Attached files

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EX-31.1 - POOL CFO SECTION 302 CERTIFICATION - POOL CORPexhibit311_2017.htm
EX-32.1 - POOL CEO AND CFO SECTION 906 CERTIFICATION - POOL CORPexhibit321_2017.htm
EX-31.2 - POOL CEO SECTION 302 CERTIFICATION - POOL CORPexhibit312_2017.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP - POOL CORPexhibit231_2017.htm
EX-21.1 - POOL SUBSIDIARY LISTING - POOL CORPexhibit211_2017.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, 2017
or
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
poolcorplogoa10.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
 
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES  ¨    NO  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, 2017 was $4,704,253,988.
As of February 21, 2018, there were 40,396,155 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement to be mailed to stockholders on or about March 29, 2018 for the
Annual Meeting to be held on May 2, 2018, are incorporated by reference in Part III of this Form 10-K.




POOL CORPORATION

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




PART I.
Item 1.  Business

General

Pool Corporation (the Company, which may be referred to as we, us or our) is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the top three distributors of irrigation and related 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, 2017, we operated 351 sales centers in North America, Europe, South America and Australia through our four distribution networks:

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

Our Industry

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

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

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

long-term growth in housing units in warmer markets due to the population migration toward the southern United States, which contributes 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, landscaping and improvements to outdoor living spaces often being key components to both pool installations and remodels; and
consumers using more automation and control products, higher quality materials and other pool features that add to our sales opportunities over time.

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


1


The following table reflects growth in the domestic installed base of in-ground swimming pools over the past 11 years (based on Company estimates and information from 2016 P.K. Data, Inc. reports):

installedbasegraph2017.jpg

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

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

The irrigation distribution business is split between residential and commercial markets, with the majority of sales related to the residential market.  Irrigation activities account for approximately 50% of total spending in the irrigation industry, with the remaining 50% of spending related to power equipment, landscape and specialty outdoor products and accessories.  As such, our irrigation business is more heavily weighted toward new home construction activities compared to our pool business. Over the last five years, our irrigation business has benefited from the continued slow recovery of single-family home construction as irrigation system installations and landscape projects typically correlate with, but lag, new home construction.

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, single-family housing turnover and home value appreciation may correlate with demand for new pool construction, with higher rates of home turnover and appreciation having a positive impact on new pool starts over time.  We also believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new swimming pools and irrigation systems.  Similar to other discretionary purchases, replacement and refurbishment activities are more heavily impacted by economic factors such as consumer confidence, GDP and employment.


2


While we estimate that new pool construction has increased to approximately 75,000 new units in 2017 from the historically low levels experienced during the economic downturn, construction levels are still down approximately 65% compared to peak historical levels and down approximately 50% to 55% from what we consider normal levels.

We believe there is potential for continued market recovery over the next several years. The economic downturn, which spanned from late 2006 to early 2010 and reached its low point in 2009 (also referred to as the Great Recession), created a build up of deferred replacement and remodeling activity, which we have largely fulfilled over the past seven years. We expect that new pool and irrigation construction levels will continue to grow incrementally, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate greater growth over the next four to seven years. Additionally, we believe favorable demographics from an aging population and southern migration are ideal for increased residential outdoor living investment. We expect that market conditions in the United States will continue to improve, enabling further replacement, remodeling and new construction activity and that the industry will realize an annual growth rate of approximately 4% to 7% over this time period. As economic trends indicate that consumer spending has largely recovered and that residential construction activities will likely continue to improve, we believe that we are well positioned to take advantage of both the market expansion and the inherent long-term growth opportunities in our industry.

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

In 2017 specifically, our industry experienced modestly favorable weather overall, despite the severe storms that impacted our industry in Texas and Florida in September and October. Due to the repairs required following major storms, sales mostly recovered by the end of the year. In 2016, an earlier start to the pool season due to warmer than usual temperatures and overall favorable weather throughout the rest of the year benefited the industry as a whole. In 2015, excessive precipitation impacted our industry in the second quarter; however a mild fall and delayed winter alleviated any contraction in industry growth rates.

Business Strategy and Growth

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

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

We promote the growth of our industry through various advertising and promotional programs intended to raise consumer awareness of the benefits and affordability of pool ownership, the ease of pool maintenance and the many ways in which a pool and the surrounding spaces may be enjoyed beyond swimming.  These programs include 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, product merchandising, business management system implementation, comprehensive product offering selections and efficient ordering and inventory management processes. In addition to these programs, we feature consumer showrooms in over 80 of our sales centers and host our annual Retail Summit to educate our customers about product offerings and the overall industry. We also act as a day-to-day resource by offering product and market expertise to serve our customers’ unique needs.


3


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.

With our 2008 acquisition of National Pool Tile Group, Inc., we added a market leading brand of pool tile and composite pool finish products, and gained a position in a wider market. To increase operating efficiency and improve market reach, we have consolidated and repositioned NPT standalone sales centers and established NPT showrooms within certain existing sales centers. In addition to our 16 standalone NPT sales centers, we currently have over 80 SCP and Superior sales centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as stocking locations for our NPT branded products.

