UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-K
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
or
oTRANSITION 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-20191231_g1.jpg
POOL CORPORATION
(Exact name of registrant as specified in its charter)
DelawarePOOL CORPORATION36-3943363
(Exact name of registrant as specified in its charter)
Delaware36-3943363
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
(I.R.S. Employer
Identification No.)
109 Northpark Boulevard, Covington, Louisiana70433-5001
Covington,Louisiana70433-5001
(Address of principal executive offices)(Zip Code)
985-892-5521(985) 892-5521
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareNASDAQPOOLNasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  x    NO  ¨
Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ¨    NO  x
Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           YES  x    NO  ¨

Yes  x    No  ¨




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationsRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES x    NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerx
x
Accelerated filer¨
Non-accelerated filer¨ (Do not check if a smaller reporting company)
o
Smaller reporting company¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  ¨    NO  Yes      No  x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant’s common stock as of June 30, 201728, 2019 was $4,704,253,988.$7,370,295,585.
As of February 21, 2018,2020, there were 40,396,15540,191,526 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement to be mailed to stockholders on or about March 29, 201826, 2020 for the
Annual Meeting to be held on May 2, 2018,April 29, 2020, are incorporated by reference in Part III of this Form 10-K.





POOL CORPORATION


TABLE OF CONTENTS
Page
PART I.
Item 1. 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.






PART I.
Item 1.  Business


General


Pool Corporation (the Company, which may be referred to as we, us or our) is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the top threeleading distributors of irrigation and relatedlandscape products in the United States. Our vision is to become the best worldwide distributor of outdoor living products that enhance the quality of outdoor home life. The Company was incorporated in the State of Delaware in 1993 and has grown from a regional distributor to a multi-national, multi-network distribution company. 


Our industry is highly fragmented, and as such, we add considerable value to the industry by purchasing products from a large number of manufacturers and then distributing the products to our customer base on conditions that are more favorable than our customers could obtain on their own.


As of December 31, 2017,2019, we operated 351373 sales centers in North America, Europe South America and Australia through our four distribution networks:


SCP Distributors (SCP);
Superior Pool Products (Superior);
Horizon Distributors (Horizon); and
National Pool Tile (NPT).


Our Industry


We believe that the swimming pool industry is relatively young, with room for continued growth from the increased penetration of new pools. Significant growth opportunities also reside with pool remodel and pool equipment replacement activities due to the aging of the installed base of swimming pools, technological advancements and the development of energy-efficient and more aesthetically attractive products. Additionally, the desire for consumers to enhance their outdoor living spaces with hardscapes, lighting and outdoor kitchens also promotes growth in this market area.

The irrigation industry shares many characteristics with the pool industry, and we believe that it will realize long‑term growth rates similar to the pool industry. As irrigation system installations and landscaping often occur in tandem with new single-family home construction, we believe the continued trend in increased housing starts also offers significant growth opportunities for the irrigation industry.


Favorable demographic and socioeconomic trends have positively impacted our industry and we believe these trends will continue to do so in the long term.  These favorable trends include the following:


long-term growth in housing units in warmer markets due to the population migration toward the southern United States, which contributes towhere use of the growing installed base of pools that homeowners must maintain;outdoor home environment is more prevalent and extends longer throughout the year;
increased homeowner spending on outdoor living spaces for relaxation and entertainment;
consumers bundling the purchase of a swimming pool and other products, with new irrigation systems, landscaping and improvements to outdoor living spaces often being key components to both pool installations and remodels; and
consumers using more automation and control products, higher quality materials and other pool features that add to our sales opportunities over time.


Almost 60% of consumer spending in the pool industry is for maintenance and minor repair of existing swimming pools.  Maintaining proper chemical balance and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, filters and safety equipment, creates a non-discretionary demand for pool chemicals, equipment and other related parts and supplies.  We also believe cosmetic considerations such as a pool’s appearance and the overall look of backyard environments create an ongoing demand for other maintenance-related goods and certain discretionary products.
 
We believe that the recurring nature of the maintenance and repair market has historically helped maintain a relatively consistent rate of industry growth.  This characteristic along with relatively consistent annual inflationary price increases of 1% to 2% on average passed on by manufacturers and distributors, has helped cushion the negative impact on revenues in periods when unfavorable economic conditions and softness in the housing market adversely impacted consumer discretionary spending including pool construction and major replacement and refurbishment activities.



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The following table reflects growth in the domestic installed base of in-ground swimming pools over the past 11 years (based on Company estimates and information from 20162018 P.K. Data, Inc. reports):


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The replacement and refurbishment market currently accounts for close to 25% of consumer spending in the pool industry.  The activity in this market, which includes major swimming pool remodeling, is driven by the aging of the installed base of pools. The timing of these types of expenditures is more sensitive to economic factors including home values, single-family home sales and consumer confidence that impact consumer spending compared to the maintenance and minor repair market.


New swimming pool construction comprises just over 15% of consumer spending in the pool industry.  The demand for new pools is driven by the perceived benefits of pool ownership including relaxation, entertainment, family activity, exercise and convenience.  The industry competes for new pool sales against other discretionary consumer purchases such as kitchen and bathroom remodeling, boats, motorcycles, recreational vehicles and vacations.  The industry is also affected by other factors including, but not limited to, consumer preferences or attitudes toward pool and related outdoor living and irrigation products for aesthetic, environmental, safety or other reasons.


The irrigation and landscape industry shares many characteristics with the pool industry, and we believe that it will realize similar long-term growth rates. Irrigation system installations often occur in tandem with new single-family home construction making it more susceptible to economic variables that drive new home sales. However, the landscape industry offers similar maintenance-related growth opportunities as the swimming pool industry. Product offerings such as chemicals and fertilizers, power equipment and related repair and maintenance services offer recurring revenue streams in an industry otherwise closely tied to the housing market. The irrigation and landscape distribution business is split betweenserves both residential and commercial markets, with the majority of sales related to the residential market.  Irrigation activities accountaccounts for approximately 50%35% - 40% of total spending in the irrigation industry, with the remaining 50%60% - 65% of spending related to landscape maintenance products, power equipment, landscapehardscapes and specialty outdoor products and accessories.

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Our NPT network primarily serves the swimming pool market but does provide some overlap with the irrigation and landscape industries as we offer our market-leading brand of pool tile, composite pool finish products and hardscapes. As more consumers create and enhance outdoor living areas and continue to invest in their outdoor environment, we believe we can focus our resources to address such demand, while leveraging our existing pool and irrigation and landscape customer base. We feel the development of our NPT network is a natural extension of our distribution model. In addition to our 17 standalone NPT sales centers, we currently have over 100 SCP and Superior sales centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT branded products. We also offer virtual tools for homeowners to shop, select and design their pool and outdoor environments, working with their chosen contractors to install these products. We believe our showrooms, local stocking of products and virtual support provide us with a competitive advantage in these categories. Given the more discretionary nature of these products, this business is more heavily weighted toward new home construction activitiessensitive to external market factors compared to our pool business. Over the last five years, our irrigation business has benefited from the continued slow recovery of single-family home construction as irrigation system installations and landscape projects typically correlate with, but lag, new home construction.overall.


Economic Environment

Certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP) affect our industry, particularly new pool and irrigation system starts as well as the timing and extent of pool refurbishments, equipment replacement, landscaping projects and equipment replacement.  outdoor living space renovations.

We believe that over the long term, single-family housing turnover and home value appreciation may correlate with demand for new pool construction, with higher rates of home turnover and appreciation having a positive impact on new pool starts over time.  We also believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new swimming pools and irrigation systems.  Similar to other discretionary purchases, replacement and refurbishment activities are more heavily impacted by economic factors such as consumer confidence, GDP and employment.employment levels. Contractor labor availability has also become an issue in recent years, limiting our customers’ ability to fully meet consumer construction and renovation demand.



The post-recession market environment from 2010 to 2019 has been characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation. However, in terms of homeowners investing in their existing homes, discretionary expenditures, including backyard renovations, have flourished over this time period with steady increases in home values and lack of affordable new homes prompting homeowners to stay in their homes longer and upgrade their home environments, including their backyard. While we estimate that new pool construction has increased to approximately 75,00080,000 new units in 2017 from the historically low levels experienced during the economic downturn,2019, construction levels are still down approximately 65% compared to peak historical levels and down approximately 50% to 55% from what we consider normal levels.

We believe there is potential for continued market recovery over An average of approximately 170,000 new units per year were built in the next several years. The economic downturn, which spanned from late 2006years leading up to early 2010 and reached its low point in 2009 (also referred to as the Great Recession), created a build up of deferred replacement and remodeling activity, which we have largely fulfilled over the past seven years.recession. We expect that new pool and irrigation construction levels will continue to grow incrementally, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate greater growth over the next four to sevenseveral years. Additionally, we believe favorable demographics from an aging population and southern migration are ideal for increased residential outdoor living investment. We expect that market

Times of strong economic conditions in the United States will continue to improve, enablingenable further replacement, remodeling and new construction activity and that the industry will realize an annual growth rate of approximately 4% to 7% over this time period. Asactivity. Although some constraints exist around residential construction activities, economic trends indicate that consumer spending has largely recovered, and that residential construction activities will likely continue to improve, we believe that we are well positioned to take advantage of both the market expansion and the inherent long-term growth opportunities in our industry.

Over the last five years, we estimate the pool industry grew from 2% to 4% per year, with favorable weather accelerating growth in any given year and unfavorable weather impeding growth. Our industry is seasonal and weather is one of the principal external factors that affects our business.  Peak industry activity occurs during the warmest months of the year, typically April through September.  Unseasonable warming or cooling trends can accelerate or delay the start or end of the pool and landscape season, impacting our maintenance and repair sales.  These impacts at the shoulders of the season are generally more pronounced in northern markets in the United States and Canada. Weather also impacts our sales of construction and installation products to the extent that above average precipitation, late spring thaws in northern markets and other extreme weather conditions delay, interrupt or cancel current or planned construction and installation activities.

In 2017 specifically, our industry experienced modestly favorable weather overall, despite the severe storms that impacted our industry in Texas and Florida in September and October. Due to the repairs required following major storms, sales mostly recovered Additionally, recent regulation passed by the endU.S. Department of Energy mandates all new and replacement motors and pumps for swimming pools must be variable speed by July 2021. This mandate, coupled with additional product developments and technological advancements, offers further growth opportunities over the year. In 2016, an earlier startnext few years.

Considering the factors discussed above, we believe we will realize annual sales growth rates of approximately 6% to 8% over the pool season due to warmer than usual temperatures and overall favorable weather throughout the rest of the year benefited the industry as a whole. In 2015, excessive precipitation impacted our industry in the second quarter; however a mild fall and delayed winter alleviated any contraction in industry growth rates.next five years.


3


Business Strategy and Growth


Our mission is to provide exceptional value to our customers and suppliers, creating exceptional return to our shareholders, while providing exceptional opportunities to our employees.  Our three core strategies are as follows:


to promote the growth of our industry;
to promote the growth of our customers’ businesses; and
to continuously strive to operate more effectively.


We promote the growth of our industry through various advertising and promotional programs intended to raise consumer awareness of the benefits and affordability of pool ownership, the ease of pool maintenance and the many ways in which a pool and the surrounding spaces may be enjoyed beyond swimming.  These programs include digital and media advertising, industry-oriented website development such as www.swimmingpool.com®, public relations campaigns and www.hottubs.com® and other onlinedigital marketing initiatives, including social media.initiatives.  We use these programs as tools to educate consumers and lead prospective pool owners to our customers.


We promote the growth of our customers’ businesses by offering comprehensive support programs that include promotional tools and marketing support to help our customers generate increased sales.  Our uniquely tailored programs include such features as customer lead generation, personalized websites, brochures, direct mail, marketing campaigns and business development training.  As a customer service, we also provide certain retail store customers assistance with all aspects of their business, including site selection, store layout and design, product merchandising, business management system implementation, comprehensive product offering selections and efficient ordering and inventory management processes. In addition to these programs, we feature consumer showrooms in over 80100 of our sales centers and host our annual Retail Summit to educate our customers about product offerings and the overall industry. We also act as a day-to-day resource by offering product and market expertise to serve our customers’ unique needs.



In addition to our efforts aimed at industry and customer growth, we strive to operate more effectively by continuously focusing on improvements in our operations suchoperations. We strive to create capacity with business to business development tools and execution to ensure best-in-class service and value creation for our customers and suppliers. In particular, we have developed the Pool360 and Horizon 24/7 platforms that help our customers be more productive by allowing them to get pricing, check availability, enter orders and make payments online while leveraging our customer service staff resources, particularly during peak business periods. These tools not only offer real-time integration into our enterprise resource planning system, creating efficiencies in our business processes as product sourcing, procurement and logistics initiatives, adoption of enhanced business practices and improved working capital management.  Other key internal growth initiatives include the continued expansion of bothwell, but they also provide our product offerings (as describedcustomers graphical catalog presentation in the “Customers and Products” section below) andsame platform. We are also actively making improvements to our distribution networks.

With our 2008 acquisition of National Pool Tile Group, Inc., we added a market leading brand of pool tile and composite pool finish products, and gained a position in a wider market. To increase operating efficiency and improve market reach, we have consolidated and repositioned NPT standalone sales centers and established NPT showrooms within certain existingwarehouses, including improved showroom layouts, sales centers.center merchandising and velocity slotting. Velocity slotting uses technology to identify fast moving, high velocity items, which are then color-coded and placed in an easily accessible location to create efficiencies for both our employees and customers. In addition to our 16 standalone NPT sales centers,these initiatives, we currently have over 80 SCP and Superior sales centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT branded products.

We feel the growth opportunities for the NPT network closely align with those of our other networks, as we see continued opportunitystrive to expand under the NPT brand. We also expect potential expansion of the network by broadening our product rangePool Corporation-branded products and sourcing capabilities. As more consumers createexclusive brand offerings and enhance outdoor living areas andto continue to invest in their outdoor environment, we believe we can focus our resources to address such demand, while leveraging our existing pool and irrigation customer base. We feel the developmentemphasize an Employer of our NPT network is a natural extension of our distribution model. While we are currently enjoying an expanding economy and improving housing market, which help fuel demand for these products, this business is more sensitive to these external market factors compared to our business overall.Choice culture.


We have grown our distribution networks through new sales center openings, acquisitions and the expansion of existing sales centers.  Given the external environment, we have increasedcenters depending on our focus onmarket presence and capacity. For additional information regarding our new sales center openings, complemented by strategic acquisitions and closures/consolidations, depending on our market presence. Since the beginningsee Item 7, “Management’s Discussion and Analysis of 2015, we have opened 11 new sales centers, including 1 new sales centerFinancial Condition and Results of Operations,” and Item 8, Note 2 of “Notes to Consolidated Financial Statements,” included in 2017. We expect to open between 4 and 6 new sales centers in 2018. Since the beginning of 2015, we have completed 9 acquisitions consisting of 24 sales centers (net of sales center consolidations within one year of acquisition). this Form 10-K.

We plan to continue to make strategic acquisitions and open new sales centers to further penetrate existing markets and expand into both new geographic markets and new product categories. For additional discussion of our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

We believe that our high customer service levels and expanded product offerings have enabled us to gain market share historically. Going forward, we expect to realize sales growth higher than the industry average due to further increases in market share and continued expansion of our product offerings.


We estimate that price inflation has averaged 1% to 2% annually in our industry over the past 10 years.years, although we experienced inflation above our historical average in 2019.  We generally pass industry price increases through theour supply chain and may make strategic volume inventory purchases ahead of vendor price increases.increases in order to obtain favorable pricing.  We estimate that annual price inflation between 20152017 and 20172018 was consistent with the ten-year average. In 2018, several manufacturers announced and implemented a mid-season price increase to offset raw material, transportation and labor inflation, which resulted in price inflation that was approximately 2% above the historical range as we sold through the products in 2019. We anticipate price inflation will vary some by product lines, but will approximatea return to the ten-yearhistorical average overall in 2018.2020.


4


Customers and Products


We serve roughly 120,000 customers. In 2017, sales to our largest 100 customers collectivelyNo single customer accounted for just under 10% or more of our total sales. We estimate that sales to our largest 1,000 customers represented approximately 25% of our total sales in 2017. Notably, 98%2019. Most of our customers are small, family-owned businesses with relatively limited capital resources and generated a large majority of our sales in 2017.resources. Most of these businesses provide labor and technical services to the end consumer and operate as independent contractors and specialty retailers employing no more than ten employees (in many cases, working alone or with a limited crew).  These customers also buy from other distributors, mass merchants, home stores, and certain specialty and internet retailers.


We provide extended payment terms to qualified customers for sales under early buy programs. The extended terms usually require payments in equal installments in April, May and June or May and June depending on geographic location. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Allowance for Doubtful Accounts” for additional information.

We sell our products primarily to the following types of customers:


swimming pool remodelers and builders;
specialty retailers that sell swimming pool supplies;
swimming pool repair and service businesses;
irrigation construction and landscape maintenance contractors; and
other commercial customers.customers who service large commercial installations such as hotels, universities and community recreational facilities.



We conduct our operations through 351373 sales centers in North America, Europe Australia and South America.Australia. Our primary markets, with the highest concentration of swimming pools, are California, Texas, Florida and Arizona, collectively representing approximately 52% of our 20172019 net sales.  In 2017,2019, we generated approximately 94% of our sales in North America (including Canada and Mexico), 5% in Europe and 1% in South America and Australia combined.Australia. While we continue to expand both domestically and internationally, we expect this geographic mix to be similar over the next few years. References to product line and product category data throughout this Form 10-K 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.


We use a combination of local and international sales and marketing personnel to promote the growth of our business and develop and strengthen our customers’ businesses.  Our sales and marketing personnel focus on developing customer programs and promotional activities, creating and enhancing sales management tools and providing product and market expertise.  Our local sales personnel work from our sales centers and are charged with understanding and meeting our customers’ specific needs.


We offer our customers more than 180,000200,000 manufacturer and Pool Corporation brandedCorporation-branded products.  We believe that our selection of pool equipment, supplies, chemicals, replacement parts, irrigation and related products and other pool construction and recreational products is the most comprehensive in the industry. We sell the following types of products:
 
maintenance products, such as chemicals, supplies and pool accessories;
repair and replacement parts for pool equipment, such as cleaners, filters, heaters, pumps and lights;
fiberglass pools and spas and packaged pool kits including walls, liners, braces and coping for in-ground and above-ground pools;
pool equipment and components for new pool construction and the remodeling of existing pools;
irrigation and related products, including irrigation system components and professional lawn care equipment and supplies;
building materials, such as concrete, plumbing and electrical components, both functional and decorative pool surfaces, decking materials, tile, hardscapes and natural stone, used for pool installations and remodeling;
commercial products, including ASMEAmerican Society of Material Engineers (ASME) heaters, safety equipment, and commercial pumps and filters; and
other pool construction and recreational products, which consist of a number of product categories and include discretionary recreational and related outdoor lifestyleliving products, such as spas, grills and components for outdoor kitchens, that enhance consumers’ use and enjoyment of outdoor living spaces, such as spas, grills and components for outdoor kitchens.spaces.


We currently have over 500600 product lines and overapproximately 50 product categories. Based on our 20172019 product classifications, sales for our pool and spa chemicals product category represented approximately 12% of total net sales for 20172019, 2018 and 13% of our total net sales in 2016 and 2015.2017. No other product categorycategories accounted for 10% or more of total net sales in any of the last three fiscal years.


Our maintenance, repair and replacement products are generally described as follows:
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maintenance and minor repair (non-discretionary); and
major refurbishment and replacement (partially discretionary).

In 2017, the sale of maintenance and minor repair products accounted for almost 60% of our sales and gross profits while just over 40% of our sales and gross profits were derived from the refurbishment, replacement, construction and installation (equipment, materials, plumbing, electrical, etc.) of swimming pools. During the Great Recession, sales of maintenance and minor repair products had increased to approximately 70% of our sales and gross profits due to the significant declines in new pool construction and deferred remodeling and replacement activity. The current trend reflects a shift back toward a greater percentage of our sales coming from major refurbishment and replacement products due to an ongoing recovery of these activities since levels reached their historic low point in 2009.

Discretionary demand for products related to pool construction and remodeling has been an important factor in our historical base business sales growth.  We have realized sales growth over the past five years due to our ongoing expansion of these product offerings and the steady improvement in new construction, remodeling and economic trends. However, new pool construction remains approximately 65% below peak historic levels and approximately 50% to 55% below what we believe to be normal levels. We continue to identify new related product categories, and we typically introduce new categories each year in select markets.  Then weWe then evaluate the performance in these markets and focus on those product categories that we believe exhibit the best long-term growth potential. We expect to realize continued sales growth for these types of product offerings by expanding the number of locations that offer these products, increasing the number of products offered at certain locations and continuing a modest broadening of these product offerings on a company-wide basis.


Recent regulation passed by the U.S. Department of Energy mandates all new and replacement motors and pumps sold for swimming pools must be variable speed by July 2021. We expect to see minimal impact from this change until mid-way through the 2021 season.New product technology provides opportunities not only for improved energy efficiency but also new enticements for leisure activities. Smart controls provide growth opportunities as most existing swimming pools run on mechanical time clocks. Major equipment manufacturers have developed and will continue to develop more retrofit kits that allow homeowners to interact with their pools or hot tubs through their smartphones. Robotic cleaners offer consumers a more efficient option for maintaining their swimming pools. We see each of these developments as significant growth opportunities.

We offer a growing selection of energy efficient and environmentally preferred products, which supports sustainability and helps our customers save energy, water and money. Our green technology products include variable speed pumps, LED pool and spa lights and high-efficiency heat pumps. We are committed to sustainable business practices, which includes products that we offer to our customers, our sourcing activities, our employment practices and our involvement within the communities in which we do business. We believe these efforts continue to be successful in creating value for our customers, shareholders, employees, suppliers and communities.

Over the last several years, we have increased our product offerings and service abilities related to commercial swimming pools, including the acquisition of Lincoln Pool Products in April 2017.pools. We consider this areathe commercial market to be a key growth opportunity as we focus more attention on providing products to customers who service large commercial installations such as hotels, universities and community recreational facilities. HoweverWhile we are leveraging our existing networks and relationships to supplygrow this market, in 2017, we also acquired Lincoln Equipment, Inc., a national distributor of equipment and supplies to this market.commercial and institutional swimming pool customers.


GrowthIn 2019, the sale of maintenance and minor repair products (non-discretionary) accounted for almost 60% of our sales and gross profits while just over 40% of our sales and gross profits were derived from the refurbishment, replacement, construction and installation (equipment, materials, plumbing, electrical, etc.) of swimming pools (partially discretionary). During the economic downturn, which spanned from late 2006 to early 2010 and reached its low point in 2009, sales of maintenance and minor repair products had increased to approximately 70% of our sales and gross profits due to the significant declines in new pool construction and deferred remodeling and replacement activity. The current trend reflects a partial shift back toward a greater percentage of our sales coming from major refurbishment and refurbishment market followingreplacement products due to the Great Recession led torecovery of these activities since levels reached their historic low point in 2009.

Post-2009, we experienced product and customer mix changes, including a shift in consumer spending to some higher value, lower margin products such as variable speed pumps and high efficiency heaters, and irrigation and related equipment, whichheaters. These products positively contribute to our sales and gross profit growth but negatively impact our gross margin. We expect continued demand for these products, but believe our efforts in various pricing and sourcing initiatives, including growth in our higher margin private label and exclusive products (PLEX) and our expansion of building materials product offerings, hashave helped offset these gross margin declines and will lead to somewhat flat gross margin trends over the next few years.


Operating Strategy


We distribute swimming pool supplies, equipment and related leisure products domestically through our SCP and Superior networks and internationally through our SCP network. We adopted the strategy of operating two distinct distribution networks within the U.S. swimming pool market primarily to offer our customers a choice of distinctive product selections, locations and service personnel.

We distribute irrigation and related products through our Horizon network and tile, decking materials and interior pool finish products through our NPT network.  We adopted the strategy of operating two distinct distribution networks within the U.S. swimming pool market primarily for two reasons:

to offer our customers a choice of distinctive product selections, locationsnetwork, as well as through SCP and service personnel; and
to increase the level of customer service and operational efficiency provided by the sales centers in each network by promoting healthy competition between the twoSuperior networks.

We evaluate our sales centers based on their performance relative to predetermined standards that include both financial and operational measures.  Our corporate support groups provide our field operations with various services, such as developing and coordinating customer and vendor related programs, human resources support, information systems support and expert resources to help them achieve their goals.  We believe our incentive programs and feedback tools, along with the competitive nature of our internal networks, stimulate and enhance employee performance.


6


Distribution


Our sales centers are located within population centers near customer concentrations, typically in industrial, commercial or mixed‑usemixed-use zones.  Customers may pick up products at any sales center location, or we may deliver products to their premises or job sites via our trucks or third partythird-party carriers.


Our sales centers maintain well-stocked inventories to meet our customers’ immediate needs.  We utilize warehouse management technology to optimize receiving, inventory control, picking, packing and shipping functions. For additional information regarding our inventory management, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Inventory Obsolescence,” of this Form 10-K.


We also operate four centralized shipping locations (CSLs) in the United States that redistribute products we purchase in bulk quantities to our sales centers or, in some cases, directly to customers.  Our CSLs are regional locations that carry a wide range of traditional swimming pool, irrigation and landscape products and related construction products.  


Purchasing and Suppliers


We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances.  It is customary in our industry for certain manufacturers to manage their shipments by offering seasonal terms to qualifying purchasers such as Pool Corporation, which are referred to as early buy purchases.  These early buy purchases typically allow us to place orders in the fall at a modest discount, take delivery of product during the off-season months and pay for these purchases in the spring or early summer.


Our preferred vendor program encourages our distribution networks to stock and sell products from a smaller number of vendors offering the best overall terms and service to optimize profitability and shareholder return.  We also work closely with our vendors to develop programs and services to better meet the needs of our customers and to concentrate our inventory investments.  These practices, together with a more comprehensive service offering, have positively impacted our selling margins and our returns on inventory investments. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Vendor Programs,” for additional information.



We regularly evaluate supplier relationships and consider alternate sourcing to assure competitive cost, service and quality standards.  Our largest suppliers include Pentair Water Pool and Spa, Inc.,plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 20%, 10%9% and 8%, respectively, of the cost of products we sold in 2017.2019.


Competition


We are the largest wholesale distributor of swimming pool and related backyard products (based on industry knowledge and available data) and the only truly national wholesale distributor focused on the swimming pool industry in the United States.  We are also one of the top threeleading distributors of irrigation and relatedlandscape products in the United States.  We face intense competition from many regional and local distributors in our markets and from one national wholesale distributor of landscape supplies.  We also face competition, both directly and indirectly, from mass market retailers (both store-based and internet) mass market retailers and large pool supply retailers who primarily buy directly from manufacturers.


Some geographic markets we serve, particularly the four largest and higher pool density markets of California, Texas, Florida and Arizona, have a greater concentration of competition than others.  Barriers to entry in our industry are relatively low.  We believe that the principal competitive factors in swimming pool and irrigation and landscape supply distribution are:


the breadth and availability of products offered;
the quality and level of customer service, including ease of ordering and product delivery;
the breadth and depth of sales and marketing programs;
consistency and stability of business relationships with customers and suppliers;
competitive product pricing; and
geographic proximity to the customer.


We believe that we generally compete favorably with respect to each of these factors.


7


Seasonality and Weather


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 swimming pool use, pool and irrigation installation and remodeling and repair activities. Sales are substantially lower during the first and fourth quarters. 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 late spring and summer, primarily because extended terms offered by our suppliers are typically payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

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.

