POOL Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The company distributes swimming pool and related products through 318 sales centers in North America and Europe. Results are highly seasonal; sales and operating income are generally highest in the second and third quarters, so Q1 results are not necessarily indicative of the full year.
Financial performance
- Revenue: Net sales were $370.4 million, up 2% from $362.0 million. Base business sales also increased 2%.
- Profit and margins: Gross profit was $104.8 million, essentially unchanged. Gross margin fell 60 basis points to 28.3%, reflecting product and geographic mix and competitive pricing. Operating income increased 15% to $6.9 million; operating margin improved to 1.9% from 1.7%. Net income declined 6% to $3.4 million, and diluted EPS fell to $0.07 from $0.08.
- Taxes and interest: The effective tax rate was 35.7%, compared with 22.8% a year earlier. Prior-year results included a larger tax benefit from the expiration of statutes of limitations. Net interest expense increased 9% to $1.6 million despite lower average debt, partly due to a higher effective rate and a prior-year tax-related interest benefit.
- Cash flow: Operating activities used $40.0 million, versus $34.0 million used in Q1 2012, mainly reflecting seasonal inventory and receivables timing. Investing activities used $5.2 million; financing activities provided $44.5 million. Cash ended the quarter at $12.9 million.
- Balance sheet and liquidity: At March 31, inventory was $494.3 million, up 7% year over year, while receivables were $188.3 million, down 6%. Total debt was $278.5 million, $20.5 million below the prior-year level but above $230.9 million at December 31, 2012. The $430 million revolving facility had $148.4 million available. The company reported compliance with its covenants; leverage ratio was 1.45 versus a maximum of 3.25, and fixed-charge coverage was 3.93 versus a minimum of 2.25.
- Shareholder returns: The quarterly dividend declared was $0.16 per share, versus $0.14. The company repurchased 65,124 shares under publicly announced programs during Q1; $88.4 million remained authorized as of April 22, 2013.
Changes and operating drivers
- Management attributed Q1 growth partly to a more normalized seasonal start compared with unusually warm weather in Q1 2012, which had advanced the prior-year season. The company had one fewer selling day.
- Sales in the four largest year-round markets grew approximately 10%, while more seasonal markets declined close to 10%. Irrigation sales increased 14%; European sales declined nearly 17% in local currencies, including a 14% decline in France.
- Building materials and tile sales rose 14%, while chemical sales declined 8%. Management cited mix and competitive pressures for the gross-margin decline, including stronger sales of certain higher-value, lower-margin products.
- Operating expenses declined 1% to $97.8 million; lower employee incentive costs offset modest spending to support growth. The company opened five sales centers and acquired one location during the quarter.
Outlook, risks, and contingencies
- Full-year 2013 diluted EPS guidance remained $2.13–$2.23. Management projected sales growth of 5%–7% and gross-profit growth of 5%–7%, with gross margins expected to improve as the year progresses. It expected a full-year effective tax rate of approximately 39%.
- Management expected operating cash flow to exceed net income for 2013 and share repurchases to be similar to 2012. It anticipated seasonal working-capital effects from early inventory buying and delayed pool openings to reverse during Q2 and Q3.
- Key stated risks include weather, economic and housing-market conditions, supplier relationships, competition, and seasonal demand. Management said adverse product/customer mix and competitive pricing pressures could persist through 2013.
- Antitrust class actions by direct and indirect purchasers remained pending in consolidated proceedings. On April 11, 2013, the court granted in part and denied in part defendants’ motions to dismiss the direct purchasers’ antitrust claim. The filing does not state a clear estimate of potential loss.
- The company used interest-rate swaps on $150 million of facility borrowings to reduce exposure to rate fluctuations. It reported no material changes in market-risk disclosures or risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Whether seasonal Q2–Q3 demand supports the stated 5%–7% sales and gross-profit growth outlook and margin recovery.
- Whether inventory, receivables, and operating cash flow normalize as management expects after the seasonal working-capital build.
- Whether competitive pricing and product/geographic mix continue to pressure gross margins.
- Developments and any disclosed financial exposure related to the antitrust litigation.
- Debt levels, revolving-credit availability, covenant compliance, and the pace of dividends and share repurchases.