POOL CORP - Quarter Report: 2018 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-26640
![poolcorplogoa15.jpg](https://www.sec.gov/Archives/edgar/data/0000945841/000094584118000091/poolcorplogoa15.jpg)
POOL CORPORATION | ||
(Exact name of registrant as specified in its charter) | ||
Delaware | 36-3943363 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
109 Northpark Boulevard, Covington, Louisiana | 70433-5001 | |
(Address of principal executive offices) | (Zip Code) | |
985-892-5521 | ||
(Registrant’s telephone number, including area code) |
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.
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o |
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 July 23, 2018, there were 40,374,954 shares of common stock outstanding.
POOL CORPORATION
Form 10-Q
For the Quarter Ended June 30, 2018
TABLE OF CONTENTS
Page | |||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POOL CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net sales | $ | 1,057,804 | $ | 988,163 | $ | 1,643,704 | $ | 1,534,603 | |||||||
Cost of sales | 749,149 | 698,499 | 1,168,976 | 1,091,318 | |||||||||||
Gross profit | 308,655 | 289,664 | 474,728 | 443,285 | |||||||||||
Selling and administrative expenses | 146,613 | 135,478 | 279,145 | 258,101 | |||||||||||
Operating income | 162,042 | 154,186 | 195,583 | 185,184 | |||||||||||
Interest and other non-operating expenses, net | 5,991 | 3,952 | 9,518 | 7,599 | |||||||||||
Income before income taxes and equity earnings | 156,051 | 150,234 | 186,065 | 177,585 | |||||||||||
Income tax provision | 39,062 | 55,654 | 37,783 | 60,772 | |||||||||||
Equity earnings in unconsolidated investments, net | 60 | 40 | 106 | 78 | |||||||||||
Net income | 117,049 | 94,620 | 148,388 | 116,891 | |||||||||||
Net loss attributable to noncontrolling interest | — | 283 | — | 294 | |||||||||||
Net income attributable to Pool Corporation | $ | 117,049 | $ | 94,903 | $ | 148,388 | $ | 117,185 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 2.89 | $ | 2.30 | $ | 3.67 | $ | 2.84 | |||||||
Diluted | $ | 2.80 | $ | 2.21 | $ | 3.55 | $ | 2.73 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 40,453 | 41,349 | 40,413 | 41,271 | |||||||||||
Diluted | 41,814 | 42,985 | 41,840 | 42,937 | |||||||||||
Cash dividends declared per common share | $ | 0.45 | $ | 0.37 | $ | 0.82 | $ | 0.68 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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POOL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 117,049 | $ | 94,620 | $ | 148,388 | $ | 116,891 | |||||||
Other comprehensive (loss) income: | |||||||||||||||
Foreign currency translation adjustments | (3,854 | ) | 3,194 | (2,879 | ) | 4,590 | |||||||||
Change in unrealized gains and losses on interest rate swaps, net of change in taxes of $(185), $(69), $(459) and $(251) | 554 | 106 | 1,378 | 392 | |||||||||||
Total other comprehensive (loss) income | (3,300 | ) | 3,300 | (1,501 | ) | 4,982 | |||||||||
Comprehensive income | 113,749 | 97,920 | 146,887 | 121,873 | |||||||||||
Comprehensive loss attributable to noncontrolling interest | — | 211 | — | 74 | |||||||||||
Comprehensive income attributable to Pool Corporation | $ | 113,749 | $ | 98,131 | $ | 146,887 | $ | 121,947 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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POOL CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)
June 30, | June 30, | December 31, | ||||||||||
2018 | 2017 | 2017 (1) | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 42,167 | $ | 26,666 | $ | 29,940 | ||||||
Receivables, net | 135,104 | 112,802 | 76,597 | |||||||||
Receivables pledged under receivables facility | 269,311 | 257,483 | 119,668 | |||||||||
Product inventories, net | 606,583 | 542,805 | 536,474 | |||||||||
Prepaid expenses and other current assets | 17,169 | 15,514 | 19,569 | |||||||||
Total current assets | 1,070,334 | 955,270 | 782,248 | |||||||||
Property and equipment, net | 113,048 | 106,787 | 100,939 | |||||||||
Goodwill | 189,066 | 186,124 | 189,435 | |||||||||
Other intangible assets, net | 12,608 | 13,430 | 13,223 | |||||||||
Equity interest investments | 1,130 | 1,158 | 1,127 | |||||||||
Other assets | 18,095 | 16,367 | 14,090 | |||||||||
Total assets | $ | 1,404,281 | $ | 1,279,136 | $ | 1,101,062 | ||||||
Liabilities and stockholders’ equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 300,232 | $ | 273,309 | $ | 245,249 | ||||||
