Pool Corporation 2006 Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2006
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
to
Commission
File Number: 0-26640
POOL
CORPORATION
(Exact
name of Registrant as specified in its charter)
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Delaware
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36-3943363
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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109
Northpark Boulevard, Covington, Louisiana
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70433-5001
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(Address
of principal executive offices)
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(Zip
Code)
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985-892-5521
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, par value $0.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES x NO ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES ¨ NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of
the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.
(Check
One):
Large
accelerated filer x
Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES ¨ NOx
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based on the closing sales price of the
Registrant’s common stock as of June 30, 2006 was approximately
$2,189,596,812.
As
of
February 23, 2007, the Registrant had 50,272,517 shares of common
stock outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant’s Proxy Statement to be mailed to stockholders on or about
March 30, 2007 for the
Annual
Meeting to be held on May 8, 2007, are incorporated by reference in
Part III of this Form 10-K.
POOL
CORPORATION
TABLE
OF CONTENTS
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Page
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PART
I.
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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7
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Item
1B.
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Unresolved
Staff Comments
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10
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Item
2.
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Properties
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10
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Item
3.
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Legal
Proceedings
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12
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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12
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PART
II.
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13
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Item
6.
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Selected
Financial Data
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15
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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33
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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62
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Item
9A.
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Controls
and Procedures
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62
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Item
9B.
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Other
Information
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65
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PART III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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65
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Item
11.
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Executive
Compensation
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65
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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65
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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65
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Item
14.
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Principal
Accounting Fees and Services
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65
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PART
IV.
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Item
15.
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Exhibits,
Financial Statement Schedules
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66
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Signatures
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67
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PART
I.
Item
1. Business
General
Based
on
industry data, Pool Corporation (the Company,
which
may be referred to as POOL,
we, us or
our)
is the
world’s largest wholesale distributor of swimming pool supplies, equipment and
related leisure products. The Company was incorporated in the State of Delaware
in 1993 under the name SCP Holding Corporation, and in 1995 changed its name
to
SCP Pool Corporation. In 2006, the Company changed its name to Pool Corporation.
This change acknowledges the Company’s growth from a regional distributor to a
multi-national, multi-network distribution company.
Our
industry is highly fragmented, and as such, we add considerable value to the
industry by purchasing products from a large number of manufacturers and then
distributing the products and offering a range of services to our customer
base
on conditions that are more favorable than these customers could obtain on
their
own.
As
of
December 31, 2006 we operated 274 sales centers in North America and Europe.
Our
Industry
We
believe that the swimming pool industry is relatively young, with room for
continued growth from increased penetration of new pools. Of the approximately
70 million homes in the United States that have the economic capacity and
the yard space to have a swimming pool, approximately 12% own a pool. Based
upon
industry data, we believe the industry has grown at a 2 to 6% annual rate for
the past several years. Higher rates of new home construction over the last
10
years, particularly in larger pool markets, have added to the market expansion
opportunity for pool ownership.
We
believe the swimming pool industry will continue to grow at a rate of
approximately 2 to 6% annually over the next five years, primarily because
of
favorable demographic and socioeconomic trends, as well as the expected
continued long-term growth in housing starts in warmer markets due to the
population migration towards the south and the need to maintain the growing
installed base of pools. We expect our sales growth to be higher than the
industry average due to increases in market share and expansion of our product
offerings.
We
believe that new pool and irrigation system starts are also impacted to some
extent by general economic conditions (as commonly measured by Gross Domestic
Product or GDP) as well as certain housing market trends. Positive GDP trends
may have a favorable impact on industry starts, while negative trends may be
unfavorable for industry starts. We believe there may be some correlation
between industry starts and the rate of housing turnover and home appreciation
over time, with higher rates of home turnover and appreciation having a positive
impact on starts over time. We also believe that any cyclicality in housing
starts, like the slowdown in new home construction that began in 2006, will
have
a limited impact on our growth as most pools, approximately 80-90%, are built
after a home is constructed.
A
large
portion of consumer spending in our industry is derived from the maintenance
of
existing swimming pools, including the repair and replacement of the equipment
for those pools. We believe that consumer demand for qualified pool
builders in many markets will continue to exceed the supply, which, along with
the recurring nature of the repair and replacement market, has helped maintain
a
relatively consistent rate of industry growth historically.
The
demand for new pools is driven by the perceived benefits of pool ownership
including relaxation, entertainment, family activity, exercise and convenience.
The industry competes for new pool sales against other discretionary consumer
purchases such as kitchen and bathroom remodeling, boats, motorcycles,
recreational vehicles and vacations.
The
industry has been positively impacted by the trend for increased homeowner
spending on outdoor living spaces for relaxation and entertainment.
Additionally, the developing trend in recent years is for consumers to bundle
the purchase of a pool with other products as part of a complete backyard
makeover. New irrigation systems and landscaping are often key components to
completing a swimming pool installation or remodel. The irrigation and landscape
market has many characteristics in common with the pool industry, and we believe
that it benefits from the same favorable demographic and socioeconomic trends
and will realize growth rates similar to the pool industry.
Our
industry is seasonal, and weather is the principal external factor which affects
our business. Peak industry activity occurs during the warmest months of the
year, typically April through September. The industry is also affected by other
factors including consumer saving and discretionary spending levels, the
increase in pool eligible households and consumer attitudes toward pool and
landscape products for environmental or safety reasons.
Business
Strategy and Growth
Our
mission is to provide exceptional value to our customers and suppliers, in
order
to provide exceptional return to our shareholders while providing exceptional
opportunities to our employees. Our three core strategies are to promote the
growth of our industry, to promote the growth of our customers’ businesses and
to continuously strive to operate more effectively.
We
promote the growth of the industry through various advertising and promotional
programs intended to raise consumer awareness of the benefits and affordability
of pool ownership, the ease of pool maintenance and the many ways in which
a
pool and the surrounding spaces may be enjoyed beyond swimming. These programs
include media advertising, industry-oriented website development such as
www.swimmingpool.com™
and
public relations campaigns. We use these programs as tools to educate consumers
and lead prospective pool owners to our customers.
We
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our uniquely tailored programs include such
features as customer lead generation, personalized websites, brochures,
marketing campaigns and business development training. As a customer service,
we
also provide certain retail store customers assistance with everything from
site
selection to store layout and design to business management system
implementation.
We
strive
to operate more effectively by continuously focusing on improvements in our
operations such as product sourcing, procurement and logistics initiatives,
adoption of enhanced business practices and improved working capital management.
In
addition to our efforts aimed at industry and customer growth, we have increased
our product breadth, as described in the “Customers and Products” section below,
and expanded our sales center network through acquisitions and new sales center
openings.
We
have
grown organically through increases in base business sales of 10% in 2006,
14%
in 2005 and 10% in 2004. Since 2002, we have opened 32 new sales centers.
Acquisitions have historically been an important source of sales growth as
well,
and since 2002, we have successfully completed 11 acquisitions, consisting
of 72
sales centers (net of sales center closings and consolidations).
In
August
2006, we acquired a total of 14 sales centers through our acquisition of
Wickham. For additional discussion of our recent acquisitions, see Note 2 of
“Notes to Consolidated Financial Statements,” included in Item 8 of this Form
10-K. We intend to pursue additional strategic acquisitions, which will allow
us
to further penetrate existing markets and expand into new geographic markets
and
product categories.
Customers
and Products
We
serve
roughly 70,000 customers, none of which account for more than 1% of our sales.
We primarily serve five types of customers:
· |
swimming
pool remodelers and builders;
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· |
retail
swimming pool stores;
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· |
swimming
pool repair and service businesses;
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· |
landscape
construction and maintenance contractors;
and
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The
majority of these customers are small, family owned businesses with relatively
limited capital resources.
We
conduct our operations through 274 sales centers in North America and Europe.
Our primary markets, which have the highest concentration of swimming pools,
are
California, Florida, Texas and Arizona, representing approximately 56% of our
net sales in 2006. We use a combination of local and international sales and
marketing personnel to promote the growth of our business and develop and
strengthen our customers’ businesses. Our sales and marketing personnel focus on
developing customer programs and promotional activities, creating and enhancing
sales management tools and providing product and market expertise. Our local
sales personnel work from the sales centers and are charged with understanding
and meeting our customers’ specific needs.
We
offer
our customers more than 100,000 national brand and private label products.
We
believe that our selection of pool equipment and supplies, chemicals,
replacement parts and complementary products is the most comprehensive in the
industry. The products we sell can be categorized as follows:
· |
maintenance products such as chemicals, supplies and pool
accessories;
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· |
repair and replacement parts for cleaners, filters, heaters, pumps
and
lights;
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· |
packaged pool kits including walls, liners, bracing, filters, heaters,
pumps and coping for in-ground and above-ground
pools;
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· |
pool equipment and materials for new pool construction and the remodeling
of existing pools; and
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· |
complementary products, including:
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construction materials used for pool installations and remodeling,
such as
concrete, plumbing and electrical components and pool surface and
decking
materials;
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irrigation and landscape products, including professional lawn care
equipment; and
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-
other discretionary recreational and related outdoor lifestyle products
that enhance consumers use and enjoyment of outdoor living
spaces.
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Maintenance
products and repair and replacement parts are non-discretionary in nature,
meaning that these items must be purchased by end-users to maintain existing
swimming pools and landscaped areas. Over 60% of our gross profits are derived
from the sale of products used to maintain and repair these existing features
and less than 40% are derived from the construction and installation (equipment,
materials, plumbing, electrical, etc.) of new pools and landscaping. We
distribute irrigation and landscape products through our Horizon Distributors
(Horizon) network , which we acquired through acquisitions in 2005 and
2006.
Our
complementary product sales grew 26% in 2006 and accounted for over 9% of our
total net sales at comparable margins to our traditional product offerings.
This
growth has been an important factor in our base business sales growth over
the
past seven years, with complementary product sales growing from approximately
$3.0 million in 1999 to over $180.0 million in 2006.
We
have
identified other product categories that could become part of our complementary
product offerings in the future. We typically introduce two to three categories
each year in certain markets. We then evaluate the performance of these test
categories and focus on those which we believe exhibit long-term growth
potential. In 2007, we intend to continue to expand our complementary products
initiative by increasing the number of locations which offer complementary
products, increasing the number of complementary products offered at certain
locations and continuing a modest broadening of the product offerings on a
company-wide basis. We expect total complementary product sales to approximate
10% of our total sales in 2007.
Operating
Strategy
We
operate three distribution networks: the SCP Distributors (SCP) network, the
Superior Pool Products (Superior) network and the Horizon network. The SCP
network consists of 152 sales centers, including 11 locations in Europe, the
Superior network consists of 62 locations and the Horizon network consists
of 60
locations.
We
distribute swimming pool supplies, equipment and related leisure products
through our SCP and Superior networks and we distribute irrigation and landscape
products through our Horizon network. We adopted the strategy of operating
two
distinct distribution networks within the swimming pool marketplace primarily
for two reasons:
1. |
To
offer our customers a choice of different distributors, featuring
distinctive product selections and service personnel;
and
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2. |
To
increase the level of customer service and operational efficiency
provided
by the sales centers in each network by promoting healthy competition
between the two networks.
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We
evaluate our sales centers based upon their performance relative to
predetermined standards that include both financial and operational measures.
Our corporate support groups provide our field operations with various services
including customer and vendor related programs, information systems support
and
expert resources to help achieve their goals. We believe our incentive programs
and feedback tools, along with the competitive nature of our internal networks,
stimulate and enhance employee performance.
Distribution
Our
sales
centers are located near customer concentrations, typically in industrial,
commercial or mixed-use zones. Customers may pick up products at any sales
center location, or products may be delivered via our trucks or third party
carriers.
Our
sales
centers maintain well-stocked inventories to meet customers’ immediate needs. We
utilize warehouse management technology to optimize receiving, inventory
control, picking, packing and shipping functions.
In
addition, we operate five centralized shipping locations and five construction
materials centers that redistribute products we purchase in bulk quantities
to
our sales centers or directly to customers.
Purchasing
and Suppliers
We
enjoy
good relationships with our suppliers, who generally offer competitive pricing,
return policies and promotional allowances. It is customary in our industry
for
manufacturers to seasonally offer extended payment terms to qualifying
purchasers such as POOL. These terms are typically available to us for
pre-season or early season purchases.
We
initiated a preferred vendor program in 1999 which encourages our buyers to
purchase products from a smaller number of vendors. We work closely with these
vendors to develop programs and services to better meet the needs of our
customers and concentrate our purchasing activities. These practices, together
with a more comprehensive service offering, have resulted in improved margins
at
the sales center level.
We
regularly evaluate supplier relationships and consider alternate sourcing to
assure competitive cost, service and quality standards. Our largest suppliers
include Pentair Corporation, Hayward Pool Products, Inc. and Waterpik
Technologies, Inc., which accounted for approximately 16%, 11% and 6%,
respectively, of the cost of products we sold in 2006.
Competition
Based
on
industry knowledge and available data, management believes we are the largest
wholesale distributor of swimming pool and related backyard products, and the
only truly national wholesale distributor focused on the swimming pool industry
in the United States. We are also one of the top three distributors of landscape
and irrigation products in the United States, and we compete against one
national wholesale distributor of these products. We face intense competition
from many regional and local distributors in our markets and to a lesser extent,
mass-market retailers and large pool supply retailers with their own internal
distribution networks.
Some
geographic markets we serve, particularly our largest, higher density markets
in
California, Florida, Texas and Arizona, are more competitive than others.
Barriers to entry in our industry are relatively low. We compete with other
distributors for rights to distribute brand-name products. If we lose or are
unable to obtain these rights, we might be materially and adversely affected.
We
believe that the size of our operations allows us to compete favorably for
such
distribution rights.
We
believe that the principal competitive factors in swimming pool and landscape
supply distribution are:
· |
the
breadth and availability of products offered; |
· |
the quality and level of customer
service;
|
· |
the breadth and depth of sales and marketing programs;
|
· |
consistency and stability of business relationships with customers;
and
|
· |
competitive product pricing.
|
We
believe that we generally compete favorably with respect to each of these
factors.
Seasonality
and Weather
For
a
discussion regarding seasonality and weather, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Environmental,
Health and Safety Regulations
Our
business is subject to regulation under local fire codes and international,
federal, state and local environmental and health and safety requirements,
including regulation by the Environmental Protection Agency, the Department
of
Transportation, the Occupational Safety and Health Administration, the National
Fire Protection Agency and the International Maritime Organization. Most of
these requirements govern the packaging, labeling, handling, transportation,
storage and sale of pool chemicals and landscape chemicals and fertilizers.
We
store certain types of chemicals and/or fertilizers at each of our sales
centers, and the storage of these items is strictly regulated by local fire
codes. In addition, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.
Employees
We
employed approximately 3,600 people at December 31, 2006. Given the seasonal
nature of our business, our peak employment period is the summer, when we add
up
to 15% more employees to our work force to meet seasonal demand.
Intellectual
Property
We
maintain both domestic and foreign registered trademarks primarily for our
private label products that are important to our current and future business
operations. We also own rights to several Internet domain names.
Geographic
Areas
Net
sales
by geographic region were as follows for the past three fiscal years (in
thousands):
|
Year
Ended December 31,
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
United
States
|
$
|
1,779,085
|
|
$
|
1,442,332
|
|
$
|
1,226,654
|
International
|
|
130,677
|
|
|
110,327
|
|
|
84,199
|
|
$
|
1,909,762
|
|
$
|
1,552,659
|
|
$
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1,310,853
|
Net
property and equipment by geographic region was as follows (in
thousands):
|
December
31,
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
United
States
|
$
|
29,825
|
|
$
|
22,520
|
|
$
|
16,214
|
International
|
|
3,808
|
|
|
3,078
|
|
|
2,381
|
|
$
|
33,633
|
|
$
|
25,598
|
|
$
|
18,595
|
Available
Information
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our website at www.poolcorp.com as soon as reasonably practical after
we electronically file such reports with, or furnish them to, the Securities
and
Exchange Commission.
Additionally,
we have adopted a Code of Business Conduct and Ethics, applicable to all
employees, officers and directors, which is available free of charge on our
website.
Item
1A. Risk
Factors
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 could be affected
by one or more factors, which could cause them to differ materially. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act.
Risk
Factors
Certain
factors that may affect our business and could cause actual results to differ
materially from those expressed in any forward-looking statements include the
following:
We
are susceptible to adverse weather conditions.
Weather
is the principal external factor affecting our business. For example,
unseasonably late warming trends in the spring or early cooling trends in the
fall can decrease the length of the pool season. Also, unseasonably cool weather
or extraordinary rainfall during the peak season can decrease swimming pool
use,
installation and maintenance, as well as landscape installations and
maintenance. These weather conditions adversely affect sales of our products.
For a discussion regarding seasonality and weather, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Our
distribution business is highly dependent on our ability to maintain favorable
relationships with suppliers.
As
a
distribution company, maintaining favorable relationships with our suppliers
is
critical to the success of our business. We believe that we add considerable
value to the swimming pool supply chain and landscape supply chain by purchasing
products from a large number of manufacturers and distributing the products
to a
highly fragmented customer base on conditions that are more favorable than
these
customers could obtain on their own. We believe that we currently enjoy good
relationships with our suppliers, who generally offer us competitive pricing,
return policies and promotional allowances. However, our inability to maintain
favorable relationships with our suppliers could have an adverse effect on
our
business.
Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
Waterpik Technologies, Inc., which accounted for approximately 16%, 11% and
6%,
respectively, of the costs of products we sold in 2006. A decision by several
suppliers, acting in concert, to sell their products directly to retail
customers and other end-users of their products, bypassing distribution
companies like ours, would have an adverse effect on our business. Additionally,
the loss of a single supplier could also adversely affect our business. We
dedicate significant resources to promote the benefits and affordability of
pool
ownership, which we believe greatly benefits our swimming pool customers and
suppliers.
We
face intense competition both from within our industry and from other leisure
product alternatives.
We
face
competition from both inside and outside of our industry. Within our industry,
we compete against various regional and local distributors and, to a lesser
extent, mass market retailers and large pool or landscape supply retailers.
Outside of our industry, we compete with sellers of other leisure product
alternatives, such as boats and motor homes, and with other companies who rely
on discretionary homeowner expenditures, such as home remodelers. New
competitors may emerge as there are low barriers to entry in our industry.
Some
geographic markets that we serve, particularly our largest, higher density
markets in California, Florida, Texas and Arizona, representing approximately
56% of our net sales in 2006, also tend to be more competitive than others.
More
aggressive competition by mass merchants and large pool or landscape supply
retailers could adversely affect our sales.
Mass market
retailers today carry a limited range of, and devote a limited amount of
shelf space to, merchandise and products targeted to our industry. Historically,
mass market retailers have generally expanded by adding new stores and
product breadth, but their product offering of pool and landscape related
products has remained relatively constant. Should mass market
retailers increase their focus on the pool or professional landscape industries,
or increase the breadth of their pool and landscape related product offerings,
they may become a more significant competitor for direct and
end-use customers which could have an adverse impact on our business. We
may face additional competitive pressures if large pool or landscape supply
retailers look to expand their customer base to compete more directly within
the
distribution channel.
The
demand for our swimming pool and related outdoor lifestyle products may be
adversely affected by unfavorable
economic conditions.
In
economic downturns, the demand for swimming pool or leisure related products
may
decline as discretionary consumer spending, the increase in pool eligible
households and swimming pool construction decline. Although maintenance
products and repair and replacement equipment that must be purchased by pool
owners to maintain existing swimming pools account for more than 60% of our
gross profits, the growth of our business depends on the expansion of the
installed pool base, which may be viewed by most consumers as a discretionary
expenditure that could be adversely affected by economic downturns.
In addition, even in generally favorable economic conditions, severe and/or
prolonged downturns in the housing market could have a material adverse impact
on our financial performance.
We
depend on key personnel.
We
consider our employees to be the foundation for our growth and success. As
such,
our future success depends in large part on our ability to attract, retain
and
motivate qualified personnel, including our executive officers and key
management personnel. If we are unable to attract and retain key personnel,
our
operating results could be adversely affected.
Specifically,
our future success depends to an extent upon the continued service of Manuel
Perez de la Mesa, our Chief Executive Officer. The loss of Mr. Perez de la
Mesa
in particular could have a material adverse effect on our business. Mr. Perez
de
la Mesa is not nearing retirement age, and we have no indication that he intends
to retire in the near future. We do not currently maintain key man insurance
on
Mr. Perez de la Mesa.
We
may not be able to sustain our pace of growth.
We
have
experienced substantial sales growth in recent years through acquisitions and
new sales center openings that have increased our size, scope and geographic
distribution. Since 2002, we have opened 32 new sales centers and have completed
11 acquisitions. These acquisitions have added 72 sales centers, net of sales
center closings and consolidations, and a centralized shipping location to
our
distribution networks. While we contemplate continued growth through
acquisitions and internal expansion, no assurance can be made as to our ability
to:
· |
identify
appropriate acquisition candidates;
|
· |
complete
acquisitions on satisfactory terms and successfully integrate acquired
businesses;
|
· |
generate
sufficient cash flows to support expansion plans and general operating
activities;
|
· |
maintain
favorable supplier arrangements and relationships; and
|
· |
identify
and divest assets which do not continue to create value consistent
with
our objectives.
|
If
we do
not manage these potential difficulties successfully, our operating results
could be adversely affected.
The
growth of our business depends on effective marketing programs.
The
growth of our business depends on the expansion of the installed pool base.
