POOL CORP - Annual Report: 2008 (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, 2008
or
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number: 0-26640
![Pool Logo](https://www.sec.gov/Archives/edgar/data/0000945841/000094584109000010/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 “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨
Non-accelerated
filer ¨
(Do not check if a smaller reporting
company) Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES ¨ NOx
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based on the closing sales price of the
Registrant’s common stock as of June 30, 2008 was
$819,774,338.
As of
February 20, 2009, the Registrant had 48,281,726 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 27, 2009 for the
Annual
Meeting to be held on May 5, 2009, 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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7
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Item
1B.
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11
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Item
2.
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11
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Item
3.
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13
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Item
4.
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13
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PART
II.
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Item
5.
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14
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Item
6.
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16
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Item
7.
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17
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Item
7A.
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34
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Item
8.
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36
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Item
9.
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65
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Item
9A.
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65
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Item
9B.
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68
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PART III.
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Item
10.
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68
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Item
11.
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68
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Item
12.
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68
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Item
13.
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68
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Item
14.
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68
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PART
IV.
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Item
15.
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69
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70
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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 and has grown 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, 2008 we operated 288 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 long-term 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
maintenance and repair of the equipment for those pools. We believe that
the recurring nature of the maintenance and repair market has helped maintain a
relatively consistent rate of industry growth historically, and has helped
cushion the negative impact on revenues in periods when unfavorable economic
conditions and softness in the housing market adversely impact pool construction
activities. The table below reflects growth in the domestic installed
base of in-ground and above-ground swimming pools over the past 10 years (based
on Company estimates and information from 2007 P.K. Data, Inc.
reports):
![Pool Graph](https://www.sec.gov/Archives/edgar/data/0000945841/000094584109000010/installedpools.jpg)
1
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), the
availability of consumer credit 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 is a direct correlation between industry starts and the rate of
housing turnover and home appreciation over time, with higher rates of home
turnover and appreciation having a positive impact on starts over
time. We also believe that homeowners’ access to consumer credit,
particularly as facilitated by mortgage-backed financing markets, is a critical
enabling factor in the purchase of new swimming pools and irrigation
systems.
In 2008,
the continuing adverse economic trends that carried over and intensified from
2007 negatively impacted our industry and our performance. These
trends were more severe in some of the largest pool markets including
California, Florida and Arizona. Specific issues included a slowdown
in the domestic housing market, with lower housing turnover, a sharp drop in new
home construction, home value deflation in many markets and a significant
tightening of consumer and commercial credit. Our expectation is that
these trends will continue in 2009, but over the long-term the industry will
return to an annual growth rate of approximately 2% to 6% when the overall
economy rebounds and the real estate and credit markets revert to
normal.
Our
industry is seasonal and weather is one of the principal external factors that
affect 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. These benefits and other exclusive services are
offered through our retail brand licensing program called The Backyard Place,
which is one of our key growth initiatives. In return for these
services, customers make commitments to meet minimum purchase levels, stock a
minimum of nine specific product categories and operate within The Backyard
Place guidelines (including weekend hour requirements). Since we launched The Backyard Place program in
2006, we have signed agreements with more than 100 retail store customers and
have realized over a 20% growth in our sales to these
customers.
2
In
addition to our efforts aimed at industry and customer growth, 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. We have increased our product breadth (as described in
the “Customers and Products” section below) and expanded our sales center
networks through acquisitions (which have been an important source of sales
growth), new sales center openings and expansions of existing sales centers.
Since 2004, we have opened 31 new sales centers (net of subsequent closings and
consolidations of new sales centers) and successfully completed 9 acquisitions
consisting of 69 sales centers (net of sales center closings and consolidations
within one year of acquisition). Given the current challenging
external environment, we opened only one new sales center location in 2008 and
do not expect to open any additional sales centers in 2009. However,
we plan to take advantage of opportunities to further expand our domestic
irrigation and international swimming pool distribution networks via
acquisitions and new openings. We also plan to selectively expand our
domestic swimming pool distribution networks and continue to grow our
complementary product offerings.
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 between 2006 and
2008. Historically, our sales growth has exceeded the industry’s
growth 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.
We
estimate that pricing inflation has averaged 1-3% annually in our industry over
the past 10 years. However, we anticipate mid to high single digit
inflationary increases in product costs in 2009. We intend to pass
these price increases through the supply chain and we expect a favorable impact
to gross margin in 2009 based on our volume of inventory purchases ahead of
vendor price increases in the second half of 2008.
For
additional discussion of our recent acquisitions, see Note 2 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We
intend to pursue additional strategic acquisitions, which will allow us to
further penetrate existing markets and expand into new geographic markets and
product categories.
Customers
and Products
We serve
roughly 70,000 customers, none of which account for more than 1% of our sales.
We primarily serve five types of customers:
·
|
swimming
pool remodelers and builders;
|
·
|
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. The current economic environment has had
the greatest impact on swimming pool remodelers and builders and landscape
construction companies. We have seen a modest contraction in our
customer base in these segments over the last two years.
We
conduct our operations through 288 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 55% of our
net sales in 2008. 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.
3
We offer
our customers more than 100,000 national brand and Pool Corporation 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;
|
·
|
packaged
pool kits including walls, liners, braces and coping for in-ground and
above-ground pools;
|
·
|
pool
equipment and components for new pool construction and the remodeling of
existing pools;
|
·
|
irrigation
and landscape products, including professional lawn care equipment;
and
|
·
|
complementary
products, which consists of a number of product categories and
includes:
|
–
|
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, spas and
grills.
|
We track and monitor the
majority of our sales by various product lines and product categories, primarily
for consideration in various incentive plan programs and to provide support for
sales and marketing efforts. We currently have over 300 product lines and over
40 product categories. Based on our 2008 product
classifications, sales for our pool and spa chemicals product category as a
percentage of total net sales was 14% in 2008, 12% in 2007 and 11% in
2006. This growth has been due to both increases in our market share
and a shift in product mix resulting from the decline in construction related
products. No other product categories accounted for 10% or more of
total net sales in any of the last three fiscal years.
Our
maintenance, repair and replacement products are categorized into maintenance
and minor repair (non-discretionary) and major repair and refurbishment
(partially discretionary) product groupings. Since maintenance and
repair products are primarily non-discretionary in nature, these items must be
purchased by end users to maintain existing swimming pools and landscaped areas.
In 2008, approximately 60% of our sales and gross profits were derived from the
sale of maintenance and repair products used to maintain and repair these
existing features and approximately 40% were derived from the replacement,
construction and installation (equipment, materials, plumbing, electrical, etc.)
of pools and landscaping. This reflects a shift toward more sales of
maintenance and repair products due to the significant declines in new pool
construction over the past three years. Historically, just over 50%
of our total sales and gross profits were related to maintenance and repair
products.
Including
sales related to our March 2008 acquisition of National Pool Tile
Group, Inc. (NPT), our complementary product sales accounted for
approximately 11% of our total net sales in 2008 at comparable margins to our
traditional product offerings. While complementary product sales excluding NPT
decreased 15% in 2008 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 and increased from approximately $3.0 million in
1999 to over $156.0 million in 2008. With our acquisition
of NPT in March 2008, our focus in 2009 will be expanding the number of sales
center locations that offer NPT’s pool tile and composite pool finish
products.
We
continue to identify 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. 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.
In 2009,
we will change how we track complementary product sales. Some
landscape products including power lawn equipment will now be tracked as
complementary products, while other products previously captured as
complementary that are part of the cost of building or remodeling a pool will
now be tracked as pool product sales, including products such as plaster,
cement, tile, coping, etc. As such, we will not report complementary
product sales amounts in the future that are comparable with the amounts
discussed above.
4
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 167 sales centers, including 12 sales centers in Europe, the
Superior network consists of 60 sales centers and the Horizon network consists
of 61 sales centers.
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 them 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 seven centralized shipping locations and six 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
Systems, Inc., which accounted for approximately 15%, 10% and 9%, respectively,
of the cost of products we sold in 2008.
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.
5
Some
geographic markets we serve, particularly our four 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;
|
·
|
competitive
product pricing; and
|
·
|
access
to commercial credit to finance business working
capital.
|
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 Consumer
Product Safety Commission, 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 3,400 people at December 31, 2008. 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.
6
Geographic
Areas
Net sales
by geographic region were as follows for the past three fiscal years (in
thousands):
Year
Ended December 31,
|
||||||||
2008
|
2007
|
2006
|
||||||
United
States
|
$
|
1,626,869
|
$
|
1,774,771
|
$
|
1,779,085
|
||
International
|
156,814
|
153,596
|
130,677
|
|||||
$
|
1,783,683
|
$
|
1,928,367
|
$
|
1,909,762
|
Net
property and equipment by geographic region was as follows (in
thousands):
December
31,
|
||||||||
2008
|
2007
|
2006
|
||||||
United
States
|
$
|
28,931
|
$
|
30,505
|
$
|
29,825
|
||
International
|
4,117
|
3,718
|
3,808
|
|||||
$
|
33,048
|
$
|
34,223
|
$
|
33,633
|
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.
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 has been and
may continue to 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 currently account for more than 80%
of our net sales and gross profits, the growth of this portion of our business
depends on the expansion of the installed pool base and could also be adversely
affected by decreases in construction activities similar to the trends in 2007
and 2008. A weakening economy may also cause deferrals of discretionary
replacement and refurbish activity. 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.
7
We
believe that homeowners’ access to consumer credit, particularly as facilitated
by mortgage-backed financing markets, is a critical enabling factor in the
purchase of new pool and irrigation systems. The recent unfavorable
economic conditions and downturn in the housing market have resulted in
significant tightening of credit markets, which has limited the ability of
consumers to access financing for new swimming pool and irrigation
systems. If these trends continue or worsen, many consumers will
likely not be able to obtain financing for pool and irrigation projects, which
could negatively impact our sales of construction related products.
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 Systems, Inc., which accounted for approximately 15%, 10% and 9%,
respectively, of the costs of products we sold in 2008. 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 significant supplier due to financial failure or a decision
to sell exclusively to other distributors, retail customers or end user
consumers 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 four largest, higher density
markets in California, Florida, Texas and Arizona, representing approximately
55% of our net sales in 2008, also tend to be more competitive than
others.
8
More
aggressive competition by mass merchants and large pool or landscape supply
retailers could adversely affect our sales.
Mass market
retailers today carry a limited range of, and devote a limited amount of
shelf space to, merchandise and products targeted to our industry. Historically,
mass market retailers have generally expanded by adding new stores and
product breadth, but their product offering of pool and landscape related
products has remained relatively constant. Should mass market
retailers increase their focus on the pool or professional landscape industries,
or increase the breadth of their pool and landscape related product offerings,
they may become a more significant competitor for direct and
end-use customers which could have an adverse impact on our business. We
may face additional competitive pressures if large pool or landscape supply
retailers look to expand their customer base to compete more directly within the
distribution channel.
We
depend on key personnel.
We
consider our employees to be the foundation for our growth and success. As such,
our future success depends in large part on our ability to attract, retain and
motivate qualified personnel, including our executive officers and key
management personnel. If we are unable to attract and retain key personnel, our
operating results could be adversely affected.
Past
growth may not be indicative of future growth.
We have
experienced substantial sales growth through acquisitions, market share gains
and new sales center openings that have increased our size, scope and geographic
distribution. During the past five fiscal years, we have opened 31 new sales
centers (net of subsequent closings and consolidations of new sales centers) and
have completed 9 acquisitions. These acquisitions have added 69 sales centers,
net of sales center closings and consolidations within one year of acquisition,
and three centralized shipping locations to our distribution networks. In 2007
and 2008, we also closed 6 existing sales centers. 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 features 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.
9
Our
business is highly seasonal.
In 2008,
approximately 67% 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.
10
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 center facilities in Florida and one 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, 2008, 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, 2008:
Network
|
12/31/07
|
New
Locations
|
Consolidated
&
Closed
Locations (1)
|
Acquired
Locations
(2)
|
Converted
Locations (3)
|
12/31/08
|
||||||
SCP
|
137
|
-
|
-
|
8
|
1
|
146
|
||||||
SPP
|
62
|
-
|
(2
|
)
|
1
|
(1
|
)
|
60
|
||||
Horizon
|
62
|
-
|
(1
|
)
|
-
|
-
|
61
|
|||||
Total
Domestic
|
261
|
-
|
(3
|
)
|
9
|
-
|
267
|
|||||
SCP
International
|
20
|
1
|
(1
|
)
|
1
(4)
|
-
|
21
|
|||||
Total
|
281
|
1
|
(4
|
)
|
10
|
-
|
288
|
(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
2008, we consolidated two sales centers and closed two sales
centers.
|
(2)
|
We
added 15 sales centers through our acquisition of National Pool Tile
Group, Inc. (NPT) in March 2008. We consolidated six of these
locations with existing sales centers, including four in March 2008
and two in the second quarter of 2008. We plan to consolidate
one additional NPT sales center with an existing SPP sales center in
2009. The remaining eight NPT sales centers are grouped as part
of our SCP distribution network.
|
(3)
|
In
2008, we converted one existing sales center in California from our SPP
network to our SCP network.
|
(4)
|
We
made two international acquisitions during 2008. Our
acquisition of Canswim Pools in March 2008 added one sales center in
Ontario, Canada. We also acquired Proplas Plasticos, S.L.
in November 2008 and consolidated this business with our existing sales
center operations in Madrid, Spain.
|
11
The table
below identifies the number of sales centers in each state or country by
distribution network as of December 31, 2008:
Location
|
SCP
|
Superior
|
Horizon
|
Total
|
|||
United
States
|
|||||||
California
|
24
|
16
|
20
|
60
|
|||
Florida
|
30
|
8
|
-
|
38
|
|||
Texas
|
16
|
4
|
13
|
33
|
|||
Arizona
|
6
|
4
|
10
|
20
|
|||
Georgia
|
7
|
2
|
1
|
10
|
|||
Tennessee
|
4
|
3
|
-
|
7
|
|||
Washington
|
1
|
-
|
6
|
7
|
|||
Alabama
|
4
|
2
|
-
|
6
|
|||
Nevada
|
2
|
1
|
3
|
6
|
|||
New
York
|
6
|
-
|
-
|
6
|
|||
Louisiana
|
5
|
-
|
-
|
5
|
|||
New
Jersey
|
3
|
2
|
-
|
5
|
|||
Ohio
|
2
|
3
|
-
|
5
|
|||
Pennsylvania
|
4
|
1
|
-
|
5
|
|||
Colorado
|
1
|
1
|
2
|
4
|
|||
Illinois
|
3
|
1
|
-
|
4
|
|||
Indiana
|
2
|
2
|
-
|
4
|
|||
Missouri
|
3
|
1
|
-
|
4
|
|||
North
Carolina
|
3
|
1
|
-
|
4
|
|||
Michigan
|
2
|
1
|
-
|
3
|
|||
Oklahoma
|
2
|
1
|
-
|
3
|
|||
Oregon
|
-
|
-
|
3
|
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
|
146
|
60
|
61
|
267
|
|||
International
|
|||||||
Canada
|
8
|
-
|
-
|
8
|
|||
France
|
5
|
-
|
-
|
5
|
|||
Portugal
|
3
|
-
|
-
|
3
|
|||
United
Kingdom
|
2
|
-
|
-
|
2
|
|||
Italy
|
1
|
-
|
-
|
1
|
|||
Spain
|
1
|
-
|
-
|
1
|
|||
Mexico
|
1
|
-
|
-
|
1
|
|||
Total
International
|
21
|
-
|
-
|
21
|
|||
Total
|
167
|
60
|
61
|
288
|
12
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 resolution 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, 2008.
