POOL CORP - Quarter Report: 2009 March (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 March 31, 2009
or
|
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to ____________
|
Commission
File Number: 0-26640
![](https://www.sec.gov/Archives/edgar/data/0000945841/000094584109000017/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
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|
(Address
of principal executive offices)
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(Zip
Code)
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985-892-5521
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||
(Registrant's
telephone number, including area code)
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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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES ¨ 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 April
24, 2009, there were 48,361,879 outstanding shares of the registrant's common
stock, $.001 par value per share.
POOL
CORPORATION
Form
10-Q
For
the Quarter Ended March 31, 2009
INDEX
PART
I. FINANCIAL INFORMATION
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Item
1. Financial Statements (Unaudited)
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|||
1
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|||
2
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|||
3
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|||
4
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|||
7
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|||
17
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|||
17
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|||
PART
II. OTHER INFORMATION
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|||
18
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|||
22
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|||
22
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23
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24
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Item
1. Financial Statements
POOL
CORPORATION
Consolidated
Statements of Income (Loss)
(Unaudited)
(In
thousands, except per share data)
Three
Months Ended
|
||||||
March
31,
|
||||||
2009
|
2008
|
|||||
Net
sales
|
$
|
276,626
|
$
|
338,215
|
||
Cost
of sales
|
195,433
|
242,861
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||||
Gross
profit
|
81,193
|
95,354
|
||||
Selling
and administrative expenses
|
84,839
|
93,157
|
||||
Operating
income (loss)
|
(3,646
|
)
|
2,197
|
|||
Interest
expense, net
|
3,327
|
5,024
|
||||
Loss
before income taxes and equity loss
|
(6,973
|
)
|
(2,827
|
)
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||
Income
tax benefit
|
(2,740
|
)
|
(1,089
|
)
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||
Equity
loss in unconsolidated investments, net
|
(2,003
|
)
|
(1,446
|
)
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||
Net
loss
|
$
|
(6,236
|
)
|
$
|
(3,184
|
)
|
Loss
per share:
|
||||||
Basic
|
$
|
(0.13
|
)
|
$
|
(0.07
|
)
|
Diluted
|
$
|
(0.13
|
)
|
$
|
(0.07
|
)
|
Weighted
average shares outstanding:
|
||||||
Basic
|
48,287
|
47,648
|
(1)
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|||
Diluted
|
48,287
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47,648
|
(1)
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|||
Cash
dividends declared per common share
|
$
|
0.13
|
$
|
0.12
|
(1) As adjusted – see Note 2.
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
1
Consolidated
Balance Sheets
(Unaudited)
(In
thousands, except share data)
March
31,
|
March
31,
|
December
31,
|
|||||||
2009
|
2008
|
2008
|
|||||||
Assets
|
|||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
13,103
|
$
|
6,476
|
$
|
15,762
|
|||
Receivables,
net
|
20,373
|
42,266
|
16,311
|
||||||
Receivables
pledged under receivables facility
|
139,945
|
163,921
|
99,273
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||||||
Product
inventories, net
|
397,863
|
476,758
|
405,914
|
||||||
Prepaid
expenses and other current assets
|
7,973
|
10,241
|
7,676
|
||||||
Deferred
income taxes
|
11,908
|
9,139
|
11,908
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||||||
Total
current assets
|
591,165
|
708,801
|
556,844
|
||||||
Property
and equipment, net
|
34,677
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34,957
|
33,048
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||||||
Goodwill
|
169,936
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167,398
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169,569
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||||||
Other
intangible assets, net
|
13,035
|
15,465
|
13,339
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||||||
Equity
interest investments
|
27,804
|
31,551
|
31,157
|
||||||
Other
assets, net
|
27,158
|
24,774
|
26,949
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||||||
Total
assets
|
$
|
863,775
|
$
|
982,946
|
$
|
830,906
|
|||
Liabilities
