POOL CORP - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2007
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
![](https://www.sec.gov/Archives/edgar/data/0000945841/000094584108000016/newpoolcorp.jpg)
POOL
CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
|
36-3943363
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
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)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, par value $0.001 per share
|
NASDAQ
Global Select Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES x NO ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES ¨ NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. YES x NO ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “small
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 ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES ¨ NOx
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based on the closing sales price of the
Registrant’s common stock as of June 29, 2007 was
$1,860,766,335.
As of
February 22, 2008, the Registrant had 47, 722,617 shares of common
stock outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant’s Proxy Statement to be mailed to stockholders on or about
March 28, 2008 for the
Annual
Meeting to be held on May 6, 2008, are incorporated by reference in
Part III of this Form 10-K.
POOL
CORPORATION
TABLE
OF CONTENTS
Page
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PART
I.
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Item
1.
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1
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Item
1A.
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6
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Item
1B.
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10
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Item
2.
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10
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Item
3.
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12
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Item
4.
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12
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PART
II.
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Item
5.
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13
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Item
6.
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15
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Item
7.
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16
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Item
7A.
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33
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Item
8.
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34
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Item
9.
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62
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Item
9A.
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62
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Item
9B.
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65
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PART III.
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Item
10.
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65
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Item
11.
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65
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Item
12.
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65
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Item
13.
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65
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Item
14.
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65
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PART
IV.
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Item
15.
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66
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67
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PART
I.
General
Based on
industry data, Pool Corporation (the Company, which may be
referred to as POOL, we, us
or our) is the
world’s largest wholesale distributor of swimming pool supplies, equipment and
related leisure products. The Company was incorporated in the State of Delaware
in 1993 under the name SCP Holding Corporation, and in 1995 changed its name to
SCP Pool Corporation. In 2006, the Company changed its name to Pool Corporation.
This change acknowledges the Company’s growth from a regional distributor to a
multi-national, multi-network distribution company.
Our
industry is highly fragmented, and as such, we add considerable value to the
industry by purchasing products from a large number of manufacturers and then
distributing the products and offering a range of services to our customer base
on conditions that are more favorable than these customers could obtain on their
own.
As of
December 31, 2007 we operated 281 sales centers in North America and
Europe.
Our
Industry
We
believe that the swimming pool industry is relatively young, with room for
continued growth from increased penetration of new pools. Of the approximately
70 million homes in the United States that have the economic capacity and
the yard space to have a swimming pool, approximately 12% own a pool. Higher
rates of new home construction from 1996 to 2005 have added to the market
expansion opportunity for pool ownership, particularly in larger pool
markets.
We
believe the long-term prospects of our industry are positively impacted by
favorable demographic and socioeconomic trends. This includes the
expected continued long-term growth in housing units in warmer markets due to
the population migration towards the south and the need to maintain the growing
installed base of pools. The industry has also been positively impacted by the
trend for increased homeowner spending on outdoor living spaces for relaxation
and entertainment. Additionally, consumers frequently bundle the purchase of a
pool with other products as part of a complete backyard makeover. New irrigation
systems and landscaping are often key components to completing a swimming pool
installation or remodel. The irrigation and landscape market has many
characteristics in common with the pool industry, and we believe that it
benefits from the same favorable demographic and socioeconomic trends and will
realize growth rates similar to the pool industry.
The
majority of consumer spending in our industry is derived from the
non-discretionary maintenance of existing swimming pools, including the repair
and replacement of the equipment for those pools. We believe that the
recurring nature of the repair and replacement market has helped maintain a
relatively consistent rate of industry growth historically, even in periods when
unfavorable economic conditions and negative trends in the housing market
adversely impact pool construction activities.
New swimming pool
construction and irrigation starts comprise the bulk of the remaining consumer
spending in our industry. The demand for new pools is driven
by the perceived benefits of pool ownership including relaxation, entertainment,
family activity, exercise and convenience. The industry competes for new pool
sales against other discretionary consumer purchases such as kitchen and
bathroom remodeling, boats, motorcycles, recreational vehicles and
vacations.
General economic
conditions (as commonly measured by Gross Domestic Product or
GDP) and
certain trends in the housing market affect our industry, particularly new pool
and irrigation system starts. Positive GDP trends may have a
favorable impact on industry starts, while negative trends may be unfavorable
for industry starts. We believe there may be some correlation between industry
starts and the rate of housing turnover and home appreciation over time, with
higher rates of home turnover and appreciation having a positive impact on
starts over time.
1
In 2007,
the sharp drop in new home construction, home value deflation in many markets,
the tightening of credit and negative trends in consumer confidence had a
negative impact on the industry and our performance. Since less than 40% of our
sales are tied to new pool or irrigation construction and we estimate
that only 10% to 20% of new pools are constructed along with new home
construction, we do not expect any cyclicality in new housing starts in itself
to have a significant long-term impact on our business. Our expectation is
that the
swimming pool industry will return to an annual growth
rate of
approximately 2% to 6% when the real estate and
credit markets revert to normal.
Our
industry is seasonal and weather is one of the principal external factors that
affects our business. Peak industry activity occurs during the warmest months of
the year, typically April through September. Unseasonable warming or
cooling trends can delay or accelerate the start or end of the pool and
landscape season, impacting our maintenance and repair sales. These impacts at
the shoulders of the season are generally more pronounced in northern
markets. Weather also impacts our sales of construction and
installation products to the extent above average precipitation, late spring
thaws in northern markets and other extreme weather conditions delay, interrupt
or cancel current or planned construction and installation
activities.
The
industry is also affected by other factors including, but not limited to,
consumer attitudes toward pool and landscape products for environmental or
safety reasons.
Business
Strategy and Growth
Our
mission is to provide exceptional value to our customers and suppliers, in order
to provide exceptional return to our shareholders while providing exceptional
opportunities to our employees. Our three core strategies are to promote the
growth of our industry, to promote the growth of our customers’ businesses and
to continuously strive to operate more effectively.
We
promote the growth of the industry through various advertising and promotional
programs intended to raise consumer awareness of the benefits and affordability
of pool ownership, the ease of pool maintenance and the many ways in which a
pool and the surrounding spaces may be enjoyed beyond swimming. These programs
include media advertising, industry-oriented website development such as www.swimmingpool.com™
and public relations campaigns. We use these programs as tools to educate
consumers and lead prospective pool owners to our customers.
We
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our uniquely tailored programs include such
features as customer lead generation, personalized websites, brochures,
marketing campaigns and business development training. As a customer service, we
also provide certain retail store customers assistance with everything from site
selection to store layout and design to business management system
implementation.
We strive
to operate more effectively by continuously focusing on improvements in our
operations such as product sourcing, procurement and logistics initiatives,
adoption of enhanced business practices and improved working capital
management.
In
addition to our efforts aimed at industry and customer growth, we have increased
our product breadth, as described in the “Customers and Products” section below.
We have also expanded our sales center network through acquisitions (which have
been an important source of sales growth), new sales center openings and
expansions of existing sales centers. Since 2003, we have opened 39 new sales
centers (net of sales center closings and consolidations) and successfully
completed 11 acquisitions consisting of 64 sales centers (net of sales center
closings and consolidations).
Based
upon industry data, we believe the industry grew at a 2% to 6% annual rate for
the period between 2000 and 2005 but declined in 2006 and
2007. Historically, our growth has exceeded the industry’s rates and
allowed us to increase market share. We expect our sales growth to be higher
than the industry average due to increases in market share and expansion of our
product offerings.
For
additional discussion of our recent acquisitions, see Note 2 and Note 14 of
“Notes to Consolidated Financial Statements,” included in Item 8 of this Form
10-K. We intend to pursue additional strategic acquisitions, which will allow us
to further penetrate existing markets and expand into new geographic markets and
product categories.
2
Customers
and Products
We serve
roughly 70,000 customers, none of which account for more than 1% of our sales.
We primarily serve five types of customers:
·
|
swimming
pool remodelers and builders;
|
·
|
retail
swimming pool stores;
|
·
|
swimming
pool repair and service businesses;
|
·
|
landscape
construction and maintenance contractors;
and
|
·
|
golf
courses.
|
The
majority of these customers are small, family owned businesses with relatively
limited capital resources.
We
conduct our operations through 281 sales centers in North America and Europe.
Our primary markets, which have the highest concentration of swimming pools, are
California, Florida, Texas and Arizona, representing approximately 54% of our
net sales in 2007. We use a combination of local and international sales and
marketing personnel to promote the growth of our business and develop and
strengthen our customers’ businesses. Our sales and marketing personnel focus on
developing customer programs and promotional activities, creating and enhancing
sales management tools and providing product and market expertise. Our local
sales personnel work from the sales centers and are charged with understanding
and meeting our customers’ specific needs.
We offer
our customers more than 100,000 national brand and private label products. We
believe that our selection of pool equipment, supplies, chemicals, replacement
parts, irrigation and landscape products and complementary products is the most
comprehensive in the industry. The products we sell can be categorized as
follows:
·
|
maintenance
products such as chemicals, supplies and pool
accessories;
|
·
|
repair
and replacement parts for cleaners, filters, heaters, pumps and
lights;
|
·
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packaged
pool kits including walls, liners, braces and coping for in-ground and
above-ground pools;
|
·
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pool
equipment and components for new pool construction and the remodeling of
existing pools;
|
·
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irrigation
and landscape products, including professional lawn care equipment;
and
|
·
|
complementary
products, including:
|
–
|
building
materials used for pool installations and remodeling, such as concrete,
plumbing and electrical components and pool surface and decking
materials; and
|
–
|
other
discretionary recreational and related outdoor lifestyle products that
enhance consumers’ use and enjoyment of outdoor living spaces, such as
pool toys and games, outdoor furniture and
grills.
|
Maintenance
products and repair and replacement parts are non-discretionary in nature,
meaning that these items must be purchased by end-users to maintain existing
swimming pools and landscaped areas. Over 60% of our gross profits are derived
from the sale of products used to maintain and repair these existing features
and less than 40% are derived from the construction and installation (equipment,
materials, plumbing, electrical, etc.) of new pools and landscaping. We
distribute irrigation and landscape products through our Horizon Distributors
(Horizon) network, which we acquired through acquisitions in 2005 and
2006.
Our
complementary product sales accounted for over 9% of our total net sales in 2007
at comparable margins to our traditional product offerings. While complementary
product sales decreased 3% in 2007 due primarily to the downturn in new pool and
irrigation construction, complementary product sales have been an important
factor in our base business sales growth over the past eight years, having grown
from approximately $3.0 million in 1999 to over $180.0 million
in 2007.
We have
identified other product categories that could become part of our complementary
product offerings in the future. We typically introduce two to three categories
each year in certain markets. We then evaluate the performance of these test
categories and focus on those which we believe exhibit long-term growth
potential. In 2008, we intend to continue to expand our complementary products
initiative by increasing the number of locations which offer complementary
products, increasing the number of complementary products offered at certain
locations and continuing a modest broadening of the product offerings on a
company-wide basis.
3
Operating
Strategy
We
operate three distribution networks: the SCP Distributors (SCP) network, the
Superior Pool Products (Superior) network and the Horizon network. The SCP
network consists of 157 sales centers, including 11 locations in Europe, the
Superior network consists of 62 locations and the Horizon network also consists
of 62 locations.
We
distribute swimming pool supplies, equipment and related leisure products
through our SCP and Superior networks, and we distribute irrigation and
landscape products through our Horizon network. We adopted the strategy of
operating two distinct distribution networks within the swimming pool
marketplace primarily for two reasons:
1.
|
To
offer our customers a choice of different distributors, featuring
distinctive product selections and service personnel;
and
|
2.
|
To
increase the level of customer service and operational efficiency provided
by the sales centers in each network by promoting healthy competition
between the two networks.
|
We
evaluate our sales centers based upon their performance relative to
predetermined standards that include both financial and operational measures.
Our corporate support groups provide our field operations with various services
including customer and vendor related programs, information systems support and
expert resources to help achieve their goals. We believe our incentive programs
and feedback tools, along with the competitive nature of our internal networks,
stimulate and enhance employee performance.
Distribution
Our sales
centers are located near customer concentrations, typically in industrial,
commercial or mixed-use zones. Customers may pick up products at any sales
center location, or products may be delivered via our trucks or third party
carriers.
Our sales
centers maintain well-stocked inventories to meet customers’ immediate needs. We
utilize warehouse management technology to optimize receiving, inventory
control, picking, packing and shipping functions.
In
addition, we operate five centralized shipping locations and four
stand-alone construction materials centers that redistribute products we
purchase in bulk quantities to our sales centers or directly to
customers.
Purchasing
and Suppliers
We enjoy
good relationships with our suppliers, who generally offer competitive pricing,
return policies and promotional allowances. It is customary in our industry for
manufacturers to seasonally offer extended payment terms to qualifying
purchasers such as POOL. These terms are typically available to us for
pre-season or early season purchases.
We
initiated a preferred vendor program in 1999 which encourages our buyers to
purchase products from a smaller number of vendors. We work closely with these
vendors to develop programs and services to better meet the needs of our
customers and concentrate our purchasing activities. These practices, together
with a more comprehensive service offering, have resulted in improved margins at
the sales center level.
We
regularly evaluate supplier relationships and consider alternate sourcing to
assure competitive cost, service and quality standards. Our largest suppliers
include Pentair Corporation, Hayward Pool Products, Inc. and Zodiac Pool Care,
Inc., which accounted for approximately 15%, 11% and 9%, respectively, of the
cost of products we sold in 2007.
4
Competition
Based on
industry knowledge and available data, management believes we are the largest
wholesale distributor of swimming pool and related backyard products and the
only truly national wholesale distributor focused on the swimming pool industry
in the United States. We are also one of the top three distributors of landscape
and irrigation products in the United States, and we compete against one
national wholesale distributor of these products. We face intense competition
from many regional and local distributors in our markets and to a lesser extent,
mass-market retailers and large pool supply retailers with their own internal
distribution networks.
Some
geographic markets we serve, particularly our largest, higher density markets in
California, Florida, Texas and Arizona, are more competitive than others.
Barriers to entry in our industry are relatively low. We compete with other
distributors for rights to distribute brand-name products. If we lose or are
unable to obtain these rights, we might be materially and adversely affected. We
believe that the size of our operations allows us to compete favorably for such
distribution rights.
We
believe that the principal competitive factors in swimming pool and landscape
supply distribution are:
·
|
the
breadth and availability of products
offered;
|
·
|
the quality and level of customer
service;
|
·
|
the breadth and depth of sales and marketing
programs;
|
·
|
consistency and stability of business relationships with customers;
and
|
·
|
competitive product pricing.
|
We
believe that we generally compete favorably with respect to each of these
factors.
Seasonality
and Weather
For a
discussion regarding seasonality and weather, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Environmental,
Health and Safety Regulations
Our
business is subject to regulation under local fire codes and international,
federal, state and local environmental and health and safety requirements,
including regulation by the Environmental Protection Agency, the Department of
Transportation, the Occupational Safety and Health Administration, the National
Fire Protection Agency and the International Maritime Organization. Most of
these requirements govern the packaging, labeling, handling, transportation,
storage and sale of chemicals and fertilizers. We store certain types of
chemicals and/or fertilizers at each of our sales centers, and the storage of
these items is strictly regulated by local fire codes. In addition, we sell
algaecides and pest control products that are regulated as pesticides under the
Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide
laws. These laws are primarily related to labeling, annual registration and
licensing.
Employees
We
employed approximately 3,500 people at December 31, 2007. Given the seasonal
nature of our business, our peak employment period is the summer, when we add
approximately 500 more employees to our work force to meet seasonal
demand.
Intellectual
Property
We
maintain both domestic and foreign registered trademarks primarily for our
private label products that are important to our current and future business
operations. We also own rights to several Internet domain names.
5
Geographic
Areas
Net sales
by geographic region were as follows for the past three fiscal years (in
thousands):
Year
Ended December 31,
|
||||||||
2007
|
2006
|
2005
|
||||||
United
States
|
$
|
1,774,771
|
$
|
1,779,085
|
$
|
1,442,332
|
||
International
|
153,596
|
130,677
|
110,327
|
|||||
$
|
1,928,367
|
$
|
1,909,762
|
$
|
1,552,659
|
Net
property and equipment by geographic region was as follows (in
thousands):
December
31,
|
||||||||
2007
|
2006
|
2005
|
||||||
United
States
|
$
|
30,505
|
$
|
29,825
|
$
|
22,520
|
||
International
|
3,718
|
3,808
|
3,078
|
|||||
$
|
34,223
|
$
|
33,633
|
$
|
25,598
|
Available
Information
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our website at www.poolcorp.com as soon as reasonably practical after
we electronically file such reports with, or furnish them to, the Securities and
Exchange Commission.
Additionally,
we have adopted a Code of Business Conduct and Ethics, applicable to all
employees, officers and directors, which is available free of charge on our
website.
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.
6
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. 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 Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality and Quarterly Fluctuations,” of this Form 10-K.
Our
distribution business is highly dependent on our ability to maintain favorable
relationships with suppliers.
As a
distribution company, maintaining favorable relationships with our suppliers is
critical to the success of our business. We believe that we add considerable
value to the swimming pool supply chain and landscape supply chain by purchasing
products from a large number of manufacturers and distributing the products to a
highly fragmented customer base on conditions that are more favorable than these
customers could obtain on their own. We believe that we currently enjoy good
relationships with our suppliers, who generally offer us competitive pricing,
return policies and promotional allowances. However, our inability to maintain
favorable relationships with our suppliers could have an adverse effect on our
business.
Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
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.
7
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.
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 11 acquisitions. These acquisitions have added 64 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.
8
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.
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.
9
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.
None.
We lease
the POOL corporate offices, which consist of approximately 50,000 square feet of
office space in Covington, Louisiana, from an entity in which we have a 50%
ownership interest. We own three sales centers in Florida and one sales center
in Texas. We lease all of our other properties and the majority of our leases
have three to seven year terms. As of December 31, 2007, we had seven leases
that expire between 2018 and 2027. Most of our leases contain renewal
options, some of which involve rent increases. In addition to minimum rental
payments, which are set at competitive rates, certain leases require
reimbursement for taxes, maintenance and insurance.
Our sales
centers range in size from approximately 2,000 square feet to 100,000 square
feet and generally consist of warehouse, counter, display and office space. Our
centralized shipping locations (CSLs) and construction materials centers range
in size from 16,000 square feet to 132,000 square feet.
We
believe that our facilities are well maintained, suitable for our business and
occupy sufficient space to meet our operating needs. As part of our normal
business, we regularly evaluate sales center performance and site suitability
and may relocate a sales center or consolidate two locations if a sales center
is redundant in a market, under performing or otherwise deemed unsuitable. We do
not believe that any single lease is material to our operations.