13
PART
II.
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“POOL”. On February 25, 2009, there were approximately 13,172
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
2008
|
||||||||||
First
Quarter
|
$
|
24.64
|
$
|
17.99
|
$
|
0.12
|
||||
Second
Quarter
|
22.43
|
17.76
|
0.13
|
|||||||
Third
Quarter
|
25.87
|
16.65
|
0.13
|
|||||||
Fourth
Quarter
|
23.39
|
13.36
|
0.13
|
|||||||
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
|
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 five times including in
the fourth quarter of 2004 and annually in the second quarter of 2005 through
2008. Future dividend payments will be at the discretion of our Board, after
considering various factors, including our earnings, capital requirements,
financial position, contractual restrictions and other relevant business
considerations. We cannot assure shareholders or potential investors that
dividends will be declared or paid any time in the future if our Board
determines 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, 2003 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.
14
![Pool Performance Graph](https://www.sec.gov/Archives/edgar/data/0000945841/000094584109000010/perfgraph.jpg)
Base
|
INDEXED
RETURNS
|
|||||
Period
|
Years
Ending
|
|||||
Company
/ Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
Pool
Corporation
|
100
|
147.46
|
173.66
|
184.56
|
94.86
|
88.18
|
S&P
MidCap 400 Index
|
100
|
116.48
|
131.11
|
144.64
|
156.18
|
99.59
|
NASDAQ
US Index
|
100
|
108.41
|
110.79
|
122.16
|
134.29
|
79.25
|
Purchases
of Equity Securities
The table
below summarizes the repurchases of our common stock in the fourth quarter of
2008.
Total
number of shares
|
Maximum
approximate
|
|||||||||
Total
number
|
Average
price
|
purchased
as part of
|
dollar
value that may yet be
|
|||||||
Period
|
of
shares purchased(1)
|
paid
per share
|
publicly
announced plan(2)
|
purchased
under the plan(3)
|
||||||
October
1-31, 2008
|
-
|
$
|
-
|
-
|
$
|
52,987,067
|
||||
November
1-30, 2008
|
165,764
|
$
|
14.96
|
-
|
$
|
52,987,067
|
||||
December
1-31, 2008
|
110,981
|
$
|
17.97
|
-
|
$
|
52,987,067
|
||||
Total
|
276,745
|
$
|
16.17
|
-
|
(1)
|
Consists
of shares of our common stock surrendered to us by employees in order to
satisfy minimum tax withholding obligations in connection with certain
exercises of employee stock options and/or the exercise price of such
options granted under our share based compensation
plans.
|
(2)
|
In
July 2002, our Board authorized $50.0 million for the repurchase of
shares of our common stock in the open market. In August 2004, November
2005 and August 2006, our Board increased the authorization for the
repurchase of shares of our common stock in the open market to a total of
$50.0 million from the amounts remaining at each of those dates. In
November 2006 and August 2007, our Board increased the authorization for
the repurchase of shares of our common stock in the open market to a total
of $100.0 million from the amounts remaining at each of those
dates.
|
(3)
|
In
2008, we purchased a total of approximately $2.0 million, or 88,260
shares, at an average price of $22.45 per share. As of February
20, 2009, $53.0 million of the authorized amount remained
available.
|
15
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)
|
2008
|
2007
|
2006
|
2005(2)
|
2004(2)
|
|||||||||||
Statement
of Income Data
|
||||||||||||||||
Net
sales
|
$
|
1,783,683
|
$
|
1,928,367
|
$
|
1,909,762
|
$
|
1,552,659
|
$
|
1,310,853
|
||||||
Net
income
|
56,956
|
69,394
|
95,024
|
80,455
|
63,406
|
|||||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$
|
1.19
|
$
|
1.42
|
$
|
1.83
|
$
|
1.53
|
$
|
1.20
|
||||||
Diluted
|
$
|
1.18
|
$
|
1.37
|
$
|
1.74
|
$
|
1.45
|
$
|
1.13
|
||||||
Cash
dividends declared
|
||||||||||||||||
per
common share
|
$
|
0.51
|
$
|
0.465
|
$
|
0.405
|
$
|
0.34
|
$
|
0.20
|
||||||
Balance Sheet Data(3)
|
||||||||||||||||
Working
capital(4)
|
$
|
294,552
|
$
|
250,849
|
$
|
227,631
|
$
|
193,525
|
$
|
128,189
|
||||||
Total
assets
|
830,906
|
814,854
|
774,562
|
740,850
|
488,075
|
|||||||||||
Total
long-term debt,
|
||||||||||||||||
including
current portion
|
307,000
|
282,525
|
191,157
|
129,100
|
50,420
|
|||||||||||
Stockholders'
equity(5)
|
241,734
|
208,791
|
277,684
|
281,724
|
227,544
|
|||||||||||
Other
|
||||||||||||||||
Base
business sales change(6)
|
(9
|
)%
|
(1
|
)%
|
10
|
%
|
14
|
%
|
10
|
%
|
||||||
Number
of sales centers
|
288
|
281
|
274
|
246
|
201
|
(1)
|
During
the years 2004 to 2008, we successfully completed 9 acquisitions
consisting of 69 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 Statement of Financial Accounting Standards (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.
|
(5)
|
The
beginning stockholders’ equity balance in 2007 reflected a reduction to
retained earnings of approximately $0.5 million related to the
implementation of Financial Accounting Standards Board (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, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations - RESULTS OF OPERATIONS,” of this
Form 10-K.
|
16
2008
FINANCIAL OVERVIEW
Financial
Results
In these
challenging times, we have focused on business improvement opportunities,
maintaining tight control over costs and strengthening our commitment to
programs and initiatives that will provide long-term value to customers,
suppliers and shareholders. Our 2008 results demonstrate our progress
towards achieving these objectives as evidenced by our gross margin expansion,
our improved cost structure and increased cash provided by operations compared
to 2007.
Net sales
decreased 8% as our sales remained pressured by the unprecedented adverse market
and economic conditions impacting our industry. Base business sales
declined 9% year over year due to soft demand for new pool and irrigation
construction products and unfavorable weather. This decrease was
partially offset by sales from acquired businesses, primarily our
March 2008 acquisition of National Pool Tile Group, Inc.
(NPT). We also realized a modest increase in maintenance, repair and
replacement (MRR) product sales. However, sales of certain MRR
products have declined as more consumers choose to defer discretionary
replacement and refurbish activity. Complementary product sales,
which are heavily weighted towards new pool construction, decreased
approximately 15% compared to a 3% decrease in the same period in
2007.
For a
discussion of our base business calculation, see the RESULTS OF OPERATIONS
section below.
Gross
profit as a percentage of net sales (gross margin) improved 140 basis
points to 28.9% in 2008 from 27.5% in 2007. The increase in 2008
gross margin is primarily attributable to improved pricing management, an
increase in the sales of preferred vendor and Pool Corporation private label
products and a favorable shift in product mix.
Selling
and administrative expenses (operating expenses) for 2008 increased 1% compared
to 2007 due to operating expenses related to acquired
businesses. Base business operating expenses decreased 3% year over
year, due primarily to the impact from continued cost control initiatives and
lower incentive compensation.
Operating
income decreased 14% to $115.5 million in 2008 while operating income as a
percentage of net sales (operating margin) was down slightly to 6.4% in 2008
compared to 6.9% in 2007. Interest expense decreased $3.2 million, or
15%, due primarily to a lower weighted average effective interest rate compared
to 2007.
Earnings
per share for 2008 was $1.18 per diluted share on net income of
$57.0 million, compared to $1.37 per diluted share on net income of
$69.4 million in 2007. Included in 2008 earnings per share is
the adverse impact of a loss of $0.04 per diluted share from our equity interest
investment in Latham Acquisition Corporation (LAC). By comparison,
this investment contributed income of $0.02 per diluted share in
2007. Our first quarter 2008 acquisitions had a dilutive impact of
$0.02 per diluted share in 2008.
Financial
Position and Liquidity
Cash
provided by operations increased $21.6 million to $93.3 million in 2008 due
primarily to the favorable impact from the decrease in accounts receivable
balances. Our 2008 cash provided by operations reflects a negative
impact of approximately $36.0 million related to the net purchase and
payment of inventory purchased ahead of vendor price increases, which was
largely offset by the benefit related to the deferral of our $30.0 million total
third and fourth quarter 2008 estimated federal tax payments. Cash
provided by operations helped fund the following in 2008:
·
|
$35.5 million
for acquisitions, including our acquisition of NPT in March
2008;
|
·
|
quarterly
cash dividend payments to shareholders, which totaled $24.4 million
for the year;
|
·
|
debt
repayments of $23.1 million;
and
|
·
|
capital
expenditures of $7.0 million.
|
17
Total net
receivables decreased 18% to $115.6 million at December 31, 2008
from $141.1 million at December 31, 2007 due to the lower sales, lower
vendor receivables, an increase in the allowance for doubtful accounts and a
shift toward more cash sales as a result of tighter credit terms. Our
allowance for doubtful accounts balance was $13.7 million at
December 31, 2008, an increase of $3.8 million over
December 31, 2007. We increased the allowance for doubtful
accounts in the second half of 2008 to reflect an increase in our total past due
receivable balances year over year. Days sales outstanding (DSO)
remained steady at 36.3 days at December 31, 2008 and
December 31, 2007.
Our
inventory levels increased 7% to $405.9 million as of
December 31, 2008 compared to $379.7 million as of
December 31, 2007. This increase reflects approximately
$17.1 million of acquired inventory, primarily related to NPT, and higher
inventory levels attributable to the slowdown in sales and opportunistic buying
in advance of vendor price increases. Our inventory turns, as
calculated on a trailing twelve month basis, slowed to 3.1 times as of
December 31, 2008 compared to 3.7 times as of
December 31, 2007.
Total
debt outstanding decreased to $327.8 million at December 31, 2008
compared to $350.9 million at December 31, 2007. Our
current ratio increased to 2.1 as of December 31, 2008 compared to 1.8
as of December 31, 2007.
Current
Trends
Continuing
adverse economic trends have significantly impacted our
industry. These 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 and a significant 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 under 20% of our sales and
gross profits tied to new pool or irrigation construction in 2008 (as our
sales related to new construction activity have declined, the proportion
of our net sales represented by MRR products has increased to over 80%);
and
|
·
|
we
believe our service-oriented model helps us gain market
share.
|
Despite
these mitigating factors, these negative trends have significantly impacted a
number of our key markets, including California, Florida and Arizona, with a
modest and more recent adverse impact in Texas. We estimate that these trends
resulted in the following decreases in new pool construction between 2005 and
2008:
2008
|
2007
|
2006
|
||||
Units
|
(60,000
|
)
|
(50,000
|
)
|
(10,000
|
)
|
%
|
(40
|
)%
|
(25
|
)%
|
(5
|
)%
|
We
believe these decreases represent the first three year decline in new pool
construction in our industry history. Since these trends worsened
throughout 2007 and 2008, they had a more pronounced impact on our results for
the year ended 2008 compared to the same period in 2007. Given the
current economic conditions, we believe these trends could continue into
2009. This may result in an even greater impact on new pool
construction and consumer spending on outdoor living spaces, which could
negatively impact our sales and earnings.
18
OUTLOOK
Building
on the progress we have made, our 2009 objectives remain focused on
strengthening our market leading positions, further improving our gross margin
and expanding our cost improvement initiatives. We will also focus on
rebalancing our inventories following the opportunistic inventory purchases that
we made in the second half of 2008.
We
believe that the ongoing housing market and general economic downturns will
continue to pressure new pool and irrigation construction
activity. However, we expect a relatively stable maintenance market
based on the increased installed based of swimming pools. Based on
lower projected customer early buy purchases compared to the first quarter of
2008, we expect to see some shift of sales from the first quarter to the second
quarter of 2009.
We
anticipate mid to high single digit inflationary product cost increases that we
expect to pass through the supply chain. Given the ongoing difficult
external environment, we will continue to focus on striking an appropriate
balance on the extension of credit and maintaining a prudent cost
structure. We expect labor costs to decrease slightly compared to
2008 based on cost savings related to our recent headcount reductions and the
fact that we have frozen salaries across the board in 2009. Similar
to 2008, we expect to realize equity losses from our investment in LAC in 2009
as their business faces sales pressures on their pool construction
products. Excluding any acquisition activity, we do not expect to
increase the number of sales centers in 2009. Given the challenges in the
external environment, we will not provide any earnings per share guidance until
we gain more visibility for how our 2009 results are tracking.
We expect
to generate sufficient cash flow and have adequate access to capital to both
fund our business objectives and our other priorities for the use of
cash.
