Where Outdoor Living Comes To L i f e ®
2018
OUR NETWORKS
AND LOCATIONS
Americas
Europe
Australia
Network
SCP
Superior
Horizon
NPT
Total
Total Sales Centers
210
70
67
17
364
TABLE OF
CONTENTS
Message to Our Shareholders ................................. 1
Financial Highlights ................................................. 2
POOLCORP’s Operating Priorities ........................... 3
Best of the Best 2018 ............................................... 4
Pool Corporation 2018 Form 10-K .......................... 5
Shareholder Information,
Company Officers & Directors ..... Inside Back Cover
VISION STATEMENT
Be the best worldwide distributor of outdoor lifestyle products that
include all products relating to swimming pools, irrigation & other
products that enhance the quality of outdoor home life.
MISSION STATEMENT
To provide exceptional value to our customers and suppliers,
creating exceptional return for our shareholders while providing
exceptional opportunities for our employees.
MESSAGE TO OUR
SHAREHOLDERS
Dear Fellow Shareholders,
2018 marked our sixth consecutive year of record sales and earnings, with 8% sales
and gross profit growth driving a 23% increase in adjusted diluted earnings per share.
Our results are the healthy by-product of Pool Corporation’s unique and sustainable
business model that has been skillfully built and honed over the last two decades by a
team of smart, hardworking wholesale distribution professionals. Even in the face of
unfavorable weather conditions in several of our major markets, our team’s superior
execution and commitment continue to prove to be formidable as we achieved
$3 billion in sales, delivering diluted earnings per share of $5.62, increasing our
dividend by 22% and returning $257 million to our shareholders through share
repurchases and dividends. In a year when some major U.S. stock market indices
declined (e.g., the S&P Midcap 400 saw a negative 11% return), Pool Corporation
shareholders earned a 16% total return.
We have a reputation as the undisputed leader in a highly fragmented, niche
distribution market that caters to the outdoor living marketplace. Our success
comes from our employees’ commitment to provide exceptional value to our customers
and suppliers coupled with our formulaic business model of multiple strategies that
continue to produce sustainable and profitable growth. In an $11.5 billion outdoor
living product market, our model collectively includes a product portfolio focused
on breadth and quality, a sales strategy targeting recurring revenue streams, sales
centers located in advantageous and growing geographic locations, customers who
are professional contractors or retailers and a team of highly focused professionals
who provide unparalleled service. When these elements are teamed with our ability
to react quickly and decisively to market changes as they occur, you have just
part of the foundation of Pool Corporation’s success story.
2018 also marked the retirement of our former president and chief executive officer,
Manny Perez de la Mesa, after 20 years at the helm. Manny’s achievements and
contributions to Pool Corporation and the swimming pool industry are unparalleled.
Under his unique leadership, our distribution network grew from 102 sales centers in
two countries to 364 sales centers in 14 countries, annual net sales increased from
$570 million to $3 billion, and shareholders realized 23% compound average annual
returns on their investment. We look forward to Manny serving as vice chairman of
our Board of Directors as we continue building a successful future for our employees,
customers, and shareholders.
As is true for all businesses, the growing effects of tighter labor markets, increased
transportation costs and rising demand for commercial real estate have begun
to impose cost pressures on our business and those of our suppliers. Add the
unpredictability of weather to the mix, and a company’s ability to deliver might be
challenged. However, our model stood firm in 2018 – a year where we saw record
rainfall in many areas and our seasonal markets opened later and closed earlier. Despite
the unfavorable weather pattern last year, we increased operating margin by 30 basis
points to a record 10.5%, with our base business operating margin improving 40
basis points to 10.7%. Many of our vendors announced 2018 mid-year price increases
affecting our product costs, and we reacted quickly and purposefully purchasing excess
inventory ahead of these increases, which allowed us to mitigate their impact while
positioning us well for 2019. Overall, in fact, we were able to provide improved returns
for our shareholders, achieving an impressive 27.7% return on invested capital.
Additionally, we continuously seek to expand our footprint strategically in all our
networks – domestic and international. In 2018, we added six new sales centers in our
North America swimming pool distribution network and three new international sales
centers. Through acquisitions, we added one international sales center and four Horizon
locations during the year. These network expansion activities reflect our continued
confidence in our industry and the strength of our team’s value proposition. Overall,
our markets and the underlying demand for our products remain strong as our team
continues to drive organic growth and increased market share.
Location is key in our success model, and we are well positioned to continue to benefit
from the domestic population migration patterns that favor U.S. Sunbelt markets with
year-round outdoor living lifestyles. We also believe our model’s sales strategy will
continue to bear fruit as it’s focused on recurring revenue streams in densely populated
markets where we are located. Fortunately, our reliance on new construction is more
modest than in the past. However, we expect new pool and irrigation construction
levels to continue to grow incrementally and believe that consumer investments in
outdoor living spaces “beyond the swimming pool” will generate greater growth for
many years to come.
As we look forward to 2019 and beyond, we expect product inflation may persist at
higher than historical levels as strong economic conditions continue to strain operating
costs for vendors and ourselves. To offset this, we will continue to build on the strengths
of our model through capacity creation – improving our processes to make our people,
facilities and vehicle fleet more productive. We continue to support our customers by
focusing on value creation, which for us is organized around three principles: Know,
Have, Do. This ensures that we have the right product and application knowledge; that
we have the inventory, the facilities, and the logistics; and that we do what’s needed
to execute and compete.
Finally, and most importantly, we are very thankful to have the best team of men
and women in the industry who strive every day to provide unparalleled service to
our approximately 120,000 customers and to deliver the best channel-to-market for
our suppliers. In today’s highly competitive environment, we strive to attract, inspire,
develop, reward, and retain our employees – and to keep them safe – so that they can
create the best possible channel-to-market experiences for our customers. Our people
are at the core of our ability to execute on our mission to create exceptional value for
our customers and suppliers, to create exceptional returns for our shareholders and
to provide exceptional opportunities for our employees.
Thank you for your support as we strive to realize our vision of becoming
the best worldwide distributor of outdoor lifestyle products,
Where Outdoor Living Comes to Life ®.
Peter D. Arvan
President and
Chief Executive Officer
John E. Stokely
Chairman of the Board of Directors
and Lead Independent Director
1
FINANCIAL
HIGHLIGHTS
Net Sales (in millions)
5% CAGR 2008-2018
2,998.1
2,788.2
2,570.8
2,363.1
2,246.6
2,079.7
1,783.7
1,539.8
1,613.7
1,954.0
1,793.3
$3,000
$2,500
$2,000
$1,500
$1,000
$500
5% CAGR 2008-2018
870.2
805.3
741.1
643.3
675.6
Gross Profit (in millions)
$900
$800
$700
$600
$500
$400
$300
$200
$100
515.2
449.7
471.3
531.6
567.4
591.3
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Operating Income (in millions)
11% CAGR 2008-2018
Net Income (in millions)
14% CAGR 2008-2018
$400
$300
$250
$200
$150
$100
$50
313.9
284.4
255.9
216.2
188.9
165.5
151.8
144.9
115.5
88.4
126.7
125.1
101.2
234.5
219.2
191.6
179.6
167.0
149.0
128.3
$300
$200
$175
$150
$125
$100
$75
$50
$25
110.7
97.3
88.9
82.0
73.6
72.0
57.0
57.6
45.7
19.2
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Adjustment to Operating Income
Adjustment to Net Income
Adjustment to Net Income - Tax Reform
Diluted Earnings Per Share
16% CAGR 2008-2018
Return On Equity (using Adjusted Net Income)
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
1.17
2008
0.93
0.39
2009
5.62
5.26
4.51
4.23
3.99
3.47
2.90
2.44
2.05
1.15
1.50
1.47
1.85
1.71
120%
100%
80%
60%
40%
20%
107.7
82.7
64.6
25.3
20.4
17.6
31.2
33.9
25.5
51.3
41.7
2010
2011
2012
2013
2014
2015
2016
2017
2018
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Adjustment to Diluted EPS
Adjustment to Diluted EPS - Tax Reform
Cumulative Adjusted Net Income
& Cash Flow From Operations (in millions)
Sources of Cash
Since company inception (in millions)
Uses of Cash
Since company inception (in millions)
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
CFFO
Adjustment Net Income
Proceeds
from Debt
$589.8
(22%)
Stock
Issuance
$301.2
(11%)
Cash Flow from
Operations
$1,819.8
(67%)
Capital
Expenditures
$299.9
(11%)
Acquisitions,
net and Other
Investments
$468.1
(17%)
Dividends
$495.2
(19%)
Treasury Stock
$1,426.8
(53%)
2
For comparability purposes, the adjusted 2009 amounts exclude a one-time non-cash charge related to our former equity investment in Latham Acquisition Corporation (LAC). We incurred a $26.5 equity loss, or a $0.54 loss per diluted share, related to LAC’s impairment charge.
The adjusted 2011 and 2012 amounts for Operating Income and Net Income exclude non-cash goodwill impairment charges of $1.6 and $6.9, respectively. Adjusted Diluted EPS for 2011 and 2012 reflect an impact of $0.03 and $0.14 per share, respectively. The adjusted 2017
amounts reduce Net Income by $12.0 related to the Tax Cuts and Jobs Act (TJCA) and $12.6 related to the implementation of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. The adjusted 2018 amounts reduce Net
Income by $15.3 and Diluted EPS by $0.36 per share related to ASU 2016-09. The CAGRs in these tables are based on the adjusted 2018 amounts.
SAFETY GROWTH PROFITABILITY
EMPLOYER OF CHOICE
POOLCORP’S OPERATING PRIORITIES
are our guiding force, ensuring that all efforts going
forward are aligned with these core values.
SAFETY
Just as safety comes first in our list of operational priorities, it must also be considered first in everything we do.
We owe it to our people, their families, and our communities to operate safe facilities and a safe fleet.
Nearly 300 drivers qualified for POOLCORP’s 2018 Annual Driver Recognition
Program. This program requires full-time drivers to complete the calendar year
without a preventable vehicle accident and without a roadside violation for
unsafe driving, driver fitness, or hazardous materials compliance.
GROWTH AND
PROFITABILITY
We pursue multiple avenues for growth, allowing us
to consistently grow faster than our industry. A key to
capturing profit is capacity creation which means
doing more with our current resources.
Our Sales Centers are creating capacity by improving:
The speed and volume of key sales processes
Utilization and turnaround time of our trucks
Usage of POOL360 and Horizon24/7
EMPLOYER OF CHOICE
POOLCORP strives to be an Employer of Choice
by investing in our people.
We ATTRACT, INSPIRE, and DEVELOP the best people.
We RECOGNIZE and REWARD them in order to RETAIN them.
This year, POOLCORP named its first ever Winners Circle
to honor an elite group of Sales Champions, along with
MVPs who made extraordinary contributions to the business
during the year. 43 hardworking employees met the criteria
and were introduced at the 2018 POOLCORP International
Sales Conference and awarded a coveted spot for
POOLCORP’s first-ever incentive trip to Aruba.
3
BEST OF
THE BEST 2018
SCP Atlanta, GA
Superior Berea, OH
SCP Fort Lauderdale, FL
SCP Lafayette, LA
NPT Montgomeryville, PA
SCP Ocala, FL
Superior Phoenix, AZ
SCP Boise, ID
SCP Kelowna, BC
Horizon Medley, FL
SCP Orange, CA
NPT Dallas, TX
We are very thankful to have the
best team of men and women in
the industry that strive each and
every day to provide unparalleled
service to our customers and be
the best channel to market for
our suppliers.”
- Peter D. Arvan, President and
Chief Executive Officer
“
4
Horizon Everett, WA
SCP Spain
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-26640
POOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
109 Northpark Boulevard, Covington, Louisiana
(Address of principal executive offices)
36-3943363
(I.R.S. Employer
Identification No.)
70433-5001
(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
Common Stock, par value $0.001 per share
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
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
No
Yes
No
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
Yes
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, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting 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
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, 2018 was $5,916,556,013.
As of February 21, 2019, there were 39,391,303 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 28, 2019 for the
Annual Meeting to be held on May 1, 2019, are incorporated by reference in Part III of this Form 10-K.
POOL CORPORATION
TABLE OF CONTENTS
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A.
Item 8.
Item 9.
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A.
Item 9B.
Controls and Procedures
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
Index to Exhibits and Signatures
Page
1
9
14
15
17
17
18
20
21
42
43
79
79
82
82
82
82
82
82
83
83
Item 1. Business
General
PART I.
Pool Corporation (the Company, which may be referred to as we, us or our) is the world’s largest wholesale distributor of swimming
pool supplies, equipment and related leisure products and is one of the top three distributors of irrigation and landscape products
in the United States. Our vision is to become the best worldwide distributor of outdoor living products that enhance the quality
of outdoor home life. The Company was incorporated in the State of Delaware in 1993 and has grown from a regional distributor
to a multi-national, multi-network distribution company.
Our industry is highly fragmented, and as such, we add considerable value to the industry by purchasing products from a large
number of manufacturers and then distributing the products to our customer base on conditions that are more favorable than our
customers could obtain on their own.
As of December 31, 2018, we operated 364 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 participate in a worldwide market for outdoor living products through our four distribution networks.
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 area.
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 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 2017 P.K. Data, Inc. reports):
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 and related outdoor living products for aesthetic,
environmental, safety or other reasons.
The irrigation and landscape industry shares many characteristics with the pool industry, and we believe that it will realize similar
long term growth rates. Irrigation system installations often occur in tandem with new single family home construction making
it more susceptible to economic variables. However, the landscape industry offers similar maintenance-related growth opportunities
as the swimming pool industry. Product offerings such as chemicals and fertilizers, power equipment and related repair and
maintenance services offer recurring revenue streams in an industry otherwise closely tied to the housing market. The irrigation
and landscape distribution business serves both residential and commercial markets, with the majority of sales related to the
residential market. Irrigation accounts for approximately 50% of total spending in the industry, with the remaining 50% of spending
related to landscape, power equipment, hardscapes and specialty outdoor products and accessories.
Our NPT network overlaps the swimming pool and irrigation and landscape industries as we offer our market-leading brand of
pool tile, composite pool finish products and hardscapes. As more consumers create and enhance outdoor living areas and continue
to invest in their outdoor environment, we believe we can focus our resources to address such demand, while leveraging our
existing pool and irrigation and landscape customer base. We feel the development of our NPT network is a natural extension of
our distribution model. In addition to our 17 standalone NPT sales centers, we currently have over 100 SCP and Superior sales
centers that feature consumer showrooms where landscape and swimming pool contractors, as well as homeowners, can view and
select pool components including pool tile, decking materials and interior pool finishes in various styles and grades, and serve as
stocking locations for our NPT branded products. Given the more discretionary nature of these products, this business is more
sensitive to external market factors compared to our business overall.
2
Economic Environment
Certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured
by Gross Domestic Product or GDP) affect our industry, particularly new pool and irrigation system starts as well as the timing
and extent of pool refurbishments, equipment replacement, landscaping projects and outdoor living space renovations.
We believe that over the long term, single-family housing turnover and home value appreciation may correlate with demand for
new pool construction, with higher rates of home turnover and appreciation having a positive impact on new pool starts over
time. We also believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new swimming
pools and irrigation systems. Similar to other discretionary purchases, replacement and refurbishment activities are more heavily
impacted by economic factors such as consumer confidence, GDP and employment.
While market conditions have been generally favorable the past year, a number of factors weigh on our industry, including lagging
new home construction, tighter lending standards, and the slower progression of a younger generation burdened by student debt
and underemployment. Labor availability and cost have also become issues in recent years, limiting our customers’ ability to fully
meet consumer demand, particularly in construction and renovation markets.
The post-recession market environment from 2010 to 2018 was characterized by the cautious recovery of consumer spending,
modest housing recovery and low inflation. However, in terms of homeowners investing in their existing homes, discretionary
expenditures, including backyard renovations, flourished over this time period. While we estimate that new pool construction
increased to approximately 80,000 new units in 2018, construction levels are still down approximately 65% compared to peak
historical levels and down approximately 50% from what we consider normal levels. An average of approximately 170,000 new
units per year were built in the years leading up to the recession. We expect that new pool and irrigation construction levels will
continue to grow incrementally, but we believe that consumer investments in outdoor living spaces beyond the swimming pool
will generate greater growth over the next five years.
Times of strong economic conditions in the United States enable further replacement, remodeling and new construction activity.
Although some constraints exist around residential construction activities, economic trends indicate that consumer spending has
largely recovered, and 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. Additionally, recent regulation passed by the U.S. Department of Energy mandates
all new and replacement motors and pumps for swimming pools must be variable speed by July 2021. This mandate, coupled
with additional product developments and technological advancements, offers further growth opportunities over the next few
years.
In an effort to mitigate inflation, the Federal Reserve raised borrowing rates several times in 2018. While it appears that the rising
interest rates slowed down borrowing for home buying in the short term, interest rates remain low by historical standards. Perhaps
more importantly, the scarcity of land and labor limited new home construction growth and drove up home values over the last
several years. By mid-2018, this trend appeared to have reached its peak or at least paused in many markets due to home affordability
coupled with rising interest rates.
Considering the factors discussed above, we believe we will realize an annual sales growth rate of approximately 6% to 9% over
the next five years.
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 core strategies are as follows:
•
•
•
to promote the growth of our industry;
to promote the growth of our customers’ businesses; and
to continuously strive to operate more effectively.
We promote the growth of our industry through various advertising and promotional programs intended to raise consumer awareness
of the benefits and affordability of pool ownership, the ease of pool maintenance and the many ways in which a pool and the
surrounding spaces may be enjoyed beyond swimming. These programs include digital and media advertising, industry-oriented
website development such as www.swimmingpool.com® and www.hottubs.com®, public relations campaigns and other online
marketing initiatives. We use these programs as tools to educate consumers and lead prospective pool owners to our customers.
3
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 100 of our sales centers and host our annual Retail Summit to educate our customers about product
offerings and the overall industry. We also act as a day-to-day resource by offering product and market expertise to serve our
customers’ unique needs.
In addition to our efforts aimed at industry and customer growth, we strive to operate more effectively by continuously focusing
on improvements in our operations. We strive to create capacity with business to business development tools and execution to
ensure best in class service and value creation for our customers and suppliers. In particular, we have developed the Pool360 and
Horizon 24/7 platforms that help our customers be more productive by allowing them to get pricing, check availability, enter
orders and make payments on line while leveraging our customer service staff resources, particularly during peak business periods.
These tools not only offer real-time integration into our enterprise resource planning system, creating efficiencies in our business
processes as well, but they also provide our customers graphical catalog presentation in the same platform. In addition to these
initiatives, we strive to emphasize an Employer of Choice culture and to expand our Pool Corporation-branded products and
exclusive brand offerings.
We have grown our distribution networks through new sales center openings, acquisitions and the expansion of existing sales
centers. In recent years, we have focused our efforts on new sales center openings, complemented by strategic acquisitions and
consolidations, depending on our market presence. For additional information regarding our new sales center openings, acquisitions
and closures/consolidations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Item 8, Note 2 of “Notes to Consolidated Financial Statements,” included in this Form 10-K.