The table
below summarizes the changes in our sales centers during the year ended
December 31, 2007:
Network
|
12/31/06
|
New
Locations
|
Consolidated
&
Closed
Locations (1)
|
Acquired
Locations
|
12/31/07
|
||
SCP
|
134
|
6
|
(3
|
)
|
-
|
137
|
|
SPP
|
62
|
1
|
(1
|
)
|
-
|
62
|
|
Horizon
|
60
|
4
|
(2
|
)
|
-
|
62
|
|
Total
Domestic
|
256
|
11
|
(6
|
)
|
-
|
261
|
|
SCP
International
|
18
|
1
|
-
|
1
|
20
|
||
Total
|
274
|
12
|
(6
|
)
|
1
|
281
|
(1)
|
Consolidated
sales centers are those locations where we expect to transfer the majority
of the existing business to our nearby sales center locations. During
2007, we consolidated four sales centers and closed two sales
centers. One of the consolidations was related to Horizon’s
CSL, which was previously counted as a separate sales center location
since it served walkup customers directly. In 2007, this
customer activity was consolidated with Horizon’s nearby sales center and
this location now serves exclusively as a CSL. In the fourth
quarter of 2007, we consolidated three other sales centers and closed two
sales centers.
|
10
The table
below identifies the number of sales centers in each state or country by
distribution network as of December 31, 2007:
Location
|
SCP
|
Superior
|
Horizon
|
Total
|
|||
United
States
|
|||||||
California
|
21
|
18
|
21
|
60
|
|||
Florida
|
29
|
8
|
-
|
37
|
|||
Texas
|
14
|
4
|
13
|
31
|
|||
Arizona
|
5
|
4
|
10
|
19
|
|||
Georgia
|
6
|
2
|
1
|
9
|
|||
Tennessee
|
4
|
3
|
-
|
7
|
|||
Alabama
|
4
|
2
|
-
|
6
|
|||
Nevada
|
2
|
1
|
3
|
6
|
|||
New
York
|
6
|
-
|
-
|
6
|
|||
Washington
|
1
|
-
|
5
|
6
|
|||
Louisiana
|
5
|
-
|
-
|
5
|
|||
New
Jersey
|
3
|
2
|
-
|
5
|
|||
Ohio
|
2
|
3
|
-
|
5
|
|||
Colorado
|
1
|
1
|
2
|
4
|
|||
Illinois
|
3
|
1
|
-
|
4
|
|||
Indiana
|
2
|
2
|
-
|
4
|
|||
Missouri
|
3
|
1
|
-
|
4
|
|||
North
Carolina
|
3
|
1
|
-
|
4
|
|||
Oregon
|
-
|
-
|
4
|
4
|
|||
Pennsylvania
|
3
|
1
|
-
|
4
|
|||
Michigan
|
2
|
1
|
-
|
3
|
|||
Oklahoma
|
2
|
1
|
-
|
3
|
|||
South
Carolina
|
2
|
1
|
-
|
3
|
|||
Virginia
|
2
|
1
|
-
|
3
|
|||
Arkansas
|
2
|
-
|
-
|
2
|
|||
Idaho
|
-
|
-
|
2
|
2
|
|||
Kansas
|
1
|
1
|
-
|
2
|
|||
Massachusetts
|
2
|
-
|
-
|
2
|
|||
Minnesota
|
1
|
1
|
-
|
2
|
|||
Connecticut
|
1
|
-
|
-
|
1
|
|||
Iowa
|
1
|
-
|
-
|
1
|
|||
Kentucky
|
-
|
1
|
-
|
1
|
|||
Maryland
|
1
|
-
|
-
|
1
|
|||
Mississippi
|
1
|
-
|
-
|
1
|
|||
Nebraska
|
1
|
-
|
-
|
1
|
|||
New
Mexico
|
1
|
-
|
-
|
1
|
|||
Utah
|
-
|
-
|
1
|
1
|
|||
Wisconsin
|
-
|
1
|
-
|
1
|
|||
Total
United States
|
137
|
62
|
62
|
261
|
|||
International
|
|||||||
Canada
|
8
|
-
|
-
|
8
|
|||
France
|
5
|
-
|
-
|
5
|
|||
Portugal
|
2
|
-
|
-
|
2
|
|||
United
Kingdom
|
2
|
-
|
-
|
2
|
|||
Italy
|
1
|
-
|
-
|
1
|
|||
Spain
|
1
|
-
|
-
|
1
|
|||
Mexico
|
1
|
-
|
-
|
1
|
|||
Total
International
|
20
|
-
|
-
|
20
|
|||
Total
|
157
|
62
|
62
|
281
|
11
From time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate disposition of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
No
matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2007.
12
PART
II.
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“POOL”. On February 22, 2008, there were approximately 14,667
beneficial holders of our common stock. The table below sets forth the high and
low sales prices of our common stock as well as dividends declared for each
quarter during the last two fiscal years.
Dividends
|
||||||||||
High
|
Low
|
Declared
|
||||||||
Fiscal
2007
|
||||||||||
First
Quarter
|
$
|
40.73
|
$
|
33.77
|
$
|
0.105
|
||||
Second
Quarter
|
42.62
|
34.85
|
0.120
|
|||||||
Third
Quarter
|
39.09
|
24.08
|
0.120
|
|||||||
Fourth
Quarter
|
28.24
|
19.70
|
0.120
|
|||||||
Fiscal
2006
|
||||||||||
First
Quarter
|
$
|
47.67
|
$
|
35.42
|
$
|
0.090
|
||||
Second
Quarter
|
50.20
|
39.89
|
0.105
|
|||||||
Third
Quarter
|
46.83
|
35.35
|
0.105
|
|||||||
Fourth
Quarter
|
42.75
|
38.01
|
0.105
|
We
initiated quarterly dividend payments to our shareholders in the second quarter
of 2004, and we have continued payments in each subsequent quarter. Our Board of
Directors (our Board) has increased the dividend amount four times including in
the fourth quarter of 2004 and annually in the second quarter of 2005, 2006 and
2007. Payment of future dividends will be at the discretion of our Board, after
taking into account various factors, including earnings, capital requirements,
financial position, contractual restrictions and other relevant business
considerations. We plan to continue to pay quarterly dividends, but there can be
no assurance that dividends will be declared or paid any time in the future if
our Board deems that there is a better use of those funds.
Stock
Performance Graph
The
information included under the caption “Stock Performance Graph” in this
Item 5 of this Annual Report on Form 10-K is not deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A
or 14C under the Securities Exchange Act of 1934 (the 1934 Act) or to the
liabilities of Section 18 of the 1934 Act, and will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the 1934 Act, except to the extent we specifically incorporate it by
reference into such a filing.
The graph
below compares the total stockholder return on our common stock for the last
five fiscal years with the total return on the NASDAQ US Index and the S&P
MidCap 400 Index for the same period, in each case assuming the investment of
$100 on December 31, 2002 and the reinvestment of all dividends. We believe the
S&P MidCap 400 Index includes companies with capitalization comparable to
ours. Additionally, we chose the S&P MidCap 400 Index for comparison, as
opposed to an industry index, because we do not believe that we can reasonably
identify a peer group or a published industry or line-of-business index that
contains companies in a similar line of business.
13
![](https://www.sec.gov/Archives/edgar/data/0000945841/000094584108000016/graph2007b.jpg)
Base
|
INDEXED
RETURNS
|
|||||
Period
|
Years
Ending
|
|||||
Company
/ Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
Pool
Corporation
|
100
|
167.88
|
247.55
|
291.54
|
309.84
|
159.25
|
S&P
MidCap 400 Index
|
100
|
135.62
|
157.97
|
177.81
|
196.16
|
211.81
|
NASDAQ
US Index
|
100
|
150.36
|
163.00
|
166.58
|
183.68
|
201.91
|
Purchases
of Equity Securities
The table
below summarizes the repurchases of our common stock in the fourth quarter of
2007.
Period
|
Total
number of shares purchased(1)
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plan(2)
|
Maximum
approximate dollar value that may yet be purchased under
the
plan(3)
|
||||||
October
1-31, 2007
|
434,752
|
$
|
25.07
|
434,752
|
$
|
54,968,410
|
||||
November
1-30, 2007
|
-
|
$
|
-
|
-
|
$
|
54,968,410
|
||||
December
1-31, 2007
|
-
|
$
|
-
|
-
|
$
|
54,968,410
|
||||
Total
|
434,752
|
$
|
25.07
|
434,752
|
(1)
|
These
shares may include 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. No shares were surrendered in the fourth
quarter.
|
(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)
|
In
2007, we purchased a total of $137.7 million, or 4.1 million shares, at an
average price or $33.51 per share. As of February 22, 2008,
$55.0 million of the authorized amount remained
available.
|
14
The table
below sets forth selected financial data from the Consolidated Financial
Statements. You should read this information in conjunction with the discussions
in Item 7 of this Form 10-K and with the Consolidated Financial Statements and
accompanying Notes in Item 8 of this Form 10-K.
Year
Ended December 31, (1)
|
||||||||||||||||
(in
thousands, except per share data)
|
2007
|
2006
|
2005(2)
|
2004(2)
|
2003(2)
|
|||||||||||
Statement
of Income Data
|
||||||||||||||||
Net
sales
|
$
|
1,928,367
|
$
|
1,909,762
|
$
|
1,552,659
|
$
|
1,310,853
|
$
|
1,155,832
|
||||||
Net
income
|
69,394
|
95,024
|
80,455
|
63,406
|
48,249
|
|||||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$
|
1.42
|
$
|
1.83
|
$
|
1.53
|
$
|
1.20
|
$
|
0.91
|
||||||
Diluted
|
$
|
1.37
|
$
|
1.74
|
$
|
1.45
|
$
|
1.13
|
$
|
0.87
|
||||||
Cash
dividends declared
|
||||||||||||||||
per
common share
|
$
|
0.465
|
$
|
0.405
|
$
|
0.34
|
$
|
0.20
|
$
|
—
|
||||||
Balance Sheet Data(3)
|
||||||||||||||||
Working
capital(4)
|
$
|
250,849
|
$
|
227,631
|
$
|
193,525
|
$
|
128,189
|
$
|
60,030
|
||||||
Total
assets
|
814,854
|
774,562
|
740,850
|
488,075
|
455,439
|
|||||||||||
Total
long-term debt,
|
||||||||||||||||
including
current portion
|
282,525
|
191,157
|
129,100
|
50,420
|
42,507
|
|||||||||||
Stockholders'
equity(5)
|
208,791
|
277,684
|
281,724
|
227,544
|
200,408
|
|||||||||||
Other
|
||||||||||||||||
Base
business sales growth(6)
|
(1
|
)%
|
10
|
%
|
14
|
%
|
10
|
%
|
11
|
%
|
||||||
Number
of sales centers
|
281
|
274
|
246
|
201
|
197
|
____________________
(1)
|
During
the years 2003 to 2007, we successfully completed 11 acquisitions
consisting of 64 sales centers. For information about our recent
acquisitions, see Note 2 of “Notes to Consolidated Financial
Statements,” included in Item 8 of this Form
10-K.
|
(2)
|
As
adjusted to reflect the impact of share-based compensation expense related
to the adoption of SFAS 123(R), Share-Based Payment,
using the modified retrospective transition
method.
|
(3)
|
The
2005 balance sheet data has been adjusted to correct the classification of
our deferred tax balances.
|
(4)
|
The
approximate 51% increase in working capital from 2004 to 2005 is due
primarily to a greater amount of early buy inventory purchases that we
made and received during the fourth quarter of 2005 and the Horizon
acquisition. This increase was partially offset by the deferral of our
third and fourth quarter 2005 estimated federal income tax payments. For
further discussion, see the “LIQUIDITY AND CAPITAL RESOURCES” section
included in Item 7 of this Form
10-K.
|
(5)
|
The
beginning stockholders’ equity balance in 2007 reflects a reduction to
retained earnings of approximately $0.5 million related to the
implementation of FASB Interpretation
No. (FIN) 48,
Accounting
for Uncertainty in Income Taxes, an
interpretation of SFAS 109,
Accounting for Income Taxes.
|
(6)
|
For
a discussion regarding our calculation of base business sales growth, see
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - RESULTS OF OPERATIONS,” of this
Form 10-K.
|
15
2007
FINANCIAL OVERVIEW
Financial
Results
Our 2007
financial results were negatively impacted by a difficult combination of
external conditions, particularly the depressed housing and real estate markets
which intensified throughout 2007. Falling home values across much of the
country and tightening credit markets created a significant drop in new
construction activities. Unfavorable weather conditions also had an adverse
impact during the first half of 2007, both on sales of construction products and
on maintenance and repair products. Extended winter conditions
delayed the start of the pool season in the Central and Northeast
regions. Record wet weather in Texas and Oklahoma caused decreases
across customer types, greatly hindering construction and installation
activities and affecting replacement and repair
activities. Considering the magnitude of these unfavorable external
trends, we believe our sales performance compares favorably to 2006 and
indicates our success in gaining market share and improving our competitive
position.
Base
business sales decreased 1% in 2007 as the significant decline in new pool
construction permits negatively impacted demand for new pool and irrigation
products. This impact was more pronounced in some of our larger markets, most
notably in Florida. These sales 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.
Complementary product sales, which are sold primarily in the new pool
construction market, decreased 3% compared to 2006.
For a
discussion of our base business calculation, see the RESULTS OF OPERATIONS
section below.
Our gross
profit as a percentage of net sales (gross margin) decreased 80 basis points to
27.5% in 2007 compared to 2006. This decrease reflects the impact of competitive
pricing pressures resulting from the current market environment and unfavorable
comparisons to 2006 gross margin. In 2006, our gross margin improved
by 40 basis points over 2005 due to benefits from our supply chain management
initiatives including pre-price increase purchases in the fourth quarter of 2005
and the second quarter of 2006.
Selling
and administrative expenses (operating expenses) increased 7% compared to 2006.
This increase includes the addition of expenses from the Wickham acquisition in
August 2006, investments in 29 new sales centers opened since the beginning of
2006, an increase in bad debt expense, higher expenses related to existing sales
center expansions and relocations and higher freight costs. These higher
expenses were partially offset by lower incentive compensation and the impact of
cost control initiatives.
Our
operating income decreased 20% to $133.8 million in 2007 while operating income
as a percentage of net sales (operating margin) decreased to 6.9% from 8.8% in
2006. Interest expense increased 46% for 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 27% to $69.4 million compared to 2006 and included $0.9 million of net
equity earnings from our investment in Latham Acquisition Corporation
(LAC).
Financial
Position and Liquidity
Cash
provided by operations increased $2.6 million to $71.6 million in 2007 due
primarily to favorable impacts from changes in working capital balances, which
offset the decrease in net income.
Coupled
with net proceeds from other financing activities of approximately $98.5
million, cash provided by operations helped fund the following in
2007:
·
|
share
repurchases of $139.7 million, including $137.7 million of open market
repurchases under our Board authorized repurchase
plan;
|
·
|
the
payment of our quarterly cash dividends to shareholders, which we
increased in the second quarter of
2007;
|
·
|
capital
expenditures of $10.9 million; and
|
·
|
financing
of over $10.0 million in working capital for our 12 new sales centers
opened in 2007.
|
16
Our
accounts receivable balance decreased 9% to $141.1 million at December 31, 2007.
Days sales outstanding (DSO) increased between periods to 36.3 days at
December 31, 2007 compared to 35.0 days at
December 31, 2006. Our allowance for doubtful accounts
increased to $9.9 million at December 31, 2007 from $4.9 million at
December 31, 2006. This increase reflects slower payments from customers in
markets that have been adversely impacted by the decline in new pool and
irrigation construction.
Our net
inventory balance increased $47.6 million to $379.7 million at December 31,
2007. The increase reflects inventory for the 12 new sales centers
opened in 2007, higher inventory levels attributable to the decline in fourth
quarter sales and higher quantities of early buy inventory received in the
fourth quarter of 2007 than in the fourth quarter of 2006. Inventory
turns, as calculated on a trailing 12 month basis, slowed to 3.7 times
in 2007 from 3.9 times in 2006.
Total
debt outstanding increased to $350.9 million at December 31, 2007 compared
to $265.4 million at December 31, 2006. This increase is attributable
to increased borrowings to fund our 2007 share repurchases and slightly higher
working capital levels. We continue to maintain a healthy current ratio of 1.8,
which was unchanged from December 31, 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
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; 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 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, 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. A 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.
17
OUTLOOK
Our
objectives in 2008 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.
|
We
believe the prolonged downturn in real estate markets and restricted access to
credit, coupled with the uncertain general economic environment, will continue
to adversely impact new pool and irrigation construction. Given the
challenges in the external environment, we will not provide any earnings per
share guidance until we gain more visibility for how our 2008 results are
tracking.
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.
Our
business is subject to significant risks, including weather, competition,
general economic conditions and other risks as detailed in Item 1A of this Form
10-K.
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our Consolidated Financial Statements in accordance with U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Management identifies critical accounting estimates as:
·
|
those
that require the use of assumptions about matters that are inherently and
highly uncertain at the time the estimates are made;
and
|
·
|
those
for which changes in the estimate or assumptions, or the use of different
estimates and assumptions, could have a material impact on our
consolidated results of operations or financial
condition.
|
Management
has discussed the development, selection and disclosure of our critical
accounting estimates with the Audit Committee of our Board. We believe the
following critical accounting estimates require us to make the most difficult,
subjective or complex judgments.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for an estimate of the losses we
will incur if our customers do not make required payments. We perform periodic
credit evaluations of our customers and typically do not require collateral.
Consistent with industry practices, we generally require payment from our
customers within 30 days except for sales under early buy programs for which we
provide extended payment terms to qualified customers. The extended terms
usually require payments in equal installments in April, May and June or May and
June, depending on geographical location. Credit losses have generally been
within or better than our expectations.
As our
business is seasonal, our customers’ businesses are also seasonal. Sales are
lowest in the winter months and our past due accounts receivable balance as a
percentage of total receivables generally increases during this time. We provide
reserves for uncollectible accounts based on the accounts receivable aging
ranging from 0.1% for amounts currently due up to 100% for specific accounts
more than 60 days past due.
18
At the
end of each quarter, we perform a reserve analysis of all accounts with past due
balances greater than $20,000. Additionally, we perform a separate reserve
analysis on the balance of our accounts receivables with emphasis on the
remainder of the past due portion of the aging. As we review these past due
accounts, we evaluate collectibility based on a combination of factors,
including:
·
|
aging
statistics and trends;
|
·
|
customer
payment history;
|
·
|
independent
credit reports; and
|
·
|
discussions
with customers.
|
During
the year, we write off account balances when we have exhausted reasonable
collection efforts and determined that the likelihood of collection is remote.
Such write-offs are charged against our allowance for doubtful accounts. In the
past five years, write-offs have averaged approximately 0.1% of net
sales.
If the
balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2007, pretax income would change by approximately
$1.2 million and earnings per share would change by approximately $0.02 per
diluted share based on the number of diluted shares outstanding at
December 31, 2007.
