POOL CORP - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2008
or
|
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to ____________
|
Commission
File Number: 0-26640
![](https://www.sec.gov/Archives/edgar/data/0000945841/000094584108000064/newpoolcorp.jpg)
POOL
CORPORATION
|
||
(Exact
name of Registrant as specified in its charter)
|
||
Delaware
|
36-3943363
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
109
Northpark Boulevard,
Covington,
Louisiana
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70433-5001
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
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985-892-5521
|
||
(Registrant's
telephone number, including area code)
|
||
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES x NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 ¨ NO x
At
October 24, 2008, there were 47,937,017 outstanding shares of the registrant's
common stock, $.001 par value per share.
POOL
CORPORATION
Form
10-Q
For
the Quarter Ended September 30, 2008
INDEX
PART
I. FINANCIAL INFORMATION
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|||
Item
1. Financial Statements (Unaudited)
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|||
1
|
|||
2
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|||
3
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|||
4
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|||
7
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|||
20
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|||
20
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|||
PART
II. OTHER INFORMATION
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|||
21
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|||
25
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|||
25
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|||
26
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27
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
Consolidated
Statements of Income
(Unaudited)
(In
thousands, except per share data)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
September
30,
|
September
30,
|
|||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
$
|
493,530
|
$
|
527,434
|
$
|
1,524,717
|
$
|
1,627,612
|
||||
Cost
of sales
|
351,730
|
387,631
|
1,084,811
|
1,176,402
|
||||||||
Gross
profit
|
141,800
|
139,803
|
439,906
|
451,210
|
||||||||
Selling
and administrative expenses
|
103,183
|
100,298
|
309,102
|
304,640
|
||||||||
Operating
income
|
38,617
|
39,505
|
130,804
|
146,570
|
||||||||
Interest
expense, net
|
4,589
|
6,349
|
14,700
|
16,765
|
||||||||
Income
before income taxes and equity earnings
|
34,028
|
33,156
|
116,104
|
129,805
|
||||||||
Provision
for income taxes
|
13,675
|
12,802
|
45,397
|
50,118
|
||||||||
Equity
earnings in unconsolidated investments, net
|
1,707
|
1,481
|
1,044
|
1,296
|
||||||||
Net
income
|
$
|
22,060
|
$
|
21,835
|
$
|
71,751
|
$
|
80,983
|
||||
Earnings
per share:
|
||||||||||||
Basic
|
$
|
0.46
|
$
|
0.45
|
$
|
1.50
|
$
|
1.64
|
||||
Diluted
|
$
|
0.45
|
$
|
0.43
|
$
|
1.47
|
$
|
1.58
|
||||
Weighted
average shares outstanding:
|
||||||||||||
Basic
|
47,824
|
48,623
|
47,694
|
49,372
|
||||||||
Diluted
|
49,060
|
50,490
|
48,735
|
51,347
|
||||||||
Cash
dividends declared per common share
|
$
|
0.13
|
$
|
0.12
|
$
|
0.38
|
$
|
0.345
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
1
Consolidated
Balance Sheets
(Unaudited)
(In
thousands, except share data)
September
30,
|
September
30,
|
December
31,
|
|||||||
2008
|
2007
|
2007
|
|||||||
Assets
|
|||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
25,278
|
$
|
50,265
|
$
|
15,825
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|||
Receivables,
net
|
45,426
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58,023
|
45,257
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||||||
Receivables
pledged under receivables facility
|
133,501
|
142,511
|
95,860
|
||||||
Product
inventories, net
|
345,944
|
317,110
|
379,663
|
||||||
Prepaid
expenses and other current assets
|
7,915
|
9,004
|
8,265
|
||||||
Deferred
income taxes
|
9,139
|
7,652
|
9,139
|
||||||
Total
current assets
|
567,203
|
584,565
|
554,009
|
||||||
Property
and equipment, net
|
32,895
|
35,518
|
34,223
|
||||||
Goodwill
|
167,376
|
155,247
|
155,247
|
||||||
Other
intangible assets, net
|
13,519
|
15,459
|
14,504
|
||||||
Equity
interest investments
|
35,592
|
34,561
|
33,997
|
||||||
Other
assets, net
|
25,299
|
19,073
|
22,874
|
||||||
Total
assets
|
$
|
841,884
|
$
|
844,423
|
$
|
814,854
|
|||
Liabilities
and stockholders’ equity
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
128,329
|
$
|
127,889
|
$
|
194,178
|
|||
Accrued
and other current liabilities
|
80,636
|
53,557
|
37,216
|
||||||
Short-term
financing
|
58,392
|
110,715
|
68,327
|
||||||
Current
portion of long-term debt and other long-term liabilities
|
5,369
|
3,350
|
3,439
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||||||
Total
current liabilities
|
272,726
|
295,511
|
303,160
|
||||||
Deferred
income taxes
|
18,608
|
15,185
|
17,714
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||||||
Long-term
debt
|
274,100
|
292,750
|
279,525
|
||||||
Other
long-term liabilities
|
6,225
|
6,152
|
5,664
|
||||||
Total
liabilities
|
571,659
|
609,598
|
606,063
|
||||||
Stockholders’
equity:
|
|||||||||
Common
stock, $.001 par value; 100,000,000 shares
|
|||||||||
authorized;
47,931,394, 47,928,454 and
|
|||||||||
47,516,989
shares issued and outstanding at
|
|||||||||
September
30, 2008, September 30, 2007 and
|
|||||||||
December
31, 2007, respectively
|
47
|
48
|
47
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||||||
Additional
paid-in capital
|
183,677
|
169,886
|
171,996
|
||||||
Retained
earnings
|
79,920
|
64,344
|
29,044
|
||||||
Treasury
stock
|
—
|
(7,110
|
)
|
—
|
|||||
Accumulated
other comprehensive income
|
6,581
|
7,657
|
7,704
|
||||||
Total
stockholders’ equity
|
270,225
|
234,825
|
208,791
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
841,884
|
$
|
844,423
|
$
|
814,854
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
thousands)
Nine
Months Ended
|
|||||||
September
30,
|
|||||||
2008
|
2007
|
||||||
Operating
activities
|
|||||||
Net
income
|
$
|
71,751
|
$
|
80,983
|
|||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
Depreciation
|
7,182
|
6,868
|
|||||
Amortization
|
3,196
|
3,665
|
|||||
Share-based
compensation
|
5,493
|
5,564
|
|||||
Excess
tax benefits from share-based compensation
|
(2,452
|
)
|
(8,345
|
)
|
|||
Equity
earnings in unconsolidated investments
|
(1,635
|
)
|
(2,087
|
)
|
|||
Other
|
1,393
|
3,476
|
|||||
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|||||||
Receivables
|
(33,908
|
)
|
(49,373
|
)
|
|||
Product
inventories
