POOL Corporation (POOL) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. POOL distributes swimming pool and outdoor-living products, operating 414 sales centers; approximately 94% of quarterly sales were in North America.
Financial results and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,412.7 million | $1,060.7 million | +33% |
| Gross profit / margin | $447.2 million / 31.7% | $301.1 million / 28.4% | +49%; +330 bps |
| Operating income / margin | $235.7 million / 16.7% | $129.0 million / 12.2% | +83% |
| Net income | $179.3 million | $98.7 million | +82% |
| Diluted EPS | $4.41 | $2.42 | +82% |
| Operating cash flow | $(208.1) million | $77.1 million | Declined $285.2 million |
Gross margin benefited from prior-year inventory-building, product mix and pricing. Selling and administrative expenses increased 23% to $211.5 million, but declined to 15.0% of sales from 16.2%. Interest and other non-operating expense rose to $5.2 million from $2.6 million as average debt increased; the weighted average effective interest rate declined to 1.5% from 2.2%.
Operating cash flow turned negative mainly because of working-capital investment, including inventory and receivables, and $79.5 million of federal tax payments deferred from 2021. Inventory was $1.64 billion, up 68% year over year; trailing-four-quarter inventory turns were 3.1 versus 4.0. Cash and cash equivalents were $35.4 million at March 31, 2022.
Total debt was $1.51 billion at March 31, 2022, compared with $433.2 million a year earlier and $1.18 billion at December 31, 2021. Debt included $532.3 million outstanding on the revolving credit facility, $500.0 million of term loans, $164.2 million under the term facility and $290.0 million under the receivables facility. Revolving-facility availability was $212.9 million. The company reported compliance with its material debt covenants; its average total leverage ratio was 1.06 against a maximum of 3.25, and its fixed-charge coverage ratio was 12.38 against a minimum of 2.25.
Material changes and business drivers
- Base-business sales grew 26%; total sales growth also reflected approximately 10%–12% product-cost inflation, recent acquisitions, and a combined approximately 5% benefit from customer early buys and an extra selling day.
- Management cited strong demand for outdoor-living products, market-share gains and improved availability of some products. Equipment sales rose 18%, building materials 29% and chemicals 58% year over year.
- Operating expenses rose with workforce and performance compensation, acquisitions, facility and freight costs, and digital-transformation investment. Expense growth remained below gross-profit growth.
- The December 2021 Porpoise acquisition added wholesale distribution operations. Its purchase-price allocation, including goodwill and intangible assets, remained preliminary at quarter-end.
- Quarterly results are seasonal: the second and third quarters generally generate the highest sales and operating income. Q1 2022 weather was less favorable overall than Q1 2021.
Outlook, risks and contingencies
Management raised its 2022 diluted EPS outlook to $18.34–$19.09, including the $0.18 per-share year-to-date share-based-compensation tax benefit. The prior range was $17.19–$17.94 and included an estimated $0.19 benefit. The outlook assumes average weather. Management expected sales growth at the higher end of its previously stated 17%–19% range and product-cost inflation of approximately 10%–11%.
Management expected full-year gross-margin trends to be relatively neutral versus 2021, with modest improvement in Q2 and declines in the latter half. It projected 2022 capital expenditures near its historical average of 1.0% of sales and an approximately 25.5% annual effective tax rate excluding the ASU 2016-09 benefit. It planned to continue opportunistic share repurchases and pay dividends as declared.
Key uncertainties include whether pandemic-era home-centric demand persists, supply-chain constraints and inflation, weather, consumer discretionary spending, housing-market conditions, labor and real-estate costs, supplier relationships, and execution of growth initiatives. The filing states that litigation arises in the ordinary course and management did not expect its resolution to materially adversely affect financial condition, results or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether demand, pricing and the 2022 sales-growth outlook remain achievable as pandemic-driven trends and inflation evolve.
- Whether elevated inventory supports peak-season availability without weakening inventory turns, margins or operating cash flow.
- Whether working-capital needs and seasonal borrowing remain manageable, including available revolver capacity and covenant headroom.
- How much reported earnings growth reflects operating performance versus the $7.3 million, or $0.18 per diluted share, Q1 tax benefit.
- Whether the final Porpoise purchase-price allocation or other acquisition developments materially change reported assets or results.