poolq3_10q.htm
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 September 30, 2007
or
|
|
o 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)
|
|
|
|
Delaware
|
|
36-3943363
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
109
Northpark Boulevard,
Covington,
Louisiana
|
|
70433-5001
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
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 Exchange
Act). YES ¨ NOx
At
October 26 2007, there were 47,504,934 outstanding shares of the registrant's
common stock, $.001 par value per share.
POOL
CORPORATION
Form
10-Q
For
the Quarter Ended September 30, 2007
INDEX
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
7
|
|
|
|
|
|
18
|
|
|
|
|
|
18
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
19
|
|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
|
|
24
|
|
|
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
POOL
CORPORATION
(Unaudited)
(In
thousands, except per share data)
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
527,434
|
|
$
|
537,017
|
|
$
|
1,627,612
|
|
$
|
1,591,276
|
|
Cost
of sales
|
|
387,631
|
|
|
387,022
|
|
|
1,176,402
|
|
|
1,134,233
|
|
Gross
profit
|
|
139,803
|
|
|
149,995
|
|
|
451,210
|
|
|
457,043
|
|
Selling
and administrative expenses
|
|
100,298
|
|
|
96,903
|
|
|
304,640
|
|
|
285,591
|
|
Operating
income
|
|
39,505
|
|
|
53,092
|
|
|
146,570
|
|
|
171,452
|
|
Interest
expense, net
|
|
6,349
|
|
|
4,276
|
|
|
16,765
|
|
|
10,983
|
|
Income
before income taxes and equity earnings
|
|
33,156
|
|
|
48,816
|
|
|
129,805
|
|
|
160,469
|
|
Provision
for income taxes
|
|
12,802
|
|
|
18,848
|
|
|
50,118
|
|
|
61,957
|
|
Equity
earnings in unconsolidated investments
|
|
1,481
|
|
|
1,525
|
|
|
1,296
|
|
|
1,513
|
|
Net
income
|
$
|
21,835
|
|
$
|
31,493
|
|
$
|
80,983
|
|
$
|
100,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.45
|
|
$
|
0.61
|
|
$
|
1.64
|
|
$
|
1.91
|
|
Diluted
|
$
|
0.43
|
|
$
|
0.58
|
|
$
|
1.58
|
|
$
|
1.82
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
48,623
|
|
|
51,532
|
|
|
49,372
|
|
|
52,243
|
|
Diluted
|
|
50,490
|
|
|
54,277
|
|
|
51,347
|
|
|
55,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
$
|
0.120
|
|
$
|
0.105
|
|
$
|
0.345
|
|
$
|
0.300
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
POOL
CORPORATION
(Unaudited)
(In
thousands, except share data)
|
September
30,
|
|
September
30,
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
50,265
|
|
$
|
40,874
|
|
$
|
16,734
|
|
Receivables,
net
|
|
58,023
|
|
|
64,540
|
|
|
51,116
|
|
Receivables
pledged under receivables facility
|
|
142,511
|
|
|
147,049
|
|
|
103,821
|
|
Product
inventories, net
|
|
317,110
|
|
|
283,930
|
|
|
332,069
|
|
Prepaid
expenses and other current assets
|
|
9,004
|
|
|
7,785
|
|
|
8,005
|
|
Deferred
income taxes
|
|
7,652
|
|
|
4,024
|
|
|
7,676
|
|
Total
current assets
|
$
|
584,565
|
|
$
|
548,202
|
|
$
|
519,421
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
35,518
|
|
|
32,201
|
|
|
33,633
|
|
Goodwill
|
|
155,247
|
|
|
156,123
|
|
|
154,244
|
|
Other
intangible assets, net
|
|
15,459
|
|
|
19,964
|
|
|
18,726
|
|
Equity
interest investments
|
|
34,561
|
|
|
32,383
|
|
|
32,509
|
|
Other
assets, net
|
|
19,073
|
|
|
13,862
|
|
|
16,029
|
|
Total
assets
|
$
|
844,423
|
|
$
|
802,735
|
|
$
|
774,562
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
127,889
|
|
|
111,349
|
|
|
177,544
|
|
Accrued
and other current liabilities
|
|
53,557
|
|
|
118,892
|
|
|
35,610
|
|
Short-term
financing
|
|
110,715
|
|
|
110,974
|
|
|
74,286
|
|
Current
portion of long-term debt and other long-term liabilities
|
|
3,350
|
|
|
3,731
|
|
|
4,350
|
|
Total
current liabilities
|
$
|
295,511
|
|
$
|
344,946
|
|
$
|
291,790
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
15,185
|
|
|
12,760
|
|
|
15,023
|
|
Long-term
debt
|
|
292,750
|
|
|
144,750
|
|
|
188,157
|
|
Other
long-term liabilities
|
|
6,152
|
|
|
1,625
|
|
|
1,908
|
|
Total
liabilities
|
$
|
609,598
|
|
$
|
504,081
|
|
$
|
496,878
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 100,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized;
47,928,454; 50,911,356 and
|
|
|
|
|
|
|
|
|
|
50,929,665
shares issued and outstanding at
|
|
|
|
|
|
|
|
|
|
September
30, 2007, September 30, 2006 and
|
|
|
|
|
|
|
|
|
|
December
31, 2006, respectively
|
|
48
|
|
|
51
|
|
|
50