We plan to continue to make strategic acquisitions and open new sales centers to further penetrate existing markets and expand
into both new geographic markets and new product categories. 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 may make strategic volume inventory purchases ahead of vendor price increases. We
estimate that annual price inflation between 2016 and 2018 was consistent with the ten-year average. In 2018, several manufacturers
announced and implemented a mid-season price increase to offset raw material, transportation and labor inflation. Unlike previous
years, we expect inflation in 2019 to fall outside of the historical range. Specifically, we expect inflation to be approximately 2%
above historical norms in 2019, but we anticipate a return to the historical average over the long term.
Customers and Products
We serve roughly 120,000 customers. No single customer accounted for 10% of our sales in 2018. Further, in 2018, sales to our
largest 100 customers collectively accounted for just over 10% of our total sales. Most of our customers are small, family-owned
businesses with relatively limited capital resources. Most of these businesses provide labor and technical services to the end
consumer and operate as independent contractors and specialty retailers employing no more than ten employees (in many cases,
working alone or with a limited crew). These customers also buy from other distributors, mass merchants, home stores, and certain
specialty and internet retailers.
We provide extended payment terms to qualified customers for sales under early buy programs. The extended terms usually require
payments in equal installments in April, May and June or May and June depending on geographic location. See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” for
additional information.
We sell our products primarily to the following types of customers:
•
•
•
•
swimming pool remodelers and builders;
specialty retailers that sell swimming pool supplies;
swimming pool repair and service businesses;
irrigation construction and landscape maintenance contractors; and
4
•
commercial customers who service large commercial installations such as hotels, universities and community recreational
facilities.
We conduct our operations through 364 sales centers in North America, Europe, South America and Australia. Our primary
markets, with the highest concentration of swimming pools, are California, Texas, Florida and Arizona, collectively representing
approximately 53% of our 2018 net sales. In 2018, we generated approximately 94% of our sales in North America (including
Canada and Mexico), 5% in Europe and 1% in South America and Australia combined. 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 living products, such as spas, grills and components for outdoor kitchens,
that enhance consumers’ use and enjoyment of outdoor living spaces.
•
•
We currently have over 600 product lines and approximately 50 product categories. Based on our 2018 product classifications,
sales for our pool and spa chemicals product category represented approximately 12% of total net sales for 2018 and 2017 and
13% of our total net sales in 2016. No other product categories account for 10% or more of total net sales in any of the last three
fiscal years.
We continue to identify new related product categories, and we typically introduce new categories each year in select markets. We
then evaluate the performance in these markets and focus on those product categories that we believe exhibit the best long-term
growth potential. We expect to realize continued sales growth for these types of product offerings by expanding the number of
locations that offer these products, increasing the number of products offered at certain locations and continuing a modest broadening
of these product offerings on a company-wide basis.
Recent regulation passed by the U.S. Department of Energy mandates all new and replacement motors and pumps for swimming
pools must be variable speed by July 2021. Additionally, new product technology provides opportunities not only for improved
energy efficiency but also new enticements for leisure activities. Smart controls provide growth opportunities as most existing
swimming pools run on mechanical time clocks. Major equipment manufacturers have developed and will continue to develop
more retrofit kits that allow homeowners to interact with their pools or hot tubs through their smartphones. Robotic cleaners offer
consumers a more efficient option for maintaining their swimming pools. We see each of these developments as significant growth
opportunities.
Over the last several years we have increased our product offerings and service abilities related to commercial swimming pools.
We consider the commercial market to be a key growth opportunity as we focus more attention on providing products to customers
who service large commercial installations such as hotels, universities and community recreational facilities. While we are
leveraging our existing networks and relationships to grow this market, in 2017 we also acquired Lincoln Equipment, Inc., a
national distributor of equipment and supplies to commercial and institutional swimming pool customers.
5
In 2018, the sale of maintenance and minor repair products (non-discretionary) accounted for almost 60% of our sales and gross
profits while just over 40% of our sales and gross profits were derived from the refurbishment, replacement, construction and
installation (equipment, materials, plumbing, electrical, etc.) of swimming pools (partially discretionary). During the economic
downturn, which spanned from late 2006 to early 2010 and reached its low point in 2009, sales of maintenance and minor repair
products had increased to approximately 70% of our sales and gross profits due to the significant declines in new pool construction
and deferred remodeling and replacement activity. The current trend reflects a shift back toward a greater percentage of our sales
coming from major refurbishment and replacement products due to the recovery of these activities since levels reached their
historic low point in 2009.
Post-2009, we experienced product and customer mix changes, including a shift in consumer spending to higher value, lower
margin products such as variable speed pumps, high efficiency heaters, and irrigation and related equipment. These products
positively contribute to our sales and gross profit growth but negatively impact our gross margin. We expect continued demand
for these products, but believe our efforts in various pricing and sourcing initiatives, including growth in our higher margin private
label and exclusive products (PLEX) and our expansion of building materials product offerings, have helped offset these gross
margin declines and will lead to somewhat flat gross margin trends over the next few years.
Operating Strategy
We distribute swimming pool supplies, equipment and related leisure products domestically through our SCP and Superior networks
and internationally through our SCP network. We adopted the strategy of operating two distinct distribution networks within the
U.S. swimming pool market primarily 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 distribute irrigation and related products through our Horizon network and tile, decking materials and interior pool finish
products through our NPT network. 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 landscape products and related construction products.
Purchasing and Suppliers
We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional
allowances. It is customary in our industry for certain manufacturers to manage their shipments by offering seasonal terms to
qualifying purchasers such as Pool Corporation, which are referred to as early buy purchases. These early buy purchases typically
allow us to place orders in the fall at a modest discount, take delivery of product during the off-season months and pay for these
purchases in the spring or early summer.
6
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.
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%, 9% and 8%, respectively, of the cost of products we sold in 2018.
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 landscape products in the United States. We face intense competition
from many regional and local distributors in our markets and from one national wholesale distributor of landscape supplies. We
also face competition, both directly and indirectly, from mass market retailers (both store-based and internet) and large pool supply
retailers who primarily buy directly from manufacturers.
Some geographic markets we serve, particularly the four largest and higher pool density markets of California, Texas, Florida and
Arizona, have a greater concentration of competition than others. Barriers to entry in our industry are relatively low. We believe
that the principal competitive factors in swimming pool and irrigation and landscape supply distribution are:
•
•
•
•
•
•
the breadth and availability of products offered;
the quality and level of customer service, including ease of ordering and product delivery;
the breadth and depth of sales and marketing programs;
consistency and stability of business relationships with customers and suppliers;
competitive product pricing; and
geographic proximity to the customer.
We believe that we generally compete favorably with respect to each of these factors.
Seasonality and Weather
Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which
represent the peak months of both swimming pool use and installation and irrigation and landscaping installations and maintenance.
Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2018, we generated approximately
62% of our net sales and 81% of our operating income in the second and third quarters of the year.
We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the
peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs
during the 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.
We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue
contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers
and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the
fourth quarter after the peak selling season ends.
7
Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects
resulting from various weather conditions.
Weather
Hot and dry
Unseasonably cool weather or
extraordinary amounts of rain
Possible Effects
•
•
Increased purchases of chemicals and supplies
for existing swimming pools
Increased purchases of above-ground pools and
irrigation and lawn care products
Fewer pool and irrigation and landscaping
installations
•
• Decreased purchases of chemicals and supplies
• Decreased purchases of impulse items such as
above-ground pools and accessories
Unseasonably early warming trends in spring/late
cooling trends in fall
• A longer pool and landscape season, thus positively
impacting our sales
(primarily in the northern half of the U.S. and Canada)
Unseasonably late warming trends in spring/early
cooling trends in fall
• A shorter pool and landscape season, thus negatively
impacting our sales
(primarily in the northern half of the U.S. and Canada)
For discussion regarding the effects seasonality and weather had on our results of operations in 2018 and 2017, 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, 2018. 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.
8
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):
United States
International
$
$
Year Ended December 31,
2017
2,545,270
242,918
2,788,188
2018
2,720,077
278,020
2,998,097
$
$
$
$
2016
2,354,726
216,077
2,570,803
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):
United States
International
2018
100,905
6,059
106,964
$
$
December 31,
2017
$
$
95,659
5,280
100,939
$
$
2016
79,064
4,226
83,290
Website Access and Available Information
Our website is www.poolcorp.com. The information on our website is not a part of this document.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our
website at www.poolcorp.com as soon as reasonably practicable 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
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, future dividend payments and other matters. Forward looking statements speak only as
of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or
unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current
facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,”
“may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.
No assurance can be given that the expected results in any forward-looking statement will be achieved, and actual results may
differ materially due to one or more factors. For these statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act.
9
Risk Factors
Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any
forward looking statement include the following:
The demand for our swimming pool, irrigation, landscape and related outdoor living 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, landscape and related outdoor living 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 and refurbishment products are required to maintain existing swimming pools, and each currently account
for approximately 60% and 25% of net sales related to our swimming pool business; however, the growth in 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. Such restrictions could result in
decreased pool and irrigation system installations which could 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%, 9% and 8%, respectively, of the costs of products we sold in 2018. 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, if our suppliers experience difficulties
or disruptions in their operations or if we lose a single significant supplier due to financial failure or a decision to sell exclusively
to retailers or end-use consumers, we may experience increased supply costs or may experience delays in establishing replacement
supply sources that meet our quality and control standards.
10
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, which has led to highly competitive markets consisting of various-sized entities, ranging
from small or local operators to large regional businesses. Given the density and demand for pool products, some geographic
markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida
and Arizona. These states encompass our four largest markets and represented approximately 53% of our net sales in 2018.
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. Our various business strategies and initiatives,
including our growth initiatives, are subject to business, economic and competitive uncertainties and contingencies, many of which
are beyond our control. While we contemplate continued growth through internal expansion and acquisitions, no assurance can
be made as to our ability to:
penetrate new markets;
generate sufficient cash flows to support expansion plans and general operating activities;
obtain financing;
identify appropriate acquisition candidates;
•
•
•
•
• 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.
The demand for our services and our results of operations are affected by the seasonal nature of our business. In 2018, we generated
approximately 62% of our net sales and 81% of our operating income in the second and third quarters of the year. These quarters
represent the peak months of 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.
11
We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our
relationship with customers, our reputation, the demand for our products and services, and our market share.
The success or our business depends in part on our ability to identify and respond promptly to evolving trends in demographics
and consumer preferences, expectations and needs while also managing appropriate inventory levels and maintaining an excellent
customer experience. It is difficult to successfully predict the products and services our customers will demand.
Customer expectations about the methods by which they purchase and receive products or services are also becoming more
demanding. Customers routinely use technology to rapidly compare products and prices, determine real-time product availability,
and purchase products. Once products are purchased, customers are seeking alternate options for lower-cost delivery of those
products. We must continually anticipate and adapt to these changes in the purchasing process.
The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety, and other
governmental regulations.
We are subject to regulation under federal, state, local and international employment, environmental, health, transportation and
safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and
fertilizers. For example, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide,
Fungicide and Rodenticide Act and various state pesticide laws. These laws primarily relate to labeling, annual registration and
licensing.
Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply
with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages,
seizures, disgorgements, penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations
in the future could prove to be costly. Although we presently do not expect to incur any capital or other expenditures relating to
regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws
and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing
changes.
The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on
activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations
have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will
continue to increase. We will 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 ability to successfully conduct operations in, and source products and materials from, international markets is affected by
many of the same risks we face in our U.S. operations, as well as unique costs and difficulties of managing international operations.
Our international operations, which accounted for 9% of our total net sales in 2018, expose us to certain additional risks, including:
•
•
•
•
•
•
difficulty in staffing international subsidiary operations;
different political economic and regulatory conditions;
local laws and customs;
currency fluctuations;
adverse tax consequences; and
dependence on other economies.
12
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 changed U.S. tax law. Our income tax provision is based on our current interpretation
of this legislation and on reasonable estimates and may change as a result of new guidance issued by regulators. Our effective
tax rate may also be impacted by changes in the geographic mix of our earnings.
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.
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 Pool Systems Pty. Ltd. branded products we distribute, our exposure to potential liability claims may
increase. Product and service quality issues could negatively impact customer confidence in our brands and our business. If our
product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality,
we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks, as well as governmental
enforcement actions. 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. Such advances could delay or hinder
our ability to process transactions or could compromise the integrity of our data, resulting in a material adverse impact on our
financial condition and results of operations. We also may experience occasional system interruptions and delays that make our
information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties.
A lack of sophistication or reliability of our information systems could adversely impact our operations and customer service and
could require major repairs or replacements, resulting in significant costs and foregone revenue.
We have 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
13
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.
14
Item 2. Properties
We lease the Pool Corporation corporate offices, which consist of approximately 60,293 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, one in Georgia and one in Tennessee. We lease all of our other properties and the majority of our leases have
three to seven year terms. As of December 31, 2018, we had 11 leases with remaining terms longer than seven years that expire
between 2026 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, 2018:
Network
SCP
Superior
Horizon
NPT (3)
Total Domestic
SCP International
Total
12/31/17 (1)
168
67
64
16
315
36
351
New
Locations
2
3
—
1
6
3
9
Consolidated
Location (2)
—
—
(1)
—
(1)
—
(1)
Acquired
Locations
—
—
4
—
4
1
5
12/31/18
170
70
67
17
324
40
364
(1) At the beginning of 2018, we converted one Superior sales center to SCP and one Horizon sales center to Superior.
(2) Consolidated sales centers are those locations where we expect to transfer the majority of the existing business to our
(3)
nearby sales center locations.
In addition to the stand-alone NPT sales centers, there are over 100 SCP and Superior locations that have consumer
showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.
15
The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, 2018:
Location
United States
California
Texas
Florida
Arizona
Georgia
Nevada
Tennessee
Washington
Alabama
New York
Virginia
Colorado
Louisiana
New Jersey
North Carolina
Pennsylvania
Illinois
Indiana
Missouri
Ohio
Oregon
South Carolina
Arkansas
Idaho
Oklahoma
Connecticut
Kansas
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Hawaii
Iowa
Kentucky
Nebraska
New Mexico
Puerto Rico
Utah
Wisconsin
Total United States
International
Canada
Australia
France
Mexico
Portugal
Spain
Belgium
Colombia
Croatia
Germany
Italy
United Kingdom
Total International
Total
SCP
Superior
Horizon
NPT
Total
29
21
35
6
6
2
5
1
4
6
2
1
5
3
3
3
3
2
3
2
1
3
3
1
2
2
2
1
2
2
1
2
1
1
—
1
1
1
1
—
170
14
6
6
4
2
2
1
1
1
1
1
1
40
210
25
5
5
7
2
3
3
—
2
—
1
2
—
2
1
1
1
2
1
2
—
1
—
—
1
—
—
—
—
—
1
—
—
—
1
—
—
—
—
1
70
—
—
—
—
—
—
—
—
—
—
—
—
—
70
16
17
16
4
9
—
3
—
6
—
—
3
2
—
—
1
—
—
—
—
—
3
—
—
2
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
67
—
—
—
—
—
—
—
—
—
—
—
—
—
67
6
6
1
2
1
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
—
—
—
—
—
17
77
48
45
24
9
8
8
7
6
6
6
5
5
5
5
5
4
4
4
4
4
4
3
3
3
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
324
14
6
6
4
2
2
1
1
1
1
1
1
40
364
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.
17
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 trading symbol “POOL.” On February 21, 2019,
there were approximately 87,073 holders of record of our common stock.
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 thirteen 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 2018. Our
Board may declare future dividends at their discretion, after considering various factors, including our earnings, capital
requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions
on dividends in our Credit Facility 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 shareholder 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, 2013 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.
Company / Index
Pool Corporation
S&P MidCap 400 Index
NASDAQ Index
Base
Period
12/31/13
100.00
$
100.00
100.00
Indexed Returns
Years Ending
12/31/16
186.96
$
129.65
133.62
12/31/17
235.19
$
150.71
173.22
12/31/18
272.69
$
134.01
168.30
12/31/14
110.71
$
109.77
114.75
12/31/15
142.95
$
107.38
122.74
18
Purchases of Equity Securities
The table below summarizes the repurchases of our common stock in the fourth quarter of 2018:
Period
October 1 – October 31, 2018
November 1 – November 30, 2018
December 1 – December 31, 2018
Total
Total Number
of Shares
Purchased (1)
353,071
339,645
321,409
1,014,125
Average
Price
Paid per
Share
$
$
$
$
145.63
148.36
145.46
146.49
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan (2)
353,071
339,645
321,409
1,014,125
Maximum Approximate
Dollar Value of Shares
That May Yet be Purchased
Under the Plan (3)
$
$
$
166,922,688
116,531,471
69,779,132
(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 2018.
In May 2018, our Board authorized an additional $200.0 million under our share repurchase program for the repurchase
of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.
(2)
(3) As of February 21, 2019, our total authorization remaining was $49.2 million.
19
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,
2018 (1)
2017 (1)
2016
2015
2014
Statement of Income Data
Net sales
Operating income
Net income
Net income attributable to Pool Corporation
Earnings per share:
Basic
Diluted
Cash dividends declared per common
share
$ 2,998,097
$ 2,788,188
$ 2,570,803
$ 2,363,139
$ 2,246,562
313,889
234,461
234,461
284,371
191,339
191,633
255,859
148,603
148,955
216,222
128,224
128,275
188,870
111,030
110,692
$
$
$
5.82
5.62
1.72
$
$
$
4.69
4.51
1.42
$
$
$
3.56
3.47
1.19
$
$
$
2.98
2.90
1.00
$
$
$
2.50
2.44
0.85
Balance Sheet Data
Working capital
Total assets (2)
Total debt (2)
Stockholders’ equity
Other
Base business sales growth (3)
Number of sales centers
$
609,634
$
460,682
$
399,337
$
356,899
$
345,305
1,240,871
1,101,062
666,761
223,590
519,650
223,146
994,095
438,042
205,210
934,361
328,045
255,743
890,971
318,872
244,352
7%
364
7%
351
7%
344
5%
336
7%
328
(1) Our Net income and Net income attributable to Pool Corporation in 2018 and 2017 were impacted by both U.S. tax reform
and Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. In
the first quarter of 2017, we adopted ASU 2016-09, which requires us to recognize all excess tax benefits or deficiencies
related to share-based compensation as a component of our income tax provision on our Consolidated Statements of
Income, rather than a component of stockholders’ equity on our Consolidated Balance Sheets. This adoption benefited
our Net income and Net income attributable to Pool Corporation by $15.3 million in 2018 and $12.6 million in 2017. As
a result of U.S. tax reform, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which
primarily reflects re measurement of our net deferred tax liability. No such tax benefits were applicable in prior years.
