# Pool Corp: Form 10-Q for the period ended Mar 31, 2020

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2020-04-30
- Accepted by EDGAR: Apr 30, 2020, 14:57 ET
- Period: 2020-03-31
- Accession: 0000945841-20-000102
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584120000102/pool-20200331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584120000102/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $677.3m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-01-01 to 2020-03-31 | $487.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2020-01-01 to 2020-03-31 | $189.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $147.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $35.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | −$25.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $30.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.77 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 40,955,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $19.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $8.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $22.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $66.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2020-03-31 | $1.24bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $1.75bn | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $652.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $1.40bn | us-gaap:Liabilities |
| Long-term debt | at 2020-03-31 | $569.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-03-31 | $8.2m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2020-03-31 | $8.1m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-03-31 | $348.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,849 characters.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2019 Annual Report on Form 10-K.

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

### Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

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

No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the COVID-19 pandemic, the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2019 Annual Report on Form 10-K and in Part II, Item 1A. of this Form 10-Q. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

### OVERVIEW

### Financial Results

We started the year with robust growth as we believe that underlying demand for our products has been strong. During the first quarter of 2020, we benefited from earlier pool openings, as mild weather combined with school closures drove greater early-season residential pool usage. Beginning in the middle of March, when stay-at-home orders related to the COVID-19 pandemic were being issued, sales growth began to level off.

Most of our North American operations are and have been continuously open for business as we are designated ‘essential’ in almost all of our markets. In Europe, our operations closed for a short period in France, Spain and Italy, in order to comply with local authorities’ orders. Our products and services are used to maintain and protect outdoor commercial, residential and municipal environments, including chemically-balanced, virus and bacteria-free swimming pool water and in the prevention of runoff, flood, fire and other natural disasters, and are ‘essential’ to the health and safety of the general public. As a result, our supply chain remains relatively intact, and with some exceptions, our customers are continuing to meet end-user needs.

As of the end of April, stay-at-home orders of varying degrees are now in place in almost all jurisdictions in which we operate, resulting in year-over-year sales declines for the month of April of five to ten percent as these orders impact our business unevenly throughout our network. It is unclear how long these conditions will last and what the continuing social and economic impact will be on our business after these restrictions are lifted. We have taken steps to preserve capital and reduce costs where warranted, while retaining options for further business adjustments as conditions evolve and we gain more clarity. For example, we currently project that our capital expenditures for 2020 will be approximately half of the $33.4 million spent in 2019. Our lower planned capital expenditures include the deferral of previously planned sales center openings until future conditions are clearer. We are working closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities. Given the seasonality of our business, our warehouses were already stocked with inventory in preparation for the upcoming peak season prior to the implementation of most stay-at-home orders. As a result, the limited vendor supply interruptions experienced to date have had a minimal impact on our business, although that could change depending on the duration and severity of social distancing conditions.

Net sales increased 13% to $677.3 million in the first quarter of 2020 compared to $597.5 million in the first quarter of 2019, while base business sales also grew 13% compared to the same period last year. During the quarter, sales benefited from strong demand for discretionary products as evidenced by higher sales growth in construction materials and products used in the remodel and replacement of in-ground pools. In addition, sales were favorably impacted by a pull forward of lower margin customer early-buy sales from the second quarter into the first and by an additional selling day in the first quarter of 2020 compared to the first quarter of 2019.

Gross profit increased 9% to $189.6 million in the first quarter of 2020 from $174.6 million in the same period of 2019. Base business gross profit improved 8% over the first quarter of 2019. Gross margin decreased 120 basis points to 28.0% in the first quarter of 2020 compared to 29.2% in the first quarter of 2019. Gross margin in the first quarter of 2019 reflected benefits from strategic inventory purchases we made ahead of vendor price increases resulting in a comparative decline in the first quarter of 2020 in addition to the impact of the customer early-buys mentioned above.

