POOL CORPORATION — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Pool Corporation distributes swimming pool, irrigation, and related outdoor-living products through 344 sales centers across North America, Europe, South America, and Australia.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $918.9 million (+8%) | $851.9 million | $1,434.1 million (+10%) | $1,302.3 million |
| Gross profit / gross margin | $270.7 million / 29.5% | $248.3 million / 29.1% | $413.8 million / 28.9% | $373.1 million / 28.6% |
| Operating income / margin | $142.4 million / 15.5% | $129.1 million / 15.2% | $172.0 million / 12.0% | $144.7 million / 11.1% |
| Net income attributable to Pool Corporation | $85.4 million (+10%) | $77.9 million | $101.8 million (+18%) | $86.3 million |
| Diluted EPS | $1.98 | $1.75 | $2.35 | $1.94 |
Q2 base-business sales increased 6%; first-half base-business sales increased 9%. Q2 gross margin improved nearly 40 basis points, mainly from supply-chain improvements. First-half operating expenses rose 6%, slower than sales growth, and fell to 16.9% of sales from 17.5%. Performance-based compensation and volume-driven labor and freight were key expense increases.
Cash flow, debt, and liquidity
- For the first six months, operating cash flow was negative $13.8 million, improved from negative $56.6 million a year earlier. Management cited earnings growth and deferred estimated tax payments related to storm-affected areas in Louisiana. Receivables growth remained a significant use of cash.
- Investing cash outflow was $44.7 million, including $19.2 million for acquisitions and $25.8 million for capital expenditures. Financing provided $76.7 million; share repurchases used $80.5 million and dividends used $24.0 million.
- Cash was $30.6 million at June 30. Total debt was $500.6 million, up $7.0 million, or 1%, from June 30, 2015. Debt included $297.9 million outstanding on the revolving credit facility and $197.2 million under the receivables facility.
- Revolver availability was $163.1 million; receivables-facility borrowings were $197.2 million against seasonal capacity of up to $200 million. The company reported covenant compliance: leverage ratio 1.54 versus a 3.25 maximum, and fixed-charge coverage 5.43 versus a 2.25 minimum.
- The company declared dividends of $0.31 per share in Q2. Shares outstanding declined year over year; Q2 repurchases totaled 165,912 shares at an average $88.11 per share.
Outlook, commentary, and notable items
- Management raised 2016 diluted EPS guidance to $3.30–$3.45 from $3.25–$3.40. It expected full-year base-business sales growth of 6%–8%, second-half gross margin broadly in line with the prior year, and operating-expense growth at about half the rate of gross-profit growth.
- Management expected full-year operating cash flow to approximate net income and anticipated $100–$150 million of cash for share repurchases. Through June 30, it had spent $77.8 million on open-market repurchases.
- Management described Q2 weather comparisons as neutral. Warmer-than-normal first-quarter weather supported early pool openings and sales. Sales gains also reflected consumer spending, market-share growth, approximately 1% product-cost inflation, and strength in building materials, equipment, and commercial products. A shift of early-buy deliveries into Q1 reduced Q2 sales by about 1%.
- Interest and other non-operating expense rose $2.1 million in Q2 and $3.1 million in the first half. This included a $1.5 million fair-value adjustment to a note receivable from a swimming-pool retailer; higher average debt and interest expense accounted for the remainder. The related VIE loan had $6.2 million outstanding at quarter-end.
- The business is highly seasonal; Q2 and Q3 are generally peak periods, and quarterly results may not indicate full-year performance. Principal risks cited include weather, economic and housing-market conditions, supplier relationships, and competition. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
- In the consolidated antitrust litigation, the court granted summary judgment for the company on the remaining claims on July 1, 2016; it had previously granted judgment on the direct purchasers’ horizontal-conspiracy claim.
Important facts for investors to verify
- Whether full-year sales and EPS guidance are achieved, given seasonality and sensitivity to weather and consumer discretionary spending.
- Whether receivables collection and seasonal working-capital needs support the expected operating cash flow, and how liquidity changes through peak season.
- Debt levels, borrowing costs, covenant headroom, and the effect of interest-rate swaps, including their October 2016 transition to forward-starting hedges.
- The collectibility and valuation assumptions behind the retailer note receivable and the recorded $1.5 million adjustment.
- The pace and funding of planned share repurchases and dividends relative to cash generation and leverage priorities.