POOL CORPORATION — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Pool Corporation distributes pool, spa, irrigation, landscape and outdoor-living products through 364 sales centers. It reported one operating segment.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $2,998.1 million | $2,788.2 million | +8% |
| Gross profit / margin | $870.2 million / 29.0% | $805.3 million / 28.9% | +8%; margin +10 bps |
| Operating income / margin | $313.9 million / 10.5% | $284.4 million / 10.2% | +10% |
| Net income attributable to Pool Corporation | $234.5 million | $191.6 million | +22% |
| Diluted EPS | $5.62 | $4.51 | +25% |
| Cash provided by operations | $118.7 million | $175.3 million | Down $56.7 million |
| Total debt at year-end | $666.8 million | $519.7 million | +28% |
Base-business sales grew 7%. Management attributed growth to stronger discretionary spending, market-share gains, increased sales of building materials and equipment, and product price increases. Operating expenses increased 7%, while expenses as a share of sales declined 10 basis points to 18.6%. Average debt rose to $579.1 million from $504.0 million, and the weighted-average effective interest rate increased to 3.3% from 2.7%.
Fourth quarter: Sales were $543.1 million versus $510.2 million, up about 6%. Net income was $16.8 million versus $25.7 million, and diluted EPS was $0.41 versus $0.62. Management cited cooler, wetter weather and a difficult comparison with favorable 2017 weather and Hurricane Irma recovery. Fourth-quarter 2017 earnings also included a tax-reform benefit.
Liquidity, capital allocation and balance sheet
- Year-end cash was $16.4 million; working capital was $609.6 million, compared with $460.7 million in 2017.
- Inventory increased 25% to $672.6 million, primarily from purchases made ahead of larger-than-normal vendor price increases. Inventory turns fell to 3.2 from 3.5.
- Operating cash flow declined mainly because of the inventory build and related working-capital needs. The company reported $146.5 million in net proceeds from borrowings.
- 2018 uses of cash included $183.6 million of open-market share repurchases, $69.4 million of dividends, $31.6 million of net capital expenditures and $2.6 million of acquisition payments.
- The $750 million revolving credit facility had $550.1 million drawn and $195.1 million available at year-end; the receivables facility had $108.5 million outstanding. The company reported covenant compliance, with a 1.72 leverage ratio versus a maximum of 3.25 and a 5.33 fixed-charge coverage ratio versus a minimum of 2.25.
Outlook, commentary and risks
- For 2019, management forecast sales growth of 7%–9% and diluted EPS of $6.05–$6.35, including an estimated $0.18 favorable impact from share-based tax accounting. It expected an effective tax rate of about 25.5%, excluding that accounting impact.
- Management anticipated opening 4–6 sales centers, selectively pursuing acquisitions, and spending $150–$200 million on share repurchases, subject to Board authorization. It expected cash from operations to approximate net income, excluding timing effects from the 2018 inventory purchases.
- Expected 2019 product-cost inflation was approximately 3%–4%, above the company’s historical norm. Management expected broadly neutral full-year gross-margin trends and flagged quarter-to-quarter comparisons affected by early-buy timing and the 2018 inventory purchases.
- Management estimated long-term annual industry sales growth of 6%–9%. It cited outdoor-living demand and a July 2021 requirement for new and replacement pool motors and pumps to be variable-speed as growth opportunities.
- Key risks include weather and seasonality, housing and consumer-credit conditions, labor availability and cost, competition, supplier concentration, variable interest rates, international currency exposure, cybersecurity and regulatory compliance. About 62% of 2018 sales and 81% of operating income occurred in the second and third quarters.
- The 2018 effective tax rate was 20.1%, including a $15.3 million benefit from ASU 2016-09; excluding that benefit, the rate was 25.3%. The 2017 rate also reflected tax-reform and share-based tax-accounting benefits.
Most important facts for investors to verify
- Whether the substantial inventory build ahead of vendor price increases converts into sales and cash flow as expected, and whether inventory turns recover.
- Whether 2019 sales and EPS guidance is achieved, considering weather, inflation, consumer demand and labor constraints.
- How debt, interest expense and share repurchases affect liquidity and leverage; verify continuing compliance with credit-facility covenants.
- The sustainability of reported earnings growth after separating the effects of tax reform and share-based compensation tax benefits.
- Any developments in supplier relationships, customer credit quality, litigation or other contingencies. Management said outstanding litigation was not expected to have a material adverse effect; the filing did not identify a material claim.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting.