Pool Corporation Reports Record 2018 Results and Provides 2019 Earnings Guidance

Globe Newswire 14-Feb-2019 7:00 AM

Highlights include:

  • Record annual sales of $3.0 billion for 2018, up 8% from 2017
  • 2018 operating margin of 10.5%, up 30 bps from 2017
  • Record 2018 diluted EPS of $5.62, an increase of 25% over 2017 including a $0.36 ASU tax benefit
  • 2019 diluted EPS guidance range of $6.05 to $6.35 including an estimated $0.18 ASU tax benefit

COVINGTON, La., Feb. 14, 2019 (GLOBE NEWSWIRE) -- Pool Corporation (NASDAQ/GSM:POOL) today announced fourth quarter and full year 2018 results.

"We delivered solid results in 2018.  Despite a later than normal start to the season, and an earlier end, we produced sales growth of 8% in 2018 on top of sales growth of 8% in 2017.  Our focus on organic growth, process discipline and value creation allowed us to convert this top line growth into operating income growth of 10% over last year," commented Peter D. Arvan, President and CEO.

Net sales increased 8% to a record high of $3.00 billion for the year ended December 31, 2018 compared to $2.79 billion in 2017.  Base business sales increased 7% fueled by market share gains and continued demand for discretionary products such as building materials, lighting and pool equipment.  We also delivered double-digit sales growth for commercial pool products in North America, where demand and market share gains were strong.

Gross profit reached a record $870.2 million for the year ended December 31, 2018, an 8% increase over gross profit of $805.3 million in 2017.  Gross margin grew 10 basis points to 29.0% in 2018 compared to 28.9% in 2017.  Execution of our supply chain management initiatives in a higher than normal industry inflationary environment in the back half of the year contributed to our results.

Selling and administrative expenses (operating expenses) increased 7% to $556.3 million in 2018, up from $520.9 million in 2017, with base business operating expenses up 5% over last year.  The increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses, as well as greater facility-related costs.  Lower performance-based compensation expense partially offset these increases.

Operating income for the year increased 10% to $313.9 million, up from $284.4 million in 2017.  Operating margin increased to 10.5% in 2018 compared to 10.2% in 2017, with a 40 basis point increase in base business operating margin.

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 in 2018 and 2017.  Our effective tax rate was 20.1% in 2018 and 29.0% in 2017.  We recorded a $15.3 million, or $0.36 per diluted share, benefit from ASU 2016-09 for the year ended December 31, 2018 compared to a benefit of $12.6 million, or $0.24 per diluted share, realized in the same period in 2017.  Excluding the benefits from ASU 2016-09, our effective tax rate was 25.3% in 2018 and 33.7% in 2017.  We expect our annual effective tax rate (excluding the benefit from ASU 2016-09) for 2019 will approximate 25.5%, which is a reduction compared to our historical rate of approximately 38.5% due to the impact of U.S. tax reform.

Net income attributable to Pool Corporation increased 22% to a record $234.5 million in 2018 compared to $191.6 million in 2017.  Earnings per share increased 25% to a record $5.62 per diluted share compared to $4.51 per diluted share in 2017.  Excluding the $0.36 per diluted share impact of ASU 2016-09 in 2018 and $0.24 in 2017, diluted earnings per share increased 23% over last year.  Adjusted EBITDA (as defined in the addendum to this release) increased 10% to $353.4 million in 2018 compared to $322.2 million in 2017 and was 11.8% of net sales in 2018 compared to 11.6% of net sales in 2017.

On the balance sheet at December 31, 2018, total net receivables, including pledged receivables, increased 6% over the prior year.  Inventory levels grew 25% to $672.6 million compared to $536.5 million last year.  In the second half of 2018, we increased our inventory purchases by approximately $100 million in advance of greater than normal vendor price increases, which negatively impacted 2018 operating cash flow, but should positively impact operating income and cash flow in early 2019.  Total debt outstanding increased $147.1 million, or 28% over last year's balance, primarily to fund the inventory buys and share repurchases.

Cash provided by operations was $118.7 million in 2018, compared to $175.3 million in 2017.  The decline in cash provided by operations reflects timing differences from the pre-price increase inventory purchases discussed above, partially offset by cash savings from a lower tax rate as a result of tax reform.  We should see a benefit to our 2019 cash flows as this inventory is sold.  Our return on invested capital (as defined in the addendum to this release) for 2018 was 27.7%, an improvement over 2017 return on invested capital of 24.7%.