Selling and administrative expenses increased 13% to $154.0 million in the first quarter of 2020 compared to the first quarter of 2019. Base business operating expenses also increased 13% over the comparable 2019 period. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amount of our Australian reporting units. Excluding non-cash impairments, both selling and administrative expenses and base business operating expenses increased 8%, reflecting increases in growth-driven variable labor and freight expenses as well as greater facility-related costs.

Operating income in the first quarter of 2020 decreased 7% to $35.6 million compared to the same period in 2019. Adjusted operating income, excluding non-cash impairments, was $42.5 million in the first quarter of 2020 compared to operating income of $38.4 million in the first quarter of 2019, an 11% increase. Operating margin was 5.3% in the first quarter of 2020, or 6.3% excluding impairment charges, compared to 6.4% in the first quarter of 2019.

We recorded an $8.0 million, or $0.19 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, *Improvements to Employee Share-Based Payment Accounting*, in the quarter ended March 31, 2020 compared to a tax benefit of $8.8 million, or $0.21 per diluted share, realized in the same period of 2019.

Net income decreased 5% to $30.9 million in the first quarter of 2020 compared to $32.6 million in the first quarter of 2019. Adjusted net income in the first quarter of 2020, excluding the tax-effected impact of non-cash impairments of $6.3 million, or $0.15 per diluted share, increased 14% to $37.2 million. Earnings per share decreased 6% to $0.75 per diluted share in the first quarter of 2020 compared to $0.80 in the same period of 2019. Excluding after-tax non-cash impairments in the first quarter of 2020 and tax benefits in both periods, adjusted earnings per diluted share increased 20% to $0.71 in the first quarter of 2020 compared to $0.59 in the first quarter of 2019. See the reconciliation of GAAP to non-GAAP measures included in RESULTS OF OPERATIONS below.

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

### Financial Position and Liquidity

As of March 31, 2020, total net receivables, including pledged receivables, increased 10% compared to March 31, 2019, driven by our March sales growth. Our DSO, as calculated on a trailing four quarters basis, was 29.2 days at March 31, 2020 and 29.8 days at March 31, 2019. Our allowance for doubtful accounts balance was $6.9 million at March 31, 2020 and $5.6 million at March 31, 2019.

Net inventory levels grew 5% compared to levels at March 31, 2019. The inventory reserve was $10.3 million at March 31, 2020 and $8.5 million at March 31, 2019. Our inventory turns, as calculated on a trailing four quarters basis, were 3.2 times at March 31, 2020 and 3.1 times at March 31, 2019.

Total debt outstanding at March 31, 2020 was $586.1 million, down 16% compared to total debt at March 31, 2019. We have used debt proceeds over the past 12 months primarily to fund business-driven working capital growth, acquisitions and share repurchases.

### Current Trends and Outlook

For a detailed discussion of trends through 2019, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

We expect 2020 diluted EPS of $5.30 to $5.90, including the impact of first quarter tax benefits of $0.19 and the $0.15 impact of non-cash impairments recorded in the first quarter of 2020. Excluding the impact of non-cash impairments, we expect 2020 adjusted diluted EPS of $5.45 to $6.05. Our updated guidance range includes a wide range of outcomes as the severity and duration of the COVID-19 pandemic remains unknown. Our previous 2020 earnings guidance range disclosed earlier in the year was $6.47 to $6.77 per diluted share, including an estimated $0.06 tax benefit. See the reconciliation of GAAP to non-GAAP measures included in RESULTS OF OPERATIONS below.

The top of our earnings guidance range assumes sales growth of 2% from 2019, while the bottom of our range assumes a sales decline of 2.5%. The majority of our business is driven by recurring revenue streams from the installed base of pools, and we believe that underlying demand for most discretionary products, including those serving the renovation and construction markets, remains strong. At the same time, the impact of extended stay-at-home and social distancing orders as well as unfavorable economic conditions resulting from the COVID-19 pandemic could have a more severe adverse impact on our business, including an easing of demand for products dependent on discretionary spending.

We expect gross margin to decline in the second quarter of 2020 compared to the second quarter of 2019 when margin growth was 30 basis points. Depending on competitor price concessions, we expect that gross margin for the full year of 2020 could decline slightly to moderately compared to gross margin for the full year of 2019.

