Pool Corp(US:POOL)2023-10-26 15:49markdown PART I. FINANCIAL INFORMATION [Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited consolidated financial statements for the period ended September 30, 2023, show a year-over-year decline in key performance metrics. Net sales, gross profit, and net income decreased for both the third quarter and the first nine months compared to 2022. The balance sheet reflects a reduction in total assets and liabilities, primarily due to lower inventory levels and debt repayment. Cash flow from operations significantly improved, driven by better working capital management [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) For the third quarter of 2023, net sales decreased by 8.7% to $1.47 billion, and net income fell by 27.5% to $137.8 million compared to Q3 2022. For the nine months ended September 30, 2023, net sales declined by 10.7% to $4.54 billion, with net income dropping by 30.3% to $471.8 million. Diluted EPS for Q3 and the nine-month period were $3.51 and $12.00, respectively, down from $4.78 and $16.82 in the prior year Q3 & Nine Months 2023 vs 2022 Income Statement Highlights (In thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Change | Nine Months 2023 | Nine Months 2022 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $1,474,407 | $1,615,339 | -8.7% | $4,538,545 | $5,083,807 | -10.7% | | **Gross Profit** | $428,731 | $503,687 | -14.9% | $1,366,269 | $1,617,681 | -15.5% | | **Operating Income** | $194,443 | $263,877 | -26.3% | $667,223 | $918,489 | -27.4% | | **Net Income** | $137,843 | $190,055 | -27.5% | $471,792 | $676,600 | -30.3% | | **Diluted EPS** | $3.51 | $4.78 | -26.6% | $12.00 | $16.82 | -28.6% | - Cash dividends declared per common share increased to **$1.10** in Q3 2023 from **$1.00** in Q3 2022, and to **$3.20** for the nine-month period from **$2.80** in the prior year[9](index=9&type=chunk) [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of September 30, 2023, total assets were $3.43 billion, a decrease from $3.69 billion a year prior, mainly due to an 18% reduction in product inventories. Total liabilities decreased to $2.01 billion from $2.50 billion, driven by a significant reduction in long-term debt. Consequently, total stockholders' equity increased to $1.42 billion from $1.19 billion Balance Sheet Summary (In thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | **Total Current Assets** | $1,832,524 | $2,199,479 | $2,018,991 | | **Product Inventories, net** | $1,259,308 | $1,539,572 | $1,591,060 | | **Total Assets** | $3,430,734 | $3,688,055 | $3,565,437 | | **Total Current Liabilities** | $709,120 | $737,260 | $675,714 | | **Long-term Debt, net** | $996,109 | $1,500,337 | $1,361,761 | | **Total Liabilities** | $2,012,508 | $2,497,177 | $2,330,243 | | **Total Stockholders' Equity** | $1,418,226 | $1,190,878 | $1,235,194 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2023, net cash provided by operating activities surged to $750.0 million from $307.5 million in the prior-year period. This was primarily due to a significant positive change in product inventories ($330.9 million inflow vs. $223.3 million outflow). Net cash used in financing activities increased to $656.8 million, reflecting net debt repayments, compared to $248.4 million used in the same period of 2022. Share repurchases decreased to $187.1 million from $471.2 million Cash Flow Summary for Nine Months Ended September 30 (In thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | **Net Cash Provided by Operating Activities** | $750,018 | $307,470 | | **Net Cash Used in Investing Activities** | ($54,506) | ($34,514) | | **Net Cash Used in Financing Activities** | ($656,835) | ($248,404) | | **Change in Cash and Cash Equivalents** | $39,629 | $24,758 | - A major driver of the increase in operating cash flow was a **$330.9 million** cash inflow from the reduction of product inventories, compared to a **$223.3 million** outflow for inventory build-up in the prior year[17](index=17&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail key accounting policies, including the adoption of ASU 2020-04 for reference rate reform (LIBOR to SOFR), which did not have a material impact. The company completed three small acquisitions in 2023. Fair value measurements are detailed for assets like interest rate swaps. The debt structure is outlined, including amendments to credit facilities to transition from LIBOR to Term SOFR - The company adopted ASU 2020-04 to facilitate the transition from LIBOR to Term SOFR for its debt agreements and interest rate swaps, with **no material impact** on financial statements[24](index=24&type=chunk)[41](index=41&type=chunk) - In 2023, the company acquired the distribution assets of Pioneer Pool Products, Inc., Recreation Supply Company, and Pro-Water Irrigation & Landscape Supply, Inc., adding a total of **four new locations**[31](index=31&type=chunk)[32](index=32&type=chunk) - Total debt as of September 30, 2023, was **$1.03 billion**, a significant decrease from **$1.51 billion** on the same date in 2022[45](index=45&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=15&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the 9% decline in Q3 2023 net sales to weaker pool construction and discretionary spending amid challenging macroeconomic conditions, although non-discretionary maintenance demand remains stable. Gross margin fell to 29.1% from 31.2% due to selling through lower-cost inventory and a more competitive environment. The company has managed operating expenses down by 2% and used strong operating cash flow to reduce total debt by nearly $479 million year-over-year. The full-year 2023 outlook projects a sales decline of around 10% and diluted EPS between $13.15 and $13.65 [Overview](index=15&type=section&id=OVERVIEW) In Q3 2023, net sales fell 9% to $1.5 billion, and operating income dropped 26% to $194.4 million year-over-year. This was driven by a slowdown in pool construction, while maintenance activities remained stable. Gross margin contracted 210 basis points to 29.1%. The company reduced inventory by 18% and total debt by $478.6 million compared to September 2022. For the full year 2023, the company expects sales to be down around 10% and has guided diluted EPS to a range of $13.15 to $13.65 Q3 2023 vs Q3 2022 Financial Highlights | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $1.5 billion | $1.6 billion | -9% | | **Gross Profit** | $428.7 million | $503.7 million | -15% | | **Gross Margin** | 29.1% | 31.2% | -210 bps | | **Operating Income** | $194.4 million | $263.9 million | -26% | | **Diluted EPS** | $3.51 | $4.78 | -27% | - The company projects full-year 2023 sales to decline by approximately **10%** compared to 2022, with diluted EPS expected to be in the range of **$13.15 to $13.65**[66](index=66&type=chunk)[69](index=69&type=chunk) - Total debt decreased by **$478.6 million** to **$1.0 billion** at September 30, 2023, from **$1.5 billion** a year earlier, funded by operating cash flows[64](index=64&type=chunk) [Results of Operations](index=18&type=section&id=RESULTS%20OF%20OPERATIONS) For Q3 2023, net sales decreased 9% due to lower volumes in discretionary products for new pool construction, partially offset by 2-3% inflationary price benefits. Gross margin fell 210 basis points to 29.1% from selling through prior strategic inventory buys and a competitive pricing environment. For the first nine months, net sales were down 11%, impacted by unfavorable weather and lower customer early buys. Operating expenses remained flat for the nine-month period due to disciplined cost management Q3 2023 vs Q3 2022 Comparison | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $1,474.4M | $1,615.3M | -9% | | **Gross Margin** | 29.1% | 31.2% | -210 bps | | **Operating Expenses** | $234.3M | $239.8M | -2% | Nine Months 2023 vs 2022 Comparison | Metric | Nine Months 2023 | Nine Months 2022 | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $4,538.5M | $5,083.8M | -11% | | **Gross Margin** | 30.1% | 31.8% | -170 bps | | **Operating Expenses** | $699.0M | $699.2M | 0% | - Q3 2023 sales of equipment and building materials, tied to discretionary spending, decreased by **9%** and **13%** respectively. In contrast, sales to commercial customers grew **10%**[80](index=80&type=chunk)[82](index=82&type=chunk) [Seasonality and Quarterly Fluctuations](index=25&type=section&id=Seasonality%20and%20Quarterly%20Fluctuations) The company's business is highly seasonal, with the second and third quarters being the peak for sales and operating income, accounting for 59% of net sales and 67% of operating income in 2022. Weather is a major external factor; hot, dry weather boosts sales, while cool, rainy conditions suppress them. In Q3 2023, hot weather in the southern U.S. benefited sales, but these gains were offset by rainy conditions in the Northeast - The business is seasonal, with the second and third quarters typically generating the **highest sales and operating income**. In 2022, these quarters accounted for **59% of net sales** and **67% of operating income**[104](index=104&type=chunk) - Weather significantly impacts results. In Q3 2023, benefits from record heat in the southern U.S. were largely offset by rainy conditions in the Northeast[111](index=111&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company's primary liquidity sources are cash from operations and bank borrowings. For the first nine months of 2023, operating cash flow was a strong $750.0 million, a significant improvement from $307.5 million in the prior year, mainly due to inventory reduction. This cash was used for debt repayment, dividends, and share repurchases. The company maintains three major credit facilities and was in compliance with all financial covenants, including a maximum average total leverage ratio of 1.48 (well below the 3.25 limit) as of September 30, 2023 Cash Flow Summary for Nine Months Ended September 30 (In thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | **Operating Activities** | $750,018 | $307,470 | | **Investing Activities** | ($54,506) | ($34,514) | | **Financing Activities** | ($656,835) | ($248,404) | - The company's **capital allocation priorities** are capital expenditures, inventory, strategic acquisitions, dividends, debt repayment (targeting a **1.5-2.0 leverage ratio**), and share repurchases[120](index=120&type=chunk) - As of September 30, 2023, the company was **in compliance** with its most restrictive financial covenants, with an average total leverage ratio of **1.48** (limit: <3.25) and a fixed charge coverage ratio of **6.07** (limit: >2.25)[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company reports no material changes to its market risk exposures during the first nine months of 2023. Key risks remain related to interest rate fluctuations on its variable-rate debt and foreign currency exchange rate movements. These risks are consistent with those disclosed in the 2022 Annual Report on Form 10-K - There have been **no material changes** in the company's exposure to interest rate risk or currency risk during the nine months ended September 30, 2023[141](index=141&type=chunk)[142](index=142&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023. No changes occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - Based on an evaluation as of September 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were **effective**[143](index=143&type=chunk) - No changes in internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[144](index=144&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various claims and litigation in the ordinary course of business. Management does not believe that the ultimate resolution of any of these matters will have a material adverse impact on its financial condition, results of operations, or cash flows - The company states that ongoing legal proceedings, which arise in the ordinary course of business, are not expected to have a **material adverse impact** on its financials[148](index=148&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - **No material changes** have been made to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[149](index=149&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the third quarter of 2023, the company repurchased a total of 384,742 shares of its common stock at an average price of $355.38 per share. As of September 30, 2023, approximately $463.3 million remained available for future repurchases under the Board-authorized program Share Repurchases in Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1-31, 2023 | — | $ — | | August 1-31, 2023 | 166,447 | $360.77 | | September 1-30, 2023 | 218,295 | $351.27 | | **Total** | **384,742** | **$355.38** | - As of October 23, 2023, **$463.3 million** remained available for share repurchases under the current Board-approved program[152](index=152&type=chunk) [Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and the financial statements formatted in Inline XBRL - The exhibits include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and financial data in Inline XBRL format[154](index=154&type=chunk)[155](index=155&type=chunk)