Year Ended December 31,
2017 2016 2015
United States $ 2,545,270
$ 2,354,726
$ 2,168,802
International 242,918
216,077
194,337
$ 2,788,188
$ 2,570,803
$ 2,363,139

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


	December 31,
	2020		2019		2018
United States	$	100,857	$	105,170	$	100,905
International	7,384		7,076		6,059
	$	108,241	$	112,246	$	106,964

December 31,
2017 2016 2015
United States $ 95,659
$ 79,064
$ 65,885
International 5,280
4,226
3,969
$ 100,939
$ 83,290
$ 69,854

Website Access and Available Information

Our website is www.poolcorp.com. The information on our website is not a part of this document.

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

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

Item 1A. Risk Factors

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

~~Our disclosure and analysis in this~~This report contains forward-looking information that involves risks and uncertainties. Our ~~forward‑looking~~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, share repurchases and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “will likely result,” “outlook,” “project,” “may,” “can,” “plan,” “target,” “potential,” “should” and other words and expressions of similar meaning.

No assurance can be given that the expected results in any forward-looking ~~statements~~statement will be achieved, and actual results ~~could be affected by~~may differ materially due to one or more ~~factors, which could cause them to differ materially.~~factors. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Risk Factors

Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any ~~forward‑looking statements include~~forward-looking statement are described below. Investors should carefully consider the ~~following:~~risks described below in addition to the other information set forth in this Annual Report on Form 10-K. The risks discussed below are not the only risks we face. Other risks or uncertainties not presently known to us, or that we currently believe are immaterial, may materially affect our business if they occur. Moreover, new risks emerge from time to time. Further, our business may also be affected by additional factors that generally apply to all companies operating in the U.S. and globally, which have not been included.

Risks Relating to Macroeconomic Conditions

The demand for our swimming pool, irrigation, landscape and related outdoor ~~lifestyle~~living products may be adversely affected by unfavorable economic conditions.

Consumer discretionary spending affects our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates and wage levels, interest rate fluctuations, inflation, disposable income levels, consumer confidence and access to credit. In economic downturns, the demand for swimming pool, irrigation, landscape and related outdoor ~~lifestyle~~living products may decline, often corresponding with declines in discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction. Maintenance and repair products and certain replacement ~~equipment, which~~and refurbishment products are required to maintain existing swimming pools, and each currently ~~account~~accounts for approximately ~~85%~~60% and 25% of net sales ~~and gross profits~~ related to our swimming pool business; however, the growth ofin this portion of our business depends on the expansion of the installed pool base and could also be adversely affected by decreases in construction activities, similar to the trends between late 2006 and early 2010. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance. Such downturns expose us to certain additional risks, including but not limited to the risk of customer closures or bankruptcies, which could shrink our potential customer base and inhibit our ability to collect on those customers’ receivables.

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

The COVID-19 pandemic and associated responses could adversely impact our business and results of operations.

The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world. In response, governmental authorities have imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in temporary store closures, limitation of store hours, limitations on the number of people in stores or in warehouses, enhanced requirements on sanitation, social distancing practices and travel restrictions, among other effects. In almost all of our markets, we are designated as an essential business under the relevant state and local regulations and have been allowed to remain open; however, if this changes, it could adversely impact our financial condition and operating results. Our sales in March and April 2020 were adversely impacted by the COVID-19 pandemic, and in the first quarter of 2020, we recorded impairment charges of $6.9 million related to the pandemic. For additional information, see Note 3 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. During 2020, there were declines followed by resurgences of COVID-19 cases throughout the U.S., and cases generally rose during the fourth quarter. In December 2020, the first COVID-19 vaccines were approved for use in the U.S., and the early stages of distribution of the vaccine are in process as of the date of this report. Recently, variants of the virus that causes COVID-19 have been identified in the U.S. and elsewhere, and information about them is rapidly emerging, including how easily they might spread, whether they could cause more severe illness, and whether currently authorized vaccines will protect against them. Accordingly, COVID-19 may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. Impacts from the COVID-19 pandemic, coupled with heightened demand, could also adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied. The ultimate impact will depend on the severity and duration of the COVID-19 pandemic and any future resurgences and actions taken by governmental authorities and other third parties in response, including the distribution and acceptance of vaccines, each of which is uncertain, rapidly changing and difficult to predict. In addition, our recent growth rates driven by home-centric trends influenced by the COVID-19 pandemic may not be sustainable and may not be indicative of future growth rates.

Risks Relating to Our Business and Industry

We are susceptible to adverse weather conditions.

~~Weather~~Given the nature of our business, weather is one of the principal external factors affecting our ~~business. For example, unseasonably~~business and the effect of seasonality has a significant impact on our results. In 2020, we generated approximately 61% of our net sales and 76% of our operating income in the second and third quarters of the year. These quarters represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season. Also, unseasonably cool weather or extraordinary rainfall during the peak season can ~~decrease~~have an adverse impact on demand due to decreased swimming pool use, installation and maintenance, as well as decreased irrigation ~~installations and landscape maintenance. These weather conditions adversely affect sales of our products.~~installations. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions. Such restrictions ~~which~~ could result in decreased pool and irrigation system installations ~~and~~which could negatively impact our sales.

Certain extreme weather events, such as hurricanes, tropical storms and wildfires may impact our ability to deliver our services or cause damage to our facilities. As a consequence of these or other catastrophic or uncharacteristic events, we may experience interruption to our operations, increased costs or losses of property, equipment or inventory, which would adversely affect our revenue and profitability.

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

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

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

Our largest suppliers are Pentair ~~Water Pool and Spa, Inc.,~~plc, Hayward Pool Products, Inc. and Zodiac Pool Systems, Inc., which accounted for approximately 20%, 10% and 8%9%, respectively, of the costs of products we sold in ~~2017.~~2020. A decision by our largest suppliers, acting individually or in concert, to sell their products directly to retailers or other end users of their products, bypassing distribution companies like ours, would have an adverse effect on our business. Additionally, if our suppliers experience difficulties or disruptions in their operations (including due to the ~~loss of~~COVID-19 pandemic) or if we lose a single significant supplier due to financial failure or a decision to sell exclusively to retailers or end-use consumers, we may experience increased supply costs or may experience delays in establishing replacement supply sources that meet our quality and control standards and may lose revenue.

We depend on a global network of suppliers to source our products, including our own branded products and products we have exclusive distribution rights to. Product quality, warranty claims or safety concerns could ~~also adversely affect~~negatively impact our sales and expose us to litigation.

We rely on manufacturers and other suppliers to provide us with the products we distribute. As we increase the number of Pool Corporation and Pool Systems Pty. Ltd. branded products we distribute, our exposure to potential liability claims may increase. Product and service quality issues could negatively impact customer confidence in our brands and our business. If our product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks, as well as governmental enforcement actions. Actual, potential or perceived product safety concerns, including health-related concerns, could damage our reputation and expose us to litigation, as well as government enforcement actions, and result in costly product recalls and other liabilities.

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

Within our industry, we directly compete against various regional and local distributors as they compete against our customers for the business of pool owners and other end-use customers. We indirectly compete against mass market retailers and large pool or irrigation supply retailers as they purchase the great majority of their needs directly from manufacturers, and to a lesser extent with internet retailers, as they purchase the majority of their needs from distributors. Outside of our industry, we compete indirectly with alternative suppliers of big ticket consumer discretionary products, such as boat and motor home distributors, and with other companies who rely on discretionary homeowner expenditures, such as home remodelers. New competitors may emerge as there are low barriers to entry in our ~~industry.~~industry, which has led to highly competitive markets consisting of various-sized entities, ranging from small or local operators to large regional businesses. Given the density and demand for pool products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly California, Texas, Florida and Arizona. These states encompass our four largest markets and represented approximately ~~52%~~54% of our net sales in ~~2017.~~2020.

More aggressive competition by store- and internet-based mass merchants and large pool or irrigation supply retailers could adversely affect our sales.

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

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

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

Given the seasonal nature of our business, we may hire additional employees during the summer months, including seasonal and part-time employees, who generally are not employed during the off-season. If we are unable to attract and hire additional personnel during the peak season, our operating results could be negatively impacted.

Past growth may not be indicative of future growth.

Historically, we have experienced substantial sales growth through organic market share gains, new sales center openings and acquisitions that have increased our size, scope and geographic distribution. ~~Since the beginning~~Our various business strategies and initiatives, including our growth initiatives, are subject to business, economic and competitive uncertainties and contingencies, many of ~~2015, we have opened 11 new sales centers and we have completed 9 acquisitions consisting of 24 sales centers (net of sales center consolidations within one year of acquisition).~~which are beyond our control. While we contemplate continued growth through internal expansion and acquisitions, no assurance can be made as to our ability to:

•penetrate new markets;

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

•obtain financing;

•identify appropriate acquisition ~~candidates;~~candidates and successfully integrate acquired businesses;

•maintain favorable supplier arrangements and relationships; and

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

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

Our results in 2020 were positively impacted by home-centric trends resulting from the COVID-19 pandemic. These trends may not continue, or may reverse, which could adversely impact our results of operations. In addition, in recent years our customers have had difficulty employing a sufficient number of qualified individuals to keep up with the demand for pool maintenance, refurbishment and installation. If this trend continues or accelerates, our results of operations could be negatively impacted.

We are subject to inventory management risks. Insufficient inventory may result in lost sales opportunities or delayed revenue, while excess inventory may negatively impact our gross margin.

We balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence due to changing customer or consumer requirements and fluctuating commodity prices. In order to successfully manage our inventories, we must estimate demand from our customers and purchase products that substantially correspond to consumer demand. If we overestimate demand and purchase too much of a particular product, we face a risk that the price of that product will fall, leaving us with inventory that we cannot sell at normal profit margins. In addition, we may have to write down such inventory if we are unable to sell it for its recorded value. If we underestimate demand and purchase insufficient quantities of products, inventory shortages could result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ products that are readily available. If we maintain insufficient inventory levels and prices rise for these products, we could be forced to purchase products at higher prices and forego profitability in order to meet customer demand. Our business, ~~is highly seasonal.~~financial condition and results of operations could be negatively impacted if either or both of these situations occur frequently or in large volumes.

~~In 2017,~~The cost of chemical products could increase our cost of sales and adversely affect our results of operations and financial condition.

Based on our 2020 product classifications, sales for our pool and hot tub chemicals product category represented approximately 10% of total net sales for 2020 and 12% of total net sales in 2019 and 2018. Our principal chemical products are granular chlorine compounds and liquid chlorine, which are commodity materials. The prices of these chemical products are a function of, among other things, manufacturing capacity and demand. We have generally passed through chlorine price increases to our customers. The price of granular chlorine compounds and liquid chlorine may increase in the future, and we ~~generated approximately~~ ~~62%~~may not be able to pass on any such increase to our customers. We purchase chlorine products primarily from the largest domestic suppliers. The alternate sources of supply we currently view as reliable may ultimately be unable to supply us with all of our ~~net~~principal chemical products, including chlorine products. Additionally, significant price fluctuations or shortages in our principal chemical products may increase our cost of sales, and ~~83%~~our results of ~~our operating income in the second~~operations and ~~third quarters of the year. These quarters represent the peak months of both swimming pool use, installation, remodeling~~financial condition could be adversely affected.

Risks Relating to Legal, Regulatory and ~~repair, and irrigation installations and maintenance. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.~~Compliance Matters

The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety and other governmental regulations. Our costs of doing business could increase as a result of changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations.

We are subject to regulation under federal, state, local and international employment, environmental, health, transportation and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. ~~For example, we~~These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events. Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements, the classification of exempt and non-exempt employees or other wage, labor or workplace regulations could increase our costs of doing business and adversely impact our results of operations.

We sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws primarily relate to labeling, annual registration and licensing.

Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly. Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed substantially and rapidly over the last 25 years and we anticipate that there will be continuing changes.

The clear trend in environmental, health, transportation and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. ~~We will attempt~~Our attempts to anticipate future regulatory requirements that might be imposed and ~~we will plan accordingly~~our plans to remain in compliance with changing regulations and to minimize the costs of such ~~compliance.~~compliance may not be as effective as we anticipate.

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

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

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

Our ability to successfully conduct operations in, and source products and materials from, international markets is affected by many of the same risks we face in our U.S. operations, as well as unique costs and difficulties of managing international operations. Our international operations, which accounted for 9% of our total net sales in ~~2017,~~2020, expose us to certain additional risks, including:

•difficulty in staffing international subsidiary operations;

•different political economic and regulatory conditions;

•local laws and customs;

•currency fluctuations;

•adverse tax consequences; and

•dependence on other economies.

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

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

Taxation and tax policy changes, tax rate changes, new tax laws, revised tax law interpretations and changes in accounting standards and guidance related to tax matters may cause fluctuations in or adversely affect our effective tax rate. ~~The Tax Cuts and Jobs Act (TJCA or the Act), enacted in December 2017, significantly changes U.S.~~Our effective tax ~~law. Our 2017 financial results include estimates regarding the effects of the Act, which are based on our current interpretation of this legislation and on reasonable estimates and~~rate may ~~change as a result of new guidance issued~~also be impacted by ~~regulators or~~ changes in the geographic mix of our ~~estimates. Additionally, in~~earnings.

In the first quarter of 2017, we adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis. Our projections of financial statement impacts related to ASU 2016-09 are subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. Excess tax benefits or deficiencies recognized under ASU 2016-09 vary from quarter to quarter and past results may not be indicative of future results. ~~Our effective tax rate may also be impacted by changes in the geographic mix of our earnings.~~

Risks Relating to Technology, Cybersecurity and Data Privacy

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

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

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

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

We are making, and expect to continue to make, investments in technology to maintain and update our computer systems. Implementing significant system changes increases the risk of computer system disruption. The potential problems and interruptions associated with implementing technology initiatives, as well as providing training and support for those initiatives, could disrupt or reduce our operational efficiency. Advances in computer and software capabilities, encryption technology and other discoveries increase the complexity of our technological environment, including how each interact with our various software ~~platforms, and may~~platforms. Such advances could delay or hinder our ability to process transactions ~~and~~or could compromise the integrity of our data, ~~which could result~~resulting in a material adverse impact on our financial condition and results of operations. We also may experience occasional system interruptions and delays that make our information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties. A lack of sophistication or reliability of our information systems could adversely impact our operations and customer service and could require major repairs or replacements, resulting in significant costs and foregone revenue.

WeThe European Union and other international regulators, as well as state governments, have ~~designed~~recently enacted or enhanced data privacy regulations, such as the California Consumer Privacy Act, and other governments are considering establishing similar or stronger protections. These regulations impose certain obligations for handling specified personal information in our systems and for apprising individuals of the information we have collected about them. Despite our best efforts to comply, any noncompliance could result in incurring potential substantial penalties and reputational damage.

Our numerous procedures and protocols designed to mitigate cybersecurity ~~risks. We continually invest~~risks (including processes to timely notify appropriate personnel for assessment and resolution and company-wide training programs), our investments in information technology security and ~~update~~our updates to our business continuity ~~plan. In the event a~~plan may not prevent or effectively mitigate adverse consequences from cybersecurity threat occurs, we have processes in place to timely notify the appropriate personnel for assessment and resolution. We also continue to expand our company-wide training programs as part of our efforts to prevent such attacks. However, therisks. The failure to maintain security over and prevent unauthorized access to our data, our customers’ personal information, including credit card information, or data belonging to our suppliers, could put us at a competitive disadvantage. Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.

~~A terrorist attack~~

General Risk Factors

We may be adversely affected by changes in LIBOR reporting practices or the ~~threat~~method in which LIBOR is determined.

Borrowings under our unsecured syndicated senior credit facility, term facility, accounts receivable securitization facility and our derivatives instruments are indexed to the London Inter-bank Offering Rate (“LIBOR”). In July 2017, the Financial Conduct Authority (the regulatory authority over LIBOR) stated they will plan for a phase out of regulatory oversight of LIBOR after 2021 to allow for an orderly transition to an alternative reference rate. On November 30, 2020, ICE Benchmark Administration, the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. The full impact of the transition away from LIBOR, including the discontinuance of LIBOR publication and the adoption of a ~~terrorist attack~~replacement rate for LIBOR, remains unclear. These changes may have an adverse impact on our financing costs and any floating rate indebtedness we may incur.

Disruptions from natural or man-made disasters or extreme weather, public safety issues, geopolitical events and security issues, labor or trade disputes and similar events could have a material adverse effect on our business.

Natural or man-made disasters or extreme weather (including as a result of climate change), public safety issues, geopolitical events and security issues (including terrorist attacks, armed hostilities or insurrections), labor or trade disputes and similar events can lead to uncertainty and have a negative impact on demand for our products, in addition to causing disruptions to our supply chain. Discretionary spending ~~on leisure product offerings such as ours~~ is generally adversely affected during times of economic, social or political uncertainty. The potential for ~~terrorist attacks, the national~~natural or man-made disasters or extreme weather, geopolitical events and ~~international responses to terrorist attacks,~~security issues, labor or trade disputes and ~~other acts of war or hostility~~similar events could create these types of uncertainties and negatively impact our business ~~for the short or long term~~ in ways that cannot presently be predicted.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease the Pool Corporation corporate offices, which consist of approximately ~~59,100~~60,000 square feet of office space in Covington, Louisiana, from an entity in which we have a 50% ownership interest. We own ~~two~~five sales center facilities in Florida, two in Texas, one in Alabama, one in California, one in Georgia and one in ~~Georgia.~~Tennessee. We lease all of our other properties and the majority of our leases have three to seven year terms. As of December 31, ~~2017,~~2020, we had 15twenty leases with remaining terms longer than seven years that expire between ~~2025~~2028 and ~~2032.~~2035.

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

Our sales centers range in size from approximately 2,000 square feet to ~~60,000~~70,000 square feet and generally consist of warehouse, counter, display and office space. Our centralized shipping locations (CSLs) range in size from approximately 103,000 square feet to 185,000 square feet.

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

The table below summarizes the changes in our sales centers during the year ended December 31, ~~2017:~~2020:


Network	12/31/19	New Locations	Closed/Consolidated Locations (1)	Acquired Locations	12/31/20
SCP	176	2	(1)	9	186
Superior	72	1	—	—	73
Horizon	67	—	(1)	10	76
NPT (2)	17	—	—	4	21
Total Domestic	332	3	(2)	23	356
SCP International	41	—	(1)	2	42
Total	373	3	(3)	25	398

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

(2)In addition to the stand-alone NPT sales centers, there are over 100 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.

Network 12/31/16
New
Locations

Consolidated
Locations ⁽²⁾

Acquired
Locations
12/31/17
SCP 162
1
—
4
167
Superior 65
—
—
2
67
Horizon 66
—
(1 ) —
65
NPT ⁽¹⁾
17
—
(1 ) —
16
Total Domestic 310
1
(2 ) 6
315
SCP International 34
—
(1 ) 3
36
Total 344
1
(3 ) 9
351


⁽¹⁾	In addition to the stand-alone NPT sales centers, there are over 80 SCP and Superior locations that have consumer showrooms and serve as stocking locations that feature NPT brand tile and composite finish products.


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

The table below identifies the number of sales centers in each state, territory or country by distribution network as of December 31, ~~2017:~~2020:


Location	SCP	Superior	Horizon	NPT	Total
United States
California	28	25	17	6	76
Florida	37	5	13	1	56
Texas	26	5	16	8	55
Arizona	7	8	9	2	26
Georgia	7	2	1	1	11
Nevada	2	3	3	1	9
New York	9	—	—	—	9
Tennessee	5	3	—	—	8
New Jersey	5	2	—	—	7
North Carolina	4	2	1	—	7
Pennsylvania	5	1	—	1	7
Virginia	3	1	3	—	7
Washington	1	—	6	—	7
Alabama	4	2	—	—	6
Indiana	2	3	—	—	5
Louisiana	5	—	—	—	5
Oregon	1	—	4	—	5
Illinois	3	1	—	—	4
Missouri	3	1	—	—	4
Ohio	2	2	—	—	4
Oklahoma	2	1	—	1	4
South Carolina	3	1	—	—	4
Arkansas	3	—	—	—	3
Colorado	—	2	1	—	3
Idaho	1	—	2	—	3
Connecticut	2	—	—	—	2
Kansas	2	—	—	—	2
Massachusetts	2	—	—	—	2
Michigan	2	—	—	—	2
Minnesota	1	1	—	—	2
Mississippi	2	—	—	—	2
Hawaii	1	—	—	—	1
Iowa	1	—	—	—	1
Kentucky	—	1	—	—	1
Maryland	1	—	—	—	1
Nebraska	1	—	—	—	1
New Mexico	1	—	—	—	1
Puerto Rico	1	—	—	—	1
Utah	1	—	—	—	1
Wisconsin	—	1	—	—	1
Total United States	186	73	76	21	356
International
Canada	16	—	—	—	16
France	7	—	—	—	7
Australia	6	—	—	—	6
Mexico	4	—	—	—	4
Portugal	2	—	—	—	2
Spain	2	—	—	—	2
Belgium	1	—	—	—	1
Croatia	1	—	—	—	1
Germany	1	—	—	—	1
Italy	1	—	—	—	1
United Kingdom	1	—	—	—	1
Total International	42	—	—	—	42
Total	228	73	76	21	398

Location SCP Superior Horizon NPT Total
United States
California 29
23
17
6
75
Texas 21
5
17
5
48
Florida 33
6
4
1
44
Arizona 6
6
10
2
24
Georgia 6
2
—
1
9
Nevada 2
3
3
—
8
Tennessee 5
3
—
—
8
Washington 1
—
6
—
7
Alabama 4
2
—
—
6
New York 6
—
—
—
6
Louisiana 5
—
—
—
5
New Jersey 3
2
—
—
5
Pennsylvania 3
1
—
1
5
Colorado 1
1
2
—
4
Illinois 3
1
—
—
4
Indiana 2
2
—
—
4
Missouri 3
1
—
—
4
North Carolina 3
1
—
—
4
Ohio 2
2
—
—
4
Oregon 1
—
3
—
4
South Carolina 3
1
—
—
4
Idaho 1
—
2
—
3
Oklahoma 2
1
—
—
3
Virginia 2
1
—
—
3
Arkansas 2
—
—
—
2
Connecticut 2
—
—
—
2
Kansas 2
—
—
—
2
Maryland 1
—
1
—
2
Massachusetts 2
—
—
—
2
Michigan 2
—
—
—
2
Minnesota 1
1
—
—
2
Mississippi 2
—
—
—
2
Hawaii 1
—
—
—
1
Iowa 1
—
—
—
1
Kentucky —
1
—
—
1
Nebraska 1
—
—
—
1
New Mexico 1
—
—
—
1
Puerto Rico 1
—
—
—
1
Utah 1
—
—
—
1
Wisconsin —
1
—
—
1
Total United States 167
67
65
16
315
International
Canada 13
—
—
—
13
France 5
—
—
—
5
Australia 5
—
—
—
5
Mexico 3
—
—
—
3
Portugal 2
—
—
—
2
Spain 2
—
—
—
2
Belgium 1
—
—
—
1
Colombia 1
—
—
—
1
Croatia 1
—
—
—
1
Germany 1
—
—
—
1
Italy 1
—
—
—
1
United Kingdom 1
—
—
—
1
Total International 36
—
—
—
36
Total 203
67
65
16
351

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

PART II.

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

Our common stock is traded on the ~~NASDAQ~~Nasdaq Global Select Market under the trading symbol “POOL.” On February ~~21, 2018,~~19, 2021, there were approximately ~~64,696~~481 holders of record of our common stock. ~~The table below sets forth the high and low closing sales prices of our common stock as well as dividends declared per common share for each quarter during the last two fiscal years.~~

High

Low

Dividends
Declared
Fiscal 2017
First Quarter $ 120.95
$ 103.93
$ 0.31
Second Quarter 123.76
116.43
0.37
Third Quarter 121.07
97.30
0.37
Fourth Quarter 131.17
110.26
0.37

Fiscal 2016
First Quarter $ 87.96
$ 74.37
$ 0.26
Second Quarter 94.03
86.68
0.31
Third Quarter 102.51
93.02
0.31
Fourth Quarter 107.49
90.59
0.31

We initiated quarterly dividend payments to our shareholders in the second quarter of 2004 and we have continued payments in each subsequent quarter. Our Board ~~of Directors (our Board)~~ has increased the dividend amount ~~twelve~~fifteen times, including in the fourth quarter of 2004, annually in the second quarters of 2005 through 2008 and in the second quarters of 2011 through ~~2017. Future dividend payments will be~~2020. Our Board may declare future dividends at ~~the~~their discretion, ~~of our Board,~~ after considering various factors, including our earnings, capital requirements, financial position, contractual restrictions and other relevant business considerations. For a description of restrictions on dividends in our Credit Facility, Term Facility and Receivables Facility, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We cannot assure shareholders or potential investors that dividends will be declared or paid any time in the future if our Board determines that there is a better use of our funds.