|
|
Additional
paid-in capital
|
|
169,886
|
|
|
142,242
|
|
|
148,821
|
|
Retained
earnings
|
|
64,344
|
|
|
164,744
|
|
|
129,932
|
|
Treasury
stock
|
|
(7,110
|
)
|
|
(14,177
|
)
|
|
(7,334
|
)
|
Accumulated
other comprehensive income
|
|
7,657
|
|
|
5,794
|
|
|
6,215
|
|
Total
stockholders’ equity
|
$
|
234,825
|
|
$
|
298,654
|
|
$
|
277,684
|
|
Total
liabilities and stockholders’ equity
|
$
|
844,423
|
|
$
|
802,735
|
|
$
|
774,562
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
POOL
CORPORATION
(Unaudited)
(In
thousands)
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
$
|
80,983
|
|
|
$
|
100,025
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
6,868
|
|
|
|
5,980
|
|
Amortization
|
|
3,665
|
|
|
|
3,472
|
|
Share-based
compensation
|
|
5,564
|
|
|
|
5,517
|
|
Excess
tax benefits from share-based compensation
|
|
(8,345
|
)
|
|
|
(10,619
|
)
|
Equity
earnings in unconsolidated investments
|
|
(2,087
|
)
|
|
|
(2,476
|
)
|
Other
|
|
3,441
|
|
|
|
1,645
|
|
Changes
in operating assets and liabilities,
|
|
|
|
|
|
|
|
net
of effects of acquisitions:
|
|
|
|
|
|
|
|
Receivables
|
|
(49,373
|
)
|
|
|
(61,121
|
)
|
Product
inventories
|
|
14,580
|
|
|
|
53,889
|
|
Accounts
payable
|
|
(49,743
|
)
|
|
|
(71,359
|
)
|
Other
current assets and liabilities
|
|
27,927
|
|
|
|
56,525
|
|
Net
cash provided by operating activities
|
|
33,480
|
|
|
|
81,478
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Acquisition
of businesses, net of cash acquired
|
|
(2,087
|
)
|
|
|
(26,662
|
)
|
Purchase
of property and equipment, net of sale proceeds
|
|
(9,407
|
)
|
|
|
(11,146
|
)
|
Dividend
on equity investment |
|
35 |
|
|
|
—
|
|
Proceeds
from sale of investment
|
|
75
|
|
|
|
—
|
|
Net
cash used in investing activities
|
|
(11,384
|
)
|
|
|
(37,808
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from revolving line of credit
|
|
306,771
|
|
|
|
311,838
|
|
Payments
on revolving line of credit
|
|
(299,928
|
)
|
|
|
(293,938
|
)
|
Proceeds
from asset-backed financing
|
|
87,479
|
|
|
|
93,347
|
|
Payments
on asset-backed financing
|
|
(51,050
|
)
|
|
|
(48,030
|
)
|
Proceeds
from long-term debt
|
|
100,000
|
|
|
|
—
|
|
Payments
on long-term debt and other long-term liabilities
|
|
(3,320
|
)
|
|
|
(1,497
|
)
|
Payments
of deferred financing costs
|
|
(397
|
)
|
|
|
(128
|
)
|
Payments
of capital lease obligations
|
|
(257
|
)
|
|
|
(257
|
)
|
Excess
tax benefits from share-based compensation
|
|
8,345
|
|
|
|
10,619
|
|
Proceeds from issuance of common stock under share-based compensation
plans
|
|
7,154
|
|
|
|
6,335
|
|
Payment
of cash dividends
|
|
(17,033
|
)
|
|
|
(15,734
|
)
|
Purchase
of treasury stock
|
|
(128,777
|
)
|
|
|
(93,495
|
)
|
Net
cash provided by (used in) financing activities
|
|
8,987
|
|
|
|
(30,940
|
)
|
Effect
of exchange rate changes on cash
|
|
2,448
|
|
|
|
1,278
|
|
Change
in cash and cash equivalents
|
|
33,531
|
|
|
|
14,008
|
|
Cash
and cash equivalents at beginning of period
|
|
16,734
|
|
|
|
26,866
|
|
Cash
and cash equivalents at end of period
|
$
|
50,265
|
|
|
$
|
40,874
|
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
POOL
CORPORATION
Notes
to Consolidated Financial Statements
(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 information. As permitted under those
rules, certain footnotes and 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 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 and nine month
periods ended September 30, 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 (FIN 48), Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109. 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
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
21,835
|
|
$
|
31,493
|
|
$
|
80,983
|
|
$
|
100,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
48,623
|
|
|
51,532
|
|
|
49,372
|
|
|
52,243
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
1,815
|
|
|
2,715
|
|
|
1,922
|
|
|
2,812
|
|
|
|
Restricted
stock awards
|
|
50
|
|
|
29
|
|
|
51
|
|
|
30
|
|
|
|
Employee
stock purchase plan
|
|
2
|
|
|
1
|
|
|
2
|
|
|
7
|
|
|
Diluted
|
|
50,490
|
|
|
54,277
|
|
|
51,347
|
|
|
55,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
$
|
0.45
|
|
$
|
0.61
|
|
$
|
1.64
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
$
|
0.43
|
|
$
|
0.58
|
|
$
|
1.58
|
|
$
|
1.82
|
|
POOL
CORPORATION
Notes
to Consolidated Financial Statements
(Continued)
(Unaudited)
The
weighted average diluted shares outstanding for the three and nine months ended
September 30, 2007 exclude stock options to purchase 1,089,125 shares and
1,085,975 shares, respectively. Since these options have exercise
prices that are higher than the average market price of our common stock,
including them in the calculation would have an anti-dilutive effect on earnings
per share for the respective periods. There were no anti-dilutive
stock options excluded from the earnings per share calculation for the three
and
nine months ended September 30, 2006.
Note
3 – Comprehensive Income
Comprehensive
income includes net income, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. Comprehensive income
for the three and nine months ended September 30, 2007 and 2006 is presented
below:
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
$
|
21,801
|
|
$
|
33,610
|
|
$
|
82,425
|
|
$
|
103,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
interest 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.
POOL
CORPORATION
Notes
to Consolidated Financial Statements
(Continued)
(Unaudited)
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%.
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. The accrued interest balance
related to unrecognized tax benefits was approximately $0.4 million at
January 1, 2007.
During
the quarter ended September 30, 2007, we recognized a decrease of approximately
$0.6 million in our gross unrecognized tax benefits as a result of a lapse
of
the applicable statute of limitations. We also recognized a
decrease of approximately $0.3 million in interest related to the unrecognized
tax benefits. The accrued interest balance related to unrecognized tax benefits
was approximately $0.4 million at
September 30, 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 2004. 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.
Note
7 – Share-Based Compensation Plans
In
May
2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007
LTIP), which authorizes the Compensation Committee of our Board of Directors
(our Board) to grant non-qualified stock options and restricted stock to
employees, directors, consultants or advisors. No more than 1,515,000
shares may be issued under this plan. Granted stock options have an
exercise price equal to our stock’s closing market price on the date of grant.
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. Restricted stock awarded under
the
2007 LTIP is issued at no cost to the grantee and is subject to vesting
restrictions. The restricted stock awards generally vest either one year from
the grant date for awards to directors or five years from the grant date for
all
other awards.
The
2007
LTIP replaced the 2002 Long-Term Incentive Plan, which the Board suspended,
and
the SCP Pool Corporation Non-Employee Directors Equity Incentive Plan, which
expired in 2006. No additional awards will be granted under these
predecessor plans.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
You
should read the following discussion in conjunction with Management's Discussion
and Analysis included in our 2006 Annual Report on Form 10-K.
OVERVIEW
Financial
Results
Net
sales
decreased 2% to $527.4 million in the third quarter of 2007 compared to $537.0
million in 2006. Our sales were negatively impacted by a difficult
combination of external conditions, including the depressed housing and real
estate markets and less than ideal weather conditions. Considering
the magnitude of these unfavorable external trends, we believe our sales
performance compares relatively well to the third quarter of 2006 and indicates
our success in gaining market share during the quarter.
Base
business sales decreased 3% during the third quarter of 2007. While
the continued decline in new pool construction permits negatively impacted
sales, we realized moderate sales growth for maintenance, repair and replacement
products due to the non-discretionary nature of these products, growth in the
installed base of swimming pools and the execution of sales, marketing and
service programs that we offer to our customers. Complementary
product sales, which are sold primarily in the new pool construction market,
decreased 5% quarter over quarter compared to 35% growth for the same period
in
2006.
Our
gross
profit as a percentage of net sales (gross margin) decreased 140 basis points
to
26.5% in the third quarter of 2007 from the third quarter of
2006. This decrease reflects the impact of competitive pricing
pressures resulting from the current market environment and pre-price increase
inventory purchases we made in the second quarter of 2006, which benefited
our
third quarter 2006 gross margin.
Selling
and administrative expenses (operating expenses) increased 4% in the third
quarter of 2007 compared to the third quarter of 2006. This increase
includes the impact from investments in new sales centers since the beginning
of
2006, higher expenses related to sales center expansions and relocations since
the second quarter of 2006 and an increase in bad debt expense. These
higher expenses were partially offset by the impact from cost control
initiatives.
Our
operating income decreased 26% to $39.5 million in the third quarter of 2007
while operating income as a percentage of net sales (operating margin) decreased
to 7.5% from 9.9% in the third quarter of 2006. Interest expense
increased 48% for the third quarter of 2007 due to higher debt levels for
borrowings to fund share repurchases and a higher average effective interest
rate compared to the same period in 2006. Net income decreased 31% to
$21.8 million compared to the third quarter of 2006 and included $1.5 million
of
net equity earnings from our investment in Latham Acquisition Corporation
(LAC).
Financial
Position and Liquidity
Total
net
receivables decreased 5% to $200.5 million at September 30, 2007 from $211.6
million at September 30, 2006 due to lower sales in 2007 and due to an
increase in the allowance for doubtful accounts. Our allowance for
doubtful accounts balance was $8.7 million at September 30, 2007, an
increase of $4.2 million over September 30, 2006. We
increased the allowance for doubtful accounts to reflect slower payments from
customers in markets that have been adversely impacted by the decline in new
pool and irrigation construction. Days sales outstanding (DSO)
increased between periods to 36.1 days at September 30, 2007 compared
to 34.5 days at September 30, 2006.
Our
inventory levels increased 12% to $317.1 million as of September 30, 2007
compared to September 30, 2006. The increase reflects inventory for
the 12 new sales centers opened since September 2006, an earlier start of
seasonal purchasing compared to 2006, inventory related to the expansion of
complementary product offerings and higher inventory levels attributed to the
decline in sales. The quality of our inventory remains high as
measured by the percentage of total inventory in our fastest-turning inventory
classes, which increased to 71% at September 30, 2007 compared to 68% at
September 30, 2006. Our inventory turns, as calculated on a trailing twelve
month basis, have remained consistent at 3.9 times as of
September 30, 2007 and September 30, 2006.
Total
debt outstanding increased to $406.5 million at September 30, 2007 compared
to
$258.0 million at September 30, 2006. This increase is
attributable to increased borrowings to fund share repurchases of approximately
$141.9 million over the past 12 months. Our current ratio increased
to 2.0 as of September 30, 2007 compared to 1.6 as of September 30,
2006.
Current
Trends
Current
economic trends include a slowdown in the domestic housing market, with lower
housing turnover, a sharp drop in new home construction, home value deflation
in
some markets, increases in short-term interest rates and a tightening of credit
in the sub-prime and less-than-prime lending markets. 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.
|
Despite
these mitigating factors, these negative trends had a more pronounced impact
during the second and third quarters of 2007 and have significantly impacted
some of our key markets, including Florida, Arizona and parts of California.
We
believe these trends, along with the impact of unusually wet weather in Texas
and Oklahoma and a delay in the start of pool construction in northern markets
due to unfavorable weather conditions in the first quarter, have resulted in
a
15% to 20% decrease in new pool construction in 2007 compared to
2006. A continuation or worsening of these trends may have an
even greater impact on new pool construction that could negatively impact
our current sales and earnings projections.
Outlook
In
September, we updated our 2007 earnings per share guidance to $1.45 to $1.55
per
diluted share to reflect our third quarter results and our more cautious outlook
for the remainder of the year. We now anticipate roughly flat sales
growth for the full year 2007. Despite the current market environment
with some competitors being very aggressive on pricing, we expect that our
fourth quarter 2007 gross margin will be marginally higher than the fourth
quarter 2006 gross margin, which was adversely impacted by our 2006 year end
vendor incentive adjustment.
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
September 30, 2007, we conducted operations through 285 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
|
|
Nine
Months Ended
|
|
September
30,
|
|
September
30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Net
sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
73.5
|
|
|
72.1
|
|
|
72.3
|
|
|
71.3
|
|
|
Gross
profit
|
26.5
|
|
|
27.9
|
|
|
27.7
|
|
|
28.7
|
|
Selling
and administrative expenses
|
19.0
|
|
|
18.0
|
|
|
18.7
|
|
|
17.9
|
|
|
Operating
income
|
7.5
|
|
|
9.9
|
|
|
9.0
|
|
|
10.8
|
|
Interest
expense
|
1.2
|
|
|
0.8
|
|
|
1.0
|
|
|
0.7
|
|
Income
before income taxes and equity earnings
|
6.3
|
%
|
|
9.1
|
%
|
|
8.0
|
%
|
|
10.1
|
%
|
Our
discussion of consolidated operating results includes 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 a period of
15 months:
·
|
acquired
sales centers;
|
·
|
sales
centers divested or consolidated with acquired sales centers;
and
|
·
|
sales
centers opened in new markets.
|
Additionally,
we generally allocate overhead expenses to acquired and new market sales centers
on the basis of their net sales as a percentage of total net sales.
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
The
following table breaks out our consolidated results into the base business
component and the acquired and new market component (sales centers excluded
from
base business):
(Unaudited)
|
|
Base
Business
|
Acquired
& New Market
|
|
Total
|
(In
thousands)
|
|
Three
Months Ended
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
September
30,
|
September
30,
|
|
September
30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
|
Net
sales
|
$
|
512,629
|
$
|
527,166
|
$
|
14,805
|
$
|
9,851
|
|
$
|
527,434
|
$
|
537,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
135,864
|
|
147,227
|
|
3,939
|
|
2,768
|
|
|
139,803
|
|
149,995
|
|
Gross
margin
|
|
26.5
|
%
|
27.9
|
%
|
26.6
|
%
|
28.1
|
%
|
|
26.5
|
%
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
96,575
|
|
95,439
|
|
3,723
|
|
1,464
|
|
|
100,298
|
|
96,903
|
|
Expenses
as a % of net sales
|
|
18.8
|
%
|
18.1
|
%
|
25.1
|
%
|
14.9
|
%
|
|
19.0
|
%
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
39,289
|
|
51,788
|
|
216
|
|
1,304
|
|
|
39,505
|
|
53,092
|
|
Operating
margin
|
|
7.7
|
%
|
9.8
|
%
|
1.5
|
%
|
13.2
|
%
|
|
7.5
|
%
|
9.9
|
%
|
For
purposes of comparing operating results for the three months ended September
30,
2007 to the three months ended September 30, 2006, 266 sales centers
were included in the base business calculations (including 23 of the 27 new
sales centers opened since the beginning of 2006) and 19 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
(1)
|
Wickham
Supply, Inc. and Water Zone, LP
|
|
August
2006
|
|
14
|
|
July
– September 2007 and
August – September 2006
|
Tor-Lyn,
Limited
|
|
February
2007
|
|
1
|
|
July
– September 2007
|
(1)
|
After
15 months of operations, we include acquired sales centers in the
base
business calculation including the comparative prior year
period.
|
Net
Sales
|
|
Three
Months Ended September 30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Net
sales
|
|
$
|
527.4
|
|
$
|
537.0
|
|
$
|
(9.6)
|
(2)
|
%
|
The
decrease in net sales is primarily due to the impact of the prolonged domestic
housing market downturn and less than ideal weather conditions, particularly
the
continued wet weather in Texas during the first half of the
quarter. The demand for new pool and irrigation construction products
continued to lag due to the significant declines in new pool construction
permits. This impact was more pronounced in some of our larger
markets, including Florida, Arizona and parts of California. Net
sales were also adversely impacted by the competitive pricing pressures
experienced in the current market environment.
These
decreases were partially offset by moderate sales growth for maintenance, repair
and replacement products, which comprises the majority of our sales and includes
chemicals and parts products. This sales growth is a result of our
continued successful execution of our sales, marketing and service programs
and
the larger installed base of swimming pools.
Complementary
products decreased 5% quarter over quarter compared to a 35% increase in the
same period in 2006. Complementary product sales were adversely
impacted by the decline in new pool construction, but benefited from our
expansion of complementary product offerings and an increase in the number
of
sales centers that now offer complementary products.
Gross
Profit
|
|
Three
Months Ended September 30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Gross
profit
|
|
$
|
139.8
|
|
$
|
150.0
|
|
$
|
(10.2)
|
(7
|
)%
|
Gross
margin
|
|
|
26.5
|
%
|
|
27.9
|
%
|
|
|
|
|
Gross
margin decreased 140 basis points between periods. Our third quarter
2007 gross margin is comparatively lower primarily due to competitive pricing
trends, as other distributors sold off excess inventories, and unfavorable
comparisons to the third quarter 2006 gross margin which benefited from our
second quarter 2006 pre-price increase inventory purchases.
Operating
Expenses
|
|
Three
Months Ended September 30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Operating
expenses
|
|
$
|
100.3
|
|
$
|
96.9
|
|
$
|
3.4
|
4
|
%
|
Operating
expenses as a percentage of net sales
|
|
|
19.0
|
%
|
|
18.0
|
%
|
|
|
|
|
Compared
to the third quarter of 2006, operating expenses grew 4% and increased 100
basis
points as a percentage of net sales while base business operating expenses
increased 1% for the third quarter of 2007 and were 70 basis points higher
as a
percentage of net sales quarter over quarter. These increases include
incremental expenses for the 27 new sales centers that we have opened since
the
beginning of 2006, higher rent expenses related to our expansion or relocation
of over 20 existing sales centers since the second quarter of 2006 and an
increase in bad debt expense due to an increase in our allowance for doubtful
accounts based on recent slowdowns in customer payments. These
expenses were partially offset by the impact from cost control
initiatives.
Interest
Expense
Interest
expense increased $2.1 million between periods due to a 44% increase in the
average debt outstanding compared to the third quarter of 2006 and an increase
in the weighted average effective interest rate to 6.1% in 2007 from 6.0% in
2006.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings. Our effective income tax rate was 38.6% for the
three months ended September 30, 2007 and September 30, 2006.
Net
Income and Earnings Per Share
Net
income decreased to $21.8 million in the third quarter of 2007 from $31.5
million in the third quarter of 2006. Net income included $1.5
million of net equity earnings from our investment in LAC in both the third
quarter of 2007 and the third quarter of 2006. Diluted earnings per
share decreased to $0.43 per share for the third quarter of 2007 from $0.58
per
share for the third quarter of 2006. The decrease in the quarter
includes the impact of approximately $0.02 per diluted share related to the
incremental operating expenses for new sales centers opened since January
2006.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
The
following table breaks out our consolidated results into the base business
component and the acquired and new market component (sales centers excluded
from
base business):
(Unaudited)
|
|
Base
Business
|
Acquired
& New Market
|
|
Total
|
(In
thousands)
|
|
Nine
Months Ended
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
September
30,
|
|
September
30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
|
Net
sales
|
$
|
1,580,783
|
$
|
1,579,633
|
$
|
46,829
|
$
|
11,643
|
|
$
|
1,627,612
|
$
|
1,591,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
437,950
|
|
453,817
|
|
13,260
|
|
3,226
|
|
|
451,210
|
|
457,043
|
|
Gross
margin
|
|
27.7
|
%
|
28.7
|
%
|
28.3
|
%
|
27.7
|
%
|
|
27.7
|
%
|
28.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
293,835
|
|
283,257
|
|
10,805
|
|
2,334
|
|
|
304,640
|
|
285,591
|
|
Expenses
as a % of net sales
|
|
18.6
|
%
|
17.9
|
%
|
23.1
|
%
|
20.0
|
%
|
|
18.7
|
%
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
144,115
|
|
170,560
|
|
2,455
|
|
892
|
|
|
146,570
|
|
171,452
|
|
Operating
margin
|
|
9.1
|
%
|
10.8
|
%
|
5.2
|
%
|
7.7
|
%
|
|
9.0
|
%
|
10.8
|
%
|
For
purposes of comparing operating results for the nine months ended September
30,
2007 to the nine months ended September 30, 2006, 266 sales centers
were included in the base business calculations (including 23 of the 27 new
sales centers opened since the beginning of 2006) and 19 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
(1)
|
Wickham
Supply, Inc. and Water Zone, LP
|
|
August
2006
|
|
14
|
|
January
– September 2007 and
August – September 2006
|
Tor-Lyn,
Limited
|
|
February
2007
|
|
1
|
|
February
– September 2007
|
(1)
|
After
15 months of operations, we include acquired sales centers in the
base
business calculation including the comparative prior year
period.
|
Net
Sales
|
|
Nine
Months Ended September 30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Net
sales
|
|
$
|
1,627.6
|
|
$
|
1,591.3
|
|
$
|
36.3
|
2
|
%
|
The
increase in net sales is a result of the Wickham acquisition and sales from
new
locations that we opened in new markets. Base business sales growth was
flat, reflecting solid sales increases for maintenance, repair and replacement
products offset by sales decreases for products used in new pool and irrigation
construction. New pool construction permits have declined
significantly, especially in our key Florida, Arizona and California markets,
due to the impact of the prolonged domestic housing market downturn and
unfavorable weather conditions. Complementary product sales decreased
2% due to the decline in new pool construction activity.
Our
sales
growth for maintenance, repair and replacement products 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.
|
Gross
Profit
|
|
Nine
Months Ended
September
30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Gross
profit
|
|
$
|
451.2
|
|
$
|
457.0
|
|
$
|
(5.8)
|
(1)
|
%
|
Gross
margin
|
|
|
27.7
|
%
|
|
28.7
|
%
|
|
|
|
|
Gross
margin decreased 100 basis points between periods, including a consistent
decline in base business gross margin. Our 2007 gross margin is
comparatively lower primarily due to the following impacts:
·
|
competitive
pricing pressures experienced in 2007 due to the current market
environment;
|
·
|
early
buy inventory purchases and discounts for early payments on those
purchases in the fourth quarter of 2005, which benefited our 2006
gross
margin; and
|
·
|
pre-price
increase inventory purchases in the second quarter of 2006, which
benefited our third quarter 2006 gross
margin.
|
Operating
Expenses
|
|
Nine
Months Ended September 30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
Change
|
|
Operating
expenses
|
|
$
|
304.6
|
|
$
|
285.6
|
|
$
|
19.0
|
7
|
%
|
Operating
expenses as a percentage of net sales
|
|
|
18.7
|
%
|
|
17.9
|
%
|
|
|
|
|
Compared
to the first nine months of 2006, operating expenses grew 7% and increased
80
basis points as a percentage of net sales. Base business operating
expenses were 4% higher in the first nine months of 2007 compared to the same
period in 2006 and increased 70 basis points as a percentage of
sales. These increases include incremental expenses for the 27 new
sales centers that we have opened since the beginning of 2006, higher rent
expenses related to our expansion or relocation of sales centers, additional
expenses for our investments in resources related to other growth initiatives
and an increase in bad debt expense due to increases in our allowance for
doubtful accounts in the second and third quarters of 2007. These
increased costs were partially offset by lower incentive expenses in the first
nine months of 2007 compared to 2006 and cost control initiatives.
We
opened
10 new sales centers in the first nine months of 2007 compared to 15 sales
centers in the first nine months of 2006.
Interest
Expense
Interest
expense increased $5.8 million between periods as average debt outstanding
was
43% higher in the first nine months of 2007 compared to the first nine months
of
2006 and the weighted average effective interest rate increased to 6.0% in
2007
from 5.7% in 2006.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings. Our effective income tax rate was 38.6% for the
nine months ended September 30, 2007 and September 30, 2006.
Net
Income and Earnings Per Share
Net
income decreased to $81.0 million in the first nine months of 2007 from $100.0
million in the first nine months of 2006. Our equity interest in LAC
produced $1.3 million of net earnings in the first nine months of 2007
compared to $1.5 million in the comparable 2006 period. For the
year, we expect a positive contribution to our earnings from
LAC. Earnings per share for the first nine months of 2007 decreased
to $1.58 per diluted share compared to $1.82 in the first nine months of
2006. The
decrease includes the impact of approximately $0.09 per diluted share related
to
the incremental operating expenses for new sales centers opened since January
2006. By comparison, the impact of incremental operating expenses for
new sales centers opened since January 2006 on results for the nine months
ended
September 30, 2006 was approximately $0.04 per diluted share.
Seasonality
and Quarterly Fluctuations
Our
business is highly seasonal. In general, sales and operating income
are highest during the second and third quarters, which represent the peak
months of both swimming pool use and installation and landscape 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, second
and third quarters of 2007, the four quarters of 2006 and the fourth quarter
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)
|
|
|
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
527,434
|
$
|
726,472
|
$
|
373,706
|
$
|
318,486
|
$
|
537,017
|
$
|
705,703
|
$
|
348,556
|
$
|
299,791
|
|
Gross
profit
|
|
|
139,803
|
|
207,922
|
|
103,485
|
|
82,905
|
|
149,995
|
|
209,000
|
|
98,048
|
|
83,211
|
|
Operating
income (loss)
|
|
|
39,505
|
|
98,433
|
|
8,632
|
|
(4,070
|
)
|
53,092
|
|
103,338
|
|
15,022
|
|
2,288
|
|
Net
income (loss)
|
|
|
21,835
|
|
57,794
|
|
1,354
|
|
(5,001
|
)
|
31,493
|
|
62,110
|
|
6,422
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
receivables, net
|
|
$
|
200,534
|
$
|
301,265
|
$
|
231,034
|
$
|
154,937
|
$
|
211,589
|
$
|
295,722
|
$
|
211,578
|
$
|
141,785
|
|
Product
inventories, net
|
|
|
317,110
|
|
388,364
|
|
413,161
|
|
332,069
|
|
283,930
|
|
367,096
|
|
406,310
|
|
330,575
|
|
Accounts
payable
|
|
|
127,889
|
|
229,691
|
|
325,448
|
|
177,544
|
|
111,349
|
|
207,727
|
|
267,296
|
|
174,170
|
|
Total
debt
|
|
|
406,465
|
|
425,599
|
|
358,522
|
|
265,443
|
|
257,974
|
|
303,000
|
|
236,188
|
|
194,757
|
|
____________________
(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)
|
|
|
Overall,
weather conditions during the third quarter of 2007 were less than ideal and
unfavorable compared to the same period in 2006. In July, below
average temperatures across most of the east coast and continued cooler and
unusually wet weather conditions in Texas had a significant impact on sales
related to pool and landscape construction. While weather conditions
were more favorable in August and September, especially in Texas, above average
rainfall in California coupled with cooler temperatures across the west coast
adversely impacted sales in the later part of the quarter.
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. 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):
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2007
|
|
2006
|
Operating
activities
|
$
|
33,480
|
|
$
|
81,478
|
|
Investing
activities
|
|
(11,384
|
)
|
|
(37,808
|
)
|
Financing
activities
|
|
8,987
|
|
|
(30,940
|
)
|
Cash
flow
provided by operations decreased $48.0 million in the first nine months of
2007
compared to the same period in 2006. This decrease is primarily due
to the reduction in net income and the difference in the timing of the payment
of our 2007 estimated income taxes, which were paid in the third quarter of
2007, and our 2006 estimated income taxes, which were deferred until the fourth
quarter of 2006 as allowed by the Katrina Emergency Tax Relief Act of
2005
During
the first nine months of 2007, the increase in cash provided by financing
activities reflects higher borrowings used primarily to fund additional share
repurchases. For the nine months ended September 30, 2007, our share
repurchases totaled $126.8 million, or approximately 3.7 million shares of
our common stock, at an average share price of $34.51.
Future
Sources and Uses of Cash
In
August 2007, 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. Subsequent to quarter end, we repurchased
approximately $10.9 million, or 434,752 shares of our common stock, leaving
$55.0 million of the authorized amount remaining as of
October 24, 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) due
February 12, 2012, as described in Note 5 of “Notes to Consolidated
Financial Statements,” included in Item 1 of this Form 10-Q.
The
Note
Purchase Agreement includes customary affirmative and negative covenants for
transactions of this type, including financial covenants, and customary events
of default, which, if they were to occur would give the holders of the Notes
the
right to accelerate the Notes.
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
September 30, 2007, there was $138.5 million outstanding and
$21.5 million available for borrowing under the Revolver. The
weighted average effective interest rate on the Revolver was approximately
6.4%
for the nine months ended September 30, 2007.
At
September 30, 2007, there was $57.8 million outstanding under the
Term Loan, of which $3.0 million is classified as current. The
weighted average effective interest rate of the Term Loan was approximately
5.6%
for the nine months ended September 30, 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%.
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 September 30, 2007,
there was $110.7 million outstanding under the Receivables Facility at a
weighted average effective interest rate of 5.9%.
As
of
September 30, 2007, we were in compliance with all covenants and
financial ratio requirements related to our Notes, 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.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
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 September 30, 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 September 30, 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 and irrigation 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 42 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 items 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
2. Unregistered Sales of Equity Securities and
Use of Proceeds
The
table
below summarizes the repurchases of our common stock in the third 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
|
July
1-31, 2007
|
|
714,879
|
|
$
|
35.04
|
|
714,693
|
|
$
|
13,448
|
August
1-31, 2007
|
|
583,682
|
|
$
|
34.21
|
|
539,500
|
|
$
|
81,626,621
|
September
1-30, 2007
|
|
522,500
|
|
$
|
30.16
|
|
522,500
|
|
$
|
65,867,465
|
Total
|
|
1,821,061
|
|
$
|
33.38
|
|
1,776,693
|
|
|
|
(1)
|
These
shares may 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 share-based compensation
plans. There were 186 and 44,182 shares surrendered for this
purpose in July and August of 2007, respectively. There were no
shares tendered for this purpose in September of
2007.
|
(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 and August 2007, our Board increased the authorization
for
the repurchase of shares of our common stock in the open market to
a total
of $100.0 million from the amounts remaining at each of those
dates. As of October 24, 2007, $55.0 million of the authorized
amount remained available.
|
Exhibits
filed as part of this report are listed in the Index to Exhibits appearing
on
page 25.
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 October 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|