WeatherPossible Effects
Hot and dryIncreased purchases of chemicals and supplies
for existing swimming pools
Increased purchases of above-ground pools and
irrigation and lawn care products
Fewer pool and irrigation and landscaping
installations
Unseasonably cool weather or extraordinary amountsDecreased purchases of chemicals and supplies
 of rainDecreased purchases of impulse items such as
above-ground pools and accessories
Unseasonably early warming trends in spring/late coolingA longer pool and landscape season, thus positively
trends in fallimpacting our sales
(primarily in the northern half of the U.S. and Canada)
Unseasonably late warming trends in spring/early coolingA shorter pool and landscape season, thus negatively
trends in fallimpacting our sales
(primarily in the northern half of the U.S. and Canada)

For a discussion regarding the effects seasonality and weather had on our results of operations in 2019 and 2018, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.


Environmental, Health and Safety Regulations


Our business is subject to regulation under local fire codes and international, federal, state and local environmental and health and safety requirements, including regulation by the Environmental Protection Agency, the Consumer Product Safety Commission, the Department of Transportation, the Occupational Safety and Health Administration, the National Fire Protection Agency and the International Maritime Organization. Most of these requirements govern the packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. We store certain types of chemicals and/or fertilizers at each of our sales centers and the storage of these items is strictly regulated by local fire codes. In addition, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws primarily relate to labeling, annual registration and licensing.


8


Employees


We employed approximately 4,0004,500 people at December 31, 2017.2019. Given the seasonal nature of our business, our peak employment period is the summer and, depending on expected sales levels, we add 200 to 500 employees to our work force to meet seasonal demand.


Intellectual Property


We maintain both domestic and foreign registered trademarks and patents, primarily for our Pool Corporation and Pool Systems Pty. Ltd. (PSL) branded products that are important to our current and future business operations. We also own rights to numerous internet domain names.



Geographic Areas


The table below presents net sales by geographic region, with international sales translated into U.S. dollars at prevailing exchange rates, for the past three fiscal years (in thousands):


 Year Ended December 31,
 201920182017
United States$2,911,772  $2,720,077  $2,545,270  
International287,745  278,020  242,918  
 $3,199,517  $2,998,097  $2,788,188  
  Year Ended December 31,
  2017 2016 2015
United States $2,545,270
 $2,354,726
 $2,168,802
International 242,918
 216,077
 194,337
  $2,788,188
 $2,570,803
 $2,363,139


The table below presents net property and equipment by geographic region, with international property and equipment balances translated into U.S. dollars at prevailing exchange rates, for the past three fiscal yearsyear ends (in thousands):


 December 31,
 201920182017
United States$105,170  $100,905  $95,659  
International7,076  6,059  5,280  
 $112,246  $106,964  $100,939  
  December 31,
  2017 2016 2015
United States $95,659
 $79,064
 $65,885
International 5,280
 4,226
 3,969
  $100,939
 $83,290
 $69,854


Website Access and Available Information


Our website is www.poolcorp.com. The information on our website is not a part of this document.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.poolcorp.com as soon as reasonably practicalpracticable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission (SEC).


Additionally, we have adopted a Code of Business Conduct and Ethics (the Code) that applies to all of our employees, officers and directors, and is available on our website at www.poolcorp.com. Any substantive amendments to the Code, or any waivers granted to any directors or executive officers, including our principal executive officer, principal financial officer, or principal accounting officer and controller, will be disclosed on our website and remain there for at least 12 months.





9


Item 1A.  Risk Factors


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


Our disclosure and analysis in thisThis report contains forward-looking information that involves risks and uncertainties. Our forward‑lookingforward-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, 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 statementsstatement will be achieved, and actual results could be affected bymay differ materially due to one or more factors, which could cause them to differ materially.factors. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.



Risk Factors


Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward‑looking statementsforward-looking statement include the following:


The demand for our swimming pool, irrigation, landscape and related outdoor lifestyleliving products may be adversely affected by unfavorable economic conditions.


Consumer discretionary spending affects our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates and wage levels, interest rate fluctuations, inflation, disposable income levels, consumer confidence and access to credit. In economic downturns, the demand for swimming pool, irrigation, landscape and related outdoor lifestyleliving products may decline, often corresponding with declines in discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction. Maintenance and repair products and certain replacement equipment, whichand refurbishment products are required to maintain existing swimming pools, and each currently account for approximately 85%60% and 25% of net sales and gross profits related to our swimming pool business; however, the growth ofin this portion of our business depends on the expansion of the installed pool base and could also be adversely affected by decreases in construction activities, similar to the trends between late 2006 and early 2010. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance. Such downturns expose us to certain additional risks, including but not limited to the risk of customer closures or bankruptcies, which could shrink our potential customer base and inhibit our ability to collect on those customers’ receivables.


We believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new pools, irrigation systems and outdoor living products. Between late 2006 and early 2010, the unfavorable economic conditions and downturn in the housing market resulted in significant tightening of credit markets, which limited the ability of consumers to access financing for new swimming pools and irrigation systems. Although we have seen improvement since 2010, tightening consumer credit could prevent consumers from obtaining financing for pool, irrigation and related outdoor projects, which could negatively impact our sales of construction-related products.


10


We are susceptible to adverse weather conditions.


WeatherGiven the nature of our business, weather is one of the principal external factors affecting our business. For example, unseasonablybusiness and the effect of seasonality has a significant impact on our results. 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. These quarters represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season. Also, unseasonably cool weather or extraordinary rainfall during the peak season can decreasehave an adverse impact on demand due to decreased swimming pool use, installation and maintenance, as well as decreased irrigation installations and landscape maintenance. These weather conditions adversely affect sales of our products.installations. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions. Such restrictions which could result in decreased pool and irrigation system installations andwhich could negatively impact our sales.

Certain extreme weather events, such as hurricanes and tropical storms, may impact our ability to deliver our services or cause damage to our facilities. As a consequence of these or other catastrophic or uncharacteristic events, we may experience interruption to our operations, increased costs or losses of property, equipment or inventory, which would adversely affect our revenue and profitability.

For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.


Our distribution business is highly dependent on our ability to maintain favorable relationships with suppliers.


As a distribution company, maintaining favorable relationships with our suppliers is critical to our success. We believe that we add considerable value to the swimming pool and irrigation supply chains by purchasing products from a large number of manufacturers and distributing the products to a highly fragmented customer base on conditions that are more favorable than these customers could obtain on their own. We believe that we currently enjoy good relationships with our suppliers, who generally offer us competitive pricing, return policies and promotional allowances. However, any failure to maintain favorable relationships with our suppliers could have an adverse effect on our business.


Our largest suppliers are Pentair Water Pool and Spa, Inc.,plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 20%, 10%9% and 8%, respectively, of the costs of products we sold in 2017.2019. A decision by our largest suppliers, acting individually or in concert, to sell their products directly to retailers or other end users of their products, bypassing distribution companies like ours, would have an adverse effect on our business. Additionally, the loss ofif our suppliers experience difficulties or disruptions in their operations or if we lose a single significant supplier due to financial failure or a decision to sell exclusively to retailers or end-use consumers, we may experience increased supply costs or may experience delays in establishing replacement supply sources that meet our quality and control standards.

We depend on a global network of suppliers to source our products, including our own branded products and products we have exclusive distribution rights to. Product quality, warranty claims or safety concerns could also adversely affectnegatively impact our sales and expose us to litigation.

We rely on manufacturers and other suppliers to provide us with the products we distribute. As we increase the number of Pool Corporation and Pool Systems Pty. Ltd. branded products we distribute, our exposure to potential liability claims may increase. Product and service quality issues could negatively impact customer confidence in our brands and our business. If our product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks, as well as governmental enforcement actions. Actual, potential or perceived product safety concerns, including health-related concerns, could expose us to litigation, as well as government enforcement actions, and result in costly product recalls and other liabilities.



11


We face intense competition both from within our industry and from other leisure product alternatives.


Within our industry, we directly compete against various regional and local distributors as they compete against our customers for the business of pool owners and other end-use customers. We indirectly compete against mass market retailers and large pool or irrigation supply retailers as they purchase the great majority of their needs directly from manufacturers, and to a lesser extent with internet retailers, as they purchase the majority of their needs from distributors. Outside of our industry, we compete indirectly with alternative suppliers of big ticket consumer discretionary products, such as boat and motor home distributors, and with other companies who rely on discretionary homeowner expenditures, such as home remodelers. New competitors may emerge as there are low barriers to entry in our industry.industry, which has led to highly competitive markets consisting of various-sized entities, ranging from small or local operators to large regional businesses. Given the density and demand for pool products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida and Arizona. These states encompass our four largest markets and represented approximately 52% of our net sales in 2017.2019.


More aggressive competition by store- and internet-based mass merchants and large pool or irrigation supply retailers could adversely affect our sales.
 
Mass market retailers today carry a limited range of, and devote a limited amount of shelf space to, merchandise and products targeted to our industry. Historically, mass market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool and irrigation related products has remained relatively constant. Should store‑ and internet-based mass market retailers increase their focus on the pool or irrigation industries, or increase the breadth of their pool and irrigation and related product offerings, they may become a more significant competitor for our direct customers and end-use consumers, which could have an adverse impact on our business. We may face additional competitive pressures if large pool or irrigation supply retailers look to expand their customer base to compete more directly within the distribution channel.


We depend on our ability to attract, develop and retain highly qualified personnel.


We consider our employees to be the foundation for our growth and success. As such, our future success depends in large part on our ability to attract, retain and motivate qualified personnel. This includes succession planning related to our executive officers and key management personnel. If we are unable to attract and retain key personnel, our operating results could be adversely affected.


Past growth may not be indicative of future growth.


Historically, we have experienced substantial sales growth through organic market share gains, new sales center openings and acquisitions that have increased our size, scope and geographic distribution. Since the beginningOur various business strategies and initiatives, including our growth initiatives, are subject to business, economic and competitive uncertainties and contingencies, many of 2015, we have opened 11 new sales centers and we have completed 9 acquisitions consisting of 24 sales centers (net of sales center consolidations within one year of acquisition).which are beyond our control. While we contemplate continued growth through internal expansion and acquisitions, no assurance can be made as to our ability to:


penetrate new markets;
generate sufficient cash flows to support expansion plans and general operating activities;
obtain financing;
identify appropriate acquisition candidates;candidates and successfully integrate acquired businesses;
maintain favorable supplier arrangements and relationships; and
identify and divest assets which do not continue to create value consistent with our objectives.


If we do not manage these potential difficulties successfully, our operating results could be adversely affected.


Our business is highly seasonal.
12



In 2017, we generated approximately 62% of our net sales and 83% of our operating income in the second and third quarters of the year. These quarters represent the peak months of both swimming pool use, installation, remodeling and repair, and irrigation installations and maintenance. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.


The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety and other governmental regulations.


We are subject to regulation under federal, state, local and international employment, environmental, health, transportation and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. For example, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws primarily relate to labeling, annual registration and licensing.


Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly. Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing changes.


The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. We will attemptOur attempts to anticipate future regulatory requirements that might be imposed and we will plan accordinglyour plans to remain in compliance with changing regulations and to minimize the costs of such compliance.compliance may not be as effective as we anticipate.


We store chemicals, fertilizers and other combustible materials that involve fire, safety and casualty risks.


We store chemicals and fertilizers, including certain combustibles and oxidizing compounds, at our sales centers. A fire, explosion or flood affecting one of our facilities could give rise to fire, safety and casualty losses and related liability claims. We maintain what we believe is prudent insurance protection. However, we cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable. Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage.


We conduct business internationally, which exposes us to additional risks.


Our ability to successfully conduct operations in, and source products and materials from, international markets is affected by many of the same risks we face in our U.S. operations, as well as unique costs and difficulties of managing international operations. Our international operations, which accounted for 9% of our total net sales in 2017,2019, expose us to certain additional risks, including:


difficulty in staffing international subsidiary operations;
different political economic and regulatory conditions;
local laws and customs;
currency fluctuations;
adverse tax consequences; and
dependence on other economies.


For foreign-sourced products, we may be subject to certain trade restrictions that would prevent us from obtaining products and thereproducts. There is also a greater risk that we may not be able to access products in a timely and efficient manner. Fluctuations in other factors relating to international trade, such as tariffs, transportation costs and inflation are additional risks for our international operations. 


13


Changes in tax laws and accounting standards related to tax matters have caused, and may in the future cause, fluctuations in our effective tax rate.


Taxation and tax policy changes, tax rate changes, new tax laws, revised tax law interpretations and changes in accounting standards and guidance related to tax matters may cause fluctuations in our effective tax rate. The Tax Cuts and Jobs Act (TJCA or the Act), enacted in December 2017, significantly changes U.S.Our effective tax law. Our 2017 financial results include estimates regarding the effects of the Act, which are based on our current interpretation of this legislation and on reasonable estimates andrate may change as a result of new guidance issuedalso be impacted by regulators or changes in the geographic mix of our estimates. Additionally, inearnings.

In the first quarter of 2017, we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis. Our projections of financial statement impacts related to ASU 2016-09 are subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. Excess tax benefits or deficiencies recognized under ASU 2016-09 vary from quarter to quarter and past results may not be indicative of future results. Our effective tax rate may also be impacted by changes in the geographic mix of our earnings.


We depend on a global network of suppliers to source our products. Product quality or safety concerns could negatively impact our sales and expose us to legal claims.

We rely on manufacturers and other suppliers to provide us with the products we sell and distribute. As we increase the number of Pool Corporation and PSL branded products we distribute, our exposure to potential liability claims may increase. The risk of claims may also be greater with respect to products manufactured by third-party suppliers outside the United States, particularly in China. Uncertainties with respect to foreign legal systems may adversely affect us in resolving claims arising from our foreign sourced products. Even if we are successful in defending any claim relating to the products we distribute, claims of this nature could negatively impact customer confidence in our products and our company. 


We rely on information technology systems to support our business operations. AnyA significant disturbance or breach of our technological infrastructure could adversely affect our financial condition and results of operations. Additionally, failure to maintain the security of confidential information could damage our reputation and expose us to litigation.


Information technology supports several aspects of our business,including among others, product sourcing, pricing, customer service, transaction processing, financial reporting, collections and cost management.  Our ability to operate effectively on a day‑to‑dayday-to-day basis and accurately report our results depends on a solid technological infrastructure, which is inherently susceptible to internal and external threats. We are vulnerable to interruption by fire, natural disaster, power loss, telecommunication failures, internet failures, security breaches and other catastrophic events. Exposure to various types of cyber-attacks such as malware, computer viruses, worms or other malicious acts, as well as human error, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services.

Advances in computer and software capabilities, encryption technology and other discoveries increase the complexity of our technological environment, including how each interact with our various software platforms, and mayplatforms. Such advances could delay or hinder our ability to process transactions andor could compromise the integrity of our data, which could resultresulting in a material adverse impact on our financial condition and results of operations. We also may experience occasional system interruptions and delays that make our information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties. A lack of sophistication or reliability of our information systems could adversely impact our operations and customer service and could require major repairs or replacements, resulting in significant costs and foregone revenue.
We have designedOur numerous procedures and protocols designed to mitigate cybersecurity risks. We continually investrisks (including processes to timely notify appropriate personnel for assessment and resolution and company-wide training programs), our investments in information technology security and updateour updates to our business continuity plan. In the event aplan may not prevent or effectively mitigate adverse consequences from cybersecurity threat occurs, we have processes in place to timely notify the appropriate personnel for assessment and resolution. We also continue to expand our company-wide training programs as part of our efforts to prevent such attacks. However, therisks. The failure to maintain security over and prevent unauthorized access to our data, our customers’ personal information, including credit card information, or data belonging to our suppliers, could put us at a competitive disadvantage. Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.


We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

Borrowings under our unsecured syndicated senior credit facility, term facility, accounts receivable securitization facility and our derivatives instruments are indexed to the London Inter-bank Offering Rate (“LIBOR”). In July 2017, the Financial Conduct Authority (the regulatory authority over LIBOR) stated they will plan for a phase out of regulatory oversight of LIBOR after 2021 to allow for an orderly transition to an alternative reference rate. Although the full impact of the transition away from LIBOR, including the discontinuance of LIBOR publication and the adoption of a replacement rate for LIBOR, remains unclear, these changes may have an adverse impact on our financing costs and any floating rate indebtedness we may incur.

A terrorist attack or the threat of a terrorist attack could have a material adverse effect on our business.


Discretionary spending on leisure product offerings such as ours is generally adversely affected during times of economic or political uncertainty. The potential for terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility could create these types of uncertainties and negatively impact our business for the short or long term in ways that cannot presently be predicted.


14


Item 1B.  Unresolved Staff Comments


None.




15


Item 2.  Properties


We lease the Pool Corporation corporate offices, which consist of approximately 59,10060,000 square feet of office space in Covington, Louisiana, from an entity in which we have a 50% ownership interest. We own twofive sales center facilities in Florida, two in Texas, one in Alabama, one in California, one in Georgia and one in Georgia.Tennessee. We lease all of our other properties and the majority of our leases have three to seven year terms. As of December 31, 2017,2019, we had 15nine leases with remaining terms longer than seven years that expire between 20252027 and 2032.


Most of our leases contain renewal options, some of which involve rent increases. In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance.


Our sales centers range in size from approximately 2,000 square feet to 60,000 square feet and generally consist of warehouse, counter, display and office space.  Our centralized shipping locations (CSLs) range in size from approximately 103,000 square feet to 185,000 square feet.


We believe that our facilities are well maintained, suitable for our business and occupy sufficient space to meet our operating needs. As part of our normal business, we regularly evaluate sales center performance and site suitability and may relocate a sales center or consolidate two locations if a sales center is redundant in a market, underperforming or otherwise deemed unsuitable. We do not believe that any single lease is material to our operations.


The table below summarizes the changes in our sales centers during the year ended December 31, 2017:2019:


Network12/31/18New
Locations
Closed/Consolidated
Locations (1)
Acquired
Locations
12/31/19
SCP170   (2)  176  
Superior70   —   72  
Horizon67   (1) —  67  
NPT (2)
17  —  —  —  17  
Total Domestic324   (3)  332  
SCP International40   (1) —  41  
Total364   (4)  373  

(1)Consolidated sales centers are those locations where we expect to transfer the majority of the existing business to our nearby sales center locations.
(2)In addition to the stand-alone NPT sales centers, there are over 100 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.


16


Network 12/31/16 
New
Locations
 
Consolidated
Locations (2)
 
Acquired
Locations
 12/31/17
SCP 162
 1
 
 4
 167
Superior 65
 
 
 2
 67
Horizon 66
 
 (1) 
 65
NPT (1)
 17
 
 (1) 
 16
Total Domestic 310
 1
 (2) 6
 315
SCP International 34
 
 (1) 3
 36
Total 344
 1
 (3) 9
 351

(1)
In addition to the stand-alone NPT sales centers, there are over 80 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.
(2)
Consolidated sales centers are those locations where we expect to transfer the majority of the existing business to our nearby sales center locations.




The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, 2017:2019:
LocationSCPSuperiorHorizonNPTTotal
United States    
California29  25  17   77  
Texas22   16   49  
Florida36     46  
Arizona    25  
Georgia  —   10  
Nevada   —   
Tennessee  —  —   
North Carolina   —   
Pennsylvania  —    
Virginia   —   
Washington —   —   
Alabama  —  —   
New York —  —  —   
Indiana  —  —   
Louisiana —  —  —   
Oregon —   —   
Colorado—    —   
Illinois  —  —   
Missouri  —  —   
New Jersey  —  —   
Ohio  —  —   
South Carolina  —  —   
Arkansas —  —  —   
Idaho — �� —   
Oklahoma  —  —   
Connecticut —  —  —   
Kansas —  —  —   
Massachusetts —  —  —   
Michigan —  —  —   
Minnesota  —  —   
Mississippi —  —  —   
Hawaii —  —  —   
Iowa —  —  —   
Kentucky—   —  —   
Maryland —  —  —   
Nebraska —  —  —   
New Mexico —  —  —   
Puerto Rico —  —  —   
Utah —  —  —   
Wisconsin—   —  —   
Total United States176  72  67  17  332  
International    
Canada15  —  —  —  15  
France —  —  — �� 
Australia —  —  —   
Mexico —  —  —   
Portugal —  —  —   
Spain —  —  —   
Belgium —  —  —   
Croatia —  —  —   
Germany —  —  —   
Italy —  —  —   
United Kingdom —  —  —   
Total International41  —  —  —  41  
Total217  72  67  17  373  

17

Location SCP Superior Horizon NPT Total
United States          
California 29
 23
 17
 6
 75
Texas 21
 5
 17
 5
 48
Florida 33
 6
 4
 1
 44
Arizona 6
 6
 10
 2
 24
Georgia 6
 2
 
 1
 9
Nevada 2
 3
 3
 
 8
Tennessee 5
 3
 
 
 8
Washington 1
 
 6
 
 7
Alabama 4
 2
 
 
 6
New York 6
 
 
 
 6
Louisiana 5
 
 
 
 5
New Jersey 3
 2
 
 
 5
Pennsylvania 3
 1
 
 1
 5
Colorado 1
 1
 2
 
 4
Illinois 3
 1
 
 
 4
Indiana 2
 2
 
 
 4
Missouri 3
 1
 
 
 4
North Carolina 3
 1
 
 
 4
Ohio 2
 2
 
 
 4
Oregon 1
 
 3
 
 4
South Carolina 3
 1
 
 
 4
Idaho 1
 
 2
 
 3
Oklahoma 2
 1
 
 
 3
Virginia 2
 1
 
 
 3
Arkansas 2
 
 
 
 2
Connecticut 2
 
 
 
 2
Kansas 2
 
 
 
 2
Maryland 1
 
 1
 
 2
Massachusetts 2
 
 
 
 2
Michigan 2
 
 
 
 2
Minnesota 1
 1
 
 
 2
Mississippi 2
 
 
 
 2
Hawaii 1
 
 
 
 1
Iowa 1
 
 
 
 1
Kentucky 
 1
 
 
 1
Nebraska 1
 
 
 
 1
New Mexico 1
 
 
 
 1
Puerto Rico 1
 
 
 
 1
Utah 1
 
 
 
 1
Wisconsin 
 1
 
 
 1
Total United States 167
 67
 65
 16
 315
International          
Canada 13
 
 
 
 13
France 5
 
 
 
 5
Australia 5
 
 
 
 5
Mexico 3
 
 
 
 3
Portugal 2
 
 
 
 2
Spain 2
 
 
 
 2
Belgium 1
 
 
 
 1
Colombia 1
 
 
 
 1
Croatia 1
 
 
 
 1
Germany 1
 
 
 
 1
Italy 1
 
 
 
 1
United Kingdom 1
 
 
 
 1
Total International 36
 
 
 
 36
Total 203
 67
 65
 16
 351



Item 3.  Legal Proceedings


From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. While the outcome of any litigation is inherently unpredictable, based on currently available facts, we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.


Item 4.  Mine Safety Disclosures


Not applicable.




18


PART II.


Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Our common stock is traded on the NASDAQNasdaq Global Select Market under the trading symbol “POOL.”  On February 21, 2018,2020, there were approximately 64,696440 holders of record of our common stock.  The table below sets forth the high and low closing sales prices of our common stock as well as dividends declared per common share for each quarter during the last two fiscal years.

  
  High
 
  Low
 
 Dividends
 Declared
Fiscal 2017      
First Quarter $120.95
 $103.93
 $0.31
Second Quarter 123.76
 116.43
 0.37
Third Quarter 121.07
 97.30
 0.37
Fourth Quarter 131.17
 110.26
 0.37
       
Fiscal 2016      
First Quarter $87.96
 $74.37
 $0.26
Second Quarter 94.03
 86.68
 0.31
Third Quarter 102.51
 93.02
 0.31
Fourth Quarter 107.49
 90.59
 0.31


We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board of Directors (our Board) has increased the dividend amount twelvefourteen times, including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through 2017.  Future dividend payments will be2019.  Our Board may declare future dividends at thetheir discretion, of our Board, after considering various factors, including our earnings, capital requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions on dividends in our Credit Facility, Term Facility and Receivables Facility, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.


Stock Performance Graph


The information included under the caption “Stock Performance Graph” in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the 1934 Act) or to the liabilities of Section 18 of the 1934 Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the 1934 Act, except to the extent we specifically incorporate it by reference into such a filing.


The following graph compares the total stockholdershareholder return on our common stock for the last five fiscal years with the total return on the S&P MidCap 400 Index and the NASDAQNasdaq Index for the same period, in each case assuming the investment of $100$100 on December 31, 20122014 and the reinvestment of all dividends. We believe the S&P MidCap 400 Index includes companies with market capitalizations comparable to ours. Additionally, we chose the S&P MidCap 400 Index for comparison, as opposed to an industry index, because we do not believe that we can reasonably identify a peer group or a published industry or line-of-business index that contains companies in a similar line of business.

pool-20191231_g3.jpg

Base
Period
Indexed Returns
Years Ending
Company / Index12/31/1412/31/1512/31/1612/31/1712/31/1812/31/19
Pool Corporation$100.00  $129.12  $168.97  $212.53  $246.47  $356.16  
S&P MidCap 400 Index100.00  97.82  118.11  137.30  122.08  154.07  
Nasdaq Index100.00  106.96  116.45  150.96  146.67  200.49  




19

  
Base
Period
 
Indexed Returns
Years Ending
Company / Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
Pool Corporation $100.00
 $139.32
 $154.24
 $199.16
 $260.48
 $327.68
S&P MidCap 400 Index 100.00
 133.50
 146.54
 143.35
 173.08
 201.20
NASDAQ Index 100.00
 140.12
 160.78
 171.97
 187.22
 242.71


Purchases of Equity Securities


The table below summarizes the repurchases of our common stock in the fourth quarter of 2017:2019:


Period 
Total Number
of Shares Purchased (1)
 
Average
Price
Paid per
Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan (2)
 
Maximum Approximate
Dollar Value of Shares
That May Yet be Purchased
Under the Plan (3)
October 1 – October 31, 2017 40,888
 $108.20
 40,888
 $53,361,113
November 1 – November 30, 2017 
 $
 
 $53,361,113
December 1 – December 31, 2017 
 $
 
 $53,361,113
Total 40,888
 $108.20
 40,888
  

Period
Total Number
of Shares Purchased (1)
These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were no shares surrendered for this purpose in the fourth quarter of 2017.
Average
Price
Paid per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan (2)
Maximum Approximate
DollarValue of Shares
That May Yet be Purchased
Underthe Plan (3)
(2)
October 1 – October 31, 2019
In May 2017, our Board authorized an additional $150.0 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.
— $— — $249,200,474 
(3)
November 1 – November 30, 2019
As of February 21, 2018, our total authorization remaining was $53.4 million.— $— — $249,200,474 
December 1 – December 31, 2019— $— — $249,200,474 
Total— $— — 




(1)These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were no shares surrendered for this purpose in the fourth quarter of 2019.
(2)In May 2019, our Board authorized an additional $200.0 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.
(3)As of February 21, 2020, our total authorization remaining was $249.2 million.

20


Item 6.  Selected Financial Data


The table below sets forth selected financial data from the Consolidated Financial Statements. You should read this information in conjunction with the discussions in Item 7 of this Form 10-K and with the Consolidated Financial Statements and accompanying Notes in Item 8 of this Form 10-K.
 
