POOL CORP - FORM 10-K - February 26, 2015

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - POOL CORP	Financial_Report.xls
EX-32.1 - POOL CEO AND CFO SECTION 906 CERTIFICATION - POOL CORP	exhibit321_2014.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP - POOL CORP	exhibit231_2014.htm
EX-31.2 - POOL CEO SECTION 302 CERTIFICATION - POOL CORP	exhibit312_2014.htm
EX-21.1 - POOL SUBSIDIARY LISTING - POOL CORP	exhibit211_2014.htm
EX-31.1 - POOL CFO SECTION 302 CERTIFICATION - POOL CORP	exhibit311_2014.htm
EX-10.7 - POOL FORM OF STOCK OPTION AGREEMENT 2015 - POOL CORP	poolformofstockoptionagree.htm
EX-10.8 - POOL FORM OF RESTRICTED AWARD AGREEMENT 2015 - POOL CORP	poolformofrestrictedawarda.htm
EX-10.6 - POOL AMENDED AND RESTATED 2007 LTIP 2015 - POOL CORP	poolamendedandrestated2007.htm
EX-10.9 - POOL FORM OF STOCK OPTION INTERNATIONAL AGREEMENT 2015 - POOL CORP	poolformofstockoptionintla.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014



o	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 CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	36-3943363
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

109 Northpark Boulevard, Covington, Louisiana	70433-5001
(Address of principal executive offices)	(Zip Code)

985-892-5521

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

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 x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant’s common stock as of June 30, 2014 was $2,378,059,318.

As of February 20, 2015, there were 43,619,932 shares of common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement to be mailed to stockholders on or about March 26, 2015 for the

Annual Meeting to be held on May 6, 2015, are incorporated by reference in Part III of this Form 10-K.

POOL CORPORATION

TABLE OF CONTENTS




		Page
PART I.

Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	13
Item 3.	Legal Proceedings	15
Item 4.	Mine Safety Disclosures	15

PART II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A.	Controls and Procedures	72
Item 9B.	Other Information	75

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance	75
Item 11.	Executive Compensation	75
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	75
Item 13.	Certain Relationships and Related Transactions, and Director Independence	75
Item 14.	Principal Accountant Fees and Services	75

PART IV.

Item 15.	Exhibits, Financial Statement Schedules	76

Signatures

PART I.

Item 1. Business

General

Pool Corporation (the Company, which may be referred to as we, us or our) is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the top three distributors of irrigation and landscape products in the United States. The Company was incorporated in the State of Delaware in 1993 and has grown from a regional distributor to a multi-national, multi-network distribution company.

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

As of December 31, 2014, we operated 328 sales centers in North America, Europe, South America and Australia through our four distribution networks:


•	SCP Distributors (SCP);


•	Superior Pool Products (Superior);


•	Horizon Distributors (Horizon); and


•	National Pool Tile (NPT).

Beginning in 2014, we identified NPT as a separate distribution network. Through this network, we sell specialized products under the NPT brand including tile, decking materials and interior pool finishes, as well as hardscape and natural stone products. Please refer to our “Business Strategy and Growth” section below for more detailed information regarding the development of our NPT distribution network.

Superior and Horizon are both wholly owned subsidiaries of SCP, which is wholly owned by Pool Corporation.

Our Industry

We believe that the swimming pool industry is relatively young, with room for continued growth from the increased penetration of new pools. Of the approximately 80 million homes in the United States that have the economic capacity and the yard space to have a swimming pool, approximately 12% currently have a pool. Significant growth opportunities also reside with pool remodel and pool equipment replacement activities due to the aging of the installed base of swimming pools, technological advancements and the development of energy-efficient products. The irrigation and landscape industry shares many characteristics with the pool industry, and we believe that it will realize long-term growth rates similar to the pool industry. As irrigation system installations and landscaping often occur in tandem with new single-family home construction, we believe the continued recovery in the housing industry also offers significant opportunities for the irrigation and landscape industry.

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


•	long-term growth in housing units in warmer markets due to the population migration toward the southern United States, which contributes to the growing installed base of pools that homeowners must maintain;


•	increased homeowner spending on outdoor living spaces for relaxation and entertainment;


•	consumers bundling the purchase of a swimming pool and other products, with new irrigation systems and landscaping often being key components to both pool installations and remodels; and


•	consumers using more automation and control products, higher quality materials and other pool features that add to our sales opportunities over time.

Approximately 60% of consumer spending in the pool industry is for maintenance and minor repair of existing swimming pools. Maintaining proper chemical balance and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, filters and safety equipment, creates a non-discretionary demand for pool chemicals, equipment and other related parts and supplies. We also believe cosmetic considerations such as a pool’s appearance and the overall look of backyard environments create an ongoing demand for other maintenance related goods and certain discretionary products.

We believe that the recurring nature of the maintenance and repair market has historically helped maintain a relatively consistent rate of industry growth. This characteristic, along with relatively consistent inflationary price increases of 1% to 2% on average passed on by manufacturers and distributors, has helped cushion the negative impact on revenues in periods when unfavorable economic conditions and softness in the housing market adversely impacted pool construction and major replacement and refurbishment activities.

The following tables reflect growth in the domestic installed base of in-ground and above-ground swimming pools over the past 11 years (based on Company estimates and information from 2014 P.K. Data, Inc. reports):

The replacement and refurbishment market currently accounts for close to 30% of consumer spending in the pool industry. The activity in this market, which includes major swimming pool remodeling, is based on the aging of the installed base of pools. The timing of these types of expenditures is more sensitive to economic factors that impact consumer spending compared to the maintenance and minor repair market.

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

The irrigation and landscape distribution business is split between residential and commercial markets, with the majority of sales related to the residential market. Irrigation and landscape maintenance activities account for approximately 40% of total spending in the irrigation industry, with the remaining 60% of spending related to irrigation construction and other discretionary related products. As such, our irrigation business is more heavily weighted toward new construction activities and the sale of discretionary related products compared to our pool business and is therefore more sensitive to economic factors that impact consumer spending. Our irrigation and landscape business has recently benefited from the continued recovery of single-family home construction as irrigation system installations and landscaping projects typically correlate with, but lag, new home construction.

Certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP) affect our industry, particularly new pool and irrigation system starts as well as the timing and extent of pool refurbishments and equipment replacement. We believe that over the long term, housing turnover and single‑family home value appreciation may correlate with demand for new pool construction, with higher rates of home turnover and appreciation having a positive impact on new pool starts over time. We also believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new swimming pools and irrigation systems. Similar to other discretionary purchases, replacement and refurbishment activities are more heavily impacted by economic factors such as consumer confidence, GDP and unemployment.

The economic downturn between 2007 and 2009 had a significant impact on our industry, driving an approximate 80% reduction in new pool construction in the United States compared to peak levels in 2005 and also contributing to a more than 30% decline in replacement and refurbishment activities. While we estimate that new pool construction has increased from a low of roughly 45,000 new units in 2009 to approximately 60,000 new units in 2014, construction levels are still down more than 70% compared to peak levels in 2005 and down approximately 60% from what we consider normal levels.

The rebound in our base business sales growth began in 2010 and reflects continued improvement in consumer discretionary expenditures and higher replacement activities, largely supported by improvements in general external market factors in the United States including consumer confidence, employment, housing, consumer financing and economic expansion. We estimate the industry grew 3% to 5% each year from 2010 to 2012. In 2013, we estimate industry growth dipped temporarily to approximately 1% to 2% given the impact of adverse weather on seasonal markets, and then returned to 3% to 5% in 2014. While unseasonably cool weather impacted the industry again in 2014, the impact was not quite as widespread, nor as severe.

Going forward, we believe there is potential for a significant sales recovery due to the build-up of deferred replacement and remodeling activity and our expectation for gradually normalized new pool and irrigation construction levels. Additionally, we believe favorable demographics from an aging population and southern migration are ideal for increased residential investment, especially in outdoor lifestyle products. We expect that market conditions in the United States will continue to improve, enabling further recovery of replacement, remodeling and new construction activity to normalized levels over the next 4 to 7 years. We expect that the industry will realize an annual growth rate of approximately 4% to 7% over this time period before reverting back to 3% to 4% annual growth over the longer term. As current economic trends indicate that consumer spending has begun to slowly recover and that construction activities will likely continue to gradually improve, we believe that we are well positioned to take advantage of both the eventual market recovery and the inherent long-term growth opportunities in our industry.