We expect base business operating expenses for the remainder of the year to benefit from actions taken by management to reduce costs and to vary in line with changes in sales performance. For the year, we expect operating expenses to range from modest growth to modest declines compared to 2019.

We expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2020 will approximate 25.5%, which is consistent with 2019. Our effective tax rate is dependent on our results of operations and may change if actual results differ materially from our current expectations, particularly any significant changes in our geographic mix. Due to ASU 2016-09, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. We recorded an $8.0 million, or $0.19 per diluted share, tax benefit from ASU 2016-09 for the three months ended March 31, 2020. We may recognize additional tax benefits related to stock option exercises in 2020 from grants that expire in years after 2020. We have not included any expected benefits in our guidance beyond what we have recognized as of March 31, 2020.

We expect cash provided by operations will remain strong in comparison to net income for the 2020 fiscal year. We expect to continue to use cash to fund opportunistic share repurchases over the next year. We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors (“the Board”). Most recently, on April 23, 2020, the Board declared a quarterly cash dividend of $0.58 per share, a five percent increase over the previous dividend amount of $0.55 per share. The dividend will be payable on May 29, 2020 to holders of record on May 15, 2020.

### RESULTS OF OPERATIONS

As of March 31, 2020, we conducted operations through 378 sales centers in North America, Europe and Australia. For the three months ended March 31, 2020, approximately 95% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net sales | **100.0%** | 100.0% |
| Cost of sales | **72.0** | 70.8 |
| Gross profit | **28.0** | 29.2 |
| Selling and administrative expenses | **21.7** | 22.8 |
| Impairment of goodwill and other assets | **1.0** | — |
| Operating income | **5.3** | 6.4 |
| Interest and other non-operating expenses, net | **0.7** | 1.1 |
| Income before income taxes and equity earnings | **4.5%** | 5.3% |

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

We have included the results of operations from acquisitions in 2020 and 2019 in our consolidated results since the acquisition dates.

### Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

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

*(Unaudited)*

*(in thousands)*

|  | Base Business Three Months Ended March 31, 2020 | 2019 | Excluded Three Months Ended March 31, 2020 | 2019 | Total Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$667,804** | $588,390 | **$9,484** | $9,066 | **$677,288** | $597,456 |
| Gross profit | **186,810** | 172,608 | **2,819** | 2,023 | **189,629** | 174,631 |
| Gross margin | **28.0%** | 29.3% | **29.7%** | 22.3% | **28.0%** | 29.2% |
| Operating expenses (1) | **150,873** | 133,599 | **3,168** | 2,646 | **154,041** | 136,245 |
| Expenses as a % of net sales | **22.6%** | 22.7% | **33.4%** | 29.2% | **22.7%** | 22.8% |
| Operating income (loss) (1) | **35,937** | 39,009 | **(349)** | (623) | **35,588** | 38,386 |
| Operating margin | **5.4%** | 6.6% | **(3.7)%** | (6.9)% | **5.3%** | 6.4% |

(1) Base business and total include $6.9 million of impairment from goodwill and other assets.

In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

| Acquired | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| Master Tile Network LLC (1) | February 2020 | 4 | February - March 2020 |
| W.W. Adcock, Inc. (1) | January 2019 | 4 | January - March 2020 and January - March 2019 |
| Turf & Garden, Inc. (1) | November 2018 | 4 | January 2020 and January 2019 |

(1) We acquired certain distribution assets of each of these companies.

When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales center count during the first three months of 2020:

|  |  |
| --- | ---: |
| December 31, 2019 | 373 |
| Acquired locations | 4 |
| New locations | 2 |
| Consolidated locations | (1) |
| March 31, 2020 | 378 |

### Net Sales

*(in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$677.3** | $597.5 | $79.8 | 13% |

Net sales and base business net sales increased 13% in the first quarter of 2020 compared to the first quarter of 2019. During the first quarter of 2020, sales benefited from earlier pool openings, as mild weather combined with school closures, drove greater early-season residential pool usage. In the first quarter of 2020, we observed above-average temperatures in most of the contiguous United States, particularly in the southern United States, whereas in the first quarter 2019, wetter and cooler-than-normal temperatures prevailed.

