POOL CORP

Income Taxes

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

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

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of 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. Upon adoption of ASU 2016-09, we were required to record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $12.6 million to our income tax provision in 2017. Prior to the adoption of this guidance, we were required to record excess tax benefits in stockholders’ equity, of which we recorded $7.4 million in 2016. For additional discussion of our adoption of this accounting guidance, see Note 1.

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



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

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



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

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

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



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

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

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



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

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

Total deferred tax assets	809			6,818

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

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

Total deferred tax liabilities	24,585			34,475

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

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

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

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



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

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

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

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