(2) Upon adoption of Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying
the Presentation of Debt Issuance Costs, we now include financing costs, net of accumulated amortization as a component
of long-term debt. For comparability across all periods presented on our Consolidated Balance Sheets, we reclassified
certain amounts from Other assets, net in prior periods to Long-term debt, net to conform to our 2018 through 2016
presentation.
(3) For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.
20
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.
2018 FINANCIAL OVERVIEW
Financial Results
We delivered solid results in 2018. Despite a later than normal start to the year, and an earlier end, we produced sales growth of
8% in 2018 on top of sales growth of 8% in 2017. Our focus on organic growth, process discipline and value creation allowed us
to convert this top line growth into operating income growth of 10% over 2017.
Base business sales grew 7% over last year fueled by continued demand for discretionary products such as building materials,
lighting and swimming pool equipment. Gross profit increased 8% for the year ended December 31, 2018 compared to 2017.
Gross margin grew 10 basis points to 29.0% for 2018 compared to 28.9% in 2017. We attribute much of the gross margin
improvement to our execution of supply chain management initiatives in a higher than normal inflationary environment in our
industry.
Selling and administrative expenses (operating expenses) increased 7% compared to 2017, 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 facility-related costs. As a percentage of net sales, operating expenses declined 10 basis points.
Operating income for the year increased 10% to $313.9 million, up from $284.4 million in 2017. Operating income as a percentage
of net sales (operating margin) increased to 10.5% in 2018 compared to 10.2% in 2017.
Both Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which we
adopted on January 1, 2017, and U.S. tax reform enacted in December 2017 impacted our income tax provision in 2018 and 2017.
Our effective tax rate was 20.1% in 2018 and 29.0% in 2017. We recorded a $15.3 million, or $0.36 per diluted share, benefit
from ASU 2016-09 for the year ended December 31, 2018 compared to a benefit of $12.6 million, or $0.24 per diluted share,
realized in the same period in 2017. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.3% in 2018
and 33.7% in 2017. We expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2019 will approximate
25.5%, which is consistent with 2018 and a reduction compared to our historical rate of approximately 38.5% due to the impact
of U.S. tax reform.
Net income attributable to Pool Corporation increased 22% compared to 2017, while earnings per share was up 25% to $5.62 per
diluted share. Excluding the impacts of ASU 2016-09 discussed above, diluted earnings per share increased 23% over last year.
Financial Position and Liquidity
Cash provided by operations was $118.7 million in 2018. Combined with $146.5 million in net proceeds from borrowings, cash
from operating activities helped fund the following initiatives:
•
•
•
•
•
share repurchases in the open market of $183.6 million;
growth in net working capital of $165.8 million;
quarterly cash dividend payments to shareholders, totaling $69.4 million for the year;
net capital expenditures of $31.6 million; and
payments of $2.6 million for acquisitions.
Total net receivables, including pledged receivables, increased 6% compared to December 31, 2017, reflective of fourth quarter
sales growth and recent acquisitions. Our allowance for doubtful accounts was $6.2 million at December 31, 2018 and $3.9 million
at December 31, 2017, primarily reflecting additional specific reserves for certain customers. Our days sales outstanding ratio,
as calculated on a trailing four quarters basis, was 30.1 days at December 31, 2018 and 29.8 days at December 31, 2017.
Inventory levels grew 25% to $672.6 million at December 31, 2018 compared to $536.5 million at December 31, 2017, primarily
related to increased inventory purchases ahead of greater-than-normal vendor price increases. Our reserve for inventory
obsolescence was $7.7 million at December 31, 2018 compared to $6.3 million at December 31, 2017. Our inventory turns, as
calculated on a trailing four quarters basis, were 3.2 times at December 31, 2018 and 3.5 times at December 31, 2017.
21
Total debt outstanding of $666.8 million at December 31, 2018 increased $147.1 million, or 28%, compared to December 31,
2017 primarily to fund the additional inventory purchases discussed above and share repurchases.
Current Trends and Outlook
While market conditions have been generally favorable the past year, a number of factors weigh on our industry, including lagging
new home construction, tighter lending standards, and the slower progression of a younger generation burdened by student debt
and underemployment. Labor availability and cost have also become issues in recent years, limiting our customers’ ability to fully
meet consumer demand, particularly in construction and renovation markets.
The post-recession market environment from 2010 to 2018 was characterized by the cautious recovery of consumer spending,
modest housing recovery and low inflation. However, in terms of homeowners investing in their existing homes, discretionary
expenditures, including backyard renovations, flourished over this time period. 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 five years.
Although some constraints exist around residential construction activities, economic trends indicate that consumer spending has
largely recovered, and 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. Additionally, recent regulation passed by the U.S. Department of Energy mandates
all new and replacement motors and pumps for swimming pools must be variable speed by July 2021. This mandate, coupled
with additional product developments and technological advancements, offers further growth opportunities over the next few
years.
While we estimate that new pool construction increased to approximately 80,000 new units in 2018, construction levels are still
down approximately 65% compared to peak historical levels and down approximately 50% 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. For 2018, we started the year off strong, but a delayed spring resulted in a later than normal start to the swimming pool
season, and we finished the year with an earlier end based on weather trends. In contrast, 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. In 2016, an earlier start to the swimming 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 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 established our initial outlook for 2019 based on reasonable expectations of organic market share growth, ongoing leverage
of infrastructure and continuous process improvements. For 2019, we expect the macroeconomic environment in the United States
will be quite similar to 2018. 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 2019 and by making selective acquisitions when appropriate
opportunities arise.
The following section summarizes our outlook for 2019:
• We expect sales growth of 7% to 9%, impacted by the following factors and assumptions:
normal weather patterns for 2019;
continued growth from replacement, remodeling and construction activity and market expansion through newer
product offerings like hardscapes and commercial pools;
inflationary product cost increases of approximately 3% to 4% (or approximately 2% above the historical
average);
estimated 1% growth from acquisitions completed throughout 2018; and
same selling days in 2019 compared to 2018, with one less day in the first quarter and one additional day in the
third quarter in 2019.
• By quarter, we expect shifts in our 2019 sales activity, which will affect sales growth comparisons to 2018. For the first
quarter of 2019, we expect the loss of a selling day, a delayed Easter and lower customer early buy sales to defer an
estimated $20 million to $30 million of sales to the second and third quarters in 2019.
22
• We expect relatively neutral gross margin trends for the full year with higher gross margin growth in the first quarter of
2019 compared to 2018 due to projected benefits from our strategic inventory purchases in 2018 and expected lower
customer early buy sales in the first quarter of 2019. We expect gross margin growth to moderate substantially in the
second and third quarters and become a difficult comparison in the fourth quarter of 2019 based on our 2018 results.
• 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.
In 2019, we expect our effective tax rate will approximate 25.5%, excluding the impact of ASU 2016-09. This projected rate is
a reduction from our historical rate of approximately 38.5%. 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, 2018 stock price, we estimate that we have approximately $7.2 million in unrealized excess tax benefits related
to stock options that will expire in the second quarter of 2019 and restricted awards that will vest in 2019. We may recognize
additional tax benefits related to stock option exercises in 2019 from grants that expire in years after 2019, 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 $15.3 million benefit in our provision for income taxes for the year ended December 31, 2018 related to
ASU 2016-09.
We project that 2019 earnings will be in the range of $6.05 to $6.35 per diluted share, including an estimated $0.18 favorable
impact from ASU 2016-09. Excluding the impact of timing differences from our strategic inventory purchases in the second half
of 2018, we expect cash provided by operations will approximate net income for fiscal 2019, and subject to additional authorization
by our Board of Directors, we anticipate that we will use $150.0 million to $200.0 million in cash for share repurchases.
On January 1, 2019, we adopted ASU 2016-02, Leases. We do not expect the new accounting pronouncement to have a material
impact on our results of operations and cash flows. For additional details, see Note 1 of our “Notes to Consolidated Financial
Statements,” included in Item 8 of this Form 10-K.
The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties,
including the sensitivity of our business to weather conditions, changes in the economy and the housing market, 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 estimates 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
23
payments in equal installments in April, May and June or May and June, depending on geographic location. Credit losses have
generally been within or better than our expectations.
Similar to our business, our customers’ businesses are seasonal. Sales are lowest in the winter months and our past due accounts
receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible
accounts based on our accounts receivable aging. These reserves range from 0.05% for amounts currently due to up to 100% for
specific accounts more than 60 days past due.
At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days
past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past
due accounts. As we review these past due accounts, we evaluate collectability based on a combination of factors including:
•
•
•
•
aging statistics and trends;
customer payment history;
independent credit reports; and
discussions with customers.
During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the
likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five
years, write-offs have averaged approximately 0.06% of net sales annually. Write-offs as a percentage of net sales approximated
0.07% in 2018, 0.05% in 2017 and 0.07% in 2016. We expect that write-offs will range from 0.05% to 0.10% of net sales in 2019.
At the end of each fiscal year, we prepare a hindsight analysis by comparing the prior year end allowance for doubtful accounts
balance to (i) current year write-offs and (ii) any significantly aged outstanding receivable balances. Based on our hindsight
analysis, we concluded that the prior year allowance was within a range of acceptable estimates and that our estimation methodology
is appropriate.
If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2018, pretax income would
change by approximately $1.2 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, 2018).
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
24
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 estimation
methodology is appropriate.
If the balance of our inventory reserve increased or decreased by 20% at December 31, 2018, pretax income would change by
approximately $1.5 million and earnings per share would change by approximately $0.03 per diluted share (based on the number
of weighted average diluted shares outstanding for the year ended December 31, 2018).
Vendor Programs
Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve any of a number
of measures. These measures generally relate to the volume level of purchases from our vendors, or our net cost of products sold,
and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendor’s
products and therefore a reduction of inventory until we sell the product, at which time we recognize such consideration as a
reduction of cost of sales in our income statement.
Throughout the year, we estimate the amount earned based on our expectation 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 changes in economic conditions and
weather. Changes in our purchasing mix also impact our estimates, as certain program rates can vary depending on our volume
of purchases from specific vendors.
We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our
estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our
estimates between reporting periods. These adjustments tend to have a greater impact on gross margin in the fourth quarter since
it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods. We
update our estimates for these arrangements at year end to reflect actual annual purchase levels. In the first quarter of the subsequent
year, we prepare a hindsight analysis by comparing actual vendor credits received to the prior year vendor receivable balances.
Based on our hindsight analysis, we concluded that our vendor program estimates were within a range of acceptable estimates
and that our estimation methodology is appropriate.
If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes
would not affect the amounts we have recorded related to products already purchased, they may lower or raise our cost for products
purchased and sold in future periods.
25
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 (the TJCA or the Act) was enacted, which significantly changed 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 reduced the overall corporate income tax rate to 21%,
created a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadened the
tax base and allowed for the immediate capital expensing of certain qualified property. Due to the complexities presented by the
Act, particularly for companies with multi-national operations, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 118 (SAB 118) to provide guidance to companies who were not able to complete their accounting in the period
of enactment prior to the reporting deadlines. Under the guidance in SAB 118, provisional amounts based on reasonable estimates
were allowable for companies that had not yet completed their accounting for certain elements under the Act. As a result of this
guidance, we recorded a provisional net benefit to our income tax provision in the fourth quarter of 2017. As of December 31,
2018, we completed our accounting for the tax effects of the Act, which did not result in a material adjustment to our provisional
amount. For the Global Intangible Low Tax Income (GILTI) provisions of the Act, we have elected an accounting policy to record
GILTI as period costs if and when incurred.
As of December 31, 2018, United States income taxes were not provided on the earnings or cash balances of our foreign subsidiaries,
outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the
undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions
may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances
is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of
any future repatriation. We determined not to change our indefinite reinvestment assertion in light of U.S. tax reform.
We operate 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).
26
We use an annual cash performance award (annual bonus) to focus corporate behavior on short-term goals for growth, financial
performance and other specific financial and business improvement metrics. Management sets the Company’s annual bonus
objectives at the beginning of the bonus plan year using both historical information and forecasted results of operations for the
current plan year. Management also establishes specific business improvement objectives for both our operating units and corporate
employees. The Compensation Committee approves objectives for annual bonus plans involving executive management.
We also utilize our medium-term (three-year) Strategic Plan Incentive Program (SPIP) to provide senior management with an
additional cash-based, pay-for-performance award based on the achievement of specified earnings growth objectives. Payouts
through the SPIP are based on three-year compound 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 earnings growth estimates for the succeeding
two years. We base our current fiscal year estimates on the same assumptions used for our annual bonus calculation and we base
our forward-looking estimates on historical growth trends and our projections for the remainder of the three-year performance
periods.
Our quarterly performance-based compensation expense and accrual balances may vary relative to actual annual bonus expense
and payouts due to the following:
•
•
•
differences between estimated and actual performance;
our projections related to achievement of multiple-year performance objectives for our SPIP; and
the discretionary components of the bonus plans.
We generally make bonus payments at the end of February following the most recently completed fiscal year. Each year, we
compare the actual bonus payouts to amounts accrued at the previous 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, 2018, our goodwill balance was $188.5 million, representing
approximately 15% 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 a goodwill impairment test in the fourth quarter of each year or on a more frequent basis if events or changes in
circumstances occur that indicate potential impairment. If the estimated fair value of any of our reporting units falls below its
carrying value, we compare the estimated fair value of the reporting unit’s goodwill to its carrying value. If the carrying value of
a reporting unit’s goodwill exceeds its estimated fair value, we perform a calculation to measure impairment, which includes
valuing the tangible and intangible assets. We recognize any 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,
we define a reporting unit as an individual sales center. As of October 1, 2018, we had 223 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 of 2018, 2017 and 2016, 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. This location’s results came in above expectations at the end of both the 2018 and 2017
swimming pool seasons, and as of December 31, 2018, the remaining goodwill balance for this reporting unit was $1.7 million.
27
We estimate the fair value of our reporting units based on an income approach that incorporates our assumptions for determining
the present value of future cash flows. We project future cash flows using management’s assumptions for sales growth rates,
operating margins, discount rates and multiples. These estimates can significantly affect the outcome of our impairment test. We
also review for potential impairment indicators at the reporting unit level based on an evaluation of recent historical operating
trends, current and projected local market conditions and other relevant factors as appropriate.
To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization
as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition
premium. Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for
the purpose of our goodwill impairment test. To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate
to reflect more conservative discounted cash flow assumptions, 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 our 2018 goodwill impairment analysis, we consider our reporting units in Australia as most at risk for goodwill
impairment. We entered Australia in July 2014 with the acquisition of a controlling interest in Pool Systems Pty. Ltd (PSL). The
previous owner of PSL provided executive oversight until our purchase of the non-controlling interest in June 2017. Since 2014,
we have continued to expand our operations in Australia via one sales center opening and the acquisitions of Newline Pool Products
in July 2017 and Pool Power in January 2018. The most sensitive assumptions related to our fair values for these locations relate
to future projected operating results and management’s ability to effectively leverage our operating structure and manage costs as
we expand our presence. As of December 31, 2018, our aggregate goodwill balance for our five reporting units in Australia was
$4.0 million.
If our assumptions or estimates in our fair value calculations change or if operating results are less than forecasted, we could incur
additional impairment charges in future periods, especially related to the reporting units discussed above. Impairment charges
would decrease operating income, negatively impact diluted EPS and result in lower asset values on our balance sheet.
Recent Accounting Pronouncements
See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for details.
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:
Net sales
Cost of sales
Gross profit
Operating expenses
Operating income
Interest and other non-operating expenses, net
Year Ended December 31,
2018
2017
2016
100.0%
100.0%
100.0%
71.0
29.0
18.6
10.5
0.7
71.1
28.9
18.7
10.2
0.5
71.2
28.8
18.9
10.0
0.6
Income before income taxes and equity earnings
9.8%
9.7%
9.4%
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 2018, 2017 and 2016. We
have included the results of operations in our consolidated results since the respective acquisition dates.
Fiscal Year 2018 compared to Fiscal Year 2017
The following table breaks out our consolidated results into the base business component and the excluded components
(sales centers excluded from base business):
(Unaudited)
(in thousands)
Net sales
Gross profit
Gross margin
Base Business
Year Ended
December 31,
Excluded
Year Ended
December 31,
Total
Year Ended
December 31,
2018
$ 2,957,006
2017
$ 2,776,103
2018
$ 41,091
2017
$ 12,085
2018
$ 2,998,097
2017
$ 2,788,188
857,590
801,716
12,583
3,573
870,173
805,289
29.0%
28.9%
30.6 %
29.6 %
29.0%
28.9%
Operating expenses
541,462
516,183
14,822
4,735
556,284
520,918
Expenses as a % of net sales
18.3%
18.6%
36.1 %
39.2 %
18.6%
18.7%
Operating income (loss)
316,128
285,533
(2,239)
(1,162)
313,889
284,371
Operating margin
10.7%
10.3%
(5.4)%
(9.6)%
10.5%
10.2%
29
We have excluded the following acquisitions from base business for the periods identified:
Acquired
Turf & Garden, Inc. (1)
Tore Pty. Ltd. (Pool Power) (1)
Chem Quip, Inc. (1)
Intermark
E-Grupa
Acquisition
Date
November 2018
January 2018
December 2017
December 2017
October 2017
New Star Holdings Pty. Ltd. (Newline)
July 2017
Lincoln Aquatics (1)
April 2017
(1) We acquired certain distribution assets of each of these companies.
Net
Sales Centers
Acquired
Periods
Excluded
4
1
5
1
1
1
1
November - December 2018
January - December 2018
December 2017 and
January - December 2018
December 2017 and
January - December 2018
October - December 2017 and
January - December 2018
January - September 2018 and
July - September 2017
January - July 2018 and
May - July 2017
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 2018:
December 31, 2017
Acquired locations
New locations
Consolidated location
December 31, 2018
351
5
9
(1)
364
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)
Net sales
Year Ended December 31,
2018
2017
Change
$
2,998.1
$
2,788.2
$ 209.9
8%
Net sales increased 8% compared to 2017, with 7% of this increase coming from base business sales growth. We started the year
off strong, but multiple storms in March hindered our customers’ ability to complete projects, and cold temperatures and snow in
our seasonal markets delayed pool openings through April. Our seasonal markets finally warmed up in May 2018, allowing us
to serve the pent-up demand and generate solid sales growth through the remainder of the second and third quarters, despite several
occurrences of severe weather during the third quarter. In the fourth quarter of 2018, much cooler and wetter weather patterns
made pool construction and remodeling activities from Texas to the East Coast difficult for our customers to pursue. Further, the
comparison to the fourth quarter of 2017 was especially tough given the favorable weather last year in our year-round markets,
which drive most of our sales in our seasonally slower fourth quarter, and the revenue generated from the Hurricane Irma recovery
in Florida in the fourth quarter of 2017. Despite a later than normal start to the season, and an earlier end, we produced 8% sales
growth in 2018 on top of sales growth of 8% in 2017.
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;
•
chemicals, our largest product category at 12% of total net sales for 2018, had increased sales of 7% compared to 2017;
and
inflation driven (estimated at approximately 1%) product selling price increases, with higher increases on certain
swimming pool equipment and parts in the fourth quarter of 2018.
