UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to


Commission File Number: 0-26640


pool-20200930_g1.jpg
POOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware36-3943363
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
109 Northpark Boulevard,
Covington, Louisiana
70433-5001
Covington,Louisiana 70433-5001
(Address of principal executive offices)(Zip Code)
985-892-5521
(Registrant’s telephone number, including area code)

(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 sharePOOLNASDAQ Global Select Market
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 Yes x    NO     No o


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 Regulations 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 Yes x    NO     No o


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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer☐
Non-accelerated filer  oSmaller reporting company☐
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth companyo
☐

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. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES o    NO Yes ☐    No x


As of October 26, 2017,2020, there were 40,166,80040,158,582 shares of common stock outstanding.






POOL CORPORATION
Form 10-Q
For the Quarter Ended September 30, 20172020


TABLE OF CONTENTS


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PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
POOL CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data) 

Three Months Ended Nine Months EndedThree Months EndedNine Months Ended
September 30, September 30,September 30,September 30,
2017 2016 2017 2016 2020201920202019
Net sales$743,401
 $691,429
 $2,278,005
 $2,125,568
Net sales$1,139,229 $898,500 $3,097,362 $2,617,283 
Cost of sales526,795
 491,878
 1,618,114
 1,512,258
Cost of sales810,531 640,569 2,205,555 1,854,408 
Gross profit216,606
 199,551
 659,891
 613,310
Gross profit328,698 257,931 891,807 762,875 
Selling and administrative expenses134,678
 125,385
 392,779
 367,194
Selling and administrative expenses180,465 153,391 495,186 447,427 
Impairment of goodwill and other assetsImpairment of goodwill and other assets0 0 6,944 0 
Operating income81,928
 74,166
 267,112
 246,116
Operating income148,233 104,540 389,677 315,448 
Interest and other non-operating expenses, net4,009
 2,989
 11,608
 9,954
Interest and other non-operating expenses, net1,861 5,498 9,292 18,538 
Income before income taxes and equity earnings77,919
 71,177
 255,504
 236,162
Income before income taxes and equity earnings146,372 99,042 380,385 296,910 
Provision for income taxes29,179
 26,807
 89,951
 90,244
Provision for income taxes27,360 19,593 73,068 53,569 
Equity earnings in unconsolidated investments, net43
 51
 121
 113
Equity earnings in unconsolidated investments, net86 76 248 210 
Net income48,783
 44,421
 165,674
 146,031
Net income$119,098 $79,525 $307,565 $243,551 
Net loss attributable to noncontrolling interest—
 113
 294
 309
Net income attributable to Pool Corporation$48,783
 $44,534
 $165,968
 $146,340
       
Earnings per share:       Earnings per share:  
Basic$1.20
 $1.06
 $4.04
 $3.48
Basic$2.97 $1.99 $7.68 $6.13 
Diluted$1.16
 $1.03
 $3.89
 $3.39
Diluted$2.92 $1.95 $7.53 $5.97 
Weighted average shares outstanding:       Weighted average shares outstanding:  
Basic40,659
 42,020
 41,065
 42,092
Basic40,123 39,933 40,073 39,750 
Diluted42,207
 43,119
 42,691
 43,201
Diluted40,839 40,865 40,849 40,811 
       
Cash dividends declared per common share$0.37
 $0.31
 $1.05
 $0.88
Cash dividends declared per common share$0.58 $0.55 $1.71 $1.55 


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

1


POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

Three Months Ended Nine Months EndedThree Months EndedNine Months Ended
September 30, September 30,September 30,September 30,
2017 2016 2017 2016 2020201920202019
Net income$48,783
 $44,421
 $165,674
 $146,031
Net income$119,098 $79,525 $307,565 $243,551 
Other comprehensive income (loss):       Other comprehensive income (loss):  
Foreign currency translation adjustments1,842
 96
 6,432
 1,367
Change in unrealized gains and losses on interest rate swaps,
net of change in taxes of $(181), $(400), $(432) and $882
283
 625
 675
 (1,379)
Foreign currency translation gains (losses)Foreign currency translation gains (losses)2,976 (2,156)(320)(734)
Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $(51), $188, $3,641 and $692Change in unrealized gains (losses) on interest rate swaps, net of change in taxes of $(51), $188, $3,641 and $692154 (565)(10,923)(2,074)
Total other comprehensive income (loss)2,125
 721
 7,107
 (12)Total other comprehensive income (loss)3,130 (2,721)(11,243)(2,808)
Comprehensive income50,908
 45,142
 172,781
 146,019
Comprehensive income$122,228 $76,804 $296,322 $240,743 
Comprehensive loss attributable to noncontrolling interest—
 45
 74
 198
Comprehensive income attributable to Pool Corporation$50,908
 $45,187
 $172,855
 $146,217


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




















2

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

 September 30, September 30, December 31,September 30,September 30,December 31,
 2017 2016 
2016 (1)
20202019
2019 (1)
 (Unaudited) (Unaudited)   (Unaudited)(Unaudited) 
Assets      Assets   
Current assets:      Current assets:   
Cash and cash equivalents $36,398
 $30,292
 $21,956
Cash and cash equivalents$74,749 $36,693 $28,583 
Receivables, net 90,142
 81,072
 61,437
Receivables, net135,555 95,971 76,648 
Receivables pledged under receivables facility 172,654
 152,333
 104,714
Receivables pledged under receivables facility230,857 211,827 149,891 
Product inventories, net 484,287
 455,156
 486,116
Product inventories, net612,824 616,217 702,274 
Prepaid expenses and other current assets 14,832
 12,084
 15,318
Prepaid expenses and other current assets12,696 12,384 16,172 
Deferred income taxes —
 5,288
 6,016
Total current assets 798,313
 736,225
 695,557
Total current assets1,066,681 973,092 973,568 
      
Property and equipment, net 103,880
 84,643
 83,290
Property and equipment, net109,086 112,816 112,246 
Goodwill 189,024
 185,486
 184,795
Goodwill199,360 188,133 188,596 
Other intangible assets, net 13,206
 13,645
 13,326
Other intangible assets, net10,522 11,235 11,038 
Equity interest investments 1,168
 1,152
 1,172
Equity interest investments1,314 1,237 1,227 
Operating lease assetsOperating lease assets180,230 175,878 176,689 
Other assets 16,333
 16,370
 15,955
Other assets20,396 19,017 19,902 
Total assets $1,121,924
 $1,037,521
 $994,095
Total assets$1,587,589 $1,481,408 $1,483,266 
      
Liabilities, redeemable noncontrolling interest and stockholders’ equity      
Liabilities and stockholders’ equityLiabilities and stockholders’ equity   
Current liabilities:      
Current liabilities:   
Accounts payable $209,062
 $199,922
 $230,728
Accounts payable$268,412 $214,309 $261,963 
Accrued expenses and other current liabilities 87,887
 126,654
 64,387
Accrued expenses and other current liabilities145,420 81,459 60,813 
Short-term borrowings and current portion of long-term debt and other long-term liabilities 8,609
 1,298
 1,105
Short-term borrowings and current portion of long-term debtShort-term borrowings and current portion of long-term debt11,709 11,840 11,745 
Current operating lease liabilitiesCurrent operating lease liabilities56,977 56,025 56,325 
Total current liabilities 305,558
 327,874
 296,220
Total current liabilities482,518 363,633 390,846 
      
Deferred income taxes 27,244
 28,359
 34,475
Deferred income taxes29,476 27,951 32,598 
Long-term debt, net 555,964
 388,891
 436,937
Long-term debt, net328,225 535,720 499,662 
Other long-term liabilities 22,614
 17,945
 18,966
Other long-term liabilities32,846 26,737 27,970 
Non-current operating lease liabilitiesNon-current operating lease liabilities125,023 121,397 122,010 
Total liabilities 911,380
 763,069
 786,598
Total liabilities998,088 1,075,438 1,073,086 
      
Redeemable noncontrolling interest —
 2,467
 2,287
      
Stockholders’ equity:      Stockholders’ equity:   
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,122,935, 41,711,888 and 41,089,720 shares issued and
outstanding at September 30, 2017, September 30, 2016 and
December 31, 2016, respectively
 40
 42
 41
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,153,287, 40,020,216 and 40,074,160 shares issued and
outstanding at September 30, 2020, September 30, 2019 and
December 31, 2019, respectively
Common stock, $0.001 par value; 100,000,000 shares authorized;
40,153,287, 40,020,216 and 40,074,160 shares issued and
outstanding at September 30, 2020, September 30, 2019 and
December 31, 2019, respectively
40 40 40 
Additional paid-in capital 420,946
 399,071
 403,162
Additional paid-in capital513,030 480,478 485,239 
Retained deficit (202,693) (113,276) (183,915)
Retained earnings (deficit)Retained earnings (deficit)98,033 (60,743)(64,740)
Accumulated other comprehensive loss (7,749) (13,852) (14,078)Accumulated other comprehensive loss(21,602)(13,805)(10,359)
Total stockholders’ equity 210,544
 271,985
 205,210
Total stockholders’ equity589,501 405,970 410,180 
Total liabilities, redeemable noncontrolling interest and stockholders’ equity $1,121,924
 $1,037,521
 $994,095
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$1,587,589 $1,481,408 $1,483,266 
(1)  Derived from audited financial statements.
The accompanying Notes are an integral part of the Consolidated Financial Statements.

3


POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 Nine Months Ended Nine Months Ended
 September 30,September 30,
 2017 2016 20202019
Operating activities    Operating activities  
Net income $165,674
 $146,031
Net income$307,565 $243,551 
Adjustments to reconcile net income to cash provided by operating activities:    
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation 17,947
 15,020
Depreciation20,979 20,648 
Amortization 1,132
 1,288
Amortization975 1,049 
Share-based compensation 9,496
 7,373
Share-based compensation11,095 10,243 
Excess tax benefits from share-based compensation —
 (6,582)
Equity earnings in unconsolidated investments, net (121) (113)Equity earnings in unconsolidated investments, net(248)(210)
Impairment of goodwill and other assetsImpairment of goodwill and other assets6,944 0 
Other 1,074
 3,799
Other1,092 5,334 
Changes in operating assets and liabilities, net of effects of acquisitions:    Changes in operating assets and liabilities, net of effects of acquisitions:  
Receivables (90,204) (71,936)Receivables(135,129)(98,538)
Product inventories 9,057
 23,624
Product inventories99,767 68,827 
Prepaid expenses and other assets (1,523) (1,094)Prepaid expenses and other assets311 1,231 
Accounts payable (27,328) (49,479)Accounts payable3,385 (29,782)
Accrued expenses and other current liabilities 26,816
 75,239
Accrued expenses and other current liabilities72,178 20,900 
Net cash provided by operating activities 112,020
 143,170
Net cash provided by operating activities388,914 243,253 
    