Stock Performance Graph

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

The following graph compares the total ~~stockholder~~shareholder return on our common stock for the last five fiscal years with the total return on the S&P 500 Index, S&P MidCap 400 Index and the ~~NASDAQ~~Nasdaq Index for the same period, in each case assuming the investment of ~~$100~~$100 on December 31, ~~2012~~2015 and the reinvestment of all dividends. Our common stock was added to the S&P 500 Index in October 2020. We believe the S&P ~~MidCap 400~~500 Index includes companies with market ~~capitalizations~~capitalization comparable to ours. Additionally, we chose the S&P ~~MidCap 400~~500 Index for comparison, as opposed to an industry index, because we do not believe that we can reasonably identify a peer group or a published industry or line-of-business index that contains companies in a similar line of business. Consistent with our prior year presentation, we have also included the S&P MidCap 400 Index.


	Base Period		Indexed Returns Years Ending											Base Period		Indexed Returns Years Ending
Company / Index	12/31/12		12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		Company / Index	12/31/15		12/31/16		12/31/17		12/31/18		12/31/19		12/31/20
Pool Corporation	$	100.00	$	139.32	$	154.24	$	199.16	$	260.48	$	327.68	Pool Corporation	$	100.00	$	130.87	$	164.60	$	190.89	$	275.84	$	488.12
S&P 500 Index													S&P 500 Index	100.00		111.96		136.40		130.42		171.49		203.04
S&P MidCap 400 Index	100.00		133.50		146.54		143.35		173.08		201.20		S&P MidCap 400 Index	100.00		120.74		140.35		124.80		157.49		179.00
NASDAQ Index	100.00		140.12		160.78		171.97		187.22		242.71
Nasdaq Index													Nasdaq Index	100.00		108.87		141.13		137.12		187.44		271.64

Purchases of Equity Securities

The table below summarizes the repurchases of our common stock in the fourth quarter of ~~2017:~~2020:


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan (2)
October 1 – October 31, 2020	17	$	349.83	—	$	176,910,333
November 1 – November 30, 2020	—	$	—	—	$	176,910,333
December 1 – December 31, 2020	—	$	—	—	$	176,910,333
Total	17	$	349.83	—

(1)These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were 17 shares surrendered for this purpose in the fourth quarter of 2020.

(2)As of February 19, 2021, our total authorization remaining was $172.0 million.

Period
Total Number
of Shares Purchased ⁽¹⁾

Average
Price
Paid per
Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plan ⁽²⁾

Maximum Approximate
Dollar Value of Shares
That May Yet be Purchased
Under the Plan ⁽³⁾
October 1 – October 31, 2017 40,888
$ 108.20
40,888
$ 53,361,113
November 1 – November 30, 2017 —
$ —
—
$ 53,361,113
December 1 – December 31, 2017 —
$ —
—
$ 53,361,113
Total 40,888
$ 108.20
40,888

⁽¹⁾

These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were no shares surrendered for this purpose in the fourth quarter of 2017.


⁽²⁾	In May 2017, our Board authorized an additional $150.0 million under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.


⁽³⁾	~~As of February 21, 2018, our total authorization remaining was $53.4 million.~~

Item 6. Selected Financial Data

The table below sets forth selected financial data from the Consolidated Financial Statements. You should read this information in conjunction with the discussions in Item 7 of this Form 10-K and with the Consolidated Financial Statements and accompanying Notes in Item 8 of this Form 10-K.Not applicable.

(in thousands, except per share data) Year Ended December 31,

2017 ⁽¹⁾
2016 2015 2014 2013
Statement of Income Data
Net sales $ 2,788,188
$ 2,570,803
$ 2,363,139
$ 2,246,562
$ 2,079,700
Operating income 284,371
255,859
216,222
188,870
165,486
Net income 191,339
148,603
128,224
111,030
97,330
Net income attributable to Pool Corporation 191,633
148,955
128,275
110,692
97,330
Earnings per share:

Basic $ 4.69
$ 3.56
$ 2.98
$ 2.50
$ 2.10
Diluted $ 4.51
$ 3.47
$ 2.90
$ 2.44
$ 2.05
Cash dividends declared per common share $ 1.42
$ 1.19
$ 1.00
$ 0.85
$ 0.73

Balance Sheet Data

Working capital $ 460,682
$ 399,337
$ 356,899
$ 345,305
$ 313,843
Total assets ⁽³⁾
1,101,062
994,095
934,361
890,971
821,647
Total debt ⁽³⁾
519,650
438,042
328,045
318,872
244,304
Stockholders’ equity 223,146
205,210
255,743
244,352
286,182

Other

Base business sales growth ⁽²⁾
7 % 7 % 5 % 7 % 6 %
Number of sales centers 351
344
336
328 321

⁽¹⁾

~~Our Net income and Net income attributable to Pool Corporation in 2017 was impacted by both U.S. tax reform and Accounting Standards Update (ASU) 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~. In the first quarter of 2017, we adopted ASU 2016-09, which requires us to recognize all excess tax benefits or deficiencies related to share-based compensation as a component of our income tax provision on our Consolidated Statements of Income, rather than a component of stockholders’ equity on our Consolidated Balance Sheets. This adoption benefited our Net income and Net income attributable to Pool Corporation $12.6 million in 2017. As a result of U.S. tax reform, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects re‑measurement of our net deferred tax liability. No such tax benefits were applicable in prior years.


⁽²⁾	For a discussion regarding our calculation of base business sales, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS,” of this Form 10-K.

⁽³⁾

~~Upon adoption of Accounting Standards Update 2015-03,~~ ~~Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs~~, we now include financing costs, net of accumulated amortization as a component of long-term debt. For comparability across all periods presented on our Consolidated Balance Sheets, we reclassified certain amounts from Other assets, net in prior periods to Long-term debt, net to conform to our 2017 and 2016 presentation.

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

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

~~2017~~2020 FINANCIAL OVERVIEW

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. Most of our North American operations are and have been continuously open for business as we are designated as an essential business in almost all of our markets. Our operations in Europe closed for a short period during the first half of 2020 in France, Spain and Italy, in order to comply with local authorities’ orders. Our products are used to maintain and protect outdoor commercial, residential and municipal environments through chemically-balanced, virus and bacteria-free swimming pool water. We also supply products used in the prevention of runoff, flood, fire and other natural disasters. These products are essential to the health and safety of the general public. As a result, our supply chain generally remains intact, with our customers continuing to meet end-user needs.

The health, safety and security of our employees has been, and remains, one of our highest priorities. We have adapted our operations and implemented a number of measures to facilitate a safer sales center environment for both our customers and employees, which includes following best practices and guidelines from the Centers for Disease Control and Prevention (CDC). We implemented enhanced hygiene and sanitation practices at our sales centers and at our corporate offices. In limited instances, we have had to close facilities in whole or in part as a result of government regulations, as well as positive or presumed positive results from COVID-19 testing. The direct impact of any closures did not have a material impact on our operations.

Beginning in the middle of March 2020, when stay-at-home orders related to the COVID-19 pandemic were initially issued, we experienced sales declines across most markets. However, as stay-at-home restrictions eased in late April through early May, our business not only rebounded, but accelerated. We experienced unprecedented demand as families spent more time at home and sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces, resulting in broad sales gains across nearly all of our product categories and geographies. While the short-term impact of this trend has had a positive impact on our business, it is unclear what the long-term impact will be. In addition, governmental restrictions have had a material impact on some of our customers, limiting their ability to operate in certain geographies from mid-March into mid-May. While these restrictions were lifted, new stay-at-home orders or other government mandates could have a material impact on our results.

Our balance sheet is strong with low leverage and sufficient access to additional capital. Given the seasonality of our business, our warehouses were stocked with inventory in preparation for the upcoming peak season prior to the implementation of most stay-at-home orders. As a result, the limited vendor supply interruptions experienced in 2020 have had a minimal impact on our business. Supply disruptions have largely been limited to categories with the greatest demand, including heat-related equipment and above-ground swimming pools and have not been material to our business. We continue to work closely with our suppliers to maintain the flow of essential products to provide customers with the materials they need to serve their communities.

Given the uncertainties caused by the COVID-19 pandemic, we began taking steps in April to reduce both capital expenditures and operating costs. As a result, capital expenditures in 2020 were $21.7 million, which is approximately 65% of 2019 capital expenditures. We specifically reduced operating costs for labor, fuel, utilities, advertising, meetings, travel and entertainment. As our business outlook and market trends improved since the implementation of these cost-saving measures, we continue to assess our discretionary spending.

The impact of the ongoing pandemic on our business and financial results will continue to vary by location and depend on numerous evolving factors that we are not able to accurately predict. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken (or may be taken in the future) in response to the pandemic and changes in customer and supplier behavior in response to the pandemic.

Financial Results

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

Net sales increased 8%23% to $3.9 billion for the year ended December 31, ~~2017~~2020 compared to ~~2016. Pool remodeling, equipment replacement and the expansion of building materials and commercial products were the major contributors to~~$3.2 billion in 2019, while base business sales ~~growth of 7%~~increased 22%. We realized broad sales gains across nearly all product categories. Our sales benefited from greater swimming pool usage and high demand for residential pool products, which was driven by home-centric trends influenced by the COVID-19 pandemic and aided by warmer weather conditions during the year.

Gross profit ~~increased 9%~~reached $1.1 billion for the year ended December 31, ~~2017 compared to 2016.~~2020, a 22% increase over gross profit of $924.9 million in 2019. Gross ~~profit as a percentage of net sales (gross margin) grew 10~~margin declined 20 basis points to ~~28.9% for 2017~~28.7% in 2020 compared to ~~28.8%~~28.9% in ~~2016.~~2019. The decline in gross margin is primarily due to sales of lower margin, big-ticket items, such as pool equipment and in-ground and above-ground pools, which comprised a larger portion of our product mix in 2020 compared to 2019.

Selling and administrative expenses (operating expenses) increased ~~7% compared~~14%, or $83.2 million, to ~~2016,~~$666.9 million in 2020, up from $583.7 million in 2019, with base business operating expenses up 5%12% over ~~last year.~~2019. The increase in ~~base business~~ operating expenses ~~was~~ primarily ~~due~~reflects a $43.9 million increase in performance-based compensation from $24.3 million in 2019 to ~~higher~~$68.2 million in 2020 and expenses of $16.9 million from recently acquired businesses. Excluding $6.9 million of impairment charges we recorded in the first quarter of 2020 and performance-based compensation in both periods, adjusted operating expenses increased 6%, reflecting growth-driven labor and freight expenses ~~as well as~~and greater ~~employee benefit~~facility-related costs ~~equity-based compensation, and technology~~partially offset by lower discretionary spending. ~~As a percentage of net sales, operating expenses declined 20 basis points.~~

Operating income for the year increased ~~11%~~36% to ~~$284.4~~$464.0 million, up from ~~$255.9~~$341.2 million in ~~2016.~~2019. Operating ~~income as a percentage of net sales (operating margin)~~margin increased 110 basis points to ~~10.2%~~11.8% in ~~2017~~2020 compared to ~~10.0%~~10.7% in ~~2016.~~2019.

~~Our provision for income taxes for 2017 was impacted by both U.S. tax reform and~~We recorded a $28.6 million, or $0.70 per diluted share, benefit from Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting,~~. As a result of the recently enacted tax legislation, we recorded a provisional tax benefit of $12.0 million~~ in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In addition to the impact from tax reform, we recorded a $12.6 million benefit in our provision for income taxes for the year ended December 31, ~~2017 related~~2020 compared to ASU 2016-09, which positively impacted our net income and earnings per share, but was partially offset by an increase of approximately 550,000 diluted weighted average shares outstanding. The combination of both tax reform and ASU 2016-09 resulted in a ~~total net~~ benefit of ~~$0.52 to our~~$23.5 million, or $0.57 per diluted ~~earnings per~~ share, realized in ~~2017.~~2019.

Net income ~~attributable~~increased 40% to ~~Pool Corporation increased 29%~~$366.7 million in 2020 compared to ~~2016, while earnings~~$261.6 million in 2019. Earnings per share ~~was up 30%~~increased 40% to ~~$4.51 per diluted share. Excluding the $0.28~~a record $8.97 per diluted share ~~impact of tax reform and the $0.24~~compared to $6.40 per diluted share in 2019. Excluding the impact of non-cash impairments, net of tax, in 2020 and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased ~~15% over last year.~~44% to $8.42 in 2020 compared to $5.83 in 2019. See the reconciliation of GAAP to non-GAAP measures included in RESULTS OF OPERATIONS below.

Financial Position and Liquidity

Cash provided by operations was ~~$175.3~~$397.6 million in ~~2017. Combined with $82.1 million in net proceeds from borrowings, cash from operating activities~~2020, which helped fund the following initiatives:

~~share repurchases in the open market~~•payments of ~~$143.2~~$124.6 million for acquisitions;

•net debt repayments of $95.8 million;

•quarterly cash dividend payments to shareholders, totaling ~~$58.0~~$91.9 million for the year;

•share repurchases, totaling $76.2 million for the year;

•net capital expenditures of $21.7 million; and

•growth in net working capital of ~~$49.9 million;~~$21.1 million.

~~net capital expenditures of $39.4 million; and~~

~~payments of $12.8 million for acquisitions.~~

Total net receivables, including pledged receivables, increased ~~18%~~28% compared to December 31, ~~2016, reflective of fourth quarter~~2019, reflecting December sales growth and ~~acquisitions.~~partially offset by improved collections. Our allowance for doubtful accounts was ~~$3.9~~$4.8 million at December 31, ~~2017~~2020 and ~~$4.1~~$5.5 million at December 31, ~~2016.~~2019. Our days sales outstanding ratio, as calculated on a trailing four quarters basis, was 26.5 days at December 31, 2020 and 29.0 days at December 31, 2019.

Inventory levels grew ~~10%~~11% to ~~$536.5~~$781.0 million at December 31, ~~2017~~2020 compared to ~~$486.1~~$702.3 million at December 31, ~~2016.~~2019, reflecting business growth and inventory from acquired businesses of $42.2 million. Our reserve for inventory obsolescence was ~~$6.3~~$11.4 million at December 31, ~~2017~~2020 compared to ~~$6.5~~$9.0 million at December 31, ~~2016.~~2019. Our inventory turns, as calculated on a trailing four quarters basis, were ~~3.5~~3.8 times at December 31, ~~2017~~2020 and ~~3.6~~3.2 times at December 31, ~~2016.~~2019.

Accrued expenses and other current liabilities increased $82.9 million to $143.7 million in 2020, primarily reflecting increases in accrued performance-based compensation, unrealized losses on interest rate swaps and deferred payroll tax payments.

Total debt outstanding of ~~$519.7~~$416.0 million at December 31, ~~2017 increased $81.6~~2020 decreased $95.4 million, or 19%, compared to December 31, ~~2016 primarily~~2019, as we have utilized our operating cash flows to ~~fund share repurchases and working capital growth.~~decrease debt balances.

Current Trends and Outlook

~~Over~~Due to the ~~last five years, we estimate the pool industry grew from 2%~~COVID-19 pandemic in 2020, families spent more time at home and sought out opportunities to ~~4% per year due to growth~~create or expand existing home-based outdoor living and entertainment spaces, which resulted in ~~the installed base of pools, which helped drive pool maintenance growth, improvement~~an increase in ~~remodeling and replacement activity and annual growth in the~~new pool construction ~~market. Improvements in general external market factors in the United States including consumer confidence, employment, housing, consumer financing~~ and ~~economic expansion, largely support our base business growth.~~greater expenditures for maintenance and remodeling products. We ~~feel these positive external trends have promoted~~believe that increased consumer spending on ~~higher value products~~homes, including outdoor living spaces, will continue in 2021 and may have longer term benefits as work-from-home trends persist or increase.

The market environment from June 2009, when the Great Recession ended, until 2020, when the COVID-19 pandemic-induced recession began, was characterized by steady economic expansion, the cautious recovery of consumer spending, modest housing recovery and low inflation.However, in terms of homeowners investing in their existing homes, discretionary expenditures, including backyard renovations, have flourished over this time period with steady increases in home values and lack of affordable new homes prompting homeowners to stay in their homes longer and upgrade their home environments, including their backyards.We expect that ~~enhance~~new pool and irrigation construction levels will continue to grow incrementally, constrained by availability of construction labor, but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate continued growth over the next several years.

Although some constraints exist around residential construction activities, we believe that we are well positioned to take advantage of both the market expansion and the inherent long term growth opportunities in our industry. Additionally, recent regulation passed by the U.S. Department of Energy mandates all new and replacement motors and pumps for swimming pools must meet certain compliance regulations by July 2021. This mandate, coupled with additional product developments and ~~outdoor living spaces. Our consistent base business sales~~technological advancements, offers further growth ~~reflects industry growth plus market share gains~~opportunities over the next few years.

In 2020, we benefited from ~~existing customers expanding their businesses and our success in newer market initiatives such~~strong pool construction trends as ~~hardscapes and commercial pools.~~

robust demand fueled by the COVID-19 pandemic led to increased home investment trends. While we estimate that new pool construction increased from approximately 80,000 units in 2019 to approximately ~~75,000~~100,000 new units in ~~2017 from the historically low levels experienced during the economic downturn,~~2020, construction levels are still down approximately ~~65%~~55% compared to peak historical levels and down approximately ~~50% to 55%~~40% from what we consider normal levels. Favorable weather plays a role in industry growth by accelerating growth in any given year, ~~while~~expanding the number of available construction days, extending the pool season and pool usage and positively impacting demand for discretionary products. Conversely, unfavorable weather impedes growth. In 2017 specifically, our industry experienced modestly favorable weather overall, despite the severe storms that impacted our industry in Texas and Florida in September and October. Due to the repairs required following major storms, sales mostly recovered by the end of the year. In 2016, an earlier start to the pool season due to warmer than usual temperatures and overall favorable weather throughout the rest of the year benefited the industry as a whole. In 2015, excessive precipitation impacted our industry in the second quarter; however a mild fall and delayed winter alleviated any contraction in industry growth rates. In establishing our outlook each year, we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance.

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

We established our initial outlook for ~~2018~~2021 based on reasonable expectations of organic market share growth, ongoing leverage of ~~infrastructure~~existing investments in our business and continuous process improvements. For ~~2018,~~2021, we expect ~~the macroeconomic environment~~strong growth in the ~~United States will be quite similar~~first half of the year, particularly the first quarter of 2021, due to ~~2017.~~ continued elevated demand influenced by the ongoing COVID-19 pandemic. In the second half of the year, we expect to face tougher year-over-year comparisons and inherent industry capacity constraints, although we remain encouraged by positive industry outlooks.

Impacts from the COVID-19 pandemic, coupled with heightened demand, could also adversely impact our supply chain, making it difficult to source and receive products needed to keep our customers adequately supplied. We anticipate that we may face product shortages or elevated prices specifically related to Trichlor, a popular sanitizer for pools and hot tubs, as the industry faces constraints resulting from the loss of a major supplier due to a fire in the summer of 2020. Although supply constraints did not have a material impact on our business in 2020, it is difficult to predict the extent to which this could impact our business in 2021.

We expect to continue to gain market share through our comprehensive service and product offerings, which we continually diversify through internal sourcing initiatives and expansion into new markets. We also plan to broaden our geographic presence by opening 48 to 610 new sales centers in ~~2018~~2021 and by making selective acquisitions when appropriate opportunities arise.

The following ~~section~~ summarizes our outlook for ~~2018:~~2021:

•We expect sales growth of 6%8% to 7%12%, impacted by the following factors and assumptions:


◦	~~assumed normal weather patterns for 2018;~~


◦	~~anticipated continued growth from replacement, remodeling and construction activity and market expansion through newer product offerings like hardscapes and commercial pools;~~


◦	~~estimated 1% growth from acquisitions completed throughout 2017;~~


◦	~~inflationary product cost increases of approximately 1% to 2%; and~~


◦	~~one additional selling day for the full year for 2018 compared to 2017 due to an extra selling day in the fourth quarter (neutral selling days for all other quarters).~~

◦normal weather patterns for 2021;

◦continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic;

◦a benefit from construction backlogs depending on our customers’ building capacity, including the availability of labor, and weather;

◦estimated 4% to 5% growth from acquisitions completed throughout 2020;

◦market share gains;

◦inflationary product cost increases of approximately 2% to 3% (compared to our historical average of 1% to 2%); and

◦estimated 2% growth in the installed base of pools.

•We ~~project~~expect gross margin to decline 20 to 40 basis points for the full year of 2021 compared to the full year of 2020 with gains or relatively neutral gross margin trends ~~for~~in the ~~full year, as we believe our sales growth will continue to be weighted toward sales~~first half of ~~lower margin discretionary products. Adverse margin impacts should be offset by benefits from our efforts~~2021 and declines in ~~supply chain management and internal pricing initiatives.~~the latter half of 2021.

•We expect operating expenses will grow at approximately 60% to 70% of the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth ~~expectations.~~expectations, with greater growth in the first half of the year and more modest growth in the back half. The main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets. However, we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal. We also expect performance-based compensation for the full year of 2021 to normalize and decrease by approximately $30.0 million compared to the full year of 2020.

Our provision for income taxes for 2017 was impacted by both U.S. tax reform and ASU 2016-09. As a result of the recently enacted tax legislation, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. In ~~2018,~~2021, we expect our effective tax rate towill approximate 25.5%, ~~which is a reduction from our historical rate of approximately 38.5%, both of which exclude~~excluding the impact of ASU 2016-09. As discussed further in Critical Accounting Estimates below, we have not finalized our accounting for the tax effects of tax reform; however, our net benefit is based on reasonable estimates for those tax effects.

Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current ~~expectations, particularly any significant changes in our geographic mix.~~expectation. Due to ASU 2016-09 requirements, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. Based on our December 31, ~~2017~~2020 stock price, we estimate that we have approximately ~~$5.4~~$4.5 million in unrealized excess tax benefits related to stock options that ~~will~~ expire and restricted awards that vest in the first quarter of ~~2018 and restricted awards that will vest in 2018. Additional~~2021. We may recognize additional tax benefits ~~could be recognized~~ related to stock option exercises in ~~2018~~2021 from grants that expire in years after ~~2018,~~2021, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the period that our employees will exercise vested stock options. We recorded a ~~$12.6~~$28.6 million benefit in our provision for income taxes for the year ended December 31, ~~2017~~2020 related to ASU 2016-09.

We project that ~~2018~~2021 earnings will be in the range of ~~$5.36~~$9.12 to ~~$5.61~~$9.62 per diluted share, including an estimated ~~$0.13 favorable impact~~$0.11 benefit from ASU ~~2016-09.~~ Th~~is range also reflects our expected 2018 income tax rate, including~~2016-09 during the ~~impact from tax reform legislation enacted in December 2017.~~first quarter of 2021. We expect cash provided by operations will approximate net income for fiscal ~~2018,~~year 2021. We expect to continue to use cash to fund opportunistic share repurchases over the next year. We also expect to use cash for the payment of cash dividends as and ~~subject to additional authorization~~when declared by our Board of ~~Directors, we anticipate that we will use $100.0 million to $150.0 million in cash for share repurchases.~~Directors.

The forward-looking statements in this Current Trends and Outlook section are subject to significant risks and uncertainties, including the effects of the evolving COVID-19 pandemic, the sensitivity of our business to weather conditions, changes in the economy and the housing market, ~~the sensitivity of our business to weather conditions,~~ our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in Item 1A of this Form 10-K. Also see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” prior to the heading “Risk Factors” in Item 1A.

CRITICAL ACCOUNTING ESTIMATES

~~We prepare our Consolidated Financial Statements~~Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles ~~(GAAP), which requires management~~that involve a significant level of estimation uncertainty and have had, or are reasonably likely 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~~financial condition or results of ~~operations or financial condition.~~operations.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. ~~We believe the following~~Our critical accounting estimates ~~require us~~are discussed below, including, to ~~make~~ the ~~most difficult, subjective~~extent material and reasonably available, the impact such estimates have had, or ~~complex judgments.~~are reasonably likely to have, on our financial condition or results of operations.

Allowance for Doubtful Accounts

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

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

At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 and more than 60 days past due. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on past due accounts. ~~As we~~We estimate future losses based upon historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review ~~these past due accounts, we evaluate collectability based on a combination~~ of ~~factors including:~~the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices.

~~aging statistics and trends;~~

~~customer payment history;~~

~~independent credit reports; and~~

~~discussions with customers.~~

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately ~~0.07%~~0.08% of net sales annually. Write-offs as a percentage of net sales approximated ~~0.05%~~0.09% in ~~2017,~~2020, 0.12% in 2019 and 0.07% in ~~2016 and 0.05% in 2015.~~2018. We expect that write-offs will range from 0.05% to 0.10% of net sales in ~~2018.~~2021.

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

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, ~~2017,~~2020, pretax income would change by approximately ~~$0.8~~$1.0 million and earnings per share would change by approximately ~~$0.01~~$0.02 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, ~~2017)~~2020).

Inventory Obsolescence

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

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

•new products with less than 12 months usage;



~~Class 0~~	~~new products with less than 12 months usage~~

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

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

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

~~Null class~~	~~non-stock special order items~~

•highest sales velocity items, which represent approximately 80% of net sales at the sales center;

•lower sales velocity items, which we keep in stock to provide a high level of customer service;

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

•non-stock special order items.

