POOL Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Pool Corporation distributes swimming-pool, irrigation and landscape products through 372 sales centers; approximately 94% of nine-month sales came from North America. Results are seasonal, with sales and operating income typically highest in Q2 and Q3.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $898.5m | $811.3m | $2,617.3m | $2,455.0m |
| Gross profit | $257.9m | $235.0m | $762.9m | $709.7m |
| Gross margin | 28.7% | 29.0% | 29.1% | 28.9% |
| Operating income | $104.5m | $92.3m | $315.4m | $287.9m |
| Operating margin | 11.6% | 11.4% | 12.1% | 11.7% |
| Net income | $79.5m | $69.3m | $243.6m | $217.6m |
| Diluted EPS | $1.95 | $1.66 | $5.97 | $5.20 |
- Cash flow: Nine-month operating cash flow was $243.3m, versus $51.3m in 2018. Management attributed the large increase primarily to reversal of working-capital timing effects from strategic inventory purchases in 2018. Investing cash outflow was $35.8m, including $8.9m for acquisitions; financing cash outflow was $187.7m, including dividends and debt repayments. Cash ended at $36.7m.
- Debt and liquidity: Total debt was $547.6m, down 6% from September 2018. The $750m revolving credit facility had $375.2m drawn and $370.0m available at quarter-end; the receivables facility had $161.2m outstanding. The company reported compliance with debt covenants and expected continued compliance. Its leverage ratio was 1.69 against a maximum of 3.25; fixed-charge coverage was 5.30 against a minimum of 2.25.
- Shareholder returns: Nine-month cash dividends were $61.8m; declared dividends were $1.55 per share, versus $1.27 a year earlier. The company had $249.2m remaining under its authorized repurchase program as of October 25, 2019.
Changes and management commentary
- Q3 sales rose 11% year over year; base-business sales increased 9%. Management cited favorable weather, strong discretionary-product demand, market-share gains, product-cost inflation and an extra selling day (about 1% sales benefit). Equipment sales grew 13% and building-material sales 10% in the quarter.
- Q3 gross margin declined 30 basis points, partly because Q3 2018 benefited from strategic inventory purchases ahead of vendor price increases. Nine-month gross margin increased 20 basis points, reflecting benefits from those purchases in the first half of 2019.
- Operating expenses increased 8% in Q3; base-business expenses rose about 5%, including higher variable labor and freight costs. Lower expenses as a share of sales supported improved operating margin.
- Nine-month sales grew 7% and base-business sales 5%, despite unfavorable weather early in the year; favorable Q3 weather helped recover delayed demand. Nine-month diluted EPS rose 15% as reported; excluding ASU 2016-09 tax benefits in both periods, it increased 12%.
- The company adopted lease accounting guidance in 2019, recording operating lease assets and liabilities that increased balance-sheet totals. Management said adoption did not materially affect earnings or cash flows; prior-year balance sheets were not restated.
Guidance, outlook and risks
- Management raised and narrowed 2019 diluted EPS guidance to $6.20–$6.40, from $6.09–$6.34. It expected total sales growth of approximately 6%–7% and full-year gross margin to be relatively flat with 2018.
- Management targeted full-year base-business operating-margin expansion of 20–40 basis points. It expected Q4 gross-margin and operating-income declines, reflecting the prior-year inventory-purchase comparison and acquired locations.
- Excluding timing effects from 2018 strategic inventory purchases, management expected 2019 operating cash flow to approximate net income. It anticipated using approximately $150m–$200m for share repurchases over the following year. No future ASU 2016-09 tax benefits were included in guidance beyond those recognized through September.
- Key exposures include weather and seasonality, economic and housing-market conditions, customer project and labor capacity, supplier relationships, competition, interest rates and foreign exchange. Management noted that actual results may differ from forward-looking statements. It reported no material change in risk factors and did not expect ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth and EPS improvement reflects underlying demand versus favorable Q3 weather, the extra selling day, inflation and share-based compensation tax benefits.
- Whether Q4 margin and operating-income declines, and the full-year guidance, materialize given the strategic-inventory comparison and seasonality.
- Whether working-capital cash-flow benefits persist after the 2018 inventory timing reversal, and how seasonal borrowing affects liquidity.
- Debt-facility availability, covenant headroom, interest-rate exposure and the effects of planned share repurchases and dividends.
- Execution of acquisitions and growth initiatives, including the impact of new locations, labor availability and freight costs.