and stockholders’ equity
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
201,300
|
$
|
333,104
|
$
|
173,688
|
|||
Accrued
expenses and other current liabilities
|
24,911
|
30,704
|
61,701
|
||||||
Short-term
financing
|
8,000
|
66,812
|
20,792
|
||||||
Current
portion of long-term debt and other long-term liabilities
|
16,613
|
3,152
|
6,111
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||||||
Total
current liabilities
|
250,824
|
433,772
|
262,292
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||||||
Deferred
income taxes
|
19,014
|
15,305
|
20,032
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||||||
Long-term
debt
|
356,721
|
326,298
|
301,000
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||||||
Other
long-term liabilities
|
5,736
|
6,221
|
5,848
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||||||
Total
liabilities
|
632,295
|
781,596
|
589,172
|
||||||
Stockholders’
equity:
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|||||||||
Common
stock, $.001 par value; 100,000,000 shares
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|||||||||
authorized;
48,358,089, 47,785,466 and 48,218,872
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|||||||||
shares
issued and outstanding
at March 31, 2009,
March
31, 2008 and
December
31, 2008, respectively
|
48
|
47
|
48
|
||||||
Additional
paid-in capital
|
192,261
|
177,650
|
189,665
|
||||||
Retained
earnings
|
41,832
|
18,863
|
54,407
|
||||||
Accumulated
other comprehensive income (loss)
|
(2,661
|
)
|
4,790
|
(2,386
|
)
|
||||
Total
stockholders’ equity
|
231,480
|
201,350
|
241,734
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
863,775
|
$
|
982,946
|
$
|
830,906
|
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
thousands)
Three
Months Ended
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|||||||
March
31,
|
|||||||
2009
|
2008
|
||||||
Operating
activities
|
|||||||
Net
loss
|
$
|
(6,236
|
)
|
$
|
(3,184
|
)
|
|
Adjustments
to reconcile net loss to net cash used in
operating activities:
|
|||||||
Depreciation
|
2,209
|
2,387
|
|||||
Amortization
|
662
|
1,064
|
|||||
Share-based
compensation
|
1,321
|
2,270
|
|||||
Excess
tax benefits from share-based compensation
|
(275
|
)
|
(1,540
|
)
|
|||
Equity
loss in unconsolidated investments
|
3,353
|
2,446
|
|||||
Other
|
(2,458
|
)
|
(2,612
|
)
|
|||
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|||||||
Receivables
|
(44,221
|
)
|
(60,100
|
)
|
|||
Product
inventories
|
7,510
|
(80,964
|
)
|
||||
Accounts
payable
|
27,600
|
136,197
|
|||||
Other
current assets and liabilities
|
(35,432
|
)
|
(11,404
|
)
|
|||
Net
cash used in operating activities
|
(45,967
|
)
|
(15,440
|
)
|
|||
Investing
activities
|
|||||||
Acquisition
of businesses, net of cash acquired
|
−
|
(32,742
|
)
|
||||
Purchase
of property and equipment, net of sale proceeds
|
(3,881
|
)
|
(1,835
|
)
|
|||
Net
cash used in investing activities
|
(3,881
|
)
|
(34,577
|
)
|
|||
Financing
activities
|
|||||||
Proceeds
from revolving line of credit
|
87,121
|
74,948
|
|||||
Payments
on revolving line of credit
|
(19,400
|
)
|
(27,425
|
)
|
|||
Proceeds
from asset-backed financing
|
13,000
|
12,655
|
|||||
Payments
on asset-backed financing
|
(25,792
|
)
|
(14,170
|
)
|
|||
Proceeds
from long-term debt
|
−
|
−
|
|||||
Payments
on long-term debt and other long-term liabilities
|
(1,536
|
)
|
(785
|
)
|
|||
Payments
of capital lease obligations
|
−
|
(251
|
)
|
||||
Payments
of deferred financing costs
|
(188
|
)
|
(22
|
)
|
|||
Excess
tax benefits from share-based compensation
|
275
|
1,540
|
|||||
Proceeds
from issuance of common stock under share-based compensation
plans
|
1,000
|
1,861
|
|||||
Payments
of cash dividends
|
(6,279
|
)
|
(5,734
|
)
|
|||
Purchases
of treasury stock
|
(59
|
)
|
(1,263
|
)
|
|||
Net
cash provided by financing activities
|
48,142
|
41,354
|
|||||
Effect
of exchange rate changes on cash
|
(953
|
)
|
(686
|
)
|
|||
Change
in cash and cash equivalents
|
(2,659
|
)
|
(9,349
|
)
|
|||
Cash
and cash equivalents at beginning of period
|
15,762
|
15,825
|
|||||
Cash
and cash equivalents at end of period
|
$
|
13,103
|
$
|
6,476
|
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 US generally accepted
accounting principles (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. The
Consolidated Financial Statements include all normal and recurring adjustments
that are necessary for a 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 2008
Annual Report on Form 10-K. The Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and accompanying
notes in our Annual Report. The results for the three month period
ended March 31, 2009 are not necessarily indicative of the results to
be expected for the twelve months ending
December 31, 2009.
Note
2 – Loss Per Share
We
calculate basic earnings (loss) per share (EPS) by dividing net income or loss
by the weighted average number of common shares outstanding. Diluted
EPS includes the dilutive effects of stock option awards.
On
January 1, 2009, we adopted Financial Accounting Standards Board
(FASB) Staff Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” This FSP states that unvested share-based payment
awards that contain non-forfeitable rights to dividends (such as our unvested
restricted stock awards) are participating securities and should be included in
the computation of both basic and diluted earnings per
share. According to the provisions of FSP EITF 03-6-1, we
now include outstanding unvested restricted stock awards of our common stock in
the basic weighted average share calculation and have adjusted prior period
basic and diluted weighted average common shares outstanding to reflect the
retrospective adoption of FSP EITF 03-6-1. The adoption of
FSP EITF 03-6-1 did not impact our basic or diluted loss per share for either
the first quarter of 2009 or 2008.
Since we
reported a net loss for both the first quarter of 2009 and 2008, there is no
difference between the basic and diluted weighted average shares outstanding for
these periods. Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive, meaning that the loss per share
would decrease. For informational purposes, the table below presents
the amounts we have excluded from the computation of diluted weighted average
shares outstanding (in thousands):
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2009
|
2008
|
|||||||
Weighted
average common shares outstanding:
|
||||||||
Basic
|
48,287
|
47,648
|
(1)
|
|||||
Effect
of dilutive securities:
|
||||||||
Stock
options
|
329
|
762
|
||||||
Employee
stock purchase plan
|
2
|
2
|
||||||
Diluted
|
48,618
|
48,412
|
(1) As adjusted for adoption of FSP EITF 03-6-1.
The
weighted average diluted shares outstanding in this computation also exclude
stock options to purchase 2,877,610 shares at March 31, 2009 and 2,962,598
shares at March 31, 2008, which are considered anti-dilutive because the
exercise prices for these options are higher than our common stock’s average
market price.
4
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 completed the purchase price allocations for our
acquisition of NPT in 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 completed the purchase
price allocations for our acquisition of Canswim in the first quarter of
2009. This acquisition did not have a material impact on our
financial position or results of operations.
In
November 2008, we acquired certain assets and liabilities of Proplas
Plasticos, S.L. (Proplas), a distributor of swimming pool products and
irrigation and plumbing supplies in Madrid, Spain. We consolidated
Proplas’ business with our existing sales center operations in Madrid and have
included the results of operations for Proplas in our Consolidated Financial
Statements since the acquisition date. We have recorded initial
purchase price allocations for our acquisition of Proplas, subject to
adjustments in accordance with the transaction documents. 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.
Note
4 – Comprehensive Loss
Comprehensive
loss includes net loss, foreign currency translation adjustments and the
unrealized gain or loss on interest rate swaps. Comprehensive loss
for the three months ended March 31, 2009 and 2008 is presented
below:
2009
|
2008
|
||||||||
Comprehensive
loss
|
$
|
(6,511
|
)
|
$
|
(6,098
|
)
|
A
rollforward of the components of Accumulated other comprehensive income (loss)
for the current period is presented below (in thousands):
|
Foreign
Currency Translation
|
Unrealized
Gain (Loss) on Interest Rate Swaps (1)
|
Total
|
||||||
Balance
at December 31, 2008
|
$
|
2,821
|
$
|
(5,207
|
)
|
$
|
(2,386
|
)
|
|
Net
change
|
(953
|
)
|
678
|
(275
|
)
|
||||
Balance
at March 31, 2009
|
$
|
1,868
|
$
|
(4,529
|
)
|
$
|
(2,661
|
)
|
(1) Change
shown net of tax benefit of $332.
5
Note
5 – Fair Value Measurements and Interest Rate Swaps
FASB
Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, 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.
We have
two interest rate swap agreements that reduce our exposure to fluctuations in
interest rates on our Floating Rate Senior Notes (the Notes) and our variable
rate Term Loan under our unsecured syndicated senior credit
facility. We have an interest rate swap agreement that converts the
variable interest rate on the Notes 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. Our other interest rate swap agreement
converts the variable interest rate on the Term Loan 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.
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). Since inception, we
have not recognized any gains or losses on these swaps and there has been no
effect on income from hedge ineffectiveness. The table below presents
the combined fair value of our swap agreements as of March 31, 2009
(in thousands):
Balance Sheet Line Item
|
Unrealized
Losses
|
|||
Accrued
expenses and other current liabilities
|
$
|
7,456
|
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.
6
You
should read the following discussion in conjunction with Management's Discussion
and Analysis included in our 2008 Annual Report on Form 10-K. For a
discussion of our base business calculations, see page 9 under the RESULTS OF
OPERATIONS section below.
OVERVIEW
Financial
Results
In a very
difficult external environment, we continue to focus on the aspects of our
business that are directly within our control. We have improved our
pricing and purchasing discipline to increase gross margins, adjusted expenses
commensurate with sales expectations and rebalanced inventories while ensuring
excellent customer service.
Net sales
for the seasonally slow first quarter decreased 18% compared to the first
quarter of 2008. Base business sales declined 21% reflecting
continued soft demand for pool and irrigation construction products, an 18%
decrease in customer early buy purchases and deferred discretionary replacement
product sales.
