POOL CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2017
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 0-26640
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POOL CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware
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36-3943363
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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109 Northpark Boulevard,
Covington, Louisiana
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70433-5001
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(Address of principal executive offices)
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(Zip Code)
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985-892-5521
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(Registrant’s telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
x
NO
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
x
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Emerging growth company
o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o
NO
x
As of
April 24, 2017
, there were
41,339,255
shares of common stock outstanding.
POOL CORPORATION
Form 10-Q
For the Quarter Ended
March 31, 2017
TABLE OF CONTENTS
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Page
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POOL CORPORATION
(Unaudited)
(In thousands, except per share data)
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Three Months Ended
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March 31,
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|||||||
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2017
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2016
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Net sales
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$
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546,441
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$
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515,250
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Cost of sales
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392,820
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372,227
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Gross profit
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153,621
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143,023
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Selling and administrative expenses
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122,623
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113,493
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Operating income
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30,998
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29,530
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Interest and other non-operating expenses, net
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3,647
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2,964
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Income before income taxes and equity earnings
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27,351
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26,566
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Provision for income taxes
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5,119
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10,228
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Equity earnings in unconsolidated investments, net
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38
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25
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Net income
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22,270
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16,363
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Net loss attributable to noncontrolling interest
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11
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8
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Net income attributable to Pool Corporation
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$
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22,281
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$
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16,371
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Earnings per share:
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Basic
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$
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0.54
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$
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0.39
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Diluted
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$
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0.52
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$
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0.38
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Weighted average shares outstanding:
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Basic
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41,192
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42,226
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Diluted
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42,877
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43,317
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Cash dividends declared per common share
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$
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0.31
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$
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0.26
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The accompanying Notes are an integral part of the Consolidated Financial Statements.
1
POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
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Three Months Ended
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March 31,
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|||||||
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2017
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2016
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Net income
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$
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22,270
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$
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16,363
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Other comprehensive income:
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Foreign currency translation adjustments
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1,396
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2,453
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Change in unrealized gains and losses on interest rate swaps,
net of change in taxes of $(183) and $913
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285
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(1,428
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)
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Total other comprehensive income
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1,681
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1,025
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Comprehensive income
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23,951
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17,388
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Comprehensive income attributable to noncontrolling interest
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(137
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)
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(104
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Comprehensive income attributable to Pool Corporation
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$
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23,814
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$
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17,284
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The accompanying Notes are an integral part of the Consolidated Financial Statements.
2
POOL CORPORATION
(In thousands, except share data)
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March 31,
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March 31,
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December 31,
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2017
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2016
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2016
(1)
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(Unaudited)
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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13,409
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$
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9,965
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$
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21,956
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Receivables, net
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61,264
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67,802
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61,437
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Receivables pledged under receivables facility
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228,755
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215,956
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104,714
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Product inventories, net
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647,884
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595,393
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486,116
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Prepaid expenses and other current assets
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15,740
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13,022
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15,318
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Deferred income taxes
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—
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5,536
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6,016
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Total current assets
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967,052
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907,674
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695,557
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Property and equipment, net
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97,140
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78,210
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83,290
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Goodwill
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185,062
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173,605
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184,795
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Other intangible assets, net
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13,172
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11,835
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13,326
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Equity interest investments
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1,174
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1,271
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1,172
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Other assets
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17,269
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20,646
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15,955
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Total assets
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$
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1,280,869
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$
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1,193,241
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$
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994,095
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Liabilities, redeemable noncontrolling interest and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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465,928
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$
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438,705
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$
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230,728
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Accrued expenses and other current liabilities
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48,982
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49,370
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64,387
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Short-term borrowings and current portion of long-term debt and other long-term liabilities
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9,775
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5,996
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1,105
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Total current liabilities
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524,685
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494,071
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296,220
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Deferred income taxes
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29,234
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29,267
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34,475
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Long-term debt, net
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480,442
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444,461
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436,937
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Other long-term liabilities
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21,430
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16,438
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18,966
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Total liabilities
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1,055,791
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984,237
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786,598
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Redeemable noncontrolling interest
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2,424
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2,769
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2,287
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Stockholders’ equity:
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Common stock, $0.001 par value; 100,000,000 shares authorized;
41,328,565, 42,059,318 and 41,089,720 shares issued and
outstanding at March 31, 2017, March 31, 2016 and
December 31, 2016, respectively
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41
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42
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41
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Additional paid-in capital
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412,314
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384,132
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403,162
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Retained deficit
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(177,157
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)
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(165,123
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)
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(183,915
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)
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Accumulated other comprehensive loss
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(12,544
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)
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(12,816
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(14,078
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)
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Total stockholders’ equity
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222,654
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206,235
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205,210
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Total liabilities, redeemable noncontrolling interest and stockholders’ equity
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$
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1,280,869
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$
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1,193,241
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$
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994,095
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(1)
Derived from audited financial statements.
The accompanying Notes are an integral part of the Consolidated Financial Statements.
3
POOL CORPORATION
(Unaudited)
(In thousands)
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Three Months Ended
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|||||||
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March 31,
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2017
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2016
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Operating activities
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Net income
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$
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22,270
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$
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16,363
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Adjustments to reconcile net income to cash used in operating activities:
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Depreciation
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5,557
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4,736
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Amortization
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365
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339
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Share-based compensation
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3,003
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2,280
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Excess tax benefits from share-based compensation
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—
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(2,780
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)
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Equity earnings in unconsolidated investments, net
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(38
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)
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(25
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)
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Other
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1,847
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2,334
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Changes in operating assets and liabilities, net of effects of acquisitions:
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Receivables
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(123,515
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)
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(125,331
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)
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Product inventories
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(161,668
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)
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(119,300
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)
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Prepaid expenses and other assets
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(2,617
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)
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(2,477
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)
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Accounts payable
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234,581
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189,915
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Accrued expenses and other current liabilities
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(12,209
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)
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(5,807
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)
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Net cash used in operating activities
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(32,424
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)
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(39,753
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)
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Investing activities
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Acquisition of businesses, net of cash acquired
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—
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(100
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)
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Purchase of property and equipment, net of sale proceeds
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(19,121
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)
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(13,405
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)
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Payments to fund credit agreement
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—
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(2,315
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)
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Other investments, net
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2
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11
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Net cash used in investing activities
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(19,119
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)
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(15,809
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)
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Financing activities
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Proceeds from revolving line of credit
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213,189
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286,845
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Payments on revolving line of credit
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(206,319
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)
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(233,952
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)
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Proceeds from asset-backed financing
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55,000
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65,000
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Payments on asset-backed financing
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(18,500
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)
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—
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Proceeds from short-term borrowings, long-term debt and other long-term liabilities
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11,441
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5,995
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Payments on short-term borrowings, long-term debt and other long-term liabilities
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(2,771
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)
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(1,700
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)
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Payments of deferred and contingent acquisition consideration
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(199
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)
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—
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Excess tax benefits from share-based compensation
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—
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2,780
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Proceeds from stock issued under share-based compensation plans
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6,149
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4,934
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Payments of cash dividends
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(12,799
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)
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(10,927
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)
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Purchases of treasury stock
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(2,725
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)
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(65,860
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)
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Net cash provided by financing activities
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42,466
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53,115
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Effect of exchange rate changes on cash and cash equivalents
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530
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(825
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)
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Change in cash and cash equivalents
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(8,547
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)
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(3,272
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)
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Cash and cash equivalents at beginning of period
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21,956
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13,237
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Cash and cash equivalents at end of period
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$
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13,409
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$
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9,965
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The accompanying Notes are an integral part of the Consolidated Financial Statements.
