Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Description of Business
As of December 31, 2020, Pool Corporation and our subsidiaries (the Company, which may be referred to as we, us or our) operated 398 sales centers in North America, Europe and Australia from which we sell swimming pool supplies, equipment and related leisure products, irrigation and landscape products and hardscape, tile and stone products to pool builders, retail stores, service companies, landscape contractors and golf courses. We distribute products through four networks: SCP Distributors (SCP), Superior Pool Products (Superior), Horizon Distributors (Horizon) and National Pool Tile (NPT).
Basis of Presentation and Principles of Consolidation
We prepared the Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The Consolidated Financial Statements include the accounts of Pool Corporation and our subsidiaries. All of our subsidiaries are wholly owned. All significant intercompany accounts and intercompany transactions have been eliminated.
Use of Estimates
To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor programs, income taxes, performance-based compensation accruals and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.
Newly Adopted Accounting Pronouncements
On January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related amendments, which are codified into Accounting Standards Codification (ASC) 326, using the cumulative-effect transition method related to our trade receivables. This new standard 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 are 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 adoption of this standard did not have a material impact on our financial position or results of operations, and 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, 2020, we adopted ASU 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 842), and all the related amendments, which are codified into ASC 842. The adoption of ASU 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 and we do not expect a material impact in future periods.
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 compensation based on these measures developed at the sales center level.
A bottom-up approach is used to develop the operating budget for each individual sales center. The CODM approves the budget and routinely monitors budget to actual results for each sales center. Additionally, our CODM makes resource allocation decisions primarily on a sales center-by-sales center basis. No single sales center meets any of the quantitative thresholds (10% of revenues, profit or assets) for separately reporting information about an operating segment. We do not track sales by product lines and product categories on a consolidated basis. We lack readily available financial information due to the number of our product lines and product categories and the fact that we make ongoing changes to product classifications within these groups, thus making it impracticable to report our sales by product category.
Seasonality and Weather
Our business is highly seasonal and weather is one of the principal external factors affecting our business. In general, sales and net income are highest during the second and third quarters, which represent the peak months of swimming pool use, pool and irrigation installation and remodeling and repair activities. Sales are substantially lower during the first and fourth 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 a sale when a customer picks up product at any sales center, when we deliver product to their premises or job sites via our trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.
We consider our distribution of products to represent one reportable revenue stream. Our products are similar in nature, and our revenue recognition policy is the same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. 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 account for these incentives as a reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as a reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists under ASC 606. Other items that we record as reductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments.
The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We recognize shipping and handling costs associated with outbound freight in selling and administrative expenses.
We report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, value-added and some excise taxes.
Vendor Programs
Many of our arrangements with our vendors provide for us to receive specified amounts of consideration when we achieve any of a number of measures. These measures are generally related to the volume level of purchases from our vendors, or our net cost of products sold, and may include negotiated pricing arrangements. We account for vendor programs as a reduction of the prices of the vendors’ products and as a reduction of inventory until we sell the products, at which time such considerations are recognized as a reduction of Cost of sales on our Consolidated Statements of Income.
Throughout the year, we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward earning each program. We accrue vendor benefits on a monthly basis using these estimates, provided that we determine they are probable and reasonably estimable. We continually revise these estimates to reflect actual credits earned based on actual purchase levels and trends related to sales and purchasing mix. When we make adjustments to our estimates, we determine whether any portion of the adjustment impacts the amount of vendor credits that are deferred in inventory. We recognize changes in our estimates as a cumulative catch-up adjustment to the amounts recognized to date in our Consolidated Financial Statements.
Shipping and Handling Costs
We record shipping and handling costs associated with inbound freight as cost of sales. The table below presents shipping and handling costs associated with outbound freight, which we include in selling and administrative expenses (in thousands):
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2020
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2019
|
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2018
|
$
|
59,224
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|
|
$
|
51,580
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|
|
$
|
48,610
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|
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):
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2020
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2019
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2018
|
$
|
6,755
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|
|
$
|
7,842
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|
|
$
|
7,390
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|
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 Global Intangible Low Tax Income (GILTI) on foreign earnings as period costs if and when incurred, although we have not realized any impacts since the enactment of U.S. tax reform enacted in December 2017.
For additional information regarding income taxes, see Note 7.
Equity Method Investments
We account for our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity method of accounting. Accordingly, we report our share of income or loss based on our ownership interest in this investment.
Earnings Per Share
We calculate basic earnings per share (EPS) by dividing Net income by the weighted average number of common shares outstanding. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. For additional discussion of earnings per share, see Note 8.