Inventory
Obsolescence
Product
inventories represent the largest asset on our balance sheet. Our goal is to
manage our inventory such that we minimize stock-outs to provide the highest
level of service to our customers. To do this, we maintain at each sales center
an adequate inventory of stock keeping units (SKUs) with the highest sales
volume. At the same time, we continuously strive to better manage our slower
moving classes of inventory, which are not as critical to our customers and
thus, inherently have lower velocity. Sales centers classify products into 13
classes based on sales at that location over the past 12 months. All inventory
is included in these classes, except for non-stock special order items and
products with less than 12 months of usage. The table below presents a
description of these inventory classes:
Class
0
|
new
products with less than 12 months usage
|
Classes
1-4
|
highest
sales value items, which represent approximately 80% of net sales at the
sales center
|
Classes
5-12
|
lower
sales value items, which we keep in stock to provide a high level of
customer service
|
Class
13
|
products
with no sales for the past 12 months, excluding special order products not
yet
|
delivered
to the customer
|
|
Null
class
|
non-stock
special order items
|
There is
little risk of obsolescence for products in classes 1-4 because products in
these classes generally turn quickly. We establish our reserve for inventory
obsolescence based on inventory classes 5-13, which we believe represent some
exposure to inventory obsolescence, with particular emphasis on SKUs with the
least sales over the previous 12 months. The reserve is intended to reflect
the value of inventory that we may not be able to sell at a profit. We provide a
reserve of 5% for inventory in classes 5-13 and non-stock inventory as
determined at the sales center level. We also provide an additional 5% reserve
for excess inventory in classes 5-12 and an additional 45% reserve for excess
inventory in class 13. We determine excess inventory, which is defined as the
amount of inventory on hand in excess of the previous 12 months usage, on a
company-wide basis.
19
In
evaluating the adequacy of our reserve for inventory obsolescence, we consider a
combination of factors including:
·
|
the
level of inventory in relationship to historical sales by product,
including inventory usage by class based on product sales at both the
sales center and Company levels;
|
·
|
changes
in customer preferences;
|
·
|
seasonal
fluctuations in inventory levels;
|
·
|
geographical
location; and
|
·
|
new
product offerings.
|
Our
reserve for inventory obsolescence may periodically require adjustment as
changes occur in the above-identified factors.
If the
balance of our inventory reserve increased or decreased by 20% at
December 31, 2007, pretax income would change by approximately
$0.7 million and earnings per share would change by approximately $0.01 per
diluted share based on the number of diluted shares outstanding at
December 31, 2007.
Vendor
Incentives
We
account for vendor incentives in accordance with the Emerging Issues Task Force
Issue 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor. Many of our vendor arrangements provide for us to receive
incentives of specified amounts of consideration, payable to us when we achieve
any of a number of measures. These measures are generally related to the volume
level of purchases from our vendors and may include negotiated pricing
arrangements. We account for vendor incentives as if they are a reduction of the
prices of the vendor’s products and therefore a reduction of inventory until we
sell the product, at which time such incentives are recognized as a reduction of
cost of sales in our income statement.
Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels that
mark our progress toward earning the incentives. We accrue vendor incentives on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. Our estimates for cumulative purchases and
sales of qualifying products are driven by our sales projections, which can be
significantly impacted by a number of external factors including weather and
changes in economic conditions. Changes in our purchasing mix also impact our
incentive estimates, as incentive rates can vary depending on our volume of
purchases from specific vendors. We continually revise these estimates
throughout the year to reflect actual purchase levels and trends. As a result,
our estimated quarterly vendor incentive accruals may include cumulative
catch-up adjustments to reflect any changes in our estimates between reporting
periods.
If market
conditions were to change, vendors may change the terms of some or all of these
programs. Although such changes would not affect the amounts we have recorded
related to products already purchased, they may lower or raise our gross margins
for products purchased and sold in future periods.
Income
Taxes
We record
deferred tax assets or liabilities based on differences between the financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future.
As of
December 31, 2007, and in accordance with the provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 109,
Accounting for Income
Taxes, United States taxes were not provided on undistributed earnings of
our foreign subsidiaries, as we have invested or expect to invest the
undistributed earnings indefinitely. If in the future these earnings are
repatriated to the United States, or if we determine that the earnings will be
remitted in the foreseeable future, additional tax provisions may be
required.
20
We hold,
through our wholly owned affiliates, cash balances in the countries in which we
operate, including amounts held outside the United States. Most of the amounts
held outside the United States could be repatriated to the United States, but,
under current law, may be subject to United States federal income taxes, less
applicable foreign tax credits. Repatriation of some foreign balances is
restricted by local laws including the imposition of withholding taxes in some
jurisdictions.
We have
operations in 38 states and seven foreign countries. The amount of income taxes
we pay is subject to adjustment by the applicable tax authorities. We are
subject to regular audits by federal, state and foreign tax authorities. Our
estimate for the potential outcome of any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved or when statutes of limitation
on potential assessments expire. These adjustments may include differences
between the estimated deferred tax liability that we have recorded for equity
earnings in unconsolidated investments and the actual taxes paid upon the return
of undistributed equity earnings through a manner other than a capital
transaction. As a result of these uncertainties, our total income tax provision
may fluctuate on a quarterly basis.
In June
2006, the FASB issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income
Taxes, an
interpretation of SFAS 109, Accounting for Income Taxes, to create a
single model to address accounting for uncertainty in tax positions. We adopted
FIN 48 effective January 1, 2007, as required. We recorded the cumulative impact
of adopting FIN 48 in retained earnings. We anticipate that the accounting under
the provisions of FIN 48 may provide for greater volatility in our effective tax
rate as items are derecognized or as we record changes in measurement in interim
periods.
Incentive
Compensation Accrual
We have
an incentive compensation structure designed to attract, motivate and retain
employees. Our incentive compensation packages include bonus plans that are
specific to each group of eligible participants and their levels and areas of
responsibility. The majority of our bonus plans have annual cash payments that
are based primarily on objective performance criteria, with a component based on
management’s discretion. We calculate bonuses as a percentage of salaries based
on the achievement of certain key measurable financial and operational results,
including budgeted operating income and diluted earnings per share. We generally
make bonus payments at the end of February following the most recent completed
fiscal year.
The
objectives for our bonus plans are set at the inception of the bonus plan year
using both historical information and forecasted results of operations for the
current plan year. The Compensation Committee of our Board approves these
objectives for certain bonus plans. We record an incentive compensation accrual
at the end of each month using management’s estimate of the total overall
incentives earned based on the amount of progress achieved towards the stated
bonus plan objectives. During the third and fourth quarters and as of our fiscal
year end, we adjust our estimated incentive compensation accrual based on our
detailed analysis of each bonus plan, the participants’ progress toward
achievement of their specific bonus plan objectives and management’s estimates
related to the discretionary components of the bonus plans. Due to both the
discretionary components of the bonus plans and the timing of the approval and
payment of the annual bonuses, our estimated quarterly incentive compensation
expense and accrual balances may vary relative to actual annual bonus expense
and payouts.
Goodwill
Our
largest intangible asset is goodwill. At December 31, 2007, our
goodwill balance was $155.2 million, representing 19% of total assets. Goodwill
represents the excess of the amount we paid to acquire a company over the
estimated fair value of tangible assets and identifiable intangible assets
acquired, less liabilities assumed.
We
account for goodwill under the provisions of SFAS 142, Goodwill and Other Intangible
Assets. Under these rules, we test goodwill for impairment annually or on
a more frequent basis if events or changes in circumstances occur that indicate
potential impairment. If the estimated fair value of any of our reporting
units has fallen below their carrying value, we will compare the estimated fair
value of the reporting units’ goodwill to its carrying value. If the carrying
value of a reporting units’ goodwill exceeds its estimated fair value, we will
recognize the difference as an impairment loss in operating income.
21
Our
goodwill impairment test requires a comparison of the estimated fair value of
each reporting unit to its carrying value, including goodwill. We estimate the
fair value of our reporting units based on a discounted cash flow approach,
which requires us to make several assumptions about projected future cash flows
and appropriate discount rates. If our assumptions or estimates change, we could
incur charges in future periods for goodwill impairment.
In
October 2007, we completed our annual goodwill impairment test and determined
there was no impairment.
Recent
Accounting Pronouncements
For
information about recent accounting pronouncements, see Note 1 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
RESULTS
OF OPERATIONS
The table
below summarizes information derived from our Consolidated Statements of Income
expressed as a percentage of net sales for the past three fiscal
years:
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of sales
|
72.5
|
71.7
|
72.1
|
|||||||
Gross
profit
|
27.5
|
28.3
|
27.9
|
|||||||
Selling
and administrative expenses
|
20.6
|
19.5
|
19.1
|
|||||||
Operating
income
|
6.9
|
8.8
|
8.7
|
|||||||
Interest
expense, net
|
1.1
|
0.8
|
0.4
|
|||||||
Income
before income taxes and equity earnings
|
5.8
|
8.0
|
8.3
|
Note:
|
Due
to rounding, percentages may not add to operating income or income before
income taxes and equity earnings.
|
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.
22
Fiscal
Year 2007 compared to Fiscal Year 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)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Net
sales
|
$
|
1,877,107
|
$
|
1,894,169
|
$
|
51,260
|
$
|
15,593
|
$
|
1,928,367
|
$
|
1,909,762
|
||
Gross
profit
|
516,375
|
535,510
|
14,271
|
4,438
|
530,646
|
539,948
|
||||||||
Gross
margin
|
27.5
|
%
|
28.3
|
%
|
27.8
|
%
|
28.5
|
%
|
27.5
|
%
|
28.3
|
%
|
||
Selling
and administrative expenses
|
384,853
|
369,498
|
12,019
|
3,068
|
396,872
|
372,566
|
||||||||
Expenses
as a % of net sales
|
20.5
|
%
|
19.5
|
%
|
23.4
|
%
|
19.7
|
%
|
20.6
|
%
|
19.5
|
%
|
||
Operating
income
|
131,522
|
166,012
|
2,252
|
1,370
|
133,774
|
167,382
|
||||||||
Operating
margin
|
7.0
|
%
|
8.8
|
%
|
4.4
|
%
|
8.8
|
%
|
6.9
|
%
|
8.8
|
%
|
We
exclude the following sales centers from our base business results 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.
For
purposes of comparing operating results for the year ended December 31, 2007 to
the year ended December 31, 2006, we have excluded 15 acquired sales
centers from base business for the periods identified in the table below and an
average of four sales centers opened in new markets, of which two are still
excluded from base business as of year end. Due to the timing of the
two sales centers closed during the fourth quarter of 2007, these locations have
not been excluded for the purpose of calculating base business for all periods
presented. The three sales centers consolidated with existing sales centers
during the fourth quarter of 2007 will remain part of the base business since we
expect to transfer
the majority of the existing business to our nearby
locations.
Acquired
|
Acquisition
Date
|
Sales
Centers Acquired
|
Period
Excluded
(1)
|
|||
Wickham
Supply, Inc. and Water Zone, LP
|
August
2006
|
14
|
January
– October 2007 and
August
– October 2006
|
|||
Tor-Lyn,
Limited
|
February
2007
|
1
|
February
– December 2007
|
(1)
|
After
15 months of operations, we include acquired and new market sales centers
in the base business calculation including the comparative prior year
period.
|
For
information about our recent acquisitions, see Note 2 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
23
Net
Sales
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2007
|
2006
|
Change
|
||||||||
Net
sales
|
$
|
1,928.4
|
$
|
1,909.8
|
$
|
18.6
|
1
|
%
|
The
increase in net sales is primarily a result of the Wickham acquisition and sales
from new locations that we opened in new markets. Base business sales decreased
1% compared to 2006 as sales declines for products used in new pool and
irrigation construction were not fully offset by the solid sales growth for
maintenance, repair and replacement products and our international
operations.
Demand
for pool and irrigation construction products was impacted by the weak housing
market, tightening credit markets and unfavorable weather conditions. New pool
construction permits declined significantly throughout 2007, especially in our
key Florida, Arizona and California markets. Net sales were also adversely
impacted by the competitive pricing pressures experienced in the current market
environment.
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;
|
·
|
the
growing installed base of swimming pools, which resulted in increased
sales of non-discretionary products;
and
|
·
|
price
increases, primarily the impact in the first half of 2007 of our mid-year
2006 inflationary increases, which we passed through the supply
chain.
|
Complementary
product sales decreased 3% year over year compared to a 26% increase from 2005
to 2006. Our complementary product sales were adversely impacted by the declines
in new construction activity, 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
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2007
|
2006
|
Change
|
||||||||
Gross
profit
|
$
|
530.6
|
$
|
539.9
|
$
|
(9.3)
|
(2)
|
%
|
|||
Gross
margin
|
27.5
|
%
|
28.3
|
%
|
Gross
margin decreased 80 basis points compared to 2006, 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, which intensified throughout 2007 given the adverse
market conditions;
|
·
|
early
buy inventory purchases and discounts for early payments on those
purchases in the fourth quarter of 2005, which benefited our first half
2006 gross margin; and
|
·
|
pre-price
increase inventory purchases in the second quarter of 2006, which
benefited our third quarter 2006 gross
margin.
|
24
Operating
Expenses
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2007
|
2006
|
Change
|
||||||||
Operating
expenses
|
$
|
396.9
|
$
|
372.6
|
$
|
24.3
|
7
|
%
|
|||
Operating
expenses as a percentage of net sales
|
20.6
|
%
|
19.5
|
%
|
Total
operating expenses grew 7% and increased 110 basis points as a percentage of net
sales compared to 2006, while base business operating expenses were 4% higher
and increased 100 basis points as a percentage of net sales. These increases
reflect the following:
·
|
incremental
expenses for the 29 new sales centers that we have opened since the
beginning of 2006;
|
·
|
higher
rent expenses related to our expansion or relocation of numerous sales
centers;
|
·
|
increases
in bad debt expense during the last nine months of
2007;
|
·
|
higher
freight costs; and
|
·
|
additional
expenses for our investments in other growth
initiatives.
|
These
increased costs were partially offset by lower incentive expenses and the impact
from cost control initiatives.
We opened
12 new sales centers in 2007 compared to 17 new sales centers in
2006.
Interest
Expense
Interest
expense increased $7.0 million between periods as average debt outstanding was
41% higher in 2007 compared to 2006. The higher debt levels in 2007 reflect
increased borrowings to fund share repurchases. The weighted average effective
interest rate also increased to 6.0% in 2007 from 5.8% in 2006.
Income
Taxes
Income
taxes decreased to $43.2 million in 2007 from $58.8 million in 2006 due to the
$40.6 million decrease in income before income taxes and equity earnings.
Our effective income tax rate was 38.66% at December 31, 2007 and
38.61% at December 31, 2006.
Net
Income and Earnings Per Share
Net
income decreased to $69.4 million in 2007 from $95.0 million in
2006. Our equity interest in LAC produced $0.9 million of net
earnings in 2007 compared to $1.6 million in 2006. Earnings per
share for 2007 decreased to $1.37 per diluted share compared to $1.74 in 2006.
The decrease includes the impact of approximately $0.16 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 in 2006 was approximately $0.06 per
diluted share last year. In both 2007 and 2006, earnings per share benefited
from the reduction of our weighted average shares outstanding due to the impact
of our share repurchase activities.
25
Fiscal
Year 2006 compared to Fiscal Year 2005
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)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
|||||||||
Net
sales
|
$
|
1,653,475
|
$
|
1,501,096
|
$
|
256,287
|
$
|
51,563
|
$
|
1,909,762
|
$
|
1,552,659
|
||
Gross
profit
|
465,942
|
417,195
|
74,006
|
15,253
|
539,948
|
432,448
|
||||||||
Gross
margin
|
28.2
|
%
|
27.8
|
%
|
28.9
|
%
|
29.6
|
%
|
28.3
|
%
|
27.9
|
%
|
||
Selling
and administrative expenses
|
316,617
|
284,443
|
55,949
|
12,642
|
372,566
|
297,085
|
||||||||
Expenses
as a % of net sales
|
19.1
|
%
|
18.9
|
%
|
21.8
|
%
|
24.5
|
%
|
19.5
|
%
|
19.1
|
%
|
||
Operating
income
|
149,325
|
132,752
|
18,057
|
2,611
|
167,382
|
135,363
|
||||||||
Operating
margin
|
9.0
|
%
|
8.8
|
%
|
7.0
|
%
|
5.1
|
%
|
8.8
|
%
|
8.7
|
%
|
Please
refer to the discussion of base business exclusions under the heading “Fiscal Year 2007 compared
to Fiscal Year 2006”
above.
For
purposes of comparing operating results for the year ended December 31, 2006 to
the year ended December 31, 2005, we have excluded 58 acquired sales
centers from base business for the periods identified in the table below and an
average of three sales centers opened in new markets, all which remain
excluded as of December 31, 2006.
Acquired
|
Acquisition
Date
|
Sales
Centers Acquired
|
Period
Excluded(1)
|
|||
Wickham
Supply, Inc. and Water Zone, LP
|
August
2006
|
14
|
August
- December 2006
|
|||
Horizon
Distributors, Inc.
|
October
2005
|
40
|
October
- December 2005 and
|
|||
January
- December 2006
|
||||||
B&B
s.r.l. (Busatta)
|
October
2005
|
1
|
November
- December 2005 and
|
|||
January
- December 2006
|
||||||
Direct
Replacements, Inc.
|
October
2005
|
1
|
November
- December 2005 and
|
|||
January
- December 2006
|
||||||
Pool
Tech Distributors, Inc.
|
December
2004
|
2
|
January
- February 2006 and 2005
|
(1)
|
After
15 months of operations, we include acquired and new market sales centers
in the base business calculation including the comparative prior year
period.
|
For
information about our recent acquisitions, see Note 2 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
26
Net
Sales
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2006
|
2005
|
Change
|
||||||||
Net
sales
|
$
|
1,909.8
|
$
|
1,552.7
|
$
|
357.1
|
23
|
%
|
The
increase in net sales is primarily a result of the Horizon acquisitions and the
growth in our base business.
Base
business sales growth was 10% in 2006 due primarily to the
following:
·
|
a
larger installed base of swimming pools resulting in increased sales of
non-discretionary products;
|
·
|
estimated
price increases of 3% to 4% that we passed through the supply
chain;
|
·
|
the
continued successful execution of our sales, marketing and service
programs;
|
·
|
26%
growth in complementary product sales;
and
|
·
|
the
opening of nine new base business sales center
locations.
|
New
product initiatives continue to be focused on our complementary products
category, for which sales have grown from $3.0 million in 1999 to $180.1 million
in 2006. These products, which our customers historically purchased from other
suppliers, carry gross margins comparable to our traditional product categories.
We no longer include Horizon’s sales in our complementary product
calculations.
Gross
Profit
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2006
|
2005
|
Change
|
||||||||
Gross
profit
|
$
|
539.9
|
$
|
432.4
|
$
|
107.5
|
25
|
%
|
|||
Gross
margin
|
28.3
|
%
|
27.9
|
%
|
Base
business gross profit growth of 12% contributed $48.7 million to the increase in
2006, while acquired sales centers accounted for most of the remaining
increase.