There is little risk of obsolescence for ~~products in classes 1-4~~our highest sales velocity items, which represent approximately 80% of net sales at the sales center, because ~~products in~~ these ~~classes~~products generally turn quickly. We establish our reserve for inventory obsolescence based on inventory ~~classes 5-13,~~with lower sales velocity and inventory with no sales for the past 12 months, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory at net realizable value. We provide a reserve of 5% for inventory ~~in classes 5-13~~with lower sales velocity, inventory with no sales for the past 12 months and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess lower sales velocity inventory ~~in classes 5-12~~ and an additional 45% reserve for excess inventory ~~in class 13.~~with no sales for the past 12 months. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months’ usage, on a company-wide basis. We also evaluate whether the calculated reserve provides sufficient coverage of total inventory with no sales for the ~~total class 13 inventory.~~past 12 months. We have not changed our methodology from prior years.

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

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

•changes in customer preferences or regulatory requirements;

•seasonal fluctuations in inventory levels;

•geographic location; and

•superseded products and new product offerings.

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

If the balance of our inventory reserve increased or decreased by 20% at December 31, ~~2017,~~2020, pretax income would change by approximately ~~$1.3~~$2.3 million and earnings per share would change by approximately ~~$0.02~~$0.04 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, ~~2017)~~2020).

Vendor Programs

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

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

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

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

Income Taxes

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

~~In December 2017, the Tax Cuts and Jobs Act (TJCA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with Accounting Standards Codification Topic (ASC) 740,~~ ~~Income Taxes~~, we are required to account for the new requirements in the period that includes the date of enactment. The Act reduces the overall corporate income tax rate to 21%, creates a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadens the tax base and allows for the immediate capital expensing of certain qualified property. Due to the complexities presented by the Act, particularly for companies with multi-national operations, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) to provide guidance to companies who are not able to complete their accounting in the period of enactment prior to the reporting deadlines. Under the guidance in SAB 118, companies that have not completed their accounting for certain elements of the Act, but can determine a reasonable estimate of those effects, should include a provisional amount based on their reasonable estimate in their financial statements. This guidance resulted in us recording a provisional net benefit to our income tax provision during the period ended December 31, 2017. As of December 31, 2017, we have not completed our accounting for the tax effects of the Act but will complete our accounting before the end of the one year period allowed by SAB 118. Any revisions to our provisional amounts will be recorded in the period when the accounting is complete and will be recorded as a discrete item in our income tax provision in that period. For theWe record Global Intangible Low Tax Income (GILTI) ~~provisions of the Act, we have elected an accounting policy to record GILTI~~on foreign earnings as period costs if and when ~~incurred.~~incurred, although we not have realized any impacts since the enactment of U.S. tax reform enacted in December 2017.

As of December 31, ~~2017, United States~~2020, U.S. income taxes were not provided on the earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. We ~~are also still evaluating whether~~determined not to change our indefinite reinvestment assertion in light of U.S. tax reform.

We ~~have operations~~operate in 39 states, 1 United States territory and 1211 foreign countries. We are subject to regular audits by federal, state and foreign tax authorities, and the amount of income taxes we pay is subject to adjustment by the applicable tax authorities. We recognize a benefit from an uncertain tax position only after determining it is more likely than not that the tax position will withstand examination by the applicable taxing authority. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We regularly evaluate our tax positions and incorporate these expectations into our reserve estimates. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. These adjustments may include changes in valuation allowances that we have established. As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

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

Performance-Based Compensation Accrual

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

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

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

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

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

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

•differences between estimated and actual performance;

•our projections related to achievement of multiple-year performance objectives for our SPIP; and

•the discretionary components of the bonus plans.

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

Impairment of Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill is our largest intangible asset. At December 31, ~~2017,~~2020, our goodwill balance was ~~$189.4~~$268.2 million,, representing approximately ~~17%~~15% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.

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

Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, ~~our~~we define a reporting unit isas an individual sales center. As of October 1, ~~2017~~,2020, we had ~~221~~226 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $5.7 million and the average goodwill balance was ~~$0.8 million~~. $0.9 million.

In October ~~2017, 2016~~of 2020, 2019 and ~~2015,~~2018, we performed our annual goodwill impairment test and did not ~~identify~~recognize any goodwill impairment at the reporting unit level.

In the ~~third~~first quarter of ~~2016,~~2020, we determined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows. We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values. In the period ended March 31, 2020, we recorded ~~a $0.6 million~~impairment equal to the total goodwill and intangibles carrying amounts of our five Australian reporting units, which included goodwill impairment ~~charge~~of $3.5 million and intangibles impairment, related to ~~an at-risk reporting unit in Quebec, Canada. We continue to monitor this location’s results, which came in above expectations at~~ the ~~end~~Pool Systems tradename and trademark, of ~~the 2017 pool season. As of December 31, 2017, the remaining goodwill balance for this reporting unit was $1.8~~$0.9 million.

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

To test the reasonableness of our fair value estimates, we compared our aggregate estimated fair values to our market capitalization as of the date of our annual impairment test. We expect that a reasonable fair value estimate would reflect a moderate acquisition premium. Our aggregate estimated fair values fell in line with our market capitalization, which we consider to be reasonable for the purpose of our goodwill impairment test. To facilitate a sensitivity analysis, we reduced our consolidated fair value estimate ~~by 5%~~ to reflect more conservative discounted cash flow ~~assumptions. This reduction addresses~~assumptions, the sensitivity of a 50 basis point increase in our estimated weighted average cost of capital or a 50 basis point decrease in the estimated perpetuity growth rate. Our sensitivity analysis generated a fair value estimate ~~significantly~~ below our market capitalization and resulted in the identification of no ~~goodwill impairments and no~~ additional at-risk locations.

Based on ~~the magnitude of their~~our 2020 goodwill ~~balances and their heightened sensitivity to weather,~~impairment analysis, we consider one of our Horizon reporting units in ~~Quebec, Canada,~~California as most at risk for goodwill ~~impairment. Results in Quebec began to fall below expectations in 2013, largely~~impairment due to ~~an extended winter~~marginal results in recent years. The most sensitive assumptions related to our fair value for this location relates to future projected operating results and ~~certain execution challenges. We cannot be assured of favorable weather conditions in any given year, which strongly impact results for our Quebec reporting units.~~management’s ability to effectively manage costs. As of December 31, ~~2017, we have three reporting units in Quebec, with a total~~2020, our aggregate goodwill balance ~~of $2.8~~for this reporting unit was $1.4 million.

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

Recent Accounting Pronouncements

~~In May 2014, the~~See Note 1 of “Notes to Consolidated Financial ~~Accounting Standards Board (FASB) issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers. The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective~~Statements,” included in Item 8 of this Form 10-K for annual periods beginning after December 15, 2017, which for us will be in the period beginning January 1, 2018. We are substantially complete with our detailed evaluation, using the five‑step model specified in the guidance, to determine the impact of the new standard.details.

Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products or services to our customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics. Since our individual sales transactions are very similar in nature, we will apply the guidance to all transactions as a portfolio. We have determined that the effects of applying this guidance to the portfolio is not materially different from applying the guidance to individual performance obligations within that portfolio.

Our revenue recognition is achieved upon delivery of products as there are no other promised services as part of our contracts with customers that are material in the context of the contract. Because our shipping and handling activities are performed before the customer obtains control of the goods, we do not consider these activities to be a promised service to the customer. Rather shipping and handling are activities to fulfill our promise to transfer the goods. Product warranties do not constitute a performance obligation for us, as products are warrantied directly by the manufacturer or the third party carrier.

To determine the amount of consideration to which we expect to be entitled in exchange for transferring promised goods, we have considered if variable consideration exists. We have reviewed our standard terms and conditions and our customary business practices to determine the transaction price. We have reviewed our pricing policies including marketing programs, coupons and free products for the purpose of determining whether we have any variable or non-cash consideration. We do not issue future-dated coupons or free product rebates. When we process manufacturer coupons, we record the customer sales price as revenue and receive reimbursement of the coupon value from the manufacturer. In addition, we reviewed our current accounting policies related to returns and price concessions for which no material changes in policy were noted. Volume rebates is a sales incentive program where we make a cash payment or apply credit to a customer account on a quarterly or annual basis, if the customer reaches a specified level of purchases. The volume rebates are accounted for as a reduction of the transaction price, and a liability is recorded until the related payment to the customer is made. We do not offer any volume discounts. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.

The majority of our sales transactions do not require any additional performance obligation after delivery; therefore we do not have multiple performance obligations for which we will have to allocate the transaction price. We do not offer customer loyalty programs.

We expect to recognize revenue when control of the product has been transferred to the customer upon delivery to the customer or the freight carrier, if delivered by a third party, as we believe our performance obligation is satisfied at such point in time.

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

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

~~The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:~~



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



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

RESULTS OF OPERATIONS

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


	Year Ended December 31,
	2020		2019		2018
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	71.3		71.1		71.0
Gross profit	28.7		28.9		29.0
Operating expenses	16.9		18.2		18.6

Operating income	11.8		10.7		10.5
Interest and other non-operating expenses, net	0.3		0.7		0.7
Income before income taxes and equity earnings	11.5	%	9.9	%	9.8	%

Year Ended December 31,
2017 2016 2015
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 71.1
71.2
71.4
Gross profit 28.9
28.8
28.6
Operating expenses 18.7
18.9
19.4
Operating income 10.2
10.0
9.1
Interest and other non-operating expenses, net 0.5
0.6
0.3
Income before income taxes and equity earnings 9.7 % 9.4 % 8.8 %



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

Our discussion of consolidated operating results includes the operating results from acquisitions in ~~2017, 2016~~2020, 2019 and ~~2015.~~2018. We have included the results of operations in our consolidated results since the respective acquisition dates.

Fiscal Year ~~2017~~2020 compared to Fiscal Year ~~2016~~2019

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


(Unaudited)	Base Business						Excluded						Total
(in thousands)	Year Ended						Year Ended						Year Ended
	December 31,						December 31,						December 31,
	2020			2019			2020			2019			2020			2019
Net sales	$	3,886,079		$	3,183,940		$	50,544		$	15,577		$	3,936,623		$	3,199,517

Gross profit	1,117,303			922,193			13,599			2,732			1,130,902			924,925
Gross margin	28.8		%	29.0		%	26.9		%	17.5		%	28.7		%	28.9		%

Operating expenses (1)	650,020			579,068			16,855			4,611			666,875			583,679
Expenses as a % of net sales	16.7		%	18.2		%	33.3		%	29.6		%	16.9		%	18.2		%

Operating income (loss) (1)	467,283			343,125			(3,256)			(1,879)			464,027			341,246
Operating margin	12.0		%	10.8		%	(6.4)		%	(12.1)		%	11.8		%	10.7		%

(1)Base business and total include $6.9 million of impairment from goodwill and other assets recorded in the first quarter of 2020.

(Unaudited) Base Business Excluded Total
(in thousands) Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2017 2016 2017 2016 2017 2016
Net sales $ 2,749,672
$ 2,558,368
$ 38,516
$ 12,435
$ 2,788,188
$ 2,570,803

Gross profit 793,866
737,335
11,423
3,752
805,289
741,087
Gross margin 28.9 % 28.8 % 29.7 % 30.2 % 28.9 % 28.8 %

Operating expenses 508,273
481,924
12,645
3,304
520,918
485,228
Expenses as a % of net sales 18.5 % 18.8 % 32.8 % 26.6 % 18.7 % 18.9 %

Operating income (loss) 285,593
255,411
(1,222 ) 448
284,371
255,859
Operating margin 10.4 % 10.0 % (3.2 )% 3.6 % 10.2 % 10.0 %

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

Acquired

Acquisition

Date

Net
Sales Centers
Acquired

~~Net~~

~~Sales Centers~~

~~Acquired~~

Periods

Excluded

~~Chem Quip,~~TWC Distributors, Inc. ^{(1) (2)}

December ~~2017~~2020

510

December ~~2017~~2020

~~Intermark~~Jet Line Products, Inc.

~~December 2017~~October 2020

~~December 2017~~

~~E-Grupa~~

~~October 2017~~

October - December ~~2017~~

~~New Star Holdings Pty. Ltd.~~

~~July 2017~~

~~July - December 2017~~2020

~~Lincoln Aquatics~~ ^{Northeastern Swimming Pool Distributors, Inc. (1)}

~~April 2017~~September 2020

~~May~~September - December ~~2017~~2020

~~Metro Irrigation Supply Company Ltd.~~ ^{Master Tile Network LLC (1)}

~~April 2016~~February 2020

~~January~~February - ~~June 2017 and April - June 2016~~December 2020

~~The Melton Corporation~~ ^{W.W. Adcock, Inc.(1)}

~~November 2015~~January 2019

January ~~2017~~- March 2020 and

January ~~2016~~

- March 2019

~~Seaboard Industries,~~Turf & Garden, Inc. ⁽¹⁾

~~October 2015~~November 2018

January ~~2017~~2020 and

January ~~2016~~

2019

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


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


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

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

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

The table below summarizes the changes in our sales centers during ~~2017:~~2020:



December 31, ~~2016~~2019	~~344~~373
Acquired locations	925
New locations	13
~~Consolidated~~Closed/consolidated locations	(3(3)	)
December 31, ~~2017~~2020	~~351~~398

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

Net Sales


(in millions)	Year Ended December 31,
	2020		2019		Change
Net sales	$	3,936.6	$	3,199.5	$	737.1	23%

(in millions) Year Ended December 31,
2017 2016 Change
Net sales $ 2,788.2
$ 2,570.8
$ 217.4
8%

Net sales increased 8%23% compared to ~~2016, despite one less selling day. Our 7%~~2019, with 22% of this increase inresulting from base business sales ~~generated much of this~~ growth. ~~We experienced modestly favorable~~As the pandemic forced families to spend more time at home in 2020, they sought out opportunities to create or expand existing home-based outdoor living and entertainment spaces. This created unprecedented demand throughout our markets, and we realized broad sales gains across nearly all product categories. Our sales benefited from greater swimming pool usage, high demand for residential pool products and warmer weather conditions during the ~~swimming pool season, which ended with severe storms in September and October in both Texas and Florida. By the end of the fourth quarter, we mostly recovered sales lost over these time periods.~~year.

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

~~continued improvement~~•strong demand for discretionary products, as evidenced by improvements in ~~consumer discretionary expenditures, including continued~~sales growth ~~in remodeling~~rates for product offerings such as equipment, building materials and ~~replacement activity~~above-ground pools and hot tubs (see discussion below);

•increased demand for residential swimming pool maintenance supplies due to earlier pool openings and increased usage, as evidenced by improvements in sales growth rates to retail customers (see discussion below);

•market share ~~growth, particularly~~gains, including those in building materials ~~and commercial~~(see discussion below);

•inflationary product ~~categories;~~cost increases of approximately 1% to 2%;

~~increased pool~~•1% sales growth from recent acquisitions; and ~~spa chemical~~

•1% sales ~~our largest product category at 12% of total net sales for 2017, up 4%~~growth from an additional selling day in 2020 compared to ~~2016, excluding the recent Lincoln Aquatics acquisition;~~2019.

~~inflation driven (estimated at close to 1%) product selling price increases; and,~~

~~acquisitions, particularly in the commercial market (Lincoln Aquatics) and Australia (Newline Pool Products)~~

We believe that sales growth rates for certain product offerings, such as equipment, building materials and ~~equipment,~~above-ground pools and hot tubs evidence increased spending in traditionally discretionary areas, ~~including~~such as pool construction, pool remodeling ~~as well as~~and equipment upgrades. In ~~2017,~~2020, sales for equipment, such as swimming pool heaters, pumps, lights and ~~lights~~filters, increased ~~10%,~~31% compared to 2019, and collectively represented approximately ~~23%~~29% of net sales. This increase reflects both the growth of replacement activity and continued demand for ~~higher‑priced, more energy-efficient products. Sales of building materials, which includes tile, grew 13% compared to 2016 and represented approximately 10% of net sales in 2017.~~

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

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

~~Gross Profit~~

(in millions) Year Ended December 31,
2017 2016 Change
Gross profit $ 805.3
$ 741.1
$ 64.2
9%
Gross margin 28.9 % 28.8 %

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

~~Operating Expenses~~

(in millions) Year Ended December 31,
2017 2016 Change
Operating expenses $ 520.9
$ 485.2
$ 35.7
7%
Operating expenses as a percentage of net sales 18.7 % 18.9 %

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

~~Interest and Other Non-operating Expenses, net~~

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

~~Income Taxes~~

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

~~Net Income and Earnings Per Share~~

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

~~Fiscal Year 2016 compared to Fiscal Year 2015~~

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

(Unaudited) Base Business Excluded Total
(in thousands) Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2016 2015 2016 2015 2016 2015
Net sales $ 2,525,164
$ 2,361,134
$ 45,639
$ 2,005
$ 2,570,803
$ 2,363,139

Gross profit 727,469
675,262
13,618
382
741,087
675,644
Gross margin 28.8 % 28.6 % 29.8 % 19.1 % 28.8 % 28.6 %

Operating expenses 475,048
458,599
10,180
823
485,228
459,422
Expenses as a % of net sales 18.8 % 19.4 % 22.3 % 41.0 % 18.9 % 19.4 %

Operating income (loss) 252,421
216,663
3,438
(441 ) 255,859
216,222
Operating margin 10.0 % 9.2 % 7.5 % (22.0 )% 10.0 % 9.1 %

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

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



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


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

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



~~December 31, 2015~~	~~336~~
~~Acquired locations~~	8
~~New locations~~	6
~~Consolidated locations~~	(6	)
~~December 31, 2016~~	~~344~~

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

~~Net Sales~~

(in millions) Year Ended December 31,
2016 2015 Change
Net sales $ 2,570.8
$ 2,363.1
$ 207.7
9%

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

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

~~very favorable weather conditions, including the second warmest year on record in the continental United States;~~

continued consumer investments in enhancing outdoor living spaces, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);

~~pool and spa chemical sales, our largest product category at 13% of total net sales, increased 6% over last year; and~~

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

We believe that sales growth rates for certain product offerings, such as building materials and equipment, support our assertion that there continues to be increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. Sales of equipment such as swimming pool heaters, pumps, and lights, which represented 8%, 7%, and 7% of our total net sales, respectively, increased collectively by 9% compared to 2015. This increase reflects both the gradual recovery of replacement activity and increased demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile ~~represent just over 9%~~and sales from recently acquired Master Tile locations, grew 23% compared to 2019 and represented approximately 12% of net sales ~~for 2016 and grew by 14%~~in 2020. Sales of above-ground pools increased 57% in 2020 compared to ~~2015.~~2019 and represented approximately 1% of net sales in 2020.

Sales to customers who service large commercial installations ~~such as hotels, universities~~ and ~~community recreational facilities~~specialty retailers that sell swimming pool supplies are included in the appropriate existing product categories, and growth or decline in ~~this area is~~these areas are reflected in the numbers above. ~~These~~Sales to retail customers increased 24% compared to 2019 and represented approximately 13% of our net sales in 2020. Sales to commercial customers declined 10% in 2020, driven by COVID-19 related closures and the decline in both business and leisure travel. Sales to commercial customers represented approximately 4% of our ~~consolidated~~ net sales in 2020.

2020 Quarterly Sales Performance Compared to 2019 Quarterly Sales Performance

•Strong demand for ~~2016~~discretionary products during the first quarter of 2020 led to net sales and increased 16% compared to 2015 due primarily to our increased focus on the commercial market, as well as greater resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.

~~In terms of quarterly performance,~~ base business sales ~~increased~~growth of 13%. Sales were also favorably impacted by an additional selling day in the first quarter of ~~2016, as warmer than normal weather across our seasonal markets kicked off 2016, allowing for accelerated pool openings and increased ability for customers~~2020 compared to perform remodel, replacement and new construction activity earlier in the year. As we have disclosed in recent years, 2016 customer early buy shipments again caused some second quarter sales to shift into the first quarter ~~and accounted for approximately 3%~~ of ~~our first quarter 2016~~2019.

•Net sales ~~growth. Neutral weather conditions in the second~~ and ~~third quarters coupled with strong execution contributed to our 6% and 5% base business sales growth in the second and third quarter of 2016, respectively. For our seasonally slow fourth quarter,~~ base business sales increased 5%14% in ~~2016 over very strong fourth~~the second quarter ~~2015 results,~~of 2020 as ~~our~~stay-at-home restrictions eased in late April through early May, and sales benefited from ~~warmer than average temperatures during this time period. See~~greater swimming pool demand and usage, resulting in broad sales gains across many product categories and geographies.

•In the third quarter of 2020, net sales and base business sales increased 27% and benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic.

•Net sales in the fourth quarter of 2020 increased 44%, while base business sales increased 39%. Sales benefited from continued stay-at-home trends combined with favorable weather nationwide and acquisitions, which added 4% to sales growth.

In addition to the sales discussion above, see further details of significant weather impacts under the subheading Seasonality and Quarterly Fluctuations below.

Gross Profit


(in millions)	Year Ended December 31,
	2020			2019			Change
Gross profit	$	1,130.9		$	924.9		$	206.0	22%
Gross margin	28.7		%	28.9		%

(in millions) Year Ended December 31,
2016 2015 Change
Gross profit $ 741.1
$ 675.6
$ 65.5
10%
Gross margin 28.8 % 28.6 %

Gross margin ~~for 2016 increased approximately~~declined 20 basis points ~~over 2015,~~to 28.7% in 2020 compared to 28.9% in 2019, primarily due to sales of lower margin, big-ticket items, such as pool equipment and ~~benefited from improvements in supply chain management~~in-ground and ~~internal initiatives, as well as favorable~~above-ground pools, which comprised a larger portion of our product mix ~~from pool openings earlier~~ in the year. These favorable impacts were partially offset by an increase in customer early buy deliveries as these sales include applicable discounts. Quarterly gross margin comparisons varied throughout the year, with an increase of 10 basis points in the first quarter, which reflects the impact of customer early buy shipments. Gross margin increased 40 basis points in both the second and third quarters and increased 20 basis points in the seasonally slower fourth quarter.2020 compared to 2019.

Operating Expenses


(in millions)	Year Ended December 31,
	2020			2019			Change
Selling and administrative expenses	$	659.9		$	583.7		$	76.2	13%
Impairment of goodwill and other assets	6.9			—			6.9		100%
Operating expenses as a percentage of net sales	16.9		%	18.2		%

(in millions) Year Ended December 31,
2016 2015 Change
Operating expenses $ 485.2
$ 459.4
$ 25.8
6%
Operating expenses as a percentage of net sales 18.9 % 19.4 %

Operating expenses increased ~~6% compared~~14%, or $83.2 million, to ~~2015, with~~$666.9 million in 2020, up from $583.7 million in 2019, while base business operating expenses ~~up 4%~~grew 12%. ~~While the~~The increase in ~~total~~ operating expenses ~~includes expenses from our more recent acquisitions, the~~primarily reflects a $43.9 million increase in ~~base business~~performance-based compensation from $24.3 million in 2019 to $68.2 million in 2020 and expenses of $16.9 million from recently acquired businesses.

In the first quarter of 2020, we recorded impairment charges of $6.9 million, which included non-cash goodwill and intangibles impairment charges of $4.4 million, equal to the total goodwill and intangibles carrying amounts of our Australian reporting units, and $2.5 million from a long-term note, as collectability was impacted by the COVID-19 pandemic.

Excluding impairment charges and performance-based compensation in both periods, adjusted operating expenses ~~was due primarily to higher~~were up 6%, reflecting growth-driven labor ~~building rent~~ and freight ~~expenses. Focusing on efficiencies~~expenses and ~~leveraging~~greater facility-related costs partially offset by lower discretionary spending. As a result of strong expense control and our ability to leverage our existing ~~infrastructure enabled us to reduce~~network, operating expenses as a percentage of ~~sales.~~net sales declined 130 basis points, contributing to the 110 basis point expansion in our operating margin for the year.

Interest and Other Non-operating Expenses, net

Interest and other non-operating expenses, net ~~increased $6.4~~decreased $11.4 million compared to ~~2015. This increase includes $3.5 million related to a non-operating note receivable. The remaining component is primarily~~2019, reflecting lower average debt levels and lower average interest ~~expense on debt, which increased $3.2 million over last year.~~rates between periods. Average outstanding debt was ~~$424.6~~$422.2 million ~~for 2016~~in 2020 versus ~~$379.2~~$599.6 million ~~for 2015.~~in 2019. Our ~~2016~~2020 average outstanding debt balance ~~reflects greater share repurchases than in 2015.~~has decreased as we utilized operating cash flows to pay off debt balances. Our weighted average effective interest rate ~~increased~~decreased to ~~2.2% for 2016~~2.1% in 2020 compared to ~~1.9% for 2015.~~3.4% in 2019.

Income Taxes

Our effective income tax rate was ~~38.5%~~18.9% at ~~both~~ December 31, ~~2016~~2020 and 17.7% at December 31, ~~2015.~~2019. We recorded a $28.6 million, or $0.70 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2020 compared to a benefit of $23.5 million, or $0.57 per diluted share, realized in the same period in 2019. Excluding the benefits from ASU 2016-09, our effective tax rate was 25.2% and 25.1% for the years ended 2020 and 2019, respectively.