4
POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Pool Corporation (the
Company
, which may be referred to as
we, us
or
our
) prepared the unaudited interim Consolidated Financial Statements following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securities and Exchange Commission (SEC) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes and other financial information required for complete financial statements.
We own a
60%
interest in Pool Systems Pty. Ltd. (PSL), an Australian company. This constitutes a controlling interest in the acquired company, which requires us to consolidate PSL’s financial position and results of operations from the date of acquisition.
The Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. All significant intercompany accounts and intercompany transactions have been eliminated.
A description of our significant accounting policies is included in our
2016
Annual Report on Form 10-K. You should read the interim Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and accompanying notes in our Annual Report. The results for our
three
month period ended
March 31, 2017
are not necessarily indicative of the expected results for our fiscal year ending
December 31, 2017
.
Variable Interest Entity
In February 2015, we entered into a five-year credit agreement with a swimming pool retailer. Under this agreement and the related revolving note, we are the primary lender of operating funds for this entity. The total lending commitment under the credit agreement is
$8.5 million
, of which
$8.4 million
is owed as of
March 31, 2017
. Amounts funded under the credit agreement are recorded within Other assets on our Consolidated Balance Sheets and are collateralized by essentially all of the assets of the business. We have a variable interest in this entity; however, we have no decision-making authority over its activities through voting or other rights. Additionally, we have no obligation to absorb any of its losses, nor do we have the right to receive any residual returns, should either occur. We are not considered the primary beneficiary of this variable interest entity, and therefore we are not required to consolidate this entity’s financial statements.
Retained Deficit
We account for the retirement of treasury shares as a reduction of retained earnings (deficit). As of
March 31, 2017
, the Retained deficit on our Consolidated Balance Sheets reflects cumulative net income, the cumulative impact of adjustments for changes in accounting pronouncements, treasury share retirements since the inception of our share repurchase programs of
$1,096.0 million
and cumulative dividends of
$380.5 million
.
Newly Adopted Accounting Pronouncements
Effective January 1, 2017, we adopted Accounting Standards Update (ASU) 2016-09,
Improvements to Employee Share-Based Payment Accounting,
on a prospective basis and as such, our prior year presentation has not changed
.
The provisions of this update simplify many key aspects of the accounting for and cash flow presentation of employee share-based compensation transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements. In accordance with the new guidance, we now record all excess tax benefits or tax deficiencies as a component of our Provision for income taxes on our Consolidated Statements of Income. As a result of the adoption, we recognized
$5.5 million
of excess tax benefits in the first quarter of 2017, which reduced our Provision for income taxes and positively impacted our Net income. Historically, these amounts were recorded as Additional paid in capital in stockholders’ equity on our Consolidated Balance Sheets. Additionally, we now present excess tax benefits or deficiencies as operating cash flows versus reclassifying the amount out of operating cash flows and presenting it in financing activities on the Condensed Consolidated Statements of Cash Flows.
5
Additional amendments from this guidance related to forfeitures and minimum statutory withholding tax requirements had no impact to our financial position, results of operations or cash flows. As permitted, we continue to estimate forfeitures to determine the amount of compensation cost to be recognized each period rather than electing to account for forfeitures as they occur, and we continue to present the value of shares withheld for minimum statutory tax withholding requirements on the Condensed Consolidated Statements of Cash Flows as a financing activity. Another impact of the adoption is that the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding of approximately
500,000
shares for the period ended March 31, 2017.
Effective January 1, 2017, we adopted ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires we classify all deferred tax assets and liabilities as noncurrent on the balance sheet rather than separately presenting net deferred tax assets or liabilities as current or noncurrent. Additionally, we no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances are also now classified as noncurrent. As permitted, we elected to adopt this guidance on a prospective basis and as such, our prior year presentation has not changed. The adoption of ASU 2015-17 did not have a material impact on our financial position, results of operations and related disclosures.
In January 2017, we adopted ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which requires that we measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The adoption of ASU 2015-11 did not have a material impact on our financial position, results of operations and related disclosures.
In January 2017, we adopted ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The adoption of ASU 2015-16 did not have a material impact on our financial position, results of operations and related disclosures.
6
We calculate basic earnings per share (EPS) by dividing Net income attributable to Pool Corporation by the weighted average number of common shares outstanding. We include outstanding unvested restricted stock awards of our common stock in the basic weighted average share calculation. Diluted EPS reflects the dilutive effects of potentially dilutive securities, which include in-the-money outstanding stock options and shares to be purchased under our employee stock purchase plan. Using the treasury stock method, the effect of dilutive securities includes these additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. As discussed in Note 1, as a result of the adoption of ASU 2016-09, the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds, resulting in an increase in diluted weighted average shares outstanding for the period ended March 31, 2017.
Stock options with exercise prices that are higher than the average market prices of our common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.
The table below presents the computation of EPS, including the reconciliation of basic and diluted weighted average shares outstanding (in thousands, except EPS):
|
|
Three Months Ended
|
|||||||
|
March 31,
|
||||||||
|
|
2017
|
2016
|
||||||
|
Net income
|
$
|
22,270
|
|
$
|
16,363
|
|
||
|
Net loss attributable to noncontrolling interest
|
11
|
|
8
|
|
||||
|
Net income attributable to Pool Corporation
|
$
|
22,281
|
|
$
|
16,371
|
|
||
|
Weighted average shares outstanding:
|
|
|
||||||
|
Basic
|
41,192
|
|
42,226
|
|
||||
|
Effect of dilutive securities:
|
|
|
||||||
|
Stock options and employee stock purchase plan
|
1,685
|
|
1,091
|
|
||||
|
Diluted
|
42,877
|
|
43,317
|
|
||||
|
Earnings per share:
|
|
|
||||||
|
Basic
|
$
|
0.54
|
|
$
|
0.39
|
|
||
|
Diluted
|
$
|
0.52
|
|
$
|
0.38
|
|
||
|
Anti-dilutive stock options excluded from diluted earnings per share computations
|
108
|
|
153
|
|
||||
In April 2016, we acquired the distribution assets of Metro Irrigation Supply Company Ltd., an irrigation and landscape supply company with eight locations in Texas.
We have completed our acquisition accounting for this acquisition. This acquisition did not have a material impact on our financial position or results of operations.