We feel the growth opportunities for the NPT network closely align with those of our other networks, as we see continued opportunity to expand under the NPT brand. 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 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 external environment, we have increased our focus on new sales center openings, complemented by strategic acquisitions and consolidations, depending on our market presence. Since the beginning of 2015, we have opened 11 new sales centers, including 1 new sales center in 2017. We expect to open between 4 and 6 new sales centers in 2018. Since the beginning of 2015, we have completed 9 acquisitions consisting of 24 sales centers (net of sales center consolidations within one year of acquisition). We plan to continue to make strategic acquisitions and open new sales centers to further penetrate existing markets and expand into both new geographic markets and new product categories.  For additional discussion of our recent acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

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

We estimate that price inflation has averaged 1% to 2% annually in our industry over the past 10 years.  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 between 2015 and 2017 was consistent with the ten-year average. We anticipate price inflation will vary some by product lines, but will approximate the ten-year average overall in 2018.

Customers and Products

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

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

swimming pool remodelers and builders;
specialty retailers that sell swimming pool supplies;
swimming pool repair and service businesses;
irrigation construction and landscape maintenance contractors; and
other commercial customers.


4


We conduct our operations through 351 sales centers in North America, Europe, Australia and South America. Our primary markets, with the highest concentration of swimming pools, are California, Texas, Florida and Arizona, collectively representing approximately 52% of our 2017 net sales.  In 2017, we generated approximately 94% of our sales in North America, 5% in Europe and 1% in South America and Australia combined. While we continue to expand both domestically and internationally, we expect this geographic mix to be similar over the next few years. References to product line and product category data throughout this Form 10-K generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.

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

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

We currently have over 500 product lines and over 50 product categories. Based on our 2017 product classifications, sales for our pool and spa chemicals product category represented approximately 12% of total net sales for 2017 and 13% of our total net sales in 2016 and 2015. No other product category accounted for 10% or more of total net sales in any of the last three fiscal years.

Our maintenance, repair and replacement products are generally described as follows:

maintenance and minor repair (non-discretionary); and
major refurbishment and replacement (partially discretionary).

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

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

5


Over the last several years we have increased our product offerings and service abilities related to commercial swimming pools, including the acquisition of Lincoln Pool Products in April 2017. We consider this area to be a key growth opportunity as we focus more attention on providing to customers who service large commercial installations such as hotels, universities and community recreational facilities. However we are leveraging our existing networks and relationships to supply to this market.

Growth in the replacement and refurbishment market following the Great Recession led to 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, and irrigation and related 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, including growth in our higher margin private label and exclusive products (PLEX) and our expansion of building materials product offerings, has helped offset these gross margin declines and will lead to somewhat flat gross margin trends over the next few years.

Operating Strategy

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

to offer our customers a choice of distinctive product selections, 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 on their performance relative to predetermined standards that include both financial and operational measures.  Our corporate support groups provide our field operations with various services, such as developing and coordinating customer and vendor related programs, 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. For additional information regarding our inventory management, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Inventory Obsolescence,” of this Form 10-K.

We also operate four centralized shipping locations (CSLs) 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 manage their shipments by offering seasonal terms to qualifying purchasers such as Pool Corporation, which are referred to as early buy purchases.  These early buy purchases typically allow us to place orders in the fall at a modest discount, take delivery of product during the off-season months and pay for these purchases in the spring or early summer.

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


6


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 20%, 10% and 8%, respectively, of the cost of products we sold in 2017.

Competition

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

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

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

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

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 4,000 people at December 31, 2017. Given the seasonal nature of our business, our peak employment period is the summer and, depending on expected sales levels, we add 200 to 500 employees to our work force to meet seasonal demand.

Intellectual Property

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


7


Geographic Areas

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

 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
United States
 
$
2,545,270

 
$
2,354,726

 
$
2,168,802

International
 
242,918

 
216,077

 
194,337

 
 
$
2,788,188

 
$
2,570,803

 
$
2,363,139


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

 
 
December 31,
 
 
2017
 
2016
 
2015
United States
 
$
95,659

 
$
79,064

 
$
65,885

International
 
5,280

 
4,226

 
3,969

 
 
$
100,939

 
$
83,290

 
$
69,854


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 earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives, and industry, general economic and other forecasts of trends 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.


8


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 may be adversely affected by unfavorable economic conditions.

Consumer discretionary spending affects our sales and is impacted by factors outside of our control, including general economic conditions, disposable income levels, consumer confidence and access to credit. In economic downturns, the demand for swimming pool, irrigation and related outdoor lifestyle products may decline, often corresponding with declines in discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction. Maintenance and repair products and certain replacement equipment, which are required to maintain existing swimming pools, currently account for approximately 85% of net sales and gross profits related to our swimming pool business; however 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 refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance. Such downturns expose us to certain additional risks, including but not limited to the risk of customer closures or bankruptcies, which could shrink our potential customer base and inhibit our ability to collect on those customers’ receivables.

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

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 irrigation installations and landscape maintenance. These weather conditions adversely affect sales of our products. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions, which could result in decreased pool and irrigation system installations and negatively impact our sales. For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.

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

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

Our largest suppliers are Pentair Water Pool and Spa, Inc., Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 20%, 10% and 8%, respectively, of the costs of products we sold in 2017. A decision by our largest suppliers, acting individually or in concert, to sell their products directly to retailers or other end users of their products, bypassing distribution companies like ours, would have an adverse effect on our business. Additionally, the loss 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.