Thus, an important part of our strategy is to promote the growth of the pool
industry through our extensive advertising and promotional programs that attempt
to raise consumer awareness regarding the benefits and affordability of pool
ownership, the ease of pool maintenance and the many ways in which a pool may
be
enjoyed beyond swimming. These programs include media advertising, website
development such as www.swimmingpool.com™
and
public relations campaigns. We believe these programs benefit the entire supply
chain from our suppliers to our customers.
We
also
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our programs include such things as
personalized websites, brochures, marketing campaigns and business development
training. We also provide certain retail store customers with assistance in
site
selection, store layout and design and business management system
implementation. Our inability to sufficiently develop effective advertising,
marketing and promotional programs to succeed in a weakened economic environment
and an increasingly competitive marketplace, in which we (and our entire supply
chain) also compete with other luxury product alternatives, could have a
material adverse effect on our business.
Our
business is highly seasonal.
In
2006,
approximately 65% of our net sales and 93% of our operating income were
generated in the second and third quarters of the year, which represent the
peak
months of swimming pool use, installation, remodeling and repair. Our sales
are
substantially lower during the first and fourth quarters of the year, when
we
may incur net losses.
The
nature of our business subjects us to compliance with Environmental, Health,
Transportation and Safety Regulations.
We
are
subject to regulation under federal, state and local environmental, health,
transportation and safety requirements, which govern such things as packaging,
labeling, handling, transportation, storage and sale of pool chemicals and
landscape chemicals and fertilizers. For example, we sell algaecides and pest
control products that are regulated as pesticides under the Federal Insecticide,
Fungicide and Rodenticide Act and various state pesticide laws. These laws
are
primarily related to labeling, annual registration and licensing.
Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties or the imposition of injunctive
relief. Moreover, compliance with such laws and regulations in the future could
prove to be costly, and there can be no assurance that we will not incur such
costs in material amounts. These laws and regulations have changed substantially
and rapidly over the last 20 years, and we anticipate that there will be
continuing changes. The clear trend in environmental, health, transportation
and
safety regulation is to place more restrictions and limitations on activities
that impact the environment, such as the use and handling of chemical
substances. Increasingly, strict restrictions and limitations have resulted
in
increased operating costs for us, and it is possible that the costs of
compliance with such laws and regulations will continue to increase. We will
attempt to anticipate future regulatory requirements that might be imposed
and
we will plan accordingly to remain in compliance with changing regulations
and
to minimize the costs of such compliance.
We
store chemicals, fertilizers and other combustible materials that involve fire,
safety and casualty risks.
We
store
chemicals and fertilizers, including certain combustible, oxidizing compounds,
at our sales centers. A fire, explosion or flood affecting one of our facilities
could give rise to fire, safety and casualty losses and related liability
claims. We maintain what we believe is prudent insurance protection. However,
we
cannot guarantee that our insurance coverage will be adequate to cover future
claims that may arise or that we will be able to maintain adequate insurance
in
the future at rates we consider reasonable. Successful claims for which we
are
not fully insured may adversely affect our working capital and profitability.
In
addition, changes in the insurance industry have generally led to higher
insurance costs and decreased availability of coverage.
We
conduct business internationally, which exposes us to additional risks.
Our
international operations expose us to certain additional risks,
including:
· |
difficulty
in staffing and managing foreign subsidiary
operations;
|
· |
uncertain
political and regulatory
conditions;
|
· |
foreign
currency fluctuations;
|
· |
adverse
tax consequences; and
|
· |
dependence
on foreign economies.
|
We
source
certain products we sell, including our private label products, from Asia and
other foreign locations. There is a significant risk that we may not be able
to
access products in a timely and efficient manner, and we may also be subject
to
certain trade restrictions that prevent us from obtaining products. Fluctuations
in other factors relating to foreign trade, such as tariffs, currency exchange
rates, transportation costs and inflation are beyond our control.
A
terrorist attack or the threat of a terrorist attack could have a material
adverse effect on our business.
The
terrorist attacks that took place on September 11, 2001, in the U.S. were
unprecedented events that have created many economic and political
uncertainties, some of which may materially impact our business. Discretionary
spending on leisure products such as ours is generally adversely affected during
times of economic uncertainty. The potential for future terrorist attacks,
the
national and international responses to terrorist attacks, and other acts of
war
or hostility have created many economic and political uncertainties, which
could
adversely affect our business for the short or long-term in ways that cannot
presently be predicted.
Item
1B. Unresolved
Staff Comments
None.
Item
2. Properties
We
lease
the POOL corporate offices, which consist of approximately 50,000 square feet
of
office space in Covington, Louisiana, from an entity in which we have a 50%
ownership interest. We own three sales centers in Florida. All of our other
properties are leased for terms that expire between 2007 and 2027. Generally,
our sales center leases have three to seven year terms with only seven leases
expiring beyond 2017. Most of our leases contain renewal options, some of which
involve rent increases. In addition to minimum rental payments, which are set
at
competitive rates, certain leases require reimbursement for taxes, maintenance
and insurance.
Our
sales
centers range in size from approximately 2,000 square feet to 100,000 square
feet and generally consist of warehouse, counter, display and office space.
Our
centralized shipping locations and construction materials centers range in
size
from 16,000 square feet to 132,000 square feet.
We
believe that our facilities are well maintained, suitable for our business
and
occupy sufficient space to meet our operating needs. As part of our normal
business, we regularly evaluate sales center performance and site suitability
and may relocate a sales center or consolidate two locations if a sales center
is redundant in a market, under performing or otherwise deemed unsuitable.
We do
not believe that any single lease is material to our operations.
The
table
below identifies the number of sales centers in each state and foreign country
by distribution network as of December 31, 2006:
Location
|
|
SCP
|
Superior
|
Horizon
|
|
Total
|
United
States
|
|
|
|
|
|
|
|
California
|
|
20
|
17
|
21
|
|
58
|
|
Florida
|
|
29
|
8
|
-
|
|
37
|
|
Texas
|
|
12
|
4
|
13
|
|
29
|
|
Arizona
|
|
5
|
4
|
8
|
|
17
|
|
Georgia
|
|
5
|
2
|
1
|
|
8
|
|
Tennessee
|
|
4
|
3
|
-
|
|
7
|
|
Alabama
|
|
4
|
2
|
-
|
|
6
|
|
Nevada
|
|
2
|
1
|
3
|
|
6
|
|
New
Jersey
|
|
3
|
3
|
-
|
|
6
|
|
New
York
|
|
6
|
-
|
-
|
|
6
|
|
Oregon
|
|
1
|
-
|
5
|
|
6
|
|
Washington
|
|
1
|
-
|
5
|
|
6
|
|
Louisiana
|
|
5
|
-
|
-
|
|
5
|
|
Ohio
|
|
2
|
3
|
-
|
|
5
|
|
Colorado
|
|
1
|
1
|
2
|
|
4
|
|
Illinois
|
|
3
|
1
|
-
|
|
4
|
|
Indiana
|
|
2
|
2
|
-
|
|
4
|
|
Missouri
|
|
3
|
1
|
-
|
|
4
|
|
North
Carolina
|
|
3
|
1
|
-
|
|
4
|
|
Pennsylvania
|
|
3
|
1
|
-
|
|
4
|
|
Michigan
|
|
2
|
1
|
-
|
|
3
|
|
Oklahoma
|
|
2
|
1
|
-
|
|
3
|
|
Virginia
|
|
2
|
1
|
-
|
|
3
|
|
Arkansas
|
|
2
|
-
|
-
|
|
2
|
|
Kansas
|
|
1
|
1
|
-
|
|
2
|
|
Massachusetts
|
|
2
|
-
|
-
|
|
2
|
|
Minnesota
|
|
1
|
1
|
-
|
|
2
|
|
South
Carolina
|
|
1
|
1
|
-
|
|
2
|
|
Connecticut
|
|
1
|
-
|
-
|
|
1
|
|
Iowa
|
|
1
|
-
|
-
|
|
1
|
|
Idaho
|
|
-
|
-
|
1
|
|
1
|
|
Kentucky
|
|
-
|
1
|
-
|
|
1
|
|
Maine
|
|
1
|
-
|
-
|
|
1
|
|
Maryland
|
|
1
|
-
|
-
|
|
1
|
|
Mississippi
|
|
1
|
-
|
-
|
|
1
|
|
Nebraska
|
|
1
|
-
|
-
|
|
1
|
|
New
Mexico
|
|
1
|
- |
-
|
|
1
|
|
Utah
|
|
-
|
-
|
1
|
|
1
|
|
Wisconsin
|
|
-
|
1
|
-
|
|
1
|
Total
United States
|
|
134
|
62
|
60
|
|
256
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
Canada
|
|
6
|
-
|
-
|
|
6
|
|
France
|
|
5
|
-
|
-
|
|
5
|
|
Portugal
|
|
2
|
-
|
-
|
|
2
|
|
United
Kingdom
|
|
2
|
-
|
-
|
|
2
|
|
Italy
|
|
1
|
-
|
-
|
|
1
|
|
Mexico
|
|
1
|
-
|
-
|
|
1
|
|
Spain
|
|
1
|
-
|
-
|
|
1
|
Total
International
|
|
18
|
-
|
-
|
|
18
|
|
|
|
|
|
|
|
|
Total
|
|
152
|
62
|
60
|
|
274
|
Item
3. Legal
Proceedings
From
time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate disposition of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2006.
PART
II.
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
Our
common stock is traded on the Nasdaq Global Select Market under the symbol
“POOL”. On February 20, 2007, there were approximately 31,270
beneficial holders of our common stock. The table below sets forth the high
and
low sales prices of our common stock as well as dividends declared for each
quarter during the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
Fiscal
2006
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
47.67
|
|
$
|
35.42
|
|
$
|
0.090
|
|
Second
Quarter
|
|
|
50.20
|
|
|
39.89
|
|
|
0.105
|
|
Third
Quarter
|
|
|
46.83
|
|
|
35.35
|
|
|
0.105
|
|
Fourth
Quarter
|
|
|
42.75
|
|
|
38.01
|
|
|
0.105
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
34.82
|
|
$
|
28.59
|
|
$
|
0.070
|
|
Second
Quarter
|
|
|
36.87
|
|
|
30.06
|
|
|
0.090
|
|
Third
Quarter
|
|
|
38.08
|
|
|
33.46
|
|
|
0.090
|
|
Fourth
Quarter
|
|
|
39.89
|
|
|
31.59
|
|
|
0.090
|
We
initiated quarterly dividend payments to our shareholders in the second quarter
of 2004, and we have continued payments in each subsequent quarter. Our Board
of
Directors (our Board) has increased the dividend amount three times including
in
the fourth quarter of 2004, the second quarter of 2005 and the second quarter
of
2006. Payment of future dividends will be at the
discretion of our Board, after taking into account various factors, including
earnings, capital requirements and surplus, financial position, contractual
restrictions and other relevant business considerations. We plan to continue
to
pay quarterly dividends, but there can be no assurance that dividends will
be
declared or paid any time in the future if our Board deems that there is a
better use of those funds.
Stock
Performance Graph
The
information included under the caption “Stock Performance Graph” in this
Item 5 of this Annual Report on Form 10-K is not deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A
or 14C under the Securities Exchange Act of 1934 or to the liabilities of
Section 18 of the Securities Exchange Act of 1934, and will not be deemed
to be incorporated by reference into any filing under the Securities Act of
1933
or the Securities Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
The
graph
below compares the total stockholder return on our common stock for the last
five fiscal years with the total return on the Nasdaq US Index and the S&P
MidCap 400 Index for the same period, in each case assuming the investment
of
$100 on December 31, 2001 and the reinvestment of all dividends. We believe
the
S&P MidCap 400 Index includes companies with comparable capitalization.
Additionally, we have chosen the S&P MidCap 400 Index for comparison, as
opposed to an industry index, because we do not believe that we can reasonably
identify a peer group or a published industry or line-of-business index that
contains companies in a similar line of business.
|
|
|
|
Base
|
INDEXED
RETURNS
|
|
Period
|
Years
Ending
|
Company
/ Index
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
Pool
Corporation
|
100
|
106.38
|
178.58
|
263.33
|
310.13
|
329.59
|
S&P
MidCap 400 Index
|
100
|
85.49
|
115.94
|
135.05
|
152.00
|
167.69
|
Nasdaq
US Index
|
100
|
69.13
|
103.36
|
112.49
|
114.88
|
126.22
|
Purchases
of Equity Securities
The
table
below summarizes the repurchases of our common stock in the fourth quarter
of
2006.
|
|
|
|
|
|
|
Total
number of shares
|
|
Maximum
approximate
|
|
|
Total
number of
|
|
Average
price
|
|
purchased
as part of
|
|
dollar
value that may yet be
|
Period
|
|
shares
purchased(1)
|
|
paid
per share
|
|
publicly
announced plan(2)
|
|
purchased
under the plan
|
October
1-31, 2006
|
|
218,270
|
|
$
|
38.54
|
|
204,236
|
|
$
|
4,073,755
|
November
1-30, 2006
|
|
43,353
|
|
$
|
41.47
|
|
-
|
|
$
|
4,073,755
|
December
1-31, 2006
|
|
188,726
|
|
$
|
39.28
|
|
186,700
|
|
$
|
92,665,247
|
Total
|
|
450,349
|
|
$
|
39.13
|
|
390,936
|
|
|
|
(1) |
These
shares include shares of our common stock surrendered to us by employees
in order to satisfy tax withholding obligations in connection with
certain
exercises of employee stock options and/or the exercise price of
such
options granted under our 1995 and 1998 Stock Option Plans. Shares
surrendered totaled 14,034 shares in October, 43,353 shares in November
and 2,026 shares in December.
|
(2) |
In
July 2002, our Board authorized $50.0 million for the repurchase
of shares
of our common stock in the open market. In August 2004, November
2005 and
August 2006, our Board increased the authorization for the repurchase
of
shares of our common stock in the open market to a total of
$50.0 million from the amounts remaining at each of those dates. In
November 2006, when approximately $4.1 million of the existing authorized
amount remained available for share repurchases, our Board increased
the
authorization for the repurchase of shares of our common stock in
the open
market to $100.0 million.
|
In
2006,
we purchased a total of $103.3 million , or 2.6 million shares, at an average
price or $39.80 per share. As of February 23, 2007, $71.8 million of the
authorized amount remained available.
Item
6. Selected
Financial Data
The
table
below sets forth selected financial data from the Consolidated Financial
Statements. You should read this information in conjunction with the discussions
in Item 7 of this Form 10-K and with the Consolidated Financial Statements
and
accompanying Notes in Item 8 of this Form 10-K.
|
|
Year
Ended December 31, (1)
|
|
(in
thousands, except per share data)
|
|
2006
|
|
|
2005(2)
|
|
|
2004(2)
|
|
|
2003(2)
|
|
|
2002(2)
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
1,909,762
|
|
$
|
1,552,659
|
|
$
|
1,310,853
|
|
$
|
1,155,832
|
|
$
|
983,246
|
|
Net
income
|
|
95,024
|
|
|
80,455
|
|
|
63,406
|
|
|
48,249
|
|
|
39,070
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.83
|
|
$
|
1.53
|
|
$
|
1.2
|
|
$
|
0.91
|
|
$
|
0.76
|
|
Diluted
|
$
|
1.74
|
|
$
|
1.45
|
|
$
|
1.13
|
|
$
|
0.87
|
|
$
|
0.72
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
common share
|
$
|
0.405
|
|
$
|
0.34
|
|
$
|
0.2
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital(4)
|
$
|
227,631
|
|
$
|
193,525
|
|
$
|
128,189
|
|
$
|
60,030
|
|
$
|
144,174
|
|
Total
assets
|
|
774,562
|
|
|
740,850
|
|
|
488,075
|
|
|
455,439
|
|
|
405,706
|
|
Total
long-term debt,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
current portion
|
|
191,157
|
|
|
129,100
|
|
|
50,420
|
|
|
42,507
|
|
|
125,175
|
|
Stockholders'
equity
|
|
277,684
|
|
|
281,724
|
|
|
227,544
|
|
|
200,408
|
|
|
145,553
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
business sales growth(5)
|
|
10
|
%
|
|
14
|
%
|
|
10
|
%
|
|
11
|
%
|
|
10
|
%
|
Number
of sales centers
|
|
274
|
|
|
246
|
|
|
201
|
|
|
197
|
|
|
185
|
|
____________________
(1) During
the years 2002 to 2006, we successfully completed 11 acquisitions consisting
of
87 sales centers, of which 15 were closed or consolidated into existing sales
centers. For information about our recent acquisitions, see Note 2 of
“Notes
to Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
(2) As
adjusted to reflect the impact of share-based compensation expense related
to
the adoption of SFAS 123(R) using the modified retrospective transition
method.
(3) The
2005
balance sheet data has been adjusted to correct the classification of our
deferred tax balances.
(4) The
approximate 51% increase in working capital from 2004 to 2005 is due primarily
to a greater amount of early buy inventory purchases that we made and received
during the fourth quarter of 2005 and the Horizon acquisition. This increase
was
partially offset by the deferral of our third and fourth quarter 2005 estimated
federal income tax payments. For further discussion, see the “LIQUIDITY AND
CAPITAL RESOURCES” section included in Item 7 of this Form 10-K.
The
approximate 58% decrease in working capital from 2002 to 2003 is due to the
classification of our former revolving line of credit balance and the addition
of short-term financing. Since this revolving line of credit expired in November
2004, the outstanding balance at December 31, 2003 was classified as current.
The accounts receivable securitization facility that we entered into in 2003
is
also classified as current.
(5) For
a
discussion regarding our calculation of base business sales growth, see Item
7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - RESULTS OF OPERATIONS,” of this Form 10-K.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
2006
FINANCIAL OVERVIEW
Financial
Results
Our
2006
financial results reflect another year of strong growth. Net sales increased
23%
in 2006 to $1.9 billion due to $204.7 million of sales growth related to
acquired sales centers and $152.4 million of sales growth from our base
business. The 10% base business sales growth reflects the continued growth
in
the installed base of swimming pools, market share gains through our execution
of sales, marketing and service programs that we offer to our customers,
inflationary price increases passed
through the supply chain, 26% growth in complementary product sales and sales
from new locations.
We
believe the impact of weather on sales in 2006 was mixed, with a favorable
sales
impact from near record high temperatures throughout much of the year across
North America and negative sales impacts due to record precipitation in the
northeast and much colder than average August and September temperatures which
shortened the pool season in certain markets.
Gross
profit increased 25% in 2006 compared to 2005 due primarily to the increase
in
net sales. Our gross profit as a percentage of net sales (gross margin)
increased 40 basis points to 28.3% in 2006. The majority of this increase
was attributable to the benefits achieved through our supply chain management
initiatives, including our pre-price increase inventory purchases in the fourth
quarter of 2005 and second quarter of 2006. Gross margin also benefited from
higher margin contributions from our acquired businesses and a slight shift
in
product mix to higher margin products. These margin improvements were partially
offset by a reduction in our earned vendor incentives as a percentage of total
net sales.
Operating
expenses in 2006 increased 25% compared to 2005. This increase was higher than
our 2006 sales growth rate due to higher expense ratios for our recently
acquired businesses, start-up costs and higher expense ratios for the 17 new
sales centers we opened in 2006 and expenses for other investments that expanded
our sales center locations and value-added programs. Examples of new programs
that we launched in 2006 include a new branded retail customer program called
The Backyard Place and a new pool financing brokerage business that enhances
our
swimming pool builder programs.
Our
operating income increased 24% in 2006 while our operating margin increased
slightly to 8.8% of net sales from 8.7% in 2005. Interest expense increased
136%
in 2006 due to higher debt levels for borrowings to fund share repurchases
and
acquisitions and a higher average effective interest rate compared to 2005.
Net
income increased 18% to $95.0 million compared to the same period in 2005 and
included $1.6 million of net equity earnings from our investment in Latham
Acquisition Corporation (LAC).
Financial
Position and Liquidity
Cash
provided by operations increased $29.6 million to $69.0 million in 2006 due
primarily to the increase in net income compared to 2005 and the impact related
to our fourth quarter 2005 early buy purchases. In 2005, our cash provided
by
operations was negatively impacted by early buy inventory purchases that we
received and paid for in the fourth quarter of 2005. This impact is reflected
in
the net change in our inventory and accounts payable balances between periods,
but the benefit to our 2006 cash provided by operations was largely offset
by
the decrease in accrued expenses which included a $27.0 million payment for
estimated federal tax payments that were deferred from the second half of 2005
as allowed by the Katrina Emergency Tax Relief Act of 2005.
Coupled
with net proceeds from other financing activities of approximately $90.6
million, cash provided by operations helped fund the following in
2006:
· |
share
repurchases of $111.1 million, including $103.3 million of open market
repurchases under our Board authorized repurchase
plan;
|
· |
our
acquisition of Wickham in August
2006;
|
· |
the
payment of our quarterly cash dividends to shareholders, which we
increased in the second quarter of 2006;
|
· |
capital
expenditures of $14.9 million; and
|
· |
financing
of $10.0 to $15.0 million in working capital for our 17 new locations
opened in 2006.
|
Our
accounts receivable balance increased 9% to $154.9 million at December 31,
2006,
including receivables related to the Wickham acquisition. Days sales outstanding
(DSO) increased between periods to 35.9 days at December 31, 2006
compared to 33.6 days at December 31, 2005 as a result of the addition
of Horizon’s receivables, which have slightly longer collection cycles. Since
our DSO calculation is based on trailing 12 month net sales, Horizon’s
receivables are not included in the 2005 calculation. Excluding Horizon from
the
2006 calculation, DSO improved slightly to 33.1 days. Our allowance for doubtful
accounts increased to $4.9 million at December 31, 2006 from $4.2
million at December 31, 2005. This increase reflects the higher receivables
balance and a slight increase in our past due receivable balances as a
percentage of total receivables.