Gross
profit as a percentage of net sales (gross margin) improved 120 basis
points to 29.4% in the first quarter of 2009 from 28.2% in the first quarter of
2008. The increase in gross margin is primarily attributable to
improved pricing management, the benefit resulting from pre-price increase
inventory purchases in the second half of 2008 and favorable sales mix
changes.
Selling
and administrative expenses (operating expenses) decreased 9% in the first
quarter of 2009 compared to the first quarter of 2008, with base business
operating expenses 11% lower due primarily to the impact of cost control
initiatives on payroll related and variable expenses.
Operating
loss was $3.6 million in the first quarter of 2009 compared to operating
income of $2.2 million in the same period in 2008. Interest
expense decreased 34% compared to the first quarter of 2008 due to a lower
weighted average effective interest rate between periods. Loss per
share for the first quarter of 2009 was $0.13 per diluted share on a net loss of
$6.2 million, compared to a loss of $0.07 per diluted share on a net
loss of $3.2 million in the same period in 2008.
Financial
Position and Liquidity
Total net
receivables decreased 22% to $160.3 million at March 31, 2009
from $206.2 million at March 31, 2008 due primarily to the decrease in
net sales and a shift toward more cash sales as a result of our tighter credit
policies. Our allowance for doubtful accounts balance was $13.4
million at March 31, 2009, an increase of $4.0 million over
March 31, 2008. 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. The allowance for doubtful
accounts has decreased approximately $0.3 million from
December 31, 2008 to March 31, 2009. Days sales outstanding
(DSO), as calculated on a trailing twelve month basis, was 36.3 days at
March 31, 2009 compared to 36.4 days at
March 31, 2008.
Our
inventory levels decreased 17% to $397.9 million as of
March 31, 2009 compared to $476.8 million as of
March 31, 2008. This decrease reflects the ongoing
implementation of our inventory rebalancing efforts to reduce inventory levels
across all product classes. Our inventory turns, as calculated on a trailing
twelve month basis, have decreased to 3.1 times as of
March 31, 2009 compared to 3.5 times as of
March 31, 2008.
Total
debt outstanding decreased to $381.2 million at March 31, 2009
compared to $396.1 million at March 31, 2008. Based on
early payments we made in the past six months to take advantage of pre-price
increase inventory purchases and early payment discounts offered by certain
vendors, we expect to realize a comparative cash flow benefit in the second
quarter and for the rest of the year.
7
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. Additionally, general economic conditions are
weak, including increasing unemployment and declining Gross Domestic Product
(GDP). Some of the factors that help mitigate the impact of these
negative 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 maintenance, repair and replacement (MRR)
products has increased to over 80%);
and
|
·
|
we
believe our service-oriented model helps us gain market
share.
|
Despite
these mitigating factors, the negative trends noted above have significantly
impacted a number of our key markets, including California, Florida and Arizona,
with a more recent adverse impact in Texas and other states. We estimate that
these trends resulted in the following decreases in new pool construction in the
United States 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
from 2007 through the first quarter of 2009, they had a more pronounced impact
on our results for the year ended 2008 and the first quarter of
2009. Given the current economic conditions, we believe these trends
will continue through 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.
Outlook
We
believe the declines in the housing market, consumer credit and general economic
conditions have combined to make 2009 an extremely challenging
year. Since maintenance and repair product sales are more seasonally
weighted to our most important second and third quarters, we expect that the
impact of these sales will partially mitigate much lower new construction and
deferred replacement product sales. As noted in our first quarter
2009 earnings release on April 23, 2009, we believe that Street
earnings consensus at that time of $0.95 per diluted share for fiscal 2009 is
reasonable.
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 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”.
8
RESULTS
OF OPERATIONS
As of
March 31, 2009, we conducted operations through 288 sales centers in
North America and Europe.
The
following table presents information derived from the Consolidated Statements of
Income (Loss) expressed as a percentage of net sales.
|
Three
Months Ended
|
||||
March
31,
|
|||||
2009
|
2008
|
||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
|
Cost
of sales
|
70.6
|
71.8
|
|||
Gross
profit
|
29.4
|
28.2
|
|||
Selling
and administrative expenses
|
30.7
|
27.5
|
|||
Operating
income (loss)
|
(1.3
|
)
|
0.6
|
||
Interest
expense, net
|
1.2
|
1.5
|
|||
Loss
before income taxes and equity loss
|
(2.5
|
)
|
(0.8
|
)
|
Note:
|
Due
to rounding, percentages may not add to operating income (loss)
or
loss before income taxes and equity
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.
