Pool Corporation (Nasdaq/GSM:POOL) today reported record results for the third quarter of 2020.

“I could not be happier with the truly outstanding results that we reported for the third quarter. Consumer spending on outdoor living products remained strong, and our team continued to execute at a very high level, which resulted in stellar results this quarter across a broad range of operating metrics,” said Peter D. Arvan, president and CEO. “In addition, as part of our strategic growth initiatives, we further expanded our network through two acquisitions, Northeastern Swimming Pool Distributors, Inc., which closed on September 11, 2020, and Jet Line Products, Inc., which closed on October 1, 2020. These businesses bring solid teams that have excelled at building exceptional customer relationships, and we are excited to have them join the POOLCORP family.”

In the third quarter of 2020, net sales increased 27% to a record $1.14 billion compared to $898.5 million in the third quarter of 2019. Our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic, as working from home becomes routine and families create and enjoy safe social and entertainment alternatives in their own backyards. We realized broad sales gains across many product categories, as maintenance, replacement, refurbishment and construction activities across most geographies were strong.

Gross profit increased 27% to a record $328.7 million in the third quarter of 2020 from $257.9 million in the same period of 2019. Gross margin increased 20 basis points to 28.9% in the third quarter of 2020 compared to 28.7% in the third quarter of 2019, with increased purchase volumes driving improvements in supply chain management.

Selling and administrative expenses (operating expenses) increased 18% to $180.5 million in the third quarter of 2020 compared to $153.4 million in the third quarter of 2019, primarily reflecting a $20.1 million increase in performance-based compensation. Excluding performance-based compensation in both periods, operating expenses increased 5% due to growth-driven freight expenses and greater facility-related costs. As a percentage of net sales, operating expenses decreased to 15.8% in the third quarter of 2020 compared to 17.1% in the same period of 2019 as we continued to realize benefits from discretionary spending controls implemented earlier in the year.

Operating income in the third quarter of 2020 increased 42% to $148.2 million compared to $104.5 million in the same period in 2019. Operating margin was 13.0% in the third quarter of 2020 compared to 11.6% in the third quarter of 2019.

We recorded an $8.5 million, or $0.21 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2020, compared to a tax benefit of $4.5 million, or $0.11 per diluted share, realized in the same period of 2019.

Net income increased 50% to $119.1 million in the third quarter of 2020 compared to $79.5 million in the third quarter of 2019. Earnings per share increased 50% to $2.92 per diluted share in the third quarter of 2020 compared to $1.95 in the same period of 2019. Excluding the impact from ASU 2016-09 in both periods, earnings per diluted share increased 47% to $2.71 in the third quarter of 2020 compared to $1.84 in the third quarter of 2019.

Net sales for the nine months ended September 30, 2020 increased 18% to a record $3.10 billion from $2.62 billion in the nine months ended September 30, 2019. Gross margin declined 30 basis points to 28.8% compared to 29.1% in the same period last year, primarily due to sales of lower margin, big-ticket items, such as in-ground and above-ground pools and pool equipment, which comprised a larger portion of our product mix in the nine months ended September 30, 2020 compared to the first nine months of 2019.

Operating expenses for the nine months ended September 30, 2020 increased 12% compared to the first nine months 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 were up 11%, reflecting a $32.1 million increase in performance-based compensation, in addition to growth-driven freight expenses and greater facility-related costs.

Operating income for the first nine months of 2020 increased 24% to a record $389.7 million compared to $315.4 million in the same period last year.   Adjusted operating income, excluding non-cash impairments, for the first nine months of 2020 increased 26% from the prior year to $396.6 million. See the reconciliation of GAAP to non-GAAP measures in the addendum of this release. Operating margin for the nine months ended September 30, 2020 was 12.6% compared to 12.1% for the nine months ended September 30, 2019.

We recorded a $22.6 million, or $0.55 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2020 compared to a $21.1 million, or $0.52 per diluted share, tax benefit in the same period of 2019.

Net income for the nine months ended September 30, 2020 increased 26% to a record $307.6 million compared to $243.6 million for the nine months ended September 30, 2019. Adjusted net income for the first nine months of 2020, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 29% to $313.9 million. Earnings per share for the first nine months of 2020 increased 26% to $7.53 per diluted share versus $5.97 in the first nine months of 2019. Excluding the impact of non-cash impairments, net of tax, adjusted diluted EPS increased 29% over 2019.

