POOL Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. POOL distributes swimming pool, irrigation and related products through 290 sales centers in North America and Europe. Results are unaudited and the business is highly seasonal.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $647.5 million | $602.1 million | $917.3 million | $878.7 million |
| Gross profit | $190.5 million | $178.1 million | $266.8 million | $259.3 million |
| Gross margin | 29.4% | 29.6% | 29.1% | 29.5% |
| Operating income | $88.9 million | $81.7 million | $81.0 million | $78.1 million |
| Net income | $52.8 million | $48.4 million | $46.7 million | $42.1 million |
| Diluted EPS | $1.05 | $0.99 | $0.93 | $0.87 |
Q2 sales rose 8%, including 5% base-business growth; six-month sales rose 4%, including 2% base-business growth. Q2 operating expenses increased 6%, while expenses as a percentage of sales declined to 15.7% from 16.0%. The six-month operating-income figure reflects a seasonally weak first quarter, including an operating loss of $7.9 million. Interest expense fell 39% in Q2 and 34% for the half, chiefly as average debt declined. The effective tax rate was 39.3% in both comparable periods.
Cash flow, liquidity and debt
- Six-month operating cash flow was $28.7 million, down from $35.6 million. Investing activities used $10.0 million, including the Metrinox acquisition; financing activities provided $4.0 million. Cash ended the period at $37.0 million.
- Total debt was $266.1 million, down $67.9 million year over year. Cash was $37.0 million. At June 30, $142.1 million was drawn on the revolving facility, with $95.5 million available; $24.0 million remained on the term loan, due in two quarterly installments in the second half of 2010.
- The company reported compliance with debt covenants: average total leverage ratio of 2.36 versus a maximum of 3.25, and fixed-charge ratio of 2.56 versus a minimum of 2.25. Management believed it would remain compliant for the rest of 2010.
- Receivables were $238.6 million, inventory $331.5 million, and accounts payable $221.4 million. DSO improved to 33.0 days from 36.1 days a year earlier; inventory turns improved to 3.2 from 3.0. The allowance for doubtful accounts was $8.3 million.
Material changes and notable items
- Pool-side demand improved, with higher discretionary purchases, market-share gains and generally favorable Q2 weather. The company said declines in pool construction and refurbishment appeared to have subsided in most markets.
- Competitive pricing and the fading benefit of prior-year inventory purchases ahead of vendor price increases pressured margins. Irrigation base-business sales declined 8% in Q2 and 12% for the first half amid weak construction markets.
- The company acquired Metrinox, a Quebec pool-products distributor with two sales centers, in April. The acquisition had no material financial impact; consideration includes up to $1.4 million of deferred and contingent payments. Recent acquisitions contributed about $0.02 to first-half diluted EPS.
- Improved receivables aging led to a Q2 reduction in the doubtful-account allowance and a $1.3 million decrease in bad-debt expense versus Q2 2009. The company also no longer holds its former Latham Acquisition Corporation (LAC) investment; LAC contributed $0.7 million of Q2 2009 equity earnings.
Outlook, risks and contingencies
Management raised the low end of 2010 diluted-EPS guidance, narrowing the range to $1.10–$1.15 from $1.00–$1.15. It expected low- to mid-single-digit sales growth for the balance of 2010, modest recovery in replacement and refurbishment, and flat-to-modest growth in new pool construction. Management expected continued gross-margin pressure and a slight Q3 increase in base-business expenses, including incentive costs. Its goal was for full-year operating cash flow to exceed net income, while noting cash flow would be comparatively lower than in 2009 because working-capital improvements would be less pronounced.
Key uncertainties include economic and housing conditions, consumer credit and discretionary spending, weather, competitive pricing, supplier relationships, and the weak irrigation market. The company disclosed a non-public FTC investigation into whether pool-industry participants, including POOL, violated competition law; it was cooperating and said the investigation did not imply a finding of violation. The filing also notes seasonal cash-flow and earnings volatility, environmental and product-handling regulation, supplier concentration, and acquisition and integration risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improved pool replacement and refurbishment demand persists, and whether weather or economic conditions alter the sales outlook.
- Whether competitive pricing continues to erode gross margin and whether incentive and other variable costs rise as expected.
- Whether receivables quality and the reduced doubtful-account allowance remain appropriate as sales and seasonal collections develop.
- Whether operating cash flow meets management’s full-year goal and supports debt payments, dividends, acquisitions and other capital uses.
- Available revolver capacity, scheduled term-loan repayment, and continued compliance with leverage and fixed-charge covenants.
- Developments in the FTC investigation and any material outcome or consequences.