Net sales increased 6% to $543.1 million in the fourth quarter of 2018 on top of 15% growth achieved in the fourth quarter of 2017.  In addition to the difficult comparison from prior year, fourth quarter 2018 sales were impacted by cooler and wetter weather in Texas and our seasonal markets.  Gross margin increased 100 basis points to 29.5% in the fourth quarter of 2018 due to our supply chain management initiatives to address the vendor price increases discussed above.  Operating income in the fourth quarter of 2018 grew 50% to $26.0 million compared to $17.3 million in the same period last year.  Operating margin increased 140 basis points in the quarter, including a 160 basis point increase in base business operating margin.   Net income attributable to Pool Corporation in the fourth quarter of 2018 was $16.8 million compared to $25.7 million in the comparable 2017 period, which benefited more from the favorable income tax adjustments.  Earnings per diluted share was $0.41 in the fourth quarter of 2018, or $0.37 excluding the $0.04 per diluted share impact from ASU 2016-09, compared to $0.62, or $0.50 excluding the $0.12 impact from ASU 2016-09, for the same period last year.  Last year's fourth quarter net income also included a tax benefit of $12.0 million related to U.S. tax reform enacted in the fourth quarter of 2017.

"We look forward to executing our strategic plan in 2019.  Our customers are reporting solid backlogs, and our team is focused on growth and value creation with our customers, while continuing to deliver solid operating leverage through capacity creation and execution.  Based on these factors, we expect earnings for 2019 will be in the range of $6.05 to $6.35 per diluted share, including an estimated $0.18 favorable impact from ASU 2016-09," said Arvan.

Based on our December 31, 2018 stock price, we estimate that we have approximately $7.2 million in unrealized excess tax benefits related to stock options that will expire in the second quarter of 2019 and restricted stock awards that will vest in the first half of 2019, adding $0.18 in diluted earnings per share over the first and second quarters.  We have included this benefit in our earnings guidance; however, additional tax benefits could be recognized related to stock option exercises in 2019 from grants that expire in years after 2019, for which we have not included any expected benefits.

POOLCORP is the world's largest wholesale distributor of swimming pool and related backyard products.  As of December 31, 2018, POOLCORP operates 364 sales centers in North America, Europe, South America and Australia, through which it distributes more than 180,000 national brand and private label products to roughly 120,000 wholesale customers.  For more information, please visit www.poolcorp.com.

This news release includes "forward-looking" statements that involve risks and uncertainties that are generally identifiable through the use of words such as "believe," "expect," "intend," "plan," "estimate," "project," "should" and similar expressions and include projections of earnings.  The forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements speak only as of the date of this release, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.  Actual results may differ materially due to a variety of 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 POOLCORP's 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) as updated by POOLCORP's subsequent filings with the SEC.

Curtis J. Scheel
Director of Investor Relations
985.801.5341
curtis.scheel@poolcorp.com

POOL CORPORATION
Consolidated Statements of Income
 (In thousands, except per share data)

  Three Months Ended   Year Ended
  December 31,   December 31,
  2018   2017   2018   2017 (1)
               
Net sales $ 543,082     $ 510,183     $ 2,998,097     $ 2,788,188  
Cost of sales 382,640     364,785     2,127,924     1,982,899  
Gross profit 160,442     145,398     870,173     805,289  
Percent 29.5 %   28.5 %   29.0 %   28.9 %
               
Selling and administrative expenses 134,472     128,139     556,284     520,918  
Operating income 25,970     17,259     313,889     284,371  
Percent 4.8 %   3.4 %   10.5 %   10.2 %
               
Interest and other non-operating expenses, net 6,448     3,581     20,896     15,189  
Income before income taxes and equity earnings 19,522     13,678     292,993     269,182  
Provision for income taxes (2) 2,786     (11,969 )   58,774     77,982  
Equity earnings in unconsolidated investments, net 75     18     242     139  
Net income 16,811     25,665     234,461     191,339  
Net loss attributable to noncontrolling interest             294  
Net income attributable to Pool Corporation $ 16,811     $ 25,665     $ 234,461     $ 191,633  
               
Earnings per share:              
Basic $ 0.42     $ 0.64     $ 5.82     $ 4.69  
Diluted $ 0.41     $ 0.62     $ 5.62     $ 4.51  
Weighted average shares outstanding:              
Basic 40,002     40,164     40,311     40,838  
Diluted 41,274     41,715     41,693     42,449  
               
Cash dividends declared per common share $ 0.45     $ 0.37     $ 1.72     $ 1.42  
                               

(1)       Derived from audited financial statements.
(2)     Our income tax provision for the fourth quarter of 2017 reflects a benefit realized related to the enactment of the Tax Cuts and Jobs Act.

