# Pool Corp: Form 10-Q for the period ended Jun 30, 2017

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2017-07-28
- Accepted by EDGAR: Jul 28, 2017, 12:57 ET
- Period: 2017-06-30
- Accession: 0000945841-17-000116
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584117000116/pool-2017630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584117000116/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $1.53bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $698.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $1.09bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-04-01 to 2017-06-30 | $289.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-01-01 to 2017-06-30 | $443.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $135.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $258.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $154.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $185.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $55.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $60.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $94.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $117.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $2.21 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $2.73 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $2.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $2.84 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 42,985,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 42,937,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | −$41.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $34.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $28.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $8.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $26.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $955.3m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $1.28bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $386.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $975.9m | us-gaap:Liabilities |
| Long-term debt | at 2017-06-30 | $538.6m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2017-06-30 | $303.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,930 characters.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2016 Annual Report on Form 10-K.

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

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

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives and industry, general economic and other forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project,” “should” and other words and expressions of similar meaning.

No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, 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 our 2016 Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

### OVERVIEW

### Financial Results

Our second quarter results show solid sales and earnings growth, founded on strong execution, with value created by our focus on improving operational leverage. Net sales for the second quarter of 2017 increased 8% to $988.2 million compared to $918.9 million in the second quarter of 2016. We realized base business sales growth of 7% with increases in swimming pool repair and remodel activities, including major pool refurbishment and replacement of key pool equipment.

Gross profit for the second quarter of 2017 increased 7% compared to the same period last year. Base business gross profit improved 6% over the second quarter of last year. Gross profit as a percentage of net sales (gross margin) decreased approximately 15 basis points to 29.3% compared to the second quarter of 2016, which comes on top of a 30 basis point increase in the first quarter of 2017. The shift in timing of customer early buy purchases into the second quarter of 2017 contributed to lower margins during the period due to applicable discounts.

Selling and administrative expenses (operating expenses) increased 6% compared to the second quarter of 2016, with base business operating expenses up 5% over the comparable 2016 period. The increase in operating expenses was primarily due to seasonally higher growth-driven labor and freight expenses, as well as higher employee-related insurance costs.

Operating income for the second quarter increased 8% compared to the same period in 2016. Operating income as a percentage of net sales (operating margin) was 15.6% for the second quarter of 2017 compared to 15.5% for the second quarter of 2016.

During the first quarter of 2017, we adopted ASU 2016-09, *Improvements to Employee Share-Based Payment Accounting,* on a prospective basis. This adoption resulted in a tax benefit recorded in our Provision for income taxes, a positive impact on our Net income and our Earnings per share and an increase of approximately 550,000 diluted weighted average shares outstanding used to calculate our earnings per diluted share for the second quarter of 2017. Net income attributable to Pool Corporation, including the tax benefit of $1.9 million from the impact of adopting ASU 2016-09, was $94.9 million in the second quarter of 2017 compared to $85.4 million for the second quarter of 2016. Earnings per share, including a favorable $0.02 per diluted share impact from the adoption of this accounting pronouncement, increased to a record $2.21 per diluted share for the three months ended June 30, 2017 versus $1.98 per diluted share for the same period in 2016.

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

### Financial Position and Liquidity

Total net receivables, including pledged receivables, increased 5% from June 30, 2016. Our allowance for doubtful accounts balance was $3.6 million at June 30, 2017 and $3.3 million at June 30, 2016. Net inventory levels grew 10% compared to levels at June 30, 2016, primarily reflecting the impact of growth, a mid-season opportunity buy, the introduction of new products and inventory acquired in our recent acquisition. The inventory reserve was $8.1 million at June 30, 2017 and $8.6 million at June 30, 2016. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at both June 30, 2017 and June 30, 2016.

Total debt outstanding at June 30, 2017 was $553.5 million, a $52.9 million, or 11% increase compared to total debt at June 30, 2016.

### Current Trends and Outlook

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

In the first quarter of 2017, we updated our 2017 earnings guidance to a range of $4.12 to $4.32 per diluted share, which reflects both an estimated benefit of $0.30 per diluted share due to the adoption of ASU 2016-09 and $0.02 from our first quarter 2017 operating results. Our expectations for the full 2017 fiscal year, before considering the estimated impact of the accounting change related to the adoption of ASU 2016-09, remain consistent with the disclosure in our 2016 Annual Report on Form 10-K. 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 shares of outstanding vested options.