Accrued expenses and other current liabilities | 83,271 | 98,225 | 65,482 | |||||||||
Short-term borrowings and current portion of long-term debt | 21,462 | 14,901 | 10,835 | |||||||||
Total current liabilities | 404,965 | 386,435 | 321,566 | |||||||||
Deferred income taxes | 24,729 | 28,445 | 24,585 | |||||||||
Long-term debt, net | 635,658 | 538,579 | 508,815 | |||||||||
Other long-term liabilities | 25,128 | 22,418 | 22,950 | |||||||||
Total liabilities | 1,090,480 | 975,877 | 877,916 | |||||||||
Stockholders’ equity: | ||||||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 40,371,424, 41,340,281 and 40,212,477 shares issued and outstanding at June 30, 2018, June 30, 2017 and December 31, 2017, respectively | 40 | 41 | 40 | |||||||||
Additional paid-in capital | 442,614 | 416,603 | 426,750 | |||||||||
Retained deficit | (119,998 | ) | (103,511 | ) | (196,316 | ) | ||||||
Accumulated other comprehensive loss | (8,855 | ) | (9,874 | ) | (7,328 | ) | ||||||
Total stockholders’ equity | 313,801 | 303,259 | 223,146 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,404,281 | $ | 1,279,136 | $ | 1,101,062 |
(1) Derived from audited financial statements.
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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POOL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Operating activities | ||||||||
Net income | $ | 148,388 | $ | 116,891 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 12,888 | 11,617 | ||||||
Amortization | 938 | 743 | ||||||
Share-based compensation | 6,481 | 6,299 | ||||||
Equity earnings in unconsolidated investments, net | (106 | ) | (78 | ) | ||||
Other | 1,861 | 2,122 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Receivables | (210,327 | ) | (199,055 | ) | ||||
Product inventories | (76,286 | ) | (53,546 | ) | ||||
Prepaid expenses and other assets | 2,100 | (2,389 | ) | |||||
Accounts payable | 55,964 | 38,673 | ||||||
Accrued expenses and other current liabilities | 21,290 | 37,378 | ||||||
Net cash used in operating activities | (36,809 | ) | (41,345 | ) | ||||
Investing activities | ||||||||
Acquisition of businesses, net of cash acquired | (578 | ) | (3,296 | ) | ||||
Purchases of property and equipment, net of sale proceeds | (24,620 | ) | (34,495 | ) | ||||
Other investments, net | — | 3 | ||||||
Net cash used in investing activities | (25,198 | ) | (37,788 | ) | ||||
Financing activities | ||||||||
Proceeds from revolving line of credit | 554,536 | 606,623 | ||||||
Payments on revolving line of credit | (545,574 | ) | (641,752 | ) | ||||
Proceeds from asset-backed financing | 177,500 | 156,600 | ||||||
Payments on asset-backed financing | (60,000 | ) | (20,100 | ) | ||||
Proceeds from short-term borrowings and current portion of long-term debt | 13,957 | 22,609 | ||||||
Payments on short-term borrowings and current portion of long-term debt | (3,330 | ) | (8,813 | ) | ||||
Payments of deferred and contingent acquisition consideration | (265 | ) | (199 | ) | ||||
Payments of deferred financing costs | (8 | ) | — | |||||
Purchase of redeemable noncontrolling interest | — | (2,573 | ) | |||||
Proceeds from stock issued under share-based compensation plans | 9,383 | 7,502 | ||||||
Payments of cash dividends | (33,194 | ) | (28,108 | ) | ||||
Purchases of treasury stock | (38,876 | ) | (8,672 | ) | ||||
Net cash provided by financing activities | 74,129 | 83,117 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 105 | 726 | ||||||
Change in cash and cash equivalents | 12,227 | 4,710 | ||||||
Cash and cash equivalents at beginning of period | 29,940 | 21,956 | ||||||
Cash and cash equivalents at end of period | $ | 42,167 | $ | 26,666 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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POOL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies
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 six month periods ended June 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 June 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, which could change the classification of certain cash receipts and cash payments on the statement of cash flows. The new guidance specifies how cash flows should be classified for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds for the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions from equity method investees and beneficial interests in securitization transactions. 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 six months of 2018.
