# Pool Corp: Form 10-Q for the period ended Sep 30, 2018

- Company: [Pool Corp](/companies/pool.md) (CIK 945841)
- Form: 10-Q
- Filed: 2018-10-30
- Accepted by EDGAR: Oct 30, 2018, 12:02 ET
- Period: 2018-09-30
- Accession: 0000945841-18-000114
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/945841/000094584118000114/pool-2018930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/945841/000094584118000114/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $811.3m | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $2.46bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $576.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $1.75bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $235.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $709.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $142.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $421.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $92.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $287.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $18.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $56.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $69.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $217.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $1.66 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $5.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $1.71 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $5.39 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 41,797,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 41,831,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $51.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $28.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $51.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $38.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $35.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $952.9m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $1.28bn | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $289.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $911.0m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $571.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-09-30 | $9.0m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2018-09-30 | $321.0k | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-09-30 | $372.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,615 characters.

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2017 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, 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,” “plan,” “project,” “should” and other words and expressions of similar meaning. In addition, forward-looking statements and estimates regarding the effects of the Tax Cuts and Jobs Act, which are based on our current interpretation of this legislation and on reasonable estimates, may change as a result of new guidance issued by regulators or changes in our estimates.

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, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our 2017 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

We produced strong third quarter results thanks to our operational execution and a continuation of the elevated demand trends for discretionary pool and irrigation related products. Despite bouts of severe weather, with Hurricane Florence impacting the Carolinas, elevated rainfall in Texas and wildfires in California, we achieved favorable results.

Net sales increased 9% to $811.3 million in the third quarter of 2018 compared to $743.4 million in the third quarter of 2017. Base business sales grew 8% over the same quarter of 2017, with demand for discretionary products such as building materials and our expanded commercial product offerings driving our sales growth.

Gross profit increased 8% to $235.0 million in the third quarter of 2018 from $216.6 million in the same period of 2017. Base business gross profit improved 8% over the third quarter of 2017. Gross profit as a percentage of net sales (gross margin) was 29.0% for the third quarter of 2018 compared to 29.1% for the third quarter of 2017. This decline in gross margin mainly reflects differences in product mix.

Selling and administrative expenses (operating expenses) increased 6% to $142.7 million in the third quarter of 2018 compared to the third quarter of 2017, with base business operating expenses up 5% over the comparable 2017 period. We attribute the expense growth to variable labor and freight costs together with higher facility costs. As a percentage of net sales, base business operating expenses declined to 17.4% for the third quarter of 2018 compared to 18.0% for the third quarter of 2017.

Operating income for the third quarter of 2018 increased to $92.3 million, up 13% compared to the same period in 2017. Operating income as a percentage of net sales (operating margin) was 11.4% for the third quarter of 2018 and 11.0% for the same period in 2017, while base business operating margin was 11.5% for the third quarter of 2018 and 11.2% for the same period 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 for the third quarter of 2018. Our effective tax rate was 20.8% and 37.4% for the third quarters of 2018 and 2017, respectively. We recorded a $3.3 million benefit from ASU 2016-09 in the quarter ended September 30, 2018 compared to a benefit of $0.3 million realized in the same period in 2017. Excluding the benefits from ASU 2016-09, our effective tax rate was 24.6% and 37.9% for the third quarters of 2018 and 2017, respectively. As previously reported, we expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2018 and future periods to approximate 25.5%, which is a reduction compared to our historical rate of approximately 38.5% due to the impact of the recent U.S. tax reform.

Net income attributable to Pool Corporation was $69.3 million in the third quarter of 2018 compared to $48.8 million in the third quarter of 2017. Earnings per share increased 43% to a record $1.66 per diluted share for the three months ended September 30, 2018 compared to $1.16 per diluted share for the same period in 2017. The reduction in our effective tax rate from 37.4% to 20.8% as discussed above reduced our income tax expense by approximately $14.5 million, or $0.35 per diluted share, in the third quarter of 2018.

References to product line and product category data throughout this report 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

As of September 30, 2018, total net receivables, including pledged receivables, increased 10% compared to September 30, 2017, primarily reflecting sales growth. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 30.2 days at September 30, 2018 and 29.8 days at September 30, 2017. Our allowance for doubtful accounts balance was $5.4 million at September 30, 2018 and $4.1 million at September 30, 2017.

Net inventory levels grew 26% compared to levels at September 30, 2017. The increase of $125.7 million between periods reflects significant inventory purchases we made in the third quarter of 2018 in advance of greater-than-normal vendor price increases, as well as purchases needed to support normal business growth, and the addition of inventories from acquisitions. The inventory reserve was $8.8 million at September 30, 2018 and $7.8 million at September 30, 2017. Our inventory turns, as calculated on a trailing four quarters basis, was 3.4 times at September 30, 2018 and 3.5 times at September 30, 2017.