The following factors benefited our sales (listed in order of estimated magnitude):

- strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials (see discussion below);
- market share gains, particularly in building materials and commercial products (see discussion below); and
- inflationary product cost increases of approximately 1% - 2%.

Additionally, sales were favorably impacted by a pull forward of lower margin customer early-buy sales from the second quarter into the first and by an additional selling day in the first quarter of 2020 compared to the first quarter of 2019.

We believe that higher sales growth rates for certain product offerings, such as equipment and building materials, evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first quarter of 2020, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased 18% compared to the same period last year. These products collectively represented approximately 31% of net sales for the period. Sales of building materials grew 14% compared to the first quarter of 2019 and represented approximately 14% of net sales in the first quarter of 2020.

Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above. Sales to these customers represented approximately 5% of our consolidated net sales for the first quarter of 2020 and increased 5% compared to the first quarter of 2019.

### Gross Profit

*(in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$189.6** | $174.6 | $15.0 | 9% |
| Gross margin | **28.0%** | 29.2% |  |  |

Gross margin was impacted in the first quarter of 2020 by a pull forward of lower margin customer early-buy sales from the second quarter into the first. In addition, gross margin in the first quarter of 2019 reflected benefits from strategic inventory purchases ahead of vendor price increases resulting in a comparative decline in the first quarter of 2020.

### Operating Expenses

*(in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Selling and administrative expenses | **$147.1** | $136.2 | $10.9 | 8% |
| Impairment of goodwill and other assets | **6.9** | — | 6.9 | 100% |
| Operating expenses as a % of net sales | **22.7%** | 22.8% |  |  |

Operating expenses and base business operating expenses increased 13% in the first quarter of 2020 compared to the first quarter of 2019. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units. Excluding impairment charges, operating expenses and base business operating expenses were up 8%, reflecting increases in growth-driven variable labor and freight expenses as well as greater facility-related costs.

### Interest and Other Non-Operating Expenses, Net

Interest and other non-operating expenses, net for the first quarter of 2020 decreased $1.8 million compared to the first quarter of 2019. The decrease reflects lower average debt levels and lower average interest rates between periods. Our weighted average effective interest rate decreased to 2.7% for the first quarter of 2020 from 3.7% for the first quarter of 2019 on lower average outstanding debt of $493.7 million versus $674.6 million for the respective periods.

### Income Taxes

Our effective income tax rate was a 0.1% benefit for the three months ended March 31, 2020 compared to a 2.5% benefit for the three months ended March 31, 2019. We recorded an $8.0 million tax benefit from ASU 2016-09 in the quarter ended March 31, 2020 compared to a benefit of $8.8 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.8% for the first quarter of 2020 and 25.1% for the first quarter of 2019. Since the goodwill and intangibles impairment charge of $4.4 million is non-deductible for tax purposes, it increased our effective tax rate 0.4% for the period ended March 31, 2020.

### Net Income and Earnings Per Share

Net income decreased 5% to $30.9 million in the first quarter of 2020 compared to the first quarter of 2019. Adjusted net income in the first quarter of 2020, excluding the tax-effected impact of non-cash impairments of $6.3 million, or $0.15 per diluted share, increased 14% to $37.2 million. Earnings per diluted share decreased 6% to $0.75 in the first quarter of 2020 versus $0.80 per diluted share for the comparable 2019 period. The benefit from ASU 2016-09 increased diluted earnings per share by $0.19 in the first quarter of 2020 and $0.21 in the first quarter of 2019. Excluding non-cash impairments, net of tax, in the first quarter of 2020 and tax benefits in both periods, earnings per diluted share increased 20% to $0.71 in the first quarter of 2020 compared to $0.59 in the first quarter of 2019. See the reconciliation of GAAP to non-GAAP measures below.

