POOL Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are primarily with the three months ended March 31, 2022. Pool Corporation distributes swimming pool, irrigation and landscape products through 427 sales centers; approximately 95% of Q1 sales were in North America. The business is seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,206.8 million | $1,412.7 million | Down 15% |
| Gross profit / gross margin | $369.8 million / 30.6% | $447.2 million / 31.7% | Profit down 17%; margin down 110 bps |
| Operating income / margin | $145.8 million / 12.1% | $235.7 million / 16.7% | Income down 38% |
| Net income | $101.7 million | $179.3 million | Down 43% |
| Diluted EPS | $2.58 | $4.41 | Down 41% |
| Operating cash flow | $103.2 million | $(208.1) million | Improved |
Interest and other non-operating expense rose to $15.8 million from $5.2 million. The weighted average effective interest rate increased to 4.8% from 1.5%, with average debt of approximately $1.3 billion in both periods. Reported effective tax rate was 21.8%; excluding the share-based compensation tax benefit, it was 25.5%.
Cash used in investing was $17.6 million, including $15.6 million of capital expenditures and $1.8 million for an acquisition. Cash used in financing was $105.5 million, including $21.2 million of net debt payments, $39.1 million of dividends and $50.5 million of treasury-stock purchases. Cash and equivalents were $26.5 million at quarter-end.
Financial position and liquidity
Total debt was $1.366 billion at March 31, 2023, versus $1.505 billion a year earlier. Inventory was $1.687 billion, up 3% year over year; inventory turns were 2.5 versus 3.1. Management said inventory was appropriately positioned for the pool season. The company had $346.3 million available under its $1.25 billion Credit Facility; total debt includes borrowings under revolving, term and receivables facilities. The average total leverage ratio was 1.48 against a 3.25 maximum, and the fixed charge ratio was 7.96 against a 2.25 minimum. The company reported compliance with material debt covenants and expected to remain compliant over the next 12 months.
Drivers and material changes
- Management estimated unfavorable weather reduced Q1 sales by approximately 5%; lower customer early-buy activity reduced sales by 2%, and European softness by 1%. Inflationary product-cost increases contributed approximately 4% to 5% to sales, less than the 10% to 12% benefit in Q1 2022.
- Southern markets were generally favorable, while unusually wet and cool weather in the western U.S. weighed on construction and maintenance-related sales. Combined base-business sales in California and Arizona were down 21% year over year; Texas and Florida were approximately in line with the prior year.
- North American seasonal-market sales fell 23%; year-round-market sales fell 9%. Europe sales declined 25%. Equipment base-business sales decreased 14%, and building-material sales decreased 7%.
- Operating expenses rose 6% to $224.0 million, driven by rent and facility costs, labor, in-person retail events and customer-focused investments; lower performance-based compensation partly offset the increases. Expenses rose to 18.6% of sales from 15.0%.
- Q1 2022 benefited from strong prior-year growth and more favorable weather in many markets. The 2023 quarter also reflected lower margins as inflationary pricing benefits moderated. Q1 2023 included a $4.8 million share-based compensation tax benefit, or $0.12 per diluted share, versus $7.3 million, or $0.18, a year earlier.
Outlook, risks and other items
Management revised its full-year 2023 sales outlook to a mid-single-digit decline versus 2022, from its prior flat-to-down 3% projection. It said new pool construction could decline by as much as 30%, and expected maintenance revenue growth to be 1 percentage point lower than previously anticipated. Full-year gross margin was projected at approximately 30.0%, with higher margin in the first half than the second half. Management planned to limit expense growth to plus or minus 2% versus 2022 and forecast diluted EPS of $14.62 to $16.12, including the year-to-date $0.12 tax benefit. The projected annual effective tax rate excluding ASU 2016-09 benefits was 25.3% to 25.5%.
Key uncertainties include weather, consumer discretionary spending, housing and construction activity, inflation and interest rates, supplier relationships, competition, and continued moderation of pandemic-era home-centric demand. Management also cited European macroeconomic uncertainty, including effects from the war in Ukraine and higher fuel prices. The company planned to continue dividends and opportunistic repurchases; $186.4 million remained under its share-repurchase authorization as of April 24, 2023. Management did not expect ordinary-course litigation to materially affect results. Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether weather-normalized demand and the revised mid-single-digit sales decline outlook prove accurate, particularly for western markets and new pool construction.
- Whether inventory levels, turns and seasonal working-capital cash flows improve as expected during the selling season.
- How higher borrowing costs affect interest expense, covenant headroom and management’s stated leverage objectives.
- Whether full-year EPS and margin guidance is achieved, including the impact of share-based compensation tax benefits that management excluded from future guidance beyond amounts already recognized.
- How dividends and share repurchases are balanced against debt reduction, capital expenditures and acquisition opportunities.