•
We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased
spending in traditionally discretionary areas including pool construction and pool remodeling, as well as equipment upgrades. In
2018, sales for equipment, such as swimming pool heaters, pumps, lights and filters, increased 7%, and collectively represented
approximately 27% 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 11% compared to 2017 and
represented approximately 12% of net sales in 2018.
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. Sales to
these customers increased 11% compared to 2017 and represented 5% of our consolidated net sales for 2018.
In terms of quarterly performance, base business sales increased 5% in the first quarter of 2018. Base business sales then increased
6% in the second quarter of 2018 despite a slow start to the quarter as discussed above. In in the third quarter of 2018, base
business sales increased 8% despite severe weather events and elevated rainfall in Texas and wildfires in California. For our
seasonally slowest fourth quarter, base business sales increased 5% in 2018 on top of 13% base business sales growth achieved
in the fourth quarter of 2017. In addition to the sales discussion above, see further details of significant weather impacts under
the subheading Seasonality and Quarterly Fluctuations below.
Gross Profit
(in millions)
Gross profit
Gross margin
Year Ended December 31,
2018
2017
Change
$
870.2
$
805.3
$
64.9
8%
29.0%
28.9%
Gross margin for 2018 increased 10 basis points compared to 2017. We attribute much of the gross margin improvement to our
execution of supply chain management initiatives in a higher than normal inflationary environment in our industry. In the second
half of 2018, we made strategic inventory purchases in advance of greater-than-normal vendor price increases.
31
Operating Expenses
(in millions)
Year Ended December 31,
Operating expenses
$
556.3
$
520.9
$
35.4
7%
Operating expenses as a percentage of net sales
18.6%
18.7%
2018
2017
Change
Operating expenses increased 7% compared to 2017, 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, offset by lower performance-based compensation.
Interest and Other Non-operating Expenses, net
Interest and other non-operating expenses, net increased $5.7 million compared to 2017. This increase mostly reflects higher
interest expense on our debt. Average outstanding debt was $579.1 million in 2018 versus $504.0 million in 2017. Our 2018
average outstanding debt balance reflects greater borrowings, primarily to fund working capital growth. Our weighted average
effective interest rate increased to 3.3% in 2018 compared to 2.7% in 2017.
Income Taxes
Our effective income tax rate was 20.1% at December 31, 2018 and 29.0% at December 31, 2017. Our provision for income taxes
in 2017 was positively impacted by both U.S. tax reform and ASU 2016-09. We recorded a $15.3 million benefit from ASU
2016-09 for the year ended December 31, 2018 compared to a benefit of $12.6 million realized in the same period in 2017.
Excluding the benefits from ASU 2016-09, our effective tax rate was 25.3% and 33.7% for the years ended 2018 and 2017,
respectively.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation increased 22% to $234.5 million in 2018 compared to $191.6 million in 2017. Earnings
per share increased 25% to $5.62 per diluted share compared to $4.51 per diluted share in 2017. Excluding the $0.36 per diluted
share impact of ASU 2016-09 in 2018 and $0.24 in 2017, diluted earnings per share increased 23% over last year.
32
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)
(in thousands)
Net sales
Gross profit
Gross margin
Base Business
Year Ended
December 31,
Excluded
Year Ended
December 31,
Total
Year Ended
December 31,
2017
$ 2,749,672
2016
$ 2,558,368
2017
$ 38,516
2016
12,435
$
2017
$ 2,788,188
2016
$ 2,570,803
793,866
737,335
11,423
28.9%
28.8%
29.7 %
Operating expenses
508,273
481,924
12,645
Expenses as a % of net sales
18.5%
18.8%
32.8 %
Operating income (loss)
285,593
255,411
(1,222)
Operating margin
10.4%
10.0%
(3.2)%
3,752
30.2%
3,304
26.6%
448
3.6%
805,289
741,087
28.9%
28.8%
520,918
485,228
18.7%
18.9%
284,371
255,859
10.2%
10.0%
For an explanation of how we calculate base business, please refer to the discussion of base business under the heading “Fiscal
Year 2018 compared to Fiscal Year 2017.”
For purposes of comparing operating results for the year ended December 31, 2017 to the year ended December 31, 2016, we
excluded acquired sales centers from base business for the periods identified in the table below.
Acquired
Chem Quip, Inc. (1) (2)
Intermark
E-Grupa
New Star Holdings Pty. Ltd.
Lincoln Aquatics (1)
Metro Irrigation Supply Company Ltd. (1)
The Melton Corporation (1)
Seaboard Industries, Inc. (1)
Acquisition
Date
December 2017
December 2017
October 2017
July 2017
April 2017
April 2016
November 2015
October 2015
Net
Sales Centers
Acquired
5
1
1
1
1
8
2
3
Periods
Excluded
December 2017
December 2017
October - December 2017
July - December 2017
May - December 2017
January - June 2017 and
April - June 2016
January 2017 and
January 2016
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 acquired sales centers are included in the sales center count below.
33
The table below summarizes the changes in our sales centers during 2017:
December 31, 2016
Acquired locations
New locations
Consolidated locations
December 31, 2017
344
9
1
(3)
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.
Net Sales
(in millions)
Net sales
Year Ended December 31,
2017
2016
Change
$
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.
34
Gross Profit
(in millions)
Gross profit
Gross margin
Year Ended December 31,
2017
2016
Change
$
805.3
$
741.1
$
64.2
9%
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.
Operating Expenses
(in millions)
Year Ended December 31,
Operating expenses
$
520.9
$
485.2
$
35.7
7%
Operating expenses as a percentage of net sales
18.7%
18.9%
2017
2016
Change
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.
35
Seasonality and Quarterly Fluctuations
For discussion regarding the effects seasonality and weather have on our business, see Item 1, “Business,” of this Form 10-K.
The following table presents certain unaudited quarterly data for 2018 and 2017. 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)
(in thousands)
Statement of Income Data
Net sales
Gross profit
Operating income
Net income
Net sales as a % of annual
net sales
Gross profit as a % of
annual gross profit
Operating income as a %
of annual operating
income
Balance Sheet Data
2018
2017
QUARTER
First
Second
Third
Fourth
First
Second
Third
Fourth
$ 585,900
$1,057,804
$ 811,311
$ 543,082
$ 546,441
$ 988,163
$ 743,401
$ 510,183
166,073
33,541
31,339
308,655
162,042
117,049
235,003
160,442
153,621
92,337
69,261
25,970
16,811
30,998
22,270
289,664
154,186
94,620
216,606
145,398
81,928
48,783
17,259
25,665
20%
19%
35%
35%
27%
27%
18%
18%
20%
19%
35%
36%
27%
27%
18%
18%
11%
52%
29%
8%
11%
54%
29%
6%
Total receivables, net
$ 314,596
$ 404,415
$ 287,773
$ 207,801
$ 290,019
$ 370,285
$ 262,796
$ 196,265
Product inventories, net
Accounts payable
Total debt
703,793
467,795
568,110
606,583
300,232
657,120
609,983
204,706
580,703
672,579
237,835
666,761
647,884
465,928
490,217
542,805
273,309
553,480
484,287
209,092
564,573
536,474
245,249
519,650
Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.
Weather Impacts on Fiscal Year 2018 to Fiscal Year 2017 Comparisons
Storm activity, as well as cooler-than-normal temperatures late in the first quarter of 2018, inhibited our first quarter sales growth.
Much of the Atlantic Coast experienced below-average temperatures in March of 2018, which caused pools to open later than in
2017, and greater storm activity in Texas and the central United States and above-average precipitation in California delayed
construction activity during the first quarter of 2018. In contrast, unseasonably mild weather benefited sales in the first quarter
of 2017 as Texas and surrounding markets experienced record warm temperatures.
While warming trends started out slow in the second quarter of 2018, the unfavorable weather comparisons turned around by the
end of the quarter. April 2018 sales struggled as much of the country experienced cold to record cold temperatures this year in
contrast to warm to record warm temperatures in 2017. With the exception of Florida, where it rained most of May and into June,
and California, which generally experienced a cooler-than-usual spring, 2018 results in the last two months of the second quarter
benefited from the warm weather throughout the country and helped relieve the effects of the slow start from earlier in the year.
36
California wildfires, large amounts of rain throughout Texas, and Hurricane Florence in the Carolinas all impacted our sales in
the third quarter of 2018. Likewise, severe storms in the third quarter of 2017, particularly Hurricanes Irma and Harvey, hindered
our sales growth in Florida and Texas last year, although Texas largely recovered by the end of September 2017. In the third
quarter of 2018, the West experienced record heat and below-average rainfall, while temperatures were also above-average in the
central United States and the Midwest, but each experienced above-average rainfall. These weather patterns were consistent with
the third quarter of 2017, resulting in overall similar weather comparisons. Much of the United States experienced cooler-than-
normal temperatures and higher than average precipitation in the fourth quarter of 2018, particularly in Texas, making it difficult
for customers to initiate and complete projects over this time period.
Weather Impacts on Fiscal Year 2017 to Fiscal Year 2016 Comparisons
Unseasonably mild weather benefited sales in the first quarter of 2017. However, while favorable weather trends early in the year
normally have a seasonally larger impact, the comparison to the first quarter of 2016 was especially tough given the benefit of the
warmer-than-normal weather across nearly all markets in the United States in the first quarter of 2016. For the first quarter of
2017, Texas and surrounding markets experienced record warm temperatures, which when coupled with below-average
precipitation for that area, spurred higher sales growth. In two of the more seasonal regions where we operate, below-average
temperatures in the North and above-average precipitation in the West negatively impacted our first quarter 2017 sales growth.
Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter
of 2017, while the weather impact overall for the quarter was fairly neutral. Temperatures and precipitation throughout most areas,
other than those described above, were normal, with only Texas benefiting from drier weather in the second quarter of 2017
compared to the above-average rainfall experienced in the same period of 2016.
Severe storms in the third quarter of 2017, particularly Hurricanes Irma and Harvey, hindered our sales growth in Florida and
Texas, although Texas largely recovered by the end of September. In the Central and Midwest, temperatures were normal for the
third quarter, contrasting with the above-average temperatures in the third quarter of 2016. The West experienced record heat and
normal rainfall in the third quarter of 2017, similar to the above-average heat in the same period of 2016. Overall, the United
States experienced favorable weather in most of the fourth quarter of 2017, particularly in Florida, which allowed for sales recovery
following Hurricane Irma.
Geographic Areas
Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers
into a single reportable segment. For additional details, see Note 1 of our “Notes to Consolidated Financial Statements,” included
in Item 8 of this Form 10-K.
For a breakdown of net sales and property, plant and equipment between our United States and international operations, see Item 1,
“Business,” of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess
our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature
of our business. Significant factors which could affect our liquidity include the following:
•
•
•
•
•
•
•
•
•
cash flows generated from operating activities;
the adequacy of available bank lines of credit;
the quality of our receivables;
acquisitions;
dividend payments;
capital expenditures;
changes in income tax laws and regulations;
the timing and extent of share repurchases; and
the ability to attract long-term capital with satisfactory terms.
37
Our primary capital needs are seasonal working capital obligations and other general corporate initiatives, including acquisitions,
dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by
bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle
applies to funds used for capital expenditures and share repurchases.
We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount
of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash
are as follows:
•
•
•
•
•
capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments
and fleet vehicles;
strategic acquisitions executed opportunistically;
payment of cash dividends as and when declared by our Board of Directors (Board);
repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and
repurchases of our common stock under our Board authorized share repurchase program.
Capital expenditures were 1.1% of net sales in 2018 and 1.4% of net sales in both 2017 and 2016. Our higher capital spending
in 2017 and 2016 related to expanding our facilities and purchasing delivery vehicles to address growth. Over the last 5 years,
capital expenditures have averaged roughly 1.0% of net sales.
Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We
focus our capital expenditure plans on the needs of our sales centers. In 2018, we performed an evaluation of our enterprise
resource planning system. Although we do not anticipate a complete replacement of our enterprise resource planning system, we
do plan to migrate our current system to a new environment over a number of years. This plan requires modest, incremental capital
investments over that time frame rather than substantial spending. For 2019, based on management’s current plans, we project
capital expenditures will continue to approximate the historical average.
We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working
capital needs that may arise. We continually evaluate potential acquisitions and hold discussions with acquisition candidates.
If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such
transactions.
As of February 21, 2019, $49.2 million of the current Board authorized amount under our authorized share repurchase plan remained
available. We expect to repurchase additional shares in the open market from time to time depending on market conditions.
We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
Operating activities
Investing activities
Financing activities
$
Year Ended December 31,
2017
175,311
(52,220)
(114,449)
2018
118,656
(34,158)
(97,571)
$
$
2016
165,378
(55,643)
(99,672)
Cash provided by operations of $118.7 million for 2018 decreased compared to 2017 primarily due to timing differences from the
pre-price increase inventory purchases, which should benefit 2019 cash flows as the inventory is sold. In 2017, cash provided by
operations improved compared to 2016 primarily due to our net income growth, partially offset by changes in working capital.
Excluding the net income benefit from the 2017 tax changes, cash provided by operating activities approximated net income in
2017.
38
Cash used in investing activities decreased in 2018 due to a decrease of $10.3 million in payments for acquisitions compared to
2017 and a $7.8 million reduction in net capital expenditures between years. As discussed above, higher capital spending in 2017
addressed our need to expand our fleet of delivery vehicles and make investments in equipment and technology. Related to the
decrease from 2016 to 2017, our 2017 cash used in investing activities reflects a decrease of $6.9 million in net payments to fund
acquisitions, partially offset by a $5.0 million increase of net capital expenditures.
Cash used in financing activities decreased in 2018, primarily due to increased net borrowings on our debt arrangements. We had
$146.5 million of net proceeds from our debt arrangements in 2018 compared to $82.1 million in 2017, primarily to fund greater
share repurchases and the pre-price increase inventory purchases. We repurchased $183.6 million of shares in the open market
in 2018 compared to $143.2 million in 2017. In 2016, we had net proceeds from our debt arrangements of $109.4 million, while
we repurchased $175.6 million of shares in the open market.
Future Sources and Uses of Cash
To supplement cash from operations as our primary source of working capital, we will continue to utilize our two major credit
facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility) and the Receivables Securitization
Facility (the Receivables Facility). For additional details regarding these facilities, see Note 5 of our “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
Revolving Credit Facility
Our Credit Facility provides for $750.0 million in borrowing capacity under a five-year unsecured revolving credit facility and
includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate
maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by
the lenders by up to $75.0 million, to a total of $825.0 million. The Credit Facility matures on September 29, 2022. We intend
to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At December 31, 2018, there was $550.1 million outstanding, a $4.8 million standby letter of credit outstanding and $195.1 million
available for borrowing under the Credit Facility. We utilize interest rate swap contracts and forward-starting interest rate swap
contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on the Credit Facility. As of
December 31, 2018, we had three interest rate swap contracts in place that became effective on October 19, 2016. These swap
contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting
contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now
effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional
amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling
$75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the
applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019.
In July 2016, we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments
on our Credit Facility to its maturity date at that time. This swap contract will convert the Credit Facility’s variable interest rate
to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and
terminates on November 20, 2020.
The weighted average effective interest rate for the Credit Facility as of December 31, 2018 was approximately 3.5%, excluding
commitment fees.
39
Financial covenants on the Credit Facility include maintenance of a maximum average total leverage ratio and a minimum fixed
charge coverage ratio, which are our most restrictive financial covenants. As of December 31, 2018, the calculations of these two
covenants are detailed below:
• Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be
less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total
Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those
terms are defined in the Credit Facility). As of December 31, 2018, our average total leverage ratio equaled 1.72 (compared
to 1.63 as of December 31, 2017) and the TTM average total debt amount used in this calculation was $608.9 million.
• Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter, our fixed charge ratio must be greater
than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense
paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of December 31,
2018, our fixed charge ratio equaled 5.33 (compared to 5.53 as of December 31, 2017) and TTM Rental Expense was
$57.4 million.
On January 1, 2019, we adopted ASU 2016-02, Leases, which requires that we record most of our leases on our balance sheets,
but we expect to recognize expenses in a manner similar to current guidance. Our Credit Facility agreement requires that we
calculate our financial covenants by excluding the effects of the new standard. We do not expect ASU 2016-02 will have a material
impact on our financial covenant calculations. For additional details regarding our adoption of this new accounting pronouncement,
see Note 1 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
The Credit Facility also limits the declaration and payment of dividends on our common stock to no more than 50% of the preceding
year’s Net Income (as defined in the Credit Facility), provided no default or event of default has occurred and is continuing, or
would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the
aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of
such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with
the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro
forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.
Under the Credit Facility, we may repurchase shares of our common stock provided no default or event of default has occurred
and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a
pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness,
make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any
other terms of the Credit Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our
outstanding debt.
Receivables Securitization Facility
As amended on October 31, 2018, our two-year Receivables Facility offers us a lower-cost form of financing, with a peak funding
capacity of up to $295.0 million between May 1 and June 30, which includes an additional seasonal funding capacity that is
available between March 1 and July 31. Other funding capacities range from $95.0 million to $280.0 million throughout the
remaining months of the year.
The Receivables Facility provides for the sale of certain of our receivables to a wholly-owned subsidiary (the Securitization
Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights
to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon
payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such
collections as proceeds for the sale of new receivables until payments become due.
The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary
for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage
ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest
expense plus rental expense) of 2.25 to 1.00.
At December 31, 2018, there was $108.5 million outstanding under the Receivables Facility at a weighted average effective interest
rate of 3.3%, excluding commitment fees.
40
Compliance and Future Availability
As of December 31, 2018, we were in compliance with all covenants and financial ratio requirements under our Credit Facility
and our Receivables Facility. We believe we will remain in compliance with all covenants and financial ratio requirements
throughout 2019. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial
Statements,” included in Item 8 of this Form 10-K.
Contractual Obligations
At December 31, 2018, our contractual obligations for long-term debt and operating leases were as follows (in thousands):
Long-term debt
Operating leases
Total
667,799
196,765
864,564
$
$
Less than
1 year
Payments Due by Period
1-3 years
3-5 years
More than
5 years
$
$
9,168
50,416
59,584
$
$
108,500
85,991
194,491
$
$
550,131
44,338
594,469
$
$
—
16,020
16,020
The table below contains estimated interest payments (in thousands) related to our long-term debt obligations presented in the
table above. We calculated estimates of future interest payments based on the December 31, 2018 outstanding debt balances,
using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective
interest rates as of December 31, 2018 for the remaining outstanding balances not covered by our swap contracts. To project the
estimated interest expense to coincide with the time periods used in the table above, we projected the estimated debt balances for
future years based on the scheduled maturity dates of the Credit Facility and the Receivables Facility. For certain of our contractual
obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by
which these potential obligations will increase or decrease over time. As such, we have excluded unrecognized tax benefits from
our contractual obligations table. See Notes 5 and 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this
Form 10-K for additional discussion related to our debt and more information related to our unrecognized tax benefits.
