Pool Corporation (POOL) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-26, FY ended December 31, 2025) + Yahoo Finance

Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: valuation of goodwill)

One-line verdict: Pool Corporation — the world's largest wholesale distributor of swimming pool supplies and related products — posted flat revenue of $5.3B and declining net income of $406M (-6.4%) in a market where new in-ground pool construction "decreased 3% to 5% from 62,000 units in 2024 to just below 60,000 units in 2025." Cash covers only 7% of $1.5B in debt, and goodwill of $707M represents 84% of equity — with Ernst & Young flagging goodwill valuation as the sole critical audit matter. The M-Score of -2.14 sits in the grey zone. Operating cash flow dropped 44% to $366M from $659M as the company pre-purchased inventory ahead of price increases. Two checks fail: cash/debt coverage and goodwill/equity ratio. The underlying business model — monopoly-like distribution to 125,000 small pool service companies — is durable, but the balance sheet is being stretched by share repurchases funded with debt.

The Swimming Pool Distribution Monopoly

Pool Corp is a distributor, not a manufacturer. Per the filing, the company has approximately "440 sales centers in North America, Europe and Australia," serving "approximately 125,000 customers, the majority of whom are small, entrepreneurial, family-owned businesses." The company generated "approximately 95% of our sales in North America."

Revenue is seasonal: "we generated approximately 61% of our net sales and 78% of our operating income in the second and third quarters."

The filing provides inflation context: "Product cost increases were generally 2% to 3% in 2025, including a 1% impact from U.S. tariffs enacted during the year." For 2026, "inflationary product cost increases to be approximately 1% to 2%."

Profitability

Per the consolidated statements of income:

Revenue has declined for three consecutive years from the 2022 pandemic peak. Operating margin compressed 250 basis points in two years from 13.5% to 11.0%. Gross margin held at 29.7% — the margin compression is entirely from operating expenses growing as a percentage of revenue (18.8% vs 16.5% two years ago).

Cash Flow: Inventory Build Consumed Cash

Operating cash flow dropped 44% despite net income declining only 6%. The culprit is inventory: the Company pre-purchased "$147M more in product inventories" ahead of vendor price increases and tariffs. Per the filing: "Our inventory balance increased 13% to $1.5 billion at December 31, 2025 compared to $1.3 billion at December 31, 2024. This growth was primarily driven by increased purchasing ahead of price increases."

The CFFO/NI ratio declined from 1.70 (2023) to 1.52 (2024) to 0.90 (2025) — a three-year deterioration trend driven by inventory investment.

Debt increased: "Total debt outstanding of $1.2 billion at December 31, 2025 increased $249.1 million compared to December 31, 2024, primarily to fund open market share repurchases of $341.1 million in 2025 and working capital needs."

The 18-Point Screening

Revenue Quality

A2 — AR spike. Total net receivables increased 10% year-over-year, "primarily due to higher sales in December 2025." The company's DSO on a trailing four-quarter basis was 26.3 days, unchanged from prior year. The 39.9% AR growth appears to be a December timing issue — higher end-of-year sales create a receivable that collects in January-February. The allowance for doubtful accounts was $8.0M, down from $8.6M, suggesting no credit quality deterioration.

Expense Quality

Inventory growing 12.8% while COGS declined 0.5% is worth monitoring. The Company explains this as pre-purchasing ahead of price increases, but inventory turns declined from 2.8x to 2.7x. If those price increases don't materialize or demand weakens further, the company will be sitting on excess stock.

Cash Flow Quality

C4 — Cash/debt coverage. Cash of $105M against total debt of $1.5B (including $188M current portion due within one year). The fixed charge ratio was 4.78x per the filing, well above covenant requirements, and the company has significant revolver availability. But the narrow cash balance means Pool Corp is dependent on its credit facility for liquidity.

Balance Sheet

D1 — Goodwill risk. Per the filing: "At December 31, 2025, our goodwill balance was $707.3 million, representing approximately 20% of total assets." Ernst & Young's critical audit matter focuses specifically on "Valuation of Goodwill — one reporting unit" with $401.6M of goodwill. The auditor notes the "significant assumptions, including projected financial information and the discount rate, which are affected by expected future market or economic conditions."

Pool Corp has made numerous acquisitions to expand its distribution network. If the pool industry downturn deepens, the fair value of these reporting units could decline below carrying value, triggering impairment. The Company recorded minor goodwill impairments ($285K in 2025, $550K in 2024) — trivial amounts, but the risk is concentrated in one reporting unit with $402M.

Acquisition Risk

Manipulation Score

Key Risks from the 10-K

1. New Pool Construction Declining

"Based on industry data, we estimate that new in-ground pool construction units decreased 3% to 5% from 62,000 units in 2024 to just below 60,000 units in 2025." For context, new pool construction peaked at approximately 100,000 units during the pandemic boom. The filing notes: "market conditions are expected to remain challenging in the near-term."

2. Tariff Impact

Product cost increases of 2-3% in 2025 included a 1% tariff impact. The filing warns that tariffs "could adversely affect our business, financial condition and results of operations" and that "our costs could increase substantially, and our gross margin and net income could be materially adversely affected."

3. Share Repurchases Funded by Debt

"Total debt outstanding of $1.2 billion at December 31, 2025 increased $249.1 million compared to December 31, 2024, primarily to fund open market share repurchases of $341.1 million." The company is borrowing to buy back stock during a period of declining earnings. If the stock price declines further, this destroys shareholder value.

4. Seasonal Liquidity Risk

"Excluding borrowings to finance acquisitions, dividend payments and share repurchases, our peak borrowing usually occurs during the second quarter" due to supplier payment timing. The minimal cash balance of $105M means the company enters its peak borrowing season with almost no cash cushion.

5. Goodwill Concentration

$401.6M of goodwill in a single reporting unit. Ernst & Young flagged this for the "significant assumptions" required. A material decline in pool industry conditions could trigger impairment.

Summary

Grade: F. Goodwill risk and debt coverage trigger elimination on a dominant franchise.

Pool Corp's distribution monopoly — serving 125,000 small pool service companies through 440 sales centers — is one of the strongest competitive positions in industrial distribution. Gross margin has been rock-stable at 29.7%. The business is not broken.

But the financial structure raises red flags. Cash covers only 7% of debt, with the debt increasing to fund share repurchases. Goodwill at 84% of equity is concentrated in one reporting unit. The M-Score sits in the grey zone. Operating cash flow dropped 44% because the company loaded up on inventory ahead of tariffs — a bet that may or may not pay off.

The F grade reflects the balance sheet's vulnerability, not the business model's quality. If pool construction volumes stabilize and the inventory pre-buy pays off through margin preservation, the numbers will improve. If the downturn deepens, the $707M in goodwill and $1.5B in debt become real risks.

**Disclaimer**: This report is based on Pool Corporation's FY2025 10-K filed with SEC EDGAR on February 26, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter — valuation of goodwill)

Fiscal year ended: December 31, 2025