9
Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
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
|
Three
Months
|
Three
Months
|
|||||||||||||||
Ended
|
Ended
|
Ended
|
||||||||||||||||
March
31,
|
March
31,
|
March
31,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$
|
253,928
|
$
|
321,281
|
$
|
22,698
|
$
|
16,934
|
$
|
276,626
|
$
|
338,215
|
||||||
Gross
profit
|
74,909
|
90,483
|
6,284
|
4,871
|
81,193
|
95,354
|
||||||||||||
Gross
margin
|
29.5
|
%
|
28.2
|
%
|
27.7
|
%
|
28.8
|
%
|
29.4
|
%
|
28.2
|
%
|
||||||
Operating
expenses
|
77,847
|
87,475
|
6,992
|
5,682
|
84,839
|
93,157
|
||||||||||||
Expenses
as a % of net sales
|
30.7
|
%
|
27.2
|
%
|
30.8
|
%
|
33.6
|
%
|
30.7
|
%
|
27.5
|
%
|
||||||
Operating
income (loss)
|
(2,938
|
)
|
3,008
|
(708
|
)
|
(811
|
)
|
(3,646
|
)
|
2,197
|
||||||||
Operating
margin
|
(1.2
|
)%
|
0.9
|
%
|
(3.1
|
)%
|
(4.8
|
)%
|
(1.3
|
)%
|
0.6
|
%
|
We
exclude the following sales centers from our base business results for a period
of 15 months (parenthetical numbers for each category indicate the number of
sales centers excluded as of March 31, 2009):
·
|
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).
|
We
generally allocate overhead expenses to excluded sales centers on the basis of
their net sales as a percentage of total net sales. After 15 months of
operations, we include acquired and new market sales centers in the base
business calculation including the comparative prior year period.
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 March 31, 2008.
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.
|
November
2008
|
0
|
January
2009 – March 2009
|
|||
National
Pool Tile (NPT)
|
March
2008
|
9
|
January
2009 – March 2009 and March 2008
|
|||
Canswim
Pools
|
March
2008
|
1
|
January
2009 – March 2009 and March 2008
|
The
number of sales centers did not change during the quarter ended
March 31, 2009.
10
Net
Sales
Three
Months Ended
March
31,
|
||||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
|||||||||
Net
sales
|
$
|
276.6
|
$
|
338.2
|
$
|
(61.6
|
)
|
(18
|
)%
|
The new
pool and irrigation construction markets continue to face unprecedented adverse
conditions created by the combination of significant declines in the real estate
and mortgage-backed financing markets. Coupled with the current
severely depressed economic environment, these external factors have placed
considerable pressure on our top line results. As a result, our seasonally
slow first quarter 2009 sales were negatively impacted as construction
activities remained depressed, fewer customers participated in early buy
purchase programs and consumers continued to defer discretionary replacement
purchases.
Base
business sales for the first quarter of 2009 decreased 21% compared to the first
quarter of 2008. This includes a 19% decline on the swimming pool
side of the business and a 35% decline on the irrigation side of the business,
which is more heavily weighted toward new construction and discretionary product
sales.
The
overall decrease in net sales was partially offset by increases due to the
following:
·
|
inflationary
price increases that we passed through the supply
chain;
|
·
|
approximately
$9.0 million of increased sales for new drains and related
safety products as a result of the Virginia Graeme Baker Pool and Spa
Safety Act, which became effective in December 2008 and imposes
mandatory federal requirements on the manufacture, distribution and/or
sale of suction entrapment avoidance devices such as safety drain covers,
public pool drain covers and public pool drain systems;
and
|
·
|
approximately
$7.0 million in sales related to our 2008
acquisitions.
|
Gross
Profit
Three
Months Ended
March
31,
|
||||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
|||||||||
Gross
profit
|
$
|
81.2
|
$
|
95.4
|
$
|
(14.2
|
)
|
(15
|
)%
|
|||
Gross
margin
|
29.4
|
%
|
28.2
|
%
|
Despite
the tough competitive pricing environment, gross margin increased 120 basis
points compared to the first quarter of 2008. The increase in gross
margin is primarily attributable to improved pricing and purchasing
discipline. Favorable impacts compared to the same period in 2008
included the following (listed in order of estimated magnitude):
·
|
increased
sales of preferred vendor and Pool Corporation private label
products;
|
·
|
benefits
resulting from pre-price increase inventory purchases made in the second
half of 2008;
|
·
|
a
shift in sales mix to products in the higher margin maintenance and repair
market; and
|
·
|
higher
recognized purchase discounts due to special payment terms offered by
certain vendors for early payments we made in the first quarter of 2009
related to 2008 early buy purchases (benefit of approximately
20 basis points).