As of June 30, 2018, we have not completed our accounting for all of the tax effects of the Act, and we have not made a material adjustment to the provisional tax benefit we recorded under Staff Accounting Bulletin (SAB) 118 at December 31, 2017. 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 of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing 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 $10.6 million in the first six months of 2018 compared to $7.4 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 June 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 $459.0 million.
6
Accumulated Other Comprehensive Loss
The table below presents the components of our Accumulated other comprehensive loss balance (in thousands):
June 30, | December 31, | ||||||||||
2018 | 2017 | 2017 | |||||||||
Foreign currency translation adjustments | $ | (10,382 | ) | $ | (9,212 | ) | $ | (7,478 | ) | ||
Unrealized gains (losses) on interest rate swaps, net of tax (1) | 1,527 | (662 | ) | 150 | |||||||
Accumulated other comprehensive loss | $ | (8,855 | ) | $ | (9,874 | ) | $ | (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 non-current assets and non-current 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 in the process of quantifying this impact, as well as the impacts on our results of operations and related disclosures. 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. Electing this option would allow us to retain our existing assessment of whether an arrangement is or contains a lease, is classified as an operating or financing lease and contains initial direct costs. We also expect to elect the practical expedients that allow us to exclude short-term leases from our Consolidated Balance Sheets and to combine lease and non-lease components. We are finalizing our internal controls over financial reporting related to the adoption of this new accounting pronouncement. |
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. |
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Standard | Description | Effective Date | Effect on Financial Statements and Other Significant Matters |
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. |
Note 2 – Earnings Per Share
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 117,049 | $ | 94,620 | $ | 148,388 | $ | 116,891 | ||||||||
Net loss attributable to noncontrolling interest | — | 283 | — | 294 | ||||||||||||
Net income attributable to Pool Corporation | $ | 117,049 | $ | 94,903 | $ | 148,388 | $ | 117,185 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 40,453 | 41,349 | 40,413 | 41,271 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and employee stock purchase plan | 1,361 | 1,636 | 1,427 | 1,666 | ||||||||||||
Diluted | 41,814 | 42,985 | 41,840 | 42,937 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 2.89 | $ | 2.30 | $ | 3.67 | $ | 2.84 | ||||||||
Diluted | $ | 2.80 | $ | 2.21 | $ | 3.55 | $ | 2.73 | ||||||||
Anti-dilutive stock options excluded from diluted earnings per share computations | — | — | — | 108 |
Note 3 – Acquisitions
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 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.
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, 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.
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Note 4 – Fair Value Measurements and Interest Rate Swaps
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 June 30, | ||||||||
2018 | 2017 | |||||||
Level 2 | ||||||||
Unrealized gains on interest rate swaps | $ | 3,096 | $ | 1,217 | ||||
Unrealized losses on interest rate swaps | — | 2,212 | ||||||
Level 3 | ||||||||
Contingent consideration liabilities | $ | 1,481 | $ | 1,493 |
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 six months of 2018, we recognized a benefit of $1.3 million as a result of our determination of ineffectiveness for the period. These amounts were recorded in Interest and other non-operating expenses, net on our Consolidated Statements of Income.
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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, which are recorded in Accumulated other comprehensive loss. At June 30, 2018, the remaining balance of the unrealized losses was $0.4 million and is being amortized over the effective period of the original forward-starting interest rate swap contracts from October 2016 to September 2018. In the first six months of 2018, we recorded expense of $0.9 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 June 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 six month periods ended June 30, 2018 and June 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.
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Contingent Consideration Liabilities
As of June 30, 2018, our Consolidated Balance Sheets reflected $0.7 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 determining our original estimates for contingent consideration, which are based on a percentage of gross profit for certain products for Melton and a multiple of gross profit for Metro, we applied a linear model using our best estimate of gross profit projections for fiscal years 2016 to 2020. The payout for Newline is based on a multiple of earnings for the first fiscal year of the acquisition. We based our estimate for the Newline payout on projected operating results for that year. All of our estimates of contingent consideration use Level 3 inputs as defined in the accounting guidance. The maximum total payouts for Metro and Newline over the related time periods are $1.0 million and AU$0.5 million, respectively.
In the first six 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 June 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 June 30, 2018, we have determined that the contingent consideration liability was in a range of acceptable estimates for all applicable fiscal periods.
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).