Net Income and Earnings Per Share

Net income ~~attributable~~increased 40% to ~~Pool Corporation increased 16% to $149.0~~$366.7 million in ~~2016~~2020 compared to ~~$128.3~~$261.6 million in ~~2015, while earnings~~2019. Adjusted net income, excluding the $6.3 million, or $0.15 per diluted share, impact of non-cash impairments, net of tax, increased 43% to $373.0 million. Earnings per share increased ~~20%~~40% to ~~$3.47~~$8.97 per diluted share compared to ~~$2.90~~$6.40 per diluted share in ~~2015.~~2019. Excluding the impact of non-cash impairments, net of tax, and the impact from ASU 2016-09 in both periods, adjusted diluted earnings per share increased 44% to $8.42 in 2020 compared to $5.83 in 2019. See the reconciliation of GAAP to non-GAAP measures below.

Reconciliation of Non-GAAP Financial Measures

Adjusted Income Statement Information

We have included adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures, as supplemental disclosures, because we believe these measures are useful to investors and others in assessing our year-over-year operating performance. We believe these measures should be considered in addition to, not as a substitute for, net income and diluted EPS presented in accordance with GAAP, respectively, and in the context of our other disclosures included within this Form 10-Q. Other companies may calculate these non-GAAP financial measures differently than we do, which may limit their usefulness as comparative measures.

The table below presents a reconciliation of net income to adjusted net income.


(Unaudited)	Year Ended
(in thousands)	December 31,
	2020
Net income	$	366,738
Impairment of goodwill and other assets	6,944
Tax impact on impairment of long-term note (1)	(654)
Adjusted net income	$	373,028

(1)As described in our First Quarter 2020 Quarterly Report on Form 10-Q, our effective tax rate at March 31, 2020 was a 0.1% benefit. Excluding impairment from goodwill and intangibles and tax benefits from ASU 2016-09 recorded in the first quarter of 2020, our effective tax rate for the first quarter of 2020 was 25.4%, which we used to calculate the tax impact related to the $2.5 million long-term note impairment.

The table below presents a reconciliation of diluted EPS to adjusted diluted EPS.


(Unaudited)	Year Ended
	December 31,
	2020		2019
Diluted EPS	$	8.97	$	6.40
After-tax non-cash impairment charges	0.15		—
Adjusted diluted EPS excluding after-tax non-cash impairment charges	9.12		6.40

ASU 2016-09 tax benefit	0.70		0.57

Adjusted diluted EPS excluding after-tax non-cash impairment charges and tax benefit	$	8.42	$	5.83

Fiscal Year 2019 compared to Fiscal Year 2018

For a detailed discussion of the Results of Operations in Fiscal Year 2019 compared to Fiscal Year 2018, see the Results of Operations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Seasonality and Quarterly Fluctuations

~~Our~~For discussion regarding the effects seasonality and weather have on our business, ~~is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months~~see Item 1, “Business,” of both swimming pool use and installation and irrigation installations and maintenance. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2017, we generated approximately 62% of our net sales and 83% of our operating income in the second and third quarters of the year.this Form 10-K.

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

The following table presents certain unaudited quarterly data for ~~2017~~2020 and ~~2016.~~2019. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.


(Unaudited)	QUARTER																								(Unaudited)	QUARTER
(in thousands)	2017												2016												(in thousands)	2020												2019
	First			Second			Third			Fourth			First			Second			Third			Fourth				First			Second			Third			Fourth			First			Second			Third			Fourth
Statement of Income Data																									Statement of Income Data
Net sales	$	546,441		$	988,163		$	743,401		$	510,183		$	515,250		$	918,889		$	691,429		$	445,235		Net sales	$	677,288		$	1,280,846		$	1,139,229		$	839,261		$	597,456		$	1,121,328		$	898,500		$	582,234
Gross profit	153,621			289,664			216,606			145,398			143,023			270,736			199,551			127,777			Gross profit	189,629			373,481			328,698			239,095			174,631			330,314			257,931			162,050
Operating income	30,998			154,186			81,928			17,259			29,530			142,420			74,166			9,743			Operating income	35,588			205,857			148,233			74,351			38,386			172,523			104,540			25,798
Net income	22,270			94,620			48,783			25,665			16,363			85,247			44,421			2,572			Net income	30,912			157,555			119,098			59,174			32,637			131,390			79,525			18,024

Net sales as a % of annual net sales	20		%	35		%	27		%	18		%	20		%	36		%	27		%	17		%	Net sales as a % of annual net sales	17		%	33		%	29		%	21		%	19		%	35		%	28		%	18		%
Gross profit as a % of annual gross profit	19		%	36		%	27		%	18		%	19		%	37		%	27		%	17		%	Gross profit as a % of annual gross profit	17		%	33		%	29		%	21		%	19		%	36		%	28		%	18		%
Operating income as a % of annual operating income	11		%	54		%	29		%	6		%	12		%	56		%	29		%	4		%	Operating income as a % of annual operating income	8		%	44		%	32		%	16		%	11		%	51		%	31		%	8		%

Balance Sheet Data																									Balance Sheet Data
Total receivables, net	$	290,019		$	370,285		$	262,796		$	196,265		$	283,758		$	351,012		$	233,405		$	166,151		Total receivables, net	$	345,915		$	453,405		$	366,412		$	289,200		$	313,127		$	417,126		$	307,798		$	226,539
Product inventories, net	647,884			542,805			484,287			536,474			595,393			493,254			455,156			486,116			Product inventories, net	858,190			628,418			612,824			780,989			815,742			694,447			616,217			702,274
Accounts payable	465,928			273,309			209,092			245,249			438,705			265,349			199,922			230,728			Accounts payable	517,620			346,272			268,412			266,753			472,487			342,335			214,309			261,963
Total debt	490,217			553,480			564,573			519,650			450,457			500,606			390,189			438,042			Total debt	586,050			438,804			339,934			416,018			698,977			692,337			547,560			511,407



Note: Due to rounding, the sum of quarterly percentage amounts may not equal 100%.

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~~	•	~~Fewer pool and irrigation installations~~
~~extraordinary amounts of rain~~	•	~~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 Fiscal Year ~~2017~~2020 to Fiscal Year ~~2016~~2019 Comparisons

~~Unseasonably mild weather benefited sales in~~In the first quarter of ~~2017. However, while~~2020, sales benefited from above-average temperatures throughout the contiguous United States, particularly in the southern United States. These favorable weather ~~trends early in the year normally have a seasonally larger impact, the comparison to~~conditions contrast from the first quarter of ~~2016 was especially tough given~~2019 when wetter and cooler-than-normal temperatures to begin 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 2017year hindered sales growth.

Cold and wet weather throughout the Mid-South and North impacted those seasonal markets in the middle of the second quarter of 2017, while the weather impact overall for the quarter was fairly neutral. Temperatures and precipitation throughout most areas other than those described above, were normal, with only Texas benefiting from drier weatherWeather conditions in the second quarter of ~~2017 compared to~~2020 were varied across the ~~above-average rainfall experienced~~contiguous United States; however, results in the ~~same period~~second quarter of ~~2016.~~2020 benefited from generally mild weather conditions. Much of the western United States benefited from warmer weather, while the southeastern United States experienced slightly below-average temperatures. Southern California and the southeastern United States, including Florida, experienced more precipitation than normal. In contrast, results for the second quarter of 2019 were largely impacted by record rainfall and cooler temperatures in three of our largest markets, California, Texas and Arizona, particularly in the month of May, which was the second wettest May on record for the contiguous United States.

~~Severe storms~~Overall, weather conditions in the third quarter of ~~2017,~~2020 were generally favorable, which benefited results. Much of the western United States experienced above-average temperatures, particularly ~~Hurricanes Irma and Harvey, hindered our sales growth~~ in ~~Florida and Texas, although Texas largely recovered by the end of September. In the Central and Midwest, temperatures were normal for the third quarter, contrasting~~California, which was also plagued with the most active wildfire year on record. Precipitation was below-average in most of the western half of the United States and normal to above-average ~~temperatures~~in the eastern half. Likewise, results in the third quarter of ~~2016. The West experienced record heat~~2019 were positively impacted by above-average temperatures and ~~normal rainfall in the third quarter of 2017, similar to the above-average heat in the same period of 2016. Overall, the United States experienced favorable weather in~~below-average precipitation throughout most of the country.

Sales in the fourth quarter of ~~2017,~~2020 benefited from above-average temperatures and below-average precipitation, particularly ~~Florida,~~in the month of November, which ~~allowed~~was the fourth warmest on record in a 126-year period for the contiguous United States. Similarly, in the fourth quarter of 2019, sales ~~recovery following Hurricane Irma.~~benefited from above average temperatures, primarily in the southern and southeastern United States.

Weather Impacts on Fiscal Year ~~2016~~2019 to Fiscal Year ~~2015~~2018 Comparisons

~~Warmer-than-normal weather across nearly~~For a detailed discussion of Weather Impacts on Fiscal Year 2019 compared to Fiscal Year 2018, see the Seasonality and Quarterly Fluctuations section of Management’s Discussion and Analysis included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Geographic Areas

Since all ~~markets~~of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. For additional details, see Note 1 of our “Notes to Consolidated Financial Statements,” included in ~~the United States benefited~~Item 8 of this Form 10-K.

For a breakdown of net sales and property, plant and equipment between our first quarter of 2016 sales growth. Warmer weather early in the season accelerates pool openings and allows for increased purchases of chemicals and maintenance supplies for existing pools. By comparison, our year-round markets experienced similar favorable weather conditions in the first quarter of 2015, while our seasonal markets, particularly in the northeast United States and ~~eastern Canada, experienced cooler-than‑normal temperatures. The unusually early warm weather in the first quarter~~international operations, see Item 1, “Business,” of 2016 in our seasonal markets benefited our first quarter sales. Growth in our California markets in the first quarter of 2016 was impacted by unfavorable weather comparisons to the same period of 2015 due to higher winter precipitation and average temperatures in 2016 versus record warm temperatures in 2015.this Form 10-K.

In the second quarter of 2016, the Midwest and Northeast experienced more favorable conditions compared to 2015, with above‑average temperatures and much drier weather in June 2016 compared to June 2015. Although the extreme rainfall experienced in Texas and adjacent states was not as prevalent in the second quarter of 2016 as compared to 2015, Texas experienced above‑average precipitation again in 2016. Florida and the Southeast experienced cooler temperatures compared to above-average and record heat in certain areas in 2015. California and the Northwest experienced warm temperatures and normal levels of precipitation in the second quarter of 2016 and 2015.

Weather conditions in the third quarter of 2016 varied throughout the United States creating a neutral overall impact on our results. The eastern half of the country experienced above-average temperatures, including record high temperatures in the Northeast and parts of the Midwest. The western half of the United States experienced mostly normal temperatures, while Texas experienced above-average precipitation. The conditions in Texas in the third quarter of 2016 were in direct contrast to the weather in the same period of 2015 when Texas was drying out from heavy precipitation, lifting third quarter 2015 sales. California and the Northwest logged drier-than-normal conditions in the third quarter of 2016 compared to average precipitation in 2015. Most of the United States experienced warm temperatures during the fourth quarter of 2016, allowing projects to continue through the remainder of the year and contributing to sales growth over the same period in 2015.

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 obligations, debt repayment obligations and other general corporate initiatives, including acquisitions, opening new sales centers, dividend payments and share repurchases. Our primary working capital obligations are for the purchase of inventory, payroll, rent, other facility costs and selling and administrative expenses. Our working capital obligations fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases. Our primary sources of working capital are cash from operations supplemented by bank borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.

We prioritize our use of cash based on investing in our business, maintaining a prudent capital structure, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:

•capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;

•strategic acquisitions executed opportunistically;

•payment of cash dividends as and when declared by our Board of Directors (Board);

•repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and

•repurchases of our common stock under our Board authorized share repurchase program.

Capital expenditures were ~~1.4%~~0.6% of net sales in ~~2017 as we expanded facilities and purchased delivery vehicles to address growth opportunities. Capital expenditures were 1.4% of net sales in 2016 and~~2020, 1.0% of net sales in ~~2015.~~2019 and 1.1% of net sales in 2018. Capital expenditures in 2020 were lower than our historical average due to cost-saving measures implemented at the beginning of the COVID-19 pandemic. Over the last 5five years, capital expenditures have averaged roughly 1.0% of net sales. ~~Going forward,~~

Our capital spending primarily relates to leasehold improvements, delivery and service vehicles and information technology. We focus our capital expenditure plans on the needs of our sales centers. For 2021, based on management’s current plans, we project capital expenditures will continue to approximate ~~this~~the historical average.

As of December 31, 2020, our average total leverage ratio was 0.86, which was below our target range of between 1.5 and 2.0 and below our average total leverage ratio of 1.61 as of December 31, 2019. Our strong operating results and cash flow from operations enabled us to reduce our debt balances in 2020. We expect our average total leverage ratio through the first half of 2021 will continue to be below our target range.

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

As of February 19, 2021, $172.0 million of the current Board authorized amount under our authorized share repurchase plan remained available. We expect to repurchase additional shares in the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.

Sources and Uses of Cash

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


	Year Ended December 31,
	2020		2019
Operating activities	$	397,581	$	298,776
Investing activities	(146,289)		(42,263)
Financing activities	(244,371)		(244,486)

Year Ended December 31,
2017 2016 2015
Operating activities $ 175,311
$ 165,378
$ 146,050
Investing activities (52,220 ) (55,643 ) (37,793 )
Financing activities (114,449 ) (99,672 ) (107,804 )

Cash provided by operations of $~~175.3~~$397.6 million for ~~2017~~2020 increased $98.8 million compared to ~~2016~~2019, primarily ~~due to~~reflecting the ~~increase~~$105.2 million improvement in net income, partially offset by changes in working capital. Excluding the net income benefit from tax changes, cash provided by operations approximates net income for 2017. The timing of our early buy inventory purchases can create fluctuations in inventory and accounts payable balances from year to year. A change in the timing of one of our inventory early buy programs in 2017 compared to 2016 resulted in higher inventory but lower accounts payable balances at year end, resulting in a negative impact to our 2017 operating cash flows.income.

~~In 2016, cash provided by operations improved compared to 2015 primarily due to our net income growth.~~

Cash used in investing activities ~~decreased~~increased in ~~2017~~2020 due to ~~a decrease~~an increase of ~~$6.9~~$115.7 million in payments for acquisitions compared to ~~2016. This~~2019, which was partially offset by a~~n additional $5.0~~an $11.7 million ofdecrease in net capital expenditures ~~in 2017 compared to 2016 to fund our continued investment in new vehicles, equipment and technology.~~ ~~Related to the increase from 2015 to 2016, our~~ ~~2016~~ ~~cash used in investing activities reflects $19.7 million~~ ~~in net payments to fund acquisitions compared to $4.5 million in net payments to fund acquisitions in 2015.~~between years.

Cash used in financing activities ~~increased in 2017, primarily due to lower net borrowings on our debt arrangements. We had $82.1 million of net proceeds from our debt arrangements in 2017 compared to $109.4~~was $244.4 million in ~~2016, primarily as a result of lower share repurchases. We repurchased $143.2 million of shares in the open market in 2017 compared to $175.6~~2020, consistent with $244.5 million in ~~2016. In 2015, we had~~2019, which primarily reflects a $59.6 million decrease in net ~~proceeds from~~debt payments, offset by additional share repurchases of $53.0 million and an increase in dividends paid of $8.2 million.

For a discussion of our ~~debt arrangements~~sources and uses of ~~$8.9 million, while we repurchased $92.4 million~~cash in 2018, see the Liquidity and Capital Resources – Sources and Uses of ~~shares~~Cash section of Management’s Discussion and Analysis included in ~~the open market.~~Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Future Sources and Uses of Cash

To supplement cash from operations as our primary source of working capital, we will continue to utilize our ~~two~~three major credit facilities, which are the Amended and Restated Revolving Credit Facility (the Credit Facility), the Term Facility (the Term Facility) and the Receivables Securitization Facility (the Receivables Facility). For additional details regarding these facilities, see Note 5 of our “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Revolving Credit Facility

~~On September 29, 2017, we amended and restated our revolving credit facility. The~~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~~$75.0 million,, to a total of ~~$825.0 million~~.$825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.

At December 31, ~~2017,~~2020, there was ~~$410.4~~$109.0 million outstanding, a ~~$4.2~~$4.8 million standby letter of credit outstanding and ~~$335.4~~$636.2 million available for borrowing under the Credit Facility. We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on the Credit Facility. As of December 31, 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 at that time. This swap contract will convert the Credit Facility’s variable interest rate to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and terminates on November 20, 2020.

The weighted average effective interest rate for the Credit Facility as of December 31, ~~2017~~2020 was approximately ~~2.9%~~1.2%, excluding commitment fees.

Term Facility

Our Term Facility provides for $185.0 million in borrowing capacity and matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the Credit Facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion. The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date. We may prepay amounts outstanding under the Term Facility without penalty other than interest breakage costs.

At December 31, 2020, the Term Facility had an outstanding balance of $175.8 million at a weighted average effective interest rate of 2.7%.

Financial Covenants

Financial covenants onof the Credit Facility and the Term Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of December 31, ~~2017,~~2020, the calculations of these two covenants are detailed below:

•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of December 31, ~~2017,~~2020, our average total leverage ratio equaled ~~1.63~~0.86 (compared to ~~1.56~~1.61 as of December 31, ~~2016)~~2019) and the TTM average total debt amount used in this calculation was ~~$524.3~~$439.3 million.

•Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of December 31, ~~2017,~~2020, our fixed charge ratio equaled ~~5.53~~7.81 (compared to ~~5.41~~5.38 as of December 31, ~~2016)~~2019) and TTM Rental Expense was ~~$54.3~~$63.2 million.

The Credit Facility and the Term Facility also ~~limits~~limit 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 and the Term 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 and the Term 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 and the Term Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

Receivables Securitization Facility

~~As amended on November 28, 2017, our~~Our two-year accounts receivable securitization facility (the Receivables ~~Facility~~Facility) offers us a ~~lower cost~~lower-cost form of financing, with a peak funding capacity of up to ~~$255.0~~$295.0 million between May 1 and ~~June 30,~~May 31, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from ~~$80.0~~$120.0 million to ~~$220.0~~$275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

The Receivables Facility provides for the sale of certain of our receivables to a ~~wholly owned~~wholly-owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain ~~third party~~third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At December 31, ~~2017,~~2020, there was ~~$100.0~~$120.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of ~~2.3%~~0.9%, excluding commitment fees.

Interest Rate Swaps

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 our variable rate borrowings. Interest expense related to the notional amounts under all swap contracts is based on the fixed rates plus the applicable margin on the respective borrowings.

In 2020, we had one interest rate swap in place, which became effective on November 20, 2019 and terminated on November 20, 2020. This swap contract was previously forward-looking and converted the variable interest rate on our variable rate borrowings to a fixed rate of 1.1425% on a notional amount of $150.0 million.

As of December 31, ~~2017,~~2020, we had two interest rate swap contracts in place, which became effective on November 20, 2020 and terminate on September 29, 2022. These swap contracts were previously forward-starting and convert the variable interest rates on our variable rate borrowings to fixed interest rates of 2.0925% and 1.5500%, respectively, on notional amounts of $75.0 million each.

We have entered into forward-starting interest rate swap contracts to extend the hedged period for future interest payments on our variable rate borrowings. These swap contracts will convert the variable interest rate to a fixed interest rate on our variable rate borrowings.

The following table provides details related to each of our forward-starting interest rate swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional Amount (in millions)

Fixed Interest Rate

Forward-starting interest rate swap 1

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

Forward-starting interest rate swap 2

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

Forward-starting interest rate swap 3

March 9, 2020

February 28, 2025

February 26, 2027

$150.0

0.8130%

Compliance and Future Availability

As of December 31, 2020, we were in compliance with all covenants and financial ratio requirements under our Credit Facility, our Term Facility and our Receivables Facility. We believe we will remain in compliance with all covenants and financial ratio requirements throughout ~~2018.~~2021. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

As of February 21, 2018, $53.4 million of the current Board authorized amount under our authorized share repurchase plan remained available. We expect to repurchase additional shares in the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.

Contractual Obligations

At December 31, ~~2017,~~2020, our contractual obligations for long-term debt, ~~and~~ operating leases and purchase obligations were as follows (in thousands):


			Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt	$	416,643	$	141,119	$	127,524	$	18,500	$	129,500
Operating leases	223,715		56,443		92,403		47,121		27,748
Purchase obligations (1)	106,357		36,369		69,988		—		—
	$	746,715	$	233,931	$	289,915	$	65,621	$	157,248

Payments Due by Period
Total
Less than
1 year
1-3 years 3-5 years
More than
5 years
Long-term debt $ 519,337
$ 8,898
$ 100,000
$ 410,439
$ —
Operating leases 221,729
55,874
92,064
52,368
21,423
$ 741,066
$ 64,772
$ 192,064
$ 462,807
$ 21,423
(1) Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases and software commitments. We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancellable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above.

~~For additional discussion related to our debt, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.~~

The table below contains estimated interest payments (in thousands) related to our long-term debt obligations ~~listed~~presented in the table above. ~~Our~~We calculated estimates of future interest payments ~~are calculated~~ based on the December 31, ~~2017~~2020 outstanding debt balances, using the fixed rates under our interest rate swap agreements for the applicable notional amounts and the weighted average effective interest rates as of December 31, ~~2017~~2020 for the remaining outstanding balances not covered by our swap contracts. To project the estimated interest expense to coincide with the time periods used in the table above, we ~~have~~ projected the estimated debt balances for future years based on the scheduled maturity dates of the Credit Facility, the Term Facility and the Receivables Facility. For certain of our contractual obligations, such as unrecognized tax benefits, uncertainties exist regarding the timing of future payments and the amount by which these potential obligations will increase or decrease over time. As such, we have excluded unrecognized tax benefits from our contractual obligations table. See ~~Note~~Notes 5 and 7 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K for additional discussion related to our debt and more information related to our unrecognized tax benefits.


			Estimated Interest Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Interest	$	23,659	$	6,793	$	8,497	$	5,651	$	2,718

Estimated Payments Due by Period
Total
Less than
1 year
1-3 years 3-5 years
More than
5 years
Interest $ 60,405
$ 14,076
$ 25,684
$ 20,645
$ —

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks, including interest rate risk and foreign currency risk. The adverse effects of potential changes in these market risks are discussed below. The following discussion does not consider the effects of the reduced level of overall economic activity that could exist following such changes. Further, in the event of changes of such magnitude, we would likely take actions to mitigate our exposure to such changes.

Interest Rate Risk

Our earnings are exposed to changes in short-term interest rates because of the variable interest rates on our debt. However, we have entered into interest rate swap contracts to reduce our exposure to market fluctuations. For information about our debt arrangements and interest rate swaps, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10‑K.

In ~~2017,~~2020, there was no interest rate risk related to the notional amounts under our interest rate swap ~~contracts for the Credit Facility.~~contracts. The portions of our outstanding balances under the Credit Facility, Term Facility and the Receivables Facility that were not covered by our interest rate swap contracts were ~~both~~ subject to variable interest rates. To calculate the potential impact in ~~2017~~2020 related to interest rate risk, we performed a sensitivity analysis assuming that we borrowed the maximum available amount under the Credit Facility, excluding the accordion feature, and the off-season maximum amount available under the Receivables Facility. Our Term Facility, entered into on December 30, 2019, was fully drawn as of that date. In this analysis, we assumed that the variable interest rates for the Credit Facility and the Receivables Facility increased by 1.0%. Based on this calculation, our pretax income would have decreased by approximately ~~$7.5~~$7.8 million and earnings per share would have decreased by approximately ~~$0.13~~$0.14 per diluted share (based on the number of weighted average diluted shares outstanding for the year ended December 31, ~~2017)~~2020). The maximum amount available under the Credit Facility is $750.0 million, excluding the $75.0 million accordion feature, and the maximum amount available under the Receivables Facility is ~~$215.0~~$255.0 million, excluding the $40.0 million seasonal increase in capacity available from March 1 to July 31.

Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position.

Currency Risk

~~We have subsidiaries~~Changes in ~~Canada,~~ the ~~United Kingdom, Belgium, Croatia, France, Germany, Italy, Portugal, Spain, Mexico, Colombia and Australia. Based on~~exchange rates for the functional currencies ~~for these~~of our international subsidiaries, as shown in the table below, ~~changes in exchange rates for these currencies~~ may positively or negatively impact our sales, operating expenses and earnings. Historically, we have not hedged our currency exposure and fluctuations in exchange rates have not materially affected our operating results. While our international operations accounted for only 9% of total net sales in ~~2017,~~2020, our exposure to currency rate fluctuations could be material in ~~2018~~2021 and future years to the extent that either currency rate changes are significant or that our international operations comprise a larger percentage of our consolidated results.



Functional Currencies
Canada		Canadian Dollar
United Kingdom		British Pound
Belgium		Euro
Croatia		Kuna
France		Euro
Germany		Euro
Italy		Euro
Portugal		Euro
Spain		Euro
Mexico		Mexican Peso
~~Colombia~~Australia		~~Colombian Peso~~
~~Australia~~	Australian Dollar

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



			Page
Report of Independent Registered Public Accounting Firm			4447

Consolidated Statements of Income			4549

Consolidated Statements of Comprehensive Income			4650

Consolidated Balance Sheets			4751

Consolidated Statements of Cash Flows			4852

Consolidated Statements of Changes in Stockholders’ Equity			4953

Notes to Consolidated Financial Statements			5054

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Pool Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pool Corporation (the Company) as of December 31, ~~2017~~2020 and ~~2016,~~2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2017,~~2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company ~~as of~~at December 31, ~~2017~~2020 and ~~2016,~~2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2017,~~2020, in conformity with U.S. generally accepted accounting principles.