(in thousands, except per share data) Year Ended December 31,(in thousands, except per share data)Year Ended December 31,
 
2017 (1)
 2016 2015 2014 2013
2019 (1)
2018 (1)
2017 (1)
20162015
Statement of Income Data          Statement of Income Data     
Net sales $2,788,188
 $2,570,803
 $2,363,139
 $2,246,562
 $2,079,700
Net sales$3,199,517  $2,998,097  $2,788,188  $2,570,803  $2,363,139  
Operating income 284,371
 255,859
 216,222
 188,870
 165,486
Operating income341,246  313,889  284,371  255,859  216,222  
Net income 191,339
 148,603
 128,224
 111,030
 97,330
Net income261,575  234,461  191,339  148,603  128,224  
Net income attributable to Pool Corporation 191,633
 148,955
 128,275
 110,692
 97,330
Net income attributable to Pool Corporation261,575  234,461  191,633  148,955  128,275  
Earnings per share:      
  
  
Earnings per share:    
Basic $4.69
 $3.56
 $2.98
 $2.50
 $2.10
Basic$6.57  $5.82  $4.69  $3.56  $2.98  
Diluted $4.51
 $3.47
 $2.90
 $2.44
 $2.05
Diluted$6.40  $5.62  $4.51  $3.47  $2.90  
Cash dividends declared per common share $1.42
 $1.19
 $1.00
 $0.85
 $0.73
Cash dividends declared per common share$2.10  $1.72  $1.42  $1.19  $1.00  
          
Balance Sheet Data    
  
  
  
Balance Sheet Data    
Working capital $460,682
 $399,337
 $356,899
 $345,305
 $313,843
Total assets (3)
 1,101,062
 994,095
 934,361
 890,971
 821,647
Total debt (3)
 519,650
 438,042
 328,045
 318,872
 244,304
Working capital (4)
Working capital (4)
$582,722  $609,634  $460,682  $399,337  $356,899  
Total assets (2), (4)
Total assets (2), (4)
1,483,266  1,240,871  1,101,062  994,095  934,361  
Total debt (2)
Total debt (2)
511,407  666,761  519,650  438,042  328,045  
Stockholders’ equity 223,146
 205,210
 255,743
 244,352
 286,182
Stockholders’ equity410,180  223,590  223,146  205,210  255,743  
          
Other      
  
  
Other    
Base business sales growth (2)
 7% 7% 5% 7% 6%
Base business sales growth (3)
Base business sales growth (3)
%%%%%
Number of sales centers 351
 344
 336
 328 321
Number of sales centers373  364  351  344  336  
 
(1)
Our Net income and Net income attributable to Pool Corporation in 2017 was impacted by both U.S. tax reform and Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. In the first quarter of 2017, we adopted ASU 2016-09, which requires us to recognize all excess tax benefits or deficiencies related to share-based compensation as a component of our income tax provision on our Consolidated Statements of Income, rather than a component of stockholders’ equity on our Consolidated Balance Sheets. This adoption benefited our Net income and Net income attributable to Pool Corporation $12.6 million in 2017. As a result of U.S. tax reform, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects re‑measurement of our net deferred tax liability. No such tax benefits were applicable in prior years.
(2)
For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.
(3)
Upon adoption of Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, we now include financing costs, net of accumulated amortization as a component of long-term debt. For comparability across all periods presented on our Consolidated Balance Sheets, we reclassified certain amounts from Other assets, net in prior periods to Long-term debt, net to conform to our 2017 and 2016 presentation.

(1)Our Net income and Net income attributable to Pool Corporation in 2019, 2018 and 2017 were impacted by both U.S. tax reform and Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. In the first quarter of 2017, we adopted ASU 2016-09, which requires us to recognize all excess tax benefits or deficiencies related to share-based compensation as a component of our income tax provision on our Consolidated Statements of Income, rather than a component of stockholders’ equity on our Consolidated Balance Sheets. This adoption benefited our Net income and Net income attributable to Pool Corporation by $23.5 million in 2019, $15.3 million in 2018 and $12.6 million in 2017. As a result of U.S. tax reform, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects re-measurement of our net deferred tax liability. No such tax benefits were applicable in prior years.

(2)Upon adoption of Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, we now include financing costs, net of accumulated amortization as a component of long-term debt. For comparability across all periods presented on our Consolidated Balance Sheets, we reclassified certain amounts from Other assets, net in 2015 to Long-term debt, net to conform to our 2019 through 2016 presentation.
(3)For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.
(4)On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) and all the related amendments. The adoption of ASU 2016-02 significantly increased assets and liabilities on our Consolidated Balance Sheet as we recorded a right-of-use asset and corresponding liability for each of our existing operating leases. We elected to apply the practical expedient that allows us to exclude comparative presentation; thus, we did not restate our prior period balance sheets to reflect the new guidance. For additional information, see Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
21


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.


20172019 FINANCIAL OVERVIEW


Financial Results


We generated strongachieved favorable results in 2017, 2019 despite inclement weather throughout much of the first half of the year. Our focus on top of excellent performancemarket share gains and favorable weather last year. We produced sales growth of 8% in 2017capacity creation allowed us to capitalize on top of sales growth of 9% in 2016our competitive advantages and converted this intodeliver solid earnings growth, primarily due to executing our strategies in pursuit of our mission every day.results.


Net sales increased 8%7% to a record high of $3.2 billion for the year ended December 31, 20172019 compared to 2016. Pool remodeling, equipment replacement$3.0 billion in 2018. Base business sales increased 5%, driven by our continued expansion in commercial and the expansion of building material products as well as healthy demand for discretionary products, such as construction materials and commercial products wereused in the major contributors to base business sales growthremodel and replacement of 7% for the year. in-ground pools.

Gross profit increased 9%reached a record $924.9 million for the year ended December 31, 20172019, a 6% increase over gross profit of $870.2 million in 2018. Gross margin was relatively flat year-over-year at 28.9% in 2019 compared to 2016. Gross profit as a percentage of net sales (gross margin) grew 10 basis points to 28.9% for 2017 compared to 28.8%29.0% in 2016.2018, with base business gross margin at 29.0% in both years.


Selling and administrative expenses (operating expenses) increased 7% compared5% to 2016,$583.7 million in 2019, up from $556.3 million in 2018, with base business operating expenses up 5%3% over last year.2018. The increase in base business operating expenses was primarily dueattributable to higher growth-driven labor and freight expenses, as well as greater employee benefit costs, equity-based compensation, and technology spending. As a percentage of net sales, operating expenses declined 20 basis points.facility-related costs.


Operating income for the year increased 11%9% to $284.4$341.2 million, up from $255.9$313.9 million in 2016.2018. Operating income as a percentage of net sales (operating margin)margin increased to 10.2%10.7% in 20172019 compared to 10.0%10.5% in 2016.2018, while base business operating margin improved 40 basis points to 10.9% in 2019.


Our provision for income taxes for 2017 was impacted by both U.S. tax reform andWe recorded a $23.5 million, or $0.57 per diluted share, benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting,. As a result of the recently enacted tax legislation, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In addition to the impact from tax reform, we recorded a $12.6 million benefit in our provision for income taxes for the year ended December 31, 2017 related2019 compared to ASU 2016-09, which positively impacted our net income and earnings per share, but was partially offset by an increase of approximately 550,000 diluted weighted average shares outstanding. The combination of both tax reform and ASU 2016-09 resulted in a total net benefit of $0.52 to our$15.3 million, or $0.36 per diluted earnings per share, realized in 2017.2018.


Net income attributableincreased 12% to Pool Corporation increased 29%a record $261.6 million in 2019 compared to 2016, while earnings$234.5 million in 2018. Earnings per share was up 30%increased 14% to $4.51 per diluted share. Excluding the $0.28a record $6.40 per diluted share impact of tax reform and the $0.24compared to $5.62 per diluted share in 2018. Excluding the impact offrom ASU 2016-09 dilutedin both periods, earnings per diluted share increased 15% over last year.11% to $5.83 in 2019 compared to $5.26 in 2018.


Financial Position and Liquidity


Cash provided by operations was $175.3$298.8 million in 2017. Combined with $82.1 million in net proceeds from borrowings, cash from operating activities2019, which helped fund the following initiatives:


share repurchases in the open market of $143.2 million;
quarterly cash dividend payments to shareholders, totaling $58.0$83.8 million for the year;
net capital expenditures of $33.4 million;
share repurchases, totaling $23.2 million for the year;
growth in net working capital of $49.9 million;
net capital expenditures of $39.4$14.2 million; and
payments of $12.8$8.9 million for acquisitions.


Total net receivables, including pledged receivables, increased 18%9% compared to December 31, 2016,2018, reflective of fourth quarterDecember sales growth and acquisitions.growth. Our allowance for doubtful accounts was $3.9$5.5 million at December 31, 20172019 and $4.1$6.2 million at December 31, 2016.2018. Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 29.0 days at December 31, 2019 and 30.1 days at December 31, 2018.


Inventory levels grew 10%4% to $536.5$702.3 million at December 31, 20172019 compared to $486.1$672.6 million at December 31, 2016.2018, reflecting normal business growth and inventory from acquired businesses of $10.3 million. Our reserve for inventory obsolescence was $6.3$9.0 million at December 31, 20172019 compared to $6.5$7.7 million at December 31, 2016.2018. Our inventory turns, as calculated on a trailing four quarters basis, were 3.53.2 times at both December 31, 20172019 and 3.6 times at December 31, 2016.2018.




Total debt outstanding of $519.7$511.4 million at December 31, 2017 increased $81.62019 decreased $155.4 million, or 19%23%, compared to December 31, 2016 primarily to fund share repurchases and working capital growth.2018.


22


Current Trends and Outlook


Over the last five years, we estimate the pool industry grew from 2% to 4% per year due to growthMarket conditions were generally favorable in 2019 tempered by unfavorable weather, which weighed on our results in the installed basefirst half of pools, which helped drive2019.We expect similar favorable market conditions to persist into 2020 and beyond, buoyed by a number of factors.

The post-recession market environment from 2010 to 2019 has been characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation.However, in terms of homeowners investing in their existing homes, discretionary expenditures, including backyard renovations, have flourished over this time period with steady increases in home values and lack of affordable new homes prompting homeowners to stay in their homes longer and upgrade their home environments, including their backyard.We expect that new pool maintenanceand irrigation construction levels will continue to grow incrementally, constrained by availability of construction labor, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate continued growth improvementover the next several years.

Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the market expansion and the inherent long term growth opportunities in remodelingour industry. Additionally, recent regulation passed by the U.S. Department of Energy mandates all new and replacement activitymotors and annual growth in the pool construction market. Improvements in general external market factors in the United States including consumer confidence, employment, housing, consumer financing and economic expansion, largely support our base business growth. We feel these positive external trends have promoted increased consumer spending on higher value products that enhancepumps for swimming pools must be variable speed by July 2021. This mandate, coupled with additional product developments and outdoor living spaces. Our consistent base business salestechnological advancements, offers further growth reflects industry growth plus market share gains from existing customers expanding their businesses and our success in newer market initiatives such as hardscapes and commercial pools.opportunities over the next few years.


While we estimate that new pool construction increased towas approximately 75,00080,000 new units in 2017 from the historically low levels experienced during the economic downturn,2019, construction levels are still down approximately 65% compared to peak historical levels and down approximately 50% to 55% from what we consider normal levels. Favorable weather plays a role in industry growth by accelerating growth in any given year, whileexpanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products. Conversely, unfavorable weather impedes growth. In 2017 specifically, our industry experienced modestly favorable weather overall, despite the severe storms that impacted our industry in TexasWetter and Florida in September and October. Due to the repairs required following major storms, sales mostly recovered by the end of the year. In 2016, an earlier start to the pool season due to warmer than usualcooler-than-normal temperatures and overall favorable weather throughout the restfirst half of 2019 delayed pool openings and led to lower construction and remodeling activity, although the latter half of the year benefited the industry as a whole. In 2015, excessive precipitation impacted our industry in the second quarter; however a mild fall and delayed winter alleviated any contraction in industry growth rates.from relatively normalized weather patterns. In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance. 

We believe there is potential for continued market recovery over the next several years. The Great Recession created a build-up of deferred replacement and remodeling activity, which we have largely fulfilled over the past seven years. We expect that new pool and irrigation construction levels will continue to grow incrementally, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate greater growth over the next four to seven years. Additionally, we believe favorable demographics from an aging population and southern migration are ideal for increased residential outdoor living investment. We expect that market conditions in the United States will continue to improve, enabling further replacement, remodeling and new construction activity and that the industry will realize an annual growth rate of approximately 4% to 7% over this time period. As economic trends indicate that consumer spending has largely recovered and that residential construction activities will likely continue to improve, we believe that we are well positioned to take advantage of both the market expansion and the inherent long‑term growth opportunities in our industry.


We established our initial outlook for 20182020 based on reasonable expectations of organic market share growth, ongoing leverage of infrastructureexisting investments in our business and continuous process improvements. For 2018,2020, we expect the macroeconomic environment in the United States will be quite similar to 2017.2019. We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets. We also plan to broaden our geographic presence by opening 48 to 610 new sales centers in 20182020 and by making selective acquisitions when appropriate opportunities arise.


The following section summarizes our outlook for 2018:2020:


We expect sales growth of 6% to 7%8%, impacted by the following factors and assumptions:
assumed normal weather patterns for 2018;
anticipated continued growth from replacement, remodeling and construction activity and market expansion through newer product offerings like hardscapes and commercial pools;
estimated 1% growth from acquisitions completed throughout 2017;
inflationary product cost increases of approximately 1% to 2%; and
one additional selling day for the full year for 2018 compared to 2017 due to an extra selling day in the fourth quarter (neutral selling days for all other quarters).
normal weather patterns for 2020, which would result in greater sales growth in the first half of the year than in the second half;
continued growth from replacement, remodeling and construction activity and market expansion through newer product and service offerings such as hardscapes and commercial pools;
inflationary product cost increases of approximately 1% to 2%; and
market share gains.

We projectexpect relatively neutral gross margin trends for the full year aswith lower gross margin growth in the first half of 2020 compared to 2019, which benefited from strategic inventory purchases we believe our salesmade in the latter half of 2018, and modestly positive gross margin growth will continue to be weighted toward salesin the second half of lower margin discretionary products. Adverse margin impacts should be offset by benefits from our efforts in supply chain management and internal pricing initiatives.the year.

We expect operating expenses will grow at approximately 60% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations.expectations, with greater growth in the first half of the year and more modest growth in the back half. The main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets. However, we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal.



23



Our provision for income taxes for 2017 was impacted by both U.S. tax reform and ASU 2016-09. As a result of the recently enacted tax legislation, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In 2018,2020, we expect our effective tax rate towill approximate 25.5%, which is a reduction from our historical rate of approximately 38.5%, both of which excludeexcluding the impact of ASU 2016-09. As discussed further in Critical Accounting Estimates below, we have not finalized our accounting for the tax effects of tax reform; however, our net benefit is based on reasonable estimates for those tax effects.

Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations, particularly any significant changes in our geographic mix.expectation. Due to ASU 2016-09 requirements, 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. Based on our December 31, 20172019 stock price, we estimate that we have approximately $5.4$2.3 million in unrealized excess tax benefits related to stock options that will expire in the first quarter of 2018 and restricted awards that will vest in 2018. Additionalthe first quarter of 2020. We may recognize additional tax benefits could be recognized related to stock option exercises in 20182020 from grants that expire in years after 2018,2020, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a $12.6$23.5 million benefit in our provision for income taxes for the year ended December 31, 20172019 related to ASU 2016-09.


We project that 20182020 earnings will be in the range of $5.36$6.47 to $5.61$6.77 per diluted share, including an estimated $0.13 favorable impact$0.06 benefit from ASU 2016-09. This range also reflects our expected 2018 income tax rate, including2016-09 during the impact from tax reform legislation enacted in December 2017.first quarter of 2020. We expect cash provided by operations will approximate net income for fiscal 2018,2020, and subject to additional authorization by our Board of Directors, we anticipate that we will use $100.0$150.0 million to $150.0$200.0 million in cash for share repurchases.


The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in Item 1A of this Form 10-K. Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.



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CRITICAL ACCOUNTING ESTIMATES


We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which requires 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 estimateestimates 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. We believe the following critical accounting estimates require us to make the most difficult, subjective or complex judgments.


Allowance for Doubtful Accounts


We maintain an allowance for doubtful accounts based on an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers. The extended terms usually require payments in equal installments in April, May and June or May and June, depending on geographic location. Credit losses have generally been within or better than our expectations.




Similar to our business, our customers’ businesses are seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on our accounts receivable aging. These reserves range from 0.05% for amounts currently due to up to 100% for specific accounts more than 60 days past due.


At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts. As we review these past due accounts, we evaluate collectability based on a combination of factors, including:


aging statistics and trends;
customer payment history;
independent credit reports; and
discussions with customers.


During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.07% of net sales annually.  Write-offs as a percentage of net sales approximated 0.05%0.12% in 2017,2019, 0.07% in 20162018 and 0.05% in 2015.2017. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2018.2020.


At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates but conservative overall as 2017 write-offs came in at the low end of the expected range based on historical trends. While we slightly loweredand that our general reserve percentage to account for declining write-offs in recent years, our overall reserveestimation methodology and process for estimating specific reserves remains unchanged.is appropriate.


If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2017,2019, pretax income would change by approximately $0.8$1.1 million and earnings per share would change by approximately $0.01$0.02 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2017)2019).


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Inventory Obsolescence


Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volumes. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently turn at slower rates.


We classify products into 13 classes at the sales center level based on sales at each location over the expected sellable period, which is the previous 12 months for most products. All inventory is included in these classes, except for special order non-stock items that lack a SKU in our system and products with less than 12 months of usage. The table below presents a description of these inventory classes:


Class 0new products with less than 12 months usage
Classes 1-4highest sales value items, which represent approximately 80% of net sales at the sales center
Classes 5-12lower sales value items, which we keep in stock to provide a high level of customer service
Class 13products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer
Null classnon-stock special order items




There is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly. We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory at net realizable value. We provide a reserve of 5% for inventory in classes 5-13 and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for excess inventory in class 13. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis.  We also evaluate whether the calculated reserve provides sufficient coverage of the total class 13 inventory.


In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors, including:


the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center level and on a company-wide basis;
changes in customer preferences or regulatory requirements;
seasonal fluctuations in inventory levels;
geographic location; and
superseded products and new product offerings.


We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors. At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end obsolescence reserve balance to (i) current year inventory write-offs and (ii) the value of products with no sales for the past 12 months that remain in inventory. Based on our hindsight analysis, we concluded that our prior year reserve was within a range of acceptable estimates and that our reserveestimation methodology is appropriate.


If the balance of our inventory reserve increased or decreased by 20% at December 31, 2017,2019, pretax income would change by approximately $1.3$1.8 million and earnings per share would change by approximately $0.02$0.03 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2017)2019).


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Vendor Programs


Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve any of a number of measures.  These measures generally relate to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements.  We account for vendor programs as a reduction of the prices of the vendor’s products and therefore a reduction of inventory until we sell the product, at which time we recognize such consideration as a reduction of cost of sales in our income statement.


Throughout the year, we estimate the amount earned based on our estimateexpectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward the attainment of various levels within certain vendor programs. We accrue vendor program benefits on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for annual purchases, future inventory levels and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including weather and changes in economic conditions.conditions and weather.  Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume of purchases from specific vendors.


We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods. We update our estimates for these arrangements at year end to reflect actual annual purchase levels. In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances. Based on our hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.


If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our cost for products purchased and sold in future periods.




Income Taxes


We record deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse.  Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.
In December 2017, the Tax Cuts and Jobs Act (TJCA(the TJCA or the Act) was enacted, whichenactment significantly changeschanged U.S. tax law. In accordance with Accounting Standards Codification Topic (ASC) 740, Income Taxes, we are required to account for the new requirements in the period that includes the date of enactment. The Act reducesreduced the overall corporate income tax rate to 21%, createscreated a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadensbroadened the tax base and allowsallowed for the immediate capital expensing of certain qualified property. Due to the complexities presented by the Act, particularly for companies with multi-national operations, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 (SAB 118) to provide guidance to allow companies who are not able to complete their accounting in the period of enactment prior to the reporting deadlines. Under the guidance in SAB 118, companies that have not completed their accounting for certain elements of the Act, but can determine a reasonable estimate of those effects, should include arecord provisional amountamounts based on their reasonable estimate in their financial statements. Thisestimates. As a result of this guidance, resulted in us recordingwe recorded a provisional net benefit to our income tax provision duringin the period ended December 31,fourth quarter of 2017. As of December 31, 2017,2018, we have not completed our accounting for the tax effects of the Act, but will complete our accounting before the end of the one year period allowed by SAB 118. Any revisionswhich did not result in a material adjustment to our provisional amounts will be recorded in the period when the accounting is complete and will be recorded as a discrete item in our income tax provision in that period.amount. For the Global Intangible Low Tax Income (GILTI) provisions of the Act, we have elected an accounting policy to record GILTI as period costs if and when incurred.
As of December 31, 2017, United States2019, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. We are also still evaluating whetherdetermined not to change our indefinite reinvestment assertion in light of U.S. tax reform.


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We have operationsoperate in 39 states, 1 United States territory and 1211 foreign countries. We are subject to regular audits by federal, state and foreign tax authorities, and the amount of income taxes we pay is subject to adjustment by the applicable tax authorities.  We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.  These adjustments may include changes in valuation allowances that we have established.  As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.


Each year, we prepare a return to provision analysis upon filing our income tax returns. Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate. Differences between our effective income tax rate and federal and state statutory tax rates are primarily due to valuation allowances recorded for certain of our international subsidiaries with tax losses.


Performance-Based Compensation Accrual


The Compensation Committee of our Board (Compensation Committee) annually reviews our compensation structure to oversee management’s implementation of maintaining a program that attracts, retains, develops and motivates employees without leading to unnecessary risk taking. Our compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility. The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including operating income and diluted earnings per share (EPS).




We use an annual cash performance award (annual bonus) to focus corporate behavior on short-term goals for growth, financial performance and other specific financial and business improvement metrics. Management sets the Company’s annual bonus objectives at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. Management also establishes specific business improvement objectives for both our operating units and corporate employees. The Compensation Committee approves objectives for annual bonus plans involving executive management.


We also utilize our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an additional cash-based, pay-for-performance award based uponon the achievement of specified earnings growth objectives. Payouts through the SPIP are based on three-year compoundedcompound annual growth rates (CAGRs) of our diluted EPS.


We record annual performance-based compensation accruals based on operating income achieved in a quarter as a percentage of total expected operating income for the year. We estimate total expected operating income for the current plan year using management’s estimate of the total overall incentives earned per the stated bonus plan objectives. Starting in June, and continuing each quarter through our fiscal year end, we adjust our estimated performance-based compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific objectives and management’s estimates related to the discretionary components of the bonus plans, if any.


We record SPIP accruals based on our total expected EPS for the current fiscal year and CAGRearnings growth estimates for the succeeding two years. We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation and we base our CAGRforward-looking estimates on historical growth ratestrends and our projections for the remainder of the three-year performance periods.


Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts due to the following:


differences between estimated and actual performance;
our projections related to achievement of multiple-year performance objectives for our SPIP; and
the discretionary components of the bonus plans.


We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we compare the actual bonus payouts to amounts accrued at the previous yearyear's end to determine the accuracy of our performance‑basedperformance-based compensation estimates. Based on our hindsight analysis, we concluded that our performance-based compensation accrual balances were within a reasonable range of acceptable estimates and that our estimation methodologies are appropriate.

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Impairment of Goodwill and Other Indefinite-Lived Intangible Assets


Goodwill is our largest intangible asset. At December 31, 2017,2019, our goodwill balance was $189.4$188.6 million,, representing approximately 17%13% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.


We perform oura goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in circumstances occur that indicate potential impairment.  If the estimated fair value of any of our reporting units falls below its carrying value, we compare the estimated fair value of the reporting unit’s goodwill to its carrying value. If the carrying value of a reporting unit’s goodwill exceeds its estimated fair value, we perform a calculation to measure impairment, which includes valuing the tangible and intangible assets. We recognize the difference as anany impairment loss in operating income.


Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, ourwe define a reporting unit isas an individual sales center.  As of October 1, 2017,2019, we had 221223 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $5.7 million and the average goodwill balance was $0.8 million. $0.8 million.

In October 2017, 2016of 2019, 2018 and 2015,2017, we performed our annual goodwill impairment test and did not identifyrecognize any goodwill impairment at the reporting unit level. In the third quarter of 2016, we recorded a $0.6 million goodwill impairment charge related to an at-risk reporting unit in Quebec, Canada. We continue to monitor this location’s results, which came in above expectations at the end of the 2017 pool season. As of December 31, 2017, the remaining goodwill balance for this reporting unit was $1.8 million.


We estimate the fair value of our reporting units based on an income approach that incorporates our assumptions for determining the present value of future cash flows.  We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples. These estimates can significantly affect the outcome of our impairment test.  We also review for potential impairment indicators at the reporting unit level based on an evaluation of recent historical operating trends, current and projected local market conditions and other relevant factors as appropriate.




To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for the purpose of our goodwill impairment test. To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate by 5% to reflect more conservative discounted cash flow assumptions. This reduction addressesassumptions, the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate. Our sensitivity analysis generated a fair value estimate significantly below our market capitalization and resulted in the identification of no goodwill impairments and no additional at-risk locations.
Based on the magnitude of theirour 2019 goodwill balances and their heightened sensitivity to weather,impairment analysis, we consider our reporting units in Quebec, Canada,Australia as most at risk for goodwill impairment. ResultsWe entered Australia in Quebec beganJuly 2014 with the acquisition of a controlling interest in Pool Systems Pty. Ltd (PSL). The previous owner of PSL provided executive oversight until our purchase of the non-controlling interest in June 2017. Since 2014, we have continued to fall below expectationsexpand our operations in 2013, largely dueAustralia via one sales center opening and the acquisitions of Newline Pool Products in July 2017 and Pool Power in January 2018. The most sensitive assumptions related to an extended winterour fair values for these locations relate to future projected operating results and certain execution challenges. We cannot be assured of favorable weather conditions in any given year, which strongly impact results formanagement’s ability to effectively leverage our Quebec reporting units.operating structure and manage costs as we expand our presence. As of December 31, 2017, we have three2019, our aggregate goodwill balance for our five reporting units in Quebec, with a total goodwill balance of $2.8Australia was $4.0 million.


If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur additional impairment charges in future periods, especially related to the reporting units discussed above.  Impairment charges would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.  


Recent Accounting Pronouncements


In May 2014, theSee Note 1 of “Notes to Consolidated Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effectiveStatements,” included in Item 8 of this Form 10-K for annual periods beginning after December 15, 2017, which for us will be in the period beginning January 1, 2018. We are substantially complete with our detailed evaluation, using the five‑step model specified in the guidance, to determine the impact of the new standard.details.


Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products or services to our customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics. Since our individual sales transactions are very similar in nature, we will apply the guidance to all transactions as a portfolio. We have determined that the effects of applying this guidance to the portfolio is not materially different from applying the guidance to individual performance obligations within that portfolio.
Our revenue recognition is achieved upon delivery of products as there are no other promised services as part of our contracts with customers that are material in the context of the contract. Because our shipping and handling activities are performed before the customer obtains control of the goods, we do not consider these activities to be a promised service to the customer. Rather shipping and handling are activities to fulfill our promise to transfer the goods. Product warranties do not constitute a performance obligation for us, as products are warrantied directly by the manufacturer or the third party carrier.
To determine the amount of consideration to which we expect to be entitled in exchange for transferring promised goods, we have considered if variable consideration exists. We have reviewed our standard terms and conditions and our customary business practices to determine the transaction price. We have reviewed our pricing policies including marketing programs, coupons and free products for the purpose of determining whether we have any variable or non-cash consideration. We do not issue future-dated coupons or free product rebates. When we process manufacturer coupons, we record the customer sales price as revenue and receive reimbursement of the coupon value from the manufacturer. In addition, we reviewed our current accounting policies related to returns and price concessions for which no material changes in policy were noted. Volume rebates is a sales incentive program where we make a cash payment or apply credit to a customer account on a quarterly or annual basis, if the customer reaches a specified level of purchases. The volume rebates are accounted for as a reduction of the transaction price, and a liability is recorded until the related payment to the customer is made. We do not offer any volume discounts. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.
The majority of our sales transactions do not require any additional performance obligation after delivery; therefore we do not have multiple performance obligations for which we will have to allocate the transaction price. We do not offer customer loyalty programs.
We expect to recognize revenue when control of the product has been transferred to the customer upon delivery to the customer or the freight carrier, if delivered by a third party, as we believe our performance obligation is satisfied at such point in time.



