Pool and irrigation products distributor Pool Corporation (NASDAQ:POOL) released first-quarter 2018 earnings Thursday before the start of trading. The company achieved record first-quarter revenue, net income, and earnings per share (EPS), despite uncooperative weather over the last three months, which effectively delayed the beginning of the industry's pool season.
We'll cover these details below, but before jumping off the diving board, let's first review the headline numbers from Thursday's report:
Pool Corporation: The raw numbers
|Metric||Q1 2018||Q1 2017||Year-Over-Year Growth|
|Revenue||$585.9 million||$546.4 million||7.2%|
|Net income||$31.3 million||$22.3 million||40.4%|
|Diluted earnings per share||$0.75||$0.52||44.2%|
What happened with Pool Corporation this quarter?
Pool Corporation's top-line increase of 7.2% was led by growth of roughly 5% in "base business," a comparable sales number that excludes new acquisitions of sales centers. The company sells pool supplies and equipment through 354 sales centers located in North America, South America, Europe, and Australia. To phrase the above in a manner that may be more familiar to investors, organic sales expanded by 5% in the quarter, with acquisitions contributing the remaining two percentage points of sales growth.
Brisk demand for discretionary year-round items, such as heaters and lighting, propelled the top-line gains. These were timely sales, since, according to the company, unfavorable weather conditions peeled off $10 million in potential sales during the quarter.
Gross profit increased by $12.4 million over the prior-year quarter, to $166.1 million. Gross margin rose by a mere 20 basis points to 28.3%. Thus, the increase in gross profit dollars was mostly due to the improved revenue versus the first quarter of 2017. Management attributed the slight change in gross margin to variances in product mix.
Operating expenses ticked up 8% versus 2017 thanks to higher labor, technology, freight, and employee insurance-related costs. Management also noted that costs tied to acquisitions were higher than normal during the quarter. Since December of 2017, Pool Corporation has acquired three companies, resulting in the addition of seven new sales centers.
The combination of recent U.S. tax legislation and Pool Corporation's adoption of a new stock compensation accounting standard in January of last year resulted in a net tax benefit of $1.3 million in the first quarter. This represented a swing in direction from a net tax provision (or expense) of $5.1 million in last year's first quarter.
Management estimates that the positive impact of the new accounting standard, known as Accounting Standards Update (ASU) 2016-09, equaled $0.22 in diluted per share earnings during the last three months, and $0.14 in the first quarter of 2017. Even after adjusting for (i.e., removing) this benefit in both years, though, diluted EPS would still have expanded by 33%, to a record $0.52 in the first quarter of 2018.
What management had to say
Pool Corporation's CEO, Manuel Perez de la Mesa, offered illuminating commentary on the quarter in the company's earnings release:
Following a strong finish to 2017, we are poised for continued solid growth in 2018 as consumer demand for outdoor living products remains high. We generated record sales and income in the first quarter of 2018 despite inclement weather in Texas and seasonal markets, which resulted in a slower than expected start to the 2018 swimming pool season.
Pools are opening later than in 2017 in seasonal markets, and remodeling and new pool construction activity has been delayed. We believe that the industry has a strong backlog due to pool owner demand for pool upgrades and remodeling, and we expect deferred sales related to pool openings to shift to the second quarter.
A long winter season across the U.S. has pushed back pool projects in many regions, and it's possible that some of this industry backlog may also benefit Pool Corporation as far as the third quarter. As a point of clarification, Pool Corporation primarily sells products, not services. So, the deferred sales de la Mesa refers to above shouldn't be mistaken for deferred revenue already in hand for the company. Instead, de la Mesa is simply discussing purchases customers have hit the pause button on for the time being.
In its earnings release, Pool Corporation increased its outlook for 2018 diluted EPS from a previous range of $5.36 to $5.61, to a new band of between $5.45 and $5.70. However, this slight bump is technical in nature, reflecting additional tax benefits expected to be derived this year from adoption of ASU 2016-09. While the first quarter of the year was particularly impressive given the poor weather, investors hoping for an upward revision to earnings estimates will have to wait and see what the high pool season (over the next two quarters) brings.