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, 2008
or
|
|
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to
____________
|
Commission
File Number: 0-26640
 POOL
CORPORATION
|
||
|
(Exact
name of Registrant as specified in its charter)
|
||
|
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, a non accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
Smaller
reporting company o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES ¨ NOx
At April
25, 2008, there were 47,809,711 outstanding shares of the registrant's common
stock, $.001 par value per share.
POOL
CORPORATION
Form
10-Q
For
the Quarter Ended March 31, 2008
INDEX
|
PART
I. FINANCIAL INFORMATION
|
|||
|
Item
1. Financial Statements (Unaudited)
|
|||
|
1
|
|||
|
2
|
|||
|
3
|
|||
|
4
|
|||
|
7
|
|||
|
17
|
|||
|
17
|
|||
|
PART
II. OTHER INFORMATION
|
|||
|
18
|
|||
|
22
|
|||
|
22
|
|||
|
23
|
|||
|
24
|
|||
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
Consolidated
Statements of Income
(Unaudited)
(In
thousands, except per share data)
|
Three
Months Ended
|
||||||
|
March
31,
|
||||||
|
2008
|
2007
|
|||||
|
Net
sales
|
$
|
338,215
|
$
|
373,706
|
||
|
Cost
of sales
|
242,861
|
270,221
|
||||
|
Gross
profit
|
95,354
|
103,485
|
||||
|
Selling
and administrative expenses
|
93,157
|
94,853
|
||||
|
Operating
income
|
2,197
|
8,632
|
||||
|
Interest
expense, net
|
5,024
|
4,519
|
||||
|
Income
(loss) before income taxes and equity losses
|
(2,827
|
)
|
4,113
|
|||
|
Provision
(benefit) for income taxes
|
(1,089
|
)
|
1,588
|
|||
|
Equity
losses in unconsolidated investments, net
|
(1,446
|
)
|
(1,171
|
)
|
||
|
Net
income (loss)
|
$
|
(3,184
|
)
|
$
|
1,354
|
|
|
Earnings
(loss) per share:
|
||||||
|
Basic
|
$
|
(0.07
|
)
|
$
|
0.03
|
|
|
Diluted
|
$
|
(0.07
|
)
|
$
|
0.03
|
|
|
Weighted
average shares outstanding:
|
||||||
|
Basic
|
47,538
|
50,201
|
||||
|
Diluted
|
47,538
|
52,462
|
||||
|
Cash
dividends declared per common share
|
$
|
0.12
|
$
|
0.105
|
||
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
1
Consolidated
Balance Sheets
(Unaudited)
(In
thousands, except share data)
|
March
31,
|
March
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
2007
|
|||||||
|
Assets
|
|||||||||
|
Current
assets:
|
|||||||||
|
Cash
and cash equivalents
|
$
|
6,476
|
$
|
30,555
|
$
|
15,825
|
|||
|
Receivables,
net
|
42,266
|
51,104
|
45,257
|
||||||
|
Receivables
pledged under receivables facility
|
163,921
|
179,930
|
95,860
|
||||||
|
Product
inventories, net
|
476,758
|
413,161
|
379,663
|
||||||
|
Prepaid
expenses and other current assets
|
10,241
|
9,383
|
8,265
|
||||||
|
Deferred
income taxes
|
9,139
|
7,676
|
9,139
|
||||||
|
Total
current assets
|
708,801
|
691,809
|
554,009
|
||||||
|
Property
and equipment, net
|
34,957
|
34,551
|
34,223
|
||||||
|
Goodwill
|
167,398
|
155,231
|
155,247
|
||||||
|
Other
intangible assets, net
|
15,465
|
17,763
|
14,504
|
||||||
|
Equity
interest investments
|
31,551
|
30,522
|
33,997
|
||||||
|
Other
assets, net
|
24,774
|
17,753
|
22,874
|
||||||
|
Total
assets
|
$
|
982,946
|
$
|
947,629
|
$
|
814,854
|
|||
|
Liabilities
and stockholders’ equity
|
|||||||||
|
Current
liabilities:
|
|||||||||
|
Accounts
payable
|
$
|
333,104
|
$
|
325,448
|
$
|
194,178
|
|||
|
Accrued
expenses and other current liabilities
|
30,704
|
24,515
|
37,216
|
||||||
|
Short-term
financing
|
66,812
|
102,300
|
68,327
|
||||||
|
Current
portion of other long-term liabilities
|
3,152
|
4,350
|
3,439
|
||||||
|
Total
current liabilities
|
433,772
|
456,613
|
303,160
|
||||||
|
Deferred
income taxes
|
15,305
|
13,867
|
17,714
|
||||||
|
Long-term
debt
|
326,298
|
253,222
|
279,525
|
||||||
|
Other
long-term liabilities
|
6,221
|
5,639
|
5,664
|
||||||
|
Total
liabilities
|
781,596
|
729,341
|
606,063
|
||||||
|
Stockholders’
equity:
|
|||||||||
|
Common
stock, $.001 par value; 100,000,000 shares
|
|||||||||
|
authorized;
47,785,466, 49,328,083 and 47,516,989
|
|||||||||
|
shares
issued and outstanding at March 31, 2008,
|
|||||||||
|
March
31, 2007 and December 31, 2007, respectively
|
47
|
49
|
47
|
||||||
|
Additional
paid-in capital
|
177,650
|
156,364
|
171,996
|
||||||
|
Retained
earnings
|
18,863
|
57,261
|
29,044
|
||||||