As allowed for under ASU 2014-09, we will apply the guidance using the modified retrospective transition method, whereby we will recognize the cumulative effect of initially applying the new standard as an adjustment to our opening balance of retained earnings (deficit). Based on our analysis, the adoption of ASU 2014-09 will not have a material impact on our financial position or results of operations. Our adoption will result in balance sheet reclassifications for recording our estimate for customer returns. Historically, our deferred revenue liability for customer returns has not been material. ASU 2014-09 requires the recognition of a current liability for the gross amount of the estimated returns, and a current asset for the cost of the related products (each less than $1.0 million at December 31, 2017).

We have determined that the adoption will not require material or significant changes to our internal controls over financial reporting.

The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:
StandardDescriptionEffective DateEffect on Financial Statements and Other Significant Matters
ASU 2016-02, Leases
Requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. The guidance is required to be applied using a modified retrospective approach.Annual periods beginning after December 15, 2018We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures. We are primarily focused on evaluating our internal controls over financial reporting, including information technology requirements, related to the adoption of this new accounting pronouncement. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheets as we will be recording a right-of-use asset and corresponding liability for our current operating leases.
ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
Changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The guidance must be applied using a cumulative-effect transition method.Annual periods beginning after December 15, 2019We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.


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StandardDescriptionEffective DateEffect on Financial Statements and Other Significant Matters
ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments

May change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. The guidance must be applied retrospectively.Annual periods beginning after December 15, 2017We do not expect the adoption of this guidance will have a material impact on our cash flow statement.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
Eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). This guidance should be applied prospectively.Annual and interim impairment tests performed in periods beginning after December 15, 2019We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.
ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
Eliminates the requirement to separately measure and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the change in the fair value of the hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item.Annual periods beginning after December 15, 2018
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.







RESULTS OF OPERATIONS


The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years:


Year Ended December 31,
201920182017
Net sales100.0 %100.0 %100.0 %
Cost of sales71.1  71.0  71.1  
Gross profit28.9  29.0  28.9  
Operating expenses18.2  18.6  18.7  
Operating income10.7  10.5  10.2  
Interest and other non-operating expenses, net0.7  0.7  0.5  
Income before income taxes and equity earnings9.9 %9.8 %9.7 %
  Year Ended December 31,
  2017 2016 2015
Net sales 100.0% 100.0% 100.0%
Cost of sales 71.1
 71.2
 71.4
Gross profit 28.9
 28.8
 28.6
Operating expenses 18.7
 18.9
 19.4
Operating income 10.2
 10.0
 9.1
Interest and other non-operating expenses, net 0.5
 0.6
 0.3
Income before income taxes and equity earnings 9.7% 9.4% 8.8%


Note: Due to rounding, percentages may not add to operating income or income before income taxes and equity earnings.


Our discussion of consolidated operating results includes the operating results from acquisitions in 2017, 20162019, 2018 and 2015.2017.  We have included the results of operations in our consolidated results since the respective acquisition dates.


Fiscal Year 20172019 compared to Fiscal Year 20162018


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


(Unaudited)Base BusinessExcludedTotal
(in thousands)Year EndedYear EndedYear Ended
 December 31,December 31,December 31,
 201920182019201820192018
Net sales$3,152,253  $2,987,937  $47,264  $10,160  $3,199,517  $2,998,097  
Gross profit912,680  867,980  12,245  2,193  924,925  870,173  
Gross margin29.0 %29.0 %25.9 %21.6 %28.9 %29.0 %
Operating expenses569,458  552,841  14,221  3,443  583,679  556,284  
Expenses as a % of net sales18.1 %18.5 %30.1 %33.9 %18.2 %18.6 %
Operating income (loss)343,222  315,139  (1,976) (1,250) 341,246  313,889  
Operating margin10.9 %10.5 %(4.2)%(12.3)%10.7 %10.5 %

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(Unaudited) Base Business Excluded Total
(in thousands) Year Ended Year Ended Year Ended
  December 31, December 31, December 31,
  2017 2016 2017 2016 2017 2016
Net sales $2,749,672
 $2,558,368
 $38,516
 $12,435
 $2,788,188
 $2,570,803
             
Gross profit 793,866
 737,335
 11,423
 3,752
 805,289
 741,087
Gross margin 28.9% 28.8% 29.7 % 30.2% 28.9% 28.8%
             
Operating expenses 508,273
 481,924
 12,645
 3,304
 520,918
 485,228
Expenses as a % of net sales 18.5% 18.8% 32.8 % 26.6% 18.7% 18.9%
             
Operating income (loss) 285,593
 255,411
 (1,222) 448
 284,371
 255,859
Operating margin 10.4% 10.0% (3.2)% 3.6% 10.2% 10.0%




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






Acquired


Acquisition
Date
Net
Sales Centers
Acquired
Net
Sales Centers
Acquired


Periods
Excluded
W.W. Adcock, Inc. (1)
January 2019January - December 2019
Turf & Garden, Inc. (1)
November 2018January - December 2019 and
November - December 2018
Tore Pty. Ltd. (Pool Power) (1)
January 2018January - April 2019 and
January - April 2018
Chem Quip, Inc. (1) (2)
December 20175December 2017January - March 2019 and January - March 2018
IntermarkDecember 20171December 2017
E-GrupaOctober 20171October - December 2017
New Star Holdings Pty. Ltd.July 20171July - December 2017
Lincoln Aquatics (1)
April 20171May - December 2017
Metro Irrigation Supply Company Ltd. (1)
April 20168January - June 2017February 2019 and AprilJanuary - June 2016
The Melton Corporation (1)
November 20152
January 2017 and
January 2016
Seaboard Industries, Inc. (1)
October 20153
January 2017 and
January 2016
February 2018


(1)
We acquired certain distribution assets of each of these companies.
(2)
We completed this acquisition on December 29, 2017. Thus we reported no results of operations in fiscal 2017 for this acquisition due to the acquisition date; however the related sales centers are included in the sales center count below.

(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 centers during 2017:2019:


December 31, 20162018344364 
Acquired locations9
New locations1
ConsolidatedClosed/consolidated locations(3(4))
December 31, 20172019351373 


For information about our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.



31



Net Sales


(in millions)Year Ended December 31,  
20192018Change
Net sales$3,199.5  $2,998.1  $201.4  7%  
(in millions) Year Ended December 31,   
  2017 2016 Change
Net sales $2,788.2
 $2,570.8
 $217.4
 8%


Net sales increased 8%7% compared to 2016, despite one less selling day. Our 7%2018, with 5% of this increase inresulting from base business sales generatedgrowth. Unfavorable weather impacts throughout much of this growth. We experienced modestly favorablethe first half of 2019, including record rainfall in May, led to delayed pool openings and lower construction and remodeling activity. Despite some weather duringevents in the third quarter, including Hurricane Dorian in Florida and Tropical Storm Imelda in southeast Texas, above average temperatures and below average precipitation throughout most of the country benefited overall swimming pool season, which ended with severe stormsindustry growth and allowed us to serve the pent-up demand from earlier in September and Octoberthe year. Favorable weather conditions continued in both Texas and Florida. By the end of the fourth quarter of 2019, as much of the southern and southeastern United States, particularly Florida, experienced above average temperatures, although some of our seasonal markets experienced weather challenges early in the quarter. These conditions supported our 2019 sales growth and are contrasted from the fourth quarter of 2018, when most of the United States experienced cooler than normal temperatures and higher than average precipitation. Despite the negative impacts resulting from the inclement weather in the first half of the year, with disciplined execution by our teams and improved weather conditions in the latter half of the year, we mostly recoveredproduced 7% sales lost over these time periods.growth in 2019 on top of sales growth of 8% in 2018.


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


continued improvement in consumer discretionary expenditures, including continued growth in remodeling and replacement activity (see discussion below);
market share growth, particularly in building materials and commercial product categories;categories (see discussion below);
increased pool and spa chemical4% sales growth in chemicals, our largest product category at 12% of total net sales for 2017, up 4%2019, compared to 2016, excluding the recent Lincoln Aquatics acquisition;2018;
inflation driven (estimated at closeapproximately 2% above our historical average of 1% to 1%2%) product selling price increases; and
acquisitions, particularly in the commercial market (Lincoln Aquatics) and Australia (Newline Pool Products)2% sales growth from recent acquisitions.


We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas including pool construction and pool remodeling, as well as equipment upgrades. In 2017,2019, sales for equipment, such as swimming pool heaters, pumps, lights and lightsfilters, increased 10%,7% compared to 2018, and collectively represented approximately 23%27% of net sales. This increase reflects both the growth of replacement activity and continued demand for higher‑priced,higher-priced, more energy-efficient products. Sales of building materials, which includes tile, grew 13%9% compared to 20162018 and represented approximately 10%12% of net sales in 2017.2019.


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. TheseSales to these customers increased 8% in 2019 on top of sales growth of 11% in 2018 and represented approximately 5% of net sales in 2019.

2019 Quarterly Sales Performance Compared to 2018 Quarterly Sales Performance

Net sales increased 10% compared to 2016 and represented 5% of our consolidated net sales for 2017, excluding the recent acquisition of Lincoln Aquatics.

In terms of quarterly performance, base business sales increased 5%2% in the first quarter of 2017, despite a 2% decline in sales related to customer early buy purchases. Base2019, while base business sales then increased 7%grew 1%. Sales in the first quarter were largely impacted by cool, wet weather, particularly in the western United States, and by a later Easter holiday than in 2018.
Favorable weather conditions in the southeastern United States led to net sales growth of 6% and base business sales growth of 4% in the second quarter of 2017 under overall neutral weather conditions for most2019. Sales in the second quarter were hindered by record rainfall and cooler temperatures in three of our four largest markets, California, Texas and Arizona.
In the quarter. Despite the severe weather eventsthird quarter of 2019, net sales increased 11%, while base business sales increased 9%. Sales in the third quarter of 2017,benefited from favorable weather conditions and one less selling day compared to the same period in 2016, base business sales increased 6% in the third quarter. strong demand throughout our industry.
For our seasonally slowest fourth quarter, both net sales and base business sales increased 13%7% in 2017 reflecting strong consumer demand, excellent execution by2019 as weather challenges early in the quarter brought an abrupt end to business in some of our team,seasonal markets.

In addition to the recovery following Hurricane Irma and overall favorable weather conditions. Seesales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.


32


Gross Profit


(in millions)Year Ended December 31,  
20192018Change
Gross profit$924.9  $870.2  $54.7  6%  
Gross margin28.9 %29.0 %  
(in millions) Year Ended December 31,   
  2017 2016 Change
Gross profit $805.3
 $741.1
 $64.2
 9%
Gross margin 28.9% 28.8%    


Gross margin for 2017 increased 10 basis pointswas relatively flat year-over-year at 28.9% in 2019 compared to 2016 mostly reflecting product mix coupled29.0% in 2018, with benefits from sourcing initiatives.base business gross margin at 29.0% in both years.



Operating Expenses


(in millions)Year Ended December 31, 
20192018Change
Operating expenses$583.7  $556.3  $27.4  5%  
Operating expenses as a percentage of net sales18.2 %18.6 %  
(in millions) Year Ended December 31,  
  2017 2016 Change
Operating expenses $520.9
 $485.2
 $35.7
 7%
Operating expenses as a percentage of net sales 18.7% 18.9%    


Operating expenses increased 7% compared5% to 2016, with$583.7 million in 2019, up from $556.3 million in 2018, while base business operating expenses up 5%grew 3%. TheIn addition to incremental costs incurred related to recent acquisitions and sales center openings, the increase in base business operating expenses was primarily dueattributable to higher growth-driven labor and freight expenses, as well as greater facility-related expenditures, equity-based compensation, and technology spending as we continue to invest in our business. Base business operatingcosts. Operating expenses as a percentage of net sales improved 30declined 40 basis points, over 2016, as we continuedcontributing to leveragethe 20 basis point expansion in our existing infrastructure.operating margin for the year and 40 points of base business operating margin expansion.


Interest and Other Non-operating Expenses, net


Interest and other non-operating expenses, net increased $0.7$2.9 million compared to 2016.2018. The increase reflects higher average debt levels and higher average interest rates between periods. Average outstanding debt was $504.0$599.6 million for 2017in 2019 versus $424.6$579.1 million for 2016.in 2018. Our 20172019 average outstanding debt balance reflects greater borrowings made in the first half of the year, primarily to fund working capital growth.growth, although debt levels declined later in the year and finished at 77% of our 2018 balance at December 31, 2019. Our weighted average effective interest rate increased to 2.7% for 20173.4% in 2019 compared to 2.2% for 2016.3.3% in 2018.


Income Taxes


Our effective income tax rate was 29.0%17.7% at December 31, 20172019 and 38.5%20.1% at December 31, 2016. Our provision for income taxes for 2017 was positively impacted by both U.S. tax reform and ASU 2016-09. As a result of the recently enacted tax legislation, we2018. We recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In addition to the impact from tax reform, we recorded a $12.6$23.5 million benefit in our provision for income taxesfrom ASU 2016-09 for the year ended December 31, 2017 related2019 compared to a benefit of $15.3 million realized in the same period in 2018. Excluding the benefits from ASU 2016-09, our adoption of ASU 2016-09.effective tax rate was 25.1% and 25.3% for the years ended 2019 and 2018, respectively.

Net Income and Earnings Per Share


Net income attributable to Pool Corporation increased 29%12% to $191.6$261.6 million in 20172019 compared to $149.0$234.5 million in 2016.2018. Earnings per share increased 30%14% to $4.51$6.40 per diluted share compared to $3.47$5.62 per diluted share in 2016.2018. Excluding the $0.28 per diluted share impact of tax reform and the $0.24$0.57 per diluted share impact of ASU 2016-09 in 2019 and $0.36 in 2018, diluted earnings per share increased 15%11% over last year.



33






Fiscal Year 20162018 compared to Fiscal Year 20152017


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

(Unaudited) Base Business Excluded Total
(in thousands) Year Ended Year Ended Year Ended
  December 31, December 31, December 31,
  2016 2015 2016 2015 2016 2015
Net sales $2,525,164
 $2,361,134
 $45,639
 $2,005
 $2,570,803
 $2,363,139
             
Gross profit 727,469
 675,262
 13,618
 382
 741,087
 675,644
Gross margin 28.8% 28.6% 29.8% 19.1 % 28.8% 28.6%
             
Operating expenses 475,048
 458,599
 10,180
 823
 485,228
 459,422
Expenses as a % of net sales 18.8% 19.4% 22.3% 41.0 % 18.9% 19.4%
             
Operating income (loss) 252,421
 216,663
 3,438
 (441) 255,859
 216,222
Operating margin 10.0% 9.2% 7.5% (22.0)% 10.0% 9.1%

For an explanation of how we calculate base business, please refer to thea detailed discussion of base business under the heading “FiscalResults of Operations in Fiscal Year 20172018 compared to Fiscal Year 2016.”

For purposes2017, see the Results of comparing operating results for the year ended December 31, 2016 to the year ended December 31, 2015, we excluded acquired sales centers from base business for the periods identified in the table below.



Acquired (1)

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
Metro Irrigation Supply Company Ltd.April 20168April - December 2016
The Melton CorporationNovember 20152January - December 2016 and November - December 2015
Seaboard Industries, Inc.October 20153January - December 2016 and November - December 2015
Poolwerx Development LLCApril 20151
January - June 2016 and
April - June 2015
St. Louis Hardscape Material & Supply, LLCDecember 20141January - March 2016 and January - March 2015

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





The table below summarizes the changes in our sales centers during 2016:

December 31, 2015336
Acquired locations8
New locations6
Consolidated locations(6)
December 31, 2016344

For information about our recent acquisitions, see Note 2Operations section of “Notes to Consolidated Financial Statements,”Management’s Discussion and Analysis included in Part II, Item 87 of thisour 2018 Annual Report on Form 10-K.

Net Sales

34
(in millions) Year Ended December 31,   
  2016 2015 Change
Net sales $2,570.8
 $2,363.1
 $207.7
 9%

Net sales increased 9% compared to 2015, with the 7% improvement in base business sales contributing much of this increase. Strong execution, combined with overall favorable weather conditions and generally favorable economic and industry conditions supported our sales growth.

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

very favorable weather conditions, including the second warmest year on record in the continental United States;
continued consumer investments in enhancing outdoor living spaces, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
pool and spa chemical sales, our largest product category at 13% of total net sales, increased 6% over last year; and
inflationary (estimated at 1% to 2%) product cost increases.

We believe that sales growth rates for certain product offerings, such as building materials and equipment, support our assertion that there continues to be increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. Sales of equipment such as swimming pool heaters, pumps, and lights, which represented 8%, 7%, and 7% of our total net sales, respectively, increased collectively by 9% compared to 2015. This increase reflects both the gradual recovery of replacement activity and increased demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent just over 9% of net sales for 2016 and grew by 14% compared to 2015.

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. These sales represented 4% of our consolidated net sales for 2016 and increased 16% compared to 2015 due primarily to our increased focus on the commercial market, as well as greater resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.

In terms of quarterly performance, base business sales increased 13% in the first quarter of 2016, as warmer than normal weather across our seasonal markets kicked off 2016, allowing for accelerated pool openings and increased ability for customers to perform remodel, replacement and new construction activity earlier in the year. As we have disclosed in recent years, 2016 customer early buy shipments again caused some second quarter sales to shift into the first quarter and accounted for approximately 3% of our first quarter 2016 sales growth. Neutral weather conditions in the second and third quarters coupled with strong execution contributed to our 6% and 5% base business sales growth in the second and third quarter of 2016, respectively. For our seasonally slow fourth quarter, base business sales increased 5% in 2016 over very strong fourth quarter 2015 results, as our sales benefited from warmer than average temperatures during this time period. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.



Gross Profit



(in millions) Year Ended December 31,   
  2016 2015 Change
Gross profit $741.1
 $675.6
 $65.5
 10%
Gross margin 28.8% 28.6%    

Gross margin for 2016 increased approximately 20 basis points over 2015, and benefited from improvements in supply chain management and internal initiatives, as well as favorable product mix from pool openings earlier in the year. These favorable impacts were partially offset by an increase in customer early buy deliveries as these sales include applicable discounts. Quarterly gross margin comparisons varied throughout the year, with an increase of 10 basis points in the first quarter, which reflects the impact of customer early buy shipments. Gross margin increased 40 basis points in both the second and third quarters and increased 20 basis points in the seasonally slower fourth quarter.

Operating Expenses

(in millions) Year Ended December 31,  
  2016 2015 Change
Operating expenses $485.2
 $459.4
 $25.8
 6%
Operating expenses as a percentage of net sales 18.9% 19.4%    

Operating expenses increased 6% compared to 2015, with base business operating expenses up 4%. While the increase in total operating expenses includes expenses from our more recent acquisitions, the increase in base business operating expenses was due primarily to higher growth-driven labor, building rent and freight expenses. Focusing on efficiencies and leveraging existing infrastructure enabled us to reduce operating expenses as a percentage of sales.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net increased $6.4 million compared to 2015. This increase includes $3.5 million related to a non-operating note receivable. The remaining component is primarily interest expense on debt, which increased $3.2 million over last year. Average outstanding debt was $424.6 million for 2016 versus $379.2 million for 2015. Our 2016 average outstanding debt balance reflects greater share repurchases than in 2015. Our weighted average effective interest rate increased to 2.2% for 2016 compared to 1.9% for 2015.

Income Taxes

Our effective income tax rate was 38.5% at both December 31, 2016 and December 31, 2015.

Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 16% to $149.0 million in 2016 compared to $128.3 million in 2015, while earnings per share increased 20% to $3.47 per diluted share compared to $2.90 per diluted share in 2015.









Seasonality and Quarterly Fluctuations


OurFor discussion regarding the effects seasonality and weather have on our business, is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak monthssee Item 1, “Business,” of both swimming pool use and installation and irrigation installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2017, we generated approximately 62% of our net sales and 83% of our operating income in the second and third quarters of the year.this Form 10-K.

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 20172019 and 2016.2018. 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) QUARTER(Unaudited)QUARTER
(in thousands) 2017 2016(in thousands)20192018
 First Second Third Fourth First Second Third Fourth FirstSecondThirdFourthFirstSecondThirdFourth
Statement of Income Data                Statement of Income Data        
Net sales $546,441
 $988,163
 $743,401
 $510,183
 $515,250
 $918,889
 $691,429
 $445,235
Net sales$597,456  $1,121,328  $898,500  $582,234  $585,900  $1,057,804  $811,311  $543,082  
Gross profit 153,621
 289,664
 216,606
 145,398
 143,023
 270,736
 199,551
 127,777
Gross profit174,631  330,314  257,931  162,050  166,073  308,655  235,003  160,442  
Operating income 30,998
 154,186
 81,928
 17,259
 29,530
 142,420
 74,166
 9,743
Operating income38,386  172,523  104,540  25,798  33,541  162,042  92,337  25,970  
Net income 22,270
 94,620
 48,783
 25,665
 16,363
 85,247
 44,421
 2,572
Net income32,637  131,390  79,525  18,024  31,339  117,049  69,261  16,811  
                
Net sales as a % of annual net sales 20% 35% 27% 18% 20% 36% 27% 17%Net sales as a % of annual net sales19 %35 %28 %18 %20 %35 %27 %18 %
Gross profit as a % of annual gross profit 19% 36% 27% 18% 19% 37% 27% 17%Gross profit as a % of annual gross profit19 %36 %28 %18 %19 %35 %27 %18 %
Operating income as a % of annual operating income 11% 54% 29% 6% 12% 56% 29% 4%Operating income as a % of annual operating income11 %51 %31 %%11 %52 %29 %%
                
Balance Sheet Data                Balance Sheet Data
Total receivables, net $290,019
 $370,285
 $262,796
 $196,265
 $283,758
 $351,012
 $233,405
 $166,151
Total receivables, net$313,127  $417,126  $307,798  $226,539  $314,596  $404,415  $287,773  $207,801  
Product inventories, net 647,884
 542,805
 484,287
 536,474
 595,393
 493,254
 455,156
 486,116
Product inventories, net815,742  694,447  616,217  702,274  703,793  606,583  609,983  672,579  
Accounts payable 465,928
 273,309
 209,092
 245,249
 438,705
 265,349
 199,922
 230,728
Accounts payable472,487  342,335  214,309  261,963  467,795  300,232  204,706  237,835  
Total debt 490,217
 553,480
 564,573
 519,650
 450,457
 500,606
 390,189
 438,042
Total debt698,977  692,337  547,560  511,407  568,110  657,120  580,703  666,761  
 
Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
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.


35

WeatherPossible Effects
Hot and dryIncreased purchases of chemicals and supplies
for existing swimming pools
Increased purchases of above-ground pools and
irrigation products
Unseasonably cool weather orFewer pool and irrigation installations
extraordinary amounts of rainDecreased 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 fallA 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 fallA shorter pool and landscape season, thus negatively impacting our sales
(primarily in the northern half of the U.S. and Canada)


Weather Impacts on Fiscal Year 20172019 to Fiscal Year 20162018 Comparisons


Unseasonably mild weather benefited sales inWetter and cooler than normal temperatures to begin the year hindered our first quarter of 2017. However, while favorable2019 sales growth. Much of the western United States, particularly California and Arizona, experienced cold to record cold temperatures in January and February. The latter half of March benefited from warmer weather trends earlythroughout most of the country and provided some relief from the slow start earlier in the year normally have a seasonally larger impact, the comparison to theyear. The first quarter of 2016 was especially tough given the benefit of the warmer-than-normal2018 experienced similar, though less significant, unfavorable weather across nearly allin certain markets, leading to more adverse conditions in the United States in the first quarter of 2016. For the first quarter of 2017, Texas and surrounding markets experienced record warm temperatures, which when coupled with below-average precipitation2019 compared to 2018.

Results for that area, spurred higher sales growth. In two of the more seasonal regions where we operate, below-average temperatures in the North and above-average precipitation in the West negatively impacted our first quarter 2017 sales growth.

Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter of 2017, while2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the weather impact overallmonth of May, which was the second wettest May on record for the quarter was fairly neutral. Temperatures and precipitation throughout most areas other than those describedcontiguous United States. In the southeastern United States, favorable weather conditions, including above were normal, with only Texas benefiting from drier weatheraverage temperatures, delivered strong sales growth in these markets. In contrast, in the second quarter of 2017 compared to the above-average rainfall experienced2018, results in the same periodlast two months of 2016.the quarter benefited from warm weather throughout the country and helped relieve the effects of a slow start from earlier in 2018.


Severe stormsAbove average temperatures and below average precipitation throughout most of the country in the third quarter of 2017, particularly Hurricanes Irma2019 positively impacted results for the quarter. In the contiguous United States, September tied with 2015 as the second warmest on record. Throughout the quarter, the southern United States and Harvey, hindered our sales growththe Ohio Valley benefited from dry conditions. Despite some weather events, including Hurricane Dorian in Florida and Tropical Storm Imelda in southeast Texas, although Texas largely recovered by the end of September. In the Central and Midwest, temperatures were normal for the third quarter, contrasting with the above-average temperaturesthese markets delivered favorable results in the third quarter of 2016. The West experienced record heat2019. Conversely, bouts of severe weather, including Hurricane Florence, elevated rainfall in Texas, and normal rainfallwildfires in California, adversely impacted results for the third quarter of 2017, similar2018.

In the fourth quarter of 2019, much of the southern and southeastern United States, particularly Florida, experienced above average temperatures, which led to increased sales growth compared to the above-average heat in the same periodfourth quarter of 2016. Overall,2018 when most of the United States experienced favorable weather in most of the fourth quarter of 2017, particularly Florida, which allowed for sales recovery following Hurricane Irma.below average temperatures and higher than average precipitation.


Weather Impacts on Fiscal Year 20162018 to Fiscal Year 20152017 Comparisons


Warmer-than-normal weather across nearlyFor a detailed discussion of Weather Impacts on Fiscal Year 2018 compared to Fiscal Year 2017, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2018 Annual Report on Form 10-K.  

Geographic Areas

Since all marketsof our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. For additional details, see Note 1 of our “Notes to Consolidated Financial Statements,” included in the United States benefitedItem 8 of this Form 10-K.

For a breakdown of net sales and property, plant and equipment between our first quarter of 2016 sales growth. Warmer weather early in the season accelerates pool openings and allows for increased purchases of chemicals and maintenance supplies for existing pools. By comparison, our year-round markets experienced similar favorable weather conditions in the first quarter of 2015, while our seasonal markets, particularly in the northeast United States and eastern Canada, experienced cooler-than‑normal temperatures. The unusually early warm weather in the first quarterinternational operations, see Item 1, “Business,” of 2016 in our seasonal markets benefited our first quarter sales. Growth in our California markets in the first quarter of 2016 was impacted by unfavorable weather comparisons to the same period of 2015 due to higher winter precipitation and average temperatures in 2016 versus record warm temperatures in 2015.this Form 10-K.





In the second quarter of 2016, the Midwest and Northeast experienced more favorable conditions compared to 2015, with above‑average temperatures and much drier weather in June 2016 compared to June 2015. Although the extreme rainfall experienced in Texas and adjacent states was not as prevalent in the second quarter of 2016 as compared to 2015, Texas experienced above‑average precipitation again in 2016. Florida and the Southeast experienced cooler temperatures compared to above-average and record heat in certain areas in 2015. California and the Northwest experienced warm temperatures and normal levels of precipitation in the second quarter of 2016 and 2015.

36

Weather conditions in the third quarter of 2016 varied throughout the United States creating a neutral overall impact on our results. The eastern half of the country experienced above-average temperatures, including record high temperatures in the Northeast and parts of the Midwest. The western half of the United States experienced mostly normal temperatures, while Texas experienced above-average precipitation. The conditions in Texas in the third quarter of 2016 were in direct contrast to the weather in the same period of 2015 when Texas was drying out from heavy precipitation, lifting third quarter 2015 sales. California and the Northwest logged drier-than-normal conditions in the third quarter of 2016 compared to average precipitation in 2015. Most of the United States experienced warm temperatures during the fourth quarter of 2016, allowing projects to continue through the remainder of the year and contributing to sales growth over the same period in 2015.


