) - The effectiveness of control systems is subject to limitations, providing only reasonable assurance regarding management's control objectives[143](index=143&type=chunk) PART II. OTHER INFORMATION This part provides additional information beyond financial statements, including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal proceedings, but management does not expect a material adverse impact on financial results - The company is subject to various claims and litigation arising in the ordinary course of business[146](index=146&type=chunk) - Management does not believe that the ultimate resolution of these matters will have a material adverse impact on the company's financial condition, results of operations, or cash flows[146](index=146&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) No material changes occurred from the risk factors previously disclosed in the 2021 Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in Part I, Item 1A "Risk Factors" in the 2021 Annual Report on Form 10-K[147](index=147&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details common stock repurchases in Q3 2022 and the remaining authorization, with future dividends at Board discretion Common Stock Repurchases (Q3 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------- | :----------------------------- | :--------------------------- | | July 1-31, 2022 | 2,953 | $359.18 | | August 1-31, 2022 | 216,796 | $366.54 | | September 1-30, 2022 | 329,043 | $340.39 | | **Total** | **548,792** | **$350.82** | - As of October 24, 2022, **$230.2 million** of the authorized amount remained available under the current share repurchase program[149](index=149&type=chunk) - The Board may declare future dividends at their discretion, after considering various factors, including earnings, capital requirements, financial position, and contractual restrictions[149](index=149&type=chunk) [Item 6. Exhibits](index=34&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed, including corporate documents, officer certifications, and Inline XBRL documents for financial statements - Exhibits include certifications by the Chief Financial Officer and Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), and 18 U.S.C. Section 1350[151](index=151&type=chunk) - Inline XBRL documents are provided for the Consolidated Statements of Income, Comprehensive Income, Balance Sheets, Condensed Consolidated Statements of Cash Flows, Consolidated Statements of Changes in Stockholders' Equity, and Notes to Consolidated Financial Statements[151](index=151&type=chunk)[152](index=152&type=chunk) [SIGNATURE](index=35&type=section&id=SIGNATURE) This section confirms the report was signed by Melanie Housey Hart, Vice President and Chief Financial Officer, on October 27, 2022 - The report was signed by Melanie Housey Hart, Vice President and Chief Financial Officer, on behalf of POOL CORPORATION[156](index=156&type=chunk) - The signing date of the report was October 27, 2022[154](index=154&type=chunk)

Financial Data and Key Metrics Changes - Net sales for Q3 2022 reached $1.6 billion, a 14% increase compared to the same period in 2021, with base business growth of 10% [7][32] - Gross margin for the quarter was 31.2%, slightly down from 31.3% in the prior year, while year-to-date gross margin improved by 140 basis points to 31.8% [18][34] - Operating income increased by 11% to $264 million, with operating margins at 16.3% for the quarter and 18.1% year-to-date [21][37] - Earnings guidance for the full year 2022 was updated to a range of $18.50 to $19.05 per share, reflecting a 22% improvement at the midpoint compared to 2021 [22][54] Business Line Data and Key Metrics Changes - Commercial pool product demand grew by 28% for the quarter, aligning with a year-to-date growth rate of 27% [12] - Retail sales excluding Pinch A Penny increased by 4%, while Pinch A Penny's retail sales rose by 16% compared to the prior year [12][13] - Equipment sales grew by 9%, chemical sales surged by 32%, and building materials increased by 14% [13][15] Market Data and Key Metrics Changes - Florida's base business revenue increased by 20%, Arizona by 18%, Texas by 10%, and California by 16% [11] - Year-round markets grew by 15%, while seasonal markets experienced a 5% growth due to unfavorable weather [11] - European operations saw a significant decline of 24% in sales, impacted by adverse weather and economic conditions [16] Company Strategy and Development Direction - The company is focused on non-discretionary maintenance and repair products, leveraging inflation and smart pool product adoption to gain market share [10][24] - Strategic investments include the acquisition of Porpoise Pool & Patio to enhance value propositions for retail and DIY segments [27][28] - The company plans to expand Pinch A Penny franchise locations, enhancing its presence in key markets [28] Management's Comments on Operating Environment and Future Outlook - Management anticipates a decline in new pool construction activity by 10% to 15% compared to 2021, but remains optimistic about renovation and maintenance segments [9][70] - The company expects inflation to mitigate potential declines in new pool construction and renovation markets [27][30] - Management expressed confidence in maintaining operating margins and managing expenses effectively in a changing economic environment [62][84] Other Important Information - The company returned $572 million to shareholders through share buybacks and increased dividends [29] - Inventory increased to $1.5 billion, with a significant portion attributed to inflation and acquisitions [41] - The company maintains a conservative leverage ratio of 1.25x, well below its historical target range [47] Q&A Session Summary Question: Confidence in maintaining gross margin above 30% in 2023 - Management reiterated long-term guidance for gross margins, expecting to maintain levels despite seasonal declines [60] Question: Earnings leverage and contribution margins - Management believes expenses will grow less than sales, allowing for potential margin growth [62] Question: Volume growth and signs of weakness - Management noted that while new pool construction is expected to decline, overall volumes are holding steady due to renovation demand [64][66] Question: Impact of inflation on pricing - Management indicated that inflation is expected to be in the 4% to 5% range for 2023, with various factors influencing different product categories [74] Question: Inventory management and balance sheet outlook - Management expressed confidence in inventory management strategies and expects normalization in inventory levels by mid-2023 [78] Question: Potential impact of European operations on overall performance - Management indicated that European operations represent a small portion of total revenue and any further decline would have a limited impact [94] Question: Accretion from the Porpoise Pool & Patio acquisition - Management suggested that economic pressures could lead to a shift towards DIY maintenance, positioning the company to capitalize on this trend [96]

& POOLCORP® Where Outdoor Living Comes to Life® Forward-Looking Statements This presentation may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date of this presentation and are subject to change. POOLCORP undertakes no obligation to update or revise forward-looking statements to reflect new circumstances or unanticipated events as they occur. Actual results may differ mat ...

For the quarterly period ended June 30, 2022 or 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 ☐ 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) (State or other jurisdiction of (I.R.S. Employer incorporation ...

Pool Corporation (NASDAQ:POOL) Q2 2022 Earnings Conference Call July 21, 2022 11:00 AM ET Company Participants Melanie Hart - VP & CFO Peter Arvan - President & CEO Conference Call Participants Ryan Merkel - William Blair David Manthey - Baird Susan Maklari - Goldman Sachs Andrew Carter - Stifel Noah Merkousko - Stephens David McGregor - Longbow Research Stephen Volkmann - Jefferies Garik Shmois - Loop Capital Operator Good day and welcome to the Pool Corporation’s Second Quarter 2022 Conference Call. [Oper ...

& POOLCORP® Where Outdoor Living Comes to Life® Forward-Looking Statements This presentation may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date of this presentation and are subject to change. POOLCORP undertakes no obligation to update or revise forward-looking statements to reflect new circumstances or unanticipated events as they occur. Actual results may differ mat ...