We continue to project base business sales growth of 5% to 7% for the full year and expect gross margin to be similar to 2016. So far in 2017, we have incurred growth-driven expense increases related to labor, facilities expansion and delivery costs. Investments in information technology as well as the timing of recognition of employee healthcare costs also added to our expense growth in the first half of the year. We expect these cost increases to moderate in the back half of the year as we work toward our leverage goal where operating expense growth approximates half the rate of our gross profit growth.

Given our $52.9 million increase in debt as of June 30, 2017 over the prior year and the increase in 30-Day LIBOR of approximately 70 basis points over last year, we expect our interest expense on borrowings in the second half of 2017 to increase by approximately $1.0 million to $1.5 million over the same period last year, depending on borrowings to fund future share repurchases.

Excluding the impact from the adoption of ASU 2016-09, we expect our effective tax rate will be consistent with 2016. 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 the adoption of the new accounting standard, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. Based on our comparison of our deferred tax assets for share-based compensation to the current intrinsic value of the underlying awards, we expect to recognize material income tax benefits in periods when these transactions occur.

We expect cash provided by operations will exceed net income for the 2017 fiscal year. We anticipate that we may use approximately $100.0 million to $150.0 million in cash to fund share repurchases in 2017.

### RESULTS OF OPERATIONS

As of June 30, 2017, we conducted operations through 345 sales centers in North America, Europe, South America and Australia.

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

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Cost of sales | **70.7** | 70.5 | **71.1** | 71.1 |
| Gross profit | **29.3** | 29.5 | **28.9** | 28.9 |
| Operating expenses | **13.7** | 14.0 | **16.8** | 16.9 |
| Operating income | **15.6** | 15.5 | **12.1** | 12.0 |
| Interest and other non-operating expenses, net | **0.4** | 0.4 | **0.5** | 0.5 |
| Income before income taxes and equity earnings | **15.2%** | 15.1% | **11.6%** | 11.5% |

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

We have included the results of operations from the acquisitions in 2017 and 2016 in our consolidated results since the acquisition date.

### Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

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

*(Unaudited)*

*(in thousands)*

|  | Base Business Three Months Ended June 30, 2017 | 2016 | Excluded Three Months Ended June 30, 2017 | 2016 | Total Three Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$973,861** | $909,899 | **$14,302** | $8,990 | **$988,163** | $918,889 |
| Gross profit | **285,267** | 267,859 | **4,397** | 2,877 | **289,664** | 270,736 |
| Gross margin | **29.3%** | 29.4% | **30.7%** | 32.0% | **29.3%** | 29.5% |
| Operating expenses | **132,432** | 126,467 | **3,046** | 1,849 | **135,478** | 128,316 |
| Expenses as a % of net sales | **13.6%** | 13.9% | **21.3%** | 20.6% | **13.7%** | 14.0% |
| Operating income | **152,835** | 141,392 | **1,351** | 1,028 | **154,186** | 142,420 |
| Operating margin | **15.7%** | 15.5% | **9.4%** | 11.4% | **15.6%** | 15.5% |

14

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

| Acquired (1) | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| Lincoln Aquatics | April 2017 | 2 | May - June 2017 |
| Metro Irrigation Supply Company Ltd. | April 2016 | 8 | April - June 2017 and April - June 2016 |

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

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

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

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

|  |  |
| --- | ---: |
| December 31, 2016 | 344 |
| Acquired location(s) | 2 |
| New location | 1 |
| Closed locations | (2) |
| June 30, 2017 | 345 |

### Net Sales

*(in millions)*

|  | Three Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$988.2** | $918.9 | $69.3 | 8% |

Net sales for the second quarter of 2017 increased 8% compared to the second quarter of 2016, with base business sales up 7% for the period. Overall, the weather impact in the quarter was neutral, with favorable weather in the earlier part of the quarter, which largely offset the adverse weather impact later in the quarter. The following factors benefited our sales growth (listed in order of estimated magnitude):

- continued consumer investments in enhancing outdoor living spaces, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
- pool and spa chemical sales, our largest product category at 13% of total net sales for the quarter, increased 3% over the second quarter of 2016; and
- inflationary (estimated at 1% to 2%) product cost increases.

