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
September 30, 2018
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
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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
October 25, 2018
, there were
40,263,296
shares of common stock outstanding.
POOL CORPORATION
Form 10-Q
For the Quarter Ended
September 30, 2018
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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Nine Months Ended
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||||||||||||||
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September 30,
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September 30,
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||||||||||||||
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2018
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2017
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2018
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2017
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Net sales
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$
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811,311
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$
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743,401
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$
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2,455,015
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$
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2,278,005
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Cost of sales
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576,308
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526,795
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1,745,283
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1,618,114
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Gross profit
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235,003
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216,606
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709,732
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659,891
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Selling and administrative expenses
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142,666
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134,678
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421,812
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392,779
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Operating income
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92,337
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81,928
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287,920
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267,112
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Interest and other non-operating expenses, net
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4,931
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4,009
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14,449
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11,608
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Income before income taxes and equity earnings
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87,406
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77,919
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273,471
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255,504
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Income tax provision
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18,206
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29,179
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55,989
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89,951
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Equity earnings in unconsolidated investments, net
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61
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43
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167
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121
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Net income
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69,261
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48,783
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217,649
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165,674
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Net loss attributable to noncontrolling interest
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—
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—
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—
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294
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Net income attributable to Pool Corporation
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$
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69,261
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$
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48,783
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$
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217,649
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$
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165,968
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Earnings per share:
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Basic
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$
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1.71
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$
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1.20
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$
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5.39
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$
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4.04
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Diluted
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$
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1.66
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$
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1.16
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$
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5.20
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$
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3.89
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Weighted average shares outstanding:
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Basic
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40,422
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40,659
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40,416
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41,065
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Diluted
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41,797
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42,207
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41,831
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42,691
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Cash dividends declared per common share
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$
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0.45
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$
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0.37
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$
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1.27
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$
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1.05
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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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Nine Months Ended
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||||||||||||||
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September 30,
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September 30,
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||||||||||||||
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2018
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2017
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2018
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2017
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Net income
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$
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69,261
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$
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48,783
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$
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217,649
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$
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165,674
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Other comprehensive income (loss):
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Foreign currency translation adjustments
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690
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1,842
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(2,188
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)
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6,432
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Change in unrealized gains and losses on interest rate swaps, net of change in taxes of $(177), $(181), $(636) and $(432)
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530
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283
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1,908
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675
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Total other comprehensive income (loss)
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1,220
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2,125
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(280
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)
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7,107
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Comprehensive income
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70,481
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50,908
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217,369
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172,781
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Comprehensive loss attributable to noncontrolling interest
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—
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—
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—
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74
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Comprehensive income attributable to Pool Corporation
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$
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70,481
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$
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50,908
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$
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217,369
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$
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172,855
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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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September 30,
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September 30,
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December 31,
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||||||||||
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2018
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2017
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2017
(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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35,693
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$
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36,398
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$
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29,940
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Receivables, net
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90,775
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90,142
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76,597
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Receivables pledged under receivables facility
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196,998
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172,654
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119,668
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Product inventories, net
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609,983
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484,287
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536,474
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Prepaid expenses and other current assets
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19,457
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14,832
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19,569
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Total current assets
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952,906
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798,313
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782,248
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Property and equipment, net
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109,942
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103,880
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100,939
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Goodwill
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189,029
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189,024
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189,435
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Other intangible assets, net
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12,305
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13,206
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13,223
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Equity interest investments
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1,163
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1,168
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1,127
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Other assets
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18,413
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16,333
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14,090
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Total assets
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$
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1,283,758
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$
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1,121,924
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$
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1,101,062
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Liabilities and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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204,706
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$
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209,062
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$
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245,249
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Accrued expenses and other current liabilities
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75,639
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87,887
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65,482
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Short-term borrowings and current portion of long-term debt
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9,343
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8,609
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10,835
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Total current liabilities
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289,688
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305,558
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321,566
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Deferred income taxes
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24,802
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27,244
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24,585
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Long-term debt, net
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571,360
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555,964
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508,815
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||||||
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Other long-term liabilities
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25,170
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22,614
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22,950
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Total liabilities
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911,020
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911,380
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877,916
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Stockholders’ equity:
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Common stock, $0.001 par value; 100,000,000 shares authorized;
40,479,584, 40,122,935
and 40,2
12,477 shares issued and
outstanding at September 30, 2018, September 30, 2017 and
December 31, 2017, respectively
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40
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40
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40
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Additional paid-in capital
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449,276
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|
420,946
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426,750
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Retained deficit
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(68,943
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)
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(202,693
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)
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(196,316
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)
|
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Accumulated other comprehensive loss
|
(7,635
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)
|
(7,749
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)
|
(7,328
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)
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Total stockholders’ equity
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372,738
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210,544
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223,146
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||||||
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Total liabilities and stockholders’ equity
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$
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1,283,758
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$
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1,121,924
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$
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1,101,062
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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)
|
|
Nine Months Ended
|
|||||||
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September 30,
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||||||||
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2018
|
2017
|
||||||
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Operating activities
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|
||||||
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Net income
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$
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217,649
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$
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165,674
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|
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Adjustments to reconcile net income to net cash provided by operating activities:
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|
||||||
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Depreciation
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19,499
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17,947
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Amortization
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1,408
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1,132
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Share-based compensation
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9,793
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9,496
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Equity earnings in unconsolidated investments, net
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(167
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)
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(121
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)
|
||||
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Other
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3,584
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1,074
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Changes in operating assets and liabilities, net of effects of acquisitions:
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||||||
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Receivables
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(93,911
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)
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(90,204
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)
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Product inventories
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(80,142
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)
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9,057
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Prepaid expenses and other assets
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143
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(1,523
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)
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||||
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Accounts payable
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(40,143
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)
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(27,328
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)
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Accrued expenses and other current liabilities
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13,547
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26,816
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Net cash provided by operating activities
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51,260
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112,020
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Investing activities
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Acquisition of businesses, net of cash acquired
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(578
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)
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(6,879
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)
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Purchases of property and equipment, net of sale proceeds
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(27,976
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)
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(37,709
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)
|
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Other investments, net
|
—
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4
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||||
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Net cash used in investing activities
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(28,554
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)
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(44,584
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)
|
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Financing activities
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||||||
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Proceeds from revolving line of credit
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820,967
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918,338
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Payments on revolving line of credit
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(813,996
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)
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(857,609
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)
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Proceeds from asset-backed financing
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193,400
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156,600
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Payments on asset-backed financing
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(138,400
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)
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(97,800
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)
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||||
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Proceeds from short-term borrowings and current portion of long-term debt
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16,118
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|
25,001
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||||
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Payments on short-term borrowings and current portion of long-term debt
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(17,610
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)
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(17,497
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)
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||||
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Payments of deferred and contingent acquisition consideration
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(265
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)
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(199
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)
|
||||
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Payments of deferred financing costs
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(8
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)
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(909
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)
|
||||
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Purchase of redeemable noncontrolling interest
|
—
|
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(2,573
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)
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||||
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Proceeds from stock issued under share-based compensation plans
|
12,732
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|
8,647
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|
||||
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Payments of cash dividends
|
(51,371
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)
|
(43,165
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)
|
||||
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Purchases of treasury stock
|
(38,906
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)
|
(141,580
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)
|
||||
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Net cash used in financing activities
|
(17,339
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)
|
(52,746
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)
|
||||
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Effect of exchange rate changes on cash and cash equivalents
|
386
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|
(248
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)
|
||||
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Change in cash and cash equivalents
|
5,753
|
|
14,442
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|
||||
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Cash and cash equivalents at beginning of period
|
29,940
|
|
21,956
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||||
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Cash and cash equivalents at end of period
|
$
|
35,693
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$
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36,398
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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.