Our
net
inventory balance increased $1.5 million to $332.1 million at December 31,
2006.
The December 31, 2005 inventory balance included approximately $53.0
million of early buy inventory purchases that we received and paid for in the
fourth quarter of 2005 to take advantage of vendor price discounts. Since we
did
not receive any significant early buy inventory during the fourth quarter of
2006, the December 31, 2006 balance reflects increases of $13.9
million for our 17 new sales centers, $8.5 million related to Wickham, and
$32.1
million related to growth of our business and some product line expansion for
construction materials and other complementary products. Inventory turns, as
calculated on a trailing 12 month basis, have slowed to 3.9 times
in 2006 from 4.3 times in 2005 due primarily to our significant
pre-price increase inventory purchases.
Total
debt outstanding increased to $265.4 million at December 31, 2006 compared
to $194.8 million at December 31, 2005. This increase is attributable to
increased borrowings to fund our 2006 share repurchases, our acquisition of
Wickham and slightly higher working capital levels. We continue to maintain
a
healthy current ratio, which increased to 1.8 as of December 31, 2006
compared to 1.6 as of December 31, 2005.
Recent
Developments
Recent
economic trends include a slowdown in the domestic housing market, with a sharp
drop in new home construction and home value deflation in many markets, and
increases in short-term interest rates. Some of the factors that have
mitigated the impact of these trends on our business include the
following:
· |
the
majority of our business is driven by recurring sales related to
the
ongoing maintenance and repair of existing pools and landscaped areas,
with less than 40% of our sales tied to new pool or irrigation
construction;
|
· |
we
estimate that only 10% to 20% of new pools are constructed along
with new
home construction; and
|
· |
we
have a low market share with the largest pool builders who we believe
are
more heavily tied to new home
construction.
|
However,
a more severe and/or prolonged housing market slowdown may have a more direct
impact on new pool construction that could negatively impact our
sales.
OUTLOOK
We
believe that the following factors will contribute to net sales growth in
2007:
· |
sales
expansion at our existing sales centers
through:
|
|
continued
execution of our sales, marketing and service programs;
|
|
the
continued growth of the installed base of swimming pools;
|
|
growth
in complementary product sales; and
|
|
a
full year of sales from the 17 new sales centers opened in
2006.
|
· |
sales
from acquired sales centers;
|
· |
expected
product price increases of 1% to 2% passed through the supply chain;
and
|
· |
the
anticipated opening of approximately 10 or 11 new sales centers in
2007.
|
In
2007,
we expect to realize more sales growth relative to 2006 as the year unfolds
based on tougher sales comparisons in the first half of the year. We believe
that complementary products will continue to grow at a faster rate than our
overall sales growth.
We
believe that gross margins will improve slightly in 2007. However, we expect
that our 2007 quarterly gross margins will be comparatively lower to 2006 in
the
first three quarters and higher in the fourth quarter due the benefits of our
aggressive pre-price increase early buys in the first three quarters of 2006
and
to our third and fourth quarter 2006 vendor incentive adjustments. The changes
in our earned incentive estimates were recorded as cumulative catch-up
adjustments to the amounts recognized in our 2006 financial statements at the
time of the adjustments.
We
expect
to continue to increase our focus on supply chain management initiatives,
including further expansion of international sourcing and private label
opportunities, particularly where margin expansion opportunities exist. We
also
plan to make further advances in working capital management to achieve continued
operational improvements in 2007 and beyond.
We
expect
a positive contribution from equity earnings from our investment in LAC in
2007.
LAC’s business is highly seasonal and more heavily weighted to northern markets,
with the first and fourth quarters being the slowest parts of the year and
the
second and third quarters being the busiest.
We
project that 2007 earnings per share will be in the range of $2.00 to $2.10
per
diluted share, which represents our long term guidance of 15% organic earnings
per share growth plus the accretive benefits of already completed acquisitions
and share repurchases. This range includes an expected $0.09 impact from stock
option expensing.
Generally,
execution is the primary overall factor affecting the Company’s results and
weather is the most significant external factor. We believe that over the long
term, we will generate sufficient cash flow and have adequate access to capital
to both fund our business objectives and provide a direct return to our
shareholders in the form of dividend payments.
Our
business is subject to significant risks, including weather, competition,
general economic conditions and other risks as detailed in Item 1A of this
Form
10-K.
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our consolidated financial statements in accordance with U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Management identifies critical accounting estimates as:
· |
those
that require the use of assumptions about matters that are inherently
and
highly uncertain at the time the estimates are made;
and
|
· |
those
for which changes in the estimate or assumptions, or the use of different
estimates and assumptions, could have a material impact on our
consolidated results of operations or financial condition.
|
Management
has discussed the development, selection and disclosure of our critical
accounting estimates with the Audit Committee of our Board. We believe the
following critical accounting estimates require us to make the most difficult,
subjective or complex judgments.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for an estimate of the losses we
will incur if our customers do not make required payments. We perform periodic
credit evaluations of our customers and typically do not require collateral.
Consistent with industry practices, we require payment from our customers within
30 days except for sales under early buy programs for which we provide extended
payment terms to qualified customers. The extended terms require payments in
equal installments in April, May and June or May and June, depending on
geographical location. In the past, credit losses have been within or better
than our expectations.
As
our
business is seasonal, our customers’ businesses are also seasonal. Sales are
lowest in the winter months, and our past due accounts receivable balance as
a
percentage of total receivables generally increases during this time. We provide
reserves for uncollectible accounts based on the accounts receivable aging
ranging from 0.1% for amounts currently due up to 100% for specific accounts
more than 60 days past due.
At
the
end of each year, we perform a reserve analysis of all accounts with past due
balances greater than $25,000. Additionally, we perform a separate reserve
analysis on the balance of our accounts receivables with emphasis on the
remainder of the past due portion of the aging. As we review these past due
accounts, we evaluate collectibility based on a combination of factors,
including:
· |
aging
statistics and trends;
|
· |
customer
payment history;
|
· |
independent
credit reports; and
|
· |
discussions
with customers.
|
During
the year, we write off account balances when we have exhausted reasonable
collection efforts and determined that the likelihood of collection is remote.
Such write-offs are charged against our allowance for doubtful accounts. In
the
past five years, write-offs have averaged less than 0.2% of net
sales.
If
the
balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2006, pretax income would change by approximately
$0.6 million and earnings per share would change by approximately $0.01 per
diluted share based on the number of diluted shares outstanding at
December 31, 2006.
Inventory
Obsolescence
Product
inventories represent the largest asset on our balance sheet. Our goal is to
manage our inventory such that we minimize stock-outs to provide the highest
level of service to our customers. To do this, we maintain at each sales center
an adequate inventory of stock keeping units (SKUs) with the highest sales
volume. At the same time, we continuously strive to better manage our slower
moving classes of inventory, which are not as critical to our customers and
thus, inherently have lower velocity. Sales centers classify products into
13
classes based on sales at that location over the past 12 months. All inventory
is included in these classes, except for non-stock special order items and
products with less than 12 months of usage. The table below presents a
description of these inventory classes:
Classes
1-4
|
highest
sales value items, which represent approximately 80% of net sales
at the
sales center
|
|
|
Classes
5-12
|
lower
sales value items, which we keep in stock to provide a high level
of
customer service
|
|
|
Class
13
|
products
with no sales for the past 12 months, excluding special order products
not
yet
|
|
delivered
to the customer
|
There
is
little risk of obsolescence for products in classes 1-4 because products in
these classes generally turn quickly. We establish our reserve for inventory
obsolescence based on inventory classes 5-13, which we believe represent some
exposure to inventory obsolescence, with particular emphasis on SKUs with the
least sales over the previous 12 months. The reserve is intended to reflect
the
value of inventory that we may not be able to sell at a profit. We provide
a
reserve of 5% for inventory in classes 5-13 and non-stock inventory as
determined at the sales center level. We also provide an additional 5% reserve
for excess inventory in classes 5-12 and an additional 45% reserve for excess
inventory in class 13. We determine excess inventory, which is defined as the
amount of inventory on hand in excess of the previous 12 months usage, on a
company-wide basis.
In
evaluating the adequacy of our reserve for inventory obsolescence, we consider
a
combination of factors including:
· |
the
level of inventory in relationship to historical sales by product,
including inventory usage by class based on product sales at both
the
sales center and Company levels;
|
· |
changes
in customer preferences;
|
· |
seasonal
fluctuations in inventory levels;
|
· |
geographical
location; and
|
Our
reserve for inventory obsolescence may periodically require adjustment as
changes occur in the above-identified factors.
If
the
balance of our inventory reserve increased or decreased by 20% at
December 31, 2006, pretax income would change by approximately
$0.5 million and earnings per share would change by approximately $0.01 per
diluted share based on the number of diluted shares outstanding at
December 31, 2006.
Vendor
Incentives
We
account for vendor incentives in accordance with the Emerging Issues Task Force
Issue 02-16, Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from
a
Vendor. Many
of
our vendor arrangements provide for us to receive incentives of specified
amounts of consideration, payable to us when we achieve any of a number of
measures. These measures are generally related to the volume level of purchases
from our vendors and may include negotiated pricing arrangements. We account
for
such incentives as if they are a reduction of the prices of the vendor’s
products and therefore as a reduction of inventory until we sell the product,
at
which time such incentives reduce cost of sales in our income statement.
Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels
that
mark our progress toward earning the incentives. We accrue vendor incentives
on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. Our estimates for cumulative purchases and
sales of qualifying products are driven by our sales projections, which can
be
significantly impacted by a number of external factors including weather and
changes in economic conditions. Changes in our purchasing mix also impact our
incentive estimates, as incentive rates can vary depending on our volume of
purchases from specific vendors. We continually revise these estimates
throughout the year to reflect actual purchase levels and trends. As a result,
our estimated quarterly vendor incentive accruals may include cumulative
catch-up adjustments to reflect any changes in our estimates between reporting
periods.
If
market
conditions were to change, vendors may change the terms of some or all of these
programs. Although such changes would not affect the amounts we have recorded
related to product already purchased, they may lower or raise our gross margins
for products sold in future periods.
Income
Taxes
We
record
deferred tax assets or liabilities based on differences between the financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse.
Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future.
As
of
December 31, 2006, and in accordance with the provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 109,
Accounting
for Income Taxes,
United
States taxes were not provided on undistributed earnings of our foreign
subsidiaries, as we have invested or expect to invest the undistributed earnings
indefinitely. If in the future these earnings are repatriated to the United
States, or if we determine that the earnings will be remitted in the foreseeable
future, additional tax provisions may be required.
We
hold,
through our wholly owned affiliates, cash balances in the countries in which
we
operate, including substantial amounts held outside the United States. Most
of
the amounts held outside the United States could be repatriated to the United
States, but, under current law, may be subject to United States federal income
taxes, less applicable foreign tax credits. Repatriation of some foreign
balances is restricted by local laws including the imposition of withholding
taxes in some jurisdictions.
We
have
operations in 39 states and seven foreign countries. The amount of income taxes
we pay is subject to adjustment by the applicable tax authorities. We are
subject to regular audits by federal, state and foreign tax authorities. Our
estimate for the potential outcome of any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities
in
the period the assessments are made or resolved or when statutes of limitation
on potential assessments expire. These adjustments may include differences
between the estimated deferred tax liability that we have recorded for equity
earnings in unconsolidated investments and the actual taxes paid upon the return
of undistributed equity earnings through a manner other than a capital
transaction. As a result of these uncertainties, our total income tax provision
may fluctuate on a quarterly basis.
In
June
2006, the FASB issued Interpretation No.(FIN) 48, Accounting
for Uncertainty in Income Taxes,
an
interpretation of SFAS 109, Accounting for Income Taxes,
to
create a single model to address accounting for uncertainty in tax positions.
We
adopted FIN 48 effective January 1, 2007, as required, and are currently in
the
process of implementing the provisions of the interpretation. The cumulative
impact of adopting FIN 48 will be recorded in retained earnings. We anticipate
that the accounting under the provisions of FIN 48 may provide for greater
volatility in our effective tax rate as items are derecognized or as we record
changes in measurement in interim periods.
Incentive
Compensation Accrual
We
have
an incentive compensation structure designed to attract, motivate and retain
employees. Our incentive compensation packages include bonus plans that are
specific to each group of eligible participants and their levels and areas
of
responsibility. The majority of our bonus plans have annual cash payments that
are based primarily on objective performance criteria, with a component based
on
management’s discretion. We calculate bonuses as a percentage of salaries based
on the achievement of certain key measurable financial and operational results,
including budgeted operating income and diluted earnings per share. We generally
make bonus payments at the end of February following the most recent completed
fiscal year.
The
objectives for our bonus plans are set at the inception of the bonus plan year
using both historical information and forecasted results of operations for
the
current plan year. The Compensation Committee of our Board approves these
objectives for certain bonus plans. We record an incentive compensation accrual
at the end of each month using management’s estimate of the total overall
incentives earned based on the amount of progress achieved towards the stated
bonus plan objectives. During the third and fourth quarters and as of our fiscal
year end, we adjust our estimated incentive compensation accrual based on our
detailed analysis of each bonus plan, the participants’ progress toward
achievement of their specific bonus plan objectives and management’s estimates
related to the discretionary components of the bonus plans. Due to both the
discretionary components of the bonus plans and the timing of the approval
and
payment of the annual bonuses, our estimated quarterly incentive compensation
expense and accrual balances may vary relative to actual annual bonus expense
and payouts.
Intangible
Assets
Our
largest intangible asset is goodwill. At December 31, 2006, our
goodwill balance was $154.2 million, representing 20% of total assets and 56%
of
stockholders’ equity. Goodwill represents the excess of the amount we paid to
acquire a company over the estimated fair value of tangible assets and
identifiable intangible assets acquired, less liabilities assumed.
We
account for goodwill under the provisions of SFAS 142, Goodwill
and Other Intangible Assets.
Under
these rules, we test goodwill for impairment annually or at any other time
when
impairment indicators exist.
In
October 2006, we performed our annual goodwill impairment test, which requires
comparison of the estimated fair value of each reporting unit to its carrying
value, including goodwill. As a result of this test, we believe the goodwill
on
our balance sheet is not impaired.
If
circumstances change or events occur to indicate that our estimated fair value
has fallen below carrying value, we will compare the estimated fair value of
the
goodwill to its carrying value. If the carrying value of goodwill exceeds the
estimated fair value of goodwill, we will recognize the difference as an
impairment loss in operating income.
RESULTS
OF OPERATIONS
The
table
below summarizes information derived from our Consolidated Statements of Income
expressed as a percentage of net sales for the past three fiscal
years:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
71.7
|
|
|
72.1
|
|
|
71.7
|
|
|
Gross
profit
|
28.3
|
|
|
27.9
|
|
|
28.3
|
|
Selling
and administrative expenses
|
19.5
|
|
|
19.1
|
|
|
20.0
|
|
|
Operating
income
|
8.8
|
|
|
8.7
|
|
|
8.3
|
|
Interest
expense, net
|
0.8
|
|
|
0.4
|
|
|
0.3
|
|
Income
before income taxes and equity earnings
|
8.0
|
|
|
8.3
|
|
|
8.0
|
|
Note:
|
Due
to rounding, percentages may not add to operating income or income
before
income taxes and equity earnings.
|
The
following discussion of consolidated operating results includes the operating
results from acquisitions in 2006, 2005 and 2004. We accounted for these
acquisitions using the purchase method of accounting, and we have included
the
results of operations in our consolidated results since the respective
acquisition dates.
We
exclude the following sales centers from base business for 15 months:
· |
acquired
sales centers;
|
· |
sales
centers divested or consolidated with acquired sales centers;
and
|
· |
new
sales centers opened in new
markets.
|
Additionally,
we generally allocate overhead expenses to acquired sales centers on the basis
of acquired sales center net sales as a percentage of total net
sales.
Fiscal
Year 2006 compared to Fiscal Year 2005
(Unaudited)
|
|
Base
Business
|
Acquired
|
|
Total
|
(In
thousands)
|
|
Year
Ended
|
Year
Ended
|
|
Year
Ended
|
|
|
December
31,
|
December
31,
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
2006
|
|
2005
|
|
Net
sales
|
$
|
1,653,475
|
$
|
1,501,096
|
$
|
256,287
|
$
|
51,563
|
|
$
|
1,909,762
|
$
|
1,552,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
465,942
|
|
417,195
|
|
74,006
|
|
15,253
|
|
|
539,948
|
|
432,448
|
|
Gross
margin
|
|
28.2
|
%
|
27.8
|
%
|
28.9
|
%
|
29.6
|
%
|
|
28.3
|
%
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
316,617
|
|
284,443
|
|
55,949
|
|
12,642
|
|
|
372,566
|
|
297,085
|
|
Expenses
as a % of net sales
|
|
19.1
|
%
|
18.9
|
%
|
21.8
|
%
|
24.5
|
%
|
|
19.5
|
%
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
149,325
|
|
132,752
|
|
18,057
|
|
2,611
|
|
|
167,382
|
|
135,363
|
|
Operating
income margin
|
|
9.0
|
%
|
8.8
|
%
|
7.0
|
%
|
5.1
|
%
|
|
8.8
|
%
|
8.7
|
%
|
For
purposes of comparing operating results for the year ended December 31, 2006
to
the year ended December 31, 2005, 210 sales centers were included in the base
business calculations and 64 sales centers were excluded because they were
acquired or opened in new markets within the last 15 months. The effect of
sales
center acquisitions in the table above includes the operations of the
following:
Acquired
|
|
Acquisition
Date
|
|
Period
Excluded (1)
|
Wickham
Supply, Inc. and Water Zone, LP
|
|
August
2006
|
|
August
- December 2006
|
B&B
s.r.l. (Busatta)
|
|
October
2005
|
|
November
- December 2005 and January - December 2006
|
Direct
Replacements, Inc.
|
|
October
2005
|
|
November
- December 2005 and January - December 2006
|
Horizon
Distributors, Inc.
|
|
October
2005
|
|
October
- December 2005 and January - December 2006
|
Pool
Tech Distributors, Inc.
|
|
December
2004
|
|
January
- February 2006 and 2005
|
(1) After
15
months of operations, we include acquired sales centers in the base business
calculation including the comparative prior year period.
For
information about our recent acquisitions, see Note 2 of
“Notes
to Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
Net
Sales
|
|
Year
Ended December 31,
|
|
|
(in
millions)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Net
sales
|
|
$
|
1,909.8
|
|
$
|
1,552.7
|
|
$
|
357.1
|
23
|
%
|
The
increase in net sales is primarily a result of the Horizon acquisitions and
the
growth in our base business.
Base
business sales growth was 10% in 2006 due primarily to the
following:
· |
a
larger installed base of swimming pools resulting in increased sales
of
non-discretionary products;
|
· |
estimated
price increases of 3% to 4% that we passed through the supply
chain;
|
· |
the
continued successful execution of our sales, marketing and service
programs;
|
· |
26%
growth in complementary product sales;
and
|
· |
the
opening of nine new base business sales center
locations.
|
New
product initiatives continue to be focused on our complementary products
category, for which sales have grown from $3.0 million in 1999 to $180.1 million
in 2006. These products, which our customers historically purchased from other
suppliers, carry gross margins comparable to our traditional product categories.
We no longer include Horizon’s sales in our complementary product
calculations.
Gross
Profit
|
|
Year
Ended December 31,
|
|
|
(in
millions)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Gross
profit
|
|
$
|
539.9
|
|
$
|
432.4
|
|
$
|
107.5
|
25
|
%
|
Gross
margin
|
|
|
28.3
|
%
|
|
27.9
|
%
|
|
|
|
|
Base
business gross profit growth of 12% contributed $48.7 million to the increase
in
2006, while acquired sales centers accounted for most of the remaining
increase.
Gross
margin increased 40 basis points in 2006 due primarily to the benefits achieved
through our supply chain management initiatives, including our pre-price
increase inventory purchases in the fourth quarter of 2005 and second quarter
of
2006. We made aggressive early buy purchases during the fourth quarter of 2005
to take advantage of price discounts and to mitigate the impact of expected
2006
price increases, and we made additional pre-price increase purchases during
the
second quarter of 2006 that benefited our third quarter gross
margins.
Our
gross
margin improvement also includes slightly higher margin contribution from
acquired businesses and a small favorable product mix shift in 2006 to higher
margin products, which is attributable to our successful sales initiatives
including our expansion of parts product and complementary product offerings.
The overall increase in gross margin was partially offset by lower earned vendor
incentives as a percentage of total net sales in 2006. This decrease reflects
a
lower aggregate vendor incentive rate compared to 2005 and a slight decrease
between years in our annual purchase volumes as a percentage of total net sales.
The decrease in rate is due to lower incentives as a percentage of total net
sales for our acquired businesses and a shift in purchasing mix to products
with
lower incentives, primarily complementary products.
Operating
Expenses
|
|
Year
Ended December 31,
|
|
(in
millions)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Operating
expenses
|
|
$
|
372.6
|
|
$
|
297.1
|
|
$
|
75.5
|
25
|
%
|
Operating
expenses as a percentage of net sales
|
|
|
19.5
|
%
|
|
19.1
|
%
|
|
|
|
|
Operating
expenses grew 25% and as a percentage of net sales increased 40 basis points
in
2006 due primarily to higher expense ratios for our recently acquired businesses
and start-up costs and higher expense ratios for new sales centers opened in
2006. We opened 17 sales centers in 2006 compared to only three sales centers
in
2005. The 17 new locations include 11 new pool sales centers and six new Horizon
sales centers. Expenses related to other investments in our business also
contributed to the increase in operating expenses. We moved 24 existing sales
centers to bigger locations, expanded another 16 existing sales center
locations, opened two new construction material distribution centers and also
launched two new value-added customer programs, among other new company
initiatives in 2006. These increases in operating expenses were partially offset
by lower employee bonuses in 2006 of approximately $4.0 million.