Our industry is seasonal and weather is one of the principal external factors that affect our business. Peak industry activity occurs during the warmest months of the year, typically April through September. Unseasonable warming or cooling trends can accelerate or delay the start or end of the pool and landscape season, impacting our maintenance and repair sales. These impacts at the shoulders of the season are generally more pronounced in northern markets in the United States and Canada. Weather also impacts our sales of construction and installation products to the extent that above average precipitation, late spring thaws in northern markets and other extreme weather conditions delay, interrupt or cancel current or planned construction and installation activities.

Business Strategy and Growth

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


•	to promote the growth of our industry;


•	to promote the growth of our customers’ businesses; and


•	to continuously strive to operate more effectively.

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

We promote the growth of our customers’ businesses by offering comprehensive support programs that include promotional tools and marketing support to help our customers generate increased sales. Our uniquely tailored programs include such features as customer lead generation, personalized websites, brochures, direct mail, marketing campaigns and business development training. As a customer service, we also provide certain retail store customers assistance with all aspects of their business including site selection, store layout and design, business management system implementation, comprehensive product offering selections and efficient ordering and inventory management processes. We also act as a day to day resource by offering product and market expertise to serve our customers’ unique needs.

Growth initiatives related to our various customer programs include our retail brand licensing program and our rewards program designed for pool service professionals. Under our brand licensing program, customers make commitments to meet minimum purchase levels, stock a minimum of nine specific product categories and operate within certain guidelines (including weekend hour requirements). Our rewards program aligns with our replacement parts growth initiative and provides customers with monthly coupons and other special discounts on parts product purchases. In addition to these programs, we also feature consumer showrooms in over 80 of our sales centers and host an annual retail summit to educate our customers about product offerings and the overall industry.

In addition to our efforts aimed at industry and customer growth, we strive to operate more effectively by continuously focusing on improvements in our operations such as product sourcing, procurement and logistics initiatives, adoption of enhanced business practices and improved working capital management. Other key internal growth initiatives include the continued expansion of both our product offerings (as described in the “Customers and Products” section below) and our distribution networks.

Beginning in early 2000, we significantly increased the breadth of our product offerings outside our traditional pool distribution business. These complementary products included building materials used for pool construction, installations and remodeling, such as concrete and pool surfacing and decking materials. With our March 2008 acquisition of National Pool Tile Group, Inc., we added a market leading brand of pool tile and composite pool finish products, and gained a position in a wider market. Over the last five years, to increase operating efficiency, we consolidated and repositioned NPT standalone sales centers and established NPT showcases within certain existing sales centers. In addition to our 12 standalone NPT sales centers, we currently have over 80 SCP and Superior sales centers that feature consumer showrooms where swimming pool dealers and homeowners can view and select pool components including tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT branded products.

We feel the growth opportunities for the NPT network closely align with those of our other networks, as we see continued opportunity to expand under the NPT name both organically and through acquisitions. We also expect potential expansion of the network by broadening our product range and sourcing capabilities. As more consumers create and enhance outdoor living areas and continue to invest in their outdoor environment, we believe we can focus our resources to address such demand, while leveraging our existing pool and irrigation/landscape customer base. We feel the development of our NPT network is a natural extension of our distribution model. While we are currently enjoying an expanding economy and improving housing market, which help fuel demand for these products, this business is more sensitive to these external market factors compared to our business overall.

We have grown our distribution networks through new sales center openings, acquisitions and the expansion of existing sales centers. Given the more stabilized external environment, we have increased our focus on new sales center openings, including satellite locations that enable us to more effectively serve customers in existing markets. Since the beginning of 2012, we have opened 16 new sales centers (net of sales center closings and consolidations), including 3 new sales centers opened in 2014. We expect to open between 7 and 9 new sales centers in 2015. Since the beginning of 2012, we have completed 8 acquisitions consisting of 14 sales centers (net of sales center closings and consolidations within one year of acquisition). The acquired locations include 5 sales centers added to our SCP network and 2 sales centers added to our NPT network in 2014. We plan to continue to make strategic acquisitions and open new sales centers to further penetrate existing markets and expand into both new geographic markets and new product categories. For additional discussion of our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

We believe that our high customer service levels and expanded product offerings have enabled us to gain market share historically, including the period between 2007 and 2009 when our industry contracted. Going forward, we expect to realize sales growth higher than the industry average due to further increases in market share and continued expansion of our product offerings.

We estimate that price inflation has averaged 1% to 2% annually in our industry over the past 10 years. We generally pass industry price increases through the supply chain and make strategic volume inventory purchases ahead of vendor price increases. We estimate that annual price inflation was consistent with the historical average between 2012 and 2014. We anticipate price inflation will vary some by product lines, but will approximate the long-term average overall in 2015.

Customers and Products

We serve over 100,000 customers. In 2014, sales to our largest 100 customers collectively accounted for approximately 8% of our sales. We approximate that our largest 1,000 customers represented only 25% of our sales. Notably, 98% of our customers are small, family-owned businesses with relatively limited capital resources. These core customers generated a large majority of our sales in 2014. Most of these businesses provide labor and technical services to the end consumer and operate as independent contractors employing no more than ten employees (in many cases, working alone or with a limited crew). These customers also buy from other distributors, mass merchants, home stores, and specialty and internet retailers.

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


•	swimming pool remodelers and builders;


•	specialty retailers that sell swimming pool supplies;


•	swimming pool repair and service businesses;


•	landscape construction and maintenance contractors; and


•	government, golf course and other commercial customers.

The recent economic environment has had the greatest impact on swimming pool remodelers and builders and landscape construction companies. We have seen a modest contraction in our customer base in these areas over the last several years.

We conduct our operations through 328 sales centers in North America, Europe, South America and Australia. Our primary markets, with the highest concentration of swimming pools, are California, Florida, Texas and Arizona, collectively representing approximately 52% of our 2014 net sales. In 2014, we generated close to 94% of our sales in North America, less than 6% in Europe and less than 1% in South America and Australia combined.

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

We offer our customers more than 160,000 national brand and Pool Corporation branded products. We believe that our selection of pool equipment, supplies, chemicals, replacement parts, irrigation and landscape products and other pool construction and recreational products is the most comprehensive in the industry. The products we sell can be categorized as follows:


•	maintenance products such as chemicals, supplies and pool accessories;


•	repair and replacement parts for pool equipment, such as cleaners, filters, heaters, pumps and lights;


•	packaged pool kits including walls, liners, braces and coping for in-ground and above-ground pools;


•	pool equipment and components for new pool construction and the remodeling of existing pools;


•	irrigation and landscape products, including irrigation system components and professional lawn care equipment and supplies;


•	building materials used for pool installations and remodeling, such as concrete, plumbing and electrical components, both functional and decorative pool surfaces, decking materials, tile, hardscapes and natural stone; and


•	other pool construction and recreational products, which consist of a number of product categories and include discretionary recreational and related outdoor lifestyle products that enhance consumers’ use and enjoyment of outdoor living spaces, such as spas, grills and components for outdoor kitchens.

We track and monitor the majority of our sales at the product level to provide support for sales and marketing efforts and for consideration in incentive plan programs. We currently have over 500 product lines and over 50 product categories. Based on our 2014 product classifications, sales for our pool and spa chemicals product category as a percentage of total net sales was 13% in 2014, 14% in 2013 and 15% in 2012. Chemical sales increased by 3% in 2014, although chemical pricing remained relatively flat. Chemical sales declined 1.5% in 2013, reflecting lower volume due to delayed pool openings compared to 2012 and flat pricing. While market share gains drove chemical volume growth of 4% in 2012, chemical sales growth did not keep pace with our overall sales growth due to lingering price deflation for certain chemical products in 2012. No other product category accounted for 10% or more of total net sales in any of the last three fiscal years.

We categorize our maintenance, repair and replacement products into the following two groupings:


•	maintenance and minor repair (non-discretionary); and


•	major refurbishment and replacement (partially discretionary).

In 2014, the sale of maintenance and minor repair products accounted for approximately 60% of our sales and gross profits while approximately 40% of our sales and gross profits were derived from the refurbishment, replacement, construction and installation (equipment, materials, plumbing, electrical, etc.) of swimming pools. These components reflect a shift back toward more sales of major refurbishment and replacement products due to an ongoing recovery of these activities since levels reached a low point in 2009. Between 2005 and early 2010, sales of maintenance and minor repair products had increased to approximately 70% of our sales and gross profits due to the significant declines in new pool construction. Prior to this industry downturn, just over 50% of our total sales and gross profits were related to maintenance and minor repair products.