Note 5 – Debt
The table below presents the components of our debt (in thousands):
June 30, | ||||||||
2018 | 2017 | |||||||
Variable rate debt | ||||||||
Short-term borrowings | $ | 14,059 | $ | 8,445 | ||||
Current portion of long-term debt: | ||||||||
Australian credit facility | 7,403 | 6,456 | ||||||
Short-term borrowings and current portion of long-term debt | 21,462 | 14,901 | ||||||
Long-term portion: | ||||||||
Revolving credit facility | 419,401 | 319,419 | ||||||
Receivables securitization facility | 217,500 | 220,000 | ||||||
Less: financing costs, net | 1,243 | 840 | ||||||
Long-term debt, net | 635,658 | 538,579 | ||||||
Total debt | $ | 657,120 | $ | 553,480 |
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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward‑looking statements express our current expectations or forecasts of possible future results or events, including projections of earnings and other financial performance measures, statements of management’s expectations regarding our plans and objectives and industry, general economic and other forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project,” “should” and other words and expressions of similar meaning.
No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, 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.
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OVERVIEW
Financial Results
We had a solid May and June of 2018, following the delayed spring in many of our seasonal markets. Despite weather challenges and seasonal labor capacity constraints on the part of our customers, consumer demand remained high and strongly contributed to our sales and gross profit growth in the second quarter of 2018.
Net sales increased 7% compared to the second quarter of 2017. Base business sales grew 6% over the same quarter of last year, with discretionary products such as building materials and equipment leading our sales growth. The impact of a weaker U.S. dollar on sales outside the U.S., primarily Europe, compared to the same period last year also favorably impacted our sales growth by approximately 1%.
Gross profit increased 7% compared to the second quarter of 2017. Base business gross profit improved 6% over the second quarter of last year. Gross profit as a percentage of net sales (gross margin) was 29.2% in the second quarter of 2018 compared to 29.3% in the second quarter of 2017. Product mix was the principal factor leading to the slightly lower margin.
Selling and administrative expenses (operating expenses) increased 8% compared to the second quarter of 2017, with base business operating expenses up approximately 7% over the comparable 2017 period. While acquisitions contributed to our overall expense growth, changes in non-executive performance-based compensation programs that impact the timing of our expense recognition also resulted in higher compensation expense in the quarter. We believe our results later in the year, particularly in the fourth quarter, should benefit from this timing change. Base business operating expenses also increased due to the unfavorable impact of foreign currency fluctuations, which collectively impacted the quarter’s expenses by 1%. As a percentage of net sales, base business operating expenses were consistent year over year at 13.6%.
Operating income for the second quarter of 2018 increased 5% to $162.0 million compared to the same period in 2017. Foreign currency exchange rate increases favorably impacted our operating income growth by 1%. Operating income as a percentage of net sales (operating margin) was 15.3% for the second quarter of 2018 and 15.6% for the same period in 2017, while base business operating margin was 15.5% for the second quarter of 2018 and 15.7% for the same period in 2017.
Interest and other non-operating expenses, net increased to $6.0 million in the second quarter of 2018 from $4.0 million in the second quarter of 2017. The $2.0 million increase primarily relates to higher interest rates on our debt and increased borrowings to fund working capital investments and share repurchases, as well as greater realized foreign currency conversion losses compared to the same period last year. These losses essentially negated the operating income benefit from changes in foreign currency exchange rates.
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 second quarter of 2018. Our effective tax rate was 25.0% and 37.0% for the second quarters of 2018 and 2017, respectively. We recorded a $1.5 million benefit from ASU 2016-09 in the quarter ended June 30, 2018, compared to a benefit of $1.9 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.3% for the second 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.
Net income attributable to Pool Corporation was $117.0 million in the second quarter of 2018 compared to $94.9 million in the second quarter of 2017. Earnings per share increased 27% to $2.80 per diluted share for the three months ended June 30, 2018 versus $2.21 per diluted share for the same period in 2017. The reduction in our effective tax rate from 37.0% to 25.0% as discussed above reduced our income tax expense by approximately $18.7 million, or $0.45 per diluted share, in the second 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 June 30, 2018, total net receivables, including pledged receivables, increased 9% compared to June 30, 2017, primarily reflecting our June 2018 sales growth and a 1% increase from acquisitions. Our days sales outstanding (DSO), as calculated on a trailing four quarters basis, was 30.2 days at June 30, 2018, an increase from 29.6 days at June 30, 2017. Our allowance for doubtful accounts balance was $4.1 million at June 30, 2018 and $3.6 million at June 30, 2017.
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Net inventory levels grew 12% compared to levels at June 30, 2017 and include growth from acquired businesses and purchases made in advance of certain mid-year vendor price increases. The inventory reserve was $8.4 million at June 30, 2018 and $8.1 million at June 30, 2017. Our inventory turns, as calculated on a trailing four quarters basis, were 3.5 times at both June 30, 2018 and June 30, 2017.
