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POOL > SEC Filings for POOL > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for POOL CORP


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with Management's Discussion and Analysis included in our 2012 Annual Report on Form 10-K.

For a discussion of our base business calculations, see the RESULTS OF OPERATIONS section below.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management's plans and objectives, future contracts, and forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as "anticipate," "estimate," "expect," "believe," "will likely result," "outlook," "project" and other words and expressions of similar meaning.

No assurance can be given that the results in any forward-looking statements will be achieved and actual results may differ materially due to one or more factors, including the sensitivity of our business to weather conditions, changes in the economy and the housing market, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants and other risks detailed in our 2012 Annual Report on Form 10-K. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

OVERVIEW

Financial Results

As anticipated, 2013 started with a more normalized onset to the season versus 2012, which impacted both sales and margins. We realized sales growth despite one less selling day and the tough comparison, given last year's unusually mild winter. We were also able to maintain good pricing discipline and expense management.

Net sales for the quarter ended March 31, 2013 increased 2% compared to the first quarter of 2012. Sales in the first quarter of last year benefited from record warm temperatures across the Northeast and Midwest, which prompted an earlier than normal start to the 2012 season. This shift contributed to sales growth of 16% in the first quarter of 2012 over the first quarter of 2011. Base business sales were up 2% in the first three months of 2013. The impact of weather on our first quarter results is evidenced by growth of approximately 10% in our four largest year-round markets while our more seasonal markets experienced declines of close to 10%. Sales on the irrigation side of the business were up 14% due in part to the gradual recovery of the housing market in some of our key states.

Gross profit for the first quarter of 2013 was essentially flat versus the same period of the prior year, while gross profit as a percentage of net sales (gross margin) declined 60 basis points to 28.3% in the first quarter of 2013. This decrease is primarily due to unfavorable product mix as well as competitive pricing pressures. As a result of the slower start to the 2013 season discussed above, geographic regions with generally higher margins experienced a proportionally smaller share of our total sales.

Selling and administrative expenses (operating expenses) and base business operating expenses for the first quarter of 2013 were essentially flat compared to the first quarter of 2012.

Operating income for the quarter increased 15% compared to 2012. Operating income as a percentage of net sales (operating margin) was 1.9% for the first quarter of 2013 compared to 1.7% in the same period in 2012.

Net income decreased 6% to $3.4 million in the first quarter of 2013. Our provision for income taxes for the first three months of 2013 included a benefit of $0.2 million related to the temporary lapse in 2012 of the controlled foreign corporation income exclusion. Comparatively, our provision for income taxes for the same period in 2012 included a benefit of approximately $0.7 million related to the expiration of statutes of limitations for income tax returns filed in the first quarter of 2009.

Earnings per share was down $0.01 to $0.07 per diluted share for the first three months of 2013 versus $0.08 per diluted share for the same period in 2012.


Financial Position and Liquidity

Total net receivables decreased 6% due primarily to the decline in net sales growth versus the first quarter of 2012. Our allowance for doubtful accounts balance was $5.4 million at March 31, 2013, a $0.4 million decrease compared to March 31, 2012 that reflects sustained improvements in our receivable aging trends. Days sales outstanding (DSO) improved between periods to 28.7 days at March 31, 2013 compared to 29.7 days at March 31, 2012.

Inventory levels were up 7% to $494.3 million at March 31, 2013, primarily in anticipation of the upcoming season. The inventory reserve was $8.5 million at March 31, 2013 compared to $8.6 million at March 31, 2012. Our inventory turns, as calculated on a trailing twelve month basis, increased to 3.4 times at March 31, 2013 compared to 3.2 times at March 31, 2012.

Total debt outstanding was $278.5 million at March 31, 2013, down $20.5 million compared to March 31, 2012.

Current Trends and Outlook

For a detailed discussion of trends, see the Current Trends and Outlook section of Management's Discussion and Analysis included in Item 7 of our 2012 Annual Report on Form 10-K.

At 5% to 7%, our overall sales growth projection for 2013 remains consistent with the estimates used in forming our annual earnings guidance. We opened five new sales centers in the first quarter and expect to open three additional new sales centers in the second quarter. Furthermore, we opened two new sales centers after the season in 2012, all of which we expect will add to our sales growth in 2013.