We believe that sales growth rates for certain product offerings, such as building materials and equipment, support our assertion that there continues to be increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. In the second quarter of 2017, the sales growth rate for equipment, such as swimming pool heaters, pumps, lights and filters, collectively, was similar to the growth rate for total net sales compared to the second quarter of 2016. This increase reflects both the ongoing recovery of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent 10% of net sales for the second quarter of 2017 and grew by 12% compared to the second quarter of 2016.

Sales to customers who service large commercial swimming pool installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories and growth in this area is reflected in the numbers above. These sales represented approximately 3% of our consolidated net sales for the second quarter of 2017 and increased 12% compared to the second quarter of 2016, excluding the recent acquisition of Lincoln Aquatics. This acquisition furthers our efforts to increase not only our focus on the commercial market, but also the resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.

### Gross Profit

*(in millions)*

|  | Three Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$289.7** | $270.7 | $19.0 | 7% |
| Gross margin | **29.3%** | 29.5% |  |  |

Gross margin for the second quarter of 2017 decreased 15 basis points compared to the second quarter of 2016. This decline is primarily due to product mix and the shift of customer early buy purchases into the second quarter, and reflects the impact that applicable discounts on customer early buys has on our margins.

### Operating Expenses

*(in millions)*

|  | Three Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$135.5** | $128.3 | $7.2 | 6% |
| Operating expenses as a % of net sales | **13.7%** | 14.0% |  |  |

Operating expenses increased 6% in the second quarter of 2017 compared to the second quarter of 2016, with base business operating expenses up 5% compared to the same period last year. This increase includes seasonally higher growth-driven expenses, such as labor and delivery expenses, as well as higher employee related insurance costs and technology spending. While higher than the second quarter of last year, the operating expense increase was in line with our sales growth and reflects our ongoing investments in our business. Operating expenses as a percentage of net sales improved slightly for the second quarter of 2017 compared to the same period last year.

### Interest and Other Non-operating Expenses, Net

Interest and other non-operating expenses, net decreased slightly compared to the second quarter of 2016, reflecting a decrease in other non-operating expenses in the quarter. Interest on borrowings increased as the weighted average effective interest rate increased to 2.6% for the second quarter of 2017 from 1.9% for the second quarter of 2016 on higher average outstanding debt of $521.2 million versus $495.5 million for the respective periods.

### Income Taxes

Our effective income tax rate was 37.0% for the three months ended June 30, 2017 and 38.4% for the three months ended June 30, 2016. The decline in our effective income tax rate is primarily due to the $1.9 million tax benefit recorded in our provision for income taxes, which reflects the impact of the adoption of ASU 2016-09.

### Net Income and Earnings Per Share

Net income attributable to Pool Corporation for the second quarter of 2017, including the tax benefit of $1.9 million from the impact of adopting ASU 2016-09, increased 11% to $94.9 million compared to the second quarter of 2016. Earnings per diluted share, including a favorable $0.02 per diluted share impact from the adoption of this accounting pronouncement, increased to $2.21 for the second quarter of 2017 versus $1.98 per diluted share for the comparable period in 2016.

### Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

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

*(Unaudited)*

*(in thousands)*

|  | Base Business Six Months Ended June 30, 2017 | 2016 | Excluded Six Months Ended June 30, 2017 | 2016 | Total Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$1,512,146** | $1,424,005 | **$22,457** | $10,134 | **$1,534,603** | $1,434,139 |
| Gross profit | **436,361** | 410,642 | **6,924** | 3,117 | **443,285** | 413,759 |
| Gross margin | **28.9%** | 28.8% | **30.8%** | 30.8% | **28.9%** | 28.9% |
| Operating expenses | **253,123** | 239,525 | **4,978** | 2,284 | **258,101** | 241,809 |
| Expenses as a % of net sales | **16.7%** | 16.8% | **22.2%** | 22.5% | **16.8%** | 16.9% |
| Operating income | **183,238** | 171,117 | **1,946** | 833 | **185,184** | 171,950 |
| Operating margin | **12.1%** | 12.0% | **8.7%** | 8.2% | **12.1%** | 12.0% |