Total debt outstanding at June 30, 2018 was $657.1 million, an increase of $103.6 million, or 19%, compared to total debt at June 30, 2017. The increased borrowings were primarily used to fund business driven working capital growth, acquisitions and share repurchases over the past 12 months.
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 continue to project base business sales growth of 6% to 7% for 2018. The extended winter in April benefited our May and June sales, but our customers’ labor capacity constraints further delayed projects. Such delays should allow projects to extend to the second half of 2018 and benefit our sales growth in the remainder of the year. We also expect inflation, which has historically averaged 1% to 2%, to provide a greater contribution to our sales growth in the latter part of 2018 due to product cost increases imposed by our vendors which we intend to pass on. We believe gross margin will be similar to 2017.
We expect base business operating expenses will grow at a rate that will enable us to achieve operating margin improvement of 20 to 40 basis points for the full year 2018 compared to 2017. 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 results later in the year, particularly in the fourth quarter, should benefit from this timing change. Costs related to labor, fuel and freight continue to rise, but we expect to improve our operating leverage with expected sales contributions as contractors catch up on their backlogs over the second half of the year.
As discussed further in Results of Operations, our average outstanding debt for the six months ended June 30, 2018 increased 18% over the same period last year, and given the increase in the 30-Day LIBOR, our effective interest rate increased approximately 50 basis points over this time period. Based on these trends, we expect Interest and other non-operating expenses, net will increase roughly $2.0 million over the back half 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 tax effects from tax reform at this time.
Our effective tax rate is dependent on our results of operations and may change if actual results are different from our current expectations, particularly any significant changes in our geographic mix. Due to 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 $10.6 million benefit from ASU 2016-09 for the six months ended June 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 are updating our 2018 earnings guidance range to $5.50 to $5.70 per diluted share from $5.45 to $5.70 per diluted share, which includes the tax benefits realized from ASU 2016-09 in the first and second quarters of 2018.
We now expect that cash provided by operations will be less than net income for the 2018 fiscal year. As discussed above, in the second quarter of 2018, we made inventory purchases ahead of certain mid-year vendor price increases. 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.
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RESULTS OF OPERATIONS
As of June 30, 2018, we conducted operations through 358 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 | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 70.8 | 70.7 | 71.1 | 71.1 | ||||||||
Gross profit | 29.2 | 29.3 | 28.9 | 28.9 | ||||||||
Operating expenses | 13.9 | 13.7 | 17.0 | 16.8 | ||||||||
Operating income | 15.3 | 15.6 | 11.9 | 12.1 | ||||||||
Interest and other non-operating expenses, net | 0.6 | 0.4 | 0.6 | 0.5 | ||||||||
Income before income taxes and equity earnings | 14.8 | % | 15.2 | % | 11.3 | % | 11.6 | % |
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.
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Three Months Ended June 30, 2018 Compared to Three Months Ended June 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 | |||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net sales | $ | 1,043,685 | $ | 982,511 | $ | 14,119 | $ | 5,652 | $ | 1,057,804 | $ | 988,163 | ||||||||||||
Gross profit | 304,242 | 287,939 | 4,413 | 1,725 | 308,655 | 289,664 | ||||||||||||||||||
Gross margin | 29.2 | % | 29.3 | % | 31.3 | % | 30.5 | % | 29.2 | % | 29.3 | % | ||||||||||||
Operating expenses | 142,261 | 133,552 | 4,352 | 1,926 | 146,613 | 135,478 | ||||||||||||||||||
Expenses as a % of net sales | 13.6 | % | 13.6 | % | 30.8 | % | 34.1 | % | 13.9 | % | 13.7 | % | ||||||||||||
Operating income (loss) | 161,981 | 154,387 | 61 | (201 | ) | 162,042 | 154,186 | |||||||||||||||||
Operating margin | 15.5 | % | 15.7 | % | 0.4 | % | (3.6 | )% | 15.3 | % | 15.6 | % |
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 | April - June 2018 | |||
Chem Quip(1) | December 2017 | 5 | April - June 2018 | |||
Intermark | December 2017 | 1 | April - June 2018 | |||
E-Grupa | October 2017 | 1 | April - June 2018 | |||
Newline Pool Products | July 2017 | 1 | April - June 2018 | |||
Lincoln Aquatics (1) | April 2017 | 1 | April - June 2018 and May - June 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 six months of 2018:
December 31, 2017 | 351 | |
Acquired location | 1 | |
New locations | 7 | |
Consolidated location | (1 | ) |
June 30, 2018 | 358 |
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Net Sales
Three Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Net sales | $ | 1,057.8 | $ | 988.2 | $ | 69.6 | 7% |
Net sales increased 7% in the second quarter of 2018 compared to the second quarter of 2017, with base business sales up 6% for the period. The quarter started out slow in April, primarily due to unseasonably cold temperatures in most of our seasonal markets, but finished strong in May and June.