Estimated Interest Payments Due by Period
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Interest
$
77,940
$
22,588
$
41,058
$
14,294
$
—
41
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, including interest rate risk and foreign currency risk. The adverse effects of potential changes in
these market risks are discussed below. The following discussion does not consider the effects of the reduced level of overall
economic activity that could exist following such changes. Further, in the event of changes of such magnitude, we would likely
take actions to mitigate our exposure to such changes.
Interest Rate Risk
Our earnings are exposed to changes in short-term interest rates because of the variable interest rates on our debt. However, we
have entered into interest rate swap contracts to reduce our exposure to market fluctuations. For information about our debt
arrangements and interest rate swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this
Form 10 K.
In 2018, there was no interest rate risk related to the notional amounts under our interest rate swap contracts for the Credit Facility.
The portions of our outstanding balances under the Credit Facility and the Receivables Facility that were not covered by our
interest rate swap contracts were subject to variable interest rates. To calculate the potential impact in 2018 related to interest rate
risk, we performed a sensitivity analysis assuming that we borrowed the maximum available amount under the Credit Facility,
excluding the accordion feature, and the off-season maximum amount available under the Receivables Facility. In this analysis,
we assumed that the variable interest rates for the Credit Facility and the Receivables Facility increased by 1.0%. Based on this
calculation, our pretax income would have decreased by approximately $7.7 million and earnings per share would have decreased
by approximately $0.14 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended
December 31, 2018). The maximum amount available under the Credit Facility is $750.0 million, excluding the $75.0 million
accordion feature, and the maximum amount available under the Receivables Facility is $255.0 million, excluding the $40.0 million
seasonal increase in capacity available from March 1 to July 31.
Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case,
we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our
swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we
continue to be in a net pay position.
Currency Risk
Changes in the exchange rates for the functional currencies of our international subsidiaries, as shown in the table below, may
positively or negatively impact our sales, operating expenses and earnings. Historically, we have not hedged our currency exposure
and fluctuations in exchange rates have not materially affected our operating results. While our international operations accounted
for only 9% of total net sales in 2018, our exposure to currency rate fluctuations could be material in 2019 and future years to the
extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our
consolidated results.
Functional Currencies
Canada
United Kingdom
Belgium
Croatia
France
Germany
Italy
Portugal
Spain
Mexico
Colombia
Australia
Canadian Dollar
British Pound
Euro
Kuna
Euro
Euro
Euro
Euro
Euro
Mexican Peso
Colombian Peso
Australian Dollar
42
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
Page
44
45
46
47
48
49
50
43
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pool Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pool Corporation (the Company) as of December 31, 2018
and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1994.
New Orleans, Louisiana
February 27, 2019
44
POOL CORPORATION
Consolidated Statements of Income
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
Operating income
Interest and other non-operating expenses, net
Income before income taxes and equity earnings
Provision for income taxes
Equity earnings in unconsolidated investments, net
Net income
Net loss attributable to noncontrolling interest
Net income attributable to Pool Corporation
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Year Ended December 31,
2017
$ 2,788,188
1,982,899
805,289
520,918
284,371
15,189
269,182
77,982
139
191,339
294
191,633
2016
$ 2,570,803
1,829,716
741,087
485,228
255,859
14,481
241,378
92,931
156
148,603
352
148,955
2018
$ 2,998,097
2,127,924
870,173
556,284
313,889
20,896
292,993
58,774
242
234,461
—
234,461
$
$
$
$
$
5.82
5.62
$
$
4.69
4.51
$
$
3.56
3.47
40,311
41,693
40,838
42,449
41,872
42,984
Cash dividends declared per common share
$
1.72
$
1.42
$
1.19
The accompanying Notes are an integral part of these Consolidated Financial Statements.
45
POOL CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustments
Change in unrealized gains and losses on interest rate swaps,
net of the change in taxes of $(425), $(769) and $(839)
Total other comprehensive income (loss)
Comprehensive income
Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Pool Corporation
$
$
Year Ended December 31,
2017
191,339
2018
234,461
$
$
2016
148,603
(4,945)
5,545
(1,661)
1,276
(3,669)
230,792
—
230,792
1,205
6,750
198,089
74
198,163
1,312
(349)
148,254
378
148,632
$
$
The accompanying Notes are an integral part of the Consolidated Financial Statements.
46
POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Receivables pledged under receivables facility
Product inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Equity interest investments
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Short-term borrowings and current portion of long-term debt
Total current liabilities
Deferred income taxes
Long-term debt, net
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
39,506,067 shares issued and outstanding at December 31, 2018 and
40,212,477 shares issued and outstanding at December 31, 2017
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2018
2017
$
$
$
$
16,358
69,493
138,308
672,579
18,506
915,244
106,964
188,472
12,004
1,213
16,974
1,240,871
237,835
58,607
9,168
305,610
29,399
657,593
24,679
1,017,281
40
453,193
(218,646)
(10,997)
223,590
1,240,871
$
$
$
$
29,940
76,597
119,668
536,474
19,569
782,248
100,939
189,435
13,223
1,127
14,090
1,101,062
245,249
65,482
10,835
321,566
24,585
508,815
22,950
877,916
40
426,750
(196,316)
(7,328)
223,146
1,101,062
The accompanying Notes are an integral part of these Consolidated Financial Statements.
47
POOL CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Share-based compensation
Excess tax benefits from share-based compensation
Provision for doubtful accounts receivable, net of write-offs
Provision for inventory obsolescence, net of write-offs
Provision (benefit) for deferred income taxes
Gains on sales of property and equipment
Equity earnings in unconsolidated investments, net
Net losses (gains) on foreign currency transactions
Impairments of goodwill and other non-operating assets
Other
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables
Product inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other current liabilities
Net cash provided by operating activities
Investing activities
Acquisition of businesses, net of cash acquired
Purchases of property and equipment, net of sale proceeds
Payments to fund credit agreement
Collections from credit agreement
Other investments, net
Net cash used in investing activities
Financing activities
Proceeds from revolving line of credit
Payments on revolving line of credit
Proceeds from asset-backed financing
Payments on asset-backed financing
Proceeds from short-term borrowings and current portion of long-term debt
Payments on short-term borrowings and current portion of long-term debt
Payments on deferred and contingent acquisition consideration
Purchase of redeemable non-controlling interest
Payments of deferred financing costs
Excess tax benefits from share-based compensation
Proceeds from stock issued under share-based compensation plans
Payments of cash dividends
Purchases of treasury stock
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2017
2016
2018
$
234,461
$
191,339
$
148,603
26,122
1,793
12,874
—
2,286
1,462
4,661
(289)
(242)
560
—
808
(14,371)
(142,170)
1,018
(6,567)
(3,750)
118,656
(2,578)
(31,580)
—
—
—
(34,158)
1,138,195
(998,503)
198,400
(189,900)
17,127
(18,793)
(661)
—
(106)
—
13,569
(69,430)
(187,469)
(97,571)
(509)
(13,582)
29,940
16,358
$
24,157
1,568
12,482
—
(154)
(267)
(4,636)
(285)
(139)
(171)
1,200
166
(21,903)
(35,783)
(4,096)
5,077
6,756
175,311
(12,834)
(39,390)
—
—
4
(52,220)
20,338
1,639
9,902
(7,370)
(155)
(448)
3,749
(320)
(156)
679
4,113
923
(5,666)
(8,050)
(3,077)
(17,896)
18,570
165,378
(19,730)
(34,352)
(5,322)
3,737
24
(55,643)
1,067,868
(1,011,977)
161,600
(145,100)
27,333
(17,603)
(324)
(2,573)
(1,104)
—
11,466
(58,029)
(146,006)
(114,449)
(658)
7,984
21,956
29,940
$
1,154,090
(1,072,557)
155,000
(126,500)
18,442
(19,037)
—
—
(69)
7,370
11,752
(49,749)
(178,414)
(99,672)
(1,344)
8,719
13,237
21,956
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
48
POOL CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
Common Stock
Additional
Paid-In
Retained
Accumulated
Other
Comprehensive
Shares
Amount
Capital
Deficit
Loss
Total
Balance at December 31, 2015
42,711
$
43
$
374,138
$ (104,709) $
(13,729) $
255,743
Net income attributable to Pool
Corporation
Foreign currency translation
Interest rate swaps, net of the change
in taxes of $(839)
Repurchases of common stock, net
of retirements
Share-based compensation
Issuance of shares under incentive
stock plans, including tax benefit
of $7,370
Declaration of cash dividends
Balance at December 31, 2016
Net income attributable to Pool
Corporation
Foreign currency translation
Interest rate swaps, net of the change
in taxes of $(769)
Repurchases of common stock, net
of retirements
Share-based compensation
Issuance of shares under incentive
stock plans (see Note 1 for tax
benefit accounting change)
Declaration of cash dividends
Redemption value adjustment of
redeemable non-controlling
interest
Balance at December 31, 2017
Net income attributable to Pool
Corporation
Foreign currency translation
Interest rate swaps, net of the change
in taxes of $(425)
Repurchases of common stock, net
of retirements
Share-based compensation
Issuance of shares under incentive
stock plans (see Note 1 for tax
benefit accounting change)
Declaration of cash dividends
Balance at December 31, 2018
—
—
—
(2,064)
—
443
—
41,090
—
—
—
(1,353)
—
475
—
—
40,212
—
—
—
(1,291)
—
585
—
39,506
$
—
—
—
(2)
—
—
—
41
—
—
—
(1)
—
—
—
—
40
—
—
—
—
—
—
—
40
—
—
—
—
9,902
19,122
—
403,162
—
—
—
—
12,482
11,466
—
148,955
—
—
(178,412)
—
—
(49,749)
(183,915)
191,633
—
—
(146,005)
—
—
(58,029)
(360)
426,750
—
(196,316)
—
—
—
—
12,874
234,461
—
—
(187,469)
—
13,569
—
453,193
—
(69,322)
$ (218,646) $
$
—
(1,661)
148,955
(1,661)
1,312
1,312
—
—
—
—
(14,078)
—
5,545
1,205
—
—
—
—
—
(7,328)
—
(4,945)
(178,414)
9,902
19,122
(49,749)
205,210
191,633
5,545
1,205
(146,006)
12,482
11,466
(58,029)
(360)
223,146
234,461
(4,945)
1,276
1,276
—
—
—
—
(10,997) $
(187,469)
12,874
13,569
(69,322)
223,590
The accompanying Notes are an integral part of these Consolidated Financial Statements.
49
POOL CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Description of Business
As of December 31, 2018, Pool Corporation and our subsidiaries (the Company, which may be referred to as we, us or our),
operated 364 sales centers in North America, Europe, South America and Australia from which we sell swimming pool supplies,
equipment and related leisure products, irrigation and landscape products, and hardscape, tile and stone products to pool builders,
retail stores, service companies, landscape contractors and golf courses. We distribute products through four networks:
SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon) and National Pool Tile (NPT).
Basis of Presentation and Principles of Consolidation
We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the
requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring
adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial
Statements include the accounts of Pool Corporation and our subsidiaries. All significant intercompany accounts and intercompany
transactions have been eliminated.
All of our subsidiaries are wholly owned. From July 31, 2014 to June 29, 2017, we owned a 60% interest in Pool Systems Pty.
Ltd. (PSL), an Australian company. Our ownership percentage constituted a controlling interest in the acquired company, which
required us to consolidate PSL’s financial position and results of operations from the date of acquisition. On June 29, 2017, we
purchased the remaining 40% interest in PSL. Thus, we have continued to consolidate PSL, but there is no longer a separate
noncontrolling interest reported on our Consolidated Statements of Income, nor Redeemable noncontrolling interest reported on
our Consolidated Balance Sheets.
Variable Interest Entity
In February 2015, we entered into a five-year credit agreement with a swimming pool retailer. Under this agreement and the
related revolving note, we were the primary lender of operating funds for this entity. The total lending commitment under the
credit agreement was $8.5 million. In December 2017, we ended our lending arrangement with this entity and exercised our rights
to the collateral that secured this agreement. The collateral was sufficient to satisfy the net balance previously recorded within
Other assets on our Consolidated Balance Sheets.
Use of Estimates
To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts,
inventory obsolescence reserves, vendor programs, income taxes, performance-based compensation accruals and goodwill
impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be
significantly different from what we expected when we made these estimates.
Newly Adopted Accounting Pronouncements
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue - Revenue from Contracts with Customers,
and all the related amendments, which are also codified into Accounting Standards Codification (ASC) 606. We elected to adopt
this guidance using the modified retrospective method. The adoption of this standard did not have a material impact on our
financial position or results of operations. We did not restate prior period information for the effects of the new standard, nor did
we adjust the opening balance of our retained deficit to account for the implementation of the new requirements of this standard.
We do not expect the adoption of this guidance to have a material effect on our results of operations in future periods. See Revenue
Recognition within this note for additional information.
On January 1, 2018, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts
and Cash Payments. The new guidance specifies how cash flows should be classified for 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. Our adoption of ASU 2016-15 had no impact on our
50
Consolidated Statement of Cash Flows as our previous classifications related to contingent consideration payments and distributions
from equity method investees is consistent with the requirements of ASU 2016-15.
On January 1, 2017, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective
basis. The provisions of this update simplify many key aspects of the accounting for and cash flow presentation of employee
share-based compensation transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements.
In accordance with the new guidance, we now record all excess tax benefits or tax deficiencies as a component of our Provision
for income taxes on our Consolidated Statements of Income. Historically, these amounts were recorded as Additional paid in
capital in stockholders’ equity on our Consolidated Balance Sheets. Additionally, we now present excess tax benefits or deficiencies
as operating cash flows versus reclassifying the amount out of operating cash flows and presenting it as a financing activity on
the Consolidated Statements of Cash Flows. See Income Taxes within this note for additional information.
On December 31, 2016, we adopted ASU 2014-15, Presentation of Financial Statements - Going Concern. Based on management’s
evaluation, which included forecasting results covering the one-year period following our 2018 Form 10-K filing date, we did not
identify any conditions or events that raise substantial doubt about our ability to continue as a going concern.
Segment Reporting
Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers
into a single reportable segment. These similarities include (i) the nature of our products and services, (ii) the types of customers
we sell to and (iii) the distribution methods we use. Our chief operating decision maker (CODM) evaluates each sales center
based on individual performance that includes both financial and operational measures. These measures include operating income
growth and accounts receivable and inventory management criteria. Each sales center manager and eligible field employee earns
performance based incentive compensation based on these measures developed at the sales center level.
A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget
and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions
primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues,
profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and
product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines
and product categories and the fact that we make ongoing changes to product classifications within these groups, thus making it
impracticable to report our sales by product category.
Seasonality and Weather
Our business is highly seasonal and weather is one of the principal external factors affecting our business. In general, sales and
net income are highest during the second and third quarters, which represent the peak months of both swimming pool use and
installation and irrigation and landscape installations and maintenance. Sales are substantially lower during the first and fourth
quarters, when we may incur net losses.
Revenue Recognition
Under ASC 606, we recognize a sale when a customer obtains control of the product, and we record the amount that reflects the
consideration we expect to receive in exchange for such product. As under the previous accounting guidance, we continue to
recognize a sale when a customer picks up product at any sales center, when we deliver product to their premises or job sites via
our trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the customer obtains
control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.
Our adoption of ASC 606 resulted in balance sheet reclassifications for recording our estimate of customer returns. ASC 606
requires the recognition of a current liability for the gross amount of estimated returns and a current asset for the cost of the related
products. This change did not have a material impact on our Consolidated Balance Sheet as of December 31, 2018.
We consider our distribution of products to represent one reportable revenue stream. Our products are similar in nature, and our
revenue recognition policy is the same across our distribution networks. Our customers share similar characteristics and purchase
products across all categories. We recognize revenue when our customers take control of our products. For customer pick-ups
or deliveries by our trucks, control passes when our customers receive our products. For third-party deliveries, control passes
when we present our products to the third-party carriers. We include shipping and handling fees billed to customers as freight out
income within net sales.
51
We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration
may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and
account for these incentives as a reduction of sales. We estimate the amount of volume incentives earned based on our estimate
of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We
record customer returns, including those associated with customer early buy programs, as a reduction of sales. Based on available
information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material.
We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration
exists under ASC 606. Other items that we record as reductions to sales include cash discounts, pricing adjustments and credit
card fees related to customer payments.
The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have
multiple performance obligations for which to allocate the transaction price. We elected to continue to recognize shipping and
handling costs associated with outbound freight in selling and administrative expenses.
We report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts
may include, but are not limited to, sales, use, value-added and some excise taxes.
Vendor Programs
Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any
of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost
of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices
of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized
as a reduction of Cost of sales on our Consolidated Statements of Income.
Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the
purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these
estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect
actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments
to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in
inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our
Consolidated Financial Statements.
Shipping and Handling Costs
We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and
handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands):
2018
2017
2016
$
48,610
$
45,247
$
39,879
Share-Based Compensation
We record share-based compensation for stock options and other share-based awards based on the estimated fair value as measured
on the grant date. For stock option awards, we use a Black-Scholes model for estimating the grant date fair value. For additional
discussion of share based compensation, see Note 6.
Advertising Costs
We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands):
2018
2017
2016
$
7,390
$
7,477
$
7,011
52
Income Taxes
Both the Tax Cuts and Jobs Act (the Act), enacted by Congress in December 2017, and ASU 2016-09, which we adopted on January
1, 2017, impacted our provision for income taxes by substantially reducing our income tax rate in 2018 and 2017.
As of December 31, 2018, we have resolved our contingent accounting related to the tax effects of the Act. We filed our federal
income tax return in the third quarter of 2018, and our return to provision adjustment, which addresses the provisional tax benefit
we recorded under Staff Accounting Bulletin (SAB) 118 at December 31, 2017, was not material. We have considered the impact
of the statutory changes from the Act on our estimated effective tax rate for 2018, including reasonable estimates of those provisions
effective for the 2018 tax year. The Act also created a new requirement that certain income earned by foreign subsidiaries, global
intangible low-taxed income (GILTI), be included in the gross income of their U.S. shareholder. Entities may make an accounting
policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or recognize
such taxes as a current-period expense when incurred. We elected to treat the tax effect of GILTI as a current-period expense
when incurred.
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options
and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously
recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax
benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised
or restrictions on stock awards lapse.
For additional information regarding income taxes, see Note 7.
Equity Method Investments
We account for our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting.
Accordingly, we report our share of income or loss based on our ownership interest in this investment.
Earnings Per Share
We calculate basic earnings per share (EPS) by dividing Net income or loss attributable to Pool Corporation by the weighted
average number of common shares outstanding. We include outstanding unvested restricted stock awards of our common stock
in the basic weighted average share calculation. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which
include in the money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the
treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been
outstanding based on the assumption that these potentially dilutive securities had been issued. For additional discussion of earnings
per share, see Note 8.
