POOL Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Pool Corporation distributes swimming pool, irrigation, and related products through 338 sales centers. Results are highly seasonal, with most annual sales and operating income generally generated in the second and third quarters.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $515.3 million | $450.4 million | +14% |
| Gross profit / margin | $143.0 million / 27.8% | $124.8 million / 27.7% | +15%; margin +10 bps |
| Operating income / margin | $29.5 million / 5.7% | $15.6 million / 3.5% | +89% |
| Net income attributable to Pool Corporation | $16.4 million | $8.4 million | +94% |
| Diluted EPS | $0.38 | $0.19 | +100% |
| Cash used in operating activities | $39.8 million | $57.7 million | Use decreased $17.9 million |
Operating expenses rose 4% to $113.5 million, but declined as a share of sales to 22.0% from 24.2%. Interest and other non-operating expense increased 49%; debt interest expense rose 16% on higher average borrowings, while the weighted-average effective interest rate remained 2.0%. The effective tax rate was 38.5%, versus 38.9%.
Financial position and liquidity
At March 31, 2016, cash was $10.0 million and total debt was $450.5 million, up 15% from $392.7 million a year earlier. Debt included $325.9 million outstanding on the revolving credit facility and $120.0 million under the receivables facility. The company reported $135.1 million of unused revolving capacity; receivables-facility capacity varies seasonally. It was in compliance with its debt covenants: leverage ratio 1.58 versus a maximum of 3.25, and fixed-charge coverage 5.34 versus a minimum of 2.25.
Operating cash use reflected seasonal working-capital needs, including increases in receivables and inventory. Investing cash use was $15.8 million, including $13.4 million of capital expenditures. Financing provided $53.1 million; the company spent $65.9 million repurchasing shares and paid $10.9 million in dividends. Inventory was $595.4 million, up 6% from March 2015; total receivables, including pledged receivables, were up 19%.
Changes, outlook, and risks
- Management attributed sales growth chiefly to warmer weather, stronger discretionary spending, market-share gains, about 3% from accelerated early-buy deliveries, and close to 2% from one additional selling day. Base-business sales increased 13%.
- Gross-margin improvement reflected product mix and pricing initiatives, partly offset by discounted, lower-margin early-buy sales. Operating expenses increased mainly from labor, marketing, and freight costs.
- Management raised 2016 diluted EPS guidance to $3.25–$3.40 from $3.20–$3.35. Assuming normal weather, it expects base-business sales growth of 6%–8%, full-year gross margin in line with 2015, and operating-expense growth at approximately half the rate of gross-profit growth. It expects the effective tax rate to be consistent with 2015 and operating cash flow to be in line with net income.
- Management estimates about half of Q1 sales growth was shifted forward from later quarters, with the largest effect expected in Q2. It anticipates $100–$150 million of cash for 2016 share repurchases; $63.2 million had been spent through March 31.
- Key risks include weather and seasonality, economic and housing-market conditions, supplier relationships, and competition. Management reported no material changes to previously disclosed risk factors or legal proceedings.
- An unusual item was $0.6 million of expense in Q1 related to the effectiveness of forward-starting interest-rate swaps. Existing swaps covering $150 million of notional borrowings expire October 19, 2016; amended forward-starting swaps are scheduled to take effect then.
Important facts for investors to verify
- Whether favorable Q1 weather and early deliveries pulled demand forward and weigh on Q2 or later results.
- How sales, margins, and operating expenses perform through the peak summer season relative to guidance.
- Seasonal working-capital requirements, debt levels, and availability under revolving and receivables facilities.
- The pace and funding of planned share repurchases, and the effect on leverage and per-share results.
- Interest-rate exposure as current swaps expire and forward-starting swaps become effective.