POOL Corporation (POOL) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company distributes swimming pool and related products through 378 sales centers; approximately 95% of Q1 sales were from North America. Results are seasonal, with sales and operating income generally highest in Q2 and Q3.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $677.3 million | $597.5 million | +13% |
| Gross profit / margin | $189.6 million / 28.0% | $174.6 million / 29.2% | Profit +9%; margin down 1.2 percentage points |
| Operating income / margin | $35.6 million / 5.3% | $38.4 million / 6.4% | -7%; margin down 1.1 percentage points |
| Net income | $30.9 million | $32.6 million | -5% |
| Diluted EPS | $0.75 | $0.80 | -6% |
| Operating cash flow | $19.7 million | $28.8 million | Down $9.1 million |
Gross margin was pressured by lower-margin early-buy sales shifted from Q2 into Q1 and by the absence of Q1 2019 benefits from strategic inventory purchases. Reported operating income included $6.9 million of impairment charges. Excluding those charges, adjusted operating income was $42.5 million, up 11%. Adjusted net income was $37.2 million, up 14%; adjusted diluted EPS excluding the impairment impact and tax benefits in both periods was $0.71 versus $0.59, up 20%. These adjusted figures are non-GAAP measures.
Q1 tax benefits from share-based compensation accounting (ASU 2016-09) were $8.0 million, or $0.19 per diluted share, compared with $8.8 million, or $0.21 per share, in Q1 2019.
Liquidity, debt and capital allocation
- At March 31, cash was $17.8 million and total debt was $586.1 million, down 16% from $699.0 million a year earlier. Debt included $192.8 million under the revolving facility, $182.7 million under the term facility and $195.1 million under the receivables facility.
- The company reported $552.4 million available under its $750 million revolving credit facility. It stated that it was in compliance with debt covenants and expected to remain compliant over the next 12 months.
- Operating cash flow fell primarily because of working-capital investment in receivables and inventory, partly offset by higher accounts payable. Investing used $22.0 million, including the Master Tile Network acquisition and capital expenditures; financing used $8.1 million.
- Cash used for share repurchases was $66.6 million, versus $23.1 million in Q1 2019. Cash dividends paid were $22.1 million. The Board declared a subsequent quarterly dividend of $0.58 per share, payable May 29, 2020.
Material changes, outlook and risks
- Management attributed Q1 sales growth to strong demand, favorable early-season weather, market-share gains, inflation and an additional selling day. Equipment sales rose 18% and building-material sales 14%. Sales growth began to level off in mid-March as COVID-19 restrictions were introduced.
- As of the end of April, year-over-year April sales were down 5%–10%. Most North American operations remained open as essential businesses, but some European operations had temporary closures. Management said the pandemic’s duration and continuing economic effects were uncertain.
- 2020 diluted EPS guidance was reduced to $5.30–$5.90, including the Q1 tax benefit and $0.15 per share from non-cash impairments. Adjusted diluted EPS guidance excluding impairments was $5.45–$6.05. Earlier guidance was $6.47–$6.77. The revised range assumed sales growth of 2% at the high end and a 2.5% decline at the low end.
- Management expected full-year gross margin could decline slightly to moderately from 2019, and operating expenses to range from modest growth to modest declines. It expected 2020 capital expenditures to be about half of 2019’s $33.4 million and cash from operations to remain strong relative to net income.
- COVID-19-related Q1 impairments totaled $6.9 million: $4.4 million of goodwill and intangible impairments for Australian reporting units and $2.5 million on a long-term note. The company also increased its doubtful-account allowance to $6.9 million from $5.6 million a year earlier. It said it was monitoring potential impairment risk in certain Italy and Quebec reporting units.
- Key risks include further COVID-19 disruption, economic and housing-market weakness, discretionary-spending declines, weather, supply interruptions, competition and seasonal working-capital needs. The filing reported no material expected adverse effect from ordinary-course litigation.
Important facts for investors to verify
- Whether sales trends after the reported April decline support the wide range of COVID-19-sensitive EPS and sales assumptions.
- Whether gross-margin pressure, early-buy timing and vendor pricing develop as management anticipated.
- Whether receivables quality, inventory levels and seasonal cash requirements remain manageable, including the effect on bad-debt reserves.
- Whether impairment assumptions for Australia and other at-risk reporting units change as forecasts and economic conditions evolve.
- Whether planned repurchases, dividends and capital spending remain consistent with cash generation, debt covenants and liquidity needs.