|
47,545
|
14,580
|
|||||
Accounts
payable
|
(67,940
|
)
|
(49,743
|
)
|
|||
Other
current assets and liabilities
|
45,910
|
27,927
|
|||||
Net
cash provided by operating activities
|
76,535
|
33,515
|
|||||
Investing
activities
|
|||||||
Acquisition
of businesses, net of cash acquired
|
(32,891
|
)
|
(2,087
|
)
|
|||
Divestiture
of business
|
1,165
|
—
|
|||||
Purchase
of property and equipment, net of sale proceeds
|
(4,999
|
)
|
(9,407
|
)
|
|||
Proceeds
from sale of investment
|
—
|
75
|
|||||
Net
cash used in investing activities
|
(36,725
|
)
|
(11,419
|
)
|
|||
Financing
activities
|
|||||||
Proceeds
from revolving line of credit
|
276,826
|
306,771
|
|||||
Payments
on revolving line of credit
|
(277,751
|
)
|
(299,928
|
)
|
|||
Proceeds
from asset-backed financing
|
73,335
|
87,479
|
|||||
Payments
on asset-backed financing
|
(83,270
|
)
|
(51,050
|
)
|
|||
Proceeds
from long-term debt
|
—
|
100,000
|
|||||
Payments
on long-term debt and other long-term liabilities
|
(2,385
|
)
|
(3,320
|
)
|
|||
Payments
of capital lease obligations
|
(251
|
)
|
(257
|
)
|
|||
Payments
of deferred financing costs
|
(22
|
)
|
(397
|
)
|
|||
Excess
tax benefits from share-based compensation
|
2,452
|
8,345
|
|||||
Proceeds
from issuance of common stock under share-based compensation
plans
|
3,736
|
7,154
|
|||||
Payments
of cash dividends
|
(18,187
|
)
|
(17,033
|
)
|
|||
Purchases
of treasury stock
|
(3,244
|
)
|
(128,777
|
)
|
|||
Net
cash (used in) provided by financing activities
|
(28,761
|
)
|
8,987
|
||||
Effect
of exchange rate changes on cash
|
(1,596
|
)
|
2,448
|
||||
Change
in cash and cash equivalents
|
9,453
|
33,531
|
|||||
Cash
and cash equivalents at beginning of period
|
15,825
|
16,734
|
|||||
Cash
and cash equivalents at end of period
|
$
|
25,278
|
$
|
50,265
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
3
Note
1 – Summary of Significant Accounting Policies
Pool
Corporation (the Company, which may be
referred to as POOL,
we, us or our) prepared the unaudited
interim Consolidated Financial Statements following accounting principles
generally accepted in the United States (GAAP) and the requirements of the
Securities and Exchange Commission (SEC) for interim financial information. As
permitted under those rules, certain footnotes and other financial information
required by GAAP for complete financial statements have been condensed or
omitted. In management’s opinion, the Consolidated Financial
Statements include all normal and recurring adjustments that are considered
necessary for the fair presentation of our financial position and operating
results including the elimination of all significant intercompany accounts and
transactions among our wholly owned subsidiaries.
A
description of our significant accounting policies is included in our 2007
Annual Report on Form 10-K. The Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and accompanying
notes in our Annual Report. The results for the three and nine month
periods ended September 30, 2008 are not necessarily indicative of the
results to be expected for the twelve months ending
December 31, 2008.
Recent
Accounting Pronouncements
In
March 2008, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. We are currently evaluating the impact
of the provisions of SFAS 161.
Note
2 – Earnings Per Share
We
calculate basic earnings per share (EPS) by dividing net income by the weighted
average number of common shares outstanding. Diluted EPS includes the
dilutive effects of stock option and restricted stock awards.
The table
below presents the reconciliation of basic and diluted weighted average number
of shares outstanding and the related EPS calculation (in thousands,
except EPS):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||
Net
income
|
$
|
22,060
|
$
|
21,835
|
$
|
71,751
|
$
|
80,983
|
||||||
Weighted
average common shares outstanding:
|
||||||||||||||
Basic
|
47,824
|
48,623
|
47,694
|
49,372
|
||||||||||
Effect
of dilutive securities:
|
||||||||||||||
Stock
options
|
1,176
|
1,815
|
984
|
1,922
|
||||||||||
Restricted
stock awards
|
57
|
50
|
54
|
51
|
||||||||||
Employee
stock purchase plan
|
3
|
2
|
3
|
2
|
||||||||||
Diluted
|
49,060
|
50,490
|
48,735
|
51,347
|
||||||||||
Basic
earnings per share
|
$
|
0.46
|
$
|
0.45
|
$
|
1.50
|
$
|
1.64
|
||||||
Diluted
earnings per share
|
$
|
0.45
|
$
|
0.43
|
$
|
1.47
|
$
|
1.58
|
4
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
The
weighted average diluted shares outstanding for the three and nine months ended
September 30, 2008 exclude stock options to purchase 1,530,442 shares
and 2,150,386 shares, respectively. The weighted average diluted
shares outstanding for the three and nine months ended
September 30, 2007 exclude stock options to purchase
1,089,125 shares and 1,085,975 shares, respectively. Since
these options have exercise prices that are higher than the average market price
of our common stock, including them in the calculation would have an
anti-dilutive effect on earnings per share for the respective
periods.
Note
3 – Acquisitions
In
March 2008, we acquired National Pool Tile Group, Inc. (NPT), a leading
wholesale distributor of pool tile and composite pool finishes serving
professional contractors in the swimming pool refurbish and construction markets
through 15 distribution sales centers. As of
June 30, 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.
Note
4 – Debt
In March 2007, we
renewed our accounts receivable securitization facility (the Receivables
Facility), which provides a seasonal borrowing capacity. The maximum
capacity was
$150.0 million through
March 2008. We amended the
Receivables Purchase Agreement under the Receivables Facility in March 2008
to extend the termination date to May 21, 2008. In May
2008, we renewed the Receivables Facility for one year through May
2009. The Receivables Facility had a maximum borrowing
capacity of up to $135.0 million through August 2008 and now provides
a maximum borrowing capacity of up to $95.0 million through May
2009.
Our
unsecured syndicated senior credit facility includes a $60.0 million term
loan (the Term Loan), which matures on
December 20, 2010. In December 2005, we entered into
an interest rate swap agreement to reduce our exposure to fluctuations in
interest rates on the Term Loan. This swap agreement terminates on
December 31, 2008. In March 2008, we entered into a
separate interest rate swap agreement to reduce our exposure to fluctuations in
interest rates for the remaining outstanding period of the Term
Loan. This swap will be in effect as of December 31, 2008
when the original swap agreement terminates and will terminate when the Term
Loan matures on December 20, 2010. We have designated both
swaps as cash flow hedges.