|
Treasury
stock
|
−
|
(886
|
)
|
−
|
|||||
|
Accumulated
other comprehensive income
|
4,790
|
5,500
|
7,704
|
||||||
|
Total
stockholders’ equity
|
201,350
|
218,288
|
208,791
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
982,946
|
$
|
947,629
|
$
|
814,854
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
thousands)
|
Three
Months Ended
|
|||||||
|
March
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Operating
activities
|
|||||||
|
Net
income (loss)
|
$
|
(3,184
|
)
|
$
|
1,354
|
||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
2,387
|
2,184
|
|||||
|
Amortization
|
1,064
|
1,220
|
|||||
|
Share-based
compensation
|
2,270
|
1,543
|
|||||
|
Excess
tax benefits from share-based compensation
|
(1,540
|
)
|
(2,834
|
)
|
|||
|
Equity
losses in unconsolidated investments
|
2,446
|
1,987
|
|||||
|
Other
|
(2,612
|
)
|
(1,920
|
)
|
|||
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|||||||
|
Receivables
|
(60,100
|
)
|
(76,398
|
)
|
|||
|
Product
inventories
|
(80,964
|
)
|
(80,453
|
)
|
|||
|
Accounts
payable
|
136,197
|
147,859
|
|||||
|
Other
current assets and liabilities
|
(11,404
|
)
|
(7,849
|
)
|
|||
|
Net
cash used in operating activities
|
(15,440
|
)
|
(13,307
|
)
|
|||
|
Investing
activities
|
|||||||
|
Acquisition
of businesses, net of cash acquired
|
(32,742
|
)
|
(842
|
)
|
|||
|
Purchase
of property and equipment, net of sale proceeds
|
(1,835
|
)
|
(3,073
|
)
|
|||
|
Proceeds
from sale of investment
|
−
|
75
|
|||||
|
Net
cash used in investing activities
|
(34,577
|
)
|
(3,840
|
)
|
|||
|
Financing
activities
|
|||||||
|
Proceeds
from revolving line of credit
|
74,948
|
87,716
|
|||||
|
Payments
on revolving line of credit
|
(27,425
|
)
|
(121,900
|
)
|
|||
|
Proceeds
from asset-backed financing
|
12,655
|
39,779
|
|||||
|
Payments
on asset-backed financing
|
(14,170
|
)
|
(11,765
|
)
|
|||
|
Proceeds
from long-term debt
|
−
|
100,000
|
|||||
|
Payments
on long-term debt and other long-term liabilities
|
(785
|
)
|
(773
|
)
|
|||
|
Payments
of capital lease obligations
|
(251
|
)
|
(257
|
)
|
|||
|
Payments
of deferred financing costs
|
(22
|
)
|
(377
|
)
|
|||
|
Excess
tax benefits from share-based compensation
|
1,540
|
2,834
|
|||||
|
Issuance
of common stock under stock option plans
|
1,861
|
2,921
|
|||||
|
Payments
of cash dividends
|
(5,734
|
)
|
(5,248
|
)
|
|||
|
Purchases
of treasury stock
|
(1,263
|
)
|
(61,788
|
)
|
|||
|
Net
cash provided by financing activities
|
41,354
|
31,142
|
|||||
|
Effect
of exchange rate changes on cash
|
(686
|
)
|
(174
|
)
|
|||
|
Change
in cash and cash equivalents
|
(9,349
|
)
|
13,821
|
||||
|
Cash
and cash equivalents at beginning of period
|
15,825
|
16,734
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
6,476
|
$
|
30,555
|
|||
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
3
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 2007
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, 2008 are not necessarily indicative of the results to be expected for
the twelve months ending December 31, 2008.
In
January 2008, we converted a $1.8 million gross trade accounts receivable
balance to a note receivable and were assigned a separate $1.4 million note
receivable upon the sale of one of our large retail customer’s business to a new
owner. We have reclassified the trade accounts receivable and the
associated reserve to the other non-current assets line item on the balance
sheet. We intend to use a cost recovery method of accounting for the assigned
note receivable.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 addresses how companies should measure fair
value when they are required to use a fair value measure for recognition and
disclosure purposes under generally accepted accounting principles.
SFAS 157 requires the fair value of an asset or liability to be based
on market-based measures that reflect our credit risk. SFAS 157 also
expands disclosure requirements to include the methods and assumptions used to
measure fair value and the effect of fair value measures on earnings.
We adopted SFAS 157 on January 1, 2008 and we do not expect this
pronouncement to have a material impact on our Consolidated Financial
Statements.