On the balance sheet at September 30, 2020, total net receivables, including pledged receivables, increased 19% compared to September 30, 2019, driven by our September sales growth and partially offset by improved collections. Inventory levels decreased 1% compared to September 30, 2019, reflecting the strong pace of sales in the third quarter of 2020. Total debt outstanding was $339.9 million at September 30, 2020, a $207.6 million decrease from total debt at September 30, 2019, as we have utilized our operating cash flows to decrease debt balances.

Cash provided by operations was $388.9 million in the first nine months of 2020 compared to $243.3 million in the first nine months of 2019, an improvement of $145.7 million. The improvement in cash provided by operations primarily reflects an increase in net income, a decline in inventory balances between periods and improvements in working capital management. Adjusted EBITDA (as defined in the addendum to this release) was $429.4 million and $347.1 million for the nine months ended September 30, 2020, and September 30, 2019, respectively. Interest expense decreased compared to last year primarily due to lower average debt levels and lower average interest rates.

“Our success is a direct result of the contributions and achievements of the POOLCORP team who have continued supporting our customers through these difficult and uncertain times. As we move forward into the fourth quarter, we believe that demand for our products remains strong, and our teams are committed to sustaining our track record of operational excellence. Based on our results to date and expectations for the remainder of the year, we are increasing and narrowing our annual earnings guidance to $8.05 to $8.35 per diluted share, including the impact of year-to-date tax benefits of $0.55 and the $0.15 impact of non-cash impairments recorded in the first quarter of 2020,” commented Arvan. “Excluding the impact of non-cash impairments, we expect 2020 adjusted diluted EPS of $8.20 to $8.50. Our previous 2020 earnings guidance range disclosed in our July 23, 2020 earnings release was $6.90 to $7.30 per diluted share or $7.05 to $7.45, excluding the impact of non-cash impairments.” See the reconciliation of GAAP to non-GAAP measures in the addendum of this release.

POOLCORP is the world’s largest wholesale distributor of swimming pool and related backyard products. POOLCORP operates 381 sales centers in North America, Europe and Australia, through which it distributes more than 200,000 national brand and private label products to roughly 120,000 wholesale customers. For more information, please visit www.poolcorp.com.

This news release includes “forward-looking” statements that involve risks and uncertainties that are generally identifiable through the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “should” and similar expressions and include projections of earnings. The forward-looking statements in this release are 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 release, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. Actual results may differ materially due to a variety of 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 POOLCORP’s 2019 Annual Report on Form 10-K, 2020 Quarterly Reports on Form 10-Q and other reports and filings filed with the Securities and Exchange Commission (SEC).

CONTACT:Curtis J. ScheelDirector of Investor Relations985.801.5341curtis.scheel@poolcorp.com

POOL CORPORATIONConsolidated Statements of Income(Unaudited)(In thousands, except per share data)

  Three Months Ended   Nine Months Ended
  September 30,   September 30,
  2020   2019   2020   2019
Net sales $ 1,139,229     $ 898,500     $ 3,097,362     $ 2,617,283  
Cost of sales 810,531     640,569     2,205,555     1,854,408  
Gross profit 328,698     257,931     891,807     762,875  
Percent 28.9 %   28.7 %   28.8 %   29.1 %
               
Selling and administrative expenses 180,465     153,391     495,186     447,427  
Impairment of goodwill and other assets         6,944     —   
Operating income 148,233     104,540     389,677     315,448  
Percent 13.0 %   11.6 %   12.6 %   12.1 %
               
Interest and other non-operating expenses, net 1,861     5,498     9,292     18,538  
Income before income taxes and equity earnings 146,372     99,042     380,385     296,910  
Provision for income taxes 27,360     19,593     73,068     53,569  
Equity earnings in unconsolidated investments, net 86     76     248     210  
Net income $ 119,098     $ 79,525     $ 307,565     $ 243,551  
               
