POOL Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited. POOL distributes pool, irrigation, and related supplies through 346 sales centers. Results are seasonal, with sales and operating income typically concentrated in the second and third quarters.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $691.4 million | $645.8 million | $2,125.6 million | $1,948.1 million |
| Gross profit | $199.6 million | $184.3 million | $613.3 million | $557.3 million |
| Operating income | $74.2 million | $65.5 million | $246.1 million | $210.2 million |
| Net income attributable to POOL | $44.5 million | $39.4 million | $146.3 million | $125.8 million |
| Diluted EPS | $1.03 | $0.90 | $3.39 | $2.83 |
- Q3 sales rose 7% (base business sales up 5%); nine-month sales increased 9% (base business up 7%). Q3 net income attributable to POOL increased 13%; nine-month diluted EPS increased 20%.
- Gross margin improved 40 basis points to 28.9% in Q3 and approximately 30 basis points to 28.9% year to date. Management attributed the improvement chiefly to supply-chain initiatives; year-to-date gains also reflected pricing and product mix.
- Operating margin rose to 10.7% from 10.1% in Q3 and to 11.6% from 10.8% year to date. Operating expenses increased 6% in both comparison periods, slower than sales growth.
- Nine-month operating cash flow was $143.2 million, versus $78.0 million in 2015. Investing used $50.2 million, including $19.3 million for acquisitions and $30.4 million for capital expenditures; financing used $75.7 million, including $117.9 million of treasury-stock purchases and $37.0 million of dividends. Cash ended at $30.3 million.
- At September 30, total debt was $390.2 million, versus $393.4 million a year earlier; long-term debt, net, was $388.9 million. The company had $180.9 million available under its $465 million revolving credit facility, plus a $4.0 million standby letter of credit outstanding. It reported compliance with debt covenants.
- Current assets were $736.2 million and current liabilities $327.9 million. Inventory was $455.2 million, up 10% from September 2015; trailing-twelve-month inventory turns were 3.6, versus 3.4.
Outlook, commentary, and notable items
- Management raised 2016 diluted EPS guidance to $3.40–$3.46 from $3.30–$3.45. It expected full-year base business sales growth of 6%–7%, low-single-digit Q4 sales growth, and full-year gross margin 20–30 basis points above 2015. Operating expense growth was expected to be about half the gross-profit growth rate; the effective tax rate was expected to be consistent with 2015.
- Management expected full-year operating cash flow to exceed net income. It anticipated approximately $150–$200 million of share repurchases for 2016; $115.3 million had been spent through September 30. The declared dividend was $0.31 per share in Q3, versus $0.26 a year earlier.
- Management described Q3 results as slightly better than expectations. Sales benefited from consumer discretionary spending, market-share gains, and approximately 1% product-cost inflation. Weather was a key variable: Texas rainfall limited the Q3 comparison benefit seen in 2015, and management noted one fewer selling day in Q4 2016.
- Accrued current liabilities included $37.5 million of deferred Q3 estimated tax payments for Louisiana storm- and flood-affected areas, payable in Q4. This deferral contributed to stronger year-to-date operating cash flow.
- Operating expenses included a $0.6 million goodwill impairment for an at-risk Quebec reporting unit; $1.7 million of goodwill remained there. Interest and other non-operating expenses included $2.0 million of year-to-date adjustments related to a note receivable. The company also recorded a $0.5 million Q3 fair-value adjustment to that note.
- POOL disclosed a $7.3 million loan outstanding to a pool retailer, with an $8.5 million commitment; it was not required to consolidate the borrower. Anti-trust litigation was described as concluded after summary judgments in the company’s favor, apart from minor administrative matters.
- Principal risks cited include weather, economic and housing-market conditions, supplier relationships, and competition. The company emphasized that results are seasonal and that quarterly performance may not indicate full-year results.
Important facts for investors to verify
- Whether fourth-quarter performance and weather support the raised $3.40–$3.46 EPS guidance and 6%–7% base business sales outlook.
- How much of the year-to-date operating cash-flow increase reflects underlying earnings versus the $37.5 million tax-payment deferral, and the timing of its Q4 payment.
- Whether inventory growth, receivables, and seasonal borrowing needs remain manageable as the business enters its slower quarter.
- Share-repurchase pace and funding, remaining authorization, debt levels, covenant headroom, and the planned amendment to the receivables facility.
- Developments in the Quebec reporting unit and the collectibility and valuation of the retailer note receivable.