POOL Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars.
Business context
POOL is a wholesale distributor of swimming pool supplies, equipment and leisure products, and irrigation, landscape and outdoor-living products. It operated 373 sales centers across North America, Europe and Australia. Maintenance and minor-repair products generated almost 60% of pool-business sales; the remainder was largely more discretionary replacement, remodeling and construction activity. The business is seasonal and weather-sensitive: the second and third quarters generated approximately 63% of annual sales and 81% of operating income.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $3,199.5 million | $2,998.1 million | +7% |
| Gross profit / gross margin | $924.9 million / 28.9% | $870.2 million / 29.0% | Profit +6%; margin down 0.1 percentage point |
| Operating income / margin | $341.2 million / 10.7% | $313.9 million / 10.5% | Income +9%; margin up 0.2 point |
| Net income | $261.6 million | $234.5 million | +12% |
| Diluted EPS | $6.40 | $5.62 | +14% |
| Cash from operations | $298.8 million | $118.7 million | +$180.1 million |
| Year-end total debt | $511.4 million | $666.8 million | Down $155.4 million, or 23% |
| Working capital | $582.7 million | $609.6 million | Down $26.9 million |
Base-business sales increased 5%. Sales growth reflected market-share gains, stronger remodeling and replacement activity, growth in building materials and commercial products, chemical sales growth, price increases, and acquisitions. Gross margin remained broadly stable; operating expenses grew more slowly than sales, helping expand operating margin. Cash from operations funded $83.8 million of dividends, $33.4 million of net capital expenditures, $23.2 million of share repurchases, $8.9 million of acquisition payments and working-capital needs.
At year-end, cash was $28.6 million. The company had $544.5 million available under its $750 million revolving facility, in addition to its term and receivables facilities. It reported covenant compliance; its average total leverage ratio was 1.61 against a maximum of 3.25, and fixed-charge coverage was 5.38 against a minimum of 2.25. FY2019 dividends declared were $2.10 per share, versus $1.72 in 2018.
Q4 2019: Net sales were $582.2 million versus $543.1 million in Q4 2018, up 7%. Operating income was $25.8 million versus $26.0 million; net income was $18.0 million versus $16.8 million; diluted EPS was $0.44 versus $0.41.
Material changes and unusual items
- FY2019 reported diluted EPS included a $0.57-per-share benefit from share-based compensation tax accounting (ASU 2016-09), compared with $0.36 in 2018. Excluding this benefit in both years, diluted EPS increased 11%, to $5.83 from $5.26.
- The reported effective tax rate was 17.7%, compared with 20.1% in 2018; excluding the ASU 2016-09 benefits, rates were 25.1% and 25.3%, respectively.
- Operating cash flow rose sharply from 2018, when strategic inventory purchases weighed on cash flow; management said this timing effect reversed in 2019.
- The company adopted lease accounting guidance in 2019, recording operating lease assets and liabilities; this increased reported balance-sheet assets and liabilities without materially affecting results or cash flows. Prior-year balance sheets were not restated.
- POOL opened nine sales centers, acquired four locations and closed or consolidated four, ending the year with 373. It reported no goodwill impairment; the Australian reporting units were identified as comparatively more sensitive to forecast operating results and cost management.
Outlook, commentary and risks
Management expected generally favorable market conditions to continue and forecast FY2020 sales growth of 6% to 8%, assuming normal weather, 1% to 2% product-cost inflation, market-share gains and continued replacement, remodeling and construction demand. It projected diluted EPS of $6.47 to $6.77, including an estimated $0.06-per-share ASU 2016-09 benefit in Q1; an approximately 25.5% effective tax rate excluding that accounting impact; and operating cash flow approximately equal to net income. Planned 2020 uses included $150 million to $200 million for share repurchases, 8 to 10 new sales centers, and capital expenditures near the historical average.
Management noted that first-half 2019 weather was unusually cool and wet, delaying pool openings and activity, while improved conditions later in the year supported growth. Its outlook assumed normal weather and did not incorporate alternative weather predictions. New-pool construction was estimated at about 80,000 units in 2019, still approximately 65% below historical peak levels and 50% below management’s estimate of normal levels; labor availability constrained construction. The company anticipated roughly 6% to 8% annual sales growth over the next five years.
Key risks include weather and seasonality; consumer spending, housing and credit conditions; competition and low barriers to entry; dependence on suppliers (the three largest represented about 37% of product costs); customer credit quality; labor and facility costs; acquisition execution; regulation and product liability; cybersecurity and technology disruption; foreign exchange; and variable interest rates and the transition away from LIBOR. A 1-percentage-point increase in variable rates under the filing’s sensitivity scenario would reduce pretax income by approximately $7.8 million. Ordinary-course litigation was not expected by management to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; goodwill valuation was identified as a critical audit matter.
Investor verification priorities
- Reconcile reported EPS growth with the $0.57-per-share share-based tax benefit and assess the sustainability of underlying earnings growth.
- Check whether 2020 sales, EPS, margin and cash-flow assumptions were achieved, particularly given the normal-weather assumption and construction-labor constraints.
- Review debt, seasonal borrowing needs, facility availability, covenants and planned $150 million to $200 million of 2020 repurchases.
- Monitor gross-margin trends, product mix, supplier terms and growth in commercial and building-material categories.
- Assess receivable and inventory quality, including allowance balances, write-offs and inventory-obsolescence reserves.
- Review goodwill assumptions and operating performance in Australia, as well as interest-rate, LIBOR-transition and foreign-currency exposures.