Investing activities    Investing activities  
Acquisition of businesses, net of cash acquired (6,879) (19,314)Acquisition of businesses, net of cash acquired(24,655)(8,913)
Purchase of property and equipment, net of sale proceeds (37,709) (30,388)
Payments to fund credit agreement —
 (3,852)
Collections from credit agreement—
 3,300
Other investments, net 4
 21
Purchases of property and equipment, net of sale proceedsPurchases of property and equipment, net of sale proceeds(16,897)(26,926)
Net cash used in investing activities (44,584) (50,233)Net cash used in investing activities(41,552)(35,839)
    
Financing activities    Financing activities  
Proceeds from revolving line of credit 918,338
 873,854
Proceeds from revolving line of credit749,840 836,534 
Payments on revolving line of credit (857,609) (866,801)Payments on revolving line of credit(909,637)(1,011,430)
Proceeds from asset-backed financing 156,600
 145,000
Proceeds from asset-backed financing261,700 189,000 
Payments on asset-backed financing (97,800) (90,000)Payments on asset-backed financing(266,700)(136,300)
Proceeds from short-term borrowings, long-term debt and other long-term liabilities 25,001
 15,705
Payments on short-term borrowings, long-term debt and other long-term liabilities (17,497) (16,107)
Payments on term facilityPayments on term facility(6,938)0 
Proceeds from short-term borrowings and current portion of long-term debtProceeds from short-term borrowings and current portion of long-term debt13,255 27,633 
Payments on short-term borrowings and current portion of long-term debtPayments on short-term borrowings and current portion of long-term debt(13,291)(24,962)
Payments of deferred financing costsPayments of deferred financing costs(12)0 
Payments of deferred and contingent acquisition consideration (199) —
Payments of deferred and contingent acquisition consideration(281)(311)
Payments of deferred financing costs (909) —
Purchase of redeemable noncontrolling interest (2,573) —
Excess tax benefits from share-based compensation —
 6,582
Proceeds from stock issued under share-based compensation plans 8,647
 10,978
Proceeds from stock issued under share-based compensation plans16,696 17,042 
Payments of cash dividends (43,165) (37,007)Payments of cash dividends(68,599)(61,752)
Purchases of treasury stock (141,580) (117,901)Purchases of treasury stock(76,194)(23,188)
Net cash used in financing activities (52,746) (75,697)Net cash used in financing activities(300,161)(187,734)
Effect of exchange rate changes on cash and cash equivalents (248) (185)Effect of exchange rate changes on cash and cash equivalents(1,035)655 
Change in cash and cash equivalents 14,442
 17,055
Change in cash and cash equivalents46,166 20,335 
Cash and cash equivalents at beginning of period 21,956
 13,237
Cash and cash equivalents at beginning of period28,583 16,358 
Cash and cash equivalents at end of period $36,398
 $30,292
Cash and cash equivalents at end of period$74,749 $36,693 

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

4


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

Common StockAdditional
Paid-In		Retained EarningsAccumulated
Other
Comprehensive
SharesAmountCapital(Deficit)LossTotal
Balance at December 31, 201940,074 $40 $485,239 $(64,740)$(10,359)$410,180 
Net income0 0 0 30,912 0 30,912 
Foreign currency translation0 0 0 0 (5,430)(5,430)
Interest rate swaps, net of the change in taxes of $2,8370 0 0 0 (8,510)(8,510)
Repurchases of common stock, net of retirements(362)0 0 (66,619)0 (66,619)
Share-based compensation0 0 3,654 0 0 3,654 
Issuance of stock under share-based compensation plans219 0 6,358 0 0 6,358 
Declaration of cash dividends0 0 0 (22,147)0 (22,147)
Balance at March 31, 202039,931 40 495,251 (122,594)(24,299)348,398 
Net income0 0 0 157,555 0 157,555 
Foreign currency translation0 0 0 0 2,134 2,134 
Interest rate swaps, net of the change in taxes of $8550 0 0 0 (2,567)(2,567)
Repurchases of common stock, net of retirements(19)0 0 (3,584)0 (3,584)
Share-based compensation0 0 3,567 0 0 3,567 
Issuance of stock under share-based compensation plans130 0 4,453 0 0 4,453 
Declaration of cash dividends0 0 0 (23,165)0 (23,165)
Balance at June 30, 202040,042 40 503,271 8,212 (24,732)486,791 
Net income— — — 119,098 — 119,098 
Foreign currency translation0 0 0 0 2,976 2,976 
Interest rate swaps, net of the change in taxes of $(51)0 0 0 0 154 154 
Repurchases of common stock, net of retirements(20)0 0 (5,990)0 (5,990)
Share-based compensation0 0 3,874 0 0 3,874 
Issuance of shares under share-based compensation plans131 0 5,885 0 0 5,885 
Declaration of cash dividends0 0 0 (23,287)0 (23,287)
Balance at September 30, 202040,153$40 $513,030 $98,033 $(21,602)$589,501 









5


Common StockAdditional
Paid-In		RetainedAccumulated
Other
Comprehensive
 SharesAmountCapitalDeficitLossTotal
Balance at December 31, 201839,506 $40 $453,193 $(218,646)$(10,997)$223,590 
Net income0 0 0 32,637 0 32,637 
Foreign currency translation0 0 0 0 214 214 
Interest rate swaps, net of the change in taxes of $900 0 0 0 (269)(269)
Repurchases of common stock, net of retirements(155)(1)0 (23,096)0 (23,097)
Share-based compensation0 0 3,259 0 0 3,259 
Adoption of ASU 2016-02
— — — (709)— (709)
Issuance of stock under share-based compensation plans328 1 7,070 0 0 7,071 
Declaration of cash dividends0 0 0 (17,819)0 (17,819)
Balance at March 31, 201939,679 40 463,522 (227,633)(11,052)224,877 
Net income0 0 0 131,390 0 131,390 
Foreign currency translation0 0 0 0 1,208 1,208 
Interest rate swaps, net of the change in taxes of $4130 0 0 0 (1,240)(1,240)
Share-based compensation0 0 3,335 0 0 3,335 
Issuance of stock under share-based compensation plans219 0 5,533 0 0 5,533 
Declaration of cash dividends0 0 0 (21,934)0 (21,934)
Balance at June 30, 201939,898 40 472,390 (118,177)(11,084)343,169 
Net income0 0 0 79,525 0 79,525 
Foreign currency translation0 0 0 0 (2,156)(2,156)
Interest rate swaps, net of the change in taxes of $1880 0 0 0 (565)(565)
Repurchases of common stock, net of retirements(1)0 0 (92)0 (92)
Share-based compensation0 0 3,649 0 0 3,649 
Issuance of shares under share-based compensation plans123 0 4,439 0 0 4,439 
Declaration of cash dividends0 0 0 (21,999)0 (21,999)
Balance at September 30, 201940,020$40 $480,478 $(60,743)$(13,805)$405,970 
The accompanying Notes are an integral part of the Consolidated Financial Statements.
6

POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies


Pool Corporation (the Company, which may be referred to as we, us or our) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements. 

Through 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 continue to consolidate PSL, but there will no longer be a separate noncontrolling interest reported on our Consolidated Statements of Income, nor Redeemable noncontrolling interest reported on our Consolidated Balance Sheets. Please see Note 6 - Redeemable Noncontrolling Interest for additional information regarding this transaction.


The interim Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated.


A description of our significant accounting policies is included in our 20162019 Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our 2019 Annual Report.Report on Form 10-K.  The results for our three and nine month periods ended September 30, 20172020 are not necessarily indicative of the expected results for our fiscal year ending December 31, 2017.2020.


Variable Interest EntityNewly Adopted Accounting Pronouncements


On January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related amendments, which are codified into Accounting Standards Codification (ASC) 326, using the cumulative-effect transition method related to our trade receivables.This new standard 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 are 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 adoption of this standard did not have a material impact on our financial position or results of operations, and we do not expect the adoption of this guidance to have a material effect on our results of operations in future periods. See Allowance for Doubtful Accounts within this note for more information.

We adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, for our interim impairment tests performed in the period ended March 31, 2020. This new standard 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 previous guidance). Rather, the measurement of a goodwill impairment charge is based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the previous guidance). The impact of the new standard is dependent on the specific facts and circumstances of individual impairments, if any. The adoption of this guidance did not impact our results of operations, statement of financial position or cash flows.

On January 1, 2020, we adopted 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, on a prospective basis. This new standard 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 adoption of this guidance did not materially impact our results of operations, statement of financial position or cash flows.

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.

7

Upon adoption of ASU 2016-13, we did not recognize an adjustment to the beginning balance of retained earnings as the impact from adoption was not material. Our estimate of future losses is made by management based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices. Our assessment of future losses in the first nine months of 2020 further considered the uncertainty of the impact of the COVID-19 pandemic on forecasted economic trends. At the end of each quarter, we also perform a reserve analysis of all accounts with balances greater than $20,000 that are more than 60 days past due. 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 (in thousands):
Nine Months Ended
September 30,
 20202019
Balance at beginning of period$5,472 $6,182 
Bad debt expense1,667 2,639 
Write-offs, net of recoveries(1,844)(2,642)
Balance at end of period$5,295 $6,179 

Goodwill and Intangibles Impairment

As discussed in Note 1 to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K, 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.

In February 2015,the first quarter of 2020, we entered into a five-year credit agreementdetermined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows. We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values. In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our 5 Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million. We also considered the impact of the COVID-19 pandemic on the expected future operating cash flows of the remainder of our reporting units. Although we do not currently anticipate any long-term impacts for the overall business, we continue to monitor reporting units that we consider more at risk; this includes one reporting unit in Italy with a swimming pool retailer. Under this agreementgoodwill balance of $3.7 million at September 30, 2020, and three reporting units in Quebec, Canada, with an aggregate goodwill balance of $2.6 million at September 30, 2020.

The determination of our reporting units’ goodwill and intangibles fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of changes in market conditions, forecasted future operating results (including sales growth rates and operating margins) and discount rates (including our weighted-average cost of capital).

Income Taxes

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 revolving note,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 on the Consolidated Statements of Income in the period in which stock options are the primary lenderexercised or restrictions on awards lapse. We recorded excess tax benefits of operating funds for this entity. The total lending commitment under the credit agreement is $8.5 million which is fully funded. Asin the third quarter of 2020 compared to $4.5 million in the third quarter of 2019 and $22.6 million in the nine months ended September 30, 2017,2020 compared to $21.1 million in the estimated realizable amount under the credit agreement is recorded within Other assets on our Consolidated Balance Sheets and is collateralized by essentially all of the assets of the business. We have a variable interest in this entity; however, we have no decision-making authority over its activities through voting or other rights. Additionally, we have no obligation to absorb any of its losses, nor do we have the right to receive any residual returns, should either occur. We are not considered the primary beneficiary of this variable interest entity, and therefore we are not required to consolidate this entity’s financial statements.nine months ended September 30, 2019.

8

Retained DeficitEarnings


We account for the retirement of treasury shares as a reduction of retainedRetained earnings (deficit). As of September 30, 2017,2020, the Retained deficitearnings on our Consolidated Balance Sheets 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 $1,234.9 million$1.5 billion and cumulative dividends of $410.9$647.5 million.