All of our subsidiaries are wholly owned. From July 31, 2014 to June 29, 2017, we owned a
60%
interest in Pool Systems Pty. Ltd. (PSL), an Australian company. Our ownership percentage constituted a controlling interest in the acquired company, which required us to consolidate PSL’s financial position and results of operations from the date of acquisition. On June 29, 2017, we purchased the remaining
40%
interest in PSL. Thus, we have continued to consolidate PSL, but there is no longer a separate noncontrolling interest reported on our Consolidated Statements of Income, nor Redeemable noncontrolling interest reported on our Consolidated Balance Sheets.
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
2017
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
2017
Annual Report on Form 10-K. The results for our
three and nine
month periods ended
September 30, 2018
are not necessarily indicative of the expected results for our fiscal year ending
December 31, 2018
.
Newly Adopted Accounting Pronouncements
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09,
Revenue - Revenue from Contracts with Customers,
and all the related amendments, which are also codified into Accounting Standards Codification (ASC) 606. We elected to adopt this guidance using the modified retrospective method. The adoption of this standard did not have a material impact on our financial position or results of operations. We did not restate prior period information for the effects of the new standard, nor did we adjust the opening balance of our retained deficit to account for the implementation of the new requirements of this standard. We do not expect the adoption of this guidance to have a material effect on our results of operations in future periods.
Under the new standard, we recognize a sale when a customer obtains control of the product, and we record the amount that reflects the consideration we expect to receive in exchange for such product. As under the previous accounting guidance, we continue to recognize a sale when a customer picks up product at any sales center, when we deliver product to their premises or job sites via our trucks or when we present the product to a third-party carrier. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to defer each period.
Our adoption of this guidance also resulted in balance sheet reclassifications for recording our estimate of customer returns. ASC 606 requires the recognition of a current liability for the gross amount of estimated returns and a current asset for the cost of the related products. This change did not have a material impact on our Consolidated Balance Sheet as of
September 30, 2018
.
On January 1, 2018, we adopted ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
. 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. Our adoption of ASU 2016-15 had no impact on our statement of cash flows as our previous classifications related to contingent consideration payments and distributions from equity method investees is consistent with the requirements of ASU 2016-15.
5
Revenue Recognition
We consider our distribution of products to represent one reportable revenue stream. Our products are similar in nature, and our revenue recognition policy is the same across our distribution networks. Our customers share similar characteristics and purchase products across all categories. We recognize revenue when our customers take control of our products. Customers may obtain our products by picking them up at any sales center location or through delivery to their premises or job sites by our trucks or third-party carriers. For customer pick-ups or deliveries by our trucks, control passes when our customers receive our products. For third-party deliveries, control passes when we present our products to the third-party carriers. We include shipping and handling fees billed to customers as freight out income within net sales.
We measure revenue as the amount of consideration we expect to receive in exchange for transferring our products. Consideration may vary due to volume incentives and expected customer returns. We offer volume incentives to some of our customers and account for these incentives as a reduction of sales. We estimate the amount of volume incentives earned based on our estimate of cumulative sales for the fiscal year relative to our customers’ progress toward achieving minimum purchase requirements. We record customer returns, including those associated with customer early buy programs, as a reduction of sales. Based on available information related to our customers’ returns, we record an allowance for estimated returns, which historically has not been material. We regularly review our marketing programs, coupons and customary business practices to determine if any variable consideration exists under ASC 606. Other items that we record as reductions to sales include cash discounts, pricing adjustments and credit card fees related to customer payments.
The majority of our sales transactions do not contain additional performance obligations after delivery; therefore, we do not have multiple performance obligations for which to allocate the transaction price. We elected to continue to recognize shipping and handling costs associated with outbound freight in selling and administrative expenses.
We report sales net of tax amounts that we collect from our customers and remit to governmental authorities. These tax amounts may include, but are not limited to, sales, use, value-added and some excise taxes.
Income Taxes
Both the Tax Cuts and Jobs Act (the Act), enacted by Congress in December 2017, and ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which we adopted on January 1, 2017, impacted our provision for income taxes by substantially reducing our income tax rate in the first
nine
months of
2018
compared to the first
nine
months of
2017
.
As of
September 30, 2018
, we have not completed our accounting for all of the tax effects of the Act. We filed our federal income tax return in the third quarter of
2018
, and our return to provision adjustment, which addresses the provisional tax benefit we recorded under Staff Accounting Bulletin (SAB) 118 at December 31, 2017, was not material. We have considered the impact of the statutory changes from the Act on our estimated effective tax rate for 2018, including reasonable estimates of those provisions effective for the 2018 tax year. The Act also created a new requirement that certain income earned by foreign subsidiaries, global intangible low-taxed income (GILTI), be included in the gross income of their U.S. shareholder. Entities may make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or recognize such taxes as a current-period expense when incurred. We elected to treat the tax effect of GILTI as a current-period expense when incurred.
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of nonqualified stock options and the lapse of restrictions on restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. We record all excess tax benefits as a component of income tax benefit or expense in the income statement in the period in which stock options are exercised or restrictions on awards lapse. We recorded excess tax benefits of
$13.9 million
in the first
nine
months of
2018
compared to
$7.7 million
in the same period of
2017
.
Retained Deficit
We account for the retirement of treasury shares as a reduction of retained earnings (deficit). As of
September 30, 2018
, 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
$1,278.2 million
and cumulative dividends of
$477.1 million
.
6
Accumulated Other Comprehensive Loss
The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
|
September 30,
|
December 31,
|
||||||||||
|
2018
|
2017
|
2017
|
|||||||||
|
Foreign currency translation adjustments
|
$
|
(9,692
|
)
|
$
|
(7,370
|
)
|
$
|
(7,478
|
)
|
||
|
Unrealized gains (losses) on interest rate swaps, net of tax
(1)
|
2,057
|
|
(379
|
)
|
150
|
|
|||||
|
Accumulated other comprehensive loss
|
$
|
(7,635
|
)
|
$
|
(7,749
|
)
|
$
|
(7,328
|
)
|
||
|
(1)
|
In February 2018, the Financial Accounting Standards Board (FASB) issued guidance that allows entities the option to reclassify the tax effects related to items in accumulated other comprehensive income (loss) to retained earnings (deficit) if deemed to be stranded in accumulated other comprehensive income (loss) due to U.S. tax reform. We do not have any material amounts stranded in Accumulated other comprehensive loss as a result of U.S. tax reform.
|
7
Recent Accounting Pronouncements Pending Adoption
The following table summarizes the recent accounting pronouncements that we plan to adopt in future periods:
|
Standard
|
Description
|
Effective Date
|
Effect on Financial Statements and Other Significant Matters
|
|
ASU 2016-02,
Leases
|
Requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. The guidance is required to be applied using a modified retrospective approach.
|
Annual periods beginning after December 15, 2018
|
We believe the adoption of ASU 2016-02 will significantly increase assets and liabilities on our Consolidated Balance Sheets as we record a right-of-use asset and corresponding liability for each of our existing operating leases. We are currently testing all of the information we have gathered to properly account for the leases under the new standard and to quantify the balance sheet impacts. We are also implementing the related process changes and testing internal controls. Based on our current lease portfolio, we do not expect a material impact on our results of operations and cash flows. Upon adoption, we expect to apply the package of practical expedients available within the new standard, which is intended to provide some relief to issuers. We will also have expanded disclosures upon adoption of this new accounting pronouncement.
|
8
|
Standard
|
Description
|
Effective Date
|
Effect on Financial Statements and Other Significant Matters
|
|
ASU 2017-12,
Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
|
Eliminates the requirement to separately measure and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the change in the fair value of the hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item.
|
Annual periods beginning after December 15, 2018
|
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.
|
|
ASU 2016-13,
Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
|
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. The guidance must be applied using a cumulative-effect transition method.
|
Annual periods beginning after December 15, 2019
|
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.
|
|
ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
|
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). This guidance should be applied prospectively.
|
Annual and interim impairment tests performed in periods beginning after December 15, 2019
|
We are currently evaluating the effect this will have on our financial position, results of operations and related disclosures.
|
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.
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.
9
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
|
Nine Months Ended
|
||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
|
Net income
|
$
|
69,261
|
|
$
|
48,783
|
|
$
|
217,649
|
|
$
|
165,674
|
|
||||
|
Net loss attributable to noncontrolling interest
|
—
|
|
—
|
|
—
|
|
294
|
|
||||||||
|
Net income attributable to Pool Corporation
|
$
|
69,261
|
|
$
|
48,783
|
|
|
$
|
217,649
|
|
|
$
|
165,968
|
|
||
|
Weighted average shares outstanding:
|
|
|
||||||||||||||
|
Basic
|
40,422
|
|
40,659
|
|
40,416
|
|
41,065
|
|
||||||||
|
Effect of dilutive securities:
|
|
|
||||||||||||||
|
Stock options and employee stock purchase plan
|
1,375
|
|
1,548
|
|
1,415
|
|
1,626
|
|
||||||||
|
Diluted
|
41,797
|
|
42,207
|
|
|
41,831
|
|
|
42,691
|
|
||||||
|
Earnings per share:
|
|
|
||||||||||||||
|
Basic
|
$
|
1.71
|
|
$
|
1.20
|
|
|
$
|
5.39
|
|
|
$
|
4.04
|
|
||
|
Diluted
|
$
|
1.66
|
|
$
|
1.16
|
|
|
$
|
5.20
|
|
|
$
|
3.89
|
|
||
|
Anti-dilutive stock options excluded from diluted earnings per share computations
|
—
|
|
108
|
|
—
|
|
108
|
|
||||||||
In January 2018, we acquired Tore Pty. Ltd. (doing business as Pool Power), a wholesale distributor of pool and spa equipment in South Australia, with one distribution center in Adelaide, Australia.
In December 2017, we acquired the distribution assets of Chem Quip, Inc. (Chem Quip), a wholesale distributor of residential and commercial swimming pool equipment, chemicals and supplies, with five distribution locations in central and northern California.
In December 2017, we acquired Kripsol Intermark Malaga S.L. (Intermark), a swimming pool equipment and supplies distributor, with one location in southern Spain.
In October 2017, we acquired E-Grupa, a national swimming pool equipment and supplies distributor, with one location in Croatia.
We have completed our acquisition accounting for these acquisitions, subject to adjustments for standard holdback provisions per the terms of the purchase agreements, which are not material. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.
In July 2017, we acquired New Star Holdings Pty. Ltd. (doing business as Newline Pool Products), a swimming pool equipment and supplies distributor, with one distribution center in Brisbane, Australia.
In April 2017, we acquired the distribution assets of Lincoln Equipment, Inc. (doing business as Lincoln Aquatics), a national distributor of equipment and supplies to commercial and institutional swimming pool customers, with one location in California.
We have completed our acquisition accounting for these acquisitions. These acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate.
10
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 contract and our contingent consideration liabilities (in thousands):
|
|
Fair Value at September 30,
|
|||||||
|
2018
|
2017
|
|||||||
|
Level 2
|
||||||||
|
Unrealized gains on interest rate swaps
|
$
|
3,542
|
|
$
|
1,201
|
|
||
|
Unrealized losses on interest rate swaps
|
—
|
|
1,791
|
|
||||
|
Level 3
|
||||||||
|
Contingent consideration liabilities
|
$
|
1,431
|
|
$
|
1,924
|
|
||
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 designated these swaps as cash flow hedges, and to the extent effective 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 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. As amended, these swap contracts terminate on November 20, 2019. In the first
nine
months of
2018
, we recognized a benefit of
$1.5 million
as a result of ineffectiveness for the period. These amounts were recorded in Interest and other non-operating expenses, net on our Consolidated Statements of Income.
11
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%
|
|||
Upon amendment of the original hedge agreements, we were required to freeze the amounts related to the changes in the fair values of these swap contracts in Accumulated other comprehensive loss. On
September 30, 2018
, these balances became fully amortized. In the first
nine
months of
2018
, we recorded expense of
$1.4 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
September 30, 2018
, 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 on the Consolidated Balance Sheets to Interest and other non-operating expenses, net on the Consolidated Statements of Income. These amounts were not material in the
nine
month periods ended
September 30, 2018
and
September 30, 2017
.
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 at that time. 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 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
September 30, 2018
, our Consolidated Balance Sheets reflected
$0.6 million
in Accrued expenses and other current liabilities and
$0.8 million
in Other long-term liabilities for contingent consideration related to future payouts for our acquisitions of The Melton Corporation (Melton), which we acquired in November 2015, Metro Irrigation Supply Company Ltd. (Metro), which we acquired in April 2016, and Newline Pool Products (Newline), which we acquired in July 2017.