5
POOL
CORPORATION
Notes
to Consolidated Financial Statements (Continued)
(Unaudited)
Note
5 – Comprehensive Income
Comprehensive
income includes net income, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. Comprehensive income
for the three and nine months ended September 30, 2008 and 2007 is presented
below:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||
Comprehensive
income
|
$
|
20,441
|
$
|
21,801
|
$
|
70,628
|
$
|
82,425
|
||||||
Note
6 – 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, 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).
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 an unrealized gain of $0.7
million related to our second Term Loan interest rate swap and unrealized losses
of $3.9 million related to our other two interest rate swaps. These
balances are included in Other assets, net and Accrued and other current
liabilities, respectively, on the Consolidated Balance Sheets at
September 30, 2008.
6
You
should read the following discussion in conjunction with Management's Discussion
and Analysis included in our 2007 Annual Report on Form 10-K. For a
discussion of our base business calculations, see page 10 under the RESULTS OF
OPERATIONS section below.
OVERVIEW
Financial
Results
Our third
quarter results were highlighted by continued improvement in gross margins and
increased earnings per share and cash provided by operations compared to the
same period in 2007.
Net sales
for the quarter ended September 30, 2008 decreased 6% compared to the
third quarter of 2007 as our sales remain pressured by the unprecedented market
and economic conditions impacting our industry. Base business sales
declined 8% as compared to the same period last year due to the continued
drop-off in new pool and irrigation construction activity 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, although 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 12% for the third quarter
of 2008 compared to a 5% decrease in the same period in 2007.
Gross
profit as a percentage of net sales (gross margin) improved to 28.7% in the
third quarter of 2008 from 26.5% for the third quarter of 2007. The
increase in gross margin is primarily attributable to improved pricing
management, a favorable shift in sales mix to products in the higher margin
maintenance market, an increase in sales of higher margin Pool Corporation
branded products and favorable comparison to the third quarter of 2007, which
was more negatively impacted by competitive pricing trends than the current
quarter.
Selling
and administrative expenses (operating expenses) increased 3% compared to the
third quarter of 2007 due to operating expenses related to acquired
businesses. Base business operating expenses decreased 1% quarter
over quarter due primarily to the impact of cost control
initiatives.
Operating
income decreased $0.9 million in the third quarter of 2008 while operating
income as a percentage of net sales (operating margin) was up slightly to 7.8%
from 7.5% in the third quarter of 2007. Interest expense decreased
28% during the quarter due to a lower weighted average effective interest rate
and lower average debt levels compared to the third quarter of
2007. Earnings per share for the third quarter of 2008 increased to
$0.45 per diluted share on net income of $22.1 million, compared to $0.43
per diluted share on net income of $21.8 million in the same period in
2007.
Financial
Position and Liquidity
Total net
receivables decreased 11% to $178.9 million at September 30, 2008
from $200.5 million at September 30, 2007 due to the decrease in net
sales, our tighter credit policies and focused collection
efforts. Our allowance for doubtful accounts balance was $10.6
million at September 30, 2008, an increase of $1.9 million over
September 30, 2007, and includes $0.6 million related to the
acquisition of NPT. We increased the allowance for doubtful accounts
in the third quarter of 2008 to reflect an increase in our total past due
receivable balances year over year. Days sales outstanding (DSO)
increased between periods to 36.4 days at September 30, 2008
compared to 36.1 days at September 30, 2007.
Our
inventory levels increased 9% to $345.9 million as of
September 30, 2008 compared to $317.1 million as of
September 30, 2007. This increase reflects
$17.9 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, have decreased to 3.3 times as
of September 30, 2008 compared to 3.9 times as of
September 30, 2007.
7
Total
debt outstanding decreased to $337.7 million at
September 30, 2008 compared to $406.5 million at
September 30, 2007. This decrease reflects the deferral of
our $28.0 million third quarter 2008 estimated federal tax payment, lower
borrowings required to fund working capital and debt repayments funded by our
strong seasonal cash collections. Our current ratio increased to 2.1
as of September 30, 2008 compared to 2.0 as of
September 30, 2007.
Current
Trends
The
continuing adverse economic trends that have carried over from 2007 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%);
|
·
|
we
believe our service-oriented model helps us gain market share;
and
|
·
|
we
estimate that only a small percentage of pools are constructed along with
new homes and we have a low market share with the largest pool builders
who we believe are more heavily tied to new home
construction.
|
Despite
these mitigating factors, these negative trends have significantly impacted a
number of our key markets, including Florida, Arizona and parts of California.
We believe these trends, along with unfavorable weather conditions, resulted in
a decrease in new pool construction of approximately 50,000 units, or 25%, in
2007. This followed a decrease of approximately 10,000 units, or 5%,
in 2006, representing the first back to back decrease in recent industry
history. In 2008, we estimate that new pool construction will drop an
additional 50,000 units, or approximately 35%. Since these
trends worsened throughout 2007 and 2008, they had a more pronounced impact on
our results in the first nine months of 2008 compared to the same period in
2007. A further worsening of these trends may have an even greater
impact on new pool construction and consumer spending on outdoor living spaces,
which could negatively impact our sales and earnings.
Outlook
We remain
focused on our 2008 objectives which include:
·
|
continuing
to execute on our business strategies that we believe will provide
long-term value to our customers, suppliers and shareholders;
and
|
·
|
exploiting
business improvement opportunities available to us while maintaining tight
control over our expenses.
|
Based on
our results for the first nine months and the current external environment, we
have updated our full year 2008 guidance based on our projection that fourth
quarter earnings per diluted share is expected to be similar to the fourth
quarter of 2007. We believe that our fourth quarter sales will be
pressured by the following:
·
|
continued
softness in new pool and irrigation
construction;
|
·
|
some
deferral of discretionary replacement and refurbish activity;
and
|
·
|
tighter
credit management practices, resulting in fewer sales to lower margin
customers than in prior years.
|
While we
expect that gross margins will benefit further from commodity cost driven price
increases by vendors that we plan to pass through the supply chain, this impact
could be partially offset by an even tougher competitive pricing
environment.
8
Looking
ahead to 2009, 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. We
anticipate higher than normal 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. Excluding any acquisition activity, we do not expect to
increase the number of sales centers in 2009.
We expect
to generate sufficient cash flow and have adequate access to capital to both
fund our business objectives and provide a direct return to our shareholders in
the form of dividend payments.