Newly AdoptedAccumulated Other Comprehensive Loss

The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
September 30,December 31,
202020192019
Foreign currency translation adjustments$(10,447)$(13,156)$(10,127)
Unrealized losses on interest rate swaps, net of tax(11,155)(649)(232)
Accumulated other comprehensive loss$(21,602)$(13,805)$(10,359)


Recent Accounting Pronouncements Pending Adoption

Effective January 1, 2017,The following table summarizes the recent accounting pronouncements that we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis 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 $7.7 million of excess tax benefits in the first nine months of 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’ equity on our Consolidated Balance Sheets. Additionally, we now present excess tax benefits or deficiencies as operating cash flows versus reclassifying the amount out of operating cash flows and presenting it in financing activities on the Condensed Consolidated Statements of Cash Flows.



Additional amendments from this guidance related to forfeitures and minimum statutory withholding tax requirements had no impact to our financial position, results of operations or cash flows. As permitted, we continue to estimate forfeitures to determine the amount of compensation cost to be recognized each period rather than electing to account for forfeitures as they occur, and we continue to present the value of shares withheld for minimum statutory tax withholding requirements on the Condensed Consolidated Statements of Cash Flows as a financing activity. Another impact 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 nine month period ended September 30, 2017.

Effective 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 electedplan to adopt this guidance on a prospective basis and as such, our prior year presentation has not changed. The adoption of ASU 2015-17 did not have a material impact on our financial position, results of operations and related disclosures.in future periods:

StandardDescriptionEffective DateEffect on Financial Statements and Other Significant Matters
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. Most amendments are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.Annual periods beginning after December 15, 2020We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures. We do not expect that there will be a material impact to the financial statements as a result of adopting this ASU.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made.The provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures.
In January 2017, we adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires that we measure inventory at 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. The adoption of ASU 2015-11 did not have a material impact on our financial position, results of operations and related disclosures.

In January 2017, we adopted ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The adoption of ASU 2015-16 did not have a material impact on our financial position, results of operations and related disclosures.




Note 2 – Earnings Per Share


We calculate basic earnings per share (EPS) by dividing Net income 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 in Note 1, 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 the three and nine months ended September 30, 2017.


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Stock options with exercise prices that are higher than the average market prices of our common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.


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

 Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
Net income$119,098 $79,525 $307,565 $243,551 
Weighted average shares outstanding:  
Basic40,123 39,933 40,073 39,750 
Effect of dilutive securities:  
Stock options and employee stock purchase plan716 932 776 1,061 
Diluted40,839 40,865 40,849 40,811 
Earnings per share:  
Basic$2.97 $1.99 $7.68 $6.13 
Diluted$2.92 $1.95 $7.53 $5.97 
Anti-dilutive stock options excluded from diluted earnings per share computations0 0 0 1 

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Net income $48,783
 $44,421
 $165,674
 $146,031
Net loss attributable to noncontrolling interest —
 113
 294
 309
Net income attributable to Pool Corporation $48,783
 $44,534
 $165,968
 $146,340
         
Weighted average shares outstanding:        
Basic 40,659
 42,020
 41,065
 42,092
Effect of dilutive securities:        
Stock options and employee stock purchase plan 1,548
 1,099
 1,626
 1,109
Diluted 42,207
 43,119
 42,691
 43,201
         
Earnings per share:        
Basic $1.20
 $1.06
 $4.04
 $3.48
Diluted $1.16
 $1.03
 $3.89
 $3.39
         
Anti-dilutive stock options excluded from diluted earnings per share computations 108
 1
 108
 1




Note 3 – Acquisitions


On July 4, 2017, we acquired New Star Holdings Pty. Ltd. (doing business as Newline Pool Products), a swimming pool equipment and supplies distributor with one distribution center in Brisbane, Australia.

On April 28, 2017,In September 2020, we acquired the distribution assets of Lincoln Equipment,Northeastern Swimming Pool Distributors, Inc. (Lincoln Aquatics), a nationalwholesale distributor of swimming pool equipment, chemicals and supplies, to commercialadding 2 locations in Ontario, Canada and institutional1 location in Quebec, Canada.

In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool customers, with twotile and hardscape products, adding 2 locations in California.Texas, 1 location in Nevada and 1 location in Oklahoma.


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.

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.

Subsequent to September 30, 2020, in October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding 3 locations in New Jersey, 3 locations in New York, 2 locations in Texas and 1 location in Florida.

These acquisitions did not have a material impact on our financial position or results of operations.operations, either individually or in the aggregate.


On April 1, 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.
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Note 4 – Fair Value Measurements and Interest Rate Swaps


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

Recurring Fair Value Measurements

The table below presents the estimated fair values of our interest rate swap contracts,contract, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):
 Fair Value at September 30,
20202019
Level 2
Unrealized gains on interest rate swaps$0 $631 
Unrealized losses on interest rate swaps14,828 1,532 
Level 3
Contingent consideration liabilities$869 $745 
  Fair Value at September 30,
  2017 2016
Level 2    
Unrealized gains on interest rate swaps $1,201
 $32
Unrealized losses on interest rate swaps 1,791
 6,174
     
Level 3    
Contingent consideration liabilities $1,924
 $1,626




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 unsecured syndicated senior credit facility (the Credit Facility).variable rate borrowings. 


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) 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. 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.


We recognize any differences between the variable interest rate paymentsin effect and the fixed interest rate settlements fromrates per our swap counterpartiescontracts as an adjustment to interest expense over the life of the swaps. We designated these swaps asIf determined to be effective cash flow hedges, and to the extent effective we record the changes in the estimated fair value of the swaps to Accumulated other comprehensive loss on our Consolidated Balance Sheets.  To the extentIf any of our interest rate swaps arewere determined to be ineffective, we would recognize the changes in the estimated fair value of our swaps in earnings.  

We currently have 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 and extend the hedged period for future interest payments on our Credit Facility. As amended, these swap contracts terminate on November 20, 2019. In the first nine months of 2017, we recognized a benefit of $1.3 million as a result of our determination of ineffectiveness for the period. These amounts were recorded in Interest and other non-operating expenses, net on our Consolidated Statements of Income.


We currently have one interest rate swap contract in place, which became effective on November 20, 2019, and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate to a fixed interest rate on our variable rate borrowings. For this interest rate swap, we have not recognized any gains or losses through income, nor has there been any effect on income from hedge ineffectiveness over the term of the swap contract.


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The following table provides additional details related to each of these amendedthis swap contracts:contract:

DerivativeInception DateEffective DateTermination DateNotional Amount
(in millions)		Fixed Interest Rate
Interest rate swap 1July 6, 2016November 20, 2019November 20, 2020$150.01.1425%

Derivative Amendment Date 
Notional
Amount
(in millions)
 
Fixed
Interest
Rate
Interest rate swap 1 October 1, 2015 $75.0 2.273%
Interest rate swap 2 October 1, 2015 $25.0 2.111%
Interest rate swap 3 October 1, 2015 $50.0 2.111%

Upon amendment ofFor 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 September 30, 2017, the remaining balance of the unrealized losses was $1.9 million and is being amortized over the effective period of the original forward-starting interest rate swap contracts from October 2016 to September 2018. In the first nine months of 2017, we recorded expense of $1.4 million as amortization of the unrealized loss in Interest and other non-operating expenses, net.

For the three interest rate swap contractscontract in effect at September 30, 2017,2020, 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 loss on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts wereThis amount was not material in the three and nine month periodsperiod ended September 30, 2017 and September 30, 2016.2020.


In July 2016 weWe have entered into an additional forward-starting interest rate swap contractcontracts to extend the hedged period for future interest payments on our Credit Facility to its maturity date at that time. Thisvariable rate borrowings. These swap contractcontracts will convert 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. our variable rate borrowings.

The following table provides additional details related to thiseach of our forward-starting interest rate swap contract:contracts:
DerivativeInception DateEffective DateTermination DateNotional
Amount
(in millions)		Fixed
Interest
Rate
Forward-starting interest rate swap 1May 7, 2019November 20, 2020September 29, 2022$75.02.0925%
Forward-starting interest rate swap 2July 25, 2019November 20, 2020September 29, 2022$75.01.5500%
Forward-starting interest rate swap 3February 5, 2020February 26, 2021February 28, 2025$150.01.3800%
Forward-starting interest rate swap 4March 9, 2020September 29, 2022February 26, 2027$150.00.7400%
Forward-starting interest rate swap 5March 9, 2020February 28, 2025February 26, 2027$150.00.8130%
Derivative Inception Date Notional
Amount
(in millions)		 Fixed
Interest
Rate
Forward-starting interest rate swap 1 July 6, 2016 $150.0 1.1425%




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.


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.


Contingent Consideration LiabilitiesNonrecurring Fair Value Measurements


As of September 30, 2017,In addition to our Consolidated Balance Sheets reflected $0.7 million in Accrued expensesassets 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, whichthat we acquired in November 2015, Metro Irrigation Supply Company Ltd. and Newline Pool Products. In determining our original estimates for contingent consideration, which are basedmeasure at fair value on a percentage of gross profit for certain products for The Melton Corporationrecurring basis, our assets and a multiple of gross profit for Metro Irrigation Supply Company Ltd., we applied a linear model usingliabilities are also subject to nonrecurring fair value measurements. Generally, our best estimate of gross profit projections for fiscal years 2016 to 2020. The payout for Newline Pool Products is basedassets are recorded at fair value on a multiplenonrecurring basis as a result 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.impairment charges.


In the first nine monthsquarter of 2017,2020, we paid approximately $0.2recorded impairment charges of $6.9 million, in contingent consideration to The Melton Corporation based on 2016 results. Sincewhich included $2.5 million from a long-term note, as collectability was impacted by the acquisition dates, we have recorded minimal adjustments to our original estimates based on the calculated 2017 payouts relatedCOVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the fiscal year ended December 31, 2016. Adjustments to the fair valuetotal goodwill and intangibles carrying amounts of contingent consideration areour Australian reporting units. See Goodwill and Intangibles Impairment within Note 1 for more information on goodwill and intangibles impairment recognized in earnings in the period in which we determine that the fair value changed. As of September 30, 2017, we have determined that the contingent consideration liability was in a range of acceptable estimates for all applicable fiscal periods.ended March 31, 2020.