7
Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on our interest rate swap contracts and contingent consideration related to recent acquisitions. The three levels of the fair value hierarchy under the accounting guidance are described below:
|
Level 1
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
Level 2
|
Inputs to the valuation methodology include:
|
|
•
|
quoted prices for similar assets or liabilities in active markets;
|
|
•
|
quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
•
|
inputs other than quoted prices that are observable for the asset or liability; or
|
|
•
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The table below presents the estimated fair values of our interest rate swap contracts, our forward-starting interest rate swap contracts and our contingent consideration liabilities (in thousands):
|
|
Fair Value at March 31,
|
|||||||
|
2017
|
2016
|
|||||||
|
Level 2
|
||||||||
|
Unrealized gains on interest rate swaps
|
$
|
1,519
|
|
$
|
—
|
|
||
|
Unrealized losses on interest rate swaps
|
2,324
|
|
6,222
|
|
||||
|
Level 3
|
||||||||
|
Contingent consideration liabilities
|
$
|
1,453
|
|
$
|
838
|
|
||
Interest Rate Swaps
We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on our unsecured syndicated senior credit facility (the Credit Facility).
For determining the fair value of our interest rate swap contracts, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Prepaid expenses and other current assets and unrealized losses in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap counterparties as an adjustment to interest expense over the life of the swaps. We have designated these swaps as cash flow hedges and we record the changes in the estimated fair value of the swaps to Accumulated other comprehensive loss on our Consolidated Balance Sheets. To the extent our interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value of our swaps in earnings.
We currently have three interest rate swap contracts in place, which became effective on October 19, 2016. These swaps were previously forward-starting contracts that were amended in October 2015. These swaps were amended to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Concurrent with the amendment of these contracts, we de-designated the original hedge arrangements and designated the amended forward-starting interest rate swap contracts as cash flow hedges. As amended, these swap contracts terminate on November 20, 2019.
In the first quarter of 2017, we recognized a benefit of
$0.8 million
as a result of our determination of ineffectiveness for the period. These amounts were recorded in Interest and other non-operating expenses, net on our Consolidated Statements of Income.
8
The following table provides additional details related to each of these amended swap contracts:
|
Derivative
|
Amendment Date
|
Notional
Amount
(in millions)
|
Fixed
Interest
Rate
|
|||
|
Interest rate swap 1
|
October 1, 2015
|
$75.0
|
2.273%
|
|||
|
Interest rate swap 2
|
October 1, 2015
|
$25.0
|
2.111%
|
|||
|
Interest rate swap 3
|
October 1, 2015
|
$50.0
|
2.111%
|
|||
To account for the de-designation of the original forward-starting swaps, we were required to freeze the amounts related to the changes in the fair values of these swaps, which are recorded in Accumulated other comprehensive loss. The balance of the unrealized losses was
$2.8 million
at March 31, 2017, and is being amortized over the effective period of the original forward-starting interest rate swap contracts from October 2016 to September 2018. In the first quarter of 2017, we recorded expense of
$0.5 million
as amortization of the unrealized loss in Interest and other non-operating expenses, net.
For the three interest rate swap contracts in effect at
March 31, 2017
, a portion of the change in the estimated fair value between periods relates to future interest expense. Recognition of the change in fair value between periods attributable to accrued interest is reclassified from Accumulated other comprehensive loss to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in the first
three
months of
2017
or
2016
.
In July 2016 we entered into an additional forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date. This swap contract will convert the variable interest rate to a fixed interest rate on borrowings under the Credit Facility. This contract becomes effective on
November 20, 2019
and terminates on
November 20, 2020
. The following table provides additional details related to this new swap contract:
|
Derivative
|
Inception Date
|
Notional
Amount (in millions) |
Fixed
Interest Rate |
|||
|
Forward-starting interest rate swap 1
|
July 6, 2016
|
$150.0
|
1.1425%
|
|||
Failure of our swap counterparties would result in the loss of any potential benefit to us under our swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying our debt agreements. Additionally, failure of our swap counterparties would not eliminate our obligation to continue to make payments under our existing swap agreements if we continue to be in a net pay position.
Our interest rate swap and forward-starting interest rate swap contracts are subject to master netting arrangements. According to our accounting policy, we do not offset the fair values of assets with the fair values of liabilities related to these contracts.
Contingent Consideration Liabilities
As of
March 31, 2017
, our Consolidated Balance Sheets reflected
$0.3 million
in Accrued expenses and other current liabilities and
$1.2 million
in Other long-term liabilities for contingent consideration related to future payouts for our acquisitions of The Melton Corporation and Metro Irrigation Supply Company Ltd. In determining our original estimates for contingent consideration, which are based on a percentage of gross profit for certain products for The Melton Corporation and a multiple of gross profit for Metro Irrigation Supply Company Ltd., we applied a linear model using our best estimate of gross profit projections for fiscal years 2016 to 2020 (Level 3 inputs as defined in the accounting guidance). The maximum total payout for Metro Irrigation Supply Company Ltd. over this time period is $1.0 million.
In the
first
quarter of
2017
, we paid approximately
$0.2 million
in contingent consideration to The Melton Corporation based on 2016 results. Since the acquisition dates, we have recorded minimal adjustments to our original estimates based on the calculated 2017 payouts related to the fiscal year ended December 31, 2016. Adjustments to the fair value of contingent consideration are recognized in earnings in the period in which we determine that the fair value changed. We have determined that the contingent consideration liability was in a range of acceptable estimates as of
March 31, 2017
.
9
Other
The carrying values of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of those instruments (Level 1 inputs). For the note receivable with our variable interest entity, our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to collectibility (Level 3 inputs). In the
first
quarter of
2017
, we recorded an additional
$1.0 million
fair value adjustment to reduce the note receivable to an amount based on the results of our discounted cash flow model for expected collections on the note receivable. The carrying value of this note receivable, including adjustments, approximates fair value. The carrying value of long-term debt approximates fair value. Our determination of the estimated fair value reflects a discounted cash flow model using our estimates, including assumptions related to borrowing rates (Level 3 inputs).
The table below presents the components of our debt as of
March 31, 2017
and
March 31, 2016
(in thousands):
|
|
March 31,
|
|||||||
|
|
2017
|
2016
|
||||||
|
Variable rate debt
|
||||||||
|
Short-term borrowings
|
$
|
9,404
|
|
$
|
5,996
|
|
||
|
Current portion of long-term debt:
|
||||||||
|
Australian Seasonal Credit Facility
|
371
|
|
—
|
|
||||
|
Short-term borrowings and current portion of long-term debt and other long-term liabilities
|
9,775
|
|
5,996
|
|
||||
|
Long-term portion:
|
|
|
||||||
|
Revolving Credit Facility
|
361,418
|
|
325,908
|
|
||||
|
Receivables Securitization Facility
|
120,000
|
|
120,000
|
|
||||
|
Less: financing costs, net
|
976
|
|
1,447
|
|
||||
|
Long-term debt, net
|
480,442
|
|
444,461
|
|
||||
|
Total debt
|
$
|
490,217
|
|
$
|
450,457
|
|
||
Certain of our foreign subsidiaries entered into a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows the participating subsidiaries to withdraw cash from the financial institution to the extent that aggregate cash deposits held by these subsidiaries are available at the financial institution. To the extent the participating subsidiaries are in an overdraft position, such overdrafts are recorded as short-term borrowings under a committed cash overdraft facility. These borrowings bear interest at a variable rate based on 3-month Euro Interbank Offered Rate (EURIBOR), plus a fixed margin. The facility has a seasonal maximum borrowing capacity of
€12.0 million
. We are required to pay a commitment fee, which is based on the borrowing capacity schedule. We pay this fee annually, in advance.
