POOL Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. POOL distributes swimming pool, spa, and outdoor-living products through 330 sales centers. Results are unaudited. The business is highly seasonal, with sales and operating income generally peaking in the second and third quarters.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $450.4 million | $406.3 million | +11%; base business +10% |
| Gross profit / margin | $124.8 million / 27.7% | $114.1 million / 28.1% | Profit +9%; margin down 40 bps |
| Operating income / margin | $15.6 million / 3.5% | $8.6 million / 2.1% | +80% |
| Net income attributable to POOL | $8.4 million | $4.2 million | +101% |
| Diluted EPS | $0.19 | $0.09 | +$0.10, or +111% |
| Operating cash flow | $(57.7) million | $(37.3) million | Greater seasonal outflow |
Operating expenses rose 4% to $109.2 million; as a share of sales they declined to 24.2% from 26.0%. Net interest expense was $2.0 million, and the effective tax rate was 38.9%. The declared quarterly dividend was $0.22 per share, versus $0.19 a year earlier.
Financial position and liquidity
- At March 31, 2015, cash was $5.0 million, total assets $1.084 billion, and total liabilities $840.0 million.
- Total debt was $394.6 million, up 22% from $324.2 million a year earlier: $280.5 million under the revolving credit facility and $114.1 million under the receivables facility. Debt is reported as long-term.
- The $465 million revolving facility had $180.8 million available. The company also had $114.1 million outstanding under its receivables facility. Management said capital availability was adequate.
- Operating cash use reflected receivables growth and the timing of payables; investing cash use was $14.5 million, including $8.8 million of capital expenditures and $5.4 million advanced under a new retailer lending agreement. Financing provided $65.7 million, including net borrowings, partly offset by $9.6 million of dividends and $8.4 million of treasury-stock purchases.
- Debt covenants were met: average total leverage was 1.68 against a maximum of 3.25, and fixed-charge coverage was 4.76 against a minimum of 2.25.
Material changes and management commentary
- Sales growth was led by discretionary replacement and remodel demand. Building materials and tile sales rose 17%, equipment 14%, and chemicals 9%.
- Customer early-buy shipments shifted some sales from Q2 into Q1, contributing approximately 3% to Q1 sales growth. These lower-margin sales reduced reported gross margin; excluding their impact, management said gross margin was essentially flat year over year.
- Warmer-than-normal weather in year-round markets aided maintenance sales, while cold and snowy conditions in the Northeast and eastern Canada constrained growth. Currency translation reduced sales by approximately 1%; the stronger U.S. dollar also favorably affected operating expenses.
- Receivables, including pledged receivables, were up 13% year over year; trailing-twelve-month DSO was 28.9 days versus 28.1. Inventory rose 6% to $559.3 million, while inventory turns remained 3.4 times.
- Foreign currency translation and interest-rate-swap changes contributed to a $5.6 million total other comprehensive loss, leaving comprehensive income attributable to POOL at $3.0 million.
Outlook, risks, and unusual items
- Management reaffirmed 2015 diluted EPS guidance of $2.72–$2.87 and sales growth guidance of 6%–8%. It expected full-year gross margin to be relatively flat versus 2014 and an effective tax rate near 39%.
- Management expected operating expenses to grow at about half the rate of gross profit, and operating cash flow to be in line with net income for fiscal 2015. It anticipated approximately $100–$150 million of cash use for share repurchases.
- Management expected currency translation to reduce reported full-year sales by approximately 1%, based on then-current exchange rates. It expected Q2 growth to be lower than the rest of the year because early-buy shipments shifted into Q1. Plans included five to seven new sales centers and selective acquisitions.
- Key risks include weather and season length, economic and housing-market conditions, foreign exchange, supplier relationships, competition, and seasonal working-capital and borrowing needs. The company cautioned that Q1 results are not necessarily indicative of the full year.
- In February 2015, POOL entered a five-year agreement to lend to a swimming-pool retailer, with an $8.5 million commitment and $6.6 million outstanding at quarter-end. It stated that it was not the entity’s primary beneficiary and did not consolidate it.
- POOL held a 60% interest in Australian distributor Pool Systems Pty. Ltd.; its noncontrolling interest is classified as redeemable. The filing reported no material developments in previously disclosed litigation and no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether Q1 sales strength, particularly early-buy shipments and replacement/remodel demand, continued through the peak selling season.
- Whether reported gross margin and full-year EPS tracked management’s guidance after the timing shift and currency effects.
- Whether seasonal receivables and inventory growth converted to cash as expected, and whether debt and covenant headroom remained adequate.
- Whether the planned $100–$150 million of repurchases, dividends, new locations, and acquisitions were completed without impairing liquidity or leverage targets.
- How weather, foreign exchange, and the retailer lending exposure affected subsequent results; the filing provides no assurance that forecasts will be achieved.