POOL CORPORATION — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the same 2017 periods. Pool Corporation distributes swimming pool, spa, irrigation and related products through 358 sales centers. Its business is highly seasonal, with sales and operating income generally highest in Q2 and Q3.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,057.8 million | $988.2 million | $1,643.7 million | $1,534.6 million |
| Gross profit / margin | $308.7 million / 29.2% | $289.7 million / 29.3% | $474.7 million / 28.9% | $443.3 million / 28.9% |
| Operating income / margin | $162.0 million / 15.3% | $154.2 million / 15.6% | $195.6 million / 11.9% | $185.2 million / 12.1% |
| Net income attributable to Pool Corporation | $117.0 million | $94.9 million | $148.4 million | $117.2 million |
| Diluted EPS | $2.80 | $2.21 | $3.55 | $2.73 |
Q2 sales and gross profit each increased 7%; base-business sales rose 6%. Diluted EPS increased 27% in Q2 and 30% in the first half. Lower taxes materially supported earnings: Q2’s effective tax rate was 25.0%, versus 37.0% a year earlier, and the reduction lowered Q2 tax expense by about $18.7 million ($0.45 per diluted share). First-half effective tax rates were 20.3% and 34.2%, respectively.
Q2 operating expenses rose 8%, faster than sales, and operating margin declined 0.3 percentage point. Management cited performance-compensation timing, acquisitions, foreign exchange, and higher operating costs. Interest and other non-operating expense rose to $6.0 million from $4.0 million, reflecting higher rates, increased borrowing and foreign-currency losses. The weighted-average effective interest rate was 3.2% versus 2.6%.
Cash flow, balance sheet and liquidity
- For the first half, operating cash flow was a use of $36.8 million, compared with a use of $41.3 million in 2017. Investing cash use was $25.2 million; financing provided $74.1 million. Cash ended at $42.2 million.
- At June 30, total debt was $657.1 million, up $103.6 million (19%) year over year; cash was $42.2 million. Debt included $419.4 million drawn on the revolving facility and $217.5 million under the receivables facility.
- The $750 million revolving facility had $325.8 million available after outstanding borrowings and a standby letter of credit. The company reported compliance with debt covenants; its average total leverage ratio was 1.72 versus a maximum of 3.25, and its fixed-charge coverage ratio was 5.40 versus a minimum of 2.25.
- Working-capital investment was significant: inventories were up 12% year over year, partly due to purchases ahead of vendor price increases; total receivables were up 9%. First-half operating cash use reflected seasonal working capital needs, including receivables and inventory.
- First-half capital expenditures were $24.6 million; cash dividends paid were $33.2 million and treasury-stock purchases were $38.9 million. Management expected approximately $100–$150 million of share repurchases for full-year 2018.
Changes, outlook and notable items
- Management attributed sales growth to strong demand for discretionary products, market-share gains, inflation and favorable foreign exchange. Equipment sales rose about 8% and building-material sales 12% in Q2. A delayed spring weighed on April results, while stronger May and June demand helped recover activity.
- Management maintained its expectation for 6%–7% base-business sales growth in 2018 and gross margin similar to 2017. It expected full-year operating-margin improvement of 20–40 basis points, with delayed projects and compensation-expense timing potentially benefiting the second half.
- Full-year diluted EPS guidance was raised at the lower end to $5.50–$5.70 from $5.45–$5.70; the range includes tax benefits realized under share-based-payment tax accounting. Management expected the 2018 effective tax rate, excluding those benefits, to be about 25.5%, versus a historical rate of about 38.5%.
- Management expected second-half interest and other non-operating expense to be about $2 million higher year over year. It also expected full-year cash from operations to be below net income, with a possible offset in 2019 as inventory purchasing normalizes.
- Weather, customer labor constraints, rising labor/fuel/freight costs, interest rates, foreign exchange, supplier relationships, competition and economic or housing-market changes are identified risks. Results are seasonal and may fluctuate; management reported no material change in the previously disclosed risk factors. Ordinary-course litigation was not expected to materially affect the company.
- The company adopted ASC 606 in 2018 with no material impact. It expected lease accounting adoption in 2019 to significantly increase reported non-current assets and liabilities; the impact was still being quantified.
Important facts for investors to verify
- Whether the raised $5.50–$5.70 diluted EPS outlook and 6%–7% base-business sales-growth expectation were achieved, and how much earnings growth came from lower taxes versus operations.
- Whether delayed projects, seasonal demand and customer labor constraints supported second-half sales and the targeted operating-margin improvement.
- How inventory, receivables and other seasonal working-capital needs affected full-year operating cash flow and debt.
- Whether planned share repurchases, higher borrowing costs and debt levels remained consistent with liquidity and covenant capacity.
- The eventual balance-sheet impact of lease accounting adoption and the final accounting for U.S. tax reform.