POOL Corporation (POOL) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; fourth-quarter results are noted separately. POOL is a wholesale distributor of pool supplies and equipment, irrigation and landscape products, and outdoor-living products. It operated 398 sales centers across North America, Europe and Australia.
Financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $3.937 billion | $3.200 billion | +23% |
| Gross profit / margin | $1.131 billion / 28.7% | $924.9 million / 28.9% | Profit +22%; margin -20 bps |
| Operating income / margin | $464.0 million / 11.8% | $341.2 million / 10.7% | Income +36%; margin +110 bps |
| Net income | $366.7 million | $261.6 million | +40% |
| Diluted EPS | $8.97 | $6.40 | +40% |
| Cash from operations | $397.6 million | $298.8 million | +$98.8 million |
| Year-end total debt | $416.0 million | $511.4 million | -19% |
Fourth-quarter sales rose 44% year over year; base-business sales increased 39%. Annual sales growth was broad-based, driven by increased residential pool use and investment in outdoor living during the pandemic, favorable weather, market-share gains and acquisitions. Equipment sales rose 31%; above-ground pool sales rose 57%. Commercial-customer sales fell 10% amid pandemic-related closures and reduced travel.
Operating expenses increased 14% to $666.9 million, including a $43.9 million increase in performance-based compensation and $16.9 million of acquired-business expenses. Excluding impairment charges and performance-based compensation in both periods, adjusted operating expenses increased 6%. Lower-margin, big-ticket products weighed on gross margin, while operating-expense leverage lifted operating margin.
Cash, debt and capital allocation
Cash from operations funded $124.6 million of acquisitions, $91.9 million of dividends, $76.2 million of share repurchases, $21.7 million of capital expenditures and debt reduction. Cash and equivalents were $34.1 million at year-end. Inventory was $781.0 million, up 11%; receivables, including pledged receivables, increased 28%, while days sales outstanding improved to 26.5 from 29.0.
Debt declined to $416.0 million, and the company reported a 0.86 average total leverage ratio, versus 1.61 a year earlier. At December 31, $636.2 million was available under the $750 million revolving facility, subject to its terms. The company reported compliance with debt covenants. The receivables facility matures November 1, 2021; the revolving facility matures September 29, 2022. Dividends declared per share increased to $2.29 from $2.10.
Material changes and unusual items
- Reported diluted EPS included a $0.70-per-share tax benefit from share-based compensation accounting, compared with $0.57 in 2019. Adjusted diluted EPS excluding that benefit and after-tax impairment charges was $8.42, up 44% from $5.83.
- The company recorded $6.9 million of first-quarter impairment charges: $4.4 million for Australian goodwill and intangibles and $2.5 million for a long-term note, with the pandemic cited as a factor.
- Acquisitions added 25 sales centers during 2020. Goodwill ended the year at $268.2 million; management identified one California reporting unit as relatively more exposed to impairment risk.
Outlook, commentary and risks
For 2021, management projected sales growth of 8%–12%, diluted EPS of $9.12–$9.62, and operating cash flow approximately equal to net income. The EPS outlook included an estimated $0.11-per-share share-based tax benefit. Management expected gross margin to decline 20–40 basis points for the year and performance-based compensation to fall by about $30 million. It planned 8–10 new sales centers and selective acquisitions.
Management expected stronger first-half demand, tougher second-half comparisons and continuing construction-capacity constraints, including limited contractor labor. It cautioned that pandemic-driven home-investment trends may not persist. Risks include COVID-19 and supply disruption, weather and seasonality, discretionary spending and housing conditions, competition, supplier concentration, labor availability, inventory management, regulation, cybersecurity and interest-rate exposure. A fire at a major supplier could constrain Trichlor availability and increase prices in 2021. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether elevated residential demand and pandemic-related home-improvement trends continue, and how 2021 comparisons affect growth.
- Whether Trichlor and other product supply constraints, inflation and contractor labor shortages affect sales, costs or margins.
- Performance against 2021 sales, EPS and gross-margin outlook, including the effects of acquisitions and the share-based tax benefit.
- Receivables-facility renewal or refinancing before its November 2021 maturity, and ongoing covenant compliance.
- Goodwill and intangible-asset valuations, especially the identified California reporting unit, and the assumptions underlying impairment testing.