POOL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)

  December 31,   December 31,    Change
  2018
  2017 (1)
  $   %
Assets              
Current assets:              
Cash and cash equivalents $ 16,358     $ 29,940     $ (13,582 )   (45 )%
Receivables, net (2) 69,493     76,597     (7,104 )   (9 )
Receivables pledged under receivables facility 138,308     119,668     18,640     16  
Product inventories, net (3) 672,579     536,474     136,105     25  
Prepaid expenses and other current assets 18,506     19,569     (1,063 )   (5 )
Total current assets 915,244     782,248     132,996     17  
               
Property and equipment, net 106,964     100,939     6,025     6  
Goodwill 188,472     189,435     (963 )   (1 )
Other intangible assets, net 12,004     13,223     (1,219 )   (9 )
Equity interest investments 1,213     1,127     86     8  
Other assets 16,974     14,090     2,884     20  
Total assets $ 1,240,871     $ 1,101,062     $ 139,809     13 %
               
Liabilities and stockholders' equity              
Current liabilities:              
Accounts payable $ 237,835     $ 245,249     $ (7,414 )   (3 )%
Accrued expenses and other current liabilities 58,607     65,482     (6,875 )   (10 )
Short-term borrowings and current portion of long-term debt 9,168     10,835     (1,667 )   (15 )
Total current liabilities 305,610     321,566     (15,956 )   (5 )
               
Deferred income taxes 29,399     24,585     4,814     20  
Long-term debt, net 657,593     508,815     148,778     29  
Other long-term liabilities 24,679     22,950     1,729     8  
Total liabilities 1,017,281     877,916     139,365     16  
Total stockholders' equity 223,590     223,146     444      
Total liabilities and stockholders' equity $ 1,240,871     $ 1,101,062     $ 139,809     13 %
                             

(1)       Derived from audited financial statements.
(2)       The allowance for doubtful accounts was $6.2 million at December 31, 2018 and $3.9 million at December 31, 2017.
(3)       The inventory reserve was $7.7 million at December 31, 2018 and $6.3 million at December 31, 2017.

POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)

  Year Ended
December 31,
       
  2018
  2017 (1)
  Change
Operating activities                      
Net income $ 234,461     $ 191,339     $ 43,122  
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation 26,122     24,157     1,965  
Amortization 1,793     1,568     225  
Share-based compensation 12,874     12,482     392  
Equity earnings in unconsolidated investments, net (242 )   (139 )   (103 )
Net losses (gains) on foreign currency transactions 560     (171 )   731  
Other (2) 8,928     (3,976 )   12,904  
Changes in operating assets and liabilities, net of effects of acquisitions:          
Receivables (14,371 )   (21,903 )   7,532  
Product inventories (142,170 )   (35,783 )   (106,387 )
Prepaid expenses and other assets 1,018     (4,096 )   5,114  
Accounts payable (6,567 )   5,077     (11,644 )
Accrued expenses and other current liabilities (3,750 )   6,756     (10,506 )
Net cash provided by operating activities 118,656     175,311     (56,655 )
           
Investing activities          
Acquisition of businesses, net of cash acquired (2,578 )   (12,834 )   10,256  
Purchase of property and equipment, net of sale proceeds (31,580 )   (39,390 )   7,810  
Other investments, net     4     (4 )
Net cash used in investing activities (34,158 )   (52,220 )   18,062  
           