4
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
Note
2 – Earnings (Loss) Per Share
We
calculate basic earnings (loss) per share (EPS) by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted EPS
includes the dilutive effects, if any, of stock option and restricted stock
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,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
income (loss)
|
$
|
(3,184
|
)
|
$
|
1,354
|
|||
|
Weighted
average common shares outstanding:
|
||||||||
|
Basic
|
47,538
|
50,201
|
||||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options
|
−
|
2,228
|
||||||
|
Restricted
stock awards
|
−
|
32
|
||||||
|
Employee
stock purchase plan
|
−
|
1
|
||||||
|
Diluted
|
47,538
|
52,462
|
||||||
|
Basic
earnings (loss) per share
|
$
|
(0.07
|
)
|
$
|
0.03
|
|||
|
Diluted
earnings (loss) per share
|
$
|
(0.07
|
)
|
$
|
0.03
|
|||
The
weighted average diluted shares outstanding for the three months ended March 31,
2007 exclude stock options to purchase 586,000 shares, which are considered
anti-dilutive because they have exercise prices that are higher than the average
market price of our common stock.
Since we
reported a net loss for the first quarter of 2008, there is no difference
between the basic and diluted weighted average number of shares outstanding for
the period. Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive, meaning that the loss per share
would decrease. For informational purposes, the amounts we have
excluded from the computation of diluted weighted average shares outstanding are
shown in the table below:
|
Weighted
average common shares outstanding:
|
||||
|
Basic
|
47,538
|
|||
|
Effect
of dilutive securities:
|
||||
|
Stock
options
|
762
|
|||
|
Restricted
stock awards
|
51
|
|||
|
Employee
stock purchase plan
|
2
|
|||
|
Diluted
|
48,353
|
|||
The
weighted average diluted shares outstanding in this computation also exclude
stock options to purchase 2,962,598 shares, which are considered anti-dilutive
because they have exercise prices that are higher than the average market price
of our common stock.
5
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
Note
3 – Acquisitions
In March
2008, we acquired National Pool Tile Group, Inc. (NPT), a leading wholesale
distributor of pool tile and composite pool finishes serving professional
contractors in the swimming pool refurbish and construction markets through 15
distribution sales centers. As of March 31, 2008, we had consolidated
four of the acquired sales centers into our existing sales
centers. We have included the results of operations for NPT in our
Consolidated Financial Statements since the acquisition date. The
purchase price allocations for our acquisition of NPT have been completed on a
preliminary basis, subject to adjustments in accordance with the purchase
agreement and other adjustments should new or additional facts about the
business become known. We expect to finalize the allocations by the
first quarter of 2009. This acquisition did not have a material
impact on our financial position or results of operations.
Also in
March 2008, we acquired Canswim Pools (Canswim), a manufacturer of in-ground
swimming pools and a distributor of in-ground swimming pools and supplies with
one sales center location in Ontario, Canada. We have included the
results of operations for Canswim in our Consolidated Financial Statements since
the acquisition date. The purchase price allocations for our
acquisition of Canswim have been completed on a preliminary basis, subject to
adjustments in accordance with the purchase agreement and other adjustments
should new or additional facts about the business become known. We
expect to finalize the allocations by the first quarter of 2009. This
acquisition did not have a material impact on our financial position or results
of operations.
Note
4 – Debt
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. On
March 21, 2008, we amended the Receivables Purchase Agreement (the
Agreement) under the Receivables Facility to extend the termination date to
May 21, 2008. We expect to renew the Receivables Facility
in May 2008 with comparable or similar terms to the
Agreement.
Our
unsecured syndicated senior credit facility includes a $60.0 million term loan
(the Term Loan), which matures on December 20, 2010. In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates on the Term Loan. This
swap agreement terminates on December 31, 2008 and we have designated this swap
as a cash flow hedge. In March 2008, we entered into a separate
interest rate swap agreement to reduce our exposure to fluctuations in interest
rates for the remaining outstanding period of the Term Loan. This
swap will be in effect as of December 31, 2008 when the original swap agreement
terminates and will terminate when the Term Loan matures on December 20,
2010.
Note
5 – Comprehensive Income (Loss)
Comprehensive
income (loss) includes net income (loss), foreign currency translation
adjustments and the unrealized gain or loss on interest rate
swaps. Comprehensive income (loss) for the three months ended March
31, 2008 and 2007 is presented below:
|
Three
Months Ended
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Comprehensive
income (loss)
|
$
|
(6,098
|
)
|
$
|
639
|
|||
6
You
should read the following discussion in conjunction with Management's Discussion
and Analysis included in our 2007 Annual Report on Form 10-K.
OVERVIEW
Financial
Results
While it
is still relatively early in the 2008 season, we are encouraged by our results
given the challenging market conditions in our industry. We improved gross
margins despite the tough competitive pricing environment and realized further
progress in managing expenses through cost control measures. The new pool
and irrigation construction markets are facing unprecedented conditions created
by the combination of significant declines in the real estate and
mortgage-backed financing markets. As a result, our sales were negatively
impacted with a more pronounced effect on our irrigation business and
complementary product sales.