PSL utilizes the Australian Seasonal Credit Facility, which provides a borrowing capacity of AU$
3.0 million
, to supplement working capital needs.
The Receivables Securitization Facility (the Receivables Facility) provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due to the third party financial institutions.
We account for the sale of the receivable interests as a secured borrowing on our Consolidated Balance Sheets. The receivables subject to the agreement collateralize the cash proceeds received from the third party financial institutions. We classify the entire outstanding balance as Long-term debt, net on our Consolidated Balance Sheets as we intend to refinance the obligations on a long-term basis. We present the receivables that collateralize the cash proceeds separately as Receivables pledged under receivables facility on our Consolidated Balance Sheets.
10
As discussed in Note 1 - Summary of Significant Accounting Policies, in July 2014, we purchased a controlling interest in PSL. Included in the transaction documents is a put/call option deed that grants us an option to purchase the shares held by the noncontrolling interest, and grants the holder of the noncontrolling interest an option to require us to purchase its shares in one or two transactions. The put/call option deed in this transaction is considered an equity contract and therefore a financial instrument under the accounting guidance. In applying the guidance for this transaction, we have determined that the financial instrument is embedded in the noncontrolling interest. As a public company, we are required to classify the noncontrolling interest and the embedded financial instrument as redeemable noncontrolling interest in a separate section of our Consolidated Balance Sheets, between liabilities and equity.
At the end of each period, we record the portion of comprehensive income or loss attributable to the noncontrolling interest to Redeemable noncontrolling interest to determine the carrying amount. We are required to compare the carrying amount to our estimated redemption value at the end of each reporting period. The redemption value is based on a multiple of a PSL earnings measure for a specified time period or the value of net assets. To the extent that the estimated redemption value exceeds the carrying amount, we would record an adjustment to Redeemable noncontrolling interest. We did not record such an adjustment at
March 31, 2017
or at
March 31, 2016
.
The table below presents the changes in Redeemable noncontrolling interest (in thousands):
|
Three Months Ended
|
|||||||
|
March 31,
|
|||||||
|
2017
|
2016
|
||||||
|
Redeemable noncontrolling interest, beginning of period
|
$
|
2,287
|
|
$
|
2,665
|
|
|
|
Net loss attributable to noncontrolling interest
|
(11
|
)
|
(8
|
)
|
|||
|
Other comprehensive income attributable to noncontrolling interest
|
148
|
|
112
|
|
|||
|
Redeemable noncontrolling interest, end of period
|
$
|
2,424
|
|
$
|
2,769
|
|
|
The holder of the non-controlling interest has informed us that he intends to exercise the put option described above, as of June 30, 2017. This transaction will require us to purchase his shares and will result in our 100% ownership of PSL.
11
You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our
2016
Annual Report on Form 10-K.
For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives and industry, general economic and other forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project,” “should” and other words and expressions of similar meaning.
No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in our
2016
Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.
OVERVIEW
Financial Results
Building on strong momentum from last year, we had a solid start to 2017. Net sales for the
first
quarter of
2017
increased
6%
to
$546.4 million
compared to
$515.3 million
in the
first
quarter of
2016
. We realized base business sales growth of
5%
for the period despite a 2% unfavorable impact on first quarter sales related to customer early buy purchases. Overall, weather was not quite as beneficial in the first quarter of 2017 as it was in the same period last year, but better-than-normal weather for the 2017 period helped drive our sales growth.
Gross profit for the
first
quarter of
2017
increased
7%
compared to the same period last year. Base business gross profit improved
6%
over the
first
quarter of last year. Gross profit as a percentage of net sales (gross margin) increased just above 30 basis points to
28.1%
compared to the
first
quarter of
2016
, primarily due to changes in customer and product mix for the quarter, including the impact of the timing of customer early buy purchases, which generally contribute lower margins due to applicable discounts.
Selling and administrative expenses (operating expenses) increased
8%
compared to the
first
quarter of
2016
, with base business operating expenses up
7%
over the comparable
2016
period. The increase in operating expenses was primarily due to higher growth-driven labor and freight expenses, the timing of certain employee related expenses and the ramp up of support costs in anticipation of our peak selling season.
Operating income for the
first
quarter increased
5%
compared to the same period in
2016
. Operating income as a percentage of net sales (operating margin) was
5.7%
for both the
first
quarter of
2017
and the
first
quarter of
2016
.
During the first quarter of 2017, we adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
on a prospective basis. This adoption resulted in a tax benefit recorded in our Provision for income taxes, a positive impact on our Net income and our earnings per share and an increase of approximately 500,000 diluted weighted average shares outstanding used to calculate our earnings per diluted share. Net income attributable to Pool Corporation, including the tax benefit of $5.5 million from the impact of adopting ASU 2016-09, was
$22.3 million
in the
first
quarter of
2017
compared to
$16.4 million
for the
first
quarter of
2016
. Earnings per share, including a favorable $0.12 per diluted share impact from the adoption of this accounting pronouncement, increased to a record
$0.52
per diluted share for the
three months
ended
March 31, 2017
versus
$0.38
per diluted share for the same period in
2016
.
12
Financial Position and Liquidity
Total net receivables, including pledged receivables, increased
2%
from
March 31, 2016
. Our allowance for doubtful accounts balance was
$4.2 million
at
March 31, 2017
and
$4.3 million
at
March 31, 2016
. Net inventory levels grew
9%
compared to levels at
March 31, 2016
. The inventory reserve was
$7.3 million
at
March 31, 2017
and
$8.3 million
at
March 31, 2016
. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at both
March 31, 2017
and
March 31, 2016
.
Total debt outstanding at
March 31, 2017
was
$490.2 million
, a
$39.8 million
, or
9%
increase compared to total debt at
March 31, 2016
.
Current Trends and Outlook
For a detailed discussion of trends through
2016
, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our
2016
Annual Report on Form 10-K.
We updated our
2017
earnings guidance to a range of $4.12 to $4.32 per diluted share, which reflects both an estimated benefit of $0.30 per diluted share due to the adoption of ASU 2016-09 and $0.02 from our first quarter
2017
operating results. Aside from the estimated impact of ASU 2016-09, our expectations for the full year
2017
remain consistent with those disclosed in our
2016
Annual Report on Form 10-K.
We continue to project base business sales growth of 5% to 7% for the full year and expect gross margin to be similar to
2016
. As discussed above, the gross margin improvement in the first quarter of
2017
reflects the impact of the timing of customer early buy purchases and is expected to neutralize throughout the remainder of the year. For the year, we expect operating expenses to grow at approximately half the rate of our gross profit growth, reflecting inflationary increases and incremental costs to support our sales growth expectations.
