POOL CORP annual report, FY2015

POOL CORPORATION — FY2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. Pool Corporation is a wholesale distributor of pool, irrigation, landscape and outdoor-living products, operating 336 sales centers across four distribution networks.

Financial results and liquidity

Metric	FY2015	FY2014	Change
Net sales	$2,363.1 million	$2,246.6 million	+5%
Gross profit / gross margin	$675.6 million / 28.6%	$643.3 million / 28.6%	+5% / unchanged
Operating income / operating margin	$216.2 million / 9.1%	$188.9 million / 8.4%	+14% / +0.7 percentage points
Net income attributable to Pool Corporation	$128.3 million	$110.7 million	+16%
Diluted EPS	$2.90	$2.44	+19%
Cash from operations	$146.1 million	$121.8 million	+$24.2 million

Base-business sales grew 5%; reported sales growth included an estimated nearly 2% adverse foreign-currency effect. Gross margin held at 28.6%, while operating expenses rose just 1% and declined to 19.4% of sales from 20.2%.
Fourth-quarter sales were $415.1 million versus $376.4 million, about 10% higher. The quarter produced $2.6 million of net income, compared with a $2.0 million loss in Q4 2014; management called it the company’s first profitable fourth quarter. Warm weather extended the season.
Operating cash flow exceeded net income by $17.8 million. Investing cash outflow was $37.8 million, including $29.1 million of net capital expenditures; financing cash outflow was $107.8 million. The company repurchased $92.4 million of shares and paid $43.1 million in dividends.
Year-end cash was $13.2 million; working capital was $356.9 million. Total debt was $329.7 million, up 3% year over year. The $465 million revolving credit facility had $273.0 million drawn and $188.0 million available; the receivables facility had $55.0 million outstanding. The company reported covenant compliance and a 1.61 average total leverage ratio against a 3.25 maximum.
Inventory was $474.3 million, up 2%, with inventory turns of 3.5 versus 3.4. Total assets were $936.0 million and stockholders’ equity was $255.7 million.

Material changes versus comparable periods

Compared with FY2014, sales growth accelerated from 8% to 5% only in the sense of reported results? The filing reports FY2014 growth of 8% and FY2015 growth of 5%, so growth moderated; FY2015 earnings nevertheless rose faster than sales, supported by expense discipline and operating-margin expansion.
Building-material sales grew 13% and equipment sales 9%; chemical sales rose about 5%. The stronger U.S. dollar reduced reported sales growth by nearly 2%, while benefiting operating expenses by approximately 2%.
Weather pressured second-quarter demand, especially in Texas and nearby states, but normalized conditions and an unusually mild fall and winter supported the second half. FY2015 cash from operations increased from $121.8 million to $146.1 million; year-end debt increased from $320.8 million to $329.7 million.
FY2014’s 8% sales growth and 7% base-business growth compared with FY2013; FY2015 growth was lower, but operating income and diluted EPS reached records.

Outlook, risks and notable items

For FY2016, management projected diluted EPS of $3.20–$3.35, base-business sales growth of 5%–7%, relatively neutral gross-margin trends, and low-to-mid-teens base-business operating-profit growth. It expected operating cash flow to approximate net income and planned $100–$150 million of share repurchases.
Management expected the U.S. market environment to be broadly similar to 2015, planned 5–7 new sales centers and selective acquisitions, and forecast industry growth of approximately 3%–6% annually over the next 4–7 years. These are forward-looking expectations, not guarantees.
Key exposures include weather and seasonality (63% of 2015 sales and 90% of operating income were generated in Q2 and Q3), discretionary consumer spending and housing, customer access to credit, competition, supplier relationships, currency movements, and environmental and product-safety regulation. Lower oil prices could weaken spending in Texas and other energy-linked markets.
The company remains a defendant in consolidated pool-products antitrust litigation. On January 27, 2016, the court granted summary judgment for Pool on direct purchasers’ horizontal-conspiracy claim; the company continues to defend the matter and said it did not expect the litigation to materially affect its financial condition, results or cash flows.
No goodwill impairment was recorded in 2015. Management identified the Italy and Quebec reporting units as at risk, with goodwill of $3.4 million and $2.2 million, respectively; weaker results or changed assumptions could prompt future impairment.
The company disclosed $169.7 million of future operating-lease payments and $329.7 million of debt at year-end. It also noted that foreign subsidiary earnings are treated as indefinitely reinvested; future repatriation could create additional tax expense.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

Whether FY2016 EPS, base-business sales growth and cash-flow expectations were achieved, and how early-buy shipments, currency and weather affected comparability.
Whether margin discipline offsets continued mix shifts toward lower-margin discretionary products, and how vendor incentives and pricing affect gross profit.
Seasonal borrowing, receivables-facility capacity, leverage and covenant headroom, alongside the planned share repurchases and dividend payments.
Developments in the antitrust litigation and operating performance or impairment indicators at the Italy and Quebec locations.
Cash generation and returns on capital from new locations, acquisitions and capital expenditures; FY2015 included $29.1 million of net capital expenditures and $4.5 million of acquisition payments.