The
forward-looking statements in this outlook section are subject to significant
risks and uncertainties, including changes in the economy and the housing
market, 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 Part II - Item 1A “Risk Factors” and our “Cautionary Statement for
Purpose of the ‘Safe Harbor’ Provisions of the Private Securities Litigation
Reform Act of 1995”.
RESULTS
OF OPERATIONS
As of
September 30, 2008, we conducted operations through 290 sales centers
in North America and Europe.
The
following table presents information derived from the Consolidated Statements of
Income expressed as a percentage of net sales.
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||
September
30,
|
September
30,
|
|||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of sales
|
71.3
|
73.5
|
71.1
|
72.3
|
||||||||
Gross
profit
|
28.7
|
26.5
|
28.9
|
27.7
|
||||||||
Selling
and administrative expenses
|
20.9
|
19.0
|
20.3
|
18.7
|
||||||||
Operating
income
|
7.8
|
7.5
|
8.6
|
9.0
|
||||||||
Interest
expense, net
|
0.9
|
1.2
|
1.0
|
1.0
|
||||||||
Income
before income taxes and equity earnings
|
6.9
|
%
|
6.3
|
%
|
7.6
|
%
|
8.0
|
%
|
Our
discussion of consolidated operating results includes the operating results from
acquisitions in 2008, 2007 and 2006. We accounted for these
acquisitions using the purchase method of accounting, and we have included the
results of operations in our consolidated results since the respective
acquisition dates.
9
Three
Months Ended September 30, 2008 Compared to Three Months Ended September
30, 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)
|
Three
Months Ended
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||
September
30,
|
September
30,
|
September
30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
$
|
467,878
|
$
|
509,766
|
$
|
25,652
|
$
|
17,668
|
$
|
493,530
|
$
|
527,434
|
||
Gross
profit
|
133,771
|
135,580
|
8,029
|
4,223
|
141,800
|
139,803
|
||||||||
Gross
margin
|
28.6
|
%
|
26.6
|
%
|
31.3
|
%
|
23.9
|
%
|
28.7
|
%
|
26.5
|
%
|
||
Selling
and administrative expenses
|
95,024
|
96,056
|
8,159
|
4,242
|
103,183
|
100,298
|
||||||||
Expenses
as a % of net sales
|
20.3
|
%
|
18.8
|
%
|
31.8
|
%
|
24.0
|
%
|
20.9
|
%
|
19.0
|
%
|
||
Operating
income (loss)
|
38,747
|
39,524
|
(130
|
)
|
(19
|
)
|
38,617
|
39,505
|
||||||
Operating
margin
|
8.3
|
%
|
7.8
|
%
|
(0.5
|
)%
|
(0.1
|
)%
|
7.8
|
%
|
7.5
|
%
|
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 September 30, 2008):
·
|
acquired
sales centers (10, net of consolidations – see table
below);
|
·
|
existing
sales centers consolidated with acquired sales centers
(6);
|
·
|
closed
sales centers (3);
|
·
|
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).
|
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.
Since we
divested our pool liner manufacturing operation in France in April 2008, we
have excluded these operations from base business for the comparative three
month period ended September 30, 2007.
We have
excluded the following acquisitions from base business for the periods
identified:
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
National
Pool Tile (NPT)
|
March
2008
|
9
|
July
– September 2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
July
– September 2008
|
The
number of sales centers did not change during the quarter ended
September 30, 2008.
10
Net
Sales
Three
Months Ended
September
30,
|
||||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
Net
sales
|
$
|
493.5
|
$
|
527.4
|
$
|
(33.9
|
)
|
(6
|
)%
|
Consistent
with our second quarter results, the decrease in net sales is primarily due to
the impacts of the ongoing difficult external environment. Total base
business sales decreased 8% compared to the third quarter of 2007, including a
7% decline on the swimming pool side of the business and 16% on the irrigation
side of the business. This impact remains more concentrated in our
larger markets with total base business sales down 13% in California, 8% in
Florida and 17% in Arizona. Complementary product sales continue to
be negatively impacted by the reduced new pool construction activity and
decreased approximately 12% compared to the third quarter of 2007.
The overall decrease in net sales was
partially offset by increases due to the following:
·
|
approximately
$13.3 million in sales related to our March 2008 acquisitions,
including approximately $12.2 million related to
NPT;
|
·
|
moderate
sales growth for MRR products, including a 7% increase in chemical
sales;
|
·
|
estimated
average price increases of 1% to 3% that we passed through the supply
chain; and
|
·
|
higher
freight out income of $1.1 million due primarily to the implementation of
fuel surcharges.
|
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
Three
Months Ended
September
30,
|
||||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
Gross
profit
|
$
|
141.8
|
$
|
139.8
|
$
|
2.0
|
1
|
%
|
||||
Gross
margin
|
28.7
|
%
|
26.5
|
%
|
The
increase in gross margin is primarily attributable to our focus on pricing
discipline at the sales center level. Other favorable impacts
compared to the third quarter of 2007 included the following (listed in order of
estimated magnitude):
·
|
a
shift in sales mix to products in the higher margin maintenance
market;
|
·
|
higher
estimated vendor incentives earned as a percentage of sales due primarily
to a shift in purchasing mix;
|
·
|
greater
margin contribution from our acquisition of
NPT;
|
·
|
a
favorable comparison to the third quarter of 2007, which was more
negatively impacted by competitive pricing due to other distributors
selling off excess inventories; and
|
·
|
increased
sales of Pool Corporation branded
products.
|
11
Operating
Expenses
Three
Months Ended
September
30,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Operating
expenses
|
$
|
103.2
|
$
|
100.3
|
$
|
2.9
|
3
|
%
|
|||
Operating
expenses as a percentage of net sales
|
20.9
|
%
|
19.0
|
%
|
The
increase in operating expenses is due to the impact of our acquired sales
centers, which had approximately $4.3 million in operating expenses during
the third quarter. This increase was partially offset by a 1%
decrease in base business operating expenses due to reduced headcount and
targeted variable expense reductions. As of
September 30, 2008, total headcount (excluding acquisitions) decreased
7% year over year while overtime and temporary labor costs declined
$1.2 million compared to the third quarter of 2007. Total
operating expenses as a percentage of net sales increased between periods due to
the decrease in net sales.
Interest
Expense
Interest
expense decreased 28% between periods as a result of our lower weighted average
effective interest rate for the period and lower debt levels. The weighted
average effective interest rate decreased to 4.7% in the third quarter of 2008
from 6.1% in the same period in 2007. Average debt outstanding was 6% lower in
the third quarter of 2008.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings. Our effective income tax rate was 40.19% for the
three months ended September 30, 2008 and 38.61% for the three months
ended September 30, 2007. The increase in the effective
income tax rate reflects a change in estimated annual losses from certain
foreign operations.