Earnings per share:              
Basic $ 2.97     $ 1.99     $ 7.68     $ 6.13  
Diluted $ 2.92     $ 1.95     $ 7.53     $ 5.97  
Weighted average shares outstanding:              
Basic 40,123     39,933     40,073     39,750  
Diluted 40,839     40,865     40,849     40,811  
               
Cash dividends declared per common share $ 0.58     $ 0.55     $ 1.71     $ 1.55  

POOL CORPORATIONCondensed Consolidated Balance Sheets(Unaudited)(In thousands)

    September 30,   September 30,   Change
    2020   2019     $     %  
                           
Assets                        
Current assets:                        
  Cash and cash equivalents $ 74,749     $ 36,693     $ 38,056     104   %
  Receivables, net (1)   135,555       95,971       39,584     41    
  Receivables pledged under receivables facility   230,857       211,827       19,030     9    
  Product inventories, net (2)   612,824       616,217       (3,393 )   (1 )  
  Prepaid expenses and other current assets   12,696       12,384       312     3    
Total current assets   1,066,681       973,092       93,589     10    
                           
Property and equipment, net   109,086       112,816       (3,730 )   (3 )  
Goodwill   199,360       188,133       11,227     6    
Other intangible assets, net   10,522       11,235       (713 )   (6 )  
Equity interest investments   1,314       1,237       77     6    
Operating lease assets   180,230       175,878       4,352     2    
Other assets   20,396       19,017       1,379     7    
Total assets $ 1,587,589     $ 1,481,408     $ 106,181     7   %
                           
Liabilities and stockholders’ equity                        
Current liabilities:                        
  Accounts payable $ 268,412     $ 214,309     $ 54,103     25   %
  Accrued expenses and other current liabilities   145,420       81,459       63,961     79    
  Short-term borrowings and current portion of long-term debt   11,709       11,840       (131 )   (1 )  
  Current operating lease liabilities   56,977       56,025       952     2    
Total current liabilities   482,518       363,633       118,885     33    
                           
Deferred income taxes   29,476       27,951       1,525     5    
Long-term debt, net   328,225       535,720       (207,495 )   (39 )  
Other long-term liabilities   32,846       26,737       6,109     23    
Non-current operating lease liabilities   125,023       121,397       3,626     3    
Total liabilities   998,088       1,075,438       (77,350 )   (7 )  
Total stockholders’ equity   589,501       405,970       183,531     45    
Total liabilities and stockholders’ equity $ 1,587,589     $ 1,481,408     $ 106,181     7   %
(1) The allowance for doubtful accounts was $5.3 million at September 30, 2020 and $6.2 million at September 30, 2019.
(2) The inventory reserve was $11.4 million at September 30, 2020 and $9.9 million at September 30, 2019.

POOL CORPORATIONCondensed Consolidated Statements of Cash Flows(Unaudited)(In thousands)

  Nine Months EndedSeptember 30,      
    2020     2019     Change
Operating activities                
Net income $ 307,565     $ 243,551     $ 64,014  
Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation   20,979       20,648       331  
  Amortization   975       1,049       (74 )
  Share-based compensation   11,095       10,243       852  
  Equity earnings in unconsolidated investments, net   (248 )     (210 )     (38 )
  Impairment of goodwill and other assets   6,944       —        6,944  
  Other   1,092       5,334       (4,242 )
Changes in operating assets and liabilities, net of effects of acquisitions:                
  Receivables   (135,129 )     (98,538 )     (36,591 )
  Product inventories   99,767       68,827       30,940  
  Prepaid expenses and other assets   311       1,231       (920 )
  Accounts payable   3,385       (29,782 )     33,167  
  Accrued expenses and other current liabilities   72,178       20,900       51,278  
Net cash provided by operating activities   388,914       243,253       145,661  
                 
Investing activities                
Acquisition of businesses, net of cash acquired   (24,655 )     (8,913 )     (15,742 )
Purchases of property and equipment, net of sale proceeds   (16,897 )     (26,926 )     10,029  
Net cash used in investing activities   (41,552 )     (35,839 )     (5,713 )
                 