Other


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 with our variable interest entity, our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to collectibility (Level 3 inputs). The carrying value of this note receivable, including adjustments, approximates fair value. The carrying value of long-term debt approximates fair value.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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Note 5 – Debt


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

 September 30,
 20202019
Variable rate debt
Short-term borrowings$0 $2,116 
Current portion of long-term debt:
Australian credit facility11,709 9,724 
Short-term borrowings and current portion of long-term debt11,709 11,840 
Long-term portion:  
Revolving credit facility40,876 375,235 
Term facility178,062 0 
Receivables securitization facility110,000 161,200 
Less: financing costs, net713 715 
Long-term debt, net328,225 535,720 
Total debt $339,934 $547,560 
  September 30,
  2017 2016
Variable rate debt    
Short-term borrowings $—
 $—
Current portion of long-term debt:    
Australian credit facility 8,609
 1,298
Short-term borrowings and current portion of long-term debt and other long-term liabilities 8,609
 1,298
     
Long-term portion:    
Revolving credit facility 415,277
 280,068
Receivables securitization facility 142,300
 110,000
Less: financing costs, net 1,613
 1,177
Long-term debt, net 555,964
 388,891
Total debt  $564,573
 $390,189



Revolving Credit Facility

On September 29, 2017, we entered into the Amended and Restated Credit Agreement (the Agreement) among us, as US Borrower, SCP Distributors Canada Inc., as Canadian Borrower, SCP Pool B.V., as Dutch Borrower, Wells Fargo Bank, National Association, as Joint Lead Arranger and Administrative Agent, and certain other joint lead arrangers, syndication agents and lenders. The Agreement amends and restates our existing unsecured syndicated senior credit facility (the Credit Facility) principally in the following ways:

extends the maturity date to September 29, 2022;
increases the borrowing capacity to $750.0 million from $465.0 million; and
provides other changes to interest rates, fees and negative covenants as outlined below.

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 million, to a total of $825.0 million.


Our obligations under the Credit Facility are guaranteed by certain of our subsidiaries. The Credit Facility also contains affirmative and negative covenants and events of default customary for transactions of this type. If we default under the Credit Facility, the lenders may terminate their commitments and may require us to repay all amounts.

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.

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.

Borrowings by the Dutch 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 annualaccounts receivable securitization facility fee ranging from 0.100% to 0.200%, depending on our leverage ratio.

Receivables Securitization Facility

The Receivables 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. 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 third party financial institutions.


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, net on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets.



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 the 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. The facility has a seasonal maximum borrowing capacity of €12.0 million. We are required to pay a commitment fee, which is based on the borrowing capacity schedule. We pay this fee annually, in advance.

Australian Credit Facility

In the second quarter of 2017, PSL entered into a new credit facility, which provides a borrowing capacity of AU$20.0 million, to fund expansion and supplement working capital needs. The facility balance at September 30, 2017 includes borrowings to fund the Newline Pool Products acquisition and the purchase of the noncontrolling interest.



Note 6 – Redeemable Noncontrolling Interest

As discussed in Note 1 - Summary of Significant Accounting Policies, 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 were 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.

The table below presents the changes in Redeemable noncontrolling interest (in thousands):


13
 September 30,
 2017 2016
Redeemable noncontrolling interest, beginning of period$2,287
 $2,665
Redemption value adjustment of noncontrolling interest360
 —
Net loss attributable to noncontrolling interest(294) (309)
Other comprehensive income attributable to noncontrolling interest220
 111
Less: purchase of redeemable noncontrolling interest2,573
 —
Redeemable noncontrolling interest, end of period$—
 $2,467






Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 20162019 Annual Report on Form 10-K.  


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


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 and share repurchases, and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.  You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.


No assurance can be given that the expected results in any forward-looking statementsstatement will be achieved, and actual results may differ materially due to one or more factors, including impacts on our business from the COVID-19 pandemic, the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 20162019 Annual Report on Form 10-K.10-K and in Part II, Item 1A. of this Form 10-Q.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.


OVERVIEW


Financial ResultsImpact of COVID-19 Pandemic


On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. Most of our North American operations are and have been continuously open for business as we are designated as an essential business in almost all of our markets. In Europe, our operations closed for a short period during the first half of 2020 in France, Spain and Italy, in order to comply with local authorities’ orders. Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water. We also supply products used in the prevention of runoff, flood, fire and other natural disasters. These products are essential to the health and safety of the general public. As a result, our supply chain remains intact, with our customers continuing to meet end-user needs.

The health, safety and security of our employees has been, and remains, one of our highest priorities. We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC). We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices. In rare instances, we have had to close facilities in whole or in part as a result of government regulations, as well as positive or presumed positive results from COVID-19 testing. The direct impact of any closures to date has not been material to our operations.

14

Beginning in the middle of March, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets. However, as stay-at-home restrictions eased in late April through early May, our business performed very wellnot only rebounded, but accelerated, resulting in net sales of $1.28 billion for the second quarter of 2020. In the third quarter of 2017, despite severe weather2020, we realized net sales of $1.14 billion, as our sales continued to benefit from elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic. As families spend more time at home, our sales have benefited from greater swimming pool demand and usage, resulting in Florida, Texas, Puerto Ricobroad sales gains across our product categories and Mexicogeographies. While the short-term impact of this trend has had a positive impact on our business, it is unclear what the long-term impact will be. In addition, governmental restrictions have had a material impact on some of our customers, limiting their ability to operate in certain geographies from Hurricanes Irma, Harvey, Maria and Katia and despite the devastating earthquake in Mexico.mid-March into mid-May. While these events are disruptive in the short term, we believe they will notrestrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our operating resultsresults.

Our balance sheet remains strong with low leverage and sufficient access to additional capital. Given the seasonality of our business, our warehouses were stocked with inventory in preparation for the year.upcoming peak season prior to the implementation of most stay-at-home orders. As a result, the limited vendor supply interruptions experienced to date have had a minimal impact on our business. Supply disruptions have largely been limited to categories with the greatest demand, including heat-related equipment and above-ground swimming pools. We continue to work closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities.


Net sales increased 8%We began taking steps in April to $743.4reduce both capital expenditures and operating costs. Specifically, we reduced expenses for labor, fuel, utilities, advertising, meetings, travel and entertainment. As our business outlook and market trends have improved since the implementation of these cost-saving measures, we continue to assess our discretionary spending. We continue to reevaluate previously deferred capital expenditures and currently expect capital expenditures in 2020 to approximate 65% of 2019 capital expenditures and range from $20.0 million forto $25.0 million.

The impact of the ongoing pandemic on our business and financial results will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken (or may be taken in the future) in response to the pandemic and changes in customer and supplier behavior in response to the pandemic.

Financial Results

In the third quarter of 20172020, net sales increased 27% to $1.14 billion compared to $691.4$898.5 million in the third quarter of 2016.2019. Our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic, as working from home became routine and families created and enjoyed safe social and entertainment alternatives in their own backyards. We realized base businessbroad sales growth of 6%. We had one less selling daygains across many product categories, as maintenance, replacement, refurbishment and construction activities across most geographies were strong.
Gross profit increased 27% to $328.7 million in the third quarter of 2017 compared to2020 from $257.9 million in the same period last year, which we believe negatively impacted base business sales growth by approximately 1%. Continued increasesof 2019. Gross margin increased 20 basis points to 28.9% in in swimming pool repair and remodel activities, including major pool refurbishment and replacement of key pool equipment, led our sales growth. The recent weather events negatively impacted our third quarter 2017 net sales by an estimated $4.0 million.
Gross profit increased 9% for the third quarter of 20172020 compared to the same period28.7% in 2016. Base business gross profit improved 7% over the third quarter of last year. Gross profit as a percentage of net sales (gross margin)2019, with increased approximately 20 basis points to 29.1% compared to the third quarter of 2016, reflecting product mix and benefits from sourcing initiatives.purchase volumes driving improvements in supply chain management.
Selling and administrative expenses (operating expenses) increased 7% compared18% to $180.5 million in the third quarter of 2016, with base business2020 compared to $153.4 million in the third quarter of 2019, primarily reflecting a $20.1 million increase in performance-based compensation. Excluding performance-based compensation in both periods, operating expenses upincreased 5% over the comparable 2016 period.due to growth-driven freight expenses and greater facility-related costs. As a percentage of net sales, base business operating expenses declineddecreased to 17.9% for15.8% in the third quarter versus 18.1% lastof 2020 compared to 17.1% in the same period of 2019, as we continued to realize benefits from discretionary spending controls implemented earlier in the year.
Operating income forin the third quarter of 2020 increased 10%42% to $148.2 million compared to $104.5 million in the same period in 2016.2019. Operating income as a percentage of net sales (operating margin)margin was 11.0% for13.0% in the third quarter of 20172020 compared to 10.7% for11.6% in the third quarter of 2016.2019.
During the first quarter of 2017, we adoptedWe recorded an $8.5 million, or $0.21 per diluted share, tax benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis. This adoption resulted in a benefit recorded in our Provision for income taxes of $0.3 million for the three monthsquarter ended September 30, 2017 and $7.72020, compared to a tax benefit of $4.5 million, for the nine months ended September 30, 2017, which positively impacted our net income and earningsor $0.11 per diluted share, but was partially offset by a required increase of approximately 500,000 and 550,000 diluted weighted average shares outstanding, respectively, used to calculate our diluted earnings per share. The total first and second quarter benefit to our diluted earnings per share from the adoption of this new accounting pronouncement was $0.14, and there was no impactrealized in the third quartersame period of 2017.


2019.
Net income attributableincreased 50% to Pool Corporation was $48.8$119.1 million in the third quarter of 20172020 compared to $44.5$79.5 million forin the third quarter of 2016.2019. Earnings per share increased 50% to a record $1.16$2.92 per diluted share forin the three months ended September 30, 2017 versus $1.03third quarter of 2020 compared to $1.95 in the same period of 2019. Excluding the impact from ASU 2016-09 in both periods, earnings per diluted share forincreased 47% to $2.71 in the same periodthird quarter of 2020 compared to $1.84 in 2016.the third quarter of 2019.
15

References to product line and product category data throughout this Form 10-Qreport generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.

Financial Position and Liquidity


TotalAs of September 30, 2020, total net receivables, including pledged receivables, increased 13% from19% compared to September 30, 2016, including a 2% increase from acquisitions.2019, driven by our September sales growth and partially offset by improved collections. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 29.827.6 days at September 30, 2017, an improvement from 30.32020 and 29.0 days at September 30, 2016, reflecting the effectiveness of our collection efforts.2019. Our allowance for doubtful accounts balance was $4.1$5.3 million at September 30, 20172020 and $3.7$6.2 million at September 30, 2016.2019.


Net inventory levels grew 6%decreased 1% compared to levels at September 30, 2016.2019, reflecting the strong pace of sales in the third quarter of 2020. The inventory reserve was $7.8$11.4 million at September 30, 20172020 and $8.1$9.9 million at September 30, 2016.2019. Our inventory turns, as calculated on a trailing four quarters basis, were 3.53.7 times at both September 30, 20172020 and 3.2 times at September 30, 2016.2019.


Accrued expenses and other current liabilities increased 79% compared to September 30, 2019, primarily reflecting increases in accrued performance-based compensation and unrealized losses on interest rate swaps.

Total debt outstanding at September 30, 20172020 was $564.6$339.9 million, an increase of $174.4 million, or 45%,down 38% compared to total debt at September 30, 2016, primarily because of share repurchases of $199.0 million2019, as we have utilized our operating cash flows to decrease debt balances. We have used debt proceeds over the lastpast 12 months as well as debt incurredprimarily to fund business drivenbusiness-driven working capital growth.growth, acquisitions, payments of cash dividends and share repurchases.


