POOL Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Pool Corporation distributes swimming pool, irrigation and related products through 372 sales centers. Results are unaudited; the business is highly seasonal, with sales and operating income generally strongest in the second and third quarters.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,121.3 million | $1,057.8 million | $1,718.8 million | $1,643.7 million |
| Gross profit / margin | $330.3 million / 29.5% | $308.7 million / 29.2% | $504.9 million / 29.4% | $474.7 million / 28.9% |
| Operating income / margin | $172.5 million / 15.4% | $162.0 million / 15.3% | $210.9 million / 12.3% | $195.6 million / 11.9% |
| Net income | $131.4 million | $117.0 million | $164.0 million | $148.4 million |
| Diluted EPS | $3.22 | $2.80 | $4.02 | $3.55 |
Q2 sales grew 6% year over year, including 4% base-business growth; six-month sales grew 5%, including 3% base-business growth. Q2 operating expenses rose 8% to $157.8 million, faster than sales, while operating margin improved slightly. The six-month effective tax rate was 17.2%, versus 20.3%; excluding employee share-based compensation tax benefits, it was 25.5% versus 26.0%.
Cash flow and liquidity: Operating cash flow was $97.4 million for the first six months, versus cash used of $36.8 million a year earlier. Investing activities used $28.5 million, including $9.3 million for acquisitions; financing activities used $25.2 million. Cash at June 30 was $60.7 million. Total debt was $692.3 million, up 5% from June 2018. The company reported $306.4 million available under its $750 million revolving credit facility and $230.4 million outstanding under its receivables facility. Its average total leverage ratio was 1.76 against a 3.25 maximum; its fixed-charge coverage ratio was 5.19 against a 2.25 minimum. Management said it was in compliance and expected adequate capital availability.
Inventory was $694.4 million, up 14% year over year, reflecting advance purchases ahead of vendor price increases, acquisitions, normal growth and a slower seasonal start. Trailing inventory turns declined to 3.1 from 3.5. DSO improved to 29.5 days from 30.2 days. The company paid $39.8 million in dividends and repurchased $23.1 million of stock during the six-month period.
Material changes and management commentary
- Despite record rainfall and cooler temperatures in California, Texas and Arizona—especially in May—Q2 sales and earnings increased. Favorable weather supported southeastern markets; unfavorable currency movements reduced Q2 sales growth by about 1%.
- Strategic inventory purchases contributed to gross-margin expansion. Management cited stronger discretionary demand, market-share gains, and inflationary product cost increases; building-material sales rose 9% in Q2 and equipment sales rose 6%.
- Interest and other non-operating expense increased year over year. The weighted-average effective interest rate was 3.5% in Q2 versus 3.2%, with higher average debt; for the first six months, the rates were 3.6% versus 3.1%.
- Adoption of lease accounting guidance increased reported assets and liabilities: operating lease assets were $173.9 million and lease liabilities totaled $175.1 million at June 30. Adoption did not materially affect results or cash flows.
Outlook, risks and contingencies
- Management expected 2019 sales growth of approximately 6%–7%, with delayed projects potentially benefiting the second half, subject to customer building capacity, labor availability and weather.
- Full-year gross margin was expected to be relatively flat, as second-half declines offset first-half gains. Management targeted base-business operating-margin improvement of approximately 20–40 basis points.
- Annual diluted EPS guidance was narrowed to $6.09–$6.34 from $6.09–$6.39. The stated outlook excludes potential additional share-based compensation tax benefits. Management expected operating cash flow to approximate net income, excluding timing effects from strategic inventory purchases, and anticipated $150–$200 million of 2019 share repurchases.
- Principal cited risks include weather sensitivity, economic and housing-market changes, supplier relationships, competition and fluctuations in share-based compensation tax benefits. The company said there were no material changes to its previously disclosed risk factors. Routine litigation was not expected to have a material adverse effect based on currently available facts.
- The filing describes seasonal working-capital needs and variable-rate debt exposure. Interest-rate swaps hedge portions of borrowings; counterparty failure could remove expected hedge benefits. Management stated it expected to remain in covenant compliance over the next 12 months.
Important facts for investors to verify
- Whether delayed pool openings and projects converted into second-half sales, and how weather affected the key markets.
- Whether inventory growth and lower inventory turns normalized, and whether strategic purchases continued to support gross margin.
- Actual full-year sales, operating-margin and diluted-EPS performance against the updated outlook, including the impact of tax benefits.
- Working-capital cash conversion, debt levels, interest costs, facility availability and covenant compliance through the seasonal peak.
- Capital returns: the company reported $249.2 million remaining under its share-repurchase authorization as of July 25, 2019; confirm subsequent repurchases and dividend decisions.