Excluding the impact from the adoption of ASU 2016-09, we expect our effective tax rate will be consistent with
2016
. Our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations, particularly any significant changes in our geographic mix. Due to the adoption of the new accounting standard, we expect our effective tax rate will fluctuate from quarter to quarter, particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse. Based on our comparison of our deferred tax assets for share‑based compensation to the current intrinsic value of the underlying awards, we expect to recognize material income tax benefits in periods when these transactions occur, as reflected in our updated earnings guidance range.
We expect cash provided by operations will exceed net income for the
2017
fiscal year. Subject to additional authorization by our Board of Directors, we anticipate that we may use approximately $100.00 million to
$150.0 million
in cash to fund share repurchases in
2017
.
13
RESULTS OF OPERATIONS
As of
March 31, 2017
, we conducted operations through
344
sales centers in North America, Europe, South America and Australia.
The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:
|
Three Months Ended
|
||||||
|
March 31,
|
||||||
|
|
2017
|
2016
|
||||
|
Net sales
|
100.0
|
%
|
100.0
|
%
|
||
|
Cost of sales
|
71.9
|
|
72.2
|
|
||
|
Gross profit
|
28.1
|
|
27.8
|
|
||
|
Operating expenses
|
22.4
|
|
22.0
|
|
||
|
Operating income
|
5.7
|
|
5.7
|
|
||
|
Interest and other non-operating expenses, net
|
0.7
|
|
0.6
|
|
||
|
Income before income taxes and equity earnings
|
5.0
|
%
|
5.2
|
%
|
||
Note: Due to rounding, percentages may not add to Operating income or Income before income taxes and equity earnings.
We have included the results of operations from the acquisition in
2016
in our consolidated results since the acquisition date.
14
Three Months Ended
March 31, 2017
Compared to Three Months Ended
March 31, 2016
The following table breaks out our consolidated results into the base business component and the excluded component (sales centers excluded from base business):
|
(Unaudited)
|
Base Business
|
Excluded
|
Total
|
|||||||||||||||||||||
|
(in thousands)
|
Three Months Ended
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||
|
|
March 31,
|
March 31,
|
March 31,
|
|||||||||||||||||||||
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
||||||||||||||||||
|
Net sales
|
$
|
538,284
|
|
$
|
514,124
|
|
$
|
8,157
|
|
$
|
1,126
|
|
$
|
546,441
|
|
$
|
515,250
|
|
||||||
|
Gross profit
|
151,095
|
|
142,776
|
|
2,526
|
|
247
|
|
153,621
|
|
143,023
|
|
||||||||||||
|
Gross margin
|
28.1
|
%
|
27.8
|
%
|
31.0
|
%
|
21.9
|
%
|
28.1
|
%
|
27.8
|
%
|
||||||||||||
|
Operating expenses
|
120,684
|
|
113,146
|
|
1,939
|
|
347
|
|
122,623
|
|
113,493
|
|
||||||||||||
|
Expenses as a % of net sales
|
22.4
|
%
|
22.0
|
%
|
23.8
|
%
|
30.8
|
%
|
22.4
|
%
|
22.0
|
%
|
||||||||||||
|
Operating income (loss)
|
30,411
|
|
29,630
|
|
587
|
|
(100
|
)
|
30,998
|
|
29,530
|
|
||||||||||||
|
Operating margin
|
5.6
|
%
|
5.8
|
%
|
7.2
|
%
|
(8.9
|
)%
|
5.7
|
%
|
5.7
|
%
|
||||||||||||
In our calculation of base business results, we have excluded the following acquisitions for the periods identified:
|
Acquired
(1)
|
Acquisition
Date
|
Net
Sales Centers
Acquired
|
Periods
Excluded
|
|||
|
Metro Irrigation Supply Company Ltd.
|
April 2016
|
8
|
January - March 2017
|
|||
|
The Melton Corporation
|
November 2015
|
2
|
January 2017 and January 2016
|
|||
|
Seaboard Industries, Inc.
|
October 2015
|
3
|
January 2017 and January 2016
|
|||
|
(1)
|
We acquired certain distribution assets of each of these companies.
|
When calculating our base business results, we exclude sales centers that are acquired, closed, or opened in new markets for a period of 15 months. We also exclude consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers.
We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.
The table below summarizes the changes in our sales center count during the first
three
months of
2017
:
|
December 31, 2016
|
344
|
|
|
New location
|
1
|
|
|
Closed location
|
(1
|
)
|
|
March 31, 2017
|
344
|
|
15
Net Sales
|
|
Three Months Ended
|
|
||||||||||||
|
March 31,
|
||||||||||||||
|
(in millions)
|
2017
|
2016
|
Change
|
|||||||||||
|
Net sales
|
$
|
546.4
|
|
$
|
515.3
|
|
$
|
31.1
|
|
6%
|
||||
Net sales for the
first
quarter of
2017
increased
6%
compared to the
first
quarter of
2016
, with base business sales up
5%
for the period despite a 2% decline in sales related to customer early buy purchases. The following factors benefited our sales growth (listed in order of estimated magnitude):
|
•
|
continued consumer investments in enhancing outdoor living spaces, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
|
|
•
|
the impact of better-than-normal weather conditions, which is amplified due to seasonality;
|
|
•
|
pool and spa chemical sales, our largest product category at 11% of total net sales, increased 3% over last year; and
|
|
•
|
inflationary (estimated at 1% to 2%) product cost increases.
|
We believe that sales growth rates for certain product offerings, such as building materials and equipment, support our assertion that there continues to be increased spending in traditionally discretionary areas including pool construction, pool remodeling, as well as equipment upgrades. Sales of equipment such as swimming pool heaters, pumps, lights and filters, which represented 9%, 9%, 8% and 4% of our total net sales for the first quarter of 2017, respectively, increased collectively by 8% compared to the first quarter of 2016. This increase reflects both the ongoing recovery of replacement activity and continued demand for higher-priced, more energy-efficient products. Sales of building materials, which includes tile, represent 11% of net sales for the first quarter of 2017 and grew by 16% compared to the first quarter of 2016. References to product line and product category data throughout this Form 10-Q generally reflect data related to the North American swimming pool market, as it is more readily available for analysis and represents the largest component of our operations.
Sales to customers who service large commercial installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories and growth in this area is reflected in the numbers above. These sales represented 4% of our consolidated net sales for the first quarter of 2017 and increased 12% compared to the first quarter of 2016. We continue to increase not only our focus on the commercial market, but also the resources assigned to this area, including designated warehouse space, increased staffing and additional vendor relationships.
Gross Profit
|
|
Three Months Ended
|
|
||||||||||||
|
March 31,
|
||||||||||||||
|
(in millions)
|
2017
|
2016
|
Change
|
|||||||||||
|
Gross profit
|
$
|
153.6
|
|
$
|
143.0
|
|
$
|
10.6
|
|
7%
|
||||
|
Gross margin
|
28.1
|
%
|
27.8
|
%
|
|
|
||||||||
Gross margin for the
first
quarter of
2017
increased just over 30 basis points compared to the
first
quarter of
2016
, due mostly to product and customer mix differences in the quarter,
including the impact of the timing of customer early buy purchases, which generally contribute lower margins due to applicable discounts.
