POOL CORPORATION — Q2 2015 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2015. Pool Corporation distributes swimming pool, spa, and related leisure products through 331 sales centers. Its business is highly seasonal, with sales and operating income typically concentrated in the second and third quarters.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $851.9 million, up 0.4% from $848.2 million | $1,302.3 million, up 3.8% from $1,254.6 million |
| Gross profit and margin | $248.3 million; 29.1%, unchanged | $373.1 million, up 3.3%; 28.6%, down from 28.8% |
| Operating income and margin | $129.1 million, up 5.4%; 15.2%, versus 14.4% | $144.7 million, up 10.4%; 11.1%, versus 10.5% |
| Net income attributable to Pool Corporation | $77.9 million, up 5.5% | $86.3 million, up 10.6% |
| Diluted EPS | $1.75, up 8.7% from $1.61 | $1.94, up 14.8% from $1.69 |
Quarterly selling and administrative expenses declined 4% to $119.1 million. Net interest expense was $1.9 million in Q2 and $3.9 million for the six-month period. The effective tax rate was 38.9% for both periods, compared with 38.8% in 2014.
Cash flow: For the first half, operating activities used $56.6 million, compared with $50.9 million used in 2014; investing activities used $18.6 million; and financing activities provided $103.8 million. Cash ended the period at $38.9 million. Management attributed operating cash use mainly to seasonal working-capital timing, particularly receivables and the payables cycle.
Balance sheet and liquidity: At June 30, cash was $38.9 million, current assets were $845.1 million, and current liabilities were $320.8 million. Total debt was $495.3 million, up 15% from $431.0 million a year earlier, primarily due to inventory purchase and payment timing. Debt comprised $311.8 million under the revolving credit facility, $180.0 million under the receivables facility, and $3.4 million of short-term borrowings. The company reported $149.2 million available under its $465 million revolving facility. It was in compliance with debt covenants; its average total leverage ratio was 1.70 against a maximum of 3.25, and fixed-charge coverage was 4.88 against a minimum of 2.25.
First-half cash uses included $62.7 million of treasury-stock purchases, $20.9 million of dividends, and $16.2 million of net capital expenditures. The declared dividend was $0.26 per share for Q2, versus $0.22 in 2014.
Material changes and management commentary
- Q2 consolidated sales were nearly flat and base-business sales were flat. Management estimated that currency translation reduced sales growth by about 2%; adverse weather reduced Q2 sales by about 2%; and the shift of early-buy shipments into Q1 reduced Q2 sales by nearly 1%.
- Record rainfall in Texas and nearby states delayed construction and reduced discretionary purchases. Cooler, wet weather in the Midwest and Northeast delayed pool openings and weighed on demand. Sales met or exceeded expectations in markets with more normal weather.
- International sales grew an estimated 8% in local currencies in the first half, but the stronger U.S. dollar reduced reported growth. Management estimated a $0.03 per diluted share adverse currency impact for both Q2 and the first half.
- For the first half, building materials and tile sales grew 12%, equipment sales 8%, and chemical sales approximately 5%. Q2 growth was 9%, 5%, and 3%, respectively.
- First-half gross margin fell about 15 basis points, partly due to early-buy shipments, which are generally bulk sales subject to discounts. Management said margin was essentially flat after excluding that effect.
Outlook, risks, and unusual items
Management narrowed 2015 diluted EPS guidance to $2.72–$2.82, from $2.72–$2.87. It expects full-year sales growth of approximately 3%, including an estimated 2% adverse currency effect; gross margin roughly flat with 2014; operating-expense growth no more than half the rate of gross-profit growth; and an effective tax rate of approximately 39%. Management expects operating cash flow to be in line with net income and anticipates approximately $100 million of share repurchases for the year.
Key risks include weather and seasonality, economic and housing-market conditions, currency movements, supplier and manufacturer relationships, competition, and variable interest rates. The company stated it had adequate capital availability and expected to remain in covenant compliance. Failure to comply with debt covenants could trigger penalties, higher borrowing costs, or accelerated debt maturity.
In Q2, the company reversed a $0.2 million contingent-consideration liability related to its Australian PSL acquisition after concluding no payout was required. It also entered a five-year lending agreement with a pool retailer: the commitment is $8.5 million, with $3.2 million outstanding at June 30. The retailer was not consolidated. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material developments in previously reported legal proceedings.
Important facts for investors to verify
- Whether weather-related delayed demand in seasonal markets returns or represents permanently lost sales, and whether the full-year sales and EPS outlook is achieved.
- How currency movements, early-buy shipment timing, and product mix affect reported growth and gross margin in subsequent quarters.
- Whether seasonal working-capital needs, debt levels, and cash conversion remain consistent with management’s expectations.
- Whether planned repurchases and dividends remain supportable within facility availability and covenant limits.
- The terms, performance, and collectibility of the retailer lending arrangement and the redemption provisions for the PSL noncontrolling interest.