Financing activities          
Proceeds from revolving line of credit 1,138,195     1,067,868     70,327  
Payments on revolving line of credit (998,503 )   (1,011,977 )   13,474  
Proceeds from asset-backed financing 198,400     161,600     36,800  
Payments on asset-backed financing (189,900 )   (145,100 )   (44,800 )
Proceeds from short-term borrowings and current portion of long-term debt 17,127     27,333     (10,206 )
Payments on short-term borrowings and current portion of long-term debt (18,793 )   (17,603 )   (1,190 )
Payments of deferred acquisition consideration (661 )   (324 )   (337 )
Payments of deferred financing costs (106 )   (1,104 )   998  
Purchase of redeemable non-controlling interest     (2,573 )   2,573  
Proceeds from stock issued under share-based compensation plans 13,569     11,466     2,103  
Payments of cash dividends (69,430 )   (58,029 )   (11,401 )
Purchases of treasury stock (187,469 )   (146,006 )   (41,463 )
Net cash used in financing activities (97,571 )   (114,449 )   16,878  
Effect of exchange rate changes on cash and cash equivalents (509 )   (658 )   149  
Change in cash and cash equivalents (13,582 )   7,984     (21,566 )
Cash and cash equivalents at beginning of period 29,940     21,956     7,984  
Cash and cash equivalents at end of period $ 16,358     $ 29,940     $ (13,582 )
                       

(1)     Derived from audited financial statements.
(2)      The Tax Cuts and Jobs Act resulted in an additional $12.0 million of net income in 2017, all of which was non-cash.

ADDENDUM

Base Business

The following tables break out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):

(Unaudited) Base Business   Excluded   Total
(in thousands) Three Months Ended   Three Months Ended   Three Months Ended
  December 31,   December 31,   December 31,
  2018   2017   2018   2017   2018   2017
Net sales $ 537,396     $ 509,791     $ 5,686     $ 392     $ 543,082     $ 510,183  
                       
Gross profit 158,576     145,305     1,866     93     160,442     145,398  
Gross margin 29.5 %   28.5 %   32.8 %   23.7 %   29.5 %   28.5 %
                       
Operating expenses 131,749     127,912     2,723     227     134,472     128,139  
Expenses as a % of net sales 24.5 %   25.1 %   47.9 %   57.9 %   24.8 %   25.1 %
                       
Operating income (loss) 26,827     17,393     (857 )   (134 )   25,970     17,259  
Operating margin 5.0 %   3.4 %   (15.1 )%   (34.2 )%   4.8 %   3.4 %

 

(Unaudited) Base Business   Excluded   Total
(in thousands) Year Ended   Year Ended   Year Ended
  December 31,   December 31,   December 31,
  2018   2017   2018   2017   2018   2017
Net sales $ 2,957,006     $ 2,776,103     $ 41,091     $ 12,085     $ 2,998,097     $ 2,788,188  
                       
Gross profit 857,590     801,716     12,583     3,573     870,173     805,289  
Gross margin 29.0 %   28.9 %   30.6 %   29.6 %   29.0 %   28.9 %
                       
Operating expenses 541,462     516,183     14,822     4,735     556,284     520,918  
Expenses as a % of net sales 18.3 %   18.6 %   36.1 %   39.2 %   18.6 %   18.7 %
                       
Operating income (loss) 316,128     285,533     (2,239 )   (1,162 )   313,889     284,371  
Operating margin 10.7 %   10.3 %   (5.4 )%   (9.6 )%   10.5 %   10.2 %
                                   

We have excluded the results of the following acquisitions from base business for the periods identified:

Acquired   Acquisition
Date
  Net
Sales Centers
Acquired
  Periods
Excluded
Turf & Garden, Inc. (1)   November 2018   4   November - December 2018
Tore Pty. Ltd. (Pool Power) (1)   January 2018   1   January - December 2018
Chem Quip, Inc. (1)   December 2017   5   December 2017 and January - December 2018
Intermark   December 2017   1   December 2017 and January - December 2018
E-Grupa   October 2017   1   October - December 2017 and January - December 2018
New Star Holdings Pty. Ltd.   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.

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 centers during 2018.

December 31, 2017 351  
Acquired locations 5  
New locations 9  
Consolidated locations (1 )
December 31, 2018 364  
     

Adjusted EBITDA

We define Adjusted EBITDA as net income or net loss plus interest expense, income taxes, depreciation, amortization, share-based compensation, goodwill and other non-cash impairments and equity earnings or losses in unconsolidated investments.  Adjusted EBITDA is not a measure of cash flow or liquidity as determined by generally accepted accounting principles (GAAP).  We have included Adjusted EBITDA as a supplemental disclosure because we believe that it is widely used by our investors, industry analysts and others as a useful supplemental liquidity measure in conjunction with cash flows provided by or used in operating activities to help investors understand our ability to provide cash flows to fund growth, service debt and pay dividends as well as compare our cash flow generating capacity from year to year.

