POOL CORPORATION — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Pool distributes swimming-pool and irrigation products through 296 sales centers in North America and Europe. Results are highly seasonal, with sales and operating income generally concentrated in the second and third quarters.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $503.6 million | $455.0 million | $1,522.9 million | $1,372.3 million |
| Gross profit | $147.9 million | $130.9 million | $450.8 million | $397.7 million |
| Gross margin | 29.4% | 28.8% | 29.6% | 29.0% |
| Operating income | $40.9 million | $37.0 million | $139.4 million | $118.0 million |
| Operating margin | 8.1% | 8.1% | 9.2% | 8.6% |
| Net income | $24.2 million | $22.8 million | $82.1 million | $69.4 million |
| Diluted EPS | $0.50 | $0.45 | $1.67 | $1.38 |
For the first nine months, operating cash flow was $32.0 million, down from $65.2 million. Investing cash outflow was $20.1 million, including $17.0 million of net capital expenditures; financing cash outflow was $1.6 million. Cash increased to $20.7 million from $9.7 million at year-end 2010.
At September 30, 2011, total debt was $268.7 million, versus $231.2 million a year earlier and $198.7 million at December 31, 2010. Current assets were $536.5 million and current liabilities $191.0 million. The filing reports covenant compliance: average total leverage ratio of 1.77 against a maximum of 3.25, and fixed charge ratio of 3.19 against a minimum of 2.25.
Changes and management commentary
- Q3 sales rose 11%; base-business sales increased 9%, with growth in both pool and irrigation products. Management attributed gains mainly to market-share growth, replacement activity, product-cost inflation, modestly improved discretionary spending and favorable currency movements.
- Q3 gross margin expanded 60 basis points, reflecting sales, pricing and purchasing discipline, vendor price increases and higher freight-out income. Operating expenses rose 14%, including higher employee incentives, delivery costs and bad-debt expense; operating margin was unchanged.
- Nine-month sales increased 11%, including 10% base-business growth. Gross margin increased 60 basis points; operating expenses rose 11%. Net income grew 18% and diluted EPS 21%, with share repurchases contributing approximately $0.06 per diluted share to the year-to-date EPS increase.
- Operating cash flow was lower year over year, which management attributed largely to comparatively higher inventory balances. Inventory was $337.7 million, up 10% from September 2010; receivables were up 3%, while DSO improved to 30.3 days from 32.2 days.
Outlook, risks and notable items
- Management raised full-year 2011 diluted EPS guidance to $1.43–$1.47, from prior guidance of $1.38–$1.45, and expected full-year operating cash flow to approximate net income.
- For Q4, management expected base-business sales growth in the mid- to high-single digits, including estimated product-cost inflation of about 2%. It cautioned that gross margin could decline by 100 or more basis points year over year, partly due to unusually favorable vendor incentives in Q4 2010. Base-business operating expense growth, excluding fuel and currency effects, was expected at approximately 2%–3% over the next several quarters.
- Management cited weak housing and economic conditions, including depressed pool construction and refurbishment activity, but saw potential from deferred replacement demand and eventual normalization of construction. Weather, consumer spending, housing activity, competition and supplier relationships remain risks. The filing states there were no material changes to previously disclosed risk factors.
- On October 19, 2011, the company entered a new $430 million unsecured revolving credit facility, maturing in 2016, replacing its $240 million facility. It had $165.9 million outstanding at closing. The company intends to use the increased capacity to repay $100 million of notes maturing in February 2012 and for growth and general corporate purposes. The new facility includes customary covenants and limits dividends and share repurchases under specified conditions.
- The company repurchased 760,288 shares in Q3 for an average $25.15 per share. At October 21, $79.5 million remained under the $100 million authorization. The May 2011 Kilpatrick asset acquisition was reported as immaterial to financial position and results.
Key facts for investors to verify
- Whether Q4 and full-year results met the revised EPS and sales outlook, particularly given seasonal margin pressure.
- Whether operating cash flow improves as seasonal working-capital balances unwind, and how inventory and receivables develop.
- Debt, borrowing availability, and compliance with the new facility’s covenants after refinancing the maturing notes.
- The sustainability of market-share gains and gross-margin expansion, including the effects of vendor incentives, pricing and delivery costs.
- The impact of continued share repurchases and dividends on leverage and liquidity.