POOL CORPORATION — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Pool Corporation distributes swimming pool, irrigation and related products through 312 sales centers in North America and Europe. Results are seasonal, with sales and operating income generally highest in Q2 and Q3.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $528.0 million | $503.6 million | $1,647.2 million | $1,522.9 million |
| Gross profit / margin | $151.5 million / 28.7% | $147.9 million / 29.4% | $478.5 million / 29.0% | $450.8 million / 29.6% |
| Operating income | $41.0 million | $40.9 million | $155.2 million | $139.4 million |
| Net income | $21.4 million | $24.2 million | $90.0 million | $82.1 million |
| Diluted EPS | $0.45 | $0.50 | $1.87 | $1.67 |
- Q3 sales rose 5%; base-business sales increased 3% (over 4% on a same-selling-day basis). Nine-month sales rose 8%, including 6% base-business growth.
- Reported Q3 net income and diluted EPS declined 12% and 10%, respectively, principally reflecting a $6.9 million non-cash, non-tax-deductible UK goodwill impairment. Excluding it, adjusted Q3 operating income was $48.0 million, adjusted net income $28.3 million and adjusted diluted EPS $0.59; the filing reports adjusted growth of 17%, 17% and 18%, respectively.
- For nine months, reported net income rose 10% and diluted EPS 12%. Excluding impairment, adjusted net income was $96.9 million and adjusted diluted EPS $2.01, up 18% and 20%.
- Gross margin fell 70 basis points in Q3 and 60 basis points year to date. Management cited product/customer mix, competitive pricing and difficult comparisons with 2011 vendor-price timing benefits; improved purchasing discipline and lower debit-card fees partly offset the decline.
- Q3 selling and administrative expenses declined 3%; base-business expenses fell 6%, largely due to lower incentive and bad-debt costs. Nine-month expenses increased 2%, mainly from acquisitions and new locations, while base-business expenses declined 1%.
- Net interest expense was $1.7 million in Q3 and $5.4 million for nine months. The weighted-average effective borrowing rate was 2.6% in Q3 versus 2.4% a year earlier.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $124.5 million, versus $32.0 million in 2011; investing cash outflow was $18.5 million and financing cash outflow $94.0 million. Operating cash flow benefited from working-capital timing and a $27.0 million deferral of Q3 estimated federal tax payments, both expected to reverse in Q4.
- Cash was $28.8 million at September 30, 2012. Total debt was $214.3 million, down $54.4 million year over year. The company repaid $100.0 million of floating-rate senior notes at maturity in February.
- The $430 million revolving credit facility had $212.5 million available at quarter-end and matures October 19, 2016. The company reported compliance with covenants; leverage ratio was 1.58 against a maximum of 3.25, and fixed-charge coverage was 3.74 against a minimum of 2.25.
- Receivables were $175.5 million, inventory $349.3 million, and current liabilities $266.4 million. DSO improved to 29.0 days from 30.3; inventory turns increased to 3.3 from 3.2.
- Nine-month capital expenditures were $13.7 million. Cash dividends paid were $21.7 million and treasury-stock purchases $55.1 million. The quarterly dividend declared was $0.16 per share versus $0.14 a year earlier.
Outlook, risks and other matters
- Management raised 2012 diluted EPS guidance to $1.80–$1.83 excluding impairment, or $1.66–$1.69 including its estimated $0.14 per-share impact.
- For Q4, management expected mid-single-digit base-business sales growth, including one additional selling day, but expected gross margin below 2011 due to mix and pricing pressure. It forecast operating expenses up 3%–4% year over year.
- Management expected full-year cash from operations to exceed net income, a full-year effective tax rate of about 40% (just over 38% excluding impairment), and approximately 20% contribution margin on base-business sales growth excluding impairment.
- The UK reporting unit’s depressed results and prolonged recovery outlook led to a full write-off of its $6.9 million goodwill balance. Management also cited uncertain consumer confidence, U.S. employment and European economic conditions. Weather, housing/remodeling activity, competition and supplier relationships remain relevant business risks.
- Acquisitions in British Columbia and Ontario were completed in early 2012 and were not material to reported results. The company authorized an additional $100 million share repurchase program in August; $114.9 million remained available across its programs as of October 22.
- No material changes to previously reported risk factors or legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether base-business sales growth and market-share gains persist after the seasonal peak and across pool, irrigation and geographic markets.
- Whether gross-margin pressure from mix and competitive pricing continues, and whether Q4 sales and expense expectations are achieved.
- The assumptions supporting the UK goodwill impairment and whether further deterioration triggers additional impairment.
- How much of 2012 operating cash flow reflects temporary working-capital and tax-payment timing, and the resulting full-year cash conversion.
- Debt, covenant headroom, borrowing costs, planned repurchases and dividend capacity under seasonal working-capital needs.