|
11
Operating
Expenses
Three
Months Ended
March
31,
|
||||||||||||
(in
millions)
|
2009
|
2008
|
Change
|
|||||||||
Operating
expenses
|
$
|
84.8
|
$
|
93.2
|
$
|
(8.4
|
)
|
(9
|
)%
|
|||
Operating
expenses as a percentage of net sales
|
30.7
|
%
|
27.5
|
%
|
The
decrease in operating expenses reflects an 11% decline in base business
operating expenses compared to the first quarter of 2008. This
decrease is due primarily to the impact of our cost control initiatives
including lower payroll related, variable and discretionary expenses. As of
March 31, 2009, total headcount decreased 3% since
December 31, 2008 and 10% since March 31, 2008, driving a 9%
decline in total labor and related costs. Delivery costs
decreased 21% quarter over quarter, which is in line with our decrease in
net sales.
The
decrease in operating expenses was partially offset by the impact of our
acquired sales centers, which had approximately $2.0 million in operating
expenses during the first quarter. Total operating expenses as
a percentage of net sales increased between periods due to the decrease in net
sales.
Interest
Expense
Interest
expense decreased 34% between periods as a result of our lower weighted average
effective interest rate for the period. The weighted average effective
interest rate decreased to 3.3% in the first quarter of 2009 from 5.2% in the
same period in 2008. Average debt outstanding levels for the first quarter of
2009 were consistent with those in the first quarter of 2008.
Income
Taxes
The
income tax benefit was greater in the first quarter of 2009 compared to the
first quarter of 2008 due to the increase in the loss before income taxes and
equity loss. Our effective income tax rate was 39.29% for the three months
ended March 31, 2009 and 38.50% for the three months ended
March 31, 2008. The increase in the effective income tax
rate reflects a change in estimated annual losses from certain foreign
operations.
Net
Loss and Loss Per Share
Net loss
increased to $6.2 million in the first quarter of 2009 from $3.2 million in
the first quarter of 2008. This increase includes a $0.5 million increase
in net loss from our equity investment in Latham Acquisition
Corporation. Our net loss was $0.13 per diluted share for the first
quarter of 2009 compared to a net loss of $0.07 per diluted share for the same
period of 2008.
12
Seasonality
and Quarterly Fluctuations
Our
business is highly seasonal. In general, sales and operating income
are highest during the second and third quarters, which represent the peak
months of both swimming pool use and installation and landscape installations
and maintenance. Sales are substantially lower during the first and
fourth quarters when we may incur net losses.
We
typically experience a build-up of product inventories and accounts payable
during the winter months in anticipation of the peak selling
season. Excluding borrowings to finance acquisitions and share
repurchases, our peak borrowing usually occurs during the second quarter,
primarily because extended payment terms offered by our suppliers typically are
payable in April, May and June, while our peak accounts receivable collections
typically occur in June, July and August. We believe that our debt
levels will peak a little earlier in 2009 based on early payments we made in the
past six months to take advantage of pre-price increase inventory purchases and
early payment discounts offered by certain vendors.
The
following table presents certain unaudited quarterly data for the first quarter
of 2009, the four quarters of 2008 and the second, third and fourth quarters of
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
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)
|
2009
|
2008
|
2007
|
|||||||||||||||
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
|||||||||||
Statement
of Income (Loss) Data
|
||||||||||||||||||
Net
sales
|
$
|
276,626
|
$
|
258,966
|
$
|
493,530
|
$
|
692,972
|
$
|
338,215
|
$
|
300,755
|
$
|
527,434
|
$
|
726,472
|
||
Gross
profit
|
81,193
|
75,322
|
141,800
|
202,752
|
95,354
|
79,436
|
139,803
|
207,922
|
||||||||||
Operating
income (loss)
|
(3,646
|
)
|
(15,328
|
)
|
38,617
|
89,990
|
2,197
|
(12,796
|
)
|
39,505
|
98,433
|
|||||||
Net
income (loss)
|
(6,236
|
)
|
(14,795
|
)
|
22,060
|
52,875
|
(3,184
|
)
|
(11,589
|
)
|
21,835
|
57,794
|
||||||
Balance
Sheet Data
|
||||||||||||||||||
Total
receivables, net
|
$
|
160,318
|
$
|
115,584
|
$
|
178,927
|
$
|
278,654
|
$
|
206,187
|
$
|
141,117
|
$
|
200,534
|
$
|
301,265
|
||
Product
inventories, net
|
397,863
|
405,914
|
345,944
|
385,258
|
476,758
|
379,663
|
317,110
|
388,364
|
||||||||||
Accounts
payable
|
201,300
|
173,688
|
128,329
|
193,663
|
333,104
|
194,178
|
127,889
|
229,691
|
||||||||||
Total
debt
|
381,221
|
327,792
|
337,742
|
441,992
|
396,110
|
350,852
|
406,465
|
425,599
|
We expect
that our quarterly results of operations will continue to fluctuate depending on
the timing and amount of revenue contributed by new and acquired sales
centers. Based on our peak summer selling season, we generally open
new sales centers and close or consolidate sales centers, when warranted, either
in the first quarter before the peak selling season starts or in the fourth
quarter after the peak selling season ends.