Foreign Currency
The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary
financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component
of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We include realized transaction gains
and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated
Statements of Income. We realized net foreign currency transaction losses of $0.6 million in 2018, gains of $0.2 million in 2017
and losses of $0.7 million in 2016.
53
Fair Value Measurements
Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest
rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under
the accounting guidance are described below:
Level 1
Level 2
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in
active markets.
Inputs to the valuation methodology include:
•
•
•
•
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive markets;
inputs other than quoted prices that are observable for the asset or liability; or
inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap
contract and our contingent consideration liabilities (in thousands):
Level 2
Unrealized gains on interest rate swaps
Unrealized losses on interest rate swaps
Level 3
Contingent consideration liabilities
Fair Value at December 31,
2018
2017
$
$
2,378
$
—
1,585
703
1,117
$
1,824
We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other
current liabilities on the Consolidated Balance Sheets. As of December 31, 2018, our Consolidated Balance Sheets reflect $0.3
million in Accrued expenses and other current liabilities and $0.8 million in Other long-term liabilities related to our estimates
for contingent consideration payouts.
The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity
of those instruments (Level 1 inputs).
For determining the fair value of our interest rate swap and forward-starting interest rate swap contracts, we use significant other
observable market data or assumptions (Level 2 inputs as defined in the accounting guidance) that we believe market participants
would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect
an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data
including interest rate curves.
The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value
reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
54
Derivatives and Hedging Activities
If determined to be effective cash flow hedges, we record the changes in the estimated fair value of our interest rate swap contracts
to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. To the extent our interest rate swaps are
determined to be ineffective, we recognize the changes in the estimated fair value in Interest and other non-operating expenses,
net on our Consolidated Statements of Income. We assess hedge effectiveness on a quarterly basis.
Our interest rate swap and forward-starting interest rate swap contracts are subject to master netting arrangements. According to
our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.
We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap
counterparties as an adjustment to interest expense over the life of the swaps.
For our interest rate swap contracts currently in effect, a portion of the change in the estimated fair value between periods relates
to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified
from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net on the Consolidated
Statements of Income. These amounts were not material in any period presented. For additional discussion of our interest rate
swaps, see Note 5.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Credit Risk and Allowance for Doubtful Accounts
We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if
customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent
with industry practices, we generally require payment from our North American customers within 30 days, except for sales under
early buy programs for which we provide extended payment terms to qualified customers.
At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days
past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on the
remainder of the past due portion of the aging. During the year, we write off account balances when we have exhausted reasonable
collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance
for doubtful accounts.
The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands):
Balance at beginning of year
Bad debt expense
Write-offs, net of recoveries
Balance at end of year
2018
2017
2016
$
$
3,897
4,164
(1,879)
6,182
$
$
4,050
916
(1,069)
3,897
$
$
4,205
1,199
(1,354)
4,050
Product Inventories and Reserve for Inventory Obsolescence
Product inventories consist primarily of goods we purchase from manufacturers to sell to our customers. We record inventory at
the lower of cost, using the average cost method, or net realizable value. We establish our reserve for inventory obsolescence
based on inventory turns by class with particular emphasis on stock keeping units with the weakest sales over the expected sellable
period, which is the previous 12 months for most products. The reserve is intended to reflect the net realizable value of inventory
that we may not be able to sell at a profit.
55
In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including:
•
•
•
•
•
the level of inventory in relation to historical sales by product, including inventory usage by class based on product sales
at both the sales center and on a company-wide basis;
changes in customer preferences or regulatory requirements;
seasonal fluctuations in inventory levels;
geographic location; and
superseded products and new product offerings.
We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors.
The following table summarizes the changes in our reserve for inventory obsolescence for the past three years (in thousands):
2018
2017
2016
Balance at beginning of year
Provision for inventory write-downs
Deduction for inventory write-offs
Balance at end of year
$
$
6,264
3,998
(2,536)
7,726
$
$
6,531
$
2,660
(2,927)
6,264
$
6,979
2,036
(2,484)
6,531
Property and Equipment
Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following
estimated useful lives:
Buildings
Leasehold improvements (1)
Autos and trucks
Machinery and equipment
Computer equipment
Furniture and fixtures
40 years
1 - 10 years
3 - 6 years
3 - 15 years
3 - 7 years
5 - 10 years
(1) For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed,
we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period.
The table below presents depreciation expense for the past three years (in thousands):
2018
2017
2016
$
26,122
$
24,157
$
20,338
Acquisitions
We use the acquisition method of accounting and recognize assets acquired and liabilities assumed at fair value as of the acquisition
date. Any contingent assets acquired and contingent liabilities assumed are also recognized at fair value if we can reasonably
estimate fair value during the measurement period (which cannot exceed one year from the acquisition date). We re-measure any
contingent liabilities at fair value in each subsequent reporting period. We expense all acquisition-related costs as incurred,
including any restructuring costs associated with a business combination.
If our initial acquisition accounting is incomplete by the end of the reporting period in which a business combination occurs, we
report provisional amounts for incomplete items. Once we obtain information required to finalize the accounting for incomplete
items, we adjust the provisional amounts recognized. We make adjustments to these provisional amounts during the measurement
period.
For all acquisitions, we include the results of operations in our Consolidated Financial Statements as of the acquisition date.
For additional discussion of acquisitions, see Note 2.
56
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and
identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for
impairment annually as of October 1st and at any other time when impairment indicators exist.
We estimate fair value based on an income approach that incorporates our assumptions for determining the present value of future
cash flows. We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount
rates and multiples. These assumptions are considered unobservable inputs (Level 3 inputs as defined in the accounting guidance).
If the estimated fair value of any of our reporting units falls below its carrying value, we compare the estimated fair value of the
reporting unit’s goodwill to its carrying value. If the carrying value of a reporting unit’s goodwill exceeds its estimated fair value,
we perform a calculation to measure impairment, which includes valuing the tangible and intangible assets. We recognize any
impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have
operations below the sales center level, our reporting unit is an individual sales center. For additional discussion of goodwill and
other intangible assets, see Note 3.
Receivables Securitization Facility
Our accounts receivable securitization facility (the Receivables Facility) provides for the sale of certain of our receivables to a
wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage
interests in the receivables and related rights to certain third-party financial institutions in exchange for cash proceeds, limited to
the applicable funding capacities.
We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables
subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire
outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the
obligations on a long term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged
under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5.
Self-Insurance
We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile
insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish self insurance reserves
based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding
known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to
the age of existing claims, estimated settlement amounts and other historical claims data.
Redeemable Noncontrolling Interest
In July 2014, we purchased a controlling interest in PSL. Included in the transaction documents was a put/call option deed that
granted us an option to purchase the shares held by the noncontrolling interest and granted the holder of the noncontrolling interest
an option to require us to purchase its shares in one or two transactions. In applying the guidance for this transaction, we determined
that the financial instrument was embedded in the noncontrolling interest. As a public company, we were required to classify the
noncontrolling interest and the embedded financial instrument as redeemable noncontrolling interest in a separate section of our
Consolidated Balance Sheets, between liabilities and equity.
On June 29, 2017, we purchased the remaining 40% interest in PSL. The actual redemption value exceeded the carrying amount,
and we recorded an adjustment to Additional paid in capital as there were no retained earnings attributable to the noncontrolling
interest.
57
The table below presents the changes in Redeemable noncontrolling interest (in thousands):
Redeemable noncontrolling interest, beginning of period
Redemption value adjustment of noncontrolling interest
Net loss attributable to noncontrolling interest
Other comprehensive income (loss) attributable to noncontrolling interest
Less: purchase of redeemable noncontrolling interest
Redeemable noncontrolling interest, end of period
2018
2017
2016
$
$
— $
—
—
—
—
— $
2,287
$
2,665
360
(294)
220
2,573
—
(352)
(26)
—
— $
2,287
Accumulated Other Comprehensive Loss
The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
Foreign currency translation adjustments
Unrealized gains on interest rate swaps, net of tax (1)
Accumulated other comprehensive loss
$
$
(12,422)
1,425
(10,997)
$
$
(7,478)
150
(7,328)
December 31,
2018
2017
(1)
In February 2018, the Financial Accounting Standards Board (FASB) issued guidance that allows entities the option to
reclassify the tax effects related to items in accumulated other comprehensive income (loss) to retained earnings (deficit)
if deemed to be stranded in accumulated other comprehensive income (loss) due to U.S. tax reform. We do not have any
material amounts stranded in Accumulated other comprehensive loss from U.S. tax reform.
Retained Deficit
We account for the retirement of treasury share repurchases as an increase of our Retained deficit on our Consolidated Balance
Sheets. As of December 31, 2018, the retained deficit reflects cumulative net income, the cumulative impact of adjustments for
changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of $1,426.8
million and cumulative dividends of $495.1 million.
Supplemental Cash Flow Information
The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands):
Year Ended December 31,
2017
2016
2018
Cash paid during the year for:
Interest
Income taxes, net of refunds
$
17,796
50,091
$
12,957
84,251
$
8,052
80,378
58
Recent Accounting Pronouncements Pending Adoption
The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:
Effect on Financial
Statements and Other
Significant Matters
The adoption of ASU
2016-02 will
significantly increase
assets and liabilities on
our consolidated
balance sheets. We are
finalizing our testing
of the information
gathered to properly
account for the new
standard. Based on
our current lease
portfolio, assumptions
related to borrowing
rates, and conclusions
related to renewal
periods, we expect to
record a right-of-use
asset and
corresponding liability
for each of our existing
operating leases of
approximately $180.0
million. We do not
expect a material
impact on our results
of operations and cash
flows. Upon adoption,
we expect to apply the
package of practical
expedients available
within the new
standard, which is
intended to provide
some relief to issuers.
We will also have
expanded disclosures
upon adoption.
We do not expect this
accounting
pronouncement will
have a material impact
on our financial
position, results of
operations and related
disclosures.
Standard
ASU 2016-02, Leases
(Topic 842)
Description
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.
Effective Date
Annual periods
beginning after
December 15, 2018
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
59
Standard
ASU 2016-13,
Financial Instruments
- Credit Losses (Topic
326): Measurement of
Credit Losses on
Financial Instruments
ASU 2017-04,
Intangibles - Goodwill
and Other (Topic 350):
Simplifying the Test for
Goodwill Impairment
Description
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.
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.
Effective Date
Annual periods
beginning after
December 15, 2019
Effect on Financial
Statements and Other
Significant Matters
We are currently
evaluating the effect
this will have on our
financial position,
results of operations
and related disclosures.
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.
60
Note 2 - Acquisitions
2018 Acquisitions
In January 2018, we acquired the distribution assets of Tore Pty. Ltd. (doing business as Pool Power), a wholesale distributor of
pool and spa equipment in South Australia, with one distribution center in Adelaide, Australia.
In November 2018, we acquired the distribution assets of Turf & Garden, Inc., a wholesale distributor of irrigation products and
landscape maintenance equipment, parts and supplies with three locations in Virginia and one location in North Carolina.
We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per
the terms of the purchase agreements, which are not material. These acquisitions did not have a material impact on our financial
position or results of operations, either individually or in the aggregate.
2017 Acquisitions
In April 2017, we acquired the distribution assets of Lincoln Equipment, Inc. (Lincoln Aquatics), a national distributor of equipment
and supplies to commercial and institutional swimming pool customers, with one location in California.
In July 2017, we acquired New Star Holdings Pty. Ltd. (doing business as Newline Pool Products), a swimming pool equipment
and supplies distributor with one distribution center in Brisbane, Australia.
In October 2017, we acquired E-Grupa, a national swimming pool equipment and supplies distributor, with one location in Croatia.
In December 2017, we acquired Kripsol Intermark Malaga S.L. (Intermark), a swimming pool equipment and supplies distributor,
with one location in southern Spain.
In December 2017, we acquired the distribution assets of Chem Quip, Inc. (Chem Quip), a wholesale distributor of residential
and commercial swimming pool equipment, chemicals and supplies, with five distribution locations in central and northern
California.
We have completed our acquisition accounting for these acquisitions. These acquisitions did not have a material impact on our
financial position or results of operations, either individually or in the aggregate.
2016 Acquisitions
In April 2016, we acquired the distribution assets of Metro Irrigation Supply Company Ltd., an irrigation and landscape supply
company with eight locations in Texas.
We have completed our acquisition accounting for this acquisition. This acquisition did not have a material impact on our financial
position or results of operations.
61
Note 3 - Goodwill and Other Intangible Assets
The table below presents changes in the carrying amount of goodwill and our accumulated impairment losses (in thousands):
Goodwill (gross) at December 31, 2016
Acquired goodwill
Foreign currency translation adjustments
Goodwill (gross) at December 31, 2017
Accumulated impairment losses at December 31, 2016
Goodwill impairment
Accumulated impairment losses at December 31, 2017
Goodwill (net) at December 31, 2017
Goodwill (gross) at December 31, 2017
Acquired goodwill
Foreign currency translation adjustments
Goodwill (gross) at December 31, 2018
Accumulated impairment losses at December 31, 2017
Goodwill impairment
Accumulated impairment losses at December 31, 2018
$
$
$
194,674
3,068
1,572
199,314
(9,879)
—
(9,879)
189,435
199,314
334
(1,297)
198,351
(9,879)
—
(9,879)
Goodwill (net) at December 31, 2018
$
188,472
In October 2018 and October 2017, we performed our annual goodwill impairment test and did not identify any goodwill impairment
at the reporting unit level. As of October 1, 2018, we had 223 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.
Other intangible assets consisted of the following (in thousands):
December 31,
2018
2017
Intangibles
Gross
Accumulated
Amortization
Intangibles
Net
Intangibles
Gross
Accumulated
Amortization
Intangibles
Net
Weighted
Average
Useful
Life
$
8,400
$
— $
8,400
$
8,400
$
— $
8,400
Indefinite
1,002
—
1,002
1,109
—
1,109
Indefinite
1,500
(812)
688
1,500
(738)
762
20
5,019
473
(3,157)
(421)
1,862
52
5,078
523
(2,243)
(406)
2,835
117
4.89
5
$
16,394
$
(4,390) $
12,004
$
16,610
$
(3,387)
$
13,223
62
Horizon
tradename
Pool
Systems
tradename
and
trademarks
National
Pool Tile
(NPT)
tradename
Non-
compete
agreements
Patents
Total other
intangibles
The Horizon and Pool Systems tradenames and trademarks have indefinite useful lives and are not subject to
amortization. However, we evaluate the useful lives of these intangible assets and test for impairment annually. The NPT
tradename, our non-compete agreements and our patents have finite useful lives, and we amortize the estimated fair value of these
agreements using the straight-line method over their respective useful lives. We have not identified any indicators of impairment
related to these assets. The useful lives for our non-compete agreements are based on their contractual terms, and the useful lives
for our patents are based on expected future cash flows. We recognize expenses related to patent renewal costs as incurred.
Other intangible amortization expense was $1.1 million in 2018, $1.0 million in 2017 and $1.0 million in 2016.
The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands):
$
2019
2020
2021
2022
2023
953
866
298
108
75
63
Note 4 - Details of Certain Balance Sheet Accounts
The table below presents additional information regarding certain balance sheet accounts (in thousands):
Receivables, net:
Trade accounts
Vendor programs
Other, net
Total receivables
Less: Allowance for doubtful accounts
Receivables, net
Prepaid expenses and other current assets:
Prepaid expenses
Other current assets
Prepaid expenses and other current assets
Property and equipment, net:
Land
Buildings
Leasehold improvements
Autos and trucks
Machinery and equipment
Computer equipment
Furniture and fixtures
Fixed assets in progress
Total property and equipment
Less: Accumulated depreciation
Property and equipment, net
Accrued expenses and other current liabilities:
Salaries and payroll deductions
Performance-based compensation
Taxes payable
Other current liabilities
Accrued expenses and other current liabilities
December 31,
2018
2017
$
$
$
$
$
$
$
$
16,451
57,304
1,920
75,675
(6,182)
69,493
15,114
3,392
18,506
3,193
5,318
45,098
82,216
61,945
39,307
9,778
1,751
248,606
(141,642)
106,964
12,475
25,261
8,337
12,534
58,607
$
$
$
$
$
$
$
$
26,681
50,302
3,511
80,494
(3,897)
76,597
14,700
4,869
19,569
3,003
4,255
41,908
70,570
55,128
38,194
9,670
1,072
223,800
(122,861)
100,939
9,987
31,807
7,970
15,718
65,482
64
Note 5 - Debt
The table below presents the components of our debt (in thousands):
Variable rate debt
Short-term borrowings
Current portion of long-term debt:
Australian credit facility
Short-term borrowings and current portion of long-term debt
$
Long-term portion:
Revolving credit facility
Receivables securitization facility
Less: financing costs, net
Long-term debt, net
Total debt
550,131
108,500
1,038
657,593
666,761
$
$
December 31,
2018
2017
$
— $
1,937
9,168
9,168
8,898
10,835
410,439
100,000
1,624
508,815
519,650
$
$
$
Revolving Credit Facility
On September 29, 2017, we, along with our wholly owned subsidiaries, SCP Distributors Canada Inc., as the Canadian Borrower,
and SCP Pool B.V., as the Dutch Borrower, amended and restated our unsecured syndicated senior credit facility (the Credit
Facility). The Credit Facility borrowing capacity increased to $750.0 million from $465.0 million under a five-year revolving
credit facility. We also extended the maturity date of the agreement to September 29, 2022.
The Credit Facility includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion
feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request
and with agreement by the lenders by up to $75.0 million, to a total of $825.0 million.
Our obligations under the Credit Facility are guaranteed by substantially all of our existing and future direct and indirect domestic
subsidiaries. The Credit Facility contains terms and provisions (including representations, covenants and conditions) and events
of default customary for transactions of this type. If we default under the Credit Facility, the lenders may terminate their
commitments under the Credit Facility and may require us to repay all amounts.
At December 31, 2018, there was $550.1 million outstanding, a $4.8 million standby letter of credit outstanding and $195.1 million
available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of
December 31, 2018 was approximately 3.5%, excluding commitment fees.
Revolving borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an
applicable margin:
a. a base rate, which is the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds
Rate plus 0.500% and (iii) the London Interbank Offered Rate (LIBOR) Market Index Rate plus 1.000%; or
b. LIBOR.
Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each
case, plus an applicable margin:
a. a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest
equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or
b. CDOR.
Borrowings by the Dutch Borrower bear interest at LIBOR plus an applicable margin.
65
The interest rate margins on the borrowings and letters of credit are based on our leverage ratio and will range from 1.025% to
1.425% on CDOR, LIBOR and swingline loans, and from 0.025% to 0.425% on Base Rate and Canadian Base Rate
loans. Borrowings under the swingline loans are based on the LIBOR Market Index Rate (LMIR) plus any applicable margin. We
are also required to pay an annual facility fee ranging from 0.100% to 0.200%, depending on our leverage ratio.