Gross
margin increased 40 basis points in 2006 due primarily to the benefits achieved
through our supply chain management initiatives, including our pre-price
increase inventory purchases in the fourth quarter of 2005 and second quarter of
2006. We made aggressive early buy purchases during the fourth quarter of 2005
to take advantage of price discounts and to mitigate the impact of expected 2006
price increases, and we made additional pre-price increase purchases during the
second quarter of 2006 that benefited our third quarter gross
margins.
Our gross
margin improvement also includes slightly higher margin contribution from
acquired businesses and a small favorable product mix shift in 2006 to higher
margin products, which is attributable to our successful sales initiatives
including our expansion of parts and complementary product offerings. The
overall increase in gross margin was partially offset by lower earned vendor
incentives as a percentage of total net sales in 2006. This decrease reflects a
lower aggregate vendor incentive rate compared to 2005 and a slight decrease
between years in our annual purchase volumes as a percentage of total net sales.
The decrease in rate is due to lower incentives as a percentage of total net
sales for our acquired businesses and a shift in purchasing mix to products with
lower incentives, primarily complementary products.
27
Operating
Expenses
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2006
|
2005
|
Change
|
||||||||
Operating
expenses
|
$
|
372.6
|
$
|
297.1
|
$
|
75.5
|
25
|
%
|
|||
Operating
expenses as a percentage of net sales
|
19.5
|
%
|
19.1
|
%
|
Operating
expenses grew 25% and as a percentage of net sales increased 40 basis points in
2006 due primarily to higher expense ratios for our recently acquired businesses
and start-up costs and higher expense ratios for new sales centers opened in
2006. We opened 17 sales centers in 2006 compared to only three sales centers in
2005. The 17 new locations include 11 new pool sales centers and six new Horizon
sales centers. Expenses related to other investments in our business also
contributed to the increase in operating expenses. We moved 24 existing sales
centers to bigger locations, expanded another 16 existing sales center
locations, opened two new construction material distribution centers and also
launched two new value-added customer programs, among other new company
initiatives in 2006. These increases in operating expenses were partially offset
by lower employee bonuses in 2006 of approximately
$4.0 million.
Interest
Expense
Interest
expense increased $8.8 million between periods as average debt outstanding was
79% higher in 2006 compared to 2005. The higher debt levels in 2006 reflect
increased borrowings to fund share repurchases, acquisitions and higher working
capital levels. The weighted average effective interest rate also increased to
5.8% in 2006 from 4.3% in 2005.
Income
Taxes
Income
taxes increased to $58.8 million in 2006 from $49.9 million in 2005 due to the
$23.3 million increase in income before income taxes and equity earnings.
Our effective income tax rate was 38.61% at December 31, 2006 and
38.74% at December 31, 2005 as adjusted for the impact of share-based
compensation expense.
Net
Income and Earnings Per Share
Net
income increased 18% to $95.0 million in 2006 from $80.5 million in 2005. Net
income in 2006 included $1.6 million of net equity earnings from our
investment in LAC. Diluted earnings per share increased 20% to $1.74 per
share in 2006 from $1.45 per share in 2005.
28
Seasonality
and Quarterly Fluctuations
Our
business is highly seasonal. In general, sales and operating income are highest
during the second and third quarters, which represent the peak months of both
swimming pool use and installation and landscape installations and maintenance.
Sales are substantially lower during the first and fourth quarters, when we may
incur net losses. In 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.
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 2007 and 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 the swimming pool industry, the results of any one
or more quarters are not necessarily a good indication of results for an entire
fiscal year or of continuing trends.
(Unaudited)
|
QUARTER
|
||||||||||||||||
(in
thousands)
|
2007
|
2006
|
|||||||||||||||
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
Statement
of Income Data
|
|||||||||||||||||
Net
sales
|
$
|
373,706
|
$
|
726,472
|
$
|
527,434
|
$
|
300,755
|
$
|
348,556
|
$
|
705,703
|
$
|
537,017
|
$
|
318,486
|
|
Gross
profit
|
103,485
|
207,922
|
139,803
|
79,436
|
98,048
|
209,000
|
149,995
|
82,905
|
|||||||||
Operating
income (loss)
|
8,632
|
98,433
|
39,505
|
(12,796
|
)
|
15,022
|
103,338
|
53,092
|
(4,070
|
)
|
|||||||
Net
income (loss)
|
1,354
|
57,794
|
21,835
|
(11,589
|
)
|
6,422
|
62,110
|
31,493
|
(5,001
|
)
|
|||||||
|
|||||||||||||||||
Net
sales as a % of annual net sales
|
19
|
%
|
38
|
%
|
27
|
%
|
16
|
%
|
18
|
%
|
37
|
%
|
28
|
%
|
17
|
%
|
|
Gross
profit as a % of annual
|
|||||||||||||||||
gross
profit
|
20
|
%
|
39
|
%
|
26
|
%
|
15
|
%
|
18
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
|
Operating
income (loss) as a
|
|||||||||||||||||
%
of annual operating income
|
6
|
%
|
74
|
%
|
30
|
%
|
(10
|
)%
|
9
|
%
|
62
|
%
|
32
|
%
|
(3
|
)%
|
|
Balance
Sheet Data
|
|||||||||||||||||
Total
receivables, net
|
$
|
231,034
|
$
|
301,265
|
$
|
200,534
|
$
|
141,117
|
$
|
211,578
|
$
|
295,722
|
$
|
211,589
|
$
|
154,937
|
|
Product
inventories, net
|
413,161
|
388,364
|
317,110
|
379,663
|
406,310
|
367,096
|
283,930
|
332,069
|
|||||||||
Accounts
payable
|
325,448
|
229,691
|
127,889
|
194,178
|
267,296
|
207,727
|
111,349
|
177,544
|
|||||||||
Total
debt
|
358,522
|
425,599
|
406,465
|
350,852
|
236,188
|
303,000
|
257,974
|
265,443
|
In the
third and fourth quarters of 2006 and full year 2007, our results of
operations include the 14 Wickham sales centers that we acquired in August
2006. 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.
29
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 positively impacting our
sales
|
(primarily
in the northern half of the US)
|
||
Unseasonably
late warming trends in spring/early cooling trends in fall
|
•
|
A
shorter pool and landscape season, thus negatively impacting our
sales
|
(primarily
in the northern half of the US)
|
In 2007,
our sales were negatively impacted by extended winter conditions that delayed
the start of the pool season in the Northeast compared to 2006, much cooler and
unusually wet weather conditions in Texas and Oklahoma during the first seven
months of 2007 (which had a significant impact on sales related to pool and
landscape construction) and less than ideal conditions in the third quarter,
which compared unfavorably to the same period in 2006.
In 2006,
our sales benefited from near record high temperatures across much of North
America. This favorable impact was more pronounced in the first quarter of 2006,
especially in our northern markets which experienced an earlier start to the
pool season compared to 2005. While maintenance and impulse sales benefited from
the near record high temperatures, sales tied to pool construction and pool
usage were hindered by above average precipitation in the northeast and
northwest. Despite 2006 being the hottest year on record nationally, sales were
negatively impacted by much colder than average August and September
temperatures which shortened the pool season in certain markets.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is defined as the ability to generate adequate amounts of cash to meet
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.
|
30
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 acquisitions. The
same principle applies to funds used for share repurchases and capital
expenditures. We prioritize our use of cash based on investing in our
business, returning money to our shareholders and maintaining 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;
|
·
|
repurchase
of common stock within Board defined parameters;
and
|
·
|
repayment
of debt.
|
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
Year
Ended December 31,
|
|||||||
2007
|
2006
|
||||||
Operating
activities
|
$
|
71,644
|
$
|
69,010
|
|||
Investing
activities
|
(12,638
|
)
|
(41,439
|
)
|
|||
Financing
activities
|
(63,957
|
)
|
(41,586
|
)
|
Our 2007
cash provided by operations increased $2.6 million compared to 2006 due
primarily to favorable impacts from changes in working capital balances, which
offset the decrease in net income. The working capital impact is
reflected in the net change in our receivable and accounts payable balances
between periods, but this benefit to our 2007 cash provided by operations was
largely offset by the increase in inventory. The change from a use of
cash in 2006 to a source of cash in 2007 from other accrued liabilities is due
to the payment in 2006 of $27.0 million in estimated federal tax payments that
we deferred from 2005 as allowed by the IRS.
Cash used
in investing activities decreased due to the reduced level of acquisition
activity in 2007. Our financing activities for the year included
$98.5 million of net proceeds from debt and cash related to our stock plans,
offset by $139.7 million of total share repurchases and $22.7 million for the
payment of our quarterly cash dividends to shareholders, which we increased in
the second quarter of 2007.
Our 2006
cash provided by operations increased $29.6 million compared to 2005 due
primarily to the increase in net income and the impact related to our fourth
quarter 2005 early buy purchases. In 2005, our cash provided by operations was
negatively impacted by early buy inventory purchases that we received and paid
for in the fourth quarter of 2005. This impact is reflected in the net change in
our inventory and accounts payable balances between periods, but the benefit to
our 2006 cash provided by operations was largely offset by the decrease in
accrued expenses which included a $27.0 million payment for estimated
federal tax payments that were deferred from the second half of 2005 as allowed
by the Katrina Emergency Tax Relief Act of 2005. The remaining increase in cash
provided by operations is attributable to the change in our accounts receivable
balance between periods.
Future
Sources and Uses of Cash
As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) now 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
December 31, 2007, there was $125.5 million outstanding and $114.0
million available for borrowing under the Revolver. The weighted average
effective interest rate on the Revolver was approximately 6.4% for the year
ended December 31, 2007.
At
December 31, 2007, there was $57.0 million outstanding under the Term
Loan of which $3.0 million is classified as current. In December 2005, we
entered into an interest rate swap agreement to reduce our exposure to
fluctuations in interest rates. The swap agreement converts our variable rate
Term Loan to a fixed-rate basis until its termination on December 31, 2008. We
have designated this swap as a cash flow hedge. During the year ended December
31, 2007, no gains or losses were recognized on this swap. The weighted
average effective interest rate of the Term Loan was approximately 5.7% for the
year ended December 31, 2007.
31
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 Sheets. We continue to employ this arrangement because it
provides us with a lower cost form of financing. At December 31, 2007,
there was $68.3 million outstanding under the Receivables Facility at a weighted
average effective interest rate of 6.0%. We intend to renew the Receivables
Facility in March 2008 with comparable or similar terms, and we do not have any
reason to believe that we will not be able to do so.
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
December 31, 2007, 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 this 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 February 22, 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.
Contractual
Obligations
At
December 31, 2007, our contractual obligations for long-term debt,
short-term financing and operating leases were as follows (in
thousands):
Payments
due by period
|
||||||||||||||
Less
than
|
5
years and
|
|||||||||||||
Total
|
1
year
|
1-2
years
|
3-4
years
|
thereafter
|
||||||||||
Long-term
debt
|
$
|
282,525
|
$
|
3,000
|
$
|
6,000
|
$
|
48,000
|
$
|
225,525
|
||||
Short-term
financing
|
68,327
|
68,327
|
—
|
—
|
—
|
|||||||||
Operating leases | 201,844 | 46,754 | 75,130 | 45,102 | 34,858 | |||||||||
$
|
552,696 |
$
|
118,081 |
$
|
81,130 |
$
|
93,102 |
$
|
260,383 |
This
table does not include estimated future interest expense related to long-term
debt and short-term financing. For additional discussion related to our debt,
see Note 5 of “Notes to Consolidated Financial Statements,” included in
Item 8 of this Form 10-K.
We have
minimum purchase requirements under a limited number of vendor agreements,
primarily those related to the purchase of chemicals. Since these
requirements are either based on a percentage of our total purchases for a
product category or a minimum number of pounds of chemicals at prevailing market
prices, the amounts of these contractual obligations are not reasonably
estimatable as of December 31, 2007 and therefore are not included in the table
above.
32
We are
exposed to market risks, including interest rate risk and foreign currency risk.
The adverse effects of potential changes in these market risks are discussed
below. The following discussion does not consider the effects of the reduced
level of overall economic activity that could exist following such changes.
Further, in the event of changes of such magnitude, we would likely take actions
to mitigate our exposure to such changes.
Interest
Rate Risk
Our
earnings are exposed to changes in short-term interest rates because of the
variable interest rates on our debt. However, we have entered into interest rate
swap agreements to reduce our exposure to fluctuations in interest rates on our
Term Loan and our Notes.
If
(i) the variable rates on our Revolver and our Receivables Facility
increased or decreased 1.0% from the rate at December 31, 2007; and
(ii) we borrowed the maximum amount available as of December 31, 2007 under the
Revolver ($315.0 million assuming that we exercised the $75.0 million
accordion feature) and the Receivables Facility ($150.0 million) for all of
2007, then our pretax income would change by approximately $4.7 million and
earnings per share would change by $0.06 per diluted share based on the number
of weighed average diluted shares outstanding at
December 31, 2007.
Currency
Risk
We have
wholly owned subsidiaries in Canada, Mexico, the United Kingdom, France,
Portugal, Spain and Italy. In the past, we have not hedged our currency
exposure, and fluctuations in exchange rates have not materially affected our
operating results. Future changes in exchange rates may positively or negatively
impact our revenues, operating expenses and earnings. Due to the size of our
international operations, however, we do not anticipate that exposure to
currency rate fluctuations will be material in 2008.
Functional
Currencies
|
|
Canada
|
Canadian
Dollar
|
United
Kingdom
|
British
Pound
|
France
|
Euro
|
Italy
|
Euro
|
Portugal
|
Euro
|
Spain
|
Euro
|
Mexico
|
Peso
|
33
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
35
|
|
36
|
|
37
|
|
38
|
|
40
|
|
41
|
34
The Board
of Directors and Shareholders
Pool
Corporation
We have
audited the accompanying consolidated balance sheets of Pool Corporation as of
December 31, 2007 and 2006, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pool
Corporation at December 31, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 8 to the financial statements, in 2007 the Company changed its
method of accounting for income taxes.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pool Corporation's internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 29, 2008
expressed an unqualified opinion thereon.