Discretionary demand for products related to pool construction and remodeling has been an important factor in our historical base business sales growth. While sales of these products declined between 2007 and 2009, we realized sales growth from 2010 to 2014 due to our ongoing expansion of these product offerings and the steady improvement in new construction, remodeling and economic trends. However, new pool construction remains approximately 70% below peak levels reached in 2005 and approximately 60% below what we believe to be normal levels. We continue to identify new related product categories and we typically introduce new categories each year in select markets. We then evaluate the performance in these test markets and focus on those product categories that we believe exhibit the best long-term growth potential. We expect to realize continued sales growth for these types of product offerings by expanding the number of locations that offer these products, increasing the number of products offered at certain locations and continuing a modest broadening of these product offerings on a company-wide basis.

In recent years we have experienced product and customer mix changes, including a shift in consumer spending to higher value, lower margin products such as variable speed pumps, high efficiency heaters, LED lighting and irrigation and landscape equipment, which positively contribute to our sales and gross profit growth but negatively impact our gross margin. We expect continued demand for these products, but believe our efforts in various pricing and sourcing initiatives and the building materials product initiatives discussed above will offset these declines and lead to somewhat flat gross margin trends over the next few years.

Operating Strategy

We distribute swimming pool supplies, equipment and related leisure products domestically through our SCP and Superior networks and internationally through our SCP network. We distribute irrigation and landscape products through our Horizon network and hardscapes, tile, decking materials and interior pool finish products through our NPT network. We adopted the strategy of operating two distinct distribution networks within the U.S. swimming pool marketplace primarily for two reasons:


•	to offer our customers a choice of distinctive product selections, locations and service personnel; and


•	to increase the level of customer service and operational efficiency provided by the sales centers in each network by promoting healthy competition between the two networks.

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

Distribution

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

Our sales centers maintain well-stocked inventories to meet our customers’ immediate needs. We utilize warehouse management technology to optimize receiving, inventory control, picking, packing and shipping functions.

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

Purchasing and Suppliers

We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances. It is customary in our industry for certain manufacturers to offer seasonal terms to qualifying purchasers such as Pool Corporation. These terms typically allow us to place orders in the fall prior to any seasonal price increases, take delivery of product during the off-season months and pay for these purchases in the spring or early summer.

Our preferred vendor program encourages our distribution networks to stock and sell products from a smaller number of vendors to optimize profitability and shareholder return. We also work closely with our vendors to develop programs and services to better meet the needs of our customers and to concentrate our inventory investments. These practices, together with a more comprehensive service offering, have positively impacted our selling margins and our returns on inventory investments.

We regularly evaluate supplier relationships and consider alternate sourcing to assure competitive cost, service and quality standards. Our largest suppliers include Pentair Water Pool and Spa, Inc., Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 19%, 11% and 7%, respectively, of the cost of products we sold in 2014.

Competition

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

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


•	the breadth and availability of products offered;


•	the quality and level of customer service;


•	the breadth and depth of sales and marketing programs;


•	consistency and stability of business relationships with customers and suppliers;


•	competitive product pricing; and


•	access to commercial credit to finance business working capital.

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

Seasonality and Weather

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

Environmental, Health and Safety Regulations

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

Employees

We employed approximately 3,700 people at December 31, 2014. Given the seasonal nature of our business, our peak employment period is the summer and, depending on expected sales levels, we add 200 to 500 employees to our work force to meet seasonal demand.

Intellectual Property

We maintain both domestic and foreign registered trademarks and patents, primarily for our Pool Corporation and Pool Systems Pty. Ltd. (PSL) branded products that are important to our current and future business operations. See Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for more information related to our 2014 PSL acquisition. We also own rights to numerous internet domain names.

Geographic Areas

The table below presents net sales by geographic region for the past three fiscal years (in thousands):



	Year Ended December 31,
	2014		2013		2012
United States	$	2,037,001	$	1,895,226	$	1,770,362
International	209,561		184,474		183,612
	$	2,246,562	$	2,079,700	$	1,953,974

The table below presents net property and equipment by geographic region for the past three fiscal years (in thousands):



	December 31,
	2014		2013		2012
United States	$	51,027	$	48,294	$	42,443
International	5,448		4,034		4,123
	$	56,475	$	52,328	$	46,566

Available Information

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

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

Item 1A. Risk Factors

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

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward‑looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends 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,” “believe,” “will likely result,” “outlook,” “project,” “should” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Risk Factors

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

The demand for our swimming pool, irrigation and related outdoor lifestyle products has been and may continue to be adversely affected by unfavorable economic conditions.

In economic downturns, the demand for swimming pool, irrigation and related outdoor lifestyle products may decline as discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction decline. Although maintenance products and repair and replacement equipment that must be purchased by pool owners to maintain existing swimming pools currently account for approximately 90% of net sales and gross profits related to our swimming pool business, the growth of this portion of our business depends on the expansion of the installed pool base and could also be adversely affected by decreases in construction activities similar to the trends between late 2006 and early 2010. A weak economy may also cause consumers to defer discretionary replacement and refurbish activity. In addition, even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance. Such downturns expose us to certain additional risks, including but not limited to the risk of customer closures or bankruptcies, which could shrink our potential customer base and inhibit our ability to collect on those customers’ receivables.

We believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new pools and irrigation systems. Between late 2006 and early 2010, the unfavorable economic conditions and downturn in the housing market resulted in significant tightening of credit markets, which limited the ability of consumers to access financing for new swimming pools and irrigation systems. Although we have seen improvement in more recent years, if these trends worsen, many consumers will likely not be able to obtain financing for pool and irrigation projects, which could negatively impact our sales of construction related products.

We are susceptible to adverse weather conditions.

Weather is one of the principal external factors affecting our business. For example, unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season. Also, unseasonably cool weather or extraordinary rainfall during the peak season can decrease swimming pool use, installation and maintenance, as well as landscape installations and maintenance. These weather conditions adversely affect sales of our products. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions, which could result in decreased pool and irrigation system installations and negatively impact our sales. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.

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

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

Our largest suppliers are Pentair Water Pool and Spa, Inc., Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 19%, 11% and 7%, respectively, of the costs of products we sold in 2014. A decision by several suppliers, acting in concert, to sell their products directly to retailers or other end users of their products, bypassing distribution companies like ours, would have an adverse effect on our business. Additionally, the loss of a single significant supplier due to financial failure or a decision to sell exclusively to retailers or end-use consumers could also adversely affect our business. We dedicate considerable resources to promote the benefits and affordability of pool ownership, which we believe significantly benefits our swimming pool customers and suppliers.

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

We face competition from both inside and outside of our industry. Within our industry, we compete against various regional and local distributors and, to a lesser extent, mass market retailers, large pool or landscape supply retailers and internet retailers. Outside of our industry, we compete with sellers of other leisure product alternatives, such as boats and motor homes, and with other companies who rely on discretionary homeowner expenditures, such as home remodelers. New competitors may emerge as there are low barriers to entry in our industry. Some geographic markets that we serve, particularly our four largest, higher density markets in California, Florida, Texas and Arizona, representing approximately 52% of our net sales in 2014, also tend to be more competitive than others.

More aggressive competition by mass merchants and large pool or landscape supply retailers could adversely affect our sales.

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

We depend on key personnel.

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

Past growth may not be indicative of future growth.

Historically, we have experienced substantial sales growth through organic market share gains, new sales center openings and acquisitions that have increased our size, scope and geographic distribution. Since the beginning of 2012, we have opened 16 new sales centers (net of sales center closings and consolidations) and we have completed 8 acquisitions consisting of 14 sales centers (net of sales center closings and consolidations within one year of acquisition). While we contemplate continued growth through internal expansion and acquisitions, no assurance can be made as to our ability to:


•	penetrate new markets;


•	generate sufficient cash flows to support expansion plans and general operating activities;


•	obtain financing;


•	identify appropriate acquisition candidates;


•	maintain favorable supplier arrangements and relationships; and


•	identify and divest assets which do not continue to create value consistent with our objectives.

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

Our business is highly seasonal.