We believe the adverse product and customer mix as well as competitive market pressures that contributed to our gross margin decline in the first quarter will continue throughout 2013; however, the impact of the unfavorable geographic mix should subside as our seasonal markets ramp up in the second quarter. Based on this factor, combined with improved purchasing and pricing discipline, we anticipate gross profit growth of 5% to 7% for the year and we expect gross margins to improve as the year progresses.

We expect normalized expense growth for the remainder of the year, including modest inflationary increases and some incremental costs to support our sales growth expectations, which should fluctuate quarterly based on seasonality.

For the full year, we project our effective income tax rate will be approximately 39%. We expect the rates for the second and fourth quarters will be slightly above the full year rate, while the third quarter rate should be slightly below the estimated annual rate.

These expectations include no significant changes in the factors considered in establishing our annual earnings guidance, which remains at $2.13 to $2.23 per diluted share. We expect cash provided by operations will exceed net income for fiscal 2013 and anticipate that share repurchases will be similar to 2012.


RESULTS OF OPERATIONS
As of March 31, 2013, we conducted operations through 318 sales centers in North
America and Europe.

The following table presents information derived from the Consolidated
Statements of Income expressed as a percentage of net sales:

                                                   Three Months Ended
                                                        March 31,
                                                    2013         2012
Net sales                                          100.0 %       100.0 %
Cost of sales                                       71.7          71.1
Gross profit                                        28.3          28.9
Operating expenses                                  26.4          27.2
Operating income                                     1.9           1.7
Interest expense, net                                0.4           0.4
Income before income taxes and equity earnings       1.4 %         1.3 %

Note: Due to rounding, percentages may not add up to operating income or income before income taxes and equity earnings.

Our discussion of consolidated operating results includes the operating results from acquisitions in 2013 and 2012. We have included the results of operations in our consolidated results since the respective acquisition dates.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 The following table breaks out our consolidated results into the base business component and the excluded components (sales centers excluded from base business):

(Unaudited)                          Base Business                 Excluded                      Total
(in thousands)                    Three Months Ended          Three Months Ended          Three Months Ended
                                       March 31,                   March 31,                   March 31,
                                  2013          2012          2013          2012          2013          2012
Net sales                      $ 366,178     $ 358,847     $  4,184      $  3,107      $ 370,362     $ 361,954

Gross profit                     103,457       103,617        1,304           946        104,761       104,563
Gross margin                        28.3 %        28.9 %       31.2  %       30.4  %        28.3 %        28.9 %

Operating expenses                95,083        96,681        2,746         1,861         97,829        98,542
Expenses as a % of net sales        26.0 %        26.9 %       65.6  %       59.9  %        26.4 %        27.2 %

Operating income (loss)            8,374         6,936       (1,442 )        (915 )        6,932         6,021

Operating margin 2.3 % 1.9 % (34.5 )% (29.4 )% 1.9 % 1.7 %


In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

                                                         Net
                                     Acquisition    Sales Centers           Periods
Acquired (1)                            Date          Acquired              Excluded
Swimming Pool Supply Center, Inc.   March 2013            1         March 2013
CCR Distribution                    March 2012            1         January - March 2013 and
                                                                    March 2012
Ideal Distributors Ltd.             February 2012         4         January - March 2013 and
                                                                    February - March 2012
G.L. Cornell Company                December 2011         1         January - February 2013
                                                                    and January - February
                                                                    2012
Poolway Schwimmbadtechnik GmbH      November 2011         1         January - February 2013
                                                                    and January - February
                                                                    2012

(1) We acquired certain distribution assets of each of these companies.

We exclude sales centers that are acquired, closed or opened in new markets from base business results for a period of 15 months. We also excluded consolidated sales centers when we do not expect to maintain the majority of the existing business and existing sales centers that are consolidated with acquired sales centers. There were four sales centers opened in new markets that were excluded from base business as of March 31, 2013.

We generally allocate corporate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired, consolidated and new market sales centers in the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales centers in the first three months of 2013:

December 31, 2012 312

Acquired            1
New locations       5
March 31, 2013    318

Net Sales
Three Months Ended
March 31,
(in millions) 2013 2012 Change Net sales $ 370.4 $ 362.0 $ 8.4 2%

Net sales for the first quarter of 2013 increased 2% despite one less selling day and tough weather comparisons versus the same period of the prior year. Sales in the first quarter of last year benefited from favorable weather conditions, especially across the Eastern half of North America, and record warm temperatures in the Northeast and Midwest spurred an earlier than normal start to remodeling projects and new pool construction in the 2012 season. Our base business sales growth of 2% included a 1% increase on the swimming pool side of the business and a 14% increase on the irrigation side of the business.