/s/ Ernst & Young
LLP
New
Orleans, Louisiana
February
29, 2008
35
(In
thousands, except per share data)
Year
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||
(As
Adjusted -
See
Note 7)
|
|||||||||
Net
sales
|
$
|
1,928,367
|
$
|
1,909,762
|
$
|
1,552,659
|
|||
Cost
of sales
|
1,397,721
|
1,369,814
|
1,120,211
|
||||||
Gross profit
|
530,646
|
539,948
|
432,448
|
||||||
Selling
and administrative expenses
|
396,872
|
372,566
|
297,085
|
||||||
Operating income
|
133,774
|
167,382
|
135,363
|
||||||
Interest
expense, net
|
22,148
|
15,196
|
6,434
|
||||||
Income
before income taxes and equity earnings
|
111,626
|
152,186
|
128,929
|
||||||
Provision
for income taxes
|
43,154
|
58,759
|
49,941
|
||||||
Equity
earnings in unconsolidated investments, net
|
922
|
1,597
|
1,467
|
||||||
Net
income
|
$
|
69,394
|
$
|
95,024
|
$
|
80,455
|
|||
Earnings
per share:
|
|||||||||
Basic
|
$
|
1.42
|
$
|
1.83
|
$
|
1.53
|
|||
Diluted
|
$
|
1.37
|
$
|
1.74
|
$
|
1.45
|
|||
Weighted
average shares outstanding:
|
|||||||||
Basic
|
48,887
|
51,866
|
52,445
|
||||||
Diluted
|
50,802
|
54,662
|
55,665
|
||||||
Cash
dividends declared per common share
|
$
|
0.465
|
$
|
0.405
|
$
|
0.34
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
36
(In
thousands, except share data)
December
31,
|
|||||||||
2007
|
2006
|
||||||||
Assets
|
|||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
15,825
|
$
|
16,734
|
|||||
Receivables,
net
|
45,257
|
51,116
|
|||||||
Receivables
pledged under receivables facility
|
95,860
|
103,821
|
|||||||
Product
inventories, net
|
379,663
|
332,069
|
|||||||
Prepaid
expenses and other current assets
|
8,265
|
8,005
|
|||||||
Deferred
income taxes
|
9,139
|
7,676
|
|||||||
Total
current assets
|
554,009
|
519,421
|
|||||||
Property
and equipment, net
|
34,223
|
33,633
|
|||||||
Goodwill
|
155,247
|
154,244
|
|||||||
Other
intangible assets, net
|
14,504
|
18,726
|
|||||||
Equity
interest investments
|
33,997
|
32,509
|
|||||||
Other
assets, net
|
22,874
|
16,029
|
|||||||
Total
assets
|
$
|
814,854
|
$
|
774,562
|
|||||
Liabilities
and stockholders' equity
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
194,178
|
$
|
177,544
|
|||||
Accrued
expenses and other current liabilities
|
37,216
|
35,610
|
|||||||
Short-term
financing
|
68,327
|
74,286
|
|||||||
Current
portion of long-term debt and other long-term liabilities
|
3,439
|
4,350
|
|||||||
Total
current liabilities
|
303,160
|
291,790
|
|||||||
Deferred
income taxes
|
17,714
|
15,023
|
|||||||
Long-term
debt
|
279,525
|
188,157
|
|||||||
Other
long-term liabilities
|
5,664
|
1,908
|
|||||||
Total
liabilities
|
606,063
|
496,878
|
|||||||
Stockholders'
equity:
|
|||||||||
Common
stock, $.001 par value; 100,000,000 shares authorized; 47,516,989 and
50,929,665 shares
|
|||||||||
issued
and outstanding at December 31, 2007 and 2006,
respectively
|
47
|
50
|
|||||||
Additional
paid-in capital
|
171,996
|
148,821
|
|||||||
Retained
earnings
|
29,044
|
129,932
|
|||||||
Treasury
stock
|
—
|
(7,334
|
)
|
||||||
Accumulated
other comprehensive income
|
7,704
|
6,215
|
|||||||
Total
stockholders' equity
|
208,791
|
277,684
|
|||||||
Total
liabilities and stockholders' equity
|
$
|
814,854
|
$
|
774,562
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
37
(In
thousands)
Year
Ended December 31,
|
|||||||||||||
2007
|
2006
|
2005
|
|||||||||||
(As
Adjusted - See Note 7)
|
|||||||||||||
Operating
activities
|
|||||||||||||
Net
income
|
$
|
69,394
|
$
|
95,024
|
$
|
80,455
|
|||||||
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|||||||||||||
Depreciation
|
9,289
|
8,162
|
5,410
|
||||||||||
Amortization
|
4,694
|
4,742
|
3,998
|
||||||||||
Share-based
compensation
|
7,398
|
7,204
|
5,966
|
||||||||||
Excess
tax benefits from share-based compensation
|
(8,482
|
)
|
(14,627
|
)
|
(13,473
|
)
|
|||||||
Provision
for doubtful accounts receivable, net of write-offs
|
5,047
|
1,217
|
(332
|
)
|
|||||||||
Provision
for inventory obsolescence, net
|
610
|
902
|
115
|
||||||||||
Change
in deferred income taxes
|
(3,747
|
)
|
(4,521
|
)
|
(7,292
|
)
|
|||||||
Loss
on sale of property and equipment
|
56
|
73
|
133
|
||||||||||
Equity
earnings in unconsolidated investments
|
(1,523
|
)
|
(2,602
|
)
|
(2,386
|
)
|
|||||||
Other
|
(40
|
)
|
—
|
—
|
|||||||||
Changes
in operating assets and liabilities,
|
|||||||||||||
net
of effects of acquisitions and divestitures:
|
|||||||||||||
Receivables
|
8,822
|
(5,301
|
)
|
(13,394
|
)
|
||||||||
Product
inventories
|
(48,001
|
)
|
5,882
|
(103,579
|
)
|
||||||||
Prepaid
expenses and other assets
|
(870
|
)
|
(1,054
|
)
|
(934
|
)
|
|||||||
Accounts
payable
|
16,505
|
(5,269
|
)
|
41,932
|
|||||||||
Accrued
expenses and other current liabilities
|
12,492
|
(20,822
|
)
|
42,834
|
|||||||||
Net
cash provided by operating activities
|
71,644
|
69,010
|
39,453
|
||||||||||
Investing
activities
|
|||||||||||||
Acquisition
of businesses, net of cash acquired
|
(2,087
|
)
|
(26,662
|
)
|
(89,963
|
)
|
|||||||
Equity
interest investments
|
—
|
—
|
(3,539
|
)
|
|||||||||
Proceeds
from sale of investment
|
75
|
—
|
—
|
||||||||||
Purchase
of property and equipment, net of sale proceeds
|
(10,626
|
)
|
(14,777
|
)
|
(8,361
|
)
|
|||||||
Net
cash used in investing activities
|
(12,638
|
)
|
(41,439
|
)
|
(101,863
|
)
|
|||||||
Financing
activities
|
|||||||||||||
Proceeds
from revolving line of credit
|
477,246
|
442,495
|
364,383
|
||||||||||
Payments
on revolving line of credit
|
(482,878
|
)
|
(380,438
|
)
|
(345,703
|
)
|
|||||||
Proceeds
from asset-backed financing
|
87,479
|
93,347
|
67,133
|
||||||||||
Payments
on asset-backed financing
|
(93,438
|
)
|
(84,718
|
)
|
(44,071
|
)
|
|||||||
Proceeds
from long-term debt
|
100,000
|
—
|
60,000
|
||||||||||
Payments
on long-term debt and other long-term liabilities
|
(4,321
|
)
|
(1,514
|
)
|
(1,350
|
)
|
|||||||
Payments
of capital lease obligations
|
(257
|
)
|
(257
|
)
|
—
|
||||||||
Payment
of deferred financing costs
|
(1,152
|
)
|
(156
|
)
|
(243
|
)
|
|||||||
Excess
tax benefits from share-based compensation
|
8,482
|
14,627
|
13,473
|
||||||||||
Issuance
of common stock under stock plans
|
7,292
|
7,220
|
4,481
|
||||||||||
Payments
of cash dividends
|
(22,734
|
)
|
(21,080
|
)
|
(17,862
|
)
|
|||||||
Purchases
of treasury stock
|
(139,676
|
)
|
(111,112
|
)
|
(32,091
|
)
|
|||||||
Net
cash provided by (used in) financing activities
|
(63,957
|
)
|
(41,586
|
)
|
68,150
|
||||||||
Effect
of exchange rate changes on cash
|
4,042
|
3,883
|
(636
|
)
|
|||||||||
Change
in cash and cash equivalents
|
(909
|
)
|
(10,132
|
)
|
5,104
|
||||||||
Cash
and cash equivalents at beginning of year
|
16,734
|
26,866
|
21,762
|
||||||||||
Cash
and cash equivalents at end of year
|
$
|
15,825
|
$
|
16,734
|
$
|
26,866
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
38
POOL CORPORATION
Consolidated
Statements of Cash Flows (continued)
(In
thousands)
Supplemental
cash flow information
|
Year
Ended December 31,
|
|||||||||
2007
|
2006
|
2005
|
||||||||
Cash
paid during the year for:
|
||||||||||
Interest
|
$
|
21,321
|
$
|
14,823
|
$
|
5,660
|
||||
Income
taxes, net of refunds
|
30,509
|
74,822
|
14,313
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
39
(In
thousands, amounts in Dollars except share data)
(2004
and 2005 as adjusted - see Note 7)
|
||||||||||||||||||
Accumulated
|
||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||
Common
Stock
|
Treasury
|
Paid-In
|
Retained
|
Comprehensive
|
||||||||||||||
Shares
|
Amount
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Total
|
||||||||||||
Balance
at December 31, 2004
|
52,186
|
52
|
—
|
95,358
|
129,260
|
2,874
|
227,544
|
|||||||||||
Net
income
|
—
|
—
|
—
|
—
|
80,455
|
80,455
|
||||||||||||
Foreign
currency translation
|
—
|
—
|
—
|
—
|
—
|
(634
|
)
|
(634
|
)
|
|||||||||
Interest
rate swap, net of tax of $63
|
—
|
—
|
—
|
—
|
—
|
(101
|
)
|
(101
|
)
|
|||||||||
Comprehensive
income, net of tax
|
79,720
|
|||||||||||||||||
Treasury
stock, 964 shares of common stock
|
—
|
—
|
(32,091
|
)
|
—
|
—
|
—
|
(32,091
|
)
|
|||||||||
Retirement
of treasury shares
|
(939
|
)
|
(1
|
)
|
31,170
|
—
|
(31,169)
|
—
|
—
|
|||||||||
Share-based
compensation
|
—
|
—
|
—
|
6,458
|
—
|
—
|
6,458
|
|||||||||||
Exercises of stock
options including tax benefit of $13,473
|
1,124
|
1
|
—
|
16,757
|
—
|
—
|
16,758
|
|||||||||||
Declaration
of cash dividends
|
—
|
—
|
—
|
—
|
(17,862)
|
—
|
(17,862
|
)
|
||||||||||
Employee
stock purchase plan
|
44
|
—
|
—
|
1,197
|
—
|
—
|
1,197
|
|||||||||||
Balance
at December 31, 2005
|
52,415
|
52
|
(921
|
)
|
119,770
|
160,684
|
2,139
|
281,724
|
||||||||||
Net
income
|
—
|
—
|
—
|
—
|
95,024
|
95,024
|
||||||||||||
Foreign
currency translation
|
—
|
—
|
—
|
—
|
—
|
3,854
|
3,854
|
|||||||||||
Interest
rate swap, net of tax of $139
|
—
|
—
|
—
|
—
|
—
|
222
|
222
|
|||||||||||
Comprehensive
income, net of tax
|
99,100
|
|||||||||||||||||
Treasury stock,
2,778 shares of common stock
|
—
|
—
|
(111,112
|
)
|
—
|
—
|
—
|
(111,112
|
)
|
|||||||||
Retirement
of treasury shares
|
(2,616
|
)
|
(3
|
)
|
104,699
|
—
|
(104,696)
|
—
|
—
|
|||||||||
Share-based
compensation
|
—
|
—
|
—
|
7,204
|
—
|
—
|
7,204
|
|||||||||||
Exercise of stock
options including
tax benefit of $14,627
|
1,072
|
1
|
—
|
19,948
|
—
|
—
|
19,949
|
|||||||||||
Declaration
of cash dividends
|
—
|
—
|
—
|
—
|
(21,080)
|
—
|
(21,080
|
)
|
||||||||||
Employee
stock purchase plan
|
58
|
—
|
—
|
1,899
|
—
|
—
|
1,899
|
|||||||||||
Balance
at December 31, 2006
|
50,929
|
50
|
(7,334
|
)
|
148,821
|
129,932
|
6,215
|
277,684
|
||||||||||
Net
income
|
—
|
—
|
—
|
—
|
69,394
|
69,394
|
||||||||||||
Foreign
currency translation
|
—
|
—
|
—
|
—
|
—
|
4,042
|
4,042
|
|||||||||||
Interest
rate swap, net of tax of $1,606
|
—
|
—
|
—
|
—
|
—
|
(2,553
|
)
|
(2,553
|
)
|
|||||||||
Comprehensive
income, net of tax
|
70,883
|
|||||||||||||||||
Treasury stock,
4,165 shares of common stock
|
—
|
—
|
(139,676
|
)
|
—
|
—
|
—
|
(139,676
|
)
|
|||||||||
Retirement
of treasury shares
|
(4,351
|
)
|
(4
|
)
|
147,010
|
—
|
(147,006)
|
—
|
—
|
|||||||||
FIN
48 cumulative adjustment
|
—
|
—
|
—
|
—
|
(542)
|
—
|
(542
|
)
|
||||||||||
Share-based
compensation
|
—
|
—
|
—
|
7,398
|
—
|
—
|
7,398
|
|||||||||||
Exercise of stock
options including
tax benefit of $8,482
|
839
|
1
|
—
|
14,544
|
—
|
—
|
14,545
|
|||||||||||
Declaration
of cash dividends
|
—
|
—
|
—
|
—
|
(22,734)
|
—
|
(22,734
|
)
|
||||||||||
Issuance
of restricted stock
|
62
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
Employee
stock purchase plan
|
37
|
—
|
—
|
1,233
|
—
|
—
|
1,233
|
|||||||||||
Balance
at December 31, 2007
|
47,516
|
47
|
—
|
171,996
|
29,044
|
7,704
|
208,791
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
40
Note 1 - Organization and Summary of Significant Accounting Policies
Description
of Business
As of
December 31, 2007, Pool Corporation and its wholly owned subsidiaries
(the Company, which may
be referred to as POOL,
we, us or our), maintained 281 sales
centers in North America and Europe from which we sell swimming pool equipment,
parts and supplies and irrigation and landscape products to pool builders,
retail stores, service companies, landscape contractors and golf courses. We
distribute products through three networks: The SCP Distributors (SCP) network,
the Superior Pool Products (Superior) network and the Horizon Distributors
(Horizon) network.
Basis
of Presentation and Principles of Consolidation
We
prepared the Consolidated Financial Statements following U.S. generally accepted
accounting principles (GAAP) and the requirements of the Securities and Exchange
Commission (SEC). The financial statements include all normal and recurring
adjustments that are necessary for a fair presentation of our financial position
and operating results.
The
Consolidated Financial Statements include the accounts of Pool Corporation and
our wholly owned subsidiaries. We eliminated all significant intercompany
accounts and transactions among our wholly owned subsidiaries. We account for
our 38% investment in Latham Acquisition Corporation (LAC), which was a 42%
interest when acquired in December 2004, and our 50% investment in
Northpark Corporate Center, LLC (NCC) using the equity method of
accounting. Accordingly, we report our share of income or loss based on our
ownership interests in these investments.
Use
of Estimates
In order
to prepare financial statements that conform to GAAP, we make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying notes. Our most significant estimates are those relating to the
allowance for doubtful accounts, the inventory reserve, vendor incentives,
income taxes and incentive compensation accruals. We continually review our
estimates and make adjustments as necessary, but actual results could be
significantly different from what we expected when we made these
estimates.
Segment
Reporting
Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 131, Disclosures
about Segments of an Enterprise and Related Information, establishes
standards for the way that public companies report information about operating
segments in annual financial statements and for related disclosures about
products and services, geographic areas and major customers. POOL’s management
evaluates our sales centers based upon their individual performance relative to
predetermined standards that include both financial and operational measures.
Additionally, POOL’s management makes decisions about how to allocate resources
primarily on a sales center-by-sales center basis. Since all of our sales
centers have similar operations and share similar economic characteristics, we
aggregate our sales centers into a single reportable segment.
41
Seasonality
and Weather
Our
business is highly seasonal and weather is one of the principal external factors
affecting our business. In general, sales and net income are highest
during the second and third quarters, which represent the peak months of both
swimming pool use and installation and landscape installations and
maintenance. Sales are substantially lower during the first and fourth
quarters when we may incur net losses.
Earnings
Per Share
In
accordance with SFAS 128, Earnings per Share, we
calculate basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share includes
the dilutive effects of stock awards. For additional discussion of earnings
per share, see Note 9.
Financial
Instruments
The
carrying values of cash, receivables, accounts payable and accrued liabilities
approximate fair value due to the short maturity of those instruments. The
carrying amount of long-term debt approximates fair value as it bears interest
at variable rates. The carrying value of interest rate swap agreements is based
on quoted market rates at each balance sheet date.
Cash
Equivalents
We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents.
Credit
Risk and Allowance for Doubtful Accounts
We record
trade receivables at the invoiced amount less an allowance for doubtful accounts
for estimated losses due to customer non-payment. We perform periodic credit
evaluations of our customers and we typically do not require collateral.
Consistent with industry practices, we require payment from our customers within
30 days except for sales under early buy programs for which we provide extended
payment terms to qualified customers. The following table summarizes the changes
in our allowance for doubtful accounts for the past three years (in
thousands):
2007
|
2006
|
2005
|
|||||||
Balance
at beginning of year
|
$
|
4,892
|
$
|
4,211
|
$
|
3,138
|
|||
Acquisition
of businesses, net
|
—
|
(536
|
)
|
1,160
|
|||||
Bad
debt expense
|
7,634
|
3,420
|
1,850
|
||||||
Write-offs,
net of recoveries
|
(2,587
|
)
|
(2,203
|
)
|
(1,937
|
)
|
|||
Balance
at end of year
|
$
|
9,939
|
$
|
4,892
|
$
|
4,211
|
42
Product
Inventories and Reserve for Inventory Obsolescence
Product
inventories consist primarily of goods purchased from manufacturers for resale
to our customers. We record inventory at the lower of cost, using the average
cost method, or market. We establish our reserve for inventory obsolescence
based on inventory turns by category with particular emphasis on stock keeping
units with the weakest sales over the previous 12 months. The reserve is
intended to reflect the net realizable value of inventory that we may not be
able to sell at a profit.
In
evaluating the adequacy of our reserve for inventory obsolescence at the sales
center level, we consider a combination of factors including:
·
|
the
level of inventory in relationship to historical sales by product,
including inventory usage by class based on product sales at both the
sales center and Company levels;
|
·
|
changes
in customer preferences;
|
·
|
seasonal
fluctuations in inventory levels;
|
·
|
geographical
location; and
|
·
|
new
product offerings.
|
Our
reserve for inventory obsolescence may periodically require adjustment as
changes occur in the above-identified factors.
The
following table summarizes the changes in our allowance for inventory
obsolescence for the past three years (in thousands):
2007
|
2006
|
2005
|
|||||||
Balance
at beginning of year
|
$
|
4,777
|
$
|
3,875
|
$
|
3,085
|
|||
Acquisition
of businesses, net
|
—
|
350
|
685
|
||||||
Provision
for inventory write-downs
|
1,788
|
1,196
|
808
|
||||||
Deduction
for inventory write-offs
|
(1,162
|
)
|
(644
|
)
|
(703
|
)
|
|||
Balance
at end of year
|
$
|
5,403
|
$
|
4,777
|
$
|
3,875
|
Vendor
Incentives
We
account for vendor incentives in accordance with the Emerging Issues Task Force
Issue 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor. Many of our arrangements with our vendors provide for us to
receive incentives of specified amounts of consideration, payable to us when we
achieve any of a number of measures. These measures are generally related to the
volume level of purchases from our vendors and may include negotiated pricing
arrangements. We account for such incentives as if they are a reduction of the
prices of the vendor’s products and therefore as a reduction of inventory until
we sell the product, at which time such incentives are recognized as a reduction
of cost of sales in our income statement.
Throughout
the year, we estimate the amount of the incentive earned based on our estimate
of cumulative purchases for the fiscal year relative to the purchase levels that
mark our progress toward earning the incentives. We accrue vendor incentives on
a monthly basis using these estimates provided that we determine they are
probable and reasonably estimable. We continually revise these estimates to
reflect actual incentives earned based on actual purchase levels and trends.
When we make adjustments to our estimates, we determine whether any portion of
the adjustment impacts the amount of vendor incentives that are deferred in
inventory. In accordance with EITF 02-16, we recognize changes in our estimates
for vendor incentives as a cumulative catch-up adjustment to the amounts
recognized to date in our financial statements.
43
Property
and Equipment
Property
and equipment are stated at cost. We depreciate property and equipment on a
straight-line basis over the following estimated useful lives:
Buildings
|
40
years
|
|
Leasehold
improvements
|
1 -
10 years (1)
|
|
Autos
and trucks
|
3
years
|
|
Machinery
and equipment
|
10
years
|
|
Computer
equipment
|
3 -
5 years
|
|
Furniture
and fixtures
|
10
years
|
(1)
|
For
substantial improvements made near the end of a lease term where we are
reasonably certain the lease will be renewed, we amortize the leasehold
improvement over the remaining life of the lease including the expected
renewal period.
|
The table
below presents depreciation expense for the past three years (in
thousands):
2007
|
2006
|
2005
|
|||||
$
|
9,289
|
$
|
8,162
|
$
|
5,410
|
Acquisitions
In
accordance SFAS 141, Business
Combinations, we account for acquisitions using the purchase method of
accounting and allocate the cost of an acquired business to the assets acquired
and liabilities assumed based on their estimated fair values. We revise these
estimates as necessary if any additional information becomes available during a
one year allocation period from the date of acquisition. These revisions may
include working capital adjustments based on new or additional facts about the
business, final estimates of acquired assets and assumed liabilities and changes
in the purchase price due to updated estimates or the resolution of items
related to contingent consideration. We include the results of operations of
acquisitions in our Consolidated Financial Statements as of the acquisition
date. For additional discussion of acquisitions, see Note 2.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the amount we paid to acquire a company over the
estimated fair value of tangible assets and identifiable intangible assets
acquired, less liabilities assumed. We account for goodwill under the provisions
of SFAS 142, Goodwill and
Other Intangible Assets. In accordance with these rules, we test goodwill
and other indefinite lived intangible assets for impairment annually or at any
other time when impairment indicators exist. For our annual goodwill impairment
test, we compare our estimated fair value of each reporting unit to its carrying
value, including goodwill. For additional discussion of goodwill and other
intangible assets, see Note 3.
Self
Insurance
We are
self-insured for employee health benefits, workers’ compensation coverage,
automobile and property and casualty insurance. We have limited our exposure by
maintaining excess and aggregate liability coverage for each of these items. We
establish self-insurance reserves based on information that we obtain from
third-party service providers regarding known claims and estimates of claims
incurred but not reported. Our management reviews these reserves based on
consideration of various factors, including but not limited to the age of
existing claims, estimated settlement amounts and other historical claims
data.