In 2014, we generated approximately 65% of our net sales and 96% of our operating income in the second and third quarters of the year. These quarters represent the peak months of both swimming pool use, installation, remodeling and repair, and landscape installations and maintenance. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.

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

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

Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly, and there can be no assurance that we will not incur such costs in material amounts. These laws and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing changes. The clear trend in environmental, health, transportation and safety regulation is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemical substances. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. We will attempt to anticipate future regulatory requirements that might be imposed and we will plan accordingly to remain in compliance with changing regulations and to minimize the costs of such compliance.

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

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

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

Our international operations, which accounted for 9.3% of our total net sales in 2014, expose us to certain additional risks, including:


•	difficulty in staffing international subsidiary operations;


•	different political and regulatory conditions;


•	currency fluctuations;


•	adverse tax consequences; and


•	dependence on other economies.

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

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

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

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

We have designed numerous procedures and protocols to mitigate these risks. We continually invest in information technology security and update our business continuity plan. However, the failure to maintain security over and prevent unauthorized access to our data, our customers’ personal information, including credit card information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in damage to our reputation and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease the Pool Corporation corporate offices, which consist of approximately 54,800 square feet of office space in Covington, Louisiana, from an entity in which we have a 50% ownership interest. We own three sales center facilities in Florida and one in Texas. We lease all of our other properties and the majority of our leases have three to seven year terms.

As of December 31, 2014, we had 11 leases with remaining terms longer than seven years that expire between 2022 and 2027. Most of our leases contain renewal options, some of which involve rent increases. In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance.

Our sales centers range in size from approximately 2,000 square feet to 60,000 square feet and generally consist of warehouse, counter, display and office space. Our centralized shipping locations (CSLs) range in size from approximately 71,000 square feet to 115,000 square feet.

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

The table below summarizes the changes in our sales centers during the year ended December 31, 2014:



Network	12/31/13	New Locations	Consolidated Locations ⁽²⁾		Acquired Locations ⁽³⁾	12/31/14
SCP	155	2	—		—	157
Superior	64	1	(1	)	—	64
Horizon	61	—	(1	)	—	60
NPT ⁽¹⁾	10	—	—		2	12
Total Domestic	290	3	(2	)	2	293
SCP International	31	—	(1	)	5	35
Total	321	3	(3	)	7	328


⁽¹⁾	In 2014, we identified NPT as a separate network. We have reclassified 10 existing sales centers from our SCP and Superior networks to our NPT network as of December 31, 2013 for the purpose of this summary. Additionally, there are over 80 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.


⁽²⁾	Consolidated sales centers are those locations where we expect to transfer the majority of the existing business to our nearby sales center locations.

⁽³⁾

We completed two acquisitions in the United States, one acquisition in Canada and one acquisition in Australia in 2014. One of our U.S. acquisitions was completed on December 31, 2014, and we have not included the acquired sales center in our 2014 count, as there were no sales attributable to Pool Corporation in fiscal 2014. We do not plan to close or consolidate any of these acquired sales centers.

The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, 2014:



Location	SCP	Superior	Horizon	NPT	Total
United States
California	24	20	17	4	65
Florida	33	6	4	1	44
Texas	18	5	10	4	37
Arizona	5	5	11	1	22
Georgia	6	2	—	1	9
Nevada	2	3	3	—	8
Tennessee	5	3	—	—	8
Washington	1	—	6	—	7
Alabama	4	2	—	—	6
New York	6	—	—	—	6
Louisiana	5	—	—	—	5
New Jersey	3	2	—	—	5
Ohio	2	3	—	—	5
Pennsylvania	3	1	—	1	5
Colorado	1	1	2	—	4
Illinois	3	1	—	—	4
Indiana	2	2	—	—	4
Missouri	3	1	—	—	4
North Carolina	3	1	—	—	4
Oregon	1	—	3	—	4
South Carolina	3	1	—	—	4
Virginia	2	1	1	—	4
Idaho	1	—	2	—	3
Oklahoma	2	1	—	—	3
Arkansas	2	—	—	—	2
Kansas	2	—	—	—	2
Maryland	1	—	1	—	2
Massachusetts	2	—	—	—	2
Michigan	2	—	—	—	2
Minnesota	1	1	—	—	2
Mississippi	2	—	—	—	2
Connecticut	1	—	—	—	1
Hawaii	1	—	—	—	1
Iowa	1	—	—	—	1
Kentucky	—	1	—	—	1
Nebraska	1	—	—	—	1
New Mexico	1	—	—	—	1
Puerto Rico	1	—	—	—	1
Utah	1	—	—	—	1
Wisconsin	—	1	—	—	1
Total United States	157	64	60	12	293
International
Canada	15	—	—	—	15
France	5	—	—	—	5
Australia	3	—	—	—	3
Mexico	3	—	—	—	3
Portugal	2	—	—	—	2
United Kingdom	2	—	—	—	2
Belgium	1	—	—	—	1
Colombia	1	—	—	—	1
Germany	1	—	—	—	1
Italy	1	—	—	—	1
Spain	1	—	—	—	1
Total International	35	—	—	—	35
Total	192	64	60	12	328

Item 3. Legal Proceedings

From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. Litigation can be expensive and disruptive to normal business operations.

As previously disclosed, a number of purported anti-trust class action suits were filed against us in various United States District Courts in 2012. The cases were transferred and consolidated before the Judicial Panel for Multidistrict Litigation, MDL Docket No. 2328, and are presently pending in the Eastern District of Louisiana. The plaintiffs include indirect purchaser plaintiffs, purporting to represent indirect purchasers of swimming pool products in Arizona, California, Florida and Missouri, and direct purchaser plaintiffs, who are current or former customers. Three additional defendants include Hayward Industries, Inc., Pentair Water Pool and Spa, Inc. and Zodiac Pool Systems, Inc. The plaintiffs seek unspecified compensatory and enhanced damages, interest, costs and fees and other equitable relief. On April 11, 2013, the Court granted in part and denied in part the defendants’ motions to dismiss the direct purchasers’ antitrust claim. On May 24, 2013, the Court granted in part and denied in part the defendants’ motions to dismiss the indirect purchasers’ antitrust claims. Both direct and indirect purchaser plaintiffs amended their complaints, and defendants moved to dismiss certain of the direct purchasers’ claims. On December 18, 2013, the Court granted in part and denied in part those motions.

On September 26, 2014, the Court preliminarily approved a class action settlement between Hayward Industries, Inc. and the direct purchaser plaintiffs. On December 22, 2014, the Court preliminarily approved a class action settlement between Zodiac Pool Systems, Inc. and the direct purchaser plaintiffs. On December 31, 2014, the Court preliminarily approved a class action settlement between Hayward Industries, Inc., Zodiac Pool Systems, Inc., and the indirect purchaser plaintiffs. We, along with Pentair Water Pool and Spa, Inc., continue to defend ourselves in this matter.

We are subject to regulation under federal, state and local environmental, transportation, and health and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals. As previously disclosed, the Office of the District Attorney for the County of Riverside, California, made a monetary demand upon us for civil penalties, alleging noncompliance in the past with local and state hazardous waste handling, storage and transportation laws, fire and building code regulations and California Business & Professions Code Section 17200, primarily relating to liquid chlorine and muriatic acid. On August 30, 2013, the Office of the District Attorney for the County of Riverside, California, filed a complaint against us for civil penalties, alleging the same 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 or other claims and litigation not discussed above will have a material adverse impact on our financial condition, results of operations or cash flows. Our view of these matters may change in the future as the litigation and related events unfold.

Item 4. Mine Safety Disclosures

Not applicable.

PART II.

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

Our common stock is traded on the NASDAQ Global Select Market under the symbol “POOL.” On February 12, 2015, there were approximately 18,253 holders of record of our common stock. The table below sets forth the high and low closing sales prices of our common stock as well as dividends declared per common share for each quarter during the last two fiscal years.



	High		Low		Dividends Declared
Fiscal 2014
First Quarter	$	61.74	$	52.68	$	0.19
Second Quarter	62.42		56.56		0.22
Third Quarter	57.53		53.92		0.22
Fourth Quarter	64.09		53.34		0.22

Fiscal 2013
First Quarter	$	48.11	$	43.27	$	0.16
Second Quarter	54.72		46.75		0.19
Third Quarter	58.39		52.09		0.19
Fourth Quarter	58.14		52.77		0.19

We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board of Directors (our Board) has increased the dividend amount nine times including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through 2014. Future dividend payments will be at the discretion of our Board, after considering various factors, including our earnings, capital requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions on dividends in our Credit Facility and Receivables Facility, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.

