POOL Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Pool Corporation distributes swimming pool and outdoor-living products through 417 sales centers; approximately 95% of nine-month sales came from North America.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,615.3 million (+14%) | $1,411.4 million | $5,083.8 million (+19%) | $4,260.0 million |
| Gross profit / margin | $503.7 million / 31.2% | $441.9 million / 31.3% | $1,617.7 million / 31.8% | $1,294.7 million / 30.4% |
| Operating income / margin | $263.9 million / 16.3% | $237.3 million / 16.8% | $918.5 million / 18.1% | $704.9 million / 16.5% |
| Net income | $190.1 million (+3%) | $184.7 million | $676.6 million (+25%) | $543.0 million |
| Diluted EPS | $4.78 (+5%) | $4.54 | $16.82 (+26%) | $13.32 |
Q3 gross margin declined 10 basis points, while nine-month gross margin improved 140 basis points. Higher costs and investment in labor, facilities, freight, technology and acquisitions contributed to expense growth. Interest and other non-operating expense rose $9.4 million in Q3 and $18.6 million for the nine months, principally reflecting higher average debt; Q3 effective borrowing rate was 3.2% versus 2.8%.
Cash flow (nine months): Operating cash flow was $307.5 million, down from $359.1 million. Investing cash outflow was $34.5 million; financing cash outflow was $248.4 million. Cash ended at $49.1 million. The company cited federal tax payments and working-capital outflows, including inventory purchases, as factors in lower operating cash flow. It paid $111.6 million in dividends and repurchased $471.2 million of stock.
Balance sheet at September 30, 2022: Total debt was $1.513 billion, versus $362.8 million a year earlier; cash was $49.1 million. Inventory was $1.540 billion, up 48% year over year, and inventory turns declined to 2.7 from 3.8. Total current assets were $2.199 billion and current liabilities $737.3 million. Debt increased to fund acquisitions, repurchases and working capital. The company reported $172.2 million available under its $750 million revolving facility, in addition to other facilities.
Changes and operating drivers
- Management attributed sales growth to product-cost inflation of approximately 9%–10%, acquisitions, demand and market-share gains. Nine-month base-business sales increased 14%; Q3 base-business sales increased 10%.
- Q3 chemicals sales rose 32%, equipment 9% and building materials 14%. European sales declined 11% in local currency in Q3, amid macroeconomic weakness.
- Q3 net income growth lagged operating income growth as higher interest costs and a smaller share-based compensation tax benefit offset part of operating gains. Q3 tax benefit under ASU 2016-09 was $0.6 million versus $4.2 million; nine-month benefit was $9.5 million versus $15.9 million.
- Inventory investment reflected supply availability efforts, inflation and acquired locations. Management reported supply-chain conditions improved in Q2 and Q3 and expected inventories to normalize with seasonal trends as 2023 progressed.
- The company acquired Tri-State Pool Distributors’ assets in April 2022. The Porpoise acquisition’s purchase-price allocation remained preliminary.
Guidance, risks and contingencies
Management forecast full-year 2022 diluted EPS of $18.50–$19.05, including $0.24 per share of tax benefits recognized year to date; prior guidance was $18.38–$19.13. Full-year sales growth guidance remained 17%–19%. Guidance assumes average weather. Management expected modest full-year gross-margin improvement, but forecast Q4 gross margin to decline 150–200 basis points year over year, citing lower vendor price inflation and incentives. The company expected operating-expense growth below gross-profit growth and an effective tax rate of approximately 25.5% excluding ASU 2016-09 benefits.
Key sensitivities include weather and seasonality, discretionary consumer spending, housing and inflation, continued demand after pandemic-era home-centered trends, supply and labor constraints, European macroeconomic conditions, currency movements, and variable interest rates. Hurricane Ian was expected to shift approximately $9 million of sales from Q3 to Q4. The company reported compliance with debt covenants; its average total leverage ratio was 1.25 against a maximum of 3.25, and fixed-charge coverage was 11.14 against a minimum of 2.25. It stated that ordinary-course litigation was not expected to have a material adverse effect and reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and earnings guidance is achieved, and how much growth reflects inflation, acquisitions or underlying volumes.
- Inventory levels, turns and reserves, and whether supply conditions and inventory normalize as management expects.
- Debt, interest expense, facility availability and covenant headroom as rates and seasonal working-capital needs change.
- Q4 margin performance, vendor incentives and the effect of weather, Hurricane Ian and European demand.
- Capital allocation, including repurchases and dividends, alongside acquisition spending and the company’s stated target leverage range of 1.5–2.0.