POOL Corporation — Q2 2013 Form 10-Q
Business context and period: Quarterly report for the three and six months ended June 30, 2013. Pool distributes swimming pool and related products through 321 sales centers in North America and Europe. Results are seasonal, with sales and operating income generally highest in the second and third quarters.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $790.4 million | $757.2 million | $1,160.8 million | $1,119.1 million |
| Gross profit / margin | $228.2 million / 28.9% | $222.4 million / 29.4% | $332.9 million / 28.7% | $327.0 million / 29.2% |
| Operating income / margin | $112.0 million / 14.2% | $108.1 million / 14.3% | $118.9 million / 10.2% | $114.2 million / 10.2% |
| Net income | $66.5 million | $64.9 million | $70.0 million | $68.6 million |
| Diluted EPS | $1.39 | $1.34 | $1.47 | $1.42 |
- Q2 sales increased 4%; net income rose 2% and diluted EPS increased $0.05. Six-month sales rose 4%, net income 2%, and diluted EPS $0.05.
- Gross margin declined 50 basis points in both comparisons. Management attributed the decline to product, customer and geographic mix and competitive pricing pressures, including stronger sales of lower-margin discretionary products.
- Six-month cash from operating activities was negative $33.0 million, versus positive $33.5 million a year earlier. The company attributed the change primarily to timing of inventory purchases and vendor payments and expected the timing impact to reverse during the rest of the year. Investing cash outflow was $11.7 million; financing cash inflow was $59.5 million.
- At June 30, cash was $26.9 million, total debt was $300.4 million, and $126.3 million was available under the credit facility. The facility had $430 million of borrowing capacity and matures in October 2016. The company reported compliance with all covenants.
- Inventory was $424.7 million, up 6% year over year; receivables were $281.1 million. DSO improved to 28.5 days from 29.3 days.
Outlook, commentary and risks
- Management revised full-year diluted EPS guidance to $2.03–$2.13, citing cooler, wetter conditions and delayed pool openings in seasonal markets. It projected approximately 5% full-year sales growth, including about 6% growth in the second half, and 3%–5% gross profit growth.
- Management expected a full-year effective tax rate of approximately 39%, operating cash flow at least equal to net income, and increased share repurchases in the third and fourth quarters. Two additional sales centers were expected to open before the season ended.
- Strong year-round markets and growth in refurbishment and replacement activity partly offset weak seasonal markets. Irrigation sales increased 10% in Q2; European sales declined approximately 4% in local currencies.
- Principal disclosed sensitivities include weather, economic and housing-market conditions, supplier relationships, competition and product mix. Management expected adverse margin mix and competitive pressures to continue, though the mix headwind was expected to moderate in the second half.
- Several purported direct- and indirect-purchaser antitrust class actions remained pending in consolidated proceedings. Courts had granted in part and denied in part motions to dismiss claims; the filing does not provide a clear estimate of potential financial exposure.
- The 2013 acquisitions were described as immaterial to financial position and results. Q2 operating expenses benefited from $2.3 million lower employee incentive costs; first-half expenses benefited from $3.5 million lower incentive costs.
Key facts for investors to verify
- Whether seasonal demand recovered as assumed in the revised sales and EPS outlook, and whether weather-related lost sales were deferred or not recovered.
- Whether gross-margin pressure moderated in the second half as management projected.
- Whether working-capital timing reversed and operating cash flow met or exceeded full-year net income.
- Credit-facility availability, covenant compliance, debt levels and the pace of planned share repurchases.
- Developments in the antitrust litigation and any subsequent disclosure of potential exposure.