Interest
Expense
Interest
expense increased $8.8 million between periods as average debt outstanding
was
79% higher in 2006 compared to 2005. The higher debt levels in 2006 reflect
increased borrowings to fund share repurchases, acquisitions and higher working
capital levels. The weighted average effective interest rate also increased
to
5.8% in 2006 from 4.3% in 2005.
Income
Taxes
Income
taxes increased to $58.8 million in 2006 from $49.9 million in 2005 due to
the
$23.3 million increase in income before income taxes and equity earnings.
Our effective income tax rate was 38.6% at December 31, 2006 and 38.7%
at December 31, 2005 as adjusted for the impact of share-based compensation
expense.
Net
Income and Earnings Per Share
Net
income increased 18% to $95.0 million in 2006 from $80.5 million in 2005. Net
income in 2006 included $1.6 million of net equity earnings from our
investment in LAC. Diluted
earnings per share increased 20% to $1.74 per share in 2006 from $1.45 per
share
in 2005.
Fiscal
Year 2005 compared to Fiscal Year 2004
|
|
|
|
|
|
(Unaudited)
|
|
Base
Business
|
Acquired
and Divested
|
|
Total
|
(In
thousands)
|
|
Year
Ended
|
Year
Ended
|
|
Year
Ended
|
|
|
December
31,
|
December
31,
|
|
December
31,
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
2005
|
|
2004
|
|
Net
sales
|
$
|
1,479,746
|
$
|
1,299,399
|
$
|
72,913
|
$
|
11,454
|
|
$
|
1,552,659
|
$
|
1,310,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
410,721
|
|
362,786
|
|
21,727
|
|
8,048
|
|
|
432,448
|
|
370,834
|
|
Gross
margin
|
|
27.8
|
%
|
27.9
|
%
|
29.8
|
%
|
70.3
|
%
|
|
27.9
|
%
|
28.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
275,772
|
|
253,749
|
|
21,313
|
|
8,930
|
|
|
297,085
|
|
262,679
|
|
Expenses
as a % of net sales
|
|
18.6
|
%
|
19.5
|
%
|
29.2
|
%
|
78.0
|
%
|
|
19.1
|
%
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
134,949
|
|
109,037
|
|
414
|
|
(882
|
)
|
|
135,363
|
|
108,155
|
|
Operating
income (loss) margin
|
|
9.1
|
%
|
8.4
|
%
|
0.6
|
%
|
(7.7
|
)%
|
|
8.7
|
%
|
8.3
|
%
|
For
purposes of comparing operating results for the year ended December 31, 2005
to
the year ended December 31, 2004, 201 sales centers were included in the base
business calculations and 45 sales centers were excluded because they were
acquired within the last 15 months. The base business calculation also excludes
our North American manufacturing operations of which we divested in December
2004. The full impact of share-based compensation expense has been included
in
the base business selling and administrative expenses. The following sales
center acquisitions and manufacturing operation divestitures are excluded from
the base business calculations for the periods identified:
Acquired
/ Divested(*)
|
|
Acquisition
/ Divestiture Date
|
|
Period
Excluded (1)
|
B&B
s.r.l. (Busatta)
|
|
October
2005
|
|
October
- December 2005
|
Direct
Replacements, Inc.
|
|
October
2005
|
|
October
- December 2005
|
Horizon
Distributors, Inc.
|
|
October
2005
|
|
October
- December 2005
|
Pool
Tech Distributors, Inc.
|
|
December
2004
|
|
January
- December 2005
|
Les
Industries R.P. Inc.’s manufacturing business(*)
|
|
December
2004
|
|
January
- December 2004
|
Fort
Wayne manufacturing
|
|
November
2003 /
December
2004(*)
|
|
January
- December 2004
|
SCP
Pool Distributors Spain, S.L.
|
|
November
2003
|
|
January
2005 and January 2004
|
(1) After
15
months of operations, we include acquired sales centers in the base business
calculation including the comparative prior year period.
Net
Sales
|
|
Year
Ended December 31,
|
|
|
(in
millions)
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
Net
sales
|
|
$
|
1,552.7
|
|
$
|
1,310.9
|
|
$
|
241.8
|
18
|
%
|
Base
business growth of 14% contributed to the increase in net sales, primarily
due
to the following:
· |
a
larger installed base of swimming pools resulting in increased sales
of
non-discretionary products;
|
· |
price
increases, which were passed through the supply
chain;
|
· |
the
continued successful execution of our sales, marketing and service
programs; and
|
· |
32%
growth in complementary product
sales.
|
We
continue to focus new product initiatives on our complementary products
category, for which sales have grown from $3.0 million in 1999 to over $140.0
million in 2005. In 2005, complementary product sales grew 32% over 2004.
The
remaining increase in net sales is attributable to acquired sales centers,
including the Horizon sales centers acquired in October 2005.
Gross
Profit
|
|
Year
Ended December 31,
|
|
|
(in
millions)
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
Gross
profit
|
|
$
|
432.4
|
|
$
|
370.8
|
|
$
|
61.6
|
17
|
%
|
Gross
margin
|
|
|
27.9
|
%
|
|
28.3
|
%
|
|
|
|
|
Base
business gross profit growth of 13% contributed $47.9 million to the increase
in
2005, while acquired sales centers accounted for the remaining increase.
Gross
margin decreased to 27.9% in 2005 primarily due to a decrease of approximately
40 basis points related to the disposition of our North American manufacturing
assets in December 2004. We also had a slight decrease in gross margin due
to
the impact of certain product price increases. Supplier price increases were
much more pronounced in 2005 than in prior years due to significant price
increases on certain chemicals used in the pool industry, as well as increases
in underlying commodity costs, particularly oil and steel. In certain product
categories, we were only able to pass along price increases on a dollar per
unit
basis rather than a percentage basis due to competitive pressures. The overall
decrease in gross margin was partially offset by improvements achieved through
our focus on supply chain management and a shift in product mix to our higher
margin products, most notably in the fourth quarter.
Operating
Expenses
|
|
Year
Ended December 31,
|
|
(in
millions)
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
Operating
expenses
|
|
$
|
297.1
|
|
$
|
262.7
|
|
$
|
34.4
|
13
|
%
|
Operating
expenses as a percentage of net sales
|
|
|
19.1
|
%
|
|
20.0
|
%
|
|
|
|
|
Operating
expenses as a percentage of net sales decreased 90 basis points in 2005 as
increases in employee related costs and freight expenses were offset by our
ability to leverage much of our existing distribution infrastructure and
personnel base to support our sales growth.
Interest
Expense
Net
interest expense increased to $6.4 million in 2005 from $3.9 million 2004 as
a
result of an increase in the effective interest rate to 4.3% in 2005 from 2.5%
in 2004 and a 21% increase in the average debt outstanding. The increase in
the
interest rate and higher average debt outstanding was partially offset by a
$0.3
million decrease in the amortization of deferred financing fees.
Income
Taxes
Income
taxes increased to $49.9 million in 2005 from $40.9 million in 2004 primarily
due to the $24.6 million increase in income before income taxes and equity
earnings. Our effective income tax rate decreased to 38.7% at December 31,
2005
from 39.2% at December 31, 2004 due primarily to the anticipated
impact of certain tax advantaged business strategies.
Net
Income and Earnings Per Share
Net
income increased 27% to $80.5 million in 2005 from $63.4 million in 2004. Net
income in 2005 included $1.5 million of net equity earnings from our
investment in LAC. Diluted
earnings per share increased 28% to $1.45 per share in 2005 from $1.13 per
share
in 2004.
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 installations and maintenance.
Sales are substantially lower during the first and fourth quarters, when we
may
incur net losses. In 2006, approximately 65% of our net sales and 93% of our
operating income were generated 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 2006 and 2005.
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 the swimming pool 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.
(Unaudited)
|
|
QUARTER
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
348,556
|
$
|
705,703
|
$
|
537,017
|
$
|
318,486
|
$
|
265,161
|
$
|
563,978
|
$
|
423,729
|
$
|
299,791
|
|
Gross
profit
|
|
98,048
|
|
209,000
|
|
149,995
|
|
82,905
|
|
71,951
|
|
162,681
|
|
114,605
|
|
83,211
|
|
Operating
income (loss)
|
|
15,022
|
|
103,338
|
|
53,092
|
|
(4,070
|
)
|
10,256
|
|
81,389
|
|
41,431
|
|
2,288
|
|
Net
income (loss)
|
|
6,422
|
|
62,110
|
|
31,493
|
|
(5,001
|
)
|
4,102
|
|
50,709
|
|
26,521
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales as a % of annual net sales
|
|
18
|
%
|
37
|
%
|
28
|
%
|
17
|
%
|
17
|
%
|
37
|
%
|
27
|
%
|
19
|
%
|
Gross
profit as a % of annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross
profit
|
|
18
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
17
|
%
|
38
|
%
|
26
|
%
|
19
|
%
|
Operating
income (loss) as a % of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annual
operating income
|
|
9
|
%
|
62
|
%
|
32
|
%
|
(3
|
)%
|
7
|
%
|
60
|
%
|
31
|
%
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
receivables, net
|
$
|
211,578
|
$
|
295,722
|
$
|
211,589
|
$
|
154,937
|
$
|
164,507
|
$
|
231,736
|
$
|
152,037
|
$
|
141,785
|
|
Product
inventories, net
|
|
406,310
|
|
367,096
|
|
283,930
|
|
332,069
|
|
281,267
|
|
247,350
|
|
197,135
|
|
330,575
|
|
Accounts
payable
|
|
267,296
|
|
207,727
|
|
111,349
|
|
177,544
|
|
219,290
|
|
165,872
|
|
99,920
|
|
174,170
|
|
Total debt
|
|
236,188
|
|
303,000
|
|
257,974
|
|
265,443
|
|
140,579
|
|
170,191
|
|
83,170
|
|
194,757
|
|
In
the
fourth quarter 2005 and full year 2006, our results of operations include the
40
Horizon sales centers that we acquired in October 2005. We expect that our
quarterly results of operations will continue to fluctuate depending on the
timing and amount of revenue contributed by new and acquired sales centers.
We
attempt to open new sales centers at the end of the fourth quarter or the first
quarter of the subsequent year to take advantage of preseason sales programs
and
the following peak selling season.
Weather
is the principal external factor affecting our business. The table below
presents some of the possible effects resulting from various weather
conditions.
Weather
|
|
Possible
Effects
|
Hot
and dry
|
•
|
Increased
purchases of chemicals and supplies
|
|
|
for
existing swimming pools
|
|
•
|
Increased
purchases of above-ground pools and
|
|
|
irrigation
products
|
|
|
|
Unseasonably
cool weather or
|
•
|
Fewer
pool and landscape installations
|
extraordinary
amounts of rain
|
•
|
Decreased
purchases of chemicals and supplies
|
|
•
|
Decreased
purchases of impulse items such as
|
|
|
above-ground
pools and accessories
|
|
|
|
Unseasonably
early warming trends in spring/late cooling trends in fall
|
•
|
A
longer pool and landscape season, thus positively impacting our
sales
|
(primarily
in the northern half of the US)
|
|
|
|
|
|
Unseasonably
late warming trends in spring/early cooling trends in fall
|
•
|
A
shorter pool and landscape season, thus negatively impacting our
sales
|
(primarily
in the northern half of the US)
|
|
|
In
2006,
our sales benefited from near record high temperatures across much of North
America. This favorable impact was more pronounced in the first quarter of
2006,
especially in our northern markets which experienced an earlier start to the
pool season compared to 2005. While maintenance and impulse sales benefited
from
the near record high temperatures, sales tied to pool construction and pool
usage were hindered by above average precipitation in the northeast and
northwest. Despite 2006 being the hottest year on record nationally, sales
were
negatively impacted by much colder than average August and September
temperatures which shortened the pool season in certain markets.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is defined as the ability to generate adequate amounts of cash to meet current
cash needs. We assess our liquidity in terms of our ability to generate cash
to
fund our operating activities, taking into consideration the seasonal nature
of
our business. Significant factors which could affect our liquidity include
the
following:
· |
cash
flows generated from operating activities;
|
· |
the
adequacy of available bank lines of
credit;
|
· |
the
timing and extent of share
repurchases;
|
· |
the
ability to attract long-term capital with satisfactory
terms.
|
Our
primary capital needs are seasonal working capital obligations and other general
corporate purposes, including acquisitions, share repurchases and dividend
payments. Our primary sources of working capital are cash from operations
supplemented by bank borrowings, which combined with seller financing have
historically been sufficient to support our growth and finance our acquisitions.
The same principle applies to funds used for share repurchases and capital
expenditures. We
prioritize our use of cash based on investing in our business, returning money
to our shareholders and maintaining an adequate debt structure. Generally,
we
prefer to maintain a one to two times EBITDA leverage ratio. Our specific
priorities for the use of cash are as follows:
· |
maintenance
and new sales center capital expenditures estimated at 0.5% to 0.75%
of
net sales;
|
· |
strategic
acquisitions executed
opportunistically;
|
· |
payment
of cash dividends as and when declared by the Board;
|
· |
repurchase
of common stock at Board defined parameters;
and
|
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
Operating
activities
|
$
|
69,010
|
|
$
|
39,453
|
|
Investing
activities
|
|
(41,439
|
)
|
|
(101,863
|
)
|
Financing
activities
|
|
(41,586
|
)
|
|
68,150
|
|
Our
2006
cash provided by operations increased $29.6 million compared to 2005 due
primarily to the increase in net income and the impact related to our fourth
quarter 2005 early buy purchases. In 2005, our cash provided by operations
was
negatively impacted by early buy inventory purchases that we received and paid
for in the fourth quarter of 2005. This impact is reflected in the net change
in
our inventory and accounts payable balances between periods, but the benefit
to
our 2006 cash provided by operations was largely offset by the decrease in
accrued expenses which included a $27.0 million payment for estimated
federal tax payments that were deferred from the second half of 2005 as allowed
by the Katrina Emergency Tax Relief Act of 2005. The remaining increase in
cash
provided by operations is attributable to the change in our accounts receivable
balance between periods.
Our
2005
cash used in investing activities included $85.7 million for our acquisition
of
Horizon in the fourth quarter of 2005. In 2006, our financing activities
included $90.6 million of net proceeds from debt and cash related to our stock
plans, offset by $111.1 million of total share repurchases and $21.1 million
for
the payment of our quarterly cash dividend to shareholders, which we increased
in the second quarter of 2006. The impact of our common stock repurchases
reduced diluted weighted average shares outstanding by approximately
1.1 million shares for the year ended December 31, 2006.
Future
Sources and Uses of Cash
Our
unsecured syndicated senior credit facility (the Credit Facility), which matures
on December 20, 2010, now provides for $220.0 million in
borrowing capacity including a $160.0 million five-year revolving credit
facility (the Revolver) and a $60.0 million term loan (the Term Loan). During
the third quarter of 2006, we exercised the $40.0 million accordion feature
under the Revolver, which increased our borrowing capacity from $180.0 million
to $220.0 million. The Credit Facility includes sublimits for the issuance
of
swingline loans and standby letters of credit.
At
December 31, 2006, there was $131.2 million outstanding and $28.4
million available for borrowing under the Revolver. The weighted average
effective interest rate on the Revolver was approximately 6.1% for the year
ended December 31, 2006.
At
December 31, 2006, there was $60.0 million outstanding under the Term
Loan of which $3.0 million is classified as current. In December 2005, we
entered into an interest rate swap agreement to reduce our exposure to
fluctuations in interest rates. Effective on June 30, 2006, the swap agreement
converts our variable rate Term Loan to a fixed-rate basis until its termination
on December 31, 2008. We have designated this swap as a cash flow hedge. During
the year ended December 31, 2006, no gains or losses were recognized on
this swap. The weighted average effective interest rate of the Term Loan was
approximately 5.5% for the year ended December 31, 2006.
In
March
2006, we renewed our accounts receivable securitization facility (the
Receivables Facility), which provides a seasonal borrowing capacity of up to
$150.0 million, through March 2007. The Receivables Facility provides for the
true sale of certain of our receivables as they are created to a wholly owned,
bankruptcy-remote subsidiary. This subsidiary grants an undivided security
interest in the receivables to an unrelated commercial paper conduit. Because
of
the structure of the bankruptcy-remote subsidiary and our ability to control
its
activities, we include the transferred receivables and related debt in our
Consolidated Balance Sheets. We continue to employ this arrangement because
it
provides us with a lower cost form of financing. At December 31, 2006,
there was $74.3 million outstanding under the Receivables Facility at a weighted
average effective interest rate of 5.6%. We intend to renew the Receivables
Facility in March 2007 with comparable or similar terms, and we do not have
any
reason to believe that we will not be able to do so.
As
of
December 31, 2006, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility and our Receivables Facility.
For additional information regarding the Credit Facility, see Note 5 of “Notes
to Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
Our
Board
increased the authorization for the repurchase of shares of our common stock
in
the open market twice during 2006, including an increase to $100.0 million
in
November 2006. Subsequent to year end, we repurchased an additional
$20.9 million, or 572,200 shares, of our common stock on the open market
leaving $71.8 million authorized for repurchases as of February 23, 2007. We
intend to continue to repurchase shares on the open market from time to time,
depending on market conditions. We may use cash flows from operations to fund
these purchases, or we may incur additional debt.
On
February 12, 2007, we issued and sold $100.0 million aggregate principal amount
of Floating Rate Senior Notes (the Notes) in a private placement offering
pursuant to a Note Purchase Agreement. The Notes are due
February 12, 2012 and will accrue interest on the unpaid principal
balance at a floating rate equal to a spread of 0.600% over the three-month
LIBOR, as adjusted from time to time. We used the net proceeds from the
placement to pay down borrowings under the Credit Facility. In February 2007,
we
also entered into an interest rate swap agreement to reduce our exposure to
fluctuations in interest rates on the Notes. The swap agreement converts the
variable interest rate to a fixed rate of 5.088% on the initial notional amount
of $100.0 million, which will decrease to a notional amount of $50.0
million in 2010. For additional information regarding the Notes, see Note 13
of
“Notes to Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
We
believe we have adequate availability of capital to fund present operations
and
anticipated growth, including expansion in existing and targeted market areas.
We continually evaluate potential acquisitions and hold discussions with
acquisition candidates. If suitable acquisition opportunities or working capital
needs arise that would require additional financing, we believe that our
financial position and earnings history provide a solid base for obtaining
additional financing resources at competitive rates and terms. Additionally,
we
may issue common or preferred stock to raise funds.
Contractual
Obligations
At
December 31, 2006, our contractual obligations for long-term debt,
short-term financing and operating leases were as follows (in
thousands):
|
|
|
|
|
Payments
due by period
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
5
years and
|
|
|
Total
|
|
|
1
year
|
|
|
1-2
years
|
|
|
3-4
years
|
|
|
thereafter
|
Long-term
debt
|
$
|
191,157
|
|
$
|
3,000
|
|
$
|
9,000
|
|
$
|
48,000
|
|
$
|
131,157
|
Short-term
financing
|
|
74,286
|
|
|
74,286
|
|
|
—
|
|
|
—
|
|
|
—
|
Operating
leases
|
|
205,357
|
|
|
47,802
|
|
|
75,042
|
|
|
47,345
|
|
|
35,168
|
|
$
|
470,800
|
|
$
|
125,088
|
|
$
|
84,042
|
|
$
|
95,345
|
|
$
|
166,325
|
This
table does not include estimated future interest expense related to long-term
debt and short-term financing. For additional discussion related to our debt,
see Note 5 of “Notes to Consolidated Financial Statements,” included in Item 8
of this Form 10-K.
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
We
are
exposed to market risks, including interest rate risk and foreign currency
risk.
The adverse effects of potential changes in these market risks are discussed
below. The following discussion does not consider the effects of the reduced
level of overall economic activity that could exist following such changes.
Further, in the event of changes of such magnitude, we would likely take actions
to mitigate our exposure to such changes.
Interest
Rate Risk
Our
earnings are exposed to changes in short-term interest rates because of the
variable interest rates on our debt. If (i) the variable rates on our
Credit Facility and our Receivables Facility increased or decreased 1.0% from
the rate at December 31, 2006; and (ii) we borrowed the maximum amount
available under the Credit Facility ($220.0 million) and the Receivables
Facility ($150.0 million) for all of 2006, then our pretax income would change
by approximately $1.9 million and earnings per share would change by $0.03
per diluted share based on the number of weighed average diluted shares
outstanding at December 31, 2006.
The
fair
value of our Revolver is not affected by changes in market interest rates.
In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates on our Term Loan. The swap was in
effect as of June 30, 2006 and terminates on December 31, 2008.
Foreign
Exchange Risk
We
have
wholly owned subsidiaries in Canada, Mexico, the United Kingdom, France,
Portugal, Spain and Italy. In the past, we have not hedged our foreign currency
exposure, and fluctuations in exchange rates have not materially affected our
operating results. Future changes in exchange rates may positively or negatively
impact our revenues, operating expenses and earnings. Due to the size of our
foreign operations, however, we do not anticipate that exposure to foreign
currency rate fluctuations will be material in 2007.