Net
Income and Earnings Per Share
Net
income increased 1% to $22.1 million in the third quarter of 2008, while
earnings per share increased to $0.45 per diluted share compared to $0.43 for
the third quarter of 2007. Our first quarter acquisitions had a
dilutive impact of approximately $0.01 per diluted share in the third quarter of
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 for the third quarter of 2008 and $0.01 for the third
quarter of 2007.
12
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
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)
|
Nine
Months Ended
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||
September
30,
|
September
30,
|
September
30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||
Net
sales
|
$
|
1,456,763
|
$
|
1,584,377
|
$
|
67,954
|
$
|
43,235
|
$
|
1,524,717
|
$
|
1,627,612
|
||
Gross
profit
|
418,414
|
440,338
|
21,492
|
10,872
|
439,906
|
451,210
|
||||||||
Gross
margin
|
28.7
|
%
|
27.8
|
%
|
31.6
|
%
|
25.1
|
%
|
28.9
|
%
|
27.7
|
%
|
||
Selling
and administrative expenses
|
289,165
|
294,146
|
19,937
|
10,494
|
309,102
|
304,640
|
||||||||
Expenses
as a % of net sales
|
19.8
|
%
|
18.6
|
%
|
29.3
|
%
|
24.3
|
%
|
20.3
|
%
|
18.7
|
%
|
||
Operating
income
|
129,249
|
146,192
|
1,555
|
378
|
130,804
|
146,570
|
||||||||
Operating
margin
|
8.9
|
%
|
9.2
|
%
|
2.3
|
%
|
0.9
|
%
|
8.6
|
%
|
9.0
|
%
|
For an
explanation of how we calculate base business, please refer to the discussion of
base business on page 10 under the heading “Three Months Ended September
30, 2008 Compared to Three Months Ended September 30, 2007”.
In
addition to the 20 sales centers excluded from base business as of
September 30, 2008, there were 2 new market sales centers 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 six month period ended
September 30, 2007.
We have
excluded the following acquisitions from base business for the periods
identified:
Acquired
|
Acquisition
Date
|
Net
Sales
Centers Acquired
|
Period
Excluded
|
|||
National
Pool Tile (NPT) (1)
|
March
2008
|
9
|
March
– September 2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
March
– September 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 the first nine months
of 2008:
December
31, 2007
|
281
|
Acquired,
net of consolidations (1)
|
10
|
New
locations
|
1
|
Consolidated
|
(1)
|
Closed
|
(1)
|
September
30, 2008
|
290
|
|
(1)
|
We
acquired 15 NPT sales centers and have consolidated 6 of these with
existing sales centers as of September 30, 2008, including 4 in
March 2008 and 2 in the second quarter of
2008.
|
13
Net
Sales
Nine
Months Ended
September
30,
|
||||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
Net
sales
|
$
|
1,524.7
|
$
|
1,627.6
|
$
|
(102.9
|
)
|
(6
|
)%
|
The new
pool and irrigation construction markets are facing unprecedented conditions
created by the combination of significant declines in the real estate and
mortgage-backed financing markets. As a result, our 2008 sales have been
negatively impacted with a more pronounced effect on our irrigation business and
complementary product sales.
Base
business sales decreased 8% due primarily to soft demand for new pool and
irrigation construction products. This impact remains more concentrated in
markets that had the greatest run-up in real estate values between 2000 and
2006, which includes a number of our larger markets in Florida, Arizona and
parts of California. Complementary product sales were negatively impacted
by the decline in new pool construction and decreased 13% compared to the first
nine months of 2007. Overall, weather conditions have been unfavorable
compared to the same period in 2007.
The overall decrease in net sales was
partially offset by increases due to the following:
·
|
approximately
$38.8 million in sales related to our first quarter 2008
acquisitions;
|
·
|
moderate
sales growth for MRR products (see discussion at page 11 under the
subheading “Net
Sales”), including a 5% increase in chemical
sales;
|
·
|
estimated
average price increases of 1% to 3% that we passed through the supply
chain;
|
·
|
4%
sales growth for our European operations;
and
|
·
|
higher
freight out income of $2.0 million due to the implementation of fuel
surcharges, which offset the increase in outbound freight
costs.
|
Gross
Profit
Nine
Months Ended
September
30,
|
||||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
|||||||||
Gross
profit
|
$
|
439.9
|
$
|
451.2
|
$
|
(11.3
|
)
|
(3
|
)%
|
|||
Gross
margin
|
28.9
|
%
|
27.7
|
%
|
Despite
the tough competitive pricing environment, gross margin increased 120 basis
points compared to the first nine months of 2007. The factors
contributing to this improvement are consistent with those attributable to the
comparative gross margin improvement for the third quarter as discussed on page
11 under the subheading “Gross
Profit”.
Operating
Expenses
Nine
Months Ended
September
30,
|
|||||||||||
(in
millions)
|
2008
|
2007
|
Change
|
||||||||
Operating
expenses
|
$
|
309.1
|
$
|
304.6
|
$
|
4.5
|
1
|
%
|
|||
Operating
expenses as a percentage of net sales
|
20.3
|
%
|
18.7
|
%
|
The
increase in operating expenses is due to approximately $9.9 million of
operating expenses related to our first quarter 2008
acquisitions. Base business operating expenses decreased 2% compared
to the first nine months of 2007, as the impact of cost control initiatives
offset increased building rental expenses of $2.3 million (primarily for
sales centers opened or expanded during 2007), 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.
14
Our cost
control initiatives include tighter management of discretionary costs, the
consolidation or closing of seven sales centers since November 2007 and
selective personnel reductions over the past year. Despite the 7%
reduction in headcount year over year (excluding acquisitions), we still reduced
overtime and temporary labor costs by $3.4 million. Compared to the
first nine months of 2007, employee insurance costs also decreased
$2.8 million due primarily to lower claims expense and incentive expenses
declined $1.8 million.
Interest
Expense
Interest
expense decreased 12% 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 7%
higher in the first nine months of 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 4.7% in the first nine
months of 2008 from 6.0% in the same period in 2007.
Income
Taxes
The
decrease in income taxes is due to the decrease in income before income taxes
and equity earnings. Our effective income tax rate was 39.10% at
September 30, 2008 and 38.61% at
September 30, 2007.