In the first
nine
months of
2018
, we paid approximately
$0.2 million
in contingent consideration to Melton based on 2017 results. Since the acquisition dates, we have recorded immaterial adjustments to our original estimates based on the calculated 2017 and 2018 payouts related to the respective fiscal years and estimated future payouts considering results through September 2018. Adjustments to the fair value of contingent consideration are recognized in earnings in the period in which we determine that the fair value changed. As of
September 30, 2018
, we have determined that the contingent consideration liability was in a range of acceptable estimates for all applicable periods.
12
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). The carrying value of long-term debt approximates fair value (Level 3 inputs). 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 (in thousands):
|
|
September 30,
|
|||||||
|
|
2018
|
2017
|
||||||
|
Variable rate debt
|
||||||||
|
Short-term borrowings
|
$
|
321
|
|
$
|
—
|
|
||
|
Current portion of long-term debt:
|
||||||||
|
Australian credit facility
|
9,022
|
|
8,609
|
|
||||
|
Short-term borrowings and current portion of long-term debt
|
9,343
|
|
8,609
|
|
||||
|
Long-term portion:
|
|
|
||||||
|
Revolving credit facility
|
417,410
|
|
415,277
|
|
||||
|
Receivables securitization facility
|
155,000
|
|
142,300
|
|
||||
|
Less: financing costs, net
|
1,050
|
|
1,613
|
|
||||
|
Long-term debt, net
|
571,360
|
|
555,964
|
|
||||
|
Total debt
|
$
|
580,703
|
|
$
|
564,573
|
|
||
Our accounts receivable 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.
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 on our Consolidated Balance Sheets as we intend and have the ability 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.
You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our
2017
Annual Report on Form 10-K.
For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.
13
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, future dividend payments 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,” “intend,” “believe,” “will likely result,” “outlook,” “plan,” “project,” “should” and other words and expressions of similar meaning. In addition, forward-looking statements and estimates regarding the effects of the Tax Cuts and Jobs Act, which are based on our current interpretation of this legislation and on reasonable estimates, may change as a result of new guidance issued by regulators or changes in our estimates.
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, excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks detailed in our
2017
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
We produced strong third quarter results thanks to our operational execution and a continuation of the elevated demand trends for discretionary pool and irrigation related products. Despite bouts of severe weather, with Hurricane Florence impacting the Carolinas, elevated rainfall in Texas and wildfires in California, we achieved favorable results.
Net sales increased
9%
to
$811.3 million
in the
third
quarter of
2018
compared to
$743.4 million
in the
third
quarter of
2017
. Base business sales grew
8%
over the same quarter of
2017
, with demand for discretionary products such as building materials and our expanded commercial product offerings driving our sales growth.
Gross profit increased
8%
to
$235.0 million
in the
third
quarter of
2018
from
$216.6 million
in the same period of
2017
. Base business gross profit improved
8%
over the
third
quarter of
2017
. Gross profit as a percentage of net sales (gross margin) was
29.0%
for the
third
quarter of
2018
compared to
29.1%
for the
third
quarter of 2017. This decline in gross margin mainly reflects differences in product mix.
Selling and administrative expenses (operating expenses) increased
6%
to
$142.7 million
in the
third
quarter of
2018
compared to the
third
quarter of
2017
, with base business operating expenses up
5%
over the comparable
2017
period. We attribute the expense growth to variable labor and freight costs together with higher facility costs. As a percentage of net sales, base business operating expenses declined to
17.4%
for the
third
quarter of
2018
compared to 18.0% for the
third
quarter of
2017
.
Operating income for the
third
quarter of
2018
increased to
$92.3 million
, up
13%
compared to the same period in
2017
. Operating income as a percentage of net sales (operating margin) was
11.4%
for the
third
quarter of
2018
and
11.0%
for the same period in
2017
, while base business operating margin was
11.5%
for the
third
quarter of
2018
and
11.2%
for the same period in
2017
.
Both Accounting Standards Update (ASU) 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which we adopted on January 1, 2017, and U.S. tax reform enacted in December 2017 impacted our income tax provision for the
third
quarter of
2018
. Our effective tax rate was
20.8%
and
37.4%
for the
third
quarters of
2018
and
2017
, respectively. We recorded a
$3.3 million
benefit from ASU 2016-09 in the quarter ended
September 30, 2018
compared to a benefit of
$0.3 million
realized in the same period in
2017
. Excluding the benefits from ASU 2016-09, our effective tax rate was
24.6%
and
37.9%
for the
third
quarters of
2018
and
2017
, respectively. As previously reported, we expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2018 and future periods to approximate 25.5%, which is a reduction compared to our historical rate of approximately 38.5% due to the impact of the recent U.S. tax reform.
14
Net income attributable to Pool Corporation was
$69.3 million
in the
third
quarter of
2018
compared to
$48.8 million
in the
third
quarter of
2017
. Earnings per share increased
43%
to a record
$1.66
per diluted share for the
three months
ended
September 30, 2018
compared to
$1.16
per diluted share for the same period in
2017
. The reduction in our effective tax rate from
37.4%
to
20.8%
as discussed above reduced our income tax expense by approximately
$14.5 million
, or
$0.35
per diluted share, in the
third
quarter of
2018
.
References to product line and product category data throughout this report 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.
Financial Position and Liquidity
As of
September 30, 2018
, total net receivables, including pledged receivables, increased
10%
compared to
September 30, 2017
, primarily reflecting sales growth. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 30.2 days at
September 30, 2018
and 29.8 days at
September 30, 2017
. Our allowance for doubtful accounts balance was
$5.4 million
at
September 30, 2018
and
$4.1 million
at
September 30, 2017
.
Net inventory levels grew
26%
compared to levels at
September 30, 2017
. The increase of
$125.7 million
between periods reflects significant inventory purchases we made in the
third
quarter of
2018
in advance of greater-than-normal vendor price increases, as well as purchases needed to support normal business growth, and the addition of inventories from acquisitions. The inventory reserve was
$8.8 million
at
September 30, 2018
and
$7.8 million
at
September 30, 2017
. Our inventory turns, as calculated on a trailing four quarters basis, was 3.4 times at
September 30, 2018
and 3.5 times at
September 30, 2017
.
Total debt outstanding at
September 30, 2018
was
$580.7 million
, up
3%
compared to total debt at
September 30, 2017
.
Current Trends and Outlook
For a detailed discussion of trends through
2017
, see the Current Trends and Outlook section of Management’s Discussion and Analysis included in Item 7 of our
2017
Annual Report on Form 10-K.
