POOL CORPORATION — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Business context
Pool Corporation is a wholesale distributor of swimming pool supplies, equipment, irrigation and landscape products, and related outdoor-living products. It operated 344 sales centers across four distribution networks. The business is seasonal, with peak activity generally in the second and third quarters; 63% of 2016 sales and 85% of operating income were generated in those quarters.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $2,570.8 million | $2,363.1 million | +9%; base-business sales +7% |
| Gross profit / gross margin | $741.1 million / 28.8% | $675.6 million / 28.6% | Gross profit +10%; margin +20 bps |
| Operating income / margin | $255.9 million / 10.0% | $216.2 million / 9.1% | +18% |
| Net income attributable to Pool Corporation | $149.0 million | $128.3 million | +16% |
| Diluted EPS | $3.47 | $2.90 | +20% |
| Cash provided by operations | $165.4 million | $146.1 million | +$19.3 million |
| Total debt at year-end | $438.0 million | $328.0 million | +34% |
Operating expenses rose 6%, slower than sales growth, and declined to 18.9% of sales from 19.4%. The effective tax rate was 38.5%, unchanged from 2015. Management attributed sales and profit growth to favorable weather, execution, recovery in remodeling and equipment replacement, and continued customer investment in outdoor living. Pool and spa chemicals were 13% of sales and grew 6%; building-material sales grew 14%.
Fourth quarter: Sales were $445.2 million versus $415.1 million in Q4 2015. Operating income was $9.7 million versus $6.0 million; net income attributable to Pool Corporation was $2.6 million versus $2.5 million, and diluted EPS was $0.06 in both periods. Results reflect the seasonally slow quarter.
Cash, liquidity and capital allocation
- Operating cash flow was $165.4 million; investing activities used $55.6 million and financing activities used $99.7 million. Cash and cash equivalents ended the year at $22.0 million.
- Working capital was $399.3 million. Inventory was $486.1 million, up 2% year over year; inventory turns improved to 3.6 from 3.5.
- Debt increased primarily in connection with share repurchases. At year-end, $354.5 million was outstanding under the $465.0 million revolving facility, with $110.5 million available after the standby letter of credit; $83.5 million was outstanding under the receivables facility. The company reported compliance with its debt covenants.
- The company repurchased $175.6 million of shares in 2016 and paid $49.7 million in dividends. Net capital expenditures were $34.4 million and acquisition payments were $19.7 million.
Material changes, outlook and notable items
- Compared with 2015, favorable weather—especially warmer conditions early and late in the year—lengthened the season and supported sales. Gross margin improved through supply-chain and pricing initiatives; operating leverage lifted operating margin.
- Management projected 2017 base-business sales growth of 5%–7% and diluted EPS of $3.80–$4.00, excluding the expected favorable impact of adopting ASU 2016-09. Assumptions include normal weather, 1%–2% product-cost inflation, and lower early-buy shipments that could reduce first-quarter sales by 2%–4% year over year while shifting sales later in the year. Gross margin was expected to be relatively neutral.
- Management expected 2017 operating cash flow to approximate net income and anticipated $100–$150 million of share repurchases, subject to further Board authorization. It planned 6–8 new sales centers and selective acquisitions.
- New-pool construction was estimated at 65,000–70,000 units in 2016, still 65%–70% below historic peak and 55%–60% below management’s estimate of normal levels. Management forecast industry growth of approximately 3%–6% annually over the next 4–7 years as activity normalizes.
- Unusual items included a $0.6 million noncash goodwill impairment charge for a Quebec reporting unit and a $3.5 million fair-value adjustment reducing a note receivable from a pool retailer, recorded in non-operating expenses. Management identified Italy and Quebec reporting units as at risk for potential future goodwill impairment.
- Principal risks include weather variability, economic and housing conditions, consumer credit availability, competition, supplier concentration, seasonal working-capital needs, interest and foreign-currency exposure, regulatory compliance, and cybersecurity. Three suppliers represented approximately 20%, 10% and 8% of product costs, respectively.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls as of December 31, 2016. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether 2017 sales and EPS guidance is achieved, particularly under normal rather than unusually favorable weather and with the anticipated early-buy shipment shift.
- Whether higher debt and planned buybacks remain consistent with the company’s leverage targets, covenant headroom and seasonal liquidity requirements.
- Whether gross-margin initiatives offset the mix shift toward higher-value, lower-margin discretionary products.
- Developments in the Quebec and Italy goodwill-risk locations and the collectibility of the note receivable subject to the 2016 fair-value adjustment.
- The effect of share-based-payment tax-accounting adoption on reported earnings, tax-rate volatility and diluted shares.