### Reconciliation of Non-GAAP Financial Measures

### 2020 Diluted EPS Guidance

We have included adjusted projected 2020 diluted EPS, a non-GAAP financial measure, as a supplemental disclosure in order to demonstrate the impact of our first quarter 2020 non-cash impairment charge on our projected 2020 diluted EPS and provide investors and others with additional information about our potential future operating performance. We believe adjusted projected 2020 diluted EPS should be considered in addition to, and not as a substitute for, our projected 2020 diluted EPS presented in accordance with GAAP, and in the context of our other forward-looking and cautionary statements included within this Form 10-Q.

The table below presents a reconciliation of projected 2020 diluted EPS to adjusted projected 2020 diluted EPS.

*(Unaudited)*

|  | 2020 Guidance Range Floor | Ceiling |
| --- | ---: | ---: |
| Diluted EPS (1) | **$5.30** | **$5.90** |
| After-tax non-cash impairment charges | **0.15** | **0.15** |
| Adjusted Diluted EPS (1) | **$5.45** | **$6.05** |

(1) Includes first quarter 2020 ASU 2016-09 tax benefit of $0.19 per diluted share and does not include potential additional tax benefits.

### Adjusted Income Statement Information

We have included adjusted operating income, adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures, as supplemental disclosures because we believe these measures are useful to investors and others in assessing our year-over-year operating performance. We believe these measures should be considered in addition to, not as a substitute for, operating income, net income, and diluted EPS presented in accordance with GAAP, respectively, and in the context of our other disclosures included within this Form 10-Q. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

The table below presents a reconciliation of operating income to adjusted operating income.

*(Unaudited)*

*(in thousands)*

|  | Three Months Ended March 31, 2020 |
| --- | ---: |
| Operating income | **$35,588** |
| Impairment of goodwill and other assets | **6,944** |
| Adjusted operating income | **$42,532** |

19

The table below presents a reconciliation of net income to adjusted net income.

*(Unaudited)*

*(in thousands)*

|  | Three Months Ended March 31, 2020 |
| --- | ---: |
| Net income | **$30,912** |
| Impairment of goodwill and other assets | **6,944** |
| Tax impact on impairment of long-term note (1) | **(654)** |
| Adjusted net income | **$37,202** |

(1) Our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles of $4.4 million and the $8.0 million tax benefit from ASU 2016-19, our effective tax rate was 25.4%, which was used to calculate the tax impact related to the $2.5 million impairment from our long-term note.

The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.

*(Unaudited)*

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Diluted EPS | **$0.75** | $0.80 |
| After-tax non-cash impairment charges | **0.15** | — |
| Adjusted diluted EPS excluding after-tax non-cash impairment charges | **0.90** | 0.80 |
| Tax benefit | **(0.19)** | (0.21) |
| Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit | **$0.71** | $0.59 |

20

### Seasonality and Quarterly Fluctuations

Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and irrigation and landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2019, we generated approximately 63% of our net sales and 81% of our operating income in the second and third quarters of the year.

We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

The following table presents certain unaudited quarterly data for the first quarter of 2020, the four quarters of 2019 and the fourth, third and second quarters of 2018. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

*(Unaudited)*

*(in thousands)*

| Statement of Income Data | QUARTER 2020 First | 2019 Fourth | Third | Second | First | 2018 Fourth | Third | Second |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$677,288** | $582,234 | $898,500 | $1,121,328 | $597,456 | $543,082 | $811,311 | $1,057,804 |
| Gross profit | **189,629** | 162,050 | 257,931 | 330,314 | 174,631 | 160,442 | 235,003 | 308,655 |
| Operating income | **35,588** | 25,798 | 104,540 | 172,523 | 38,386 | 25,970 | 92,337 | 162,042 |
| Net income | **30,912** | 18,024 | 79,525 | 131,390 | 32,637 | 16,811 | 69,261 | 117,049 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$345,915** | $226,539 | $307,798 | $417,126 | $313,127 | $207,801 | $287,773 | $404,415 |
| Product inventories, net | **858,190** | 702,274 | 616,217 | 694,447 | 815,742 | 672,579 | 609,983 | 606,583 |
| Accounts payable | **517,620** | 261,963 | 214,309 | 342,335 | 472,487 | 237,835 | 204,706 | 300,232 |
| Total debt | **586,050** | 511,407 | 547,560 | 692,337 | 698,977 | 666,761 | 580,703 | 657,120 |

We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the fourth quarter after the peak selling season ends.

Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects resulting from various weather conditions.

| Weather |  | Possible Effects |
| --- | --- | --- |
| Hot and dry | • | Increased purchases of chemicals and supplies for existing swimming pools |
|  | • | Increased purchases of above-ground pools and irrigation and lawn care products |
| Unseasonably cool weather or extraordinary amounts of rain | • | Fewer pool and irrigation and landscape installations |
|  | • | Decreased purchases of chemicals and supplies |
|  | • | Decreased purchases of impulse items such as above-ground pools and accessories |
| Unseasonably early warming trends in spring/late cooling trends in fall | • | A longer pool and landscape season, thus positively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |
| Unseasonably late warming trends in spring/early cooling trends in fall | • | A shorter pool and landscape season, thus negatively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |

### Weather Impacts on 2020 and 2019 Results

In the first quarter of 2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States. These favorable weather conditions contrast from the first quarter of 2019 when wetter and cooler-than-normal temperatures to begin the year hindered sales growth.

### LIQUIDITY AND CAPITAL RESOURCES

Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:

- cash flows generated from operating activities;
- the adequacy of available bank lines of credit;
- the quality of our receivables;
- acquisitions;
- dividend payments;
- capital expenditures;
- changes in income tax laws and regulations;
- the timing and extent of share repurchases; and
- the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations and other general corporate initiatives, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

- capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;
- strategic acquisitions executed opportunistically;
- payment of cash dividends as and when declared by our Board of Directors (Board);
- repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and
- repurchases of our common stock under our Board-authorized share repurchase program.

Capital expenditures were 1.0% of net sales in 2019, 1.1% of net sales in 2018 and 1.4% of net sales in 2017. Our higher capital spending in 2017 related to expanding our facilities and purchasing delivery vehicles to address growth. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. We expect total capital expenditures in 2020 to be half of 2019 capital expenditures as we reduce spending in response to the economic impacts of the COVID-19 pandemic.

### Sources and Uses of Cash

The following table summarizes our cash flows (in thousands):

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | **$19,728** | $28,804 |
| Investing activities | **(21,982)** | (16,109) |
| Financing activities | **(8,149)** | (2,050) |

Cash provided by operations of $19.7 million for the first three months of 2020 decreased $9.1 million compared to the first three months of 2019 due to fluctuations in our working capital balances primarily related to growth of our receivables and inventories, which were offset by increases in our accounts payable.

Cash used in investing activities for the first three months of 2020 increased compared to the first three months of 2019 primarily due to the acquisition of Master Tile Network LLC, which we completed in February 2020.

Cash used in financing activities was $8.1 million for the first three months of 2020 compared to $2.1 million for the first three months of 2019, which reflects additional share repurchases of $43.5 million and an increase in dividends paid of $4.3 million, offset by a $42.4 million increase in amounts provided by net borrowings.

### Future Sources and Uses of Cash

### Revolving Credit Facility

Our Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility and includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At March 31, 2020, there was $192.8 million outstanding, a $4.8 million standby letter of credit outstanding and $552.4 million available for borrowing under the Credit Facility. We pay interest on revolving borrowings under the Credit Facility at a variable rate based on the one month London Interbank Offered Rate (LIBOR), plus an applicable margin. The weighted average effective interest rate for the Credit Facility as of March 31, 2020 was approximately 1.9%, excluding commitment fees.