We project base business sales growth of approximately 7% for
2018
. After a slower than normal start in March and April, activity returned to expected levels through the end of the third quarter with the main limitation being customer capacity. We believe that customer labor constraints and reduced work days due to higher rainfall in selected markets created a build up of demand in the second and third quarters, which will lead to ongoing sales growth in the fourth quarter of
2018
as demand remains strong. Due to product cost increases imposed by our vendors, which we have passed on to our customers, we also expect inflation to be closer to 2% in the fourth quarter of
2018
versus the historical average of 1% to 2%. We believe this factor will benefit our gross margin in the fourth quarter of
2018
and expect our full year
2018
gross margin to be similar to
2017
.
We continue to expect base business operating expenses will grow at a rate that will enable us to achieve operating margin improvement of approximately 20 to 40 basis points for the full year
2018
compared to
2017
. Through September, our operating margin has improved 20 basis points year to date and should improve to the upper end of our 20 to 40 basis points range by the end of the fourth quarter. Changes in non-executive performance-based compensation programs that impact the timing of our expense recognition resulted in higher compensation expense in the first half of
2018
, primarily in the second quarter. We believe our fourth quarter results should particularly benefit from this timing change, as we observed some benefit in the third quarter. Inflationary pressure related to labor, fuel and freight continues to rise, but we expect our productivity plans will allow these cost increases to better correlate with sales volume growth and improve our operating leverage.
As discussed further in Results of Operations, our average outstanding debt for the
nine
months ended
September 30, 2018
increased 14% over the same period last year, and given the increase in the 30-Day LIBOR, our effective interest rate increased approximately 60 basis points between periods. Based on these trends, we expect Interest and other non-operating expenses, net will increase roughly $2.0 million in the fourth quarter of
2018
compared to the same period in
2017
.
In 2018, we expect our effective tax rate to approximate 25.5%, which is a reduction from our historical rate of approximately 38.5%, both of which exclude the impact of ASU 2016-09. We have not finalized our accounting for the effects of tax reform; however, our estimated effective tax rate is based on reasonable estimates for the effects from tax reform at this time.
15
Our effective tax rate is dependent on our results of operations and may change if actual results differ materially from our current expectations, particularly any significant changes in our geographic mix. Due to ASU 2016-09 requirements, 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. We recorded a
$13.9 million
benefit from ASU 2016-09 for the
nine
months ended
September 30, 2018
. Additional tax benefits could be recognized related to stock option exercises in 2018 from grants that expire in years after 2018, for which we have not included any expected benefits in our guidance. The estimated impact related to ASU 2016-09 is subject to several assumptions which can vary significantly, including our estimated share price and the periods in which our employees will exercise vested stock options.
We have updated our 2018 earnings guidance range to $5.58 to $5.78 per diluted share from $5.50 to $5.70 per diluted share, which includes the tax benefits realized from ASU 2016-09 in the first
nine
months of
2018
.
Given the timing changes in our inventory purchasing activity in
2018
, we expect that cash provided by operations will be less than net income for the
2018
fiscal year. We expect an offsetting benefit in 2019 as our purchasing activity normalizes. We anticipate that we may use approximately $100.0 million to $150.0 million in cash for share repurchases in
2018
.
RESULTS OF OPERATIONS
As of
September 30, 2018
, we conducted operations through
360
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
|
Nine Months Ended
|
|||||||||||
|
September 30,
|
September 30,
|
|||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
||||||||
|
Net sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost of sales
|
71.0
|
|
70.9
|
|
71.1
|
|
71.0
|
|
||||
|
Gross profit
|
29.0
|
|
29.1
|
|
28.9
|
|
29.0
|
|
||||
|
Operating expenses
|
17.6
|
|
18.1
|
|
17.2
|
|
17.2
|
|
||||
|
Operating income
|
11.4
|
|
11.0
|
|
11.7
|
|
11.7
|
|
||||
|
Interest and other non-operating expenses, net
|
0.6
|
|
0.5
|
|
0.6
|
|
0.5
|
|
||||
|
Income before income taxes and equity earnings
|
10.8
|
%
|
10.5
|
%
|
11.1
|
%
|
11.2
|
%
|
||||
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 acquisitions in
2018
and
2017
in our consolidated results since the acquisition dates.
16
Three Months Ended
September 30, 2018
Compared to Three Months Ended
September 30, 2017
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
|
|||||||||||||||||||||
|
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
||||||||||||||||||
|
Net sales
|
$
|
800,971
|
|
$
|
738,391
|
|
$
|
10,340
|
|
$
|
5,010
|
|
$
|
811,311
|
|
$
|
743,401
|
|
||||||
|
Gross profit
|
231,841
|
|
215,078
|
|
3,162
|
|
1,528
|
|
235,003
|
|
216,606
|
|
||||||||||||
|
Gross margin
|
28.9
|
%
|
29.1
|
%
|
30.6
|
%
|
30.5
|
%
|
29.0
|
%
|
29.1
|
%
|
||||||||||||
|
Operating expenses
|
139,392
|
|
132,663
|
|
3,274
|
|
2,015
|
|
142,666
|
|
134,678
|
|
||||||||||||
|
Expenses as a % of net sales
|
17.4
|
%
|
18.0
|
%
|
31.7
|
%
|
40.2
|
%
|
17.6
|
%
|
18.1
|
%
|
||||||||||||
|
Operating income (loss)
|
92,449
|
|
82,415
|
|
(112
|
)
|
(487
|
)
|
92,337
|
|
81,928
|
|
||||||||||||
|
Operating margin
|
11.5
|
%
|
11.2
|
%
|
(1.1
|
)%
|
(9.7
|
)%
|
11.4
|
%
|
11.0
|
%
|
||||||||||||
In our calculation of base business results, we have excluded the following acquisitions for the periods identified:
|
Acquired
|
Acquisition
Date
|
Net
Sales Centers
Acquired
|
Periods
Excluded
|
|||
|
Pool Power
(1)
|
January 2018
|
1
|
July - September 2018
|
|||
|
Chem Quip
(1)
|
December 2017
|
5
|
July - September 2018
|
|||
|
Intermark
|
December 2017
|
1
|
July - September 2018
|
|||
|
E-Grupa
|
October 2017
|
1
|
July - September 2018
|
|||
|
Newline Pool Products
|
July 2017
|
1
|
July - September 2018 and
July - September 2017
|
|||
|
Lincoln Aquatics
(1)
|
April 2017
|
1
|
July 2018 and July 2017
|
|||
|
(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
nine
months of
2018
:
|
December 31, 2017
|
351
|
|
|
Acquired location
|
1
|
|
|
New locations
|
9
|
|
|
Consolidated location
|
(1
|
)
|
|
September 30, 2018
|
360
|
|
17
Net Sales
|
|
Three Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Net sales
|
$
|
811.3
|
|
$
|
743.4
|
|
$
|
67.9
|
|
9%
|
||||
Net sales increased
9%
in the
third
quarter of
2018
compared to the
third
quarter of
2017
, with base business sales up
8%
for the period. Despite severe weather events, with Hurricane Florence impacting the Carolinas, elevated rainfall in Texas and wildfires in California, we achieved favorable results.