Current Trends and Outlook


For a detailed discussion of trends through 2016,2019, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Part II, Item 7 of our 20162019 Annual Report on Form 10-K.  


In conjunction with the release ofBased on our first quarter 2017 results we updated our 2017 earnings guidance from an initial range of $3.80 to $4.00 per diluted share to a range of $4.12 to $4.32 per diluted share, which reflected both an estimated benefit of $0.30 due to the adoption of ASU 2016-09date and $0.02 from better than expected first quarter 2017 operating results. We maintained this guidance following the release of our second quarter 2017 earnings results, which were largely in line with our expectations. Given changes in employee stock option exercise patterns in the third quarter of 2017, we updated our expectations for the remainder of 2017the year, we expect 2020 diluted EPS of $8.05 to include only$8.35, including the $0.14impact of year-to-date tax benefit from ASU 2016-09 realizedbenefits of $0.55 and the $0.15 impact of non-cash impairments recorded in the first quarter of 2020. Our previous 2020 earnings guidance range disclosed in our Second Quarter 2020 Quarterly Report on Form 10-Q was $6.90 to $7.30, including year-to-date tax benefits of $0.34 and second quartersthe $0.15 impact of 2017.non-cash impairments. Our operating results were in line with2020 earnings guidance range assumes average weather conditions and no adverse impacts from a resurgence of COVID-19 and related government responses.

We expect net sales growth for 2020 to approximate 18% to 20%. The majority of our expectations,business is driven by recurring revenue streams from the installed base of pools, and we have narrowedbelieve that underlying demand for most discretionary products, including those serving the renovation and construction markets, remains strong. In addition, we believe that our earnings guidancesales for the fourth quarter of 2020 will continue to a range of $4.01 to $4.11 per diluted share. The estimated impact related to ASU 2016-09 isbenefit from delayed projects, subject to several assumptions which can vary significantly,our customers’ building capacity, including our estimated share pricethe availability of labor and favorable weather. At the same time, the impact of new stay-at-home orders or government mandates, as well as unfavorable economic conditions resulting from the COVID-19 pandemic and the period thatresurgence of COVID-19 cases in some of our employees will exercise sharesmarkets, could adversely impact our business, including an easing of outstanding vested options.demand for products dependent on discretionary spending.


We project base business sales growth of 6% to 7%expect gross margin for the full year and expectof 2020 to decline modestly compared to gross margin to be similar to 2016, including an expectedfor the full year of 2019 given the decline in gross margin inthrough the first nine months of 2020. We expect gross margin for the fourth quarter of 2017 due2020 to anticipated product mix changes following major third quarter weather events as well as an unfavorable comparisonbe relatively flat compared to the fourth quarter 2016 results, which benefited by 20 basis points from an increase in the vendor incentive accrual at year-end. For the year, we have incurred growth-driven expense increases related to labor, facilities expansion and delivery costs, although the growth in these types of operating expenses has moderated as we have moved throughout the year. 2019.

We expect base business operating expenses as a percentagefor the remainder of netthe year to benefit from actions taken by management in the second quarter of 2020 to reduce costs and to vary ratably with changes in sales for 2017 to decline between 20 and 40 basis points as compared to 2016, resulting in a 20 to 40 basis points increase in base business operating income as a percentage of net sales.

Given our $174.4 million increase in debt as of September 30, 2017 overperformance. For the prior year and the increase in 30-Day LIBOR of approximately 70 basis points over last year, we expect our Interest and other non-operatingoperating expenses net for the full year 2017 to increase by approximately $1.5 million10% to $2.0 million over 2016, depending on fourth quarter borrowings12% compared to fund future share repurchases.2019, primarily due to increases in performance-based compensation.



16


Excluding the impact from the adoption of ASU 2016-09, weWe expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2020 will beapproximate 25.5%, which is consistent with 2016.2019. Our effective tax rate is dependent uponon our results of operations and may change if actual results are differentdiffer materially from our current expectations, particularly any significant changes in our geographic mix. Due to the adoption of the new accounting standard,ASU 2016-09, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. Based on our comparison of our deferredWe recorded a $22.6 million, or $0.55 per diluted share, tax assetsbenefit from ASU 2016-09 for share-based compensation to the current intrinsic value of the underlying awards, we expect tonine months ended September 30, 2020. We may recognize material incomeadditional tax benefits in periods when these transactions occur. The impact related to ASU 2016-09 is subject to several variables, includingstock option exercises in 2020 from grants that expire in years after 2020. We have not included any expected benefits in our share price and the period in which our employees will exercise sharesguidance beyond what we have recognized as of outstanding vested options.September 30, 2020.

We expect cash provided by operations will exceedremain strong in comparison to net income for the 20172020 fiscal year. We anticipate that we mayexpect to continue to use approximately $140.0 million to $160.0 million in cash to fund opportunistic share repurchases over the next year. We also expect to use cash for the payment of cash dividends as and when declared by our Board of Directors (the Board).

The following summarizes our current expectations for 2021:

•We expect sales growth in 2017.2021 to be impacted by the following factors and assumptions:

◦normal weather patterns;
◦continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic;

◦a benefit from delayed projects depending on our customers’ building capacity, including the availability of labor, and weather;
◦estimated 2% growth in the installed base of pools;
◦estimated 4% growth from acquisitions completed throughout 2020; and
◦inflationary product cost increases of approximately 2% to 3% (compared to our historical average of 1% to 2%).

•We expect performance-based compensation for the full year of 2021 to normalize and decrease by $15.0 million to $20.0 million compared to the full year of 2020.


RESULTS OF OPERATIONS

As of September 30, 2017,2020, we conducted operations through 346381 sales centers in North America, Europe South America and Australia. For the nine months ended September 30, 2020, approximately 94% of our net sales were from our operations in North America.


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

Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
Net sales100.0 %100.0 %100.0 %100.0 %
Cost of sales71.1 71.3 71.2 70.9 
Gross profit28.9 28.7 28.8 29.1 
Selling and administrative expenses15.8 17.1 16.0 17.1 
Impairment of goodwill and other assets— — 0.2 — 
Operating income13.0 11.6 12.6 12.1 
Interest and other non-operating expenses, net0.2 0.6 0.3 0.7 
Income before income taxes and equity earnings12.8 %11.0 %12.3 %11.3 %
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.9
 71.1
 71.0
 71.1
Gross profit 29.1
 28.9
 29.0
 28.9
Operating expenses 18.1
 18.1
 17.2
 17.3
Operating income 11.0
 10.7
 11.7
 11.6
Interest and other non-operating expenses, net 0.5
 0.4
 0.5
 0.5
Income before income taxes and equity earnings 10.5% 10.3% 11.2% 11.1%


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


We have included the results of operations from the acquisitions in 20172020 and 20162019 in our consolidated results since the acquisition dates.


17




Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited)Base BusinessExcludedTotal
(in thousands)Three Months EndedThree Months EndedThree Months Ended
 September 30,September 30,September 30,
 202020192020201920202019
Net sales$1,133,608 $895,489 $5,621 $3,011 $1,139,229 $898,500 
Gross profit326,692 257,525 2,006 406 328,698 257,931 
Gross margin28.8 %28.8 %35.7 %13.5 %28.9 %28.7 %
Operating expenses178,773 152,630 1,692 761 180,465 153,391 
Expenses as a % of net sales15.8 %17.0 %30.1 %25.3 %15.8 %17.1 %
Operating income (loss)147,919 104,895 314 (355)148,233 104,540 
Operating margin13.0 %11.7 %5.6 %(11.8)%13.0 %11.6 %
(Unaudited) Base Business Excluded Total
(in thousands) Three Months Ended Three Months Ended Three Months Ended
  September 30, September 30, September 30,
  2017 2016 2017 2016 2017 2016
Net sales $734,175
 $691,204
 $9,226
 $225
 $743,401
 $691,429
             
Gross profit 213,788
 199,455
 2,818
 96
 216,606
 199,551
Gross margin 29.1% 28.9% 30.5 % 42.7 % 29.1% 28.9%
             
Operating expenses 131,066
 125,225
 3,612
 160
 134,678
 125,385
Expenses as a % of net sales 17.9% 18.1% 39.2 % 71.1 % 18.1% 18.1%
             
Operating income (loss) 82,722
 74,230
 (794) (64) 81,928
 74,166
Operating margin 11.3% 10.7% (8.6)% (28.4)% 11.0% 10.7%

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


Acquired

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
Northeastern Swimming Pool Distributors, Inc. (1)
September 20203September 2020
Master Tile Network LLC (1)
February 20204July - September 2020


Acquired

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
New Star Holdings Pty. Ltd.July 20171July - September 2017
Lincoln Aquatics (1)
April 20172July - September 2017

(1)
We acquired certain distribution assets of this company.


(1)We acquired certain distribution assets of this company.

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


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


The table below summarizes the changes in our sales center count during the first nine months of 2017:2020:


December 31, 20162019344373 
Acquired locations37 
New locationlocations13 
ClosedClosed/consolidated locations(2(2))
September 30, 20172020346381 



18



Net Sales
 Three Months Ended 
September 30,
(in millions)20202019Change
Net sales$1,139.2 $898.5 $240.7 27%
  Three Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Net sales $743.4
 $691.4
 $52.0
 8%


Net sales and base business net sales increased 8%27% in the third quarter of 20172020 compared to the third quarter of 2016, with base business2019. Our sales up 6%benefited from continued elevated demand for the period. Severe weather events during the third quarter of this year, particularly Hurricanes Irma and Harvey, were the most disruptive impact to our sales growth. Sales in Texas largely recoveredresidential pool products, driven by home-centric trends influenced by the end of the quarter, but salesCOVID-19 pandemic, as working from home became routine and families created and enjoyed safe social and entertainment alternatives in Florida remain behind the growth levels experienced prior to Hurricane Irma. We estimate these recent weather events negatively impacted net sales by approximately $4.0 million. Our seasonal markets generated sales growth of 6% during the quarter.their own backyards.


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


continued consumer investments in enhancing outdoor living spaces,•strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as equipment, building materials and equipmentabove-ground pools and spas (see discussion below);
•increased demand for residential swimming pool maintenance supplies due to increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);
•market share gains;gains, including those in building materials (see discussion below); and
pool and spa chemical sales, our largest product category at 14% of total net sales for the quarter, increased 2% over the third quarter of 2016 under less attractive weather conditions in 2017 and excluding the recent Lincoln Aquatics acquisition; and
•inflationary product cost increases (estimated at closeof approximately 1% to 1%)2%.

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

one less selling day in the third quarter of 2017 compared to the same period last year, affecting net sales growth approximately 1%; and
recent weather events (described above).