The
forward-looking statements in this outlook section are subject to significant
risks and uncertainties, including changes in the economy and the housing
market, the sensitivity of our business to weather conditions, our ability to
maintain favorable relationships with suppliers and manufacturers, competition
from other leisure product alternatives and mass merchants, and other risks
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 geographic 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.
19
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 0.2% of net sales
annually. In 2008, write-offs were 0.3% of net sales, reflecting a
trend related to the negative impacts on some of our customer’s businesses due
to the difficult external environment.
If the
balance of the accounts receivable reserve increased or decreased by 20% at
December 31, 2008, pretax income would change by approximately
$2.7 million and earnings per share would change by approximately $0.03 per
diluted share based on the number of diluted shares outstanding at
December 31, 2008.
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 at the local sales center level,
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.
20
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 or regulatory
requirements;
|
·
|
seasonal
fluctuations in inventory levels;
|
·
|
geographic
location; and
|
·
|
new
product offerings.
|
We
periodically adjust our reserve for inventory obsolescence as changes occur in
the above-identified factors.
If the
balance of our inventory reserve increased or decreased by 20% at
December 31, 2008, pretax income would change by approximately
$1.7 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, 2008.
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 identifiable 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, 2008, and in accordance with the provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 109,
Accounting for Income
Taxes, United States taxes were not provided on undistributed earnings of
our foreign subsidiaries, as we have invested or expect to invest the
undistributed earnings indefinitely. If in the future these earnings are
repatriated to the United States, or if we determine that the earnings will be
remitted in the foreseeable future, additional tax provisions may be
required.
We hold,
through our wholly owned affiliates, cash balances in the countries in which we
operate, including 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.
21
We have
operations in 38 states and 7 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 recently completed
fiscal year.
Management
sets the objectives for our bonus plans at the beginning 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 objectives and management’s estimates related to
the discretionary components of the bonus plans. Our estimated quarterly
incentive compensation expense and accrual balances may vary relative to actual
annual bonus expense and payouts due to the following:
·
|
the
discretionary components of the bonus
plans;
|
·
|
the
timing of the approval and payment of the annual bonuses;
and
|
·
|
our
projections related to achievement of multiple year performance objectives
for our Strategic Plan Incentive
Program.
|
Impairment
of Goodwill and Equity Method Investments
Goodwill
Our
largest intangible asset is goodwill. At December 31, 2008, our
goodwill balance was $169.6 million, representing 20% 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 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 recognize the
difference as an impairment loss in operating income. Since our operating
segment is defined as an individual sales center and we do not have operations
below the sales center level, our reporting unit is an individual sales
center.
22
We
estimate the fair value of our reporting units by utilizing fair value models,
which require us to make several assumptions about projected future cash
flows, discount rates and multiples. In order to determine the
reasonableness of the assumptions included in our fair value calculations, we
compare the total estimated fair value for all aggregated reporting units to our
market capitalization on the date of our impairment test. We also
review for potential impairment indicators at the reporting unit level based on
a detailed evaluation of recent historical operating trends, current and
projected local market conditions and other relevant factors as
appropriate. If our assumptions or estimates change, we could incur
impairment charges in future periods which would decrease operating income and
result in lower asset values on our balance sheet. For example, a
change in the estimated discount rate of 1% could have resulted in the fair
value of our United Kingdom reporting unit falling below its carrying
value. Our United Kingdom reporting unit had a goodwill balance of
$7.1 million at December 31, 2008. We have 198 other
reporting units with goodwill balances. For these reporting units,
the highest goodwill balance is $5.7 million and the average goodwill
balance is $0.8 million.
In
October 2008, we performed our annual goodwill impairment test. As a
result of this test, we determined that the goodwill attributed to one of our
Ohio sales centers was impaired. Based on the current and projected
economic conditions in this market and fixed cost obligations related to an
unfavorable long-term lease for this sales center facility, we determined that
the estimated fair value for this reporting unit was less than its carrying
value. As a result, we performed additional impairment testing to
determine the implied fair value of this reporting unit’s
goodwill. Since the implied fair value of goodwill was less than the
carrying value, we wrote-off the $0.4 million goodwill balance related to
this reporting unit. This impairment expense is recorded in selling
and administrative expenses on the Consolidated Statements of
Income. Based on our annual goodwill impairment test, we
determined that the goodwill attributed to our other reporting units is not
impaired.
Equity
Method Investments
We have
two equity method investments, consisting of our 38% investment in Latham
Acquisition Corporation (LAC) and our 50% investment in
Northpark Corporate Center. We account for these
investments in accordance with Accounting Principles Board (APB) Opinion 18,
The Equity Method of
Accounting for Investments in Common Stock. The carrying value
of our investments at December 31, 2008 was $31.2 million,
including $30.1 million for LAC.
We
evaluate our equity method investments for potential impairment indicators on an
ongoing basis. This evaluation requires the exercise of judgment
based upon the specific facts and circumstances of each investment. A
series of actual operating losses or projected future losses of an investee or
other factors may indicate a decrease in value of the investment. If
impairment indicators exist, we will evaluate whether the impairment is
other-than-temporary. Impairment is measured by comparing the
investment carrying amount to the estimated fair value of the
investment.
Based on
the fact that LAC’s results have deteriorated due to the current external market
conditions (including a net loss in 2008) and our expectations for a continued
difficult environment in 2009, we considered other relevant facts and
circumstances to determine whether there is an indicator of a decrease in the
value of our investment as of December 31, 2008 and, if so, whether it
reflects an other-than-temporary impairment. In evaluating the value
of our investment in LAC, we considered the following:
·
|
the
current challenging industry environment, which had a negative impact on
LAC’s 2008 results;
|
·
|
expectations
for LAC’s near-term and long-term results based primarily on LAC’s market
position and financial projections (including projections used by LAC in
its annual impairment test, which determined that there was no
impairment of its goodwill and other intangible balances as of December
31, 2008);
|
·
|
the
anticipated timeframe for LAC’s return to profitability;
and
|
·
|
LAC’s
current financial condition, including its ability to meet working capital
needs.
|
Using the
criteria listed above, we determined that there was no impairment of our
equity method investments as of December 31, 2008. If there are
changes in LAC’s financial projections or the factors we consider in performing
our evaluations, there could be indicators of a potential decrease in the value
of our investments that may result in other-than-temporary
impairments.
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.
23
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,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of sales
|
71.1
|
72.5
|
71.7
|
|||||||
Gross
profit
|
28.9
|
27.5
|
28.3
|
|||||||
Selling
and administrative expenses
|
22.4
|
20.6
|
19.5
|
|||||||
Operating
income
|
6.4
|
6.9
|
8.8
|
|||||||
Interest
expense, net
|
1.1
|
1.1
|
0.8
|
|||||||
Income
before income taxes and equity earnings (loss)
|
5.4
|
5.8
|
8.0
|
Note: Due to
rounding, percentages may not add to operating income or income before income
taxes and equity earnings (loss).
Our
discussion of consolidated operating results includes the operating results from
acquisitions in 2008, 2007 and 2006. We accounted for these
acquisitions using the purchase method of accounting and we have included the
results of operations in our consolidated results since the respective
acquisition dates.
Fiscal
Year 2008 compared to Fiscal Year 2007
The
following table breaks out our consolidated results into the base business
component and the excluded components (sales centers excluded from base
business):
(Unaudited)
|
Base
Business
|
Excluded
|
Total
|
|||||||||||
(In
thousands)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
$
|
1,696,848
|
$
|
1,873,359
|
$
|
86,835
|
$
|
55,008
|
$
|
1,783,683
|
$
|
1,928,367
|
||
Gross
profit
|
488,502
|
517,157
|
26,726
|
13,489
|
515,228
|
530,646
|
||||||||
Gross
margin
|
28.8
|
%
|
27.6
|
%
|
30.8
|
%
|
24.5
|
%
|
28.9
|
%
|
27.5
|
%
|
||
Operating
expenses
|
370,658
|
382,230
|
29,094
|
14,642
|
399,752
|
396,872
|
||||||||
Expenses
as a % of net sales
|
21.8
|
%
|
20.4
|
%
|
33.5
|
%
|
26.6
|
%
|
22.4
|
%
|
20.6
|
%
|
||
Operating
income (loss)
|
117,844
|
134,927
|
(2,368
|
)
|
(1,153
|
)
|
115,476
|
133,774
|
||||||
Operating
margin
|
6.9
|
%
|
7.2
|
%
|
(2.7
|
)%
|
(2.1
|
)%
|
6.4
|
%
|
6.9
|
%
|
We
exclude the following sales centers from base business results for a period of
15 months (parenthetical numbers for each category indicate the number of sales
centers excluded as of December 31, 2008):
·
|
acquired
sales centers (10, net of consolidations – see table
below);
|
·
|
existing
sales centers consolidated with acquired sales centers
(7);
|
·
|
closed
sales centers (4);
|
·
|
consolidated
sales centers in cases where we do not expect to maintain the majority of
the existing business (1); and
|
·
|
sales
centers opened in new markets (0).
|
24
We
generally allocate corporate overhead expenses to excluded sales centers on the
basis of their net sales as a percentage of total net sales. After 15
months of operations, we include acquired, consolidated and new market sales
centers in the base business calculation including the comparative prior year
period.
In
addition to the 22 sales centers excluded from base business as of December
31, 2008, there were two sales centers opened in new markets that were
excluded from January to May 2008 before they became base business sales
centers in June 2008. Since we divested our pool liner
manufacturing operation in France in April 2008, we have also excluded
these operations from base business for the comparative nine month period ended
December 31, 2007.
We have
excluded the following acquisitions from base business for the periods
identified:
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
Proplas
Plasticos, S.L.
(1)
|
November
2008
|
0
|
November
and December 2008
|
|||
National
Pool Tile (NPT) (2)
|
March
2008
|
9
|
March
– December 2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
March
– December 2008
|
|||
Tor-Lyn,
Limited
|
February
2007
|
1
|
February
– April 2007 and January – April
2008
|
The table
below summarizes the changes in our sales centers during 2008:
December
31, 2007
|
281
|
Acquired,
net of consolidations (2)
|
10
|
New
locations
|
1
|
Consolidated
|
(2)
|
Closed
|
(2)
|
December
31, 2008
|
288
|
(1)
|
We
acquired a single location in Spain and have consolidated it with our
existing Madrid sales center
operations.
|
(2)
|
We
acquired 15 NPT sales centers and have consolidated 6 of these with
existing sales centers, including 4 in March 2008 and 2 in the second
quarter of 2008.
|
For
information about our recent acquisitions, see Note 2 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
Net
Sales
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Net
sales
|
$
|
1,783.7
|
$
|
1,928.4
|
$
|
144.7
|
(8)
|
%
|
The new
pool and irrigation construction markets are facing unprecedented adverse
conditions created by the combination of significant declines in the real estate
and mortgage-backed financing markets. As a result, our 2008 sales were
negatively impacted with a more profound effect on pool and irrigation
construction product sales. The decrease in net sales was more pronounced
in our seasonally slow fourth quarter, declining 14% compared to the same period
in 2007 as the economy worsened and consumers began to defer more discretionary
repair and replacement purchases.
Base
business sales decreased 9% compared to 2007, including an 8% decline on the
swimming pool side of the business and 18% on the irrigation side of the
business. This impact remains more concentrated in markets that had
the greatest run-up in real estate values between 2000 and 2006, which includes
a number of our larger markets in Florida, Arizona and parts of
California. The decline in new pool construction negatively impacted
complementary product sales, which decreased 15% compared to 2007.
Overall, weather conditions were unfavorable compared to the same period in 2007
(see discussion of significant weather impacts under the heading Seasonality and Quarterly
Fluctuations beginning on page 31).
25
The
overall decrease in net sales was partially offset by increases due to the
following:
·
|
approximately
$47.0 million in sales related to our 2008
acquisitions;
|
·
|
moderate
sales growth for MRR products, including a 5% increase in chemical
sales;
|
·
|
estimated
average price increases of 2% to 4% that we passed through the supply
chain;
|
·
|
higher
freight out income of $3.3 million due to the implementation of fuel
surcharges, which offset the increase in outbound freight costs;
and
|
·
|
2%
sales growth for our International operations due primarily to favorable
currency fluctuations.
|
Our sales
growth for MRR products was primarily due to the following:
·
|
the
continued successful execution of our sales, marketing and service
programs, which we believe have resulted in market share
gains;
|
·
|
higher
sales of non-discretionary products due to the increased installed base of
swimming pools, which we estimate to have grown approximately 2% to 3% in
2007; and
|
·
|
price
increases (as mentioned above).
|
Gross
Profit
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Gross
profit
|
$
|
515.2
|
$
|
530.6
|
$
|
(15.4)
|
(3)
|
%
|
|||
Gross
margin
|
28.9
|
%
|
27.5
|
%
|
Despite
the tough competitive pricing environment, gross margin increased 140 basis
points compared to 2007. The increase in gross
margin is primarily attributable to our focus on pricing discipline at the sales
center level. Other favorable impacts compared to 2007 included the
following (listed in order of estimated magnitude):
·
|
increased
sales of preferred vendor and Pool Corporation private label
products;
|
·
|
greater
margin contribution from our acquisition of
NPT;
|
·
|
a
shift in sales mix to products in the higher margin maintenance
market;
|
·
|
benefits
to our fourth quarter gross margin resulting from pre-price increase
inventory purchases (increase of 130 to 150 basis points in the fourth
quarter and approximately 20 basis points for fiscal 2008);
and
|
·
|
a
favorable comparison to 2007, which was more negatively impacted by
competitive pricing due to other distributors selling off excess
inventories.
|
Operating
Expenses
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Operating
expenses
|
$
|
399.8
|
$
|
396.9
|
$
|
2.9
|
1
|
%
|
|||
Operating
expenses as a percentage of net sales
|
22.4
|
%
|
20.6
|
%
|
The
increase in operating expenses is due to approximately $14.5 million of
operating expenses related to our 2008 acquisitions, which was partially offset
by a 3% decrease in base business operating expenses compared to
2007. The impact of cost control initiatives offset higher building
rental expenses of $2.6 million (primarily for sales centers opened or
expanded during 2007), an increase in bad debt expense of $2.2 million, higher
product delivery costs and inflationary increases in wages and other
costs. Total operating expenses as a percentage of net sales
increased between periods due to the decrease in net sales.
Our cost
control initiatives include tighter management of discretionary costs, the
consolidation or closing of nine sales centers since November 2007 and selective
personnel reductions over the past year. Despite the 6% reduction in
headcount year over year (excluding acquisitions), we still reduced overtime and
temporary labor costs by $4.5 million. Compared to 2007, incentive
expenses declined $3.8 million and employee insurance costs also decreased
due primarily to lower claims expense.
26
Interest
Expense
Interest
expense decreased 15% between periods as the impact of a decrease in our
weighted average effective interest rate for the period more than offset our
higher average debt outstanding balance. Average debt outstanding was 3%
higher for the year ended 2008, reflecting our increased borrowings during the
first half of 2008 that funded our March 2008 acquisitions. The weighted
average effective interest rate decreased to 4.8% in 2008 from 6.0% in
2007.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings (loss). Our effective income tax rate was 39.26% at
December 31, 2008 and 38.66% at December 31, 2007. The
increase in the effective income tax rate reflects a valuation allowance
established for annual losses from certain foreign operations.
Net
Income and Earnings Per Share
Net
income decreased 18% to $57.0 million in 2008. Earnings per share for 2008
decreased to $1.18 per diluted share compared to $1.37 in 2007. The
dilutive impact of our first quarter acquisitions was approximately $0.02 per
diluted share for 2008. In both periods, earnings per share benefited
from the reduction of our weighted average shares outstanding due to the impact
of our 2007 share repurchase activities. This included an accretive
impact of approximately $0.02 in 2008 and $0.01 in 2007.
Fiscal
Year 2007 compared to Fiscal Year 2006
The
following table breaks out our consolidated results into the base business
component and the excluded components (sales centers excluded from base
business):
(Unaudited)
|
Base
Business
|
Excluded
|
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
|
%
|
|
Operating
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
|
%
|
For an
explanation of how we calculate base business, please refer to the discussion of
base business beginning on page 24 under the heading “Fiscal Year 2008
compared to Fiscal Year 2007”.
27
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
|
|||
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
|
The table
below summarizes the changes in our sales centers during 2007:
December
31, 2006
|
274
|
Acquired
|
1
|
New
locations
|
12
|
Consolidated
(1)
|
(4)
|
Closed
|
(2)
|
December
31, 2007
|
281
|
(1)
|
One
of the consolidations was related to Horizon’s centralized shipping
location (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.
|
For
information about our 2007 and 2006 acquisitions, see Note 2 of “Notes to
Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
Net
Sales
Year
Ended December 31,
|
|||||||||||
(in
millions)
|
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 sales growth for MRR
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 difficult
market environment.
Our sales
growth for MRR products was primarily due to the following:
·
|
the
continued successful execution of our sales, marketing and service
programs, resulting in market share
gains;
|
·
|
higher
sales of non-discretionary products due to the increased installed base of
swimming pools, which we estimate to have grown approximately 3% to 4% in
2006; 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.
|
28
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
(listed in order of estimated magnitude):
·
|
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.
|
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 (listed in order of estimated magnitude):
·
|
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 of $4.2 million compared to
2006;
|
·
|
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.
29
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 in 2006. 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.
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 2008, approximately 67% 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 2008 and 2007. 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)
|
2008
|
2007
|
|||||||||||||||
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
Statement
of Income Data
|
|||||||||||||||||
Net
sales
|
$
|
338,215
|
$
|
692,972
|
$
|
493,530
|
$
|
258,966
|
$
|
373,706
|
$
|
726,472
|
$
|
527,434
|
$
|
300,755
|
|
Gross
profit
|
95,354
|
202,752
|
141,800
|
75,322
|
103,485
|
207,922
|
139,803
|
79,436
|
|||||||||
Operating
income (loss)
|
2,197
|
89,990
|
38,617
|
(15,328
|
)
|
8,632
|
98,433
|
39,505
|
(12,796
|
)
|
|||||||
Net
income (loss)
|
(3,184
|
)
|
52,875
|
22,060
|
(14,795
|
)
|
1,354
|
57,794
|
21,835
|
(11,589
|
)
|
||||||
Net
sales as a % of annual net sales
|
19
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
19
|
%
|
38
|
%
|
27
|
%
|
16
|
%
|
|
Gross
profit as a % of annual
|
|||||||||||||||||
gross
profit
|
19
|
%
|
39
|
%
|
28
|
%
|
15
|
%
|
20
|
%
|
39
|
%
|
26
|
%
|
15
|
%
|
|
Operating
income (loss) as a
|
|||||||||||||||||
%
of annual operating income
|
2
|
%
|
78
|
%
|
33
|
%
|
(13
|
)%
|
6
|
%
|
74
|
%
|
30
|
%
|
(10
|
)%
|
|
Balance
Sheet Data
|
|||||||||||||||||
Total
receivables, net
|
$
|
206,187
|
$
|
278,654
|
$
|
178,927
|
$
|
115,584
|
$
|
231,034
|
$
|
301,265
|
$
|
200,534
|
$
|
141,117
|
|
Product
inventories, net
|
476,758
|
385,258
|
345,944
|
405,914
|
413,161
|
388,364
|
317,110
|
379,663
|
|||||||||
Accounts
payable
|
333,104
|
193,663
|
128,329
|
173,688
|
325,448
|
229,691
|
127,889
|
194,178
|
|||||||||
Total
debt
|
396,110
|
441,992
|
337,742
|
327,792
|
358,522
|
425,599
|
406,465
|
350,852
|
Note: Due to rounding, the sum of quarterly percentage amounts may
not equal 100%.
We expect
that our quarterly results of operations will continue to fluctuate depending on
the timing and amount of revenue contributed by new and acquired sales
centers. Based on our peak summer selling season, we generally open
new sales centers and close or consolidate sales centers, when warranted, either
in the first quarter before the peak selling season starts or in the fourth
quarter after the peak selling season ends.
30
Weather
is one of the principal external factors affecting our business. The
table below presents some of the possible effects resulting from various weather
conditions.
Weather
|
Possible
Effects
|
|
Hot
and dry
|
•
|
Increased
purchases of chemicals and supplies
|
for
existing swimming pools
|
||
•
|
Increased
purchases of above-ground pools and
|
|
irrigation
products
|
||
Unseasonably
cool weather or extraordinary
amounts of rain
|
•
|
Fewer
pool and landscape installations
|
•
|
Decreased
purchases of chemicals and supplies
|
|
•
|
Decreased
purchases of impulse items such as
|
|
above-ground
pools and accessories
|
||
Unseasonably
early warming trends in spring/late cooling trends in fall
|
•
|
A
longer pool and landscape season, thus increasing our
sales
|
(primarily
in the northern half of the US)
|
||
Unseasonably
late warming trends in spring/early cooling trends in fall
|
•
|
A
shorter pool and landscape season, thus decreasing our
sales
|
(primarily
in the northern half of the US)
|
In the
first half of 2008, our sales benefited from more favorable weather in Texas and
Oklahoma compared to the same period in 2007 (see discussion
below). However, our sales were negatively impacted in 2008 by
generally unfavorable weather conditions including cooler temperatures and
higher precipitation nationally compared to 2007. The start of the
2008 pool season was delayed even further than in 2007 due to several late
winter storms in the Midwest and Northeast and much cooler March temperatures
across most of the country. Cooler than normal temperatures in August
and September also shortened the pool season in 2008 for most North
American markets excluding the West Coast, while a number of severe
tropical systems adversely impacted our sales in Texas, Florida and Louisiana
during the third quarter of 2008.
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.
31
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;
|
·
|
dividend
payments;
|
·
|
capital
expenditures;
|
·
|
the
timing and extent of share repurchases;
and
|
·
|
the
ability to attract long-term capital with satisfactory
terms.
|
Our
primary capital needs are seasonal working capital obligations and other general
corporate purposes, including acquisitions, share repurchases and dividend
payments. Our primary sources of working capital are cash from operations
supplemented by bank borrowings, which combined with seller financing have
historically been sufficient to support our growth and finance 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, which has averaged
approximately 0.5% to 0.75% of net sales historically but dropped to 0.4%
of net sales in 2008 due to lower capacity
expansion;
|
·
|
strategic
acquisitions executed
opportunistically;
|
·
|
payment
of cash dividends as and when declared by the Board;
and
|
·
|
repayment
of debt.
|
While we
still have our Board authorized share repurchase program in place with
$53.0 million of the current authorized amount remaining available as of
December 31, 2008, this is not a current priority for the use of
cash.
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
Year
Ended December 31,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Operating
activities
|
$
|
93,282
|
$
|
71,644
|
$
|
69,010
|
||||
Investing
activities
|
(41,304
|
)
|
(12,638
|
)
|
(41,439
|
)
|
||||
Financing
activities
|
(44,726
|
)
|
(63,957
|
)
|
(41,586
|
)
|
Cash flow
provided by operations increased $21.6 million compared to 2007 due primarily to
the favorable impact from the reduction in outstanding accounts
receivable. Our 2008 cash provided by operating activities also
reflects the benefit related to our $30.0 million deferred third and fourth
quarter 2008 estimated federal tax payments as allowed by the Internal Revenue
Service (IRS) for taxpayers affected by Hurricane Gustav. This
benefit was offset by a negative impact of approximately $36.0 million
related to the net purchase and payment of inventory purchased ahead of vendor
price increases. In 2008, the increase in cash used in investing
activities reflects cash paid for our March 2008 acquisitions partially
offset by a decrease in capital expenditures. Cash used in financing
activities in 2008 includes $23.1 million of net payments on
debt.
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.
32
Cash used
in investing activities decreased in 2007 compared to 2006 due to the reduced
level of acquisition activity. 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.
Future
Sources and Uses of Cash
As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) provides for $300.0 million in borrowing capacity
including a $240.0 million five-year revolving credit facility (the
Revolver) and a $60.0 million term loan (the Term Loan). The Term Loan matures
on December 20, 2010 and the Revolver matures on December 20,
2012. The Credit Facility includes sublimits for the issuance of
swingline loans and standby letters of credit. Pursuant to an
accordion feature, the aggregate maximum principal amount of the commitments
under the Revolver may be increased at our request and with agreement by the
lenders by up to $75.0 million, to a total of $315.0 million.
At
December 31, 2008, there was $153.0 million outstanding and $86.3
million available for borrowing under the Revolver. The weighted average
effective interest rate on the Revolver was approximately 4.2% for the year
ended December 31, 2008.
At December 31, 2008, there was
$54.0 million outstanding under the Term Loan of which $6.0 million is
classified as current. In March 2008, we entered into a new
interest rate swap agreement to reduce our exposure to fluctuations in interest
rates for the remaining outstanding period of the Term Loan. The swap agreement
converts the Term Loan’s variable interest rate to a fixed rate of 2.4% on the
initial notional amount of $54.0 million, which will decrease as payments
are made on the Term Loan, until maturity on December 31, 2010. The swap
agreement has an effective date of
December 31, 2008.
In
May 2008, we renewed our accounts receivable securitization facility (the
Receivables Facility) for one year through May 2009. Effective
September 2008, the Receivables Facility provided a borrowing capacity of
up to $95.0 million, which was reduced to $75 million in
January 2009. For a discussion of amendments we made to the
Receivables Facility in January 2009, see Note 14 of “Notes to Consolidated
Financial Statements,” included in Item 8 of this Form 10-K.
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
additional borrowing capacity and
flexibility. At December 31, 2008, there was $20.8
million outstanding under the Receivables Facility at a weighted average
effective interest rate of 3.8%. We intend to renew the Receivables Facility in
the second quarter of 2009 with comparable or similar terms as those contained
in the facility as amended on January 15, 2009.
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, 2008, we were in compliance with all covenants and financial
ratio requirements related to our Credit Facility, our Notes and our Receivables
Facility. For additional information regarding our debt arrangements, see Note 5
of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form
10-K.
33
In the
first quarter of 2009, our cash flows will be negatively impacted by the payment
of our $30.0 million third and fourth quarter 2008 estimated federal tax
payments in January 2009. As discussed above in the Sources and
Uses of Cash section, we deferred these payments as allowed by the
IRS.
As of
February 20, 2009, $53.0 million of the current Board authorized amount
under our share repurchase program remained available. While share repurchases
are not a current priority, we may 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
the current capacity to finance any working capital needs that may arise. We
continually evaluate potential acquisitions and hold discussions with
acquisition candidates. If suitable acquisition opportunities arise that would
require financing, we believe that we have the ability to finance any such
transactions. Additionally, we may issue common or preferred stock to raise
funds.
Contractual
Obligations
At
December 31, 2008 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
|
$
|
307,000
|
$
|
6,000
|
$
|
48,000
|
$
|
253,000
|
$
|
—
|
||||
Short-term
financing
|
20,792
|
20,792
|
—
|
—
|
—
|
|||||||||
Operating
leases
|
201,969
|
51,022
|
75,898
|
45,422
|
29,627
|
|||||||||
$
|
529,761
|
$
|
77,814
|
$
|
123,898
|
$
|
298,422
|
$
|
29,627
|
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. The
table below contains estimated interest payments related to our long-term debt
and short-term financing obligations listed in the table above. Our
estimates of future interest payments are calculated based on the
December 31, 2008 outstanding balances of each of our debt instruments
and the related effective interest rates for the year ended
December 31, 2008. On our Term Loan and our Notes, the
variable rates are converted to fixed rates under our existing swap
agreements. To
project the estimated interest expense to coincide with the time periods used in
the table above, we have projected the estimated debt balances for future years
based on information currently available related to scheduled payments and
maturities of these debt instruments.
Estimated
payments due by period
|
||||||||||||||
Less
than
|
5
years and
|
|||||||||||||
Total
|
1
year
|
1-2
years
|
3-4
years
|
thereafter
|
||||||||||
Future
interest expense
|
$
|
48,808
|
$
|
13,546
|
$
|
23,748
|
$
|
11,514
|
$
|
—
|
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
We are
exposed to market risks, including interest rate risk and foreign currency risk.
