POOL Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Pool Corporation distributes swimming-pool, irrigation and landscape products through 434 sales centers across North America, Europe and Australia; approximately 95% of nine-month sales came from North America.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,474.4 million | $1,615.3 million | $4,538.5 million | $5,083.8 million |
| Gross profit | $428.7 million | $503.7 million | $1,366.3 million | $1,617.7 million |
| Gross margin | 29.1% | 31.2% | 30.1% | 31.8% |
| Operating income | $194.4 million | $263.9 million | $667.2 million | $918.5 million |
| Net income | $137.8 million | $190.1 million | $471.8 million | $676.6 million |
| Diluted EPS | $3.51 | $4.78 | $12.00 | $16.82 |
- Q3 sales declined 9%, gross profit 15%, and net income and diluted EPS 27% year over year. Nine-month sales fell 11%, net income 30%, and diluted EPS 29%.
- Q3 operating expenses fell 2% to $234.3 million, but rose to 15.9% of sales from 14.8%; operating margin declined to 13.2% from 16.3%. Nine-month operating expenses were essentially flat at $699.0 million, or 15.4% of sales versus 13.8%.
- Interest and other non-operating expense was $13.6 million in Q3 and $46.3 million for nine months, versus $11.7 million and $25.4 million, respectively, a year earlier. Higher interest rates more than offset lower average debt.
- Nine-month operating cash flow was $750.0 million, compared with $307.5 million; the improvement was primarily due to working-capital changes, including a $330.9 million inventory cash inflow. Investing cash outflow was $54.5 million and financing cash outflow was $656.8 million.
- Cash was $85.2 million at September 30. Total debt was $1.034 billion, down from $1.513 billion a year earlier and $1.387 billion at year-end 2022. Inventory was $1.259 billion, down 18% year over year. Current assets were $1.833 billion and current liabilities $709.1 million.
- At September 30, $557.2 million remained available under the Credit Facility. The company reported covenant compliance, with an average total leverage ratio of 1.48 against a maximum of 3.25 and fixed-charge coverage of 6.07 against a minimum of 2.25.
Drivers, changes and notable items
- Management cited weaker pool construction and discretionary replacement activity amid challenging economic conditions; routine pool maintenance demand remained stable. Q3 sales also faced a one-day calendar disadvantage, estimated at a 1% impact.
- Inflationary product-cost increases benefited Q3 sales by approximately 2%–3%, compared with 9%–10% in Q3 2022. For the first nine months, the estimated benefit was approximately 4%, versus 9%–10% in 2022. Unfavorable weather reduced nine-month sales by an estimated 2%, and lower early-buy activity also weighed on sales.
- Gross margin was pressured by the prior-year benefit from strategic lower-cost inventory purchases, product and customer mix, competitive pricing and price deflation in some products. Equipment sales declined 9% in Q3; building-material sales declined 13%. Commercial-customer sales increased 10% in Q3 and in the nine-month period.
- The company recorded $0.6 million of goodwill impairment in 2023, primarily associated with a Texas Horizon reporting unit. Nine-month share repurchases were $187.1 million and cash dividends paid were $125.0 million. Q3 dividends declared were $1.10 per share, up from $1.00.
- Debt facilities were amended in June 2023 to transition the applicable reference rate from LIBOR to Term SOFR; the receivables securitization maximum was increased from $350 million to $500 million. The filing says adoption of reference-rate reform accounting guidance had no material impact.
Outlook and risks
Management maintained its 2023 outlook: full-year sales down around 10% versus 2022; Q4 sales down mid- to high-single digits, depending primarily on weather and pool construction; full-year gross margin approximately 30.0%, with Q4 around 29.0%; and operating expense growth limited to 1%, excluding potential Q4 acquisitions. Expected 2023 diluted EPS is $13.15–$13.65, including $0.15 per share of tax benefits recognized year to date. The projected effective tax rate excluding the share-based-payment tax benefit is approximately 25.0%–25.2%.
Key uncertainties include weather and seasonality, consumer discretionary spending, housing and construction conditions, inflation and interest rates, supplier relationships, competition, regulation and execution of growth plans. The company says it expects to remain in covenant compliance for the next 12 months and believes capital is adequate. Ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether the forecast sales decline, approximately 30% gross margin and $13.15–$13.65 diluted EPS range are achieved, given construction trends and weather sensitivity.
- Whether margin pressure persists as lower-cost inventory benefits fade and product/customer mix and competitive pricing evolve.
- How higher borrowing rates affect interest expense and whether debt reduction continues; review facility availability, maturities and covenant headroom.
- Whether inventory normalization and working-capital cash generation are sustainable, rather than primarily timing-related.
- Potential effects of additional goodwill impairment, share repurchases and tax benefits on reported earnings and cash allocation. As of October 23, 2023, $463.3 million remained available under the repurchase authorization.