We believe that higher sales growth rates for certain product offerings, such as equipment, building materials and equipment,above-ground pools and spas evidence increased spending in traditionally discretionary areas, includingsuch as pool construction, and pool remodeling as well asand equipment upgrades. In the third quarter of 2017, the2020, sales growth rate for equipment, such aswhich includes swimming pool heaters, pumps, lights and filters, collectively, was similarincreased 36% compared to the 8% growth ratesame period last year. Equipment collectively represented approximately 28% of net sales for total netthe period. Sales of building materials, including sales from recently acquired Master Tile locations, grew 29% compared to the third quarter of 2016. This increase reflects both the ongoing recovery of replacement activity2019 and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, representrepresented approximately 10%11% of net sales forin the third quarter of 20172020. Sales of above-ground pools and grew by 9%spas increased 60% in the third quarter of 2020 compared to the third quarter of 2016.2019 and represented approximately 2% of net sales for the period.


Sales to customers who service large commercial installations and specialty retailers that sell swimming pool installations such as hotels, universities and community recreational facilitiessupplies are included in the appropriate existing product categories, and growth or decline in this area isthese areas are reflected in the numbers above. These salesSales to retail customers increased 28% in the third quarter of 2020 compared to the third quarter of 2019 and represented just over 4%approximately 14% of our consolidated net sales for the third quarter of 2017 and increased 12%2020. Sales to commercial customers declined 10% in the third quarter of 2020 compared to the third quarter of 2016, excluding2019, driven by COVID-19 related closures and the recent acquisition of Lincoln Aquatics. With Lincoln Aquatics,decline in both business and leisure travel. Sales to commercial sales representcustomers represented approximately 5%3% of our consolidated net sales and this acquisition furthers our efforts to increase not only our focus on the commercial market, but also the resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.

Gross Profit
  Three Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Gross profit $216.6
 $199.6
 $17.0
 9%
Gross margin 29.1% 28.9%    

Gross margin for the third quarter of 20172020.

Gross Profit
 Three Months Ended 
September 30,
(in millions)20202019Change
Gross profit$328.7 $257.9 $70.8 27%
Gross margin28.9 %28.7 %  

Gross margin increased approximately 20 basis points to 28.9% in the third quarter of 2020 compared to 28.7% in the third quarter of 2019, with increased purchase volumes driving improvements in supply chain management.

19

Operating Expenses
 Three Months Ended 
September 30,
(in millions)20202019Change
Selling and administrative expenses$180.5 $153.4 $27.1 18%
Operating expenses as a % of net sales15.8 %17.1 %  

Operating expenses increased 18% in the third quarter of 2020 compared to the third quarter of 2016. This2019, reflecting an increase primarily reflects product mix and benefits from sourcing initiatives.



Operating Expenses
  Three Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Operating expenses $134.7
 $125.4
 $9.3
 7%
Operating expenses as a % of net sales 18.1% 18.1%    

Operating expenses increased 7%in performance-based compensation of $20.1 million in the third quarter of 2017 compared to the third quarter of 2016, with base business2020. Excluding performance-based compensation in both periods, operating expenses upincreased 5% compareddue to the same period last year. Increased growth-driven labor and freight expenses as well as higher performance-based and equity-based compensation costs comprised the majority of our operating expense growth. As a percentage of net sales, base business operating expenses declined to 17.9% for the third quarter versus 18.1% last year.greater facility-related costs.


Interest and Other Non-operatingNon-Operating Expenses, Net


Interest and other non-operating expenses, net increased $1.0for the third quarter of 2020 decreased $3.6 million compared to the third quarter of 2016, primarily due to higher2019. The decrease reflects lower average debt levels and lower average interest rates on our debt and an increase in borrowings.between periods. Our weighted average effective interest rate increaseddecreased to 2.7%1.9% for the third quarter of 20172020 from 2.0%3.4% for the third quarter of 20162019 on higherlower average outstanding debt of $535.5$331.5 million versus $426.7$568.3 million for the respective periods.


Income Taxes


Our effective income tax rate was 37.4%18.7% for the three months ended September 30, 2017 and 37.7%2020 compared to 19.8% for the three months ended September 30, 2016.2019. We recorded an $8.5 million tax benefit from ASU 2016-09 in the quarter ended September 30, 2020 compared to a tax benefit of $4.5 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 24.5% for the third quarter of 2020 and 24.3% for the third quarter of 2019. Our third quarter effective income tax rate is typically lower compared to other quarters primarily due to the timing of our accounting for uncertain tax positions, including the expiration of statutes of limitations. The decline also reflects a $0.3 million tax benefit recorded in our provision for income taxes from the adoption of ASU 2016-09.


Net Income and Earnings Per Share


Net income attributableincreased 50% to Pool Corporation increased 10% to $48.8$119.1 million in the third quarter of 20172020 compared to the third quarter of 2016.2019. Earnings per diluted share increased 50% to $1.16 for$2.92 in the third quarter of 20172020 versus $1.03$1.95 per diluted share for the comparable period in 2016.2019 period. The adoption ofbenefit from ASU 2016-09 did not have an impact ourincreased diluted earnings per diluted share by $0.21 in the third quarter of 2017.2020 and $0.11 in the third quarter of 2019. Excluding tax benefits in both periods, earnings per diluted share increased 47% to $2.71 in the third quarter of 2020 compared to $1.84 in the third quarter of 2019.



20



Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
(Unaudited)Base BusinessExcludedTotal
(in thousands)Nine Months EndedNine Months EndedNine Months Ended
 September 30,September 30,September 30,
 202020192020201920202019
Net sales$3,078,463 $2,601,801 $18,899 $15,482 $3,097,362 $2,617,283 
Gross profit885,002 759,858 6,805 3,017 891,807 762,875 
Gross margin28.7 %29.2 %36.0 %19.5 %28.8 %29.1 %
Operating expenses (1)
495,710 443,107 6,420 4,320 502,130 447,427 
Expenses as a % of net sales16.1 %17.0 %34.0 %27.9 %16.2 %17.1 %
Operating income (loss) (1)
389,292 316,751 385 (1,303)389,677 315,448 
Operating margin12.6 %12.2 %2.0 %(8.4)%12.6 %12.1 %
(Unaudited) Base Business Excluded Total
(in thousands) Nine Months Ended Nine Months Ended Nine Months Ended
  September 30, September 30, September 30,
  2017 2016 2017 2016 2017 2016
Net sales $2,246,446
 $2,116,393
 $31,559
 $9,175
 $2,278,005
 $2,125,568
             
Gross profit 650,419
 610,454
 9,472
 2,856
 659,891
 613,310
Gross margin 29.0% 28.8% 30.0% 31.1% 29.0% 28.9%
             
Operating expenses 383,636
 365,287
 9,143
 1,907
 392,779
 367,194
Expenses as a % of net sales 17.1% 17.3% 29.0% 20.8% 17.2% 17.3%
             
Operating income 266,783
 245,167
 329
 949
 267,112
 246,116
Operating margin 11.9% 11.6% 1.0% 10.3% 11.7% 11.6%

(1)Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.

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


Acquired

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
Northeastern Swimming Pool Distributors, Inc. (1)
September 20203September 2020
Master Tile Network LLC (1)
February 20204February - September 2020
W.W. Adcock, Inc. (1)
January 20194January - March 2020 and
January - March 2019
Turf & Garden, Inc. (1)
November 20184January 2020 and
January 2019


Acquired

Acquisition
Date
Net
Sales Centers
Acquired

Periods
Excluded
New Star Holdings Pty. Ltd.July 20171July - September 2017
Lincoln Aquatics (1)
April 20172May - September 2017
Metro Irrigation Supply Company Ltd. (1)
April 20168
January - June 2017 and
April - June 2016
The Melton Corporation (1)
November 20152
January 2017 and
January 2016
Seaboard Industries, Inc. (1)
October 20153
January 2017 and
January 2016

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


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

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2016,2019, please refer to the discussion under the heading Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 2016.2019.



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Net Sales
 Nine Months Ended 
September 30,
(in millions)20202019Change
Net sales$3,097.4 $2,617.3 $480.1 18%
  Nine Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Net sales $2,278.0
 $2,125.6
 $152.4
 7%


Net sales and base business net sales for the first nine months of 20172020 increased 7%18% compared to the same period last year,year. During the first quarter of 2020, sales benefited from earlier pool openings, as mild weather combined with muchschool closures drove greater early-season residential pool usage. As stay-at-home restrictions eased in late April through early May, families continued to search for safe, at-home leisure activities, resulting in broad sales gains across our product categories and geographies. In the third quarter of this growth resulting2020, our sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the 6% improvementCOVID-19 pandemic. Sales were also favorably impacted approximately 1% by an additional selling day in base business sales.the first nine months of 2020.


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


continued improvement•strong demand for discretionary products, as evidenced by improvements in consumer discretionary expenditures, including market recovery in remodelingsales growth rates for product offerings such as equipment, building materials and replacement activityabove-ground pools and spas (see discussion below);
•increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);
•market share growth, particularlygains, including those in building materials and commercial product categories;(see discussion below);
pool and spa chemical sales, our largest product category at 13% of total net sales for the nine months ended September 30, 2017, increased 3% compared to the first nine months of 2016, excluding the recent Lincoln Aquatics acquisition; and
•inflationary (estimated at close to 1%) product cost increases.increases of approximately 1% to 2%.


We believe that sales growth rates for certain product offerings, such as equipment, building materials and equipment,above-ground pools and spas evidence increased spending in traditionally discretionary areas, includingsuch as pool construction, pool remodeling as well asand equipment upgrades. In the first nine months of 2017, the2020, sales growth rate for equipment, such aswhich includes swimming pool heaters, pumps, lights and filters, collectively, was similar to the 7% growth rate for total net salesincreased approximately 26% compared to the same period in 2016. This increase reflects both the ongoing recovery of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent approximately 11%last year. Equipment collectively represented 28% of net sales forin the first nine months of 2017 and2020. Sales of building materials, including sales from recently acquired Master Tile locations, grew by 12%18% compared to the first nine months of 2016.2019 and represented approximately 12% of net sales in the first nine months of 2020. Sales of above-ground pools and spas increased 53% in the first nine months of 2020 and represented approximately 2% of net sales in the first nine months of 2020.


Sales to customers who service large commercial installations such as hotels, universities and community recreational facilitiesspecialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth or decline in this area isthese areas are reflected in the numbers above. TheseIn the first nine months of 2020, sales to retail customers increased 22% and represented approximately 14% of our consolidated net sales. Sales to commercial customers declined 10% in the first nine months of 2020, driven by COVID-19 related closures and the decline in both business and leisure travel. Sales to commercial customers represented approximately 4% of our consolidated net sales forin the first nine months of 2017 and increased 12%2020.

Gross Profit
 Nine Months Ended 
September 30,
(in millions)20202019Change
Gross profit$891.8 $762.9 $128.9 17%
Gross margin28.8 %29.1 %  

Gross margin declined 30 basis points to 28.8% compared to 29.1% in the same period in 2016, excluding the recent acquisitionlast year, primarily due to sales of Lincoln Aquatics.

Gross Profit
  Nine Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Gross profit $659.9
 $613.3
 $46.6
 8%
Gross margin 29.0% 28.9%    

Grosslower margin, forbig-ticket items, such as in-ground and above-ground pools and pool equipment, which comprised a larger portion of our product mix in the nine months ended September 30, 2017 was in line with gross margin for the nine months ended September 30, 2016.