9


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

Within our industry, we directly compete against various regional and local distributors as they compete against our customers for the business of pool owners and other end-use customers. We indirectly compete against mass market retailers and large pool or irrigation supply retailers as they purchase the great majority of their needs directly from manufacturers, and to a lesser extent with internet retailers, as they purchase the majority of their needs from distributors. Outside of our industry, we compete indirectly with alternative suppliers of big ticket consumer discretionary products, such as boat and motor home distributors, and with other companies who rely on discretionary homeowner expenditures, such as home remodelers. New competitors may emerge as there are low barriers to entry in our industry. Given the density and demand for pool products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida and Arizona. These states encompass our four largest markets and represented approximately 52% of our net sales in 2017.

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

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

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

Past growth may not be indicative of future growth.

Historically, we have experienced substantial sales growth through organic market share gains, new sales center openings and acquisitions that have increased our size, scope and geographic distribution. Since the beginning of 2015, we have opened 11 new sales centers and we have completed 9 acquisitions consisting of 24 sales centers (net of sales center consolidations within one year of acquisition). 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 2017, we generated approximately 62% of our net sales and 83% of our operating income in the second and third quarters of the year. These quarters represent the peak months of both swimming pool use, installation, remodeling and repair, and irrigation installations and maintenance. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.


10


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

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

Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply with these laws and regulations may result in 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. Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing changes.

The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. We will 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 combustibles and oxidizing compounds, at our sales centers. A fire, explosion or flood affecting one of our facilities could give rise to fire, safety and casualty losses and related liability claims. We maintain what we believe is prudent insurance protection. However, we cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable. Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage.

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

Our international operations, which accounted for 9% of our total net sales in 2017, 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.

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. 

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

Taxation and tax policy changes, tax rate changes, new tax laws, revised tax law interpretations, and changes in accounting standards and guidance related to tax matters, may cause fluctuations in our effective tax rate. The Tax Cuts and Jobs Act (TJCA or the Act), enacted in December 2017, significantly changes U.S. tax law. Our 2017 financial results include estimates regarding the effects of the Act, which are based on our current interpretation of this legislation and on reasonable estimates and may change as a result of new guidance issued by regulators or changes in our estimates. Additionally, in the first quarter of 2017, we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis. Our projections of financial statement impacts related to ASU 2016-09 are subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. Excess tax benefits or deficiencies recognized under ASU 2016-09 vary from quarter to quarter and past results may not be indicative of future results. Our effective tax rate may also be impacted by changes in the geographic mix of our earnings.


11


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

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

We rely on information technology systems to support our business operations. 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, transaction processing, financial reporting, collections and cost management.  Our ability to operate effectively on a day‑to‑day basis and accurately report our results depends on a solid technological infrastructure, which is inherently susceptible to internal and external threats.  We are vulnerable to interruption by fire, natural disaster, power loss, telecommunication failures, internet failures, security breaches and other catastrophic events. Exposure to various types of cyber-attacks such as malware, computer viruses, worms, or other malicious acts, as well as human error, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services. Advances in computer and software capabilities, encryption technology and other discoveries increase the complexity of our technological environment, including how each interact with our various software platforms, and may delay or hinder our ability to process transactions and compromise the integrity of our data, which could result in a material adverse impact on our financial condition and results of operations.
  
We have designed numerous procedures and protocols to mitigate cybersecurity risks. We continually invest in information technology security and update our business continuity plan. In the event a cybersecurity threat occurs, we have processes in place to timely notify the appropriate personnel for assessment and resolution. We also continue to expand our company-wide training programs as part of our efforts to prevent such attacks. However, the failure to maintain security over and prevent unauthorized access to our data, our customers’ personal information, including credit card information, or data belonging to our suppliers, could put us at a competitive disadvantage. Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.

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.


12



Item 2.  Properties

We lease the Pool Corporation corporate offices, which consist of approximately 59,100 square feet of office space in Covington, Louisiana, from an entity in which we have a 50% ownership interest. We own two sales center facilities in Florida, two in Texas, one in California and one in Georgia. We lease all of our other properties and the majority of our leases have three to seven year terms. As of December 31, 2017, we had 15 leases with remaining terms longer than seven years that expire between 2025 and 2032.

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

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

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

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

Network
 
12/31/16
 
New
Locations
 
Consolidated
Locations (2)
 
Acquired
Locations
 
12/31/17
SCP
 
162

 
1

 

 
4

 
167

Superior
 
65

 

 

 
2

 
67

Horizon
 
66

 

 
(1
)
 

 
65

NPT (1)
 
17

 

 
(1
)
 

 
16

Total Domestic
 
310

 
1

 
(2
)
 
6

 
315

SCP International
 
34

 

 
(1
)
 
3

 
36

Total
 
344

 
1

 
(3
)
 
9

 
351


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



13



The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, 2017:
Location
 
SCP
 
Superior
 
Horizon
 
NPT
 
Total
United States
 
 
 
 
 
 
 
 
 
 
California
 
29

 
23

 
17

 
6

 
75

Texas
 
21

 
5

 
17

 
5

 
48

Florida
 
33

 
6

 
4

 
1

 
44

Arizona
 
6

 
6

 
10

 
2

 
24

Georgia
 
6

 
2

 

