POOL Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Pool Corporation distributes swimming pool, irrigation and related products through 325 sales centers. Results are unaudited and the company cautions that first-quarter results are not necessarily indicative of the full year because the business is highly seasonal.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $406.3 million | $370.4 million | +10% |
| Gross profit / margin | $114.1 million / 28.1% | $104.8 million / 28.3% | +9%; margin down 20 bps |
| Operating income / margin | $8.6 million / 2.1% | $6.9 million / 1.9% | +25% |
| Net income | $4.2 million | $3.4 million | +22% |
| Diluted EPS | $0.09 | $0.07 | +$0.02 |
| Operating cash flow | $(37.3) million | $(40.0) million | Cash used decreased |
Operating expenses increased 8% to $105.5 million, while expenses as a percentage of sales declined to 26.0% from 26.4%. Net interest expense rose to $1.9 million, primarily due to foreign-currency settlement losses; debt interest expense was slightly lower year over year. The effective tax rate was 38.8%, compared with 35.7%.
Balance sheet, debt and liquidity
At March 31, 2014, cash was $7.3 million, total assets were $1.013 billion, and total debt was $324.2 million, up 16% from $278.5 million a year earlier. Debt included $215.9 million under the revolving credit facility and $108.4 million under the receivables securitization facility. The company reported $245.9 million of borrowing availability under its $465 million revolving facility. It also described seasonal receivables-facility capacity of up to $120 million, with an additional seasonal limit of up to $40 million potentially available during April–June.
Inventory was $527.3 million, up 7% year over year. Total receivables were $211.1 million, up 12%; DSO improved to 28.1 days from 28.7. The balance sheet separately presents $163.4 million of receivables pledged under the receivables facility. Cash used in operations reflected seasonal receivables and inventory investment, partly offset by higher accounts payable. Investing cash outflow was $10.3 million, including $4.5 million for acquisitions and $5.9 million of net capital expenditures. Financing provided $47.8 million, including net borrowing, while the company spent $28.2 million on treasury stock and paid $8.6 million in dividends.
The company was in compliance with debt covenants. Its average total leverage ratio was 1.44 against a maximum of 3.25, and its fixed-charge coverage ratio was 4.31 against a minimum of 2.25. The company stated it expected to remain in compliance and believed available capital was adequate for operations and working capital needs.
Material changes and management commentary
- Base-business sales grew 9%. Management attributed growth mainly to improved replacement and remodeling activity, housing-related activity, market-share gains and an estimated 1%–2% contribution from product-cost inflation.
- Building materials and tile sales rose 20%; equipment sales rose 13%; chemical sales rose 2%. An estimated 2% of sales growth reflected early-buy purchases shifting from Q2 into Q1, affecting year-over-year comparability and reducing Q1 gross margin. Excluding this timing effect, management said gross margin was essentially flat.
- Operating expenses increased due to sales-support costs, inflation, outside professional fees and expansion of the annual retail marketing event. Management noted higher expected performance-based compensation for 2014.
- Two acquisitions added four sales centers during the quarter; the company also opened one location and consolidated one. The acquisitions were not material to reported financial position or results.
- Quarter-end debt was higher than a year earlier, which management attributed to seasonal inventory-payment timing. Pool Corporation generated about 66% of 2013 sales and essentially all of 2013 operating income in Q2 and Q3; borrowing needs typically peak in Q2.
Outlook, risks and contingencies
Management affirmed 2014 diluted EPS guidance of $2.35–$2.45 and expected sales growth in the mid-to-upper single digits. It projected gross profit growth roughly in line with sales, relatively flat gross margin, full-year effective tax rate of approximately 38.5%, and operating-expense growth at roughly half the gross-profit growth rate. Performance-based compensation was expected to be $4–$5 million higher than in 2013, largely recorded in Q2 and Q3. Management expected operating cash flow to be in line with net income for 2014 and share repurchases similar to 2013; capital expenditures were projected near the high end of the company’s historical range.
Key risks include weather sensitivity, economic and housing-market conditions, supplier relationships, competition and seasonal working-capital needs. Management reported that Q1 weather was broadly similar to the prior-year quarter and did not significantly affect sales-growth comparisons. Pending matters include consolidated antitrust class actions and a California civil-penalty complaint concerning alleged hazardous-material handling and related regulatory violations. Management said it did not believe resolution of these matters would materially adversely affect financial condition, results or cash flows, while noting litigation outcomes are inherently unpredictable. No material changes to previously disclosed risk factors or market-risk disclosures were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the early-buy timing shift into Q1 reverses in Q2 and how it affects full-season sales and margins.
- Progress toward the $2.35–$2.45 EPS guidance, including the expected $4–$5 million increase in performance-based compensation.
- Seasonal cash requirements, inventory and receivables trends, debt levels, and continued access to revolving and receivables financing.
- Compliance with debt covenants and the effect of acquisitions, dividends and share repurchases on leverage and liquidity.
- Developments in the antitrust and California environmental/regulatory proceedings.