POOL CORPORATION — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Pool Corporation distributes swimming pool supplies and related products through 442 sales centers across North America, Europe and Australia; approximately 95% of quarterly sales were from North America. Results are seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,120.8 million | $1,206.8 million | Down 7% |
| Gross profit / margin | $338.6 million / 30.2% | $369.8 million / 30.6% | Profit down 8%; margin down 40 bps |
| Selling and administrative expenses | $229.8 million | $224.0 million | Up 3%; 20.5% of sales versus 18.6% |
| Operating income / margin | $108.7 million / 9.7% | $145.8 million / 12.1% | Operating income down 25% |
| Net income | $78.9 million | $101.7 million | Down 22% |
| Diluted EPS | $2.04 | $2.58 | Down 21% |
| Operating cash flow | $145.4 million | $103.2 million | Increased, primarily on working-capital changes |
Interest and other non-operating expenses were $13.4 million, down $2.4 million year over year as average debt declined. The weighted-average effective interest rate rose to 5.3% from 4.8%. The reported Q1 effective tax rate was 17.3%, including a $7.4 million share-based compensation tax benefit ($0.19 per diluted share); excluding that benefit, the rate was 25.1%.
Balance sheet, debt and liquidity
- At March 31, 2024, cash was $68.0 million and total debt was $979.2 million, down $386.6 million from March 31, 2023. Long-term debt, net, was $942.5 million; short-term borrowings and current debt were $36.7 million.
- Inventory was $1.497 billion, down $189.7 million (11%) from a year earlier. Inventory turns improved to 2.7 from 2.5.
- Operating cash flow of $145.4 million and investing cash outflows of $19.0 million were offset in part by financing outflows of $124.2 million. Financing included $42.3 million of cash dividends and $16.3 million of share repurchases.
- The company reported $618.6 million available under its revolving credit facility at quarter-end. Its average total leverage ratio was 1.36 against a maximum of 3.25; its fixed charge ratio was 5.71 against a minimum of 2.25. The company said it was in compliance with material covenants and expects to remain compliant over the next 12 months.
- The receivables securitization facility, with $262.3 million outstanding, matures November 1, 2024. The filing describes planned use of this facility and other credit facilities to support seasonal working capital needs.
Material changes and management commentary
- Sales declined amid weaker pool construction and discretionary demand, mixed weather, and lower inflation-related price benefits. Management estimated unfavorable weather reduced sales by approximately 2%; inflationary product cost increases contributed approximately 1%–2% to sales, versus 4%–5% a year earlier.
- Maintenance demand was stable, while pool construction and discretionary activity were weaker. Equipment sales fell 3% and building materials sales fell 11%. Retail sales fell 4%; commercial pool sales were flat.
- Gross margin was supported by supply-chain initiatives and a $12.6 million (110-basis-point) benefit from reducing estimated import taxes recorded in Q4 2022. It was pressured by higher product costs than in Q1 2023, product and customer mix, and increased preseason early buys. Management noted that Q1 2023 benefited more from lower-cost inventory accumulated earlier.
- Operating expenses rose due to facility and rent costs, wage inflation, insurance, technology initiatives and greenfield investments, partly offset by lower variable compensation and freight costs.
- Acquisitions were limited in the quarter: the company acquired one Mississippi distribution location. Base-business results approximated consolidated results.
Guidance, risks and contingencies
Management expects full-year 2024 sales to be flat to slightly positive versus 2023, assuming normal weather, sustained maintenance demand, discretionary construction volumes flat to down 10%, remodeling and renovation volumes flat to down 10%, and inflationary product cost increases of approximately 2%–3%. It projects gross margin of approximately 30.0%, with the highest margin in Q2; operating margin of approximately 13.0%; and diluted EPS of $13.19–$14.19, including the $0.19 per-share tax benefit recognized through Q1. The projected annual effective tax rate, excluding the ASU 2016-09 benefit, is approximately 25.3%. Planned 2024 capital expenditures are 1.0%–1.5% of sales.
Outcomes remain sensitive to weather, consumer discretionary spending, housing-market and macroeconomic conditions, inflation and interest rates, construction and renovation demand, supplier relationships, competition, regulation and tariffs, and the durability of pandemic-era home-centric demand. The company cautions that quarterly results are seasonal and Q1 results do not necessarily indicate full-year performance. It disclosed ordinary-course claims and litigation, but does not believe their resolution will materially adversely affect its financial condition, results or cash flows. No material changes to previously disclosed risk factors were reported.
Management stated that disclosure controls and procedures were effective as of March 31, 2024, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether construction and discretionary demand stabilizes, and whether the full-year sales assumptions are supported by actual seasonal trends and weather.
- Whether gross margin can approach the approximately 30% full-year outlook after the Q1 import-tax benefit and with product-cost and mix pressures.
- Whether expense growth can moderate enough to support the approximately 13% operating-margin and $13.19–$14.19 diluted-EPS outlook.
- Debt and seasonal liquidity developments, including refinancing or renewal of the receivables facility before its November 2024 maturity and continued covenant compliance.
- The impact of share-based compensation tax benefits on reported quarterly tax rates and EPS; management did not include additional expected 2024 benefits in its guidance beyond those recognized through March 31.