POOL Corporation — FY 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; fourth-quarter figures are noted separately. POOL is a wholesale distributor of pool supplies and equipment and irrigation and landscape products, operating 298 sales centers in North America and Europe. Results are seasonal, with roughly 67% of annual sales generated in the second and third quarters.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $1.793 billion | $1.614 billion | +11% |
| Gross profit / margin | $531.6 million / 29.6% | $471.3 million / 29.2% | +13%; margin +40 bps |
| Operating income / margin | $125.1 million / 7.0% | $101.2 million / 6.3% | +24%; margin +70 bps |
| Net income | $72.0 million | $57.6 million | +25% |
| Diluted EPS | $1.47 | $1.15 | +28% |
| Cash provided by operations | $75.1 million | $94.0 million | Down $18.9 million |
| Capital expenditures | $19.5 million | $8.1 million | Higher, including vehicle and IT spending |
Operating cash flow exceeded net income by $3.1 million, but declined year over year largely because of inventory investment. The company spent $71.0 million on share repurchases and paid $26.5 million in dividends. Working capital was $307.1 million, cash was $17.5 million, and total debt was $247.3 million at year-end. The new $430 million revolving credit facility had $147.3 million drawn and $280.0 million available; the company reported compliance with its covenants. The $100 million senior notes were repaid at maturity in February 2012 using the facility.
Fourth-quarter net sales were $270.4 million versus $241.4 million a year earlier. Operating loss was $14.3 million versus $16.8 million, and net loss was $10.1 million versus $11.8 million.
Material changes versus prior periods
- Base-business sales grew 10% in 2011, with pool sales up 10% and irrigation sales up 8%; management attributed much of the growth to market-share gains, expanded product offerings and improved replacement demand.
- Gross margin improved through pricing and purchasing discipline and a shift toward preferred-vendor and company-branded products. Fourth-quarter margin declined 60 basis points year over year, partly because fourth-quarter 2010 included nonrecurring vendor incentives.
- Operating expenses rose 10%, including a $15.4 million increase in employee incentive costs and a $1.6 million goodwill impairment charge. Lower weighted-average shares from repurchases contributed approximately $0.05 to diluted EPS.
- Debt increased $48.6 million during the year, while inventory rose 11% to $386.9 million. Days sales outstanding improved to 29.9 days from 31.6.
Outlook, risks and unusual items
- For 2012, management projected base-business sales growth of 5%–8%, modest gross-margin improvement, operating-profit growth at 20% or more of base-business sales growth, diluted EPS of $1.69–$1.79 and operating cash flow above net income. It expected product-cost inflation of 1%–2% and at least five new sales-center openings.
- Management described a gradual industry recovery, estimating U.S. new-pool construction at about 57,000 units in 2011, still approximately 70% below its 2005 peak. It forecast 4%–8% industry annual growth during a recovery period of 8–10 years, followed by 3%–5% longer-term growth.
- Key risks include economic and housing weakness, consumer-credit availability, weather and seasonality, intense competition, supplier dependence, customer credit losses, regulatory compliance, international and currency exposure, and potential future goodwill impairment. Management identified certain Horizon locations and other units as more exposed to impairment risk.
- In October 2011, POOL recorded a $1.6 million goodwill impairment for three Texas Horizon locations. The FTC settlement resolving its investigation was non-monetary, involved no admission of liability, and became final January 10, 2012. Multiple customer antitrust class actions alleging monopolization were pending; plaintiffs sought unspecified damages and other relief. The company said it intended to defend the cases and did not then expect material financial impact.
- Other relevant sensitivities: management estimated that a 1 percentage-point increase in variable interest rates under its specified borrowing scenario would reduce pretax income by about $2.8 million; goodwill impairment estimates were sensitive to discount-rate and growth assumptions. The company said weather had a small favorable effect on 2011 sales.
Important facts for investors to verify
- Whether the 2012 sales and EPS outlook was achieved, and how much growth came from market share, acquisitions, inflation and underlying demand.
- Inventory growth, working-capital conversion and operating cash flow relative to earnings as the seasonal selling cycle progresses.
- Debt levels, available revolver capacity, covenant headroom, interest-rate exposure and the effect of share repurchases and dividends on leverage.
- Developments in the antitrust litigation and any resulting financial or operational exposure; the final FTC order and its requirements.
- Goodwill valuation assumptions and performance of the identified at-risk sales centers, along with customer credit quality and supplier concentration.
The filing reports an unqualified audit opinion on the financial statements and an unqualified opinion on internal control over financial reporting.