The following factors benefited our sales (listed in order of estimated magnitude):
|
•
|
strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
|
|
•
|
market share gains, particularly in building materials and commercial products (see discussion below); and
|
|
•
|
inflationary product cost increases (estimated at approximately 1%).
|
We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the
third
quarter of
2018
, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately
8%
compared to the same period last year. These products collectively represented approximately
25%
of net sales for the period. Sales of building materials grew
16%
compared to the
third
quarter of
2017
and represented approximately
11%
of net sales in the
third
quarter of
2018
.
Sales to customers who service large commercial swimming pools 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. Sales to these customers represented approximately
4%
of our consolidated net sales for the
third
quarter of
2018
and increased
9%
compared to the
third
quarter of
2017
.
Gross Profit
|
|
Three Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Gross profit
|
$
|
235.0
|
|
$
|
216.6
|
|
$
|
18.4
|
|
8%
|
||||
|
Gross margin
|
29.0
|
%
|
29.1
|
%
|
|
|
||||||||
The slight decline in gross margin between periods primarily reflects minor product mix differences.
Operating Expenses
|
|
Three Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Operating expenses
|
$
|
142.7
|
|
$
|
134.7
|
|
$
|
8.0
|
|
6%
|
||||
|
Operating expenses as a % of net sales
|
17.6
|
%
|
18.1
|
%
|
|
|
||||||||
Operating expenses increased
6%
in the
third
quarter of
2018
compared to the
third
quarter of
2017
, with base business operating expenses up approximately
5%
compared to the same period last year. This increase reflects variable labor and freight costs together with higher facility costs.
18
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the
third
quarter of
2018
increased
$0.9 million
compared to the
third
quarter of
2017
. The increase mostly reflects higher interest expense on our debt. Our weighted average effective interest rate increased to
3.3%
for the
third
quarter of
2018
from
2.7%
for the
third
quarter of
2017
on higher average outstanding debt of
$566.2 million
versus
$535.5 million
for the respective periods.
Income Taxes
Our effective income tax rate was
20.8%
for the three months ended
September 30, 2018
and
37.4%
for the three months ended
September 30, 2017
. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the
third
quarter of
2018
. We recorded a
$3.3 million
benefit from ASU 2016-09 in the quarter ended
September 30, 2018
compared to a benefit of
$0.3 million
realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was
24.6%
and
37.9%
for the
third
quarters of
2018
and
2017
, respectively, mostly reflecting the lower corporate income tax rate enacted as part of U.S. tax reform.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation increased
42%
to
$69.3 million
in the
third
quarter of
2018
compared to the
third
quarter of
2017
. Earnings per diluted share increased to
$1.66
for the
third
quarter of
2018
versus
$1.16
per diluted share for the comparable
2017
period. The reduction in our effective tax rate from
37.4%
to
20.8%
as discussed above reduced our income tax expense by approximately
$14.5 million
, or
$0.35
per diluted share, in the
third
quarter of
2018
.
19
Nine Months Ended
September 30, 2018
Compared to Nine Months Ended
September 30, 2017
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)
|
Nine Months Ended
|
Nine Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
||||||||||||||||||
|
Net sales
|
$
|
2,419,766
|
|
$
|
2,266,386
|
|
$
|
35,249
|
|
$
|
11,619
|
|
$
|
2,455,015
|
|
$
|
2,278,005
|
|
||||||
|
Gross profit
|
699,058
|
|
656,433
|
|
10,674
|
|
3,458
|
|
709,732
|
|
659,891
|
|
||||||||||||
|
Gross margin
|
28.9
|
%
|
29.0
|
%
|
30.3
|
%
|
29.8
|
%
|
28.9
|
%
|
29.0
|
%
|
||||||||||||
|
Operating expenses
|
409,791
|
|
388,299
|
|
12,021
|
|
4,480
|
|
421,812
|
|
392,779
|
|
||||||||||||
|
Expenses as a % of net sales
|
16.9
|
%
|
17.1
|
%
|
34.1
|
%
|
38.6
|
%
|
17.2
|
%
|
17.2
|
%
|
||||||||||||
|
Operating income (loss)
|
289,267
|
|
268,134
|
|
(1,347
|
)
|
(1,022
|
)
|
287,920
|
|
267,112
|
|
||||||||||||
|
Operating margin
|
12.0
|
%
|
11.8
|
%
|
(3.8
|
)%
|
(8.8
|
)%
|
11.7
|
%
|
11.7
|
%
|
||||||||||||
In our calculation of base business results, we have excluded the following acquisitions for the periods identified:
|
Acquired
|
Acquisition
Date
|
Net
Sales Centers
Acquired
|
Periods
Excluded
|
|||
|
Pool Power
(1)
|
January 2018
|
1
|
January - September 2018
|
|||
|
Chem Quip
(1)
|
December 2017
|
5
|
January - September 2018
|
|||
|
Intermark
|
December 2017
|
1
|
January - September 2018
|
|||
|
E-Grupa
|
October 2017
|
1
|
January - September 2018
|
|||
|
Newline Pool Products
|
July 2017
|
1
|
January - September 2018 and
July - September 2017
|
|||
|
Lincoln Aquatics
(1)
|
April 2017
|
1
|
January - July 2018 and
May - July 2017
|
|||
|
(1)
|
We acquired certain distribution assets of each of these companies.
|
For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2017, please refer to the discussion under the heading
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017.
20
Net Sales
|
|
Nine Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Net sales
|
$
|
2,455.0
|
|
$
|
2,278.0
|
|
$
|
177.0
|
|
8%
|
||||
Net sales for the first
nine
months of
2018
increased
8%
compared to the same period last year, with most of this growth resulting from the
7%
improvement in base business sales. We started the year off strong, but multiple storms in March hindered our customers’ ability to complete projects, and cold temperatures and snow in our seasonal markets delayed pool openings through April. Our seasonal markets finally warmed up in May
2018
, allowing us to serve the pent-up demand and generate solid sales growth through the remainder of the second and third quarters, despite several occurrences of severe weather in the third quarter of
2018
.
The following factors benefited our sales (listed in order of estimated magnitude):
|
•
|
strong demand for discretionary products, as evidenced by improvements in sales growth rates for product offerings such as building materials and equipment (see discussion below);
|
|
•
|
market share gains, particularly in building materials and commercial products (see discussion below);
|
|
•
|
sales growth of 8% from irrigation products which represented 9% of net sales; and
|
|
•
|
inflationary product cost increases (estimated at approximately 1%).
|
We believe that sales growth rates for certain product offerings, such as building materials and equipment, evidence increased spending in traditionally discretionary areas, such as pool construction, pool remodeling and equipment upgrades. In the first
nine
months of
2018
, sales for equipment, which includes swimming pool heaters, pumps, lights and filters, increased approximately
8%
compared to the same period last year. These products collectively represented
26%
of net sales in the first
nine
months of
2018
. Sales of building materials grew
12%
compared to the first
nine
months of
2017
and represented approximately
12%
of net sales in the first nine months of
2018
.
