POOL Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Pool Corporation distributes swimming pool, spa and irrigation products through 360 sales centers. Results are unaudited and the business is seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $811.3 million | $743.4 million | $2,455.0 million | $2,278.0 million |
| Gross profit / margin | $235.0 million / 29.0% | $216.6 million / 29.1% | $709.7 million / 28.9% | $659.9 million / 29.0% |
| Operating income / margin | $92.3 million / 11.4% | $81.9 million / 11.0% | $287.9 million / 11.7% | $267.1 million / 11.7% |
| Net income attributable to Pool | $69.3 million | $48.8 million | $217.6 million | $166.0 million |
| Diluted EPS | $1.66 | $1.16 | $5.20 | $3.89 |
Q3 sales rose 9% and base-business sales rose 8%; diluted EPS increased 43%. For the first nine months, sales rose 8% and base-business sales rose 7%; net income attributable to Pool increased 31%. Gross margin edged down, primarily due to product mix. Q3 operating expenses increased 6%, but declined as a percentage of sales to 17.6% from 18.1%, supporting improved operating margin.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $51.3 million, down from $112.0 million. Management attributed the decline mainly to inventory purchases made ahead of larger-than-normal vendor price increases and expects cash provided by operations to be below net income for 2018.
- Investing cash outflow was $28.6 million, including $28.0 million of net property and equipment purchases. Financing cash outflow was $17.3 million; cash dividends paid were $51.4 million and treasury stock purchases were $38.9 million.
- At September 30, cash was $35.7 million and total debt was $580.7 million, up 3% from a year earlier. Debt included $417.4 million outstanding on the revolving credit facility and $155.0 million under the receivables facility.
- The $750 million revolving facility had $327.8 million available after outstanding borrowings and a standby letter of credit. The company reported compliance with debt covenants; its leverage ratio was 1.68 against a maximum of 3.25, and its fixed-charge coverage ratio was 5.44 against a minimum of 2.25.
Management outlook, risks and notable items
- Management projected 2018 base-business sales growth of approximately 7% and raised diluted EPS guidance to $5.58–$5.78, including tax benefits realized under share-based compensation tax accounting.
- Management expected full-year gross margin to be similar to 2017 and operating-margin improvement of approximately 20–40 basis points versus 2017, with improvement toward the upper end of that range by year-end. It expected Q4 interest and other non-operating expense to increase approximately $2.0 million year over year.
- The company expected 2018 inflation to be higher in Q4 due to vendor price increases passed on to customers, with potential benefit to gross margin. It expected inventory purchasing to normalize in 2019, benefiting cash flow.
- The effective tax rate was 20.8% in Q3 and 20.5% for the nine months, compared with 37.4% and 35.2%, respectively, in 2017. U.S. tax reform and share-based compensation tax benefits contributed; the latter provided $3.3 million in Q3 and $13.9 million year to date. Management’s estimated 2018 rate excluding those share-based compensation benefits was approximately 25.5%.
- Management cited strong discretionary-product demand and market-share gains, despite Hurricane Florence, heavy Texas rainfall and California wildfires. Risks include weather and seasonality, customer labor constraints, labor/fuel/freight cost inflation, interest-rate increases, economic and housing-market conditions, competition and the timing of employee stock-option exercises affecting tax benefits.
- Inventory was $610.0 million, up 26% year over year, reflecting advance purchases, business growth and acquisitions. Inventory turns were 3.4 versus 3.5 a year earlier. The company anticipated approximately $100–$150 million of 2018 share repurchases.
- Adoption of revenue-recognition guidance in 2018 had no material impact. The company expected the new lease standard, effective in 2019, to significantly increase balance-sheet assets and liabilities, but not materially affect results of operations or cash flows.
Important facts for investors to verify
- Whether Q4 demand, pricing and operating-margin performance support the raised $5.58–$5.78 diluted EPS outlook.
- Whether advance inventory purchases convert to sales and cash, and whether operating cash flow recovers as management expects in 2019.
- How higher interest rates and debt levels affect interest expense, liquidity and covenant headroom.
- How much of earnings growth reflects sustainable operating performance versus lower tax rates and share-based compensation tax benefits.
- Whether weather, customer capacity constraints and rising labor, fuel and freight costs alter sales or margins.