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); |
• | higher foreign exchange rates, primarily the Euro, compared to the same period last year, which benefited our consolidated net sales growth by 1%; |
• | 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 second 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 12% compared to the second quarter of 2017 and represented approximately 11% of net sales in the second quarter of 2018.
Sales to customers who service large commercial swimming pool installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above. These sales represented approximately 5% of our consolidated net sales for the second quarter of 2018 and increased 8% compared to the second quarter of 2017.
Gross Profit
Three Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Gross profit | $ | 308.7 | $ | 289.7 | $ | 19.0 | 7% | |||||||
Gross margin | 29.2 | % | 29.3 | % |
The slight decline in gross margin between periods reflects minor product mix differences.
Operating Expenses
Three Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Operating expenses | $ | 146.6 | $ | 135.5 | $ | 11.1 | 8% | |||||||
Operating expenses as a % of net sales | 13.9 | % | 13.7 | % |
Operating expenses increased 8% in the second quarter of 2018 compared to the second quarter of 2017, with base business operating expenses up approximately 7% compared to the same period last year. Changes in non-executive performance-based compensation programs that impact the timing of our expense recognition resulted in higher compensation expense in the second quarter of 2018. Base business operating expenses also increased due to the unfavorable impact of foreign currency fluctuations, which collectively impacted the quarter’s expenses by 1%, and higher costs associated with opening new locations in existing markets over the past 12 months.
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Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the second quarter of 2018 increased $2.0 million compared to the second quarter of 2017. The increase mostly reflects higher interest expense on our debt, as well as greater realized foreign currency conversion losses compared to the same period last year. Our weighted average effective interest rate increased to 3.2% for the second quarter of 2018 from 2.6% for the second quarter of 2017 on higher average outstanding debt of $626.8 million versus $521.2 million for the respective periods.
Income Taxes
Our effective income tax rate was 25.0% for the three months ended June 30, 2018 and 37.0% for the three months ended June 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the second quarter of 2018. We recorded a $1.5 million benefit from ASU 2016-09 in the quarter ended June 30, 2018 compared to a benefit of $1.9 million realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.3%, for the second quarters of 2018 and 2017, respectively, mostly reflecting the lower corporate tax rate enacted as part of U.S. tax reform.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation increased 23% to $117.0 million in the second quarter of 2018 compared to the second quarter of 2017. Earnings per diluted share increased to $2.80 for the second quarter of 2018 versus $2.21 per diluted share for the comparable 2017 period. The reduction in our effective tax rate from 37.0% to 25.0% as discussed above reduced our income tax expense by approximately $18.7 million, or $0.45 per diluted share, in the second quarter of 2018.
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Six Months Ended June 30, 2018 Compared to Six Months Ended June 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) | Six Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net sales | $ | 1,618,795 | $ | 1,527,995 | $ | 24,909 | $ | 6,608 | $ | 1,643,704 | $ | 1,534,603 | ||||||||||||
Gross profit | 467,217 | 441,355 | 7,511 | 1,930 | 474,728 | 443,285 | ||||||||||||||||||
Gross margin | 28.9 | % | 28.9 | % | 30.2 | % | 29.2 | % | 28.9 | % | 28.9 | % | ||||||||||||
Operating expenses | 270,399 | 255,636 | 8,746 | 2,465 | 279,145 | 258,101 | ||||||||||||||||||
Expenses as a % of net sales | 16.7 | % | 16.7 | % | 35.1 | % | 37.3 | % | 17.0 | % | 16.8 | % | ||||||||||||
Operating income (loss) | 196,818 | 185,719 | (1,235 | ) | (535 | ) | 195,583 | 185,184 | ||||||||||||||||
Operating margin | 12.2 | % | 12.2 | % | (5.0 | )% | (8.1 | )% | 11.9 | % | 12.1 | % |
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 - June 2018 | |||
Chem Quip(1) | December 2017 | 5 | January - June 2018 | |||
Intermark | December 2017 | 1 | January - June 2018 | |||
E-Grupa | October 2017 | 1 | January - June 2018 | |||
Newline Pool Products | July 2017 | 1 | January - June 2018 | |||
Lincoln Aquatics (1) | April 2017 | 1 | January - June 2018 and May - June 2017 |
(1) | We acquired certain distribution assets of 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 June 30. 2018 Compared to Three Months Ended June 30, 2017.