 
1

 
9

Nevada
 
2

 
3

 
3

 

 
8

Tennessee
 
5

 
3

 

 

 
8

Washington
 
1

 

 
6

 

 
7

Alabama
 
4

 
2

 

 

 
6

New York
 
6

 

 

 

 
6

Louisiana
 
5

 

 

 

 
5

New Jersey
 
3

 
2

 

 

 
5

Pennsylvania
 
3

 
1

 

 
1

 
5

Colorado
 
1

 
1

 
2

 

 
4

Illinois
 
3

 
1

 

 

 
4

Indiana
 
2

 
2

 

 

 
4

Missouri
 
3

 
1

 

 

 
4

North Carolina
 
3

 
1

 

 

 
4

Ohio
 
2

 
2

 

 

 
4

Oregon
 
1

 

 
3

 

 
4

South Carolina
 
3

 
1

 

 

 
4

Idaho
 
1

 

 
2

 

 
3

Oklahoma
 
2

 
1

 

 

 
3

Virginia
 
2

 
1

 

 

 
3

Arkansas
 
2

 

 

 

 
2

Connecticut
 
2

 

 

 

 
2

Kansas
 
2

 

 

 

 
2

Maryland
 
1

 

 
1

 

 
2

Massachusetts
 
2

 

 

 

 
2

Michigan
 
2

 

 

 

 
2

Minnesota
 
1

 
1

 

 

 
2

Mississippi
 
2

 

 

 

 
2

Hawaii
 
1

 

 

 

 
1

Iowa
 
1

 

 

 

 
1

Kentucky
 

 
1

 

 

 
1

Nebraska
 
1

 

 

 

 
1

New Mexico
 
1

 

 

 

 
1

Puerto Rico
 
1

 

 

 

 
1

Utah
 
1

 

 

 

 
1

Wisconsin
 

 
1

 

 

 
1

Total United States
 
167

 
67

 
65

 
16

 
315

International
 
 
 
 
 
 
 
 
 
 
Canada
 
13

 

 

 

 
13

France
 
5

 

 

 

 
5

Australia
 
5

 

 

 

 
5

Mexico
 
3

 

 

 

 
3

Portugal
 
2

 

 

 

 
2

Spain
 
2

 

 

 

 
2

Belgium
 
1

 

 

 

 
1

Colombia
 
1

 

 

 

 
1

Croatia
 
1

 

 

 

 
1

Germany
 
1

 

 

 

 
1

Italy
 
1

 

 

 

 
1

United Kingdom
 
1

 

 

 

 
1

Total International
 
36

 

 

 

 
36

Total
 
203

 
67

 
65

 
16

 
351


14



Item 3.  Legal Proceedings

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

Item 4.  Mine Safety Disclosures

Not applicable.


15



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 21, 2018, there were approximately 64,696 holders of record of our common stock.  The table below sets forth the high and low closing sales prices of our common stock as well as dividends declared per common share for each quarter during the last two fiscal years.

 
 
  High
 
  Low
 
 Dividends
 Declared
Fiscal 2017
 
 
 
 
 
 
First Quarter
 
$
120.95

 
$
103.93

 
$
0.31

Second Quarter
 
123.76

 
116.43

 
0.37

Third Quarter
 
121.07

 
97.30

 
0.37

Fourth Quarter
 
131.17

 
110.26

 
0.37

 
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
 
First Quarter
 
$
87.96

 
$
74.37

 
$
0.26

Second Quarter
 
94.03

 
86.68

 
0.31

Third Quarter
 
102.51

 
93.02

 
0.31

Fourth Quarter
 
107.49

 
90.59

 
0.31


We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board of Directors (our Board) has increased the dividend amount twelve times including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through 2017.  Future dividend payments will 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 S&P MidCap 400 Index and the NASDAQ Index for the same period, in each case assuming the investment of $100 on December 31, 2012 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.



16



stckprfrmgraph2017.jpg

 
 
Base
Period
 
Indexed Returns
Years Ending
Company / Index
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
 
12/31/17
Pool Corporation
 
$
100.00

 
$
139.32

 
$
154.24

 
$
199.16

 
$
260.48

 
$
327.68

S&P MidCap 400 Index
 
100.00

 
133.50

 
146.54

 
143.35

 
173.08

 
201.20

NASDAQ Index
 
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71


Purchases of Equity Securities

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

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

 
$
108.20

 
40,888

 
$
53,361,113

November 1 – November 30, 2017
 

 
$

 

 
$
53,361,113

December 1 – December 31, 2017
 

 
$

 

 
$
53,361,113

Total
 
40,888

 
$
108.20

 
40,888

 
 


(1) 
These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were no shares surrendered for this purpose in the fourth quarter of 2017.
(2) 
In May 2017, our Board authorized an additional $150.0 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.
(3) 
As of February 21, 2018, our total authorization remaining was $53.4 million.