Sales to customers who service large commercial swimming pools 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. Sales to these customers represented approximately
5%
of our consolidated net sales in the first
nine
months of
2018
and increased 10% compared to the same period in
2017
.
Gross Profit
|
|
Nine Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Gross profit
|
$
|
709.7
|
|
$
|
659.9
|
|
$
|
49.8
|
|
8%
|
||||
|
Gross margin
|
28.9
|
%
|
29.0
|
%
|
|
|
||||||||
The slight decline in gross margin between periods primarily reflects minor product mix differences.
Operating Expenses
|
|
Nine Months Ended
|
|
||||||||||||
|
September 30,
|
||||||||||||||
|
(in millions)
|
2018
|
2017
|
Change
|
|||||||||||
|
Operating expenses
|
$
|
421.8
|
|
$
|
392.8
|
|
$
|
29.0
|
|
7%
|
||||
|
Operating expenses as a % of net sales
|
17.2
|
%
|
17.2
|
%
|
|
|
||||||||
For the first
nine
months of
2018
, operating expenses increased
7%
over the same period last year, with base business operating expenses up
6%
. Higher costs related to labor, technology, facilities and vehicles contributed to this increase.
21
Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the first
nine
months of
2018
increased
$2.8 million
compared to the same period last year. The increase mostly reflects higher interest expense on our debt. Our weighted average effective interest rate increased to
3.2%
for the first
nine
months of
2018
from
2.6%
for the same period of
2017
on higher average outstanding debt of
$569.5 million
versus
$501.0 million
for the respective periods.
Income Taxes
Our effective income tax rate was
20.5%
for the
nine
months ended
September 30, 2018
compared to
35.2%
for the
nine
months ended
September 30, 2017
. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the first
nine
months of
2018
. We recorded a
$13.9 million
benefit from ASU 2016-09 for the
nine
months ended
September 30, 2018
compared to the
$7.7 million
benefit realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was
25.5%
and
38.2%
for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively, mostly reflecting the lower corporate income tax rate enacted as part of U.S. tax reform.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation increased
31%
to
$217.6 million
for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
. Earnings per diluted share increased to
$5.20
for the
nine
months ended
September 30, 2018
versus
$3.89
per diluted share for the
nine
months ended
September 30, 2017
. The reduction in our effective tax rate from
35.2%
to
20.5%
as discussed above reduced our income tax expense by approximately
$40.3 million
, or
$0.96
per diluted share, in the first
nine
months of
2018
.
22
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
2017
, we generated approximately
62%
of our net sales and
83%
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, second and third quarters of 2018, the four quarters of 2017 and the fourth quarter of 2016. 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)
|
2018
|
2017
|
2016
|
|||||||||||||||||||||||||||||
|
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
||||||||||||||||||||||||
|
Statement of Income Data
|
||||||||||||||||||||||||||||||||
|
Net sales
|
$
|
811,311
|
|
$
|
1,057,804
|
|
$
|
585,900
|
|
$
|
510,183
|
|
$
|
743,401
|
|
$
|
988,163
|
|
$
|
546,441
|
|
$
|
445,235
|
|
||||||||
|
Gross profit
|
235,003
|
|
308,655
|
|
166,073
|
|
145,398
|
|
216,606
|
|
289,664
|
|
153,621
|
|
127,777
|
|
||||||||||||||||
|
Operating income
|
92,337
|
|
162,042
|
|
33,541
|
|
17,259
|
|
81,928
|
|
154,186
|
|
30,998
|
|
9,743
|
|
||||||||||||||||
|
Net income
|
69,261
|
|
117,049
|
|
31,339
|
|
25,665
|
|
48,783
|
|
94,620
|
|
22,270
|
|
2,572
|
|
||||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||||||||||||||
|
Total receivables, net
|
$
|
287,773
|
|
$
|
404,415
|
|
$
|
314,596
|
|
$
|
196,265
|
|
$
|
262,796
|
|
$
|
370,285
|
|
$
|
290,019
|
|
$
|
166,151
|
|
||||||||
|
Product inventories, net
|
609,983
|
|
606,583
|
|
703,793
|
|
536,474
|
|
484,287
|
|
542,805
|
|
647,884
|
|
486,116
|
|
||||||||||||||||
|
Accounts payable
|
204,706
|
|
300,232
|
|
467,795
|
|
245,249
|
|
209,062
|
|
273,309
|
|
465,928
|
|
230,728
|
|
||||||||||||||||
|
Total debt
|
580,703
|
|
657,120
|
|
568,110
|
|
519,650
|
|
564,573
|
|
553,480
|
|
490,217
|
|
438,042
|
|
||||||||||||||||
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.
23
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
2018
and
2017
Results
California wildfires, large amounts of rain throughout Texas, and Hurricane Florence in the Carolinas all impacted our sales in the
third
quarter of
2018
. Likewise, severe storms in the third quarter of 2017, particularly Hurricanes Irma and Harvey, hindered our sales growth in Florida and Texas last year, although Texas largely recovered by the end of September 2017. In the third quarter of 2018, the West experienced record heat and below average rainfall, while temperatures were also above average in the central United States and the Midwest, but each experienced above average rainfall. These weather patterns were consistent with that experienced in the third quarter of last year, resulting in overall similar weather comparisons.
While warming trends started out slow in the second quarter of
2018
, the unfavorable weather comparisons turned around by the end of the quarter. With the exception of Florida, where it rained most of May and into June, and California, which generally experienced a cooler-than-usual spring,
2018
results in the last two months of the second quarter benefited from the warm weather throughout the country and helped relieve the effects of the slow start from earlier in the year. April
2018
sales struggled as much of the country experienced cold to record cold temperatures this year, in contrast to warm to record warm temperatures in 2017.
Storm activity, as well as cooler-than-normal temperatures late in the first quarter of
2018
, inhibited our first quarter sales growth. Much of the Atlantic Coast experienced below-average temperatures in March of 2018, which caused pools to open later than in 2017, while greater storm activity in Texas and the central United States and above average precipitation in California delayed construction activity during the first quarter of 2018. In contrast, unseasonably mild weather benefited sales in the first quarter of 2017, as Texas and surrounding markets experienced record warm temperatures.
24
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;
|
|
•
|
the quality of our receivables;
|
|
•
|
acquisitions;
|
|
•
|
dividend payments;
|
|
•
|
capital expenditures;
|
|
•
|
changes in income tax laws and regulations;
|
|
•
|
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 principles apply 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, including a modest amount of debt, and returning cash to our shareholders through dividends and share repurchases. Our specific priorities for the use of cash are as follows:
|
•
|
capital expenditures primarily for maintenance and growth of our sales center structure, technology-related investments and fleet vehicles;
|
|
•
|
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.
|
Capital expenditures were 1.4% of net sales in 2017 as we expanded facilities and purchased vehicles to address growth opportunities. Capital expenditures were 1.4% of net sales in 2016 and 1.0% of net sales in 2015. Over the last five years, capital expenditures have averaged roughly 1.0% of net sales. Going forward, we project capital expenditures will approximate this average.