Functional
Currencies
|
Canada
|
Canadian
Dollar
|
Mexico
|
Peso
|
United
Kingdom
|
British
Pound
|
France
|
Euro
|
Portugal
|
Euro
|
Spain
|
Euro
|
Italy
|
Euro
|
Item
8. Financial
Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
35
|
|
|
Consolidated
Statements of Income
|
36
|
|
|
Consolidated
Balance Sheets
|
37
|
|
|
Consolidated
Statements of Cash Flows
|
38
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
39
|
|
|
Notes
to Consolidated Financial Statements
|
40
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Pool
Corporation
We
have
audited the accompanying consolidated balance sheets of Pool Corporation
(formerly SCP Pool Corporation) as of December 31, 2006 and 2005, and
the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pool Corporation
at
December 31, 2006 and 2005, and the consolidated results of its operations
and
its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated February 28, 2007 expressed an unqualified opinion
thereon.
/s/
Ernst
& Young LLP
New
Orleans, Louisiana
February
28, 2007
POOL
CORPORATION
Consolidated
Statements of Income
(In
thousands, except per share data)
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As
Adjusted - See Note 7)
|
|
|
(As
Adjusted - See Note 7)
|
|
Net
sales
|
$
|
1,909,762
|
|
$
|
1,552,659
|
|
$
|
1,310,853
|
|
Cost
of sales
|
|
1,369,814
|
|
|
1,120,211
|
|
|
940,019
|
|
Gross profit
|
|
539,948
|
|
|
432,448
|
|
|
370,834
|
|
Selling
and administrative expenses
|
|
372,566
|
|
|
297,085
|
|
|
262,679
|
|
Operating income
|
|
167,382
|
|
|
135,363
|
|
|
108,155
|
|
Interest
expense, net
|
|
15,196
|
|
|
6,434
|
|
|
3,855
|
|
Income
before income taxes and equity earnings
|
|
152,186
|
|
|
128,929
|
|
|
104,300
|
|
Provision
for income taxes
|
|
58,759
|
|
|
49,941
|
|
|
40,894
|
|
Equity
earnings in unconsolidated investments, net
|
|
1,597
|
|
|
1,467
|
|
|
—
|
|
Net
income
|
$
|
95,024
|
|
$
|
80,455
|
|
$
|
63,406
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.83
|
|
$
|
1.53
|
|
$
|
1.20
|
|
Diluted
|
$
|
1.74
|
|
$
|
1.45
|
|
$
|
1.13
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
51,866
|
|
|
52,445
|
|
|
52,838
|
|
Diluted
|
|
54,662
|
|
|
55,665
|
|
|
55,911
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
$
|
0.405
|
|
$
|
0.34
|
|
$
|
0.20
|
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
POOL
CORPORATION
Consolidated
Balance Sheets
(In
thousands, except share data)
|
December
31,
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(As
Adjusted -
See
Note 7)
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
16,734
|
|
$
|
26,866
|
|
|
Receivables,
net
|
|
51,116
|
|
|
42,809
|
|
|
Receivables
pledged under receivables facility
|
|
103,821
|
|
|
98,976
|
|
|
Product
inventories, net
|
|
332,069
|
|
|
330,575
|
|
|
Prepaid
expenses
|
|
8,005
|
|
|
5,190
|
|
|
Deferred
income taxes
|
|
7,676
|
|
|
3,727
|
|
Total
current assets
|
|
519,421
|
|
|
508,143
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
33,633
|
|
|
25,598
|
|
Goodwill
|
|
154,244
|
|
|
139,546
|
|
Other
intangible assets, net
|
|
18,726
|
|
|
22,838
|
|
Equity
interest investments
|
|
32,509
|
|
|
29,907
|
|
Other
assets, net
|
|
16,029
|
|
|
14,818
|
|
Total
assets
|
$
|
774,562
|
|
$
|
740,850
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
177,544
|
|
$
|
174,170
|
|
|
Accrued
and other current liabilities
|
|
35,610
|
|
|
73,441
|
|
|
Short-term
financing
|
|
74,286
|
|
|
65,657
|
|
|
Current
portion of long-term debt and other long-term liabilities
|
|
4,350
|
|
|
1,350
|
|
Total
current liabilities
|
|
291,790
|
|
|
314,618
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
15,023
|
|
|
13,274
|
|
Long-term
debt
|
|
188,157
|
|
|
129,100
|
|
Other
long-term liabilities
|
|
1,908
|
|
|
2,134
|
|
Total
liabilities
|
|
496,878
|
|
|
459,126
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 100,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
50,929,665 and 52,414,883 shares
|
|
|
|
|
|
|
|
|
issued
and outstanding at December 31, 2006
|
|
|
|
|
|
|
|
|
and
2005, respectively
|
|
50
|
|
|
52
|
|
|
Additional
paid-in capital
|
|
148,821
|
|
|
119,770
|
|
|
Retained
earnings
|
|
129,932
|
|
|
160,684
|
|
|
Treasury
stock
|
|
(7,334
|
)
|
|
(921
|
)
|
|
Accumulated
other comprehensive income
|
|
6,215
|
|
|
2,139
|
|
Total
stockholders' equity
|
|
277,684
|
|
|
281,724
|
|
Total
liabilities and stockholders' equity
|
$
|
774,562
|
|
$
|
740,850
|
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
POOL
CORPORATION
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As
Adjusted - See Note 7)
|
|
|
(As
Adjusted - See Note 7)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
$
|
95,024
|
|
$
|
80,455
|
|
$
|
63,406
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
8,162
|
|
|
5,410
|
|
|
5,895
|
|
|
|
Amortization
|
|
4,742
|
|
|
3,998
|
|
|
4,334
|
|
|
|
Share-based
compensation
|
|
7,204
|
|
|
5,966
|
|
|
7,060
|
|
|
|
Excess
tax benefits from share-based compensation
|
|
(14,627
|
)
|
|
(13,473
|
)
|
|
(3,621
|
)
|
|
|
Provision
for doubtful accounts receivable, net of write-offs
|
|
1,217
|
|
|
(332
|
)
|
|
(774
|
)
|
|
|
Provision
for inventory obsolescence, net
|
|
902
|
|
|
115
|
|
|
(51
|
)
|
|
|
Change
in deferred income taxes
|
|
(4,521
|
)
|
|
(7,292
|
)
|
|
(1,604
|
)
|
|
|
Loss
on sale of property and equipment
|
|
73
|
|
|
133
|
|
|
43
|
|
|
|
Equity
earnings in unconsolidated investments
|
|
(2,602
|
)
|
|
(2,386
|
)
|
|
—
|
|
|
|
Changes
in operating assets and liabilities,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of effects of acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
(5,301
|
)
|
|
(13,394
|
)
|
|
(12,879
|
)
|
|
|
|
|
Product
inventories
|
|
5,882
|
|
|
(103,579
|
)
|
|
(2,681
|
)
|
|
|
|
|
Prepaid
expenses and other assets
|
|
(1,054
|
)
|
|
(934
|
)
|
|
(2,300
|
)
|
|
|
|
|
Accounts
payable
|
|
(5,269
|
)
|
|
41,932
|
|
|
(6,880
|
)
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
(20,822
|
)
|
|
42,834
|
|
|
7,950
|
|
Net
cash provided by operating activities
|
|
69,010
|
|
|
39,453
|
|
|
57,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Acquisition
of businesses, net of cash acquired
|
|
(26,662
|
)
|
|
(89,963
|
)
|
|
(644
|
)
|
Equity
interest investments
|
|
—
|
|
|
(3,539
|
)
|
|
(7,702
|
)
|
Purchase
of property and equipment, net of sale proceeds
|
|
(14,777
|
)
|
|
(8,361
|
)
|
|
(6,063
|
)
|
Net
cash used in investing activities
|
|
(41,439
|
)
|
|
(101,863
|
)
|
|
(14,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from revolving line of credit
|
|
442,495
|
|
|
364,383
|
|
|
340,104
|
|
Payments
on revolving line of credit
|
|
(380,438
|
)
|
|
(345,703
|
)
|
|
(328,584
|
)
|
Proceeds
from asset-backed financing
|
|
93,347
|
|
|
67,133
|
|
|
66,522
|
|
Payments
on asset-backed financing
|
|
(84,718
|
)
|
|
(44,071
|
)
|
|
(66,345
|
)
|
Proceeds
from long-term debt
|
|
—
|
|
|
60,000
|
|
|
—
|
|
Payments
on long-term debt and other long-term liabilities
|
|
(1,514
|
)
|
|
(1,350
|
)
|
|
(2,023
|
)
|
Payments
of capital lease obligations
|
|
(257
|
)
|
|
—
|
|
|
—
|
|
Payment
of deferred financing costs
|
|
(156
|
)
|
|
(243
|
)
|
|
(483
|
)
|
Excess
tax benefits from share-based compensation
|
|
14,627
|
|
|
13,473
|
|
|
3,621
|
|
Issuance
of common stock under stock option plans
|
|
7,220
|
|
|
4,481
|
|
|
2,574
|
|
Payment
of cash dividends
|
|
(21,080
|
)
|
|
(17,862
|
)
|
|
(10,706
|
)
|
Purchase
of treasury stock
|
|
(111,112
|
)
|
|
(32,091
|
)
|
|
(40,823
|
)
|
Net
cash provided by (used in) financing activities
|
|
(41,586
|
)
|
|
68,150
|
|
|
(36,143
|
)
|
Effect
of exchange rate changes on cash
|
|
3,883
|
|
|
(636
|
)
|
|
1,604
|
|
Change
in cash and cash equivalents
|
|
(10,132
|
)
|
|
5,104
|
|
|
8,950
|
|
Cash
and cash equivalents at beginning of year
|
|
26,866
|
|
|
21,762
|
|
|
12,812
|
|
Cash
and cash equivalents at end of year
|
$
|
16,734
|
|
$
|
26,866
|
|
$
|
21,762
|
|
Supplemental
cash flow information
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
14,823
|
|
$
|
5,660
|
|
$
|
2,965
|
|
|
|
Income
taxes, net of refunds
|
|
74,822
|
|
|
14,313
|
|
|
36,053
|
|
See
Note
2 for the net assets acquired and liabilities assumed for acquisitions recorded
using the purchase method of accounting.
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
POOL
CORPORATION
Consolidated
Statements of Changes in Stockholders’ Equity
(In
thousands, amounts in Dollars except share data)
(2003,
2004 and 2005 as adjusted - see Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
Common
Stock
|
|
Treasury
|
|
Paid-In
|
|
Retained
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Capital
|
|
Earnings
|
Income
(Loss)
|
|
Total
|
|
Balance
at December 31, 2003
|
|
53,222
|
|
53
|
|
—
|
|
81,699
|
|
117,382
|
1,275
|
|
200,409
|
|
|
Net
income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
63,406
|
—
|
|
63,406
|
|
|
Foreign
currency translation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
1,582
|
|
1,582
|
|
|
Interest
rate swaps, net of tax of $11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
17
|
|
17
|
|
|
Comprehensive
income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
65,005
|
|
|
Treasury
stock, 1,568 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common
stock |
|
—
|
|
—
|
|
(40,823
|
)
|
—
|
|
—
|
—
|
|
(40,823
|
)
|
|
Retirement
of treasury shares
|
|
(1,568
|
)
|
(1)
|
|
40,823
|
|
—
|
|
(40,822)
|
—
|
|
—
|
|
|
Unearned
compensation
|
|
—
|
|
—
|
|
—
|
|
424
|
|
—
|
—
|
|
424
|
|
|
Share-based
compensation
|
|
—
|
|
—
|
|
—
|
|
7,040
|
|
—
|
—
|
|
7,040
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefit of $3,621 |
|
419
|
|
—
|
|
—
|
|
5,048
|
|
—
|
—
|
|
5,048
|
|
|
Declaration
of cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(10,706)
|
—
|
|
(10,706
|
)
|
|
Issuance
of restricted stock
|
|
55
|
|
—
|
|
—
|
|
—
|
|
—
|
—
|
|
—
|
|
|
Employee
stock purchase plan
|
|
58
|
|
—
|
|
—
|
|
1,147
|
|
—
|
—
|
|
1,147
|
|
Balance
at December 31, 2004
|
|
52,186
|
|
52
|
|
—
|
|
95,358
|
|
129,260
|
2,874
|
|
227,544
|
|
|
Net
income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
80,455
|
|
|
80,455
|
|
|
Foreign
currency translation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
(634
|
)
|
(634
|
)
|
|
Interest
rate swap, net of tax of $63
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
(101
|
)
|
(101
|
)
|
|
Comprehensive
income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
79,720
|
|
|
Treasury
stock, 964 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common
stock |
|
—
|
|
—
|
|
(32,091
|
)
|
—
|
|
—
|
—
|
|
(32,091
|
)
|
|
Retirement
of treasury shares
|
|
(939
|
)
|
(1
|
)
|
31,170
|
|
—
|
|
(31,169)
|
—
|
|
—
|
|
|
Unearned
compensation
|
|
—
|
|
—
|
|
—
|
|
389
|
|
—
|
—
|
|
389
|
|
|
Share-based
compensation
|
|
—
|
|
—
|
|
—
|
|
6,069
|
|
—
|
—
|
|
6,069
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefit of $13,473 |
|
1,124
|
|
1
|
|
—
|
|
16,757
|
|
—
|
—
|
|
16,758
|
|
|
Declaration
of cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(17,862)
|
—
|
|
(17,862
|
)
|
|
Employee
stock purchase plan
|
|
44
|
|
—
|
|
—
|
|
1,197
|
|
—
|
—
|
|
1,197
|
|
Balance
at December 31, 2005
|
|
52,415
|
|
52
|
|
(921
|
)
|
119,770
|
|
160,684
|
2,139
|
|
281,724
|
|
|
Net
income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
95,024
|
|
|
95,024
|
|
|
Foreign
currency translation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
3,854
|
|
3,854
|
|
|
Interest
rate swap, net of tax of $76
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
222
|
|
222
|
|
|
Comprehensive
income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
99,100
|
|
|
Treasury
stock, 2,802 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common
stock |
|
—
|
|
—
|
|
(111,112
|
)
|
—
|
|
—
|
—
|
|
(111,112
|
)
|
|
Retirement
of treasury shares
|
|
(2,616
|
)
|
(3
|
)
|
104,699
|
|
—
|
|
(104,696)
|
—
|
|
—
|
|
|
Unearned
compensation
|
|
—
|
|
—
|
|
—
|
|
262
|
|
—
|
—
|
|
262
|
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
6,942
|
|
|
|
|
6,942
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefit of $14,627 |
|
1,072
|
|
1
|
|
—
|
|
19,948
|
|
—
|
—
|
|
19,949
|
|
|
Declaration
of cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(21,080)
|
—
|
|
(21,080
|
)
|
|
Employee
stock purchase plan
|
|
58
|
|
—
|
|
—
|
|
1,899
|
|
—
|
—
|
|
1,899
|
|
Balance
at December 31, 2006
|
|
50,929
|
|
50
|
|
(7,334
|
)
|
148,821
|
|
129,932
|
6,215
|
|
277,684
|
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
Note
1 - Organization and Summary of Significant Accounting
Policies
Description
of Business
As
of
December 31, 2006, Pool Corporation and its wholly owned subsidiaries
(the Company,
which
may be referred to as POOL,
we,
us or
our),
maintained 274 sales centers in North America and Europe from which we sell
swimming pool equipment, parts and supplies and irrigation and landscape
products to pool builders, retail stores, service companies, landscape
contractors and golf courses. We distribute products through three networks:
The
SCP Distributors (SCP) network, the Superior Pool Products (Superior) network
and the Horizon Distributors (Horizon) network.
Basis
of Presentation and Principles of Consolidation
We
prepared the consolidated financial statements following U.S. generally accepted
accounting principles (GAAP) and the requirements of the Securities and Exchange
Commission (SEC). The financial statements include all normal and recurring
adjustments that are necessary for a fair presentation of our financial position
and operating results.
The
consolidated financial statements include the accounts of Pool Corporation
and
our wholly owned subsidiaries. We eliminated all significant intercompany
accounts and transactions among our wholly owned subsidiaries. We account for
our investment in Latham Acquisition Corporation (LAC), which was a 42% interest
when acquired in December 2004 and has been a 38% interest since September
2005,
and our 50% investment in Northpark Corporate Center, LLC (NCC) using the equity
method of accounting. Accordingly, we report our share of income or loss based
on our ownership interests in these investments.
Use
of Estimates
In
order
to prepare financial statements that conform to GAAP, we make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying notes. Our most significant estimates are those relating to the
allowance for doubtful accounts, the inventory reserve, vendor incentives,
income taxes and incentive compensation accruals. We continually review our
estimates and make adjustments as necessary, but actual results could be
significantly different from what we expected when we made these
estimates.
Segment
Reporting
Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 131, Disclosures
about Segments of an Enterprise and Related Information, establishes
standards for the way that public companies report information about operating
segments in annual financial statements and for related disclosures about
products and services, geographic areas and major customers. POOL’s management
evaluates our sales centers based upon their individual performance relative
to
predetermined standards that include both financial and operational measures.
Additionally, POOL’s management makes decisions about how to allocate resources
primarily on a sales center-by-sales center basis. Since all of our sales
centers have similar operations and share similar economic characteristics,
we
aggregate our sales centers into a single reportable segment.
Seasonality
and Weather
Our
business is highly seasonal, and weather is the principal external factor
affecting our business. In general, sales and net income are highest during
the
second and third quarters, which represent the peak months of both swimming
pool
use and installation and landscape installations and maintenance. Sales are
substantially lower during the first and fourth quarters when we may incur
net
losses.
Stock
Split
In
August
2004, our Board of Directors declared a three-for-two stock split of our common
stock, which was paid in the form of a stock dividend on September 10, 2004
to
the stockholders of record at the close of business on August 23, 2004.
Accordingly, all 2004 share and per share data and the related capital amounts
reflect the effects of this split.
Earnings
Per Share
In
accordance with SFAS 128, Earnings
per Share,
we
calculate basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share includes
the dilutive effects of stock awards.
Financial
Instruments
The
carrying values of cash, receivables, accounts payable and accrued liabilities
approximate fair value due to the short maturity of those instruments. The
carrying amount of long-term debt approximates fair value as it bears interest
at variable rates. The carrying value of interest rate swap agreements is based
on quoted market rates at each balance sheet date.
Cash
Equivalents
We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents.
Credit
Risk and Allowance for Doubtful Accounts
We
record
our trade receivables at the invoiced amount less an allowance for doubtful
accounts for estimated losses due to customer non-payment. We perform periodic
credit evaluations of our customers and we typically do not require collateral.
Consistent with industry practices, we require payment from our customers within
30 days except for sales under early buy programs for which we provide extended
payment terms to qualified customers. The following table summarizes the changes
in our allowance for doubtful accounts for the past three years (in
thousands):
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
at beginning of year
|
$
|
4,211
|
|
$
|
3,138
|
|
$
|
3,843
|
|
Acquisition
of businesses, net
|
|
(536
|
)
|
|
1,160
|
|
|
—
|
|
Bad
debt expense
|
|
3,420
|
|
|
1,850
|
|
|
1,308
|
|
Write-offs,
net of recoveries
|
|
(2,203
|
)
|
|
(1,937
|
)
|
|
(2,013
|
)
|
Balance
at end of year
|
$
|
4,892
|
|
$
|
4,211
|
|
$
|
3,138
|
|
Product
Inventories and Reserve for Inventory Obsolescence
Product
inventories consist primarily of goods purchased from manufacturers for resale
to our customers. We record inventory at the lower of cost, using the average
cost method, or market. We establish our reserve for inventory obsolescence
based on inventory turns by category with particular emphasis on stock keeping
units with the weakest sales over the previous 12 months. The reserve is
intended to reflect the net realizable value of inventory that we may not be
able to sell at a profit.
In
evaluating the adequacy of our reserve for inventory obsolescence at the sales
center level, we consider a combination of factors including:
· |
the
level of inventory in relationship to historical sales by product,
including inventory usage by class based on product sales at both
the
sales center and Company levels;
|
· |
changes
in customer preferences;
|
· |
seasonal
fluctuations in inventory levels;
|
· |
geographical
location; and
|
Our
reserve for inventory obsolescence may periodically require adjustment as
changes occur in the above-identified factors.
The
following table summarizes the changes in our allowance for inventory
obsolescence for the past three years (in thousands):
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
at beginning of year
|
$
|
3,875
|
|
$
|
3,085
|
|
$
|
3,115
|
|
Acquisition
of businesses, net
|
|
350
|
|
|
685
|
|
|
—
|
|
Provision
for inventory writedowns
|
|
1,196
|
|
|
808
|
|
|
346
|
|
Deduction
for inventory write-offs
|
|
(644
|
)
|
|
(703
|
)
|
|
(376
|
)
|
Balance
at end of year
|
$
|
4,777
|
|
$
|
3,875
|
|
$
|
3,085
|
|
Vendor
Incentives
We
account for vendor incentives in accordance with the Emerging Issues Task Force
Issue 02-16, Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from
a
Vendor. Many
of
our arrangements with our vendors provide for us to receive incentives of
specified amounts of consideration, payable to us when we achieve any of a
number of measures. These measures are generally related to the volume level
of
purchases from our vendors and may include negotiated pricing arrangements.
We
account for such incentives as if they are a reduction of the prices of the
vendor’s products and therefore as a reduction of inventory until we sell the
product, at which time such incentives reduce cost of sales in our income
statement.
Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels
that
mark our progress toward earning the incentives. We accrue vendor incentives
on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. We continually revise these estimates to
reflect actual incentives earned based on actual purchase levels and trends.
When we make adjustments to our estimates, we determine whether any portion
of
the adjustment impacts the amount of vendor incentives that are deferred in
inventory. In accordance with EITF 02-16, we recognize changes in our estimates
for vendor incentives as a cumulative catch-up adjustment to the amounts
recognized to date in our financial statements.