Financing activities                
Proceeds from revolving line of credit   749,840       836,534       (86,694 )
Payments on revolving line of credit   (909,637 )     (1,011,430 )     101,793  
Proceeds from asset-backed financing   261,700       189,000       72,700  
Payments on asset-backed financing   (266,700 )     (136,300 )     (130,400 )
Payments on term facility   (6,938 )     —        (6,938 )
Proceeds from short-term borrowings and current portion of long-term debt   13,255       27,633       (14,378 )
Payments on short-term borrowings and current portion of long-term debt   (13,291 )     (24,962 )     11,671  
Payments of deferred financing costs   (12 )           (12 )
Payments of deferred and contingent acquisition consideration   (281 )     (311 )     30  
Proceeds from stock issued under share-based compensation plans   16,696       17,042       (346 )
Payments of cash dividends   (68,599 )     (61,752 )     (6,847 )
Purchases of treasury stock   (76,194 )     (23,188 )     (53,006 )
Net cash used in financing activities   (300,161 )     (187,734 )     (112,427 )
Effect of exchange rate changes on cash and cash equivalents   (1,035 )     655       (1,690 )
Change in cash and cash equivalents   46,166       20,335       25,831  
Cash and cash equivalents at beginning of period   28,583       16,358       12,225  
Cash and cash equivalents at end of period $ 74,749     $ 36,693     $ 38,056  

ADDENDUM

Base Business

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

(Unaudited)   Base Business   Excluded   Total
(in thousands)   Three Months Ended   Three Months Ended   Three Months Ended
    September 30,   September 30,   September 30,
    2020   2019   2020   2019   2020   2019
Net sales   $ 1,133,608     $ 895,489     $ 5,621     $ 3,011       $ 1,139,229     $ 898,500  
                         
Gross profit   326,692     257,525     2,006     406       328,698     257,931  
Gross margin   28.8 %   28.8 %   35.7 %   13.5   %   28.9 %   28.7 %
                         
Operating expenses   178,773     152,630     1,692     761       180,465     153,391  
Expenses as a % of net sales   15.8 %   17.0 %   30.1 %   25.3   %   15.8 %   17.1 %
                         
Operating income (loss)   147,919     104,895     314     (355 )     148,233     104,540  
Operating margin   13.0 %   11.7 %   5.6 %   (11.8 ) %   13.0 %   11.6 %
(Unaudited)   Base Business   Excluded   Total
(in thousands)   Nine Months Ended   Nine Months Ended   Nine Months Ended
    September 30,   September 30,   September 30,
    2020   2019   2020   2019   2020   2019
Net sales   $ 3,078,463     $ 2,601,801     $ 18,899     $ 15,482       $ 3,097,362     $ 2,617,283  
                         
Gross profit   885,002     759,858     6,805     3,017       891,807     762,875  
Gross margin   28.7 %   29.2 %   36.0 %   19.5   %   28.8 %   29.1 %
                         
Operating expenses (1)   495,710     443,107     6,420     4,320       502,130     447,427  
Expenses as a % of net sales   16.1 %   17.0 %   34.0 %   27.9   %   16.2 %   17.1 %
                         
Operating income (loss) (1)   389,292     316,751     385     (1,303 )     389,677     315,448  
Operating margin   12.6 %   12.2 %   2.0 %   (8.4 ) %   12.6 %   12.1 %
(1) Base business and total include $6.9 million of impairment from goodwill and other assets.

We have excluded the following acquisitions from base business for the periods identified:

Acquired   Acquisition Date   Net Sales Centers Acquired   Periods Excluded
Northeastern Swimming Pool Distributors, Inc. (1)   September 2020   3   September 2020
Master Tile Network LLC (1)   February 2020   4   February - September 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 in the first nine months of 2020.

December 31, 2019 373    
Acquired locations 7    
New locations 3    
Closed/consolidated locations (2 )  
September 30, 2020 381    

Adjusted EBITDA

We define Adjusted EBITDA as net income or net loss plus interest and other non-operating expenses, income taxes, depreciation, amortization, share-based compensation, goodwill and other non-cash impairments and equity earnings or loss in unconsolidated investments.  Adjusted EBITDA is not a measure of cash flow or liquidity as determined by generally accepted accounting principles (GAAP). We have included Adjusted EBITDA as a supplemental disclosure because we believe that it is widely used by our investors, industry analysts and others as a useful supplemental liquidity measure in conjunction with cash flows provided by or used in operating activities to help investors understand our ability to provide cash flows to fund growth, service debt, repurchase shares and pay dividends as well as compare our cash flow generating capacity from year to year.