13
Weather
is one of the principal external factors affecting our business. The
table below presents some of the possible effects resulting from various weather
conditions.
Weather
|
Possible
Effects
|
|
Hot
and dry
|
•
|
Increased
purchases of chemicals and supplies
|
for
existing swimming pools
|
||
•
|
Increased
purchases of above-ground pools and
|
|
irrigation
products
|
||
Unseasonably
cool weather or extraordinary
amounts of rain
|
•
|
Fewer
pool and landscape installations
|
•
|
Decreased
purchases of chemicals and supplies
|
|
•
|
Decreased
purchases of impulse items such as
|
|
|
above-ground
pools and accessories
|
|
Unseasonably
early warming trends in spring/late cooling trends in fall
|
•
|
A
longer pool and landscape season, thus increasing our
sales
|
(primarily
in the northern half of the US)
|
||
|
||
Unseasonably
late warming trends in spring/early cooling trends in fall
|
•
|
A
shorter pool and landscape season, thus decreasing our
sales
|
(primarily
in the northern half of the US)
|
While
weather conditions in the first quarter of 2009 were generally favorable
compared to the same period last year, we did not realize any positive impact on
sales given the overriding adverse economic environment. Temperatures
were above average across most of North America in the first quarter of 2009,
with below average precipitation throughout most of our markets excluding a much
wetter than normal March in the Southeast. Unfavorable weather
delayed the start of the pool season in both 2008 and 2009 in a number of our
markets, with the 2009 season adversely impacted by much colder than normal
temperatures in the first half of April.
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, dividend payments and share
repurchases. 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 capital expenditures and share
repurchases.
14
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 have 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
March 31, 2009, 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):
Three
Months Ended
March
31,
|
|||||||
2009
|
2008
|
|
|||||
Operating
activities
|
$
|
(45,967
|
)
|
$
|
(15,440
|
)
|
|
Investing
activities
|
(3,881
|
)
|
(34,577
|
)
|
|||
Financing
activities
|
48,142
|
41,354
|
Cash flow
used in operations increased $30.5 million in the first three months of 2009
compared to the same period in 2008. This change is primarily due to
our January 2009 payment of $30.0 million for estimated third and fourth quarter
2008 federal income taxes, which were deferred by the IRS as allowed for
taxpayers in areas affected by Hurricane Gustav. Cash used in
investing activities for the three months ended March 31, 2008
included $32.7 million of cash paid for our March 2008
acquisitions. Cash provided by financing activities in the first
three months of 2009 includes $53.4 million of net borrowings under our
debt arrangements.
Future
Sources and Uses of Cash
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 term loan (the Term
Loan, with an original principle of $60.0 million).
At March
31, 2009, there was $220.7 million outstanding and $16.9 million
available for borrowing under the Revolver. The Revolver matures on
December 20, 2012. The weighted average effective interest
rate on the Revolver was approximately 1.8% for the three months ended
March 31, 2009.
At March
31, 2009, there was $52.5 million outstanding under the Term Loan of
which $16.5 million was classified as current. The Term Loan
amortizes quarterly through December 20, 2010, with the majority of
the payments due in 2010. Our current interest rate swap agreement
reduces our exposure to fluctuations in interest rates for the remaining
outstanding period of the Term Loan by converting our variable rate to a
fixed rate basis. This swap will terminate when the Term Loan
matures on December 20, 2010. The weighted average
effective interest rate on the Term Loan was approximately 3.2% for the three
months ended March 31, 2009.
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.
15
In
May 2008, we renewed our accounts receivable securitization facility (the
Receivables Facility) for one year through May 2009. On January 15,
2009, we amended our Receivables Facility. The amendment affected
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. At March 31, 2009, there
was $8.0 million outstanding under the Receivables Facility at a weighted
average effective interest rate of 2.9%. We expect to renew or
replace the Receivables Facility in May 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. 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 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.
Financial
covenants on our Credit Facility, Notes and Receivables Facility are closely
aligned and include a minimum fixed charge coverage ratio and maintenance of a
maximum total leverage ratio, which are our most restrictive financial
covenants. As of March 31, 2009, the calculations of these two
covenants are detailed below:
·
|
Maximum Average Total Leverage
Ratio. On the last day of each fiscal quarter, our average total
leverage ratio must be less than or equal to 3.25 to
1.00. Average Total Leverage ratio is the ratio of the trailing
twelve months (TTM) Average Total Funded Indebtedness plus the TTM
Average Accounts Securitization Proceeds divided by the TTM EBITDA (as
those terms are defined in our amended Credit Facility). As of
March 31, 2009, our average total leverage ratio equaled 2.92 (compared to
2.77 as of December 31, 2008) and TTM average total debt was
$374.8 million.
|
·
|
Minimum Fixed Charge
Ratio. On the last day of each fiscal quarter, our fixed charge
ratio must be greater than 2.25 to 1.00. Fixed Charge Ratio is
the ratio of the TTM EBITDAR (as defined in our amended Credit Facility)
divided by TTM Interest Expense (as defined in our amended Credit
Facility) paid or payable in cash plus TTM Rental Expense (as defined in
our amended Credit Facility). As of March 31, 2009, our fixed
charge ratio equaled 2.49 (compared to 2.52 as of
December 31, 2008) and TTM Rental Expense was
$57.9 million.
|
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 no
default or event of default has occurred and is continuing and the dividends are
declared and paid in a manner consistent with our past
practice. Failure to comply with these financial covenants, scheduled
interest payments, scheduled principal repayments, or any other terms of our
amended credit facilities could result in the acceleration of the maturities of
our outstanding debt. As of March 31, 2009, we were in
compliance with all covenants and financial ratio requirements related to our
Credit Facility, our Notes and our Receivables Facility. We
believe we will remain in compliance throughout the rest of the
year.
For
additional information regarding our debt arrangements, see Note 5 of “Notes to
Consolidated Financial Statements,” included in Item 8 of our 2008
Form 10-K.
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.
As of
April 24, 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.
16
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 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, 2008. 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, 2008.
Foreign
Exchange Risk
There
have been no material changes from what we reported in our Form 10-K for
the year ended December 31, 2008.
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 March 31, 2009, management, including the
CEO and CFO, performed an evaluation of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, management,
including the CEO and CFO, concluded that as of March 31, 2009, 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.
17
PART
II. OTHER INFORMATION
Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Our
disclosure and analysis in this report contains forward-looking information that
involves risks and uncertainties. Our forward-looking statements express our
current expectations or forecasts of possible future results or events,
including projections of future performance, statements of management’s plans
and objectives, future contracts, and forecasts of trends and other matters.
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,
2008 and the first quarter of 2009. 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
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 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.
18
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.
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.
19
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 years, we have opened 30 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.
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.
20
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.
21
The table
below summarizes the repurchases of our common stock in the first quarter of
2009:
Maximum
approximate
|
||||||||||
Total
number of shares
|
dollar
value of shares
|
|||||||||
Total
number of
|
Average
price
|
purchased
as part of
|
that
may yet be
|
|||||||
Period
|
shares
purchased(1)
|
paid
per share
|
publicly
announced plan(2)
|
purchased
under the plan(3)
|
||||||
January
1-31, 2009
|
—
|
$
|
—
|
—
|
$
|
52,987,067
|
||||
February
1-28, 2009
|
3,727
|
$
|
15.84
|
—
|
$
|
52,987,067
|
||||
March
1-31, 2009
|
—
|
$
|
—
|
—
|
$
|
52,987,067
|
||||
Total
|
3,727
|
$
|
15.84
|
—
|
(1)
|
Consists
of shares of our common stock surrendered to us by employees in order to
satisfy tax withholding obligations in connection with certain share-based
compensation awards and/or the exercise price of stock 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
$100.0 million from the amounts remaining at each of those
dates.
|
(3)
|
As
of April 24, 2009, $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 24.
22
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on May 1, 2009.
POOL
CORPORATION
|
||
By:
|
/s/
Mark W. Joslin
|
|
Mark
W. Joslin
Vice
President and Chief Financial Officer, and duly authorized signatory on
behalf of the Registrant
|
23
Incorporated
by Reference
|
|||||||||||
No.
|
Description
|
Filed
with this Form 10-Q
|
Form
|
File
No.
|
Date
Filed
|
||||||
3.1
|
Restated
Certificate of Incorporation of the Company.
|
10-Q
|
000-26640
|
08/09/2006
|
|||||||
3.2
|
Restated
Composite Bylaws of the Company.
|
10-Q
|
000-26640
|
08/09/2006
|
|||||||
4.1
|
Form
of certificate representing shares of common stock of the
Company.
|
8-K
|
000-26640
|
05/19/2006
|
|||||||
Certification
by Mark W. Joslin pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||||
Certification
by Manuel J. Perez de la Mesa pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
X
|
||||||||||
Certification
by Manuel J. Perez de la Mesa and Mark W. Joslin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
X
|
24