Sources and Uses of Cash
The following table summarizes our cash flows (in thousands):
|
|
Nine Months Ended
|
|||||||
|
September 30,
|
||||||||
|
|
2018
|
2017
|
||||||
|
Operating activities
|
$
|
51,260
|
|
$
|
112,020
|
|
||
|
Investing activities
|
(28,554
|
)
|
(44,584
|
)
|
||||
|
Financing activities
|
(17,339
|
)
|
(52,746
|
)
|
||||
Cash
provided by
operating activities
decreased
$60.8 million
during the first
nine
months of
2018
compared to the first
nine
months of
2017
primarily due to timing differences from pre-price increase inventory purchases in 2018, which should benefit future periods’ cash flows as the inventory is sold. In 2018, we increased our inventory purchases in advance of greater‑than‑normal vendor price increases, which negatively impacted operating cash flow, but should positively impact operating income for the remainder of 2018 and into fiscal 2019.
25
Cash
used in
investing activities for the first
nine
months of
2018
decreased
compared to the first
nine
months of
2017
primarily due to earlier-than-normal vehicle additions to our fleet in the first
nine
months of last year as well as the Lincoln Aquatics acquisition that occurred in the second quarter of 2017.
Cash
used in
financing activities
decreased
for the first
nine
months of
2018
compared to the first
nine
months of
2017
, which reflects a
$102.7 million
decline in share repurchases offset by a
$66.6 million
decrease in amounts provided by net borrowings.
Future Sources and Uses of Cash
Revolving Credit Facility
Our Credit Facility provides for $750.0 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 $825.0 million. The Credit Facility matures on September 29, 2022. We intend to use the Credit Facility for general corporate purposes, for future share repurchases and to fund future growth initiatives.
At
September 30, 2018
, there was
$417.4 million
outstanding, a
$4.8 million
standby letter of credit outstanding and
$327.8 million
available for borrowing 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
September 30, 2018
, we had 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 at that time. 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
September 30, 2018
was approximately
3.2%
, 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. As of
September 30, 2018
, 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
September 30, 2018
, our average total leverage ratio equaled
1.68
(compared to
1.72
as of June 30, 2018) and the TTM average total debt amount used in this calculation was
$577.8 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
September 30, 2018
, our fixed charge ratio equaled
5.44
(compared to
5.40
as of June 30, 2018) and TTM Rental Expense was
$56.7 million
.
|
On January 1, 2019, we will adopt ASU 2016-02,
Leases,
which will require that we record most of our leases on our balance sheets, but we expect to recognize expenses in a manner similar to current guidance. Our Credit Facility agreement requires that we calculate our financial covenants by excluding the effects of the new standard. We do not expect ASU 2016-02 will have a material impact on our financial covenant calculations.
26
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.
Receivables Securitization Facility
Our two-year accounts receivable securitization facility (the Receivables Facility) offers us a lower cost form of financing, with a peak funding capacity of up to $255.0 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 $80.0 million to $220.0 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
September 30, 2018
, there was
$155.0 million
outstanding under the Receivables Facility at a weighted average effective interest rate of
3.0%
, excluding commitment fees.
Compliance and Future Availability
As of
September 30, 2018
, we believe we were in compliance with all covenants and financial ratio requirements under our Credit Facility and our Receivables Facility. 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
2017
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
October 25, 2018
,
$186.1 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.
27
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
2017
Annual Report on Form 10-K. We have not changed these policies from those previously disclosed.
Recent Accounting Pronouncements
See Note 1 of “Notes to Consolidated Financial Statements,” included in Item 1 of this Form 10-Q for detail.
Interest Rate Risk
There have been no material changes during the
nine
months ended
September 30, 2018
from what we reported in our
2017
Annual Report on Form 10-K. For additional information on our interest rate risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our
2017
Annual Report on Form 10-K.
Currency Risk
There have been no material changes during the
nine
months ended
September 30, 2018
from what we reported in our
2017
Annual Report on Form 10-K. For additional information on our currency risk, refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Part II, Item 7A. in our
2017
Annual Report on Form 10-K.
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
September 30, 2018
, 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
September 30, 2018
, 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.
28
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
2017
Annual Report on Form 10-K.
The table below summarizes the repurchases of our common stock in the
third
quarter of
2018
:
|
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)
|
||||||||||
|
July 1 - 31, 2018
|
198
|
|
$
|
153.25
|
|
—
|
|
$
|
218,340,678
|
|
||||
|
August 1 - 31, 2018
|
—
|
|
$
|
—
|
|
—
|
|
$
|
218,340,648
|
|
||||
|
September 1 - 30, 2018
|
—
|
|
$
|
—
|
|
—
|
|
$
|
218,340,678
|
|
||||
|
Total
|
198
|
|
$
|
153.25
|
|
—
|
|
|
||||||
|
(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. All
198
shares were surrendered for this purpose in the
third
quarter of
2018
.
|
|
(2)
|
In
May 2018
, our Board authorized an additional
$200.0 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
October 25, 2018
,
$186.1 million
of the authorized amount remained available under our current share repurchase program.
|
29
Exhibits filed as part of this report are listed below.
|
|
|
|
|
|
|
Incorporated by Reference
|
||||
|
No.
|
|
Description
|
|
Filed/ Furnished with this
Form 10-Q
|
|
Form
|
|
File No.
|
|
Date Filed
|
|
|
Restated Certificate of Incorporation of the Company.
|
|
|
|
10-Q
|
|
000-26640
|
|
8/9/2006
|
|
|
|
Amended and Restated Bylaws of the Company.
|
|
|
|
8-K
|
|
000-26640
|
|
12/20/2012
|
|
|
|
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 furnished 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 and nine
months ended
September 30, 2018
and
September 30, 2017
;
|
|
2.
|
Consolidated Statements of Comprehensive Income for the
three and nine
months ended
September 30, 2018
and
September 30, 2017
;
|
|
3.
|
Consolidated Balance Sheets at
September 30, 2018
,
December 31, 2017
and
September 30, 2017
;
|
|
4.
|
Condensed Consolidated Statements of Cash Flows for the
nine
months ended
September 30, 2018
and
|
September 30, 2017
; and
|
5.
|
Notes to Consolidated Financial Statements.
|
30
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
October 30, 2018
.
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|
|
POOL CORPORATION
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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By:
|
/s/ Mark W. Joslin
|
|
|
|
Mark W. Joslin
|
|
Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant
|
||
31
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 DebtItem 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