Stock Performance Graph

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

The following graph compares the total stockholder return on our common stock for the last five fiscal years with the total return on the NASDAQ Index and the S&P MidCap 400 Index for the same period, in each case assuming the investment of $100 on December 31, 2009 and the reinvestment of all dividends. We believe the S&P MidCap 400 Index includes companies with market capitalizations comparable to ours. Additionally, we chose the S&P MidCap 400 Index for comparison, as opposed to an industry index, because we do not believe that we can reasonably identify a peer group or a published industry or line-of-business index that contains companies in a similar line of business.



	Base Period		Indexed Returns Years Ending
Company / Index	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		12/31/14
Pool Corporation	$	100.00	$	121.04	$	164.89	$	235.55	$	328.18	$	363.32
S&P MidCap 400 Index	100.00		126.64		124.45		146.69		195.84		214.97
NASDAQ Index	100.00		118.02		117.04		137.47		192.62		221.02

Purchases of Equity Securities

The table below summarizes the repurchases of our common stock in the fourth quarter of 2014.



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽²⁾	Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan ⁽³⁾
October 1 – October 31, 2014	24,100	$	54.39	24,100	$	64,519,358
November 1 – November 30, 2014	—	$	—	—	$	64,519,358
December 1 – December 31, 2014	—	$	—	—	$	64,519,358
Total	24,100	$	54.39	24,100


⁽¹⁾	These shares may include shares of our common stock surrendered to us by employees in order to satisfy tax withholding obligations in connection with certain exercises of employee stock options and/or the exercise price of such options granted under our share-based compensation plans. There were no shares surrendered for this purpose in the fourth quarter of 2014.


⁽²⁾	In May 2014, our Board authorized an additional $100.0 million under our existing share repurchase program. This program allows for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.


⁽³⁾	In 2014, we purchased a total of $132.3 million, or 2,349,122 shares, in the open market at an average price of $56.34 per share. As of February 20, 2015, $64.5 million of the authorized amount remained available under our current share repurchase program.

Item 6. Selected Financial Data

The table below sets forth selected financial data from the Consolidated Financial Statements. You should read this information in conjunction with the discussions in Item 7 of this Form 10-K and with the Consolidated Financial Statements and accompanying Notes in Item 8 of this Form 10-K.



(in thousands, except per share data)	Year Ended December 31,
	2014			2013			2012 ⁽¹⁾			2011			2010
Statement of Income Data
Net sales	$	2,246,562		$	2,079,700		$	1,953,974		$	1,793,318		$	1,613,746
Operating income	188,870			165,486			144,869			125,067			101,245
Net income attributable to Pool Corporation	110,692			97,330			81,972			71,993			57,638
Earnings per share:
Basic	$	2.50		$	2.10		$	1.75		$	1.49		$	1.17
Diluted	$	2.44		$	2.05		$	1.71		$	1.47		$	1.15
Cash dividends declared per common share	$	0.85		$	0.73		$	0.62		$	0.55		$	0.52

Balance Sheet Data
Working capital ⁽²⁾	$	345,305		$	313,843		$	295,100		$	305,467		$	265,054
Total assets ⁽²⁾	892,937			823,761			780,576			770,902			728,545
Total long-term debt, including current portion	320,838			246,418			230,882			247,300			198,700
Stockholders’ equity	244,352			286,182			281,623			279,746			285,182

Other
Base business sales growth ⁽³⁾	7		%	6		%	7		%	10		%	2		%
Number of sales centers	328			321			312			298			291


⁽¹⁾	In 2012, operating income, net income attributable to Pool Corporation and earnings per share amounts were significantly impacted by a $6.9 million non-cash goodwill impairment charge related to our United Kingdom reporting unit. The impact of this impairment charge on earnings was $0.14 per diluted share.


⁽²⁾	The 2011 working capital and total assets amounts have been adjusted to reclassify our deferred tax balances and our deferred tax valuation allowances between current and non-current line items to reflect net presentation. The 2011 total assets balance also reflects a change in the presentation of deferred service charge income.


⁽³⁾	For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.

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

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

In our discussion of results of operations below, adjusted operating income, adjusted net income attributable to Pool Corporation and adjusted diluted earnings per share for 2012 exclude the Goodwill impairment line item on the Consolidated Statements of Income. We have provided these adjusted amounts because we believe it helps investors assess our year-over-year operating performance.

2014 FINANCIAL OVERVIEW

Financial Results

Our record results for 2014 marked another year of significant success and consistent investment in the future. Our base business results showed sustained growth as we continued to gain share by providing progressively more value and better service to our customers and suppliers. Additionally, we expanded our presence globally and broadened our product base, strengthening our capabilities in areas we expect will deliver unique long-term value.

Net sales for the year ended December 31, 2014 increased 8% compared to 2013. Base business sales increased 7%, which reflects increased demand for discretionary products, particularly in our building materials and equipment product offerings, as well as continued growth in sales of pool and landscaping maintenance products. Replacement and remodel activity, demand for energy efficient products and market share gains resulting from our team’s high customer service levels drove our sales growth.

Gross profit for the year ended December 31, 2014 increased 9% over 2013. Gross profit as a percentage of net sales (gross margin) increased 20 basis points to 28.6% for 2014.

Selling and administrative expenses (operating expenses) for 2014 increased 7% from 2013. Base business operating expenses increased 5% year over year, primarily due to greater personnel costs including performance-based incentive compensation expense, higher freight costs, increased facility-related expenses and higher professional fees.

Operating income for the year improved 14% over 2013. Operating income as a percentage of net sales (operating margin) increased to 8.4% in 2014 compared to 8.0% in 2013.

Net income attributable to Pool Corporation increased 14% compared to 2013, while earnings per share was up 19% to a record $2.44 per diluted share.

Financial Position and Liquidity

Cash provided by operations was $121.8 million in 2014 and exceeded total net income by $10.8 million. Combined with $73.4 million in net proceeds from borrowings, cash from operating activities helped fund the following initiatives:


•	share repurchases in the open market of $132.3 million;


•	quarterly cash dividend payments to shareholders, which totaled $37.6 million for the year;


•	net capital expenditures of $17.3 million; and


•	payments of $10.6 million for acquisitions.

Total net receivables, including pledged receivables, increased 12% compared to December 31, 2013. This increase is consistent with our December 2014 sales growth, which included an additional billing day compared to December 2013. Our receivables quality remains high, with days sales outstanding (DSO), as calculated on a trailing twelve month basis, of 28.7 days at December 31, 2014 compared to 28.1 days at December 31, 2013.

Inventory levels grew 9% to $467.0 million at December 31, 2014 compared to $429.2 million at December 31, 2013. Our inventory turns, as calculated on a trailing twelve month basis, were 3.4 times at both December 31, 2014 and December 31, 2013.

Total debt outstanding of $320.8 million at December 31, 2014 increased $74.4 million compared to December 31, 2013 primarily to fund greater share repurchases in 2014 versus 2013.

Current Trends and Outlook

The pool industry continued to show signs of recovery in 2014, mostly due to the gradual improvement in remodeling and replacement activity. Heightened demand for discretionary products that create and enhance outdoor living areas supported industry growth. Stability in single-family home construction markets also benefited the landscape and irrigation business.

The economic downturn between 2007 and 2009 had a significant impact on our industry, driving an approximate 80% reduction in new pool construction in the United States compared to peak levels in 2005 and also contributing to more than a 30% decline in replacement and refurbishment activities. While we estimate that new pool construction has increased from a low of roughly 45,000 new units in 2009 to approximately 60,000 new units in 2014, construction levels are still down more than 70% compared to peak levels in 2005 and down approximately 60% from what we consider normal levels.

For 2015, we expect the macroeconomic environment in the United States and the opportunities available to us to grow market share will be quite similar to 2014. As for international markets, the U.S. dollar is currently significantly stronger against most major currencies versus a year ago. We expect this condition to remain throughout 2015, adversely impacting our reported sales by about 1% but having little impact on our 2015 bottom line results. We project 6% to 8% base business sales growth, including our expectation for average inflationary product cost increases of 1% to 2%. We expect to gain market share through our comprehensive product offerings, which we continually diversify, geographic expansion in 2014, and investments in people and technology. We also expect to modestly expand our presence by opening five to seven new locations in 2015 and by making selective acquisitions when appropriate opportunities arise. We believe our sales growth will continue to be weighted toward sales of lower margin discretionary products, but due to our efforts in various pricing and sourcing initiatives and our building materials product initiatives, will result in relatively neutral gross margin trends for the full year.