The adverse effects of potential changes in these market risks are discussed
below. The following discussion does not consider the effects of the reduced
level of overall economic activity that could exist following such changes.
Further, in the event of changes of such magnitude, we would likely take actions
to mitigate our exposure to such changes.
Interest
Rate Risk
Our
earnings are exposed to changes in short-term interest rates because of the
variable interest rates on our debt. 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.
34
If
(i) the variable rates on our Revolver and our Receivables Facility
increased or decreased 1.0% from the rate at December 31, 2008; and
(ii) we borrowed the maximum amount available as of December 31, 2008 under the
Revolver ($315.0 million, assuming that at our request and with agreement
by the lenders, we exercised the $75.0 million accordion feature) and the
Receivables Facility ($95.0 million) for all of 2008, then our pretax
income would decrease by approximately $4.1 million and earnings per share
would decrease by $0.05 per diluted share based on the number of weighed average
diluted shares outstanding at December 31, 2008.
Failure
of our swap counterparty would result in the loss of any potential benefit to us
under our swap agreements. In this case, we would still be obligated to pay the
variable interest payments underlying our debt
agreements. Additionally, failure of our swap counterparty would not
eliminate our obligation to continue to make payments under our existing swap
agreements if we continue to be in a net pay position.
Currency
Risk
We have
wholly owned subsidiaries in Canada, the United Kingdom, France, Italy,
Portugal, Spain and Mexico. 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 relative small
size of our international operations, however, we do not anticipate that
exposure to currency rate fluctuations will be material in 2009.
Functional
Currencies
|
|
Canada
|
Canadian
Dollar
|
United
Kingdom
|
British
Pound
|
France
|
Euro
|
Italy
|
Euro
|
Portugal
|
Euro
|
Spain
|
Euro
|
Mexico
|
Peso
|
35
Item 8. Financial
Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
36
The Board
of Directors and Shareholders
Pool
Corporation
We have
audited the accompanying consolidated balance sheets of Pool Corporation as of
December 31, 2008 and 2007, and the related consolidated statements of income,
shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, 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, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 2, 2009
expressed an unqualified opinion thereon.
/s/Ernst &
Young LLP
New
Orleans, Louisiana
March 2,
2009
37
Consolidated
Statements of Income
(In
thousands, except per share data)
Year
Ended December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
||||||
Net
sales
|
$
|
1,783,683
|
$
|
1,928,367
|
$
|
1,909,762
|
|||
Cost
of sales
|
1,268,455
|
1,397,721
|
1,369,814
|
||||||
Gross profit
|
515,228
|
530,646
|
539,948
|
||||||
Selling
and administrative expenses
|
399,752
|
396,872
|
372,566
|
||||||
Operating income
|
115,476
|
133,774
|
167,382
|
||||||
Interest
expense, net
|
18,912
|
22,148
|
15,196
|
||||||
Income
before income taxes and equity earnings (loss)
|
96,564
|
111,626
|
152,186
|
||||||
Provision
for income taxes
|
37,911
|
43,154
|
58,759
|
||||||
Equity
earnings (loss) in unconsolidated investments, net
|
(1,697
|
)
|
922
|
1,597
|
|||||
Net
income
|
$
|
56,956
|
$
|
69,394
|
$
|
95,024
|
|||
Earnings
per share:
|
|||||||||
Basic
|
$
|
1.19
|
$
|
1.42
|
$
|
1.83
|
|||
Diluted
|
$
|
1.18
|
$
|
1.37
|
$
|
1.74
|
|||
Weighted
average shares outstanding:
|
|||||||||
Basic
|
47,758
|
48,887
|
51,866
|
||||||
Diluted
|
48,444
|
50,802
|
54,662
|
||||||
Cash
dividends declared per common share
|
$
|
0.51
|
$
|
0.465
|
$
|
0.405
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
38
Consolidated
Balance Sheets
(In
thousands, except share data)
December
31,
|
|||||||||
2008
|
2007
|
||||||||
Assets
|
|||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
15,762
|
$
|
15,825
|
|||||
Receivables,
net
|
16,311
|
45,257
|
|||||||
Receivables
pledged under receivables facility
|
99,273
|
95,860
|
|||||||
Product
inventories, net
|
405,914
|
379,663
|
|||||||
Prepaid
expenses and other current assets
|
7,676
|
8,265
|
|||||||
Deferred
income taxes
|
11,908
|
9,139
|
|||||||
Total
current assets
|
556,844
|
554,009
|
|||||||
Property
and equipment, net
|
33,048
|
34,223
|
|||||||
Goodwill
|
169,569
|
155,247
|
|||||||
Other
intangible assets, net
|
13,339
|
14,504
|
|||||||
Equity
interest investments
|
31,157
|
33,997
|
|||||||
Other
assets, net
|
26,949
|
22,874
|
|||||||
Total
assets
|
$
|
830,906
|
$
|
814,854
|
|||||
Liabilities
and stockholders' equity
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
173,688
|
$
|
194,178
|
|||||
Accrued
expenses and other current liabilities
|
61,701
|
37,216
|
|||||||
Short-term
financing
|
20,792
|
68,327
|
|||||||
Current
portion of long-term debt and other long-term liabilities
|
6,111
|
3,439
|
|||||||
Total
current liabilities
|
262,292
|
303,160
|
|||||||
Deferred
income taxes
|
20,032
|
17,714
|
|||||||
Long-term
debt
|
301,000
|
279,525
|
|||||||
Other
long-term liabilities
|
5,848
|
5,664
|
|||||||
Total
liabilities
|
589,172
|
606,063
|
|||||||
Stockholders'
equity:
|
|||||||||
Common
stock, $.001 par value; 100,000,000 shares authorized;
48,218,872 and 47,516,989 shares
|
|||||||||
issued
and outstanding at December 31, 2008 and
2007, respectively
|
48
|
47 | |||||||
Additional
paid-in capital
|
189,665
|
171,996
|
|||||||
Retained
earnings
|
54,407
|
29,044
|
|||||||
Accumulated
other comprehensive income (loss)
|
(2,386
|
)
|
7,704
|
||||||
Total
stockholders' equity
|
241,734
|
208,791
|
|||||||
Total
liabilities and stockholders' equity
|
$
|
830,906
|
$
|
814,854
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
39
Consolidated
Statements of Cash Flows
(In
thousands)
Year
Ended December 31,
|
|||||||||||||
2008
|
2007
|
2006
|
|||||||||||
Operating
activities
|
|||||||||||||
Net
income
|
$
|
56,956
|
$
|
69,394
|
$
|
95,024
|
|||||||
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|||||||||||||
Depreciation
|
9,732
|
9,289
|
8,162
|
||||||||||
Amortization
|
3,722
|
4,694
|
4,742
|
||||||||||
Share-based
compensation
|
6,709
|
7,398
|
7,204
|
||||||||||
Excess
tax benefits from share-based compensation
|
(4,538
|
)
|
(8,482
|
)
|
(14,627
|
)
|
|||||||
Provision
for doubtful accounts receivable, net of write-offs
|
4,619
|
5,047
|
1,217
|
||||||||||
Provision
for inventory obsolescence, net
|
1,813
|
610
|
902
|
||||||||||
Change
in deferred income taxes
|
(2,198
|
)
|
(3,747
|
)
|
(4,521
|
)
|
|||||||
Loss
on sale of property and equipment
|
333
|
56
|
73
|
||||||||||
Equity
(earnings) loss in unconsolidated investments
|
2,800
|
(1,523
|
)
|
(2,602
|
)
|
||||||||
Goodwill
impairment
|
440
|
—
|
—
|
||||||||||
Other
|
(104
|
)
|
(40
|
)
|
—
|
||||||||
Changes
in operating assets and liabilities,
|
|||||||||||||
net
of effects of acquisitions and divestitures:
|
|||||||||||||
Receivables
|
26,350
|
8,822
|
(5,301
|
)
|
|||||||||
Product
inventories
|
(11,098
|
)
|
(48,001
|
)
|
5,882
|
||||||||
Prepaid
expenses and other assets
|
25
|
(870
|
)
|
(1,054
|
)
|
||||||||
Accounts
payable
|
(24,916
|
)
|
16,505
|
(5,269
|
)
|
||||||||
Accrued
expenses and other current liabilities
|
22,637
|
12,492
|
(20,822
|
)
|
|||||||||
Net
cash provided by operating activities
|
93,282
|
71,644
|
69,010
|
||||||||||
Investing
activities
|
|||||||||||||
Acquisition
of businesses, net of cash acquired
|
(35,466
|
)
|
(2,087
|
)
|
(26,662
|
)
|
|||||||
Divestiture
of business
|
1,165
|
—
|
—
|
||||||||||
Proceeds
from sale of investment
|
—
|
75
|
—
|
||||||||||
Purchase
of property and equipment, net of sale proceeds
|
(7,003
|
)
|
(10,626
|
)
|
(14,777
|
)
|
|||||||
Net
cash used in investing activities
|
(41,304
|
)
|
(12,638
|
)
|
(41,439
|
)
|
|||||||
Financing
activities
|
|||||||||||||
Proceeds
from revolving line of credit
|
370,948
|
477,246
|
442,495
|
||||||||||
Payments
on revolving line of credit
|
(343,473
|
)
|
(482,878
|
)
|
(380,438
|
)
|
|||||||
Proceeds
from asset-backed financing
|
83,335
|
87,479
|
93,347
|
||||||||||
Payments
on asset-backed financing
|
(130,870
|
)
|
(93,438
|
)
|
(84,718
|
)
|
|||||||
Proceeds
from long-term debt
|
—
|
100,000
|
—
|
||||||||||
Payments
on long-term debt and other long-term liabilities
|
(3,171
|
)
|
(4,321
|
)
|
(1,514
|
)
|
|||||||
Payments
of capital lease obligations
|
(251
|
)
|
(257
|
)
|
(257
|
)
|
|||||||
Payment
of deferred financing costs
|
(56
|
)
|
(1,152
|
)
|
(156
|
)
|
|||||||
Excess
tax benefits from share-based compensation
|
4,538
|
8,482
|
14,627
|
||||||||||
Proceeds
from issuance of common stock under share-based compensation
plans
|
6,423
|
7,292
|
7,220
|
||||||||||
Payments
of cash dividends
|
(24,431
|
)
|
(22,734
|
)
|
(21,080
|
)
|
|||||||
Purchases
of treasury stock
|
(7,718
|
)
|
(139,676
|
)
|
(111,112
|
)
|
|||||||
Net
cash used in financing activities
|
(44,726
|
)
|
(63,957
|
)
|
(41,586
|
)
|
|||||||
Effect
of exchange rate changes on cash
|
(7,315
|
)
|
4,042
|
3,883
|
|||||||||
Change
in cash and cash equivalents
|
(63
|
)
|
(909
|
)
|
(10,132
|
)
|
|||||||
Cash
and cash equivalents at beginning of year
|
15,825
|
16,734
|
26,866
|
||||||||||
Cash
and cash equivalents at end of year
|
$
|
15,762
|
$
|
15,825
|
$
|
16,734
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
40
POOL CORPORATION
Consolidated
Statements of Cash Flows (continued)
(In
thousands)
Supplemental
cash flow information
|
Year
Ended December 31,
|
|||||||||
2008
|
2007
|
2006
|
||||||||
Cash
paid during the year for:
|
||||||||||
Interest
|
$
|
18,226
|
$
|
21,321
|
$
|
14,823
|
||||
Income
taxes, net of refunds
|
8,619
|
30,509
|
74,822
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
41
Consolidated
Statements of Changes in Stockholders’ Equity
(In
thousands, amounts in Dollars except share data)
(2005
as adjusted - see Note 1)
|
|||||||||||||||||
Accumulated
|
|||||||||||||||||
Additional
|
Other
|
||||||||||||||||
Common
Stock
|
Treasury
|
Paid-In
|
Retained
|
Comprehensive
|
|||||||||||||
Shares
|
Amount
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Total
|
|||||||||||
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
|
||||||||||
Net
income
|
—
|
—
|
—
|
—
|
56,956
|
—
|
56,956
|
||||||||||
Foreign
currency translation
|
—
|
—
|
—
|
—
|
—
|
(7,315
|
)
|
(7,315
|
)
|
||||||||
Interest
rate swap, net of tax of $1,730
|
—
|
—
|
—
|
—
|
—
|
(2,775
|
)
|
(2,775
|
)
|
||||||||
Comprehensive
income, net of tax
|
46,866
|
||||||||||||||||
Treasury
stock, 429 shares
|
|||||||||||||||||
of common stock
|
—
|
—
|
(7,719
|
)
|
—
|
—
|
—
|
(7,719
|
)
|
||||||||
Retirement
of treasury shares
|
(429
|
)
|
(1
|
)
|
7,719
|
—
|
(7,718)
|
—
|
—
|
||||||||
Share-based
compensation
|
—
|
—
|
—
|
6,709
|
—
|
—
|
6,709
|
||||||||||
Exercise
of stock options
|
|||||||||||||||||
including
tax benefit of $4,538
|
1,058
|
2
|
—
|
9,875
|
—
|
—
|
9,877
|
||||||||||
Declaration
of cash dividends
|
—
|
—
|
—
|
—
|
(24,431)
|
—
|
(24,431
|
)
|
|||||||||
Issuance
of restricted stock
|
5
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||
Other
|
—
|
—
|
—
|
—
|
556
|
—
|
556
|
||||||||||
Employee
stock purchase plan
|
68
|
—
|
—
|
1,085
|
—
|
—
|
1,085
|
||||||||||
Balance
at December 31, 2008
|
48,218
|
48
|
—
|
189,665
|
54,407
|
(2,386
|
)
|
241,734
|
The
accompanying Notes are an integral part of these Consolidated Financial
Statements.
42
Notes
to Consolidated Financial Statements
Note
1 - Organization and Summary of Significant Accounting Policies
Description
of Business
As of
December 31, 2008, Pool Corporation and our wholly owned subsidiaries
(the Company, which may
be referred to as POOL,
we, us or our), maintained 288 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.
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, incentive compensation accruals and impairment
evaluations. 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.