Net sales
for the seasonally slow first quarter decreased compared to the first quarter of
2007. Base business sales declined approximately 11% (compared to 4%
growth in the first quarter of 2007 over the first quarter of 2006) on soft
demand for pool and irrigation construction products. Complementary
product sales continue to be negatively impacted by the decline in new pool
construction and decreased 16% compared to the first quarter of 2007.
Unfavorable weather also had an adverse effect on our results for the
quarter.
Gross
profit as a percentage of net sales (gross margin) improved 50 basis points
to 28.2% in the first quarter of 2008 from the first quarter of 2007.
Improved pricing discipline and favorable product mix changes contributed to
this increase, which was partially offset by the impact of competitive pricing
pressures resulting from the current market environment.
Selling
and administrative expenses (operating expenses) decreased 2% compared to the
first quarter of 2007. This decrease is primarily attributable to the
impact of cost control initiatives, which offset increased expenses related to
sales centers opened and expanded during 2007 and higher freight
costs.
Operating
income decreased to $2.2 million in the first quarter of 2008 while
operating income as a percentage of net sales (operating margin) decreased
to 0.6% from 2.3% in the first quarter of 2007. Interest expense increased
11% during the quarter due to higher average debt levels, which were partially
offset by a lower weighted average effective interest rate compared to the first
quarter of 2007. Loss per share for the first quarter of 2008 was $0.07
per diluted share on a net loss of $3.2 million, compared to earnings of
$0.03 per diluted share in the same period in 2007.
Financial
Position and Liquidity
Total net
receivables decreased 11% to $206.2 million at March 31, 2008 from $231.0
million at March 31, 2007 due to the decrease in sales. Our
allowance for doubtful accounts balance was $9.4 million at
March 31, 2008, an increase of $4.6 million over
March 31, 2007. We increased the allowance for doubtful
accounts during the last nine months of 2007 to reflect slower payments from
customers in markets that have been adversely impacted by the decline in new
pool and irrigation construction. The allowance for doubtful accounts
has decreased approximately $0.5 million from December 31, 2007 to
March 31, 2008, primarily due to write offs of certain large accounts that were
fully reserved. Days sales outstanding (DSO) increased between
periods to 36.4 days at March 31, 2008 compared to 35.3 days at
March 31, 2007.
Our
inventory levels increased 15% to $476.8 million as of March 31, 2008 compared
to $413.2 million as of March 31, 2007. This increase
reflects higher inventory levels attributable to the decline in first quarter
sales and $17.1 million of acquired inventory, primarily related to
National Pool Tile. Our inventory turns, as calculated on a trailing
twelve month basis, have decreased to 3.5 times as of March 31, 2008
compared to 3.9 times as of March 31, 2007.
7
Approximately
98% of the increase in our inventory levels compared to March 31, 2007 is
attributable to our North American pool operations. Of this
increase, approximately 97% is related to products in our
fastest-turning inventory classes of stock keeping units (SKUs). We
believe that our fully stocked inventory levels provide a competitive advantage
that helps us gain market share and realize gross margin improvements in a
market where our competitors lack our working capital flexibility. We
will be working throughout the season to reduce our inventory to more normalized
levels and expect to show progress in the second quarter on a comparative
basis.
Total
debt outstanding increased to $396.1 million at March 31, 2008 compared to
$358.5 million at March 31, 2007. This increase is
attributable to increased borrowings to fund our 2007 share repurchase
activities and our first quarter 2008 acquisitions. Our current ratio
increased to 1.6 as of March 31, 2008 compared to 1.5 as of
March 31, 2007.
Current
Trends
Current
economic trends that have carried over from 2007 include a slowdown in the
domestic housing market, with lower housing turnover, a sharp drop in new home
construction, home value deflation in many markets, decreases in short-term
interest rates and a tightening of consumer and commercial credit. Some of
the factors that help mitigate the impact of these trends on our business
include the following:
|
·
|
the
majority of our business is driven by 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;
|
|
·
|
we
have a low market share with the largest pool builders who we believe are
more heavily tied to new home construction;
and
|
|
·
|
we
believe our service-oriented model helps us gain market
share.
|
Despite these mitigating factors, these
negative trends have significantly impacted a number of our key markets,
including Florida, Arizona and parts of California. We believe these
trends, along with unfavorable weather conditions, resulted in a decrease in new
pool construction of approximately 50,000 units, or 25%, in 2007. This followed
a decrease of approximately 10,000 units, or 5%, in 2006, representing the first
back to back decrease in recent industry history. Since these trends
worsened throughout 2007 and into the first quarter of 2008, they had a more
pronounced impact on our first quarter results compared to the same period in
2007. A further continuation or worsening of these trends may have an even
greater impact on new pool construction and consumer spending on outdoor living
spaces, which could negatively impact our sales and
earnings.
Outlook
We remain
focused on our 2008 objectives, which include:
|
·
|
continuing
to execute on our business strategies that we believe will provide
long-term value to our customers, suppliers and shareholders;
and
|
|
·
|
exploiting
business improvement opportunities available to us while maintaining tight
control over our expenses.
|
Based on
our first quarter results and the current external environment, we project full
year 2008 earnings per share will be in the range of $1.20 to $1.50 per diluted
share. The assumptions that were used to develop our low end of the range
include a decrease in net sales of 5% from the prior year combined with flat
gross margins. The higher end of the range was based on net sales consistent
with the prior year and achieving a 50 basis point improvement in gross margins.
Both scenarios include the assumption that base business expenses will be flat
with 2007 levels, excluding management incentives which will vary with
performance.
We
believe that our sales will continue to be pressured by adverse impacts on new
pool and irrigation construction caused by the significant declines experienced
in the real estate and mortgage-backed financing markets. We expect
sales comparisons relative to 2007 to be more favorable as the remainder of the
year unfolds based on our weaker sales performance from June 2007 through the
end of the 2007 pool season compared to the same periods in 2006.
8
We expect
to generate sufficient cash flow and have adequate access to capital to both
fund our business objectives and provide a direct return to our shareholders in
the form of dividend payments.
The
forward-looking statements in this outlook section are subject to significant
risks and uncertainties, including sensitivity of our business to weather
conditions, our ability to maintain favorable relationships with suppliers and
manufacturers, competition from other leisure product alternatives and mass
merchants, changes in the economy and the housing market 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, 2008, we conducted operations through 291 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,
|
|||||
|
2008
|
2007
|
||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
|
|
Cost
of sales
|
71.8
|
72.3
|
|||
|
Gross
profit
|
28.2
|
27.7
|
|||
|
Selling
and administrative expenses
|
27.5
|
25.4
|
|||
|
Operating
income
|
0.6
|
2.3
|
|||
|
Interest
expense, net
|
1.5
|
1.2
|
|||
|
Income
(loss) before income taxes and equity losses
|
(0.8
|
)
|
1.1
|
||
|
Note:
|
Due
to rounding, percentages may not add to operating income or income (loss)
before income taxes and equity
earnings.
|
Our
discussion of consolidated operating results includes the operating results from
acquisitions in 2008, 2007 and 2006. 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.
9
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
The
following table breaks out our consolidated results into the base business
component and the excluded component (sales centers excluded from base
business):
|
(Unaudited)
|
Base
Business
|
Excluded
|
Total
|
|||||||||||||||
|
(In
thousands)
|
Three
Months
|
Three
Months
|
Three
Months
|
|||||||||||||||
|
Ended
|
Ended
|
Ended
|
||||||||||||||||
|
March
31,
|
March
31,
|
March
31,
|
||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
sales
|
$
|
332,346
|
$
|
371,812
|
$
|
5,869
|
$
|
1,894
|
$
|
338,215
|
$
|
373,706
|
||||||
|
Gross
profit
|
93,547
|
103,035
|
1,807
|
450
|
95,354
|
103,485
|
||||||||||||
|
Gross
margin
|
28.1
|
%
|
27.7
|
%
|
30.8
|
%
|
23.8
|
%
|
28.2
|
%
|
27.7
|
%
|
||||||
|
Selling
and administrative expenses
|
90,873
|
93,671
|
2,284
|
1,182
|
93,157
|
94,853
|
||||||||||||
|
Expenses
as a % of net sales
|
27.3
|
%
|
25.2
|
%
|
38.9
|
%
|
62.4
|
%
|
27.5
|
%
|
25.4
|
%
|
||||||
|
Operating
income (loss)
|
2,674
|
9,364
|
(477
|
)
|
(732
|
)
|
2,197
|
8,632
|
||||||||||
|
Operating
income (loss) margin
|
0.8
|
%
|
2.5
|
%
|
(8.1
|
)%
|
(38.7
|
)%
|
0.6
|
%
|
2.3
|
%
|
||||||
We
exclude the following sales centers from our base business results for a period
of 15 months (parenthetical numbers for each category indicate the number of
sales centers excluded as of March 31, 2008):
|
·
|
acquired
sales centers (13 - see table
below);
|
|
·
|
new
sales centers opened in new markets
(2);
|
|
·
|
closed
sales centers (3); and
|
|
·
|
consolidated
sales centers in cases where we do not expect to maintain the majority of
the existing business (1).
|
We
generally allocate corporate overhead expenses to excluded sales centers on the
basis of their net sales as a percentage of total net sales. After 15 months of
operations, we include acquired and new market sales centers in the base
business calculation including the comparative prior year period.
We have
excluded the following acquisitions from base business for the periods
identified:
|
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
|
National
Pool Tile (NPT) (1)
|
March
2008
|
11
|
March
2008
|
|||
|
Canswim
Pools
|
March
2008
|
1
|
March
2008
|
|||
|
Tor-Lyn,
Limited
|
February
2007
|
1
|
February
– March 2007 and January – March
2008
|
The table
below summarizes the changes in our sales centers during the quarter ended March
31, 2008:
|
December
31, 2007
|
281
|
|
Acquired,
net of consolidations (1)
|
12
|
|
Consolidated
|
(1)
|
|
Closed
|
(1)
|
|
March
31, 2008
|
291
|
(1) We
consolidated 4 of the 15 acquired NPT sales centers with existing sales centers
at the end of March 2008.
10
Net
Sales
|
Three
Months Ended
March
31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Net
sales
|
$
|
338.2
|
$
|
373.7
|
$
|
(35.5
|
)
|
(9
|
)%
|
|||
The
decrease in net sales is primarily due to the impact of the prolonged domestic
housing market downturn. The demand for new pool and irrigation
construction products continued to lag due to the significant declines in new
pool construction permits. This impact remains more concentrated in
markets that had the greatest run-up in real estate values between 2000 and
2006, which includes a number of our larger markets in Florida, Arizona and
parts of California. Complementary product sales were negatively impacted
by the decline in new pool construction and decreased 16% compared to the first
quarter of 2007. Unfavorable weather conditions also had a negative effect
on sales during the quarter as extended winter conditions delayed the start of
the pool season in the Midwest and Northeast.
The overall decrease in net sales was
partially offset by increases due to the following:
|
·
|
moderate
sales growth for maintenance, repair and replacement
products;
|
|
·
|
moderate
sales growth for our European
operations;
|
|
·
|
sales
related to our acquisitions and new sales centers;
and
|
|
·
|
estimated
average price increases of 1% to 3% that we passed through the supply
chain.
|
Gross
Profit
|
Three
Months Ended
March
31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Gross
profit
|
$
|
95.4
|
$
|
103.5
|
$
|
(8.1
|
)
|
(8
|
)%
|
|||
|
Gross
margin
|
28.2
|
%
|
27.7
|
%
|
||||||||
Despite
the tough competitive pricing environment, gross margin increased 50 basis
points compared to the first quarter of 2007. This improvement is
primarily attributable to our focus on pricing discipline at the sales center
level and a favorable shift in product mix due to a decline in lower margin
construction related sales.
Operating
Expenses
|
Three
Months Ended
March
31,
|
||||||||||||
|
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Operating
expenses
|
$
|
93.2
|
$
|
94.9
|
$
|
(1.7
|
)
|
(2
|
)%
|
|||
|
Operating
expenses as a percentage of net sales
|
27.5
|
%
|
25.4
|
%
|
||||||||
Compared
to the first quarter of 2007, operating expenses decreased 2% as the impact of
cost control initiatives offset higher costs related to the
following:
|
·
|
sales
centers opened and expanded during
2007;
|
|
·
|
additional
expenses related to our first quarter acquisition of
NPT;
|
|
·
|
higher
product delivery costs; and
|
|
·
|
inflation
in wages and other costs.
|
Our cost
control initiatives include tighter management of discretionary costs, the
consolidation or closing of seven sales centers since November 2007 and
selective personnel reductions over the last nine months. Based on our
first quarter loss, operating expenses also reflect lower incentive expenses
compared to the first quarter of 2007. Total operating expenses as a
percentage of net sales increased to 27.5% in the first quarter of 2008 from
25.4% in the same period in 2007 due to the decrease in net sales.
11
Interest
Expense
Interest
expense increased 11% between periods as our higher average debt outstanding
balance more than offset the impact of a decrease in our weighted average
effective interest rate for the period. Average debt outstanding was 24%
higher in the first quarter of 2008 due to increased borrowings that funded our
2007 share repurchase activities and our first quarter 2008 acquisitions.
The weighted average effective interest rate decreased to 5.2% in the first
quarter of 2008 from 5.9% in the same period in 2007.
Income
Taxes
The
decrease in income taxes is due to the decrease in income (loss) before income
taxes and equity losses. Our effective income tax rate was 38.50% at March
31, 2008 and 38.61% at March 31, 2007.
Net
Income (Loss) and Earnings (Loss) Per Share
We had a
net loss of $3.2 million in the first quarter of 2008 compared to net income of
$1.4 million in the first quarter of 2007. This decrease includes a
$0.3 million increase in net equity losses from our investment in
LAC.
Our net
loss of $0.07 per diluted share for the first quarter of 2008 compared to
earnings of $0.03 per diluted share in the same period in 2007. Both
periods include impact of approximately $0.02 per share related to higher
interest expense due to borrowings for share repurchases. While the reduction in
the weighted average share balances due to these share repurchases slightly
offset the earnings per share impact of higher interest expense in the first
quarter of 2007, there was no such benefit in the first quarter of 2008 since we
had a loss. We expect that our 2007 share repurchases will provide an
accretive impact for the full year 2008.
12
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 2008, the four quarters of 2007 and the second, third and fourth quarters of
2006. 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)
|
QUARTERS
|
|||||||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||||||||
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
|||||||||||
|
Statement
of Income Data
|
||||||||||||||||||
|
Net
sales
|
$
|
338,215
|
$
|
300,755
|
$
|
527,434
|
$
|
726,472
|
$
|
373,706
|
$
|
318,486
|
$
|
537,017
|
$
|
705,703
|
||
|
Gross
profit
|
95,354
|
79,436
|
139,803
|
207,922
|
103,485
|
82,905
|
149,995
|
209,000
|
||||||||||
|
Operating
income (loss)
|
2,197
|
(12,796
|
)
|
39,505
|
98,433
|
8,632
|
(4,070
|
)
|
53,092
|
103,338
|
||||||||
|
Net
income (loss)
|
(3,184
|
)
|
(11,589
|
)
|
21,835
|
57,794
|
1,354
|
(5,001
|
)
|
31,493
|
62,110
|
|||||||
|
Balance
Sheet Data
|
||||||||||||||||||
|
Total
receivables, net
|
$
|
206,187
|
$
|
141,117
|
$
|
200,534
|
$
|
301,265
|
$
|
231,034
|
$
|
154,937
|
$
|
211,589
|
$
|
295,722
|
||
|
Product
inventories, net
|
476,758
|
379,663
|
317,110
|
388,364
|
413,161
|
332,069
|
283,930
|
367,096
|
||||||||||
|
Accounts
payable
|
333,104
|
194,178
|
127,889
|
229,691
|
325,448
|
177,544
|
111,349
|
207,727
|
||||||||||
|
Total
debt
|
396,110
|
350,852
|
406,465
|
425,599
|
358,522
|
265,443
|
257,974
|
303,000
|
||||||||||
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. Based on our peak summer selling season, we generally open
new sales centers and close or consolidate sales centers, when warranted,
either in the first quarter before the peak selling season starts or in the
fourth quarter after the peak selling season ends.
13
Weather
is one of the principal external factors 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 2008, our sales were negatively impacted by unfavorable weather
conditions which included several late winter storms in the Midwest and
Northeast and much cooler March temperatures across most of the country compared
to 2007. While the start of the 2007 pool season was delayed by extended
winter conditions in the Northeast, near record snowfall throughout most of our
northern markets delayed the start of the 2008 pool season even further. Our
first quarter sales did benefit from more favorable weather in Texas and
Oklahoma, which had been significantly impacted by ice storms in
2007.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is defined as the ability to generate adequate amounts of cash to meet
short-term and long-term 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;
|
|
·
|
acquisitions;
|
|
·
|
the
timing and extent of share
repurchases;
|
|
·
|
capital
expenditures;
|
|
·
|
dividend
payments; and
|
| · |
the
ability to attract long-term capital with satisfactory
terms.
|
14
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 a prudent 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
|
|
·
|
repayment
of debt.
|
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
|
Three
Months Ended
|
|||||||
|
March
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Operating
activities
|
$
|
(15,440
|
)
|
$
|
(13,307
|
)
|
|
|
Investing
activities
|
(34,577
|
)
|
(3,840
|
)
|
|||
|
Financing
activities
|
41,354
|
31,142
|
|||||
Cash flow
used in operations decreased $2.1 million in the first three months of 2008
compared to the same period in 2007. This decrease is primarily due
to the reduction in net income. During the first three months of
2008, the increase in cash provided by financing activities reflects borrowings
used to fund our NPT acquisition in March 2008. While we had higher
net borrowings in the first quarter of 2007, the majority of these borrowings
were used to fund share repurchase activities.
Future
Sources and Uses of Cash
As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) provides for $300.0 million in borrowing capacity
including a $240.0 million five-year revolving credit facility (the
Revolver) and a $60.0 million term loan (the Term Loan). The Term Loan matures
on December 20, 2010 and the Revolver matures on December 20,
2012. The Credit Facility includes sublimits for the issuance of
swingline loans and standby letters of credit. Pursuant to an
accordion feature, the aggregate maximum principal amount of the commitments
under the Revolver may be increased from time to time, by up to $75.0 million,
to a total of $315 million.
At March
31, 2008, there was $173.0 million outstanding and $64.3 million
available for borrowing under the Revolver. The weighted average effective
interest rate on the Revolver was approximately 4.9% for the quarter ended
March 31, 2008.
At March
31, 2008, there was $56.3 million outstanding under the Term Loan of
which $3.0 million is classified as current. In December 2005, we entered into
an interest rate swap agreement to reduce our exposure to fluctuations in
interest rates. The swap agreement converts our variable rate Term Loan to a
fixed-rate basis until its termination on December 31, 2008. We have designated
this swap as a cash flow hedge. The weighted average effective interest rate of
the Term Loan was approximately 5.7% for the quarter ended March
31, 2008. In March 2008, we entered into a separate
interest rate swap agreement to reduce our exposure to fluctuations in interest
rates for the remaining outstanding period of the Term Loan. This
swap will be in effect as of December 31, 2008 when the original swap agreement
terminates and will terminate when the Term Loan matures on December 20,
2010.
15
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. On March 21, 2008, we amended the
Receivables Purchase Agreement under the Receivables Facility to extend the
termination date to May 21, 2008. We expect to renew the Receivables
Facility in May 2008 with comparable or similar terms, and we do not have any
reason to believe that we will not be able to do so.
The
Receivables Facility provides for the true sale of certain of our receivables as
they are created to a wholly owned, bankruptcy-remote subsidiary. This
subsidiary grants an undivided security interest in the receivables to an
unrelated commercial paper conduit. Because of the structure of the
bankruptcy-remote subsidiary and our ability to control its activities, we
include the transferred receivables and related debt in our Consolidated Balance
Sheets. We continue to employ this arrangement because it provides us with a
lower cost form of financing. At March 31, 2008, there was
$66.8 million outstanding under the Receivables Facility at a weighted
average effective interest rate of 4.8%.
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 accrue interest on the unpaid principal balance
at a floating rate equal to a spread of 0.600% over the three-month LIBOR, as
adjusted from time to time. We used the net proceeds from the placement to pay
down borrowings under the Credit Facility. In February 2007, we also entered
into an interest rate swap agreement to reduce our exposure to fluctuations in
interest rates on the Notes. The swap agreement converts the Notes’ 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.
As of
March 31, 2008, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility, our Notes and our Receivables
Facility. For additional information regarding our debt arrangements, see Note 5
of “Notes to Consolidated Financial Statements,” included in Item 8 of our 2007
Form 10-K.
Our Board
increased the authorization for the repurchase of shares of our common stock in
the open market during 2007, including an increase to $100.0 million in August
2007. As of April 25, 2008, $55.0 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.
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,
2007. We have not changed these policies from those previously
disclosed.
16
Interest
Rate Risk
There
have been no material changes from what we reported in our Form 10-K for the
year ended December 31, 2007.
Foreign
Exchange Risk
There
have been no material changes from what we reported in our Form 10-K for the
year ended December 31, 2007.
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, 2008, 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, 2008, 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.
17
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. This includes statements under the heading “Overview –
Outlook” in Part 1, Item 2, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this Form
10-Q. 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:
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 growth rate of 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 this portion of our business depends on the
expansion of the installed pool base and could also be adversely affected by
decreases in construction activities similar to the trends in 2007 and the first
quarter of 2008. 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. Such downturns
expose us to certain additional risks, including but not limited to the risk of
customer closures or bankruptcies, which could shrink our potential customer
base and inhibit our ability to collect on those customers’
receivables.
We
are susceptible to adverse weather conditions.
Weather
is one of the principal external factors affecting our business. For example,
unseasonably late warming trends in the spring or early cooling trends in the
fall can shorten 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 1, Item 2,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Quarterly Fluctuations,” of this Form
10-Q.
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.
18
Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
Zodiac Pool Care, Inc., which accounted for approximately 15%, 11% and 9%,
respectively, of the costs of products we sold in 2007. 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
54% of our net sales in 2007, 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.
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 President and
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.
19
Past
growth may not be indicative of future growth.
We have
experienced substantial sales growth through acquisitions and new sales center
openings that have increased our size, scope and geographic distribution. During
the past five fiscal years, we have opened 39 new sales centers and have
completed 13 acquisitions. These acquisitions have added 76 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:
|
·
|
penetrate
new markets;
|
|
·
|
identify
appropriate acquisition candidates;
|
|
·
|
complete
acquisitions on satisfactory terms and successfully integrate acquired
businesses;
|
|
·
|
obtain
financing;
|
|
·
|
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 2007,
approximately 65% of our net sales and over 100% 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 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
higher 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.
20
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 international subsidiary
operations;
|
|
·
|
different
political and regulatory
conditions;
|
|
·
|
currency
fluctuations;
|
|
·
|
adverse
tax consequences; and
|
|
·
|
dependence
on other economies.
|
We source
certain products we sell, including our private label products, from Asia and
other international sources. There is a greater 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 international trade, such as tariffs, currency
exchange rates, transportation costs and inflation are additional risks for our
international operations.
A
terrorist attack or the threat of a terrorist attack could have a material
adverse effect on our business.
Discretionary
spending on leisure product offerings such as ours is generally adversely
affected during times of economic or political uncertainty. The potential for
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility could create these types of
uncertainties and negatively impact our business for the short or long-term in
ways that cannot presently be predicted.
21
The table
below summarizes the repurchases of our common stock in the first quarter of
2008:
|
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(3)
|
||||||
|
January
1-31, 2008
|
763
|
$
|
20.20
|
−
|
$
|
54,968,410
|
||||
|
February
1-29, 2008
|
63,527
|
$
|
19.64
|
−
|
$
|
54,968,410
|
||||
|
March
1-31, 2008
|
−
|
$
|
−
|
−
|
$
|
54,968,410
|
||||
|
Total
|
64,290
|
$
|
19.65
|
−
|
||||||
|
(1)
|
Consists
of shares of our common stock surrendered to us by employees in order to
satisfy minimum 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.
|
|
(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.
|
|
(3)
|
As
of April 25, 2008, $55.0 million of the authorized amount remained
available under our share repurchase
program.
|
Exhibits
filed as part of this report are listed in the Index to Exhibits appearing on
page 24.
22
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 April 30, 2008.
|
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
|
23
|
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
|
||||||||||
24