We also have ~~also~~ audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2017,~~2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February ~~28, 2018~~25, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures ~~include~~included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.


									Valuation of Goodwill
Description of the Matter									At December 31, 2020, the Company’s goodwill was $268.2 million. As discussed in Note 3 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is assigned to reporting units as of the acquisition date. Auditing management’s annual goodwill impairment test was complex and highly judgmental due to the estimation required to determine the fair value of the reporting units. In particular, the fair value estimate is sensitive to certain assumptions, such as changes in the weighted average cost of capital, revenue growth rate, operating margin, and terminal growth rate which are affected by expectations about future market or economic conditions.


How We Addressed the Matter in Our Audit									We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and other relevant factors, such as historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved a specialist to assist in our evaluation of the valuation methodology applied by the Company and the significant assumptions used in estimating the fair value of the Company. In addition, we reviewed the allocation of the Company’s fair value to its reporting units and the comparison of the Company’s fair value to its market capitalization.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1994.

New Orleans, Louisiana

February ~~28, 2018~~25, 2021

POOL CORPORATION

Consolidated Statements of Income

(In thousands, except per share data)


	Year Ended December 31,
	2020		2019		2018
Net sales	$	3,936,623	$	3,199,517	$	2,998,097
Cost of sales	2,805,721		2,274,592		2,127,924
Gross profit	1,130,902		924,925		870,173
Selling and administrative expenses	659,931		583,679		556,284
Impairment of goodwill and other assets	6,944		0		0
Operating income	464,027		341,246		313,889
Interest and other non-operating expenses, net	12,353		23,772		20,896
Income before income taxes and equity earnings	451,674		317,474		292,993
Provision for income taxes	85,231		56,161		58,774
Equity earnings in unconsolidated investments, net	295		262		242
Net income	$	366,738	$	261,575	$	234,461



Earnings per share:
Basic	$	9.14	$	6.57	$	5.82
Diluted	$	8.97	$	6.40	$	5.62
Weighted average shares outstanding:
Basic	40,106		39,833		40,311
Diluted	40,865		40,865		41,693

Cash dividends declared per common share	$	2.29	$	2.10	$	1.72

Year Ended December 31,
2017 2016 2015
Net sales $ 2,788,188
$ 2,570,803
$ 2,363,139
Cost of sales 1,982,899
1,829,716
1,687,495
Gross profit 805,289
741,087
675,644
Selling and administrative expenses 520,918
485,228
459,422
Operating income 284,371
255,859
216,222
Interest and other non-operating expenses, net 15,189
14,481
8,072
Income before income taxes and equity earnings 269,182
241,378
208,150
Provision for income taxes 77,982
92,931
80,137
Equity earnings in unconsolidated investments, net 139
156
211
Net income 191,339
148,603
128,224
Net loss attributable to noncontrolling interest 294
352
51
Net income attributable to Pool Corporation $ 191,633
$ 148,955
$ 128,275

Earnings per share:
Basic $ 4.69
$ 3.56
$ 2.98
Diluted $ 4.51
$ 3.47
$ 2.90
Weighted average shares outstanding:
Basic 40,838
41,872
43,105
Diluted 42,449
42,984
44,254

Cash dividends declared per common share $ 1.42
$ 1.19
$ 1.00

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POOL CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands)


	Year Ended December 31,
	2020		2019		2018
Net income	$	366,738	$	261,575	$	234,461
Other comprehensive (loss) income:
Foreign currency translation adjustments	5,210		2,295		(4,945)
Change in unrealized losses and gains on interest rate swaps, net of the change in taxes of $2,957, $552 and $(425)	(8,870)		(1,657)		1,276
Total other comprehensive (loss) income	(3,660)		638		(3,669)
Comprehensive income	$	363,078	$	262,213	$	230,792

Year Ended December 31,
2017 2016 2015
Net income $ 191,339
$ 148,603
$ 128,224
Other comprehensive income (loss):
Foreign currency translation adjustments 5,545
(1,661 ) (9,046 )
Change in unrealized gains and losses on interest rate swaps,
net of the change in taxes of $(769), $(839) and $653
1,205
1,312
(1,021 )
Total other comprehensive income (loss) 6,750
(349 ) (10,067 )
Comprehensive income 198,089
148,254
118,157
Comprehensive loss attributable to noncontrolling interest 74
378
448
Comprehensive income attributable to Pool Corporation $ 198,163
$ 148,632
$ 118,605

The accompanying Notes are an integral part of the Consolidated Financial Statements.

POOL CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)


	December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	34,128	$	28,583
Receivables, net	122,252		76,648
Receivables pledged under receivables facility	166,948		149,891
Product inventories, net	780,989		702,274
Prepaid expenses and other current assets	17,610		16,172

Total current assets	1,121,927		973,568

Property and equipment, net	108,241		112,246
Goodwill	268,167		188,596
Other intangible assets, net	12,181		11,038
Equity interest investments	1,292		1,227
Operating lease assets	205,875		176,689
Other assets	21,987		19,902
Total assets	$	1,739,670	$	1,483,266

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	266,753	$	261,963
Accrued expenses and other current liabilities	143,694		60,813
Short-term borrowings and current portion of long-term debt	11,869		11,745
Current operating lease liabilities	60,933		56,325
Total current liabilities	483,249		390,846

Deferred income taxes	27,653		32,598
Long-term debt, net	404,149		499,662
Other long-term liabilities	38,261		27,970
Non-current operating lease liabilities	146,888		122,010
Total liabilities	1,100,200		1,073,086

Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 40,232,210 shares issued and outstanding at December 31, 2020 and 40,074,160 shares issued and outstanding at December 31, 2019	40		40
Additional paid-in capital	519,579		485,239
Retained earnings (deficit)	133,870		(64,740)
Accumulated other comprehensive loss	(14,019)		(10,359)
Total stockholders’ equity	639,470		410,180
Total liabilities and stockholders’ equity	$	1,739,670	$	1,483,266

December 31,
2017 2016
Assets
Current assets:
Cash and cash equivalents $ 29,940
$ 21,956
Receivables, net 76,597
61,437
Receivables pledged under receivables facility 119,668
104,714
Product inventories, net 536,474
486,116
Prepaid expenses and other current assets 19,569
15,318
Deferred income taxes —
6,016
Total current assets 782,248
695,557

Property and equipment, net 100,939
83,290
Goodwill 189,435
184,795
Other intangible assets, net 13,223
13,326
Equity interest investments 1,127
1,172
Other assets 14,090
15,955
Total assets $ 1,101,062
$ 994,095

Liabilities, redeemable noncontrolling interest and stockholders’ equity
Current liabilities:
Accounts payable $ 245,249
$ 230,728
Accrued expenses and other current liabilities 65,482
64,387
Short-term borrowings and current portion of long-term debt 10,835
1,105
Total current liabilities 321,566
296,220

Deferred income taxes 24,585
34,475
Long-term debt, net 508,815
436,937
Other long-term liabilities 22,950
18,966
Total liabilities 877,916
786,598

Redeemable noncontrolling interest —
2,287

Stockholders’ equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
40,212,477 shares issued and outstanding at December 31, 2017 and
41,089,720 shares issued and outstanding at December 31, 2016
40
41
Additional paid-in capital 426,750
403,162
Retained deficit (196,316 ) (183,915 )
Accumulated other comprehensive loss (7,328 ) (14,078 )
Total stockholders’ equity 223,146
205,210
Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 1,101,062
$ 994,095

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POOL CORPORATION

Consolidated Statements of Cash Flows

(In thousands)


	Year Ended December 31,
	2020		2019		2018
Operating activities
Net income	$	366,738	$	261,575	$	234,461
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	27,967		27,885		26,122
Amortization	1,431		1,389		1,793
Share-based compensation	14,516		13,472		12,874

Provision for doubtful accounts receivable, net of write-offs	(664)		(710)		2,286
Provision for inventory obsolescence, net of write-offs	2,362		1,310		1,462
(Benefit) provision for deferred income taxes	(2,542)		3,723		4,661
Losses (gains) on sales of property and equipment	38		(85)		(289)
Equity earnings in unconsolidated investments, net	(295)		(262)		(242)
Net losses on foreign currency transactions	1,748		1,347		560
Impairment of goodwill and other assets	6,944		0		0
Other	410		3,313		808
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	(38,688)		(15,691)		(14,371)
Product inventories	(42,447)		(14,165)		(142,170)
Prepaid expenses and other assets	(13,744)		(4,218)		1,018
Accounts payable	(9,212)		16,860		(6,567)
Accrued expenses and other current liabilities	83,019		3,033		(3,750)
Net cash provided by operating activities	397,581		298,776		118,656

Investing activities
Acquisition of businesses, net of cash acquired	(124,587)		(8,901)		(2,578)
Purchases of property and equipment, net of sale proceeds	(21,702)		(33,362)		(31,580)



Net cash used in investing activities	(146,289)		(42,263)		(34,158)

Financing activities
Proceeds from revolving line of credit	1,053,968		1,066,529		1,138,195
Payments on revolving line of credit	(1,145,616)		(1,415,988)		(998,503)
Proceeds from asset-backed financing	326,700		189,000		198,400
Payments on asset-backed financing	(321,700)		(182,500)		(189,900)
Proceeds from term facility	0		185,000		0
Payments on term facility	(9,250)		0		0
Proceeds from short-term borrowings and current portion of long-term debt	13,822		30,863		17,127
Payments on short-term borrowings and current portion of long-term debt	(13,698)		(28,286)		(18,793)
Payments of deferred financing costs	(12)		(406)		(106)
Payments on deferred and contingent acquisition consideration	(281)		(312)		(661)


Proceeds from stock issued under share-based compensation plans	19,824		18,574		13,569
Payments of cash dividends	(91,929)		(83,772)		(69,430)
Purchases of treasury stock	(76,199)		(23,188)		(187,469)
Net cash used in financing activities	(244,371)		(244,486)		(97,571)
Effect of exchange rate changes on cash and cash equivalents	(1,376)		198		(509)
Change in cash and cash equivalents	5,545		12,225		(13,582)
Cash and cash equivalents at beginning of year	28,583		16,358		29,940
Cash and cash equivalents at end of year	$	34,128	$	28,583	$	16,358

Year Ended December 31,
2017 2016 2015
Operating activities
Net income $ 191,339
$ 148,603
$ 128,224
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 24,157
20,338
16,373
Amortization 1,568
1,639
1,015
Share-based compensation 12,482
9,902
9,543
Excess tax benefits from share-based compensation —
(7,370 ) (7,706 )
Provision for doubtful accounts receivable, net of write-offs (154 ) (155 ) 197
Provision for inventory obsolescence, net of write-offs (267 ) (448 ) 576
Provision (benefit) for deferred income taxes (4,636 ) 3,749
4,198
(Gains) losses on sales of property and equipment (285 ) (320 ) 230
Equity earnings in unconsolidated investments, net (139 ) (156 ) (211 )
Net (gains) losses on foreign currency transactions (171 ) 679
774
Impairments of goodwill and other non-operating assets 1,200
4,113
500
Other 166
923
(869 )
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables (21,903 ) (5,666 ) (16,656 )
Product inventories (35,783 ) (8,050 ) (10,848 )
Prepaid expenses and other assets (4,096 ) (3,077 ) (434 )
Accounts payable 5,077
(17,896 ) 9,956
Accrued expenses and other current liabilities 6,756
18,570
11,188
Net cash provided by operating activities 175,311
165,378
146,050

Investing activities

Acquisition of businesses, net of cash acquired (12,834 ) (19,730 ) (4,483 )
Purchases of property and equipment, net of sale proceeds (39,390 ) (34,352 ) (29,095 )
Payments to fund credit agreement —
(5,322 ) (8,860 )
Collections from credit agreement —
3,737
4,557
Other investments, net 4
24
88
Net cash used in investing activities (52,220 ) (55,643 ) (37,793 )

Financing activities
Proceeds from revolving line of credit 1,067,868
1,154,090
911,712
Payments on revolving line of credit (1,011,977 ) (1,072,557 ) (890,406 )
Proceeds from asset-backed financing 161,600
155,000
143,400
Payments on asset-backed financing (145,100 ) (126,500 ) (156,000 )
Proceeds from short-term borrowings and current portion of long-term debt 27,333
18,442
8,119
Payments on short-term borrowings and current portion of long-term debt (17,603 ) (19,037 ) (7,948 )
Payments on deferred and contingent acquisition consideration (324 ) —
—
Purchase of redeemable non-controlling interest (2,573 ) —
—
Payments of deferred financing costs (1,104 ) (69 ) (320 )
Excess tax benefits from share-based compensation —
7,370
7,706
Proceeds from stock issued under share-based compensation plans 11,466
11,752
18,269
Payments of cash dividends (58,029 ) (49,749 ) (43,117 )
Purchases of treasury stock (146,006 ) (178,414 ) (99,219 )
Net cash used in financing activities (114,449 ) (99,672 ) (107,804 )
Effect of exchange rate changes on cash and cash equivalents (658 ) (1,344 ) (2,046 )
Change in cash and cash equivalents 7,984
8,719
(1,593 )
Cash and cash equivalents at beginning of year 21,956
13,237
14,830
Cash and cash equivalents at end of year $ 29,940
$ 21,956
$ 13,237

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POOL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)


	Common Stock			Additional Paid-In		Retained Earnings		Accumulated Other Comprehensive
	Shares	Amount		Capital		(Deficit)		Loss		Total
Balance at December 31, 2017	40,212	$	40	$	426,750	$	(196,316)	$	(7,328)	$	223,146
Net income	0	0		0		234,461		0		234,461
Foreign currency translation	0	0		0		0		(4,945)		(4,945)
Interest rate swaps, net of the change in taxes of $(425)	0	0		0		0		1,276		1,276
Repurchases of common stock, net of retirements	(1,291)	0		0		(187,469)		0		(187,469)
Share-based compensation	0	0		12,874		0		0		12,874
Issuance of stock under share-based compensation plans	585	0		13,569		0		0		13,569
Declaration of cash dividends	0	0		0		(69,322)		0		(69,322)

Balance at December 31, 2018	39,506	40		453,193		(218,646)		(10,997)		223,590
Net income	0	0		0		261,575		0		261,575
Foreign currency translation	0	0		0		0		2,295		2,295
Interest rate swaps, net of the change in taxes of $552	0	0		0		0		(1,657)		(1,657)
Repurchases of common stock, net of retirements	(155)	0		0		(23,188)		0		(23,188)
Share-based compensation	0	0		13,472		0		0		13,472
Adoption of ASU 2016-02	—	—		—		(709)		—		(709)
Issuance of stock under share-based compensation plans	723	0		18,574		0		0		18,574
Declaration of cash dividends	0	0		0		(83,772)		0		(83,772)
Balance at December 31, 2019	40,074	40		485,239		(64,740)		(10,359)		410,180
Net income	0	0		0		366,738		0		366,738
Foreign currency translation	0	0		0		0		5,210		5,210
Interest rate swaps, net of the change in taxes of $2,957	0	0		0		0		(8,870)		(8,870)
Repurchases of common stock, net of retirements	(401)	0		0		(76,199)		0		(76,199)
Share-based compensation	0	0		14,516		0		0		14,516
Issuance of stock under share-based compensation plans	559	0		19,824		0		0		19,824
Declaration of cash dividends	0	0		0		(91,929)		0		(91,929)
Balance at December 31, 2020	40,232	$	40	$	519,579	$	133,870	$	(14,019)	$	639,470

Common Stock
Additional
Paid-In
Retained
Accumulated
Other
Comprehensive

Shares Amount Capital Deficit Loss Total
Balance at December 31, 2014 43,511
$ 44
$ 338,620
$ (90,650 ) $ (3,662 ) $ 244,352
Net income attributable to Pool Corporation —
—
—
128,275
—
128,275
Foreign currency translation —
—
—
—
(9,046 ) (9,046 )
Interest rate swaps, net of the change in taxes of $653 —
—
—
—
(1,021 ) (1,021 )
Repurchases of common stock, net of retirements (1,448 ) (2 ) —
(99,217 ) —
(99,219 )
Share-based compensation —
—
9,543
—
—
9,543
Issuance of shares under incentive stock plans, including tax benefit of $7,706 648
1
25,975
—
—
25,976
Declaration of cash dividends —
—
—
(43,117 ) —
(43,117 )
Balance at December 31, 2015 42,711
43
374,138
(104,709 ) (13,729 ) 255,743
Net income attributable to Pool Corporation —
—
—
148,955
—
148,955
Foreign currency translation —
—
—
—
(1,661 ) (1,661 )
Interest rate swaps, net of the change in taxes of $(839) —
—
—
—
1,312
1,312
Repurchases of common stock, net of retirements (2,064 ) (2 ) —
(178,412 ) —
(178,414 )
Share-based compensation —
—
9,902
—
—
9,902
Issuance of shares under incentive stock plans, including tax benefit of $7,370 443
—
19,122
—
—
19,122
Declaration of cash dividends —
—
—
(49,749 ) —
(49,749 )
Balance at December 31, 2016 41,090
41
403,162
(183,915 ) (14,078 ) 205,210
Net income attributable to Pool Corporation —
—
—
191,633
—
191,633
Foreign currency translation —
—
—
—
5,545
5,545
Interest rate swaps, net of the change in taxes of $(769) —
—
—
—
1,205
1,205
Repurchases of common stock, net of retirements (1,353 ) (1 ) —
(146,005 ) —
(146,006 )
Share-based compensation —
—
12,482
—
—
12,482
Issuance of shares under incentive stock plans (see Note 1 for tax benefit accounting change) 475
—
11,466
—
—
11,466
Declaration of cash dividends —
—
—
(58,029 ) —
(58,029 )
Redemption value adjustment of redeemable non-controlling interest —
—
(360 ) —
—
(360 )
Balance at December 31, 2017 40,212
$ 40
$ 426,750
$ (196,316 ) $ (7,328 ) $ 223,146

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POOL CORPORATION

Notes to Consolidated Financial Statements

Note 1 - Organization and Summary of Significant Accounting Policies

Description of Business

As of December 31, ~~2017,~~2020, Pool Corporation and our subsidiaries (the Company, which may be referred to as we, us or our), operated ~~351~~398 sales centers in North America, Europe ~~South America~~ and Australia from which we sell swimming pool supplies, equipment ~~parts~~ and ~~supplies,~~related leisure products, irrigation and ~~related~~landscape products and hardscape, tile and stone products to pool builders, retail stores, service companies, landscape contractors and golf courses. We distribute products through ~~four~~4 networks: SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon) and National Pool Tile (NPT).

Basis of Presentation and Principles of Consolidation

We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial Statements include the accounts of Pool Corporation and our subsidiaries. All of our subsidiaries are wholly owned. All significant intercompany accounts and intercompany transactions have been eliminated.

All of our subsidiaries are wholly owned. From July 31, 2014 to June 29, 2017, we owned a 60% interest in Pool Systems Pty. Ltd. (PSL), an Australian company. Our ownership percentage constituted a controlling interest in the acquired company, which required us to consolidate PSL’s financial position and results of operations from the date of acquisition. On June 29, 2017, we purchased the remaining 40% interest in PSL. Thus, we will continue to consolidate PSL, but there will no longer be a separate noncontrolling interest reported on our Consolidated Statements of Income, nor Redeemable noncontrolling interest reported on our Consolidated Balance Sheets.

~~Variable Interest Entity~~

In February 2015, we entered into a five-year credit agreement with a swimming pool retailer. Under this agreement and the related revolving note, we were the primary lender of operating funds for this entity. The total lending commitment under the credit agreement was $8.5 million. In December 2017, we ended our lending arrangement with this entity and exercised our rights to the collateral that secured this agreement. The collateral was sufficient to satisfy the net balance previously recorded within Other assets on our Consolidated Balance Sheets.

Use of Estimates

To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor ~~incentives,~~programs, income taxes, ~~incentive~~performance-based compensation accruals and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.

Newly Adopted Accounting Pronouncements

~~Effective~~On January 1, ~~2017,~~2020, we adopted Accounting Standards Update (ASU) ~~2016-09,~~ ~~Improvements to Employee Share-Based Payment~~2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related amendments, which are codified into Accounting~~, on a prospective basis and as such, our prior year presentation has not changed. The provisions of this update simplify many key aspects of~~ Standards Codification (ASC) 326, using the accounting for and cash flow presentation of employee share-based compensation transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements. In accordance with the new guidance, we now record all excess tax benefits or tax deficiencies as a component of our Provision for income taxes on our Consolidated Statements of Income. As a result of the adoption, we recognized $12.6 million of excess tax benefits in 2017, which reduced our Provision for income taxes and positively impacted our Net income. Historically, these amounts were recorded as Additional paid in capital in stockholders’ equity on our Consolidated Balance Sheets. Additionally, we now present excess tax benefits or deficiencies as operating cash flows versus reclassifying the amount out of operating cash flows and presenting it in financing activities on the Consolidated Statements of Cash Flows.

~~Additional amendments from this guidance~~cumulative-effect transition method related to ~~forfeitures~~our trade receivables.This new standard changes the way companies evaluate credit losses for most financial assets and ~~minimum statutory withholding tax requirements had no impact~~certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to ~~our financial position, results of operations or cash flows. As permitted, we continue~~use a new forward-looking “expected loss” model to estimate forfeitures to determine the amount of compensation cost to be recognized each period rather than electing to account for forfeitures as they occur, and we continue to present the value of shares withheld for minimum statutory tax withholding requirements on the Consolidated Statements of Cash Flows as a financing activity. Another impact of the adoption is that the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds,evaluate impairment, potentially resulting in ~~an increase in diluted weighted average shares outstanding~~earlier recognition of ~~approximately 550,000 shares~~allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year ~~ended December 31, 2017.~~

~~On January 1, 2017, we adopted ASU 2015-17,~~ ~~Balance Sheet Classification~~ of ~~Deferred Taxes~~, which requires we classify all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Additionally, we no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances are also now classified as noncurrent. As permitted, we elected to adopt this guidance on a prospective basis and as such, our prior year presentation has not changed.origination for most financing receivables. The adoption of ~~ASU 2015-17~~this standard did not have a material impact on our financial position or results of operations, and ~~related disclosures.~~we do not expect the adoption of this guidance to have a material effect on our results of operations in future periods. As the impact from adoption was not material, we did not recognize an adjustment to the beginning balance of retained earnings.

We adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, for our interim impairment tests performed in the period ended March 31, 2020. This new standard eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the previous guidance). Rather, the measurement of a goodwill impairment charge is based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the previous guidance). The impact of the new standard is dependent on the specific facts and circumstances of individual impairments, if any. The adoption of this guidance did not impact our results of operations, statement of financial position or cash flows.

On January 1, ~~2017,~~2020, we adopted ASU ~~2015-11,~~ ~~Inventory~~2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on a prospective basis. This new standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The adoption of this guidance did not materially impact our results of operations, statement of financial position or cash flows.

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic ~~330): Simplifying~~842), and all the ~~Measurement of Inventory~~,related amendments, which requires that we measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.are codified into ASC 842. The adoption of ASU ~~2015-11~~2016-02 significantly increased assets and liabilities on our Consolidated Balance Sheet as we recorded a right-of-use asset and corresponding liability for each of our existing operating leases. We adopted this guidance using the modified retrospective approach by recognizing a cumulative adjustment to retained earnings on the adoption date, which was not material. Additionally, we elected to apply the practical expedient that allows us to exclude comparative presentation; thus, we did not restate our prior period balance sheet to reflect the new guidance.

We recorded operating lease assets of approximately $175.7 million and operating lease liabilities of approximately $181.6 million as of January 1, 2019. To calculate the present value of our lease liabilities, we used the incremental borrowing rate on December 31, 2018, for operating leases that commenced prior to that date. The difference between the operating lease assets and operating lease liabilities primarily represents our straight-line rent liability of $5.1 million recorded under previous accounting guidance. Under ASU 2016-02, this liability is considered a reduction of the operating lease asset. We recorded the remaining difference between our operating lease assets and operating lease liabilities, net of the deferred tax impact, as an adjustment to our retained deficit. Additionally, we reclassified prepaid rent of $4.9 million as of January 1, 2019 to our operating lease asset resulting in a balance of $180.6 million as of the adoption date. The adoption of this guidance did not materially impact our results of operations or cash flows. For additional information regarding our adoption of this guidance, see Note 9.

On January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The new guidance eliminated the requirement to separately measure and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the change in the fair value of the hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item. The adoption of this standard did not have a material impact on our financial position ~~results of operations~~ and ~~related disclosures.~~

~~On January 1, 2017,~~ we ~~adopted ASU 2015-16,~~ ~~Simplifying the Accounting for Measurement-Period Adjustments~~, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The adoption of ASU 2015-16 diddo not ~~have~~expect a material impact ~~on our financial position, results of operations and related disclosures.~~in future periods.