Foreign Currency
The functional currency of each of our foreign subsidiaries is its applicable local currency. We translate our foreign subsidiary financial statements into U.S. dollars based on published exchange rates. We include these translation adjustments as a component of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. We include realized transaction gains and losses that arise from exchange rate fluctuations in Interest and other non-operating expenses, net on the Consolidated Statements of Income. We realized net foreign currency transaction losses of $1.7 million in 2020, $1.3 million in 2019 and $0.6 million in 2018. In 2019, our net foreign currency transaction loss included a $0.9 million reclassification from Accumulated other comprehensive loss related to the closing of our sales center in Colombia.
Fair Value Measurements
Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology include:
•quoted prices for similar assets or liabilities in active markets;
•quoted prices for identical or similar assets or liabilities in inactive markets;
•inputs other than quoted prices that are observable for the asset or liability; or
•inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Recurring Fair Value Measurements
The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):
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Fair Value at December 31,
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2020
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2019
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Level 2
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Unrealized gains on interest rate swaps
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$
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223
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$
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655
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Unrealized losses on interest rate swaps
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12,314
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|
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919
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Level 3
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Contingent consideration liabilities
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$
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1,343
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|
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$
|
703
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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) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.
The carrying value of long-term debt approximates fair value (Level 3 inputs). Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
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.
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. For additional discussion of goodwill and intangibles impairment, see Note 3.
Derivatives and Hedging Activities
At inception, we formally designate and document our 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 at least quarterly, 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 our interest rate swap contracts to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
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 any period presented. For additional discussion of our interest rate swaps, see Note 5.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Credit Risk and Allowance for Doubtful Accounts
We record trade receivables at the invoiced amounts less an allowance for doubtful accounts for estimated losses we may incur if customers do not pay. We perform periodic credit evaluations of our customers and we typically do not require collateral. Consistent with industry practices, we generally require payment from our North American customers within 30 days, except for sales under early buy programs for which we provide extended payment terms to qualified customers.
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 $20,000 that are more than 60 days past due. During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against our allowance for doubtful accounts.
The following table summarizes the changes in our allowance for doubtful accounts for the past three years (in thousands):
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2020
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2019
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2018
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Balance at beginning of year
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$
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5,472
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$
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6,182
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$
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3,897
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Bad debt expense
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|
1,900
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|
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2,768
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|
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4,164
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Write-offs, net of recoveries
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(2,564)
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|
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(3,478)
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|
|
(1,879)
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Balance at end of year
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$
|
4,808
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|
|
$
|
5,472
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|
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$
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6,182
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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 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):
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2020
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2019
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2018
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Balance at beginning of year
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$
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9,036
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|
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$
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7,726
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|
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$
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6,264
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Provision for inventory write-downs
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6,181
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3,656
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3,998
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Deduction for inventory write-offs
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(3,819)
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(2,346)
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(2,536)
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Balance at end of year
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$
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11,398
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|
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$
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9,036
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|
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$
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7,726
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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:
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Buildings
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40 years
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Leasehold improvements (1)
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1 - 10 years
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Autos and trucks
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3 - 6 years
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Machinery and equipment
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3 - 15 years
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Computer equipment
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3 - 7 years
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Furniture and fixtures
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5 - 10 years
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(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):
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2020
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2019
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2018
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$
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27,967
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|
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$
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27,885
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|
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$
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26,122
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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). To the extent the carrying value of a reporting unit is greater than its estimated fair value, we record a goodwill impairment charge for the difference, 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 financial institutions in exchange for cash proceeds, limited to the applicable funding capacities.
We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third-party financial institutions. We classify the entire outstanding balance as Long-term debt on our Consolidated Balance Sheets as we intend and have the ability to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets. For additional discussion of the Receivables Facility, see Note 5.
Self-Insurance
We are self-insured for employee health benefits, workers’ compensation coverage, property and casualty, and automobile insurance. To limit our exposure, we also maintain excess and aggregate liability coverage. We establish self-insurance reserves based on estimates of claims incurred but not reported and information that we obtain from third-party service providers regarding known claims. Our management reviews these reserves based on consideration of various factors, including but not limited to the age of existing claims, estimated settlement amounts and other historical claims data.
Accumulated Other Comprehensive Loss
The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
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|
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|
|
December 31,
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2020
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2019
|
Foreign currency translation adjustments
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$
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(4,917)
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$
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(10,127)
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Unrealized losses on interest rate swaps, net of tax
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(9,102)
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(232)
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Accumulated other comprehensive loss
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$
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(14,019)
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|
|
$
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(10,359)
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Retained Earnings
We account for the retirement of treasury share repurchases as an increase of our Retained earnings (deficit) on our Consolidated Balance Sheets. As of December 31, 2020, the retained 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 $1.5 billion and cumulative dividends of $670.8 million.