Net
Income and Earnings Per Share
Net
income decreased 11% to $71.8 million in the first nine months of 2008 compared
to the first nine months of 2007. Earnings per share for the first nine
months of 2008 decreased to $1.47 per diluted share compared to $1.58 in the
first nine months of 2007. The accretive impact of our first quarter
acquisitions was approximately $0.01 per diluted share for the first nine months
of 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 $0.06 for the nine months ended September 30, 2008 and
$0.02 for the same period in 2007.
15
Seasonality
and Quarterly Fluctuations
Our
business is highly seasonal. In general, sales and operating income
are highest during the second and third quarters, which represent the peak
months of both swimming pool use and installation and landscape installations
and maintenance. Sales are substantially lower during the first and
fourth quarters when we may incur net losses.
We
typically experience a build-up of product inventories and accounts payable
during the winter months in anticipation of the peak selling
season. Excluding borrowings to finance acquisitions and share
repurchases, our peak borrowing usually occurs during the second quarter,
primarily because extended payment terms offered by our suppliers typically are
payable in April, May and June, while our peak accounts receivable collections
typically occur in June, July and August.
The
following table presents certain unaudited quarterly data for the first, second
and third quarters of 2008, the four quarters of 2007 and the fourth quarter of
2006. We have included income statement and balance sheet data for
the most recent eight quarters to allow for a meaningful comparison of the
seasonal fluctuations in these amounts. In our opinion, this
information reflects all normal and recurring adjustments considered necessary
for a fair presentation of this data. Due to the seasonal nature of
our industry, the results of any one or more quarters are not necessarily an
accurate indication of results for an entire fiscal year or of continuing
trends.
(Unaudited)
|
QUARTERS
|
|||||||||||||||||
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||||||||
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
|||||||||||
Statement
of Income Data
|
||||||||||||||||||
Net
sales
|
$
|
493,530
|
$
|
692,972
|
$
|
338,215
|
$
|
300,755
|
$
|
527,434
|
$
|
726,472
|
$
|
373,706
|
$
|
318,486
|
||
Gross
profit
|
141,800
|
202,752
|
95,354
|
79,436
|
139,803
|
207,922
|
103,485
|
82,905
|
||||||||||
Operating
income (loss)
|
38,617
|
89,990
|
2,197
|
(12,796
|
)
|
39,505
|
98,433
|
8,632
|
(4,070
|
)
|
||||||||
Net
income (loss)
|
22,060
|
52,875
|
(3,184
|
)
|
(11,589
|
)
|
21,835
|
57,794
|
1,354
|
(5,001
|
)
|
|||||||
Balance
Sheet Data
|
||||||||||||||||||
Total
receivables, net
|
$
|
178,927
|
$
|
278,654
|
$
|
206,187
|
$
|
141,117
|
$
|
200,534
|
$
|
301,265
|
$
|
231,034
|
$
|
154,937
|
||
Product
inventories, net
|
345,944
|
385,258
|
476,758
|
379,663
|
317,110
|
388,364
|
413,161
|
332,069
|
||||||||||
Accounts
payable
|
128,329
|
193,663
|
333,104
|
194,178
|
127,889
|
229,691
|
325,448
|
177,544
|
||||||||||
Total
debt
|
337,742
|
441,992
|
396,110
|
350,852
|
406,465
|
425,599
|
358,522
|
265,443
|
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.
16
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
third quarter of 2008, weather conditions were generally unfavorable compared to
the same period last year. While temperatures were warmer than normal
on the west coast, temperatures were cooler than normal across much of the rest
of the country in August and September and a number of severe tropical systems
negatively impacted our sales in Texas, Florida and Louisiana.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is defined as the ability to generate adequate amounts of cash to meet
short-term and long-term cash needs. We assess our liquidity in terms
of our ability to generate cash to fund our operating activities, taking into
consideration the seasonal nature of our business. Significant
factors which could affect our liquidity include the following:
·
|
cash
flows generated from operating
activities;
|
·
|
the
adequacy of available bank lines of
credit;
|
·
|
acquisitions;
|
·
|
the
timing and extent of share
repurchases;
|
·
|
capital
expenditures;
|
·
|
dividend
payments; and
|
·
|
the ability to attract long-term capital with satisfactory terms. |
Our
primary capital needs are seasonal working capital obligations and other general
corporate purposes, including acquisitions, share repurchases and dividend
payments. Our primary sources of working capital are cash from
operations supplemented by bank borrowings, which combined with seller financing
have historically been sufficient to support our growth and finance our
acquisitions. We prioritize our use of cash based on investing in our
business, returning money to our shareholders and maintaining a prudent debt
structure.
17
Our
specific priorities for the use of cash are as follows:
·
|
maintenance
and new sales center capital expenditures estimated at 0.5% to 0.75% of
net sales;
|
·
|
strategic
acquisitions executed
opportunistically;
|
·
|
payment
of cash dividends as and when declared by the Board of
Directors;
|
·
|
repurchase
of common stock at Board-defined parameters;
and
|
·
|
repayment
of debt.
|
Sources
and Uses of Cash
The
following table summarizes our cash flows (in thousands):
Nine
Months Ended
September
30,
|
|||||||
2008
|
2007
|
||||||
Operating
activities
|
$
|
76,535
|
$
|
33,515
|
|||
Investing
activities
|
(36,725
|
)
|
(11,419
|
)
|
|||
Financing
activities
|
(28,761
|
)
|
8,987
|
Cash flow
provided by operations increased $43.0 million in the first nine months of 2008
compared to the same period in 2007. This increase is due to the
deferral of a $28.0 million third quarter 2008 estimated federal tax payment as
allowed by the Internal Revenue Service for taxpayers affected by Hurricane
Gustav and favorable impacts from changes in working capital balances that more
than offset the reduction in net income. During the first nine months of
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 the first nine
months of 2008 includes $10.9 million of net payments on
debt. In the first nine months of 2007, we used the majority of our
net borrowings to fund share repurchase activities.
Future
Sources and Uses of Cash
As
amended on December 20, 2007, our unsecured syndicated senior credit
facility (the Credit Facility) provides for $300.0 million in borrowing
capacity including a $240.0 million five-year revolving credit facility
(the Revolver) and a $60.0 million term loan (the Term Loan). The Term Loan
matures on December 20, 2010 and the Revolver matures on
December 20, 2012. The Credit Facility includes sublimits
for the issuance of swingline loans and standby letters of
credit. Pursuant to an accordion feature, the aggregate maximum
principal amount of the commitments under the Revolver may be increased from
time to time, by up to $75.0 million, to a total of
$315.0 million.
At
September 30, 2008, there was $124.6 million outstanding and $113.9
million available for borrowing under the Revolver. The weighted average
effective interest rate on the Revolver was approximately 4.3% for the nine
months ended September 30, 2008.