44
Advertising
Costs
We
expense advertising costs when incurred. The table below presents advertising
expense for the past three years (in thousands):
2007
|
2006
|
2005
|
|||||
$
|
7,646
|
$
|
9,463
|
$
|
7,763
|
Income
Taxes
In June
2006, the FASB issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income
Taxes, an
interpretation of SFAS 109, Accounting for Income Taxes, to create a
single model to address accounting for uncertainty in tax positions. We adopted
FIN 48 effective January 1, 2007, as required. We recorded the
cumulative impact of adopting FIN 48 in retained earnings. We anticipate that
the accounting under the provisions of FIN 48 may provide for greater volatility
in our effective tax rate as items are derecognized or as we record changes in
measurement in interim periods.
We record
deferred tax assets or liabilities based on differences between financial
reporting and tax basis of assets and liabilities using currently enacted rates
and laws that will be in effect when we expect the differences to reverse. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future.
We record
a valuation allowance to reduce the carrying amounts of net deferred tax assets
if there is uncertainty regarding their realization. We consider many factors
when assessing the likelihood of future realization including our recent
cumulative earnings experience by taxing jurisdiction, expectations of future
taxable income, the carryforward periods available to us for tax reporting
purposes and other relevant factors. For
additional discussion of income taxes, see Note 8.
Share-Based Compensation
We
account for our employee stock options under SFAS 123(R), Share-Based Payment, which
requires companies to recognize compensation cost for stock options and other
stock-based awards based on their estimated fair value as measured on the grant
date. We have selected a Black-Scholes model for estimating the grant date fair
value of share-based payments under SFAS 123(R). For additional
discussion of share-based compensation, see Note 7.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin 104 (SAB
104), Revenue Recognition in
Financial Statements, and the appropriate amendments. SAB 104 requires
that four basic criteria must be met before we can recognize
revenue:
1. persuasive
evidence of an arrangement exists;
2. delivery
has occurred or services have been rendered;
3. the
seller’s price to the buyer is fixed or determinable; and
4. collectibility
is reasonably assured.
We record
revenue when customers take delivery of products. Customers may pick up products
at any sales center location, or products may be delivered via our trucks or
third party carriers. Products shipped via third party carriers are considered
delivered based on the shipping terms, which are generally FOB shipping
point.
We may
offer volume incentives, which we accrue monthly as an adjustment to net sales.
We record customer returns, including those associated with early buy programs,
as an adjustment to net sales. In the past, customer returns have not been
material.
We report
revenue net of tax amounts that we collect from our customers and remit to
governmental authorities. These tax amounts may include, but are not limited to,
sales, use, value added and some excise taxes.
45
Derivatives
and Hedging Activities
We
recognize all derivatives at fair value on the balance sheet. The effective
portion of changes in the fair value of derivatives qualifying as cash flow
hedges are recognized in other comprehensive income until the hedged item is
recognized in earnings, or until it becomes unlikely that the hedged transaction
will occur. The ineffective portion of a derivative’s change in fair value is
immediately recognized in earnings.
We
currently have two interest rate swaps in place to reduce our exposure to
fluctuations in interest rates. We designated these swaps as cash flow hedges.
We recognize any differences paid or received on the interest rate swaps as
an adjustment to interest expense over the life of the swaps. For
additional discussion of our interest rate swaps, see Note 5.
Shipping
and Handling Costs
We
include shipping and handling fees billed to customers in net sales and we
record shipping and handling costs associated with inbound freight as cost of
sales. The table below presents shipping and handling costs associated with
outbound freight, which we include in selling and administrative expenses (in
thousands):
2007
|
2006
|
2005
|
||||||
$
|
36,054
|
$
|
32,682
|
$
|
27,332
|
Reclassifications
For
comparative purposes, certain amounts in the 2006 and 2005 financial statements
have been reclassified to conform to the 2007 presentation.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 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 will require the fair value of an asset or liability to be based
on market-based measures that reflect our credit risk. SFAS 157 will also
expand disclosure requirements to include the methods and assumptions used to
measure fair value and the effect of fair value measures on earnings. We will
adopt SFAS 157 on January 1, 2008 and this pronouncement is not
expected to have a material impact on our Consolidated Financial
Statements.
In
December 2007, the FASB issued SFAS 141 (Revised), Business Combinations
(SFAS 141(R)), which replaced SFAS 141, Business Combinations (SFAS 141), and
SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements — an Amendment of
ARB 51 (SFAS 160). SFAS 141(R) retains the fundamental
requirements of SFAS 141, but broadens its scope by applying the
acquisition method to all transactions and other events in which one entity
obtains control over one or more other businesses. SFAS 141(R) also requires
that consideration exchanged be measured at fair value as of the acquisition
date, that liabilities related to contingent consideration be recognized at the
acquisition date and remeasured at fair value in each subsequent reporting
period, that acquisition-related costs be expensed as incurred and that income
be recognized if the fair value of the net assets acquired exceeds the fair
value of the consideration transferred. SFAS 160 establishes accounting and
reporting standards for noncontrolling interests (i.e., minority interests) in a
subsidiary, including changes in a parent’s ownership interest in a subsidiary,
and requires that noncontrolling interests in subsidiaries be classified as a
separate component of equity.
SFAS 141(R)
and SFAS 160 are effective for fiscal years beginning after
December 15, 2008. These pronouncements are required to be applied
prospectively, except for the presentation and disclosure requirements of
SFAS 160, which are required to be applied retrospectively for all periods
presented. We are currently assessing the impact SFAS 141(R) and SFAS 160
will have on our Consolidated Financial Statements.
46
Note
2 - Acquisitions and Divestitures
2007
Acquisitions
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.
2006
Acquisitions
In August
2006, we acquired all of the outstanding stock of Wickham Supply, Inc. and Water
Zone, LP (collectively Wickham), a leading regional irrigation products
distributor. Wickham operates 14 distribution sales centers with
13 locations throughout Texas and one location in Georgia. We have included
the results of operations for Wickham in our Consolidated Financial Statements
since the acquisition date. We finalized the purchase price allocations for our
acquisition of Wickham during the third quarter of 2007.
2005
Acquisitions
In
October 2005, we acquired all of the outstanding stock of Automatic Rain Company
through our newly formed and wholly owned subsidiary Horizon Distributors, Inc.
(Horizon). Horizon is a leading regional wholesale distributor of irrigation and
landscape products serving professional contractors in the landscape
construction and maintenance markets. This transaction brought added depth and
diversity to our operations through an extension of our non-core swimming pool
product offerings and furthered our objective of being the resource for pool and
landscaping contractors. Horizon was a natural addition to our business, as
irrigation and landscaping are often key components to completing a swimming
pool installation or remodel.
The
purchase price for the issued and outstanding stock of Automatic Rain Company
was approximately $87.1 million in cash, which included approximately $1.4
million in working capital adjustments that were recorded as of
December 31, 2005 and paid in 2006. The purchase price was determined
based on our negotiations with the former shareholders of Automatic Rain Company
and our valuation considerations, which included historical and prospective
earnings, net asset value and other valuation considerations consistent with our
historical valuation of acquisitions.
We
finalized the purchase price allocations for our acquisition of Automatic Rain
Company during the third quarter of 2006. In connection with the acquisition, we
recorded other intangible assets totaling $11.8 million for the estimated fair
value of a tradename, a non-compete agreement and certain employment contracts.
We also recorded $35.0 million of goodwill in connection with the
acquisition. Horizon's results of operations are included in the
Consolidated Statements of Income since the acquisition date.
In
October 2005, we also acquired B&B s.r.l. (Busatta), a swimming pool supply
distributor based in the northwestern Italian city of San Bernardo d'Ivrea, near
Turin, as well as the assets of Direct Replacements, Inc., a Marietta, Georgia
packaged pool distributor. Busatta is our first location in Italy and allows us
to further our presence in the European market. We have included the results of
operations for Busatta and Direct Replacements, Inc. in our Consolidated
Financial Statements since the respective acquisition dates. We have finalized
the purchase price allocations for these acquisitions.
47
Note
3 - Goodwill and Other Intangible Assets
In
October 2007, we performed our annual goodwill impairment test. As a
result of this test, we believe the goodwill on our balance sheet is not
impaired.
The
changes in the carrying amount of goodwill are as follows (in
thousands):
Balance
at December 31, 2005
|
$
|
139,546
|
|
Acquired
goodwill
|
14,613
|
||
Purchase
price adjustments, net
|
85
|
||
Balance
at December 31, 2006
|
154,244
|
||
Acquired
goodwill
|
585
|
||
Purchase
price adjustments, net
|
418
|
||
Balance
at December 31, 2007
|
$
|
155,247
|
Purchase
price adjustments in 2007 represent final adjustments for the Wickham
acquisition. Purchase price adjustments in 2006 represent final adjustments for
the Horizon acquisition, the write-off of a $2.1 million deferred tax
liability related to a previous acquisition and final adjustments related to our
other 2005 acquisitions.
Other
intangible assets consist of the following (in thousands):
December
31,
|
||||||
2007
|
2006
|
|||||
Tradename
(indefinite life)
|
$
|
8,400
|
$
|
8,400
|
||
Non-compete
agreements (5.0 year weighted average useful life)
|
18,761
|
18,561
|
||||
Employment
contracts (2.9 year weighted average useful life)
|
1,000
|
1,000
|
||||
Distribution
agreement (5.0 year useful life)
|
6,115
|
6,115
|
||||
34,276
|
34,076
|
|||||
Less
accumulated amortization
|
(19,772
|
)
|
(15,350
|
)
|
||
$
|
14,504
|
$
|
18,726
|
The
tradename has an indefinite useful life, and therefore is not subject to
amortization, but is subject to periodic impairment testing under SFAS 142. The
non-compete agreements, employment contracts and distribution agreements
have finite useful lives and we amortize these agreements using the
straight-line method over their respective contractual terms. Other intangible
amortization expense was $4.5 million in 2007 and $4.6 million in
2006.
The table
below presents estimated amortization expense for other intangible assets for
the next five years (in thousands):
2008
|
$
|
3,186
|
2009
|
1,485
|
|
2010
|
1,053
|
|
2011
|
380
|
|
2012
|
—
|
48
Note
4 - Details of Certain Balance Sheet Accounts
The table
below presents additional information regarding certain balance sheet accounts
(in thousands):
December
31,
|
|||||||
2007
|
2006
|
||||||
Receivables:
|
|||||||
Trade
accounts
|
$
|
21,281
|
$
|
18,952
|
|||
Trade
accounts, pledged
|
95,860
|
103,821
|
|||||
Vendor
incentives
|
32,118
|
34,085
|
|||||
Other
|
1,796
|
2,971
|
|||||
151,055
|
159,829
|
||||||
Less
allowance for doubtful accounts
|
(9,938
|
)
|
(4,892
|
)
|
|||
$
|
141,117
|
$
|
154,937
|
||||
Property
and equipment:
|
|||||||
Land
|
$
|
1,185
|
$
|
1,621
|
|||
Building
|
1,716
|
1,342
|
|||||
Leasehold
improvements
|
17,459
|
14,360
|
|||||
Autos
and trucks
|
1,405
|
1,388
|
|||||
Machinery
and equipment
|
20,065
|
17,439
|
|||||
Computer
equipment
|
16,316
|
18,737
|
|||||
Furniture
and fixtures
|
9,161
|
8,109
|
|||||
Fixed assets in progress | 2,143 | 3,733 | |||||
69,450
|
66,729
|
||||||
Less
accumulated depreciation
|
(35,227
|
)
|
(33,096
|
)
|
|||
$
|
34,223
|
$
|
33,633
|
||||
Other
assets, net:
|
|||||||
Non-current
deferred income taxes
|
$
|
17,275
|
$
|
12,742
|
|||
Other
|
5,599
|
3,287
|
|||||
$
|
22,874
|
$
|
16,029
|
||||
Accrued
expenses and other current liabilities:
|
|||||||
Salaries
and bonuses
|
$
|
13,867
|
$
|
19,006
|
|||
Current
deferred tax liability
|
2,144
|
4,039
|
|||||
Other
|
21,205
|
12,565
|
|||||
$
|
37,216
|
$
|
35,610
|
49
Note
5 - Debt
The
components of our debt for the past two years were as follows (in
thousands):
December
31,
|
|||||||
2007
|
2006
|
||||||
Current
portion:
|
|||||||
Accounts
Receivable Securitization Facility (described below)
|
$
|
68,327
|
$
|
74,286
|
|||
Current
portion of Term Loan
|
3,000
|
3,000
|
|||||
71,327
|
77,286
|
||||||
Long-term
portion:
|
|||||||
Revolving
Line of Credit, variable rate (described below)
|
125,525
|
131,157
|
|||||
Term
Loan, variable rate (described below)
|
54,000
|
57,000
|
|||||
Floating
Rate Senior Notes (described below)
|
100,000
|
—
|
|||||
279,525
|
188,157
|
||||||
Total
debt
|
$
|
350,852
|
$
|
265,443
|
Unsecured
Syndicated Senior Credit Facility
As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) now 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 or trade 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
December 31, 2007, there was $125.5 million outstanding and
$114.0 million available for borrowing under the Revolver. The weighted average
effective interest rate of the Revolver was approximately 6.4% for the year
ended December 31, 2007.
Borrowings
under the Revolver bear interest, at our option, at either of the
following:
a.
|
a
base rate, which is the greater of (i) the prime rate or (ii) the
overnight Federal Funds Rate plus 0.500%; plus a spread ranging from 0% to
0.250% depending on our leverage ratio;
or
|
b.
|
the
London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.500% to
1.250%, with such spread in each case depending on our leverage
ratio.
|
Borrowings
under the Term Loan bear interest, at our option, at either of the
following:
a.
|
a
base rate, which is the greater of (i) the Wachovia Bank, National
Association prime rate or (ii) the overnight Federal Funds Rate plus
0.500%; or
|
b.
|
LIBOR
plus a spread ranging from 0.625% to 0.750%, with such spread in each case
depending on our leverage ratio.
|
We are
also required to pay the following amounts under the Credit
Facility:
a.
|
an
annual facility fee of 0.125% to 0.300%, with such spread in each case
depending on our leverage ratio;
|
b.
|
an
annual letter of credit issuance fee of 0.125% multiplied by the face
amount of each letter of credit;
and
|
c.
|
a
letter of credit commission of 0.500% to 1.250% multiplied by face amount
of each letter of credit, with such spread in each case depending on our
leverage ratio.
|
At
December 31, 2007, there was $57.0 million outstanding on the
Term Loan. Our scheduled quarterly principal installments on the Term Loan began
on March 31, 2007. Future payments on the Term Loan will be $3.0 million in
2008, $6.0 million in 2009 and $48.0 million in 2010. The weighted average
effective interest rate of the Term Loan was approximately 5.7% for the year
ended December 31, 2007.
50
Our
obligations under the Credit Facility are guaranteed by all of our existing and
future direct and indirect domestic subsidiaries. The Credit Facility contains
terms and provisions (including representations, covenants and conditions) and
events of default customary for transactions of this type. If an event of
default occurs and is continuing under the Credit Facility, the lenders may
terminate their obligations under the Credit Facility and may require us to
repay all amounts.
Floating
Rate Senior Notes
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. 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 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.
Accounts
Receivable Securitization Facility
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 Sheets. We employed this arrangement because it provides us
with a lower cost form of financing. At December 31, 2007 there was
$68.3 million outstanding under the Receivables Facility at a weighted average
effective interest rate of 6.0%.
Interest
Rate Swaps
In
December 2005, we entered into an interest rate swap agreement to reduce our
exposure to fluctuations in interest rates. Effective on June 30, 2006, the swap
agreement converts our variable rate Term Loan to a fixed-rate basis until its
termination on December 31, 2008. 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. 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%.
We record
any differences paid or received on our interest rate swaps as adjustments to
interest expense over the life of the swaps. We have designated these swaps as a
cash flow hedges and we record the changes in the fair value of the swaps to
accumulated other comprehensive income. During the year ended
December 31, 2007, no gains or losses were recognized on these swaps and
there was no effect on income from hedge ineffectiveness. The net difference
between interest paid and interest received related to the swap agreements
resulted in a $0.5 million reduction of interest expense. At
December 31, 2007, the combined fair value of the swap
agreements was a $4.0 million unrealized loss in the Consolidated Balance
Sheet.
51
Financial
and Other Covenants
Financial
covenants on our amended Credit Facility include maintenance of a maximum
average total leverage ratio and a minimum fixed charge coverage ratio. Other
covenants include restrictions on our ability to, among other things, pay
dividends or make other capital distributions (other than in accordance with our
current dividend policy). The Credit Facility limits the declaration and payment
of dividends on our common stock to no more than 50% of the preceding year’s net
income, provided that we are not in default or no event of default has occurred
and the dividends are declared and paid in a manner consistent with our past
practice.
Financial
covenants on the Notes and on the Receivables Facility are similar to those on
the Credit Facility. In December 2007, we amended the covenants on the
Receivables Facility to align them more closely with those under the amended
Credit Facility and the Notes.
As of
December 31, 2007, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility, our Notes and our Receivables
Facility.
Deferred
Financing Costs
We
capitalize financing costs we incur related to implementing and amending our
debt. We record these costs as other assets on our Consolidated Balance Sheets
and amortize them over the contractual life of the related debt. The changes in
deferred financing costs are as follows (in thousands):
2007
|
2006
|
|||||
Balance
at beginning of year
|
$
|
856
|
$
|
726
|
||
Financing
costs deferred
|
1,152
|
155
|
||||
Write-off
fully amortized financing costs
|
—
|
(25
|
)
|
|||
Balance
at end of year
|
2,008
|
856
|
||||
Less
accumulated amortization
|
(469
|
)
|
(242
|
)
|
||
$
|
1,539
|
$
|
614
|
Note
6 - Comprehensive Income
Comprehensive
income includes net income, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. Total comprehensive income for
the past three years (in thousands) was:
2007
|
2006
|
2005
|
|||||
$
|
70,883
|
$
|
99,100
|
$
|
79,720
|
Accumulated
other comprehensive income as presented on the Consolidated Balance Sheets
consists of the following components (in thousands):
|
Foreign Currency Translation | Unrealized Gain (Loss) on Interest Rate Swaps | Total | ||||||
Balance
at December 31, 2005
|
$ |
2,240
|
$ |
(101
|
)
|
$ |
2,139
|
||
Net
change
|
3,854
|
222
|
4,076
|
||||||
Balance
at December 31, 2006
|
6,094
|
121
|
6,215
|
||||||
Net
change
|
4,042
|
(2,553
|
)
|
1,489
|
|||||
Balance
at December 31, 2007
|
$
|
10,136
|
$
|
(2,432
|
)
|
$
|
7,704
|
52
Note
7 - Share-Based Compensation
We
adopted SFAS 123(R) on January 1, 2006 using a Black-Scholes-Merton option
valuation model and the modified retrospective transition method. Prior to
January 1, 2006, we accounted for stock option awards under the intrinsic value
method prescribed by APB 25, as permitted by SFAS 123, Accounting for Stock-Based
Compensation. Accordingly, we did not record compensation expense for
options issued with an exercise price equal to the stock’s market price on the
grant date. As of January 1, 2006, we have adjusted all prior period financial
statements and the related footnote disclosures to reflect compensation cost for
the amounts previously reported in our pro-forma footnote disclosures required
by SFAS 123, as corrected for immaterial amounts of compensation cost associated
with our employee stock purchase plan.
