POOL Corporation 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing reports full-year results and unaudited quarterly results; Q4 is summarized separately below. Pool Corporation distributes swimming pool supplies and equipment, irrigation and landscape products through 321 sales centers. It reported one operating segment.
Financial results and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2,079.7 million | $1,954.0 million | Up 6% |
| Gross profit / gross margin | $591.3 million / 28.4% | $567.4 million / 29.0% | Profit up 4%; margin down 60 basis points |
| Operating income / margin | $165.5 million / 8.0% | $144.9 million / 7.4% | Up 14% |
| Net income | $97.3 million | $82.0 million | Up 19% |
| Diluted EPS | $2.05 | $1.71 | Up 20% |
| Cash provided by operations | $105.1 million | $119.1 million | Down $14.0 million |
| Total debt at year-end | $246.4 million | $230.9 million | Up $15.5 million |
Operating cash flow exceeded net income by $7.8 million. Investing activities used $19.9 million, including $18.7 million of net capital expenditures. The company paid $33.8 million in dividends and repurchased $94.3 million of shares during 2013. Year-end cash was $8.0 million, working capital was $313.8 million, and total assets were $823.8 million. Receivables were up 10% year over year, while days sales outstanding improved to 28.1 from 28.8; inventory rose 7% to $429.2 million.
At year-end, $194.4 million was outstanding under the $465 million revolving credit facility, with $267.4 million available; a further $52.0 million was outstanding under the receivables facility. The company reported compliance with debt covenants, a 1.40 average total leverage ratio against a 3.25 maximum, and a 4.29 fixed-charge coverage ratio against a 2.25 minimum.
Q4 and changes versus prior periods
- Q4 2013 sales were $340.8 million versus $306.8 million in Q4 2012. Base-business sales growth was 11%, following slower growth in the first half as weather delayed pool openings.
- Q4 operating loss narrowed to $6.8 million from $10.3 million; net loss narrowed to $5.0 million from $8.0 million.
- For the full year, base-business sales grew 6%: pool products rose 6% and irrigation and landscape products rose 11%. Building materials and tile sales increased 20%, while chemical sales declined 1.5%.
- Gross margin declined to 28.4% from 29.0%, reflecting sales mix shifts toward higher-value, lower-margin discretionary products, customer and geographic mix, lower vendor incentive rates, and competitive pricing. Selling and administrative expenses increased 2%, slower than sales.
- 2012 results included a non-cash $6.9 million U.K. goodwill impairment charge, reducing diluted EPS by $0.14. Excluding that charge, 2013 net income rose 9% and diluted EPS rose 11% versus adjusted 2012 results. No goodwill impairment was recorded in 2013, though management identified certain European, Canadian and U.S. reporting units as more exposed to potential impairment.
Outlook, risks and other notable items
Management projected 2014 base-business sales growth of 6% to 8%, including expected product-cost inflation of 1% to 2%; operating profit growth of at least 15%; and diluted EPS of $2.35 to $2.45. It expected expenses to grow at about half the rate of sales, cash from operations to approximate net income, and share repurchases to be similar to 2013. Management anticipated more normal seasonal weather and a sales mix still weighted toward discretionary products, implying negative-to-neutral gross-margin trends. Longer term, it forecast industry growth of roughly 4% to 7% annually over the next four to seven years, then 3% to 4%.
- The business is highly seasonal: 66% of 2013 sales and essentially all operating income came in Q2 and Q3. Weather can materially shift demand, and adverse weather in 2013 weighed on seasonal markets.
- Management cited economic and housing conditions, consumer credit, competition, supplier relationships, weather, regulation, foreign currency, cybersecurity and execution of expansion plans as risks. Three suppliers represented approximately 37% of 2013 product costs combined.
- Pending matters include consolidated antitrust class actions seeking unspecified damages and a California civil-penalty complaint concerning chemical handling and storage. The company said it intended to defend the antitrust matters and did not expect the California matter to have a material adverse effect; litigation outcomes remain uncertain.
- The board increased the share-repurchase authorization by $100 million in November 2013. The company repurchased 1.77 million shares for $94.3 million during 2013 and declared dividends of $0.73 per share.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether sales growth, particularly in discretionary construction, remodeling and irrigation products, supports management’s 2014 sales and EPS outlook.
- Whether gross margins stabilize after the 2013 decline, given product mix, pricing competition and vendor incentives.
- Seasonal working-capital needs, cash conversion and borrowing levels as the company enters the peak selling season.
- Progress on the identified goodwill-risk locations and developments in the antitrust and California regulatory matters.
- Whether share repurchases and dividend payments remain consistent with cash generation, debt covenants and the company’s capital priorities.