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 bank 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 as we expandedrelated to expanding our facilities and purchasedpurchasing delivery vehicles to address growth opportunities. Capital expenditures were 1.4% of net sales in 2016 and 1.0% of net sales in 2015.growth. Over the last 5five years, capital expenditures have averaged roughly 1.0% of net sales. Going forward,

Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We focus our capital expenditure plans on the needs of our sales centers. In 2018, we performed an evaluation of our enterprise resource planning system. Although we do not anticipate a complete replacement of our enterprise resource planning system, we do plan to migrate our current system to a new environment over a number of years. This plan requires modest, incremental capital investments over that time frame rather than a significant, one-time investment. For 2020, based on management’s current plans, we project capital expenditures will continue to approximate thisthe historical average.



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 February 21, 2020, $249.2 million of the current Board authorized amount under our authorized share repurchase plan remained available. We expect to repurchase additional shares in 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.

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Sources and Uses of Cash


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


 Year Ended December 31,
 20192018
Operating activities$298,776  $118,656  
Investing activities(42,263) (34,158) 
Financing activities(244,486) (97,571) 
  Year Ended December 31,
  2017 2016 2015
Operating activities $175,311
 $165,378
 $146,050
Investing activities (52,220) (55,643) (37,793)
Financing activities (114,449) (99,672) (107,804)


Cash provided by operations of $175.3$298.8 million for 20172019 increased $180.1 million compared to 2016primarily2018. The strategic inventory purchases that we made in the latter half of 2018 negatively impacted our 2018 cash flows due to the increasetiming differences that reversed in net income, partially offset by changes in working capital. Excluding the net income benefit from tax changes, cash provided by operations approximates net income for 2017. The timing of our early buy inventory purchases can create fluctuations in inventory and accounts payable balances from year to year. A change in the timing of one of our inventory early buy programs in 2017 compared to 2016 resulted in higher inventory but lower accounts payable balances at year end, resulting in a negative impact to our 2017 operating cash flows.2019.


In 2016, cash provided by operations improved compared to 2015 primarily due to our net income growth.

Cash used in investing activities decreasedincreased in 20172019 due to a decreasean increase of $6.96.3 millionin payments for acquisitions compared to 2016. This was offset by2018 and an additional $5.0$1.8 million ofincrease in net capital expenditures in 2017 compared to 2016 to fund our continued investment in new vehicles, equipment and technology. Related to the increase from 2015 to 2016, our 2016 cash used in investing activities reflects $19.7 million in net payments to fund acquisitions compared to $4.5 million in net payments to fund acquisitions in 2015.between years.


Cash used in financing activities increased in 2017,2019, which primarily due to lower net borrowingsreflects increased payments on our debt arrangements.revolving line of credit. We had $82.1$155.4 million of net proceeds frompayments on our debt arrangements in 20172019 compared to $109.4net proceeds of $146.5 million in 2016, primarily as a result of lower share repurchases.2018. We repurchased $143.2$23.2 million of shares in the open market2019 compared to $187.5 million in 2018.

For a discussion of our sources and uses of cash in 2017, compared to $175.6 millionsee the Liquidity and Capital Resources – Sources and Uses of Cash section of Management’s Discussion and Analysis included in 2016. In 2015, we had net proceeds fromPart II, Item 7 of our debt arrangements of $8.9 million, while we repurchased $92.4 million of shares in the open market.2018 Annual Report on Form 10-K.


Future Sources and Uses of Cash


To supplement cash from operations as our primary source of working capital, we will continue to utilize our twothree major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility). For additional details regarding these facilities, see Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.


Revolving Credit Facility


On September 29, 2017, we amended and restated our revolving credit facility. TheOur 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$75.0 million,, to a total of $825.0 million.$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 December 31, 2017,2019, there was $410.4$200.7 million outstanding, a $4.2$4.8 million standby letter of credit outstanding and $335.4$544.5 million available for borrowing under the Credit Facility. 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 the Credit Facility.  As of December 31, 2017, we have three interest rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019.


In July 2016, we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date at that time. This swap contract will convert the Credit Facility’s variable interest rate to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and terminates on November 20, 2020.
The weighted average effective interest rate for the Credit Facility as of December 31, 20172019 was approximately 2.9%2.8%, 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 with 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 December 31, 2019, the Term Facility was fully drawn with an outstanding balance of $185.0 million at a weighted average effective interest rate of 2.5%. Proceeds from the Term Facility were used to pay down the Credit Facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

38


Financial Covenants

Financial covenants onof 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 December 31, 2017,2019, 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 December 31, 2017,2019, our average total leverage ratio equaled 1.631.61 (compared to 1.561.72 as of December 31, 2016)2018) and the TTM average total debt amount used in this calculation was $524.3$614.9 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 December 31, 2017,2019, our fixed charge ratio equaled 5.535.38 (compared to 5.415.33 as of December 31, 2016)2018) and TTM Rental Expense was $54.3$60.2 million.


On January 1, 2019, we adopted ASU 2016-02, Leases, which requires that we record most of our leases on our balance sheets. Our Credit Facility and Term Facility agreements require that we calculate our financial covenants by excluding the effects of the new standard. The adoption of ASU 2016-02 did not have a material impact on our financial covenant calculations. For additional details regarding our adoption of this new accounting pronouncement, see Note 1 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

The Credit Facility and the Term Facility also limitslimit 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


As amended on November 28, 2017,1, 2019, our two-year Receivables Facility offers us a lower costlower-cost form of financing, with a peak funding capacity of up to $255.0$295.0 million between May 1 and June 30,May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $80.0$120.0 million to $220.0$275.0 million throughout the remaining months of the year.
The Receivables Facility provides for the sale of certain of our receivables to a wholly ownedwholly-owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third partythird-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.
39


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 December 31, 2017,2019, there was $100.0$115.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.3%2.6%, 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.  
In 2019, we had three interest rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. These interest rate swap contracts terminated on November 20, 2019. These amended swap contracts converted variable interest rates on our variable rate borrowings to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts was based on the fixed rates plus the applicable margin on our variable rate borrowings.
As of December 31, 2017,2019, we had one interest rate swap in place, which became effective on November 20, 2019. This swap contract was previously forward-looking 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. The contract terminates on November 20, 2020.
In May and July 2019, we entered into additional forward-starting interest rate swap contracts, which will convert the variable interest rate on our variable rate borrowings to fixed interest rates of 2.0925% and 1.5500%, respectively, on notional amounts of $75.0 million each. These contracts become effective on November 20, 2020 and terminate on September 29, 2022.
On February 5, 2020, we entered into a forward-starting interest rate swap contract with a fixed interest rate of 1.3800% on a notional amount of $150.0 million. This contract becomes effective on February 26, 2021 and terminates on February 28, 2025.

Compliance and Future Availability
As of December 31, 2019, 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 2018.2020.  For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this 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 February 21, 2018, $53.4 million of the current Board authorized amount under our authorized share repurchase plan remained available. We expect to repurchase additional shares in 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.
40



Contractual Obligations


At December 31, 2017,2019, our contractual obligations for long-term debt and operating leases were as follows (in thousands):


  Payments Due by Period
TotalLess than
1 year
1-3 years3-5 yearsMore than
5 years
Long-term debt$512,418  $20,995  $334,173  $18,500  $138,750  
Operating leases189,367  51,621  83,036  38,771  15,939  
 $701,785  $72,616  $417,209  $57,271  $154,689  
    Payments Due by Period
  Total 
Less than
1 year
 1-3 years 3-5 years 
More than
5 years
Long-term debt $519,337
 $8,898
 $100,000
 $410,439
 $
Operating leases 221,729
 55,874
 92,064
 52,368
 21,423
  $741,066
 $64,772
 $192,064
 $462,807
 $21,423


For additional discussion related to our debt, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.  The table below contains estimated interest payments (in thousands) related to our long-term debt obligations listedpresented in the table above.  OurWe calculated estimates of future interest payments are calculated based on the December 31, 20172019 outstanding debt balances, using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective interest rates as of December 31, 20172019 for the remaining outstanding balances not covered by our swap contracts.  To project the estimated interest expense to coincide with the time periods used in the table above, we have projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility, the Term Facility and the Receivables Facility. For certain of our contractual obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time. As such, we have excluded unrecognized tax benefits from our contractual obligations table. See NoteNotes 5 and 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our debt and more information related to our unrecognized tax benefits.  


  Estimated Interest Payments Due by Period
TotalLess than
1 year
1-3 years3-5 yearsMore than
5 years
Interest$47,351  $13,725  $20,787  $6,862  $5,977  

41

    Estimated Payments Due by Period
  Total 
Less than
1 year
 1-3 years 3-5 years 
More than
5 years
Interest $60,405
 $14,076
 $25,684
 $20,645
 $




Item 7A.  Quantitative and Qualitative Disclosures about Market Risk


We are exposed to market risks, including interest rate risk and foreign currency risk. The adverse effects of potential changes in these market risks are discussed below. The following discussion does not consider the effects of the reduced level of overall economic activity that could exist following such changes. Further, in the event of changes of such magnitude, we would likely take actions to mitigate our exposure to such changes.


Interest Rate Risk


Our earnings are exposed to changes in short-term interest rates because of the variable interest rates on our debt. However, we have entered into interest rate swap contracts to reduce our exposure to market fluctuations. For information about our debt arrangements and interest rate swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10‑K.


In 2017,2019, there was no interest rate risk related to the notional amounts under our interest rate swap contracts for the Credit Facility.contracts. The portions of our outstanding balances under the Credit Facility, Term Facility and the Receivables Facility that were not covered by our interest rate swap contracts were both subject to variable interest rates. To calculate the potential impact in 20172019 related to interest rate risk, we performed a sensitivity analysis assuming that we borrowed the maximum available amount under the Credit Facility, excluding the accordion feature, and the off-season maximum amount available under the Receivables Facility. Our Term Facility, entered into on December 30, 2019, was fully drawn as of that date. In this analysis, we assumed that the variable interest rates for the Credit Facility and the Receivables Facility increased by 1.0%. Based on this calculation, our pretax income would have decreased by approximately $7.5$7.8 million and earnings per share would have decreased by approximately $0.13$0.14 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2017)2019). The maximum amount available under the Credit Facility is $750.0 million, excluding the $75.0 million accordion feature, and the maximum amount available under the Receivables Facility is $215.0$255.0 million, excluding the $40.0 million seasonal increase in capacity available from March 1 to July 31.


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


Currency Risk


We have subsidiariesChanges in Canada, the United Kingdom, Belgium, Croatia, France, Germany, Italy, Portugal, Spain, Mexico, Colombia and Australia. Based onexchange rates for the functional currencies for theseof our international subsidiaries, as shown in the table below, changes in exchange rates for these currencies may positively or negatively impact our sales, operating expenses and earnings. Historically, we have not hedged our currency exposure and fluctuations in exchange rates have not materially affected our operating results. While our international operations accounted for only 9% of total net sales in 2017,2019, our exposure to currency rate fluctuations could be material in 20182020 and future years to the extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our consolidated results.


Functional Currencies
CanadaCanadian Dollar
United KingdomBritish Pound
BelgiumEuro
CroatiaKuna
FranceEuro
GermanyEuro
ItalyEuro
PortugalEuro
SpainEuro
MexicoMexican Peso
ColombiaAustraliaColombian Peso
AustraliaAustralian Dollar




42


Item 8.  Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






43


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
Pool Corporation


Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pool Corporation (the Company) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 201827, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.


Valuation of Goodwill
Description of the MatterAt December 31, 2019, the Company’s goodwill was $188.6 million. As discussed in Note 3 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is assigned to reporting units as of the acquisition date.

Auditing management’s annual goodwill impairment test was complex and highly judgmental due to the estimation required to determine the fair value of the reporting units. In particular, the fair value estimate is sensitive to certain assumptions, such as changes in the weighted average cost of capital, revenue growth rate, operating margin, and terminal growth rate which are affected by expectations about future market or economic conditions.
44


How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above.

To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and other relevant factors, such as historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved a specialist to assist in our evaluation of the valuation methodology applied by the Company and the significant assumptions used in estimating the fair value of the Company. In addition, we reviewed the allocation of the Company’s fair value to its reporting units and the comparison of the Company’s fair value to its market capitalization.



/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1994.


New Orleans, Louisiana
February 28, 201827, 2020






45


POOL CORPORATION
Consolidated Statements of Income
(In thousands, except per share data)


 Year Ended December 31,
  201920182017
Net sales$3,199,517  $2,998,097  $2,788,188  
Cost of sales2,274,592  2,127,924  1,982,899  
Gross profit924,925  870,173  805,289  
Selling and administrative expenses583,679  556,284  520,918  
Operating income341,246  313,889  284,371  
Interest and other non-operating expenses, net23,772  20,896  15,189  
Income before income taxes and equity earnings317,474  292,993  269,182  
Provision for income taxes56,161  58,774  77,982  
Equity earnings in unconsolidated investments, net262  242  139  
Net income261,575  234,461  191,339  
Net loss attributable to noncontrolling interest—  —  294  
Net income attributable to Pool Corporation$261,575  $234,461  $191,633  
Earnings per share:   
Basic$6.57  $5.82  $4.69  
Diluted$6.40  $5.62  $4.51  
Weighted average shares outstanding:   
Basic39,833  40,311  40,838  
Diluted40,865  41,693  42,449  
Cash dividends declared per common share$2.10  $1.72  $1.42  
 Year Ended December 31,
  2017 2016 2015
Net sales$2,788,188
 $2,570,803
 $2,363,139
Cost of sales1,982,899
 1,829,716
 1,687,495
Gross profit805,289
 741,087
 675,644
Selling and administrative expenses520,918
 485,228
 459,422
Operating income284,371
 255,859
 216,222
Interest and other non-operating expenses, net15,189
 14,481
 8,072
Income before income taxes and equity earnings269,182
 241,378
 208,150
Provision for income taxes77,982
 92,931
 80,137
Equity earnings in unconsolidated investments, net139
 156
 211
Net income191,339
 148,603
 128,224
Net loss attributable to noncontrolling interest294
 352
 51
Net income attributable to Pool Corporation$191,633
 $148,955
 $128,275
      
Earnings per share:     
Basic$4.69
 $3.56
 $2.98
Diluted$4.51
 $3.47
 $2.90
Weighted average shares outstanding:     
Basic40,838
 41,872
 43,105
Diluted42,449
 42,984
 44,254
      
Cash dividends declared per common share$1.42
 $1.19
 $1.00


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






46


POOL CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands)


 Year Ended December 31,
  201920182017
Net income$261,575  $234,461  $191,339  
Other comprehensive income (loss):
Foreign currency translation adjustments2,295  (4,945) 5,545  
Change in unrealized losses and gains on interest rate swaps,
net of the change in taxes of $552, $(425) and $(769)
(1,657) 1,276  1,205  
Total other comprehensive income (loss)638  (3,669) 6,750  
Comprehensive income262,213  230,792  198,089  
Comprehensive loss attributable to noncontrolling interest—  —  74  
Comprehensive income attributable to Pool Corporation$262,213  $230,792  $198,163  
 Year Ended December 31,
  2017 2016 2015
Net income$191,339
 $148,603
 $128,224
Other comprehensive income (loss):     
Foreign currency translation adjustments5,545
 (1,661) (9,046)
Change in unrealized gains and losses on interest rate swaps,
net of the change in taxes of $(769), $(839) and $653
1,205
 1,312
 (1,021)
Total other comprehensive income (loss)6,750
 (349) (10,067)
Comprehensive income198,089
 148,254
 118,157
Comprehensive loss attributable to noncontrolling interest74
 378
 448
Comprehensive income attributable to Pool Corporation$198,163
 $148,632
 $118,605


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






47


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


 December 31,
 20192018
Assets  
Current assets:  
Cash and cash equivalents$28,583  $16,358  
Receivables, net76,648  69,493  
Receivables pledged under receivables facility149,891  138,308  
Product inventories, net702,274  672,579  
Prepaid expenses and other current assets16,172  18,506  
Total current assets973,568  915,244  
Property and equipment, net112,246  106,964  
Goodwill188,596  188,472  
Other intangible assets, net11,038  12,004  
Equity interest investments1,227  1,213  
Operating lease assets176,689  —  
Other assets19,902  16,974  
Total assets$1,483,266  $1,240,871  
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$261,963  $237,835  
Accrued expenses and other current liabilities60,813  58,607  
Short-term borrowings and current portion of long-term debt11,745  9,168  
Current operating lease liabilities56,325  —  
Total current liabilities390,846  305,610  
Deferred income taxes32,598  29,399  
Long-term debt, net499,662  657,593  
Other long-term liabilities27,970  24,679  
Non-current operating lease liabilities122,010  —  
Total liabilities1,073,086  1,017,281  
Stockholders’ equity:  
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,074,160 shares issued and outstanding at December 31, 2019 and
39,506,067 shares issued and outstanding at December 31, 2018
40  40  
Additional paid-in capital485,239  453,193  
Retained deficit(64,740) (218,646) 
Accumulated other comprehensive loss(10,359) (10,997) 
Total stockholders’ equity410,180  223,590  
Total liabilities and stockholders’ equity$1,483,266  $1,240,871  
 December 31,
 2017 2016
Assets   
Current assets:   
Cash and cash equivalents$29,940
 $21,956
Receivables, net76,597
 61,437
Receivables pledged under receivables facility119,668
 104,714
Product inventories, net536,474
 486,116
Prepaid expenses and other current assets19,569
 15,318
Deferred income taxes
 6,016
Total current assets782,248
 695,557
    
Property and equipment, net100,939
 83,290
Goodwill189,435
 184,795
Other intangible assets, net13,223
 13,326
Equity interest investments1,127
 1,172
Other assets14,090
 15,955
Total assets$1,101,062
 $994,095
    
Liabilities, redeemable noncontrolling interest and stockholders’ equity   
Current liabilities:   
Accounts payable$245,249
 $230,728
Accrued expenses and other current liabilities65,482
 64,387
Short-term borrowings and current portion of long-term debt10,835
 1,105
Total current liabilities321,566
 296,220
    
Deferred income taxes24,585
 34,475
Long-term debt, net508,815
 436,937
Other long-term liabilities22,950
 18,966
Total liabilities877,916
 786,598
    
Redeemable noncontrolling interest
 2,287
    
Stockholders’ equity:   
Common stock, $.001 par value; 100,000,000 shares authorized;
40,212,477 shares issued and outstanding at December 31, 2017 and
41,089,720 shares issued and outstanding at December 31, 2016
40
 41
Additional paid-in capital426,750
 403,162
Retained deficit(196,316) (183,915)
Accumulated other comprehensive loss(7,328) (14,078)
Total stockholders’ equity223,146
 205,210
Total liabilities, redeemable noncontrolling interest and stockholders’ equity$1,101,062
 $994,095


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


48


POOL CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, Year Ended December 31,
2017 2016 2015 201920182017
Operating activities     Operating activities   
Net income $191,339
 $148,603
 $128,224
Net income $261,575  $234,461  $191,339  
Adjustments to reconcile net income to net cash provided by operating activities:     
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation24,157
 20,338
 16,373
Depreciation27,885  26,122  24,157  
Amortization1,568
 1,639
 1,015
Amortization1,389  1,793  1,568  
Share-based compensation12,482
 9,902
 9,543
Share-based compensation13,472  12,874  12,482  
Excess tax benefits from share-based compensation
 (7,370) (7,706)
Provision for doubtful accounts receivable, net of write-offs(154) (155) 197
Provision for doubtful accounts receivable, net of write-offs(710) 2,286  (154) 
Provision for inventory obsolescence, net of write-offs(267) (448) 576
Provision for inventory obsolescence, net of write-offs1,310  1,462  (267) 
Provision (benefit) for deferred income taxes(4,636) 3,749
 4,198
Provision (benefit) for deferred income taxes3,723  4,661  (4,636) 
(Gains) losses on sales of property and equipment(285) (320) 230
Gains on sales of property and equipmentGains on sales of property and equipment(85) (289) (285) 
Equity earnings in unconsolidated investments, net(139) (156) (211)Equity earnings in unconsolidated investments, net(262) (242) (139) 
Net (gains) losses on foreign currency transactions(171) 679
 774
Impairments of goodwill and other non-operating assets1,200
 4,113
 500
Net losses (gains) on foreign currency transactionsNet losses (gains) on foreign currency transactions1,347  560  (171) 
Impairment of other non-operating assetImpairment of other non-operating asset—  —  1,200  
Other166
 923
 (869)Other3,313  808  166  
Changes in operating assets and liabilities, net of effects of acquisitions:     
Changes in operating assets and liabilities, net of effects of acquisitions:   
Receivables(21,903) (5,666) (16,656)Receivables(15,691) (14,371) (21,903) 
Product inventories(35,783) (8,050) (10,848)Product inventories(14,165) (142,170) (35,783) 
Prepaid expenses and other assets(4,096) (3,077) (434)Prepaid expenses and other assets(4,218) 1,018  (4,096) 
Accounts payable5,077
 (17,896) 9,956
Accounts payable16,860  (6,567) 5,077  
Accrued expenses and other current liabilities6,756
 18,570
 11,188
Accrued expenses and other current liabilities3,033  (3,750) 6,756  
Net cash provided by operating activities175,311
 165,378
 146,050
Net cash provided by operating activities298,776  118,656  175,311  
     
Investing activities   
  
Investing activities   
Acquisition of businesses, net of cash acquired(12,834) (19,730) (4,483)Acquisition of businesses, net of cash acquired(8,901) (2,578) (12,834) 
Purchases of property and equipment, net of sale proceeds(39,390) (34,352) (29,095)Purchases of property and equipment, net of sale proceeds(33,362) (31,580) (39,390) 
Payments to fund credit agreement
 (5,322) (8,860)
Collections from credit agreement
 3,737
 4,557
Other investments, net4
 24
 88
Other investments, net—  —   
Net cash used in investing activities(52,220) (55,643) (37,793)Net cash used in investing activities(42,263) (34,158) (52,220) 
     
Financing activities     
Financing activities   
Proceeds from revolving line of credit1,067,868
 1,154,090
 911,712
Proceeds from revolving line of credit1,066,529  1,138,195  1,067,868  
Payments on revolving line of credit(1,011,977) (1,072,557) (890,406)Payments on revolving line of credit(1,415,988) (998,503) (1,011,977) 
Proceeds from asset-backed financing161,600
 155,000
 143,400
Proceeds from asset-backed financing189,000  198,400  161,600  
Payments on asset-backed financing(145,100) (126,500) (156,000)Payments on asset-backed financing(182,500) (189,900) (145,100) 
Proceeds from term facilityProceeds from term facility185,000  —  —  
Proceeds from short-term borrowings and current portion of long-term debt27,333
 18,442
 8,119
Proceeds from short-term borrowings and current portion of long-term debt30,863  17,127  27,333  
Payments on short-term borrowings and current portion of long-term debt(17,603) (19,037) (7,948)Payments on short-term borrowings and current portion of long-term debt(28,286) (18,793) (17,603) 
Payments on deferred and contingent acquisition consideration(324) 
 
Payments on deferred and contingent acquisition consideration(312) (661) (324) 
Purchase of redeemable non-controlling interest(2,573) 
 
Purchase of redeemable non-controlling interest—  —  (2,573) 
Payments of deferred financing costs(1,104) (69) (320)Payments of deferred financing costs(406) (106) (1,104) 
Excess tax benefits from share-based compensation
 7,370
 7,706
Proceeds from stock issued under share-based compensation plans11,466
 11,752
 18,269
Proceeds from stock issued under share-based compensation plans18,574  13,569  11,466  
Payments of cash dividends(58,029) (49,749) (43,117)Payments of cash dividends(83,772) (69,430) (58,029) 
Purchases of treasury stock(146,006) (178,414) (99,219)Purchases of treasury stock(23,188) (187,469) (146,006) 
Net cash used in financing activities(114,449) (99,672) (107,804)Net cash used in financing activities(244,486) (97,571) (114,449) 
Effect of exchange rate changes on cash and cash equivalents(658) (1,344) (2,046)Effect of exchange rate changes on cash and cash equivalents198  (509) (658) 
Change in cash and cash equivalents7,984
 8,719
 (1,593)Change in cash and cash equivalents12,225  (13,582) 7,984  
Cash and cash equivalents at beginning of year21,956
 13,237
 14,830
Cash and cash equivalents at beginning of year16,358  29,940  21,956  
Cash and cash equivalents at end of year$29,940
 $21,956
 $13,237
Cash and cash equivalents at end of year$28,583  $16,358  $29,940  
The accompanying Notes are an integral part of these Consolidated Financial Statements.


49


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


Common StockAdditional
Paid-In
RetainedAccumulated
Other
Comprehensive
 SharesAmountCapitalDeficitLossTotal
Balance at December 31, 201641,090  $41  $403,162  $(183,915) $(14,078) $205,210  
Net income attributable to Pool Corporation—  —  —  191,633  —  191,633  
Foreign currency translation—  —  —  —  5,545  5,545  
Interest rate swaps, net of the change in taxes of $(769)—  —  —  —  1,205  1,205  
Repurchases of common stock, net of retirements(1,353) (1) —  (146,005) —  (146,006) 
Share-based compensation—  —  12,482  —  —  12,482  
Issuance of shares under incentive stock plans475  —  11,466  —  —  11,466  
Declaration of cash dividends—  —  —  (58,029) —  (58,029) 
Redemption value adjustment of redeemable non-controlling interest—  —  (360) —  —  (360) 
Balance at December 31, 201740,212  40  426,750  (196,316) (7,328) 223,146  
Net income attributable to Pool Corporation—  —  —  234,461  —  234,461  
Foreign currency translation—  —  —  —  (4,945) (4,945) 
Interest rate swaps, net of the change in taxes of $(425)—  —  —  —  1,276  1,276  
Repurchases of common stock, net of retirements(1,291) —  —  (187,469) —  (187,469) 
Share-based compensation—  —  12,874  —  —  12,874  
Issuance of shares under incentive stock plans585  —  13,569  —  —  13,569  
Declaration of cash dividends—  —  —  (69,322) —  (69,322) 
Balance at December 31, 201839,506  40  453,193  (218,646) (10,997) 223,590  
Net income attributable to Pool Corporation—  —  —  261,575  —  261,575  
Foreign currency translation—  —  —  —  2,295  2,295  
Interest rate swaps, net of the change in taxes of $552—  —  —  —  (1,657) (1,657) 
Repurchases of common stock, net of retirements(155) —  —  (23,188) —  (23,188) 
Share-based compensation—  —  13,472  —  —  13,472  
Adoption of ASU 2016-02—  —  —  (709) —  (709) 
Issuance of shares under incentive stock plans723  —  18,574  —  —  18,574  
Declaration of cash dividends—  —  —  (83,772) —  (83,772) 
Balance at December 31, 201940,074  $40  $485,239  $(64,740) $(10,359) $410,180  
  Common Stock 
Additional
Paid-In
 Retained 
Accumulated
Other
Comprehensive
  
  Shares Amount Capital Deficit Loss Total
Balance at December 31, 2014 43,511
 $44
 $338,620
 $(90,650) $(3,662) $244,352
Net income attributable to Pool Corporation 
 
 
 128,275
 
 128,275
Foreign currency translation 
 
 
 
 (9,046) (9,046)
Interest rate swaps, net of the change in taxes of $653 
 
 
 
 (1,021) (1,021)
Repurchases of common stock, net of retirements (1,448) (2) 
 (99,217) 
 (99,219)
Share-based compensation 
 
 9,543
 
 
 9,543
Issuance of shares under incentive stock plans, including tax benefit of $7,706 648
 1
 25,975
 
 
 25,976
Declaration of cash dividends 
 
 
 (43,117) 
 (43,117)
Balance at December 31, 2015 42,711
 43
 374,138
 (104,709) (13,729) 255,743
Net income attributable to Pool Corporation 
 
 
 148,955
 
 148,955
Foreign currency translation 
 
 
 
 (1,661) (1,661)
Interest rate swaps, net of the change in taxes of $(839) 
 
 
 
 1,312
 1,312
Repurchases of common stock, net of retirements (2,064) (2) 
 (178,412) 
 (178,414)
Share-based compensation 
 
 9,902
 
 
 9,902
Issuance of shares under incentive stock plans, including tax benefit of $7,370 443
 
 19,122
 
 
 19,122
Declaration of cash dividends 
 
 
 (49,749) 
 (49,749)
Balance at December 31, 2016 41,090
 41
 403,162
 (183,915) (14,078) 205,210
Net income attributable to Pool Corporation 
 
 
 191,633
 
 191,633
Foreign currency translation 
 
 
 
 5,545
 5,545
Interest rate swaps, net of the change in taxes of $(769) 
 
 
 
 1,205
 1,205
Repurchases of common stock, net of retirements (1,353) (1) 
 (146,005) 
 (146,006)
Share-based compensation 
 
 12,482
 
 
 12,482
Issuance of shares under incentive stock plans (see Note 1 for tax benefit accounting change) 475
 
 11,466
 
 
 11,466
Declaration of cash dividends 
 
 
 (58,029) 
 (58,029)
Redemption value adjustment of redeemable non-controlling interest 
 
 (360) 
 
 (360)
Balance at December 31, 2017 40,212
 $40
 $426,750
 $(196,316) $(7,328) $223,146



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


50


POOL CORPORATION
Notes to Consolidated Financial Statements
 
Note 1 - Organization and Summary of Significant Accounting Policies


Description of Business


As of December 31, 2017,2019, Pool Corporation and our subsidiaries (the Company, which may be referred to as we, us or our), operated 351373 sales centers in North America, Europe South America and Australia from which we sell swimming pool supplies, equipment parts and supplies,related leisure products, irrigation and relatedlandscape products and hardscape, tile and stone products to pool builders, retail stores, service companies, landscape contractors and golf courses. We distribute products through four4 networks: SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon) and National Pool Tile (NPT).