Property
and Equipment
Property
and equipment are stated at cost. We depreciate property and equipment on a
straight-line basis over the following estimated useful lives:
Buildings
|
|
40
years
|
Leasehold
improvements
|
|
1
-
10 years (1)
|
Autos
and trucks
|
|
3
years
|
Machinery
and equipment
|
|
10
years
|
Computer
equipment
|
|
3
-
5 years
|
Furniture
and fixtures
|
|
10
years
|
(1) For
substantial improvements made near the end of a lease term where we are
reasonably certain the lease will be renewed, we amortize the leasehold
improvement over the remaining life of the lease including the expected renewal
period.
The
table
below presents depreciation expense for the past three years (in
thousands):
|
2006
|
|
|
2005
|
|
|
2004
|
$
|
8,162
|
|
$
|
5,410
|
|
$
|
5,898
|
Acquisitions
In
accordance SFAS No. 141, Business
Combinations,
we
account for acquisitions using the purchase method of accounting and allocate
the cost of an acquired business to the assets acquired and liabilities assumed
based on their estimated fair values. We revise these estimates as necessary
if
any additional information becomes available during a one year allocation period
from the date of acquisition. These revisions may include working capital
adjustments based on new or additional facts about the business, final estimates
of acquired assets and assumed liabilities and changes in the purchase price
due
to updated estimates or the resolution of items related to contingent
consideration. We include the results of operations of acquisitions in our
Consolidated Financial Statements as of the acquisition date.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the amount we paid to acquire a company over the
estimated fair value of tangible assets and identifiable intangible assets
acquired, less liabilities assumed. We account for goodwill under the provisions
of SFAS 142, Goodwill
and Other Intangible Assets.
In
accordance with these rules, we test goodwill and other indefinite lived
intangible assets for impairment annually or at any other time when impairment
indicators exist. For our annual goodwill impairment test, we compare our
estimated fair value of each reporting unit to its carrying value, including
goodwill. For additional discussion of goodwill and other intangible assets,
see
Note 3.
Self
Insurance
We
are
self-insured for employee health benefits, workers’ compensation coverage and
property and casualty insurance. We have limited our exposure by maintaining
excess and aggregate liability coverage for each of these items. We establish
self-insurance reserves based on known claims and estimates of claims incurred
but not reported that we obtain from third-party service providers. Our
management reviews these reserves based on consideration of various factors,
including but not limited to the age of existing claims, estimated settlement
amounts and other historical claims data.
Advertising
Costs
We
expense advertising costs when incurred. The table below presents advertising
expense for the past three years (in thousands):
|
2006
|
|
|
2005
|
|
|
2004
|
$
|
9,463
|
|
$
|
7,763
|
|
$
|
6,830
|
Income
Taxes
We
record
deferred tax assets or liabilities based on differences between financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse.
Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future. For additional discussion of income
taxes, see Note 8.
Share-Based
Compensation
We
account for our employee stock options under SFAS 123(R), Share-Based
Payment, which
requires companies to recognize compensation cost for stock options and other
stock-based awards based on their estimated fair value as measured on the grant
date. We have selected a Black-Scholes model for estimating the grant date
fair
value of share-based payments under FAS 123(R) and we used the
modified-retrospective transition method. As such, all prior period financial
statements have been adjusted to reflect compensation cost for the amounts
previously reported in our pro-forma footnote disclosures required by SFAS
123,
Accounting for Stock-Based Compensation, as corrected for immaterial
amounts of compensation cost associated with our employee stock purchase plan.
For additional discussion of share-based compensation, see Note 7.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) 104,
Revenue
Recognition in Financial Statements,
and the
appropriate amendments. SAB 104 requires that four basic criteria must be met
before we can recognize revenue:
1. persuasive
evidence of an arrangement exists;
2. delivery
has occurred or services have been rendered;
3. the
seller’s price to the buyer is fixed or determinable; and
4. collectibility
is reasonably assured.
We
record
revenue when customers take delivery of products. Customers may pick up products
at any sales center location, or products may be delivered via our trucks or
third party carriers. Products shipped via third party carriers are considered
delivered based on the shipping terms, which are generally FOB shipping
point.
We
may
offer volume incentives, which we accrue monthly as an adjustment to net sales.
We record customer returns, including those associated with early buy programs,
as an adjustment to net sales. In the past, customer returns have not been
material.
We
report
revenue net of tax amounts that we collect from our customers and remit to
governmental authorities. These tax amounts may include, but are not limited
to,
sales, use, value added and some excise taxes.
Derivatives
and Hedging Activities
We
recognize all derivatives at fair value on the balance sheet. The effective
portion of changes in the fair value of derivatives qualifying as cash flow
hedges are recognized in other comprehensive income until the hedged item is
recognized in earnings, or until it becomes unlikely that the hedged transaction
will occur. The ineffective portion of a derivative’s change in fair value is
immediately recognized in earnings.
In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates. We designated this swap as a cash
flow hedge. We recognize any differences paid or received on the interest
rate swap as an adjustment to interest expense over the life of the swap.
The swap was in effect as of June 30, 2006 and terminates on December 31,
2008.
Shipping
and Handling Costs
We
include shipping and handling fees billed to customers in net sales, and we
record shipping and handling costs associated with inbound freight as cost
of
sales. The table below presents shipping and handling costs associated with
outbound freight, which we include in selling and administrative expenses (in
thousands):
|
2006
|
|
|
2005
|
|
|
2004
|
|
$
|
32,682
|
|
$
|
27,332
|
|
$
|
23,261
|
|
Reclassifications
We
have
corrected the classification of our deferred tax balances in the Consolidated
Balance Sheet as of December 31, 2005. This reclassification did not
impact total net assets, net income, earnings per share or cash provided by
operations as previously reported. For additional discussion of deferred income
taxes, see Note 8.
We
also
corrected the classification of share-based compensation expense in the 2004
Consolidated Statement of Cash Flows. The impact of this reclassification
was a $0.7 million increase in net cash provided by operations and an offsetting
increase in net cash used in investing activities. This reclassification
had no effect on net income or earnings per share as previously
reported.
Note
2 - Acquisitions and Divestitures
2006
Acquisitions
In
August
2006, we acquired all of the outstanding stock of Wickham Supply, Inc. and
Water
Zone, LP (collectively Wickham), a leading regional irrigation products
distributor. Wickham operates 14 distribution sales centers with 13 locations
throughout Texas and one location in Georgia. We have included the results
of
operations for Wickham in our Consolidated Financial Statements since the
acquisition date. Our purchase price allocations for Wickham have been completed
on a preliminary basis, subject to adjustment should new or additional facts
about the business become known. We expect to finalize the allocations by the
third quarter of 2006.
2005
Acquisitions
In
October 2005, we acquired all of the outstanding stock of Automatic Rain Company
through our newly formed and wholly owned subsidiary Horizon Distributors,
Inc.
(Horizon). Horizon is a leading regional wholesale distributor of irrigation
and
landscape products serving professional contractors in the landscape
construction and maintenance markets. We believe this
transaction brings added depth and diversity to our operations through an
extension of our non-core swimming pool product offerings and furthers our
objective of being the resource for pool and landscaping contractors. Horizon
is
a natural addition to our business, as irrigation and landscaping are often
key
components to completing a swimming pool installation or remodel.
The
purchase price for the issued and outstanding stock of Automatic Rain Company
was approximately $87.1 million in cash, which includes approximately $1.4
million in working capital adjustments that were recorded as of December 31,
2005, and paid subsequent to year end. The
purchase
price was determined based on our negotiations with the former shareholders
of
Automatic Rain Company and our valuation considerations, which included
historical and prospective earnings, net asset value and other valuation
considerations consistent with our historical valuation of
acquisitions.
We
accounted for the acquisition as a purchase business combination with the
purchase price preliminarily allocated to the fair values of the acquired assets
net of assumed liabilities. In connection with the acquisition, we recorded
other intangible assets totaling $14.4 million for the estimated fair value
of a
tradename, a non-compete agreement and certain employment contracts. We also
recorded $33.0 million of goodwill in connection with the acquisition, which
we
expect to be fully deductible for tax purposes.
During
the first quarter of 2006, we made a purchase price allocation adjustment that
lowered the estimated fair value of non-compete provisions within the employment
contracts of certain members of Horizon’s management team. During the third
quarter of 2006, we made a $0.7 million purchase price allocation adjustment
that reduced the allowance for doubtful accounts. Based on better collections,
the realized value of the accounts receivable was higher than originally
estimated. With these adjustments, we have finalized the purchase price
allocations for our acquisition of Automatic Rain Company. Horizon's
results of operations are included in the Consolidated Statements of Income
since the acquisition date.
The
following table summarizes the final estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in
thousands):
Current
assets
|
$
|
64,851
|
|
Property
and equipment, net
|
|
3,875
|
|
Goodwill
|
|
34,963
|
|
Other
intangible assets
|
|
11,800
|
|
Other
assets
|
|
176
|
|
Total
assets acquired
|
|
115,665
|
|
Current
liabilities
|
|
28,538
|
|
Net
assets acquired
|
$
|
87,127
|
|
The
components of intangible assets listed in the table above as of the acquisition
date are as follows (in thousands):
Horizon
tradename (indefinite life)
|
$
|
8,400
|
Non-compete
agreement (5 year useful life)
|
|
2,400
|
Employment
contracts (2.9 year weighted average useful life)
|
|
1,000
|
Total
other intangible assets
|
$
|
11,800
|
We
determined that the Horizon tradename has an indefinite life, and therefore
it
is not subject to amortization. We are amortizing the non-compete agreement
and
employee contracts using the straight-line method over their estimated useful
lives.
In
October 2005, we also acquired B&B s.r.l. (Busatta), a swimming pool supply
distributor based in the northwestern Italian city of San Bernardo d'Ivrea,
near
Turin, as well as the assets of Direct Replacements, Inc., a Marietta, Georgia
packaged pool distributor. Busatta is our first location in Italy and allows
us
to further our presence in the European market. We have included the results
of
operations for Busatta and Direct Replacements, Inc. in our Consolidated
Financial Statements since the respective acquisition dates. We have finalized
the purchase price allocations for these acquisitions.
2004
Acquisitions and Divestitures
In
December 2004, we acquired certain assets of Latham International LP’s Canadian
subsidiary, Pool Tech Distribution Inc., (Pool Tech or the Pool Tech
Acquisition). Pool Tech distributes swimming pool supplies and equipment through
three sales centers in Ontario, Canada. We funded this transaction primarily
through the exchange of manufacturing assets held by our subsidiary, Les
Industries R.P. Inc. As a part of this transaction, we also completed the
divestiture of our manufacturing assets located in Fort Wayne, Indiana to LAC.
In exchange for these assets and cash consideration, we received a 42% interest
in LAC. Our decision to divest of our manufacturing facilities in Canada and
Indiana allows us to focus on our core distribution business while our
investment in LAC provides us with a strategic relationship with an important
supplier.
Other
intangible assets include the estimated fair value of the non-compete agreement
related to Pool Tech, which we are amortizing on a straight-line basis over
the
five year contractual life. We recorded a $0.2 million gain on the
exchange, the entire amount of which was deferred and recorded as a reduction
of
our investment in LAC. We disposed of approximately $12.9 million of
goodwill in connection with the divestiture of our manufacturing assets in
Canada and Indiana. In connection with this transaction, LAC acquired the
business of Latham International, LP, a manufacturer of vinyl swimming pool
liners, polymer and steel panels, steps and related swimming pool products
based
in Albany, New York.
We
have
included the results of operations for Pool Tech in our Consolidated Financial
Statements since the acquisition date. We account for our interest in LAC using
the equity method of accounting. Accordingly, we report our share of income
or
loss based on our ownership interest in LAC.
Note
3 - Goodwill and Other Intangible Assets
In
October 2006, we performed our annual goodwill impairment test. As a
result of this test, we believe the goodwill on our balance sheet is not
impaired.
The
changes in the carrying amount of goodwill are as follows (in
thousands):
Balance
at December 31, 2004
|
$
|
104,684
|
|
Acquired
goodwill
|
|
37,015
|
|
Purchase
price adjustments, net
|
|
(2,153
|
)
|
Balance
at December 31, 2005
|
|
139,546
|
|
Acquired
goodwill
|
|
14,613
|
|
Purchase
price adjustments, net
|
|
85
|
|
Balance
at December 31, 2006
|
$
|
154,244
|
|
Purchase
price adjustments in 2006 represent final adjustments for the Horizon
acquisition, the write-off of a $2.1 million deferred tax liability related
to a
previous acquisition and final adjustments related to our other 2005
acquisitions. Purchase price adjustments in 2005 represent payment of contingent
amounts related to the 2003 Quebec acquisition and certain adjustments related
to the Pool Tech acquisition.
Other
intangible assets consist of the following (in thousands):
|
December
31,
|
|
|
2006
|
|
2005
|
|
Tradename
(indefinite life)
|
$
|
8,400
|
|
$
|
8,400
|
|
Non-compete
agreements (5.0 year weighted average useful life)
|
|
18,561
|
|
|
15,605
|
|
Employment
contracts (2.9 year weighted average useful life)
|
|
1,000
|
|
|
3,600
|
|
Distribution
agreement (5 year useful life)
|
|
6,115
|
|
|
6,115
|
|
|
|
34,076
|
|
|
33,720
|
|
Less
accumulated amortization
|
|
(15,350
|
)
|
|
(10,882
|
)
|
|
$
|
18,726
|
|
$
|
22,838
|
|
The
tradename has an indefinite useful life, and therefore is not subject to
amortization, but is subject to periodic impairment testing under FAS 142.
The
non-compete and distribution agreements have finite useful lives, and as such,
we amortize these agreements using the straight-line method over their
respective contractual terms. Other intangible amortization expense was
$4.6 million and $3.9 million in 2006 and 2005, respectively.
The
table
below presents estimated amortization expense for other intangible assets for
the next five years (in thousands):
2007
|
$
|
4,365
|
|
2008
|
|
3,146
|
|
2009
|
|
1,445
|
|
2010
|
|
1,014
|
|
2011
|
|
356
|
|
Note
4 - Details of Certain Balance Sheet Accounts
The
table
below presents additional information regarding certain balance sheet accounts
(in thousands):
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Receivables:
|
|
|
|
|
|
|
|
Trade
accounts
|
$
|
18,952
|
|
$
|
10,462
|
|
|
Trade
accounts, pledged
|
|
103,821
|
|
|
98,976
|
|
|
Vendor
incentives
|
|
34,085
|
|
|
32,120
|
|
|
Other
|
|
2,971
|
|
|
4,438
|
|
|
|
|
159,829
|
|
|
145,996
|
|
|
Less
allowance for doubtful accounts
|
|
(4,892
|
)
|
|
(4,211
|
)
|
|
|
$
|
154,937
|
|
$
|
141,785
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
|
$
|
1,621
|
|
$
|
1,257
|
|
|
Building
|
|
1,342
|
|
|
1,342
|
|
|
Leasehold
improvements
|
|
14,360
|
|
|
10,597
|
|
|
Autos
and trucks
|
|
1,388
|
|
|
880
|
|
|
Machinery
and equipment
|
|
17,439
|
|
|
14,632
|
|
|
Computer
equipment
|
|
18,737
|
|
|
16,156
|
|
|
Furniture
and fixtures
|
|
11,842
|
|
|
8,488
|
|
|
|
|
66,729
|
|
|
53,352
|
|
|
Less
accumulated depreciation
|
|
(33,096
|
)
|
|
(27,754
|
)
|
|
|
$
|
33,633
|
|
$
|
25,598
|
|
|
|
|
|
|
|
|
Accrued
expenses and other current liabilities:
|
|
|
|
|
|
|
|
Salaries,
bonuses and profit sharing
|
$
|
19,006
|
|
$
|
24,022
|
|
|
Current
deferred tax liability
|
|
4,039
|
|
|
4,546
|
|
|
Other
(1)
|
|
12,565
|
|
|
44,873
|
|
|
|
$
|
35,610
|
|
$
|
73,441
|
|
|
|
|
|
|
|
|
Other
assets, net:
|
|
|
|
|
|
|
|
Non-current
deferred income taxes
|
$
|
12,742
|
|
$
|
9,756
|
|
|
Other
|
|
3,287
|
|
|
5,062
|
|
|
|
$
|
16,029
|
|
$
|
14,818
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
Purchase
price payments to Litehouse, net
|
$
|
341
|
|
$
|
741
|
|
|
Payments
due - non-compete agreements, net
|
|
70
|
|
|
1,049
|
|
|
Other
|
|
1,497
|
|
|
344
|
|
|
|
$
|
1,908
|
|
$
|
2,134
|
|
(1) The
2005
balance includes $27.0 million of income taxes payable related to the deferral
of estimated income tax payments as allowed by the Hurricane Katrina Tax Relief
Act of 2005.
Note
5 - Debt
The
components of our long-term debt for the past two years were as follows (in
thousands):
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Revolving
Line of Credit, variable rate (described below)
|
$
|
131,157
|
|
$
|
69,100
|
|
Term
Loan, variable rate (described below)
|
|
60,000
|
|
|
60,000
|
|
|
|
|
191,157
|
|
|
129,100
|
|
Less
current portion
|
|
(3,000
|
)
|
|
—
|
|
Total
long-term debt
|
$
|
188,157
|
|
$
|
129,100
|
|
As
amended on December 20, 2005, our unsecured syndicated senior credit facility
(the Credit Facility), which matures on December 20, 2010, now
provides for $220.0 million in borrowing capacity including a
$160.0 million five-year revolving credit facility (the Revolver) and a
$60.0 million term loan (the Term Loan). During the third quarter of 2006,
we
exercised the $40.0 million accordion feature under the Revolver, which
increased our borrowing capacity from $180.0 million to $220.0 million. The
Credit Facility includes sublimits for the issuance of swingline loans and
standby letters of credit.
At
December 31, 2006, there was $131.2 million outstanding and $28.4
million available for borrowing under the Revolver. The weighted average
effective interest rate of the Revolver was approximately 6.1% for the year
ended December 31, 2006.
Borrowings
under the Revolver bear interest, at our option, at either of the
following:
a. |
a
base rate, which is the greater of (i) the Wachovia Bank, National
Association prime rate or (ii) the overnight Federal Funds Rate plus
0.50%; or
|
b. |
the
London Interbank Offered Rate (LIBOR) plus a spread ranging from
0.600% to
1.250%, with such spread in each case depending on our leverage ratio.
|
Borrowings
under the Term Loan bear interest, at our option, at either of the
following:
a. |
a
base rate, which is the greater of (i) the Wachovia Bank, National
Association prime rate or (ii) the overnight Federal Funds Rate plus
0.50%; or
|
b. |
the
London Interbank Offered Rate (LIBOR) plus a spread ranging from
0.625% to
0.750%, with such spread in each case depending on our leverage ratio.
|
We
are
also required to pay (a) an annual facility fee of 0.150% to 0.250%, with such
spread in each case depending on our leverage ratio, (b) an annual commercial
letter of credit issuance fee of 0.125% multiplied by the face amount of each
letter of credit and (c) a letter of credit commission of 0.150% to 0.250%
multiplied by face amount of each letter of credit, with such spread in each
case depending on our leverage ratio.
At
December 31, 2006, there was $60.0 million outstanding on the
Term Loan. Of the total outstanding balance, $57.0 million is classified as
long-term and payments totaling $3.0 million are classified as current. Our
scheduled quarterly principal installments on the Term Loan begin on March
31,
2007. Future payments on the Term Loan will be $3.0 million in 2007, $3.0
million in 2008, $6.0 million in 2009 and $48.0 million in 2010. The
weighted average effective interest rate of the Term Loan was approximately
5.5%
for the year ended December 31, 2006.
In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates. Effective on June 30, 2006, the
swap
agreement converts our variable rate Term Loan to a fixed-rate basis until
its
termination on December 31, 2008. We record any differences paid or received
on
the interest rate swap as an adjustment to interest expense over the life of
the
swap. We have designated this swap as a cash flow hedge and we record the
changes in the fair value of the swap to accumulated other comprehensive income.
During
the year ended December 31, 2006, no gains or losses were recognized on
this swap and there was no effect on income from hedge ineffectiveness. The
net
difference between interest paid and interest received related to the swap
agreement included in interest expense was $0.2 million. At
December 31, 2006, the fair value of the swap agreement was a $0.2
million unrealized gain in the Consolidated Balance Sheet.
Our
obligations under the Credit Facility are guaranteed by all of our existing
and
future direct and indirect domestic subsidiaries. The
Credit Facility contains terms and provisions (including representations,
covenants and conditions) and events of default customary for transactions
of
this type. If an event of default occurs and is continuing under the Credit
Facility, the lenders may terminate their obligations thereunder and may require
us to repay all amounts thereunder. Financial covenants include maintenance
of a
maximum average total leverage ratio and a minimum fixed charge coverage ratio.
Other covenants include restrictions on our ability to, among other things,
pay
dividends or make other capital distributions (other than in accordance with
our
current dividend policy). The Credit Facility limits the declaration and payment
of dividends on our common stock to no more than 50% of the preceding year’s net
income, provided that we are not in default or no event of default has occurred
and the dividends are declared and paid in a manner consistent with our past
practice.
In
March
2006, we renewed our accounts receivable securitization facility (the
Receivables Facility), which provides a seasonal borrowing capacity of up to
$150.0 million, through March 2007. The Receivables Facility provides for the
true sale of certain of our receivables as they are created to a wholly owned,
bankruptcy-remote subsidiary. This subsidiary grants an undivided security
interest in the receivables to an unrelated commercial paper conduit. Because
of
the structure of the bankruptcy-remote subsidiary and our ability to control
its
activities, we include the transferred receivables and related debt in our
Consolidated Balance Sheets. We employed this arrangement because it provides
us
with a lower cost form of financing. The Receivables Facility has numerous
restrictive covenants, which require that we maintain a minimum average total
leverage ratio, fixed charge coverage ratio and minimum net worth ratio. At
December 31, 2006 there was $74.3 million outstanding under the
Receivables Facility at a weighted average effective interest rate of
5.6%.