We believe Adjusted EBITDA should be considered in addition to, not as a substitute for, operating income or loss, net income or loss, cash flows provided by or used in operating, investing and financing activities or other income statement or cash flow statement line items reported in accordance with GAAP.  Other companies may calculate Adjusted EBITDA differently than we do, which may limit its usefulness as a comparative measure.

The table below presents a reconciliation of net income to Adjusted EBITDA.

(Unaudited) Year Ended December 31,
(in thousands) 2018   2017
               
Net income $ 234,461     $ 191,339  
Add:      
Interest and other non-operating expenses (1) 20,336     15,360  
Provision for income taxes 58,774     77,982  
Share-based compensation 12,874     12,482  
Equity earnings in unconsolidated investments, net (242 )   (139 )
Depreciation 26,122     24,157  
Amortization (2) 1,102     976  
Adjusted EBITDA $ 353,427     $ 322,157  
               

(1)       Shown net of interest income and net of gains and losses on foreign currency transactions and includes amortization of deferred financing costs as discussed below.
(2)       Excludes amortization of deferred financing costs of $691 for 2018 and $592 for 2017.  This non-cash expense is included in Interest and other non-operating expenses, net on the Consolidated Statements of Income.

The table below presents a reconciliation of Adjusted EBITDA to net cash provided by operating activities.  Please see page 6 for our Condensed Consolidated Statements of Cash Flows.

(Unaudited) Year Ended December 31,
(in thousands) 2018   2017
               
Adjusted EBITDA $ 353,427     $ 322,157  
Add:      
Interest and other non-operating expenses, net of interest income (19,645 )   (14,768 )
Provision for income taxes (58,774 )   (77,982 )
Net losses (gains) on foreign currency transactions 560     (171 )
Other 8,928     (3,976 )
Change in operating assets and liabilities (165,840 )   (49,949 )
Net cash provided by operating activities $ 118,656     $ 175,311  
               

Return on Invested Capital

We calculate Return on Invested Capital (ROIC) using trailing four quarter results.  We define ROIC as Net income attributable to Pool Corporation adjusted for Interest and other non-operating expenses, net (net of taxes at the effective tax rate), divided by the sum of average Long-term debt, net, average Short-term borrowings and the current portion of long-term debt and average Total stockholders' equity from our financial statements as filed with the SEC.  We have included ROIC as a supplemental disclosure because we believe that it may be used by our investors, industry analysts and others as a measure of the efficiency and effectiveness of our use of capital.

ROIC is not a measure of financial performance under GAAP.  We believe ROIC should be considered in addition to, not as a substitute for, operating income or loss, net income or loss, cash flows provided by or used in operating, investing and financing activities or other income statement, balance sheet or cash flow statement line items reported in accordance with GAAP.  Other companies may calculate ROIC differently than we do, which may limit its usefulness as a comparative measure.

The table below presents our calculation of ROIC at December 31, 2018 and 2017.

(Unaudited) Year Ended December 31,
(in thousands) 2018   2017 (1)
Numerator (trailing four quarters total):              
Net income attributable to Pool Corporation $ 234,461     $ 179,633  
Interest and other non-operating expenses, net 20,896     15,189  
Less: taxes on Interest and other non-operating expenses, net at 20.1% and 33.4%, respectively (4,200 )   (5,073 )
  $ 251,157     $ 189,749  
Denominator (average of trailing four quarters):      
Long-term debt, net $ 602,984     $ 520,950  
Short-term borrowings and current portion of long-term debt 15,190     11,030  
Total stockholders' equity 289,979     236,901  
  $ 908,153     $ 768,881  
       
Return on invested capital 27.7 %   24.7 %
           

(1)       To calculate ROIC for 2017, we reduced Net income attributable to Pool Corporation by $12.0 million, which represents our benefit related to the enactment of the Tax Cuts and Jobs Act.  We also adjusted our effective tax rate and our December 31, 2017 retained earnings balance for this benefit.  ROIC for 2017 based on reported amounts is 26.2%.

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