POOL CORPORATION — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Pool Corporation distributes swimming-pool and irrigation products through 293 sales centers in North America and Europe. The quarter is seasonally slow; results are not necessarily indicative of full-year performance.
Financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $312.9 million | $269.8 million | +16% |
| Gross profit / margin | $91.4 million / 29.2% | $76.3 million / 28.3% | +20%; margin +90 bps |
| Selling and administrative expenses | $90.8 million | $84.2 million | +8% |
| Operating income (loss) | $0.6 million | $(7.9) million | Improved |
| Net loss | $(0.6) million | $(6.1) million | Improved |
| Diluted loss per share | $(0.01) | $(0.12) | Improved |
| Net interest expense | $1.6 million | $2.4 million | Down 30% |
Base-business sales grew 15%: swimming-pool sales rose 15% and irrigation sales 12%. Gross-margin improvement reflected purchasing and pricing discipline and easier year-over-year comparisons. Operating expenses rose mainly from higher variable costs, including employee incentives and delivery expenses.
Cash flow, balance sheet and liquidity
- Operating cash use was $37.1 million, versus $25.3 million in Q1 2010, reflecting seasonal working-capital needs, including receivables and inventory. Investing cash use was $6.2 million, mainly capital expenditures; financing provided $45.0 million.
- Cash was $11.4 million at March 31, 2011. Receivables were $173.8 million and inventory was $438.8 million. Inventory increased 15% year over year (12% excluding acquired inventory); management cited seasonal preparation and higher replenishment. DSO improved to 31.0 days from 34.2 days.
- Total debt was approximately $280.2 million, up $2.0 million year over year. Revolver borrowings were $180.2 million, with $57.5 million available. The $100 million Floating Rate Senior Notes mature in February 2012; management said it would evaluate refinancing alternatives during 2011.
- Debt covenants were met: average total leverage ratio was 1.81 against a maximum of 3.25; fixed-charge ratio was 2.96 against a minimum of 2.25. Management believed capital availability was adequate and expected covenant compliance through year-end.
- The company repurchased 1.34 million shares under its program during the quarter and paid $6.3 million in dividends. Q1 financing activity included $36.0 million of treasury-stock purchases.
Outlook, commentary and risks
- Management raised 2011 diluted EPS guidance to $1.35–$1.45 from initial guidance of $1.27–$1.35. It expected full-year operating cash flow to approximate net income.
- For the rest of 2011, management anticipated mid-single-digit sales growth, modest full-year gross-margin improvement, and slightly higher base-business expenses that would decline as a percentage of sales. Expected contribution margin was approximately 20%.
- Management attributed Q1 strength partly to more favorable weather, market-share gains and somewhat improved consumer spending; easier comparisons also benefited reported growth. It expected more modest sales growth after Q1 and did not anticipate meaningful improvement in major household discretionary spending.
- Management estimated 2011 average inflationary product-cost increases of 1%–2%, including vendor price increases and deflation in some chemical products. The industry remained affected by depressed pool construction and refurbishment activity and weak housing and economic conditions.
- Key risks include weather sensitivity, economic and housing trends, supplier relationships, competition, and seasonal working-capital demands. Interest-rate swaps hedge portions of the notes and revolver; counterparty failure could remove hedge benefits. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether Q1 sales growth persists after favorable weather and easier comparisons, especially against management’s mid-single-digit outlook.
- Whether the raised EPS guidance and modest margin improvement are achieved as seasonal activity shifts into later quarters.
- Working-capital and borrowing needs during peak season, including inventory levels, revolver availability and covenant headroom.
- Plans and terms for refinancing the $100 million notes due February 2012.
- Cash generation relative to management’s expectation that full-year operating cash flow will approximate net income.