Business context and reporting period
POOL Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the same period in 2017. The company distributes pool, spa and related products through 354 sales centers. Results are highly seasonal, with the second and third quarters typically strongest.
Financial performance
Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $585.9 | $546.4 | +7% |
| Gross profit / margin | $166.1 / 28.3% | $153.6 / 28.1% | +8%; +20 bps |
| Operating income / margin | $33.5 / 5.7% | $31.0 / 5.7% | +8%; margin flat |
| Net income attributable to Pool | $31.3 | $22.3 | +41% |
| Diluted EPS | $0.75 | $0.52 | +44% |
| Cash used in operating activities | $44.1 | $32.4 | Outflow increased |
| Capital expenditures | $14.6 | $19.1 | Lower outflow |
Base-business sales grew 5%, and base-business operating income grew 11%; acquisitions contributed to reported results. Operating expenses rose 8% (5% for base business), reflecting higher labor, technology, freight and employee-insurance costs, partly offset by lower performance-based compensation. Cash used in operations primarily reflected seasonal working-capital needs, including earlier payment of certain inventory purchases.
Financial position and liquidity
At March 31, 2018, cash was $8.8 million, total debt was $568.1 million (up $77.9 million, or 16%, year over year), and total assets were $1.38 billion. Debt growth primarily funded working capital, acquisitions and share repurchases over the prior 12 months. Inventory was $703.8 million, up 9% year over year; total receivables were $314.6 million, up 8%.
The $750 million unsecured revolving facility had $388.8 million outstanding, $4.2 million in standby letters of credit and $357.0 million available. The receivables facility had $160.0 million outstanding. The company reported compliance with debt covenants; its leverage ratio was 1.67 against a maximum of 3.25, and fixed-charge coverage was 5.46 against a minimum of 2.25. The filing says it expects to remain compliant and believes available capital is adequate.
Material changes, outlook and risks
- Weather and demand: Storms, cold temperatures and excess precipitation delayed pool openings, construction and remodeling. Management estimated about $10 million of Q1 sales impact, but cited strong demand in year-round markets and expected some deferred sales to shift into later quarters. April weather and customer capacity constraints could push the recovery further into 2018.
- Taxes and earnings quality: The effective tax rate was a 4.3% benefit, versus an 18.7% provision in Q1 2017. A $9.0 million benefit from share-based compensation tax accounting (ASU 2016-09) exceeded management’s prior expectation by $3.6 million, or $0.09 per diluted share. Excluding that benefit, the effective rates were 25.7% and 38.8%, respectively. Management attributed the lower underlying rate principally to U.S. tax reform. Excluding ASU 2016-09 benefits, Q1 diluted EPS was $0.53 versus $0.40.
- Guidance: 2018 diluted EPS guidance increased to $5.45–$5.70 from $5.36–$5.61, solely due to the additional Q1 tax benefit. Management expects base-business sales growth of 6%–7%, gross margin similar to 2017, and operating-margin improvement of 20–40 basis points. It expects a roughly 25.5% annual effective tax rate excluding ASU 2016-09 benefits, and higher full-year interest expense as debt and rates rise.
- Capital allocation: Management expected 2018 operating cash flow to approximate net income and anticipated $100–$150 million of share repurchases, subject to further board authorization. The company paid $15.0 million in dividends in Q1. Its outlook is subject to seasonal working-capital demands and financing needs.
- Risks and unusual items: Management highlighted weather sensitivity, economic and housing-market conditions, competition, supplier relationships and volatility in share-based compensation tax benefits. Interest-rate exposure is partly hedged; the weighted average effective rate was 3.0% versus 2.6% a year earlier. Adoption of ASC 606 did not materially affect results. The company expects lease accounting adoption in 2019 to significantly increase reported balance-sheet assets and liabilities. Ordinary-course litigation was not expected to have a material adverse effect; reported risk factors were unchanged.
Important facts for investors to verify
- Whether delayed pool openings and weather-affected construction activity converted into sales in subsequent quarters, and whether full-year 6%–7% base-business growth remained achievable.
- How much reported EPS growth depended on the $9.0 million share-based compensation tax benefit, and the eventual tax rate as tax-reform accounting is finalized.
- Whether seasonal working-capital requirements, inventory levels and receivable collections support management’s operating-cash-flow expectation.
- Debt, borrowing costs and covenant headroom as interest rates rise, alongside the planned repurchases and other capital uses.
- The balance-sheet effects of lease-standard adoption and any material developments in litigation or other contingencies.