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Net Sales
Six Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Net sales | $ | 1,643.7 | $ | 1,534.6 | $ | 109.1 | 7% |
Net sales for the first six months of 2018 increased 7% compared to the same period last year, with most of this growth resulting from the 6% 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 in May and June.
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 are less impacted by weather; 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 six 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 27% of net sales in the first half of 2018. Sales of building materials grew 10% compared to the first six months of 2017 and represented approximately 12% of net sales in the first half of 2018.
Sales to customers who service large commercial swimming pool installations such as hotels, universities and community recreational facilities are included in the appropriate existing product categories, and growth in this area is reflected in the numbers above. These sales represented approximately 5% of our consolidated net sales in the first six months of 2018 and increased 11% compared to the same period in 2017.
Gross Profit
Six Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Gross profit | $ | 474.7 | $ | 443.3 | $ | 31.4 | 7% | |||||||
Gross margin | 28.9 | % | 28.9 | % |
Gross margin was consistent the same period of prior year.
Operating Expenses
Six Months Ended | ||||||||||||||
June 30, | ||||||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||||
Operating expenses | $ | 279.1 | $ | 258.1 | $ | 21.0 | 8% | |||||||
Operating expenses as a % of net sales | 17.0 | % | 16.8 | % |
For the first six months of 2018, operating expenses increased 8% 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.
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Interest and Other Non-Operating Expenses, Net
Interest and other non-operating expenses, net for the first six months of 2018 increased $1.9 million compared to the same period last year. The increase mostly reflects higher interest expense on our debt, as well as greater realized foreign currency conversion losses compared to the same period last year. Our weighted average effective interest rate increased to 3.1% for the first six months of 2018 from 2.6% for the same period of 2017 on higher average outstanding debt of $571.3 million versus $483.6 million for the respective periods.
Income Taxes
Our effective income tax rate was 20.3% for the six months ended June 30, 2018 compared to 34.2% for the six months ended June 30, 2017. Both ASU 2016-09 and U.S. tax reform impacted our income tax provision for the first six months of 2018. We recorded a $10.6 million benefit from ASU 2016-09 for the six months ended June 30, 2018 compared to the $7.4 million benefit realized in the same period last year. Excluding the benefits from ASU 2016-09, our effective tax rate was 26.0% and 38.4%, for the six months ended June 30, 2018 and June 30, 2017, respectively, mostly reflecting the lower corporate tax rate enacted as part of U.S. tax reform.
Net Income and Earnings Per Share
Net income attributable to Pool Corporation increased 27% to $148.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Earnings per diluted share increased to $3.55 for the six months ended June 30, 2018 versus $2.73 per diluted share for the six months ended June 30, 2017. The reduction in our effective tax rate from 34.2% to 20.3% as discussed above reduced our income tax expense by approximately $25.9 million, or $0.62 per diluted share, in the first six months of 2018.
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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 and second quarters of 2018, the four quarters of 2017 and the third and fourth quarters 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 | |||||||||||||||||||||||||||||
Second | First | Fourth | Third | Second | First | Fourth | Third | |||||||||||||||||||||||||
Statement of Income Data | ||||||||||||||||||||||||||||||||
Net sales | $ | 1,057,804 | $ | 585,900 | $ | 510,183 | $ | 743,401 | $ | 988,163 | $ | 546,441 | $ | 445,235 | $ | 691,429 | ||||||||||||||||
Gross profit | 308,655 | 166,073 | 145,398 | 216,606 | 289,664 | 153,621 | 127,777 | 199,551 | ||||||||||||||||||||||||
Operating income | 162,042 | 33,541 | 17,259 | 81,928 | 154,186 | 30,998 | 9,743 | 74,166 | ||||||||||||||||||||||||
Net income | 117,049 | 31,339 | 25,665 | 48,783 | 94,620 | 22,270 | 2,572 | 44,421 | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||||||||||
Total receivables, net | $ | 404,415 | $ | 314,596 | $ | 196,265 | $ | 262,796 | $ | 370,285 | $ | 290,019 | $ | 166,151 | $ | 233,405 | ||||||||||||||||
Product inventories, net | 606,583 | 703,793 | 536,474 | 484,287 | 542,805 | 647,884 | 486,116 | 455,156 | ||||||||||||||||||||||||
Accounts payable | 300,232 | 467,795 | 245,249 | 209,062 | 273,309 | 465,928 | 230,728 | 199,922 | ||||||||||||||||||||||||
Total debt | 657,120 | 568,110 | 519,650 | 564,573 | 553,480 | 490,217 | 438,042 | 390,189 |
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.