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

| Acquired (1) | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| Lincoln Aquatics | April 2017 | 2 | May - June 2017 |
| Metro Irrigation Supply Company Ltd. | April 2016 | 8 | January - June 2017 and April - June 2016 |
| The Melton Corporation | November 2015 | 2 | January 2017 and January 2016 |
| Seaboard Industries, Inc. | October 2015 | 3 | January 2017 and January 2016 |

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

For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2016, please refer to page 15 under the heading *Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016.*

### Net Sales

*(in millions)*

|  | Six Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$1,534.6** | $1,434.1 | $100.5 | 7% |

Net sales for the first six months of 2017 increased 7% compared to the same period last year, with much of this growth resulting from the 6% improvement in base business sales. Weather impacts in the first half of 2017 were not as beneficial as they were in 2016.

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

- continued improvement in consumer discretionary expenditures, including market recovery in remodeling and replacement activity (see discussion below);
- pool and spa chemical sales, our largest product category at 12% of total net sales for the first half of the year, increased 3% compared to the first six months of 2016;
- market share growth, particularly in building materials and commercial product categories; and
- inflationary (estimated at approximately 1%) product cost increases.

We believe that sales growth rates for certain product offerings, such as building materials and equipment, support our assertion that there continues to be increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. In the first six months of 2017, the sales growth rate for equipment, such as swimming pool heaters, pumps, lights and filters, collectively, was similar to the growth rate for total net sales compared to the first six months of 2016. This increase reflects both the ongoing recovery of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent 10% of net sales for the first six months of 2017 and grew by 14% compared to the first half of 2016.

Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories and growth in this area is reflected in the numbers above. These sales represented just under 4% of our consolidated net sales for the first six months of 2017 and increased 12% compared to the same period of 2016, excluding the recent acquisition of Lincoln Aquatics.

### Gross Profit

*(in millions)*

|  | Six Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$443.3** | $413.8 | $29.5 | 7% |
| Gross margin | **28.9%** | 28.9% |  |  |

Gross margin for the six months ended June 30, 2017 was flat compared to the six months ended June 30, 2016. When considered on a year to date basis, the impact of the shift in timing of customer early buy purchases from the first quarter into the second quarter of 2017 was essentially neutral. While gross margin decreased approximately 15 basis points in the second quarter, it increased 30 basis points in the first quarter of 2017.

### Operating Expenses

*(in millions)*

|  | Six Months Ended June 30, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$258.1** | $241.8 | $16.3 | 7% |
| Operating expenses as a % of net sales | **16.8%** | 16.9% |  |  |

For the first six months of 2017, operating expenses were up 7% over the same period last year, with base business operating expenses up 6%. The increase in base business operating expenses was primarily due to higher growth-driven labor, freight expenses and higher employee-related health insurance costs, as well as ongoing investments in our business. Operating expenses as a percentage of net sales was consistent for the first six months of 2017 and 2016.

### Interest and Other Non-operating Expenses, Net

Interest and other non-operating expenses, net for the first six months of 2017 increased $0.6 million compared to the same period last year. This increase reflects $1.5 million higher interest on borrowings, offset by a lower adjustment related to a non-operating note receivable. Our weighted average effective interest rate increased to 2.6% for the first six months of 2017 from 1.9% for the same period of 2016 on higher average outstanding debt of $483.6 million versus $442.9 million for the respective periods.

### Income Taxes

Our effective income tax rate was 34.2% for the six months ended June 30, 2017 compared to 38.5% for the six months ended June 30, 2016. The decline in our effective income tax rate is primarily due to the $7.4 million tax benefit recorded in our provision for income taxes, which reflects the impact of the adoption of ASU 2016-09.

### Net Income and Earnings Per Share

Earnings per share for the first six months of 2017, including a favorable $0.14 per diluted share impact from the adoption of ASU 2016-09, increased to $2.73 per diluted share to on Net income attributable to Pool Corporation of $117.2 million, compared to $2.35 per diluted share on Net income attributable to Pool Corporation of $101.8 million in the comparable 2016 period.

