POOL Corporation 10-Q Summary
Business context and reporting period: Unaudited results for the quarter and six months ended June 30, 2012. Pool Corporation distributes swimming pool, irrigation and related products through 308 sales centers in North America and Europe. Its business is highly seasonal, with peak sales generally in the second and third quarters.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $757.2 million | $706.4 million | $1,119.1 million | $1,019.3 million |
| Gross profit | $222.4 million | $211.4 million | $327.0 million | $302.8 million |
| Operating income | $108.1 million | $97.9 million | $114.2 million | $98.5 million |
| Net income | $64.9 million | $58.6 million | $68.6 million | $57.9 million |
| Diluted EPS | $1.34 | $1.19 | $1.42 | $1.17 |
- Q2 sales rose 7%, net income 11%, and diluted EPS 13%. First-half sales rose 10%, net income 18%, and diluted EPS 21%.
- Q2 gross margin was 29.4%, down approximately 50 basis points year over year; operating margin was 14.3%, up 40 basis points. First-half gross margin was 29.2%, down 50 basis points; operating margin was 10.2%, up 50 basis points.
- Six-month operating cash flow was $33.5 million, versus cash used of $18.9 million in the prior-year period. Investing cash outflow was $14.1 million and financing cash inflow was $13.9 million. Cash at June 30 was $50.3 million.
- Total debt was $309.8 million at June 30, 2012. The $430 million revolving facility had $117.5 million available. The company reported compliance with its covenants: leverage ratio 1.66 against a maximum of 3.25, and fixed-charge coverage 3.59 against a minimum of 2.25.
- Current assets were $742.8 million and current liabilities $355.6 million. Receivables were $270.1 million and inventory $402.3 million. DSO improved to 29.3 days from 30.7; inventory turns rose to 3.3 from 3.2.
- Quarterly dividends declared were $0.16 per share. The company repurchased approximately $42.1 million of shares in the first half; $26.1 million remained available under its repurchase authorization as of July 23.
Material changes and management commentary
- Base-business sales increased 5% in Q2, including 5% growth in pool-related sales and 11% in irrigation. First-half base-business sales grew more than 7%; Europe sales declined 4% in local currencies.
- Management attributed growth to market-share gains, improved consumer discretionary spending, product-cost inflation and a larger installed pool base. Acquisitions and new-market openings also contributed to reported growth. Two Canadian distributor asset acquisitions were completed in February and March; their reported impact was not material.
- The unusually mild winter and record-warm spring pulled some seasonal sales into the first and early second quarters. June sales were affected by cooler and less favorable weather and the earlier-than-normal seasonal peak.
- Gross margin pressure reflected a difficult comparison with 2011 vendor-price-increase inventory benefits, competitive pricing, customer mix and lower margins from recent acquisitions. Purchasing and pricing discipline and lower card fees partly offset these pressures.
- Q2 operating expenses increased less than 1%; base-business expenses fell 2%, helped by lower incentive costs, currency effects and reduced bad-debt expense. First-half operating expenses increased 4%, while expenses as a share of sales declined to 19.0% from 20.0%.
Outlook, risks and contingencies
- Management narrowed 2012 diluted EPS guidance to $1.75-$1.82, from $1.75-$1.85, citing the early seasonal peak and an uncertain economic environment. It continued to expect full-year base-business sales growth of 5%-8%, with 2%-4% projected for the second half.
- Management expected second-half gross margin to decline year over year, particularly against a strong third-quarter 2011 comparison. It expected modest full-year expense growth, a full-year effective tax rate of about 38%, approximately 20% contribution margin, and operating cash flow exceeding net income.
- Key risks include weather, the economy and housing market, consumer confidence and employment, competition, supplier relationships, foreign exchange and seasonality. Management cautioned that interim results are not necessarily indicative of full-year results.
- Antitrust class actions were consolidated in federal court; plaintiffs seek unspecified damages and other relief. The company considers the claims without merit and intends to defend itself. Riverside County made a civil-penalty demand regarding alleged chemical-handling and related regulatory violations; discussions were ongoing, and the company did not expect a material adverse effect, but could not predict the outcome.
- Five interest-rate swaps hedge portions of facility borrowings through October 2016. Counterparty failure could eliminate expected hedge benefits. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether second-half sales growth and the revised EPS guidance are achieved, given the sales shift caused by weather and the early season peak.
- Whether competitive pricing and the 2011 comparison continue to pressure gross margins, especially in the third quarter.
- Facility availability, seasonal working-capital needs, debt levels and continued compliance with credit-facility covenants.
- Developments and potential financial exposure from the antitrust litigation and Riverside County regulatory matter.
- Whether operating cash flow exceeds net income as management projected; first-half cash flow benefited from a more normal seasonal cash cycle compared with 2011.