Supplemental Cash Flow Information
The following table presents supplemental disclosures to the accompanying Consolidated Statements of Cash Flows (in thousands):
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Year Ended December 31,
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2020
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2019
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2018
|
Cash paid during the year for:
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Interest
|
$
|
8,257
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|
|
$
|
20,960
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|
|
$
|
17,796
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|
Income taxes, net of refunds
|
81,792
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|
|
51,076
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|
|
50,091
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|
Recent Accounting Pronouncements Pending Adoption
The following table summarizes the remaining recent accounting pronouncements that we plan to adopt in future periods:
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Standard
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Description
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Effective Date
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Effect on Financial Statements and Other Significant Matters
|
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes
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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.
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Annual periods beginning after December 15, 2020
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We do not expect that there will be a material impact to the financial statements as a result of adopting this ASU.
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ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting
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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.
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The provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed.
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We are currently evaluating the effect this standard will have on our financial position, results of operations and related disclosures.
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Note 2 - Acquisitions
2020 Acquisitions
In February 2020, we acquired the distribution assets of Master Tile Network LLC, a wholesale distributor of swimming pool tile and hardscape products, adding two locations in Texas, one location in Nevada and one location in Oklahoma.
In September 2020, we acquired the distribution assets of Northeastern Swimming Pool Distributors, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding two locations in Ontario, Canada.
In October 2020, we acquired Jet Line Products, Inc., a wholesale distributor of swimming pool equipment, chemicals and supplies, adding three locations in New Jersey, three locations in New York, two locations in Texas and one location in Florida.
In December 2020, we acquired TWC Distributors, Inc., a wholesale distributor of irrigation and landscape maintenance products, adding nine locations in Florida and one 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.
2019 Acquisitions
In January 2019, we acquired the distribution assets of W.W. Adcock, Inc., a wholesale distributor of swimming pool products, equipment, parts and supplies adding two locations in Pennsylvania, one location in North Carolina and one 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.
2018 Acquisitions
In January 2018, we acquired the distribution assets of Tore Pty. Ltd. (doing business as Pool Power), a wholesale distributor of pool and hot tub equipment in South Australia, with one distribution center in Adelaide, Australia.
In November 2018, we acquired the distribution assets of Turf & Garden, Inc., a wholesale distributor of irrigation products and landscape maintenance equipment, parts and supplies with three locations in Virginia and one location in North Carolina.
We have completed our acquisition accounting for these acquisitions. 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
|
—
|
|
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
|
|
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 five 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 2020 and October 2019, we performed our annual goodwill impairment test and did not record any goodwill impairment at the reporting unit level. As of October 1, 2020, we had 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 $0.9 million.
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
|
—
|
|
|
—
|
|
|
—
|
|
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
470
|
|
|
(470)
|
|
|
—
|
|
|
5
|
Total other intangibles
|
$
|
16,817
|
|
|
$
|
(4,636)
|
|
|
$
|
12,181
|
|
|
$
|
15,971
|
|
|
$
|
(4,933)
|
|
|
$
|
11,038
|
|
|
|
The Horizon tradename has an indefinite useful life and is not subject to amortization. However, we evaluate the useful life of this intangible asset and test for impairment annually. The NPT tradename and our non-compete agreements 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.
Other intangible amortization expense was $1.0 million in both 2020 and 2019 and $1.1 million in 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
|
|
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
|
|
Note 5 - Debt
The table below presents the components of our debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Variable rate debt
|
|
|
|
|
Short-term borrowings
|
|
$
|
—
|
|
|
$
|
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
|
|
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 million, to a total of $825.0 million.
Our obligations under the Credit Facility are guaranteed by substantially all of our existing and future direct and indirect domestic subsidiaries. The Credit Facility contains terms and provisions (including representations, covenants and conditions) and events of default customary for transactions of this type. If we default under the Credit Facility, the lenders may terminate their commitments under the Credit Facility and may require us to repay all amounts.
At December 31, 2020, there was $109.0 million outstanding, a $4.8 million standby letter of credit outstanding and $636.2 million available for borrowing under the Credit Facility. The weighted average effective interest rate for the Credit Facility as of December 31, 2020 was approximately 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.
Borrowings by the Canadian Borrower bear interest, at the Canadian Borrower’s option, at either of the following and, in each case, plus an applicable margin:
a.a base rate, which is the greatest of (i) the Canadian Reference Bank prime rate and (ii) the annual rate of interest equal to the sum of the Canadian Dealer Offered Rate (CDOR) plus 1.000%; or
b.CDOR.
Borrowings by the 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 1, 2019, we and certain of our subsidiaries entered into an amendment of our two-year accounts receivable securitization facility (the Receivables Facility). As amended, the Receivables Facility has a peak seasonal funding capacity of up to $295.0 million for the month of May, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $120.0 million to $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 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, 2020, there was $120.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 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.
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, Pool Systems Pty. Ltd. (PSL) entered into a credit facility to fund expansion and supplement working capital needs. The credit facility provides a borrowing capacity of AU$20.0 million.