Total debt outstanding at September 30, 2018 was $580.7 million, up 3% compared to total debt at September 30, 2017.

### Current Trends and Outlook

For a detailed discussion of trends through 2017, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our 2017 Annual Report on Form 10-K.

We project base business sales growth of approximately 7% for 2018. After a slower than normal start in March and April, activity returned to expected levels through the end of the third quarter with the main limitation being customer capacity. We believe that customer labor constraints and reduced work days due to higher rainfall in selected markets created a build up of demand in the second and third quarters, which will lead to ongoing sales growth in the fourth quarter of 2018 as demand remains strong. Due to product cost increases imposed by our vendors, which we have passed on to our customers, we also expect inflation to be closer to 2% in the fourth quarter of 2018 versus the historical average of 1% to 2%. We believe this factor will benefit our gross margin in the fourth quarter of 2018 and expect our full year 2018 gross margin to be similar to 2017.

We continue to expect base business operating expenses will grow at a rate that will enable us to achieve operating margin improvement of approximately 20 to 40 basis points for the full year 2018 compared to 2017. Through September, our operating margin has improved 20 basis points year to date and should improve to the upper end of our 20 to 40 basis points range by the end of the fourth quarter. Changes in non-executive performance-based compensation programs that impact the timing of our expense recognition resulted in higher compensation expense in the first half of 2018, primarily in the second quarter. We believe our fourth quarter results should particularly benefit from this timing change, as we observed some benefit in the third quarter. Inflationary pressure related to labor, fuel and freight continues to rise, but we expect our productivity plans will allow these cost increases to better correlate with sales volume growth and improve our operating leverage.

As discussed further in Results of Operations, our average outstanding debt for the nine months ended September 30, 2018 increased 14% over the same period last year, and given the increase in the 30-Day LIBOR, our effective interest rate increased approximately 60 basis points between periods. Based on these trends, we expect Interest and other non-operating expenses, net will increase roughly $2.0 million in the fourth quarter of 2018 compared to the same period in 2017.

In 2018, we expect our effective tax rate to approximate 25.5%, which is a reduction from our historical rate of approximately 38.5%, both of which exclude the impact of ASU 2016-09. We have not finalized our accounting for the effects of tax reform; however, our estimated effective tax rate is based on reasonable estimates for the effects from tax reform at this time.

Our effective tax rate is dependent on our results of operations and may change if actual results differ materially 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. We recorded a $13.9 million benefit from ASU 2016-09 for the nine months ended September 30, 2018. Additional tax benefits could be recognized related to stock option exercises in 2018 from grants that expire in years after 2018, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the periods in which our employees will exercise vested stock options.

We have updated our 2018 earnings guidance range to $5.58 to $5.78 per diluted share from $5.50 to $5.70 per diluted share, which includes the tax benefits realized from ASU 2016-09 in the first nine months of 2018.

Given the timing changes in our inventory purchasing activity in 2018, we expect that cash provided by operations will be less than net income for the 2018 fiscal year. We expect an offsetting benefit in 2019 as our purchasing activity normalizes. We anticipate that we may use approximately $100.0 million to $150.0 million in cash for share repurchases in 2018.

### RESULTS OF OPERATIONS

As of September 30, 2018, we conducted operations through 360 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 September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Cost of sales | **71.0** | 70.9 | **71.1** | 71.0 |
| Gross profit | **29.0** | 29.1 | **28.9** | 29.0 |
| Operating expenses | **17.6** | 18.1 | **17.2** | 17.2 |
| Operating income | **11.4** | 11.0 | **11.7** | 11.7 |
| Interest and other non-operating expenses, net | **0.6** | 0.5 | **0.6** | 0.5 |
| Income before income taxes and equity earnings | **10.8%** | 10.5% | **11.1%** | 11.2% |

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 2018 and 2017 in our consolidated results since the acquisition dates.

### Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

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 September 30, 2018 | 2017 | Excluded Three Months Ended September 30, 2018 | 2017 | Total Three Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$800,971** | $738,391 | **$10,340** | $5,010 | **$811,311** | $743,401 |
| Gross profit | **231,841** | 215,078 | **3,162** | 1,528 | **235,003** | 216,606 |
| Gross margin | **28.9%** | 29.1% | **30.6%** | 30.5% | **29.0%** | 29.1% |
| Operating expenses | **139,392** | 132,663 | **3,274** | 2,015 | **142,666** | 134,678 |
| Expenses as a % of net sales | **17.4%** | 18.0% | **31.7%** | 40.2% | **17.6%** | 18.1% |
| Operating income (loss) | **92,449** | 82,415 | **(112)** | (487) | **92,337** | 81,928 |
| Operating margin | **11.5%** | 11.2% | **(1.1)%** | (9.7)% | **11.4%** | 11.0% |

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

| Acquired | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| Pool Power (1) | January 2018 | 1 | July - September 2018 |
| Chem Quip(1) | December 2017 | 5 | July - September 2018 |
| Intermark | December 2017 | 1 | July - September 2018 |
| E-Grupa | October 2017 | 1 | July - September 2018 |
| Newline Pool Products | July 2017 | 1 | July - September 2018 and July - September 2017 |
| Lincoln Aquatics (1) | April 2017 | 1 | July 2018 and July 2017 |

(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 nine months of 2018:

|  |  |
| --- | ---: |
| December 31, 2017 | 351 |
| Acquired location | 1 |
| New locations | 9 |
| Consolidated location | (1) |
| September 30, 2018 | 360 |

17

### Net Sales

*(in millions)*

|  | Three Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$811.3** | $743.4 | $67.9 | 9% |

Net sales increased 9% in the third quarter of 2018 compared to the third quarter of 2017, with base business sales up 8% for the period. Despite severe weather events, with Hurricane Florence impacting the Carolinas, elevated rainfall in Texas and wildfires in California, we achieved favorable results.

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

- strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
- market share gains, particularly in building materials and commercial products (see discussion below); and
- inflationary product cost increases (estimated at approximately 1%).

We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the third quarter of 2018, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 8% compared to the same period last year. These products collectively represented approximately 25% of net sales for the period. Sales of building materials grew 16% compared to the third quarter of 2017 and represented approximately 11% of net sales in the third quarter of 2018.

Sales to customers who service large commercial swimming pools 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 represented approximately 4% of our consolidated net sales for the third quarter of 2018 and increased 9% compared to the third quarter of 2017.

### Gross Profit

*(in millions)*

|  | Three Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$235.0** | $216.6 | $18.4 | 8% |
| Gross margin | **29.0%** | 29.1% |  |  |

The slight decline in gross margin between periods primarily reflects minor product mix differences.

### Operating Expenses

*(in millions)*

|  | Three Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$142.7** | $134.7 | $8.0 | 6% |
| Operating expenses as a % of net sales | **17.6%** | 18.1% |  |  |

Operating expenses increased 6% in the third quarter of 2018 compared to the third quarter of 2017, with base business operating expenses up approximately 5% compared to the same period last year. This increase reflects variable labor and freight costs together with higher facility costs.

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

Interest and other non-operating expenses, net for the third quarter of 2018 increased $0.9 million compared to the third quarter of 2017. The increase mostly reflects higher interest expense on our debt. Our weighted average effective interest rate increased to 3.3% for the third quarter of 2018 from 2.7% for the third quarter of 2017 on higher average outstanding debt of $566.2 million versus $535.5 million for the respective periods.

### Income Taxes

Our effective income tax rate was 20.8% for the three months ended September 30, 2018 and 37.4% for the three months ended September 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the third quarter of 2018. We recorded a $3.3 million benefit from ASU 2016-09 in the quarter ended September 30, 2018 compared to a benefit of $0.3 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 24.6% and 37.9% for the third quarters of 2018 and 2017, respectively, mostly reflecting the lower corporate income tax rate enacted as part of U.S. tax reform.

### Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 42% to $69.3 million in the third quarter of 2018 compared to the third quarter of 2017. Earnings per diluted share increased to $1.66 for the third quarter of 2018 versus $1.16 per diluted share for the comparable 2017 period. The reduction in our effective tax rate from 37.4% to 20.8% as discussed above reduced our income tax expense by approximately $14.5 million, or $0.35 per diluted share, in the third quarter of 2018.

### Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

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 Nine Months Ended September 30, 2018 | 2017 | Excluded Nine Months Ended September 30, 2018 | 2017 | Total Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$2,419,766** | $2,266,386 | **$35,249** | $11,619 | **$2,455,015** | $2,278,005 |
| Gross profit | **699,058** | 656,433 | **10,674** | 3,458 | **709,732** | 659,891 |
| Gross margin | **28.9%** | 29.0% | **30.3%** | 29.8% | **28.9%** | 29.0% |
| Operating expenses | **409,791** | 388,299 | **12,021** | 4,480 | **421,812** | 392,779 |
| Expenses as a % of net sales | **16.9%** | 17.1% | **34.1%** | 38.6% | **17.2%** | 17.2% |
| Operating income (loss) | **289,267** | 268,134 | **(1,347)** | (1,022) | **287,920** | 267,112 |
| Operating margin | **12.0%** | 11.8% | **(3.8)%** | (8.8)% | **11.7%** | 11.7% |

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

| Acquired | Acquisition Date | Net Sales Centers Acquired | Periods Excluded |
| --- | --- | ---: | --- |
| Pool Power (1) | January 2018 | 1 | January - September 2018 |
| Chem Quip(1) | December 2017 | 5 | January - September 2018 |
| Intermark | December 2017 | 1 | January - September 2018 |
| E-Grupa | October 2017 | 1 | January - September 2018 |
| Newline Pool Products | July 2017 | 1 | January - September 2018 and July - September 2017 |
| Lincoln Aquatics (1) | April 2017 | 1 | January - July 2018 and May - July 2017 |

(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, 2017, please refer to the discussion under the heading *Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017.*

### Net Sales

*(in millions)*

|  | Nine Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **$2,455.0** | $2,278.0 | $177.0 | 8% |

Net sales for the first nine months of 2018 increased 8% compared to the same period last year, with most of this growth resulting from the 7% improvement in base business sales. 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 in the third quarter of 2018.

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

- strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
- market share gains, particularly in building materials and commercial products (see discussion below);
- sales growth of 8% from irrigation products which represented 9% of net sales; and
- inflationary product cost increases (estimated at approximately 1%).

We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first nine months of 2018, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately 8% compared to the same period last year. These products collectively represented 26% of net sales in the first nine months of 2018. Sales of building materials grew 12% compared to the first nine months of 2017 and represented approximately 12% of net sales in the first nine months of 2018.

Sales to customers who service large commercial swimming pools 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 represented approximately 5% of our consolidated net sales in the first nine months of 2018 and increased 10% compared to the same period in 2017.

### Gross Profit

*(in millions)*

|  | Nine Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | **$709.7** | $659.9 | $49.8 | 8% |
| Gross margin | **28.9%** | 29.0% |  |  |

The slight decline in gross margin between periods primarily reflects minor product mix differences.

### Operating Expenses

*(in millions)*

|  | Nine Months Ended September 30, 2018 | 2017 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Operating expenses | **$421.8** | $392.8 | $29.0 | 7% |
| Operating expenses as a % of net sales | **17.2%** | 17.2% |  |  |

For the first nine months of 2018, operating expenses increased 7% over the same period last year, with base business operating expenses up 6%. Higher costs related to labor, technology, facilities and vehicles contributed to this increase.

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

Interest and other non-operating expenses, net for the first nine months of 2018 increased $2.8 million compared to the same period last year. The increase mostly reflects higher interest expense on our debt. Our weighted average effective interest rate increased to 3.2% for the first nine months of 2018 from 2.6% for the same period of 2017 on higher average outstanding debt of $569.5 million versus $501.0 million for the respective periods.

### Income Taxes

Our effective income tax rate was 20.5% for the nine months ended September 30, 2018 compared to 35.2% for the nine months ended September 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the first nine months of 2018. We recorded a $13.9 million benefit from ASU 2016-09 for the nine months ended September 30, 2018 compared to the $7.7 million benefit realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.5% and 38.2% for the nine months ended September 30, 2018 and September 30, 2017, respectively, mostly reflecting the lower corporate income tax rate enacted as part of U.S. tax reform.

### Net Income and Earnings Per Share

Net income attributable to Pool Corporation increased 31% to $217.6 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Earnings per diluted share increased to $5.20 for the nine months ended September 30, 2018 versus $3.89 per diluted share for the nine months ended September 30, 2017. The reduction in our effective tax rate from 35.2% to 20.5% as discussed above reduced our income tax expense by approximately $40.3 million, or $0.96 per diluted share, in the first nine months of 2018.

### 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 2017, we generated approximately 62% of our net sales and 83% of our operating income in the second and third quarters of the year.