Basis of Presentation and Principles of Consolidation


We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial Statements include the accounts of Pool Corporation and our subsidiaries. All significant intercompany accounts and intercompany transactions have been eliminated.


All of our subsidiaries are wholly owned. From July 31, 2014 to June 29, 2017, we owned a 60% interest in Pool Systems Pty. Ltd. (PSL), an Australian company. Our ownership percentage constituted a controlling interest in the acquired company, which required us to consolidate PSL’s financial position and results of operations from the date of acquisition. On June 29, 2017, we purchased the remaining 40% interest in PSL. Thus, we will continuehave continued to consolidate PSL, but there willis no longer be a separate noncontrolling interest reported on our Consolidated Statements of Income, nor Redeemable noncontrolling interest reported on our Consolidated Balance Sheets.

Variable Interest Entity

In February 2015, we entered into a five-year credit agreement with a swimming pool retailer. Under this agreement and the related revolving note, we were the primary lender of operating funds for this entity. The total lending commitment under the credit agreement was $8.5 million. In December 2017, we ended our lending arrangement with this entity and exercised our rights to the collateral that secured this agreement. The collateral was sufficient to satisfy the net balance previously recorded within Other assets on our Consolidated Balance Sheets.


Use of Estimates


To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor incentives,programs, income taxes, incentiveperformance-based compensation accruals and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.


Newly Adopted Accounting Pronouncements


EffectiveOn January 1, 2017,2019, we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment2016-02, Leases (Topic 842), and all the related amendments, which are codified into Accounting, on a prospective basis Standards Codification (ASC) 842. The adoption of ASU 2016-02 significantly increased assets and as such, our prior year presentation has not changed. The provisions of this update simplify many key aspects of the accounting for and cash flow presentation of employee share-based compensation transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements. In accordance with the new guidance, we now record all excess tax benefits or tax deficiencies as a component of our Provision for income taxes on our Consolidated Statements of Income. As a result of the adoption, we recognized $12.6 million of excess tax benefits in 2017, which reduced our Provision for income taxes and positively impacted our Net income. Historically, these amounts were recorded as Additional paid in capital in stockholders’ equityliabilities on our Consolidated Balance Sheets.Sheet as we recorded a right-of-use asset and corresponding liability for each of our existing operating leases. We adopted this guidance using the modified retrospective approach by recognizing a cumulative adjustment to retained earnings on the adoption date, which was not material. Additionally, we nowelected to apply the practical expedient that allows us to exclude comparative presentation; thus, we did not restate our prior period balance sheet to reflect the new guidance.

We recorded operating lease assets of approximately $175.7 million and operating lease liabilities of approximately $181.6 million as of January 1, 2019. To calculate the present excessvalue of our lease liabilities, we used the incremental borrowing rate on December 31, 2018, for operating leases that commenced prior to that date.The difference between the operating lease assets and operating lease liabilities primarily represents our straight-line rent liability of $5.1 million recorded under previous accounting guidance. Under ASU 2016-02, this liability is considered a reduction of the operating lease asset. We recorded the remaining difference between our operating lease assets and operating lease liabilities, net of the deferred tax benefits or deficienciesimpact, as an adjustment to our retained deficit. Additionally, we reclassified prepaid rent of $4.9 million as of January 1, 2019 to our operating cash flows versus reclassifyinglease asset resulting in a balance of $180.6 million as of the amount outadoption date.

The adoption of operating cash flows and presenting it in financing activities on the Consolidated Statements of Cash Flows.


Additional amendments from this guidance related to forfeitures and minimum statutory withholding tax requirements had nodid not materially impact to our financial position, results of operations or cash flows. As permitted,For additional information regarding our adoption of this new guidance, see Note 9.

51


On January 1, 2019, we continueadopted Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to estimate forfeituresAccounting for Hedging Activities. The new guidance eliminates the requirement to determineseparately measure and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the amountchange in the fair value of compensation costthe hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassified to be recognized each period rather than electing to account for forfeitures as they occur, and we continueearnings in the same income statement line item that is used to present the value of shares withheld for minimum statutory tax withholding requirements on the Consolidated Statements of Cash Flows as a financing activity. Another impactearnings effect of the adoption is that the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding of approximately 550,000 shares for the year ended December 31, 2017.

On January 1, 2017, we adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires we classify all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Additionally, we no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances are also now classified as noncurrent. As permitted, we elected to adopt this guidance on a prospective basis and as such, our prior year presentation has not changed.hedged item. The adoption of ASU 2015-17this standard did not have a material impact on our financial position results of operations and related disclosures.we do not expect a material impact in future periods.


On January 1, 2017,2018, we adopted ASU 2015-11, Inventory (Topic 330): SimplifyingAccounting Standards Update (ASU) 2014-09, Revenue - Revenue from Contracts with Customers, and all the Measurement of Inventory,related amendments, which requires that we measure inventory atare also codified into Accounting Standards Codification (ASC) 606. We elected to adopt this guidance using the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.modified retrospective method. The adoption of ASU 2015-11this standard did not have a material impact on our financial position or results of operations. We did not restate prior period information for the effects of the new standard, nor did we adjust the opening balance of our retained deficit to account for the implementation of the new requirements of this standard. We do not expect the adoption of this guidance to have a material effect on our results of operations and related disclosures.in future periods. See Revenue Recognition within this note for additional information.


On January 1, 2017,2018, we adopted ASU 2015-16, Simplifying the Accounting2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new guidance specifies how cash flows should be classified for Measurement-Period Adjustments, which eliminates the requirement that an acquirer indebt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, accountproceeds for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the periodsettlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in which it determines the amount of the adjustment. Thesecuritization transactions. Our adoption of ASU 2015-16 did not have a material2016-15 had no impact on our financial position, resultsConsolidated Statement of operationsCash Flows as our previous classifications related to contingent consideration payments and related disclosures.distributions from equity method investees is consistent with the requirements of ASU 2016-15.

As required, we adopted ASU 2014-15, Presentation of Financial Statements - Going Concern, as of December 31, 2016. Based on management’s evaluation, which included forecasting results covering the one-year period following our 2017 Form 10-K filing date, we did not identify any conditions or events that raise substantial doubt about our ability to continue as a going concern.


Segment Reporting


Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. These similarities include (i) the nature of our products and services, (ii) the types of customers we sell to and (iii) the distribution methods we use. Our chief operating decision maker (CODM) evaluates each sales center based on individual performance that includes both financial and operational measures. These measures include operating income growth and accounts receivable and inventory management criteria. Each sales center manager and eligible field employee earns performance-based incentive compensation based on these measures developed at the sales center level.


A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions about how to allocate resources primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues, profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines and product categories and the fact that we make ongoing changes as to how products are classifiedproduct classifications within these groups, thus making it impracticable to report our sales by product category.


Seasonality and Weather


Our business is highly seasonal and weather is one of the principal external factors affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of both swimming pool use, pool and irrigation installation and irrigation installationsremodeling and maintenance.repair activities. Sales are substantially lower during the first and fourth quarters, when we may incur net losses.quarters.



Revenue Recognition


WeUnder ASC 606, we recognize revenuea sale when four basic criteria are met:

1.   persuasive evidencea customer obtains control of an arrangement exists;
2.   delivery has occurred or services have been rendered;
3.   our pricethe product, and we record the amount that reflects the consideration we expect to receive in exchange for such product. As under the buyer is fixed or determinable; and
4.   collectability is reasonably assured.

Customers may take delivery of products inprevious accounting guidance, we continue to recognize a variety of ways. Customers may picksale when a customer picks up productsproduct at any sales center, location, orwhen we may deliver productsproduct to their premises or job sites via our trucks; in these instances, we record revenue upon delivery to the customers. We also deliver products through third party carriers, and we record revenuetrucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the third party carriers. Products shipped via third party carrierscustomer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.

We consider our distribution of products to represent one reportable revenue stream. Our products are considered delivered based onsimilar in nature, and our revenue recognition policy is the shipping terms, which are generally FOB shipping point.same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. We include shipping and handling fees billed to customers as freight out income within net sales.


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We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and we account for these incentives as an adjustment toa reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as an adjustment toa reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists under ASC 606. Other items that we record as adjustmentsreductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments.


The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We elected to continue to recognize shipping and handling costs associated with outbound freight in selling and administrative expenses.

We also report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, value addedvalue-added and some excise taxes.

Effective January 1, 2018, we will adopt ASU 2014-09, Revenue from Contracts with Customers, and subsequent amendments. Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products to our customer. We expect to recognize revenue when control of the product has been transferred to the customer upon delivery to the customer or the freight carrier, if delivered by a third party, as we believe our performance obligation is satisfied at such point in time. This treatment is consistent with our current revenue recognition policies. We evaluated our bill and hold sales under the new guidance and determined that revenue may be recognized earlier under ASU 2014-09. However, at December 31, 2017, a cumulative catch-up adjustment related to bill and hold transactions would not be material due to the seasonal nature of our business.

We reviewed our terms and conditions, marketing programs, coupons and customary business practices to determine if any variable consideration exists in our revenue transactions. We did not identify any arrangements that would cause different accounting treatment under the new guidance. The majority of our sales transactions do not require any additional performance obligation after delivery; therefore, we do not have multiple performance obligations for which we will have to allocate the transaction price. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.

As allowed under ASU 2014-09, we will apply the guidance using the modified retrospective transition method, whereby we will recognize the cumulative effect of initially applying the new standard as an adjustment to our opening balance of retained earnings (deficit). Based on our analysis, the adoption of ASU 2014-09 will not have a material impact on our financial position or results of operations. Our adoption will result in balance sheet reclassifications for recording our estimate for customer returns. Historically, our deferred revenue liability for customer returns has not been material. ASU 2014-09 requires the recognition of a current liability for the gross amount of the estimated returns and a current asset for the cost of the related products (each less than $1.0 million at December 31, 2017). We will also provide enhanced disclosures regarding our revenue recognition policies.


Vendor Programs


Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized as a reduction of Cost of sales on our Consolidated Statements of Income.



Throughout the year, we estimate the amount earned based on our estimateexpectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our Consolidated Financial Statements.


Shipping and Handling Costs


We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands):
201920182017
$51,580  $48,610  $45,247  
2017 2016 2015
$45,247
 $39,879
 $36,783


Share-Based Compensation


We record share-based compensation for stock options and other share-based awards based on the estimated fair value as measured on the grant date. For stock option awards, we use a Black-Scholes model for estimating the grant date fair value. For additional discussion of share-based compensation, see Note 6.


Advertising Costs


We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands):
201920182017
$7,842  $7,390  $7,477  
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2017 2016 2015
$7,477
 $7,011
 $7,127


Income Taxes


We record deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.
In December 2017, the Tax Cuts and Jobs Act (TJCA or the(the Act) was enacted, whichenactment significantly changeschanged U.S. tax law. In accordance with Accounting Standards Codification Topic (ASC) 740, Income Taxes, we are required to account for the new requirements in the period that includes the date of enactment. The Act reduces the overall corporate income tax rate to 21%, creates a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadens the tax base and allows for the immediate capital expensing of certain qualified property. Due to the complexities presented by the Act, particularly for those companies with multi-national operations, the Securities and Exchange CommissionSEC issued Staff Accounting Bulletin (SAB) 118 (SAB 118) to provide guidance to allow companies who are not able to complete their accounting in the period of enactment prior to the reporting deadlines. Under the guidance in SAB 118, companies that have not completed their accounting for certain elements of the Act, but can determine a reasonable estimate of those effects, should include arecord provisional amountamounts based on their reasonable estimate in their financial statements. Thisestimates.As a result of this guidance, resulted in us recordingwe recorded a provisional net benefit to theour income tax provision duringin the period ended December 31,fourth quarter of 2017. AsWe filed our federal income tax return in the third quarter of 2018, and our return to provision adjustment, which addresses the provisional tax benefit we recorded under SAB 118 at December 31, 2017, wewas not material.

We have not completedconsidered the impact of the statutory changes from the Act on our accountingestimated effective tax rate for 2019, including reasonable estimates of those provisions effective for the 2019 tax effectsyear. The Act also created a new requirement that certain income earned by foreign subsidiaries, global intangible low-taxed income (GILTI), be included in the gross income of their U.S. shareholder. Entities may make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or recognize such taxes as a current-period expense when incurred. We elected to treat the Act. tax effect of GILTI as a current-period expense when incurred.

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised or restrictions on stock awards lapse.

For additional discussion of the effects of the Act and our current estimates, see Note 7.
We record a valuation allowance to reduce the carrying amounts of net deferred tax assets if there is uncertaintyinformation regarding their future realization. We consider many factors when assessing the likelihood of future realization including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. For additional discussion of income taxes, see Note 7.


Equity Method Investments


We account for our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in this investment.


Earnings Per Share


We calculate basic earnings per share (EPS) by dividing Net income or loss attributable to Pool Corporation by the weighted average number of common shares outstanding. We include outstanding unvested restricted stock awards of our common stock in the basic weighted average share calculation. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. As discussed above, as a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding. For additional discussion of earnings per share, see Note 8.


Foreign Currency


The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We include realized transaction gains and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated Statements of Income. We realized a net foreign currency transaction gainsloss of $1.3 million in 2019, which included a $0.9 million reclassification from Accumulated other comprehensive loss related to the closing of our sales center in Colombia. We realized a net foreign currency transaction loss of $0.6 million in 2018 and a gain of $0.2 million in 2017 and losses of $0.7 million in 2016 and $0.8 million in 2015.2017.


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Fair Value Measurements


Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:


Level 1Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2Inputs to the valuation methodology include:

Level 2 Inputs to the valuation methodology include:
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive markets;
inputs other than quoted prices that are observable for the asset or liability; or
inputs that are derived principally from or corroborated by observable market data by correlation or other means.


Level 3Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The table below presents the estimated fair values of our interest rate swap contracts,contract, our forward-starting interest rate swap contractcontracts and our contingent consideration liabilities (in thousands):
 Fair Value at December 31,
20192018
Level 2
Unrealized gains on interest rate swaps$655  $2,378  
Unrealized losses on interest rate swaps919  —  
Level 3
Contingent consideration liabilities$703  $1,117  
  Fair Value at December 31,
  2017 2016
Level 2    
Unrealized gains on interest rate swaps $1,585
 $1,521
Unrealized losses on interest rate swaps 703
 3,138
     
Level 3    
Contingent consideration liabilities $1,824
 $1,611



We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. As of December 31, 2019, our Consolidated Balance Sheets reflect $0.3 million in Accrued expenses and other current liabilities and $0.4 million in Other long-term liabilities related to our estimates for contingent consideration payouts.

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs).

For determining the fair value of our interest rate swap and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs as defined in the accounting guidance) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk.  Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.


As of December 31, 2017, our Consolidated Balance Sheets reflect $0.7 million in Accrued expenses and other current liabilities and $1.2 million in Other long-term liabilities for contingent consideration related to future payouts for our acquisitions of The Melton Corporation, which we acquired in November 2015, Metro Irrigation Supply Company Ltd. and Newline Pool Products. In determining our original estimates for contingent consideration, which are based on a percentage of gross profit for certain products for The Melton Corporation and a multiple of gross profit for Metro Irrigation Supply Company Ltd., we applied a linear model using our best estimate of gross profit projections for fiscal years 2016 to 2020. The payout for Newline Pool Products is based on a multiple of earnings for the first fiscal year of the acquisition. We based our estimate for the Newline payout on projected operating results for that year. All of our estimates of contingent consideration use Level 3 inputs as defined in the accounting guidance. The maximum total payouts for Metro Irrigation Supply Company Ltd. and Newline Pool Products over the related time periods are $1.0 million and AU$0.5 million, respectively.

In 2017, we paid approximately $0.2 million in contingent consideration to The Melton Corporation based on 2016 results. Since the acquisition dates, we have recorded minimal adjustments to our original estimates based on the calculated 2017 payouts related to the fiscal year ended December 31, 2016 and the calculated 2018 and future payouts considering results for the fiscal year ended December 31, 2017. Adjustments to the fair value of contingent consideration are recognized in earnings in the period in which we determine that the fair value changed. As of December 31, 2017, we have determined that the contingent consideration liability was in a range of acceptable estimates for all applicable fiscal periods.

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs). For the note receivable settled with our former variable interest entity in 2017, our determination of the estimated fair value reflected a discounted cash flow model using our estimates, including assumptions related to collectability. In 2017, we recorded $1.2 million of fair value adjustments to reduce the note receivable to the estimated realizable amount based on the results of our discounted cash flow model for expected payments under the note receivable. The carrying value of long-term debt approximates fair value (Level 3 inputs).  Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).




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Derivatives and Hedging Activities


We designated our interest rate swap and forward-starting interest rate swap contracts asIf determined to be effective cash flow hedges, and we assess hedge effectiveness on a quarterly basis. To the extent effective, we record the changes in the estimated fair value of the swapsour interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. To the extent our interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value in Interest and other non-operating expenses, net on our Consolidated Statements of Income. We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap counterparties as an adjustment to interest expense over the life of the swaps.assess hedge effectiveness on a quarterly basis.

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


We recognize any differences between the variable interest rate in effect and the fixed interest rate per our swap contracts as an adjustment to interest expense over the life of the swaps.

For our interest rate swap contractscontract currently in effect, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in 2017, 2016 or 2015. In October 2016, we began reclassifying the fair values related to our original forward-starting swaps from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net. These unrealized losses are being amortized over the effectiveany period of the original forward-starting interest rate swap contracts from October 2016 to September 2018.presented. For additional discussion of our interest rate swaps, see Note 5.


Cash Equivalents


We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.



Credit Risk and Allowance for Doubtful Accounts


We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers.


At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on the remainder of the past due portion of the aging. During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts.


The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands):
 201920182017
Balance at beginning of year$6,182  $3,897  $4,050  
Bad debt expense2,768  4,164  916  
Write-offs, net of recoveries(3,478) (1,879) (1,069) 
Balance at end of year$5,472  $6,182  $3,897  
  2017 2016 2015
Balance at beginning of year $4,050
 $4,205
 $4,008
Bad debt expense 916
 1,199
 1,110
Write-offs, net of recoveries (1,069) (1,354) (913)
Balance at end of year $3,897
 $4,050
 $4,205


Product Inventories and Reserve for Inventory Obsolescence


Product inventories consist primarily of goods we purchase from manufacturers to sell to our customers. We record inventory at the lower of cost, using the average cost method, or net realizable value. We establish our reserve for inventory obsolescence based on inventory turns by class with particular emphasis on stock keeping units with the weakest sales over the expected sellable period, which is the previous 12 months for most products. The reserve is intended to reflect the net realizable value of inventory that we may not be able to sell at a profit.


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In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including:


the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center and on a company-wide basis;
changes in customer preferences or regulatory requirements;
seasonal fluctuations in inventory levels;
geographic location; and
superseded products and new product offerings.


We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors.


The following table summarizes the changes in our reserve for inventory obsolescence for the past three years (in thousands):
 201920182017
Balance at beginning of year$7,726  $6,264  $6,531  
Provision for inventory write-downs3,656  3,998  2,660  
Deduction for inventory write-offs(2,346) (2,536) (2,927) 
Balance at end of year$9,036  $7,726  $6,264  
  2017 2016 2015
Balance at beginning of year $6,531
 $6,979
 $6,403
Provision for inventory write-downs 2,660
 2,036
 3,043
Deduction for inventory write-offs (2,927) (2,484) (2,467)
Balance at end of year $6,264
 $6,531
 $6,979




Property and Equipment


Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives:


Buildings40 years
Leasehold improvements (1)
1 - 10 years
Autos and trucks3 - 6 years
Machinery and equipment3 - 15 years
Computer equipment3 - 7 years
Furniture and fixtures5 - 10 years


(1)
For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period.

(1)For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period.

The table below presents depreciation expense for the past three years (in thousands):
201920182017
$27,885  $26,122  $24,157  
2017
2016 2015
$24,157
 $20,338
 $16,373


Acquisitions


We use the acquisition method of accounting and recognize assets acquired and liabilities assumed at fair value as of the acquisition date. Any contingent assets acquired and contingent liabilities assumed are also recognized at fair value if we can reasonably estimate fair value during the measurement period (which cannot exceed one year from the acquisition date). We re-measure any contingent liabilities at fair value in each subsequent reporting period. We expense all acquisition-related costs as incurred, including any restructuring costs associated with a business combination.


If our initial acquisition accounting is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for incomplete items. Once we obtain information required to finalize the accounting for incomplete items, we adjust the provisional amounts recognized. We make adjustments to these provisional amounts during the measurement period.


For all acquisitions, we include the results of operations in our Consolidated Financial Statements as of the acquisition date. For additional discussion of acquisitions, see Note 2.

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Goodwill and Other Intangible Assets


Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for impairment annually as of October 1st and at any other time when impairment indicators exist.


We estimate fair value based on an income approach that incorporates our assumptions for determining the present value of future cash flows.  We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples. These assumptions are considered unobservable inputs (Level 3 inputs as defined in the accounting guidance). If the estimated fair value of any of our reporting units falls below its carrying value, we compare the estimated fair value of the reporting unit’s goodwill to its carrying value. If the carrying value of a reporting unit’s goodwill exceeds its estimated fair value, we perform a calculation to measure impairment, which includes valuing the tangible and intangible assets. We recognize the difference as anany impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. For additional discussion of goodwill and other intangible assets, see Note 3.



Receivables Securitization Facility


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


We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third partythird-party financial institutions. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long‑termlong-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5.


Self-Insurance


We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish self‑insuranceself-insurance reserves based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to the age of existing claims, estimated settlement amounts and other historical claims data.


Redeemable Noncontrolling Interest


In July 2014, we purchased a controlling interest in PSL. Included in the transaction documents was a put/call option deed that granted us an option to purchase the shares held by the noncontrolling interest and granted the holder of the noncontrolling interest an option to require us to purchase its shares in one or two transactions. The put/call option deed in this transaction was considered an equity contract and therefore a financial instrument under the accounting guidance. In applying the guidance for this transaction, we determined that the financial instrument was embedded in the noncontrolling interest. As a public company, we arewere required to classify the noncontrolling interest and the embedded financial instrument as redeemable noncontrolling interest in a separate section of our Consolidated Balance Sheets, between liabilities and equity.


On June 29, 2017, we purchased the remaining 40% interest in PSL. The actual redemption value exceeded the carrying amount, and we recorded an adjustment to Additional paid in capital as there were no retained earnings attributable to the noncontrolling interest.


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The table below presents the changes in Redeemable noncontrolling interest (in thousands):
201920182017
Redeemable noncontrolling interest, beginning of period$—  $—  $2,287  
Redemption value adjustment of noncontrolling interest—  —  360  
Net loss attributable to noncontrolling interest—  —  (294) 
Other comprehensive income attributable to noncontrolling interest—  —  220  
Less: purchase of redeemable noncontrolling interest—  —  2,573  
Redeemable noncontrolling interest, end of period$—  $—  $—  
 2017 2016 2015
Redeemable noncontrolling interest, beginning of period$2,287
 $2,665
 $3,113
Redemption value adjustment of noncontrolling interest360
 
 
Net loss attributable to noncontrolling interest(294) (352) (51)
Other comprehensive income (loss) attributable to noncontrolling interest220
 (26) (397)
Less: purchase of redeemable noncontrolling interest2,573
 
 $
Redeemable noncontrolling interest, end of period$
 $2,287
 $2,665



Accumulated Other Comprehensive Loss


The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):


 December 31,  
20192018
Foreign currency translation adjustments$(10,127) $(12,422) 
Unrealized (losses) gains on interest rate swaps, net of tax (1)
(232) 1,425  
Accumulated other comprehensive loss$(10,359) $(10,997) 
  December 31,
 2017 2016
Foreign currency translation adjustments$(7,478) $(13,024)
Unrealized gains (losses) on interest rate swaps, net of tax (1)
150
 (1,054)
Accumulated other comprehensive loss$(7,328) $(14,078)


(1)In February 2018, the Financial Accounting Standards Board (FASB) issued guidance that allows entities the option to reclassify the tax effects related to items in accumulated other comprehensive income (loss) to retained earnings (deficit) if deemed to be stranded in accumulated other comprehensive income (loss) due to U.S. tax reform. We do not have any material amounts stranded in Accumulated other comprehensive loss from U.S. tax reform.
(1)
In February 2018, the Financial Accounting Standards Board (FASB) issued guidance that allows entities the option to reclassify the tax effects related to items in accumulated other comprehensive income (loss) to retained earnings (deficit) if deemed to be stranded in accumulated other comprehensive income (loss) due to U.S. tax reform. Because the change in the tax effects of our unrealized gains on interest rate swaps was not material, we elected not to reclassify such amounts. We reclassify the income tax effects of amounts in accumulated other comprehensive loss in the period in which the respective gross amount is released.


Retained Deficit


We account for the retirement of treasury share repurchases as an increase of our Retained deficit on our Consolidated Balance Sheets.  As of December 31, 2017,2019, the retained deficit reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $1,239.3$1,450.0 million and cumulative dividends of $425.8$578.9 million.


Supplemental Cash Flow Information


The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands):


 Year Ended December 31,
 201920182017
Cash paid during the year for:   
Interest $20,960  $17,796  $12,957  
Income taxes, net of refunds51,076  50,091  84,251  

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 Year Ended December 31,
 2017 2016 2015
Cash paid during the year for:     
Interest $12,957
 $8,052
 $6,316
Income taxes, net of refunds84,251
 80,378
 65,668
Recent Accounting Pronouncements Pending Adoption




The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:
StandardDescriptionEffective DateEffect on Financial Statements and Other Significant Matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The guidance must be applied using a cumulative-effect transition method.Annual periods beginning after December 15, 2019We do not expect this accounting pronouncement will have a material impact on our financial position or results of operations.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
Eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). This guidance should be applied prospectively.Annual and interim impairment tests performed in periods beginning after December 15, 2019We do not expect this accounting pronouncement will have a material impact on our financial positions, results of operations and related disclosures.
ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.Annual periods beginning after December 15, 2019We do not expect this accounting pronouncement will have a material impact on our financial positions, results of operations and related disclosures.
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes
Simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance should generally be applied prospectively.Annual periods beginning after December 15, 2020We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.