Overall, we anticipate operating expenses will grow at approximately half the rate of our gross profit growth in 2015, reflecting inflationary increases and incremental costs to support our sales growth expectations. We expect base business results will generate operating profit growth in the mid-teens.

Based on these expectations, we project that 2015 earnings will range from $2.72 to $2.87 per diluted share. We expect cash provided by operations will approximate net income for fiscal 2015 and anticipate that we may use approximately $100.0 million to $150.0 million in cash for share repurchases.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, and other risks detailed in Item 1A of this Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

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


•	those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and


•	those for which changes in the estimate or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. We believe the following critical accounting estimates require us to make the most difficult, subjective or complex judgments.

Allowance for Doubtful Accounts

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

As our business is seasonal, our customers’ businesses are also seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on our accounts receivable aging. These reserves range from 0.1% for amounts currently due up to 100% for specific accounts more than 60 days past due.

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


•	aging statistics and trends;


•	customer payment history;


•	independent credit reports; and


•	discussions with customers.

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.2% of net sales annually. Write-offs as a percentage of net sales were 0.1% in 2014, 0.1% in 2013 and 0.1% in 2012. We expect that write-offs will remain at approximately 0.1% of net sales in 2015.

At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year-end allowance for doubtful accounts balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our hindsight analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our reserve methodology is appropriate.

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2014, pretax income would change by approximately $0.8 million and earnings per share would change by approximately $0.01 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2014).

Inventory Obsolescence

Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volumes. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently have lower velocity. We classify products into 13 classes at the sales center level based on sales at each location over the past 12 months (or 36 months for tile and parts products). All inventory is included in these classes, except for special order non-stock items that lack an SKU in our system and products with less than 12 months of usage. The table below presents a description of these inventory classes:



Class 0	new products with less than 12 months usage (or 36 months for tile and parts products)

Classes 1-4	highest sales value items, which represent approximately 80% of net sales at the sales center

Classes 5-12	lower sales value items, which we keep in stock to provide a high level of customer service

Class 13	products with no sales for the past 12 months at the local sales center level, excluding special order products not yet delivered to the customer

Null class	non-stock special order items

There is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly. We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit. We provide a reserve of 5% for inventory in classes 5-13 and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for excess inventory in class 13. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis. We also evaluate whether the calculated reserve provides sufficient coverage of the total class 13 inventory.

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


•	the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center and on a company-wide basis;


•	changes in customer preferences or regulatory requirements;


•	seasonal fluctuations in inventory levels;


•	geographic location; and


•	superseded products and new product offerings.

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

If the balance of our inventory reserve increased or decreased by 20% at December 31, 2014, pretax income would change by approximately $1.3 million and earnings per share would change by approximately $0.02 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, 2014).

Vendor Incentives

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

Throughout the year, we estimate the amount of the incentive earned based on our estimate of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning the incentives. We accrue vendor incentives on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for annual purchases, future inventory levels and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including weather and changes in economic conditions. Changes in our purchasing mix also impact our incentive estimates, as incentive rates can vary depending on our volume of purchases from specific vendors. We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor incentive accruals may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods. These adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor incentive arrangements are based on calendar year periods. We update our estimates for these arrangements at year end to reflect actual annual purchase levels. In the first quarter of the subsequent year, we prepare a hindsight analysis by comparing actual vendor incentives received to the prior year vendor incentive balances. Based on our hindsight analysis, we concluded that our vendor incentive estimates were within a range of acceptable estimates and that our estimation methodology is appropriate.

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

Income Taxes

We record deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

As of December 31, 2014, we have not provided for United States income taxes on undistributed earnings of our foreign subsidiaries, as we have invested or expect to invest the undistributed earnings indefinitely. If these earnings are repatriated to the United States in the future, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation.

We hold, through our wholly owned affiliates, cash balances in the countries in which we operate, including amounts held outside the United States. Most of the amounts held outside the United States could be repatriated to the United States, but under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws including the imposition of withholding taxes in some jurisdictions. Historically our foreign locations have not generated adequate earnings to both repatriate to the United States and fund foreign operations. Those historical and future foreign earnings will remain permanently reinvested and be used to support our foreign operations and pay non-U.S. obligations.

We have operations in 39 states, 1 United States territory and 11 foreign countries. The amount of income taxes we pay is subject to adjustment by the applicable tax authorities. We are subject to regular audits by federal, state and foreign tax authorities. We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions, assess the probability of examinations by taxing authorities and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. These adjustments may include changes in valuation allowances that we have established. As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

Each year, we prepare a return to provision analysis upon filing our income tax returns. Based on this hindsight analysis, we concluded that our prior year income tax provision was within a range of acceptable estimates and that our provision calculation methodology is appropriate.

Incentive Compensation Accrual

Our incentive compensation structure is designed to attract, motivate and retain employees. Our incentive compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility. The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria, with a component based on management’s discretion. We calculate bonuses based on the achievement of certain key measurable financial and operational results, including budgeted operating income and diluted earnings per share.

Management sets the objectives for our bonus plans at the beginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. The Compensation Committee of our Board approves these objectives for certain bonus plans. We record incentive compensation accruals based on positive operating income achieved in a quarter as a percentage of total expected operating income for the year. We estimate total expected operating income for the current plan year using management’s estimate of the total overall incentives earned per the stated bonus plan objectives. Starting in June, and continuing each quarter through our fiscal year end, we adjust our estimated incentive compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific objectives and management’s estimates related to the discretionary components of the bonus plans.

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


•	the discretionary components of the bonus plans;


•	differences between estimated and actual performance; and


•	our projections related to achievement of multiple-year performance objectives for our Strategic Plan Incentive Program.

We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we compare the actual bonus payouts to amounts accrued at the previous year end to determine the accuracy of our incentive compensation estimates. Based on our hindsight analysis, we concluded that our incentive compensation accrual balance was within a reasonable range of acceptable estimates and that our reserve methodology is appropriate.

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill is our largest intangible asset. At December 31, 2014, our goodwill balance was $173.9 million, representing approximately 19% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.

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

Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. As of October 1, 2014, we had 215 reporting units with allocated goodwill balances. The highest goodwill balance was $5.7 million and the average goodwill balance was $0.8 million.

In October 2014 and October 2013, we performed our annual goodwill impairment test and did not identify any goodwill impairment at the reporting unit level. During the third quarter of 2012, we performed an interim goodwill impairment analysis based on our identification of impairment indicators related to our results through the end of the 2012 pool season. As a result of our interim impairment analysis in the third quarter of 2012, we recorded a non-cash goodwill impairment charge of $6.9 million equal to the total carrying amount of our United Kingdom reporting unit.

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

To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our aggregate estimated fair values were 5% below our market capitalization, which we consider to be conservative, but reasonable for the purpose of our goodwill impairment test. Our sensitivity analysis, which incorporated more conservative projected cash flow assumptions and fell close to 10% below our market capitalization, resulted in the identification of no goodwill impairments and no additional locations as potentially at risk.

We performed a second sensitivity analysis over our two remaining key fair value assumptions and determined that a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate would generate fair value estimates significantly below our market capitalization, evidencing that our estimates for these assumptions fell at the conservative end of a range of acceptable estimates.

Based on the magnitude of its goodwill balance and the continued economic challenges in Italy, we currently consider our Italy reporting unit as most at risk for goodwill impairment. Our most sensitive estimates pertain to this reporting unit’s product mix and the related impact on our gross margin projections, which are incorporated into our discounted cash flow assumptions. As of December 31, 2014, our at-risk reporting unit in Italy had a goodwill balance of $3.8 million. One reporting unit in Quebec, Canada, which has a significant goodwill balance, was identified at risk for goodwill impairment when results began to fall below expectations in 2013 largely due to its heightened sensitivity to weather and certain execution challenges. We cannot be assured of favorable weather conditions in any given year, which strongly impact this reporting unit’s results. As of December 31, 2014, our at-risk reporting unit in Quebec had a goodwill balance of $2.7 million.

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. ASU 2014-09 will be effective for annual periods beginning after December 15, 2016 and will replace most existing revenue recognition guidance in U.S. GAAP. The guidance may be applied using either a retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our financial position, results of operations and related disclosures.