Operating Expenses
|
|
Three Months Ended
|
|
||||||||||||
|
March 31,
|
||||||||||||||
|
(in millions)
|
2017
|
2016
|
Change
|
|||||||||||
|
Operating expenses
|
$
|
122.6
|
|
$
|
113.5
|
|
$
|
9.1
|
|
8%
|
||||
|
Operating expenses as a % of net sales
|
22.4
|
%
|
22.0
|
%
|
|
|
||||||||
Operating expenses increased
8%
in the
first
quarter of
2017
compared to the
first
quarter of
2016
, with base business operating expenses up
7%
compared to the same period last year. This increase reflects investments we have made in our business as we
16
prepare for our busy selling season. We also incurred inflationary cost increases and an increase in freight expenses of $0.8 million. Also of note, share-based compensation expense increased roughly $0.7 million, driven primarily by our higher share price.
Interest and Other Non-operating Expenses, Net
Interest and other non-operating expenses, net increased
$0.7 million
compared to the
first
quarter of
2016
, primarily as a result of higher interest expense on our borrowings, due to higher average debt levels and an increase in our effective interest rates. Our weighted average effective interest rate increased to
2.6%
for the
first
quarter of
2017
from
2.0%
for the
first
quarter of
2016
on higher average outstanding debt of
$446.3 million
versus
$390.1 million
for the respective periods.
Income Taxes
Our effective income tax rate was
18.7%
for the three months ended
March 31, 2017
and
38.5%
for the three months ended
March 31, 2016
. The decline in our effective income tax rate is primarily due to the $5.5 million tax benefit recorded in our provision for income taxes, which reflects the impact of the adoption of ASU 2016-09.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation for the
first
quarter of
2017
, including the tax benefit of $5.5 million from the impact of adopting ASU 2016-09
,
increased
36%
to
$22.3 million
compared to the
first
quarter of
2016
. Earnings per diluted share, including a favorable $0.12 per diluted share impact from the adoption of this accounting pronouncement, increased to
$0.52
for the
first
quarter of
2017
versus
$0.38
per diluted share for the comparable period in
2016
.
17
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and landscape maintenance and installation. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In
2016
, we generated approximately
63%
of our net sales and
85%
of our operating income in the second and third quarters of the year.
We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.
The following table presents certain unaudited quarterly data for the first quarter of 2017, the four quarters of 2016 and the fourth, third and second quarters of 2015. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.
|
(Unaudited)
|
QUARTER
|
||||||||||||||||||||||||||||||||
|
(in thousands)
|
2017
|
2016
|
2015
|
||||||||||||||||||||||||||||||
|
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
|||||||||||||||||||||||||
|
Statement of Income Data
|
|||||||||||||||||||||||||||||||||
|
Net sales
|
$
|
546,441
|
|
$
|
445,235
|
|
$
|
691,429
|
|
$
|
918,889
|
|
$
|
515,250
|
|
$
|
415,075
|
|
$
|
645,779
|
|
$
|
851,855
|
|
|||||||||
|
Gross profit
|
153,621
|
|
127,777
|
|
199,551
|
|
270,736
|
|
143,023
|
|
118,295
|
|
184,288
|
|
248,260
|
|
|||||||||||||||||
|
Operating income
|
30,998
|
|
9,743
|
|
74,166
|
|
142,420
|
|
29,530
|
|
5,979
|
|
65,512
|
|
129,132
|
|
|||||||||||||||||
|
Net income
|
22,270
|
|
2,572
|
|
44,421
|
|
85,247
|
|
16,363
|
|
2,579
|
|
39,403
|
|
77,809
|
|
|||||||||||||||||
|
Balance Sheet Data
|
|||||||||||||||||||||||||||||||||
|
Total receivables, net
|
$
|
290,019
|
|
$
|
166,151
|
|
$
|
233,405
|
|
$
|
351,012
|
|
283,758
|
|
$
|
156,756
|
|
$
|
219,774
|
|
$
|
318,498
|
|
||||||||||
|
Product inventories, net
|
647,884
|
|
486,116
|
|
455,156
|
|
493,254
|
|
595,393
|
|
474,275
|
|
412,587
|
|
473,362
|
|
|||||||||||||||||
|
Accounts payable
|
465,928
|
|
230,728
|
|
199,922
|
|
265,349
|
|
438,705
|
|
246,554
|
|
170,582
|
|
236,868
|
|
|||||||||||||||||
|
Total debt
|
490,217
|
|
438,042
|
|
390,189
|
|
500,606
|
|
450,457
|
|
328,045
|
|
393,370
|
|
493,580
|
|
|||||||||||||||||
We expect that our quarterly results of operations will continue to fluctuate depending on the timing and amount of revenue contributed by new and acquired sales centers. Based on our peak summer selling season, we generally open new sales centers and close or consolidate sales centers, when warranted, either in the first quarter before the peak selling season begins or in the fourth quarter after the peak selling season ends.
18
Weather is one of the principal external factors affecting our business. The table below presents some of the possible effects resulting from various weather conditions.
|
Weather
|
|
Possible Effects
|
|
Hot and dry
|
•
|
Increased purchases of chemicals and supplies
for existing swimming pools
|
|
|
•
|
Increased purchases of above-ground pools and
irrigation products
|
|
|
|
|
|
Unseasonably cool weather or extraordinary amounts of rain
|
•
|
Fewer pool and landscape installations
|
|
•
|
Decreased purchases of chemicals and supplies
|
|
|
|
•
|
Decreased purchases of impulse items such as
above-ground pools and accessories
|
|
|
|
|
|
Unseasonably early warming trends in spring/late cooling trends in fall
|
•
|
A longer pool and landscape season, thus positively impacting our sales
|
|
(primarily in the northern half of the U.S. and Canada)
|
|
|
|
|
|
|
|
Unseasonably late warming trends in spring/early cooling trends in fall
|
•
|
A shorter pool and landscape season, thus negatively impacting our sales
|
|
(primarily in the northern half of the U.S. and Canada)
|
|
|
Weather Impacts on
2017
and
2016
Results
Unseasonably mild weather benefitted sales in the first quarter of 2017. However, while favorable weather trends early in the year normally have a seasonally larger impact, the comparison to the first quarter of 2016 was especially tough given the weather benefit of the warmer-than-normal weather across nearly all markets in the United States in the first quarter of 2016. For the first quarter of 2017, Texas and surrounding markets experienced record warm temperatures, which when coupled with below-average precipitation for that area, spurred higher sales growth. In two of the more seasonal regions where we operate, below-average temperatures in the North and above-average precipitation in the West negatively impacted our first quarter 2017 sales growth.
19
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term cash needs. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect our liquidity include the following:
|
•
|
cash flows generated from operating activities;
|
|
•
|
the adequacy of available bank lines of credit;
|
|
•
|
acquisitions;
|
|
•
|
scheduled debt payments;
|
|
•
|
dividend payments;
|
|
•
|
capital expenditures;
|
|
•
|
the timing and extent of share repurchases; and
|
|
•
|
the ability to attract long-term capital with satisfactory terms.
|
Our primary capital needs are seasonal working capital requirements and other general corporate purposes, including acquisitions, dividend payments and share repurchases. Our primary sources of working capital are cash from operations supplemented by borrowings, which have historically been sufficient to support our growth and finance acquisitions. The same principle applies to funds used for capital expenditures and share repurchases.