### Term Facility

Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. The Term Facility will be repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal repayment equal to 66.25% of the Term Facility due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At March 31, 2020, there was $182.7 million outstanding under the Term Facility with a weighted average effective interest rate of 2.4%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

### Financial Covenants

Financial covenants of the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of March 31, 2020, the calculations of these two covenants are detailed below:

- *Maximum Average Total Leverage Ratio*. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of March 31, 2020, our average total leverage ratio equaled 1.49 (compared to 1.61 as of December 31, 2019) and the TTM average total debt amount used in this calculation was $572.7 million.
- *Minimum Fixed Charge Coverage Ratio*. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of March 31, 2020, our fixed charge ratio equaled 5.56 (compared to 5.38 as of December 31, 2019) and TTM Rental Expense was $60.6 million.

The Credit Facility and the Term Facility also limit the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s Net Income (as defined in the Credit Facility and the Term Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.

Under the Credit Facility and the Term Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

### Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak funding capacity of up to $295.0 million between May 1 and May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $120.0 million to $275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021.

The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At March 31, 2020, there was $195.1 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.6%, excluding commitment fees.

### Interest Rate Swaps

We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings. Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.

As of March 31, 2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million. Interest expense related to the notional amounts under this swap contract is based on the fixed rate plus the applicable margin on our variable rate borrowings.

We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.

The following table provides details related to each of our forward-starting interest rate swap contracts:

| Derivative | Inception Date | Effective Date | Termination Date | Notional Amount (in millions) | Fixed Interest Rate |
| --- | --- | --- | --- | ---: | ---: |
| Forward-starting interest rate swap 1 | May 7, 2019 | November 20, 2020 | September 29, 2022 | $75.0 | 2.0925% |
| Forward-starting interest rate swap 2 | July 25, 2019 | November 20, 2020 | September 29, 2022 | $75.0 | 1.5500% |
| Forward-starting interest rate swap 3 | February 5, 2020 | February 26, 2021 | February 28, 2025 | $150.0 | 1.3800% |
| Forward-starting interest rate swap 4 | March 9, 2020 | September 29, 2022 | February 26, 2027 | $150.0 | 0.7400% |
| Forward-starting interest rate swap 5 | March 9, 2020 | February 28, 2025 | February 26, 2027 | $150.0 | 0.8130% |

### Compliance and Future Availability

As of March 31, 2020, we believe we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility. We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 2019 Annual Report on Form 10-K.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.

As of April 27, 2020, $182.8 million of the current Board-authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the Credit and Receivables Facilities.

### CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

- those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and
- those for which changes in the estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2019 Annual Report on Form 10-K. See **Allowance for Doubtful Accounts** in Note 1 for more information on our adoption of ASU 2016-13. We have not changed any other policies from those previously disclosed.

### Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

## Market risk

As filed, 708 characters.

### Interest Rate Risk

There have been no material changes during the three months ended March 31, 2020 from what we reported in our 2019 Annual Report on Form 10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2019 Annual Report on Form 10-K.

### Currency Risk

There have been no material changes during the three months ended March 31, 2020 from what we reported in our 2019 Annual Report on Form 10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2019 Annual Report on Form 10-K.

## Controls and procedures

As filed, 1,535 characters.

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2020, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of March 31, 2020, our disclosure controls and procedures were effective.

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Based on the most recent evaluation, we have concluded that no change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,887 characters.

In light of recent developments related to the COVID-19 pandemic, we are supplementing the risk factors previously disclosed in our Annual Report on Form 10-K with the below risk factor. There have been no other material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K.

***The outbreak of COVID-19 and associated responses could adversely impact our business and results of operations.***

The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world. In response, governmental authorities have imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary store closures, limitation of store hours, limitations on the number of people in stores or in warehouses, requirements on sanitation and social distancing practices and travel restrictions, among other effects. Our sales in March and April 2020 were adversely impacted by the COVID-19 pandemic. Additionally, in the first quarter of 2020, we recorded impairment charges of $6.9 million related to the pandemic. For additional information, see the “Overview” section of Management’s Discussion and Analysis in Part I, Item 2 and **Nonrecurring Fair Value Measurements** within Note 4. COVID-19 and any resulting economic downturn may have further negative impacts on our business, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.

Filed Apr 30, 2020.
Source: SEC EDGAR, the filing index for accession 0000945841-20-000102. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.