POOL Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Pool Corporation distributes swimming pool, landscape and irrigation products through 326 sales centers. Results are highly seasonal, with sales and operating income generally concentrated in the second and third quarters.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $848.2 million | $790.4 million | $1,254.6 million | $1,160.8 million |
| Gross profit | $247.0 million | $228.2 million | $361.1 million | $332.9 million |
| Operating income | $122.5 million | $112.0 million | $131.1 million | $118.9 million |
| Net income | $73.9 million | $66.5 million | $78.1 million | $70.0 million |
| Diluted EPS | $1.61 | $1.39 | $1.69 | $1.47 |
- Q2 sales rose 7%; base-business sales also increased 7%. Six-month sales increased 8%, including 7% base-business growth.
- Gross margin was 29.1% in Q2, up 25 basis points year over year; first-half gross margin was 28.8%, up 10 basis points.
- Q2 operating margin improved to 14.4% from 14.2%; first-half operating margin was 10.5% versus 10.2%.
- Q2 net income increased 11% and diluted EPS increased 16%. Share repurchases reduced weighted-average shares and added nearly $0.02 to Q2 diluted EPS, according to management.
- Six-month operating cash flow was negative $50.9 million, versus negative $33.0 million in 2013; investing cash flow was negative $16.4 million and financing cash flow was positive $87.7 million. Management attributed the higher operating cash use primarily to vendor-payment timing.
Financial position and liquidity
- At June 30, cash was $27.6 million and total debt was $431.0 million, up 43% from $300.4 million a year earlier. Debt comprised $271.0 million under the revolving credit facility and $160.0 million under the receivables securitization facility.
- Management said higher debt primarily reflected greater first-half share repurchases and timing in inventory purchases and payments. First-half treasury-stock purchases totaled $88.7 million; cash dividends paid were $18.4 million.
- The revolving facility had $190.3 million available. Receivables-facility funding capacity is seasonal; $160.0 million was outstanding at a weighted-average effective rate of 0.9%. The revolving facility’s weighted-average effective rate was approximately 2.0% at quarter-end.
- The company reported compliance with debt covenants. Its average total leverage ratio was 1.48 against a maximum of 3.25, and its fixed-charge coverage ratio was 4.51 against a minimum of 2.25.
- Net inventory was $451.5 million, up 6% year over year. Total net receivables, including pledged receivables, increased 9%; DSO improved to 28.3 days from 28.5.
Changes, outlook and risks
- Growth reflected continued replacement and remodeling activity, market-share gains, customer early-buy purchases in the first half, and approximately 1% product-cost inflation. Building materials and tile sales rose 22% in Q2; equipment sales rose 9% and chemical sales rose 3%.
- Prolonged cold and wet weather, particularly in Canada and the northern U.S., constrained seasonal-market growth. Severe drought in parts of California and Arizona also curbed sales growth.
- Management reaffirmed 2014 diluted EPS guidance of $2.35–$2.45, projected a full-year effective tax rate of approximately 38.5%, and expected full-year operating cash flow to be in line with net income. It expected sales and gross-profit growth rates for the rest of 2014 to be similar to the first half, gross margin relatively flat versus 2013, and more modest base-business expense growth in the second half. Share repurchases were expected to lessen in the second half.
- Risks highlighted include weather sensitivity, economic and housing-market changes, supplier relationships, competition, and seasonal working-capital demands. Management cited no material changes to previously disclosed risk factors and stated it expected to remain in covenant compliance.
- Pending matters include consolidated antitrust class actions and a California civil-penalty case concerning alleged hazardous-material handling and related regulatory violations. The company said it did not believe resolution would materially adversely affect its financial condition, results or cash flows, while noting outcomes are uncertain.
- The company entered into four forward-starting interest-rate swaps in May to hedge future borrowings. It was evaluating the effect of the new revenue-recognition standard, which was not yet effective.
Important facts for investors to verify
- Whether weather and seasonal demand support the reaffirmed full-year EPS guidance.
- How working-capital timing and seasonal cash conversion affect operating cash flow in the second half.
- Debt levels, share repurchases, facility availability and covenant headroom as seasonal borrowing needs change.
- Whether gross-margin improvement persists given product mix, pricing, freight costs and management’s flat-margin outlook.
- Developments and potential exposure in the antitrust and environmental/regulatory proceedings.