~~As required, we adopted ASU 2014-15,~~ ~~Presentation of Financial Statements - Going Concern,~~ as of December 31, 2016. Based on management’s evaluation, which included forecasting results covering the one-year period following our 2017 Form 10-K filing date, we did not identify any conditions or events that raise substantial doubt about our ability to continue as a going concern.

Segment Reporting

Since all of our sales centers have similar operations and share similar economic characteristics, we aggregate our sales centers into a single reportable segment. These similarities include (i) the nature of our products and services, (ii) the types of customers we sell to and (iii) the distribution methods we use. Our chief operating decision maker (CODM) evaluates each sales center based on individual performance that includes both financial and operational measures. These measures include operating income growth and accounts receivable and inventory management criteria. Each sales center manager and eligible field employee earns performance-based ~~incentive~~ compensation based on these measures developed at the sales center level.

A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions ~~about how to allocate resources~~ primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues, profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines and product categories and the fact that we make ongoing changes as to ~~how products are classified~~product classifications within these groups, thus making it impracticable to report our sales by product category.

Seasonality and Weather

Our business is highly seasonal and weather is one of the principal external factors affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of ~~both~~ swimming pool use, pool and irrigation installation and ~~irrigation installations~~remodeling and ~~maintenance.~~repair activities. Sales are substantially lower during the first and fourth ~~quarters, when we may incur net losses.~~quarters.

Revenue Recognition

Under ASC 606, we recognize a sale when a customer obtains control of the product, and we record the amount that reflects the consideration we expect to receive in exchange for such product. We recognize ~~revenue~~a sale when ~~four basic criteria are met:~~

~~1. persuasive evidence of an arrangement exists;~~

~~2. delivery has occurred or services have been rendered;~~

~~3. our price to the buyer is fixed or determinable; and~~

~~4. collectability is reasonably assured.~~

~~Customers may take delivery of products in~~ a ~~variety of ways. Customers may pick~~customer picks up ~~products~~product at any sales center, ~~location, or~~when we ~~may~~ deliver ~~products~~product to their premises or job sites via our ~~trucks; in these instances, we record revenue upon delivery to the customers. We also deliver products through third party carriers, and we record revenue~~trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the ~~third party carriers. Products shipped via third party carriers~~customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.

We consider our distribution of products to represent one reportable revenue stream. Our products are ~~considered delivered based on~~similar in nature, and our revenue recognition policy is the ~~shipping terms, which are generally FOB shipping point.~~same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. We include shipping and handling fees billed to customers as freight out income within net sales.

We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and we account for these incentives as ~~an adjustment to~~a reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as ~~an adjustment to~~a reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists under ASC 606. Other items that we record as ~~adjustments~~reductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments.

The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We recognize shipping and handling costs associated with outbound freight in selling and administrative expenses.

We ~~also~~ report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, ~~value added~~value-added and some excise taxes.

~~Effective January 1, 2018, we will adopt ASU 2014-09,~~ ~~Revenue from Contracts with Customers,~~ and subsequent amendments. Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised products to our customer. We expect to recognize revenue when control of the product has been transferred to the customer upon delivery to the customer or the freight carrier, if delivered by a third party, as we believe our performance obligation is satisfied at such point in time. This treatment is consistent with our current revenue recognition policies. We evaluated our bill and hold sales under the new guidance and determined that revenue may be recognized earlier under ASU 2014-09. However, at December 31, 2017, a cumulative catch-up adjustment related to bill and hold transactions would not be material due to the seasonal nature of our business.

We reviewed our terms and conditions, marketing programs, coupons and customary business practices to determine if any variable consideration exists in our revenue transactions. We did not identify any arrangements that would cause different accounting treatment under the new guidance. 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 will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.

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

Vendor Programs

Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized as a reduction of Cost of sales on our Consolidated Statements of Income.

Throughout the year, we estimate the amount earned based on our ~~estimate~~expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our Consolidated Financial Statements.

Shipping and Handling Costs

We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands):


2020		2019		2018
$	59,224	$	51,580	$	48,610

2017 2016 2015
$ 45,247
$ 39,879
$ 36,783

Share-Based Compensation

We record share-based compensation for stock options and other share-based awards based on the estimated fair value as measured on the grant date. For stock option awards, we use a Black-Scholes model for estimating the grant date fair value. For additional discussion of share-based compensation, see Note 6.

Advertising Costs

We expense advertising costs when incurred. The table below presents advertising expense for the past three years (in thousands):


2017		2016		2015
2020						2020	2019		2018
$	7,477	$	7,011	$	7,127	6,755	$	7,842	$	7,390

Income Taxes

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised or restrictions on stock awards lapse.

We record ~~deferred tax assets~~Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and ~~liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect~~ when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

~~In December 2017, the Tax Cuts and Jobs Act (TJCA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with Accounting Standards Codification Topic (ASC) 740,~~ ~~Income Taxes~~, we are required to account for the new requirements in the period that includes the date of enactment. The Act reduces the overall corporate income tax rate to 21%, creates a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadens the tax base and allows for the immediate capital expensing of certain qualified property. Due to the complexities presented by the Act, particularly for those companies with multi-national operations, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) to provide guidance to companies who are not able to complete their accounting in the period of enactment prior to the reporting deadlines. Under the guidance in SAB 118, companies that have not completed their accounting for certain elements of the Act, but can determine a reasonable estimate of those effects, should include a provisional amount based on their reasonable estimate in their financial statements. This guidance resulted in us recording a provisional net benefit to the income tax provision during the period ended December 31, 2017. As of December 31, 2017,incurred, although we have not ~~completed our accounting for~~realized any impacts since the enactment of U.S. tax ~~effects of the Act.~~ reform enacted in December 2017.

For additional ~~discussion of the effects of the Act and our current estimates, see Note 7.~~

~~We record a valuation allowance to reduce the carrying amounts of net deferred tax assets if there is uncertainty~~information regarding their future realization. We consider many factors when assessing the likelihood of future realization including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. For additional discussion of income taxes, see Note 7.

Equity Method Investments

We account for our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in this investment.

Earnings Per Share

We calculate basic earnings per share (EPS) by dividing Net income ~~or loss attributable to Pool Corporation~~ by the weighted average number of common shares outstanding. ~~We include outstanding unvested restricted stock awards of our common stock in the basic weighted average share calculation.~~ Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. As discussed above, as a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding. For additional discussion of earnings per share, see Note 8.

Foreign Currency

The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We include realized transaction gains and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated Statements of Income. We realized net foreign currency transaction ~~gains~~losses of ~~$0.2~~$1.7 million in ~~2017 and losses of $0.7~~2020, $1.3 million in ~~2016~~2019 and ~~$0.8~~$0.6 million in ~~2015.~~2018. In 2019, our net foreign currency transaction loss included a $0.9 million reclassification from Accumulated other comprehensive loss related to the closing of our sales center in Colombia.

Fair Value Measurements

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:


~~Level 1~~	~~Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.~~

Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.


~~Level 2~~	~~Inputs to the valuation methodology include:~~

Level 2 Inputs to the valuation methodology include:

•quoted prices for similar assets or liabilities in active markets;

•quoted prices for identical or similar assets or liabilities in inactive markets;

•inputs other than quoted prices that are observable for the asset or liability; or

•inputs that are derived principally from or corroborated by observable market data by correlation or other means.


~~Level 3~~	~~Inputs to the valuation methodology are unobservable and significant to the fair value measurement.~~

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Recurring Fair Value Measurements

The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap ~~contract~~contracts and our contingent consideration liabilities (in thousands):


	Fair Value at December 31,
	2020		2019
Level 2
Unrealized gains on interest rate swaps	$	223	$	655
Unrealized losses on interest rate swaps	12,314		919

Level 3
Contingent consideration liabilities	$	1,343	$	703

Fair Value at December 31,
2017 2016
Level 2
Unrealized gains on interest rate swaps $ 1,585
$ 1,521
Unrealized losses on interest rate swaps 703
3,138

Level 3
Contingent consideration liabilities $ 1,824
$ 1,611

We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. As of December 31, 2020, our Consolidated Balance Sheets reflect $0.3 million in Accrued expenses and other current liabilities and $1.0 million in Other long-term liabilities related to our estimates for contingent consideration payouts.

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs).

For determining the fair value of our interest rate swap and forward-starting interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 ~~inputs as defined in the accounting guidance)~~inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.

As of December 31, 2017, our Consolidated Balance Sheets reflect $0.7 million in Accrued expenses and other current liabilities and $1.2 million in Other long-term liabilities for contingent consideration related to future payouts for our acquisitions of The Melton Corporation, which we acquired in November 2015, Metro Irrigation Supply Company Ltd. and Newline Pool Products. In determining our original estimates for contingent consideration, which are based on a percentage of gross profit for certain products for The Melton Corporation and a multiple of gross profit for Metro Irrigation Supply Company Ltd., we applied a linear model using our best estimate of gross profit projections for fiscal years 2016 to 2020. The payout for Newline Pool Products is based on a multiple of earnings for the first fiscal year of the acquisition. We based our estimate for the Newline payout on projected operating results for that year. All of our estimates of contingent consideration use Level 3 inputs as defined in the accounting guidance. The maximum total payouts for Metro Irrigation Supply Company Ltd. and Newline Pool Products over the related time periods are $1.0 million and AU$0.5 million, respectively.

In 2017, we paid approximately $0.2 million in contingent consideration to The Melton Corporation based on 2016 results. Since the acquisition dates, we have recorded minimal adjustments to our original estimates based on the calculated 2017 payouts related to the fiscal year ended December 31, 2016 and the calculated 2018 and future payouts considering results for the fiscal year ended December 31, 2017. Adjustments to the fair value of contingent consideration are recognized in earnings in the period in which we determine that the fair value changed. As of December 31, 2017, we have determined that the contingent consideration liability was in a range of acceptable estimates for all applicable fiscal periods.

The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs). For the note receivable settled with our former variable interest entity in 2017, our determination of the estimated fair value reflected a discounted cash flow model using our estimates, including assumptions related to collectability. In 2017, we recorded $1.2 million of fair value adjustments to reduce the note receivable to the estimated realizable amount based on the results of our discounted cash flow model for expected payments under the note receivable. The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).

Nonrecurring Fair Value Measurements

In addition to our assets and liabilities that we measure at fair value on a recurring basis, our assets and liabilities are also subject to nonrecurring fair value measurements. Generally, our assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.

Derivatives and Hedging Activities

~~We designated~~At inception, we formally designate and document our interest rate swap ~~and forward-starting interest rate swap~~ contracts that qualify for hedge accounting as cash flow hedges of interest payments on variable rate borrowings. We formally assess, both at inception and ~~we assess hedge effectiveness on a~~at least quarterly, ~~basis.~~whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, we record the changes in the estimated fair value of ~~the swaps~~our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. To the extent our interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value in Interest and other non-operating expenses, net on our Consolidated Statements of Income. We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap counterparties as an adjustment to interest expense over the life of the swaps.

Our interest rate swap contracts and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.

We recognize any differences between the variable interest rate in effect and the fixed interest rate per our swap contracts as an adjustment to interest expense over the life of the swaps.

For our interest rate swap contracts currently in effect, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in 2017, 2016 or 2015. In October 2016, we began reclassifying the fair values related to our original forward-starting swaps from Accumulated other comprehensive income (loss) to Interest and other non-operating expenses, net. These unrealized losses are being amortized over the effectiveany period ~~of the original forward-starting interest rate swap contracts from October 2016 to September 2018.~~presented. For additional discussion of our interest rate swaps, see Note 5.

Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Credit Risk and Allowance for Doubtful Accounts

We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers.

Management estimates future losses based on historical bad debts, customer receivable balances, age of customer receivable balances, customers’ financial conditions and current and forecasted economic trends, including certain trends in the housing market, the availability of consumer credit and general economic conditions (as commonly measured by Gross Domestic Product or GDP). We monitor housing market trends through review of the House Price Index as published by the Federal Housing Finance Agency, which measures the movement of single-family house prices. At the end of each quarter, we perform a reserve analysis of all accounts with balances greater than $20,000 ~~and~~that are more than 60 days past due. ~~Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on the remainder of the past due portion of the aging.~~ During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts.

The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands):


	2020		2019		2018
Balance at beginning of year	$	5,472	$	6,182	$	3,897
Bad debt expense	1,900		2,768		4,164
Write-offs, net of recoveries	(2,564)		(3,478)		(1,879)
Balance at end of year	$	4,808	$	5,472	$	6,182

2017 2016 2015
Balance at beginning of year $ 4,050
$ 4,205
$ 4,008
Bad debt expense 916
1,199
1,110
Write-offs, net of recoveries (1,069 ) (1,354 ) (913 )
Balance at end of year $ 3,897
$ 4,050
$ 4,205

Product Inventories and Reserve for Inventory Obsolescence

Product inventories consist primarily of goods we purchase from manufacturers to sell to our customers. We record inventory at the lower of cost, using the average cost method, or net realizable value. We establish our reserve for inventory obsolescence based on inventory turns by class with particular emphasis on stock keeping units with the weakest sales over the expected sellable period, which is the previous 12 months for most products. The reserve is intended to reflect the net realizable value of inventory that we may not be able to sell at a profit.

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

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

•changes in customer preferences or regulatory requirements;

•seasonal fluctuations in inventory levels;

•geographic location; and

•superseded products and new product offerings.

We periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors.

The following table summarizes the changes in our reserve for inventory obsolescence for the past three years (in thousands):


	2020		2019		2018
Balance at beginning of year	$	9,036	$	7,726	$	6,264
Provision for inventory write-downs	6,181		3,656		3,998
Deduction for inventory write-offs	(3,819)		(2,346)		(2,536)
Balance at end of year	$	11,398	$	9,036	$	7,726

2017 2016 2015
Balance at beginning of year $ 6,531
$ 6,979
$ 6,403
Provision for inventory write-downs 2,660
2,036
3,043
Deduction for inventory write-offs (2,927 ) (2,484 ) (2,467 )
Balance at end of year $ 6,264
$ 6,531
$ 6,979

Property and Equipment

Property and equipment are stated at cost. We depreciate property and equipment on a straight-line basis over the following estimated useful lives:



Buildings			40 years
Leasehold improvements ⁽¹⁾			1 - 10 years
Autos and trucks			3 - 6 years
Machinery and equipment			3 - 15 years
Computer equipment			3 - 7 years
Furniture and fixtures			5 - 10 years


⁽¹⁾	For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period.

(1)For substantial improvements made near the end of a lease term where we are reasonably certain the lease will be renewed, we amortize the leasehold improvement over the remaining life of the lease including the expected renewal period.

The table below presents depreciation expense for the past three years (in thousands):


2020		2019		2018
$	27,967	$	27,885	$	26,122

2017
2016 2015
$ 24,157
$ 20,338
$ 16,373

Acquisitions

We use the acquisition method of accounting and recognize assets acquired and liabilities assumed at fair value as of the acquisition date. Any contingent assets acquired and contingent liabilities assumed are also recognized at fair value if we can reasonably estimate fair value during the measurement period (which cannot exceed one year from the acquisition date). We re-measure any contingent liabilities at fair value in each subsequent reporting period. We expense all acquisition-related costs as incurred, including any restructuring costs associated with a business combination.

If our initial acquisition accounting is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for incomplete items. Once we obtain information required to finalize the accounting for incomplete items, we adjust the provisional amounts recognized. We make adjustments to these provisional amounts during the measurement period.

For all acquisitions, we include the results of operations in our Consolidated Financial Statements as of the acquisition date. For additional discussion of acquisitions, see Note 2.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. We test goodwill and other indefinite-lived intangible assets for impairment annually as of October 1st and at any other time when impairment indicators exist.

We estimate fair value based on an income approach that incorporates our assumptions for determining the present value of future cash flows. We project future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples. These assumptions are considered unobservable inputs (Level 3 inputs as defined in the accounting guidance). IfTo the ~~estimated fair value of any of our reporting units falls below its carrying value, we compare the estimated fair value of the reporting unit’s goodwill to its carrying value. If~~extent the carrying value of a reporting ~~unit’s goodwill exceeds~~unit is greater than its estimated fair value, we ~~recognize~~record a goodwill impairment charge for the difference, ~~as an~~up to the carrying value of the goodwill. We recognize any impairment loss in operating income. Since we define an operating segment as an individual sales center and we do not have operations below the sales center level, our reporting unit is an individual sales center. For additional discussion of goodwill and other intangible assets, see Note 3.

Receivables Securitization Facility

Our accounts receivable securitization facility (the Receivables Facility) provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain ~~third party~~third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.

We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the ~~third party~~third-party financial institutions. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a ~~long‑term~~long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5.

Self-Insurance

We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish ~~self‑insurance~~self-insurance reserves based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to the age of existing claims, estimated settlement amounts and other historical claims data.

~~Redeemable Noncontrolling Interest~~

In July 2014, we purchased a controlling interest in PSL. Included in the transaction documents was a put/call option deed that granted us an option to purchase the shares held by the noncontrolling interest and granted the holder of the noncontrolling interest an option to require us to purchase its shares in one or two transactions. The put/call option deed in this transaction was considered an equity contract and therefore a financial instrument under the accounting guidance. In applying the guidance for this transaction, we determined that the financial instrument was embedded in the noncontrolling interest. As a public company, we are required to classify the noncontrolling interest and the embedded financial instrument as redeemable noncontrolling interest in a separate section of our Consolidated Balance Sheets, between liabilities and equity.

On June 29, 2017, we purchased the remaining 40% interest in PSL. The actual redemption value exceeded the carrying amount, and we recorded an adjustment to Additional paid in capital as there were no retained earnings attributable to the noncontrolling interest.

~~The table below presents the changes in Redeemable noncontrolling interest (in thousands):~~

2017 2016 2015
Redeemable noncontrolling interest, beginning of period $ 2,287
$ 2,665
$ 3,113
Redemption value adjustment of noncontrolling interest 360
—
—
Net loss attributable to noncontrolling interest (294 ) (352 ) (51 )
Other comprehensive income (loss) attributable to noncontrolling interest 220
(26 ) (397 )
Less: purchase of redeemable noncontrolling interest 2,573
—
$ —
Redeemable noncontrolling interest, end of period $ —
$ 2,287
$ 2,665

Accumulated Other Comprehensive Loss

The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):


	December 31,
	2020		2019
Foreign currency translation adjustments	$	(4,917)	$	(10,127)
Unrealized losses on interest rate swaps, net of tax	(9,102)		(232)
Accumulated other comprehensive loss	$	(14,019)	$	(10,359)

December 31,
2017 2016
Foreign currency translation adjustments $ (7,478 ) $ (13,024 )
Unrealized gains (losses) on interest rate swaps, net of tax ⁽¹⁾
150
(1,054 )
Accumulated other comprehensive loss $ (7,328 ) $ (14,078 )

⁽¹⁾

In February 2018, the Financial Accounting Standards Board (FASB) issued guidance that allows entities the option to reclassify the tax effects related to items in accumulated other comprehensive income (loss) to retained earnings (deficit) if deemed to be stranded in accumulated other comprehensive income (loss) due to U.S. tax reform. Because the change in the tax effects of our unrealized gains on interest rate swaps was not material, we elected not to reclassify such amounts. We reclassify the income tax effects of amounts in accumulated other comprehensive loss in the period in which the respective gross amount is released.

Retained ~~Deficit~~Earnings

We account for the retirement of treasury share repurchases as an increase of our Retained ~~deficit~~earnings (deficit) on our Consolidated Balance Sheets. As of December 31, ~~2017,~~2020, the retained ~~deficit~~earnings reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of ~~$1,239.3 million~~$1.5 billion and cumulative dividends of ~~$425.8~~$670.8 million.

Supplemental Cash Flow Information

The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands):


	Year Ended December 31,
	2020		2019		2018
Cash paid during the year for:
Interest	$	8,257	$	20,960	$	17,796
Income taxes, net of refunds	81,792		51,076		50,091

Recent Accounting Pronouncements Pending Adoption

The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:


Standard	Description	Effective Date	Effect on Financial Statements and Other Significant Matters
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes	Simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Most amendments are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.	Annual periods beginning after December 15, 2020	We do not expect that there will be a material impact to the financial statements as a result of adopting this ASU.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made.	The provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.	We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures.

Year Ended December 31,
2017 2016 2015
Cash paid during the year for:
Interest $ 12,957
$ 8,052
$ 6,316
Income taxes, net of refunds 84,251
80,378
65,668

Note 2 - Acquisitions

~~2017~~2020 Acquisitions

In ~~April 2017,~~February 2020, we acquired the distribution assets of ~~Lincoln Equipment, Inc. (Lincoln Aquatics),~~Master Tile Network LLC, a ~~national~~wholesale distributor of ~~equipment and supplies to commercial and institutional~~ swimming pool ~~customers, with one~~tile and hardscape products, adding 2 locations in Texas, 1 location in ~~California.~~Nevada and 1 location in Oklahoma.

In ~~July 2017,~~September 2020, we acquired ~~New Star Holdings Pty. Ltd. (doing business as Newline~~the distribution assets of Northeastern Swimming Pool ~~Products), a swimming pool equipment and supplies distributor with one distribution center in Brisbane, Australia.~~

~~In October 2017, we acquired E-Grupa, a national swimming pool equipment and supplies distributor, with one location in Croatia.~~

~~In December 2017, we acquired Kripsol Intermark Malaga S.L. (Intermark), a swimming pool equipment and supplies distributor, with one location in southern Spain.~~

~~In December 2017, we acquired Chem Quip,~~Distributors, Inc. ~~(Chem Quip)~~, a wholesale distributor of ~~residential and commercial~~ swimming pool equipment, chemicals and supplies, ~~with five distribution~~adding 2 locations in ~~central~~Ontario, Canada.

In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and ~~northern California.~~supplies, adding 3 locations in New Jersey, 3 locations in New York, 2 locations in Texas and 1 location in Florida.

In December 2020, we acquired TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding 9 locations in Florida and 1 in Georgia.

We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.

~~2016~~2019 Acquisitions

In ~~April 2016,~~January 2019, we acquired the distribution assets of ~~Metro Irrigation Supply Company Ltd.~~W.W. Adcock, Inc., ~~an irrigation~~a wholesale distributor of swimming pool products, equipment, parts and ~~landscape supply company with eight~~supplies adding 2 locations in ~~Texas.~~Pennsylvania, 1 location in North Carolina and 1 location in Virginia.

We have completed our acquisition accounting for this acquisition. This acquisition did not have a material impact on our financial position or results of operations.

~~2015~~2018 Acquisitions

In ~~April 2015, we acquired certain distribution assets from Poolwerx Development LLC and opened a satellite sales center location serving South Mesa, Arizona. In October 2015,~~January 2018, we acquired the distribution assets of ~~Seaboard Industries, Inc.~~Tore Pty. Ltd. (doing business as Pool Power), a ~~swimming pool supply~~ wholesale distributor of pool and hot tub equipment in South Australia, with ~~one sales~~1 distribution center ~~location~~ in ~~Connecticut and two sales center locations in New Jersey.~~ Adelaide, Australia.

In November ~~2015,~~2018, we acquired the distribution assets of ~~The Melton Corporation,~~Turf & Garden, Inc., a ~~masonry materials~~wholesale distributor of irrigation products and landscape maintenance equipment, parts and supplies ~~distributor~~ with ~~one sales center~~3 locations in Virginia and 1 location in ~~California and one sales center location in Arizona.~~North Carolina.

We have completed our acquisition accounting for ~~each of~~ these acquisitions. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.

Note 3 - Goodwill and Other Intangible Assets

The table below presents changes in the carrying amount of goodwill and our accumulated impairment losses (in thousands):


Goodwill (gross) at December 31, 2018	$	198,351

Foreign currency translation adjustments	124
Goodwill (gross) at December 31, 2019	198,475

Accumulated impairment losses at December 31, 2018	(9,879)
Goodwill impairment	0
Accumulated impairment losses at December 31, 2019	(9,879)

Goodwill (net) at December 31, 2019	$	188,596

Goodwill (gross) at December 31, 2019	$	198,475
Acquired goodwill	82,497
Foreign currency translation adjustments	584
Goodwill (gross) at December 31, 2020	281,556

Accumulated impairment losses at December 31, 2019	(9,879)
Goodwill impairment	(3,510)
Accumulated impairment losses at December 31, 2020	(13,389)

Goodwill (net) at December 31, 2020	$	268,167

Goodwill (gross) at December 31, 2015 $ 182,027
Acquired goodwill 12,696
Foreign currency translation adjustments (49 )
Goodwill (gross) at December 31, 2016 194,674

Accumulated impairment losses at December 31, 2015 (9,266 )
Goodwill impairment (613 )
Accumulated impairment losses at December 31, 2016 (9,879 )

Goodwill (net) at December 31, 2016 $ 184,795

Goodwill (gross) at December 31, 2016 $ 194,674
Acquired goodwill 3,068
Foreign currency translation adjustments 1,572
Goodwill (gross) at December 31, 2017 199,314

Accumulated impairment losses at December 31, 2016 (9,879 )
Goodwill impairment —
Accumulated impairment losses at December 31, 2017 (9,879 )

Goodwill (net) at December 31, 2017 $ 189,435

The determination of our reporting units’ goodwill and intangibles fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of changes in market conditions, forecasted future operating results (including sales growth rates and operating margins) and discount rates (including our weighted-average cost of capital).