### Seasonality and Quarterly Fluctuations

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

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

The following table presents certain unaudited quarterly data for the first and second quarters of 2017, the four quarters of 2016 and the third and fourth quarters of 2015. 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 | QUARTER 2017 Second | First | 2016 Fourth | Third | Second | First | 2015 Fourth | Third |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$988,163** | $546,441 | $445,235 | $691,429 | $918,889 | $515,250 | $415,075 | $645,779 |
| Gross profit | **289,664** | 153,621 | 127,777 | 199,551 | 270,736 | 143,023 | 118,295 | 184,288 |
| Operating income | **154,186** | 30,998 | 9,743 | 74,166 | 142,420 | 29,530 | 5,979 | 65,512 |
| Net income | **94,620** | 22,270 | 2,572 | 44,421 | 85,247 | 16,363 | 2,579 | 39,403 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$370,285** | $290,019 | $166,151 | $233,405 | $351,012 | 283,758 | $156,756 | $219,774 |
| Product inventories, net | **542,805** | 647,884 | 486,116 | 455,156 | 493,254 | 595,393 | 474,275 | 412,587 |
| Accounts payable | **273,309** | 465,928 | 230,728 | 199,922 | 265,349 | 438,705 | 246,554 | 170,582 |
| Total debt | **553,480** | 490,217 | 438,042 | 390,189 | 500,606 | 450,457 | 328,045 | 393,370 |

We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the fourth quarter after the peak selling season ends.

Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects resulting from various weather conditions.

| Weather |  | Possible Effects |
| --- | --- | --- |
| Hot and dry | • | Increased purchases of chemicals and supplies for existing swimming pools |
|  | • | Increased purchases of above-ground pools and irrigation products |
| Unseasonably cool weather or extraordinary amounts of rain | • | Fewer pool and landscape installations |
|  | • | Decreased purchases of chemicals and supplies |
|  | • | Decreased purchases of impulse items such as above-ground pools and accessories |
| Unseasonably early warming trends in spring/late cooling trends in fall | • | A longer pool and landscape season, thus positively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |
| Unseasonably late warming trends in spring/early cooling trends in fall | • | A shorter pool and landscape season, thus negatively impacting our sales |
| (primarily in the northern half of the U.S. and Canada) |  |  |

### Weather Impacts on 2017 and 2016 Results

Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter, while the weather impact overall for the quarter was fairly neutral. Temperatures 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.

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.

### LIQUIDITY AND CAPITAL RESOURCES

Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:

- cash flows generated from operating activities;
- the adequacy of available bank lines of credit;
- acquisitions;
- scheduled debt payments;
- dividend payments;
- capital expenditures;
- the timing and extent of share repurchases; and
- the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital requirements and other general corporate purposes, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.

We prioritize our use of cash based on investing in our business, maintaining a prudent debt structure and returning money to our shareholders. Our specific priorities for the use of cash are as follows:

- maintenance and new sales center capital expenditures;
- 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.

Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Capital expenditures were 1.4% of net sales in 2016, 1.0% of net sales in 2015 and 0.8% of sales in 2014. For 2017, we project capital expenditures will be approximately 1.5% of net sales as we expand facilities and purchase delivery vehicles to address growth opportunities.

### Sources and Uses of Cash

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

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Operating activities | **$(41,345)** | $(13,757) |
| Investing activities | **(37,788)** | (44,730) |
| Financing activities | **83,117** | 76,671 |

Cash used in operating activities of $41.3 million increased during the first six months of 2017 compared to the first six months of 2016 due to a combination of growth-related increases in inventories and receivables and the payment of our normal scheduled payment of our second quarter estimated taxes. These estimated payments for the second quarter of 2016 were deferred as allowed for areas affected by severe storms and flooding in Louisiana.

Cash used in investing activities for the first six months of 2017 decreased compared to the first six months of 2016. While we had increased investment in capital expenditures for vehicle additions in the first six months of 2017, our cash used for acquisitions was considerably lower in the period.

Cash provided by financing activities increased for the first six months of 2017 compared to the first six months of 2016, which reflects a $57.0 million decrease in net borrowings, offset by a $71.8 million decline in amounts used for share repurchases. Dividends paid to shareholders increased by $4.2 million in the first six months of 2017 compared to the first six months of 2016.