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Note 2 - Acquisitions


2019 Acquisitions

In January 2019, we acquired the distribution assets of W.W. Adcock, Inc., a wholesale distributor of swimming pool products, equipment, parts and supplies adding 2 locations in Pennsylvania, 1 location in North Carolina and 1 location in Virginia.

We have completed our acquisition accounting for this acquisition. This acquisition did not have a material impact on our financial position or results of operations.

2018 Acquisitions

In January 2018, we acquired the distribution assets of Tore Pty. Ltd. (doing business as Pool Power), a wholesale distributor of pool and spa equipment in South Australia, with 1 distribution center in Adelaide, Australia.

In November 2018, we acquired the distribution assets of Turf & Garden, Inc., a wholesale distributor of irrigation products and landscape maintenance equipment, parts and supplies with 3 locations in Virginia and 1 location in North Carolina.

We have completed our acquisition accounting for these acquisitions. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.

2017 Acquisitions


In April 2017, we acquired the distribution assets of Lincoln Equipment, Inc. (Lincoln Aquatics), a national distributor of equipment and supplies to commercial and institutional swimming pool customers, with one1 location in California.


In July 2017, we acquired New Star Holdings Pty. Ltd. (doing business as Newline Pool Products), a swimming pool equipment and supplies distributor with one1 distribution center in Brisbane, Australia.


In October 2017, we acquired E-Grupa, a national swimming pool equipment and supplies distributor, with one1 location in Croatia.


In December 2017, we acquired Kripsol Intermark Malaga S.L. (Intermark), a swimming pool equipment and supplies distributor, with one1 location in southern Spain.


In December 2017, we acquired the distribution assets of Chem Quip, Inc. (Chem Quip), a wholesale distributor of residential and commercial swimming pool equipment, chemicals and supplies, with five5 distribution locations in central and northern California.


We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.

2016 Acquisitions

In April 2016, we acquired the distribution assets of Metro Irrigation Supply Company Ltd., an irrigation and landscape supply company with eight locations in Texas.

We have completed our acquisition accounting for this acquisition. This acquisition did not have a material impact on our financial position or results of operations.

2015 Acquisitions

In April 2015, we acquired certain distribution assets from Poolwerx Development LLC and opened a satellite sales center location serving South Mesa, Arizona. In October 2015, we acquired the distribution assets of Seaboard Industries, Inc., a swimming pool supply wholesale distributor with one sales center location in Connecticut and two sales center locations in New Jersey. In November 2015, we acquired the distribution assets of The Melton Corporation, a masonry materials and supplies distributor with one sales center location in California and one sales center location in Arizona.

We have completed our acquisition accounting for each of these acquisitions. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.




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Note 3 - Goodwill and Other Intangible Assets


The table below presents changes in the carrying amount of goodwill and our accumulated impairment losses (in thousands):


Goodwill (gross) at December 31, 2017$199,314 
Acquired goodwill334 
Foreign currency translation adjustments(1,297)
Goodwill (gross) at December 31, 2018198,351 
Accumulated impairment losses at December 31, 2017(9,879)
Goodwill impairment— 
Accumulated impairment losses at December 31, 2018(9,879)
Goodwill (net) at December 31, 2018$188,472 
Goodwill (gross) at December 31, 2018$198,351 
Foreign currency translation adjustments124 
Goodwill (gross) at December 31, 2019198,475 
Accumulated impairment losses at December 31, 2018(9,879)
Goodwill impairment— 
Accumulated impairment losses at December 31, 2019(9,879)
Goodwill (net) at December 31, 2019$188,596 
Goodwill (gross) at December 31, 2015$182,027
Acquired goodwill12,696
Foreign currency translation adjustments(49)
Goodwill (gross) at December 31, 2016194,674
  
Accumulated impairment losses at December 31, 2015(9,266)
Goodwill impairment(613)
Accumulated impairment losses at December 31, 2016(9,879)
  
Goodwill (net) at December 31, 2016$184,795
  
Goodwill (gross) at December 31, 2016$194,674
Acquired goodwill3,068
Foreign currency translation adjustments1,572
Goodwill (gross) at December 31, 2017199,314
  
Accumulated impairment losses at December 31, 2016(9,879)
Goodwill impairment
Accumulated impairment losses at December 31, 2017(9,879)
  
Goodwill (net) at December 31, 2017$189,435


In October 20172019 and October 2016,2018, we performed our annual goodwill impairment test and did not identifyrecord any goodwill impairment at the reporting unit level. As of October 1, 2017,2019, we had 221223 reporting units with allocated goodwill balances.  The most significant goodwill balance for a reporting unit was $5.7 million and the average goodwill balance per reporting unit was $0.8 million.

In the third quarter of 2016, we performed an interim goodwill impairment analysis for an at-risk reporting unit in Quebec, Canada. We had been monitoring this location’s results, which came in below expectations at the end of the 2016 pool season. Due to this impairment indicator, we performed an interim goodwill impairment analysis. We estimated the fair value of this reporting unit based on an income approach that incorporates our assumptions for determining the present value of future cash flows.  We projected future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples. Because the carrying value of this reporting unit’s goodwill exceeded its estimated fair value, we recorded a non-cash goodwill impairment charge in Selling and administrative expenses on the Consolidated Statements of Income in 2016.






Other intangible assets consisted of the following (in thousands):

 December 31,Weighted Average Useful Life
 20192018
Intangibles Gross  Accumulated AmortizationIntangibles NetIntangibles Gross  Accumulated Amortization  Intangibles Net  
Horizon tradename$8,400  $—  $8,400  $8,400  $—  $8,400  Indefinite  
Pool Systems tradename and trademarks990  —  990  1,002  —  1,002  Indefinite  
National Pool Tile (NPT) tradename1,500  (887) 613  1,500  (812) 688  20
Non-compete agreements4,611  (3,576) 1,035  5,019  (3,157) 1,862  4.85
Patents470  (470) —  473  (421) 52  5
Total other intangibles$15,971  $(4,933) $11,038  $16,394  $(4,390) $12,004  

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 December 31,
 2017 2016
Horizon tradename (indefinite life)$8,400
 $8,400
Pool Systems tradename and trademarks (indefinite lives)1,109
 1,023
National Pool Tile (NPT) tradename (20 year life)1,500
 1,500
Non-compete agreements (5 year weighted average useful life)5,078
 4,396
Patents (5 year weighted average useful life)523
 483
Other intangible assets16,610
 15,802
Less: Accumulated amortization(3,387) (2,476)
Other intangible assets, net$13,223
 $13,326


The Horizon and Pool Systems tradenames and trademarks have indefinite useful lives and are not subject to amortization.  However, we evaluate the useful lives of these intangible assets and test for impairment annually.  The NPT tradename, our non-compete agreements and our patents have finite useful lives, and we amortize the estimated fair value of these agreements using the straight-line method over their respective useful lives. We have not identified any indicators of impairment related to these assets. The useful lives for our non-compete agreements are based on their contractual terms, and the useful lives for our patents are based on expected future cash flows. We recognize expenses related to patent renewal costs as incurred.


Other intangible amortization expense was $1.0 million in 2017,2019, $1.1 million in 2018 and $1.0 million in 2016 and $0.4 million in 2015.2017.


The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands):


2020$856  
2021298  
2022108  
202375  
202475  

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2018 $1,080
2019 905
2020 833
2021 353
2022 163




Note 4 - Details of Certain Balance Sheet Accounts


The table below presents additional information regarding certain balance sheet accounts (in thousands):
 
 December 31,
 20192018
Receivables, net:  
Trade accounts$18,455  $16,451�� 
Vendor programs59,228  57,304  
Other, net4,437  1,920  
Total receivables82,120  75,675  
Less: Allowance for doubtful accounts(5,472) (6,182) 
Receivables, net$76,648  $69,493  
Prepaid expenses and other current assets:  
Prepaid expenses$14,568  $15,114  
Other current assets1,604  3,392  
Prepaid expenses and other current assets$16,172  $18,506  
Property and equipment, net:  
Land$3,608  $3,193  
Buildings7,132  5,318  
Leasehold improvements50,165  45,098  
Autos and trucks89,052  82,216  
Machinery and equipment69,027  61,945  
Computer equipment43,001  39,307  
Furniture and fixtures9,886  9,778  
Fixed assets in progress1,761  1,751  
Total property and equipment273,632  248,606  
Less: Accumulated depreciation(161,386) (141,642) 
Property and equipment, net$112,246  $106,964  
Accrued expenses and other current liabilities:  
Salaries and payroll deductions$13,688  $12,475  
Performance-based compensation22,907  25,261  
Taxes payable9,814  8,337  
Other current liabilities14,404  12,534  
Accrued expenses and other current liabilities$60,813  $58,607  

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  December 31,
  2017 2016
Receivables, net:    
Trade accounts $26,681
 $18,533
Vendor programs 50,302
 44,842
Other, net 3,511
 2,112
Total receivables 80,494
 65,487
Less: Allowance for doubtful accounts (3,897) (4,050)
Receivables, net $76,597
 $61,437
     
Prepaid expenses and other current assets:    
Prepaid expenses $14,700
 $13,584
Other current assets 4,869
 1,734
Prepaid expenses and other current assets $19,569
 $15,318
     
Property and equipment, net:    
Land $3,003
 $1,685
Buildings 4,255
 2,465
Leasehold improvements 41,908
 38,348
Autos and trucks 70,570
 53,371
Machinery and equipment 55,128
 45,535
Computer equipment 38,194
 39,251
Furniture and fixtures 9,670
 9,951
Fixed assets in progress 1,072
 2,065
Total property and equipment 223,800
 192,671
Less: Accumulated depreciation (122,861) (109,381)
Property and equipment, net $100,939
 $83,290
     
Accrued expenses and other current liabilities:    
Salaries and payroll deductions $9,987
 $8,878
Performance-based compensation 31,807
 32,226
Taxes payable 7,970
 8,424
Other current liabilities 15,718
 14,859
Accrued expenses and other current liabilities $65,482
 $64,387




Note 5 - Debt


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


 December 31,
 20192018
Variable rate debt
Short-term borrowings$1,647  $—  
Current portion of long-term debt:
Australian credit facility10,098  9,168  
Short-term borrowings and current portion of long-term debt11,745  9,168  
Long-term portion:  
Revolving credit facility200,673  550,131  
Term facility185,000  —  
Receivables securitization facility115,000  108,500  
Less: financing costs, net1,011  1,038  
Long-term debt, net499,662  657,593  
Total debt $511,407  $666,761  
  December 31,
  2017 2016
Variable rate debt    
Short-term borrowings $1,937
 $
Current portion of long-term debt:    
Australian credit facility 8,898
 1,105
Short-term borrowings and current portion of long-term debt 10,835
 1,105
     
Long-term portion:    
Revolving credit facility 410,439
 354,549
Receivables securitization facility 100,000
 83,500
Less: financing costs, net 1,624
 1,112
Long-term debt, net $508,815
 $436,937
Total debt  $519,650
 $438,042


Revolving Credit Facility


On September 29, 2017, we, along with our wholly owned subsidiaries, SCP Distributors Canada Inc., as the Canadian Borrower, and SCP Pool B.V., as the Dutch Borrower, amended and restated our unsecured syndicated senior credit facility (the Credit Facility). The Credit Facility borrowing capacity increased to $750.0 million from $465.0 million under a five-year revolving credit facility. We also extended the maturity date of the agreement to September 29, 2022. As amended on November 7, 2019, SCP Pool B.V. was removed as the Dutch Borrower and replaced with SCP International, Inc. as the Euro Borrower.


The Credit Facility 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$75.0 million,, to a total of $825.0 million.  $825.0 million.  


Our obligations under the Credit Facility are guaranteed by substantially all of our existing and future direct and indirect domestic subsidiaries.  The Credit Facility contains terms and provisions (including representations, covenants and conditions) and events of default customary for transactions of this type.  If we default under the Credit Facility, the lenders may terminate their commitments under the Credit Facility and may require us to repay all amounts.


At December 31, 2017,2019, there was $410.4$200.7 million outstanding, a $4.2$4.8 million standby letter of credit outstanding and $335.4$544.5 million available for borrowing under the Credit Facility.  The weighted average effective interest rate for the Credit Facility as of December 31, 20172019 was approximately 2.9%2.8%, excluding commitment fees.


Revolving borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:


a.a base rate, which is the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) the London Interbank Offered Rate (LIBOR) Market Index Rate plus 1.000%; or
b.LIBOR.

a.a base rate, which is the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) the London Interbank Offered Rate (LIBOR) Market Index Rate plus 1.000%; or
b.LIBOR.

Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin:


a.a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or
b.CDOR.

a.a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or
b.CDOR.

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Borrowings by the DutchEuro Borrower bear interest at LIBOR plus an applicable margin.




The interest rate margins on the borrowings and letters of credit are based on our leverage ratio and will range from 1.025% to 1.425% on CDOR, LIBOR and swingline loans, and from 0.025% to 0.425% on Base Rate and Canadian Base Rate loans.  Borrowings under the swingline loans are based on the LIBOR Market Index Rate (LMIR) plus any applicable margin.  We are also required to pay an annual facility fee ranging from 0.100% to 0.200%, depending on our leverage ratio.


Term Facility

On December 30, 2019, we along with certain of our subsidiaries entered into a $185.0 million term facility (the Term Facility) with Bank of America, N.A. The Term Facility matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Company's revolving credit facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

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 with 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 classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

Our obligations under the Term Facility are guaranteed by substantially all of our existing and future domestic subsidiaries. The Term Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. If we default under the Term Facility, the lenders may terminate their commitments under the Term Facility and may require us to repay all amounts.

At December 31, 2019, the Term Facility was fully drawn with an outstanding balance of $185.0 million at a weighted average effective interest rate of 2.5%.

Borrowings under the Term Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:

a.a base rate, which is the greatest of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus one-half of one percent (0.50%), (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” or (iii) the Eurodollar Rate (defined below) plus one percent (1.00%); or
b.the Eurodollar Rate, which is the rate per annum equal to the LIBOR as administered by the ICE Benchmark Administration (or any successor administrator), as published on the applicable Bloomberg screen page with a term equivalent to the applicable interest period.

The interest rate margins on the borrowings are based on our leverage ratio and will range from 1.125% to 1.625% on Eurodollar Rate borrowings and 0.125% to 0.625% on Base Rate borrowings.

Receivables Securitization Facility


On November 28, 2017,1, 2019, we and certain of our subsidiaries entered into an amendment of our two-yeartwo-year accounts receivable securitization facility (the Receivables Facility). As amended, the Receivables Facility has a peak seasonal funding capacity of up to $255.0$295.0 million betweenfor the month of May, 1 and June 30, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $80.0$120.0 million to $220.0$275.0 million throughout the remaining months of the year.


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 partythird-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 to the financial institutions.


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The Receivables Facility is subject to terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Failure to maintain certain ratios or meet certain of these covenants could trigger an amortization event.


At December 31, 2017,2019, there was $100.0$115.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.3%2.6%, excluding commitment fees.


Depending on the funding source used by the financial institutions to purchase the receivables, amounts outstanding under the Receivables Facility bear interest at one of the following and, in each case, plus an applicable margin of 0.75%:


a.for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable rates in the commercial paper market at the time of issuance; or
b.for financial institutions not using the commercial paper market, LMIR.

a.for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable rates in the commercial paper market at the time of issuance; or
b.for financial institutions not using the commercial paper market, LMIR.

We also pay an unused fee of 0.35% on the excess of the facility limit over the average daily capital outstanding. We pay this fee monthly in arrears.


Australian Seasonal Credit Facility


In the second quarter of 2017, PSL entered into a new credit facility to fund expansion and supplement working capital needs. The new credit facility provides a borrowing capacity of AU$20.0 million, and the balance as of December 31, 2017 includes borrowings to fund the Newline Pool Products acquisition and the purchase of the noncontrolling interest. The previous credit facility, used to supplement working capital needs during peak season, provided a borrowing capacity of AU$3.0 million.


Cash Pooling Arrangement


Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity is €12.0 million.



Interest Rate Swaps


We currently haveIn 2019, we had three interest rate swap contracts in place, which became effective on October 19, 2016. These swaps were previously forward-starting contracts that were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates at that time and extend the hedged period for future interest payments on our Credit Facility. As amended, thesevariable rate borrowings. These swap contracts terminateterminated on November 20, 2019. We recognized expense of $0.5 million in 2019, a benefit of $1.2 million in 2018 and a benefit of $2.4 million in 2017 expense of $0.1 million in 2016 and a benefit of $0.6 million in 2015 as a result of our determination of ineffectiveness for the period.ineffectiveness. These amounts were recorded in Interest and other non-operating expenses, net on our Consolidated Statements of Income.
The following table provides additional details related to each of these amended swap contracts:


DerivativeAmendment DateNotional
Amount
(in millions)
Fixed
Interest
Rate
Interest rate swap 1October 1, 2015$75.0  2.273 %
Interest rate swap 2October 1, 201525.0  2.111 %
Interest rate swap 3October 1, 201550.0  2.111 %
Derivative Amendment Date 
Notional
Amount
(in millions)
 
Fixed
Interest
Rate
Interest rate swap 6 October 1, 2015 $75.0
 2.273%
Interest rate swap 7 October 1, 2015 25.0
 2.111%
Interest rate swap 8 October 1, 2015 50.0
 2.111%


Upon amendment of the original hedge agreements, we were required to freeze the amounts related to the changes in the fair values of these swaps, which are recorded in Accumulated other comprehensive loss. At December 31, 2017, the remaining balance of the unrealized losses was $1.4 million and is being amortized over the effective period of the original forward-starting interest rate swap contracts from October 2016 toOn September 2018.30, 2018, these balances became fully amortized. We recorded expense of $1.4 million in 2018 and $1.9 million in 2017 and $0.4 million in 2016 as amortization of the unrealized loss in Interest and other non-operating expenses, net.


In July 2016, we entered into a new forward-starting
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We currently have one interest rate swap contract to extend the hedged period for future interest paymentsin place, which became effective on our Credit Facility to its maturity date.November 20, 2019. This swap contract will convertwas previously forward-starting and converts the variable interest rate to a fixed interest rate on borrowings under the Credit Facility. This contract becomes effective on November 20, 2019 and terminates on November 20, 2020. The following table provides additional details related toour variable rate borrowings. For this swap contract:

Derivative Inception Date Notional
Amount
(in millions)
 Fixed
Interest
Rate
Forward-starting interest rate swap July 6, 2016 $150.0
 1.1425%

The net difference between interest paid and interest received related to our swap agreements resulted in incremental interest expense of $1.7 million in 2017, $1.3 million in 2016 and $1.4 million in 2015. 

In 2016 and 2015, we had five interest rate swap, contracts in place to reduce our exposure to fluctuations in interest rates on the Credit Facility.  Each of these swap contracts terminated on October 19, 2016.  These swaps converted the variable interest rates to fixed interest rates on borrowings under the Credit Facility. For these interest rate swaps, we recognized no gains or losses through income, nor was there any effect on income from hedge ineffectiveness over the term of thesethe swap contracts. contract. This contract terminates on November 20, 2020.

The following table provides additional details related to each ofthis swap contract:
DerivativeInception DateNotional
Amount
(in millions)
Fixed
Interest
Rate
Interest rate swap 4July 6, 2016$150.0  1.1425 %


In May and July 2019, we entered into additional 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 contracts become effective on November 20, 2020 and terminate on September 29, 2022.

The following table provides additional details related to these swap contracts:


DerivativeInception DateNotional
Amount
(in millions)
Fixed
Interest
Rate
Forward-starting interest rate swap 1May 7, 2019$75.0  2.0925 %
Forward-starting interest rate swap 2July 25, 2019$75.0  1.5500 %
Derivative Effective Date 
Notional
Amount
(in millions)
 
Fixed
Interest
Rate
Interest rate swap 1 November 21, 2011 $25.0
 1.185%
Interest rate swap 2 November 21, 2011 25.0
 1.185%
Interest rate swap 3 December 21, 2011 50.0
 1.100%
Interest rate swap 4 January 17, 2012 25.0
 1.050%
Interest rate swap 5 January 19, 2012 25.0
 0.990%


On February 5, 2020, we entered into a forward-starting interest rate swap contract with a fixed interest rate of 1.3800% on a notional amount of $150.0 million. This contract becomes effective on February 26, 2021 and terminates on February 28, 2025.



The net difference between interest paid and interest received related to our swap agreements resulted in an incremental interest benefit of $0.3 million in 2019, and an expense of $0.3 million in 2018 and $1.7 million in 2017.

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


Financial and Other Covenants


Financial covenants onof the Credit Facility, Term Facility and Receivables Facility are closely aligned and include a minimum fixed charge coverage ratio and maintenance of a maximum average total leverage ratio, which are our most restrictive covenants. The Credit Facility and the Term Facility also limitslimit 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 Term Facility could result in penalty payments, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.


As of December 31, 2017,2019, we were in compliance with all covenants and financial ratio requirements related to the Credit Facility, the Term Facility and the Receivables Facility.


68


Deferred Financing Costs


We capitalize financing costs we incur related to implementing and amending our debt arrangements. We record these costs as a reduction of Long-term debt, net on our Consolidated Balance Sheets and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in deferred financing costs for the past two years (in thousands):


December 31,
 20192018
Deferred financing costs:  
Balance at beginning of year$4,712  $4,606  
Financing costs deferred406  106  
Balance at end of year5,118  4,712  
Less: Accumulated amortization(4,107) (3,674) 
Deferred financing costs, net of accumulated amortization$1,011  $1,038  


69

  December 31,
  2017 2016
Deferred financing costs:    
Balance at beginning of year $4,883
 $4,814
Financing costs deferred 1,104
 69
Write-off of fully amortized deferred financing costs (1,381) 
Balance at end of year 4,606
 4,883
Less: Accumulated amortization (2,982) (3,771)
Deferred financing costs, net of accumulated amortization $1,624
 $1,112






Note 6 - Share-Based Compensation


Share-Based Plans


Current Plan


In May 2007, our stockholdersshareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors.  In May 2016, our stockholdersshareholders approved an amendment and restatement of the 2007 Long‑TermLong-Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares.  As of December 31, 2017,2019, we had 4,615,1484,319,501 shares available for future issuance including 1,186,5211,037,669 shares that may be issued as restricted stock.


Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no cost to the grantee.  Both stock options and restricted stock awards vest over time depending on an employee’s length of service with the Company.  Share-based awards to our employees generally vest either five years from the grant date or on a three/three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. Share‑basedShare-based awards to our non-employee directors vest one year from the grant date.


Beginning with 2016 grants, certain restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria discusseddescribed above. The awards provide for a three-yearthree-year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. Since each grant date, we have concluded attainment of these performance conditions to be probable to be achieved in the first three-year performance period of the performance-based grants for each of the performance-based grants from 2016 through 2019. Further, we achieved the performance conditions for the 2017 and 2016 performance-based grants.grants in the their respective first three-year performance periods.


Stock Option Awards


The following table summarizes stock option activity under our share-based plans for the year ended December 31, 2017:2019:


 SharesWeighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(Years)
Aggregate
Intrinsic Value
Balance at December 31, 20181,879,151  $48.19    
Granted65,525  160.67    
Less: Exercised640,475  26.29    
           Forfeited2,150  150.29    
Balance at December 31, 20191,302,051  $64.46  4.12$192,600,967  
Exercisable at December 31, 2019877,812  $42.05  2.71$149,516,227  

70

  Shares 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic Value
Balance at December 31, 2016 2,550,883
 $34.70
    
Granted 108,275
 116.99
    
Less: Exercised 364,984
 26.88
    
           Forfeited 6,775
 94.20
    
Balance at December 31, 2017 2,287,399
 $39.67
 3.85 $205,820,051
         
Exercisable at December 31, 2017 1,650,386
 $26.33
 2.55 $170,526,117




The following table presents information about stock options outstanding and exercisable at December 31, 2017:2019:


 Outstanding
Stock Options
Exercisable
Stock Options
Range of Exercise PricesSharesWeighted Average
Remaining
Contractual Term
(Years)
Weighted Average Exercise PriceSharesWeighted Average Exercise Price
$ 20.32 to $ 37.13478,102  1.51$29.12  478,102  $29.12  
$ 37.14 to $ 69.85436,266  4.1057.19  345,202  53.84  
$ 69.86 to $ 181.60387,683  7.35116.22  54,508  80.80  
 1,302,051  4.12$64.46  877,812  $42.05  
  
Outstanding
Stock Options
 
Exercisable
Stock Options
Range of Exercise Prices Shares 
Weighted Average
Remaining
Contractual Term
(Years)
 Weighted Average Exercise Price Shares Weighted Average Exercise Price
$ 18.00 to $ 20.34 885,493
 1.36 $19.54
 885,493
 $19.54
$ 20.35 to $ 45.61 811,756
 3.91 33.75
 695,031
 31.76
$ 45.62 to $ 117.04 590,150
 7.51 78.02
 69,862
 58.30
  2,287,399
 3.85 $39.67
 1,650,386
 $26.33


The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options:


 Year Ended December 31,
(in thousands, except share amounts)201920182017
Options exercised640,475  491,448  364,984  
Cash proceeds$16,839  $11,779  $9,809  
Intrinsic value of options exercised$97,007  $61,469  $33,302  
Tax benefits realized$24,252  $15,367  $12,809  
  Year Ended December 31,
(in thousands, except share amounts) 2017 2016 2015
Options exercised 364,984
 343,237
 543,028
Cash proceeds $9,809
 $10,340
 $17,137
Intrinsic value of options exercised $33,302
 $21,094
 $22,676
Tax benefits realized $12,809
 $7,891
 $8,326


We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the following table:
 
 Year Ended December 31,
(Weighted average)201920182017
Expected volatility21.4 %23.7 %26.6 %
Expected term7.0years7.3years7.3years
Risk-free interest rate2.52 %2.87 %2.44 %
Expected dividend yield1.3 %1.5 %1.5 %
Grant date fair value$37.75   $35.71   $32.00   
  Year Ended December 31,
(Weighted average) 2017 2016 2015
Expected volatility 26.6%  29.7%  33.8% 
Expected term 7.3
years 7.1
years 7.2
years
Risk-free interest rate 2.44%  1.75%  1.95% 
Expected dividend yield 1.5%  1.5%  1.5% 
Grant date fair value $32.00
  $22.86
  $22.57
 


We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock.  We use weekly price observations for our historical volatility calculation because we believe that they providethis provides the most appropriate measurement of volatility given the trading patterns of our common stock.  We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. The weighted average expected term is impacted by a higher expected term estimate for stock option awards granted to our named executive officers.  The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option. We determined the expected dividend yield based on the anticipated dividends over the expected term.


For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting period, or if shorter, the period from the grant date to the date that employees meet the retirement provisions ofemployee becomes eligible to retire under our share-based award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method.



71



The following table presents the total share-based compensation expense for stock option awards and the related recognized tax benefits for the past three years (in thousands):


 201920182017
Option grants share-based compensation expense$3,021  $3,218  $3,553  
Option grants share-based compensation tax benefits755  805  888  
  2017 2016 2015
Option grant share-based compensation expense $3,553
 $3,735
 $3,688
Option grant recognized tax benefits 888
 1,409
 1,331


At December 31, 2017,2019, the unamortized compensation expense related to stock option awards totaled $3.5$2.7 million.  We anticipate that this expense will be recognized over a weighted average period of 1.72.3 years.


Restricted Stock Awards


The table below presents restricted stock awardsaward activity under our share-based plans for the year ended December 31, 2017:2019:


 SharesWeighted Average
Grant Date Fair Value
Balance unvested at December 31, 2018307,773  $101.93  
Granted (at market price) (1)
71,494  162.81  
Less: Vested75,143  74.45  
Forfeited820  109.93  
Balance unvested at December 31, 2019303,304  $123.13  
  Shares 
Weighted Average
Grant Date Fair Value
Balance unvested at December 31, 2016 285,019
 $64.33
Granted (at market price) (1)
 95,479
 115.38
Less: Vested 79,224
 52.73
Forfeited 3,750
 80.69
Balance unvested at December 31, 2017 297,524
 $83.36


(1)The majority of these shares contain performance-based vesting conditions.