We prioritize our use of cash based on investing in our business, maintaining a prudent debt structure and returning money to our shareholders. Our specific priorities for the use of cash are as follows:
|
•
|
maintenance and new sales center capital expenditures;
|
|
•
|
strategic acquisitions executed opportunistically;
|
|
•
|
payment of cash dividends as and when declared by our Board of Directors (Board);
|
|
•
|
repayment of debt to maintain an average total leverage ratio (as defined below) between 1.5 and 2.0; and
|
|
•
|
repurchases of our common stock under our Board authorized share repurchase program.
|
Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Capital expenditures were 1.4% of net sales in 2016, 1.0% of net sales in 2015 and 0.8% of sales in 2014. For 2017, we project capital expenditures will be approximately 1.5% of net sales as we expand facilities and purchase delivery vehicles to address growth opportunities.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
|
|
Three Months Ended
|
|||||||
|
March 31,
|
||||||||
|
|
2017
|
2016
|
||||||
|
Operating activities
|
$
|
(32,424
|
)
|
$
|
(39,753
|
)
|
||
|
Investing activities
|
(19,119
|
)
|
(15,809
|
)
|
||||
|
Financing activities
|
42,466
|
|
53,115
|
|
||||
Cash
used in
operating activities of
$32.4 million
improved during the first
three
months of
2017
compared to the first
three
months of
2016
primarily due to our net income growth and the favorable impact of the adoption of ASU 2016-09.
Cash used in investing activities for the first
three
months of
2017
increased compared to the first
three
months of
2016
mostly due to our increased investment in capital expenditures for vehicle additions in the first three months of 2017.
Cash provided by financing activities decreased for the first three months of 2017 compared to the first three months of 2016, which reflects a
$70.1 million
decrease in net borrowings, offset by a
$63.1 million
decline in amounts used for share repurchases. Dividends paid to shareholders increased by
$1.9 million
in the first
three
months of
2017
compared to the first
three
months of
2016
.
20
Future Sources and Uses of Cash
Revolving Credit Facility
Our Credit Facility provides for $465.0 million in borrowing capacity under a five-year unsecured revolving credit facility and includes sublimits for the issuance of swingline loans and standby letters of credit. Pursuant to an accordion feature, the aggregate maximum principal amount of the commitments under the Credit Facility may be increased at our request and with agreement by the lenders by up to $75.0 million, to a total of $540.0 million. The Credit Facility matures on November 20, 2020. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At
March 31, 2017
, there was
$361.4 million
outstanding,
$99.6 million
available for borrowing and a $4.0 million standby letter of credit outstanding under the Credit Facility. We utilize interest rate swap contracts and forward-starting interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on the Credit Facility. As of
March 31, 2017
, we have three interest rate swap contracts in place that became effective on
October 19, 2016
. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019.
In July 2016 we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date. This swap contract will convert the Credit Facility’s variable interest rate to a fixed rate of 1.1425% on a notional amount of $150.0 million. The contract becomes effective on November 20, 2019 and terminates on November 20, 2020.
The weighted average effective interest rate for the Credit Facility as of
March 31, 2017
was approximately
2.7%
, excluding commitment fees.
Financial covenants on the Credit Facility include maintenance of a maximum average total leverage ratio and a minimum fixed charge coverage ratio, which are our most restrictive financial covenants. As of
March 31, 2017
, the calculations of these two covenants are detailed below:
|
•
|
Maximum Average Total Leverage Ratio
. On the last day of each fiscal quarter, our average total leverage ratio must be less than 3.25 to 1.00. Average Total Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds divided by the TTM EBITDA (as those terms are defined in the Credit Facility). As of
March 31, 2017
, our average total leverage ratio equaled
1.59
(compared to
1.56
as of December 31, 2016) and the TTM average total debt amount used in this calculation was
$454.3 million
.
|
|
•
|
Minimum Fixed Charge Coverage Ratio
. On the last day of each fiscal quarter, our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense paid or payable in cash plus TTM Rental Expense (as those terms are defined in the Credit Facility). As of
March 31, 2017
, our fixed charge ratio equaled
5.41
(consistent with our December 31, 2016 fixed charge ratio) and TTM Rental Expense was
$53.0 million
.
|
The Credit Facility also limits the declaration and payment of dividends on our common stock to no more than 50% of the preceding year’s Net Income (as defined in the Credit Facility), provided no default or event of default has occurred and is continuing, or would result from the payment of dividends. Additionally, we may declare and pay quarterly dividends notwithstanding that the aggregate amount of dividends paid would be in excess of the 50% limit described above so long as (i) the amount per share of such dividends does not exceed the amount per share paid during the most recent fiscal year in which we were in compliance with the 50% limit and (ii) our Average Total Leverage Ratio is less than 3.00 to 1.00 both immediately before and after giving pro forma effect to such dividends. Further, dividends must be declared and paid in a manner consistent with our past practice.
Under the Credit Facility, we may repurchase shares of our common stock provided no default or event of default has occurred and is continuing, or would result from the repurchase of shares, and our maximum average total leverage ratio (determined on a pro forma basis) is less than 2.50 to 1.00. Other covenants include restrictions on our ability to grant liens, incur indebtedness, make investments, merge or consolidate, and sell or transfer assets. Failure to comply with any of our financial covenants or any other terms of the Credit Facility could result in penalty payments, higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.
21
Receivables Securitization Facility
Our two-year Receivables Facility offers us a lower cost form of financing, with a peak funding capacity of up to $220.0 million between May 1 and June 30, which includes an additional seasonal funding capacity that is available between March 1 and July 31. Other funding capacities range from $65.0 million to $150.0 million throughout the remaining months of the year.
The Receivables Facility provides for the sale of certain of our receivables to a wholly owned subsidiary (the Securitization Subsidiary). The Securitization Subsidiary transfers variable undivided percentage interests in the receivables and related rights to certain third party financial institutions in exchange for cash proceeds, limited to the applicable funding capacities. Upon payment of the receivables by customers, rather than remitting to the financial institutions the amounts collected, we retain such collections as proceeds for the sale of new receivables until payments become due.
The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.
At
March 31, 2017
, there was
$120.0 million
outstanding under the Receivables Facility at a weighted average effective interest rate of
1.7%
, excluding commitment fees.
As of
March 31, 2017
, we were in compliance with all covenants and financial ratio requirements. We believe we will remain in compliance with all covenants and financial ratio requirements throughout the next twelve months. For additional information regarding our debt arrangements, see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8 of our
2016
Annual Report on Form 10-K.
We believe we have adequate availability of capital to fund present operations and the current capacity to finance any working capital needs that may arise. We continually evaluate potential acquisitions and hold discussions with acquisition candidates. If suitable acquisition opportunities arise that would require financing, we believe that we have the ability to finance any such transactions.
As of
April 24, 2017
,
$46.6 million
of the current Board authorized amount under our share repurchase program remained available. We expect to repurchase additional shares on the open market from time to time depending on market conditions. We plan to fund these repurchases with cash provided by operations and borrowings under the credit and receivables facilities.
CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:
|
•
|
those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and
|
|
•
|
those for which changes in the estimate or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.
|
Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our
2016
Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). The FASB also issued subsequent amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods beginning after December 15, 2017, which for us will be in the period beginning January 1, 2018. We are continuing to perform our detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard.
|
•
|
Under the new standard, revenue will be recognized when we satisfy our performance obligation by transferring promised goods or services to our customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics. Since our individual sales transactions are very similar in nature, we anticipate applying the guidance to all transactions as a portfolio. We expect that the effects of applying this guidance to the portfolio would not differ materially from applying the guidance to individual performance obligations within that portfolio.
|
22
|
•
|
Our revenue recognition will be achieved upon delivery of goods as there are no other promised services as part of our contracts with customers. Because shipping and handling activities are performed before the customer obtains control of the goods, we do not consider these activities to be a promised service to the customer. Rather shipping and handling are activities to fulfill our promise to transfer the goods. Product warranties do not constitute a performance obligation for us, as products are warrantied directly by the manufacturer.
|
|
•
|
To determine the amount of consideration which we expect to be entitled in exchange for transferring promised goods, we will consider if variable consideration exists. We will consider the terms of the contract and our customary business practices to determine the transaction price. We have reviewed our pricing policies and strategies including marketing, loyalty and incentive programs for the purpose of determining whether we have any variable or non-cash consideration. No material items were noted. In addition, we will review our current accounting policies related to returns, price concessions and volume discounts. We will continue our accounting policy election to exclude from revenue all amounts we collect and remit to governmental authorities.
|
|
•
|
The majority of our sales transactions do not require any additional performance obligation after delivery, therefore we do not have multiple performance obligations for which we will have to allocate the transaction price.
|
|
•
|
We expect to recognize revenue upon delivery to the customer as our performance obligation will be satisfied at that point in time.
|
We expect to apply the guidance using the cumulative-effect transition method. Based on our analysis performed to date, we do not expect the adoption of ASU 2014-09 will have a material impact on our financial position or results of operations but will result in additional disclosures regarding our revenue recognition policies.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. The adoption of ASU 2016-02 will have a significant impact on our Consolidated Balance Sheets as we will be recording a right-of-use asset and corresponding liability for our current operating leases. We are still in the process of evaluating the effect that ASU 2016-02 will have on our results of operations and related disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
, which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,
which may change the classification of certain cash receipts and cash payments on an entity’s statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. Current guidance for these topics is principles-based, requiring judgment in application and creating diversity in practice. ASU 2016-15 will be effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted for all entities. We have not elected to early adopt this guidance. We are currently evaluating the effect that ASU 2016-15 will have on our financial position and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (commonly referred to as Step 2 under the current guidance). Rather, the measurement of a goodwill impairment charge will be based on the excess of a reporting unit’s carrying value over its fair value (Step 1 under the current guidance). ASU 2017-04 will be effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for annual and interim goodwill impairment tests beginning after January 1, 2017. We are currently evaluating the effect that ASU 2017-04 will have on our financial position, results of operations and related disclosures.
23
Interest Rate Risk
There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended
December 31, 2016
that affect fiscal
2017
.
Currency Risk
There have been no material changes from what we reported in our Annual Report on Form 10-K for the year ended
December 31, 2016
that affect fiscal
2017
.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Act). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As of
March 31, 2017
, management, including the CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that as of
March 31, 2017
, our disclosure controls and procedures were effective.
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Based on the most recent evaluation, we have concluded that no change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
24
From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters. While the outcome of any litigation is inherently unpredictable, based on currently available facts we do not believe that the ultimate resolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.
There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
The table below summarizes the repurchases of our common stock in the
first
quarter of
2017
:
|
Period
|
Total Number
of Shares
Purchased
(1)
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased as Part of Publicly
Announced Plan
(2)
|
Maximum Approximate
Dollar Value of Shares That May Yet be Purchased
Under the Plan
(3)
|
||||||||||
|
January 1 - 31, 2017
|
—
|
|
$
|
—
|
|
—
|
|
$
|
46,574,308
|
|
||||
|
February 1 - 28, 2017
|
23,798
|
|
$
|
114.50
|
|
—
|
|
$
|
46,574,308
|
|
||||
|
March 1 - 31, 2017
|
—
|
|
$
|
—
|
|
—
|
|
$
|
46,574,308
|
|
||||
|
Total
|
23,798
|
|
$
|
114.50
|
|
—
|
|
|
||||||
|
(1)
|
These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were
23,798
shares surrendered for this purpose in the
first
quarter of
2017
.
|
|
(2)
|
In
February 2016
, our Board authorized an additional
$150.0 million
under our share repurchase program for the repurchase of shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions.
|
|
(3)
|
As of
April 24, 2017
,
$46.6 million
of the authorized amount remained available under our current share repurchase program.
|
Exhibits filed as part of this report are listed in the Index to Exhibits appearing on page 27.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
April 27, 2017
.
|
|
|
POOL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Mark W. Joslin
|
|
|
|
Mark W. Joslin
|
|
Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant
|
||
26
INDEX TO EXHIBITS
|
|
|
|
|
|
|
Incorporated by Reference
|
||||
|
No.
|
|
Description
|
|
Filed with this
Form 10-Q
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
3.1
|
|
Restated Certificate of Incorporation of the Company.
|
|
|
|
10-Q
|
|
000-26640
|
|
8/9/2006
|
|
3.2
|
|
Restated Composite Bylaws of the Company.
|
|
|
|
8-K
|
|
000-26640
|
|
12/20/2012
|
|
4.1
|
|
Form of certificate representing shares of common stock of the Company.
|
|
|
|
8-K
|
|
000-26640
|
|
5/19/2006
|
|
|
Certification by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
|
|
|
Certification by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
|
|
|
Certification by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
|
|
101.INS
|
+
|
XBRL Instance Document
|
|
X
|
|
|
|
|
|
|
|
101.SCH
|
+
|
XBRL Taxonomy Extension Schema Document
|
|
X
|
|
|
|
|
|
|
|
101.CAL
|
+
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
101.DEF
|
+
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
101.LAB
|
+
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
101.PRE
|
+
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
X
|
|
|
|
|
|
|
+ Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
|
1.
|
Consolidated Statements of Income for the
three
months ended
March 31, 2017
and
March 31, 2016
;
|
|
2.
|
Consolidated Statements of Comprehensive Income for the
three
months ended
March 31, 2017
and
March 31, 2016
;
|
|
3.
|
Consolidated Balance Sheets at
March 31, 2017
,
December 31, 2016
and
March 31, 2016
;
|
|
4.
|
Condensed Consolidated Statements of Cash Flows for the
three
months ended
March 31, 2017
and
|
March 31, 2016
; and
|
5.
|
Notes to Consolidated Financial Statements.
|
27
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Summary Of Significant Accounting PoliciesNote 2 Earnings Per ShareNote 3 AcquisitionsNote 4 Fair Value Measurements and Interest Rate SwapsNote 5 DebtNote 6 Redeemable Noncontrolling InterestItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits