POOL Q1 2007 Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31, 2007
or
|
|
oTRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to
____________
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|
Commission
File Number: 0-26640
POOL
CORPORATION
|
(Exact
name of Registrant as specified in its charter)
|
|
|
|
Delaware
|
|
36-3943363
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
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|
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|
109
Northpark Boulevard,
Covington,
Louisiana
|
|
70433-5001
|
(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)
|
|
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 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.
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
At
April
23, 2007, there were 49,234,336 outstanding shares of the registrant's common
stock, $.001 par value per share.
POOL
CORPORATION
Form
10-Q
For
the Quarter Ended March 31, 2007
INDEX
PART
I. FINANCIAL INFORMATION
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Item
1. Financial Statements (Unaudited)
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|
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1
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2
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|
|
3
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|
|
4
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7
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|
|
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16
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16
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PART
II. OTHER INFORMATION
|
|
|
|
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17
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21
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21
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22
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23
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
POOL
CORPORATION
(Unaudited)
(In
thousands, except per share data)
|
Three
Months Ended
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
373,706
|
|
$
|
348,556
|
|
Cost
of sales
|
|
270,221
|
|
|
250,508
|
|
Gross
profit
|
|
103,485
|
|
|
98,048
|
|
Selling
and administrative expenses
|
|
94,853
|
|
|
83,026
|
|
Operating
income
|
|
8,632
|
|
|
15,022
|
|
Interest
expense, net
|
|
4,519
|
|
|
2,851
|
|
Income
before income taxes and equity losses
|
|
4,113
|
|
|
12,171
|
|
Provision
for income taxes
|
|
1,588
|
|
|
4,699
|
|
Equity
losses in unconsolidated investments, net
|
|
(1,171
|
)
|
|
(1,050
|
)
|
Net
income
|
$
|
1,354
|
|
$
|
6,422
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
$
|
0.12
|
|
Diluted
|
$
|
0.03
|
|
$
|
0.12
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
50,201
|
|
|
52,593
|
|
Diluted
|
|
52,462
|
|
|
55,443
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
$
|
0.105
|
|
$
|
0.09
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
POOL
CORPORATION
(Unaudited)
(In
thousands, except share data)
|
|
March
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
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|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
30,555
|
|
$
|
5,964
|
|
$
|
16,734
|
|
Receivables,
net
|
|
51,104
|
|
|
42,988
|
|
|
51,116
|
|
Receivables
pledged under receivables facility
|
|
179,930
|
|
|
168,590
|
|
|
103,821
|
|
Product
inventories, net
|
|
413,161
|
|
|
406,310
|
|
|
332,069
|
|
Prepaid
expenses and other current assets
|
|
9,383
|
|
|
5,193
|
|
|
8,005
|
|
Deferred
income taxes
|
|
7,676
|
|
|
3,970
|
|
|
7,676
|
|
Total
current assets
|
$
|
691,809
|
|
$
|
633,015
|
|
$
|
519,421
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
34,551
|
|
|
27,884
|
|
|
33,633
|
|
Goodwill
|
|
155,231
|
|
|
142,177
|
|
|
154,244
|
|
Other
intangible assets, net
|
|
17,763
|
|
|
18,955
|
|
|
18,726
|
|
Equity
interest investments
|
|
30,522
|
|
|
28,182
|
|
|
32,509
|
|
Other
assets, net
|
|
17,753
|
|
|
15,413
|
|
|
16,029
|
|
Total
assets
|
$
|
947,629
|
|
$
|
865,626
|
|
$
|
774,562
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
325,448
|
|
|
267,296
|
|
|
177,544
|
|
Accrued
and other current liabilities
|
|
24,515
|
|
|
51,827
|
|
|
35,610
|
|
Short-term
financing
|
|
102,300
|
|
|
80,275
|
|
|
74,286
|
|
Current
portion of other long-term liabilities
|
|
4,350
|
|
|
2,100
|
|
|
4,350
|
|
Total
current liabilities
|
$
|
456,613
|
|
$
|
401,498
|
|
$
|
291,790
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
13,867
|
|
|
12,786
|
|
|
15,023
|
|
Long-term
debt
|
|
253,222
|
|
|
155,163
|
|
|
188,157
|
|
Other
long-term liabilities
|
|
5,639
|
|
|
2,174
|
|
|
1,908
|
|
Total
liabilities
|
$
|
729,341
|
|
$
|
571,621
|
|
$
|
496,878
|
|
|
|
|
|
|
|
|
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Stockholders’
equity:
|
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|
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|
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Common
stock, $.001 par value; 100,000,000
|
|
|
|
|
|
|
|
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|
shares
authorized; 49,328,083, 52,880,856
|
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|
|
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|
|
|
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|
and
50,929,665 shares issued and
|
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|
|
|
|
|
|
|
|
outstanding
at March 31, 2007,
|
|
|
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|
|
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March
31, 2006 and
|
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|
|
|
|
|
|
|
|
December
31, 2006, respectively
|
|
49
|
|
|
52
|
|
|
50
|
|
Additional
paid-in capital
|
|
156,364
|
|
|
133,860
|
|
|
148,821
|
|
Retained
earnings
|
|
57,261
|
|
|
157,370
|
|
|
129,932
|
|
Treasury
stock
|
|
(886
|
)
|
|
—
|
|
|
(7,334
|
)
|
Accumulated
other comprehensive income
|
|
5,500
|
|
|
2,723
|
|
|
6,215
|
|
Total
stockholders’ equity
|
$
|
218,288
|
|
$
|
294,005
|
|
$
|
277,684
|
|
Total
liabilities and stockholders’ equity
|
$
|
947,629
|
|
$
|
865,626
|
|
$
|
774,562
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
POOL
CORPORATION
(Unaudited)
(In
thousands)
|
Three
Months Ended
|
|
|
March
31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
$
|
1,354
|
|
|
$
|
6,422
|
|
Adjustments
to reconcile net income to
net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
2,184
|
|
|
|
1,860
|
|
Amortization
|
|
1,220
|
|
|
|
1,328
|
|
Share-based
compensation
|
|
1,543
|
|
|
|
2,145
|
|
Excess
tax benefits from share-based compensation
|
|
(2,834
|
)
|
|
|
(8,236
|
)
|
Equity
losses in unconsolidated investments
|
|
1,987
|
|
|
|
1,725
|
|
Other
|
|
(1,920
|
)
|
|
|
(1,578
|
)
|
Changes
in operating assets and liabilities, net
of effects of acquisitions:
|
|
|
|
|
|
|
|
Receivables
|
|
(76,398
|
)
|
|
|
(69,638
|
)
|
Product
inventories
|
|
(80,453
|
)
|
|
|
(76,348
|
)
|
Accounts
payable
|
|
147,859
|
|
|
|
93,145
|
|
Other
current assets and liabilities
|
|
(7,849
|
)
|
|
|
(11,484
|
)
|
Net
cash used in operating activities
|
|
(13,307
|
)
|
|
|
(60,659
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Acquisition
of businesses, net of cash acquired
|
|
(842
|
)
|
|
|
(1,446
|
)
|
Purchase
of property and equipment, net of sale proceeds
|
|
(3,073
|
)
|
|
|
(3,408
|
)
|
Proceeds
from sale of investment
|
|
75
|
|
|
|
—
|
|
Net
cash used in investing activities
|
|
(3,840
|
)
|
|
|
(4,854
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from revolving line of credit
|
|
87,716
|
|
|
|
71,213
|
|
Payments
on revolving line of credit
|
|
(121,900
|
)
|
|
|
(44,400
|
)
|
Proceeds
from asset-backed financing
|
|
39,779
|
|
|
|
23,622
|
|
Payments
on asset-backed financing
|
|
(11,765
|
)
|
|
|
(9,004
|
)
|
Proceeds
from long-term debt
|
|
100,000
|
|
|
|
—
|
|
Payments
on long-term debt and other long-term liabilities
|
|
(773
|
)
|
|
|
(23
|
)
|
Payments
of capital lease obligations
|
|
(257
|
)
|
|
|
(257
|
)
|
Payments
of deferred financing costs
|
|
(377
|
)
|
|
|
(18
|
)
|
Excess
tax benefits from share-based compensation
|
|
2,834
|
|
|
|
8,236
|
|
Issuance
of common stock under stock option plans
|
|
2,921
|
|
|
|
3,709
|
|
Payment
of cash dividends
|
|
(5,248
|
)
|
|
|
(4,750
|
)
|
Purchase
of treasury stock
|
|
(61,788
|
)
|
|
|
(4,071
|
)
|
Net
cash provided by financing activities
|
|
31,142
|
|
|
|
44,257
|
|
Effect
of exchange rate changes on cash
|
|
(174
|
)
|
|
|
354
|
|
Change
in cash and cash equivalents
|
|
13,821
|
|
|
|
(20,902
|
)
|
Cash
and cash equivalents at beginning of period
|
|
16,734
|
|
|
|
26,866
|
|
Cash
and cash equivalents at end of period
|
$
|
30,555
|
|
|
$
|
5,964
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
POOL
CORPORATION
(Unaudited)
Note
1 - Summary of Significant Accounting Policies
Pool
Corporation (the Company,
which
may be referred to as POOL,
we,
us
or
our)
prepared the unaudited interim consolidated financial statements following
accounting principles generally accepted in the United States (GAAP) and the
requirements of the Securities and Exchange Commission (SEC) for interim
financial reporting. As permitted under those rules, certain footnotes or other
financial information required by GAAP for complete financial statements have
been condensed or omitted. In management’s opinion, the financial statements
include all normal and recurring adjustments that are considered necessary
for
the fair presentation of our financial position and operating results including
amounts recorded in the first quarter of 2007 related to the final determination
of employee bonuses for the fiscal year ended December 31, 2006 and the
elimination of all significant intercompany accounts and transactions among
our
wholly owned subsidiaries.
A
description of our significant accounting policies is included in our 2006
Annual Report on Form 10-K. The Consolidated Financial Statements should be
read in conjunction with the consolidated financial statements and accompanying
notes in our Annual Report. The results for the three month period ended
March 31, 2007 are not necessarily indicative of the results to be
expected for the twelve months ending December 31, 2007.
On
January 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation 48, Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
(FIN
48).
Please see Note 6 for additional information.
Note
2 - Earnings Per Share
We
calculate basic earnings per share (EPS) by dividing net income by the weighted
average number of common shares outstanding. Diluted EPS includes the dilutive
effects of stock and option awards.
The
table
below presents the reconciliation of basic and diluted weighted average number
of shares outstanding and the related EPS calculation (in thousands,
except EPS):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
$
|
1,354
|
|
$
|
6,422
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
50,201
|
|
|
52,593
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
2,228
|
|
|
2,818
|
|
|
|
Restricted
stock awards
|
|
32
|
|
|
30
|
|
|
|
Employee
stock purchase plan
|
|
1
|
|
|
2
|
|
|
Diluted
|
|
52,462
|
|
|
55,443
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
$
|
0.03
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
$
|
0.03
|
|
$
|
0.12
|
|
The
weighted average diluted shares outstanding for the three months ended March
31,
2007 exclude stock options to purchase 586,000 shares. Since these options
have
exercise prices that are higher than the average market price of our common
stock for the quarter, including them in the calculation would have an
anti-dilutive effect on earnings per share.
There were no shares excluded from the weighted average
diluted shares outstanding for the three months ended
March 31, 2006.
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
Note
3 - Comprehensive Income
Comprehensive
income includes net income, foreign currency translation adjustments and any
unrealized gains or losses on interest rate swaps, net of income taxes on
unrealized gains or losses. Comprehensive income was $0.6 million and
$7.0 million for the three months ended March 31, 2007 and
March 31, 2006, respectively.
Note
4 - Acquisitions
As
discussed in Note 2 of “Notes to Consolidated Financial Statements” included in
Item 8 of our 2006 Annual Report on Form 10-K, in August 2006 we
acquired 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.
In
February 2007, we acquired Tor-Lyn Limited, a swimming pool supply distributor
with one sales center location in Ontario, Canada. We have included the results
of operations for Tor-Lyn Limited in our Consolidated Financial Statements
since
the acquisition date. This acquisition did not have a material impact on our
financial position or results of operations.
Note
5 - 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. 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
unsecured syndicated senior credit facility.
We used
the net proceeds from the placement to pay down borrowings under our revolving
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 as defined by the Note Purchase Agreement. 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.
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.
Any
difference paid or received on the interest rate swap will be recognized as
an
adjustment to interest expense over the life of the swap. We record the changes
in the fair value of the swap to accumulated other comprehensive income. We
have
designated this swap as a cash flow hedge. 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%.
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
Note
6 - Income Taxes
As
discussed in Note 1, we adopted FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a reduction of approximately
$0.5 million to the January 1, 2007 retained earnings balance. At
January 1, 2007, the total amount of gross unrecognized tax benefits
was approximately $3.3 million. This amount includes approximately
$2.2 million of unrecognized tax benefits which would decrease our
effective tax rate if recognized at some point in the future.
Effective
January 1, 2007, in connection with the adoption of FIN 48, we changed our
accounting policy and now recognize accrued interest related to unrecognized
tax
benefits in interest expense and recognize penalties in selling and
administrative expenses. These amounts were previously classified as a component
of income tax expense. We had approximately $0.4 million in accrued
interest at January 1, 2007.
At March
31, 2007, our gross unrecognized tax benefits and the amount of
unrecognized tax benefits which could impact our effective tax rate were
substantially unchanged compared to the balances at January 1, 2007. During
the
quarter ended March 31, 2007, we recognized approximately
$0.1 million in interest related to unrecognized tax benefits. We had
approximately $0.5 million in accrued interest at
March 31, 2007.
We
file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. With few exceptions, we are no longer subject to U.S.
federal, state and local or non-U.S. income tax examinations by tax authorities
for years before 2003. 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.
You
should read the following discussion in conjunction with Management's Discussion
and Analysis included in our 2006 Annual Report on Form 10-K.
OVERVIEW
Financial
Results
Net
sales
grew 7% to $373.7 million in the first quarter of 2007 compared to
$348.6 million in 2006. Base business sales growth of 4%, which was
on top of 15% growth in the first quarter of 2006, contributed
$12.4 million to the increase. The remaining increase is attributable
primarily to acquired sales centers, including the Wickham business acquired
in
August 2006. Our sales were negatively impacted by the unfavorable
weather conditions in the first quarter of 2007, particularly given the
tough weather comparison due to the unseasonably warm weather in the first
quarter of 2006.
Our
base
business sales growth continues to reflect the growth in the installed base
of
swimming pools and market share gains through our execution of sales, marketing
and service programs that we offer to our customers. This growth was
partially offset by a 7% decrease in complementary product sales during the
quarter. Our complementary products category faced a tough sales
comparison to last year given the 36% growth achieved in the first quarter
of 2006. Complementary product sales were also impacted by a decline
in pool construction in some markets and commodity price decreases.
Our
gross
profit as a percentage of net sales (gross margin) decreased
40 basis points to 27.7% in the first quarter of 2007 compared to
the same period in 2006. Our first quarter 2007 gross margin is
comparatively lower primarily due to the impacts of early buy and early pay
inventory purchases in the fourth quarter of 2005, which benefited our first
quarter 2006 gross margin.
Operating
expenses in the first quarter of 2007 increased 14% compared to 2006. This
increase reflects the
impact from our investments in 24 new sales centers opened since the beginning
of 2006, higher expenses related to the significant number of sales center
expansions and relocations we have made in the past 15 months and expenses
for
other investments including the expansion of our value-added programs.
Our
operating income decreased to $8.6 million in the first quarter of 2007 and
our operating margin decreased to 2.3% of sales from 4.3% in 2006.
Interest expense increased 59% in the first quarter of 2007 due to higher debt
levels for borrowings to fund share repurchases and acquisitions and a higher
average effective interest rate compared to the same period in 2006. Net
income decreased to $1.4 million compared to $6.4 million in the first quarter
of 2006 and included $1.2 million of net equity losses from our investment
in Latham Acquisition Corporation (LAC).
Financial
Position and Liquidity
Our
accounts receivable balance increased $19.5 million, or 9%, to
$231.0 million at March 31, 2007, compared to $211.6 million
at March 31, 2006. This increase is consistent with our increase in
net sales, particularly in the latter part of the quarter, and also includes
approximately $7.7 million in Wickham receivables. Days sales outstanding
(DSO) increased between periods to 35.3 days at March 31, 2007
compared to 34.0 days at March 31, 2006 as a result of the
addition of Horizon’s and Wickham’s receivables, which have slightly longer
collection cycles. Excluding Horizon and Wickham, DSO improved to 33.2 days
compared to 33.0 days at March 31, 2006.
Our
inventory levels increased 2% to $413.2 million as of
March 31, 2007, compared to $406.3 million at
March 31, 2006. This increase reflects our normal build up to seasonal
inventory levels, as well as additional inventories on hand at new sales
centers, but is offset by the fact that inventory balances at
March 31, 2006 were higher than normal pre-season levels due to our
heavy early buy inventory purchases in the fourth quarter of 2005. Our inventory
turns, as calculated on a trailing twelve month basis, have slowed to
3.9 times as of March 31, 2007 from 4.0 times as of
March 31, 2006.
Total
debt outstanding increased to $358.5 million at March 31, 2007
compared to $236.2 million at March 31, 2006. This increase is
primarily attributable to the net increase in borrowings that helped fund $164.7
million in total share repurchases over the past twelve months. We continue
to
maintain a healthy current ratio of 1.5 as of March 31, 2007,
which was down slightly from 1.6 at March 31, 2006.
Current
Trends
Current
economic trends include a slowdown in the domestic housing market, with a sharp
drop in new home construction, home value deflation in some markets and
increases in short-term interest rates. Some of the factors that mitigate 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.
|
We
believe these trends, along with a delay in the start of pool construction
in
northern markets due to unfavorable weather conditions in the first quarter,
could result in a 5 to 10% decrease in new pool construction in 2007.
A
more
severe and/or prolonged housing market slowdown may have a more pronounced
impact on new pool construction that could negatively impact our projected
sales
and earnings.
