POOL Corporation — Q2 2020 Form 10-Q
Business context and period. Pool Corporation distributes swimming pool, irrigation and related products through 378 sales centers in North America, Europe and Australia. This filing covers the quarter and six months ended June 30, 2020; approximately 94% 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 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,280.8 million | $1,121.3 million | $1,958.1 million | $1,718.8 million |
| Gross profit / margin | $373.5 million / 29.2% | $330.3 million / 29.5% | $563.1 million / 28.8% | $504.9 million / 29.4% |
| Operating income / margin | $205.9 million / 16.1% | $172.5 million / 15.4% | $241.4 million / 12.3% | $210.9 million / 12.3% |
| Net income | $157.6 million | $131.4 million | $188.5 million | $164.0 million |
| Diluted EPS | $3.87 | $3.22 | $4.62 | $4.02 |
- Second-quarter sales rose 14%, operating income 19%, net income 20% and diluted EPS 20%. First-half sales rose 14%, net income 15% and diluted EPS 15%.
- Q2 selling and administrative expense was $167.6 million, up 6%; as a share of sales it declined to 13.1% from 14.1%. Management cited higher performance-based compensation, partly offset by lower discretionary spending.
- First-half operating results included a $6.9 million impairment charge: $3.5 million of Australian goodwill, $0.9 million of related intangibles and $2.5 million on a long-term note. The charge was recorded in Q1; Q2 had no impairment charge.
- Operating cash flow for the first half was $221.2 million, versus $97.4 million a year earlier. Investing cash outflow was $26.7 million; financing cash outflow was $177.8 million. Cash at June 30 was $44.2 million.
- Total debt was $438.8 million at June 30, down 37% from $692.3 million a year earlier. Long-term debt, net was $429.2 million. The company reported $730.5 million available on its $750 million revolving facility and $235.0 million outstanding under its receivables facility.
- The company paid $45.3 million of dividends and repurchased $70.2 million of stock during the first half. Quarterly dividends declared were $0.58 per share, versus $0.55 in Q2 2019.
Material changes and management commentary
- Management said sales fell across most markets after stay-at-home orders began in mid-March, then rebounded and accelerated as restrictions eased and at-home pool demand increased. Q2 retail sales grew 22%; commercial sales fell 21% amid closures and reduced travel.
- Q2 equipment sales increased 22%, building-material sales 7%, and above-ground pool and spa sales 55% year over year. Sales benefited from stronger discretionary demand, greater pool use, market-share gains and approximately 1%–2% product-cost inflation.
- Q2 gross margin decreased 30 basis points; management attributed the decline to product mix, including a greater share of lower-margin big-ticket products, and comparison with prior-year strategic inventory purchases. First-half gross margin declined 60 basis points.
- Lower average debt and interest rates reduced Q2 interest and other non-operating expense by $3.8 million year over year. The Q2 weighted-average effective interest rate was 1.8%, versus 3.5%.
Outlook, risks and contingencies
- Management raised 2020 diluted EPS guidance to $6.90–$7.30, from $5.30–$5.90. Guidance includes $0.34 per share of first-half tax benefits from share-based compensation accounting and the $0.15 per-share effect of Q1 non-cash impairments. It assumes average weather and no adverse effects from a resurgence of COVID-19 or related government responses.
- Expected 2020 net sales growth is approximately 11%–13%. Management expects second-half gross margin to be relatively flat year over year and full-year gross margin to decline moderately from 2019; operating expenses are expected to increase 6%–8%.
- Expected 2020 capital expenditures are $20–$25 million, revised upward from the prior estimate of approximately half of 2019 spending of $33.4 million. Management expects strong operating cash flow and anticipates cash use for opportunistic repurchases and dividends, subject to Board action.
- Key uncertainties include renewed COVID-19 restrictions, changing customer demand, supply constraints in high-demand categories, economic conditions, weather and customers’ construction capacity and labor availability. Management noted rising COVID-19 cases and renewed restrictions in some markets.
- COVID-19-related impairment testing relied on uncertain forecasts and discount-rate assumptions. Management identified reporting units in Italy and Quebec for continued monitoring. The company reported compliance with debt covenants at June 30 and expected to remain compliant over the following 12 months.
- The filing states ordinary-course claims and litigation are not expected, based on currently available facts, to have a material adverse effect. Management concluded disclosure controls were effective as of June 30, 2020.
Important facts for investors to verify
- Whether the unusually strong at-home pool demand and raised EPS and sales outlook persisted, particularly after COVID-19 restrictions and consumer behavior changed.
- Whether lower-margin product mix, supplier pricing and inventory conditions affected gross margins as management projected.
- How much of first-half operating cash flow reflected seasonal working-capital movements and deferred tax payments; the filing notes $18.2 million of deferred tax payments, of which $14.7 million was paid in Q3.
- Debt-facility availability, seasonal receivables financing, covenant headroom and the terms and value of share repurchases and dividends.
- Potential further impairments or credit losses if COVID-19 or economic conditions worsen; the filing does not quantify the potential amount.