Cash Pooling Arrangement
Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. We also pay a commitment fee on the average outstanding balance. This fee is paid annually in advance. Our borrowing capacity is €12.0 million.
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
In 2020, we had one interest rate swap contract in place, which became effective on November 20, 2019 and terminated on November 20, 2020. This swap contract was previously forward-starting and converted the variable interest rate to a fixed interest rate on our 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 this swap 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%
|
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 variable interest rate to fixed interest rates on our variable rate borrowings. Interest expense related to the 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 value of these interest rate swap contracts are recorded to Accumulated other comprehensive loss on the 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 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%
|
The net difference between interest paid and interest received related to our swap agreements resulted in an incremental interest expense of $0.9 million in 2020, a benefit of $0.3 million in 2019 and an expense of $0.3 million in 2018.
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.
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 of 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 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, 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
|
|
Note 6 - Share-Based Compensation
Share-Based Plans
Current Plan
In May 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors. In May 2016, our shareholders approved an amendment and restatement of the 2007 Long-Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As of December 31, 2020, we had 4,189,438 shares available for future issuance including 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. Share-based awards to our employees generally vest either five years from the grant date or on a three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. Share-based awards to our non-employee directors vest one year from the grant date.
Beginning with 2016 grants, certain restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria described above. The awards provide for a three-year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. For each 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 that the performance condition is probable to be attained in the initial three-year performance period.
Stock Option Awards
The following table summarizes stock option activity under our share-based plans for the year ended December 31, 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
|
|
The following table presents information about stock options outstanding and exercisable at December 31, 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
|
|
|
—
|
|
|
—
|
|
|
|
884,059
|
|
|
4.66
|
|
$
|
91.49
|
|
|
532,114
|
|
|
$
|
58.37
|
|
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
|
|
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
|
|
|
We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock. We use weekly price observations for our historical volatility calculation because we believe this provides the most appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. 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 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 the 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 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
|
|
At December 31, 2020, the unamortized compensation expense related to stock option awards totaled $2.8 million. We anticipate recognizing this expense over a weighted average period of 2.6 years.
Restricted Stock Awards
The table below presents restricted stock award activity under our share-based plans for the year ended December 31, 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
|
|
(1)The majority of these shares contain performance-based vesting conditions.
At December 31, 2020, the unamortized compensation expense related to the restricted stock awards totaled $12.7 million. We anticipate recognizing this expense over a weighted average period of 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
|
|
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
|
|
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; 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 each of the last three years, our employees purchased the following aggregate number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
10,929
|
|
|
12,716
|
|
|
15,966
|
|
The grant date fair value for the most recent ESPP purchase period ended July 31, 2020 was $88.21 per share. Share-based compensation expense related to our ESPP was $0.7 million in 2020, $0.4 million in 2019 and $0.5 million in 2018.
Note 7 - Income Taxes
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. We record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $28.6 million to our income tax provision in 2020, $23.5 million in 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
|
|
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
|
|
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
|
%
|
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
|
|
At December 31, 2020, certain of our international subsidiaries had tax loss carryforwards totaling approximately $13.6 million, which expire in various years after 2021. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were $3.8 million as of December 31, 2020 and $4.8 million as of December 31, 2019. We have recorded a corresponding valuation allowance of $2.9 million and $4.6 million in the respective years.
As of December 31, 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 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.
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
|
|
—
|
|
|
332
|
|
|
40
|
|
Balance at end of year
|
|
$
|
15,553
|
|
|
$
|
13,582
|
|
|
$
|
12,179
|
|
The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $12.3 million at December 31, 2020 and $10.7 million at December 31, 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 2018. Accrued interest related to unrecognized tax benefits was approximately $2.7 million at December 31, 2020 and $1.7 million at December 31, 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 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)
|
|
—
|
|
|
—
|
|
|
—
|
|
(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.
Note 9 - Commitments and Contingencies
Commitments
We lease facilities for our corporate and administrative offices, sales centers and centralized shipping locations under operating leases that expire in various years through 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 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 lease payments over the 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 and 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.
Based on our lease portfolio as of December 31, 2020, the table below sets forth the approximate future lease payments related to 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
|
|
To calculate the present value of our lease liabilities, we determined our incremental borrowing rate based on the effective interest rate on our Credit Facility adjusted for a collateral feature similar to that of our leased properties, as we 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 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 amounts included in the measurement of 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 rules.
Transactions
We lease corporate and administrative offices from NCC, an entity we have held a 50% ownership interest in since 2005. NCC owns and operates an office building in Covington, Louisiana. We lease corporate and administrative offices from NCC, occupying approximately 60,000 square feet of office space, and we pay rent of $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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 - Employee Benefit Plans
We offer a 401(k) savings and retirement plan, which is a defined contribution plan 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
|
|
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
|
|
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.