POOL Corporation — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Pool distributes swimming pool and related products through 345 sales centers. Its business is highly seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance and position
Amounts in millions, except per-share data and ratios.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $988.2 | $918.9 | $1,534.6 | $1,434.1 |
| Gross profit | $289.7 | $270.7 | $443.3 | $413.8 |
| Operating income | $154.2 | $142.4 | $185.2 | $172.0 |
| Net income attributable to Pool Corporation | $94.9 | $85.4 | $117.2 | $101.8 |
| Diluted EPS | $2.21 | $1.98 | $2.73 | $2.35 |
| Gross margin | 29.3% | 29.5% | 28.9% | 28.9% |
| Operating margin | 15.6% | 15.5% | 12.1% | 12.0% |
- Q2 sales rose 8% (base business +7%); six-month sales rose 7% (base business +6%). Q2 operating income increased 8%, and attributable net income increased 11%.
- Q2 gross margin declined about 15 basis points year over year, largely due to product mix and customer early-buy purchases shifting into the quarter, which brought discounts. First-half gross margin was unchanged year over year.
- Q2 operating expenses increased 6%; first-half expenses increased 7%. Higher labor, freight, employee insurance, technology, and business investment contributed.
- For the first six months, cash used in operations was $41.3, versus $13.8 used in 2016; investing used $37.8, versus $44.7; financing provided $83.1, versus $76.7. Operating cash use reflected seasonal increases in receivables and inventory, as well as estimated tax payments.
- At June 30, cash was $26.7, total debt $553.5, and current assets and current liabilities were $955.3 and $386.4, respectively. Debt was up $52.9, or 11%, from June 30, 2016. Inventory was up 10% year over year.
- The revolving credit facility had $319.4 outstanding and $141.4 available, plus a $4.2 standby letter of credit. The receivables facility had $220.0 outstanding. The company reported compliance with debt covenants; its leverage and fixed-charge coverage ratios were 1.54 and 5.52, against limits of less than 3.25 and at least 2.25, respectively.
Material changes, outlook and risks
- Pool Corporation acquired the remaining 40% interest in Australian subsidiary Pool Systems Pty. Ltd. on June 29, ending the reported noncontrolling interest. It also acquired Lincoln Aquatics in April; the acquisition was not material to reported financial results. A further Australian acquisition closed July 3, after quarter-end.
- Adoption of ASU 2016-09 produced $7.4 of first-half tax benefits, including $1.9 in Q2; management estimated the benefit lifted diluted EPS by $0.14 for the first half and $0.02 for Q2. Management cautioned that future benefit estimates depend on factors including share price and employee option exercise timing.
- Management’s 2017 diluted EPS guidance, updated in Q1, was $4.12–$4.32, including an estimated $0.30 benefit from ASU 2016-09 and $0.02 from Q1 operating results. It projected full-year base-business sales growth of 5%–7% and gross margin similar to 2016.
- Management expected operating expense growth to moderate in the second half, cash provided by operations to exceed full-year net income, capital expenditures of approximately 1.5% of net sales, and $100–$150 of cash use for 2017 share repurchases. It expected second-half interest expense to be $1.0–$1.5 higher year over year, depending partly on borrowing for repurchases.
- Key sensitivities include weather, economic and housing-market conditions, supplier relationships, competition, seasonal working-capital needs, and variable borrowing costs. Management noted weather was broadly neutral for Q2, while cold and wet conditions hurt some regional markets. It reported no material changes to previously disclosed risk factors and did not expect ordinary-course litigation to materially affect the company.
- Management expected no material financial-statement impact from adopting the new revenue standard, but anticipated additional disclosures. The forthcoming lease standard was expected to materially increase balance-sheet assets and liabilities; its effect on results was still under evaluation.
Important facts for investors to verify
- Whether the 5%–7% base-business sales outlook and $4.12–$4.32 diluted EPS guidance are achieved, separating operating performance from share-based-compensation tax benefits.
- Whether second-half cost growth moderates as planned and gross margin remains consistent with the full-year outlook.
- Seasonal cash conversion, inventory and receivables growth, and funding needs through the remainder of the peak selling season.
- Debt levels, facility availability, interest expense, covenant headroom, and the scale and funding of planned share repurchases.
- Integration and performance of recent acquisitions, including the post-quarter Newline Pool Products acquisition, and the effect of weather and regional demand.