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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
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 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 last year.
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. In contrast, unseasonably mild weather benefited sales in the first quarter of 2017, as Texas and surrounding markets experienced record warm temperatures.
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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):
Six Months Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Operating activities | $ | (36,809 | ) | $ | (41,345 | ) | ||
Investing activities | (25,198 | ) | (37,788 | ) | ||||
Financing activities | 74,129 | 83,117 |
Cash used in operating activities decreased $4.5 million during the first six months of 2018 compared to the first six months of 2017 primarily due to higher net income, offset by changes in our working capital. Increased inventory levels and lower income tax accruals in 2018 versus 2017 negatively impacted our 2018 cash flow, but were largely offset by later invoice payments in accounts payable.
Cash used in investing activities for the first six months of 2018 decreased compared to the first six months of 2017 primarily due to earlier-than-normal vehicle additions to our fleet in the first six months of last year as well as the Lincoln Aquatics acquisition that occurred in the second quarter of 2017.
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Cash provided by financing activities decreased for the first six months of 2018 compared to the first six months of 2017, which reflects additional share repurchases of $30.2 million offset by a $21.9 million increase 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 June 30, 2018, there was $419.4 million outstanding, a $4.8 million standby letter of credit outstanding and $325.8 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 June 30, 2018, we have three interest rate swap contracts in place that became effective on October 19, 2016. These swap contracts were previously forward-starting and were amended in October 2015 to bring the fixed rates per our forward-starting contracts in line with current market rates and extend the hedged period for future interest payments on our Credit Facility. Now effective, these amended swap contracts convert the Credit Facility’s variable interest rate to fixed rates of 2.273% on a notional amount of $75.0 million and 2.111% on two separate notional amounts, one $25.0 million and the other $50.0 million, totaling $75.0 million. Interest expense related to the notional amounts under these swap contracts is based on the fixed rates plus the applicable margin on the Credit Facility. These interest rate swap contracts will terminate on November 20, 2019.
In July 2016, we entered into a forward-starting interest rate swap contract to extend the hedged period for future interest payments on our Credit Facility to its maturity date 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 June 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 June 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 June 30, 2018, our average total leverage ratio equaled 1.72 (compared to 1.67 as of March 31, 2018) and the TTM average total debt amount used in this calculation was $572.4 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 June 30, 2018, our fixed charge ratio equaled 5.40 (compared to 5.46 as of March 31, 2018) and TTM Rental Expense was $56.1 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.
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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 June 30, 2018, there was $217.5 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.8%, excluding commitment fees.
As of June 30, 2018, 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 July 23, 2018, $218.3 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.
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
There have been no material changes during the six months ended June 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 six months ended June 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.
Item 4. Controls and Procedures
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 June 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 June 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarizes the repurchases of our common stock in the second 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) | ||||||||||
April 1 - 30, 2018 | 80,200 | $ | 138.51 | 80,200 | $ | 42,252,446 | ||||||||
May 1 - 31, 2018 | 146,527 | $ | 140.57 | 137,925 | $ | 222,919,161 | ||||||||
June 1 - 30, 2018 | 31,935 | $ | 143.37 | 31,935 | $ | 218,340,678 | ||||||||
Total | 258,662 | $ | 140.27 | 250,060 |
(1) | These shares may include shares of our common stock surrendered to us by employees in order to satisfy minimum tax withholding obligations in connection with certain exercises of employee stock options or lapses upon vesting of restrictions on previously restricted share awards, and/or to cover the exercise price of such options granted under our share-based compensation plans. There were 8,602 shares surrendered for this purpose in the second 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 July 23, 2018, $218.3 million of the authorized amount remained available under our current share repurchase program. |
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Item 6. Exhibits
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 six months ended June 30, 2018 and June 30, 2017; |
2. | Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and June 30, 2017; |
3. | Consolidated Balance Sheets at June 30, 2018, December 31, 2017 and June 30, 2017; |
4. | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and |
June 30, 2017; and
5. | Notes to Consolidated Financial Statements. |
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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 July 27, 2018.
POOL CORPORATION | ||
By: | /s/ Mark W. Joslin | |
Mark W. Joslin | ||
Senior Vice President and Chief Financial Officer, and duly authorized signatory on behalf of the registrant |
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