As
of
December 31, 2006, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility and our Receivables Facility.
We
capitalize financing costs we incur related to implementing and amending our
debt. These costs are recorded as other assets on our Consolidated Balance
Sheets and amortized over the contractual life of the related debt. The changes
in deferred financing costs are as follows (in thousands):
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
$
|
726
|
|
$
|
2,010
|
|
Financing
cost deferred
|
|
155
|
|
|
243
|
|
Write
off fully amortized financing costs
|
|
(25
|
)
|
|
(1,527
|
)
|
Balance
at end of year
|
|
856
|
|
|
726
|
|
Less
accumulated amortization
|
|
(242
|
)
|
|
(134
|
)
|
|
$
|
614
|
|
$
|
592
|
|
Note
6 - Comprehensive Income
Comprehensive
income includes net income, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. Total comprehensive income
for
the past three years (in thousands) was:
|
2006
|
|
|
2005
|
|
|
2004
|
$
|
99,100
|
|
$
|
79,720
|
|
$
|
65,005
|
Accumulated
other comprehensive income as presented on the Consolidated Balance Sheets
consists of the following components (in thousands):
|
|
Foreign
Currency Translation
|
|
|
Unrealized
Gain (Loss) on Interest Rate Swaps
|
|
|
Total
|
|
Balance
at December 31, 2004
|
$
|
2,874
|
|
$
|
—
|
|
$
|
2,874
|
|
Net
change
|
|
(634
|
)
|
|
(101
|
)
|
|
(735
|
)
|
Balance
at December 31, 2005
|
|
2,240
|
|
|
(101
|
)
|
|
2,139
|
|
Net
change
|
|
3,854
|
|
|
222
|
|
|
4,076
|
|
Balance
at December 31, 2006
|
$
|
6,094
|
|
$
|
121
|
|
$
|
6,215
|
|
Note
7 - Share-Based Compensation
We
adopted SFAS 123(R) on January 1, 2006 using a Black-Scholes-Merton option
valuation model and the modified retrospective transition method. Prior to
January 1, 2006, we accounted for stock option awards under the intrinsic value
method prescribed by APB 25, as permitted by SFAS 123,
Accounting for Stock-Based Compensation.
Accordingly, we did not record compensation expense for options issued with
an
exercise price equal to the stock’s market price on the grant date. As of
January 1, 2006, we have adjusted all prior period financial statements and
the
related footnote disclosures to reflect compensation cost for the amounts
previously reported in our pro-forma footnote disclosures required by SFAS
123,
as corrected for immaterial amounts of compensation cost associated with our
employee stock purchase plan.
Share-Based
Plans
We
award
stock options and restricted stock to our employees and non-employee directors
under our stock option plans.
Under
the
1995 Stock Option Plan (the 1995 Plan) our Board of Directors (the Board) was
authorized to grant stock options to employees, agents, consultants or
independent contractors. These options generally were exercisable two years
after the grant date, and they expire ten years from the grant date. In May
1998, the Board suspended the 1995 Plan. Options granted prior to the suspension
were not affected by this action.
In
May
1998, our stockholders approved the 1998 Stock Option Plan (the 1998 Plan),
which authorized the Board to grant stock options, stock appreciation rights,
restricted stock and performance awards to employees, agents, consultants or
independent contractors. These options generally were exercisable three or
more
years after the grant date, and they expire ten years after the grant date.
In
May 2002, the Board suspended the 1998 Plan. Options granted prior to the
suspension were not affected by this action.
In
May
2002, our stockholders approved the 2002 Long-Term Incentive Plan (the 2002
Plan), which authorized the Board to grant stock options and restricted stock
awards to employees, agents, consultants or independent contractors. In
May 2004, our stockholders approved an amendment to increase the number of
shares authorized for issuance under the 2002 Plan from 1,575,000 to 2,700,000
shares. Granted options have an exercise price equal to our stock’s market price
on the grant date. These options generally vest either five years from the
grant
date or on a three/five year split vest schedule, where half of the options
vest
three years from the grant date and the remainder vest five years from the
grant
date. These options expire ten years from the grant date.
The
SCP
Pool Corporation Non-Employee Directors Equity Incentive Plan (the Director
Plan) permits the Board to grant stock options to each non-employee director.
No
more than 1,350,000 shares may be issued under this plan. Granted options have
an exercise price equal to our stock’s market price on the grant date. The
options generally may be exercised one year after the grant date, and they
expire ten years after the grant date. The Director plan expired during
2006.
Stock
Option Awards
The
following is a summary of the stock option activity under our stock option
plans
for the year ended December 31, 2006:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
6,796,687
|
|
$
|
10.69
|
|
|
|
|
|
Granted
|
|
598,800
|
|
|
38.84
|
|
|
|
|
|
Exercised
|
|
1,072,286
|
|
|
4.94
|
|
|
|
|
|
Forfeited
|
|
51,242
|
|
|
23.05
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
6,271,959
|
|
$
|
14.26
|
|
5.13
|
|
$
|
156,228,227
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
3,702,377
|
|
$
|
7.61
|
|
3.68
|
|
$
|
116,847,018
|
The
table
below summarizes information about stock options outstanding and exercisable
at
December 31, 2006:
|
|
Outstanding
Stock Options
|
|
Exercisable
Stock Options
|
|
|
|
Weighted
Average
|
Weighted
|
|
|
Weighted
|
|
|
|
Remaining
|
Average
|
|
|
Average
|
Range
of exercise prices
|
|
Shares
|
Contractual
Life
|
Exercise
Price
|
|
Shares
|
Exercise
Price
|
$
0.00 to $ 5.99
|
|
1,896,064
|
2.49
years
|
$
|
3.40
|
|
1,896,064
|
$
|
3.40
|
$
6.00 to $ 11.99
|
|
1,879,201
|
5.03
years
|
|
10.75
|
|
1,368,893
|
|
10.29
|
$
12.00 to $ 17.99
|
|
767,101
|
5.19
years
|
|
13.08
|
|
295,503
|
|
13.25
|
$
18.00 to $ 23.99
|
|
597,226
|
7.13
years
|
|
21.67
|
|
69,000
|
|
21.67
|
$
24.00 to $ 29.99
|
|
36,500
|
7.53
years
|
|
26.74
|
|
12,750
|
|
26.91
|
$
30.00 to $ 47.30
|
|
1,095,867
|
8.65
years
|
|
35.45
|
|
60,167
|
|
31.51
|
$
0.00 to $ 47.30
|
|
6,271,959
|
5.13
years
|
|
14.26
|
|
3,702,377
|
|
7.61
|
The
following table summarizes the cash proceeds and tax benefits realized from
the
exercise of stock options:
|
|
Year
Ended December 31,
|
((In
thousands, except share data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Options
exercised
|
|
1,072,286
|
|
|
1,124,241
|
|
|
421,290
|
|
Cash
proceeds
|
$
|
5,287
|
|
$
|
3,311
|
|
$
|
1,486
|
|
Intrinsic
value of options exercised
|
$
|
39,921
|
|
$
|
35,788
|
|
$
|
9,603
|
|
Tax
benefits realized
|
$
|
15,414
|
|
$
|
14,133
|
|
$
|
3,886
|
|
We
estimated the fair value of employee stock option awards at the grant date
based
on the assumptions summarized in the following table:
|
|
Year
Ended December 31,
|
(Weighted
average)
|
|
2006
|
|
2005
|
|
2004
|
Expected
volatility
|
|
30.8
|
%
|
|
30.3
|
%
|
|
35.0
|
%
|
Expected
term
|
|
6.0
|
years
|
|
7.0
|
years
|
|
7.0
|
years
|
Risk-free
interest rate
|
|
4.33
|
%
|
|
4.22
|
%
|
|
3.87
|
%
|
Expected
dividend yield
|
|
1.0
|
%
|
|
1.0
|
%
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Grant
date fair value
|
$
|
13.27
|
|
$
|
11.34
|
|
$
|
9.67
|
|
We
calculated expected volatility over the expected term of the awards based on
our
historical volatility. In prior years, we used monthly price observations for
our historical volatility calculation. In 2006, we began using weekly price
observations for our historical volatility calculation because we believe that
they provide a more appropriate measurement of volatility given the trading
patterns of our common stock. We estimated the expected term based on the
vesting period of the awards and our historical exercise activity for awards
with similar characteristics. The risk-free interest rate is based on the U.S.
Treasury zero-coupon issues with a remaining term approximating the expected
term of the option. We determined the expected dividend yield based on the
anticipated dividends over the expected term.
For
purposes of recognizing share-based compensation expense, we ratably expense
the
estimated fair value of employee stock options over the options’ requisite
service period. Generally, the requisite service period for our share-based
awards is the vesting period. We recognize compensation cost for awards with
graded vesting using the graded vesting recognition method.
The
table
below presents the total share-based compensation expense for stock option
awards and the related recognized tax benefits for the past three years (in
thousands):
|
|
2006
|
|
|
2005
|
|
|
2004
|
Share-based
compensation expense
|
$
|
6,554
|
|
$
|
5,344
|
|
$
|
5,679
|
Recognized
tax benefits
|
|
2,525
|
|
|
2,078
|
|
|
2,215
|
In
2006,
we modified certain stock option agreements to reflect the proper grant
dates and exercise prices. There was no material impact related to the
modification of these stock option agreements. As such, we did not recognize
any
additional share-based compensation expense.
Restricted
Stock Awards
The
following is a summary of the restricted stock awards activity under our stock
option plans for the year ended December 31, 2006:
|
|
Shares
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
Balance
unvested at December 31, 2005
|
|
52,400
|
|
|
|
|
|
Granted
(at market price)
|
|
—
|
|
|
|
|
|
Vested
|
|
2,500
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
|
|
|
Balance
unvested at December 31, 2006
|
|
49,900
|
|
7.14
|
|
$
|
1,954,583
|
|
|
|
|
|
|
|
|
Vested
at December 31, 2006
|
|
5,000
|
|
7.61
|
|
$
|
195,850
|
The
restricted stock awards generally vest five years from the grant date, and
expire ten years from the grant date. At December 31, 2006, the unamortized
compensation expense related to the restricted stock awards totaled $0.4
million, which will be recognized over a weighted average period of 2.1 years.
The total fair value of restricted stock awards vested during the years ended
December 31, 2006 and 2005 was $0.1 million for each year. No restricted
stock awards vested during 2004. Total share-based compensation expense
recognized related to these restricted stock awards was $0.2 million, $0.3
million and $0.2 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
Prior
to
the adoption of SFAS 123(R), we recorded restricted stock awards as unearned
compensation, a reduction of stockholders’ equity, based on the quoted fair
market value of our common stock on the date of grant. We adjusted the common
stock balances on the date of grant to reflect the issuance of the restricted
stock awards. We recorded compensation expense ratably over the vesting period
with an offsetting credit to the unearned compensation balance. Under the
provisions of SFAS 123(R), restricted stock awards are not deemed to be issued
until the end of the vesting period. As such, we reclassified the unearned
compensation balance to additional paid-in capital upon adoption and we
recognize compensation cost over the requisite service period with an offsetting
credit to additional paid-in capital.
Employee
Stock Purchase Plan
In
March
1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan
(the ESPP). Under our ESPP, employees who meet minimum age and length of service
requirements may purchase stock at 85% of the lower of:
a. |
the
closing price of our common stock at the end of a six month plan
period
ending either June 30 or December 31;
or
|
b. |
the
average of the beginning and ending closing prices of our common
stock for
such six month period.
|
No
more
than 956,250 shares of our common stock may be issued under our ESPP. For the
two plan periods in each year presented below, we awarded the following
aggregate share amounts:
|
2006
|
|
|
2005
|
|
|
2004
|
|
49,666
|
|
|
49,795
|
|
|
56,622
|
Share-based
compensation expense related to our ESPP was $0.4 million in 2006, $0.3 million
in 2005 and $0.4 million in 2004. The grant date fair value for the most recent
purchase period ended December 31, 2006 was $5.88 per share.
Impact
of Adoption of SFAS 123(R)
The
impact of the adoption of SFAS 123(R) on our Consolidated Statements of Income
and Consolidated Statements of Cash Flows is as follows (in thousands, except
per share data):
|
|
Year
Ended December 31,
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Increase/(decrease)
|
|
|
Increase/(decrease)
|
|
|
Increase/(decrease)
|
|
Income
before income taxes and equity earnings
|
|
$
|
(6,942
|
)
|
|
$
|
(4,894
|
)
|
|
$
|
(5,439
|
)
|
Provision
for income taxes
|
|
|
(2,680
|
)
|
|
|
(1,728
|
)
|
|
|
(1,904
|
)
|
Net income
|
|
|
(4,262
|
)
|
|
|
(3,166
|
)
|
|
|
(3,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
786
|
|
|
$
|
1,368
|
|
|
$
|
722
|
|
Net
cash used in financing activities
|
|
|
(786
|
)
|
|
|
(1,368
|
)
|
|
|
(722
|
)
|
The
impact of the adoption of SFAS 123(R) on our Consolidated Balance Sheet at
January 1, 2005 is as follows (in thousands):
|
|
Increase/
(decrease)
|
|
Deferred
income taxes (included in Other assets, net)
|
|
$
|
7,209
|
|
Additional
paid-in capital
|
|
|
18,631
|
|
Retained
earnings
|
|
|
(12,514
|
)
|
Unearned
compensation
|
|
|
1,092
|
|
Note
8 - Income Taxes
Income
from continuing operations before the provision for income taxes is attributable
to the following jurisdictions (in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
United
States
|
$
|
147,345
|
|
$
|
124,679
|
|
$
|
98,785
|
|
Foreign
|
|
4,841
|
|
|
4,250
|
|
|
5,515
|
|
Total
|
$
|
152,186
|
|
$
|
128,929
|
|
$
|
104,300
|
|
The
provision for income taxes consisted of the following (in
thousands):
|
|
Year
Ended December 31,
|
|
|
|
|
2006 |
|
2005 |
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
49,603
|
|
$
|
44,864
|
|
$
|
32,692
|
|
|
State
and other
|
|
8,812
|
|
|
8,381
|
|
|
7,738
|
|
|
|
|
58,415
|
|
|
53,245
|
|
|
40,430
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
362
|
|
|
(2,844
|
)
|
|
793
|
|
|
State
and other
|
|
(18
|
)
|
|
(460
|
)
|
|
(329
|
)
|
|
|
|
344
|
|
|
(3,304
|
)
|
|
464
|
|
Total
|
|
$
|
58,759
|
|
$
|
49,941
|
|
|
40,894
|
|
We
made
payments related to income taxes totaling $74.8 million in 2006 and
$14.3 million in 2005. We deferred our third and fourth quarter 2005
estimated federal tax payments as allowed by the Katrina Emergency Tax Relief
Act of 2005 (the Act). These payments of approximately $27.0 million were paid
in October 2006.
A
reconciliation of the U.S. federal statutory tax rate to our effective tax
rate
on income before income taxes and equity earnings is as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Federal
statutory rate
|
|
35.00
|
%
|
|
35.00
|
%
|
|
35.00
|
%
|
Other,
primarily state income tax rate
|
|
3.61
|
|
|
3.74
|
|
|
4.21
|
|
Total
effective tax rate
|
|
38.61
|
%
|
|
38.74
|
%
|
|
39.21
|
%
|
We
recorded equity earnings in LAC net of income tax expense of $1.0 million and
$0.9 million in 2006 and 2005, respectively. These amounts are not reflected
in
the tables above.
The
components of the deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
Deferred
tax assets:
|
|
|
|
|
|
|
Product
inventories
|
$
|
5,380
|
|
$
|
3,078
|
|
Accrued
expenses
|
|
1,482
|
|
|
649
|
|
Allowance
for doubtful accounts
|
|
814
|
|
|
-
|
Total
current deferred tax assets
|
|
7,676
|
|
|
3,727
|
|
|
|
|
|
|
|
|
Leases
|
|
1,073
|
|
|
751
|
|
Stock
options
|
|
10,483
|
|
|
8,744
|
|
Depreciation
|
|
331
|
|
|
-
|
|
Other
|
|
855
|
|
|
261
|
Total
non-current deferred tax assets
|
|
12,742
|
|
|
9,756
|
Total
deferred tax assets
|
|
20,418
|
|
|
13,483
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
Trade
discounts on purchases
|
|
2,726
|
|
|
1,887
|
|
Prepaid
expenses
|
|
1,313
|
|
|
1,171
|
|
Allowance
for doubtful accounts
|
|
-
|
|
|
146
|
|
Accumulated
other comprehensive income
|
|
-
|
|
|
1,342
|
Total
current deferred tax liabilities
|
|
4,039
|
|
|
4,546
|
|
|
|
|
|
|
|
|
Intangible
assets, primarily goodwill
|
|
13,099
|
|
|
11,775
|
|
Equity
earnings in unconsolidated interests
|
|
1,924
|
|
|
919
|
|
Depreciation
|
|
-
|
|
|
580
|
Total
non-current deferred tax liabilities
|
|
15,023
|
|
|
13,274
|
Total
deferred tax liabilities
|
|
19,062
|
|
|
17,820
|
|
|
|
|
|
|
Net
deferred tax asset (liability)
|
$
|
1,356
|
|
$
|
(4,337)
|
As
presented in the Consolidated Statements of Cash Flows, the change in deferred
income taxes includes, among other items, the change in deferred income taxes
related to the deferred income tax provision, the change in deferred income
taxes related to the increase in equity earnings in unconsolidated interests
and
the change in deferred income taxes related to the estimated tax impact of
accumulated other comprehensive income.
We
reduce
federal and state income taxes payable by the tax benefits associated with
the
exercise of nonqualified stock options. We receive an income tax benefit based
on the difference between the option exercise price and the fair market value
of
the stock at the time the option is exercised. This benefit, which we record
in
stockholders’ equity, was $14.6 million in 2006 and $13.5 million in
2005.
As
of
December 31, 2006, United States income taxes were not provided on earnings
of
our foreign subsidiaries, as we have invested or expect to invest the
undistributed earnings indefinitely. If in the future these earnings are
repatriated to the United States, or if we determine that the earnings will
be
remitted in the foreseeable future, additional income tax provisions may be
required.
We
hold,
through our affiliates, cash balances in the countries in which we operate,
including significant amounts held outside the United States. Most of the
amounts held outside the United States could be repatriated to the United
States, but, under current law, may be subject to United States federal income
taxes, less applicable foreign tax credits. Repatriation of some foreign
balances is restricted by local laws including the imposition of withholding
taxes in some jurisdictions. We have not provided for the United States federal
tax liability on these amounts and for financial statement purposes, these
foreign cash balances are considered indefinitely reinvested outside the United
States.
In
June
2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting
for Uncertainty in Income Taxes,
an
interpretation of SFAS 109, Accounting for Income Taxes,
to
create a single model to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007,
as required. The cumulative impact of adopting FIN 48 will be recorded in
retained earnings. We do not expect that the adoption of FIN 48 will have a
material impact our financial position and results of operations. We anticipate
that the accounting for FIN 48 may provide for greater volatility in our
effective income tax rate as items are derecognized or there are changes in
measurement recorded in interim periods.
Note
9 - Earnings Per Share
The
table
below presents the reconciliation of basic and diluted weighted average number
of shares outstanding (in thousands):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
Net
income
|
$
|
95,024
|
|
$
|
80,455
|
|
$
|
63,406
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
51,866
|
|
|
52,445
|
|
|
52,838
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
2,758
|
|
|
3,185
|
|
|
3,046
|
|
|
Restricted
stock awards
|
|
30
|
|
|
24
|
|
|
10
|
|
|
Employee
stock purchase plan
|
|
8
|
|
|
11
|
|
|
17
|
|
Diluted
|
|
54,662
|
|
|
55,665
|
|
|
55,911
|
Note
10 - Commitments and Contingencies
We
lease
facilities for our corporate office, sales centers, vehicles and equipment
under
non-cancelable operating leases that expire in various years through 2027.
Most
of our leases contain renewal options, some of which involve rate increases.
For
leases with step rent provisions whereby the rental payments increase
incrementally over the life of the lease, we recognize the total minimum lease
payments on a straight-line basis over the minimum lease term. The table below
presents rent expense associated with operating leases for the past three years
(in thousands):
|
2006
|
|
|
2005
|
|
|
2004
|
$
|
58,398
|
|
$
|
43,513
|
|
$
|
38,513
|
The
table
below sets forth the approximate future minimum lease payments as of
December 31, 2006 related to non-cancelable operating leases with
initial terms of one year or more (in thousands):
2007
|
|
47,802
|
|
2008
|
|
41,406
|
|
2009
|
|
33,637
|
|
2010
|
|
26,241
|
|
2011
|
|
21,104
|
|
Thereafter
|
|
35,168
|
|
From
time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate disposition of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
Note
11 - Related Party Transactions
In
May
2005, we acquired a 50% membership interest in NCC through a $1.1 million
cash contribution. NCC owns and operates an office building in Covington,
Louisiana. We lease corporate and administrative offices from NCC, occupying
approximately 50,000 square feet of office space. We amended the lease agreement
in May 2005. The amended agreement has a 10 year term and, as of
December 31, 2006, we pay rent of $56,600 per month.
In
October 1999, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Mandeville, Louisiana. The sole member of S&C
Development, LLC is A. David Cook, a POOL executive officer. The original seven
year lease term commenced on January 1, 2000 and was set to expire on
December 31, 2006. We renewed this lease for an additional seven year lease
term, at a monthly rent of $7,031. The lease will expire on December 31,
2013.