17



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,
 
 
2017 (1)
 
2016
 
2015
 
2014
 
2013
Statement of Income Data
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,788,188

 
$
2,570,803

 
$
2,363,139

 
$
2,246,562

 
$
2,079,700

Operating income
 
284,371

 
255,859

 
216,222

 
188,870

 
165,486

Net income
 
191,339

 
148,603

 
128,224

 
111,030

 
97,330

Net income attributable to Pool Corporation
 
191,633

 
148,955

 
128,275

 
110,692

 
97,330

Earnings per share:
 
 
 
 
 
 

 
 

 
 

Basic
 
$
4.69

 
$
3.56

 
$
2.98

 
$
2.50

 
$
2.10

Diluted
 
$
4.51

 
$
3.47

 
$
2.90

 
$
2.44

 
$
2.05

Cash dividends declared per common share
 
$
1.42

 
$
1.19

 
$
1.00

 
$
0.85

 
$
0.73

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 

 
 

 
 

 
 

Working capital
 
$
460,682

 
$
399,337

 
$
356,899

 
$
345,305

 
$
313,843

Total assets (3)
 
1,101,062

 
994,095

 
934,361

 
890,971

 
821,647

Total debt (3)
 
519,650

 
438,042

 
328,045

 
318,872

 
244,304

Stockholders’ equity
 
223,146

 
205,210

 
255,743

 
244,352

 
286,182

 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 

 
 

 
 

Base business sales growth (2)
 
7
%
 
7
%
 
5
%
 
7
%
 
6
%
Number of sales centers
 
351

 
344

 
336

 
328
 
321

 
(1) 
Our Net income and Net income attributable to Pool Corporation in 2017 was impacted by both U.S. tax reform and Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. In the first quarter of 2017, we adopted ASU 2016-09, which requires us to recognize all excess tax benefits or deficiencies related to share-based compensation as a component of our income tax provision on our Consolidated Statements of Income, rather than a component of stockholders’ equity on our Consolidated Balance Sheets. This adoption benefited our Net income and Net income attributable to Pool Corporation $12.6 million in 2017. As a result of U.S. tax reform, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects re‑measurement of our net deferred tax liability. No such tax benefits were applicable in prior years.
(2) 
For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.
(3) 
Upon adoption of Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, we now include financing costs, net of accumulated amortization as a component of long-term debt. For comparability across all periods presented on our Consolidated Balance Sheets, we reclassified certain amounts from Other assets, net in prior periods to Long-term debt, net to conform to our 2017 and 2016 presentation.

18



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.

2017 FINANCIAL OVERVIEW

Financial Results

We generated strong results in 2017, on top of excellent performance and favorable weather last year. We produced sales growth of 8% in 2017 on top of sales growth of 9% in 2016 and converted this into solid earnings growth, primarily due to executing our strategies in pursuit of our mission every day.

Net sales increased 8% for the year ended December 31, 2017 compared to 2016. Pool remodeling, equipment replacement and the expansion of building materials and commercial products were the major contributors to base business sales growth of 7% for the year. Gross profit increased 9% for the year ended December 31, 2017 compared to 2016. Gross profit as a percentage of net sales (gross margin) grew 10 basis points to 28.9% for 2017 compared to 28.8% in 2016.

Selling and administrative expenses (operating expenses) increased 7% compared to 2016, with base business operating expenses up 5% over last year. The increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses, as well as greater employee benefit costs, equity-based compensation, and technology spending. As a percentage of net sales, operating expenses declined 20 basis points.

Operating income for the year increased 11% to $284.4 million, up from $255.9 million in 2016. Operating income as a percentage of net sales (operating margin) increased to 10.2% in 2017 compared to 10.0% in 2016.

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

Net income attributable to Pool Corporation increased 29% compared to 2016, while earnings per share was up 30% to $4.51 per diluted share. Excluding the $0.28 per diluted share impact of tax reform and the $0.24 per diluted share impact of ASU 2016-09, diluted earnings per share increased 15% over last year.

Financial Position and Liquidity

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

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

Total net receivables, including pledged receivables, increased 18% compared to December 31, 2016, reflective of fourth quarter sales growth and acquisitions. Our allowance for doubtful accounts was $3.9 million at December 31, 2017 and $4.1 million at December 31, 2016.

Inventory levels grew 10% to $536.5 million at December 31, 2017 compared to $486.1 million at December 31, 2016. Our reserve for inventory obsolescence was $6.3 million at December 31, 2017 compared to $6.5 million at December 31, 2016. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at December 31, 2017 and 3.6 times at December 31, 2016.


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Total debt outstanding of $519.7 million at December 31, 2017 increased $81.6 million or 19% compared to December 31, 2016 primarily to fund share repurchases and working capital growth.

Current Trends and Outlook

Over the last five years, we estimate the pool industry grew from 2% to 4% per year due to growth in the installed base of pools, which helped drive pool maintenance growth, improvement in remodeling and replacement activity and annual growth in the pool construction market. Improvements in general external market factors in the United States including consumer confidence, employment, housing, consumer financing and economic expansion, largely support our base business growth. We feel these positive external trends have promoted increased consumer spending on higher value products that enhance swimming pools and outdoor living spaces. Our consistent base business sales growth reflects industry growth plus market share gains from existing customers expanding their businesses and our success in newer market initiatives such as hardscapes and commercial pools.