Based on
the number of product lines and product categories we have, the fact that we do
not track sales by product lines and product categories on a consolidated basis
and the fact that we make ongoing changes to how products are classified within
these groups, it is impracticable to report our sales by product
category.
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.
43
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 to customers. We account for these incentives
as an adjustment to net sales. We estimate the amount of volume
incentives earned based on our estimate of cumulative sales for the fiscal year
relative to our customers’ progress toward achieving minimum purchase
requirements. 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.
Vendor
Incentives
We
account for vendor incentives in accordance with the Emerging Issues Task Force
Issue (EITF) 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 Consolidated Financial Statements.
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):
2008
|
2007
|
2006
|
||||||
$
|
38,024
|
$
|
36,054
|
$
|
32,682
|
44
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 the 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). 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. For additional discussion of share-based compensation, see Note
7.
Advertising
Costs
We
expense advertising costs when incurred. The table below presents advertising
expense for the past three years (in thousands):
2008
|
2007
|
2006
|
||||||
$
|
7,139
|
$
|
7,646
|
$
|
9,463
|
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.
Equity
Method Investments
We
account for our 38% investment in Latham Acquisition Corporation (LAC) 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. LAC is a
manufacturer of packaged pools and related products. Since we
purchase inventory from LAC, we adjust our share of LAC’s income or loss to
defer the estimated gross profit recognized by LAC related to our ending on-hand
inventory balance. In the fourth quarter of 2008, we revised our
estimation process for determining the deferred gross profit
amount. Based on our ending on-hand inventory balance at
December 31, 2008, we recognized approximately $1.0 million of
additional equity loss than we would have under our previous deferral
calculation. Our net equity loss from our investment in LAC was $1.7
million in 2008 compared to net equity earnings of $0.9 million in
2007.
The
carrying value of our investments at December 31, 2008 was
$31.2 million, including $30.1 million for LAC. We evaluate our
equity method investments for potential impairment indicators on an ongoing
basis. This evaluation requires the exercise of judgment based upon
the specific facts and circumstances of each investment. A series of
actual operating losses or projected future losses of an investee or other
factors may indicate a decrease in value of the investment. If
impairment indicators exist, we will evaluate whether the impairment is
other-than-temporary. We determined that there was no impairment of
our equity method investments as of December 31, 2008.
45
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 share-based awards. For additional discussion
of earnings per share, see Note 9.
Fair
Value Measurements
Effective
January 1, 2008, we prospectively implemented the provisions of SFAS 157,
Fair Value
Measurements. For the fair value measurements that are
required or permitted under other standards, SFAS 157 clarifies the fair
value objective and establishes a framework for developing fair value
estimates. In February 2008, the FASB issued FASB Staff Position
FAS 157-2, Effective Date
of FASB Statement No. 157 (FSP FAS 157-2), which defers the
effective date for us to January 1, 2009 for all nonfinancial assets
and liabilities, except those that are recognized or disclosed at fair value on
a recurring basis (that is, at least annually). We do not believe the
adoption of FSP FAS 157-2 will have a material impact on our Consolidated
Financial Statements.
SFAS 157
provides a framework for measuring fair value and establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value, giving the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 inputs), the next priority to observable market
based inputs or unobservable inputs that are corroborated by market data (Level
2 inputs) and the lowest priority to unobservable inputs (Level 3
inputs).
In
measuring the fair value of our assets and liabilities, we use significant other
observable market data or assumptions (Level 2 inputs) that we believe market
participants would use in pricing an asset or liability, including assumptions
about risk when appropriate. Our assets and liabilities that are
measured at fair value on a recurring basis include the unrealized gain or loss
on our interest rate swaps.
Derivatives
and Hedging Activities
We
recognize all derivatives at fair value on the Consolidated Balance Sheet. The
effective portion of changes in the fair value of derivatives qualifying as cash
flow hedges are recognized in other comprehensive income (loss) 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.
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.
46
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):
2008
|
2007
|
2006
|
|||||||
Balance
at beginning of year
|
$
|
9,938
|
$
|
4,892
|
$
|
4,211
|
|||
Acquisition
of businesses, net
|
—
|
—
|
(536
|
)
|
|||||
Bad
debt expense
|
9,855
|
7,634
|
3,420
|
||||||
Write-offs,
net of recoveries
|
(5,355
|
)
|
(2,588
|
)
|
(2,203
|
)
|
|||
Reclassified
balance (1)
|
(750
|
)
|
—
|
—
|
|||||
Balance
at end of year
|
$
|
13,688
|
$
|
9,938
|
$
|
4,892
|
(1)
|
Upon
conversion of a customer’s outstanding $1.8 million trade accounts
receivable balance to a note receivable balance in January 2008, we
reclassified both the gross trade accounts receivable balance and the
associated reserve balance to other non-current assets on the Consolidated
Balance Sheet.
|
Product
Inventories and Reserve for Inventory Obsolescence
Product
inventories consist primarily of goods we purchase from manufacturers to sell 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 or regulatory
requirements;
|
·
|
seasonal
fluctuations in inventory levels;
|
·
|
geographic
location; and
|
·
|
new
product offerings.
|
We
periodically adjust our reserve for inventory obsolescence as changes occur in
the above-identified factors.
47
The
following table summarizes the changes in our allowance for inventory
obsolescence for the past three years (in thousands):
2008
|
2007
|
2006
|
|||||||
Balance
at beginning of year
|
$
|
5,403
|
$
|
4,777
|
$
|
3,875
|
|||
Acquisition
of businesses, net
|
1,165
|
—
|
350
|
||||||
Provision
for inventory write-downs
|
3,131
|
1,788
|
1,196
|
||||||
Deduction
for inventory write-offs
|
(1,251
|
)
|
(1,162
|
)
|
(644
|
)
|
|||
Balance
at end of year
|
$
|
8,448
|
$
|
5,403
|
$
|
4,777
|
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
|
7 -
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):
2008
|
2007
|
2006
|
||||||
$
|
9,732
|
$
|
9,289
|
$
|
8,162
|
Acquisitions
In
accordance with 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 acquired businesses 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
reporting units to their carrying value, including goodwill. We
continually evaluate our operating performance against our estimates to
determine if an updated interim assessment is necessary. Since our
operating segment is defined as an individual sales center and we do not have
operations below the sales center level, our reporting unit is an individual
sales center. For additional discussion of goodwill and other
intangible assets, see Note 3.
48
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 estimates of claims incurred but not
reported and information that we obtain from third-party service providers
regarding known claims. 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.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141 (Revised), Business Combinations
(SFAS 141(R)), which replaced SFAS 141, and SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB 51.
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. We will apply SFAS 141(R) prospectively to business
combinations completed on or after January 1, 2009. We do not believe the
adoption of SFAS 141(R) will have a significant impact on our current
consolidated results of operations and financial position. SFAS 160 is
also required to be applied prospectively, except for the presentation and
disclosure requirements, which are required to be applied retrospectively for
all periods presented. The adoption of SFAS 160 will not have a
material impact on our Consolidated Financial Statements.
In
March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures that will provide a better
understanding of their effects on an entity’s financial position, financial
performance and cash flows. The provisions of SFAS 161 are
effective for fiscal years and interim periods beginning after
November 15, 2008. The adoption of SFAS 161 will
impact our footnote disclosures included in our Consolidated Financial
Statements.
Note
2 - Acquisitions and Divestitures
2008
Acquisitions and Divestitures
In
March 2008, we acquired National Pool Tile Group, Inc. (NPT), a leading
wholesale distributor of pool tile and composite pool finishes serving
professional contractors in the swimming pool refurbish and construction markets
through 15 distribution sales centers. As of
December 31, 2008, we had consolidated six of the acquired sales
centers into our existing sales centers. We have included the results
of operations for NPT in our Consolidated Financial Statements since the
acquisition date. We have completed the purchase price allocations
for our acquisition of NPT on a preliminary basis, subject to adjustments in
accordance with the purchase agreement and other adjustments should new or
additional facts about the business become known. We expect to
finalize the allocations by the first quarter of 2009. This
acquisition did not have a material impact on our financial position or results
of operations.
Also in
March 2008, we acquired Canswim Pools (Canswim), a manufacturer of
in-ground swimming pools and a distributor of in-ground swimming pools and
supplies with one sales center location in Ontario, Canada. We have
included the results of operations for Canswim in our Consolidated Financial
Statements since the acquisition date. We have completed the purchase
price allocations for our acquisition of Canswim on a preliminary basis, subject
to adjustments in accordance with the purchase agreement and other adjustments
should new or additional facts about the business become known. We
expect to finalize the allocations by the first quarter of 2009. This
acquisition did not have a material impact on our financial position or results
of operations.
49
In
November 2008, we acquired Proplas Plasticos, S.L. (Proplas), a distributor
of swimming pool products and irrigation and plumbing supplies in Madrid,
Spain. We have included the results of operations for Proplas in our
Consolidated Financial Statements since the acquisition date. We have
completed the purchase price allocations for our acquisition of Proplas on a
preliminary basis and are currently negotiating certain aspects of the purchase
agreement which could impact the terms of the transaction. The
allocation is subject to adjustments in accordance with the purchase agreement
as ultimately resolved and other adjustments should new or additional facts
about the business become known. We will finalize any adjustments to
the preliminary allocations by the fourth quarter of 2009. This
acquisition did not have a material impact on our financial position or results
of operations.
In
April 2008, we divested our pool liner manufacturing operation in France
(SOFI Manufacturing). We acquired SOFI Manufacturing as part of our
2003 acquisition of Sud Ouest Filtration, a distributor of swimming pool
products operating one sales center in Bordeaux, France. Our decision
to divest our pool liner manufacturing operation allows us to focus on our core
distribution business.
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.
Note
3 - Goodwill and Other Intangible Assets
In
October 2008, we performed our annual goodwill impairment test. As a
result of this test, we determined that the goodwill attributed to one of our
Ohio sales centers was impaired. Based on the current and projected
economic conditions in this market and fixed cost obligations related to an
unfavorable long-term lease for this sales center facility, we determined that
the estimated fair value for this reporting unit was less than its carrying
value. As a result, we performed additional impairment testing to
determine the implied fair value of this reporting unit’s
goodwill. Since the implied fair value of goodwill was less than the
carrying value, we wrote off the $0.4 million goodwill balance related to
this reporting unit. This impairment expense is recorded in selling
and administrative expenses on the Consolidated Statements of
Income.
We have
199 reporting units with goodwill balances as of
December 31, 2008. For these reporting units, the
highest goodwill balance is $7.1 million related to our United Kingdom
reporting unit. We believe the remaining goodwill related to our
sales centers is not impaired.
50
The
changes in the carrying amount of goodwill are as follows (in
thousands):
Balance
at December 31, 2006
|
$
|
154,244
|
|
Acquired
goodwill
|
585
|
||
Purchase
price adjustments, net
|
418
|
||
Balance
at December 31, 2007
|
155,247
|
||
Acquired
goodwill
|
14,790
|
||
Purchase
price adjustments, net
|
(28
|
)
|
|
Goodwill
impairment
|
(440
|
)
|
|
Balance
at December 31, 2008
|
$
|
169,569
|
Purchase price adjustments represent final adjustments in 2008 for the Tor-Lyn Limited acquisition and in 2007 for the Wickham acquisition.
Other
intangible assets consist of the following (in thousands):
December
31,
|
||||||
2008
|
2007
|
|||||
Horizon
tradename (indefinite life)
|
$
|
8,400
|
$
|
8,400
|
||
NPT
tradename (20 year life)
|
1,500
|
—
|
||||
Non-compete
agreements (5 year weighted average useful life)
|
9,017
|
18,761
|
||||
Employment
contracts (2.9 year weighted average useful life)
|
1,000
|
1,000
|
||||
Distribution
agreement (5 year useful life)
|
6,115
|
6,115
|
||||
26,032
|
34,276
|
|||||
Less
accumulated amortization
|
(12,693
|
)
|
(19,772
|
)
|
||
$
|
13,339
|
$
|
14,504
|
The
Horizon tradename has an indefinite useful life and is not subject to
amortization. However, we evaluate the remaining useful life of this
intangible asset and test for impairment periodically as required by SFAS 142.
The NPT tradename, non-compete agreements, employment contracts and distribution
agreement have finite useful lives and we amortize these agreements using the
straight-line method over their respective useful lives. The useful
lives for our non-compete agreements, employment contracts and distribution
agreement are based on their contractual terms.