In the first quarter of 2020, we determined certain impairment triggers for our Australian reporting units had occurred due to the impact of the COVID-19 pandemic on expected future operating cash flows. We performed interim goodwill impairment analyses, which included discounted cash flow analyses, and determined that the estimated fair values of our Australian reporting units no longer exceeded their carrying values. In the period ended March 31, 2020, we recorded impairment equal to the total goodwill and intangibles carrying amounts of our 5 Australian reporting units, which included goodwill impairment of $3.5 million and intangibles impairment, related to the Pool Systems tradename and trademark, of $0.9 million. We recorded these amounts in Impairment of goodwill and other assets on our Consolidated Statements of Income.

In October ~~2017~~2020 and October ~~2016,~~2019, we performed our annual goodwill impairment test and did not ~~identify~~record any goodwill impairment at the reporting unit level. As of October 1, ~~2017,~~2020, we had ~~221~~226 reporting units with allocated goodwill balances. The most significant goodwill balance for a reporting unit was $5.7 million and the average goodwill balance per reporting unit was ~~$0.8~~$0.9 million.

In the third quarter of 2016, we performed an interim goodwill impairment analysis for an at-risk reporting unit in Quebec, Canada. We had been monitoring this location’s results, which came in below expectations at the end of the 2016 pool season. Due to this impairment indicator, we performed an interim goodwill impairment analysis. We estimated the fair value of this reporting unit based on an income approach that incorporates our assumptions for determining the present value of future cash flows. We projected future cash flows using management’s assumptions for sales growth rates, operating margins, discount rates and multiples. Because the carrying value of this reporting unit’s goodwill exceeded its estimated fair value, we recorded a non-cash goodwill impairment charge in Selling and administrative expenses on the Consolidated Statements of Income in 2016.

Other intangible assets consisted of the following (in thousands):


	December 31,												Weighted Average Useful Life
	2020						2019
	Intangibles Gross		Accumulated Amortization		Intangibles Net		Intangibles Gross		Accumulated Amortization		Intangibles Net
Horizon tradename	$	8,400	$	—	$	8,400	$	8,400	$	—	$	8,400	Indefinite
Pool Systems tradename and trademarks	0		—		0		990		—		990		Indefinite
National Pool Tile (NPT) tradename	1,500		(962)		538		1,500		(887)		613		20
Non-compete agreements	6,917		(3,674)		3,243		4,611		(3,576)		1,035		4.62
Patents	0		0		0		470		(470)		0		5
Total other intangibles	$	16,817	$	(4,636)	$	12,181	$	15,971	$	(4,933)	$	11,038

December 31,
2017 2016
Horizon tradename (indefinite life) $ 8,400
$ 8,400
Pool Systems tradename and trademarks (indefinite lives) 1,109
1,023
National Pool Tile (NPT) tradename (20 year life) 1,500
1,500
Non-compete agreements (5 year weighted average useful life) 5,078
4,396
Patents (5 year weighted average useful life) 523
483
Other intangible assets 16,610
15,802
Less: Accumulated amortization (3,387 ) (2,476 )
Other intangible assets, net $ 13,223
$ 13,326

The Horizon ~~and Pool Systems tradenames and trademarks have~~tradename has an indefinite useful ~~lives~~life and ~~are~~is not subject to amortization. However, we evaluate the useful ~~lives~~life of ~~these~~this intangible ~~assets~~asset and test for impairment annually. The NPT tradename and our non-compete agreements ~~and our patents~~ have finite useful lives, and we amortize the estimated fair value of these agreements using the straight-line method over their respective useful lives. We have not identified any indicators of impairment related to these assets. The useful lives for our non-compete agreements are based on their contractual ~~terms, and the useful lives for our patents are based on expected future cash flows. We recognize expenses related to patent renewal costs as incurred.~~terms.

Other intangible amortization expense was $1.0 million in ~~2017, $1.0~~both 2020 and 2019 and $1.1 million in ~~2016 and $0.4 million in 2015.~~2018.

The table below presents estimated amortization expense for other intangible assets for the next five years (in thousands):


2021	$	1,085
2022	895
2023	773
2024	470
2025	395

2018 $ 1,080
2019 905
2020 833
2021 353
2022 163

Note 4 - Details of Certain Balance Sheet Accounts

The table below presents additional information regarding certain balance sheet accounts (in thousands):


	December 31,
	2020		2019
Receivables, net:
Trade accounts	$	33,553	$	18,455
Vendor programs	90,988		59,228
Other, net	2,519		4,437
Total receivables	127,060		82,120
Less: Allowance for doubtful accounts	(4,808)		(5,472)
Receivables, net	$	122,252	$	76,648

Prepaid expenses and other current assets:
Prepaid expenses	$	16,401	$	14,568
Other current assets	1,209		1,604
Prepaid expenses and other current assets	$	17,610	$	16,172

Property and equipment, net:
Land	$	3,608	$	3,608
Buildings	7,348		7,132
Leasehold improvements	54,300		50,165
Autos and trucks	95,667		89,052
Machinery and equipment	73,353		69,027
Computer equipment	29,935		43,001
Furniture and fixtures	9,448		9,886
Fixed assets in progress	4,608		1,761
Total property and equipment	278,267		273,632
Less: Accumulated depreciation	(170,026)		(161,386)
Property and equipment, net	$	108,241	$	112,246

Accrued expenses and other current liabilities:
Salaries and payroll deductions	$	24,930	$	13,688
Performance-based compensation	59,897		22,907
Taxes payable	20,676		9,814
Unrealized losses on interest rate swaps	12,314		919
Other current liabilities	25,877		13,485
Accrued expenses and other current liabilities	$	143,694	$	60,813

December 31,
2017 2016
Receivables, net:
Trade accounts $ 26,681
$ 18,533
Vendor programs 50,302
44,842
Other, net 3,511
2,112
Total receivables 80,494
65,487
Less: Allowance for doubtful accounts (3,897 ) (4,050 )
Receivables, net $ 76,597
$ 61,437

Prepaid expenses and other current assets:
Prepaid expenses $ 14,700
$ 13,584
Other current assets 4,869
1,734
Prepaid expenses and other current assets $ 19,569
$ 15,318

Property and equipment, net:
Land $ 3,003
$ 1,685
Buildings 4,255
2,465
Leasehold improvements 41,908
38,348
Autos and trucks 70,570
53,371
Machinery and equipment 55,128
45,535
Computer equipment 38,194
39,251
Furniture and fixtures 9,670
9,951
Fixed assets in progress 1,072
2,065
Total property and equipment 223,800
192,671
Less: Accumulated depreciation (122,861 ) (109,381 )
Property and equipment, net $ 100,939
$ 83,290

Accrued expenses and other current liabilities:
Salaries and payroll deductions $ 9,987
$ 8,878
Performance-based compensation 31,807
32,226
Taxes payable 7,970
8,424
Other current liabilities 15,718
14,859
Accrued expenses and other current liabilities $ 65,482
$ 64,387

Note 5 - Debt

The table below presents the components of our debt (in thousands):


	December 31,
	2020		2019
Variable rate debt
Short-term borrowings	$	0	$	1,647
Current portion of long-term debt:
Australian credit facility	11,869		10,098
Short-term borrowings and current portion of long-term debt	11,869		11,745

Long-term portion:
Revolving credit facility	109,024		200,673
Term facility	175,750		185,000
Receivables securitization facility	120,000		115,000
Less: financing costs, net	625		1,011
Long-term debt, net	404,149		499,662
Total debt	$	416,018	$	511,407

December 31,
2017 2016
Variable rate debt
Short-term borrowings $ 1,937
$ —
Current portion of long-term debt:
Australian credit facility 8,898
1,105
Short-term borrowings and current portion of long-term debt 10,835
1,105

Long-term portion:
Revolving credit facility 410,439
354,549
Receivables securitization facility 100,000
83,500
Less: financing costs, net 1,624
1,112
Long-term debt, net $ 508,815
$ 436,937
Total debt $ 519,650
$ 438,042

Revolving Credit Facility

On September 29, 2017, we, along with our wholly owned subsidiaries, SCP Distributors Canada Inc., as the Canadian Borrower, and SCP Pool B.V., as the Dutch Borrower, amended and restated our unsecured syndicated senior credit facility (the Credit Facility). The Credit Facility borrowing capacity increased to $750.0 million from $465.0 million under a five-year revolving credit facility. We also extended the maturity date of the agreement to September 29, 2022. As amended on November 7, 2019, SCP Pool B.V. was removed as the Dutch Borrower and replaced with SCP International, Inc. as the Euro Borrower.

The Credit Facility includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to ~~$75.0~~$75.0 million,, to a total of ~~$825.0 million~~. $825.0 million.

Our obligations under the Credit Facility are guaranteed by substantially all of our existing and future direct and indirect domestic subsidiaries. The Credit Facility contains terms and provisions (including representations, covenants and conditions) and events of default customary for transactions of this type. If we default under the Credit Facility, the lenders may terminate their commitments under the Credit Facility and may require us to repay all amounts.

At December 31, ~~2017,~~2020, there was ~~$410.4~~$109.0 million outstanding, a ~~$4.2~~$4.8 million standby letter of credit outstanding and ~~$335.4~~$636.2 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of December 31, ~~2017~~2020 was approximately ~~2.9%~~1.2%, excluding commitment fees.

Revolving borrowings under the Credit Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:


a.	a base rate, which is the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) the London Interbank Offered Rate (LIBOR) Market Index Rate plus 1.000%; or


b.	~~LIBOR.~~

a.a base rate, which is the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus 0.500% and (iii) the London Interbank Offered Rate (LIBOR) Market Index Rate plus 1.000%; or

b.LIBOR.

Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin:


a.	~~a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or~~


b.	~~CDOR.~~

a.a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or

b.CDOR.

Borrowings by the ~~Dutch~~Euro Borrower bear interest at LIBOR plus an applicable margin.

The interest rate margins on the borrowings and letters of credit are based on our leverage ratio and will range from 1.025% to 1.425% on CDOR, LIBOR and swingline loans, and from 0.025% to 0.425% on Base Rate and Canadian Base Rate loans. Borrowings under the swingline loans are based on the LIBOR Market Index Rate (LMIR) plus any applicable margin. We are also required to pay an annual facility fee ranging from 0.100% to 0.200%, depending on our leverage ratio.

Term Facility

On December 30, 2019, we along with certain of our subsidiaries entered into a $185.0 million term facility (the Term Facility) with Bank of America, N.A. The Term Facility matures on December 30, 2026. Proceeds from the Term Facility were used to pay down the company's revolving credit facility, adding capacity for future share repurchases, acquisitions and growth-oriented working capital expansion.

The Term Facility is repaid in quarterly installments of 1.250% of the Term Facility on the last business day of each quarter beginning in the first quarter of 2020. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. The total of the quarterly payments will be equal to 33.75% of the Term Facility with the final principal repayment, equal to 66.25% of the Term Facility, due on the maturity date.

Our obligations under the Term Facility are guaranteed by substantially all of our existing and future domestic subsidiaries. The Term Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. If we default under the Term Facility, the lenders may terminate their commitments under the Term Facility and may require us to repay all amounts.

At December 31, 2020, the Term Facility had an outstanding balance of $175.8 million at a weighted average effective interest rate of 2.7%.

Borrowings under the Term Facility bear interest, at our option, at either of the following and, in each case, plus an applicable margin:

a.a base rate, which is the greatest of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus one-half of one percent (0.50%), (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” or (iii) the Eurodollar Rate (defined below) plus one percent (1.00%); or

b.the Eurodollar Rate, which is the rate per annum equal to the LIBOR as administered by the ICE Benchmark Administration (or any successor administrator), as published on the applicable Bloomberg screen page with a term equivalent to the applicable interest period.

The interest rate margins on the borrowings are based on our leverage ratio and will range from 1.125% to 1.625% on Eurodollar Rate borrowings and 0.125% to 0.625% on Base Rate borrowings.

Receivables Securitization Facility

On November ~~28, 2017,~~1, 2019, we and certain of our subsidiaries entered into an amendment of our ~~two-year~~two-year accounts receivable securitization facility (the Receivables Facility). As amended, the Receivables Facility has a peak seasonal funding capacity of up to ~~$255.0~~$295.0 million ~~between~~for the month of 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~~$120.0 million to ~~$220.0~~$275.0 million throughout the remaining months of the year. The Receivables Facility matures on November 1, 2021. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis.

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~~third-party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due to the financial institutions.

The Receivables Facility is subject to terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Failure to maintain certain ratios or meet certain of these covenants could trigger an amortization event.

At December 31, ~~2017,~~2020, there was ~~$100.0~~$120.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of ~~2.3%~~0.9%, excluding commitment fees.

Depending on the funding source used by the financial institutions to purchase the receivables, amounts outstanding under the Receivables Facility bear interest at one of the following and, in each case, plus an applicable margin of 0.75%:


a.	~~for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable rates in the commercial paper market at the time of issuance; or~~


b.	~~for financial institutions not using the commercial paper market, LMIR.~~

a.for financial institutions using the commercial paper market, commercial paper rates based on the applicable variable rates in the commercial paper market at the time of issuance; or

b.for financial institutions not using the commercial paper market, LMIR.

We also pay an unused fee of 0.35% on the excess of the facility limit over the average daily capital outstanding. We pay this fee monthly in arrears.

Australian Seasonal Credit Facility

In the second quarter of 2017, ~~PSL~~Pool Systems Pty. Ltd. (PSL) entered into a ~~new~~ credit facility to fund expansion and supplement working capital needs. The ~~new~~ credit facility provides a borrowing capacity of AU$20.0 million, and the balance as of December 31, 2017 includes borrowings to fund the Newline Pool Products acquisition and the purchase of the noncontrolling interest. The previous credit facility, used to supplement working capital needs during peak season, provided a borrowing capacity of AU$3.0 million.

Cash Pooling Arrangement

Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity is €12.0 million.

Maturities of Long-Term Debt

The table below presents maturities of long-term debt, excluding unamortized deferred financing costs, for the next five years (in thousands):


2021	$	141,119
2022	118,274
2023	9,250
2024	9,250
2025	9,250

Interest Rate Swaps

~~We currently have three~~In 2020, we had one interest rate swap ~~contracts~~contract in place, which became effective on October 19, 2016. These swaps were previously forward-starting contracts that were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market ratesNovember 20, 2019 and ~~extend the hedged period for future interest payments on our Credit Facility. As amended, these swap contracts terminate~~terminated on November 20, ~~2019. We recognized~~2020. This swap contract was previously forward-starting and converted the variable interest rate to a benefit of $2.4 million in 2017, expense of $0.1 million in 2016 and a benefit of $0.6 million in 2015 as a result of our determination of ineffectiveness for the period. These amounts were recorded in Interest and other non-operating expenses, netfixed interest rate on our ~~Consolidated Statements of Income.~~variable rate borrowings. Interest expense related to the notional amount under this swap contract was based on the fixed rate plus the applicable margin on our variable rate borrowings.

The following table provides additional details related to ~~each of these amended~~this swap ~~contracts:~~contract:

Derivative

Inception Date

Effective Date

Termination Date

Notional
Amount
(in millions)

Fixed
Interest
Rate

Interest rate swap 1

July 6, 2016

November 20, 2019

November 20, 2020

$150.0

1.1425%

Derivative Amendment Date
Notional
Amount
(in millions)

Fixed
Interest
Rate
Interest rate swap 6 October 1, 2015 $ 75.0
2.273 %
Interest rate swap 7 October 1, 2015 25.0
2.111 %
Interest rate swap 8 October 1, 2015 50.0
2.111 %

~~Upon amendment of~~We currently have two interest rate swaps in place, which became effective on November 20, 2020 and terminate on September 29, 2022. These swap contracts were previously forward-starting and convert the ~~original hedge agreements, we were required~~variable interest rate to ~~freeze the amounts~~fixed interest rates on our variable rate borrowings. Interest expense related to the ~~changes~~notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on our variable rate borrowings. Changes in the estimated fair ~~values~~value of these ~~swaps, which~~interest rate swap contracts are recorded into Accumulated other comprehensive ~~loss. At December 31, 2017,~~loss on the ~~remaining balance of the unrealized losses was $1.4 million and is being amortized over the effective period of the original~~Consolidated Balance Sheets.

The following table provides additional details related to these swap contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional
Amount
(in millions)

Fixed
Interest
Rate

Interest Rate Swap 2

May 7, 2019

November 20, 2020

September 29, 2022

$75.0

2.0925%

Interest Rate Swap 3

July 25, 2019

November 20, 2020

September 29, 2022

$75.0

1.5500%

We have entered into additional forward-starting interest rate swap contracts ~~from October 2016 to September 2018. We recorded expense of $1.9 million in 2017 and $0.4 million in 2016 as amortization of the unrealized loss in Interest and other non-operating expenses, net.~~

~~In July 2016, we entered into a new forward-starting interest rate swap contract~~ to extend the hedged period for future interest payments on our ~~Credit Facility to its maturity date. This~~variable rate borrowings. These swap ~~contract~~contracts will convert the variable interest rate to a fixed interest rate on ~~borrowings under the Credit Facility. This contract becomes effective on November 20, 2019 and terminates on November 20, 2020.~~ our variable rate borrowings.

The following table provides ~~additional~~ details related to ~~this~~each of our forward-starting interest rate swap ~~contract:~~contracts:

Derivative

Inception Date

Effective Date

Termination Date

Notional
Amount
(in millions)

Fixed
Interest
Rate

Forward-Starting Interest Rate Swap 1

February 5, 2020

February 26, 2021

February 28, 2025

$150.0

1.3800%

Forward-Starting Interest Rate Swap 2

March 9, 2020

September 29, 2022

February 26, 2027

$150.0

0.7400%

Forward-Starting Interest Rate Swap 3

March 9, 2020

February 28, 2025

February 26, 2027

$150.0

0.8130%

Derivative Inception Date Notional
Amount
(in millions) Fixed
Interest
Rate
Forward-starting interest rate swap July 6, 2016 $ 150.0
1.1425 %

The net difference between interest paid and interest received related to our swap agreements resulted in an incremental interest expense of ~~$1.7~~$0.9 million in ~~2017, $1.3~~2020, a benefit of $0.3 million in ~~2016~~2019 and ~~$1.4~~an expense of $0.3 million in ~~2015.~~ 2018.

~~In 2016 and 2015, we had five interest rate swap contracts in place to reduce our exposure to fluctuations in interest rates on the Credit Facility. Each of these swap contracts terminated on~~ ~~October 19, 2016~~. These swaps converted the variable interest rates to fixed interest rates on borrowings under the Credit Facility. For these interest rate swaps, we recognized no gains or losses through income, nor was there any effect on income from hedge ineffectiveness over the term of these swap contracts. The following table provides additional details related to each of these swap contracts:

Derivative Effective Date
Notional
Amount
(in millions)

Fixed
Interest
Rate
Interest rate swap 1 November 21, 2011 $ 25.0
1.185 %
Interest rate swap 2 November 21, 2011 25.0
1.185 %
Interest rate swap 3 December 21, 2011 50.0
1.100 %
Interest rate swap 4 January 17, 2012 25.0
1.050 %
Interest rate swap 5 January 19, 2012 25.0
0.990 %

We previously had three interest rate swap contracts which became effective on October 19, 2016 and terminated on November 20, 2019. These swaps were previously forward-starting contracts that were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with market rates at that time and extend the hedged period for future interest payments on our variable rate borrowings. Upon amendment of the original hedge agreements, we were required to freeze the amounts related to the changes in the fair values of these swaps, which were recorded in Accumulated other comprehensive loss. These balances became fully amortized in 2018, and we recorded expense of $1.4 million in 2018 as amortization of the unrealized loss in Interest and other non-operating expenses, net. We recognized expense of $0.5 million in 2019 and a benefit of $1.2 million in 2018 as a result of ineffectiveness. We recorded these amounts in Interest and other non-operating expenses, net on our Consolidated Statements of Income.

Financial and Other Covenants

Financial covenants onof the Credit Facility, Term Facility and Receivables Facility are closely aligned and include a minimum fixed charge coverage ratio and maintenance of a maximum average total leverage ratio, which are our most restrictive covenants. The Credit Facility and the Term Facility also ~~limits~~limit 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 and the Term 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 and the Term 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 and Term Facility could result in penalty payments, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

As of December 31, ~~2017,~~2020, we were in compliance with all covenants and financial ratio requirements related to the Credit Facility, the Term Facility and the Receivables Facility.

Deferred Financing Costs

We capitalize financing costs we incur related to implementing and amending our debt arrangements. We record these costs as a reduction of Long-term debt, net on our Consolidated Balance Sheets and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in deferred financing costs for the past two years (in thousands):


	December 31,
	2020		2019
Deferred financing costs:
Balance at beginning of year	$	5,118	$	4,712
Financing costs deferred	12		406

Balance at end of year	5,130		5,118
Less: Accumulated amortization	(4,505)		(4,107)
Deferred financing costs, net of accumulated amortization	$	625	$	1,011

December 31,
2017 2016
Deferred financing costs:
Balance at beginning of year $ 4,883
$ 4,814
Financing costs deferred 1,104
69
Write-off of fully amortized deferred financing costs (1,381 ) —
Balance at end of year 4,606
4,883
Less: Accumulated amortization (2,982 ) (3,771 )
Deferred financing costs, net of accumulated amortization $ 1,624
$ 1,112

Note 6 - Share-Based Compensation

Share-Based Plans

Current Plan

In May 2007, our ~~stockholders~~shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors. In May 2016, our ~~stockholders~~shareholders approved an amendment and restatement of the 2007 ~~Long‑Term~~Long-Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As of December 31, ~~2017,~~2020, we had ~~4,615,148~~4,189,438 shares available for future issuance including ~~1,186,521~~971,975 shares that may be issued as restricted stock.

Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no cost to the grantee. Both stock options and restricted stock awards vest over time depending on an employee’s length of service with the ~~Company.~~company. Share-based awards to our employees generally vest either five years from the grant date or on a ~~three~~/three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. ~~Share‑based~~Share-based awards to our non-employee directors vest one year from the grant date.

Beginning with 2016 grants, certain restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria ~~discussed~~described above. The awards provide for a ~~three-year~~three-year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. ~~Since~~For each ~~grant date,~~of the performance-based grants from 2016 through 2018, we achieved the performance condition in the initial three-year performance period. For the performance-based grants in 2019 and 2020, we have concluded ~~attainment of these~~that the performance ~~conditions to be~~condition is probable to be ~~achieved~~attained in the ~~first~~initial three-year performance ~~period for the 2017 and 2016 performance-based grants.~~period.

Stock Option Awards

The following table summarizes stock option activity under our share-based plans for the year ended December 31, ~~2017:~~2020:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance at December 31, 2019	1,302,051	$	64.46
Granted	67,869	219.95
Less: Exercised	482,361	36.61
Forfeited	3,500	90.70
Balance at December 31, 2020	884,059	$	91.49	4.66	$	248,430,030

Exercisable at December 31, 2020	532,114	$	58.37	3.04	$	167,153,553

Shares
Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Term
(Years)

Aggregate
Intrinsic Value
Balance at December 31, 2016 2,550,883
$ 34.70

Granted 108,275
116.99

Less: Exercised 364,984
26.88

Forfeited 6,775
94.20

Balance at December 31, 2017 2,287,399
$ 39.67
3.85 $ 205,820,051

Exercisable at December 31, 2017 1,650,386
$ 26.33
2.55 $ 170,526,117

The following table presents information about stock options outstanding and exercisable at December 31, ~~2017:~~2020:


	Outstanding Stock Options				Exercisable Stock Options
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Term (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$ 24.50 to $ 58.26	343,143	2.09	$	45.98	343,143	$	45.98
$ 58.27 to $ 117.04	325,422	5.10	87.17		188,971	80.86
$ 117.05 to $ 220.01	215,494	8.09	170.48		0	0
	884,059	4.66	$	91.49	532,114	$	58.37

Outstanding
Stock Options

Exercisable
Stock Options
Range of Exercise Prices Shares
Weighted Average
Remaining
Contractual Term
(Years)
Weighted Average Exercise Price Shares Weighted Average Exercise Price
$ 18.00 to $ 20.34 885,493
1.36 $ 19.54
885,493
$ 19.54
$ 20.35 to $ 45.61 811,756
3.91 33.75
695,031
31.76
$ 45.62 to $ 117.04 590,150
7.51 78.02
69,862
58.30
2,287,399
3.85 $ 39.67
1,650,386
$ 26.33

The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options:


	Year Ended December 31,
(in thousands, except share amounts)	2020		2019		2018
Options exercised	482,361		640,475		491,448
Cash proceeds	$	17,657	$	16,839	$	11,779
Intrinsic value of options exercised	$	116,794	$	97,007	$	61,469
Tax benefits realized	$	29,199	$	24,252	$	15,367

Year Ended December 31,
(in thousands, except share amounts) 2017 2016 2015
Options exercised 364,984
343,237
543,028
Cash proceeds $ 9,809
$ 10,340
$ 17,137
Intrinsic value of options exercised $ 33,302
$ 21,094
$ 22,676
Tax benefits realized $ 12,809
$ 7,891
$ 8,326

We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the following table:


	Year Ended December 31,
(Weighted average)	2020				2019				2018
Expected volatility	20.7		%		21.4		%		23.7		%
Expected term	6.8			years	7.0			years	7.3			years
Risk-free interest rate	1.22		%		2.52		%		2.87		%
Expected dividend yield	1.3		%		1.3		%		1.5		%
Grant date fair value	$	42.52			$	37.75			$	35.71

Year Ended December 31,
(Weighted average) 2017 2016 2015
Expected volatility 26.6 % 29.7 % 33.8 %
Expected term 7.3
years 7.1
years 7.2
years
Risk-free interest rate 2.44 % 1.75 % 1.95 %
Expected dividend yield 1.5 % 1.5 % 1.5 %
Grant date fair value $ 32.00
$ 22.86
$ 22.57

We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock. We use weekly price observations for our historical volatility calculation because we believe ~~that they provide~~this provides the most appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. ~~The~~In 2018, the weighted average expected term is impacted by a higher expected term estimate for stock option awards granted to our named executive officers. There were no stock option awards granted to named executive officers in 2019 or 2020. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option. We determined the expected dividend yield based on the ~~anticipated~~ dividends we anticipate paying over the expected term.