While we estimate that new pool construction increased to approximately 75,000 new units in 2017 from the historically low levels experienced during the economic downturn, construction levels are still down approximately 65% compared to peak historical levels and down approximately 50% to 55% from what we consider normal levels. Favorable weather plays a role in industry growth by accelerating growth in any given year, while unfavorable weather impedes growth. In 2017 specifically, our industry experienced modestly favorable weather overall, despite the severe storms that impacted our industry in Texas and Florida in September and October. Due to the repairs required following major storms, sales mostly recovered by the end of the year. In 2016, an earlier start to the pool season due to warmer than usual temperatures and overall favorable weather throughout the rest of the year benefited the industry as a whole. In 2015, excessive precipitation impacted our industry in the second quarter; however a mild fall and delayed winter alleviated any contraction in industry growth rates. In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance. 

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

We established our initial outlook for 2018 based on reasonable expectations of organic market share growth, ongoing leverage of infrastructure and continuous process improvements. For 2018, we expect the macroeconomic environment in the United States will be quite similar to 2017. We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets. We also plan to broaden our geographic presence by opening 4 to 6 new sales centers in 2018 and by making selective acquisitions when appropriate opportunities arise.

The following section summarizes our outlook for 2018:

We expect sales growth of 6% to 7%, impacted by the following factors and assumptions:
assumed normal weather patterns for 2018;
anticipated continued growth from replacement, remodeling and construction activity and market expansion through newer product offerings like hardscapes and commercial pools;
estimated 1% growth from acquisitions completed throughout 2017;
inflationary product cost increases of approximately 1% to 2%; and
one additional selling day for the full year for 2018 compared to 2017 due to an extra selling day in the fourth quarter (neutral selling days for all other quarters).
We project relatively neutral gross margin trends for the full year, as we believe our sales growth will continue to be weighted toward sales of lower margin discretionary products. Adverse margin impacts should be offset by benefits from our efforts in supply chain management and internal pricing initiatives.
We expect operating expenses will grow at approximately 60% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations. The main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets. However, we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal.

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

Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations, particularly any significant changes in our geographic mix. Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. Based on our December 31, 2017 stock price, we estimate that we have approximately $5.4 million in unrealized excess tax benefits related to stock options that will expire in the first quarter of 2018 and restricted awards that will vest in 2018. Additional tax benefits could be recognized related to stock option exercises in 2018 from grants that expire in years after 2018, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a $12.6 million benefit in our provision for income taxes for the year ended December 31, 2017 related to ASU 2016-09.

We project that 2018 earnings will be in the range of $5.36 to $5.61 per diluted share, including an estimated $0.13 favorable impact from ASU 2016-09. This range also reflects our expected 2018 income tax rate, including the impact from tax reform legislation enacted in December 2017. We expect cash provided by operations will approximate net income for fiscal 2018, and subject to additional authorization by our Board of Directors, we anticipate that we will use $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. Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to Item 1A.

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.


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

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

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

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.07% of net sales annually.  Write-offs as a percentage of net sales approximated 0.05% in 2017, 0.07% in 2016 and 0.05% in 2015. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2018.

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

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2017, 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, 2017).

Inventory Obsolescence

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

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

Class 0
new products with less than 12 months usage
 
 
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


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

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

the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales at both the sales center 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, 2017, 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, 2017).

Vendor Programs

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

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

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

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


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Income Taxes

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

We have operations in 39 states, 1 United States territory and 12 foreign countries. We are subject to regular audits by federal, state and foreign tax authorities, and the amount of income taxes we pay is subject to adjustment by the applicable tax authorities.  We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.  These adjustments may include changes in valuation allowances that we have established.  As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

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

Performance-Based Compensation Accrual

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


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

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

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

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

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

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

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

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill is our largest intangible asset. At December 31, 2017, our goodwill balance was $189.4 million, representing approximately 17% 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, 2017, we had 221 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $5.7 million and the average goodwill balance was $0.8 million. In October 2017, 2016 and 2015, we performed our annual goodwill impairment test and did not identify any goodwill impairment at the reporting unit level. In the third quarter of 2016, we recorded a $0.6 million goodwill impairment charge related to an at-risk reporting unit in Quebec, Canada. We continue to monitor this location’s results, which came in above expectations at the end of the 2017 pool season. As of December 31, 2017, the remaining goodwill balance for this reporting unit was $1.8 million.

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


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To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for the purpose of our goodwill impairment test. To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate by 5% to reflect more conservative discounted cash flow assumptions. This reduction addresses the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate. Our sensitivity analysis generated a fair value estimate significantly below our market capitalization and resulted in the identification of no goodwill impairments and no additional at-risk locations.
  
Based on the magnitude of their goodwill balances and their heightened sensitivity to weather, we consider our reporting units in Quebec, Canada, as most at risk for goodwill impairment. Results in Quebec began to fall below expectations in 2013, largely due to an extended winter and certain execution challenges. We cannot be assured of favorable weather conditions in any given year, which strongly impact results for our Quebec reporting units. As of December 31, 2017, we have three reporting units in Quebec, with a total goodwill balance of $2.8 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 ASU 2014-09, Revenue from Contracts with Customers. The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods beginning after December 15, 2017, which for us will be in the period beginning January 1, 2018. We are substantially complete with our detailed evaluation, using the five‑step model specified in the guidance, to determine the impact of the new standard.

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


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

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

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

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Standard
Description
Effective Date
Effect on Financial Statements and Other Significant Matters
ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
May change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. The guidance must be applied retrospectively.
Annual periods beginning after December 15, 2017
We do not expect the adoption of this guidance will have a material impact on our cash flow statement.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
Eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). This guidance should be applied prospectively.
Annual and interim impairment tests performed in periods beginning after December 15, 2019
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.
ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
Eliminates the requirement to separately measure and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the change in the fair value of the hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item.
Annual periods beginning after December 15, 2018
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.






