POOL Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Pool Corporation distributes swimming pool supplies and related products through 369 sales centers across North America, Europe, South America and Australia. Results are unaudited and the company notes that first-quarter results are not necessarily indicative of full-year performance; the business is highly seasonal, with its strongest sales and operating income generally in Q2 and Q3.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $597.5 million | $585.9 million | Up 2% |
| Gross profit / gross margin | $174.6 million / 29.2% | $166.1 million / 28.3% | Profit up 5%; margin up 0.9 percentage point |
| Operating income / operating margin | $38.4 million / 6.4% | $33.5 million / 5.7% | Income up 14% |
| Net income | $32.6 million | $31.3 million | Up 4% |
| Diluted EPS | $0.80 | $0.75 | Up 7% |
| Operating cash flow | $28.8 million provided | $44.1 million used | Improved $73.0 million |
Base-business sales grew 1%. Gross-margin improvement reflected benefits from strategic inventory purchases made in 2018 and lower customer early buys in Q1. Selling and administrative expenses rose 3% to $136.2 million; expenses were 22.8% of sales versus 22.6% a year earlier.
The $8.8 million Q1 tax benefit associated with share-based compensation accounting increased diluted EPS by $0.21. Excluding that benefit, management reported diluted EPS of $0.59 versus $0.53 in Q1 2018, up 11%. The comparable 2018 tax benefit was $9.0 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $28.6 million at March 31, 2019, versus $8.8 million a year earlier.
- Operating cash flow was $28.8 million; investing activities used $16.1 million and financing activities used $2.1 million. The operating cash-flow improvement primarily reflected lower Q1 inventory purchases after pre-price-increase purchases in 2018. Capital expenditures were $6.7 million.
- Total debt was $699.0 million, up 23% year over year, primarily to fund working capital growth, acquisitions and share repurchases. Debt included $503.1 million under the revolving credit facility and $175.1 million under the receivables facility.
- The company reported $242.1 million available under its $750 million revolving credit facility, after outstanding borrowings and a letter of credit. It said it was in compliance with debt covenants; leverage ratio was 1.80 against a maximum of 3.25, and fixed-charge coverage was 5.17 against a minimum of 2.25.
- Inventory was $815.7 million, up 16% from March 2018, reflecting strategic purchases, acquisitions, growth and a slower seasonal start. Inventory turns declined to 3.1 from 3.5.
Material changes and management commentary
Cooler and wetter weather, particularly in western U.S. markets, and later Easter timing delayed pool openings and reduced early buys. Management estimated these factors, together with a lost selling day, reduced Q1 sales by approximately $30 million to $45 million, with possible sales recovery later in the year depending on weather and customer capacity. Sales were also negatively affected by approximately 2% from the lost selling day and 1% from unfavorable currency movements. Building-material sales rose 8%; equipment sales were relatively flat.
Interest and other non-operating expenses increased $3.1 million to $6.6 million. Average debt rose to $674.6 million from $515.9 million, and the weighted-average effective interest rate rose to 3.7% from 3.0%. Total debt at quarter-end was also higher than a year earlier.
Pool Corporation adopted lease accounting standard ASC 842 on January 1, 2019, recording operating lease assets and liabilities; it did not restate prior-period balance sheets. The adoption did not materially affect earnings or cash flows. At March 31, operating lease assets were $177.3 million and lease liabilities totaled $178.5 million.
Outlook, risks and contingencies
- 2019 diluted EPS guidance was raised to $6.09–$6.39 from $6.05–$6.35, solely for an additional $0.04 per share of tax benefit; other earnings expectations were unchanged.
- Management expected 2019 base-business sales growth of approximately 7%–9%, gross margin similar to 2018, and full-year operating-margin improvement of approximately 20–40 basis points. It expected a slight Q2 gross-margin improvement and a Q4 decline versus the prior year.
- Management expected higher full-year interest expense than in 2018. The expected annual effective tax rate, excluding share-based compensation benefits, was approximately 25.5%.
- Excluding timing effects from strategic inventory purchases, management expected 2019 operating cash flow to approximate net income. It anticipated $150 million–$200 million of share repurchases, subject to further Board authorization. The filing reported $49.2 million remaining under the then-current authorization as of April 25, 2019.
- Key risks include weather sensitivity, economic and housing-market changes, supplier relationships, competition and variability in share-based compensation tax benefits. Management said risk factors were not materially changed from its 2018 Form 10-K.
- The company described ordinary-course litigation and did not believe its resolution would materially adversely affect financial condition, results or cash flows. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- Whether weather-delayed demand translated into the expected later-year sales recovery, and whether the 7%–9% base-business growth outlook was achieved.
- Whether higher inventory converted to seasonal sales and cash flow, given lower inventory turns and the importance of working-capital timing.
- Debt growth, borrowing costs and covenant headroom, particularly as seasonal funding needs rise.
- The extent to which reported EPS and future guidance depend on variable share-based compensation tax benefits.
- The amount and timing of planned share repurchases and their funding from operations or borrowings.