We believe Adjusted EBITDA should be considered in addition to, not as a substitute for, operating income or loss, net income or loss, cash flows provided by or used in operating, investing and financing activities or other income statement or cash flow statement line items reported in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, which may limit its usefulness as a comparative measure.

The table below presents a reconciliation of Adjusted EBITDA to net cash provided by operating activities. Please see page 6 for our Condensed Consolidated Statements of Cash Flows.

(Unaudited)   Three Months Ended     Nine Months Ended
(in thousands)   September 30,     September 30,
      2020     2019     2020     2019
Adjusted EBITDA $ 159,310     $ 115,508     $ 429,360     $ 347,065  
  Add:                      
  Interest and other non-operating expenses, net of interest income   (1,758 )     (5,390 )     (8,982 )     (18,215 )
  Provision for income taxes   (27,360 )     (19,593 )     (73,068 )     (53,569 )
  Other   (2,079 )     2,776       1,092       5,334  
  Change in operating assets and liabilities   39,601       52,511       40,512       (37,362 )
Net cash provided by operating activities $ 167,714     $ 145,812     $ 388,914     $ 243,253  

The table below presents a reconciliation of net income to Adjusted EBITDA.

(Unaudited)   Three Months Ended     Nine Months Ended
(in thousands)   September 30,     September 30,
      2020     2019     2020     2019
Net income $ 119,098     $ 79,525     $ 307,565     $ 243,551  
  Add:                      
  Interest and other non-operating expenses (1)   1,861       5,498       9,292       18,538  
  Provision for income taxes   27,360       19,593       73,068       53,569  
  Share-based compensation   3,874       3,649       11,095       10,243  
  Equity earnings in unconsolidated investments   (86 )     (76 )     (248 )     (210 )
  Impairment of goodwill and other assets               6,944        
  Depreciation   6,986       7,090       20,979       20,648  
  Amortization (2)   217       229       665       726  
Adjusted EBITDA $ 159,310     $ 115,508     $ 429,360     $ 347,065  
(1) Shown net of interest income and includes gains and losses on foreign currency transactions and amortization of deferred financing costs as discussed below.
(2) Excludes amortization of deferred financing costs of $103 and $108 for the three months ended September 30, 2020 and September 30, 2019, respectively, and $310 and $323 for the nine months ended September 30, 2020 and September 30, 2019, respectively. This non-cash expense is included in Interest and other non-operating expenses, net on the Consolidated Statements of Income.

2020 Diluted EPS Guidance

We have included adjusted projected 2020 diluted EPS, a non-GAAP financial measure, in this press release as a supplemental disclosure to demonstrate the impact of our non-cash impairment charge recorded in the first quarter of 2020 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, 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 in this press release.

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) $ 8.05     $ 8.35  
After-tax non-cash impairment charges 0.15     0.15  
Adjusted Diluted EPS (1) $ 8.20     $ 8.50  

(1) Includes 2020 year-to-date ASU 2016-09 tax benefit of $0.55 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, in this press release 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 in this press release. 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) Nine Months Ended
(in thousands) September 30,
  2020
Operating income $ 389,677  
Impairment of goodwill and other assets 6,944  
Adjusted operating income $ 396,621  

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

(Unaudited) Nine Months Ended
(in thousands) September 30,
  2020
Net income $ 307,565  
Impairment of goodwill and other assets 6,944  
Tax impact on impairment of long-term note (1) (654 )
Adjusted net income $ 313,855  

(1)  As described in our April 23, 2020 earnings release, our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-19 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.

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

(Unaudited) Nine Months Ended
  September 30,
  2020   2019
Diluted EPS $ 7.53     $ 5.97  
After-tax non-cash impairment charges 0.15      
Adjusted diluted EPS excluding after-tax non-cash impairment charges 7.68     5.97  
Tax benefit (0.55 )   (0.52 )
Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit $ 7.13     $ 5.45