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

The following table presents certain unaudited quarterly data for the first, second and third quarters of 2018, the four quarters of 2017 and the fourth quarter of 2016. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

*(Unaudited)*

*(in thousands)*

| Statement of Income Data | QUARTER 2018 Third | Second | First | 2017 Fourth | Third | Second | First | 2016 Fourth |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **$811,311** | $1,057,804 | $585,900 | $510,183 | $743,401 | $988,163 | $546,441 | $445,235 |
| Gross profit | **235,003** | 308,655 | 166,073 | 145,398 | 216,606 | 289,664 | 153,621 | 127,777 |
| Operating income | **92,337** | 162,042 | 33,541 | 17,259 | 81,928 | 154,186 | 30,998 | 9,743 |
| Net income | **69,261** | 117,049 | 31,339 | 25,665 | 48,783 | 94,620 | 22,270 | 2,572 |
| **Balance Sheet Data** |  |  |  |  |  |  |  |  |
| Total receivables, net | **$287,773** | $404,415 | $314,596 | $196,265 | $262,796 | $370,285 | $290,019 | $166,151 |
| Product inventories, net | **609,983** | 606,583 | 703,793 | 536,474 | 484,287 | 542,805 | 647,884 | 486,116 |
| Accounts payable | **204,706** | 300,232 | 467,795 | 245,249 | 209,062 | 273,309 | 465,928 | 230,728 |
| Total debt | **580,703** | 657,120 | 568,110 | 519,650 | 564,573 | 553,480 | 490,217 | 438,042 |

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 2018 and 2017 Results

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 that experienced in the third quarter of last year, resulting in overall similar weather comparisons.

While warming trends started out slow in the second quarter of 2018, the unfavorable weather comparisons turned around by the end of the quarter. 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. 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.

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, while 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.

### 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.

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 principles apply 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, 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 1.4% of net sales in 2017 as we expanded facilities and purchased vehicles to address growth opportunities. Capital expenditures were 1.4% of net sales in 2016 and 1.0% of net sales in 2015. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Going forward, we project capital expenditures will approximate this average.

### Sources and Uses of Cash

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

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | **$51,260** | $112,020 |
| Investing activities | **(28,554)** | (44,584) |
| Financing activities | **(17,339)** | (52,746) |

Cash provided by operating activities decreased $60.8 million during the first nine months of 2018 compared to the first nine months of 2017 primarily due to timing differences from pre-price increase inventory purchases in 2018, which should benefit future periods’ cash flows as the inventory is sold. In 2018, we increased our inventory purchases in advance of greater‑than‑normal vendor price increases, which negatively impacted operating cash flow, but should positively impact operating income for the remainder of 2018 and into fiscal 2019.

Cash used in investing activities for the first nine months of 2018 decreased compared to the first nine months of 2017 primarily due to earlier-than-normal vehicle additions to our fleet in the first nine months of last year as well as the Lincoln Aquatics acquisition that occurred in the second quarter of 2017.

Cash used in financing activities decreased for the first nine months of 2018 compared to the first nine months of 2017, which reflects a $102.7 million decline in share repurchases offset by a $66.6 million decrease in amounts provided by net borrowings.

### Future Sources and Uses of Cash

### 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 September 30, 2018, there was $417.4 million outstanding, a $4.8 million standby letter of credit outstanding and $327.8 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 September 30, 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 September 30, 2018 was approximately 3.2%, 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. As of September 30, 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 September 30, 2018, our average total leverage ratio equaled 1.68 (compared to 1.72 as of June 30, 2018) and the TTM average total debt amount used in this calculation was $577.8 million.
- *Minimum Fixed Charge Coverage Ratio*. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of September 30, 2018, our fixed charge ratio equaled 5.44 (compared to 5.40 as of June 30, 2018) and TTM Rental Expense was $56.7 million.

On January 1, 2019, we will adopt ASU 2016-02, *Leases,* which will require 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.

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 accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak funding capacity of up to $255.0 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 $80.0 million to $220.0 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 September 30, 2018, there was $155.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 3.0%, excluding commitment fees.

### Compliance and Future Availability

As of September 30, 2018, we believe 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 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 2017 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 October 25, 2018, $186.1 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 2017 Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.

### Recent Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 1 of this Form 10-Q for detail.

## Market risk

As filed, 714 characters.

### Interest Rate Risk

There have been no material changes during the nine months ended September 30, 2018 from what we reported in our 2017 Annual Report on Form 10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2017 Annual Report on Form 10-K.

### Currency Risk

There have been no material changes during the nine months ended September 30, 2018 from what we reported in our 2017 Annual Report on Form 10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our 2017 Annual Report on Form 10-K.

## Controls and procedures

As filed, 1,543 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 September 30, 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 September 30, 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.

## Risk factors

As filed, 141 characters.

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our 2017 Annual Report on Form 10-K.

Filed Oct 30, 2018.
Source: SEC EDGAR, the filing index for accession 0000945841-18-000114. Last ingested by Listed: Nov 2, 2026, 16:44 ET. No prices; not investment advice.