POOL CORPORATION — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Pool Corporation distributes swimming pool supplies and related products through 346 sales centers across North America, Europe, South America and Australia. Results are seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $743.4 million | $691.4 million | $2,278.0 million | $2,125.6 million |
| Gross profit / margin | $216.6 million / 29.1% | $199.6 million / 28.9% | $659.9 million / 29.0% | $613.3 million / 28.9% |
| Operating income / margin | $81.9 million / 11.0% | $74.2 million / 10.7% | $267.1 million / 11.7% | $246.1 million / 11.6% |
| Net income attributable to Pool | $48.8 million | $44.5 million | $166.0 million | $146.3 million |
| Diluted EPS | $1.16 | $1.03 | $3.89 | $3.39 |
- Q3 net sales rose 8%, including 6% base-business growth; management estimated hurricanes and other severe weather reduced quarterly sales by about $4 million. One fewer selling day reduced estimated base-business growth by approximately 1%.
- Q3 gross margin increased about 20 basis points, primarily due to product mix and sourcing initiatives. Base-business operating expenses as a share of sales improved to 17.9% from 18.1%.
- For the first nine months, operating cash flow was $112.0 million, down from $143.2 million. The filing attributes the decrease to growth-related increases in receivables and inventories and the timing of estimated tax payments.
- Nine-month investing cash use was $44.6 million, including $37.7 million of net capital expenditures and $6.9 million for acquisitions. Financing cash use was $52.7 million, including $141.6 million of treasury stock purchases and $43.2 million of dividends, partly offset by net borrowing.
- Cash was $36.4 million at September 30. Total debt was $564.6 million, up $174.4 million, or 45%, from September 30, 2016; management cited share repurchases and working-capital growth as principal drivers. Long-term debt, net, was $556.0 million.
- Q3 declared dividends were $0.37 per share, versus $0.31 a year earlier. The company repurchased approximately 1.24 million shares in Q3 at a reported average price of $107.29.
Changes, outlook and commentary
- Management narrowed full-year 2017 diluted EPS guidance to $4.01–$4.11, from the prior $4.12–$4.32 range, citing changed employee stock-option exercise patterns. The guidance includes a $0.14-per-share benefit from ASU 2016-09 recognized in Q1 and Q2; the filing says the benefit estimate depends on assumptions, including share price and exercise timing.
- Management projected full-year base-business sales growth of 6%–7%, gross margin broadly similar to 2016, and a 20–40 basis-point decline in base-business operating expenses as a percentage of sales. It expected 2017 operating cash flow to exceed net income and approximately $140–$160 million of cash to be used for share repurchases.
- The September 29 amendment to the revolving credit agreement extended maturity to September 2022 and increased capacity from $465 million to $750 million, with a further $75 million accordion option. At quarter-end, $415.3 million was drawn and $330.5 million was available; a $4.2 million standby letter of credit was outstanding. The receivables facility had $142.3 million outstanding.
- At quarter-end, the average total leverage ratio was 1.60 against a maximum of 3.25, and the fixed-charge coverage ratio was 5.50 against a minimum of 2.25. The company reported compliance with its debt covenants and expected to remain compliant over the next 12 months.
- Severe weather, including Hurricanes Irma, Harvey and Maria and an earthquake in Mexico, disrupted operations; management did not expect a material full-year impact. The filing identifies weather, economic and housing-market conditions, supplier relationships and competition among risks.
- The company bought the remaining 40% interest in Australian subsidiary Pool Systems Pty. Ltd. on June 29, eliminating its noncontrolling interest. It also acquired Newline Pool Products and Lincoln Aquatics in 2017; management said these acquisitions had no material impact on financial position or results.
- Adoption of ASU 2016-09 reduced nine-month income tax expense by $7.7 million and positively affected net income; the filing reports a $0.3 million tax benefit in Q3. Management noted the standard can cause quarter-to-quarter tax-rate and EPS variability. The company expected the 2018 revenue-recognition standard would not materially affect results, but expected the new lease standard to significantly increase balance-sheet assets and liabilities.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors or market-risk disclosures were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether full-year diluted EPS falls within the revised $4.01–$4.11 guidance, and how much depends on uncertain share-based compensation tax benefits.
- Whether cash generation and seasonal working-capital needs support planned capital spending, dividends and share repurchases without further material debt growth.
- Debt levels, variable-rate exposure, covenant headroom and actual availability under the revolving and receivables facilities.
- Sales and margins following the weather disruptions, including management’s assumptions for fourth-quarter product mix and gross margin.
- Implementation effects of the upcoming lease and revenue-recognition accounting standards, particularly the expected lease-related balance-sheet increase.