28



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,
 
 
2017
 
2016
 
2015
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
71.1

 
71.2

 
71.4

Gross profit
 
28.9

 
28.8

 
28.6

Operating expenses
 
18.7

 
18.9

 
19.4

Operating income
 
10.2

 
10.0

 
9.1

Interest and other non-operating expenses, net
 
0.5

 
0.6

 
0.3

Income before income taxes and equity earnings
 
9.7
%
 
9.4
%
 
8.8
%

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

Our discussion of consolidated operating results includes the operating results from acquisitions in 2017, 2016 and 2015.  We have included the results of operations in our consolidated results since the respective acquisition dates.

Fiscal Year 2017 compared to Fiscal Year 2016

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,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
2,749,672

 
$
2,558,368

 
$
38,516

 
$
12,435

 
$
2,788,188

 
$
2,570,803

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
793,866

 
737,335

 
11,423

 
3,752

 
805,289

 
741,087

Gross margin
 
28.9
%
 
28.8
%
 
29.7
 %
 
30.2
%
 
28.9
%
 
28.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
508,273

 
481,924

 
12,645

 
3,304

 
520,918

 
485,228

Expenses as a % of net sales
 
18.5
%
 
18.8
%
 
32.8
 %
 
26.6
%
 
18.7
%
 
18.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
285,593

 
255,411

 
(1,222
)
 
448

 
284,371

 
255,859

Operating margin
 
10.4
%
 
10.0
%
 
(3.2
)%
 
3.6
%
 
10.2
%
 
10.0
%


29



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



Acquired
 

Acquisition
Date
 
Net
Sales Centers
Acquired
 

Periods
Excluded
Chem Quip, Inc. (1) (2)
 
December 2017
 
5
 
December 2017
Intermark
 
December 2017
 
1
 
December 2017
E-Grupa
 
October 2017
 
1
 
October - December 2017
New Star Holdings Pty. Ltd.
 
July 2017
 
1
 
July - December 2017
Lincoln Aquatics (1)
 
April 2017
 
1
 
May - December 2017
Metro Irrigation Supply Company Ltd. (1)
 
April 2016
 
8
 
January - June 2017 and April - June 2016
The Melton Corporation (1)
 
November 2015
 
2
 
January 2017 and
January 2016
Seaboard Industries, Inc. (1)
 
October 2015
 
3
 
January 2017 and
January 2016

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

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

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

The table below summarizes the changes in our sales centers during 2017:

December 31, 2016
344

Acquired locations
9

New locations
1

Consolidated locations
(3
)
December 31, 2017
351


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


30



Net Sales

(in millions)
 
Year Ended December 31,
 
  
 
 
2017
 
2016
 
Change
Net sales
 
$
2,788.2

 
$
2,570.8

 
$
217.4

 
8%

Net sales increased 8% compared to 2016, despite one less selling day. Our 7% increase in base business sales generated much of this growth. We experienced modestly favorable weather during the swimming pool season, which ended with severe storms in September and October in both Texas and Florida. By the end of the fourth quarter, we mostly recovered sales lost over these time periods.

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

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

We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. In 2017, sales for equipment such as swimming pool heaters, pumps, and lights increased 10%, and collectively represented approximately 23% of net sales. This increase reflects both the growth of replacement activity and continued demand for higher‑priced, more energy-efficient products. Sales of building materials, which includes tile, grew 13% compared to 2016 and represented approximately 10% of net sales in 2017.

Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above. These sales increased 10% compared to 2016 and represented 5% of our consolidated net sales for 2017, excluding the recent acquisition of Lincoln Aquatics.

In terms of quarterly performance, base business sales increased 5% in the first quarter of 2017, despite a 2% decline in sales related to customer early buy purchases. Base business sales then increased 7% in the second quarter of 2017 under overall neutral weather conditions for most of the quarter. Despite the severe weather events in the third quarter of 2017, and one less selling day compared to the same period in 2016, base business sales increased 6% in the third quarter. For our seasonally slowest fourth quarter, base business sales increased 13% in 2017 reflecting strong consumer demand, excellent execution by our team, the recovery following Hurricane Irma and overall favorable weather conditions. See discussion of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.

Gross Profit

(in millions)
 
Year Ended December 31,
 
  
 
 
2017
 
2016
 
Change
Gross profit
 
$
805.3

 
$
741.1

 
$
64.2

 
9%
Gross margin
 
28.9
%
 
28.8
%
 
 
 
 

Gross margin for 2017 increased 10 basis points compared to 2016 mostly reflecting product mix coupled with benefits from sourcing initiatives.

31



Operating Expenses

(in millions)
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
Change
Operating expenses
 
$
520.9

 
$
485.2

 
$
35.7

 
7%
Operating expenses as a percentage of net sales
 
18.7
%
 
18.9
%
 
 
 
 

Operating expenses increased 7% compared to 2016, with base business operating expenses up 5%. The increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses, as well as greater facility-related expenditures, equity-based compensation, and technology spending as we continue to invest in our business. Base business operating expenses as a percentage of net sales improved 30 basis points over 2016, as we continued to leverage our existing infrastructure.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net increased $0.7 million compared to 2016. Average outstanding debt was $504.0 million for 2017 versus $424.6 million for 2016. Our 2017 average outstanding debt balance reflects greater borrowings, primarily to fund working capital growth. Our weighted average effective interest rate increased to 2.7% for 2017 compared to 2.2% for 2016.