RESULTS OF OPERATIONS

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



	Year Ended December 31,
	2014		2013		2012
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	71.4		71.6		71.0
Gross profit	28.6		28.4		29.0
Operating expenses	20.2		20.5		21.3
Goodwill impairment	—		—		0.4
Operating income	8.4		8.0		7.4
Interest expense, net	0.3		0.3		0.3
Income before income taxes and equity earnings	8.1	%	7.6	%	7.1	%

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

Our discussion of consolidated operating results includes the operating results from acquisitions in 2014, 2013 and 2012. We have included the results of operations in our consolidated results since the respective acquisition dates.

Fiscal Year 2014 compared to Fiscal Year 2013

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



(Unaudited)	Base Business						Excluded						Total
(in thousands)	Year Ended						Year Ended						Year Ended
	December 31,						December 31,						December 31,
	2014			2013			2014			2013			2014			2013
Net sales	$	2,221,788		$	2,077,945		$	24,774		$	1,755		$	2,246,562		$	2,079,700

Gross profit	634,738			590,832			8,602			445			643,340			591,277
Gross margin	28.6		%	28.4		%	34.7		%	25.4		%	28.6		%	28.4		%

Operating expenses	447,348			425,382			7,122			409			454,470			425,791
Expenses as a % of net sales	20.1		%	20.5		%	28.7		%	23.3		%	20.2		%	20.5		%

Operating income	187,390			165,450			1,480			36			188,870			165,486
Operating margin	8.4		%	8.0		%	6.0		%	2.1		%	8.4		%	8.0		%

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



Acquired	Acquisition Date	Net Sales Centers Acquired	Periods Excluded
St. Louis Hardscape Material & Supply, LLC ⁽¹⁾⁽²⁾	December 2014	1	December 2014
Pool Systems Pty. Ltd.	July 2014	3	August - December 2014
DFW Stone Supply, LLC ⁽¹⁾	March 2014	2	March - December 2014
Atlantic Chemical & Aquatics Inc.⁽¹⁾	February 2014	2	February - December 2014
B. Shapiro Supply, LLC ⁽¹⁾	May 2013	1	January - July 2014 and May - July 2013
Swimming Pool Supply Center, Inc. ⁽¹⁾	March 2013	1	January - May 2014 and March - May 2013


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

⁽²⁾

We completed this acquisition on December 31, 2014. We excluded this sales center from base business for the period identified as per our definition of base business, but also because no results of operations are included in fiscal 2014 due to the acquisition date. We also have not included this sales center in our sales center count as of December 31, 2014, nor in the table below which summarizes the changes in our sales centers during the year.

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

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

The table below summarizes the changes in our sales centers during 2014:



December 31, 2013	321
Acquired	7
New locations	3
Consolidated locations	(3	)
December 31, 2014	328

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

Net Sales



(in millions)	Year Ended December 31,
	2014		2013		Change
Net sales	$	2,246.6	$	2,079.7	$	166.9	8%

Net sales increased 8% compared to last year, including a 7% increase in base business sales. After last year’s late start to the pool season, we anticipated a comparative benefit from more favorable weather conditions in 2014, but this expectation did not materialize due to prolonged cold and wet weather in many of our seasonal markets, particularly Canada and the northern United States. As a result, the timing of 2014 pool openings in many of those areas was similar to 2013. In 2014, base business sales increased by 5% in our seasonal markets versus 8% in our largest, year-round markets compared to 2013.

The overall base business sales increase also reflected the impact of the following (listed in order of estimated magnitude):


•	continued improvement in consumer discretionary expenditures, including gradual recovery in remodeling and replacement activity, as evidenced by sales growth rates for product offerings such as building materials and equipment (see discussion below);


•	market share gains attributed to continued improvements in customer service levels and expansion of product offerings;


•	an increase in customer early buy purchases; and


•	inflationary (estimated at approximately 1%) product cost increases.

Sales of building materials and tile grew by 20% compared to last year. Collectively, these products accounted for close to 10% of our total sales. Our continued strong growth in building materials reflected market share growth resulting from our expansion of stocking locations and broader product offerings as well as the partial recovery in pool remodeling. Sales of equipment, which includes heaters, pumps, lighting and filters, increased by approximately 11% compared to last year. Chemical sales increased by 3% while chemical pricing remained relatively flat.

Base business sales increased 9% in the first quarter of 2014. Approximately 2% of our first quarter sales growth reflected a change in the timing of customer early buy purchases, which effectively shifted sales into the first quarter of 2014 that historically have occurred in the second quarter. Despite not having the expected benefit of a return to normal seasonal weather patterns, we realized base business sales growth of 7% and 5% in the second and third quarters of 2014. For our seasonally slow fourth quarter, base business sales increased 8% in 2014, as we capitalized on favorable weather conditions during this time period. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 34.

Gross Profit



(in millions)	Year Ended December 31,
	2014			2013			Change
Gross profit	$	643.3		$	591.3		$	52.0	9%
Gross margin	28.6		%	28.4		%

Gross margin increased 20 basis points over last year. We believe our efforts in various pricing and sourcing initiatives in 2014, as well as higher volume incentives from certain of our vendors contributed to this improvement. Favorable product mix due to higher building materials sales growth rates and a reduction in equipment sales growth rates compared to 2013 also added some benefit given comparatively lower margins on heaters, pumps, lighting and filters. The unfavorable gross margin impact of first quarter 2014 customer early buy purchases somewhat offset these benefits. Purchases included in customer early buys are primarily comprised of lower margin discretionary products and include applicable discounts.

Year over year, gross margin comparisons ranged from mostly flat to slightly improved each quarter during 2014, with a decline of 20 basis points in the first quarter, due to the impact of customer early buy purchases described above, then improvements of 25 basis points in the second quarter, 50 basis points in the third quarter and 10 basis points in the fourth quarter, which also reflects some benefit from our recent acquisitions.

Operating Expenses



(in millions)	Year Ended December 31,
	2014			2013			Change
Operating expenses	$	454.5		$	425.8		$	28.7	7%
Operating expenses as a percentage of net sales	20.2		%	20.5		%

Operating expenses increased 7% compared to 2013, with base business operating expenses up 5%. The increase in base business operating expenses is primarily attributed to the following (listed in order of magnitude with approximate impact):


•	greater personnel costs ($12.4 million, including a $2.7 million increase related to performance-based incentive compensation expense);


•	higher freight costs ($2.9 million);


•	increased facility-related expenses, including building rent, utilities and maintenance ($2.3 million); and


•	higher outside professional fees ($2.3 million).

Interest Expense, net

Interest expense, net increased 11% compared to 2013. Average outstanding debt was $342.9 million for 2014 versus $256.1 million for 2013. The weighted average effective interest rate declined to 1.9% in 2014 compared to 2.4% in 2013. The decrease in our effective interest rate compared to last year reflects the utilization of available borrowing capacity on our Receivables Facility at lower interest rates than under our Credit Facility.

Income Taxes

Our effective income tax rate was 38.9% at December 31, 2014, consistent with our rate of 38.8% at December 31, 2013.

Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 14% to $110.7 million in 2014 compared to $97.3 million in 2013, while earnings per share increased 19% to $2.44 per diluted share compared to $2.05 per diluted share in 2013.

Earnings per share for 2014 included an accretive impact of approximately $0.05 per diluted share from the reduction in our weighted average shares outstanding due to our share repurchase activities during the year.

Fiscal Year 2013 compared to Fiscal Year 2012

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



(Unaudited)	Base Business						Excluded						Total
(in thousands)	Year Ended						Year Ended						Year Ended
	December 31,						December 31,						December 31,
	2013			2012			2013			2012			2013			2012
Net sales	$	2,067,579		$	1,949,035		$	12,121		$	4,939		$	2,079,700		$	1,953,974

Gross profit	588,095			565,932			3,182			1,475			591,277			567,407
Gross margin	28.4		%	29.0		%	26.3		%	29.9		%	28.4		%	29.0		%

Operating expenses	421,527			413,626			4,264			1,966			425,791			415,592
Expenses as a % of net sales	20.4		%	21.2		%	35.2		%	39.8		%	20.5		%	21.3		%

Goodwill impairment	—			6,946			—			—			—			6,946

Operating income (loss)	166,568			145,360			(1,082		)	(491		)	165,486			144,869
Operating margin	8.1		%	7.5		%	(8.9		)%	(9.9		)%	8.0		%	7.4		%

For an explanation of how we calculate base business, please refer to the discussion of base business on page 26 under the heading “Fiscal Year 2014 compared to Fiscal Year 2013.”

