POOL Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The business is seasonal, with sales and operating income generally concentrated in the second and third quarters.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $706.4 | $647.5 | $1,019.3 | $917.3 |
| Gross profit / margin | $211.4 / 29.9% | $190.5 / 29.4% | $302.8 / 29.7% | $266.8 / 29.1% |
| Operating income / margin | $97.9 / 13.9% | $88.9 / 13.7% | $98.5 / 9.7% | $81.0 / 8.8% |
| Net income | $58.6 | $52.8 | $57.9 | $46.7 |
| Diluted EPS | $1.19 | $1.05 | $1.17 | $0.93 |
Q2 sales rose 9%; base-business sales increased 8%, including a 1% benefit from currency. First-half sales rose 11%, with base-business sales up 10%. Growth reflected market-share gains and increased replacement, remodeling and construction activity. Q2 gross margin expanded 50 basis points; first-half margin expanded 60 basis points. Management attributed improvement mainly to sales and pricing discipline, purchasing, vendor price increases and, in Q2, higher freight-out income.
Operating expenses rose 12% in Q2 and 10% in the first half. Higher employee incentives, delivery and fuel costs, currency effects, variable expenses and bad-debt expense contributed. Interest expense declined 5% in Q2 and 19% year to date, aided by lower effective interest rates. Q2 diluted EPS growth included an estimated $0.04 per-share benefit from lower weighted-average shares following repurchases; the first-half benefit was approximately $0.03 per share.
Cash flow, balance sheet and capital
- First-half operating cash flow was a use of $18.9, versus $28.7 provided in the prior-year period. The filing cites higher receivables and inventory purchases ahead of vendor price increases; net income increased.
- First-half investing cash use was $15.2, including $12.4 of capital expenditures and $2.6 for acquisitions. Financing provided $59.8, including $107.3 of net revolving-credit borrowings and $43.7 of treasury-stock purchases. Cash ended at $37.2.
- At June 30, total debt was $306.0, up $39.9 from June 30, 2010. This included $100.0 current debt and $206.0 long-term debt. Cash was $37.2; net debt was therefore approximately $268.8.
- Current assets were $710.9 and current liabilities $427.7. Receivables were $266.0, up 11% year over year; days sales outstanding improved to 30.7 from 33.0. Inventory was $389.8, up 18% year over year, partly reflecting advance purchasing and sales growth.
- The $240.0 revolving facility had $206.0 outstanding and $31.9 available at June 30. The company reported compliance with debt covenants: average total leverage ratio of 1.75 versus a 3.25 maximum, and fixed-charge ratio of 3.13 versus a 2.25 minimum.
- Cash dividends declared were $0.14 per share for Q2 and $0.27 per share for the first half. The company authorized a new $100.0 million repurchase program in May; $99.3 million remained available as of July 22, 2011.
Outlook, risks and notable items
Management raised the lower end of full-year 2011 diluted EPS guidance, narrowing the range to $1.38–$1.45 from $1.35–$1.45. It expected full-year cash from operations to approximate net income. Management forecast mid-single-digit base-business sales growth in the second half, approximately 2% average product-cost inflation versus the second half of 2010, modest Q3 gross-margin improvement, and possible Q4 margin decline of 100 or more basis points against a strong prior-year comparison. It expected higher Q3 expenses, especially incentives and variable costs, and estimated close to 20% contribution margin on 2011 base-business sales growth.
Management described signs of stabilization in pool and irrigation markets but said consumer, employment, financing and housing conditions remained depressed. It expected construction activity to remain near depressed levels through at least the rest of 2011. Key risks include weather sensitivity, the economy and housing market, supplier relationships, competition and seasonal working-capital needs. Results for the interim periods may not indicate full-year performance.
The company had $100.0 million of Floating Rate Senior Notes due February 2012 and a revolving facility maturing December 2012. Management said it would evaluate financing alternatives in the second half of 2011 and might revise or replace the revolver; economic uncertainty could worsen financing terms. Two interest-rate swaps hedged $50.0 million each of the Notes and revolver; counterparty failure could eliminate potential hedge benefits. The May 2011 Kilpatrick asset acquisition was reported as not material to financial position or results.
Key facts for investors to verify
- Whether second-half sales, gross-margin and expense trends meet management’s assumptions and the $1.38–$1.45 diluted EPS outlook.
- Whether operating cash flow recovers as expected after first-half working-capital outflows, particularly receivables and inventory.
- Progress and terms of refinancing the Notes due February 2012 and the revolver due December 2012; monitor borrowing availability and covenant headroom.
- Whether inventory growth, receivable quality and customer collections remain consistent with sales growth and the reported improvement in DSO.
- Potential effects of weather, housing-market weakness, vendor pricing, fuel costs and seasonal fluctuations on results and liquidity.