POOL Corporation — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. Pool distributes swimming-pool, spa, landscape and related products through 329 sales centers. Results are seasonal, with sales and operating income typically strongest in the second and third quarters.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $615.5 million | $578.2 million | $1,870.1 million | $1,738.9 million |
| Gross profit / margin | $176.2 million / 28.6% | $162.6 million / 28.1% | $537.3 million / 28.7% | $495.5 million / 28.5% |
| Operating income / margin | $58.5 million / 9.5% | $53.4 million / 9.2% | $189.6 million / 10.1% | $172.3 million / 9.9% |
| Net income attributable to Pool | $34.8 million | $32.3 million | $112.9 million | $102.3 million |
| Diluted EPS | $0.78 | $0.68 | $2.47 | $2.14 |
Cash flow and liquidity. Nine-month operating cash flow was $37.2 million, down from $53.8 million, primarily reflecting working-capital increases, including receivables and inventory. Investing cash use was $23.9 million, including $9.4 million for acquisitions and $14.7 million in net capital expenditures. Financing cash use was $4.7 million. Cash was $14.5 million at September 30, 2014.
Total debt was $393.7 million, up 51% from $260.4 million a year earlier. It included $311.1 million under the revolving credit facility, $80.0 million under the receivables facility and $2.6 million under an Australian seasonal facility. The company reported $150.1 million available under its revolving credit facility. It was in compliance with debt covenants: leverage ratio 1.60 versus a 3.25 maximum, and fixed-charge coverage ratio 4.56 versus a 2.25 minimum.
Material changes and management commentary
- Q3 sales grew 6%, with base-business sales up 5%; nine-month sales grew 8%, with base-business sales up 7%. Replacement and remodeling demand, market-share gains and approximately 1% product-cost inflation supported growth. Building materials and tile sales rose 19% in Q3 and 21% year to date.
- Gross margin improved 50 basis points in Q3 and 20 basis points year to date. Management cited margin initiatives and favorable product mix; early-buy purchases partly offset year-to-date improvement.
- Operating expenses increased 8% in both periods. Drivers included higher performance-based compensation, employee insurance, freight and investments in personnel, equipment and technology.
- Q3 net income attributable to Pool increased 8%; diluted EPS rose 15%, including an estimated nearly $0.03 per-share benefit from lower weighted-average shares following repurchases. Nine-month diluted EPS included an estimated $0.04 per-share repurchase benefit.
- In July, Pool acquired a 60% controlling interest in Australian distributor Pool Systems Pty. Ltd.; the transaction also involved Niagara Pool Supplies. The acquisition added redeemable noncontrolling interest and potential contingent consideration. Other 2014 acquisitions included distribution assets in Nova Scotia and Texas.
Outlook, risks and unusual items
Management tightened 2014 diluted EPS guidance to $2.38–$2.43 from $2.35–$2.45. It expected full-year sales and gross-profit growth in the mid- to upper-single digits, slight gross-margin improvement, an effective tax rate of 38.5%–39.0%, and operating cash flow in line with net income. Management said results remained on target as the company entered the seasonally slow fourth quarter.
Principal risks highlighted include weather sensitivity, economic and housing-market conditions, supplier relationships and competition. Cool, wet conditions affected seasonal markets during 2014; third-quarter cooler temperatures in parts of the country reduced pool use and maintenance demand. Results are seasonal and individual quarters may not indicate full-year performance. The company also cautioned that actual results may differ from forward-looking statements.
Share repurchases were substantial: 834,700 shares were bought in Q3 for an average $55.60 per share, and $64.5 million remained under the authorized program as of October 24. Management said repurchases may continue, funded by operating cash and borrowings. The company entered four forward-starting interest-rate swaps in May to hedge future borrowing costs. A new revenue-recognition standard was under evaluation; the filing did not quantify its expected effect.
Important facts for investors to verify
- Whether the stated 2014 EPS guidance and cash-flow expectations were achieved, given the fourth quarter’s seasonality.
- How working-capital needs, share repurchases and acquisition spending affect operating cash flow and debt levels.
- Whether margin gains persist as product mix, weather and discretionary replacement demand change.
- The terms and potential redemption value of the PSL noncontrolling interest and contingent consideration.
- Future covenant headroom and available borrowing capacity, including the seasonal limits of the receivables facility.