Operating Expenses
  Nine Months Ended  
  September 30,  
(in millions) 2017 2016 Change
Operating expenses $392.8
 $367.2
 $25.6
 7%
Operating expenses as a % of net sales 17.2% 17.3%    

For2020 compared to the first nine months of 2017,2019.

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Operating Expenses
 Nine Months Ended 
September 30,
(in millions)20202019Change
Selling and administrative expenses$495.2 $447.4 $47.8 11%
Impairment of goodwill and other assets6.9 — 6.9 100%
Operating expenses as a % of net sales16.2 %17.1 %  

Operating expenses for the nine months endedSeptember 30, 2020 increased 12% compared to the first nine months of 2019. In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic, and non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units. Excluding impairment charges, operating expenses were up 7% over the same period last year, with base business operating expenses up 5%. The11%, reflecting a $32.1 million increase in base business operating expenses was primarily dueperformance-based compensation, in addition to higher growth-driven labor and freight expenses as well asand greater employee-related health insurance costs, equity-based compensation, and technology spending as we continue to invest in our business. Operating expenses as a percentage of net sales was consistent for the first nine months of 2017 and 2016 and improved by 20 basis points on a base business basis.facility-related costs.


Interest and Other Non-operatingNon-Operating Expenses, Net


Interest and other non-operating expenses, net for the first nine months of 2017 increased $1.72020 decreased $9.2 million compared to the same period last year, primarily due to higheryear. The decrease reflects lower average debt levels and lower average interest rates on our debt and an increase in borrowings.between periods. Our weighted average effective interest rate increaseddecreased to 2.6%2.2% for the first nine months of 20172020 from 2.0%3.5% for the same period of 20162019 on higher average outstanding debt of $501.0$439.4 million versus $437.3$631.1 million for the respective periods.


Income Taxes


Our effective income tax rate was 35.2%19.2% for the nine months ended September 30, 20172020 compared to 38.2%18.0% for the nine months ended September 30, 2016. The decline2019. We recorded a $22.6 million, or $0.55 per diluted share, tax benefit from ASU 2016-09 in the nine months ended September 30, 2020compared to a $21.1 million, or $0.52 per diluted share, tax benefit in the same period of 2019. Excluding the benefits from ASU 2016-09, our effective income tax rate is primarily due towas 25.2% for the $7.7 million tax benefit recorded in our provisionnine months ended September 30, 2020 and 25.1% for income taxes, which reflects the impact of the adoption of ASU 2016-09.nine months ended September 30, 2019.


Net Income and Earnings Per Share


Net income increased 26% to $307.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Earnings per diluted share increased to $7.53 for the nine months ended September 30, 2020 versus $5.97 per diluted share for the nine months ended September 30, 2019. Adjusted net income for the first nine months of 2017, including a favorable $0.142020, excluding the $6.3 million, or $0.15 per diluted share, impact fromof non-cash impairments, net of tax, increased 29% to $313.9 million. Excluding the adoptionimpact of non-cash impairments, net of tax, and tax benefits from ASU 2016-09 in both periods, adjusted diluted EPS increased 31% to $3.89 per diluted share on Net income attributable to Pool Corporation of $166.0 million,$7.13 for the nine months ended September 30, 2020 compared to $3.39 per$5.45 for the nine months ended September 30, 2019. See the reconciliation of GAAP to non-GAAP measures below.


23

Reconciliation of Non-GAAP Financial Measures

Adjusted Income Statement Information
We have included adjusted net income and adjusted diluted share on NetEPS, which are non-GAAP financial measures, as supplemental disclosures because we believe these measures are useful to investors and others in assessing our year-over-year operating performance. We believe these measures should be considered in addition to, not as a substitute for, net income attributable to Pool Corporation of $146.3 millionand diluted EPS presented in accordance with GAAP, respectively, and in the comparable 2016 period.context of our other disclosures included within this Form 10-Q. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.


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


(Unaudited)Nine Months Ended
(in thousands)September 30,
2020
Net income$307,565
Impairment of goodwill and other assets6,944
Tax impact on impairment of long-term note (1)
(654)
Adjusted net income$313,855

(1)As described in our First Quarter 2020 Quarterly Report on Form 10-Q, our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.


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

(Unaudited)Nine Months Ended
September 30,
20202019
Diluted EPS$7.53 $5.97 
After-tax non-cash impairment charges0.15 — 
Adjusted diluted EPS excluding after-tax non-cash impairment charges7.68 5.97 
Tax benefit(0.55)(0.52)
Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit$7.13 $5.45 

24

Seasonality and Quarterly Fluctuations


Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and irrigation and landscape maintenanceinstallations and installation.maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2016,2019, we generated approximately 63% of our net sales and 85%81% of our operating income in the second and third quarters of the year.


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


The following table presents certain unaudited quarterly data for the first, second and third quarters of 2017,2020, the four quarters of 20162019 and the fourth quarter of 2015.2018.  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
(in thousands)202020192018
 ThirdSecondFirstFourthThirdSecondFirstFourth
Statement of Income Data
Net sales$1,139,229 $1,280,846 $677,288 $582,234 $898,500 $1,121,328 $597,456 $543,082 
Gross profit328,698 373,481 189,629 162,050 257,931 330,314 174,631 160,442 
Operating income148,233 205,857 35,588 25,798 104,540 172,523 38,386 25,970 
Net income119,098 157,555 30,912 18,024 79,525 131,390 32,637 16,811 
Balance Sheet Data
Total receivables, net$366,412 $453,405 $345,915 $226,539 $307,798 $417,126 $313,127 $207,801 
Product inventories, net612,824 628,418 858,190 702,274 616,217 694,447 815,742 672,579 
Accounts payable268,412 346,272 517,620 261,963 214,309 342,335 472,487 237,835 
Total debt339,934 438,804 586,050 511,407 547,560 692,337 698,977 666,761 
(Unaudited) QUARTER
(in thousands) 2017 2016 2015
  Third Second First Fourth Third Second First Fourth
Statement of Income Data                
Net sales $743,401
 $988,163
 $546,441
 $445,235
 $691,429
 $918,889
 $515,250
 $415,075
Gross profit 216,606
 289,664
 153,621
 127,777
 199,551
 270,736
 143,023
 118,295
Operating income 81,928
 154,186
 30,998
 9,743
 74,166
 142,420
 29,530
 5,979
Net income 48,783
 94,620
 22,270
 2,572
 44,421
 85,247
 16,363
 2,579
                 
Balance Sheet Data                
Total receivables, net $262,796
 $370,285
 $290,019
 $166,151
 $233,405
 $351,012
 283,758
 $156,756
Product inventories, net 484,287
 542,805
 647,884
 486,116
 455,156
 493,254
 595,393
 474,275
Accounts payable 209,062
 273,309
 465,928
 230,728
 199,922
 265,349
 438,705
 246,554
Total debt 564,573
 553,480
 490,217
 438,042
 390,189
 500,606
 450,457
 328,045



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.



25


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 dry•
Increased purchases of chemicals and supplies

for existing swimming pools
•
Increased purchases of above-ground pools and

irrigation and lawn care products
Unseasonably cool weather or extraordinary amounts of rain•Fewer pool and irrigation and landscape installations
•Decreased purchases of chemicals and supplies
•
Decreased purchases of impulse items such as

above-ground pools and accessories
Unseasonably early warming trends in spring/late cooling trends in fall•A longer pool and landscape season, thus positively impacting our sales
(primarily in the northern half of the U.S. and Canada)
Unseasonably late warming trends in spring/early cooling trends in fall•A shorter pool and landscape season, thus negatively impacting our sales
(primarily in the northern half of the U.S. and Canada)


Weather Impacts on 20172020 and 20162019 Results


Severe stormsOverall, weather conditions in the third quarter of 2017,2020 were generally favorable, which benefited results. Much of the western United States experienced above-average temperatures, particularly Hurricanes Irma and Harvey, hindered our sales growth in Florida and Texas, although Texas largely recovered by the end of September. In the Central and Midwest, temperatures were normal for this time of year, contrastingCalifornia, which was also plagued with the most active wildfire year on record. Precipitation was below-average in most of the western half of the United States and normal to above-average temperaturesin the eastern half. Likewise, results in the third quarter of 2016. The West experienced record heat2019 were positively impacted by above-average temperatures and normal rainfall in the third quarter of 2017, similar to the above average heat in the same period last year.

Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter, while the weather impact overall for the quarter was fairly neutral. Temperatures andbelow-average precipitation throughout most areas other than those described above, were normal, with only Texas benefiting from drier weatherof the country.

Weather conditions in the second quarter of 2017 compared to2020 were varied across the above average rainfall experiencedcontiguous United States; however, results in the same periodsecond quarter of 2016.

Unseasonably2020 benefited from generally mild weather conditions. Much of the western United States benefited salesfrom warmer weather, while the southeastern United States experienced slightly below-average temperatures. Southern California and the southeastern United States, including Florida, experienced more precipitation than normal. In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.

In the first quarter of 2017. However, while2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States. These favorable weather trends early in the year normally have a seasonally larger impact, the comparison toconditions contrast from the first quarter of 2016 was especially tough given2019 when wetter and cooler-than-normal temperatures to begin the benefit of the warmer-than-normal weather across nearly all markets 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 precipitation 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 2017year hindered sales growth.



26




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;
acquisitions;•the quality of our receivables;
scheduled debt payments;•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 requirementsobligations and other general corporate purposes,initiatives, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.


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


•capital expenditures primarily for maintenance and newgrowth of our sales center capital expenditures;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 authorizedBoard-authorized share repurchase program.


For 2017, we project capitalCapital expenditures will be approximately 1.5%were 1.0% of net sales as we expandin 2019, 1.1% of net sales in 2018 and 1.4% of net sales in 2017. Our higher capital spending in 2017 related to expanding our facilities and purchasepurchasing delivery vehicles to address growth opportunities.growth. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. CapitalDue to the deferral of capital expenditures were 1.4%earlier in the year to address the COVID-19 pandemic, we expect capital expenditures in 2020 to approximate 65% of net sales in 2016, 1.0% of net sales in 20152019 capital expenditures and 0.8% of sales in 2014.range from $20.0 million to $25.0 million.