For purposes of comparing operating results for the year ended December 31, 2013 to the year ended December 31, 2012, we excluded acquired sales centers from base business for the periods identified in the table below. There was one sales center opened in a new market that was excluded from base business as of December 31, 2013.



Acquired ⁽¹⁾	Acquisition Date	Net Sales Centers Acquired	Periods Excluded
B. Shapiro Supply, LLC	May 2013	1	May - December 2013
Swimming Pool Supply Center, Inc.	March 2013	1	March - December 2013
CCR Distribution	March 2012	1	January - May 2013 and March - May 2012
Ideal Distributors Ltd.	February 2012	4	January - April 2013 and February - April 2012
G.L. Cornell Company	December 2011	1	January - February 2013 and January - February 2012
Poolway Schwimmbadtechnik GmbH	November 2011	1	January - February 2013 and January - February 2012


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

The table below summarizes the changes in our sales centers during 2013:



December 31, 2012	312
Acquired	2
New locations	10
Consolidated locations	(3	)
December 31, 2013	321

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

Net Sales



(in millions)	Year Ended December 31,
	2013		2012		Change
Net sales	$	2,079.7	$	1,954.0	$	125.7	6%

Net sales, as well as base business sales, increased 6% in 2013. The base business sales increase is comprised of a 6% increase from swimming pool product sales and an 11% increase from irrigation product sales. In local currencies, net sales in Europe were relatively flat compared to 2012, reflecting the impact of cold and wet weather conditions on results over the first half of the year, and the effects of the continued difficult economic environment.

The principal factors impacting our base business sales growth included the following (listed in order of estimated magnitude):


•	market share gains attributable to continued improvements in customer service levels, sales growth rates for certain discretionary product offerings such as building materials (see discussion below), heaters, pumps and lighting, and higher base business sales growth for irrigation systems and landscape equipment due in part to the gradual recovery of the housing market in some of our key states;

•

challenging weather comparisons in the first half of the year, resulting in declines in non-discretionary product sales, primarily in our seasonal markets, supported by continued growth in our largest, year-round markets and discretionary product sales (for the year, net sales growth of 11% in our largest, year-round markets tracked well above the 2% growth in our seasonal markets, although this differential narrowed throughout the third and fourth quarters as weather comparisons normalized); and


•	inflationary product cost increases (estimated at approximately 1% to 2%).

Sales of building materials and tile grew by 20% in 2013 compared to 2012, although collectively these products only accounted for approximately 11% of our total sales. Chemical sales declined by 1.5%, reflecting lower volume due to delayed pool openings compared to 2012, while chemical pricing remained relatively flat.

We realized base business sales growth of 2% in the first quarter and 4% in the second quarter of 2013, compared to the 2012 periods. Throughout the first half of 2013, comparatively difficult weather versus the first half of 2012 suppressed our sales growth. Sales through May of 2012 benefited from unusually favorable weather, especially across the Eastern half of North America. Record warm temperatures in the Northeast and Midwest United States spurred an earlier than normal start to remodeling projects and new pool construction in the 2012 season. In 2013, later than normal pool openings in our seasonal markets in North America and Europe further added to these challenging comparisons. Weather normalized in the latter half of 2013, leading to base business sales growth of 9% in the third quarter and 11% in the fourth quarter. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations beginning on page 34.

Gross Profit



(in millions)	Year Ended December 31,
	2013			2012			Change
Gross profit	$	591.3		$	567.4		$	23.9	4%
Gross margin	28.4		%	29.0		%

Gross margin declined approximately 60 basis points from 2012. This decrease is primarily due to unfavorable product mix, customer mix and geographic mix as well as competitive pricing pressures. Double-digit sales growth of higher value, lower margin discretionary products such as variable speed pumps, high efficiency heaters, LED lighting products, irrigation systems and landscape equipment positively contributed to sales and gross profit dollars but negatively impacted our margins. This growth outpaced our sales of higher margin, non-discretionary product lines generally associated with basic pool maintenance and repair activity. Additionally, as a result of the slower start to the 2013 season, geographic regions with generally higher margins contributed a proportionally smaller share of our total sales growth.

The following factors collectively impacted gross margin throughout 2013:


•	changes in our product mix, as discussed in detail above;


•	growth in sales to larger, lower margin customers, primarily those focused on remodeling and construction activities;


•	higher sales growth rates in our lower margin, year-round markets compared to our seasonal markets;


•	lower volume incentive rates from certain vendors;


•	higher credit card fees as a percentage of net sales; and


•	increased presence of Internet retailers who set low industry reference prices for certain products.

Year over year, gross margin comparisons fell below the prior year each quarter during 2013, with declines of 60 basis points in the first quarter, 50 basis points in the second quarter, 60 basis points in the third quarter and 90 basis points in the fourth quarter. These declines reflect the changes in product and customer mix discussed above, while geographic mix also contributed to the margin decline in the first and second quarters of 2013. The larger decline in the fourth quarter is due primarily to a more favorable impact on fourth quarter 2012 gross margins from certain vendor incentives.

Operating Expenses



(in millions)	Year Ended December 31,
	2013			2012			Change
Operating expenses	$	425.8		$	415.6		$	10.2	2%
Operating expenses as a percentage of net sales	20.5		%	21.3		%

Operating expenses, as well as base business operating expenses, increased 2% compared to 2012. Increases in overall compensation-related costs, driven by inflationary salary increases and headcount increases to support new sales centers, and higher professional fees were partially offset by a reduction in performance-based compensation.

Interest Expense, net

Interest expense, net for 2013 was consistent with 2012. Average outstanding debt was $256.1 million for 2013 versus $250.3 million for 2012. The weighted average effective interest rate declined slightly to 2.4% in 2013 compared to 2.6% in 2012.

Income Taxes

Our effective income tax rate was 38.8% at December 31, 2013 compared to 41.0% at December 31, 2012. Excluding the impact of the 2012 goodwill impairment charge, our effective income tax rate for 2012 was 39.8%. The impact on the provision from the change in our valuation allowance for foreign net operating losses was 0.57% in 2013 compared to 1.97% in 2012.

Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 19% to $97.3 million in 2013 compared to $82.0 million in 2012, while earnings per share increased 20% to $2.05 per diluted share compared to $1.71 per diluted share in 2012. Excluding the $6.9 million ($0.14 per diluted share) impact from the goodwill impairment charge in 2012, net income attributable to Pool Corporation for 2013 increased 9% over 2012 adjusted net income attributable to Pool Corporation of $88.9 million, while diluted EPS increased 11% from adjusted diluted earnings per share of $1.85 for 2012.

Earnings per share for 2013 also included an accretive impact of approximately $0.02 per diluted share from the reduction in our weighted average shares outstanding due to our share repurchase activities during the year.

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 landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2014, we generated approximately 65% of our net sales and 96% 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 2014 and 2013. 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)	2014												2013
	First			Second			Third			Fourth			First			Second			Third			Fourth
Statement of Income Data
Net sales	$	406,344		$	848,240		$	615,536		$	376,442		$	370,362		$	790,392		$	578,157		$	340,789
Gross profit	114,100			246,976			176,244			106,020			104,761			228,166			162,557			95,793
Operating income (loss)	8,646			122,499			58,457			(732		)	6,932			111,993			53,375			(6,814		)
Net income (loss)	4,188			73,863			34,958			(1,979		)	3,440			66,533			32,332			(4,975		)

Net sales as a % of annual net sales	18		%	38		%	27		%	17		%	18		%	38		%	28		%	16		%
Gross profit as a % of annual gross profit	18		%	38		%	27		%	16		%	18		%	39		%	27		%	16		%
Operating income (loss) as a % of annual operating income	5		%	65		%	31		%	—		%	4		%	68		%	32		%	(4		)%

Balance Sheet Data
Total receivables, net	$	211,107		$	306,500		$	207,165		$	140,645		$	188,294		$	281,064		$	180,898		$	125,287
Product inventories, net	527,304			451,507			414,331			466,962			494,321			424,679			365,596			429,197
Accounts payable	370,002			233,549			154,511			236,294			338,026			239,976			142,777			214,596
Total debt