POOL Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. POOL is a wholesale distributor of swimming-pool supplies and equipment and irrigation and landscape products, operating 291 sales centers in North America and Europe.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $1,613.7 million | $1,539.8 million | Up 5% |
| Gross profit / margin | $471.3 million / 29.2% | $449.7 million / 29.2% | Profit up 5%; margin unchanged |
| Operating income / margin | $101.2 million / 6.3% | $88.4 million / 5.7% | Up 14%; margin up 60 bps |
| Net income | $57.6 million | $19.2 million | Up substantially |
| Diluted EPS | $1.15 | $0.39 | Up $0.76 |
| Cash from operations | $94.0 million | $113.3 million | Down $19.3 million |
| Total debt at year-end | $198.7 million | $248.7 million | Down $50.0 million |
FY 2010 interest expense, net, was $6.6 million versus $9.7 million; the effective tax rate was 39.2%. Working capital was $265.1 million, cash was $9.7 million, and stockholders’ equity was $285.2 million. The company paid $25.7 million in dividends and spent $8.1 million on capital expenditures. It repurchased $12.1 million of shares during 2010.
Fourth-quarter sales were $241.4 million versus $231.0 million in Q4 2009. The company reported a fourth-quarter operating loss of $16.8 million and net loss of $11.8 million, compared with losses of $21.8 million and $13.6 million, respectively, in Q4 2009.
Material changes versus prior period
- Base-business sales rose 2% for the year; pool-related base-business sales rose 3%, while irrigation sales declined 10% amid weak construction demand.
- Sales benefited from acquisitions, market-share gains, expanded product offerings, and more favorable weather in several regions. Comparisons were partly offset by about $17 million of prior-year sales tied to new pool-safety products and by price deflation in some products.
- Operating expenses rose 2% overall, primarily due to acquisitions; base-business expenses were essentially flat. Expense ratio improved to 22.9% from 23.5%.
- FY 2009 net income included a $28.7 million equity loss related to Latham Acquisition Corporation, including a $26.5 million non-cash impairment. POOL had no equity interest in LAC in 2010; therefore, the year-over-year earnings increase is not solely a measure of operating growth.
- Receivables collection improved: DSO fell to 31.6 days from 34.9, and past-due receivables as a share of total receivables declined 730 basis points. Inventory fell 2% to $347.4 million, while inventory turns improved to 3.3 from 3.0.
Liquidity, debt, outlook and risks
Operating cash flow funded acquisitions, debt repayment, dividends, capital spending, and buybacks. At December 31, 2010, $98.7 million was outstanding on the $240 million revolving facility, with $139.2 million available. The $100 million senior notes mature in February 2012; management said it would evaluate refinancing alternatives during 2011. The company was in compliance with debt covenants; its leverage ratio was 1.99 against a maximum of 3.25, and its fixed-charge ratio was 2.78 against a minimum of 2.25.
Management projected 2011 diluted EPS of $1.27–$1.35, low-to-mid-single-digit base-business sales growth, modest gross-margin improvement, and operating cash flow approximating or exceeding net income. It expected 1%–2% average product-cost inflation, with deflation in certain chemicals, and planned three new sales centers excluding acquisitions. Management cautioned that consumer spending may recover slowly and construction could remain depressed through 2011.
- Key risks: economic and housing weakness, limited consumer credit, weather and seasonality, discretionary spending exposure, intense competition, supplier concentration, and customer credit risk. The four largest pool markets—California, Florida, Texas, and Arizona—represented about 50% of sales.
- Other exposures: environmental and chemical-handling regulation, international currency and trade risks, interest-rate and swap-counterparty risk, and potential goodwill impairment. Goodwill was $178.5 million; management reported no impairment in 2010 but identified several locations as more exposed under sensitivity analyses.
- Contingencies: The FTC was conducting a non-public investigation into possible conduct under Section 5 of the FTC Act. The company said the investigation does not imply a finding of violation and that it was cooperating. Management did not expect ordinary-course litigation to materially affect results.
- Controls and audit: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether 2011 sales and EPS guidance was achieved, especially given the stated slow recovery and ongoing weakness in construction.
- How much earnings growth reflects operating improvement versus the absence of the 2009 LAC impairment.
- Refinancing or repayment plans for the $100 million notes due February 2012 and continued compliance with credit-facility covenants.
- Whether receivables, inventory turns, and operating cash flow remain strong as seasonal working-capital needs rise.
- Developments in the FTC investigation, supplier relationships, and goodwill-risk locations.