The
employment contracts and distribution agreement intangibles were fully amortized
as of December 31, 2008. During 2008, we wrote off three
fully amortized non-compete agreements that totaled
$10.4 million. Other intangible amortization expense was $3.4
million in 2008, $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):
2009
|
$
|
1,695
|
|
2010
|
1,245
|
||
2011
|
584
|
||
2012
|
205
|
||
2013
|
147
|
51
Note
4 - Details of Certain Balance Sheet Accounts
The table
below presents additional information regarding certain balance sheet accounts
(in thousands):
December
31,
|
|||||||
2008
|
2007
|
||||||
Receivables:
|
|||||||
Trade
accounts
|
$
|
5,454
|
$
|
21,281
|
|||
Trade
accounts, pledged
|
99,273
|
95,860
|
|||||
Vendor
incentives
|
21,293
|
32,118
|
|||||
Other
|
3,252
|
1,796
|
|||||
129,272
|
151,055
|
||||||
Less
allowance for doubtful accounts
|
(13,688
|
)
|
(9,938
|
)
|
|||
$
|
115,584
|
$
|
141,117
|
||||
Property
and equipment:
|
|||||||
Land
|
$
|
1,631
|
$
|
1,185
|
|||
Building
|
2,145
|
1,716
|
|||||
Leasehold
improvements
|
19,208
|
17,459
|
|||||
Autos
and trucks
|
1,771
|
1,405
|
|||||
Machinery
and equipment
|
20,393
|
20,065
|
|||||
Computer
equipment
|
18,097
|
16,316
|
|||||
Furniture
and fixtures
|
9,654
|
9,161
|
|||||
Fixed
assets in progress
|
2,299
|
2,143
|
|||||
75,198
|
69,450
|
||||||
Less
accumulated depreciation
|
(42,150
|
)
|
(35,227
|
)
|
|||
$
|
33,048
|
$
|
34,223
|
||||
Other
assets, net:
|
|||||||
Non-current
deferred income taxes
|
$
|
21,324
|
$
|
17,275
|
|||
Other
|
5,625
|
5,599
|
|||||
$
|
26,949
|
$
|
22,874
|
||||
Accrued
expenses and other current liabilities:
|
|||||||
Salaries
and bonuses
|
$
|
12,543
|
$
|
13,867
|
|||
Current
deferred tax liability
|
3,685
|
2,144
|
|||||
Other(1)
|
45,473
|
21,205
|
|||||
$
|
61,701
|
$
|
37,216
|
||||
(1)
|
The
2008 balance includes $30.0 million of income taxes payable related to the
deferral of estimated income tax payments as allowed by Internal Revenue
Service Notice 2008-100, which was issued after Hurricane
Gustav.
|
52
Note
5 - Debt
The
components of our debt for the past two years were as follows (in
thousands):
December
31,
|
|||||||
2008
|
2007
|
||||||
Current
portion:
|
|||||||
Accounts
Receivable Securitization Facility (described below)
|
$
|
20,792
|
$
|
68,327
|
|||
Current
portion of Term Loan
|
6,000
|
3,000
|
|||||
26,792
|
71,327
|
||||||
Long-term
portion:
|
|||||||
Revolving
Line of Credit, variable rate (described below)
|
153,000
|
125,525
|
|||||
Term
Loan, variable rate (described below)
|
48,000
|
54,000
|
|||||
Floating
Rate Senior Notes (described below)
|
100,000
|
100,000
|
|||||
301,000
|
279,525
|
||||||
Total
debt
|
$
|
327,792
|
$
|
350,852
|
Unsecured
Syndicated Senior Credit Facility
As
amended on December 20, 2007, our unsecured syndicated senior credit facility
(the Credit Facility) provides for $300.0 million in borrowing capacity
including a $240.0 million five-year revolving credit facility (the
Revolver) and a $60.0 million term loan (the Term Loan). The Term Loan matures
on December 20, 2010 and the Revolver matures on December 20, 2012. The Credit
Facility includes sublimits for the issuance of swingline loans and standby or
trade letters of credit. Pursuant to an accordion feature, the
aggregate maximum principal amount of the commitments under the Revolver may be
increased at our request and with agreement by the lenders by up to $75.0
million, to a total of $315.0 million.
At
December 31, 2008, there was $153.0 million outstanding and $86.3
million available for borrowing under the Revolver. The weighted average
effective interest rate of the Revolver was approximately 4.2% for the year
ended December 31, 2008.
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 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% 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% 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, depending on our leverage
ratio.
|
At
December 31, 2008, there was $54.0 million outstanding under 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 $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, 2008. See discussion of our interest rate
swaps below.
53
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. 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. We used the net proceeds from the placement
to pay down borrowings under the Revolver. See discussion of our
interest rate swaps below.
Accounts
Receivable Securitization Facility
In
May 2008, we renewed our accounts receivable securitization facility (the
Receivables Facility) for one year through May 2009. Effective
September 2008, the Receivables Facility provided a borrowing capacity of
up to $95.0 million. For a discussion of amendments we made to
the Receivables Facility on January 15, 2009, see Note 14.
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, 2008, there was $20.8 million
outstanding under the Receivables Facility at a weighted average effective
interest rate of 3.8%.
Interest
Rate Swaps
In
December 2005, we entered into an interest rate swap agreement to reduce
our exposure to fluctuations in interest rates on the Term Loan. This
swap agreement terminated on December 31, 2008. In
March 2008, we entered into a separate interest rate swap agreement to
reduce our exposure to fluctuations in interest rates for the remaining
outstanding period of the Term Loan. The swap agreement converts the
Term Loan’s variable interest rate to a fixed rate of 2.4% on the initial
notional amount, which will decrease as payments are made on the Term Loan until
maturity on December 20, 2010. This swap has an effective
date of December 31, 2008.
In
February 2007, we 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 terminates 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
cash flow hedges and we record the changes in the fair value of the swaps to
accumulated other comprehensive income (loss). During the year ended
December 31, 2008, 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 $2.3 million increase interest expense. At
December 31, 2008, the combined fair value of the swap agreements was
an $8.5 million unrealized loss and is included in Accrued expenses and other
current liabilities on the Consolidated Balance Sheet.
54
Failure
of our swap counterparty would result in the loss of any potential benefit to us
under our swap agreements. In this case, we would still be obligated to pay the
variable interest payments underlying our debt
agreements. Additionally, failure of our swap counterparty would not
eliminate our obligation to continue to make payments under our existing swap
agreements if we continue to be in a net pay position.
Financial
and Other Covenants
Financial
covenants on our amended Credit Facility, the Notes and the Receivables Facility
are closely aligned and include a minimum fixed charge coverage ratio and
maintenance of a maximum average total leverage ratio, which are our most
restrictive covenants. 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 also
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.
As of
December 31, 2008, 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):
2008
|
2007
|
|||||
Balance
at beginning of year
|
$
|
2,008
|
$
|
856
|
||
Financing
costs deferred
|
56
|
1,152
|
||||
Balance
at end of year
|
2,064
|
2,008
|
||||
Less
accumulated amortization
|
(835
|
)
|
(469
|
)
|
||
$
|
1,229
|
$
|
1,539
|
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:
2008
|
2007
|
2006
|
||||||
$
|
46,866
|
$
|
70,883
|
$
|
99,100
|
Accumulated
other comprehensive income (loss) as presented on the Consolidated Balance
Sheets consists of the following components (in thousands):
|
Foreign
Currency Translation
|
Unrealized
Gain (Loss) on Interest Rate Swaps (1)
|
Total
|
||||||
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
|
|||||
Net
change
|
(7,315
|
)
|
(2,775
|
)
|
(10,090
|
)
|
|||
Balance
at December 31, 2008
|
$
|
2,821
|
$
|
(5,207
|
)
|
$
|
(2,386
|
)
|
(1) Amounts are shown
net of tax.
55
Note
7 - Share-Based Compensation
Share-Based
Plans
We award
stock options and restricted stock to our employees and non-employee directors
under our stock option plans.
Current
Plan
In May
2007, our stockholders approved the 2007 Long-Term Incentive Plan (the 2007
LTIP), which authorizes the Compensation Committee of our Board of Directors
(the 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, both of which are discussed below.
No more than 1,515,000 shares may be issued under the 2007
LTIP. Granted stock options have an exercise price equal to our
stock’s closing market price on the date of grant. Depending on an employee’s
length of service with the Company, 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.
Preceding
Plans
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
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.
Under the
1995 Stock Option Plan (the 1995 Plan) 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
expired 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. As of December 31, 2008, all options granted under
the 1995 Plan have been exercised or cancelled.
56
Stock
Option Awards
The
following is a summary of the stock option activity under our stock option plans
for the year ended December 31, 2008:
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
|||||||
Balance
at December 31, 2007
|
5,877,365
|
$
|
17.05
|
|||||||
Granted
|
935,051
|
20.40
|
||||||||
Exercised
|
(1,057,760
|
)
|
5.05
|
|||||||
Forfeited
|
(199,070
|
)
|
27.85
|
|||||||
Balance
at December 31, 2008
|
5,555,586
|
$
|
19.51
|
5.07
|
$
|
21,989,946
|
||||
Exercisable
at December 31, 2008
|
3,174,998
|
$
|
12.73
|
3.12
|
$
|
21,989,946
|
The table
below summarizes information about stock options outstanding and exercisable at
December 31, 2008:
Outstanding
Stock Options
|
Exercisable
Stock Options
|
||||||||
Weighted
Average
|
|||||||||
Remaining
|
Weighted
|
Weighted
|
|||||||
Contractual
Life
|
Average
|
Average
|
|||||||
Range
of exercise prices
|
Shares
|
(years)
|
Exercise
Price
|
Shares
|
Exercise
Price
|
||||
$
0.00 to $ 5.99
|
646,297
|
1.11
|
$
|
4.30
|
646,297
|
$
|
4.30
|
||
$
6.00 to $ 11.99
|
1,441,551
|
3.04
|
10.79
|
1,441,551
|
10.79
|
||||
$
12.00 to $ 17.99
|
572,527
|
3.17
|
13.08
|
572,527
|
13.08
|
||||
$
18.00 to $ 23.99
|
1,404,144
|
7.58
|
20.90
|
211,506
|
21.67
|
||||
$
24.00 to $ 29.99
|
36,500
|
5.52
|
26.74
|
12,750
|
26.91
|
||||
$
30.00 to $ 47.30
|
1,454,567
|
7.14
|
35.94
|
290,367
|
33.28
|
||||
5,555,586
|
5.07
|
$
|
19.51
|
3,174,998
|
$
|
12.73
|
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 amounts)
|
2008
|
2007
|
2006
|
||||||
Options
exercised
|
1,057,760
|
838,746
|
1,072,286
|
||||||
Cash
proceeds
|
$
|
5,339
|
$
|
6,061
|
$
|
5,287
|
|||
Intrinsic
value of options exercised
|
$
|
14,312
|
$
|
24,457
|
$
|
39,921
|
|||
Tax
benefits realized
|
$
|
5,619
|
$
|
9,443
|
$
|
15,414
|
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)
|
2008
|
2007
|
2006
|
||||||
Expected
volatility
|
31.0
|
%
|
29.6
|
%
|
30.8
|
%
|
|||
Expected
term
|
6.7
|
years
|
6.5
|
years
|
6.0
|
years
|
|||
Risk-free
interest rate
|
3.17
|
%
|
4.49
|
%
|
4.33
|
%
|
|||
Expected
dividend yield
|
1.0
|
%
|
1.0
|
%
|
1.0
|
%
|
|||
Grant
date fair value
|
$
|
6.89
|
$
|
12.99
|
$
|
13.27
|
57
We
calculated expected volatility over the expected term of the awards based on our
historical volatility. We use weekly price observations for our
historical volatility calculation because we believe that they provide the most
appropriate measurement of volatility given the trading patterns of our common
stock. We estimated the expected term based on the vesting period of
the awards and our historical exercise activity for awards with similar
characteristics. The risk-free interest rate is based on the U.S. Treasury
zero-coupon issues with a remaining term approximating the expected term of the
option. We determined the expected dividend yield based on the anticipated
dividends over the expected term.
For
purposes of recognizing share-based compensation expense, we ratably expense the
estimated fair value of employee stock options over the options’ requisite
service period. Generally, the requisite service period for our share-based
awards is the vesting period. We recognize compensation cost for awards with
graded vesting using the graded vesting recognition method.
The table
below presents the total share-based compensation expense for stock option
awards and the related recognized tax benefits for the past three years (in
thousands):
2008
|
2007
|
2006
|
||||||
Share-based
compensation expense
|
$
|
5,721
|
$
|
5,875
|
$
|
6,554
|
||
Recognized
tax benefits
|
2,246
|
2,268
|
2,525
|
At
December 31, 2008, the unamortized compensation expense related to stock option
awards totaled $8.6 million, which will be recognized over a weighted
average period of 2.2 years. 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, 2008:
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||
Balance
unvested at December 31, 2007
|
109,801
|
$
|
30.58
|
|||
Granted
(at market price)
|
11,348
|
21.15
|
||||
Vested
|
(20,326
|
)
|
37.85
|
|||
Forfeited
|
(6,000
|
)
|
37.85
|
|||
Balance
unvested at December 31, 2008
|
94,823
|
$
|
27.43
|
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, 2008, the unamortized compensation expense related to the restricted stock
awards totaled $0.7 million, which will be recognized over a weighted
average period of 0.9 years.
The table
below presents the total number of restricted stock awards that vested for the
past three years and the related fair value of those awards (in thousands,
except share amounts):
2008
|
2007
|
2006
|
||||||
Shares
vested
|
20,326
|
2,500
|
2,500
|
|||||
Fair
value of restricted stock awards vested
|
$
|
344
|
$
|
91
|
$
|
94
|
58
The table
below presents the total share-based compensation expense for restricted stock
awards for the past three years (in thousands):
2008
|
2007
|
2006
|
||||||
Share-based
compensation expense
|
$
|
809
|
$
|
1,321
|
$
|
247
|
Employee
Stock Purchase Plan
In March
1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan
(the ESPP). Under our ESPP, employees who meet minimum age and length of service
requirements may purchase stock at 85% of the lower of:
a.
|
the
closing price of our common stock at the end of a six month plan period
ending either June 30 or December 31; or
|
b. | the average of the beginning and ending closing prices of our common stock for such six month period. |
No more than 956,250 shares of our common stock may be issued under our ESPP. For the two plan periods in each year presented below, we awarded the following aggregate share amounts:
2008
|
2007
|
2006
|
||||||
65,052
|
50,424
|
49,666
|
The grant
date fair value for the most recent ESPP purchase period ended
December 31, 2008 was $2.99 per share. Share-based
compensation expense related to our ESPP was $0.2 million in 2008, $0.2
million in 2007 and $0.4 million in 2006.
Note
8 - Income Taxes
Income
before income taxes and equity earnings (loss) is attributable to the following
jurisdictions (in thousands):
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
2006
|
||||||
United
States
|
$
|
93,854
|
$
|
107,853
|
$
|
147,345
|
|||
Foreign
|
2,710
|
3,773
|
4,841
|
||||||
Total
|
$
|
96,564
|
$
|
111,626
|
$
|
152,186
|
The
provision for income taxes consisted of the following (in
thousands):
Year
Ended December 31,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Current:
|
||||||||||
Federal
|
$
|
32,743
|
$
|
41,040
|
$
|
49,603
|
||||
State
and other
|
6,262
|
6,471
|
8,812
|
|||||||
39,005
|
47,511
|
58,415
|
||||||||
Deferred:
|
||||||||||
Federal
|
(992
|
)
|
(4,005
|
)
|
362
|
|||||
State
and other
|
(102
|
)
|
(352
|
)
|
(18
|
)
|
||||
(1,094
|
)
|
(4,357
|
)
|
344
|
||||||
Total
|
$
|
37,911
|
$
|
43,154
|
$
|
58,759
|
We made
payments related to income taxes totaling $8.6 million in 2008 and
$30.5 million in 2007. We deferred our third and fourth quarter 2008
estimated federal tax payments of $30.0 million until January 2009 as
allowed by Internal Revenue Service Notice 2008-100, which was issued following
Hurricane Gustav.
