POOL CORPORATION — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Pool Corporation distributes swimming pool and related products through 381 sales centers; approximately 94% of nine-month sales came from North America. The business is highly seasonal, with sales and operating income generally highest in the second and third quarters.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,139.2 million | $898.5 million | $3,097.4 million | $2,617.3 million |
| Gross profit / margin | $328.7 million / 28.9% | $257.9 million / 28.7% | $891.8 million / 28.8% | $762.9 million / 29.1% |
| Operating income / margin | $148.2 million / 13.0% | $104.5 million / 11.6% | $389.7 million / 12.6% | $315.4 million / 12.1% |
| Net income | $119.1 million | $79.5 million | $307.6 million | $243.6 million |
| Diluted EPS | $2.92 | $1.95 | $7.53 | $5.97 |
- Q3 sales rose 27%, net income rose 50%, and diluted EPS rose 50%. Excluding the respective ASU 2016-09 tax benefits, diluted EPS increased 47%, to $2.71 from $1.84.
- Nine-month sales increased 18%, net income 26%, and diluted EPS 26%. Gross margin declined 30 basis points year over year for the period, mainly because lower-margin, big-ticket products represented a larger share of sales. Q3 gross margin, by contrast, improved 20 basis points.
- Q3 selling and administrative expense increased 18%, including a $20.1 million increase in performance-based compensation; excluding that compensation, expense increased 5%. Expense as a share of sales declined to 15.8% from 17.1%.
- Nine-month operating results include $6.9 million of impairment charges recorded in Q1. These included $4.4 million of non-cash impairment of Australian goodwill and intangibles and a $2.5 million long-term note impairment.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $388.9 million, versus $243.3 million in 2019. Investing activities used $41.6 million, including acquisitions and capital expenditures; financing activities used $300.2 million, including net debt repayments, $68.6 million in dividends paid, and $76.2 million in treasury-stock purchases.
- Cash was $74.7 million at September 30, 2020. Total debt was $339.9 million, down 38% from $547.6 million a year earlier. Long-term debt included $40.9 million outstanding on the revolver, $178.1 million on the term facility, and $110.0 million under the receivables facility.
- The company reported $704.3 million available under its $750 million revolving facility, after outstanding borrowings and a standby letter of credit. Its average total leverage ratio was 1.01 against a maximum of 3.25; its fixed-charge coverage ratio was 7.10 against a minimum of 2.25. Management said it was in compliance with covenants and expected to remain compliant for the next 12 months.
- Receivables, including pledged receivables, rose 19% year over year, while DSO improved to 27.6 days from 29.0. Inventory fell 1% year over year. The filing describes strong operating cash generation and adequate access to capital, while noting seasonal working-capital needs.
Changes, outlook and risks
- Management attributed strong 2020 demand to home-centric behavior during COVID-19, increased pool use, earlier openings, market-share gains and favorable weather. Q3 sales of equipment rose 36%, building materials 29%, and above-ground pools and spas 60%. Commercial-customer sales declined 10% in Q3 amid pandemic-related closures and reduced travel.
- The company raised 2020 diluted EPS guidance to $8.05–$8.35 from $6.90–$7.30. Guidance includes $0.55 per share of year-to-date ASU 2016-09 tax benefits and a $0.15 per-share impact from Q1 non-cash impairments. It assumes average weather and no adverse effects from a COVID-19 resurgence or related government responses.
- Management expected 2020 sales growth of approximately 18%–20%, modest full-year gross-margin decline, and operating-expense growth of 10%–12%, primarily due to performance-based compensation. Expected 2020 capital expenditures were $20–$25 million, approximately 65% of 2019 spending.
- For 2021, management cited normal weather, continued elevated residential demand, delayed projects, estimated 2% installed-pool-base growth, 4% acquisition contribution, and 2%–3% product-cost inflation as planning assumptions. It expected performance-based compensation to decline $15–$20 million from 2020. These are expectations, not guarantees.
- Key uncertainties include the duration and effects of COVID-19, renewed restrictions, economic and discretionary-spending trends, customer building capacity and labor availability, supplier constraints, weather, and possible normalization of unusually elevated residential demand. Supply constraints had been limited mainly to high-demand categories; no material operational impact from facility closures was reported to date.
- The filing reports no litigation expected, based on currently available facts, to materially affect the company. It also notes that goodwill impairment estimates rely on uncertain forecasts and discount-rate assumptions; certain Italian and Quebec reporting units remained under monitoring. An October 2020 acquisition of Jet Line Products occurred after the reporting date.
Important facts for investors to verify
- Whether elevated pool-product demand persists or moderates, and whether delayed projects can be completed given labor, weather and customer capacity.
- Progress against the $8.05–$8.35 EPS and 18%–20% sales-growth outlook, including the contribution of tax benefits and the Q1 impairment.
- Gross-margin trends as product mix shifts, and whether performance-based compensation and other operating costs normalize as management expects.
- Seasonal working-capital needs, receivables quality, available credit capacity, debt levels and continued covenant compliance.
- Potential further impairment or other COVID-19 effects, and the extent to which supply constraints or new government restrictions affect operations.