At December 31, 2017,2019, the unamortized compensation expense related to the restricted stock awards totaled $6.2$8.8 million.  We anticipate that this expense will be recognized over a weighted average period of 2.8 years.


The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value of those awards (in thousands, except share amounts):


 201920182017
Restricted stock awards - shares vested75,143  68,149  79,224  
Fair value of restricted stock awards vested$12,316  $9,642  $9,260  
  2017 2016 2015
Restricted stock awards - shares vested 79,224
 95,420
 147,619
Fair value of restricted stock awards vested $9,260
 $7,960
 $10,182


The following table presents the total share-based compensation expense for restricted stock awards for the past three years (in thousands):


 201920182017
Restricted stock awards share-based compensation expense$10,026  $9,151  $8,547  


72

  2017 2016 2015
Restricted stock awards share-based compensation expense $8,547
 $5,993
 $5,513


Employee Stock Purchase Plan


In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan (the ESPP). Under the ESPP, employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:

a.as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31 (prior to the amendment, the six month plan period ended on June 30 or December 31); or
b.the average of the beginning and ending closing prices of our common stock for such six month period.



a.as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31; or

b.the average of the beginning and ending closing prices of our common stock for such six month period.

No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in 2017, the one six month offering period in 2016,2019, 2018 and the two six month offering periods in 2015,2017, our employees purchased the following aggregate number of shares:


201920182017
12,716  15,966  16,610  
2017 2016 2015
16,610
 8,649
 22,555


The grant date fair value for the most recent ESPP purchase period ended July 31, 20172019 was $17.30$44.45 per share.  Share-based compensation expense related to our ESPP was $0.4 million in 2017, $0.22019, $0.5 million in 20162018 and $0.3$0.4 million in 2015.2017.


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Note 7 - Income Taxes
Our provision for income taxes forIn December 2017, was impacted by the Tax Cuts and Jobs Act (TCJA or the(the Act) enactment in December 2017 and our adoption of Accounting Standards Update (ASU) 2016-09, Improvements to Share-Based Payment Accounting, on January 1, 2017.
significantly changed U.S. tax law. As of December 31, 2017, we havehad not completed our accounting for the tax effects of the Act. In accordance with SAB 118, we have recorded provisional amounts related to the transition tax, impacts of the Act on state taxes, provisions of the Act related to deferred tax balances, and foreign tax implications. Our accounting for the tax effects of the Act will be completed before the measurement period, which is one year from the Act’s enactment date. As a result of the Act, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflectsreflected the re-measurement of our net deferred tax liability. We believeliability to the new U.S. Federal tax rate. As of December 31, 2018, we resolved our net benefit is based on reasonable estimates for thosecontingent accounting related to the tax effects of the Act. Changes to these estimates or new guidance issued by regulators may materially impactWe filed our provision forfederal income taxes and effective tax ratereturn in the period inthird quarter of 2018, and our return to provision adjustment, which addressed the adjustments are made.provisional tax benefit recorded under SAB 118 and was not material.
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. Upon adoption of ASU 2016-09, we were required toWe record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $12.6$23.5 million to our income tax provision in 2017. Prior to the adoption of this guidance, we were required to record excess tax benefits in stockholders’ equity, of which we recorded $7.42019, $15.3 million in 2016. For additional discussion of our adoption of this accounting guidance, see Note 1.

2018 and $12.6 million in 2017.
Income before income taxes and equity earnings is attributable to the following jurisdictions (in thousands):


  Year Ended December 31,
  201920182017
United States$304,259  $278,311  $259,436  
Foreign13,215  14,682  9,746  
Total$317,474  $292,993  $269,182  
   Year Ended December 31,
   2017 2016 2015
United States $259,436
 $234,646
 $203,269
Foreign 9,746
 6,732
 4,881
Total $269,182
 $241,378
 $208,150




The provision for income taxes consisted of the following (in thousands):


 Year Ended December 31,
 201920182017
Current:   
Federal$35,270  $39,504  $71,329  
State and other17,168  14,609  11,289  
Total current provision for income taxes52,438  54,113  82,618  
Deferred:   
Federal4,154  4,676  (6,643) 
State and other(431) (15) 2,007  
Total deferred provision for income taxes3,723  4,661  (4,636) 
Provision for income taxes$56,161  $58,774  $77,982  

74

  Year Ended December 31,
  2017 2016 2015
Current:      
Federal $71,329
 $77,000
 $65,676
State and other 11,289
 12,182
 10,263
Total current provision for income taxes 82,618
 89,182
 75,939
       
Deferred:      
Federal (6,643) 4,079
 4,568
State and other 2,007
 (330) (370)
Total deferred provision for income taxes (4,636) 3,749
 4,198
Provision for income taxes $77,982
 $92,931
 $80,137


A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity earnings is as follows:


 Year Ended December 31,
 201920182017
Federal statutory rate21.00 %21.00 %35.00 %
Change in valuation allowance0.10  (0.13) (0.06) 
Stock-based compensation(7.40) (5.23) (4.67) 
Re-measurement of net deferred tax liability—  —  (4.46) 
Other, primarily state income tax rate3.99  4.42  3.16  
Total effective tax rate17.69 %20.06 %28.97 %
  Year Ended December 31,
  2017 2016 2015
Federal statutory rate 35.00% 35.00% 35.00%
Change in valuation allowance (0.06) 0.10
 0.20
Stock-based compensation (4.67) 
 
Re-measurement of net deferred tax liability (4.46) 
 
Other, primarily state income tax rate 3.16
 3.40
 3.30
Total effective tax rate 28.97% 38.50% 38.50%

Upon our adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, effective January 1, 2017, we classified all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Also, we no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances are also be required to be classified as noncurrent. We adopted this guidance on a prospective basis, and as such, our prior year balances or classifications have not changed.



The table below presents the components of our deferred tax assets and liabilities (in thousands):


 December 31,
 20192018
Deferred tax assets:  
Product inventories$5,740  $5,413  
Accrued expenses927  776  
Leases42,698  1,189  
Share-based compensation9,245  9,427  
Uncertain tax positions2,852  2,558  
Net operating losses4,807  5,058  
Interest rate swaps66  —  
Other2,889  2,080  
Total non-current69,224  26,501  
Less: Valuation allowance(4,794) (5,058) 
Component reclassified for net presentation(63,699) (20,897) 
Total non-current, net731  546  
Total deferred tax assets731  546  
Deferred tax liabilities:
Trade discounts on purchases2,326  2,094  
Prepaid expenses2,821  1,804  
Leases41,418  —  
Intangible assets, primarily goodwill32,331  30,988  
Depreciation17,401  14,924  
Interest rate swaps—  486  
Total non-current96,297  50,296  
Component reclassified for net presentation(63,699) (20,897) 
Total non-current, net32,598  29,399  
Total deferred tax liabilities32,598  29,399  
Net deferred tax liability$31,867  $28,853  

75


  December 31,
  2017 2016
Deferred tax assets:    
Product inventories $
 $7,010
Accrued expenses 
 3,978
Allowance for doubtful accounts 
 396
Total current 
 11,384
Component reclassified for net presentation 
 (5,368)
Total current, net 
 6,016
     
Product inventories 4,287
 
Accrued expenses 1,804
 
Allowance for doubtful accounts 154
 
Leases 1,188
 1,920
Share-based compensation 8,884
 13,778
Uncertain tax positions 2,087
 2,746
Net operating losses 5,441
 5,735
Interest rate swaps 
 674
Other 1,475
 2,465
Total non-current 25,320
 27,318
Less: Valuation allowance (5,440) (5,735)
Component reclassified for net presentation (19,071) (20,781)
Total non-current, net 809
 802
     
Total deferred tax assets 809
 6,818
     
Deferred tax liabilities: 

 

Trade discounts on purchases 
 2,698
Prepaid expenses 
 2,670
Total current 
 5,368
Component reclassified for net presentation 
 (5,368)
Total current, net 
 
     
Trade discounts on purchases 1,520
 
Prepaid expenses 1,857
 
Intangible assets, primarily goodwill 29,348
 42,930
Depreciation 10,870
 12,326
Interest rate swaps 61
 
Total non-current 43,656
 55,256
Component reclassified for net presentation (19,071) (20,781)
Total non-current, net 24,585
 34,475
     
Total deferred tax liabilities 24,585
 34,475
     
Net deferred tax liability $23,776
 $27,657



At December 31, 2017,2019, certain of our international subsidiaries had tax loss carryforwards totaling approximately $21.3$17.7 million,, which expire in various years after 2018.2020.  Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were $5.4$4.8 million as of December 31, 20172019 and $5.7$5.1 million as of December 31, 2016.2018.  We have recorded a corresponding valuation allowance of $5.4$4.6 million and $5.7$5.1 million in the respective years.


As of December 31, 2017,2019, United States income taxes were not provided on earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. We are also still evaluating whether to change our indefinite reinvestment assertion in light of U.S. tax reform.


The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands):


 201920182017
Balance at beginning of year$12,179  $9,937  $7,846  
Increases for tax positions taken during a prior period771  76  129  
Increases for tax positions taken during the current period2,354  3,809  3,260  
Decreases resulting from the expiration of the statute of limitations1,390  1,603  869  
Decreases relating to settlements332  40  429  
Balance at end of year$13,582  $12,179  $9,937  
  2017 2016 2015
Balance at beginning of year $7,846
 $5,978
 $4,690
Increases for tax positions taken during a prior period 129
 10
 410
Increases for tax positions taken during the current period 3,260
 2,819
 1,782
Decreases resulting from the expiration of the statute of limitations 869
 961
 904
Decreases relating to settlements 429
 
 
Balance at end of year $9,937
 $7,846
 $5,978


The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $7.9$10.7 million at December 31, 20172019 and $5.1$9.6 million at December 31, 2016.2018.


We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record related penalties in Selling and administrative expenses on our Consolidated Statements of Income.  For unrecognized tax benefits, we had interest expense of $0.6 million in 2019, $0.2 million in 2017,2018 and $0.2 million in 2016 and $0.1 million in 2015.2017.  Accrued interest related to unrecognized tax benefits was approximately $0.9$1.7 million at December 31, 20172019 and $0.7$1.1 million at December 31, 2016.2018.


We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014.2016.



76



Note 8 - Earnings Per Share


The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):

 Year Ended December 31,
 201920182017
Net income$261,575  $234,461  $191,339  
Net loss attributable to noncontrolling interest—  —  294  
Net income attributable to Pool Corporation$261,575  $234,461  $191,633  
Weighted average shares outstanding:   
Basic39,833  40,311  40,838  
Effect of dilutive securities:   
Stock options and employee stock purchase plan1,032  1,382  1,611  
Diluted40,865  41,693  42,449  
Earnings per share:   
Basic$6.57  $5.82  $4.69  
Diluted$6.40  $5.62  $4.51  
Anti-dilutive stock options excluded from diluted earnings per share computations (1)
—  —  108  

(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.


77

  Year Ended December 31,
  2017 2016 2015
Net income $191,339
 $148,603
 $128,224
Net loss attributable to noncontrolling interest 294
 352
 51
Net income attributable to Pool Corporation $191,633
 $148,955
 $128,275
Weighted average shares outstanding:    
  
Basic 40,838
 41,872
 43,105
Effect of dilutive securities:    
  
Stock options and employee stock purchase plan (1)
 1,611
 1,112
 1,149
Diluted 42,449
 42,984
 44,254
       
Earnings per share:      
Basic $4.69
 $3.56
 $2.98
Diluted $4.51
 $3.47
 $2.90
       
Anti-dilutive stock options excluded from diluted earnings per share computations (2)
 108
 1
 


(1)
As discussed in Note 1, as a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities for 2017 excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding as compared to 2016 and 2015.

(2)
Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.


Note 9 - Commitments and Contingencies


Commitments


We lease facilities for our corporate office,and administrative offices, sales centers and centralized shipping locations under operating leases that expire in various years through 2032. Most of our leases contain five-year terms with renewal options that allow us to extend the lease term beyond the initial period, subject to terms agreed upon at lease inception. Based on our leasing practices and contract negotiations, we determined that we are not reasonably certain to exercise the renewal options and, as such, we have not included optional renewal periods in our measurement of operating lease assets, liabilities and expected lease terms.

We elected to apply the package of practical expedients available within ASU 2016-02, which is intended to provide some relief to issuers. Electing this option allowed us to retain our existing assessment of which involve rate increases. whether an arrangement is or contains a lease, is classified as an operating or financing lease and contains initial direct costs. We also elected the practical expedients that allow us to exclude short-term leases from our Consolidated Balance Sheets and to combine lease and non-lease components. For additional discussion of our adoption of this accounting guidance, see Note 1.

For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize expense on a straight-line basis determined by the total minimum lease payments over the minimum lease term. To the extent we determine that future obligations related to real estate taxes, insurance and other lease components are variable, we exclude them from the measurement of our operating lease assets and liabilities.

Some of our real estate agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The table below presents rent expense associated with facility vehicle and equipmentvehicle operating leases for the past three years (in thousands):

Lease CostClassification201920182017
Operating lease cost (1)
Selling and administrative expenses  $60,104  $57,235  $54,023  
Variable lease cost  Selling and administrative expenses  $13,778  $12,867  $12,138  
(1)Includes short-term lease cost, which is not material.
2017 2016 2015
$66,161
 $63,940
 $60,129



TheBased on our lease portfolio as of December 31, 2019, the table below sets forth the approximate future minimum lease payments as of December 31, 2017 related to non-cancelable facility operating leases and the non-cancelable portion of certain equipment operating leases with initial terms of one year or more (in thousands):


2020$51,621  
202145,992  
202237,044  
202324,711  
202414,060  
Thereafter15,939  
Total lease payments189,367  
Less: interest11,032  
Present value of lease liabilities$178,335  


78


2018 $55,874
2019 49,540
2020 42,524
2021 30,756
2022 21,612
Thereafter 21,423

Upon adoptionTo calculate the present value of ASU 2016-02, Leases,our lease liabilities, we will be required to record most leasesdetermined our incremental borrowing rate based on the effective interest rate on our balance sheets and recognize expenses inCredit Facility adjusted for a mannercollateral feature similar to current guidance. We will also be required to provide enhanced disclosures related tothat of our lease agreements. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheetsleased properties, as we will be recording a right-of-use assetare unable to derive implicit rates from our existing leases. The table below presents the weighted-average remaining lease term (years) of our operating leases and corresponding liabilitythe weighted-average discount rate used in the above calculation:

December 31,
Lease Term and Discount Rate for Operating Leases 2019
Weighted-average remaining lease term (years)4.57
Weighted-average discount rate 3.41 %

The table below presents the amount of cash paid for our current operating leases. We are evaluatingamounts included in the effect that ASU 2016-02 will have on our resultsmeasurement of operations and related disclosures.lease liabilities (in thousands):


Year Ended
December 31,
2019
Operating cash flows for lease liabilities$56,617 

Contingencies


From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. Each quarter, we evaluate developments related to claims and litigation and record a liability if we deem a loss to be probable and estimable. When evaluating these matters for accrual and disclosure, we consider factors such as historical experience, specific facts and claims asserted, the likelihood we will prevail and the magnitude of any potential loss. The outcome of any litigation is inherently unpredictable. Based on currently available facts, we do not believe that the ultimate resolution of any of these claims and litigation matters will have a material adverse impact on our financial condition, results of operations or cash flows. We do not believe our exposure for any of these matters is material for disclosure, either individually or in the aggregate.



79


Note 10 - Related Party Transactions


Policy


Our policy for related party transactions is included in our written Audit Committee Charter.  This policy requires that our Audit Committee review and approve all related party transactions required to be disclosed in our Annual Proxy Statement or required to be approved based on NASDAQNasdaq rules.


Transactions


In May 2005,We lease corporate and administrative offices from NCC, an entity we acquiredhave held a 50% membershipownership interest in NCC through a $1.1 million cash contribution.since 2005.  NCC owns and operates an office building in Covington, Louisiana.  We lease corporate and administrative offices from NCC, occupying approximately 59,10060,000 square feet of office space.  In May 2005, we amended the lease agreement, which had a ten-year term. In June 2013, we exercised an option to extend the term of a portion of the lease agreement through May 2020. In March 2015, we exercised a second option to extend the term of the lease agreement through May 2025.  As of December 31, 2017, wespace and pay rent of $94,872$0.1 million per month. Our lease term ends May 2025.


The table below presents rent expense associated with this lease for the past three years (in thousands):


 201920182017
NCC$1,222  $1,155  $1,122  


  2017 2016 2015
NCC $1,122
 $1,035
 $1,016




Note 11 - Employee Benefit Plans


We offer a 401(k) savings and retirement plan, which is a defined contribution plan and provides benefits for substantially all employees who meet length of service requirements. Eligible employees are able to contribute up to 75% of their compensation, subject to the federal dollar limit. For plan participants, we provide a matching contribution. We contribute a total maximum match on employee contributions of up to 4% of their compensation, with a 100% match on the first 3% of compensation deferred and a 50% match on deferrals between 3% and 5% of compensation. We also offer retirement plans for certain of our international entities. The plan funding is calculated as a percentage of the employee’s earnings and in compliance with local laws and practices. The related expense is not material and is included in the table below.


We have a nonqualified deferred compensation plan that allows certain employees who occupy key management positions to defer salary and bonus amounts.  This plan also provides a matching contribution similar to that provided under our 401(k) plan to the extent that a participant’s contributions to the 401(k) plan are limited by IRS deferral and compensation limitations. The total combined company matching contribution provided to a participant under the 401(k) plan and the nonqualified deferred compensation plan for any one year may not exceed 4% of a participant’s salary and bonus.  The employee and company matching contributions are invested in certain equity and fixed income securities based on individual employee elections.


The table below sets forth our contributions for the past three years (in thousands):


 201920182017
Defined contribution and international retirement plans$7,373  $7,239  $6,946  
Deferred compensation plan195  245  325  

80

  2017 2016 2015
Defined contribution and international retirement plans $6,946
 $5,817
 $5,583
Deferred compensation plan 325
 194
 218


Note 12 - Quarterly Financial Data (Unaudited)


The table below summarizes the unaudited quarterly results of operations for the past two years (in thousands, except per share data):


  Quarter
  20192018
  FirstSecondThirdFourthFirstSecondThirdFourth
Net sales$597,456  $1,121,328  $898,500  $582,234  $585,900  $1,057,804  $811,311  $543,082  
Gross profit174,631  330,314  257,931  162,050  166,073  308,655  235,003  160,442  
Net income32,637  131,390  79,525  18,024  31,339  117,049  69,261  16,811  
Earnings per share:        
Basic$0.83  $3.30  $1.99  $0.45  $0.78  $2.89  $1.71  $0.42  
Diluted$0.80  $3.22  $1.95  $0.44  $0.75  $2.80  $1.66  $0.41  
  Quarter
  2017 2016
  First Second Third Fourth First Second Third Fourth
Net sales$546,441
 $988,163
 $743,401
 $510,183
 $515,250
 $918,889
 $691,429
 $445,235
Gross profit153,621
 289,664
 216,606
 145,398
 143,023
 270,736
 199,551
 127,777
Net income (1)
22,270
 94,620
 48,783
 25,665
 16,363
 85,247
 44,421
 2,572
Net income attributable to Pool Corporation (1)
22,281
 94,903
 48,783
 25,665
 16,371
 85,435
 44,534
 2,615
Earnings per share:         
  
  
  
Basic$0.54
 $2.30
 $1.20
 $0.64
 $0.39
 $2.03
 $1.06
 $0.06
Diluted$0.52
 $2.21
 $1.16
 $0.62
 $0.38
 $1.98
 $1.03
 $0.06


The sum of basic and diluted earnings per share for each of the quarters may not equal the total basic and diluted earnings per share for the annual periods because of rounding differences and a difference in the way that in-the-money stock options are considered from quarter to quarter. 

(1)
Our Net income and Net income attributable to Pool Corporation reflect the adoption of ASU 2016-09 for all periods presented in 2017. For additional information related to the adoption of this accounting standard, see Note 1. Our fourth quarter 2017 Net income and Net income attributable to Pool Corporation reflects benefits recorded due to U.S. tax reform. For additional information related to the impact of U.S. tax reform on our financial statements, see Note 7.








81


Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Not applicable.


Item 9A.  Controls and Procedures


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 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 December 31, 2017,2019, 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 December 31, 2017,2019, 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.





82



Management’s Report on Internal Control Over Financial Reporting
 
Pool Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements.  All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Any evaluation or projection of effectiveness to future periods is also subject to risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Pool Corporation’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management has concluded that, as of December 31, 2017,2019, Pool Corporation’s internal control over financial reporting was effective.


The independent registered public accounting firm that audited the Consolidated Financial Statements included in Item 8 of this Form 10-K has issued a report on Pool Corporation’s internal control over financial reporting. This report appears below.





83



Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
Pool Corporation


Opinion on Internal Control over Financial Reporting
We have audited Pool Corporation’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework)framework) (the COSO criteria). In our opinion, Pool Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and our report dated February 28, 201827, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
DefinitionsDefinition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


 /s/ Ernst & Young LLP
                                
New Orleans, Louisiana
February 28, 201827, 2020






84


Item 9B.  Other Information


Not applicable.


PART III.


Item 10.  Directors, Executive Officers and Corporate Governance


Incorporated by reference to Pool Corporation’s 20182020 Proxy Statement to be filed with the SEC.


Item 11.  Executive Compensation


Incorporated by reference to Pool Corporation’s 20182020 Proxy Statement to be filed with the SEC.


Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Incorporated by reference to Pool Corporation’s 20182020 Proxy Statement to be filed with the SEC.


Item 13.  Certain Relationships and Related Transactions, and Director Independence


Incorporated by reference to Pool Corporation’s 20182020 Proxy Statement to be filed with the SEC.


Item 14.  Principal Accountant Fees and Services


Incorporated by reference to Pool Corporation’s 20182020 Proxy Statement to be filed with the SEC.






























85


PART IV.


Item 15.  Exhibits, Financial Statement Schedules


(a)The following documents are filed as part of this report:

(a)The following documents are filed as part of this report:

(1)Consolidated Financial Statements:
Page
(2)Financial Statement Schedules.
All schedules are omitted because they are not applicable or are not required or because the required information is provided in our Consolidated Financial Statements or accompanying Notes included in Item 8 of this Form 10-K.
(3)The exhibits listed in the Index to Exhibits.






Item 16.  Form 10-K Summary


None




























86



INDEX TO EXHIBITS


Incorporated by Reference
No.DescriptionFiled/
Furnished
with this
Form 10-K
FormFile No.Date Filed
3.1 Incorporated by Reference
No.Description
Filed
with this
Form 10-K
FormFile No.Date Filed
3.110-Q000-2664008/09/2006
3.28-K000-2664012/20/201202/08/2019
4.18-K000-2664005/19/2006
10.14.2 *X10-K000-2664002/27/2020
10.1 *8-K000-2664005/06/2016
10.2*8-K000-2664005/06/2016
10.3*10-K000-2664002/26/2015
10.4*10-K000-2664002/26/2016
10.5*8-K000-2664005/06/2009
10.6*8-K000-2664005/06/2009
10.7*10-K000-2664003/18/2003
10.8*10-K000-2664003/31/1999
10.910.8 *10-K000-2664003/01/2005
10.1010.9 *10-K000-2664002/24/2017
10.1110.10 *10-K000-2664003/01/2010
10.12*10-Q000-2664004/29/2005
10.1310.11 *10-Q000-2664004/29/2005
10.1410.12 10-Q000-2664004/29/2005
10.1510.13 *8-K10-K000-2664005/06/201602/27/2019





Incorporated by Reference
No.DescriptionFiled/
Furnished
with this
Form 10-K
FormFile No.Date Filed
10.14 Incorporated by Reference
No.Description
Filed
with this
Form 10-K
FormFile No.Date Filed
10.1610-Q000-2664010/31/2011
10.1710-Q000-2664007/31/2013
10.1810-Q000-2664007/31/2013
10.198-K000-2664009/24/2013
10.2010-Q000-2664010/30/2014
10.218-K000-2664011/25/2014
10.228-K000-2664011/20/2015
10.238-K000-2664010/02/2017
10.2410.15 *8-K000-2664009/24/2018
10.16 X10-K000-2664002/27/2020
10.17 X10-K000-2664002/27/2020
10.18 *8-K10-K000-2664005/06/201602/27/2019
10.2510.19 8-K000-2664010/17/2013
10.2610.20 8-K000-2664010/17/2013
10.2710.21 10-Q000-2664007/30/2014





Incorporated by Reference
No.DescriptionFiled/
Furnished
with this
Form 10-K
FormFile No.Date Filed
10.31 8-K000-2664001/02/2020
Subsidiaries of the registrant.X
Consent of Ernst & Young LLP.X
Certification by Mark W. JoslinChief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X
Certification by Manuel J. Perez de la MesaChief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X
Certification by Manuel J. Perez de la MesaChief Executive Officer and Mark W. JoslinChief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X
101.INS++Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documentX
101.SCH++Inline XBRL Taxonomy Extension Schema DocumentX
101.CAL++Inline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEF++Inline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LAB++Inline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PRE++Inline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104 +Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101X

*Indicates a management contract or compensatory plan or arrangement

+Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
1.
Consolidated Statements of Income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015;
2.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015;
3.
Consolidated Balance Sheets at December 31, 2017 and December 31, 2016;
4.
Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015;
5.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, December 31, 2016 and December 31, 2015; and
6.Notes to Consolidated Financial Statements.



* Indicates a management contract or compensatory plan or arrangement

+ Attached as Exhibit 101 to this report are the following items formatted in iXBRL (Inline Extensible Business Reporting Language):
1.Consolidated Statements of Income for the years ended December 31, 2019, December 31, 2018 and December 31, 2017;
2.Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, December 31, 2018 and December 31, 2017;
3.Consolidated Balance Sheets at December 31, 2019 and December 31, 2018;
4.Consolidated Statements of Cash Flows for the years ended December 31, 2019, December 31, 2018 and December 31, 2017;
5.Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, December 31, 2018 and December 31, 2017; and
6.Notes to Consolidated Financial Statements.



SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2018.27, 2020.


POOL CORPORATION
By:
By:/s/ JOHN E. STOKELY
John E. Stokely, Chairman of the Board
and Lead Independent Director


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on February 28, 2018.27, 2020.


Signature:Title:
/s/ JOHN E. STOKELY
John E. StokelyChairman of the Board and Lead Independent Director
/s/ PETER D. ARVAN
Peter D. ArvanPresident, Chief Executive Officer and Director
/s/ MARK W. JOSLIN
Mark W. JoslinSenior Vice President and Chief Financial Officer
/s/ MELANIE M. HOUSEY HART
Melanie M. Housey HartVice President, Corporate Controller and Chief Accounting Officer
/s/ ANDREW W. CODE
Andrew W. CodeDirector
  /s/ TIMOTHY M. GRAVEN
  Timothy M. GravenDirector
/s/ DEBRA S. OLER
Debra S. OlerDirector
/s/ MANUEL J. PEREZ DE LA MESA
Manuel J. Perez de la MesaPresident, Chief Executive Officer and Director
/s/ MARK W. JOSLIN
Mark W. JoslinSenior Vice President and Chief Financial Officer
/s/ MELANIE M. HOUSEY HART
Melanie M. Housey HartCorporate Controller and Chief Accounting Officer
/s/ ANDREW W. CODE
Andrew W. CodeDirector
  /s/ TIMOTHY M. GRAVEN
  Timothy M. GravenDirector
/s/ HARLAN F. SEYMOUR
Harlan F. SeymourDirector
/s/ ROBERT C. SLEDD
Robert C. SleddDirector
/s/ DAVID G. WHALEN
David G. WhalenDirector


































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