POOL CORPORATION — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2013. Pool distributes swimming-pool, irrigation and related products through 323 sales centers. Results are highly seasonal, with sales and operating income generally concentrated in the second and third quarters.
Financial performance
| Metric | Q3 2013 | Change vs. Q3 2012 | First nine months 2013 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $578.2 million | +10% (base business +9%) | $1,738.9 million | +6% (base business +5%) |
| Gross profit / margin | $162.6 million / 28.1% | Profit +7%; margin down 60 bps | $495.5 million / 28.5% | Profit +4%; margin down 50 bps |
| Operating income / margin | $53.4 million / 9.2% | +30% reported; +11% versus prior-year adjusted operating income | $172.3 million / 9.9% | +11% reported |
| Net income | $32.3 million | +51% reported; +14% versus prior-year adjusted net income | $102.3 million | +14% reported; +6% versus prior-year adjusted net income |
| Diluted EPS | $0.68 | +$0.23 reported; +$0.09 versus prior-year adjusted EPS | $2.14 | +$0.27 reported; +6% versus prior-year adjusted EPS |
| Operating cash flow | Not separately reported for the quarter | — | $53.8 million | Down from $124.5 million |
Q3 2012 included a $6.9 million non-cash goodwill impairment charge, which reduced reported prior-year results; management’s adjusted comparisons exclude that charge. Q3 2013 gross margin remained under pressure from product, customer and geographic mix and competitive pricing, despite higher sales and gross-profit dollars.
Financial position and liquidity
- At September 30, 2013, cash was $24.2 million, current assets were $583.9 million and current liabilities were $207.5 million.
- Total debt was $260.4 million, up $46.1 million, or 22%, from September 30, 2012. The company reported $201.3 million available under its $465 million revolving credit facility.
- The credit facility was amended in September: maturity extended to September 20, 2018, and capacity increased from $430 million to $465 million, with an accordion feature allowing up to $540 million subject to lender agreement.
- For the nine months, investing cash outflow was $15.6 million and financing cash outflow was $26.0 million. The company paid $25.1 million in cash dividends and repurchased $53.0 million of treasury stock.
- Receivables rose 4% year over year; days sales outstanding improved to 28.3 from 29.0. Inventory increased 5% to $365.6 million, while inventory turns improved to 3.4 from 3.3.
Changes, outlook and key risks
- Management attributed the year-to-date operating cash flow decline mainly to timing of federal tax payments and inventory-related cash flows, and expected these timing differences to largely reverse in Q4. Full-year operating cash flow was expected to approximate net income.
- 2013 diluted EPS guidance was narrowed to $2.03–$2.08, from the prior range of $2.03–$2.13. Management expected Q4 sales growth in the mid-to-upper single digits; full-year sales growth of 5%–6% and gross-profit growth of 3%–4%.
- Management expected Q4 gross margin to remain below 2012 levels because lower-margin discretionary products and year-round markets were growing faster than higher-margin products and seasonal markets. Full-year expense growth was expected to remain similar to the year-to-date rate of under 2%; the projected effective tax rate was approximately 38.5%.
- Weather, economic and housing conditions, supplier relationships, competition and product/customer/geographic mix are material business sensitivities. Management noted more normalized Q3 weather after challenging, cool and wet conditions in seasonal markets earlier in 2013.
- A two-year receivables securitization facility was entered into on October 11, 2013, with seasonal capacity of up to $120 million (and potential additional capacity of up to $40 million by purchaser agreement). Amortization triggers include leverage and fixed-charge coverage thresholds; the company guarantees certain originator and servicer obligations, but not receivables’ collectability.
- Antitrust class actions remained pending, with motions to dismiss some claims before the court. A Riverside County, California civil-penalty complaint concerning alleged hazardous-material handling and related compliance matters was filed in August 2013; the company did not expect a material adverse effect, though the outcome was uncertain.
- The company reported compliance with credit-facility covenants at quarter-end and effective disclosure controls. It reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether management’s $2.03–$2.08 diluted EPS guidance and full-year sales and gross-profit growth expectations were achieved, particularly given margin pressure and weather sensitivity.
- Whether operating cash flow recovered as expected in Q4 and whether working-capital movements, including receivables, inventory and supplier payments, normalized.
- Debt, borrowing availability and covenant headroom after the credit amendment and the subsequent receivables securitization; monitor the securitization’s seasonal funding and trigger terms.
- Developments and any financial impact from the antitrust litigation and Riverside County complaint.
- Share repurchases and dividends relative to cash generation, debt levels and covenant restrictions.