In local currencies, net sales in Europe declined nearly 17% in the first quarter of 2013, primarily driven by a 14% decline in France. The combination of lingering winter weather, four fewer selling days (based on the shift of the 2013 Easter holiday into March), and the challenging European economy unfavorably impacted France's first quarter results.


The overall base business sales increase reflects the impact of the following (listed in order of estimated magnitude):

an abnormal shift in sales in the first quarter of the prior year, which contributed to sales growth of 16% in the first quarter of 2012 over the first quarter of 2011; the impact of this shift is further evidenced by growth of approximately 10% in our four largest year-round markets, while our more seasonal markets experienced declines of close to 10%;

market share gains attributed to continued improvements in customer service levels, sales growth rates for certain product offerings such as building materials (see discussion below) and higher base business sales growth for the irrigation side of the business due in part to the gradual recovery of the housing market in some of our key states;

continued improvement in consumer discretionary expenditures, including some market recovery in remodeling activity;

inflationary product cost increases (estimated at approximately 1% to 2%); and

higher sales of non-discretionary products due to the increased installed base of pools, which we estimate grew 1% over the past year.

Sales of building materials and tile grew by 14% compared to the first quarter of 2012, although collectively these products only accounted for approximately 11% of our total sales. Chemical sales declined by 8%, reflecting lower volume due to delayed pool openings compared to 2012, while chemical pricing remained relatively flat.

Gross Profit
                   Three Months Ended
                       March 31,
(in millions)       2013         2012        Change
Gross profit    $   104.8      $ 104.6     $ 0.2    -%
Gross margin         28.3 %       28.9 %

Gross margin declined approximately 60 basis points in the first quarter of 2013. This decrease is primarily due to unfavorable product mix as well as competitive pricing pressures. As a result of the slower start to the 2013 season, geographic regions with generally higher margins contributed a proportionally smaller share of our total sales.

The following items collectively impacted gross margin in the first quarter of 2013:

shift in sales in the first quarter of the prior year, resulting in unfavorable geographic and product mix comparisons in the first quarter of 2013;

competitive pricing pressures in our four largest markets; and

changes in our product and customer mix, as double-digit sales growth for higher value, lower margin products such as variable speed pumps, motorized pool lifts, pool heaters and LED lighting positively contributed to sales and gross profit dollars but negatively impacted our margins.

Operating Expenses
                                            Three Months Ended
                                                March 31,
(in millions)                                2013          2012         Change
Operating expenses                       $    97.8       $ 98.5     $ (0.7 )   (1)%
Operating expenses as a % of net sales        26.4 %       27.2 %

Operating expenses, as well as base business operating expenses, were consistent with the first quarter of 2012. Modest expense increases to support sales growth were offset by $1.2 million in lower employee incentive costs.


Interest Expense, net

Interest expense, net increased $0.1 million or 9% compared to the first quarter of 2012. Average outstanding debt was $245.5 million in the first quarter of 2013 versus $265.8 million in the first quarter of 2012. The weighted average effective interest rate increased to 2.6%, from 2.5% for the same period last year, which offset the benefit of lower debt levels. Additionally, in the first quarter of the prior year, we recognized a $0.3 million benefit due to the reversal of estimated interest expense related to previously uncertain tax positions.

Income Taxes

Our effective income tax rate was 35.7% for the three months ended March 31, 2013 compared to 22.8% for the three months ended March 31, 2012. Our provision for income taxes for the first three months of 2013 included a benefit of $0.2 million related to the temporary lapse in 2012 of the controlled foreign corporation income exclusion. Comparatively, our provision for income taxes for the same period in 2012 included a benefit of approximately $0.7 million related to the expiration of statutes of limitations for income tax returns filed in the first quarter of 2009.

Net Income and Earnings Per Share

Net income decreased 6% to $3.4 million compared to the first quarter of 2012, while earnings per share decreased $0.01 from the same period of last year to $0.07 per diluted share.


Seasonality and Quarterly Fluctuations

Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and landscape maintenance and installation. Sales are substantially lower during the first and fourth quarters, when we may incur net losses. In 2012, we generated approximately 66% of our net sales and over 100% of our operating income in the second and third quarters of the year.

We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August.

The following table presents certain unaudited quarterly data for the first quarter of 2013, the four quarters of 2012 and the second, third and fourth quarters of 2011. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily a good indication of results for an entire fiscal year or of continuing trends.

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