Business context and reporting period
POOL Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. It distributes swimming pool, irrigation and landscape products through 432 sales centers in North America, Europe and Australia; approximately 95% of first-half sales came from North America. Results are seasonal, with sales and operating income typically highest in the second and third quarters.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,857.4 million | $2,055.8 million | $3,064.1 million | $3,468.5 million |
| Gross profit | $567.8 million | $666.8 million | $937.5 million | $1,114.0 million |
| Gross margin | 30.6% | 32.4% | 30.6% | 32.1% |
| Operating income | $327.0 million | $418.9 million | $472.8 million | $654.6 million |
| Operating margin | 17.6% | 20.4% | 15.4% | 18.9% |
| Net income | $232.3 million | $307.3 million | $333.9 million | $486.5 million |
| Diluted EPS | $5.91 | $7.63 | $8.48 | $12.03 |
Q2 selling and administrative expenses declined 3% to $240.8 million, but rose to 13.0% of sales from 12.1%. First-half expenses increased 1% to $464.8 million and were 15.2% of sales versus 13.2%. Q2 interest and other non-operating expense increased $8.4 million year over year to $16.9 million; the effective interest rate on average debt was 5.2%, compared with 2.0%.
Cash flow, debt and liquidity
For the six months ended June 30, operating cash flow was $376.8 million, compared with $28.7 million a year earlier, primarily reflecting improved working capital as inventory was sold through, partly offset by lower net income. Investing activities used $41.9 million, including $30.2 million of capital expenditures and $11.5 million for acquisitions. Financing activities used $328.5 million; the company reported $202.5 million of net debt payments, $82.0 million of dividends paid and $50.7 million of treasury-stock purchases. Cash ended the period at $53.2 million. The filing does not provide quarterly cash-flow totals separately.
Total debt was $1.185 billion at June 30, 2023, down from $1.595 billion a year earlier and $1.387 billion at December 31, 2022. The company reported $518.6 million available under its Credit Facility and $348.2 million outstanding under the Receivables Facility. Its average total leverage ratio was 1.48 against a maximum of 3.25; its fixed-charge coverage ratio was 6.74 against a minimum of 2.25. The company said it was in compliance with material covenants and expected to remain compliant over the next 12 months. It reported $600 million remaining under its share repurchase authorization as of July 24, 2023.
Material changes and management commentary
- Q2 sales fell 10% and first-half sales fell 12%. Management attributed weakness to cautious consumer sentiment, cooler and unfavorable weather, slower-than-expected maintenance activity, reduced outdoor-living construction and deferred discretionary replacement purchases.
- Management estimated unfavorable weather reduced Q2 sales by approximately $30 million and first-half sales by approximately 3%. Lower customer early-buy activity also weighed on sales. Inflationary product cost increases supported sales by approximately 3%–4% in Q2 and 4% in the first half, less than the prior-year benefit.
- Q2 gross margin declined 180 basis points, reflecting the prior-year benefit from stronger inflation and pricing. First-half margin also benefited from sales of lower-cost strategic inventory, with that benefit expected to diminish.
- Product volumes were weaker in discretionary categories: Q2 equipment sales declined 8% and building-material sales declined 8%. Retail-customer sales fell 11% in Q2, while commercial-customer sales rose 8%.
- Debt declined as operating cash was used to repay borrowings. The company also amended credit agreements to replace LIBOR references with SOFR and increased the maximum Accounts Securitization capacity from $350 million to $500 million.
Guidance, outlook and risks
Management revised its 2023 sales outlook to a decline of around 10% from 2022, versus the prior expectation of a mid-single-digit decline. It expects new-construction and repair-and-remodel trends toward the lower end of previously described ranges. Full-year gross margin is projected at approximately 30.0%, with the first half expected to exceed the second half. Management aims to limit operating-expense growth to 1%, excluding potential acquisitions, and forecasts diluted EPS of $13.14–$14.14, including $0.14 of first-half share-based-compensation tax benefits. The projected annual effective tax rate, excluding those benefits, is approximately 25.2%.
Key risks cited include weather sensitivity; economic conditions, consumer discretionary spending, housing activity, inflation and interest rates; supplier relationships; competition; execution of growth plans; and regulatory or tax changes. The company said ordinary-course litigation was not expected to have a material adverse effect based on currently available information and insurance coverage. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether the revised sales and EPS outlook is achieved, particularly given weather, consumer demand and seasonal trends.
- Whether gross margin converges toward the approximately 30% full-year outlook as lower-cost inventory benefits fade.
- Whether cash generation remains sufficient to fund seasonal working capital, debt repayments, dividends, capital spending and potential buybacks.
- How higher interest rates affect interest expense and whether the company maintains covenant headroom.
- The amount and timing of future tax benefits from share-based compensation; management excluded unrecognized future benefits from guidance.