59
A
reconciliation of the U.S. federal statutory tax rate to our effective tax rate
on income before income taxes and equity earnings (loss) is as
follows:
Year
Ended December 31,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Federal
statutory rate
|
35.00
|
%
|
35.00
|
%
|
35.00
|
%
|
||||
Other,
primarily state income tax rate
|
4.26
|
3.66
|
3.61
|
|||||||
Total
effective tax rate
|
39.26
|
%
|
38.66
|
%
|
38.61
|
%
|
In 2008,
we recorded a $1.1 million reduction in the deferred tax liability related to
our equity losses in LAC. In 2007, we recorded a deferred tax
liability of $0.6 million related to our equity earnings in
LAC. 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,
|
||||||||
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Product
inventories
|
$
|
8,727
|
$
|
6,417
|
||||
Accrued
expenses
|
1,358
|
1,418
|
||||||
Allowance
for doubtful accounts
|
1,823
|
1,304
|
||||||
Total
current
|
11,908
|
9,139
|
||||||
Leases
|
1,447
|
1,206
|
||||||
Share-based
compensation
|
13,789
|
12,155
|
||||||
Depreciation
|
—
|
135
|
||||||
Uncertain
tax positions
|
1,244
|
1,062
|
||||||
Net
operating losses
|
2,159
|
1,082
|
||||||
Interest
rate swaps
|
3,260
|
1,529
|
||||||
Other
|
1,584
|
1,188
|
||||||
23,483
|
18,357
|
|||||||
Less:
Valuation allowance
|
(2,159
|
)
|
(1,082
|
)
|
||||
Total
non-current
|
21,324
|
17,275
|
||||||
Total
deferred tax assets
|
33,232
|
26,414
|
||||||
Deferred
tax liabilities:
|
||||||||
Trade
discounts on purchases
|
2,540
|
716
|
||||||
Prepaid
expenses
|
1,145
|
1,428
|
||||||
Total
current
|
3,685
|
2,144
|
||||||
Intangible
assets, primarily goodwill
|
18,071
|
15,188
|
||||||
Depreciation
|
538
|
—
|
||||||
Equity
earnings (loss) in unconsolidated investments
|
1,423
|
2,526
|
||||||
Total
non-current
|
20,032
|
17,714
|
||||||
Total
deferred tax liabilities
|
23,717
|
19,858
|
||||||
Net
deferred tax asset
|
$
|
9,515
|
$
|
6,556
|
60
At
December 31, 2008, certain of our international subsidiaries had tax loss
carryforwards totaling approximately $7.0 million, which expire in various years
after 2009. Deferred tax assets related to the tax loss carryforwards
of these international subsidiaries were $2.2 million as of December 31, 2008
and $1.1 million as of December 31, 2007. We have recorded a
corresponding valuation allowance of $2.2 million and $1.1 million in the
respective years.
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 our equity loss in unconsolidated investments and the change in
deferred income taxes related to the estimated tax impact of accumulated other
comprehensive income (loss).
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 $4.5 million in 2008 and $8.5 million in
2007.
As of
December 31, 2008, 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, 2008 (in thousands):
Balance
at December 31, 2007
|
$
|
3,538
|
|
Increases
for tax positions taken during a prior period
|
149
|
||
Increases
for tax positions taken during the current period
|
928
|
||
Decreases
resulting from the expiration of the statute of
limitations
|
(296
|
)
|
|
Decreases
relating to settlements
|
(432
|
)
|
|
Balance
at December 31, 2008
|
$
|
3,887
|
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.
The total
amount of unrecognized tax benefits that, if recognized, would decrease the
effective tax rate was $2.5 million at December 31, 2008 and $2.3 million
at 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 $0.6 million
in accrued interest at December 31, 2008 and approximately $0.4 million at
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 2005. 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.
61
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,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Net
income
|
$
|
56,956
|
$
|
69,394
|
$
|
95,024
|
||||
Weighted
average common shares outstanding:
|
||||||||||
Basic
|
47,758
|
48,887
|
51,866
|
|||||||
Effect
of dilutive securities:
|
||||||||||
Stock
options
|
622
|
1,848
|
2,758
|
|||||||
Restricted
stock awards
|
59
|
62
|
30
|
|||||||
Employee
stock purchase plan
|
5
|
5
|
8
|
|||||||
Diluted
|
48,444
|
50,802
|
54,662
|
The
weighted average diluted shares outstanding for the years ended December 31,
2008 and December 31, 2007 exclude stock options to purchase 2,888,211 and
1,077,375 shares, respectively. Since these options have exercise
prices that are higher than the average market price of our common stock,
including them in the calculation would have an anti-dilutive effect on earnings
per share for the respective periods. There were no anti-dilutive
stock options excluded from the earnings per share calculation for the year
ended December 31, 2006.
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):
2008
|
2007
|
2006
|
||||||
$
|
67,043
|
$
|
62,673
|
$
|
54,517
|
The table
below sets forth the approximate future minimum lease payments as of
December 31, 2008 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):
2009
|
51,022
|
||
2010
|
42,324
|
||
2011
|
33,574
|
||
2012
|
27,290
|
||
2013
|
18,132
|
||
Thereafter
|
29,627
|
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 resolution of any of these matters will have a material
adverse impact on our financial condition, results of operations or cash
flows.
62
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 ten year term. As of
December 31, 2008, we pay rent of $67,342 per month.
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 sole member of S&C Development, LLC is A. David Cook,
a POOL executive officer. The original five year lease term commenced
on February 4, 2002, and the current renewal covers a term of seven
years and will expire on December 31, 2013. As of
December 31, 2008, we pay rent of $4,985 per month for the 8,600
square foot space.
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, 2008, 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, 2008, we pay rent of
$10,758 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 original seven year lease term
commenced on November 16, 2001. The current five year lease
renewal commenced on December 1, 2008 and will expire on November 30,
2013. As of December 31, 2008, we pay rent of $9,360 per
month for the 20,000 square foot facility.
In
October 1999, we entered into a lease agreement with S&C Development, LLC
for a sales center facility in Mandeville, Louisiana. In
November 2007, S&C Development, LLC sold this facility to an unrelated
third party and we executed a lease with the new landlord.
The table
below presents rent expense associated with these leases for the past three
years (in thousands):
2008
|
2007
|
2006
|
||||||
NCC
|
$
|
807
|
$
|
795
|
$
|
436
|
||
Other
|
457
|
522
|
516
|
|||||
Total
|
$
|
1,264
|
$
|
1,317
|
$
|
952
|
63
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.
The table
below sets forth our matching contributions for the past three years
(in thousands):
2008
|
2007
|
2006
|
||||||
Matching
contributions 401(k)
|
$
|
3,703
|
$
|
3,497
|
$
|
3,043
|
||
Matching
contributions deferred compensation plan
|
15
|
32
|
125
|
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
|
|||||||||||||||||||||||||
2008
|
2007
|
||||||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||
Net
sales
|
$
|
338,215
|
$
|
692,972
|
$
|
493,530
|
$
|
258,966
|
$
|
373,706
|
$
|
726,472
|
$
|
527,434
|
$
|
300,755
|
|||||||||
Gross
profit
|
95,354
|
202,752
|
141,800
|
75,322
|
103,485
|
207,922
|
139,803
|
79,436
|
|||||||||||||||||
Net
income (loss)
|
(3,184
|
)
|
52,875
|
22,060
|
(14,795
|
)
|
1,354
|
57,794
|
21,835
|
(11,589
|
)
|
||||||||||||||
Earnings
(loss) per share:
|
|||||||||||||||||||||||||
Basic
|
$
|
(0.07
|
)
|
$
|
1.11
|
$
|
0.46
|
$
|
(0.31
|
)
|
$
|
0.03
|
$
|
1.17
|
$
|
0.45
|
$
|
(0.24
|
)
|
||||||
Diluted
|
$
|
(0.07
|
)
|
$
|
1.09
|
$
|
0.45
|
$
|
(0.31
|
)
|
$
|
0.03
|
$
|
1.12
|
$
|
0.43
|
$
|
(0.24
|
)
|
The sum
of basic and diluted earnings per share for each of the quarters may not equal
the total basic and diluted earnings per share for the annual 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
January 15, 2009, we amended our Receivables Facility. The amendment
affects various terms of the existing Receivables Purchase Agreement, including
increasing required loss reserves used in calculating the available funding
amount, loosening the delinquency and default trigger ratios for our seasonally
slower months of October through April and reducing the facility size from
$95.0 million to $75.0 million. The maturity date of the Receivables
Facility remains May 2009.
64
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item 9A. Controls
and Procedures
The term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the Act). The rules refer to
the controls and other procedures designed to ensure that information required
to be disclosed in reports that we file or submit under the Act is (1) recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms and (2) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure. As of December 31, 2008, management, including
the CEO and CFO, performed an evaluation of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, management,
including the CEO and CFO, concluded that as of December 31, 2008, our
disclosure controls and procedures were effective.
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with 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.
65
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 regarding
the reliability of financial reporting and the preparation
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, 2008. 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, 2008, POOL’s internal control over financial reporting was
effective.
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.
66
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, 2008, 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, 2008, 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, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008 of Pool Corporation, and our report
dated March 2, 2009, expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
New
Orleans, Louisiana
March 2,
2009
67
Item 9B. Other Information
Not
applicable.
PART
III.
Item 10. Directors, Executive Officers and Corporate
Governance
Incorporated
by reference to POOL’s 2009 Proxy Statement to be filed with the
SEC.
Item 11. Executive Compensation
Incorporated
by reference to POOL’s 2009 Proxy Statement to be filed with the
SEC.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Incorporated
by reference to POOL’s 2009 Proxy Statement to be filed with the
SEC.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Incorporated
by reference to POOL’s 2009 Proxy Statement to be filed with the
SEC.
Item 14. Principal Accounting Fees and
Services
Incorporated
by reference to POOL’s 2009 Proxy Statement to be filed with the
SEC.
68
PART
IV.
Item 15. Exhibits, Financial Statement
Schedules
(a)
|
The
following documents are filed as part of this
report:
|
(1)
|
Consolidated
Financial Statements:
|
||
Page
|
|||
37
|
|||
38
|
|||
39
|
|||
40
|
|||
42
|
|||
43
|
|||
(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 Exhibits.
|
||
69
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March
2, 2009.
POOL
CORPORATION
|
|
By:
|
/s/
WILSON B. SEXTON
|
Wilson
B. Sexton, Chairman of the Board and
Director
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 2, 2009.
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
|
/s/
MELANIE M. HOUSEY
|
|
Melanie
M. Housey
|
Corporate
Controller and Chief 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
|
70
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
|
|||||
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
|
71
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this Form 10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
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 Sale 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
|
||||||
10.28
|
Amendment
No. 9 to the Receivables Purchase Agreement, dated as of August 10,
2007.
|
10-K
|
000-26640
|
2/29/2008
|
||||||
10.29
|
Amendment
No. 10 to the Receivables Purchase Agreement, dated as of December 20,
2007.
|
10-K
|
000-26640
|
2/29/2008
|
||||||
10.30
|
Amendment
No. 12 to the Receivables Purchase Agreement, dated as of May 20,
2008.
|
8-K
|
000-26640
|
5/23/2008
|
||||||
10.31
|
Amendment
No. 3 to the Receivables Sale Agreement, dated as of May 20,
2008.
|
8-K
|
000-26640
|
5/23/2008
|
||||||
10.32
|
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
|
||||||
10.33
|
Performance
Undertaking dated as of March 27, 2003, by and between SCP Pool
Corporation and Superior Commerce LLC.
|
10-Q
|
000-26640
|
04/30/2003
|
||||||
10.34
|
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
|
||||||
10.35
|
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
|
72
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this Form 10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
10.36
|
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
|
||||||
10.37
|
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
|
||||||
10.38
|
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
|
||||||
10.39
|
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
|
||||||
10.40
|
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
|
||||||
10.41
|
Lease
(Oklahoma Service Center) entered into as of January 15, 2001, by and
between Dave Cook, individually and SCP Pool Corporation, as amended by
First Amendment, entered into as of October 24, 2001 by and between
S&C Development, LLC and SCP Pool Corporation, as amended by First
Amendment, entered into, as of December 5, 2001 by and between S&C
Development, LLC and SCP Pool Corporation.
|
10-Q
|
000-26640
|
07/30/2004
|
||||||
10.42
|
*
|
Form
of Stock Option Agreement under the Non-employee Directors Equity
Incentive Plan.
|
10-K
|
000-26640
|
03/01/2005
|
|||||
10.43
|
Nonqualified
Deferred Compensation Plan Basic Plan Document, dated March 1,
2005.
|
10-Q
|
000-26640
|
04/29/2005
|
||||||
10.44
|
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
|
73
Incorporated
by Reference
|
||||||||||
No.
|
Description
|
Filed
with this Form 10-K
|
Form
|
File
No.
|
Date
Filed
|
|||||
10.45
|
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
|
||||||
10.46
|
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
|
||||||
10.47
|
Note
Purchase Agreement by and among Pool Corporation and the Purchasers party
thereto.
|
8-K
|
000-26640
|
02/15/2007
|
||||||
10.48
|
Subsidiary
Guaranty by Pool Corporation in favor of the holders from time to time of
the Notes.
|
8-K
|
000-26640
|
02/15/2007
|
||||||
10.49
|
*
|
Pool
Corporation Executive Bonus Plan
|
10-K
|
000-26640
|
03/01/2007
|
|||||
10.50
|
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.
|
10-K
|
000-26640
|
02/29/2008
|
||||||
10.51
|
Amended
and Restated Subsidiary Guaranty Agreement dated as of December 20,
2007.
|
10-K
|
000-26640
|
02/29/2008
|
||||||
10.52
|
*
|
2008
Strategic Plan Incentive Program (SPIP)
|
8-K
|
000-26640
|
03/03/2008
|
|||||
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
|
74