For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting period, or if shorter, the period from the grant date to the date ~~that employees meet~~ the ~~retirement provisions of~~employee becomes eligible to retire under our share-based award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method.

The following table presents the total share-based compensation expense for stock option awards ~~and the related recognized tax benefits~~ for the past three years (in thousands):


	2020		2019		2018
Option grants share-based compensation expense	$	2,842	$	3,021	$	3,218
Option grants share-based compensation tax benefits	710		755		805

2017 2016 2015
Option grant share-based compensation expense $ 3,553
$ 3,735
$ 3,688
Option grant recognized tax benefits 888
1,409
1,331

At December 31, ~~2017,~~2020, the unamortized compensation expense related to stock option awards totaled ~~$3.5~~$2.8 million. We anticipate ~~that~~recognizing this expense ~~will be recognized~~ over a weighted average period of ~~1.7~~2.6 years.

Restricted Stock Awards

The table below presents restricted stock ~~awards~~award activity under our share-based plans for the year ended December 31, ~~2017:~~2020:


	Shares	Weighted Average Grant Date Fair Value
Balance unvested at December 31, 2019	303,304	$	123.13
Granted (at market price) (1)	66,309	225.14
Less: Vested	77,294	100.16
Forfeited	615	87.29
Balance unvested at December 31, 2020	291,704	$	153.12

Shares
Weighted Average
Grant Date Fair Value
Balance unvested at December 31, 2016 285,019
$ 64.33
Granted (at market price) ⁽¹⁾
95,479
115.38
Less: Vested 79,224
52.73
Forfeited 3,750
80.69
Balance unvested at December 31, 2017 297,524
$ 83.36

⁽¹⁾The majority of these shares contain performance-based vesting conditions.

At December 31, ~~2017,~~2020, the unamortized compensation expense related to the restricted stock awards totaled ~~$6.2~~$12.7 million. We anticipate ~~that~~recognizing this expense ~~will be recognized~~ over a weighted average period of ~~2.8~~2.9 years.

The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value of those awards (in thousands, except share amounts):


	2020		2019		2018
Restricted stock awards - shares vested	77,294		75,143		68,149
Fair value of restricted stock awards vested	$	16,813	$	12,316	$	9,642

2017 2016 2015
Restricted stock awards - shares vested 79,224
95,420
147,619
Fair value of restricted stock awards vested $ 9,260
$ 7,960
$ 10,182

The following table presents the total share-based compensation expense for restricted stock awards for the past three years (in thousands):


	2020		2019		2018
Restricted stock awards share-based compensation expense	$	10,965	$	10,026	$	9,151

2017 2016 2015
Restricted stock awards share-based compensation expense $ 8,547
$ 5,993
$ 5,513

Employee Stock Purchase Plan

In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan (the ESPP). Under the ESPP, employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:


a.	as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31 (prior to the amendment, the six month plan period ended on June 30 or December 31); or


b.	~~the average of the beginning and ending closing prices of our common stock for such six month period.~~

a.as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31; or

b.the average of the beginning and ending closing prices of our common stock for such six month period.

No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in ~~2017,~~each of the ~~one six month offering period in 2016, and the two six month offering periods in 2015,~~last three years, our employees purchased the following aggregate number of shares:


2020	2019	2018
10,929	12,716	15,966

2017 2016 2015
16,610
8,649
22,555

The grant date fair value for the most recent ESPP purchase period ended July 31, ~~2017~~2020 was ~~$17.30~~$88.21 per share. Share-based compensation expense related to our ESPP was $0.7 million in 2020, $0.4 million in ~~2017,~~ ~~$0.2~~2019 and $0.5 million in ~~2016 and~~ ~~$0.3 million~~ ~~in 2015.~~2018.

Note 7 - Income Taxes

~~Our provision for income taxes for 2017 was impacted by the Tax Cuts and Jobs Act (TCJA or the Act) enactment in December 2017 and our adoption of Accounting Standards Update (ASU) 2016-09,~~ ~~Improvements to Share-Based Payment Accounting, on January 1, 2017.~~

As of December 31, 2017, we have not completed our accounting for the tax effects of the Act. In accordance with SAB 118 we have recorded provisional amounts related to the transition tax, impacts of the Act on state taxes, provisions of the Act related to deferred tax balances, and foreign tax implications. Our accounting for the tax effects of the Act will be completed before the measurement period, which is one year from the Act’s enactment date. As a result of the Act, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflects the re-measurement of our net deferred tax liability. We believe our net benefit is based on reasonable estimates for those tax effects of the Act. Changes to these estimates or new guidance issued by regulators may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made.

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. ~~Upon adoption of ASU 2016-09, we were required to~~We record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of ~~$12.6~~$28.6 million to our income tax provision in ~~2017. Prior to the adoption of this guidance, we were required to record excess tax benefits in stockholders’ equity, of which we recorded $7.4~~2020, $23.5 million in ~~2016. For additional discussion of our adoption of this accounting guidance, see Note 1.~~

2019 and $15.3 million in 2018.

Income before income taxes and equity earnings is attributable to the following jurisdictions (in thousands):


	Year Ended December 31,
	2020		2019		2018
United States	$	428,857	$	304,259	$	278,311
Foreign	22,817		13,215		14,682
Total	$	451,674	$	317,474	$	292,993

Year Ended December 31,
2017 2016 2015
United States $ 259,436
$ 234,646
$ 203,269
Foreign 9,746
6,732
4,881
Total $ 269,182
$ 241,378
$ 208,150

The provision for income taxes consisted of the following (in thousands):


	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	67,093	$	35,270	$	39,504
State and other	20,680		17,168		14,609
Total current provision for income taxes	87,773		52,438		54,113

Deferred:
Federal	(1,298)		4,154		4,676
State and other	(1,244)		(431)		(15)
Total deferred provision for income taxes	(2,542)		3,723		4,661
Provision for income taxes	$	85,231	$	56,161	$	58,774

Year Ended December 31,
2017 2016 2015
Current:
Federal $ 71,329
$ 77,000
$ 65,676
State and other 11,289
12,182
10,263
Total current provision for income taxes 82,618
89,182
75,939

Deferred:
Federal (6,643 ) 4,079
4,568
State and other 2,007
(330 ) (370 )
Total deferred provision for income taxes (4,636 ) 3,749
4,198
Provision for income taxes $ 77,982
$ 92,931
$ 80,137

A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity earnings is as follows:


	Year Ended December 31,
	2020		2019		2018
Federal statutory rate	21.00	%	21.00	%	21.00	%
Change in valuation allowance	(0.22)		0.10		(0.13)
Stock-based compensation	(6.34)		(7.40)		(5.23)

Other, primarily state income tax rate	4.43		3.99		4.42
Total effective tax rate	18.87	%	17.69	%	20.06	%

Year Ended December 31,
2017 2016 2015
Federal statutory rate 35.00 % 35.00 % 35.00 %
Change in valuation allowance (0.06 ) 0.10
0.20
Stock-based compensation (4.67 ) —
—
Re-measurement of net deferred tax liability (4.46 ) —
—
Other, primarily state income tax rate 3.16
3.40
3.30
Total effective tax rate 28.97 % 38.50 % 38.50 %

~~Upon our adoption of ASU 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes~~, effective January 1, 2017, we classified all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Also, we no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances are also be required to be classified as noncurrent. We adopted this guidance on a prospective basis, and as such, our prior year balances or classifications have not changed.

The table below presents the components of our deferred tax assets and liabilities (in thousands):


	December 31,
	2020		2019
Deferred tax assets:








Product inventories	$	6,110	$	5,740
Accrued expenses	4,101		927

Leases	50,301		42,698
Share-based compensation	8,730		9,245
Uncertain tax positions	3,266		2,852
Net operating losses	3,829		4,807
Interest rate swaps	3,023		66

Other	3,628		2,889
Total non-current	82,988		69,224
Less: Valuation allowance	(3,166)		(4,794)
Component reclassified for net presentation	(78,542)		(63,699)
Total non-current, net	1,280		731

Total deferred tax assets	1,280		731

Deferred tax liabilities:






Trade discounts on purchases	2,218		2,326
Prepaid expenses	3,379		2,821
Leases	49,004		41,418
Intangible assets, primarily goodwill	34,244		32,331
Depreciation	17,350		17,401

Total non-current	106,195		96,297
Component reclassified for net presentation	(78,542)		(63,699)
Total non-current, net	27,653		32,598

Total deferred tax liabilities	27,653		32,598

Net deferred tax liability	$	26,373	$	31,867

December 31,
2017 2016
Deferred tax assets:
Product inventories $ —
$ 7,010
Accrued expenses —
3,978
Allowance for doubtful accounts —
396
Total current —
11,384
Component reclassified for net presentation —
(5,368 )
Total current, net —
6,016

Product inventories 4,287
—
Accrued expenses 1,804
—
Allowance for doubtful accounts 154
—
Leases 1,188
1,920
Share-based compensation 8,884
13,778
Uncertain tax positions 2,087
2,746
Net operating losses 5,441
5,735
Interest rate swaps —
674
Other 1,475
2,465
Total non-current 25,320
27,318
Less: Valuation allowance (5,440 ) (5,735 )
Component reclassified for net presentation (19,071 ) (20,781 )
Total non-current, net 809
802

Total deferred tax assets 809
6,818

Deferred tax liabilities:

Trade discounts on purchases —
2,698
Prepaid expenses —
2,670
Total current —
5,368
Component reclassified for net presentation —
(5,368 )
Total current, net —
—

Trade discounts on purchases 1,520
—
Prepaid expenses 1,857
—
Intangible assets, primarily goodwill 29,348
42,930
Depreciation 10,870
12,326
Interest rate swaps 61
—
Total non-current 43,656
55,256
Component reclassified for net presentation (19,071 ) (20,781 )
Total non-current, net 24,585
34,475

Total deferred tax liabilities 24,585
34,475

Net deferred tax liability $ 23,776
$ 27,657

At December 31, ~~2017,~~2020, certain of our international subsidiaries had tax loss carryforwards totaling approximately ~~$21.3~~$13.6 million,, which expire in various years after ~~2018.~~2021. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were ~~$5.4~~$3.8 million as of December 31, ~~2017~~2020 and ~~$5.7~~$4.8 million as of December 31, ~~2016.~~2019. We have recorded a corresponding valuation allowance of ~~$5.4~~$2.9 million and ~~$5.7~~$4.6 million in the respective years.

As of December 31, ~~2017,~~2020, United States income taxes were not provided on earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax ~~reform.~~reform enacted in December 2017. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation. ~~We are also still evaluating whether to change our indefinite reinvestment assertion in light of U.S. tax reform~~.

The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands):


	2020		2019		2018
Balance at beginning of year	$	13,582	$	12,179	$	9,937
Increases for tax positions taken during a prior period	1,363		771		76
Increases for tax positions taken during the current period	2,721		2,354		3,809
Decreases resulting from the expiration of the statute of limitations	2,113		1,390		1,603
Decreases relating to settlements	0		332		40
Balance at end of year	$	15,553	$	13,582	$	12,179

2017 2016 2015
Balance at beginning of year $ 7,846
$ 5,978
$ 4,690
Increases for tax positions taken during a prior period 129
10
410
Increases for tax positions taken during the current period 3,260
2,819
1,782
Decreases resulting from the expiration of the statute of limitations 869
961
904
Decreases relating to settlements 429
—
—
Balance at end of year $ 9,937
$ 7,846
$ 5,978

The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was ~~$7.9~~$12.3 million at December 31, ~~2017~~2020 and ~~$5.1~~$10.7 million at December 31, ~~2016.~~2019.

We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record related penalties in Selling and administrative expenses on our Consolidated Statements of Income. For unrecognized tax benefits, we had interest expense of $1.0 million in 2020, $0.6 million in 2019 and $0.2 million in ~~2017, $0.2 million in 2016 and $0.1 million in 2015.~~2018. Accrued interest related to unrecognized tax benefits was approximately ~~$0.9~~$2.7 million at December 31, ~~2017~~2020 and ~~$0.7~~$1.7 million at December 31, ~~2016.~~2019.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before ~~2014.~~2017.

Note 8 - Earnings Per Share

The table below presents the computation of earnings per share, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except per share data):


	Year Ended December 31,
	2020		2019		2018
Net income	$	366,738	$	261,575	$	234,461

Weighted average shares outstanding:
Basic	40,106		39,833		40,311
Effect of dilutive securities:
Stock options and employee stock purchase plan	759		1,032		1,382
Diluted	40,865		40,865		41,693

Earnings per share:
Basic	$	9.14	$	6.57	$	5.82
Diluted	$	8.97	$	6.40	$	5.62

Anti-dilutive stock options excluded from diluted earnings per share computations (1)	0		0		0

(1)Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.

Year Ended December 31,
2017 2016 2015
Net income $ 191,339
$ 148,603
$ 128,224
Net loss attributable to noncontrolling interest 294
352
51
Net income attributable to Pool Corporation $ 191,633
$ 148,955
$ 128,275
Weighted average shares outstanding:

Basic 40,838
41,872
43,105
Effect of dilutive securities:

Stock options and employee stock purchase plan ⁽¹⁾
1,611
1,112
1,149
Diluted 42,449
42,984
44,254

Earnings per share:
Basic $ 4.69
$ 3.56
$ 2.98
Diluted $ 4.51
$ 3.47
$ 2.90

Anti-dilutive stock options excluded from diluted earnings per share computations ⁽²⁾
108
1
—


⁽¹⁾	As discussed in Note 1, as a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities for 2017 excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding as compared to 2016 and 2015.


⁽²⁾	~~Since these options have exercise prices that are higher than the average market prices of our common stock, including them in the calculation would have an anti-dilutive effect on earnings per share.~~

Note 9 - Commitments and Contingencies

Commitments

We lease facilities for our corporate ~~office,~~and administrative offices, sales centers and centralized shipping locations under operating leases that expire in various years through ~~2032.~~2035. Most of our leases contain five-year terms with renewal options that allow us to extend the lease term beyond the initial period, subject to terms agreed upon at lease inception. Based on our leasing practices and contract negotiations, we determined that we are not reasonably certain to exercise the renewal options and, as such, we have not included optional renewal periods in our measurement of operating lease assets, liabilities and expected lease terms.

We elected to apply the package of practical expedients available within ASU 2016-02, which is intended to provide some relief to issuers. Electing this option allowed us to retain our existing assessment of ~~which involve rate increases.~~ whether an arrangement is or contains a lease, is classified as an operating or financing lease and contains initial direct costs. We also elected the practical expedients that allow us to exclude short-term leases from our Consolidated Balance Sheets and to combine lease and non-lease components. For additional discussion of our adoption of this accounting guidance, see Note 1.

For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize expense on a straight-line basis determined by the total ~~minimum~~ lease payments over the ~~minimum~~ lease term. To the extent we determine that future obligations related to real estate taxes, insurance and other lease components are variable, we exclude them from the measurement of our operating lease assets and liabilities.

Some of our real estate agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The table below presents rent expense associated with facility ~~vehicle~~ and ~~equipment~~vehicle operating leases for the past three years (in thousands):




Lease Cost	Classification	2020		2019		2018
Operating lease cost (1)	Selling and administrative expenses	$	63,141	$	60,104	$	57,235
Variable lease cost	Selling and administrative expenses	$	16,700	$	13,778	$	12,867

(1)Includes short-term lease cost, which is not material.

2017 2016 2015
$ 66,161
$ 63,940
$ 60,129

~~The~~Based on our lease portfolio as of December 31, 2020, the table below sets forth the approximate future ~~minimum~~ lease payments ~~as of December 31, 2017~~ related to ~~non-cancelable facility operating leases and the non-cancelable portion of certain equipment~~ operating leases with initial terms of one year or more (in thousands):


2021	$	56,443
2022	52,513
2023	39,890
2024	28,085
2025	19,036
Thereafter	27,748
Total lease payments	223,715
Less: interest	15,894
Present value of lease liabilities	$	207,821

2018 $ 55,874
2019 49,540
2020 42,524
2021 30,756
2022 21,612
Thereafter 21,423

~~Upon adoption~~To calculate the present value of ~~ASU 2016-02,~~ ~~Leases~~,our lease liabilities, we ~~will be required to record most leases~~determined our incremental borrowing rate based on the effective interest rate on our ~~balance sheets and recognize expenses in~~Credit Facility adjusted for a ~~manner~~collateral feature similar to ~~current guidance. We will also be required to provide enhanced disclosures related to~~that of our lease agreements. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheetsleased properties, as we ~~will be recording a right-of-use asset~~are unable to derive implicit rates from our existing leases. The table below presents the weighted-average remaining lease term (years) of our operating leases and ~~corresponding liability~~the weighted-average discount rate used in the above calculation:


	December 31,
Lease Term and Discount Rate for Operating Leases	2020		2019
Weighted-average remaining lease term (years)	5.10		4.57
Weighted-average discount rate	2.99	%	3.41	%

The table below presents the amount of cash paid for ~~our current operating leases. We are evaluating~~amounts included in the ~~effect that ASU 2016-02 will have on our results~~measurement of ~~operations and related disclosures.~~lease liabilities (in thousands):


	Year Ended
	December 31,
	2020		2019
Operating cash flows for lease liabilities	$	60,723	$	56,617

Contingencies

From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. Each quarter, we evaluate developments related to claims and litigation and record a liability if we deem a loss to be probable and estimable. When evaluating these matters for accrual and disclosure, we consider factors such as historical experience, specific facts and claims asserted, the likelihood we will prevail and the magnitude of any potential loss. The outcome of any litigation is inherently unpredictable. Based on currently available facts, we do not believe that the ultimate resolution of any of these claims and litigation matters will have a material adverse impact on our financial condition, results of operations or cash flows. We do not believe our exposure for any of these matters is material for disclosure, either individually or in the aggregate.

Note 10 - Related Party Transactions

Policy

Our policy for related party transactions is included in our written Audit Committee Charter. This policy requires that our Audit Committee review and approve all related party transactions required to be disclosed in our Annual Proxy Statement or required to be approved based on ~~NASDAQ~~Nasdaq rules.

Transactions

~~In May 2005,~~We lease corporate and administrative offices from NCC, an entity we ~~acquired~~have held a 50% ~~membership~~ownership interest in ~~NCC through a~~ ~~$1.1 million~~ ~~cash contribution.~~since 2005. NCC owns and operates an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately ~~59,100~~60,000 square feet of office space. In May 2005, we amended the lease agreement, which had a ten-year term. In June 2013, we exercised an option to extend the term of a portion of the lease agreement through May 2020. In March 2015, we exercised a second option to extend the term of the lease agreement through May 2025. As of December 31, 2017,space, and we pay rent of ~~$94,872~~$0.1 million per month. Our lease term ends May 2025.

The table below presents rent expense associated with this lease for the past three years (in thousands):


	2020		2019		2018
NCC	$	1,222	$	1,222	$	1,155

2017 2016 2015
NCC $ 1,122
$ 1,035
$ 1,016

Note 11 - Employee Benefit Plans

We offer a 401(k) savings and retirement plan, which is a defined contribution plan ~~and~~that provides benefits for substantially all employees who meet length of service requirements. Eligible employees are able to contribute up to 75% of their compensation, subject to the federal dollar limit. For plan participants, we provide a matching contribution. We contribute a total maximum match on employee contributions of up to 4% of their compensation, with a 100% match on the first 3% of compensation deferred and a 50% match on deferrals between 3% and 5% of compensation. We also offer retirement plans for certain of our international entities. The plan funding is calculated as a percentage of the employee’s earnings and in compliance with local laws and practices. The related expense is not material and is included in the table below.

We have a nonqualified deferred compensation plan that allows certain employees who occupy key management positions to defer salary and bonus amounts. This plan also provides a matching contribution similar to that provided under our 401(k) plan to the extent that a participant’s contributions to the 401(k) plan are limited by IRS deferral and compensation limitations. The total combined company matching contribution provided to a participant under the 401(k) plan and the nonqualified deferred compensation plan for any one year may not exceed 4% of a participant’s salary and bonus. The employee and company matching contributions are invested in certain equity and fixed income securities based on individual employee elections.

The table below sets forth our contributions for the past three years (in thousands):


	2020		2019		2018
Defined contribution and international retirement plans	$	8,259	$	7,373	$	7,239
Deferred compensation plan	160		195		245

2017 2016 2015
Defined contribution and international retirement plans $ 6,946
$ 5,817
$ 5,583
Deferred compensation plan 325
194
218

Note 12 - Quarterly Financial Data (Unaudited)

The table below summarizes the unaudited quarterly results of operations for the past two years (in thousands, except per share data):


	Quarter
	2020								2019
	First		Second		Third		Fourth		First		Second		Third		Fourth
Net sales	$	677,288	$	1,280,846	$	1,139,229	$	839,261	$	597,456	$	1,121,328	$	898,500	$	582,234

Gross profit	189,629		373,481		328,698		239,095		174,631		330,314		257,931		162,050
Net income	30,912		157,555		119,098		59,174		32,637		131,390		79,525		18,024
Earnings per share:
Basic	$	0.77	$	3.94	$	2.97	$	1.47	$	0.83	$	3.30	$	1.99	$	0.45
Diluted	$	0.75	$	3.87	$	2.92	$	1.45	$	0.80	$	3.22	$	1.95	$	0.44

   Quarter
   2017 2016
   First Second Third Fourth First Second Third Fourth
Net sales $ 546,441
$ 988,163
$ 743,401
$ 510,183
$ 515,250
$ 918,889
$ 691,429
$ 445,235
Gross profit 153,621
289,664
216,606
145,398
143,023
270,736
199,551
127,777
Net income ⁽¹⁾
22,270
94,620
48,783
25,665
16,363
85,247
44,421
2,572
Net income attributable to Pool Corporation ⁽¹⁾
22,281
94,903
48,783
25,665
16,371
85,435
44,534
2,615
Earnings per share:

Basic $ 0.54
$ 2.30
$ 1.20
$ 0.64
$ 0.39
$ 2.03
$ 1.06
$ 0.06
Diluted $ 0.52
$ 2.21
$ 1.16
$ 0.62
$ 0.38
$ 1.98
$ 1.03
$ 0.06

The sum of basic and diluted earnings per share for each of the quarters may not equal the total basic and diluted earnings per share for the annual periods because of rounding differences and a difference in the way that in-the-money stock options are considered from quarter to quarter.

⁽¹⁾

Our Net income and Net income attributable to Pool Corporation reflect the adoption of ASU 2016-09 for all periods presented in 2017. For additional information related to the adoption of this accounting standard, see Note 1. Our fourth quarter 2017 Net income and Net income attributable to Pool Corporation reflects benefits recorded due to U.S. tax reform. For additional information related to the impact of U.S. tax reform on our financial statements, see Note 7.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of December 31, ~~2017,~~2020, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of December 31, ~~2017,~~2020, 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.

Management’s Report on Internal Control Over Financial Reporting

Pool Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Any evaluation or projection of effectiveness to future periods is also subject to risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Pool Corporation’s management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2017.~~2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management has concluded that, as of December 31, ~~2017,~~2020, Pool Corporation’s internal control over financial reporting was effective.

The independent registered public accounting firm that audited the Consolidated Financial Statements included in Item 8 of this Form 10-K has issued a report on Pool Corporation’s internal control over financial reporting. This report appears below.

Report of Independent Registered Public Accounting Firm

~~The~~To the Board of Directors and Stockholders

of Pool Corporation

Opinion on Internal Control over Financial Reporting

We have audited Pool Corporation’s internal control over financial reporting as of December 31, ~~2017,~~2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 ~~Framework)~~framework) (the COSO criteria). In our opinion, Pool Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2017,~~2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, ~~2017~~2020 and ~~2016,~~2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, ~~2017,~~2020, and the related notes and our report dated February ~~28, 2018~~25, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

~~Definitions~~Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

New Orleans, Louisiana

February ~~28, 2018~~25, 2021

Item 9B. Other Information

Not applicable.

PART III.

Item 10. Directors, Executive Officers and Corporate Governance