Outlook
In
2007,
we expect to realize more sales growth relative to 2006 as the year unfolds
based on easier sales comparisons in the second half of the year. Overall,
we
anticipate mid- to high-single digit sales growth for the full year 2007. We
believe that gross margins will improve moderately for the full year 2007 with
quarterly gross margins comparatively lower than 2006 in the second quarter
and
higher in the second half of the year as benefits of our aggressive 2005 early
buy and early pay purchases benefited margins in the first half of 2006 and
third and fourth quarter 2006 vendor incentive adjustments adversely impacted
margins in these quarters.
Consistent
with our prior guidance, we project that 2007 earnings per share will be in
the
range of $2.00 to $2.10 per diluted share. This projection represents our
long term guidance of 15% organic earnings per share growth plus the accretive
benefits of already completed acquisitions and share repurchases. We expect
cash
flow from operations for the year to be between $80 and $90
million.
Our
business is subject to significant risks, including weather, competition,
general economic conditions and other risks detailed in Part II - Item 1A.
“Risk
Factors” and our “Cautionary Statement for Purpose of the ‘Safe Harbor’
Provisions of the Private Securities Litigation Reform Act of
1995”.
RESULTS
OF OPERATIONS
As
of
March 31, 2007, we conducted operations through 282 sales centers in North
America and Europe.
The
following table presents information derived from the Consolidated Statements
of
Income expressed as a percentage of net sales.
|
Three
Months Ended
|
|
March
31,
|
|
2007
|
|
2006
|
Net
sales
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
72.3
|
|
|
71.9
|
|
Gross
profit
|
27.7
|
|
|
28.1
|
|
Selling
and administrative expenses
|
25.4
|
|
|
23.8
|
|
Operating
income
|
2.3
|
|
|
4.3
|
|
Interest
expense
|
1.2
|
|
|
0.8
|
|
Income
before income taxes and equity losses
|
1.1
|
|
|
3.5
|
|
For
the
purposes of the following base business discussion, the consolidated operating
results include the operating results from acquisitions in 2007, 2006 and 2005.
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.
Three
Months Ended March 31, 2007 Compared to Three Months Ended March 31,
2006
(Unaudited)
|
|
Base
Business
|
Acquired
& New Market
|
Total
|
(In
thousands)
|
|
Three
Months Ended
|
Three
Months Ended
|
Three
Months Ended
|
|
|
March
31,
|
March
31,
|
March
31,
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
Net
sales
|
$
|
360,322
|
|
|
$
|
347,935
|
|
|
$
|
13,384
|
|
|
$
|
621
|
|
|
$
|
373,706
|
|
|
$
|
348,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
99,639
|
|
|
|
97,982
|
|
|
|
3,846
|
|
|
|
66
|
|
|
|
103,485
|
|
|
|
98,048
|
|
Gross
margin
|
|
27.7
|
%
|
|
|
28.2
|
%
|
|
|
28.7
|
%
|
|
|
10.6
|
%
|
|
|
27.7
|
%
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
91,712
|
|
|
|
82,626
|
|
|
|
3,141
|
|
|
|
400
|
|
|
|
94,853
|
|
|
|
83,026
|
|
Expenses
as a % of net sales
|
|
25.5
|
%
|
|
|
23.7
|
%
|
|
|
23.5
|
%
|
|
|
64.4
|
%
|
|
|
25.4
|
%
|
|
|
23.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
7,927
|
|
|
|
15,356
|
|
|
|
705
|
|
|
|
(334
|
)
|
|
|
8,632
|
|
|
|
15,022
|
|
Operating
income (loss) margin
|
|
2.2
|
%
|
|
|
4.4
|
%
|
|
|
5.3
|
%
|
|
|
(53.8
|
)%
|
|
|
2.3
|
%
|
|
|
4.3
|
%
|
For
purposes of comparing operating results for the three months ended
March 31, 2007 to the three months ended March 31, 2006, 260
sales centers were included in the base business calculations (including 17
of
the 24 new sales centers opened since the beginning of 2006) and 22 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
reflects the operations of the following:
Acquired
|
|
Acquisition
Date
|
|
Sales
Centers Acquired
|
|
Period
Excluded
|
Wickham
Supply, Inc. and Water Zone, LP
|
|
August
2006
|
|
14
|
|
January
- March 2007
|
Tor-Lyn,
Limited
|
|
February
2007
|
|
1
|
|
February
- March 2007
|
Net
Sales
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Net
sales
|
|
$
|
373.7
|
|
$
|
348.6
|
|
$
|
25.1
|
7
|
%
|
The
increase in net sales is a result of 4% base business growth, the Wickham
acquisition and sales from new locations that we opened in new markets.
Our sales were negatively impacted by unfavorable weather conditions during
the
quarter, with base business sales essentially flat in January and February
compared to the same period in 2006. Our sales increased approximately 10%
in March driven by more favorable weather in our markets throughout the
sunbelt.
The
base
business growth in the first quarter of 2007 was primarily due to the
following:
· |
the
continued successful execution of our sales, marketing and service
programs, resulting in market share gains;
|
· |
a
larger installed base of swimming pools resulting in increased sales
of
non-discretionary products; and
|
· |
price
increases, primarily the mid-year 2006 inflationary increases which
we
passed through the supply chain.
|
During
the quarter, there was a 7% decrease in complementary product sales due to
the
tough sales comparison to last year, a decline in pool construction in some
markets and commodity price decreases.
Gross
Profit
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
|
2007
|
|
|
|
2006
|
|
|
Change
|
Gross
profit
|
|
$
|
103.5
|
|
|
$
|
98.0
|
|
|
$
|
5.5
|
|
6
|
%
|
Gross
margin
|
|
|
27.7
|
%
|
|
|
28.1
|
%
|
|
|
|
|
|
|
Gross
margin decreased 40 basis points between periods, including a 50 basis point
decline in base business gross margin. Our
first
quarter 2007 gross margin is comparatively lower primarily due to the impacts
of
early buy inventory purchases and discounts for early payments on those
purchases in the fourth quarter of 2005, which benefited our first quarter
2006
gross margin. Our gross margin also reflects a lower estimated vendor
incentive rate compared to the first quarter of 2006. These decreases were
partially offset by gross margin improvements attributable to certain price
increases and slightly higher margin contribution from acquired sales
centers.
Operating
Expenses
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
|
2007
|
|
|
|
2006
|
|
|
Change
|
Operating
expenses
|
|
$
|
94.9
|
|
|
$
|
83.0
|
|
|
$
|
11.9
|
|
14
|
%
|
Operating
expenses as a percentage of net sales
|
|
|
25.4
|
%
|
|
|
23.8
|
%
|
|
|
|
|
|
|
Compared
to the first quarter of 2006, operating expenses grew 14% and increased 160
basis points as a percentage of net sales. Base business operating
expenses were 11% higher in the first quarter of 2007 compared to the same
period in 2006 and increased 170 basis points as a percentage of sales. This
increase includes incremental expenses for the 24 new sales centers that we
have
opened since the beginning of 2006, higher rent expenses related to our
expansion or relocation of almost 40 existing sales centers over the past 15
months and additional expenses for our investments in resources related to
other
growth initiatives. During the quarter, we managed other operating costs
at levels consistent with the overall sales growth rate.
Interest
Expense
Interest
expense increased $1.7 million between periods as average debt outstanding
was
40% higher in the first quarter of 2007. The higher debt levels reflect
increased borrowings to fund share repurchases and acquisitions. The weighted
average effective interest rate also increased to 5.9% in the first quarter
of
2007 from 5.3% in the same period in 2006.
Income
Taxes
The
decrease in income taxes is due to the $8.1 million decrease in income
before income taxes and equity losses. Our effective income tax rate was 38.6%
for the quarters ended March 31, 2007 and
March 31, 2006.
Net
Income and Earnings Per Share
Net
income decreased to $1.4 million in the first quarter of 2007 from
$6.4 million in the first quarter of 2006. The 2007 amount included
$1.2 million of net equity losses from our investment in LAC, up slightly
from $1.1 million in losses for the same period last year.
Diluted
earnings per share decreased to $0.03 per share in the first quarter of 2007
compared to $0.12 per share in the first quarter of 2006. The
decrease includes the impact of approximately $0.03 per diluted share related
to
the incremental operating expenses for our new sales centers and approximately
$0.02 per diluted share related to interest expense on borrowings that funded
our significant share repurchase activity. Since we have seasonally lower
profits in the first quarter, the reduction in our diluted weighted average
share balance due to our share repurchases did not fully offset the earnings
per
share impact of higher interest expense. We expect that our share repurchases
will provide $0.04 to $0.05 of accretion for the full year 2007, with a
favorable impact in the second and third quarters and a negative earnings per
share impact in the seasonally slower fourth quarter.
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.
We
typically experience a build-up of product inventories and accounts payable
during the winter months in anticipation of the peak selling season. Excluding
borrowings to finance acquisitions and share repurchases, our peak borrowing
usually occurs during the second quarter, primarily because extended payment
terms offered by our suppliers typically are payable in April, May and June,
while our peak accounts receivable collections typically occur in June, July
and
August.