At
September 30, 2008, there was $54.8 million outstanding under the Term
Loan of which $5.3 million is classified as current. In December 2005,
we entered into an interest rate swap agreement to reduce our exposure to
fluctuations in interest rates. The swap agreement converts our variable rate
Term Loan to a fixed-rate basis until the swap’s termination on
December 31, 2008. The weighted average effective interest rate
of the Term Loan was approximately 5.7% for the nine months ended
September 30, 2008. In March 2008, we entered into a
separate interest rate swap agreement to reduce our exposure to fluctuations in
interest rates for the remaining outstanding period of the Term
Loan. This swap will be in effect as of December 31, 2008
when the original swap agreement terminates and will terminate when the Term
Loan matures on December 20, 2010.
18
In May 2008, we renewed our accounts receivable securitization facility (the Receivables Facility) for one year through May 2009. As of September 2008, the Receivables Facility provides a borrowing capacity of up to $95.0 million.
The
Receivables Facility provides for the true sale of certain of our receivables as
they are created to a wholly owned, bankruptcy-remote subsidiary. This
subsidiary grants an undivided security interest in the receivables to an
unrelated commercial paper conduit. Because of the structure of the
bankruptcy-remote subsidiary and our ability to control its activities, we
include the transferred receivables and related debt in our Consolidated Balance
Sheets. We continue to employ this arrangement because it provides us with a
lower cost form of financing. At September 30, 2008, there was
$58.4 million outstanding under the Receivables Facility at a weighted
average effective interest rate of 3.7%.
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
September 30, 2008, we were in compliance with all covenants and
financial ratio requirements related to our Credit Facility, our Notes and our
Receivables Facility. For additional information regarding our debt
arrangements, see Note 5 of “Notes to Consolidated Financial Statements,”
included in Item 8 of our 2007 Form 10-K.
Our Board
increased the authorization for the repurchase of shares of our common stock in
the open market during 2007, including an increase to $100.0 million in
August 2007. As of October 24, 2008,
$53.0 million of the authorized amount remained available. 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 capacity to finance any such
transactions. Additionally, we may issue common or preferred stock to raise
funds.
19
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States (GAAP), which requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Management identifies critical accounting
estimates as:
·
|
those
that require the use of assumptions about matters that are inherently and
highly uncertain at the time the estimates are made;
and
|
·
|
those
for which changes in the estimate or assumptions, or the use of different
estimates and assumptions, could have a material impact on our
consolidated results of operations or financial
condition.
|
Management
has discussed the development, selection and disclosure of our critical
accounting estimates with the Audit Committee of our Board of
Directors. For a description of our critical accounting estimates
that require us to make the most difficult, subjective or complex judgments,
please see our Annual Report on Form 10-K for the year ended
December 31, 2007. We have not changed these policies from
those previously disclosed.
Interest
Rate Risk
There
have been no material changes from what we reported in our Form 10-K for
the year ended December 31, 2007.
Foreign
Exchange Risk
There
have been no material changes from what we reported in our Form 10-K for
the year ended December 31, 2007.
The term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the Act). The rules refer to
the controls and other procedures designed to ensure that information required
to be disclosed in reports that we file or submit under the Act is (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 September 30, 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 September 30, 2008,
our disclosure controls and procedures were effective.
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United
States. Based on the most recent evaluation, we have concluded that
no change in our internal control over financial reporting occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
20
PART
II. OTHER INFORMATION
Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Our
disclosure and analysis in this report contains forward-looking information that
involves risks and uncertainties. Our forward-looking statements express our
current expectations or forecasts of possible future results or events,
including projections of future results, statements of management’s plans and
objectives, future contracts, and forecasts of trends and other
matters. This includes statements under the heading “Overview –
Outlook” in Part 1, Item 2, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this
Form 10-Q. Forward-looking statements speak only as of the date
of this filing, and we undertake no obligation to update or revise such
statements to reflect new circumstances or unanticipated events as they occur.
You can identify these statements by the fact that they do not relate strictly
to historic or current facts and often use words such as “anticipate”,
“estimate”, “expect”, “believe,” “will likely result,” “outlook,” “project” and
other words and expressions of similar meaning. No assurance can be given that
the results in any forward-looking statements will be achieved and actual
results could be affected by one or more factors, which could cause them to
differ materially. For these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act.
Risk
Factors
Certain
factors that may affect our business and could cause actual results to differ
materially from those expressed in any forward-looking statements include the
following:
The
demand for our swimming pool and related outdoor lifestyle products 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.
We
are susceptible to adverse weather conditions.
Weather
is one of the principal external factors affecting our business. For example,
unseasonably late warming trends in the spring or early cooling trends in the
fall can shorten the length of the pool season. Also, unseasonably cool weather
or extraordinary rainfall during the peak season can decrease swimming pool use,
installation and maintenance, as well as landscape installations and
maintenance. These weather conditions adversely affect sales of our products.
For a discussion regarding seasonality and weather, see Part 1,
Item 2, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality and Quarterly Fluctuations,” of this
Form 10-Q.
21
Our
distribution business is highly dependent on our ability to maintain favorable
relationships with suppliers.
As a
distribution company, maintaining favorable relationships with our suppliers is
critical to the success of our business. We believe that we add considerable
value to the swimming pool supply chain and landscape supply chain by purchasing
products from a large number of manufacturers and distributing the products to a
highly fragmented customer base on conditions that are more favorable than these
customers could obtain on their own. We believe that we currently enjoy good
relationships with our suppliers, who generally offer us competitive pricing,
return policies and promotional allowances. However, our inability to maintain
favorable relationships with our suppliers could have an adverse effect on our
business.
Our
largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and
Zodiac Pool Care, Inc., which accounted for approximately 15%, 11% and 9%,
respectively, of the costs of products we sold in 2007. A decision by several
suppliers, acting in concert, to sell their products directly to retail
customers and other end-users of their products, bypassing distribution
companies like ours, would have an adverse effect on our business. Additionally,
the loss of a single supplier could also adversely affect our business. We
dedicate significant resources to promote the benefits and affordability of pool
ownership, which we believe greatly benefits our swimming pool customers and
suppliers.
We
face intense competition both from within our industry and from other leisure
product alternatives.
We face
competition from both inside and outside of our industry. Within our industry,
we compete against various regional and local distributors and, to a lesser
extent, mass market retailers and large pool or landscape supply retailers.
Outside of our industry, we compete with sellers of other leisure product
alternatives, such as boats and motor homes, and with other companies who rely
on discretionary homeowner expenditures, such as home remodelers. New
competitors may emerge as there are low barriers to entry in our industry. Some
geographic markets that we serve, particularly our largest, higher density
markets in California, Florida, Texas and Arizona, representing approximately
54% of our net sales in 2007, also tend to be more competitive than
others.