Receivables Securitization Facility
On October 31, 2018, we and certain of our subsidiaries entered into an amendment of our two-year accounts receivable
securitization facility (the Receivables Facility). As amended, the Receivables Facility has a peak seasonal funding capacity of
up to $295.0 million for the month of May, which includes an additional seasonal funding capacity that is available between March
1 and July 31. Other funding capacities range from $95.0 million to $280.0 million throughout the remaining months of the year.
The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization
Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights
to certain third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon
payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such
collections as proceeds for the sale of new receivables until payments become due to the financial institutions.
The Receivables Facility is subject to terms and conditions (including representations, covenants and conditions precedent)
customary for transactions of this type. Failure to maintain certain ratios or meet certain of these covenants could trigger an
amortization event.
At December 31, 2018, there was $108.5 million outstanding under the Receivables Facility at a weighted average effective interest
rate of 3.3%, excluding commitment fees.
Depending on the funding source used by the financial institutions to purchase the receivables, amounts outstanding under the
Receivables Facility bear interest at one of the following and, in each case, plus an applicable margin of 0.75%:
a.
b.
for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable
rates in the commercial paper market at the time of issuance; or
for financial institutions not using the commercial paper market, LMIR.
We also pay an unused fee of 0.35% on the excess of the facility limit over the average daily capital outstanding. We pay this fee
monthly in arrears.
Australian Seasonal Credit Facility
In the second quarter of 2017, PSL entered into a credit facility to fund expansion and supplement working capital needs. The
credit facility provides a borrowing capacity of AU$20.0 million.
Cash Pooling Arrangement
Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management
purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that
aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries
are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility.
These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin.
We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity
is €12.0 million.
66
Interest Rate Swaps
We currently have three interest rate swap contracts in place, which became effective on October 19, 2016. These swaps were
previously forward-starting contracts that were amended in October 2015 to bring the fixed rates per our forward-starting contracts
in line with market rates at that time and extend the hedged period for future interest payments on our Credit Facility. As amended,
these swap contracts terminate on November 20, 2019. We recognized a benefit of $1.2 million in 2018, a benefit of $2.4 million
in 2017 and expense of $0.1 million in 2016 as a result of ineffectiveness. These amounts were recorded in Interest and other
non-operating expenses, net on our Consolidated Statements of Income.
The following table provides additional details related to each of these amended swap contracts:
Derivative
Interest rate swap 6
Interest rate swap 7
Interest rate swap 8
Amendment Date
October 1, 2015
October 1, 2015
October 1, 2015
Notional
Amount
(in millions)
Fixed
Interest
Rate
$
75.0
25.0
50.0
2.273%
2.111%
2.111%
Upon amendment of the original hedge agreements, we were required to freeze the amounts related to the changes in the fair
values of these swaps, which are recorded in Accumulated other comprehensive loss. On September 30, 2018, these balances
became fully amortized. We recorded expense of $1.4 million in 2018 and $1.9 million in 2017 as amortization of the unrealized
loss in Interest and other non-operating expenses, net.
In July 2016, we entered into a new forward-starting interest rate swap contract to extend the hedged period for future interest
payments on our Credit Facility to its maturity date. This swap contract will convert the variable interest rate to a fixed interest
rate on borrowings under the Credit Facility. This contract becomes effective on November 20, 2019 and terminates on
November 20, 2020. The following table provides additional details related to this swap contract:
Derivative
Inception Date
Notional
Amount
(in millions)
Fixed
Interest
Rate
Forward-starting interest rate swap
July 6, 2016
$
150.0
1.1425%
The net difference between interest paid and interest received related to our swap agreements resulted in incremental interest
expense of $0.3 million in 2018, $1.7 million in 2017 and $1.3 million in 2016.
In 2016, we had five interest rate swap contracts in place to reduce our exposure to fluctuations in interest rates on the Credit
Facility. Each of these swap contracts terminated on October 19, 2016. These swaps converted the variable interest rates to fixed
interest rates on borrowings under the Credit Facility. For these interest rate swaps, we recognized no gains or losses through
income, nor was there any effect on income from hedge ineffectiveness over the term of these swap contracts. The following table
provides additional details related to each of these swap contracts:
Derivative
Interest rate swap 1
Interest rate swap 2
Interest rate swap 3
Interest rate swap 4
Interest rate swap 5
Effective Date
November 21, 2011
November 21, 2011
December 21, 2011
January 17, 2012
January 19, 2012
Notional
Amount
(in millions)
$
25.0
25.0
50.0
25.0
25.0
Fixed
Interest
Rate
1.185%
1.185%
1.100%
1.050%
0.990%
67
Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case,
we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our
swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we
continue to be in a net pay position.
Financial and Other Covenants
Financial covenants on the Credit Facility and Receivables Facility are closely aligned and include a minimum fixed charge
coverage ratio and maintenance of a maximum average total leverage ratio, which are our most restrictive covenants. The Credit
Facility also limits the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s
Net Income (as defined in the Credit Facility), provided no default or event of default has occurred and is continuing, or would
result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate
amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends
does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit
and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to
such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.
Under the Credit Facility, we may repurchase shares of our common stock provided no default or event of default has occurred
and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a
pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness,
make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any
other terms of the Credit Facility could result in penalty payments, higher interest rates on our borrowings or the acceleration of
the maturities of our outstanding debt.
As of December 31, 2018, we were in compliance with all covenants and financial ratio requirements related to the Credit Facility
and the Receivables Facility.
Deferred Financing Costs
We capitalize financing costs we incur related to implementing and amending our debt arrangements. We record these costs as a
reduction of Long-term debt, net on our Consolidated Balance Sheets and amortize them over the contractual life of the related
debt arrangements. The table below summarizes changes in deferred financing costs for the past two years (in thousands):
December 31,
2018
2017
$
4,606
$
106
—
4,712
(3,674)
1,038
$
4,883
1,104
(1,381)
4,606
(2,982)
1,624
Deferred financing costs:
Balance at beginning of year
Financing costs deferred
Write-off of fully amortized deferred financing costs
Balance at end of year
Less: Accumulated amortization
Deferred financing costs, net of accumulated amortization
$
68
Note 6 - Share-Based Compensation
Share-Based Plans
Current Plan
In May 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation
Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees,
directors, consultants or advisors. In May 2016, our shareholders approved an amendment and restatement of the 2007 Long Term
Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As
of December 31, 2018, we had 4,453,450 shares available for future issuance including 1,108,023 shares that may be issued as
restricted stock.
Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant
date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no
cost to the grantee. Both stock options and restricted stock awards vest over time depending on an employee’s length of service
with the Company. Share-based awards to our employees generally vest either five years from the grant date or on a three/five
year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five
years from the grant date. Share based awards to our non-employee directors vest one year from the grant date.
Beginning with 2016 grants, certain restricted stock awards to our employees contain performance-based criteria in addition to
the service-based vesting criteria discussed above. The awards provide for a three-year performance period for the metric to be
achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end
of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and
canceled. Since each grant date, we have concluded attainment of these performance conditions to be probable to be achieved in
the first three-year performance period for the 2018, 2017 and 2016 performance-based grants. Further, we achieved the
performance condition for the 2016 grant in the first three-year performance period ending December 31, 2018.
Stock Option Awards
The following table summarizes stock option activity under our share-based plans for the year ended December 31, 2018:
Balance at December 31, 2017
Granted
Less: Exercised
Forfeited
Balance at December 31, 2018
Shares
2,287,399
85,375
491,448
2,175
1,879,151
Exercisable at December 31, 2018
1,358,874
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(Years)
Aggregate
Intrinsic
Value
$
$
$
39.67
138.03
23.97
84.32
48.19
31.52
3.76
2.45
$188,773,097
$159,166,141
69
The following table presents information about stock options outstanding and exercisable at December 31, 2018:
Range of Exercise Prices
Shares
Outstanding
Stock Options
Weighted Average
Remaining
Contractual Term
(Years)
$ 18.44 to $ 24.50
$ 24.51 to $ 69.85
$ 69.86 to $ 138.11
817,077
719,599
342,475
1,879,151
1.33
4.51
7.96
3.76
Exercisable
Stock Options
Weighted
Average
Exercise
Price
$
21.42
46.75
—
Shares
817,077
541,797
—
Weighted
Average
Exercise
Price
$
21.42
51.06
106.05
$
48.19
1,358,874
$
31.52
The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options:
(in thousands, except share amounts)
Options exercised
Cash proceeds
Intrinsic value of options exercised
Tax benefits realized
Year Ended December 31,
2018
491,448
11,779
61,469
15,367
$
$
$
2017
364,984
9,809
33,302
12,809
$
$
$
2016
343,237
10,340
21,094
7,891
$
$
$
We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the
following table:
(Weighted average)
Expected volatility
Expected term
Risk-free interest rate
Expected dividend yield
Grant date fair value
2018
23.7%
Year Ended December 31,
2017
26.6%
2016
29.7%
7.3 years
7.3 years
7.1 years
2.87%
1.5%
2.44%
1.5%
1.75%
1.5%
$ 35.71
$ 32.00
$ 22.86
We calculated expected volatility over the expected term of the awards based on the historical volatility of our common
stock. We use weekly price observations for our historical volatility calculation because we believe this provides the most
appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on
the vesting period of the awards and our historical exercise activity for awards with similar characteristics. The weighted average
expected term is impacted by a higher expected term estimate for stock option awards granted to our named executive
officers. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the
expected term of the option. We determined the expected dividend yield based on the anticipated dividends over the expected
term.
For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock
options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting
period, or if shorter, the period from the grant date to the date that employees meet the retirement provisions of our share-based
award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method.
70
The following table presents the total share-based compensation expense for stock option awards for the past three years (in
thousands):
Option grants share-based compensation expense
Option grants share-based compensation tax benefits
$
$
3,218
805
$
3,553
888
3,735
1,409
2018
2017
2016
At December 31, 2018, the unamortized compensation expense related to stock option awards totaled $3.3 million. We anticipate
that this expense will be recognized over a weighted average period of 2.4 years.
Restricted Stock Awards
The table below presents restricted stock awards activity under our share-based plans for the year ended December 31, 2018:
Balance unvested at December 31, 2017
Granted (at market price) (1)
Less: Vested
Forfeited
Balance unvested at December 31, 2018
Weighted
Average
Grant Date
Fair Value
83.36
$
138.25
64.78
77.89
101.93
$
Shares
297,524
80,598
68,149
2,200
307,773
(1) The majority of these shares contain performance-based vesting conditions.
At December 31, 2018,
the unamortized compensation expense related
$7.6 million. We anticipate that this expense will be recognized over a weighted average period of 2.7 years.
the restricted stock awards
to
totaled
The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value
of those awards (in thousands, except share amounts):
Restricted stock awards - shares vested
Fair value of restricted stock awards vested
$
2018
68,149
9,642
2017
79,224
9,260
$
2016
95,420
7,960
$
The following table presents the total share-based compensation expense for restricted stock awards for the past three years
(in thousands):
Restricted stock awards share-based compensation expense
$
9,151
$
8,547
$
5,993
2018
2017
2016
Employee Stock Purchase Plan
In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan (the ESPP). Under the ESPP,
employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:
a. as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either
July 31 or January 31 (prior to the amendment, the six month plan period ended on June 30 or December 31); or
the average of the beginning and ending closing prices of our common stock for such six month period.
b.
71
No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in
2018 and 2017, and the one six month offering period in 2016, our employees purchased the following aggregate number of shares:
2018
15,966
2017
16,610
2016
8,649
The grant date fair value for the most recent ESPP purchase period ended July 31, 2018 was $31.43 per share. Share-based
compensation expense related to our ESPP was $0.5 million in 2018, $0.4 million in 2017 and $0.2 million in 2016.
Note 7 - Income Taxes
Both ASU 2016-09, which we adopted on January 1, 2017, and U.S. tax reform enacted in December 2017, impacted our income
tax provision for 2018 and 2017.
As of December 31, 2017, we had not completed our accounting for the tax effects of the Act. In accordance with SAB 118, we
recorded provisional amounts related to the transition tax, impacts of the Act on state taxes, provisions of the Act related to deferred
tax balances, and foreign tax implications. As a result of the Act, we recorded a provisional tax benefit of $12.0 million in the
fourth quarter of 2017, which primarily reflected the re-measurement of our net deferred tax liability to the new U.S. Federal tax
rate.
As of December 31, 2018, we have resolved our contingent accounting related to the tax effects of the Act. We filed our federal
income tax return in the third quarter of 2018, and our return to provision adjustment, which addresses the provisional tax benefit
recorded under SAB 118, was not material.
We have considered the impact of the statutory changes from the Act on our estimated effective tax rate for 2018, including
reasonable estimates of those provisions effective for the 2018 tax year. We believe our net benefit is based on reasonable estimates
for those tax effects of the Act. Changes to these estimates or new guidance issued by regulators may materially impact our
provision for income taxes and effective tax rate in the period in which the adjustments are made.
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock
options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount
of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. Upon adoption
of ASU 2016-09, we were required to record all excess tax benefits or deficiencies as income tax benefit or expense in the income
statement. We recorded excess tax benefits of $15.3 million to our income tax provision in 2018 and $12.6 million in 2017. Prior
to the adoption of this guidance, we were required to record excess tax benefits in stockholders’ equity, of which we recorded $7.4
million in 2016. For additional discussion of our adoption of this accounting guidance, see Note 1.
Income before income taxes and equity earnings is attributable to the following jurisdictions (in thousands):
Year Ended December 31,
2017
259,436
9,746
269,182
2018
278,311
14,682
292,993
$
$
$
$
2016
234,646
6,732
241,378
United States
Foreign
Total
$
$
72
The provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
2017
2016
2018
Current:
Federal
State and other
Total current provision for income taxes
Deferred:
Federal
State and other
Total deferred provision for income taxes
Provision for income taxes
$
$
39,504
14,609
54,113
4,676
(15)
4,661
58,774
$
$
71,329
11,289
82,618
(6,643)
2,007
(4,636)
77,982
$
$
77,000
12,182
89,182
4,079
(330)
3,749
92,931
A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity earnings
is as follows:
Year Ended December 31,
2018
2017
2016
Federal statutory rate
Change in valuation allowance
Stock-based compensation
Re-measurement of net deferred tax liability
Other, primarily state income tax rate
Total effective tax rate
21.00%
(0.13)
(5.23)
—
4.42
20.06%
35.00%
(0.06)
(4.67)
(4.46)
3.16
28.97%
35.00%
0.10
—
—
3.40
38.50%
73
The table below presents the components of our deferred tax assets and liabilities (in thousands):
Deferred tax assets:
Product inventories
Accrued expenses
Leases
Share-based compensation
Uncertain tax positions
Net operating losses
Other
Total non-current
Less: Valuation allowance
Component reclassified for net presentation
Total non-current, net
December 31,
2018
2017
$
5,413
$
776
1,189
9,427
2,558
5,058
2,080
26,501
(5,058)
(20,897)
546
4,287
1,804
1,188
8,884
2,087
5,441
1,629
25,320
(5,440)
(19,071)
809
Total deferred tax assets
546
809
Deferred tax liabilities:
Trade discounts on purchases
Prepaid expenses
Intangible assets, primarily goodwill
Depreciation
Interest rate swaps
Total non-current
Component reclassified for net presentation
Total non-current, net
2,094
1,804
30,988
14,924
486
50,296
(20,897)
29,399
1,520
1,857
29,348
10,870
61
43,656
(19,071)
24,585
Total deferred tax liabilities
29,399
24,585
Net deferred tax liability
$
28,853
$
23,776
At December 31, 2018, certain of our international subsidiaries had tax loss carryforwards totaling approximately $19.0 million,
which expire in various years after 2019. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries
were $5.1 million as of December 31, 2018 and $5.4 million as of December 31, 2017. We have recorded a corresponding valuation
allowance of $5.1 million and $5.4 million in the respective years.
As of December 31, 2018, 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.
74
The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands):
Balance at beginning of year
Increases for tax positions taken during a prior period
Increases for tax positions taken during the current period
Decreases resulting from the expiration of the statute of limitations
Decreases relating to settlements
Balance at end of year
2018
2017
2016
$
9,937
76
3,809
1,603
40
$ 12,179
$
$
7,846
129
3,260
869
429
9,937
$
$
5,978
10
2,819
961
—
7,846
The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $9.6 million at
December 31, 2018 and $7.9 million at December 31, 2017.
We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record
related penalties in Selling and administrative expenses on our Consolidated Statements of Income. For unrecognized tax benefits,
we had interest expense of $0.2 million in 2018, $0.2 million in 2017 and $0.2 million in 2016. Accrued interest related to
unrecognized tax benefits was approximately $1.1 million at December 31, 2018 and $0.9 million at December 31, 2017.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we
are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015.
75
Note 8 - Earnings Per Share
The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average
shares outstanding (in thousands, except per share data):
Net income
Net loss attributable to noncontrolling interest
Net income attributable to Pool Corporation
Weighted average shares outstanding:
Basic
Effect of dilutive securities:
Stock options and employee stock purchase plan (1)
Diluted
Earnings per share:
Basic
Diluted
Year Ended December 31,
2018
234,461
—
234,461
2017
191,339
294
191,633
$
$
2016
148,603
352
148,955
$
$
40,311
40,838
41,872
1,382
41,693
1,611
42,449
1,112
42,984
5.82
5.62
$
$
4.69
4.51
$
$
3.56
3.47
$
$
$
$
Anti-dilutive stock options excluded from diluted earnings per share
computations (2)
—
108
1
(1) As a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities for 2018 and 2017 excludes
any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted
average shares outstanding as compared to 2016.
(2) Since these options have exercise prices that are higher than the average market prices of our common stock, including
them in the calculation would have an anti-dilutive effect on earnings per share.
Note 9 - Commitments and Contingencies
Commitments
We lease facilities for our corporate office, sales centers and centralized shipping locations under operating leases that expire in
various years through 2032. Most of our leases contain five-year terms with renewal options. For leases with step rent provisions
whereby the rental payments increase incrementally over the life of the lease, we recognize expense on a straight-line basis
determined by the total minimum lease payments over the minimum lease term. The table below presents rent expense associated
with facility and vehicle operating leases for the past three years (in thousands):
2018
2017
2016
$
70,102
$
66,161
$
63,940
76
The table below sets forth the approximate future minimum lease payments as of December 31, 2018 related to non-cancelable
facility operating leases with initial terms of one year or more (in thousands):
$
2019
2020
2021
2022
2023
Thereafter
50,416
48,580
37,411
28,078
16,260
16,020
Upon adoption of ASU 2016-02, Leases, we will be required to record most leases on our balance sheets and recognize expenses
in a manner similar to current guidance. We will also be required to provide enhanced disclosures related to our lease agreements.
ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied
using a modified retrospective approach, which for us will entail recording an immaterial cumulative adjustment to retained
earnings as of January 1, 2019 rather than retrospectively adjusting prior periods. This adoption approach will also result in a
balance sheet presentation that will not be comparable to the prior period in the first year of adoption.
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. Presentation of leases within our Consolidated Statements
of Income and Consolidated Statements of Cash Flows will be generally consistent with the current lease accounting guidance.