Income Taxes

Our effective income tax rate was 29.0% at December 31, 2017 and 38.5% at December 31, 2016. Our provision for income taxes for 2017 was positively impacted by both U.S. tax reform and ASU 2016-09. As a result of the recently enacted tax legislation, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In addition to the impact from tax reform, we recorded a $12.6 million benefit in our provision for income taxes for the year ended December 31, 2017 related to our adoption of ASU 2016-09.
 
Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 29% to $191.6 million in 2017 compared to $149.0 million in 2016. Earnings per share increased 30% to $4.51 per diluted share compared to $3.47 per diluted share in 2016. Excluding the $0.28 per diluted share impact of tax reform and the $0.24 per diluted share impact of ASU 2016-09, diluted earnings per share increased 15% over last year.





32



Fiscal Year 2016 compared to Fiscal Year 2015

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

(Unaudited)
 
Base Business
 
Excluded
 
Total
(in thousands)
 
Year Ended
 
Year Ended
 
Year Ended
 
 
December 31,
 
December 31,
 
December 31,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
2,525,164

 
$
2,361,134

 
$
45,639

 
$
2,005

 
$
2,570,803

 
$
2,363,139

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
727,469

 
675,262

 
13,618

 
382

 
741,087

 
675,644

Gross margin
 
28.8
%
 
28.6
%
 
29.8
%
 
19.1
 %
 
28.8
%
 
28.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
475,048

 
458,599

 
10,180

 
823

 
485,228

 
459,422

Expenses as a % of net sales
 
18.8
%
 
19.4
%
 
22.3
%
 
41.0
 %
 
18.9
%
 
19.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
252,421

 
216,663

 
3,438

 
(441
)
 
255,859

 
216,222

Operating margin
 
10.0
%
 
9.2
%
 
7.5
%
 
(22.0
)%
 
10.0
%
 
9.1
%

For an explanation of how we calculate base business, please refer to the discussion of base business under the heading “Fiscal Year 2017 compared to Fiscal Year 2016.”

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



Acquired (1)
 

Acquisition
Date
 
Net
Sales Centers
Acquired
 

Periods
Excluded
Metro Irrigation Supply Company Ltd.
 
April 2016
 
8
 
April - December 2016
The Melton Corporation
 
November 2015
 
2
 
January - December 2016 and November - December 2015
Seaboard Industries, Inc.
 
October 2015
 
3
 
January - December 2016 and November - December 2015
Poolwerx Development LLC
 
April 2015
 
1
 
January - June 2016 and
April - June 2015
St. Louis Hardscape Material & Supply, LLC
 
December 2014
 
1
 
January - March 2016 and January - March 2015

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




33



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

December 31, 2015
336

Acquired locations
8

New locations
6

Consolidated locations
(6
)
December 31, 2016
344


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,
 
  
 
 
2016
 
2015
 
Change
Net sales
 
$
2,570.8

 
$
2,363.1

 
$
207.7

 
9%

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

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

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

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

Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories and growth in this area is reflected in the numbers above. These sales represented 4% of our consolidated net sales for 2016 and increased 16% compared to 2015 due primarily to our increased focus on the commercial market, as well as greater resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.

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


34



Gross Profit

(in millions)
 
Year Ended December 31,
 
  
 
 
2016
 
2015
 
Change
Gross profit
 
$
741.1

 
$
675.6

 
$
65.5

 
10%
Gross margin
 
28.8
%
 
28.6
%
 
 
 
 

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

Operating Expenses

(in millions)
 
Year Ended December 31,
 
 
 
 
2016
 
2015
 
Change
Operating expenses
 
$
485.2

 
$
459.4

 
$
25.8

 
6%
Operating expenses as a percentage of net sales
 
18.9
%
 
19.4
%
 
 
 
 

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

Interest and Other Non-operating Expenses, net

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

Income Taxes

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

Net Income and Earnings Per Share

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








35



Seasonality and Quarterly Fluctuations

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

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 2017 and 2016. 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)
 
2017
 
2016
 
 
First
 
Second
 
Third
 
Fourth
 
First
 
Second
 
Third
 
Fourth
Statement of Income Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
546,441

 
$
988,163

 
$
743,401

 
$
510,183

 
$
515,250

 
$
918,889

 
$
691,429

 
$
445,235

Gross profit
 
153,621

 
289,664

 
216,606

 
145,398

 
143,023

 
270,736

 
199,551

 
127,777

Operating income
 
30,998

 
154,186

 
81,928

 
17,259

 
29,530

 
142,420

 
74,166

 
9,743

Net income
 
22,270

 
94,620

 
48,783

 
25,665

 
16,363

 
85,247

 
44,421

 
2,572

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales as a % of annual net sales
 
20
%
 
35
%
 
27
%
 
18
%
 
20
%
 
36
%
 
27
%
 
17
%
Gross profit as a % of annual gross profit
 
19
%
 
36
%
 
27
%
 
18