More
aggressive competition by mass merchants and large pool or landscape supply
retailers could adversely affect our sales.
Mass market
retailers today carry a limited range of, and devote a limited amount of
shelf space to, merchandise and products targeted to our industry. Historically,
mass market retailers have generally expanded by adding new stores and
product breadth, but their product offering of pool and landscape related
products has remained relatively constant. Should mass market
retailers increase their focus on the pool or professional landscape industries,
or increase the breadth of their pool and landscape related product offerings,
they may become a more significant competitor for direct and
end-use customers which could have an adverse impact on our business. We
may face additional competitive pressures if large pool or landscape supply
retailers look to expand their customer base to compete more directly within the
distribution channel.
We
depend on key personnel.
We
consider our employees to be the foundation for our growth and success. As such,
our future success depends in large part on our ability to attract, retain and
motivate qualified personnel, including our executive officers and key
management personnel. If we are unable to attract and retain key personnel, our
operating results could be adversely affected.
Specifically,
our future success depends to an extent upon the continued service of
Manuel Perez de la Mesa, our President and
Chief Executive Officer. The loss of Mr. Perez de la Mesa in
particular could have a material adverse effect on our business.
Mr. Perez de la Mesa is not nearing retirement age, and we have
no indication that he intends to retire in the near future. We do not currently
maintain key man insurance on Mr. Perez de la Mesa.
22
Past
growth may not be indicative of future growth.
We have
experienced substantial sales growth through acquisitions and new sales center
openings that have increased our size, scope and geographic distribution. Since
the beginning of fiscal 2003, we have opened 40 new sales centers and have
completed 13 acquisitions. These acquisitions have added 74 sales centers, net
of sales center closings and consolidations, and 3 centralized shipping
locations to our distribution networks. While we contemplate continued growth
through acquisitions and internal expansion, no assurance can be made as to our
ability to:
·
|
penetrate
new markets;
|
·
|
identify
appropriate acquisition candidates;
|
·
|
complete
acquisitions on satisfactory terms and successfully integrate acquired
businesses;
|
·
|
obtain
financing;
|
·
|
generate
sufficient cash flows to support expansion plans and general operating
activities;
|
·
|
maintain
favorable supplier arrangements and relationships;
and
|
·
|
identify
and divest assets which do not continue to create value consistent with
our objectives.
|
If we do
not manage these potential difficulties successfully, our operating results
could be adversely affected.
The
growth of our business depends on effective marketing programs.
The
growth of our business depends on the expansion of the installed pool base.
Thus, an important part of our strategy is to promote the growth of the pool
industry through our extensive advertising and promotional programs that attempt
to raise consumer awareness regarding the benefits and affordability of pool
ownership, the ease of pool maintenance and the many ways in which a pool may be
enjoyed beyond swimming. These programs include media advertising, website
development such as www.swimmingpool.com™
and public relations campaigns. We believe these programs benefit the entire
supply chain from our suppliers to our customers.
We also
promote the growth of our customers’ businesses through comprehensive support
programs that offer promotional tools and marketing support to help generate
increased sales for our customers. Our programs include such things as
personalized websites, brochures, marketing campaigns and business development
training. We also provide certain retail store customers with assistance in site
selection, store layout and design and business management system
implementation. Our inability to sufficiently develop effective advertising,
marketing and promotional programs to succeed in a weakened economic environment
and an increasingly competitive marketplace, in which we (and our entire supply
chain) also compete with other luxury product alternatives, could have a
material adverse effect on our business.
Our
business is highly seasonal.
In 2007,
approximately 65% of our net sales and over 100% of our operating income were
generated in the second and third quarters of the year, which represent the peak
months of swimming pool use, installation, remodeling and repair. Our sales are
substantially lower during the first and fourth quarters of the year, when we
may incur net losses.
The
nature of our business subjects us to compliance with Environmental, Health,
Transportation and Safety Regulations.
We are
subject to regulation under federal, state and local environmental, health,
transportation and safety requirements, which govern such things as packaging,
labeling, handling, transportation, storage and sale of chemicals and
fertilizers. For example, we sell algaecides and pest control products that are
regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide
Act and various state pesticide laws. These laws are primarily related to
labeling, annual registration and licensing.
23
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.
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.
24
The table
below summarizes the repurchases of our common stock in the third quarter of
2008:
Maximum
approximate
|
||||||||||
Total
number of shares
|
dollar
value of shares
|
|||||||||
Total
number of
|
Average
price
|
purchased
as part of
|
that
may yet be
|
|||||||
Period
|
shares
purchased(1)
|
paid
per share
|
publicly
announced plan(2)
|
purchased
under the plan(3)
|
||||||
July
1-31, 2008
|
—
|
$
|
—
|
—
|
$
|
54,968,410
|
||||
August
1-31, 2008
|
—
|
$
|
—
|
—
|
$
|
54,968,410
|
||||
September
1-30, 2008
|
88,260
|
$
|
22.45
|
88,260
|
$
|
52,987,067
|
||||
Total
|
88,260
|
$
|
22.45
|
88,260
|
(1)
|
These
shares may include shares of our common stock surrendered to us by
employees in order to satisfy tax withholding obligations in connection
with certain exercises of employee stock options and/or the exercise price
of such options granted under our share-based compensation
plans. There were no shares surrendered for this purpose in the
third quarter of 2008.
|
(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
$100.0 million from the amounts remaining at each of those
dates.
|
(3)
|
As
of October 24, 2008, $53.0 million of the authorized amount remained
available under our share repurchase
program.
|
Exhibits
filed as part of this report are listed in the Index to Exhibits appearing on
page 27.
25
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on October 31, 2008.
POOL
CORPORATION
|
||
By:
|
/s/
Mark W. Joslin
|
|
Mark
W. Joslin
Vice
President and Chief Financial Officer, and duly authorized signatory on
behalf of the Registrant
|
26
Incorporated
by Reference
|
|||||||||||
No.
|
Description
|
Filed
with this Form 10-Q
|
Form
|
File
No.
|
Date
Filed
|
||||||
3.1
|
Restated
Certificate of Incorporation of the Company.
|
10-Q
|
000-26640
|
08/09/2006
|
|||||||
3.2
|
Restated
Composite Bylaws of the Company.
|
10-Q
|
000-26640
|
08/09/2006
|
|||||||
4.1
|
Form
of certificate representing shares of common stock of the
Company.
|
8-K
|
000-26640
|
05/19/2006
|
|||||||
Certification
by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||||
Certification
by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
X
|
||||||||||
Certification
by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
X
|
27