Sources and Uses of Cash


The following table summarizes our cash flows (in thousands):
 Nine Months Ended
September 30,
 20202019
Operating activities$388,914 $243,253 
Investing activities(41,552)(35,839)
Financing activities(300,161)(187,734)
  Nine Months Ended
  September 30,
  2017 2016
Operating activities $112,020
 $143,170
Investing activities (44,584) (50,233)
Financing activities (52,746) (75,697)


Cash provided by operating activitiesoperations of $112.0$388.9 million decreased duringfor the first nine months of 20172020 increased $145.7 million compared to the first nine months of 2016 due to2019. The improvement in cash provided by operations primarily reflects an increase in net income, a combination of growth-related increasesdecline in inventoriesinventory balances between periods and receivables and the payment of our normal scheduled payment of our third quarter estimated taxes. These estimated payments for the third quarter of 2016 were deferred as allowed for areas affected by severe storms and floodingimprovements in Louisiana.

working capital management.
Cash used in investing activities for the first nine months of 2017 decreased2020 increased compared to the first nine months of 2016. While2019 primarily due to the acquisitions of Master Tile Network LLC, which we made increased investmentscompleted in capital expenditures for vehicle additionsFebruary 2020, and Northeastern Swimming Pool Distributors, Inc., which we completed in the first nine months of 2017, ourSeptember 2020. The increase in cash used forin investing activities due to acquisitions was considerablypartially offset by lower in the current period.capital expenditures.

27


Cash used in financing activities decreasedwas $300.2 million for the first nine months of 20172020 compared to $187.7 million for the first nine months of 2016,2019, which reflects a $65.4$52.2 million increase in amounts provided by net borrowings, partially offset by a $23.7debt payments, additional share repurchases of $53.0 million and an increase in amounts used for share repurchases. Dividendsdividends paid to shareholders increased by $6.2 million in the first nine months of 2017 compared to the first nine months of 2016.$6.8 million.


Future Sources and Uses of Cash

Revolving Credit Facility
On September 29, 2017, we amended and restated our existing seniorOur Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility (the Credit Facility) principally in the following ways:

extends the maturity date to September 29, 2022;
increases the borrowing capacity to $750.0 million from $465.0 million;
increasesand includes sublimits for the issuance of swingline loans;
decreases the pricingloans and standby letters of all loans; and
provides additional capacity under certain negative covenants related to indebtedness, liens, investments and dispositions of assets.

credit.  Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million.  The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At September 30, 2017,2020, there was $415.3$40.9 million outstanding, a $4.2$4.8 million standby letter of credit outstanding and $330.5$704.3 million available for borrowing under the Credit Facility.  We utilizepay 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 revolving borrowings under the Credit Facility.  As of September 30, 2017, we have three interestFacility at a variable 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 ratesone month London Interbank Offered Rate (LIBOR), plus thean 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.
margin. The weighted average effective interest rate for the Credit Facility as of September 30, 20172020 was approximately 2.7%1.1%, excluding commitment fees.
Term Facility
Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. The Term Facility will be repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal payment, 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 September 30, 2020, there was $178.1 million outstanding under the Term Facility with a weighted average effective interest rate of 2.1%. We pay interest on borrowings under the Term Facility at a variable rate based on the one month LIBOR, plus an applicable margin.

Financial Covenants
Financial covenants onof the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio.ratio, which are our most restrictive financial covenants.  As of September 30, 2017,2020, the calculations of these two covenants are detailed below:
•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00.  Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility).  As of September 30, 2017,2020, our average total leverage ratio equaled 1.601.01 (compared to 1.541.26 as of June 30, 2017)2020) and the TTM average total debt amount used in this calculation was $496.5$466.3 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 September 30, 2017,2020, our fixed charge ratio equaled 5.507.10 (compared to 5.526.27 as of June 30, 2017)2020) and TTM Rental Expense was $53.5$61.2 million.


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.
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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 penalty payments, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

Our two-year accounts receivable securitization facility (the Receivables FacilityFacility) offers us a lower cost form of financing, with a peak funding capacity of up to $220.0$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 $65.0$120.0 million to $150.0$275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021.

The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third 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.
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 September 30, 2017,2020, there was $142.3$110.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.0%0.9%, excluding commitment fees.

Interest Rate Swaps
We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our variable rate borrowings.   Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.
As of September 30, 2017,2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminates on November 20, 2020. This swap contract was previously forward-starting and converts the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million. Interest expense related to the notional amounts under this swap contract is based on the fixed rate plus the applicable margin on our variable rate borrowings.
We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.

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

DerivativeInception DateEffective DateTermination DateNotional Amount (in millions)Fixed Interest Rate
Forward-starting interest rate swap 1May 7, 2019November 20, 2020September 29, 2022$75.02.0925%
Forward-starting interest rate swap 2July 25, 2019November 20, 2020September 29, 2022$75.01.5500%
Forward-starting interest rate swap 3February 5, 2020February 26, 2021February 28, 2025$150.01.3800%
Forward-starting interest rate swap 4March 9, 2020September 29, 2022February 26, 2027$150.00.7400%
Forward-starting interest rate swap 5March 9, 2020February 28, 2025February 26, 2027$150.00.8130%

Compliance and Future Availability
As of September 30, 2020, we believe we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility.  We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months.  For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Part II, Item 8 of our 20162019 Annual Report on Form 10-K.10-K and in Part I, Item 1 of this Form 10-Q.
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 October 26, 2017, $53.42020, $176.9 million of the current Board authorizedBoard-authorized amount under our share repurchase program remained available.  We expect to repurchase additional shares on the open market from time to time depending on market conditions.  We plan to fund these repurchases with cash provided by operations and borrowings under the creditCredit and receivables facilities.Receivables Facilities.


CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:
•those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and
•those for which changes in the 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.  For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 20162019 Annual Report on Form 10-K.  See Allowance for Doubtful Accounts in Note 1 of Part I, Item 1 of this Form 10-Q for more information on our adoption of ASU 2016-13. We have not changed theseany other policies from those previously disclosed.

Recent Accounting Pronouncements
In May 2014, theSee Note 1 of “Notes to Consolidated Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods beginning after December 15, 2017, which for us will beStatements,” included in the period beginning JanuaryPart I, Item 1 2018. We are continuing to perform our detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard.

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 anticipate applying the guidance to all transactions as a portfolio. We expect that the effects of applying this guidance to the portfolio would not differ materially from applying the guidance to individual performance obligations within that portfolio.
Our revenue recognition will be 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 will be satisfied at that point in time.

We expect to apply the guidance using the modified retrospective transition method. Based on our analysis performed to date, we do not expect the adoption of ASU 2014-09 will have a material impact on our financial position or results of operations, but we expect it will result in additional disclosures regarding our revenue recognition policies. We also do not expect the adoption will require material or significant changes to our internal controls over financial reporting. We have expanded our revenue recognition inquiries to additional departments and updated our questionnaires primarily to identify matters that would signal variable consideration implications under the new guidance. We are also in the process of drafting additional pricing policies to address potential revenue recognition implications.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. 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 Sheets as we will be recording a right-of-use asset and corresponding liability for our current operating leases. We are evaluating the effect that ASU 2016-02 will have on our 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 newForm 10-Q for discussion of recent accounting pronouncement.pronouncements.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments, which 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. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which 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. Current guidance for these topics is principles-based, requiring judgment in application and creating diversity in practice. ASU 2016-15 will be effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted for all entities. We have not elected to early adopt this guidance. We are currently evaluating the effect that ASU 2016-15 will have on our financial position and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which 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). ASU 2017-04 will be effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for annual and interim goodwill impairment tests beginning after January 1, 2017. We are currently evaluating the effect that ASU 2017-04 will have on our financial position, results of operations and related disclosures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
There have been no material changes during the nine months ended September 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K.
Currency Risk
There have been no material changes during the nine months ended September 30, 2020 from what we reported in our 2019 Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A in our 2019 Annual Report on Form 10-K.

Item 4.  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 Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  As of September 30, 2017,2020, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, management, including the CEO and CFO, concluded that as of September 30, 2017,2020, our disclosure controls and procedures were effective.
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Based on the most recent evaluation, we have concluded that no change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION


Item 1.  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 1A.  Risk Factors
We are supplementing the risk factors previously disclosed in our Annual Report on Form 10-K with the below risk factor related to the COVID-19 pandemic. There have been no other material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K for10-K.

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

The COVID-19 pandemic has significantly impacted economic activity and markets throughout the year ended December 31, 2016.world. In response, governmental authorities have imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in temporary (and in some cases permanent) store closures, limitation of store hours, limitations on the number of people in stores or in warehouses, requirements on sanitation and social distancing practices and travel restrictions, among other effects. Our sales in March and April 2020 were adversely impacted by the COVID-19 pandemic. Additionally, in the first quarter of 2020, we recorded impairment charges of $6.9 million related to the pandemic. For additional information, see Goodwill and Intangibles Impairment in Note 1 of Part I, Item 1 of this Form 10-Q. Recently, there have been reports of increasing numbers of new COVID-19 cases in certain of our markets, including some of our larger markets, which could result in some governments extending or re-imposing restrictions. Accordingly, COVID-19 may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarizes the repurchases of our common stock in the third quarter of 2017:2020:
Period
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
Maximum Approximate
Dollar Value of Shares
That May Yet be Purchased
Under the Plan (2)
July 1-31, 2020390 $313.96 — $182,777,893 
August 1-31, 2020— $— — $182,777,893 
September 1-30, 202019,613 $299.17 19,613 $176,910,333 
Total20,003 $299.46 19,613  
(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.  In the third quarter of 2020, 390 shares were surrendered for this purpose.
(2)As of October 26, 2020, $176.9 million of the authorized amount remained available under our current share repurchase program.
Our Board of Directors may declare future dividends at their discretion, 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 the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis in Part I, Item 2. 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.

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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)
July 1 - 31, 2017 287,641
 $109.65
 287,641
 $159,133,234
August 1 - 31, 2017 871,775
 $107.25
 871,590
 $65,654,104
September 1 - 30, 2017 79,335
 $99.19
 79,335
 $57,785,144
Total 1,238,751
 $107.29
 1,238,566
  
(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 185 shares surrendered for this purpose in the third quarter of 2017.
(2)
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.
(3)
As of October 26, 2017, $53.4 million of the authorized amount remained available under our current share repurchase program.




Item 6.  Exhibits


Exhibits filed as part of this report are listed below.
Incorporated by Reference
No.Description
FiledFiled/ Furnished with this

Form 10-Q
FormFile No.Date Filed
Restated Certificate of Incorporation of the Company.10-Q000-266408/9/2006
Amended and Restated Composite Bylaws of the Company.8-K000-2664012/20/20122/8/2019
Form of certificate representing shares of common stock of the Company.8-K000-266405/19/2006
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 furnished 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 document.X
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 101)X
+ Attached as Exhibit 101 to this report are the following items formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language):
1.
1.Consolidated Statements of Income for the three and nine months ended September 30, 2017 and September 30, 2016;
2.Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and September 30, 2016;
3.Consolidated Balance Sheets at September 30, 2017, December 31, 2016 and September 30, 2016;
4.Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and
September 30, 2016;2020 and
5.Notes to Consolidated Financial Statements.

September 30, 2019;

2.Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and September 30, 2019;

3.Consolidated Balance Sheets at September 30, 2020, December 31, 2019 and September 30, 2019;
4.Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019;

5.Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019; and
6.Notes to Consolidated Financial Statements.







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SIGNATURE


Pursuant to the requirements 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 October 31, 2017.
30, 2020.
POOL CORPORATION
By:/s/ Mark W. Joslin
Mark W. Joslin
Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant















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