### Future Sources and Uses of Cash

### Revolving Credit Facility

Our Credit Facility provides for $465.0 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 $540.0 million. The Credit Facility matures on November 20, 2020. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At June 30, 2017, there was $319.4 million outstanding, $141.4 million available for borrowing and a $4.2 million standby letter of credit outstanding 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 June 30, 2017, we have three interest rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019.

In July 2016 we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date. 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 June 30, 2017 was approximately 2.9%, excluding commitment fees.

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 June 30, 2017, 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 June 30, 2017, our average total leverage ratio equaled 1.54 (compared to 1.59 as of March 31, 2017) and the TTM average total debt amount used in this calculation was $463.1 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 June 30, 2017, our fixed charge ratio equaled 5.52 (compared to 5.41 as of March 31, 2017) and TTM Rental Expense was $53.1 million.

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.

### Receivables Securitization Facility

Our two-year Receivables Facility offers us a lower cost form of financing, with a peak funding capacity of up to $220.0 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 $65.0 million to $150.0 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 June 30, 2017, there was $220.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 1.9%, excluding commitment fees.

As of June 30, 2017, we were in compliance with all covenants and financial ratio requirements. We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of our 2016 Annual Report on Form 10-K.

We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.

As of July 27, 2017, $177.1 million of the current Board authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.

### CRITICAL ACCOUNTING ESTIMATES

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

- those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and
- those for which changes in the estimate or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2016 Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.

### Recent Accounting Pronouncements

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

- Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products or services to our customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics. Since our individual sales transactions are very similar in nature, we anticipate applying the guidance to all transactions as a portfolio. We expect that the effects of applying this guidance to the portfolio would not differ materially from applying the guidance to individual performance obligations within that portfolio.
- Our revenue recognition will be achieved upon delivery of products as there are no other promised services as part of our contracts with customers. Because shipping and handling activities are performed before the customer obtains control of the goods, we do not consider these activities to be a promised service to the customer. Rather shipping and handling are activities to fulfill our promise to transfer the goods. Product warranties do not constitute a performance obligation for us, as products are warrantied directly by the manufacturer or the third party carrier.
- To determine the amount of consideration which we expect to be entitled in exchange for transferring promised goods, we have considered if variable consideration exists. We have reviewed our standard terms and conditions and our customary business practices to determine the transaction price. We have reviewed our pricing policies and strategies including marketing, loyalty and incentive programs for the purpose of determining whether we have any variable or non-cash consideration. No material items were noted. In addition, we reviewed our current accounting policies related to returns, price concessions and volume discounts. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.
- The majority of our sales transactions do not require any additional performance obligation after delivery, therefore we do not have multiple performance obligations for which we will have to allocate the transaction price.
- We expect to recognize revenue upon delivery to the customer or the freight carrier if delivered by a third party as our performance obligation will be satisfied at that point in time.

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

In February 2016, the FASB issued ASU 2016-02, *Leases*, which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheets as we will be recording a right-of-use asset and corresponding liability for our current operating leases. We are evaluating the effect that ASU 2016-02 will have on our results of operations and related disclosures. We are primarily focused on evaluating our internal controls over financial reporting, including information technology requirements, related to the adoption of this new accounting pronouncement.

In June 2016, the FASB issued ASU 2016-13, *Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments*, which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.

In August 2016, the FASB issued ASU 2016-15, *Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,* which may change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. Current guidance for these topics is principles-based, requiring judgment in application and creating diversity in practice. ASU 2016-15 will be effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted for all entities. We have not elected to early adopt this guidance. We are currently evaluating the effect that ASU 2016-15 will have on our financial position and related disclosures.

In January 2017, the FASB issued ASU 2017-04, *Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment*, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). ASU 2017-04 will be effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for annual and interim goodwill impairment tests beginning after January 1, 2017. We are currently evaluating the effect that ASU 2017-04 will have on our financial position, results of operations and related disclosures.

## Market risk

As filed, 347 characters.

### Interest Rate Risk

There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.

### Currency Risk

There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended December 31, 2016 that affect fiscal 2017.

## Controls and procedures

As filed, 1,533 characters.

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of June 30, 2017, 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 June 30, 2017, 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.

## Risk factors

As filed, 173 characters.

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Filed Jul 28, 2017.
Source: SEC EDGAR, the filing index for accession 0000945841-17-000116. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.