The
following table presents certain unaudited quarterly data for the first quarter
of 2007, the four quarters of 2006 and the second, third and fourth quarters
of
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 our industry, the results of any one
or
more quarters are not necessarily an accurate indication of results for an
entire fiscal year or of continuing trends.
(Unaudited)
|
|
QUARTER
|
|
(in
thousands)
|
|
|
2007
|
|
2006
|
|
2005
(1)
|
|
|
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
373,706
|
$
|
318,486
|
$
|
537,017
|
$
|
705,703
|
$
|
348,556
|
$
|
299,791
|
$
|
423,729
|
$
|
563,978
|
|
Gross
profit
|
|
|
103,485
|
|
82,905
|
|
149,995
|
|
209,000
|
|
98,048
|
|
83,211
|
|
114,605
|
|
162,681
|
|
Operating
income (loss)
|
|
|
8,632
|
|
(4,070
|
)
|
53,092
|
|
103,338
|
|
15,022
|
|
2,288
|
|
41,431
|
|
81,389
|
|
Net
income (loss)
|
|
|
1,354
|
|
(5,001
|
)
|
31,493
|
|
62,110
|
|
6,422
|
|
(876
|
)
|
26,521
|
|
50,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
receivables, net
|
|
$
|
231,034
|
$
|
154,937
|
$
|
211,589
|
$
|
295,722
|
$
|
211,578
|
$
|
141,785
|
$
|
152,037
|
$
|
231,736
|
|
Product
inventories, net
|
|
|
413,161
|
|
332,069
|
|
283,930
|
|
367,096
|
|
406,310
|
|
330,575
|
|
197,135
|
|
247,350
|
|
Accounts
payable
|
|
|
325,448
|
|
177,544
|
|
111,349
|
|
207,727
|
|
267,296
|
|
174,170
|
|
99,920
|
|
165,872
|
|
Total
debt
|
|
|
358,522
|
|
265,443
|
|
257,974
|
|
303,000
|
|
236,188
|
|
194,757
|
|
83,170
|
|
170,191
|
|
____________________
|
(1) |
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. For additional information, see Note 7 of “Notes to Consolidated
Financial Statements” included in Item 8 of our 2006 Annual Report on Form
10-K.
|
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 extraordinary
amounts of rain
|
•
|
Fewer
pool and landscape installations
|
|
•
|
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 increasing 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 decreasing our
sales
|
(primarily
in the northern half of the US)
|
|
|
In
the
first quarter of 2007, our sales were negatively impacted by unfavorable weather
conditions which included significantly colder temperatures in January and
February compared to the same periods in 2006, ice storms in Texas and Oklahoma
and several winter storms that impacted the upper Midwest and Northeast in
late
February and early March. Much warmer temperatures in March helped drive
sales growth in our sunbelt markets, although extended winter conditions delayed
the start of the pool season in the Northeast compared to 2006.
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.
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 of
Directors;
|
· |
repurchase
of common stock at Board-defined parameters;
and
|
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
|
Three
Months Ended
March
31,
|
|
|
2007
|
|
|
|
2006
|
Operating
activities
|
$
|
(13,307
|
)
|
|
$
|
(60,659
|
)
|
Investing
activities
|
|
(3,840
|
)
|
|
|
(4,854
|
)
|
Financing
activities
|
|
31,142
|
|
|
|
44,257
|
|
Cash
used
in operations decreased $47.4 million to $13.3 million in the first
three months of 2007 compared to the same period in 2006. The decrease in cash
used in operations is primarily due to a difference between periods in the
timing of payments related to our year end early buy inventory purchases. We
received and paid for a portion of our early buy purchases in the fourth quarter
of 2005, but the majority of our early buy purchases in the fourth quarter
of
2006 had extended payment terms and are included in accounts payable at
March 31, 2007.
During
the first quarter of 2007, share repurchases totaled $61.4 million, or
approximately 1.7 million shares of our common stock, at an average share price
of $35.56.
Future
Sources and Uses of Cash
In
November 2006, when approximately $4.1 million of the existing
authorized amount remained available for share repurchases, our Board of
Directors (our Board) increased the authorization for the repurchase of shares
of our common stock in the open market to $100.0 million. As of
April 17, 2007, $27.5 million of the authorized amount remained
available. 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. 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 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.
Our
unsecured syndicated senior credit facility (the Credit Facility), which matures
on December 20, 2010, 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). The Credit
Facility includes sublimits for the issuance of swingline loans and standby
letters of credit.
At
March 31, 2007, there was $97.0 million outstanding and
$59.6 million available for borrowing under the Revolver. The average
effective interest rate on the Revolver was approximately 5.9% for the three
months ended March 31, 2007.
