POOL Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless otherwise noted. POOL distributes swimming pool, irrigation, and related products through 307 sales centers in North America and Europe. The company cautions that its highly seasonal first-quarter results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $362.0 million | $312.9 million |
| Gross profit / gross margin | $104.6 million / 28.9% | $91.4 million / 29.2% |
| Operating income / margin | $6.0 million / 1.7% | $0.6 million / 0.2% |
| Net income (loss) | $3.7 million | $(0.6) million |
| Diluted EPS | $0.08 | $(0.01) |
| Net interest expense | $1.5 million | $1.6 million |
| Cash used in operating activities | $34.0 million | $37.1 million |
Sales increased 16%, including 13% base-business growth and 3% from acquisitions and new centers. Gross profit rose 14%, while gross margin declined 30 basis points. Operating expenses increased 8% overall and 5% in the base business; expenses were 27.2% of sales versus 29.0%. The reported effective tax rate was 22.82% versus 39.20%; a $0.7 million reduction in the estimated annual tax provision contributed about $0.02 to Q1 diluted EPS. Without that benefit, the filing does not provide a precise adjusted EPS figure.
At March 31, 2012, cash was $20.7 million, current assets $709.6 million, and current liabilities $353.7 million. Receivables were $201.8 million and inventory $462.8 million. Total debt was approximately $299.0 million, compared with $280.2 million at March 31, 2011. The $430 million revolving credit facility had $127.9 million available; its maturity is October 19, 2016. The company reported compliance with its covenants and stated it expected to remain compliant through 2012. Operating cash use reflected seasonal working-capital needs, including receivables and inventory growth, partly offset by higher accounts payable. Investing cash use was $10.6 million, including $3.9 million for acquisitions and $6.7 million for property and equipment. Financing cash provided was $48.0 million.
Q1 cash dividends paid were $6.7 million; dividends declared were $0.14 per share, versus $0.13 a year earlier. The company repurchased $2.4 million of shares during the quarter, and $65.5 million remained available under the repurchase authorization as of April 23, 2012.
Material changes and management commentary
- Favorable weather, particularly record warmth in the Northeast and Midwest, advanced pool openings, remodeling, and construction activity and shifted some sales from Q2 into March. Management also cited market-share gains, improving discretionary spending, and estimated product-cost inflation of 1%–2%.
- Pool-side base-business sales increased 14%; irrigation sales increased 2%. Building materials, tile, and packaged pool products grew more than 25%, while parts sales increased 1%. Chemical sales rose 10%.
- Gross-margin pressure reflected a difficult comparison with Q1 2011, when early inventory buys benefited margin. Management cited improved purchasing and pricing discipline as a partial offset; higher inventory-obsolescence adjustments were unfavorable.
- Interest expense on borrowings was slightly higher, as average debt rose 17%, largely offset by a lower weighted-average effective borrowing rate: 2.44% versus 2.65%. Reported net interest expense also included a $0.3 million adjustment related to estimated interest on previously uncertain tax positions.
- The company acquired distribution assets of Ideal Distributors and CCR Distributors in Canada in February and March. These acquisitions were not material to financial position or results, according to the filing.
Outlook, risks, and contingencies
Management raised 2012 diluted EPS guidance to $1.75–$1.85 from $1.69–$1.79. The outlook assumes 5%–8% base-business sales growth for the remaining nine months, a full-year effective tax rate of approximately 38%, and modest expense growth. Management expects gross margin to be neutral to slightly positive for the rest of the year, while noting the challenge of improving full-year margin after a 40-basis-point increase in 2011. It expects contribution margin of 20% or higher and cash from operations to exceed net income. The outlook includes two fewer selling days in September than in 2011. Four sales centers opened in Q1, with six more expected in Q2.
Key risks include weather sensitivity, economic and housing-market conditions, supplier relationships, competition, and the timing of seasonal sales and cash collections. Management noted that favorable Q1 weather may have shifted activity forward from Q2. The business generally earns its highest sales and operating income in Q2 and Q3 and can incur losses in Q1 and Q4. Debt covenants restrict leverage, dividends, and share repurchases; noncompliance could lead to penalties, higher rates, or accelerated debt maturities. Five interest-rate swaps hedge portions of facility borrowings through October 2016; counterparty failure could eliminate their benefit. The filing reported no material changes to previously disclosed market risks or risk factors. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of Q1’s 16% sales growth reflects weather-related timing shifts versus sustained demand and market-share gains.
- Progress toward the $1.75–$1.85 EPS guidance, including the roughly $0.02 per-share Q1 tax benefit and the projected 38% full-year tax rate.
- Whether gross margin stabilizes as management expects, given Q1’s 30-basis-point decline and inventory-obsolescence pressure.
- Seasonal working-capital needs, cash conversion, and debt usage as receivables and inventory build ahead of peak selling months.
- Facility availability, covenant headroom, planned acquisitions, and the use of cash for dividends and share repurchases.