In
January 2002, we entered into a lease agreement with S&C Development, LLC
for additional warehouse space adjacent to our Mandeville sales center. The
original five year lease term commenced on February 4, 2002, and was
set to expire on December 31, 2006. We renewed this lease for an additional
seven year lease term at a monthly rent of $4,840. The total $11,871 monthly
lease payment is for both facilities consisting of 21,100 square feet. The
lease
will expire on December 31, 2013.
In
January 2001, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Oklahoma City, Oklahoma. The ten year lease
term
commenced on November 10, 2001, and, as of
December 31, 2006, we pay rent of $12,745 per month for the 25,000
square foot facility.
In
March
1997, we entered into a lease agreement with Kenneth St. Romain for a sales
center facility in Baton Rouge, Louisiana. Kenneth St. Romain is a POOL general
manager. In
January 2002, we extended this lease for a second term of five years
which commenced on March 1, 2002. As of December 31, 2006,
we pay rent of $10,340 per month for the 23,500 square foot facility.
In
May
2001, we entered into a lease agreement with Kenneth St. Romain for a sales
center facility in Jackson, Mississippi. The seven year lease term commenced
on
November 16, 2001, and, as of December 31, 2006, we pay rent
of $8,823 per month for the 20,000 square foot facility.
The
table
below presents rent expense associated with these leases for the past three
years (in thousands):
|
2006
|
|
|
2005
|
|
|
2004
|
$
|
952
|
|
$
|
946
|
|
$
|
501
|
Note
12 - Employee Benefit Plans
We
offer
a 401(k) savings and retirement plan, which provides benefits for substantially
all employees who meet minimum age and length of service requirements. Eligible
employees are able to contribute up to 25% of their compensation, subject to
the
federal dollar limit. For plan participants, we contribute 50% of employee
contributions up to 8% of their compensation. Effective January 1, 2005, we
eliminated our profit-sharing plan and increased the discretionary company
matching contribution for the 401(k) plan to 8% as discussed above.
Effective
March 1, 2005, we adopted the Pool Corp Deferred Compensation Plan, a
nonqualified deferred compensation plan. The plan allows certain employees
who
occupy key management positions to defer salary and bonus amounts, and provides
a matching contribution similar to that provided under our 401(k) plan to the
extent that a participant’s contributions to the 401(k) plan are limited by IRS
non-discrimination limitations. The total company matching contribution provided
to a participant under the 401(k) plan and the Pool Corp Deferred Compensation
Plan combined for any one year may not exceed 4% of a participant’s salary and
bonus.
The
employee and company sponsored contributions are invested in certain equity
and
fixed income securities based on individual employee elections.
The
table
below sets forth our matching contributions and profit-sharing contributions
for
the past three years (in thousands):
|
|
2006
|
|
|
2005
|
|
|
2004
|
Matching
contributions 401(k)
|
$
|
2,487
|
|
$
|
2,244
|
|
$
|
1,843
|
Matching
contributions deferred compensation plan
|
|
125
|
|
|
77
|
|
|
—
|
Profit-sharing
contributions
|
|
—
|
|
|
—
|
|
|
1,280
|
Note
13 - Quarterly Financial Data (Unaudited)
The
table
below summarizes the unaudited quarterly operating results of operations for
the
past two years (in thousands, except per share data):
|
|
Quarter
|
|
|
|
2006
|
|
2005
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Net
sales
|
$
|
348,556
|
|
$
|
705,703
|
|
$
|
537,017
|
|
$
|
318,486
|
|
$
|
265,161
|
|
$
|
563,978
|
|
$
|
423,729
|
|
$
|
299,791
|
|
Gross
profit
|
|
98,048
|
|
|
209,000
|
|
|
149,995
|
|
|
82,905
|
|
|
71,951
|
|
|
162,681
|
|
|
114,605
|
|
|
83,211
|
|
Net
income (loss)
|
|
6,422
|
|
|
62,110
|
|
|
31,493
|
|
|
(5,001
|
)
|
|
4,102
|
|
|
50,709
|
|
|
26,521
|
|
|
(876
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
$
|
1.18
|
|
$
|
0.61
|
|
$
|
(0.10
|
)
|
$
|
0.08
|
|
$
|
0.97
|
|
$
|
0.50
|
|
$
|
(0.02
|
)
|
|
Diluted
|
$
|
0.12
|
|
$
|
1.12
|
|
$
|
0.58
|
|
$
|
(0.10
|
)
|
$
|
0.07
|
|
$
|
0.91
|
|
$
|
0.47
|
|
$
|
(0.02
|
)
|
The
sum
of basic and diluted earnings per share for each of the quarters may not equal
the total basic and diluted earnings per share for the annual period because
of
rounding differences and a difference in the way that in-the-money stock
options are considered from quarter to quarter under the requirements of SFAS
128, Earnings
per Share.
Note
14 - Subsequent Event
On
February 12, 2007, we issued and sold $100.0 million aggregate
principal amount of Floating Rate Senior Notes (the Notes) in a private
placement offering pursuant to a Note Purchase Agreement. The Notes are due
February 12, 2012 and will accrue interest on the unpaid principal
balance at a floating rate equal to a spread of 0.600% over the three-month
LIBOR, as adjusted from time to time. The Notes have scheduled quarterly
payments that are due on February 12, May 12, August 12 and
November 12 of each year. The Notes are unsecured and are guaranteed by
each domestic subsidiary that is or becomes a borrower or guarantor under our
Credit Facility. We used the net proceeds from the placement to pay down
borrowings under the Credit Facility.
The
Notes
are subject to redemption at our option, in whole or in part, at 103% of the
principal amount on or prior to February 12, 2008 and at 100% of the principal
amount thereafter, plus accrued interest to the date of redemption and any
LIBOR
breakage amount. In the event we have a change of control, the holders of the
Notes will have the right to put the Notes back to us at par.
The
Note
Purchase Agreement includes customary affirmative and negative covenants for
transactions of this type, including a maximum Funded Indebtedness to EBITDA
covenant, a minimum Fixed Charge Coverage covenant and limitations on priority
debt, liens, subsidiary debt, asset sales and mergers and consolidations. The
Agreement also contains customary events of default, which if they were to
occur
would give the holders of the Notes the right to accelerate the
Notes.
In
February 2007, we also entered into an interest rate swap agreement to reduce
our exposure to fluctuations in interest rates on the Notes. The swap agreement
converts the variable interest rate to a fixed rate of 5.088%on the initial
notional amount of $100.0 million, which will decrease to a notional amount
of
$50.0 million in 2010. The swap agreement will terminate on
February 12, 2012. Including the 0.600% spread, we expect to pay an
effective interest rate on the Notes of approximately 5.688%.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
applicable.
Item
9A. Controls
and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the Act). The rules refer to the
controls and other procedures designed to ensure that information required
to be
disclosed in reports that we file or submit under the Act is recorded,
processed, summarized and reported within the time periods specified. In the
fourth quarter of 2006, we enhanced our disclosure controls and procedures
to
address the Security and Exchange Commission’s new Executive Compensation
disclosure requirements for Definitive Proxy Statements on Schedule 14A. As
of
December 31, 2006, management, including the CEO and CFO, performed an
evaluation of the effectiveness of our disclosure controls and procedures.
Based
on that evaluation, management, including the CEO and CFO, concluded that as
of
December 31, 2006, our disclosure controls and procedures were
effective.
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Based on the most recent
evaluation, we have concluded that no change in our internal control over
financial reporting occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
POOL’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. Our internal
control system was designed to provide reasonable assurance to POOL’s management
and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined
to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Any evaluation or projection of
effectiveness to future periods is also subject to risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
POOL’s
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based
on
this assessment, management has concluded that, as of December 31, 2006,
POOL’s internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
The
registered public accounting firm that audited the consolidated financial
statements included in Item 8 of this Form 10-K has issued an attestation
report on management’s assessment of POOL’s internal controls over financial
reporting. This report appears below.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Pool
Corporation
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Pool Corporation
(formerly SCP Pool Corporation) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in
Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Pool Corporation’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Pool Corporation maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Pool Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pool
Corporation as of December 31, 2006 and 2005, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2006, and our report dated
February 28, 2007 expressed an unqualified opinion
thereon.
/s/
Ernst
& Young LLP
New
Orleans, Louisiana
February
28, 2007
Item
9B. Other
Information
Not
applicable.
PART
III.
Item
10. Directors,
Executive Officers and Corporate Governance
Incorporated
by reference to POOL’s 2007 Proxy Statement to be filed with the
SEC.
Item
11. Executive
Compensation
Incorporated
by reference to POOL’s 2007 Proxy Statement to be filed with the
SEC.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Incorporated
by reference to POOL’s 2007 Proxy Statement to be filed with the
SEC.
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
Incorporated
by reference to POOL’s 2007 Proxy Statement to be filed with the
SEC.
Item
14. Principal
Accounting Fees and Services
Incorporated
by reference to POOL’s 2007 Proxy Statement to be filed with the
SEC.
PART
IV.
Item
15. Exhibits,
Financial Statement Schedules
(a)
|
The
following documents are filed as part of this report:
|
|
|
|
|
(1)
|
Consolidated
Financial Statements:
|
|
|
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
34
|
|
|
Consolidated
Statements of Income
|
35
|
|
|
Consolidated
Balance Sheets
|
36
|
|
|
Consolidated
Statements of Cash Flows
|
37
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
38
|
|
|
Notes
to Consolidated Financial Statements
|
39
|
|
|
|
|
(2)
|
Financial
Statement Schedules.
|
|
|
All
schedules are omitted because they are not applicable or are not
required
|
|
|
or
because the required information is provided in our Consolidated
Financial
|
|
|
Statements
or accompanying Notes included in Item 8 of this Form
10-K.
|
|
|
|
|
(3)
|
The
exhibits listed in the Index to the Exhibits.
|
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 1, 2007.
|
POOL
CORPORATION
|
|
|
|
|
|
|
|
|
By:
|
/S/
WILSON B. SEXTON
|
|
Wilson
B. Sexton, Chairman of the Board
|
|
and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 1, 2007.
Signature:
|
Title:
|
/S/
WILSON B. SEXTON
|
|
Wilson
B. Sexton
|
Chairman
of the Board and Director
|
|
|
/S/
MANUEL J. PEREZ DE LA MESA
|
|
Manuel
J. Perez de la Mesa
|
President,
Chief Executive Officer and Director
|
|
|
/S/
MARK W. JOSLIN
|
|
Mark
W. Joslin
|
Vice
President and Chief Financial Officer (Principal Accounting
Officer)
|
|
|
/S/
ANDREW W. CODE
|
|
Andrew
W. Code
|
Director
|
|
|
/S/
JAMES J. GAFFNEY
|
|
James
J. Gaffney
|
Director
|
|
|
/S/
GEORGE
T. HAYMAKER
|
|
George
T. Haymaker
|
Director
|
|
|
/S/
HARLAN F. SEYMOUR
|
|
Harlan
F. Seymour
|
Director
|
|
|
/S/
ROBERT C. SLEDD
|
|
Robert
C. Sledd
|
Director
|
|
|
/S/
JOHN E. STOKELY
|
|
John
E. Stokely
|
Director
|
INDEX
TO EXHIBITS
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|
|
|
|
|
Incorporated
by Reference
|
No.
|
|
Description
|
|
Filed
with this Form 10-K
|
|
Form
|
|
File
No.
|
|
Date
Filed
|
3.1
|
|
Restated
Certificate of Incorporation of the Company.
|
|
|
|
10-Q
|
|
000-26640
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08/09/2006
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3.2
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|
Restated
Composite Bylaws of the Company.
|
|
|
|
10-Q
|
|
000-26640
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|
08/09/2006
|
4.1
|
|
Form
of certificate representing shares of common stock of the Company.
|
|
|
|
8-K
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|
000-26640
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|
05/19/2006
|
10.1
|
*
|
SCP
Pool Corporation 1995 Stock Option Plan.
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|
|
|
S-1
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33-92738
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|
08/18/1995
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10.2
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*
|
Form
of Individual Stock Option Agreement under 1995 Stock Option
Plan.
|
|
|
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S-1
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33-92738
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|
08/18/1995
|
10.3
|
*
|
Amended
and Restated Non-Employee Directors Equity Incentive Plan,
as
amended by Amendment No. 1.
|
|
|
|
10-Q
10-Q
|
|
000-26640
000-26640
|
|
08/13/2001
07/25/2002
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10.4
|
*
|
SCP
Pool Corporation 1998 Stock Option Plan.
|
|
|
|
DEF
14A
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|
000-26640
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|
04/08/1998
|
10.5
|
*
|
Form
of Stock Option Agreement under 1998 Stock Option Plan.
|
|
|
|
10-K
|
|
000-26640
|
|
03/31/1999
|
10.6
|
*
|
Amended
and Restated SCP Pool Corporation Employee Stock Purchase Plan.
|
|
|
|
10-Q
|
|
000-26640
|
|
07/25/2002
|
10.7
|
*
|
Amended
and Restated SCP Pool Corporation 2002 Long-Term Incentive
Plan.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.8
|
*
|
Form
of Stock Option Agreement under 2002 Long-Term Incentive
Plan.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.9
|
*
|
Employment
Agreement, dated January 25, 1999, among SCP Pool Corporation, South
Central Pool Supply, Inc. and Manuel J. Perez de la Mesa.
|
|
|
|
10-K
|
|
000-26640
|
|
03/31/1999
|
10.10
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC
and John
M. Murphy.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.11
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC
and A.
David Cook.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.12
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC
and
Christopher W. Wilson.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.13
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC
and
Stephen C. Nelson.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.14
|
*
|
Compensation
of Non-Employee Directors.
|
|
|
|
10-K
|
|
000-26640
|
|
03/07/2006
|
10.15
|
*
|
Form
of Indemnity Agreement for Directors and Officers.
|
|
|
|
10-Q
|
|
000-26640
|
|
10/29/2004
|
10.16
|
|
Louisiana
Tax Equalization Agreement.
|
|
|
|
10-Q
|
|
000-26640
|
|
10/29/2004
|
10.17
|
*
|
Tax
Reimbursement Arrangement.
|
|
|
|
10-Q
|
|
000-26640
|
|
07/30/2004
|
10.18
|
|
Receivables
Sale Agreement dated as of March 27, 2003, among SCP Distributors
LLC, SCP
Services LP and Superior Pool Products LLC, as Originators, and Superior
Commerce LLC, as Buyer.
|
|
|
|
10-Q
|
|
000-26640
|
|
04/30/2003
|
10.19
|
|
Receivables
Purchase Agreement dated as of March 27, 2003, among Superior Commerce,
LLC, as Seller, SCP Distributors LLC, as Servicer, Jupiter Securitization
Corporation and Bank One, NA (Main Office Chicago) as Agent,
as
amended by amendment dated as of March 25, 2004
|
|
|
|
10-Q
10-Q
|
|
000-26640
000-26640
|
|
04/30/2003
04/30/2004
|
|
|
|
|
|
|
|
|
|
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10.20
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|
Intercreditor
Agreement dated as of March 27, 2003, by and between Bank One, NA,
as
agent under the Credit Agreement, and Bank One, NA (Main Office Chicago),
as agent under the Receivables Purchase Agreement.
|
|
|
|
10-Q
|
|
000-26640
|
|
04/30/2003
|
10.21
|
|
Credit
Agreement dated as of November 2, 2004, among SCP Pool Corporation,
as US
Borrower, SCP Distributors Inc., as Canadian Borrower, the Lenders,
Wachovia Bank, National Association, as Administrative Agent, Swingline
Lender and Issuing Lender, Congress Financial Corporation (Canada)
as
Canadian Dollar Lender, JPMorgan Chase Bank, a syndication Agent,
Hibernia
National Bank as Documentation Agent and Wells Fargo Bank Association,
as
Documentation Agents.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.22
|
|
Subsidiary
Guaranty Agreement dated as of November 2, 2004.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.23
|
|
Performance
Undertaking dated as of March 27, 2003, by and between SCP Pool
Corporation and Superior Commerce LLC.
|
|
|
|
10-Q
|
|
000-26640
|
|
04/30/2003
|
10.24
|
|
Asset
Exchange Agreement, dated as of November 12, 2004 by and among SCP
Pool
Corporation, Les Industries R.P. Inc. and Latham Acquisition
Corp.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.25
|
|
Asset
Contribution Agreement, dated as of November 12, 2004 by and among
SCP
Pool Corporation, Fort Wayne Pools, Inc and Latham Acquisition
Corp.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.26
|
|
Subscription
and Stockholders’ Agreement, dated as of November 12, 2004, by and among
Latham Acquisition Corp., Fort Wayne Pools, Inc., Brockway Moran
&
Partners Fund II, L.P. and Brockway Moran & Partners II. Co-Invest
Fund, L.P
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.27
|
|
Lease
(Mandeville Service Center) entered into as of October 19, 1999,
by and
between S&C Development Company, LLC and South Central Pool Supply,
Inc, as amended by Lease Agreement Amendment No. One, entered into
as of
May 26, 2000, by and between S&C Development Company, LLC and South
Central Pool Supply, Inc,
as
amended by the Second Amendment entered into as of January 16, 2007
by and
between S&C Development Company, LLC and SCP Distributors,
LLC,
as
amended by Lease Agreement (Warehouse) entered into as of January
16,
2002, by and between S&C Development Company, LLC and SCP
Distributors, LLC, as amended by First Amendment entered into as
of
February 11, 2002 by and between S&C Development Company, LLC and SCP
Distributors, LLC,
as
amended by Second Amendment entered into as of January 16, 2007 by
and
between S&C Development Company, LLC and SCP Distributors,
LLC.
|
|
X
X
|
|
10-Q
10-Q
|
|
000-26640
000-26640
|
|
07/30/2004
07/30/2004
|
10.28
|
|
Lease
(Oklahoma Service Center) entered into as of January 15, 2001, by
and
between Dave Cook, individually and SCP Pool Corporation, as amended
by
First Amendment, entered into as of October 24, 2001 by and between
S&C Development, LLC and SCP Pool Corporation, as amended by First
Amendment, entered into, as of December 5, 2001 by and between S&C
Development, LLC and SCP Pool Corporation.
|
|
|
|
10-Q
|
|
000-26640
|
|
07/30/2004
|
10.29
|
*
|
Form
of Stock Option Agreement under the Non-employee Director’s Equity
Incentive Plan.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2005
|
10.30
|
|
Nonqualified
Deferred Compensation Plan Basic Plan Document, dated March 1, 2005.
|
|
|
|
10-Q
|
|
000-26640
|
|
04/29/2005
|
10.31
|
|
Nonqualified
Deferred Compensation Plan Adoption Agreement by an among SCP
Distributors, L.L.C., Superior Pool Products, L.L.C. and Cypress,
Inc.,
dated March 1, 2005
|
|
|
|
10-Q
|
|
000-26640
|
|
04/29/2005
|
10.32
|
|
Trust
Agreement by and among SCP Distributors, L.L.C., Superior Pool Products,
L.L.C. and Cypress, Inc. and T. Rowe Price Trust Company, dated March
1,
2005.
|
|
|
|
10-Q
|
|
000-26640
|
|
04/29/2005
|
10.33
|
|
Agreement
and Plan of Merger by and among Automatic Rain Company, Horizon
Distributors, Inc. and the Shareholder Parties, dated August 26,
2005.
|
|
|
|
8-K
|
|
000-26640
|
|
10/04/2005
|
10.34
|
|
Second
Amendment of the Credit Agreement, dated December 20, 2005, among
SCP Pool
Corporation, as US Borrower, SCP Distributors Inc., as Canadian Borrower,
the Lenders, Wachovia Bank, National Association, as Administrative
Agent
Swingline Lender and Issuing Lender, Congress Financial Corporation
(Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, as syndication
Agent, Hibernia National Bank and Wells Fargo Bank Association as
Co-Documentation Agents and Regions Bank.
|
|
|
|
10-K
|
|
000-26640
|
|
03/07/2006
|
10.35
|
|
Note
Purchase Agreement by and among Pool Corporation and the Purchasers
party
thereto.
|
|
|
|
8-K
|
|
000-26640
|
|
02/15/2007
|
10.36
|
|
Subsidiary
Guaranty by Pool Corporation in favor of the holders from time to
time of
the Notes.
|
|
|
|
8-K
|
|
000-26640
|
|
02/15/2007
|
10.37
|
|
Third
Amendment of the Credit Agreement, dated February 9, 2007, among
SCP Pool
Corporation, as US Borrower, SCP Distributors Inc., as Canadian Borrower,
the Lenders, Wachovia Bank, National Association, as Administrative
Agent
Swingline Lender and Issuing Lender, Congress Financial Corporation
(Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, as syndication
Agent, Hibernia National Bank and Wells Fargo Bank Association as
Co-Documentation Agents and Regions Bank.
|
|
X
|
|
|
|
|
|
|
10.38
|
*
|
Pool
Corporation Executive Bonus Plan
|
|
X
|
|
|
|
|
|
|
14
|
|
Code
of Business Conduct and Ethics for Directors, Officers and Employees.
|
|
|
|
10-K
|
|
000-26640
|
|
03/01/2004
|
21.1
|
|
Subsidiaries
of the registrant.
|
|
X
|
|
|
|
|
|
|
23.1
|
|
Consent
of Ernst & Young LLP.
|
|
X
|
|
|
|
|
|
|
31.1
|
|
Certification
by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
X
|
|
|
|
|
|
|
32.1
|
|
Certification
by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
X
|
|
|
|
|
|
|
*
Indicates a management contract or compensatory plan or arrangement