Share-Based
Plans
We award
stock options and restricted stock to our employees and non-employee directors
under our stock option plans.
Under the
1995 Stock Option Plan (the 1995 Plan) our Board of Directors (the Board) was
authorized to grant stock options to employees, agents, consultants or
independent contractors. These options generally were exercisable two years
after the grant date, and they expire ten years from the grant date. In May
1998, the Board suspended the 1995 Plan. Options granted prior to the suspension
were not affected by this action.
In May
1998, our stockholders approved the 1998 Stock Option Plan (the 1998 Plan),
which authorized the Board to grant stock options, stock appreciation rights,
restricted stock and performance awards to employees, agents, consultants or
independent contractors. These options generally were exercisable three or more
years after the grant date, and they expire ten years after the grant date. In
May 2002, the Board suspended the 1998 Plan. Options granted prior to the
suspension were not affected by this action.
In May
2002, our stockholders approved the 2002 Long-Term Incentive Plan (the 2002
Plan), which authorized the Board to grant stock options and restricted stock
awards to employees, agents, consultants or independent contractors. In
May 2004, our stockholders approved an amendment to increase the number of
shares authorized for issuance under the 2002 Plan from 1,575,000 to 2,700,000
shares. Granted options have an exercise price equal to our stock’s market price
on the grant date. These options generally vest either five years from the grant
date or on a three/five year split vest schedule, where half of the options vest
three years from the grant date and the remainder vest five years from the grant
date. These options expire ten years from the grant date. In May 2007, the Board
suspended the 2002 Plan. Options granted prior to the suspension were not
affected by this action.
The SCP
Pool Corporation Non-Employee Directors Equity Incentive Plan (the Director
Plan) permitted the Board to grant stock options to each non-employee director.
No more than 1,350,000 shares were authorized to be issued under this plan.
Granted options have an exercise price equal to our stock’s market price on the
grant date. The options generally may be exercised one year after the grant
date, and they expire ten years after the grant date. The Director Plan expired
during 2006.
In May
2007, our stockholders approved the 2007 Long-Term Incentive Plan (the 2007
LTIP), which authorizes the Compensation Committee of our Board to grant
non-qualified stock options and restricted stock to employees, directors,
consultants or advisors. The 2007 LTIP has replaced the 2002 Plan and
the Director Plan. 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.
53
Stock
Option Awards
The
following is a summary of the stock option activity under our stock option plans
for the year ended December 31, 2007:
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
|||||||
Balance
at December 31, 2006
|
6,271,959
|
$
|
14.26
|
|||||||
Granted
|
551,875
|
37.08
|
||||||||
Exercised
|
(838,746
|
)
|
7.23
|
|||||||
Forfeited
|
(107,723
|
)
|
33.75
|
|||||||
Balance
at December 31, 2007
|
5,877,365
|
$
|
17.05
|
4.78
|
$
|
42,715,526
|
||||
Exercisable
at December 31, 2007
|
3,572,108
|
$
|
9.65
|
3.21
|
$
|
38,732,856
|
The table
below summarizes information about stock options outstanding and exercisable at
December 31, 2007:
Outstanding
Stock Options
|
Exercisable
Stock Options
|
||||||||
Weighted
Average
|
Weighted
|
Weighted
|
|||||||
Remaining
|
Average
|
Average
|
|||||||
Range
of exercise prices
|
Shares
|
Contractual
Life (years)
|
Exercise
Price
|
Shares
|
Exercise
Price
|
||||
$
0.00 to $ 5.99
|
1,453,377
|
1.67
|
$
|
3.64
|
1,453,377
|
$
|
3.64
|
||
$
6.00 to $ 11.99
|
1,670,086
|
4.05
|
10.79
|
1,164,956
|
10.27
|
||||
$
12.00 to $ 17.99
|
606,428
|
4.18
|
13.08
|
603,503
|
13.08
|
||||
$
18.00 to $ 23.99
|
557,732
|
6.11
|
21.67
|
214,355
|
21.67
|
||||
$
24.00 to $ 29.99
|
36,500
|
6.52
|
26.74
|
12,750
|
26.91
|
||||
$
30.00 to $ 47.30
|
1,553,242
|
8.18
|
36.00
|
123,167
|
35.23
|
||||
5,877,365
|
4.78
|
$ |
17.05
|
3,572,108
|
$
|
9.65
|
The
following table summarizes the cash proceeds and tax benefits realized from the
exercise of stock options:
Year
Ended December 31,
|
|||||||||
(In
thousands, except share data)
|
2007
|
2006
|
2005
|
||||||
Options
exercised
|
838,746
|
1,072,286
|
1,124,241
|
||||||
Cash
proceeds
|
$
|
6,061
|
$
|
5,287
|
$
|
3,311
|
|||
Intrinsic
value of options exercised
|
$
|
24,457
|
$
|
39,921
|
$
|
35,788
|
|||
Tax
benefits realized
|
$
|
9,443
|
$
|
15,414
|
$
|
14,133
|
We
estimated the fair value of employee stock option awards at the grant date based
on the assumptions summarized in the following table:
Year
Ended December 31,
|
|||||||||
(Weighted
average)
|
2007
|
2006
|
2005
|
||||||
Expected
volatility
|
29.6
|
%
|
30.8
|
%
|
30.3
|
%
|
|||
Expected
term
|
6.5
|
years
|
6.0
|
years
|
7.0
|
years
|
|||
Risk-free
interest rate
|
4.49
|
%
|
4.33
|
%
|
4.22
|
%
|
|||
Expected
dividend yield
|
1.0
|
%
|
1.0
|
%
|
1.0
|
%
|
|||
Grant
date fair value
|
$
|
12.99
|
$
|
13.27
|
$
|
11.34
|
54
We
calculated expected volatility over the expected term of the awards based on our
historical volatility. In 2006, we began using weekly price observations for our
historical volatility calculation because we believe that they provide a more
appropriate measurement of volatility given the trading patterns of our common
stock. Prior to 2006, we used monthly price observations for our historical
volatility calculation. We estimated the expected term based on the vesting
period of the awards and our historical exercise activity for awards with
similar characteristics. The risk-free interest rate is based on the U.S.
Treasury zero-coupon issues with a remaining term approximating the expected
term of the option. We determined the expected dividend yield based on the
anticipated dividends over the expected term.
For
purposes of recognizing share-based compensation expense, we ratably expense the
estimated fair value of employee stock options over the options’ requisite
service period. Generally, the requisite service period for our share-based
awards is the vesting period. We recognize compensation cost for awards with
graded vesting using the graded vesting recognition method.
The table
below presents the total share-based compensation expense for stock option
awards and the related recognized tax benefits for the past three years (in
thousands):
2007
|
2006
|
2005
|
|||||||
Share-based
compensation expense
|
$
|
5,875
|
$
|
6,554
|
$
|
5,344
|
|||
Recognized
tax benefits
|
2,268
|
2,525
|
2,078
|
In 2006,
we modified certain stock option agreements to reflect the proper grant
dates and exercise prices. There was no material impact related to the
modification of these stock option agreements. As such, we did not recognize any
additional share-based compensation expense.
Restricted Stock
Awards
The
following is a summary of the restricted stock awards activity under our stock
option plans for the year ended December 31, 2007:
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||
Balance
unvested at December 31, 2006
|
49,900
|
$
|
21.03
|
|||
Granted
(at market price)
|
66,151
|
37.85
|
||||
Vested
|
(2,500
|
)
|
21.67
|
|||
Forfeited
|
(3,750
|
)
|
37.85
|
|||
Balance
unvested at December 31, 2007
|
109,801
|
$
|
30.58
|
The
restricted stock awards generally vest one year from the grant date for awards
to directors and five years from the grant date for other awards. At December
31, 2007, the unamortized compensation expense related to the restricted stock
awards totaled $1.5 million, which will be recognized over a weighted
average period of 2.04 years. The total fair value of restricted stock awards
vested during the years ended December 31, 2007, 2006 and 2005 was
$0.1 million for each year. Total share-based compensation expense
recognized related to these restricted stock awards was $1.3 million, $0.2
million and $0.3 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
Employee
Stock Purchase Plan
In March
1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan
(the ESPP). Under our ESPP, employees who meet minimum age and length of service
requirements may purchase stock at 85% of the lower of:
a.
|
the
closing price of our common stock at the end of a six month plan period
ending either June 30 or December 31; or
|
b. | the average of the beginning and ending closing prices of our common stock for such six month period. |
55
No more
than 956,250 shares of our common stock may be issued under our ESPP. For the
two plan periods in each year presented below, we awarded the following
aggregate share amounts:
2007
|
2006
|
2005
|
|||||
50,482
|
49,666
|
49,795
|
Share-based
compensation expense related to our ESPP was $0.2 million in 2007, $0.4 million
in 2006 and $0.3 million in 2005. The grant date fair value for the most
recent purchase period ended December 31, 2007 was $2.97 per
share.
Note
8 - Income Taxes
Income
from continuing operations before the provision for income taxes is attributable
to the following jurisdictions (in thousands):
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
2005
|
||||||
United
States
|
$
|
107,853
|
$
|
147,345
|
$
|
124,679
|
|||
Foreign
|
3,773
|
4,841
|
4,250
|
||||||
Total
|
$
|
111,626
|
$
|
152,186
|
$
|
128,929
|
The
provision for income taxes consisted of the following (in
thousands):
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
Current:
|
||||||||||
Federal
|
$
|
41,040
|
$
|
49,603
|
$
|
44,864
|
||||
State
and other
|
6,471
|
8,812
|
8,381
|
|||||||
47,511
|
58,415
|
53,245
|
||||||||
Deferred:
|
||||||||||
Federal
|
(4,005
|
)
|
362
|
(2,844
|
)
|
|||||
State
and other
|
(352
|
)
|
(18
|
)
|
(460
|
)
|
||||
(4,357
|
)
|
344
|
(3,304
|
)
|
||||||
Total
|
$
|
43,154
|
$
|
58,759
|
$
|
49,941
|
56
We made
payments related to income taxes totaling $31.0 million in 2007 and
$74.8 million in 2006. We deferred our third and fourth quarter 2005
estimated federal tax payments as allowed by the Katrina Emergency Tax Relief
Act of 2005 (the Act). These payments of approximately $27.0 million were paid
in October 2006.
A
reconciliation of the U.S. federal statutory tax rate to our effective tax rate
on income before income taxes and equity earnings is as follows:
Year
Ended December 31,
|
|||||||||
2007
|
2006
|
2005
|
|||||||
Federal
statutory rate
|
35.00
|
%
|
35.00
|
%
|
35.00
|
%
|
|||
Other,
primarily state income tax rate
|
3.66
|
3.61
|
3.74
|
||||||
Total
effective tax rate
|
38.66
|
%
|
38.61
|
%
|
38.74
|
%
|
We
recorded equity earnings in LAC net of a deferred tax liability of $0.9 million
in 2007 and $1.0 million in 2006. These amounts are not reflected in the tables
above.
The
components of the deferred tax assets and liabilities are as follows (in
thousands):
December
31,
|
||||||
2007
|
2006
|
|||||
Deferred
tax assets:
|
||||||
Product
inventories
|
$
|
6,417
|
$
|
5,380
|
||
Accrued
expenses
|
1,418
|
1,482
|
||||
Allowance
for doubtful accounts
|
1,304
|
814
|
||||
Total
current
|
9,139
|
7,676
|
||||
Leases
|
1,206
|
1,073
|
||||
Share-based
compensation
|
12,155
|
10,483
|
||||
Depreciation
|
135
|
331
|
||||
Uncertain
tax positions
|
1,062
|
—
|
||||
Net
operating losses
|
1,082
|
304
|
||||
Interest
rate swaps
|
1,529
|
—
|
||||
Other
|
1,188
|
855
|
||||
18,357
|
13,046
|
|||||
Less:
Valuation allowance
|
(1,082
|
)
|
(304)
|
|||
Total
non-current
|
17,275
|
12,742
|
||||
Total
deferred tax assets
|
26,414
|
20,418
|
||||
Deferred
tax liabilities:
|
||||||
Trade
discounts on purchases
|
716
|
2,726
|
||||
Prepaid
expenses
|
1,428
|
1,313
|
||||
Total
current
|
2,144
|
4,039
|
||||
Intangible
assets, primarily goodwill
|
15,188
|
13,099
|
||||
Equity
earnings in unconsolidated interests
|
2,526
|
1,924
|
||||
Total
non-current
|
17,714
|
15,023
|
||||
Total
deferred tax liabilities
|
19,858
|
19,062
|
||||
Net
deferred tax asset
|
$
|
6,556
|
$
|
1,356
|
At
December 31, 2007, certain international subsidiaries had tax loss carryforwards
of approximately $3.2 million, which expire in various years after
2008. Deferred tax assets related to the tax loss carryforwards of
these international subsidiaries were $1.1 million as of December 31, 2007 and
$0.3 million as of December 31, 2006. We have recorded a
corresponding valuation allowance of $1.1 million and $0.3 million in the
respective years.
57
As
presented in the Consolidated Statements of Cash Flows, the change in deferred
income taxes includes, among other items, the change in deferred income taxes
related to the deferred income tax provision, the change in deferred income
taxes related to the increase in equity earnings in unconsolidated investments
and the change in deferred income taxes related to the estimated tax impact of
accumulated other comprehensive income.
We reduce
federal and state income taxes payable by the tax benefits associated with the
exercise of nonqualified stock options. We receive an income tax benefit based
on the difference between the option exercise price and the fair market value of
the stock at the time the option is exercised. To the extent realized tax
deductions for option exercises exceed the amount of previously recognized
deferred tax benefits related to share-based compensation for these option
awards, we record an excess tax benefit in stockholders' equity. We
recorded excess tax benefits of $8.5 million in 2007 and
$14.6 million in 2006.
As of
December 31, 2007, United States income taxes were not provided on earnings of
our foreign subsidiaries, as we have invested or expect to invest the
undistributed earnings indefinitely. If in the future these earnings are
repatriated to the United States, or if we determine that the earnings will be
remitted in the foreseeable future, additional income tax provisions may be
required.
We hold,
through our affiliates, cash balances in the countries in which we operate,
including significant amounts held outside the United States. Most of the
amounts held outside the United States could be repatriated to the United
States, but, under current law, may be subject to United States federal income
taxes, less applicable foreign tax credits. Repatriation of some foreign
balances is restricted by local laws including the imposition of withholding
taxes in some jurisdictions. We have not provided for the United States federal
tax liability on these amounts and for financial statement purposes, these
foreign cash balances are considered indefinitely reinvested outside the United
States.
The
following is a summary of the activity related to uncertain tax positions for
the year ended December 31, 2007 (in thousands):
Balance
at January 1, 2007
|
$
|
3,345
|
|
Decreases
for tax positions taken during a prior period
|
(126
|
)
|
|
Increases
for tax positions taken during the current period
|
1,009
|
||
Decreases
resulting from the expiration of the statute of
limitations
|
(588
|
)
|
|
Decreases
relating to settlements
|
(102
|
)
|
|
Balance
at December 31, 2007
|
$
|
3,538
|
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
unrecognized tax benefits was approximately $3.3 million.
The total
amount of unrecognized tax benefits that, if recognized, would decrease the
effective tax rate was $2.2 million at January 1, 2007 and $2.3 million
December 31, 2007.
Effective
January 1, 2007, in connection with the adoption of FIN 48, we changed our
accounting policy and now recognize accrued interest related to unrecognized tax
benefits in interest expense and recognize penalties in selling and
administrative expenses. These amounts were previously classified as
a component of income tax expense. We had approximately $0.4 million
in accrued interest at both January 1, 2007 and December 31, 2007.
We file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. With few exceptions, we are no longer subject
to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 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.
58
Note
9 - Earnings Per Share
The table
below presents the reconciliation of basic and diluted weighted average number
of shares outstanding (in thousands):
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
Net
income
|
$
|
69,394
|
$
|
95,024
|
$
|
80,455
|
||||
Weighted
average common shares outstanding:
|
||||||||||
Basic
|
48,887
|
51,866
|
52,445
|
|||||||
Effect
of dilutive securities:
|
||||||||||
Stock
options
|
1,848
|
2,758
|
3,185
|
|||||||
Restricted
stock awards
|
62
|
30
|
24
|
|||||||
Employee
stock purchase plan
|
5
|
8
|
11
|
|||||||
Diluted
|
50,802
|
54,662
|
55,665
|
The
weighted average diluted shares outstanding for the year ended December 31, 2007
exclude stock options to purchase 1,077,375 shares. 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 years ended December 31, 2006 and
December 31, 2005.
Note
10 - Commitments and Contingencies
We lease
facilities for our corporate office, sales centers, vehicles and equipment under
operating leases that expire in various years through 2027. Most of our leases
contain renewal options, some of which involve rate increases. For leases with
step rent provisions whereby the rental payments increase incrementally over the
life of the lease, we recognize the total minimum lease payments on a
straight-line basis over the minimum lease term. The table below presents rent
expense associated with operating leases for the past three years (in
thousands):
2007
|
2006
|
2005
|
|||||
$
|
66,015
|
$
|
58,398
|
$
|
43,513
|
The table
below sets forth the approximate future minimum lease payments as of
December 31, 2007 related to non-cancelable operating leases and the
non-cancelable portion of certain vehicle operating leases with initial terms of
one year or more (in thousands):
2008
|
$
|
46,754
|
2009
|
40,977
|
|
2010
|
34,153
|
|
2011
|
26,086
|
|
2012
|
19,016
|
|
Thereafter
|
34,858
|
From time
to time, we are subject to various claims and litigation arising in the ordinary
course of business, including product liability, personal injury, commercial,
contract and employment matters. While the outcome of any litigation is
inherently unpredictable, we do not believe, based on currently available facts,
that the ultimate disposition of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
Note
11 - Related Party Transactions
In May
2005, we acquired a 50% membership interest in NCC through a $1.1 million
cash contribution. NCC owns and operates an office building in Covington,
Louisiana. We lease corporate and administrative offices from NCC, occupying
approximately 50,000 square feet of office space. We amended the lease agreement
in May 2005. The amended agreement has a 10 year term and, as of
December 31, 2007, we pay rent of $67,258 per month.
59
In
October 1999, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Mandeville, Louisiana. The sole member of S&C
Development, LLC is A. David Cook, a POOL executive officer. The original seven
year lease term commenced on January 1, 2000 and was set to expire on
December 31, 2006. We renewed this lease for an additional seven year
term. In November, 2007, S&C Development, LLC sold this facility
to an unrelated third party and we executed a lease with the new
landlord.
In
January 2002, we entered into a lease agreement with S&C Development, LLC
for additional warehouse space adjacent to our Mandeville sales center. The
original five year lease term commenced on February 4, 2002, and was
set to expire on December 31, 2006. We renewed this lease for an additional
seven year term. We pay rent of $4,985 per month for the 8,600 square
foot space. The lease will expire on December 31, 2013.
In
January 2001, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Oklahoma City, Oklahoma. The ten year lease
term commenced on November 10, 2001 and will expire on
November 30, 2011. As of December 31, 2007, we
pay rent of $12,995 per month for the 25,000 square foot facility.
In March
1997, we entered into a lease agreement with Kenneth St. Romain for a sales
center facility in Baton Rouge, Louisiana. Kenneth St. Romain is a POOL Group
Vice President. We extended this lease for a third term of five
years, which commenced on March 1, 2007 and will expire on February
28, 2012. As of December 31, 2007, we pay rent of $10,723
per month for the 23,500 square foot facility.
In May
2001, we entered into a lease agreement with Kenneth St. Romain for a sales
center facility in Jackson, Mississippi. The seven year lease term commenced on
November 16, 2001 and will expire on November 30, 2008. As
of December 31, 2007, we pay rent of $8,580 per month for the 20,000
square foot facility.
The table
below presents rent expense associated with these leases for the past three
years (in thousands):
2007
|
2006
|
2005
|
|||||
$
|
1,317
|
$
|
952
|
$
|
946
|
Note
12 - Employee Benefit Plans
We offer
a 401(k) savings and retirement plan, which provides benefits for substantially
all employees who meet minimum age and length of service requirements. Eligible
employees are able to contribute up to 75% of their compensation, subject to the
federal dollar limit. For plan participants, we
provide a matching contribution. As of January 1, 2007, we contribute
a total match on employee contributions of up to 4% of their compensation, with
a 100% match on the first 3% of compensation deferred and a 50% match on
deferrals between 3% and 5% of compensation.
Effective
March 1, 2005, we adopted the Pool Corp Deferred Compensation Plan, a
nonqualified deferred compensation plan. The plan allows certain employees who
occupy key management positions to defer salary and bonus amounts, and provides
a matching contribution similar to that provided under our 401(k) plan to the
extent that a participant’s contributions to the 401(k) plan are limited by IRS
non-discrimination limitations. The total Company matching contribution provided
to a participant under the 401(k) plan and the Pool Corp Deferred Compensation
Plan combined for any one year may not exceed 4% of a participant’s salary and
bonus.
The
employee and Company sponsored contributions are invested in certain equity and
fixed income securities based on individual employee elections.
60
The table
below sets forth our matching contributions for the past three years
(in thousands):
2007
|
2006
|
2005
|
|||||||
Matching
contributions 401(k)
|
$
|
3,497
|
$
|
3,043
|
$
|
2,244
|
|||
Matching
contributions deferred compensation plan
|
32
|
125
|
77
|
Note
13 - Quarterly Financial Data (Unaudited)
The table
below summarizes the unaudited quarterly operating results of operations for the
past two years (in thousands, except per share data):
Quarter
|
|||||||||||||||||||||||||
2007
|
2006
|
||||||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||
Net
sales
|
$
|
373,706
|
$
|
726,472
|
$
|
527,434
|
$
|
300,755
|
$
|
348,556
|
$
|
705,703
|
$
|
537,017
|
$
|
318,486
|
|||||||||
Gross
profit
|
103,485
|
207,922
|
139,803
|
79,436
|
98,048
|
209,000
|
149,995
|
82,905
|
|||||||||||||||||
Net
income (loss)
|
1,354
|
57,794
|
21,835
|
(11,589
|
)
|
6,422
|
62,110
|
31,493
|
(5,001
|
)
|
|||||||||||||||
Earnings
(loss) per share:
|
|||||||||||||||||||||||||
Basic
|
$
|
0.03
|
$
|
1.17
|
$
|
0.45
|
$
|
(0.24
|
)
|
$
|
0.12
|
$
|
1.18
|
$
|
0.61
|
$
|
(0.10
|
)
|
|||||||
Diluted
|
$
|
0.03
|
$
|
1.12
|
$
|
0.43
|
$
|
(0.24
|
)
|
$
|
0.12
|
$
|
1.12
|
$
|
0.58
|
$
|
(0.10
|
)
|
The sum
of basic and diluted earnings per share for each of the quarters does not equal
the total basic and diluted earnings per share for the annual periods because of
rounding differences and a difference in the way that in-the-money stock
options are considered from quarter to quarter under the requirements of SFAS
128, Earnings per
Share.
Note
14 - Subsequent Event
On
February 16, 2008, we signed a definitive purchase agreement to acquire National
Pool Tile Group, Inc. (National Pool Tile), the leading wholesale distributor of
pool tile and composite pool finishes. National Pool Tile serves professional
contractors in the swimming pool refurbish and construction markets through 15
distribution sales centers. We expect the transaction to close in March 2008 and
we intend to fund this transaction through utilization of our existing bank
facilities.
61
Not
applicable.
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
December 31, 2007, management, including the CEO and CFO, performed an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, management, including the CEO and CFO, concluded that as of
December 31, 2007, our disclosure controls and procedures were
effective.
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Based on the most recent
evaluation, we have concluded that no change in our internal control over
financial reporting occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
62
Management’s
Report on Internal Control Over Financial Reporting
POOL’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. Our internal
control system was designed to provide reasonable assurance to POOL’s management
and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Any evaluation or projection of
effectiveness to future periods is also subject to risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
POOL’s
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management has concluded that, as of
December 31, 2007, POOL’s internal control over financial reporting was
effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
The
independent registered public accounting firm that audited the consolidated
financial statements included in Item 8 of this Form 10-K has issued a
report on POOL’s internal controls over financial reporting. This report appears
below.
63
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Pool
Corporation
We have
audited Pool Corporation’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Pool Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Pool Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pool
Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007 of Pool Corporation and our report
dated February 29, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young
LLP
New
Orleans, Louisiana
February
29, 2008
64
Not
applicable.
PART
III.
Incorporated
by reference to POOL’s 2008 Proxy Statement to be filed with the
SEC.
Incorporated
by reference to POOL’s 2008 Proxy Statement to be filed with the
SEC.
Incorporated
by reference to POOL’s 2008 Proxy Statement to be filed with the
SEC.
Incorporated
by reference to POOL’s 2008 Proxy Statement to be filed with the
SEC.
Incorporated
by reference to POOL’s 2008 Proxy Statement to be filed with the
SEC.
65
PART
IV.
(a)
|
The
following documents are filed as part of this
report:
|
(1)
|
Consolidated
Financial Statements:
|
||
Page
|
|||
35
|
|||
36
|
|||
37
|
|||
38
|
|||
40
|
|||
41
|
|||
(2)
|
Financial
Statement Schedules.
|
||
All
schedules are omitted because they are not applicable or are not
required
|
|||
or
because the required information is provided in our Consolidated
Financial
|
|||
Statements
or accompanying Notes included in Item 8 of this Form
10-K.
|
|||
(3)
|
The
exhibits listed in the Index to the Exhibits.
|
||
66
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on February
29, 2008.
POOL
CORPORATION
|
|
By:
|
/s/
WILSON B. SEXTON
|
Wilson
B. Sexton, Chairman of the Board and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on February 29, 2008.
Signature:
|
Title:
|
/s/
WILSON B. SEXTON
|
|
Wilson
B. Sexton
|
Chairman
of the Board and Director
|
/s/
MANUEL J. PEREZ DE LA MESA
|
|
Manuel
J. Perez de la Mesa
|
President,
Chief Executive Officer and Director
|
/s/
MARK W. JOSLIN
|
|
Mark
W. Joslin
|
Vice
President and Chief Financial Officer (Principal Accounting
Officer)
|
/s/
ANDREW W. CODE
|
|
Andrew
W. Code
|
Director
|
/s/
JAMES J. GAFFNEY
|
|
James
J. Gaffney
|
Director
|
/s/
GEORGE T. HAYMAKER
|
|
George
T. Haymaker
|
Director
|
/s/
HARLAN F. SEYMOUR
|
|
Harlan
F. Seymour
|
Director
|
/s/
ROBERT C. SLEDD
|
|
Robert
C. Sledd
|
Director
|
/s/
JOHN E. STOKELY
|
|
John
E. Stokely
|
Director
|
67
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this
Form
10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
3.1
|
Restated
Certificate of Incorporation of the Company.
|
10-Q
|
000-26640
|
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
|
||||||
10.1
|
*
|
SCP
Pool Corporation 1995 Stock Option Plan.
|
S-1
|
33-92738
|
08/18/1995
|
|||||
10.2
|
*
|
Form
of Individual Stock Option Agreement under 1995 Stock Option
Plan.
|
S-1
|
33-92738
|
08/18/1995
|
|||||
10.3
|
*
|
Amended
and Restated Non-Employee Directors Equity Incentive Plan,
|
10-Q
|
000-26640
|
08/13/2001
|
|||||
10.4
|
as
amended by Amendment No. 1.
|
10-Q
|
000-26640
|
07/25/2002
|
||||||
10.5
|
*
|
SCP
Pool Corporation 1998 Stock Option Plan.
|
DEF
14A
|
000-26640
|
04/08/1998
|
|||||
10.6
|
*
|
Form
of Stock Option Agreement under 1998 Stock Option Plan.
|
10-K
|
000-26640
|
03/31/1999
|
|||||
10.7
|
*
|
Amended
and Restated SCP Pool Corporation Employee Stock Purchase Plan.
|
10-Q
|
000-26640
|
07/25/2002
|
|||||
10.8
|
*
|
Amended
and Restated SCP Pool Corporation 2002 Long-Term Incentive
Plan.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.9
|
*
|
Form
of Stock Option Agreement under 2002 Long-Term Incentive
Plan.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.10
|
*
|
Pool
Corporation 2007 Long-Term Incentive Plan
|
8-K
|
000-26640
|
05/11/2007
|
|||||
10.11
|
*
|
Form
of Stock Option Agreement for Employees under the 2007 Long-Term Incentive
Plan
|
8-K
|
000-26640
|
05/11/2007
|
|||||
10.12
|
*
|
Form
of Restricted Stock Agreement for Employees under the 2007 Long-Term
Incentive Plan
|
8-K
|
000-26640
|
05/11/2007
|
|||||
10.13
|
*
|
Form
of Stock Option Agreement for Directors under the 2007 Long-Term Incentive
Plan
|
8-K
|
000-26640
|
05/11/2007
|
|||||
10.14
|
*
|
Form
of Restricted Stock Agreement for Directors under the 2007 Long-Term
Incentive Plan
|
8-K
|
000-26640
|
05/11/2007
|
|||||
10.15
|
*
|
Employment
Agreement, dated January 25, 1999, among SCP Pool Corporation, South
Central Pool Supply, Inc. and Manuel J. Perez de la Mesa.
|
10-K
|
000-26640
|
03/31/1999
|
|||||
10.16
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC and A.
David Cook.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.17
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC and
Christopher W. Wilson.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
68
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this
Form
10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
10.18
|
*
|
Employment
Agreement, dated January 17, 2003, between SCP Distributors, LLC and
Stephen C. Nelson.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.19
|
*
|
Compensation
of Non-Employee Directors.
|
10-K
|
000-26640
|
03/07/2006
|
|||||
10.20
|
*
|
Form
of Indemnity Agreement for Directors and Officers.
|
10-Q
|
000-26640
|
10/29/2004
|
|||||
10.21
|
Louisiana
Tax Equalization Agreement.
|
10-Q
|
000-26640
|
10/29/2004
|
||||||
10.22
|
*
|
Tax
Reimbursement Arrangement
|
10-Q
|
000-26640
|
07/30/2004
|
|||||
10.23
|
Receivables
Sale Agreement dated as of March 27, 2003, among SCP Distributors LLC, SCP
Services LP and Superior Pool Products LLC, as Originators, and Superior
Commerce LLC, as Buyer.
|
10-Q
|
000-26640
|
04/30/2003
|
||||||
10.24
|
Receivables
Purchase Agreement dated as of March 27, 2003, among Superior Commerce,
LLC, as Seller, SCP Distributors LLC, as Servicer, Jupiter Securitization
Corporation and Bank One, NA (Main Office Chicago) as
Agent
|
10-Q
|
000-26640
|
04/30/2003
|
||||||
10.25
|
as
amended by amendment dated as of March 25, 2004
|
10-Q
|
000-26640
|
04/30/2004
|
||||||
10.26
|
Omnibus
Amendment for Amendment No. 7 to Receivables Purchase Agreement and
Amendment No. 2 to Receivables Sales Agreement, dated as of March 22,
2007, among SCP Distributors, LLC, Superior Pool Products, LLC, Horizon
Distributors, Inc., Superior Commerce LLC, JPMorgan Chase Bank, N.A. f/k/a
Bank One, NA (Main Office Chicago) and Jupiter Securitization
Corporation
|
8-K
|
000-26640
|
3/26/2007
|
||||||
10.27
|
Amendment
No. 8 to the Receivables Purchase Agreement, dated as of
March
29, 2007.
|
10-Q
|
000-26640
|
5/02/2007
|
||||||
Amendment
No. 9 to the Receivables Purchase Agreement, dated as of
August
10, 2007.
|
X
|
|||||||||
Amendment
No. 10 to the Receivables Purchase Agreement, dated as of December 20,
2007.
|
X
|
|||||||||
10.30
|
Intercreditor
Agreement dated as of March 27, 2003, by and between Bank One, NA, as
agent under the Credit Agreement, and Bank One, NA (Main Office Chicago),
as agent under the Receivables Purchase Agreement.
|
10-Q
|
000-26640
|
04/30/2003
|
||||||
10.31
|
Performance
Undertaking dated as of March 27, 2003, by and between SCP Pool
Corporation and Superior Commerce LLC.
|
10-Q
|
000-26640
|
04/30/2003
|
||||||
69
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this
Form
10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
10.32
|
Asset
Exchange Agreement, dated as of November 12, 2004 by and among SCP Pool
Corporation, Les Industries R.P. Inc. and Latham Acquisition
Corp.
|
10-K
|
000-26640
|
03/01/2005
|
||||||
10.33
|
Asset
Contribution Agreement, dated as of November 12, 2004 by and among SCP
Pool Corporation, Fort Wayne Pools, Inc and Latham Acquisition
Corp.
|
10-K
|
000-26640
|
03/01/2005
|
||||||
10.34
|
Subscription
and Stockholders’ Agreement, dated as of November 12, 2004, by and among
Latham Acquisition Corp., Fort Wayne Pools, Inc., Brockway Moran &
Partners Fund II, L.P. and Brockway Moran & Partners II. Co-Invest
Fund, L.P
|
10-K
|
000-26640
|
03/01/2005
|
||||||
10.35
|
Lease
(Mandeville Service Center) entered into as of October 19, 1999,
by and between S&C Development Company, LLC and South Central Pool
Supply, Inc, as amended by Lease Agreement Amendment No. One, entered into
as of May 26, 2000, by and between S&C Development Company, LLC and
South Central Pool Supply, Inc
|
10-Q
|
000-26640
|
07/30/2004
|
||||||
10.36
|
as
amended by the Second Amendment entered into as of January 16, 2007 by and
between S&C Development Company, LLC and SCP Distributors,
LLC
|
10-K
|
000-26640
|
03/01/2007
|
||||||
10.37
|
as
amended by Lease Agreement (Warehouse) entered into as of
January
16, 2002, by and between S&C Development Company, LLC and
SCP
Distributors, LLC, as amended by First Amendment entered into as of
February
11, 2002 by and between S&C Development Company, LLC and
SCP
Distributors, LLC
|
10-Q
|
000-26640
|
07/30/2004
|
||||||
10.38
|
as
amended by Second Amendment entered into as of January 16, 2007 by and
between S&C Development Company, LLC and SCP Distributors,
LLC.
|
10-K
|
000-26640
|
03/01/2007
|
||||||
10.39
|
Lease
(Oklahoma Service Center) entered into as of January 15, 2001, by and
between Dave Cook, individually and SCP Pool Corporation, as amended by
First Amendment, entered into as of October 24, 2001 by and between
S&C Development, LLC and SCP Pool Corporation, as amended by First
Amendment, entered into, as of December 5, 2001 by and between S&C
Development, LLC and SCP Pool Corporation.
|
10-Q
|
000-26640
|
07/30/2004
|
||||||
70
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this Form 10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
10.40
|
*
|
Form
of Stock Option Agreement under the Non-employee Directors Equity
Incentive Plan.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.41
|
Nonqualified
Deferred Compensation Plan Basic Plan Document, dated
March
1, 2005.
|
10-Q
|
000-26640
|
04/29/2005
|
||||||
10.42
|
Nonqualified
Deferred Compensation Plan Adoption Agreement by an among SCP
Distributors, L.L.C., Superior Pool Products, L.L.C. and Cypress, Inc.,
dated March 1, 2005
|
10-Q
|
000-26640
|
04/29/2005
|
||||||
10.43
|
Trust
Agreement by and among SCP Distributors, L.L.C., Superior Pool Products,
L.L.C. and Cypress, Inc. and T. Rowe Price Trust Company, dated March 1,
2005.
|
10-Q
|
000-26640
|
04/29/2005
|
||||||
10.44
|
Agreement
and Plan of Merger by and among Automatic Rain Company, Horizon
Distributors, Inc. and the Shareholder Parties, dated August 26,
2005.
|
8-K
|
000-26640
|
10/04/2005
|
||||||
10.45
|
Note
Purchase Agreement by and among Pool Corporation and the Purchasers party
thereto.
|
8-K
|
000-26640
|
02/15/2007
|
||||||
10.46
|
Subsidiary
Guaranty by Pool Corporation in favor of the holders from time to time of
the Notes.
|
8-K
|
000-26640
|
02/15/2007
|
||||||
10.47
|
*
|
Pool
Corporation Executive Bonus Plan
|
10-K
|
000-26640
|
03/01/2007
|
|||||
Amended
and Restated Credit Agreement dated as of December 20, 2007, among Pool
Corporation, as US Borrower, SCP Distributors Inc., as Canadian Borrower,
the Lenders, Wachovia Bank, National Association, as Administrative Agent,
Swingline Lender and Issuing Lender, Wachovia Capital Finance Corporation
(Canada) as Canadian Dollar Lender, JPMorgan Chase Bank, a syndication
Agent, Wells Fargo Bank National Association, Regions Bank and Capital
One, National Association, as Documentation Agents.
|
X
|
|||||||||
Amended
and Restated Subsidiary Guaranty Agreement dated as of
December
20, 2007.
|
X
|
|||||||||
14
|
Code
of Business Conduct and Ethics for Directors, Officers and
Employees.
|
10-K
|
000-26640
|
03/01/2004
|
||||||
Subsidiaries
of the registrant.
|
X
|
|||||||||
Consent
of Ernst & Young LLP.
|
X
|
|||||||||
Certification
by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
|||||||||
Certification
by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and
15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
X
|
|||||||||
Certification
by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
X
|
|
*
|
Indicates
a management contract or compensatory plan or
arrangement
|
71