At
March 31, 2007, there was $59.3 million outstanding under the
Term Loan of which $3.0 million is classified as current. The average
effective interest rate of the Term Loan was approximately 5.5% for the three
months ended March 31, 2007.
Our
obligations under the Credit Facility are guaranteed by certain of our existing
and future 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. For additional information regarding the
Credit Facility, see Note 5 of “Notes to Consolidated Financial Statements,”
included in our 2006 Annual Report on Form 10-K.
In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates on the Term Loan. The swap agreement
converts our variable rate interest on the Term Loan to a fixed rate until
its
termination on December 31, 2008.
In
February 2007, in conjunction with the private placement, we entered into
another 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. This 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%.
During
the quarter ended March 31, 2007, no gains or losses were recognized on these
swaps.
In
March
2007, we renewed our accounts receivable securitization facility (the
Receivables Facility), which provides a seasonal borrowing capacity of up to
$150.0 million, through March 2008. 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 Sheet. We continue to employ this arrangement
because it provides us with a lower cost form of financing. At
March 31, 2007, there was $102.3 million outstanding under the
Receivables Facility at an average effective interest rate of 5.9%.
As
of
March
31, 2007, we were in compliance with all covenants and financial ratio
requirements related to our Credit Facility and our Receivables Facility.
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.
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States (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 of Directors. For
a
description of our critical accounting estimates that require us to make the
most difficult, subjective or complex judgments, please see our Annual Report
on
Form 10-K for the year ended December 31, 2006. We have not changed these
policies from those previously disclosed.
Interest
Rate Risk
There
have been no material changes from what we reported in our Form 10-K for the
year ended December 31, 2006.
Foreign
Exchange Risk
There
have been no material changes from what we reported in our Form 10-K for the
year ended December 31, 2006.
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. As of
March 31, 2007, 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
March 31, 2007, 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 accounting principles generally accepted in the United States. 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.
PART
II. OTHER INFORMATION
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 Part I - Item 2,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Quarterly Fluctuations.”
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 39 new sales centers and have completed
12 acquisitions. These acquisitions have added 73 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.
The
table
below summarizes the repurchases of our common stock in the first quarter of
2007:
|
|
|
|
|
|
|
|
Maximum
approximate
|
|
|
|
|
|
|
Total
number of shares
|
|
dollar
value of shares
|
|
|
Total
number of
|
|
Average
price
|
|
purchased
as part of
|
|
that
may yet be
|
Period
|
|
shares
purchased(1)
|
|
paid
per share
|
|
publicly
announced plan(2)
|
|
purchased
under the plan
|
January
1-31, 2007
|
|
327,156
|
|
$
|
36.39
|
|
326,600
|
|
$
|
80,781,873
|
February
1-28, 2007
|
|
374,659
|
|
$
|
36.44
|
|
364,400
|
|
$
|
67,503,020
|
March
1-31, 2007
|
|
1,035,300
|
|
$
|
35.00
|
|
1,035,300
|
|
$
|
31,269,639
|
Total
|
|
1,737,115
|
|
$
|
35.57
|
|
1,726,300
|
|
|
|
(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 556 shares in January, 10,259 shares in February
and
zero shares in March.
|
(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. As
of April 17, 2007, $27.5 million of the authorized amount remained
available.
|
Exhibits
filed as part of this report are listed in the Index to Exhibits appearing
on
page 22.
Items
1, 3, 4 and 5 are not applicable and have been omitted.
Pursuant
to the requirements 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 May 2, 2007.
|
|
POOL
CORPORATION
|
|
|
|
|
|
|
|
BY:
|
/s/
Mark W. Joslin
|
|
|
Mark
W. Joslin
Vice
President and Chief Financial Officer, and duly authorized signatory
on
behalf of the Registrant
|
|
|
|
|
|
|
Incorporated
by Reference
|
No.
|
|
Description
|
|
Filed
with this Form 10-Q
|
|
Form
|
|
File
No.
|
|
Date
Filed
|
3.1
|
|
Restated
Certificate of Incorporation of the Company.
|
|
|
|
10-Q
|
|
000-26640
|
|
08/09/2006
|
3.2
|
|
Restated
Composite Bylaws of the Company.
|
|
|
|
10-Q
|
|
000-26640
|
|
08/09/2006
|
4.1
|
|
Form
of certificate representing shares of common stock of the Company.
|
|
|
|
8-K
|
|
000-26640
|
|
05/19/2006
|
|
|
Amendment
No. 8 to the Receivables Purchase Agreement, dated as of
March 29, 2007.
|
|
X
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|