POOL Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Pool Corporation operated 344 sales centers across North America, Europe, South America and Australia. Its business is seasonal, with sales and operating income generally highest in the second and third quarters.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $546.4 million | $515.3 million | +6% |
| Gross profit / margin | $153.6 million / 28.1% | $143.0 million / 27.8% | +7%; margin +0.3 percentage points |
| Operating income / margin | $31.0 million / 5.7% | $29.5 million / 5.7% | +5%; margin unchanged |
| Net income attributable to Pool Corporation | $22.3 million | $16.4 million | +36% |
| Diluted EPS | $0.52 | $0.38 | +37% |
| Operating cash flow | $(32.4) million | $(39.8) million | Cash use improved |
| Capital expenditures | $19.1 million | $13.4 million | Higher, mainly vehicle investment |
Gross margin improved primarily because of product and customer mix and the timing of customer early-buy purchases, which typically carry lower margins. Operating expenses rose 8% to $122.6 million, reflecting growth-related labor and freight, including a $0.8 million increase in freight, employee-related costs and preparation for peak season. The effective tax rate was 18.7%, versus 38.5%.
Financial position, debt and liquidity
- At March 31, 2017, cash was $13.4 million; total debt was $490.2 million, up $39.8 million (9%) from March 31, 2016. Long-term debt, net, was $480.4 million.
- Inventory was $647.9 million, up 9% year over year. Receivables, including receivables pledged under the securitization facility, totaled $290.0 million, up 2% year over year.
- Cash used in operating activities was $32.4 million, principally reflecting seasonal working-capital needs: receivables and inventory uses were partly offset by higher accounts payable. Management expects full-year operating cash flow to exceed net income.
- The revolving credit facility had $361.4 million outstanding and $99.6 million available at quarter-end, with a $4.0 million standby letter of credit outstanding. The receivables facility had $120.0 million outstanding. The company reported compliance with debt covenants; its leverage ratio was 1.59 against a maximum of 3.25, and fixed-charge coverage was 5.41 against a minimum of 2.25.
- Cash dividends paid were $12.8 million; dividends declared were $0.31 per share, up from $0.26. The company anticipated approximately $100–$150 million of 2017 share repurchases, subject to Board authorization; $46.6 million remained under the existing authorization as of April 24, 2017.
Material changes and unusual items
- Q1 sales grew 5% on a base-business basis, despite a 2% unfavorable effect from customer early-buy purchases. Better-than-normal weather supported growth, although the comparison was difficult because Q1 2016 also benefited from unusually warm weather. Building-material sales rose 16%; selected pool equipment sales collectively rose 8%.
- Adoption of ASU 2016-09 produced a $5.5 million income-tax benefit and approximately $0.12 of diluted EPS benefit in Q1. Management included an estimated $0.30 per diluted share benefit from the standard in its full-year guidance. The accounting change also increased diluted weighted-average shares by approximately 500,000.
- Interest and other non-operating expense rose $0.7 million. Average debt and borrowing rates were higher; the weighted-average effective interest rate was 2.6%, versus 2.0%. The company also recorded a $0.8 million benefit related to interest-swap ineffectiveness and $0.5 million amortization expense on previously deferred swap losses.
- The holder of the noncontrolling interest in Australian subsidiary PSL notified the company of an intention to exercise the put option as of June 30, 2017. The company expects to purchase the holder’s shares and own 100% of PSL; the filing does not provide a clear purchase price.
- In Q1, the company recorded an additional $1.0 million fair-value reduction to a note receivable from a pool retailer in which it has a variable interest. The company said it is not the entity’s primary beneficiary and does not consolidate it.
Guidance, outlook and risks
- Updated 2017 diluted EPS guidance is $4.12–$4.32, reflecting the estimated ASU 2016-09 benefit and Q1 results. The company maintained its expectation of 5%–7% full-year base-business sales growth and gross margin similar to 2016.
- Management expects operating expenses to grow at approximately half the rate of gross-profit growth. It expects the Q1 gross-margin benefit from early-buy timing and mix to normalize over the rest of the year, and—excluding the accounting change—expects the effective tax rate to be consistent with 2016.
- Management projected 2017 capital expenditures of approximately 1.5% of net sales, primarily for facilities and delivery vehicles. Quarterly and annual results may vary materially with weather, the housing and economic environment, and seasonal demand; the company noted that Q1 results are not necessarily indicative of full-year results.
- Management identified weather, economic and housing-market changes, supplier relationships, competition and seasonal working-capital requirements as relevant risks. It reported no material changes to previously disclosed risk factors or market-risk disclosures. Ordinary-course litigation was not expected to have a material adverse effect based on facts then available.
- Revenue-recognition adoption was expected in 2018 and was not expected to materially affect financial position or results, though additional disclosures were anticipated. The company expected the new lease standard to significantly affect the balance sheet; its effect on results and disclosures was still under evaluation.
Investor facts to verify
- How much of reported Q1 earnings growth and full-year EPS guidance depends on share-based compensation tax benefits, and how variable those benefits may be.
- Whether sales growth, gross margins and operating-expense growth track guidance after early-buy timing and unusually favorable weather effects normalize.
- Seasonal working-capital needs, cash conversion and debt levels through the peak selling season, including continued covenant headroom and facility availability.
- The cost and timing of the planned PSL put-option purchase, which the filing does not quantify.
- Progress and eventual balance-sheet impact of lease-standard adoption, and collectibility of the retailer note receivable.