POOL Corporation — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012, with fourth-quarter results also presented. POOL is a wholesale distributor of swimming-pool supplies, equipment and leisure products, and irrigation and landscape products. It operated 312 sales centers across North America and Europe. Its business is highly seasonal, with about 66% of 2012 sales and more than 100% of operating income generated in the second and third quarters.
Financial results and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $1,954.0 million | $1,793.3 million |
| Gross profit / gross margin | $567.4 million / 29.0% | $531.6 million / 29.6% |
| Operating income / operating margin | $144.9 million / 7.4% | $125.1 million / 7.0% |
| Net income | $82.0 million | $72.0 million |
| Diluted EPS | $1.71 | $1.47 |
| Cash from operations | $119.1 million | $75.1 million |
Base-business sales grew 7%; total sales rose 9%, including contributions from acquisitions and new-market locations. Adjusting for goodwill impairment, management reported FY 2012 operating income of $151.8 million, adjusted net income of $88.9 million and adjusted diluted EPS of $1.85; these are non-GAAP comparisons supplied by management.
Cash and cash equivalents were $12.5 million at year-end; working capital was $295.1 million. Total debt was $230.9 million, down $16.4 million year over year. The $430 million revolving facility had $195.5 million available, and POOL reported compliance with its covenants. The company generated $119.1 million in operating cash flow and used $16.3 million for net capital expenditures, $29.1 million for dividends and $77.0 million for open-market repurchases. The annual dividend declared was $0.62 per share.
In Q4, sales were $306.8 million versus $270.4 million a year earlier. Operating loss was $10.3 million versus $14.3 million, and net loss was $8.0 million versus $10.1 million.
Material changes versus the prior year
- Sales increased 9% and base-business sales increased 7%, reflecting market-share gains, improved discretionary spending, replacement activity, product expansion and estimated product-cost inflation of 1% to 2%.
- Operating income rose 16% and net income rose 14%; diluted EPS increased 16%, supported in part by fewer weighted-average shares following repurchases.
- Gross margin fell 60 basis points to 29.0%, due to product and customer mix, competitive pricing and comparison with 2011’s opportunistic inventory purchases.
- Operating expenses rose 3%, while base-business operating expenses were essentially flat. Debt declined, and operating cash flow increased by $44.0 million.
- A $6.9 million non-cash goodwill impairment was recorded for the U.K. reporting unit, compared with a $1.6 million charge in 2011. The 2012 impairment reduced diluted EPS by $0.14.
Outlook, commentary and risks
Management projected 2013 diluted EPS of approximately $2.13 to $2.23 and base-business sales growth of 5% to 7%, including anticipated inflation of 1% to 2%. It expected gross margin to be relatively flat for the year, with quarterly comparisons varying by 30 or more basis points; operating-expense growth was expected at about half the rate of sales growth. Management anticipated operating cash flow would exceed net income and share repurchases would be similar to 2012. Longer term, it forecast industry growth of 4% to 7% annually over the next 7 to 10 years, then 3% to 5%.
Management cited a potential recovery from deferred remodeling and replacement activity, gradual normalization of pool and irrigation construction, and continued market-share gains. However, U.S. new-pool construction remained more than 70% below its 2005 peak and about 60% below management’s normalized level estimate. The outlook is subject to economic and housing conditions, consumer financing, weather, competitive pricing, product mix, supplier relationships, currency movements and European economic weakness. The business also faces low barriers to entry and significant seasonal fluctuations.
Legal matters include consolidated purported direct- and indirect-purchaser antitrust class actions seeking unspecified damages and equitable relief; POOL said it would vigorously defend itself. Riverside County, California, also made a monetary demand alleging hazardous-material handling, storage and transportation violations. The company could not predict the outcome but did not expect the Riverside matter to materially affect its financial condition, results or cash flows. Management stated that other claims were not expected to have a material adverse effect.
Other notable exposures include potential further goodwill impairment in certain European and domestic reporting units, variable-rate debt exposure despite interest-rate swaps, foreign-currency risk, and regulated storage and handling of chemicals and fertilizers. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2013 sales and EPS guidance was achieved, and how much growth came from underlying business versus acquisitions, pricing and market-share gains.
- Whether gross margin stabilized amid competitive pricing and lower-margin product/customer mix.
- Whether operating cash flow, debt levels, facility availability and covenant headroom remained consistent with management’s expectations.
- Developments in U.K., Spain and Italy operations and any additional goodwill impairment indicators.
- Updates and financial exposure, if any, from the antitrust litigation and Riverside County demand.
- The effect of weather, housing and consumer-credit conditions on seasonal sales and deferred pool construction and remodeling demand.