For additional information on this new accounting pronouncement, refer to Note 1.
Contingencies
From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product
liability, personal injury, commercial, contract and employment matters. Each quarter, we evaluate developments related to claims
and litigation and record a liability if we deem a loss to be probable and estimable. When evaluating these matters for accrual
and disclosure, we consider factors such as historical experience, specific facts and claims asserted, the likelihood we will prevail
and the magnitude of any potential loss. The outcome of any litigation is inherently unpredictable. Based on currently available
facts, we do not believe that the ultimate resolution of any of these claims and litigation matters will have a material adverse impact
on our financial condition, results of operations or cash flows. We do not believe our exposure for any of these matters is material
for disclosure, either individually or in the aggregate.
Note 10 - Related Party Transactions
Policy
Our policy for related party transactions is included in our written Audit Committee Charter. This policy requires that our Audit
Committee review and approve all related party transactions required to be disclosed in our Annual Proxy Statement or required
to be approved based on NASDAQ rules.
Transactions
In May 2005, we acquired a 50% membership interest in NCC through a $1.1 million cash contribution. NCC owns and operates
an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately
60,293 square feet of office space. In March 2015, we exercised a second option to extend the term of the lease agreement through
May 2025. As of December 31, 2018, we pay rent of $97,976 per month.
The table below presents rent expense associated with this lease for the past three years (in thousands):
2018
2017
2016
NCC
$
1,155
$
1,122
$
1,035
77
Note 11 - Employee Benefit Plans
We offer a 401(k) savings and retirement plan, which is a defined contribution plan and provides benefits for substantially all
employees who meet length of service requirements. Eligible employees are able to contribute up to 75% of their compensation,
subject to the federal dollar limit. For plan participants, we provide a matching contribution. We contribute a total maximum
match on employee contributions of up to 4% of their compensation, with a 100% match on the first 3% of compensation deferred
and a 50% match on deferrals between 3% and 5% of compensation. We also offer retirement plans for certain of our international
entities. The plan funding is calculated as a percentage of the employee’s earnings and in compliance with local laws and practices.
The related expense is not material and is included in the table below.
We have a nonqualified deferred compensation plan that allows certain employees who occupy key management positions to defer
salary and bonus amounts. This plan also provides a matching contribution similar to that provided under our 401(k) plan to the
extent that a participant’s contributions to the 401(k) plan are limited by IRS deferral and compensation limitations. The total
combined company matching contribution provided to a participant under the 401(k) plan and the nonqualified deferred
compensation plan for any one year may not exceed 4% of a participant’s salary and bonus. The employee and company matching
contributions are invested in certain equity and fixed income securities based on individual employee elections.
The table below sets forth our contributions for the past three years (in thousands):
Defined contribution and international retirement plans
$
7,239
$
6,946
$
Deferred compensation plan
245
325
5,817
194
2018
2017
2016
Note 12 - Quarterly Financial Data (Unaudited)
The table below summarizes the unaudited quarterly results of operations for the past two years (in thousands, except per share
data):
2018
2017
Quarter
First
Second
Third
Fourth
First
Second
Third
Fourth (1)
Net sales
Gross profit
Net income
$ 585,900
$1,057,804
$ 811,311
$ 543,082
$ 546,441
$ 988,163
$ 743,401
$ 510,183
166,073
31,339
308,655
117,049
235,003
69,261
160,442
16,811
153,621
22,270
289,664
94,620
216,606
48,783
145,398
25,665
Net income attributable to
Pool Corporation
Earnings per share:
31,339
117,049
69,261
16,811
22,281
94,903
48,783
25,665
Basic
Diluted
$
$
0.78
0.75
$
$
2.89
2.80
$
$
1.71
1.66
$
$
0.42
0.41
$
$
0.54
0.52
$
$
2.30
2.21
$
$
1.20
1.16
$
$
0.64
0.62
The sum of basic and diluted earnings per share for each of the quarters may not equal the total basic and diluted earnings per
share for the annual periods because of rounding differences and a difference in the way that in-the-money stock options are
considered from quarter to quarter.
(1) Our fourth quarter 2017 Net income and Net income attributable to Pool Corporation reflects benefits recorded due to
U.S. tax reform. For additional information related to the impact of U.S. tax reform on our financial statements, see
Note 7.
78
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in
reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of December 31,
2018, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of December 31, 2018, our
disclosure controls and procedures were effective.
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Based on the most recent evaluation, we have concluded that no change in our internal control
over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
79
Management’s Report on Internal Control Over Financial Reporting
Pool Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system
was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published
financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Any evaluation or projection of effectiveness to future periods is also subject to risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Pool Corporation’s management assessed the effectiveness of our internal control over financial reporting as of December 31,
2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013 Framework). Based on this assessment,
management has concluded that, as of December 31, 2018, Pool Corporation’s internal control over financial reporting was
effective.
The independent registered public accounting firm that audited the Consolidated Financial Statements included in Item 8 of this
Form 10-K has issued a report on Pool Corporation’s internal control over financial reporting. This report appears below.
80
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pool Corporation
Opinion on Internal Control over Financial Reporting
We have audited Pool Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the COSO criteria). In our opinion, Pool Corporation (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements
of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31,
2018, and the related notes and our report dated February 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 27, 2019
81
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III.
Incorporated by reference to Pool Corporation’s 2019 Proxy Statement to be filed with the SEC.
Item 11. Executive Compensation
Incorporated by reference to Pool Corporation’s 2019 Proxy Statement to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference to Pool Corporation’s 2019 Proxy Statement to be filed with the SEC.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to Pool Corporation’s 2019 Proxy Statement to be filed with the SEC.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to Pool Corporation’s 2019 Proxy Statement to be filed with the SEC.
82
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Page
44
45
46
47
48
49
50
All schedules are omitted because they are not applicable or are not required
or because the required information is provided in our Consolidated Financial
Statements or accompanying Notes included in Item 8 of this Form 10-K.
(3) The exhibits listed in the Index to Exhibits.
Item 16. Form 10-K Summary
None
83
INDEX TO EXHIBITS
No.
3.1
3.2
4.1
10.1
10.2
10.3
Description
Restated Certificate of Incorporation of the Company.
Amended and Restated Bylaws of the Company.
Form of certificate representing shares of common
stock of the Company.
* Amended and Restated SCP Pool Corporation
Employee Stock Purchase Plan.
* Pool Corporation Amended and Restated 2007
Long Term Incentive Plan.
* Form of Stock Option Agreement for Employees under
the Amended and Restated 2007 Long Term Incentive
Plan.
Filed/
Furnished
with this
Form 10-K
Incorporated by Reference
Form
10-Q
8-K
8-K
File No.
Date Filed
000-26640 08/09/2006
000-26640 02/08/2019
000-26640 05/19/2006
8-K
000-26640 05/06/2016
8-K
000-26640 05/06/2016
10-K
000-26640 02/26/2015
10.4
* Form of Performance-Based Restricted Stock
10-K
000-26640
02/26/2016
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Agreement under the Pool Corporation Amended and
Restated 2007 Long-Term Incentive Plan
* Form of Stock Option Agreement for Directors under
the Amended and Restated 2007 Long Term Incentive
Plan.
* Form of Restricted Stock Agreement for Directors
under the Amended and Restated 2007 Long-Term
Incentive Plan.
* Form of Employment Agreement.
* Employment Agreement, dated January 25, 1999,
among SCP Pool Corporation, South Central Pool
Supply, Inc. and Manuel J. Perez de la Mesa.
* Employment Agreement, dated January 17, 2003,
between SCP Distributors, LLC and A. David Cook.
* Employment Agreement, dated December 20, 2016,
between SCP Distributors, LLC and Peter D. Arvan.
* Compensation of Non-Employee Directors.
* Nonqualified Deferred Compensation Plan Basic Plan
Document, dated March 1, 2005.
* Nonqualified Deferred Compensation Plan Adoption
Agreement by and among SCP Distributors, L.L.C.,
Superior Pool Products, L.L.C. and Cypress, Inc.,
dated March 1, 2005.
8-K
000-26640 05/06/2009
8-K
000-26640 05/06/2009
10-K
10-K
000-26640 03/18/2003
000-26640 03/31/1999
10-K
000-26640 03/01/2005
10-K
000-26640 02/24/2017
10-K
10-Q
000-26640 03/01/2010
000-26640 04/29/2005
10-Q
000-26640 04/29/2005
10.14
Trust Agreement by and among SCP Distributors,
10-Q
000-26640 04/29/2005
L.L.C., Superior Pool Products, L.L.C. and Cypress,
Inc. and T. Rowe Price Trust Company, dated March 1,
2005.
10.15
* Pool Corporation Executive Officer Annual Incentive
X
10-K
000-26640
02/27/2019
Plan
No.
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Description
Credit Agreement dated as of October 19, 2011, among
Pool Corporation, as US Borrower, SCP Distributors
Canada Inc., as Canadian Borrower, SCP Pool B.V., as
Dutch Borrower, the Lenders, Wells Fargo Bank,
National Association, as Administrative Agent,
Swingline Lender and Issuing Lender, JPMorgan
Chase Bank, N.A., as Syndication Agent, Wells Fargo
Securities, LLC and J.P. Morgan Securities, LLC, as
joint Lead Arrangers and joint Bookrunners, Bank of
America, N.A., Regions Bank and Capital One, N.A.,
as Documentation Agents, and Branch Banking and
Trust Company, Comerica Bank and Union Bank, N.A.
as amended by Second Amendment entered into as of
April 1, 2013.
as amended by Third Amendment entered into as of
June 14, 2013.
as amended by Fourth Amendment to Credit
Agreement and First Amendment to Subsidiary
Guaranty Agreement entered into as of September 20,
2013.
as amended by Fifth Amendment to Credit Agreement
entered into as of July 25, 2014.
as amended by Sixth Amendment to Credit Agreement
entered into as of November 20, 2014.
Consent to Extension of the Amended and Restated
Credit Agreement entered into as of November 20,
2015.
Amended and Restated Credit Agreement dated as of
September 29, 2017, among Pool Corporation as US
Borrower, by and among Pool Corporation, as US
Borrower, SCP Distributors Canada Inc., as Canadian
Borrower, SCP Pool B.V., as Dutch Borrower, Wells
Fargo Bank, National Association, as Joint Lead
Arranger, Administrative Agent, Swingline Lender and
an Issuing Lender, Bank of America, N.A., MUFG
Union Bank, N.A., Capital One, N.A., Regions Bank,
and BB&T Capital Markets, each as Joint Lead
Arranger and Syndication Agent, and Fifth Third Bank,
JP Morgan Chase Bank, N.A., Industrial and
Commercial Bank of China Ltd., New York Branch,
and the Bank of East Asia Ltd., New York Branch.
as amended by First Amendment to Amended and
Restated Credit Agreement
Filed/
Furnished
with this
Form 10-K
Incorporated by Reference
Form
10-Q
File No.
Date Filed
000-26640 10/31/2011
10-Q
000-26640
07/31/2013
10-Q
000-26640
07/31/2013
8-K
000-26640
09/24/2013
10-Q
000-26640
10/30/2014
8-K
8-K
000-26640
11/25/2014
000-26640
11/20/2015
8-K
000-26640
10/02/2017
8-K
000-26640
09/24/2018
* Pool Corporation Strategic Plan Incentive Program.
X
10-K
000-26640
02/27/2019
Receivables Sale and Contribution Agreement, dated
as of October 11, 2013, between SCP Distributors
LLC, Horizon Distributors, Inc., Superior Pool
Products LLC and Poolfx Supply LLC, as Originators
and Superior Commerce LLC, as Buyer.
Receivables Purchase Agreement, dated as of October
11, 2013, among Superior Commerce LLC as Seller,
SCP Distributors LLC, as the Servicer, the Purchasers
from time to time thereto, The Bank of
Tokyo Mitsubishi UFJ, Ltd., New York Branch, as the
Victory Group Co-Agent and Wells Fargo Bank,
National Association, as the Wells Group Co-Agent
and as Administrative Agent.
8-K
000-26640
10/17/2013
8-K
000-26640
10/17/2013
No.
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
21.1
23.1
31.1
31.2
32.1
Description
as amended by Second Amendment to the Receivables
Purchase Agreement dated as of June 25, 2014.
Filed/
Furnished
with this
Form 10-K
Incorporated by Reference
Form
10-Q
File No.
000-26640
Date Filed
07/30/2014
as amended by Third Amendment to the Receivables
Purchase Agreement dated as of October 24, 2014.
8-K
000-26640
10/28/2014
as amended by Fourth Amendment to the Receivables
Purchase Agreement dated as of October 1, 2015.
8-K
000-26640
10/20/2015
as amended by Fifth Amendment to the Receivables
Purchase Agreement dated as of October 15, 2015.
as amended by Sixth Amendment to the Receivables
Purchase Agreement dated as of October 28, 2016.
8-K
000-26640
10/20/2015
8-K
000-26640
10/31/2016
as amended by Seventh Amendment to the Receivables
Purchase Agreement dated as of August 31, 2017.
8-K
000-26640
09/01/2017
as amended by Eighth Amendment to the Receivables
Purchase Agreement dated as of November 28, 2017.
8-K
000-26640
11/29/2017
as amended by Ninth Amendment to the Receivables
Purchase Agreement dated as of October 31. 2018.
Performance Undertaking, dated as of October 11,
2013, by and between Pool Corporation and Superior
Commerce LLC.
Subsidiaries of the registrant.
Consent of Ernst & Young LLP.
Certification by Mark W. Joslin pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Peter D. Arvan pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Peter D. Arvan and Mark W. Joslin
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS + XBRL Instance Document
101.SCH + XBRL Taxonomy Extension Schema Document
101.CAL + XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF + XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB + XBRL Taxonomy Extension Label Linkbase
Document
101.PRE + XBRL Taxonomy Extension Presentation Linkbase
Document
8-K
000-26640
11/02/2018
8-K
000-26640
10/17/2013
X
X
X
X
X
X
X
X
X
X
X
*
Indicates a management contract or compensatory plan or arrangement
+ Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
1. Consolidated Statements of Income for the years ended December 31, 2018, December 31, 2017 and December 31, 2016;
2. Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, December 31, 2017 and
December 31, 2016;
3. Consolidated Balance Sheets at December 31, 2018 and December 31, 2017;
4. Consolidated Statements of Cash Flows for the years ended December 31, 2018, December 31, 2017 and December 31,
2016;
5. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, December 31, 2017
and December 31, 2016; and
6. Notes to Consolidated Financial Statements.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on February 27, 2019.
SIGNATURES
POOL CORPORATION
By:
/s/ JOHN E. STOKELY
John E. Stokely, Chairman of the Board
and Lead Independent Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities indicated on February 27, 2019.
Signature:
Title:
/s/ JOHN E. STOKELY
John E. Stokely
/s/ PETER D. ARVAN
Peter D. Arvan
/s/ MARK W. JOSLIN
Mark W. Joslin
Chairman of the Board and Lead Independent Director
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
/s/ MELANIE M. HOUSEY HART
Melanie M. Housey Hart
Corporate Controller and Chief Accounting Officer
/s/ ANDREW W. CODE
Andrew W. Code
/s/ TIMOTHY M. GRAVEN
Timothy M. Graven
/s/ DEBRA S. OLER
Debra S. Oler
/s/ MANUEL J. PEREZ DE LA MESA
Manuel J. Perez de la Mesa
/s/ HARLAN F. SEYMOUR
Harlan F. Seymour
/s/ ROBERT C. SLEDD
Robert C. Sledd
/s/ DAVID G. WHALEN
David G. Whalen
Director
Director
Director
Director
Director
Director
Director
[This page intentionally left blank]
SHAREHOLDER
INFORMATION
COMPANY OFFICERS
AND DIRECTORS
SEC Filings / Investor Contact
Pool Corporation reports filed with or furnished to the
Securities and Exchange Commission are available without
charge to shareholders upon written request. These
requests and other investor inquiries should be directed
to Investor Relations at the company’s corporate
address below.
Shareholders’ Meeting
The Annual Shareholders’ Meeting of Pool Corporation will be
held on Wednesday, May 1, 2019, at 9:00 a.m., Central Time,
at our corporate headquarters, located at 109 Northpark
Boulevard, Covington, Louisiana 70433. Shareholders of record
as of March 14, 2019 will be entitled to vote at this meeting.
Stock Listing
Officers
Peter D. Arvan (1)
President and Chief Executive Officer
A. David Cook (1)
Group Vice President
Mark W. Joslin (1)
Senior Vice President and Chief Financial Officer
Kenneth G. St. Romain (1)
Group Vice President
Timothy M. Babco
General Manager and Chief Information Officer
Melanie M. Housey Hart (1)
Vice President, Corporate Controller and
Chief Accounting Officer
Pool Corporation’s common stock is traded on the NASDAQ
Global Select Market under the symbol POOL.
Jennifer M. Neil (1)
Vice President, Secretary and Chief Legal Officer
Company Address
Pool Corporation
109 Northpark Boulevard
Covington, LA 70433-5001
Phone: 985.892.5521
www.poolcorp.com
Registrar and Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233
Phone: 877.498.8861
Inquiries regarding stock transfers, lost certificates
or address changes should be directed to
Computershare at the above address.
For more information: www.computershare.com
Independent Registered
Public Accounting Firm
Ernst & Young LLP
New Orleans, LA
Outside Securities Counsel
Jones Walker LLP
New Orleans, LA
(1) Executive Officer
(2) Chairman, Audit Committee
(3) Member, Audit Committee
(4) Chairman, Compensation Committee
(5) Member, Compensation Committee
(6) Chairman, Nominating and
Corporate Governance Committee
(7) Member, Nominating and
Corporate Governance Committee
(8) Chairman, Strategic Planning Committee
(9) Member, Strategic Planning Committee
Richard A. Postoll
Vice President and General Manager
Robert R. Rankin
Vice President and General Manager
Donna K. Williams
Vice President and Chief Marketing Officer
Board of Directors
John E. Stokely (3), (6)
Chairman of the Board
Retired, Former President, Chief Executive Officer
and Chairman of Richfood Holdings, Inc.
Manuel J. Perez de la Mesa
Vice Chairman of the Board
Retired, Former President and Chief Executive Officer
of Pool Corporation
Andrew W. Code (5)
Founder and Former Managing Partner, CHS Capital
Timothy M. Graven (2), (7)
Retired, Former President and Chief Operating Officer
of Steel Technologies, Inc.
Debra S. Oler (5), (9)
Senior Vice President/President North American Sales
and Service of W.W. Grainger, Inc.
Harlan F. Seymour (4), (7), (8)
Retired, Former Chairman of ACI Worldwide, Inc.
Robert C. Sledd (3), (5)
Retired, Former Chairman and Chief Executive Officer
of Performance Food Group Company
David G. Whalen (3), (9)
Former President and Chief Executive Officer
of A.T. Cross Company
2018
109 Northpark Boulevard
Covington, LA 70433-5001
Phone: 985.892.5521
EXCEPTIONAL:
VALUE
RETURN
OPPORTUNITIES